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Steel Strip wheels ltd. (SSWL) reported net sales of INR 11,103Mn in 3Q FY24 (~18% increase on YoY basis) and PAT of INR 595 Mn (~36% increase over YoY basis). EBITDAM excluding other income stood at 10.5%, declined on YoY basis. This decline is majorly due to increase in other expenses which by 9% primarily due to heightened freight costs attributed to the Red Sea issue. The substantial increase in freight costs was successfully passed on to clients, contributing to the overall top line. Further, there was an increase in steel prices by INR 2 per kg from October 1, and this increased the top line by INR 150 Mn approx., which further impacted the margin in percentage term. We expect the margin to improve with the help of increasing alloy wheel production and better exports. SSWL acquisition of AMW increased the company's debt by INR 1,000 Mn. The company export segment in Q3FY24 has grown 179%in revenue on YoY basis. We expect this export growth to continue, and we see exports of INR 5,500 - 6,000 Mn for FY24.

Export Surge Fuels Optimistic FY25 Growth Outlook:

In Q3FY24 exports have grown 179% on YoY basis in revenue. This is due to improving demand scenario. The momentum should continue in FY25 as company sees huge potential for alloys exports. The phase-1 expansion of alloy wheel production capacity, reaching 3.6 million units annually, is set to commence in February 2024. The full capacity of 4.8 million units is anticipated to be operational by Q2FY25. Currently, the company holds orders for approximately 3.6 million units, with potential growth to over 4 million units in FY25. This optimistic outlook is attributed to Maruti issuing RFQs for alloys and strong support from export activities.

Continuous EBITDA Advancement:

Promising Growth Trajectory and Sustainable Momentum Unveiled: In Q3FY24, EBITDA Margins was at 10.5% as compared to 11.5% in Q3FY23 and 11% in Q2FY24. This was due to heightened freight costs attributed to the Red Sea issue and increase in steel prices in the month of October. However, SSWL saw a notable increase in EBITDA/wheel, reaching around Rs. 252 compared to the previous quarter's Rs. 243 and Rs. 240 in Q4FY23. The management is confident in sustaining profit margin growth, emphasizing product premiumization. This is driven by the expansion of the alloy wheel business, increased exports, a rising market share in electric motor hub wheels, and the addition of AL knuckles to the sales mix. With a dedicated focus on operational excellence, the management targets a medium-term EBITDA/wheel margin between Rs. 250- 260. However, achieving this goal involves a careful balance, as positive contributions from operational efficiencies may be offset by start-up costs related to the AMW facility.

Other Highlights

• AMW Auto Components:

Having acquired AMW as a 100% subsidiary, a payment of approximately Rs 1.38 billion settled the acquisition in full. The asset is projected to be operational within the next 4-5 months. The enhanced capacity will cater to the CV industry, exports, tractors, and passenger vehicles. Positive EBITDA Margin is anticipated from FY26 onwards.

• Capex:

Total capex would be of Inr 4700 Mn in FY24 which includes AMW acquisition, Knuckle casting project, Alloy wheels capacity expansion and maintenance capex, etc. For FY25 Management has guided a capex of Inr 1800 Mn.

• Tax Rate:

The company has moved to the new Income tax regime wherein the effective tax rate will be at 25% from Q4FY24 onwards against 33% in earlier periods.

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