Ladies and gentlemen, good day, and welcome to Pitti Engineering's Q3 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Please note that this conference call will be recorded. Joining us today on this call is Mr. Akshay S. Pitti, Vice Chairman and Managing Director. Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risk and uncertainties. For a list of such considerations, please refer to the earnings presentation. I would now like to hand the call over to Mr. Akshay Pitti. Over to you, sir.
Thank you, and a warm welcome to our Q3 earnings call. I will start by giving you an overview of our operational and financial performance before opening the floor for a Q&A session. Revenue for quarter three FY 2024 was INR 296.92 crore, registering a year-over-year growth of 24.19%. Sales volume stood at 10,572 metric ton, as compared to 9,150 metric ton in Q3 FY 2023, an increase of 15.54%. Sales realization and EBITDA per ton for the quarter were INR 2,77,751 and INR 41,700, respectively. EBITDA for the quarter was INR 44.09 crore, registering a 13.58% growth on a year-over-year basis.
PAT was INR 13.32 crores, up by 9.81%. I'm pleased to note that both sales volume and EBITDA for the quarter were highest ever recorded in the company's history. For nine months of FY 2024, total revenue was INR 890 crores, EBITDA was INR 129.07 crores, and PAT was INR 49.84 crores. During the year, we have accounted INR 13.09 crores of incentive income from our Aurangabad facility. We expect to further account INR 32.42 crores in Q4 FY 2024, subject to requisite approvals. Sales volume for nine months was 30,870 metric tons, putting us well on track of achieving our annual target of 42,000 tons. Net debt as on 31/12/2023 stood at INR 317.60 crores.
So far in the financial year, we have spent about INR 85 crores towards capital expenditure. The remaining approved CapEx will be spent by H1 FY25. With this, we are on track for our expansion of Aurangabad facility. As you're aware, the company had filed the scheme of amalgamation with Pitti Engineering and Pitti Rail, with stock exchanges on 26th June 2023. We have received a no objection on 26th October 2023. Currently, the scheme is pending approvals from NCLT. We anticipate completing the merger in H1 FY25. We are seeing strong growth in order book and projections from our clients, driven primarily by rail, wind energy and power generation sectors. Further, we have significant new customer acquisitions in automotive, power generation and railway segments. The order book as of 31st December 2023, was INR 898 crore.
For FY 2025, we are targeting 50,000 metric tons as sales volume. With the expanded capacity in Aurangabad, increase in machined components business, further augmented by the merger of Pitti Castings, we expect significant improvement in margin profile of the company in the coming year. I now open the floor for a Q&A session.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Naysar Parikh with Native Capital. Please go ahead.
Yeah, hi. Thanks for taking the question. I just want to understand, you know, from steel prices perspective, if tomorrow we were to see, you know, a sharp correction in steel prices, something like that, how are we placed, both in terms of, you know, what kind of impacts do we foresee on, margins, realization, et cetera?
See, on a gross margin basis, there will be no decline as we have a price variation clause with the customer. If there's a sharp correction downward or an increase in steel price, on both sides, we are protected.
So you will be able to revise your prices basically, right?
Yes, we have already done that. If you see in the past six quarters, there's a continuous trend of decline in raw material pricing, and that has not affected our margin. And prior to that, when the steel prices were on upward trend, there was a similar story. There was no impact to our margin.
Okay, got it. And, from a capacity perspective, you know, can you just talk about the expansion that we're doing, and then, how and when will that start kicking in? We are at 90% on the machining side, so what will when will that kick in?
So the capacity augmentation will be completed fully by H1 2025. Right now, in terms of sheet metal, we have a 50,000 ton capacity, which will be enhanced to about 72,000 metric tons. And on the machining side, we have about 460,000 machining capacity, which will increase to 615,000 machining.
Okay. Got it. Understood. And, you did give some brief highlights of the sectors that you're seeing demand in. Can you elaborate a bit, you know, in terms of your order book or order inflow, you know, what, what is the order inflow like, and where, what is the order book, and what is the growth year-on-year?
