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Expansion on-track, ISMT to lead margin recovery

Kirloskar Ferrous reported consol. EBITDA of INR2.5bn, above JMfe of INR2.3bn. The out-performance in EBITDA was primarily on account of strong numbers posted by subsidiary ISMT. Key takeaways from the call are –1) Company expects to end FY24 with 3-5% YoY volume growth on casting front i.e 135kt for full year and remains optimistic about FY25. 2) Company has sucessfully upgraded all its BF’s with current capacity at 165,000 tons of hot metal and expects volumes to improve marginally in 2H. 3) Demand from CV and infra segment remained strong where as sluggish demand on tractor front led to volume de-growth. 4) ISMT turnaround continues to be on track with ‘70 MW’ solar power plant to be operational by March’ 24 with resultant cost saving expected at INR700mn p.a. Further, company plans to have solar power plant with capacity of 175 MW with resultant cost saving of INR1.7bn 5) Machining capacity currently stands at 600mt/month and expects to increase it to 1,000mt/month by FY24. 6) During the quarter the company completed acquisition of Oliver Engineering Private Limited (on 29th Sep’23) and has commenced refurbishment activities with plant expected to be operational in 5-6 months with capacity of 28,000 tons. KFIL continues to remain well paced on margin expansion path amidst new projects underway to reduce RM cost, coupled with margin accretive product profile at ISMT. Stock currently trades at 6x EV/EBITDA on FY25E. Maintain BUY.

* Higher realizations lead to steady operational performance: Kirloskar Ferrous standalone reported a revenue decrease of 5% QoQ to INR8.8bn primarily on account of lower volumes (down 6.7% QoQ at 133kt). Volumes were largely impacted due to (a) planned shut downs for installing bell less top (b) weaker demand tractor segment (contributing 35% of casting volumes) due to deficit monsoon. EBITDA came in at INR1.3bn up 5% QoQ implying a blended EBITDA/t of INR10.0k, a sequential increase of 12% mainly on account of lower RM cost. PAT stood at INR569mn up 5.8% QoQ.

* Healthy performance on ISMT front uplifting overall performance: ISMT reported 13.9% QoQ increase in revenues to INR7.5bn. EBITDA came at INR1.2bn up 52.4% QoQ driven by topline growth. Consequently, PAT came in at INR513mn up 26.1% QoQ. On consolidated basis company reported revenue of INR15.6bn up 3.8% QoQ. EBITDA came in at INR2.5bn up 21.7% QoQ. PAT came in at INR683mn (including impairment loss of INR367mn for ISMT subsidary).

* Triggers in place for cost optimizing and improving realizations: KFIL during the quarter completed its planned maintenance of bell-less top for MBF-1 and continues to remain on track for its various projects for capacity enhancement (refer exhibit 6) providing comfort for long term growth amidst increased operational efficiencies post ISMT merger and Oliver engineering limited acquisition.

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