SG Mart Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Revenue scaled sharply, volume-led: Q2 revenue crossed INR1,800 crores on over 350,000 tons of sales volume, recovering from a sub-INR1,200 crore Q1 as all three revenue streams hit high levels.
• A once-in-a-decade steel crash hit margins: Steel prices fell ~15% across six back-to-back monthly corrections, forcing an INR17–18 crore inventory loss even with only 8 days of stock. Management calls the event a blue moon and says prices are now stable.
• Service centre rollout is the growth engine: Three centres are live, Raipur and Dubai start by December 2024, and 10 more are planned for next year, targeting 20–25 centres by FY27 and a 40–50% revenue contribution within two years.
• FY27 revenue and margin guidance reaffirmed: Management is "more confident" in hitting INR17,000–18,000 crores revenue with a 2.5% EBITDA margin by FY27, and reiterated FY25 revenue guidance of INR6,500 crores.
• What to watch next quarter: Whether the 120,000-ton monthly volume run-rate holds, the Raipur and Dubai centre startups land on time, and any reversal of inventory losses if steel prices firm.

Volume & Revenue Trajectory

• Q2 volume breakout: Sales volume exceeded 350,000 tons in the quarter, translating to a 120,000-ton monthly run-rate that management will try to sustain for the rest of FY25.
• FY26–27 volume ambition: The plan steps up to 160,000 tons per month in FY26 and 250,000 tons per month in FY27, underpinning the INR17,000–18,000 crore revenue target.
• B2B metal trading fill-up: A tie-up with India's largest steel supplier and imported steel opportunities drove strong volumes, with momentum expected to continue through FY25.
• Revenue guidance intact despite lower steel prices: Management clarified that FY25 guidance of INR6,500 crores is not reduced; lower steel prices make revenue appear smaller but volume guidance is unchanged.
• Distribution business building slowly: Rebar sales were slow due to a construction slowdown, but the introduction of light structures, angles and channels under the private label is encouraging and should scale to all channel partners in 2–3 months.

Anubhav Gupta: "any business which is sitting on such a low inventory... I'm proud to tell you that our team managed such a sharp increase in the revenue on quarter-on-quarter basis despite keeping the inventory at such a low level"

Margin & the Steel Price Event

• The 15% crash: Steel prices corrected by roughly INR2,000 per ton, twice each in July, August and September, a cumulative ~15% fall that management says has happened only 2–3 times in its 3.5-decade history running Apollo Tubes.
• Inventory loss mechanics: Despite holding only 8 days of inventory (30,000–35,000 tons), the six back-to-back corrections forced an inventory loss of INR4,000–5,000 per ton, totaling INR17–18 crores.
• Operating margin also softened: Even after adding back the inventory loss, operating margins were lower because in a falling market the company protects clients by offering discounts.
• Steel price outlook: Prices are now stable and showing a reversal trend; management believes another 15% fall is "nearly impossible" because it would push the entire INR1 trillion steel sector into heavy losses.
• Full-year margin guidance held: Management reiterated that full-year EBITDA margin will be "2% plus," consistent with the guidance given in September 2024, and noted it never gives quarterly guidance.

Anubhav Gupta: "This kind of scenario comes once in a decade. You don't see that very often. You see this once in a decade. Last such fall we saw was in like 2007-2008."

Service Centre Rollout

• Current footprint: Three service centres are operational in Ghaziabad, Bangalore and Pune. Raipur and Dubai are expected to start by December 2024, taking the count to five fully operational centres by Q4.
• Next-year pipeline: Ten new centres are identified for the next financial year: Chennai, Indore, Jaipur, Siliguri, Hyderabad, Ahmedabad, and three to four more locations being worked on. Land acquisition and construction will proceed through calendar 2025.
• Long-term target: Management aims to operate a minimum of 20–25 service centres by FY27, with service centres contributing 40–50% of revenue within the next two years.
• Capital deployment: INR1,100–1,200 crores of cash on books will be deployed as centres are commissioned, covering both capex and inventory. H2 FY25 capex may reach another INR100 crores, with INR300–400 crores budgeted for next year.
• New product lines from service centres: Solar profile structures, a 40,000-ton monthly market worth ~INR250 crores, will start in December or January. Machinery for purlins and deck sheeting to service the PEB construction industry is also planned.

Business Model & Balance Sheet

• Margin protection thesis: Management argues the 2.5% EBITDA margin is "very protected" because the business carries no debt (no interest cost), has high asset turns (no high depreciation), and books no debtors (no write-off risk). The only risk is inventory, which was stress-tested in Q2.
• Net working capital negative: Working capital remained negative because warehouses and service centres are still ramping up. Management expects it to stay negative for the next few quarters until the business scales to 200,000–250,000 tons monthly volume, after which the model assumes 15–20 days of net working capital.
• Cash generation: Strong operating cash flow generated free cash flow, with cash on books increasing marginally despite heavy spending on new service centres.
• Team and promoter roles: A core team of ~120 professionals runs three verticals. Promoter Sanjay Gupta handles steel sourcing, mill MOUs, pricing and negotiation; no other promoter family member is involved in day-to-day operations.
• Zinc business testing: Zinc distribution started "just to test the waters" last quarter and, despite very low volume, emerged as India's largest distributor. Management is still learning the curve and does not want to deploy capital unnecessarily; revenue clarity is expected next quarter.

Anubhav Gupta: "2.5% EBITDA margin is very protected, right? We don't have debt, so there is no interest cost, right? The asset turns are so high, there is no high depreciation cost."

Industry Context & Competitive Position

• New steel supply wave: After five years of supply scarcity, new steel capacity started hitting Indian markets from December 2023, putting downward pressure on domestic prices before the Chinese steel price fall triggered the sharp Q2 correction.
• Structural tailwind for resellers: As steel capacity expands, mills will increasingly need resellers like SG Mart who can buy in bulk and distribute to end-user industries, a role management believes will grow.
• Business model learnings: Key early insights include the criticality of inventory churn management, which the team executes even more efficiently than Apollo Tubes because there is no manufacturing, and customer behaviour patterns such as servicing the PEB construction industry with cut-to-length plates.
• Business still young: The business started in June 2023, giving it only 15–16 months of operating history. Management has made no decisions to stop pursuing any initiative based on early learnings.

Anubhav Gupta: "if they have to fall again by 15%, then INR1 trillion rupees steel sector will report heavy losses like right from JSW to Tata Steel to Steel Authority which is nearly impossible"

Guidance & Commitments

Key Metrics