Ramkrishna Forgings Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Strong year, confident outlook: Revenue grew 22% YoY in Q4 and 31% for FY23, with management "extremely confident" of continued growth in FY24, backed by order book visibility and customer conversions.
• The railway wheel JV is the defining bet: The ₹12,226 Crore, 20-year Indian Railways contract, won via consortium, anchors a Greenfield project that will start production in late FY26 and generate revenue from FY27.
• Margins held despite cost pressure: EBITDA margin expanded 42 bps sequentially to 22.52%, even as raw material costs hit an eight-quarter high; management expects to sustain or improve from here.
• Europe is the breakout geography: Revenue from Europe reached 15% of total from a zero base in two years, driven by successful customer trial conversions.
• What to watch next quarter: The pace of the 56,000-tonne capex completion by September 2023, the trajectory of warm forging margins, and any quantified update on the wheel JV's financing structure.

The Railway Wheel Megaproject

• Contract secured: The Ramkrishna Forgings & Titagarh Wagons Consortium received a Letter of Award for manufacturing and supplying forged wheels to Indian Railways, a ₹12,226 Crore order over 20 years.
• Project structure: A completely Greenfield joint venture, with RKFL holding a 51% stake and a total capex plan close to ₹1,200-plus Crores. RKFL's equity contribution is ₹180 Crores over three years.
• Timeline: Production is expected to start from the last quarter of FY2026, with revenue flowing from FY2027 onwards.
• Margin ambition: Management is aiming for the JV to deliver margins similar to standalone RKFL's current forging business.
• Export optionality: Management is already in touch with global OEMs who buy wheels, citing limited global capacity post the Ukraine war, and expects to have long-term export contracts signed before the plant commences production.
• Financing clarity pending: The equity portion is still being worked out; management committed to providing specific equity and debt numbers for the SPV over the next three years by the first quarter.

Naresh Jalan: "I think we can safely say that the current margins which we are doing in standalone basis in RKFL we are aiming for similar margins in the joint venture."

Growth Drivers & Order Book

• Customer conversion engine: The company won ~₹700-plus Crores of orders in FY23, reflecting successful conversions of customers where trials were ongoing. A long-term contract with a North American Tier-1 was renewed, adding a new product range and bringing total contracts for the year to eight, worth ₹774.70 Crores.
• Europe ramp-up: Revenue from Europe reached 15% of total sales, up from zero two years ago, a trajectory management attributes directly to trial conversions maturing into supply relationships.
• Domestic CV tailwind: India's commercial vehicle segment saw remarkable growth driven by economic activity, infrastructure development, and government initiatives like Make in India and Atmanirbhar Bharat.
• Railways doubling: Management is targeting a near-doubling of railway sales this year, moving from ~3% of revenue to 5%-plus.
• Oil & gas entry: The company recently entered the oil and gas market in Gulf countries and expects this segment to add 100 to 150 bps to its business share.
• Volume guidance: Tonnage growth guidance of 15% to 20% for FY24 is maintained, with management expecting a very strong year.

Naresh Jalan: "Starting from a base of zero and within two years we have reached a revenue of close to 15% from Europe so I think that substantiates out statement what I have said that we are working on customers and it takes time but customers are getting converted as we move up."

Capacity Expansion & Warm Forging

• 56,000-tonne capex nearing completion: All capacity addition is on track to be completed on or before September 2023, with 20,000-plus tonnes starting production within the current quarter and 53,000 tonnes within the first six months.
• Optimal utilization timeline: Management expects to reach optimum utilization levels from the new assets within six to eight months, supported by the current order book.
• Warm forging operational: Supplies of warm-forged differential gears and pinions have already begun to domestic and overseas customers over the last two quarters, primarily for the commercial vehicle market.
• Light vehicle pivot: New warm forging equipment, completing in the next couple of months, will target the light vehicle market; some contracts are already secured, with more being pursued globally and in India.
• Differential assembly platform: Warm forging is the first step toward making the entire differential assembly one of the company's product platforms, with significant progress expected over the next two years.
• Press capacity restatement: Operating efficiency improvements from automation will lead to an 8% to 10% increase in press plant capacity, with the exercise completing by August 2023 and a 10% to 15% jump visible from Q2.

Naresh Jalan: "we are looking at, at least 100 to 150 bps more than what we are on an average doing in our traditional forging setup in warm forging."

Margins & Cost Structure

• Sequential margin expansion: EBITDA margin reached 22.52%, up 42 bps QoQ, despite raw material costs as a percentage of sales hitting an eight-quarter high of 50.2%.
• Raw material spike is mix-driven: The elevated raw material ratio is a function of product mix and the timing of sales realization versus raw material consumption, not raw material price movement or vendor discount delays.
• Freight tailwind: Other expenses declined significantly QoQ despite revenue and volume growth, driven by a reduction in ocean freight and shipping costs.
• EBITDA per tonne improved: While gross margin percentage declined, EBITDA per tonne improved by ₹2,500 per tonne, reflecting better realizations.
• Energy cost reduction ahead: A solar power order has been placed for a 7.82 MW rooftop plant (estimated cost ₹35 Crores); once installed in nine months, electricity costs will come down.
• Contract indexation: Global contracts are backed by steel price resets on a quarterly basis and inflationary adjustments once a year; energy and inflation revisions for the current cycle are still being negotiated with OEMs, with clarity expected in one to two months.

Naresh Jalan: "We expect to retain and improve both. You will see continued outperformance in terms of margins."

Balance Sheet & Capital Allocation

• Debt reduction commitment: Standalone debt is targeted to reduce by ₹150–₹200 Crores per annum, with consolidated debt not increasing and net debt expected to go down. For FY24 specifically, debt reduction of ₹100–₹150 Crores is planned post-dividend.
• Working capital improvement: The working capital cycle improved as payables rose proportionally with revenue while debtors did not rise commensurately; the target is to bring working capital days to ~100 from the current ~108.
• Interest cost nuance: Although debt has declined each quarter, interest cost increased due to a rate hike from 6% to 8%, plus higher bank charges for increased utilization of non-fund-based limits, LC usage, and commitment costs to keep limits intact.
• Capital allocation policy: The stated policy for standalone RKFL is strict: debt reduction first, then dividends, with leftover cash deployed back into growth capacities within the forging and value-add business.
• Credit rating upgrade: Long-term ratings were upgraded by both ICRA and India Ratings to A plus with a stable outlook.
• Tax rate shift: The company will move to the 25% tax rate (22% plus surcharge) in the next financial year.

EV & Subsidiary Bets

• TSUYO profitable: The EV subsidiary is already breakeven and in profit, with ₹12-plus Crores in revenue last year and an expectation of at least a threefold jump this year.
• TSUYO investment plan: A ₹100 Crores investment plan over five years aims to graduate TSUYO from a motor supplier to a complete e-axle and transmission solution provider, with RKFL's stake going up to 51%, making it a significant arm for the EV portfolio.
• ACIL and JMT Auto acquisitions: Management is hopeful of completing the acquisitions as fast as possible but declined to comment on exact timelines, citing the legal process; capex plans post-acquisition will only be shared after the court order.
• EV market scope: The company is entering the passenger vehicle segment but not two-wheelers; current EV revenue contribution and two-year projections were not disclosed.

Guidance & Commitments

Key Metrics