Pitti Engineering Limited: Is it on an inflection point?

Pitti Engineering Conall Notes Q2 FY24

Highlights:

1. Sales Volume:

• Up 17.38% YoY to 10,340 tonnes.

2. Revenue from Operations:

• Quarter revenue: 290 Crores.
• 4.56% decrease due to material price reduction passed on to clients.

3. Record EBITDA:

• Highest-ever at 42.56 Crores, up 16.44% YoY.

4. Government Incentive Impact:

• Maharashtra government incentive: 10.9 Crores.
• Boosts net profit to 22.55 Crores.

5. Capacity Utilization:

• Lamination: 72.27%.
• Machining: 91%.

6. Order Book Strength:

• Robust at 716 Crores as of September 30, 2023.

Incentives and Revenue

1. FY2023 Recognition:

• 10 Crores realized this quarter.
• Categorized under “other income.”

2. FY2024 Projections:

• Anticipated 30 Crores in Q4.
• FY2024 incentive: 34 Crores.
• Recognition annually in two tranches.
• Crediting typically takes 6 to 8 months from sanctioning.

Capacity and Business

1. Capacity Increase:

• QoQ increase from 50,200 to 56,000 MT.
• Next increase planned in March 2024 to reach 72,000 MT.

2. Volume Targets:

• Q3 target: 10,500 tonnes.
• Q4 target: 11,000 tonnes.
• On track with annual target of 42,000 tonnes.

3. Overseas Business – Europe:

• Recent breakthroughs in Europe.
• Expecting Rs. 100 Crores revenue in FY2024-2025.
• Growth from wind turbine and marine businesses.

4. Outlook:

• Positive three-year outlook for Europe.

Raw Material, Contracts, Railway Business, and Guidance

1. Raw Material Prices:

• Current quarter: Rs. 90,000 per MT.
• Year-ago: Rs. 1,15,000 per MT.
• Next two quarters expected to be stable.

2. Price Correction and Contracts:

• Prices stable; no need for reduction.
• Contracts have quarterly Price Variable Clause.

3. Railway Opportunity:

• 8,000 MT lamination sold annually to railways.
• Machine components: 70% of overall business.
• Annualized revenue: Rs. 400-500 Crores.
• Potential increase: Rs. 200-250 Crores in the next years.

4. Capex and Revenue Guidance:

• Capex: Additional Rs. 120 Crores for the year.
• Revenue guidance: Around Rs. 1,100 Crores, extrapolating from Q2.

Capacity

1. Capacity Utilization:

• Current: 56,000 MT, scaling to 72,000 MT.
• Current utilization: 71%.
• FY2025 sales target: 48,000 MT (66% utilization).
• FY2026 sales target: 56,000 MT (80% utilization).

2. Future Capacity Plans:

• No plans beyond 72,000 MT.
• Further plans based on market progress.

Order Book, Demand, and Subsidiary Merger

1. Order Book and Demand:

• Short-term order book flat, marginal Q4 increase.
• Longer-term impacted by depleting 10-year Indian loco business contracts.
• Stable demand; cautious outlook due to elections.
• Strong order books in North American and European markets.

2. Direct Exports and Margins:

• Strong growth in direct exports.
• Margins similar, depending on value add.

3. Subsidiary Merger:

• Approval received from stock exchanges and SEBI.
• NCLT application in progress.
• Merger expected by March 31st, 2024.

European Business, Green Energy, and EVs

1. European Business:

• Lamination Business:
  • Competitors from Europe and China.
  • European manufacturers shifting orders to Asia.
  • Companies prioritizing supply chain diversification.
• Machine Components:
  • India slightly more expensive than China, but customers derisking from China.

2. Green Energy in Europe:

• Demand from green energy sectors: hydro, wind, green hydrogen.
• New business in marine generators due to emission regulations.

3. Electric Vehicles (EVs):

• Current Status:
  • Two customers in two-wheelers.
  • Seven clients in three-wheelers, buses, and off-highway vehicles combined.
  • Slow start in EV component demand; imports from China.
  • Unorganized market retrofitting EVs gaining traction.
• Future Outlook:
  • Major OEMs expected to enter manufacturing in 3-4 years.
  • EV component market potential around 1,00,000 tonnes.
  • Company poised for growth in this sector

Margin Outlook and EBITDA Projections

1. Current Margin Profile:

• EBITDA per tonne at 42,000 for the current half-year.
• Anticipate an increase to 43,000-43,500 by Q4.

2. Future Margin Trends:

• Continued rise in machine components contribution.
• Blended EBITDA per tonne expected to reach 45,000 for FY2025.

3. Factors for Change:

• Increased machining capacity deployment.
• Positive impact from the proposed merger.

Turnover, EBITDA, Acquisitions, and Private Capex

1. Turnover and EBITDA:

• Plain components: 100 Crores revenue annually.
• Machining-related components: ~200 Crores.
• Anticipate doubling in 2-3 years with increased machine capacity.

2. Private Capex:

• Healthy demand observed among clientele.
• Government capex ahead but strong private demand.
• Private capex remains robust compared to the previous year.

3. Future Expectations:

• Continued growth in private capex anticipated.

MNC Customers, Supply Chain, Joint Ventures

1. Joint Ventures Opportunities:

• Existing MNC relationships.
• Supply chain realignment opens joint venture possibilities.
• Initial focus on specific railway bill of materials.

2. Expansion Constraints:

• Current focus on execution and steep targets.
• Constraints due to capital and managerial bandwidth.
• Prioritizing current commitments, merger, and machine components opportunity.

3. Strategic Approach:

• Concentrating on present commitments before new ventures.
• Excitement about machine components opportunity.
• Delay in targeting certain locomotive interior components for potential joint ventures.

4. Revenue from European Opportunity:

• Anticipated 100 Crores revenue.
• Mix of machine components and high-level assembly.
• High margin business, applicable even in the Indian market.

Strategic Focus and Market Expansion:

1. Major Contributors:

• Railways, power, and industrial segments key to top-end growth.
• Power includes data centers, DG sets, hydro, thermal projects, wind turbines, and generators.
• Industrial spans diverse sectors other than Railways.

2. Target Industries (Two-Year Perspective):

• Focus on renewable energy, mining equipment, automotive, and appliances.
• Aiming to increase market share in appliances and automotive.

3. Client Relationships:

• Major supplier for Cummins in India.
• Open to global opportunities but not the sole supplier.
• Uncertainty on future India-Europe supply chain dynamics.