Sarthak Metals Ltd Q3 FY24 Earnings Conference Call Insights

Key highlights from Sarthak Metals Ltd (SMLT) Q3 FY24 Earnings Concall

• New Business Initiatives
  • Company launching new flux cored wires business with successful trial production runs and BIS certification.
  • Targeting government approvals for railway sector.
  • Launching new biotech division focused on enzymes for ethanol production and other applications.
  • Tied up with CSIR for technology transfer and working with institutes for standardization.
  • Plans to invest INR 100 crores into biotech division to generate INR 350 crores revenue at 30% margin.
• Financial Performance
  • Revenue down 19% YoY and 3% QoQ to INR 75 crores for 3Q.
  • EBITDA margins affected by lower sales of high margin cored wires and aluminum pricing cycle.
  • Finance cost increased sequentially and YoY to INR 33 lakhs.
  • PAT at INR 1.72 crores.
• Cored Wire/Aluminium Flipping Coils Business Update
  • Revenue of INR 28 crores in Q3.
  • Lower price realizations and volumes due to multiple factors.
  • Top clients include leading steel manufacturers.
  • Aluminum flipping coils revenue of INR 36 crores in Q3.
  • Painful commodity pricing cycle affecting margins.
• Growth Opportunities
  • Government’s 20% ethanol blending target by 2025 to require 1,000 crore liters including 100 crore liters 2G ethanol.
  • Biotech enzymes global market over INR 75,000 crores with 10-15% CAGR.
  • Plans to focus on enzymes for ethanol, breweries, textiles, food processing etc.
  • Also focusing on protein nutrition and dietary supplements.
• Flux Cored Wires Update
  • Early adopter of the technology.
  • Strategic location near major fabrication houses with large order books.
  • Too soon to reveal order book details.
  • Rapidly getting approvals from customers.
  • New segment, confident can utilize 100% capacity in coming quarters.
  • At peak can generate INR 4 crores revenue; plans to scale up capacity.
• Diversification/Exploration
  • No plans to diversify into other metal sectors currently.
  • Focused on the two new initiatives in flux cored wires and biotech.
  • Biotechnology top focus area currently.
  • Aiming to establish credibility in renewable energy enzymes for ethanol blending.
  • Also want to build a healthcare segment within biotech division.
  • Government support a positive in biotechnology space.
• Performance vs. Guidance
  • Revenue of INR 236 cr in 9M significantly below full year guidance of INR 400 cr.
  • OPM also lower than guided.
  • Factors contributing to downturn:
    • Lower product realizations hurting revenue and margins.
    • Volatile and cyclical pricing especially for aluminum.
    • Rising input costs but falling output prices.
• Demand Environment
  • Domestic cored wire sales muted, no change.
  • Increased aluminum sales 20% QoQ.
  • Overall demand still flat, not highly growing.
  • Steel market still in cyclical downturn.
  • Not seeing volume growth to gain market share as indicated.
• Margins Sustainability/Drivers
  • Current low gross margins not sustainable due to high impact of aluminum business cycle.
  • Also lower cored wire exports due to inventory issues.
  • Aluminum business needs revival to escape pricing cycle.
  • Taking measures like lower inventory to improve situation.
  • Improving product mix toward cored wires.
  • Higher exports and steel quality mix.
  • Improved capacity utilization.
• Competitive Positioning
  • Facing pricing pressure unable to pass higher costs.
  • Need to clarify competitive edge in this environment.
  • Steel prices rising but unable to take price increases.
• Outlook
  • Q4 sales expected to remain flat.
  • Margins need price realization to improve.
  • Aluminum highly commoditized, needs price recovery.
  • Global tensions preventing aluminum price increases.
  • FY24 revenue estimate around INR 330 crores.
  • FY25 baseline growth of 10%.
• Capacity Utilization
  • Cored wires at 60% utilization.
  • Aluminum at 50-60% utilization.
  • Peak revenue at current prices around INR 700-800 crores.
• Biotech Enzymes
  • New non-core business, a leap for company.
  • Gaining credibility via government collaborations.
  • Detergent companies early focus area.
  • Flagship product for 2G ethanol blending program; order potential on ramp up.
  • Leveraging business experience to enter new area.
  • INR 10 crores investment in FY25; Revenue to start in H2 FY25.
  • INR 100 crores total investment over time.