Ramkrishna Forgings Ltd Q4 FY2025 Concall Summary

Key Takeaways

• A one-time clean-up quarter, not an operating collapse: Revenue fell 3% YoY and EBITDA halved to ₹99 Crores, but both were driven by a ₹170 Crores revenue recognition reset and a ₹220 Crores inventory write-down, not demand destruction. PAT of ₹200 Crores was inflated by a ₹223 Crores deferred tax credit.
• An inventory discrepancy of ₹220 Crores was fully provided for: Over-reporting of production and under-reporting of rejections accumulated into a book-to-physical gap, discovered after input/output ratios stopped making sense. Management calls it a system error with no cash leakage, and an 8-day plant shutdown enabled a piece-to-piece count.
• The balance sheet is being repaired on multiple fronts: Promoters are infusing ₹205 Crores via warrants at a premium, the capex cycle ends by September, and debt reduction is promised by FY26-end from warrant money, tax refunds, and free cash flow.
• FY26 growth guidance of 15–20% is reaffirmed with conviction: Management is "absolutely sure," citing new order wins, the Mexican entity ramp-up, JMT Auto's turnaround, and the one-time nature of Q4's revenue deferral which reverses in the coming quarter.
• What to watch next quarter: Whether the ~₹170 Crores of deferred revenue actually books, the pace of JMT Auto's margin contribution, and the final fact-finding report's root-cause findings, which management says will be made public within a week.

The Inventory Discrepancy: What Happened

• The gap: Book stock exceeded physical stock by ₹220 Crores in FY24-25 and ₹50 Crores in FY23-24, fully provided for in the restated numbers. The issue surfaced when the input/output ratio of raw material to finished goods stopped reconciling, because cash was not paid for metal that was never actually bought.
• The mechanism: Two errors compounded: production was over-reported in the system, and rejections were under-reported. Together they created a notional inventory overstatement with no corresponding cash outflow, no theft, and no money leaving the system.
• How it was found: The company undertook its first-ever 8-day complete plant shutdown to conduct a physical count of every item across all locations. An interim joint fact-finding report from independent external agencies has been received; the final report on root causes is expected within a week and will be made public.
• Why controls failed: Management acknowledged the company "grew faster than its system" and took responsibility for not upgrading controls in time, but did not explain how the lapse persisted for over a year despite having SAP, internal auditors, and annual bank inventory audits.
• Corrective action: Manual data feeding is being eliminated, systems are being put on auto mode directly linked to production equipment, and enhanced auto-recordings with stricter controls are being implemented with a target to complete robust system integration before end of September.

Naresh Jalan: "The Company has grown faster than its system. I can only give you only a very simple answer that Company has grown faster than its system. And that is my fault that we have not been able to bring in or get more robust system as the Company grew."

Revenue Recognition Reset

• Two policy changes hit Q4 simultaneously: Revenue is no longer recognized until goods physically reach the customer (domestic), and for U.S. exports, recognition now occurs only after duty is paid at the U.S. port rather than upon shipment. Together these deferred ~₹170 Crores of revenue out of Q4.
• One-time impact, permanent policy: The ₹170 Crores moves from debtors to inventory and will be recognized in the coming quarter as goods arrive and duties clear. Going forward this is the normal practice with no recurring drag, because the timing mismatch normalizes after the transition quarter.
• Not linked to the inventory error: Management clarified the revenue recognition change was a separate best-practice reset adopted after taking cognizance of the inventory issue, not a consequence of the discrepancy itself. The inventory error was a production-recording problem, not a revenue recognition problem.

Naresh Jalan: "We have taken cognizance of whatever has happened. And going forward, to get into best practices, we have basically reset our entire recognition model..."

Balance Sheet & Capital Structure Repair

• Promoter warrant infusion: The board approved 9,75,000 warrants to a promoter entity at ₹2,100 each, bringing in ₹204.75 Crores. The premium pricing was deliberate to limit equity dilution to 0.5% and signal that promoters are standing with the company. Management commits the entire amount will come within this financial year, not the full 18 months allowed.
• Debt reduction pathway: Substantial debt reduction is expected by FY26-end, funded by the warrant money, a tax refund from the ACIL merger, free cash flow from debtor conversion, and the end of the major capex cycle. Working capital, which rose ~₹400 Crores during the year on Red Sea transit delays and inventory build for new orders, should normalize as overseas warehouse stock is consumed in the current quarter.
• Capex cycle ending: The 8,000-tonne press and aluminium forging press will be completed by September-end, with presses starting in July or mid-August and contributing revenue soon after. For the next 1.5 years, capex drops to a maintenance level of ₹100–₹150 Crores.
• Credit rating upgrade: India Ratings upgraded the long-term bank loan rating to IND AA (Stable Outlook) from IND AA- in April 2025, and no bank has approached the company to withdraw or reduce limits.
• Merger progress: The NCLT-approved merger of ACIL into the parent is complete (appointed date 20 February 2024), and the merger of Multitech Auto and Mal Metalliks into Ramkrishna Casting Solution is underway for completion this year.

Naresh Jalan: "We did not want that one such issue should dent the entire confidence of our investor community and that's the reason this premium has been paid, to basically give a message to the overall investor community that promoters are withstanding with the Company."

Growth Levers & Order Book

• New order wins: ₹710 Crores booked in Q4 with a 4-year program life, split 74% automotive and 23% non-automotive. Indian Railways orders for fully assembled bogie frames were also secured.
• Mexican entity ramp-up: The Mexico operation is now operational, receiving forgings from India for full machining and supply into the U.S. market. Management calls it a "golden goose" for the next 3 years, positioned to benefit regardless of tariff outcomes since customers, not the company, bear the tariff cost.
• JMT Auto turnaround: After over a year of rebuilding the NCLT-acquired asset, a major North American oil and gas customer has returned, samples are under completion, and significant sales are expected from next quarter onwards in oil and gas and off-highway segments. Margins were nominal in FY25 but are expected to contribute meaningfully in FY26.
• U.S. market: Demand is currently subdued but customers expect a hockey-stick recovery in a couple of months as the market has gone below replacement levels. No order resets or requests for price concessions on tariffs have been received.
• Passenger car entry: Revenue from the passenger car segment is expected to begin "in a big way" from FY27.
• Capacity additions: Cold forging capacity of 25,000 tonnes was commissioned in January 2025, and hot/warm forging balance capacity of 14,250 tonnes was commissioned in March 2025.

Naresh Jalan: "At the right moment, we have set up our Mexican entity. I can tell you this Mexican entity is going to be the golden goose for us for the next 3 years' time."

Margin Trajectory

• FY24 as the base: Management considers FY24's 20.9% EBITDA margin as the benchmark to build from, not the restated five-quarter numbers which include the inventory write-offs. Near-term margin guidance was declined, with management calling the Q4 hit a one-off incident.
• Aspirational target intact: The aspirational 24–25% EBITDA margin target by FY28 remains. By end-FY26 and FY27, margins are expected to be "much above" past levels, supported by the end of the capex cycle, JMT Auto's ramp-up, and operating leverage on the 15–20% revenue growth.
• Multitech and JMT contribution: Multitech Auto delivered more than 15% full-year margin in FY25. JMT Auto had very nominal margin for FY25 but is expected to show its full potential from Q1 FY26 onwards as it ramps up.
• Tax-free status: The company expects to be tax-free in the coming year based on the ACIL merger.

Guidance & Commitments

Key Metrics