See, overall, I would say if you see the consumer motors or the industrial motor side of the business, that is, not growing as fast as the other segments. The growth is primarily driven by railways and renewable energy and power generation segments.
Okay. And what would be your order in, you know, order book or order intake growth, if besides the revenues, we can look at some of that metrics? Do you? Can you share those metrics?
If you see the order book and you adjust it for the price, selling price for the quarter, we are seeing about a 25%-30% increase in the order book, adjusted basis. Q2 FY 2023, we had a closing order book of INR 716 crores, and for Q3, it is about INR 898 crores.
Okay. Got it. All right. Okay. Thank you, sir.
Thank you. The next question is from the line of Prathamesh Dahake from Motilal Oswal. Please go ahead.
Hi, sir. Am I audible?
Yes, you're audible. Please go ahead.
Hi, hi. So my first question is regarding our gross margins in this quarter. So we can see that our contribution from exports has also increased by 5% year-over-year, as well as our, it's a value addition from, so, the contribution value-added products has also increased by two percentage points. What is the reason our gross margin only increased by one percentage point? That is my first question. Second is regarding our overheads. Our employee expenses have increased in line with our year-over-year revenue growth. Any reason for the same? And our other expenses have also increased by, let's say, two percentage points. What is the reason behind the same?
Yeah. So see, the gross margin and export correlation that you're trying to do does not work. As you know, the selling price or the value addition that we do for the product, whether it's in the domestic market or the export market, is same. So you will not see a margin improvement just because exports are more or exports are less. It's got to do with the product mix. And if you see the increase in 1% gross margin, I think that is fair, keeping in line with the kind of product mix that we've had. In terms of overhead and employee costs, there's the normal increments that are there. Plus, in addition to that, we are obviously going to start the staffing of our various departments ahead of the CapEx.
That would be the reason probably why you're seeing a marginal increase in employee cost, and other expenses would be the same reason.
Okay, so
It does not track perfectly as per your sales. Obviously, all those expenses and other things have to happen prior to the CapEx
Okay.
That we start doing.
Agreed. So, what are the products that currently we are exporting as of, as of now?
We are exporting products for all the other segments that we, cater to, like the railway segment, the wind energy segment, the power generation segment, mainly, the motor and generator components and some machine components.
So is it kind of mostly loose lamination or something like that? Because even if that contribution, if realization is not same for both exports and domestic, still I am unable to understand if it would have been a better product, our GM should have improved, right?
It's not a better product, it's the same product. So if you take the customer, we supply to the same customer
I know.
in, in India and in, the U.S. market. So the product does not change, or the profile of the product does not change. It's a similar product.
Mm-hmm.
It's just that the consumption point is in India or it's in U.S. That's the only difference in our product.
Aren't realizations better in exports, just on a like-to-like basis?
No, there's no difference in realization in exports. The packaging cost, the interest cost, or the trade cost related to export would be added. So there's additional cost also when the export is there. So whatever increase in realization you see has a corresponding cost.
Okay.
Which is why you're seeing the other expenses also increasing. That is where you would account for those additional, packaging, crate, et cetera, warehousing, all of those costs. The product that we make is same for the Indian market and the export market, and the client also is the same. So we have Westinghouse Electric Technologies, Wabtec, as a client in India, and the same client in Europe, sorry, in U.S.
Understood. My last, one last question would be, you had mentioned that there will be significant margin improvement on account of merger of PCPL. Can you please explain us how this thing would pan out?
So it's not only on account of PCPL, obviously. I'm mentioning due to the increased volume. So obviously, we are going from 42,000 tons to 50,000 tons next year. So obviously the economies of scale will kick in, and your overhead costs on a per ton basis would be further distributed. In addition to that, the increase in machined components business is going to add value. And when you merge Pitti Castings, obviously the EBITDA that that company is doing will get added to our EBITDA. And if you see the sales profile of that company, approximately 70% of its revenue is derived from procurements from Pitti Engineering. So when we consolidate the two companies' balance sheets, the sales would kind of be. The common sale will be removed, and the EBITDA margin would get added.
