Ramkrishna Forgings Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong quarter, broad-based growth: Revenue rose 32% YoY, driven by export volume growth of 19% QoQ and a richer product mix that lifted realizations 11% sequentially.
• The mix shift is structural, not cyclical: MHCV is now only 50% of automotive volume, with Class 8, LCV and sub-9-tonne vehicles filling the other half; non-auto segments are targeted to reach 25% of revenue.
• Margins held despite cost headwinds: Standalone EBITDA margins improved sequentially even as consolidated margins dipped slightly on subsidiary performance; management expects current levels to sustain and improve.
• Capacity expansion is fully funded from cash flow: A 56,000-tonne press line is underway, all capex will be funded from free cash flow, and the company remains committed to its net debt-free target by FY25.
• What to watch next quarter: Whether the 15%+ export growth target for FY23 stays on track, the pace of freight cost normalization, and the Supreme Court decision that unlocks the ACIL acquisition.

Revenue Drivers & Product Mix

• Export engine firing: 19% sequential volume growth in exports came from past order wins converting to revenue, with faster conversion rates than before.
• Realization jump of 11% QoQ: Driven by three factors: products moving from machining to assemblies, some from forging to machining, and better press utilization with higher-tonnage components on the same presses.
• Raw material pass-through: Management stated there was no decrease in raw material prices for them during the quarter; if steel prices fall in future, realizations may adjust accordingly.
• Geography mix stable: The Q2 geography split was almost identical to H1 FY23, with exports at 40-42% of sales.
• Production vs. sales: Production ran slightly ahead of sales over the last two quarters; management expects export demand to improve QoQ and sees no destocking concern.

Naresh Jalan: "It's mostly changed from some products have changed from machining to assemblies and some products from forging to machining. And some we have -- because of current order book, we have been able to utilize better the press, getting more higher tonnage into the same presses. All three have been factors contributing to higher realization."

Diversification: Away from MHCV

• MHCV dependence structurally declining: MHCV is now only 50% of automotive volume, with the balance from Class 8 trucks, LCVs and vehicles below 9 tonnes; as a share of total revenue, MHCV sits at roughly 40%.
• Non-auto ambition: The non-auto segment currently contributes ~19% of revenue; management is targeting 25%, with railways and the EV business as the primary growth vectors.
• Railway business scaling: Currently 2% of total revenue, the railway order book stands at ~₹100 crores; management expects to double orders this year and reach ₹200-250 crores in railway sales by FY24.
• EV traction: The EV business is expected to form 3-4% of total revenue in the near future, adding another leg to the non-auto diversification story.
• North America off-highway entry: The company entered the off-highway and tractor-trailer segments in North America, adding new product varieties that will further reduce MHCV concentration.

Naresh Jalan: "Sunny, I think in terms of MHCV, we are no more an MHCV supplier. MHCV as a basket is only 50% of our automotive volume balance 50% of my automotive volume comes from Class 8, LCV, every vehicle, which is below 9 tonnes basically."

Margins & Cost Structure

• Standalone margins improved: Sequential consolidated EBITDA margin dipped slightly due to lower profit at the subsidiary level, but standalone margins went up.
• Power and fuel costs fell: These costs dropped from 45.8% to 43.3% sequentially, helped by better utilization spreading fixed power costs over higher tonnage and improved press line placement efficiency.
• Freight costs still elevated: Other expenses rose QoQ on higher export ocean freight; freight costs are coming down but not yet back to earlier levels, and management called further declines "very difficult to predict."
• Inventory in tonnage terms declining: Inventory has decreased over the last three years in tonnage terms; the valuation increase reflects higher steel and goods prices, and the company is working on further reduction over coming quarters.
• Foreign exchange tailwind: A net gain of ₹12 crores was booked in Q2, factoring in both gains and losses on foreign currency debt restatement.

Lalit Khetan: "Current margin levels are here to sustain. We are going to sustain current margin and endeavor will be to improve upon these margins."

Capacity Expansion & Capex

• 56,000-tonne press line underway: New-generation press lines with cold and warm forging technologies are being added, taking total press capacity to roughly 2,43,000 tonnes; 50% will be ready by March 2023 and the balance by September 2023.
• Capex fully funded from free cash flow: ₹153 crores already spent on the new capacity, with another ₹150 crores required; all capex will be funded from internally generated cash, with the balance allocated to debt reduction and dividends.
• Standalone capex ex-ACIL: An additional ₹100 crores is planned for H2 FY23 outside the ACIL acquisition.
• 4 MW solar plant: Being installed at a cost of ~₹12-12.5 crores, which will further reduce power costs once operational.
• Volume target for FY23: 1,30,000 tonnes, with 62,000 tonnes achieved in H1 and ~68,000 tonnes expected in H2.

Naresh Jalan: "We have already committed to it. And in our presentation also, you can see any Capex, which will happen that will happen from free cash flow generated by the company during the year, and we'll surely adhere to those plans of debt reduction and allocating balance capital for dividend and Capex."

Demand Environment & Order Book

• Steady demand, no pent-up normalization: Management sees steady demand across North America and Europe, with no cancellations or deferments from European OEMs; new order intake remains healthy and the basket is filled to sustain the targeted 20% CAGR growth path.
• Five new orders in H1: Totaling ₹408.5 crores, these wins span diverse segments and geographies.
• Europe energy cost tailwind: Rising energy costs in Europe are one factor bringing business to Indian forging companies; management confirmed no cancellations or deferments from European customers.
• Order book disclosure limited: Management declined to provide a total order book figure, noting that OEMs work on monthly or three-month schedules, making a consolidated number difficult to define; only the railway order book of ~₹100 crores was disclosed.

Naresh Jalan: "I don't think there is anything in terms of normalization of pent-up demand. We are seeing a steady demand. And with new order wins, I think our basket is filled up to the extent we require in terms of keeping on with predicted growth of 20% CAGR a year."

Balance Sheet & Capital Allocation

• Preferential allotment approved: Convertible warrants of ₹94 crores were approved, with the majority earmarked for debt reduction.
• Debt reduction on track: The company wishes to repay another ₹100 crores by FY23 year-end; the target to become net debt-free by FY25 remains intact.
• Dividend declared: A second interim dividend of ₹0.50 per equity share was announced.
• ACIL acquisition pending: The ~₹110 crore acquisition of machining capacity for 2-wheelers and tractors awaits a favorable Supreme Court order, expected in the next one to two months; completion is targeted this fiscal year.
• Effective tax rate: Guided at 22-24% for FY23.

Guidance & Commitments

Key Metrics