Key Takeaways
- Strong quarter, capacity-led growth: Total income rose ~24% YoY driven by broad demand, while the company became debt-free and expanded capacity to 1.25 crore meters per annum.
- Margins improved through value, not volume: EBITDA margin reached 21.4% as the company shifted mix toward higher value-added products sold to value-added industries, using the same machines and manpower.
- The US pivot is a double-edged sword: Growing sales to the Americas lifted revenue but stretched receivables, because transit times are longer and US payment terms are on credit.
- Metal bellows is the next growth leg: A customer-pulled, ₹43 cr project for metal bellows and expansion joints was approved, with full benefit expected in FY26.
- What to watch next quarter: Whether the robotic welding trial succeeds, the pace of the working capital cycle reduction, and any update on the Middle East team build-out.
Growth & Capacity Expansion
- Phase one nearly done: Capacity reached 1.25 crore meters per annum as of 30th September 2023, with the remaining ~0.1 crore meters projected to be finished by the end of the current financial year, taking total capacity to 1.35 crore meters.
- Phase two land secured: A ~79,000 square foot land parcel adjacent to the existing site was procured, and next financial year's capacity expansion from 13.5 to ~1.65 crore meters will happen there.
- Full-year growth guided: Management expects full-year growth anywhere between 30% to 40%.
- Utilization running hot: Capacity utilization was about 95% on 1.25 crore meters in the last quarter, leaving little slack before new capacity comes online.
- Volume data withheld: Management declined to provide quantity-wise sales volume or YoY volume growth, citing over 700 SKUs and products ranging from quarter inch to 14 inches in diameter, stating "it's not the numbers that matter, but ultimately the value."
Daud: "These are not the commoditized steel items. These are very specific, high-end stainless steel, products."
Margin & Working Capital
- Value-added mix drove margin: Overall margins increased because the company is focusing on selling much higher value-added products, using the same machines and manpower to sell to value-added industries.
- Receivables stretched by US shift: Receivables increased because sales to the America region grew; transit time from India to the USA and Latin America is much longer than to Europe or the Middle East, and US payment terms are generally on credit.
- Working capital reduction targeted: The company aims to reduce the working capital cycle over the next few quarters, with local raw material sourcing from India helping reduce inventory days over time. The working capital cycle from last year is a fair assumption for the next few years.
- Margin guidance withheld: The company will definitely focus on improving margins but cannot give a specific number.
Metal Bellows & Automation
- Customer-pulled project: Customers who currently import bellows demanded a high-quality Indian manufacturing facility, prompting the board to approve a separate project for metal bellows and expansion joints with capacity of 3 lakh pieces per year at an estimated cost of ~₹43 cr, financed through internal accruals.
- Phased capex and payoff: The ₹45 cr metal bellows capex will happen in two phases stretching from FY25 up to FY26, with top line and bottom line impact starting to be seen towards the end of the next financial year and full benefit arriving in FY26.
- Robotic welding in trial: The company is in talks with a few companies to develop a robotic welding machine specifically designed to weld fittings onto the hose, and is awaiting the first machine. Once trial and commercialization happen, the company will adopt it on a large scale, changing lines one by one.
- Capex for full robotics unknown: When asked what capex to estimate if robots were added to all lines, management responded, "Actually, I would not have that number right now."
Daud: "Customers have demanded us, to come up with the metal bellows project because they are currently importing these bellows from outside India and they want somebody from India with a high quality manufacturing facility to come up with bellows."
Markets & Geography
- Export engine dominates: 85% of total revenue came from exports, majorly from America and European regions, and exports will continue to remain the major source of sales for at least the next few years.
- India base to outgrow: With Make In India and high-tech industries coming to India, the India market might grow at a higher percentage compared to the export market because the base is smaller.
- Middle East push begins: The company has started to build up a team for the Middle East market and will soon go aggressively in that region.
- Gas market on standby: A separate team focuses on the gas market, and the company will be ready as soon as the market is ready to accept.
Daud: "We feel that the India market might grow at a higher percentage as compared to the export market. Because obviously the base of the India market is smaller as compared to the export market. However, exports will continue to remain our major source of sales, at least for the next few years."
Raw Materials & Supply Chain
- Local sourcing pivot: Over the past three to four months, the company started procuring coil from a large Indian manufacturer who has matched Chinese prices, and the Indian manufacturer is now given first priority over the Chinese company.
- China dependence falling: In the next year, sourcing from China will definitely be less than 50% on the overall purchase of coils.
- New materials planned: The company plans to add hoses made of different materials in the future.
Guidance & Commitments
| Commitment | Specifics | Timeline |
|---|---|---|
| Phase one capacity completion | Total capacity reaches 1.35 crore meters per annum | End of current financial year |
| Full-year revenue growth | 30% to 40% growth | Current financial year |
| Phase two capacity expansion | Capacity increases from 13.5 to ~1.65 crore meters | Next financial year |
| China sourcing reduction | Sourcing from China less than 50% of overall coil purchase | Next year |
| Metal bellows full benefit | Full top line and bottom line benefit from Pune project | FY26 |
| Metal bellows capex | ₹45 cr spent in two phases | FY25 up to FY26 |
| Remaining current-year capex | Approximately another ₹20 cr to be spent | Current financial year |
Key Metrics
| Metric | Q2 FY24 |
|---|---|
| Total income | ₹84 cr, growth of ~24% YoY |
| EBITDA | ₹18 cr, growth of 48.3% YoY |
| EBITDA margin | 21.4%, up from 17–18% in prior-year quarter, ~360 bps improvement |
| PAT | ₹11.6 cr, growth of ~53.8% YoY |
| H1 FY24 revenue | ₹168 cr, growth of ~21.5% YoY |
| H1 FY24 EBITDA | ₹34.9 cr, growth of ~39.4% YoY |
| H1 FY24 EBITDA margin | 20.7% |
| H1 FY24 PAT | ₹22.6 cr, growth of 41% YoY |
| Export share of revenue | 85% of total revenue |
| Full-year revenue growth guidance | 30% to 40% range |
| Capacity | 1.25 crore meters as of 30 Sep 2023; phase-one expansion to reach 1.35 crore meters by end of FY24 |
| Capacity utilization | ~95% on 1.25 crore meters |
| Stainless steel corrugated flexible hoses share | ~64% of H1 FY24 sales |
| Assemblies and fittings share | ~28% of H1 FY24 revenue, up from ~26–27% in prior year |
| Other segment share | ~8% of H1 FY24 revenue |
| Inventory days | 99 days |
| Debt repaid from IPO proceeds and internal accruals | ₹32 cr; company is now debt-free |
| Metal bellows project capacity | 3 lakh pieces per year; estimated cost ~₹43 cr, financed through internal accruals |
| Metal bellows project expected revenue at full utilization | ₹100 cr to ₹120 cr |
| Metal bellows project expected bottom-line margin | 25% to 30% |
| H1 FY24 capex spent | ~₹18 cr; additional ~₹20 cr planned for remainder of FY24 |
| FY25 total capex estimate | ₹60 cr to ₹70 cr |