So that itself, if you see, would yield in significant margin improvement. All these three measures put together. Oh, okay. Understood. That's all from my side as of now.
Thank you. The next question is from the line of Karan Kamdar from D.R. Choksey Finserv Pvt. Ltd. Please go ahead.
Hello, sir. Thank you for the opportunity. So what I wanted to understand is other expenses. Can you throw some color? I think you already explained, due to the new CapEx. If you could throw some a little more of the color that, when can it, can we expect to stabilize as a % of revenue, that would be helpful.
The other expense will not typically be due to percentage of revenue. It also has to do with, you know, other expenses where we account for the packaging cost, the forwarding cost, carriage outward. So depending on the location, like if you see the exports are slightly higher in the current last quarter, therefore, the corresponding expenditure related to those would be higher. There won't be a linear transition from revenue to other expense.
Okay. So can you give, like, a rough date on a fixed and a variable basis of other expenses so that would give more clarity, as in how much of it would be fixed and how much of it would be variable?
See, out of the INR 30 crore of other expenses in last quarter, about 15 odd crore would be fixed and the other would be variable in nature.
Do you see any increases in freight costs because of geopolitical disruptions? Are the costs increasing currently?
As of now, we have not seen any significant increase in cost. But see again, as far as any cost increase is concerned, we are able to pass that through to our clients.
Okay, got it. Thank you. I'll join back the queue if I have any more questions. Thank you, sir.
Thank you. The next question is from the line of Umesh Jain from Kotak Life. Please go ahead.
Hi, thanks for the opportunity, and congrats on a very good set of numbers as well as the guidance. My question is on Pitti Castings. If I remember correctly, the company had some unabsorbed losses and post-merger, I assume we will be able to set off with our existing listed operations. So what's the total number of unabsorbed losses that we have, we can, you know, utilize in future?
As of 31st March 2023, the unabsorbed losses in that company was approximately INR 80 crores.
Okay. That the entire INR 80 crore will be available for us to utilize in the listed operations. So I assume tax rate in FY 2025 for us should be lower.
Yes.
Okay. That's it from my side. Thank you.
Thank you. The next question is from the line of Sanjeev Zarbade, an individual investor. Please go ahead.
Yeah, sir, my first question is regarding how is the business environment in machining business and how is it panning out in Europe?
So, machining business is quite buoyant. If you see today in the China Plus One strategies that lot of the MNCs are using, the biggest opportunity for us to grow our business in is in machine component. Whether it is casting that you machine or fabricated parts. As far as specifically Europe is concerned, it's a good market to enter. The overall European market is down, but because they are trying to divert some of their sourcing to India, we are seeing a good amount of demand coming from Europe and North America both.
Okay. And how many new components you would have added in the railways business, sir?
I won't have that number offhand, but it would be, at least about 50 different kind of components and assemblies put together.
All right. Sir, one last question on the financial side. Our gross debt has been steadily building up over the last few years. What would be the net debt by the end of this financial year?
The net debt by the end of this financial year should be within line of what we had guided earlier. We are seeing a peak debt of INR 375 crore, what we had targeted earlier. We've not crossed that.
Okay. Okay. Okay, sir, thanks, and all the best.
Yeah.
Thank you. The next question is from the line of Tanish from Bees Capital. Please go ahead.
Can you give me a trend of raw material prices this quarter versus last quarter?
Sorry, you're not audible.
Can you give me a trend of current raw material prices versus last quarter?
For the last quarter to this quarter, the raw material prices have remained stagnant.
Okay. How are the margins across different segments, like, railways or other segments enjoy higher margins, or is it similar across the segments?
See, the margin profile depends on the type of product that we supply. The more value add we do, obviously has more margin impact. In terms of machining versus lamination, machining would have a higher margin when compared to lamination.
No, I'm talking about the segments, like, say, railways have a higher margins or your power segments enjoy, or is it similar across the profile?
