Steelcast Ltd

CHETAN TAMBOLI

CHAIRMAN AND MANAGING DIRECTOR

Steelcast

is poised at a sweet spot in its existence

OVERVIEW

During the year under review, the company's revenues declined from INR 478.65 Cr in FY 2022-23 to INR 412.51 Cr in FY 2023-24 while the profit after tax increased from INR 70.52 Cr in FY 2022-23 to INR 75.00 Cr in FY 2023-24. This represented profitable growth, a validation of the Company's business model. I must assure our stakeholders that this decline in revenue does not represent the conclusion of the growth trend at our company; it represents a period of brief consolidation before the company returns to its erstwhile revenue growth journey.

The principal reason for the revenue decline was that the downstream sector especially in North America and Europe selected to liquidate its inventory, staggering purchases from companies like ours. Consequently, customers' worked with a lower inventory but there will soon come a time more likely during the current financial year when these customers will scale their output to respond to the needs of higher infrastructure spending by the countries where they are based. This investment could be a complement of fresh infrastructure spending in line with a growing global trend of deepening infrastructure investments; it could also be catalysed by replacement spending that is critical to infrastructure effectiveness in those countries. Based on engagements with our customers, we believe that this resumed capital expenditure is likely to transpire starting the current financial year, strengthening our revenues and profits.

At Steelcast, we invested in our business across initiatives with the objective to be prepared for this projected upturn.

Our priority is a commitment to moderate our cost of staying in business. During the last financial year, the company made a decisive INR 32 Cr investment in renewable energy. This investment was directed at two outcomes: one, the aggregate 10 MW investment will empower the company to reduce its manufacturing cost, considering that the cost of renewable energy generation is considerably lower than conventional thermal energy. For the company, the switchover to renewable energy has started generating a INR 12 Cr annual saving. This investment in renewable energy is likely to be recovered in around 30 months, validating our commitment to prudent capital expenditure and business model competitiveness. We believe that this lower cost structure will enhance our viability across market cycles, reinforcing our position as one of the most competitive producers in our sector the world over.

The other priority is broadbasing and deepening our customer presence. During the last few years, Steelcast selected to broadbase from an excessive dependence on customers from the earthmoving, mining and construction sectors by extending into the large railroads sector. The extension of the company's sectoral presence was also justified by the emergence of the ‘China plus one' reality where a number of American railroad companies sought to supplement their supply chains by stepping up purchases from non-China suppliers and securing their supply chains. Besides, American railroads continue to be the preferred transportation mode on account of their competitiveness vis a vis roadways, indicating that this continues to be a growth segment.

This broadbasing was easier said than achieved; this required the company to be benchmarked against demanding certifications relevant to the North American railroad sector; this also required the company to present its credentials to large railroad companies. I am pleased to report that this commitment is paying off; the company is engaged in fruitful discussions with American railroad companies and the initial enquiries should translate into orders during the current financial year when the sector's capex cycle revives, and the US government increases its spending in the North American railroad sector. This broadbasing is expected to enhance the proportion of the company's revenues derived from the railroads business from around 3% during the year under review to nearly 20% three years from now. The combination of a growing addressable market and a larger corporate priority is expected to deepen our business model robustness leading to enhanced sustainability across market cycles. The third corporate priority that we successfully addressed during the year under review was debt moderation. During the last few years, the surplus generated by the company was higher than the need to reinvest (considering that the company possessed adequate manufacturing capacity). This surplus was progressively used to moderate long-term debt and replace short-term debt with surpluses earned by the company. During the year under review, the company emerged completely debt-free for the first time in six decades, a seminal moment in a capital-intensive business. By replacing all the debt on our books, we have moderated our operating costs; by enhancing cash on our books INR 31 Cr as on 31st March 2024 we have secured our accruals to address a range of projects intended to capitalise on emerging opportunities. Besides, this shift from debt funding to an accruals-driven business model signifies a sweet spot that is likely to translate into enhanced stakeholder value across the coming years. At Steelcast, we are prepared to win across competitive markets through a combination of cash-enhancing capabilities on the one hand and a capital allocation discipline on the other. We believe that sustainable growth will be derived from capacity creation ahead of peak asset utilisation, which we believe should transpire by 2027-28. Our first step in addressing this reality would be to build a sizable corpus derived from accruals, empowering the company to embark on a capex cycle from 2026 so that it possesses increased manufacturing capacity by the time peak asset utilisation is reached. At our company, we will continue to strengthen our business through various initiatives in the interim before we embark on our next decisive capex cycle.

One, the company intends to strengthen its portfolio through the manufacture of a wider range of products. The maximum weight of casting products that the company can presently manufacture is 2.5 tonnes; the company intends to make prudent investments that empower it to address larger piece weights, which is likely to widen its addressable market on the one hand and enhance value-addition on the other.

Two, the company intends to commission a dedicated facility to manufacture products for the product replacement market. This is likely to broadbase the company's customer mix and deepen its relationship-driven business model. Three, the company intends to undertake a part of the operations that is presently conducted by customers. This could relieve customers of engaging in capital expenditure; it could also liberate customers of investing in their managerial and manufacturing bandwidth. In turn, this arrangement is likely to widen the company's value chain, increase realisations, graduate a product towards a complete solution and secure customer engagement. Four, the company will continue to invest in its marketing across USA and Europe, widening its presence in 15 countries to 18 in two years. We believe that this geographic broadbasing is expected to empower the company to capitalise on the growth plans of a wider range of countries on the one hand while moderating the risk of an excessive dependence in a few.

Five, the company will continue to invest in superior process flows and automation with the objective to enhance productivity by at least 25%, a competitive advantage in a business marked by labour intensity. On the overall, I need to send out a message to customers that Steelcast is poised at a sweet spot in its existence: the company is secured by multi-year customer relationships, broad-based products portfolio and moderated cost structure. We are optimistic that this complement will translate into not just superior stakeholder value; it could achieve this outcome quicker, enhancing our brand.