Ramkrishna Forgings Ltd Q4 FY2022 Concall Summary

Key Takeaways

• 77% revenue growth, margin surge: FY22 revenue jumped 77% and EBITDA margin expanded 521 bps YoY, driven by CV recovery, cost initiatives and operating leverage.
• Export resilience despite headwinds: Exports grew 96% even as chip shortages and geopolitics persisted for three quarters, helped by geographic diversification into South America and Thailand.
• FY23 growth guided at 22–25%: Management expects mostly volume-driven topline growth, with margins continuing to improve for at least six to eight quarters, though not at the same 500 bps magnitude.
• Capital allocation locked in: 50–60% of operating cash flow earmarked for debt repayment, ~40% for value-add capex over the next three years; no forging capacity addition planned.
• What to watch next quarter: Whether the 22–25% FY23 growth guidance holds as chip shortages persist, the pace of margin improvement, and any update on new orders moving from sample stage to production.

Financial Performance

• Revenue drivers: 77% FY22 revenue increase came from strong CV industry recovery post-COVID and efficient order execution; exports grew 96%, domestic grew 66%.
• Margin levers: EBITDA margin rose 521 bps YoY through improved capacity utilization, cost-cutting initiatives, increasing automation and incorporating latest technology into manufacturing.
• Capacity utilization: Overall utilization was ~77% during the year, expected to improve in the next couple of years yielding operating leverage benefit; baseline expected to move to 80%+ in FY23.
• RM pass-through mechanics: 99% of raw material cost is captured via contractual pass-through to OEMs with a one-quarter or one-month lag, so the complete P&L never gets hit due to non-pass-through.
• Freight cost drag: Freight costs rose steeply, with North America at 4.5x the FY22 average and currently above 5x; the company recovered ~₹60 Crores from customers but could not recover the full amount, eating into margins.
• Fuel cost shift: Converting internal capacities from gas, furnace oil and LDO to electricity to reduce fuel cost and save raw material due to heat loss; benefits expected over the full year, not immediately next quarter.
• Inventory clarification: Production exceeded sales by 32,000 metric tonnes in FY22 because shipping time increased from 45 days to 85–90 days, increasing material in float to maintain JIT at customer end, not because of high inventory buildup.
• Export realization: Export realization increased by ₹5 per kg in Q4; any perceived change versus domestic is due to premix changes, not a broad realization decline.

Naresh Jalan: "I think you will be able to see still growth both in terms of topline and bottomline but the amount of inflextion which has happened of 500 basis points, it may not happen as that much but yes you will be able to see continuous growth in terms of overall margins which we feel that is going to continue for at least six to eight quarters."

Demand Environment & Order Book

• New business wins: Bagged 3 new contracts in Q4 FY22 aggregating ₹144 Crores; full year new business of ₹984 Crores from 18 contracts.
• European OEM win: Received PPAP clearance and confirmation from a European OEM for a multiyear order; a new Jamshedpur fabrication facility was approved by a leading European OEM in mining and earthmoving, resulting in start of production.
• Order book strength: No order cancellations from any geography; contracts with customers are strong until FY24 end.
• Domestic CV bullishness: Management is extremely bullish on the domestic CV segment due to government infrastructure spending; the company is capex-ready to utilize the opportunity.
• US market green shoots: Seeing green shoots in US build rates, expected to continue in the next couple of quarters due to large backlogs representing 8–10 months of build rate at full volume.
• Semiconductor shortage: Likely to persist for some time; the industry is coping with alternative measures and the issue is expected to resolve in coming quarters.
• Inventory correction risk dismissed: Management does not foresee any impact from inventory correction; because the build rate is so slow, there is no buildup of inventory at the export platform.

Naresh Jalan: "I think I can only tell you it is a big no. We have had no order cancellations whether it is North America, whether it is Europe or anywhere in the world, my contracts with my customers are strong and it will be till FY2024 end."

Export Strategy & Geographic Mix

• Export growth engine: Exports grew 96% in FY22; strong demand from Europe helped de-risk export reliance from the United States.
• Geographic diversification: Despite chip shortage and geopolitical issues persisting for ~3 quarters, exports were maintained due to geographical segment breakup; addition of South America, Thailand and other regions expected to sustain growth.
• Revenue mix target: Expect to sustain a 50-50 or 45-50 export-domestic mix going forward.
• Russia exposure contained: Russia was never a very big order book; management declined to comment further, preferring to wait for matters to settle down.
• New offices: Opened new offices in various geographies, adding to existing offices in the United States, Mexico and Turkey, to pursue an aggressive export growth strategy.

Naresh Jalan: "I think if you see our exports while these problems are there since about three quarters now, we have been constantly able to maintain our exports because of the break up in the geographical segments and we believe that with addition of new segments such as South America, Thailand and other places, I think we will be able to maintain the same growth may be some country specific, it goes further down but we as RKFL do not believe that our overall portfolio is going to decline in terms of exports."

Product & Segment Diversification

• Non-auto push: Targeting a 75-25 auto to non-auto mix in the next three to four years, up from the current mix.
• Addressable content ambition: Targeting to increase addressable content per vehicle to 84% by FY27; moving from rear axle to front axle, aiming for complete value-add fully built front axle.
• Railway segment: Performed one of the best quarters over the last three quarters; expected to do excellently well in FY23 with railways running in full swing.
• Fabrication business: Facility started in October; FY22 turnover was around ₹10 Crores, expected to jump multifold in FY23.
• Warm forging: Commissioned warm forging plant and begun shipping product samples, enabling addition of a new product to the basket.
• Heavy vehicle dependence reduced: Dependence on only heavy vehicles has decreased dramatically over the last 8–10 quarters.
• EV strategy: Volumes budgeted based on market predictions of total equipment sales; targeting a mix of three-wheelers and PVs, though management declined to name specific products citing company policy.

Capital Allocation & Balance Sheet

• Debt reduction priority: Will deploy 50% to 60% of cash surplus generated in upcoming years to debt reduction/payment, and 30% to 40% to capex and working capital; policy may change slightly if there are higher price increases or other requirements.
• Capex philosophy: Zero capex planned for ring rolling or forging capacity addition; only kaizens for productivity improvement; capex is mainly on the value-add side, not forging capacity increase.
• Revenue potential: With the current gross block and work-in-progress, ₹3,600–4,000 Crores of revenue is achievable in the next three years.
• ROE target: Expect to see 20%+ ROE within FY23; as the company rides up the value-add chain and improves internal efficiencies, much better ROEs are expected going forward.
• Working capital elongation: Debtor days elongation is primarily due to increased shipping time; extra material is kept in transit to avoid air shipments and meet JIT commitments. Domestic sales to Tata Motor involve bill discounting which gets added to debtors, making the cycle look elongated.

Naresh Jalan: "I think it is good to have a good capacity utilization, it does not predict that we need to add capacities over there."

Guidance & Commitments

Key Metrics