It is similar across the profile of end market. It's only differentiated by the level of value add we do, and the other differentiation is in lamination versus machine component. Machine component is superior to lamination in terms of margin, and within lamination, the level of assembly and value addition define the margin profile of that particular product. So it is very possible that you supply a very highly assembled and value-added product along with machining to any segment. Okay. Okay, thank you.
Thank you. We have the next question from the line of Mukund, an individual investor. Please go ahead.
Hello, sir. I just wanted to know your CapEx plan for the next three years and also the debt profile, you know, for the next three years, if you can elaborate on that?
So in terms of CapEx for the next three years, see, firstly, let me just start by, you know, giving the six-month plan. By September 2024, we will finish the budget-approved CapEx that we had announced in the past. So that amount is about INR 120 crore, if I remember correctly, which will be completely capitalized by September 2024. Beyond that, we are not looking at any significant CapEx today. We'll have probably 30-40 crores worth of CapEx ongoing every year.
Okay. Okay, thank you, sir.
Thank you. The next question is from the line of Prathamesh Dahake from Motilal Oswal. Please go ahead. Prathamesh, the line for you has been unmuted. You may proceed with your question.
Hi. Hi, am I audible?
Yes, you are audible.
Hi, my first question regarding CapEx is, once we are done with all the CapEx that we have decided, how much time will it take to be fully utilized? And what is the top, top, I mean, highest revenue potential from the same? My second question would be, globally, all players like EuroGroup, Tempel, et cetera, are very bullish on lamination and cores for auto components, while our company's exposure to auto is minuscule. How do you see demand for auto, as well as related sectors shaping in the Indian context?
Okay. So see, from the CapEx turn to the time, you asked when we can utilize the full capacity. So, our capacity utilization first is about 80% of installed capacity based on historic levels. That is what we target to achieve. For FY 2025, we set a target of 50,000 tons. For FY 2026, we are already on record setting a target for 57,000-58,000 tons. So that would be, you know, peak utilization.
Okay.
After we, or when we come close to achieving that, we will look at any, any additional CapEx, looking at the market at that day to further enhance the capacity. In terms of automotive business, you're right, Tempel, EuroGroup, Feintool, I mean, these companies are very bullish on automotive, especially EV traction motor-related components. But if you see in India, the manufacturing of those, EV motors, especially four-wheelers, is not happening in country today. So,
Okay.
The opportunity in India for EV motors manufacturing lamination is a potential which can mature in some time. Today, we are trying to get into the automotive segment, which you see we have some of the automotive players already listed as our clients now. Further, we are acquiring more clients, which we'll be announcing in the next quarter. We are getting into their IC part of the business, so we are getting into something like generator-related products or starter motor-related products to get into that ecosystem. And when those companies will start producing products for EV or traction motor, we would be ready to supply those products to them. On the EV product side, specifically, we are supplying for two-wheelers already. The numbers and volume in that product segment is growing, but the revenue potential is very small.
In terms of revenue potential per two-wheeler, I think our product would not be more than $1,000-$1,500 for one.
Okay.
Lamination core. In the four-wheeler, it becomes significantly higher.
Understood. And, if we were to, let's say, on a very, very broader level, divide our product portfolio into core lamination, only loose lamination, semi, semi-assembled, and fully value assembled, how do you see the margins or gross margins varying? If you could give us some color as to if everything in our kitty goes into fully value-added, how much margin improvement can we expect on a gross margin levels?
See, on a segment basis, the quantum of fully assembled changes. So if you take an appliance or consumer product, something like a fan, there's not that much value add that you can do on a particular product. Vis-a-vis something, say, like a data center or renewable energy, where you have large shaft, different kind of child parts, castings, which you can integrate into the product. If you take in terms of the volume, the loose lamination to semi-assembled to the fully assembled lamination, fully assembled would be about 10% of revenues right now, and semi-assembled would be the remaining. We already give you the breakup of assembled and loose. So about the total product mix, I think, 75% is assembled, of which about 10% is fully assembled.
Okay.
The stator, core, and shaft, and all those things integrated.
Okay, and-
25% is loose.
