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.