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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.

I tried using ValueResearchOnline platform to calculate XIRR of my holdings. As I mentioned, since I have 3 demat accounts, it was a pain to calculate the XIRR of my portfolio especially for my Sharekhan demat accounts (I have 2 of them).

One word of caution if someone is trying to upload his / her portfolio in VRO platform, please take care of the bonus / split shares as sometimes it gets messed up. I manually adjusted those bonus and split shares that I got in last 10 years before I uploaded entire portfolio on the platform.

Here are the results:

1. Zerodha account (3 years) – I have started investing in Zerodha account since 2020 and these days I am using only Zerodha to purchase any new stock. Sharekhan is only for selling or applying for IPOs in case of shareholder category. Here is the XIRR for Zerodha account.

2. For all demat accounts (> 10 years) – I have started investing journey since late 2012 / early 2013. So, it has been almost 10 years now. Below is the XIRR details of my entire portfolio across all 3 demat accounts (2 Sharekhan and 1 Zerodha):

Hi, yess this only for this summer because of two reasons 1st uneven rainy season, 2nd the consequence of first one which leads to huge drop in sales of ice cream. So this temporary and will have to track on next year rainy season.