Steelcast Ltd – leading steel castings

Steelcast FY23 AR Notes

Business

• The Company manufactures steel and alloy casting products. The company’s competence is reflected in its extensive product range: from 2.5 Kg to 2,500 Kg.
• Company’s revenue grew 58% vs. EBITDA grew 79%. This validates that revenue growth was not due to price discounting but from superior economies of scale and related competitiveness.
• Facts
  • Export vs domestic mix is 60:40
  • Volumes sold in FY23 = 15740 MT; capacity utilisation just above 50%
  • Revenue per person has increased from 3.3 Cr in FY20 to 4.09 Cr in FY23
  • No. of customers increased from 26 to 43
  • Employee retention rate at 98%
• There is a structural shift in the industry –
  • Customers want to diversify supply chain from China
  • This led to incremental business for Steelcast as 2.4% of revenue was from first time customers
  • China wage rate has become high and since castings sector is labour intensive, it benefits Steelcast in India
  • Castings production has heat exposure and is physically exerting. Hence shift from developed nations to economies like India where labour is available
  • India is resourceful metallurgical region is the world
  • Customers are demanding stability rather than lowest bidder for castings and there is premium to be paid for highest quality castings in quickest time
  • Steelcast is mostly shortlisted whenever someone comes to India for casting products
• These factors can help company do –
  • Higher volumes and build economies of scale to increase margins
  • Want to touch 1000 Cr in few years
• Raw material handling –
  • Company entered into long term contracts with vendors to procure RM at lower cost than LME prices
  • Negotiated pass through costs with customers
• Besides, the company does not manufacture and market cookie cutter products. It understands customer needs and delivers in line with a precise metallurgical recipe that does not underperform at the customer’s. The result is that our products have established an impressive multi-year track record of robust performance at the customer’s end. This led to product returns from customers less than 0.1%
• Sectors that influence the demand –
  • Whenever ore and metal sectors perform well, mining and rail equipment OEMs get into capex mode leading to higher demand for castings
  • Cement, steel, Earthmoving and construction sectors offer tailwinds
• Competitive edge –
  • Steelcast matches the price-value proposition offered by respected North American and Western Europe casting manufacturers.
  • Steelcast’s enquiry to order fulfilment cycle is shorter than most large and reputable casting manufacturers the world over, making it a preferred supplier.
  • Demonstrated that company is not just fleeting suppliers for a customer to capitalise on an arbitrage; but a long term partner with the product development life cycle of some of the most respected companies in USA
  • Low labour cost in India is an advantage
  • Only 5 major players in India
• Capacity –
  • Increased capacity from 17K TPA to 30K TPA
  • Aim to enhance production from 16K TPA in FY23 to 20K TPA in FY24
• Cost savings
  • Renewable energy plant to save 11 Cr annually
• Management targets –
  • Shrink product dev time from 9-12 months to 6-7 months by new tooling introduction
  • Moderate product dev cycle time from 55-60 days to 40-45 days
  • This will mean that business can grow with internal accruals rather than debt or extra equity
  • Shrink working capital days from 100 to 90
  • Intends to manufacture higher value added products
  • The Company expects to reach 100% capacity utilisation by FY 2026-27, produce 5,000 Tonnes per quarter and growing over 20% per year by volume

Risk

• Business is very labour intensive and can only scale linearly with labour opposed to machine driven businesses
• There is a challenge to grow beyond moderate teen percentages due to this reason. Company cannot raise production by pressing a button
• Needs to be on toes to deliver higher quality and new employee training needs to be at par
• Appreciation in iron and steel prices increases costs for the business
• Freight challenges exist as bulky material need to be exported
• Customer concentration as 32% of export revenues come from single customer
• Domestic realisations are lower than exports

Capital Allocation

• CFO = 108 Cr
• Capex = 47 Cr = 43%
• Dividend = 28%
• Debt repayment = 39 Cr = 36%