IFGL Refractories Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record H1 revenue, margin squeeze: The company posted one of its highest-ever half-year revenues, but EBITDA margins were hit by sharp inflation, higher operating expenses and FX swings.
• Domestic strength offsets export softness: Indian demand was the bright spot while exports slowed; management sees domestic consumption staying very high over the next year, driven by infrastructure spending ahead of the 2024 elections.
• Europe bracing for a tough winter quarter: European steel output cuts make the next quarter challenging, though falling ocean freight and a China sourcing advantage for the UK subsidiary provide partial relief.
• Customer price pushback is real: Clients are making serious requests for price corrections; management is in discussions and concedes some corrections will happen, but the process will take time.
• What to watch next quarter: Whether European results hold up as steel output falls, the pace and size of customer price givebacks, and the ramp-up of the Vizag Phase 2 and Kandla expansions.

Topline & Demand

• India engine running hot: Domestic market outperformed exports in Q2, with management citing very good order flow and no issue with orders; the major catalyst ahead is infrastructure investment tied to the 2024 Indian election cycle.
• Export slowdown: Export demand has softened, with some countries facing energy issues and a broader slowdown in Europe weighing on order intake; orders remain consistent but are not the 12–14 month type.
• European steel headwind: A lot of the European steel industry has reduced output, making the next quarter quite challenging for the company's European subsidiaries.
• Offsetting freight relief: Falling ocean freight costs from China, plus the ability to source from Chinese manufacturing bases for the UK company (Monocon), will provide a boost to business that was constrained during the period of high freight rates.
• Foundry bright spot: Hofmann in Germany has seen an uplift in some higher-value product areas within the foundry industry, which will benefit results.
• USA mixed: Some slowdown on the steelmaking front, but EI Ceramics has delivered very good success and profitability in the last two months, a trend management expects to continue.

McIntosh: "We believe the next quarter will be quite challenging from the point of view of the market because a lot of the European steel industry has reduced output. However, there are a couple of things which may help the results and that is that with the reducing freight costs from China and having our manufacturing sources for the UK company in China. There will be a boost from business, which we expect to grow again given the fact that we were not able to do that business during the high freight rate saturation."

Margins & Costs

• Inflation bite: EBITDA margins were impacted by sharp inflation, increased operating expenses and foreign exchange variations; domestic raw material rates have not come down.
• Ocean freight the main cost lever: The only significant cost reduction has been ocean freight for imported raw materials, which has come down materially over the last four to five months; this benefit is partially offset by rupee depreciation since imports are dollar-denominated.
• Customer price negotiations underway: Customers are making serious requests for price corrections; management is pushing back with data, but acknowledges discussions will take time and there will be some corrections.
• International inflation managed: Very high inflation in European and American markets has been largely offset by successful price increases, so international EBITDA is not expected to change too much.
• Sustainable margin band: Management pegs sustainable EBITDA margins at 14% to 17%.
• Cost optimization in motion: The company is implementing automation at various stages as a cost optimization measure to improve margins.

Sarda: "Yes, there are, I think, serious requests by the customers or, and we are in discussions with them, showing them figure that the things are not that what they are trying to think. But then the discussions will take time. But there will be some corrections also."

Subsidiary Health

• EI Ceramics turnaround: After historical volatility, EI Ceramics has returned to producing very consistent profitability over the last three months, which is the main driver of the higher consolidated figure; this is expected to continue.
• Hofmann stability: Hofmann has shown no volatility month-on-month, with very consistent profitability over the last year and during the quarter.
• Monocon gel casting project: The largely automated manufacturing system for the activated gel casting project is almost ready, with robots installed and being programmed; completion expected early in 2023.
• European aggregate view: Overall European results next quarter are expected to be slightly below but still reasonably good figures.

Capex & Capacity Expansion

• Vizag Phase 2 nearing completion: Will add 800 tons per month and enable entry into new markets with RHD gas snorkel and large precast shapes, combined with computational fluid dynamic capabilities; many products will be new to India; commissioning in Q4 FY23.
• Vizag Phase 3: Casting flux capacity of about 14,000 tons per year coming on stream.
• Kandla expansion: Capacity will double from 20,000 to 40,000 pieces per month; expected by Q1 FY24.
• International projects: Hofmann is expanding its manufacturing hall in Germany (more decluttering than capacity at first) and restarting manufacturing in the Czech Republic for additional capacity; the USA clay graphite plant relocation from Ohio to Michigan is complete, with some equipment upgrades for EI Ceramics.
• R&D centre: New research and technology center in Odisha on track to be operational in the first half of 2023.
• Overall capex timeline: The final piece of the current expansion cycle completes in Q4 FY24, with various projects at different stages.

Balance Sheet & Capital Allocation

• Debt rising on working capital: Debt is increasing primarily because of working capital needs tied to a huge inventory build-up, some debtor delays, and the overall volume of business growing over the last 1–1.5 years.
• Cash preserved for growth: Management is holding cash to fund the large capex plan (partially met by term loans, partially from internal cash) and to keep dry powder for a potential acquisition; there is no intention to do any buyback immediately.

Sarda: "The cash which we have is to increase the value of the company by maybe adding capex or adding capacities or maybe looking for an acquisition at a later date. If we get tomorrow, when we have an acquisition ready, we may not have the cash readily available. So that's the reason why we have kept the cash. We don't intend to do any buyback immediately."

Guidance & Commitments

Key Metrics