Some important points from the November 2024 concall:
Risks
● Raw Material Price Volatility: While recent trends show a downward correction in raw material prices, especially coking coal, this volatility remains a risk factor. Electrosteel mitigates this by using back-to-back contracts for 5-6 months of their order book, but a sudden surge in prices could impact profitability, especially for the 25% of the order book that remains open.
● Competition: The DI pipe market is witnessing increased competition. While Electrosteel is a leader with a 19% market share, new entrants or aggressive expansion by existing players could pressure margins.
● Government Policy Changes: Government initiatives like Jal Jeevan Mission and AMRUT 2.0 are significant demand drivers for Electrosteel. Any policy changes or funding cuts to these programs could impact order inflow.
● Geopolitical Risks and Ocean Freight: Electrosteel aims to increase its presence in export markets. Geopolitical uncertainties and fluctuations in ocean freight costs can impact export volumes and profitability. The Russia-Ukraine conflict is a relevant example impacting global trade and shipping costs.
● Blast Furnace Stability: The recent shutdown and slower-than-anticipated stabilization of the blast furnace at the Srikalahasthi unit highlight operational risks. While management is working on solutions, recurring issues could impact production targets and profitability.
● Execution of Greenfield Project: Electrosteel is investing in a Greenfield project to expand capacity. Delays or cost overruns in this project could strain finances and impact future growth prospects.
Future Sales and Margins
● Sales Volume: Electrosteel expects to reach a sales volume of around 850,000 tonnes in FY25, a 13.8% growth compared to FY24. The company aims for 900,000 tonnes per annum by FY26 and 1 million tonnes by FY27, demonstrating a growth-oriented strategy.
● EBITDA Margin: Management expects to maintain an EBITDA per tonne of INR 15,000 to 16,000 in the near to medium term. This translates to an EBITDA margin range of 16% to 18%. They believe this is achievable due to stable demand, operational efficiencies, and potential benefits from softening raw material prices.
Overall:
Electrosteel Castings Limited presents a positive outlook on sales growth driven by government initiatives, capacity expansion, and a robust order book. Management is optimistic about sustaining healthy EBITDA margins. However, risks like raw material price volatility, competition, and successful execution of growth plans need careful monitoring.
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