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We recently hosted the management of Kirloskar Ferrous (KFIL), represented by Mr R.V.Gumaste (Managing Director) and Mr. Srivatsan R.S (CFO). The company provided insights on its capacity expansion plans which include expansion of pig iron capacity from 0.6 mn tons to 0.8 mn tons on the back of a) upgradation of MBFII – completed in 2QFY23 b) Hiryur BF upgradation – interactions on going with MECON c) PCI and Oxygen enrichment – commissioning expected by 3QFY24. The casting capacity is also expected to increase from 150ktpa to 180ktpa with the commissioning of second foundry at Solapur by 4QFY23. The company expects volumes of ~600 ktpa in case of pig iron and ~15% volume growth in case of casting during FY24. KFIL recently operationalized the second coke oven plant, ensuring self-sufficiency for coke going forward. The company’s merger with ISMT is in progress and will make the business activities more sustainable in the long term. The merger will help improve operational efficiencies through standardisation and simplification of business processes. The combined business would also benefit from increased scale, expanded reach and higher cross-selling opportunities. The company’s cost saving initiatives and likely commencement of captive iron ore mining operations post final stage forest clearances will likely provide further impetus to margins. We upward revise our earnings for FY24/25 and increase fair value (+16.3%) (refer exhi. 2). Maintain BUY.

* Capacity expansion to ensure sufficient capacity going forward: KFIL plans to expand its pig iron capacity from 0.6 mn tons to 0.8 mn tons on the back of a) upgradation of MBFII – completed in 2QFY23 b) Hiryur BF upgradation – interactions on going with MECON c) PCI and Oxygen enrichment – commissioning expected by 3QFY24. The casting capacity is also expected to increase from 150ktpa to 180ktpa with the commissioning of second foundry at Solapur. Capacity expansion plans to ensure sufficient capacity going forward.

* KFIL – ISMT merger to offer synergistic benefits: KFIL’s merger with ISMT will offer synergistic benefits and make the business activities more sustainable in the long term. Further, the merger will also help improve operational efficiencies through standardisation and simplification of business processes. The combined business would also benefit from increased scale, expanded reach and higher cross-selling opportunities. The merger would ensure greater integration and flexibility for both companies which will likely strengthen the asset base, revenues, and service range. The appointed date of the proposed scheme is April 1, 2023. Exchange ratio for the merger stands at 17 fully paid-up equity shares of Kirloskar Ferrous (nominal value of INR5 each) for every 100 fully paid-up equity shares of ISMT (nominal value of INR5 each) except shares held by Kirloskar ferrous in ISMT.

* Cost optimisation initiatives on track: KFIL has proactively structured changes to reduce its costs. The company has planned capex to save cost through backward integration by setting up coke ovens, installing Bell-less top for blast furnaces and introducing pulverised coal injection. The company recently operationalized the second coke oven plant, thereby ensuring self-sufficiency for coke going forward. The company also expects to commission the 20 MW power unit by FY23 end which will ensure surplus power at Koppal while the pulverised coal injection project completion is expected by 3QFY24.

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