In our major end sectors, like railways, energy, renewable energy, if I were to see margins, I mean, if I just give loose lamination versus if I give a fully assembled thing, how much extra do we enjoy in terms of gross margin? If you could tell us, if you could give us some color on that.
See, in terms of revenue, I would be more comfortable giving in terms of gross margin, firstly.
Okay.
If you take a loose lamination, the loose lamination would be somewhere around INR 180,000 per ton in terms of selling price. In terms of a fully assembled product solution, on the stator and rotor both, that would be about close to INR 9-10 lakh a ton.
Okay. Okay, so I
That you can probably kind of get an idea as to the gross margin potential.
Okay, I understand. Understood. Okay, that's all from my side.
Thank you.
Thank you. The next question is from the line of Mukund, an individual investor. Please go ahead.
Hello, sir. A year ago, in one of the con calls, your long-term goal was, in 10 years, you know, we should be touching a revenue of INR 7,000-8,000 crores, which is like close to $1 billion plus. And, in terms of metric tons, 150,000 metric tons was what was the goal that we wanted to achieve in the next 10 years. Now, how far are we, are we? Now, it's been a year, now, so are we on track or on it or, you know, how are we progressing towards it?
Yeah, I think, 150,000 metric tons of sheet metal sales in 10 years is a goal that we are very confident of achieving. We are on track. There are developments which we are undertaking. Shortly, you'll see the result. It should kind of give you an idea as to where we are heading.
Great, sir. Thank you. Appreciate it.
Thank you. We have the next question from the line of Pulkit Singhal from Dalmus Capital Management. Please go ahead.
Thank you for the opportunity, and congrats on a good set of numbers. First question is on just the order book pick up that you've seen. Q on Q is almost 25%, 25-30 on an adjusted price basis. Would you call it some kind of one-off or seasonality, or is there something to read into from a more longer term basis that is possibly happening?
On a longer term basis, if you see, we are getting more order inquiries, as we had mentioned in the past, also from the European markets. So those orders are typically a longer cycle order book. So you're. That is the reason why you're seeing this growth, especially from the marine segment and the wind power segment, we are seeing huge order input from the European markets. In addition to that, the overall wind energy market in India also is picking up significantly. Wind as a segment has a longer visibility in terms of order book.
Okay, but so export as a component of order book, how has that possibly changed?
I don't have that number offhand, but if I have to estimate it, I would say that of the 30% growth that you're seeing in adjusted value order book, more than half, maybe 60%-65%, is driven from the export side.
Understood. And this you are seeing continuing into Q4 and forward into FY 2025 as well?
Yes. See, on the export side, the value-added product is more prevalent on the export side. So we are seeing a lot of transition from loose to more assembled laminations and from assembled to even more assembled products in the export business going forward over the next one year.
Understood. Okay.
So the value per ton on export will keep going up.
Got it. And it ties up with your, you know, what you talked about exports, I mean, whatever it be, in terms of China plus or Europe, European costs going up. So that structural aspect, which was there, is finally playing out in orders as is.
Yes.
And, secondly, in terms of the non-motor part of the business, that is, non-laminations or anything to do with motors, how big is that now, FY 2024? How are you seeing that, you know, shape up over the next two years? Because when you talk about targets purely in terms of tonnage, I'm presuming that can be a bit misleading because that, that just talks about the motor side of the business.
See, non-motor related revenue, non-motor generator related revenue, we would be targeting INR 500 crore top line by FY 2027.
Okay. And where is that right now, FY 2024, broadly?
See, right now we don't have a number for pure non-motor because there are so many components that we do machining and castings of, which go into the motor component, that we don't track them separately. But if I were to estimate it, it should be about INR 125 crore-INR 130 crore top line today.
Understood. So this 125 is what you're saying may go to
500, effectively.
500. That is the basic rationale for acquiring the foundry and merging it into the listed scope.
Understood. And almost 30% of sales, which is external, so almost, I would say, you know, maybe INR 50 crore is added purely from an acquisition perspective?
Yes.
It's been closer to 170, going to 500. So that's to that extent, realization per ton can significantly go up. I mean, the tonnage aspect will not be capturing this part of growth, which is fine.
