Ramkrishna Forgings Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Margin expansion story intact: Gross margin improved ~200 bps QoQ, driven by new order wins converting to production and a shift up the value chain. Management expects elevated margins to sustain for the full year.
• Export demand robust, mix shift underway: North America and Europe demand is projected to stay strong for the full year, with product mix tilting toward higher-realization oil & gas and light vehicle parts, making tonnage an increasingly irrelevant metric.
• Railways set to double: The railway segment is expected to grow 100% YoY in absolute top-line terms this year, up from ~INR 50 crore last year, supported by a new fabrication facility.
• Debt reduction on track: INR 30 crore of debt was repaid in the quarter, and management targets becoming net debt-free in three years purely from operating cash flows, with no capital raise built into that plan.
• What to watch next quarter: Whether the INR 388 crore in new export contracts begins to translate into visible order book buildup, and if the full impact of rising interest rates on borrowing costs materializes as flagged.

Margin & Operating Performance

• Gross margin driver: The ~200 bps QoQ improvement came from new order wins converting into regular production and the company moving up the value-added chain, not from any inventory or raw material tailwind.
• Inventory change is not a benefit: The INR 70 crore change in inventory represents extra production over sales; the underlying gross margin improvement is real and stands on its own.
• YoY margin decline explained: Q1 FY23 gross margin dropped ~6% vs Q1 FY22 because last year's domestic market was depressed by COVID's second wave, pushing the export mix above 50% of sales. Export realizations carry freight in the value, so raw material cost appeared lower and gross margins looked higher. That mix reversed in Q1 FY23.
• Machining at full tilt: Machining capacity is currently utilized at 100%, while press utilization sits in the 50%–65% range depending on product mix, with improvement expected in coming quarters.
• Finance cost steady for now: Q1 finance cost was INR 26 crore; management expects it to remain at current levels because even if interest rates rise further, debt reduction will offset the impact. The full effect of rate hikes has not yet been felt.

Naresh Jalan: "The gross margin, I think is here to sustain. And I think we can expect this levels to remain elevated for the full year."

Export Demand & Product Mix

• North America and Europe robust: Demand from both regions is projected to stay strong for the full year as OEMs manufacture more vehicles with the chip shortage easing. Current export performance is sustainable and will continue for the entire year.
• Realization tailwinds: Higher export realization is driven by a mix of currency and product change: improved offtake in oil and gas (better realization), higher sales of light vehicles in North America, and new customer entry at better pricing in Europe.
• Tonnage is the wrong lens: Export tonnage has stayed around 10,000 tonnes per quarter for the last 5–6 quarters because the product mix is shifting toward LCV parts and oil & gas parts, which are low-weight. Revenue growth should be viewed in rupee terms, not tonnage.
• Export mix range: Export contribution to top line is expected to remain in the 30%–40% range, with maybe 3%–4% variation up or down.
• Freight distorts quarter-on-quarter comparisons: Total export includes freight; the prior quarter's export realization had an element of freight realized from the customer, and the adjustment for that means the numbers will not exactly match a simple volume-times-realization calculation.
• No hedging liability: The company passes forex movements of plus/minus 5% on to the customer every quarter and takes no call on the forex side, carrying no hedging liability.

New Order Wins & Capacity Strategy

• Four new contracts worth INR 388 crore: Won from Europe and North America during the quarter, with execution starting from FY24. Some contracts span three years, some five years; the INR 388 crore figure is estimated annualized volume, entirely export.
• Value-chain move into assemblies: The company has started into sub-assemblies and full complete assemblies, and won a new business order for differential housing cases, enabling it to move up the value chain and diversify its product portfolio.
• Capacity strategy is value over volume: Management is not looking at augmenting huge tonnage capacity; the focus is on adding capacity in automation and value-add (machining) to improve bottom lines more significantly than the top line. Ring rolling utilization can go up to 130%–135% depending on product mix.
• Key focus segments: High-margin segments are the priority: assemblies, EV products, and oil & gas.
• No traditional order book maintained: The company does not maintain a disclosed order book, making the INR 388 crore contract announcement the primary visibility into forward revenue.

Naresh Jalan: "We are looking at adding more capacity in augmenting automation and value-add in the products. So that will improve the bottom lines more significantly than the top line."

Domestic & Railway Outlook

• Railways to double: The company expects to grow 100% on what it did last year, with top line from railways expected to double in absolute terms this year vs. last year's ~INR 50 crore. The new fabrication facility commissioned last year is driving good order inflow, and railways will do extremely well in the overall portfolio for the next 2–3 years.
• Domestic market to outperform: The domestic market is expected to outperform in the next 3–4 years, driven by railways, commercial vehicles, light vehicles, passenger vehicles (nascent), and tractor segments.
• Supply chain shift to India: A lot of supplies are moving to India from other parts of the world, benefiting Indian manufacturers.

Steel Prices & Raw Material

• Automotive steel prices unchanged: As of April 1, automotive steel prices in India have had no price correction and remain unchanged as of the call date (July 21, 2022). Management expects current realization to sustain with no expectation of prices going up or down for at least the next three quarters.
• HRC pricing not relevant: Management stated that HRC steel pricing is not relevant to the automotive component industry and declined to comment on it.
• Raw material sourcing undisclosed: Management declined to comment on the number of players it sources raw material from.

Capital Allocation & Balance Sheet

• Debt reduced by INR 30 crore: In line with the capital allocation strategy.
• Net debt-free in three years: Management targets becoming net debt-free in three years' time purely from operations, with no capital raising built into that plan. Projected cash flows are expected to be sufficient to fund growth without additional borrowing.
• Capital allocation policy: Part of cash flow goes to debt repayment and working capital, then dividend payout, then whatever remains post-dividend is ploughed back into augmenting new capacity or plant.
• Fundraising plan dropped: No fundraising is expected at the current moment given current stock performance and expected business volume for the next three years.
• Full-year debt guidance deferred: Management wants to wait for one more quarter before giving a full-year number on the debt side.
• Borrowing cost ticking up: Blended cost of borrowing is near 7%, marginally up 40–50 bps this quarter, with the full impact of rate hikes not yet felt.

Naresh Jalan: "And basically what, Lalit, wants to say, from operations we want to be debt free in next three years' time. There is no -- he is not building in any capital raising to be debt free in next three years."

Guidance & Commitments

Key Metrics