IFGL Refractories Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Soft volumes, margin resilience: Volumes saw a slight drop, but standalone EBITDA margin improved to 16% from 14% QoQ, helped by lower ocean freight and raw material costs.
• Europe drags, America shines: European demand and a seasonal German slowdown hurt the quarter, while the America business delivered very good results and is expected to stay strong.
• Capex cycle on track: The ₹177 Cr expansion plan is ~50% spent, with Vizag Phase 2 complete and new products already receiving orders; management sees a 3–3.5x revenue potential on this capex.
• Cost tailwinds bottoming out: Raw material and ocean freight declines have flattened, limiting further margin expansion from this lever to a possible 2–5% at most.
• What to watch next quarter: Whether European demand stabilizes as management predicts, the pace of Vizag Phase 1 utilization ramp toward the 40–50% target, and any customer push for price cuts as input costs fall.

Demand & Volume Environment

• Volume degrowth: A slight drop in volumes was driven by a demand slowdown in Europe, no sales to CIS countries, and lower sales in other West Asian nations.
• Kandla drag: The Kandla plant operated at only 65–70% utilization, contributing directly to the volume decline.
• Export hit: The standalone topline drop from ~₹211 Cr to ~₹182 Cr QoQ was attributed partly to product mix, with export markets taking a bigger hit than domestic.
• Europe specifics: Sales from UK and German operations improved marginally, but sales from India into those countries were lower. The German operation historically sees a seasonal dip in the December quarter with ~15 days of lost sales.
• America strength: The America business did very well in Q3 and is expected to continue performing well in Q4.
• India demand outlook: Management cited the ₹10 lakh Cr infrastructure capex in Budget 2023 as a major demand driver, expecting it to boost steel and consequently refractories demand. The Indian steel market is growing at a 6–7% CAGR.

Sarda: "As of now I think our feeling is that Europe's major problems are over because they have now been able to wither away the peak of winter so the situation is expected to improve from here."

Margin Walk & Cost Structure

• Standalone EBITDA margin: Improved from 14% to 16% QoQ, driven primarily by lower other expenses as ocean freight came down versus the September 2022 quarter.
• Consolidated EBITDA margin: Currently at ~12%, close to the stated target of above 13%.
• Raw material costs: The reduction is flattening; costs have gone up everywhere and further reduction may be only 2–5%, appearing to bottom out.
• Ocean freight: A steep fall over the last three months has now stopped, with shipping companies also signaling a bottom.
• Employee cost rigidity: ~95% of employee costs are fixed and do not reduce proportionately with turnover declines, creating operating leverage risk in a downturn.
• Global vs India margin structure: Global refractory margins are structurally lower than Indian margins due to lower interest rates in Europe (2–3% vs 8–9% in India), more mature products, and currently down markets. Global companies are content with ~10% margins while IFGL targets higher.
• No price cuts yet: No significant price cuts were taken in the last quarter; prices were maintained as costs declined. Management is non-committal on future cuts, stating they will wait and see what customers want.

Sarda: "If you look at our interest rates are about 8% to 9% and global interest if you talk of the interest rates in Europe it was about 2% to 3% so their overall margins level they will be happy at about 10% we will not be happy at about 14% to 15% so that is the difference."

Capex & Expansion Progress

• Plan amendment: The expected project cost was amended from ₹166 Cr to ₹177 Cr, majorly for a new lab in Kandla and changes in structural plan and design. A term loan of ₹120 Cr has been tied up.
• Spend progress: Out of ₹177 Cr, ~50% has been spent or committed, with the balance expected largely complete by March 2024.
• Vizag Phase 2: Now complete; the plant has started receiving orders for new products including RHD gas snorkels and large precast shapes, combined with CFD capabilities.
• Vizag Phase 1: Commissioned September 2021 at ~₹32 Cr; utilization has reached ~25%, with a target of 40–50% in FY2024.
• US relocation: Completed relocation and modernization of a clay graphite manufacturing plant for foundry products in Michigan; initial customer trial phase completed successfully.
• UK automation: A largely automated manufacturing system for an activated gel casting project is almost ready, with a robot installed and being programmed.
• Germany expansion: A new plant expansion has commenced with the foundation of a new hall laid; project completion is expected in the middle of the New Year.
• R&D lab: A new R&D and Technology Centre in Odisha is under construction at ~₹20 Cr capex, expected to be operational in H1 FY2024. The objective is to enhance product capabilities, introduce new products, and use alternative raw materials.

Sarda: "We normally take our sales capex ratio to about 3 to 3.5 times so whatever we are capex you can easily say three times we are revenue potential."

Segment & Subsidiary Performance

Strategic Positioning & Growth Ambition

• Growth target: IFGL aims to beat the average growth rate of both competition and the user industry. With steel growth expected at 6–7% and the refractory industry at 7–10%, IFGL’s target is to grow higher than those benchmarks.
• Global footprint rationale: Management frames IFGL as an Indian multinational with footprints across the globe. Products made overseas are complementary to Indian production, not identical, except for EI Ceramics.
• Currency dynamics: A depreciating rupee benefits export realizations but negatively impacts input costs like raw materials and ocean freight. Historically, IFGL has been a net beneficiary as a net exporter and net foreign exchange earner.
• Turkey exposure: The earthquake did not occur in an area where IFGL’s customers are located; initial information suggests no customers were affected, though the situation needs further assessment. Reconstruction may follow a natural calamity pattern.

Sarda: "I can only say that we will beat average growth rate of either competition or the user industry that is our target to go higher growth than those benchmark figures."

Guidance & Commitments

Key Metrics