Yes, exactly. And the EBITDA per ton also will grow up, go up because of this.
So it'll be good if we can, you know, kind of start disclosing this, I mean, annual or quarterly, because this is a different vector of growth and has nothing to do with tonnage, and
We are working on that. So we are trying to work on, trying to put a metric where we can kind of separate these two verticals and, you know, kind of give ideas, at least on the top line and the gross margin. Maybe we'll not be able to distribute down to EBITDA basis, but at least on a gross margin basis, to give you a segment. So we are working on that. I think post the integration of the foundry unit, it'll become easier for us to kind of do that accounting and share with the team.
Understood. Right. Okay. Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Nisar Parekh, from Native Capital. Please go ahead.
Yeah, thanks for the follow-up. In this quarter, you know, around 50% is obviously railways, so INR 150 crore of run rate in the quarter. So I just wanted to understand, one, is this sustainable, now we're seeing this kind of an order book? And secondly, just if you could give a
a rough breakup, you know, Wabtec would be how much? Is 60%-70% Wabtec, or just some directional view, that would be helpful.
The Wabtec out of the overall railways would be about 55% odd, in terms of the overall railway business. In terms of railway being sustainable at 50%, I don't think that is sustainable, as our revenue will go, go up, go up. Railways will contribute, going, even going forward, maybe INR 150 crore-INR 160 crore of top line, but we are expecting the overall business value to increase.
So the incremental growth then will. Because I think majority of the growth, in this quarter would be, say, driven by railways. So in the
Going forward, we are seeing values coming in from wind segment, power generation. If you see the current quarter, all of those segments are down when compared to the past. So those will pick up once again as the revenue grow, goes up.
Got it. All right. Okay. Thank you so much.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may please press star and one. To ask a question, ladies and gentlemen, you may press star and one on your touchtone phones. We have the next question from the line of Bhavani Kumar from Phillip Capital. Please go ahead.
Yeah, good morning.
Sir, your line is sounding muffled. If you could use a handset to speak, sir, please.
Is it now better?
Slightly better, sir. Please go ahead.
Thank you, sir, for the opportunity. Just wanted to ask one question. Recently, in the budget, they have announced to convert normal bogies to Vande Bharat standard. So is there any kind of opportunity lying for us in this segment?
Hello, I can't understand what you're saying. It's very muffled.
Hello? Hello.
Yes, sir.
Hello.
Go ahead. Sir, I request you to please move to an area with better network.
Hello, is it audible now, sir?
This is much better, sir. Please go ahead.
Yeah. So, sir, just wanted to understand that recently government has announced in its budgets to convert normal bogies into the Vande Bharat kind of standard. So, is there any opportunity lying for us in this segment? Just wanted to hear your view on this.
So in that, we won't have any significant opportunity, as they are trying to upgrade the existing train system into the interior standards and the quality of Vande Bharat. Where we have the opportunity is in something like a Vande Bharat, where the coaches itself are self-propelled. So on the self-propelled coaches, yes, we have an opportunity. On the new locomotive, we have an opportunity. We don't do any parts which are on the inside of the locomotive, like your berth or toilet or, you know, those lighting, all of those kind of things we don't do.
Understood. Understood. Also, sir, it, it will be helpful if you can give two or three revenue order, revenue drivers going ahead, some, some segments or any order in pipeline, that would be very helpful for us.
So, if you see, the railway business has grown significantly in the last quarter, which I see continuing going forward. In addition to this, on the power generation and wind power segment, we are seeing good growth coming over the next couple of quarters. We have some new customer acquisition also in both of those segments, apart from regular product development happening.
Understood, sir. Understood. Thank you so much for the opportunity.
Thank you. Participants, you may press star and one to ask a question. As there are no further questions, ladies and gentlemen, we have reached the end of the question and answer session. On behalf of Pitti Engineering, that concludes this conference. Thank you for joining the call. For further queries or visiting the plant, please be in touch with Rama Naidu from Intellect PR on 992-020-9623. Thank you for joining us, and have a wonderful day.