Saturday, November 11, 2017

Business Analysis - Kirloskar Ferrous Industries Ltd.


Kirloskar Ferrous Industries (KFIL), incorporated in 1991, is engaged in manufacturing of pig iron and ferrous casting used in automobile and tractor industries. KFIL was promoted by Kirloskar Oil Engines Limited (KOEL) and Shivaji Works Limited (SWL) and in 2007, SWL was later acquired by KOEL. 

Company caters to the requirement of pig iron, intricate thin walled grey iron castings to the tractor, auto, engine and other related segments. Company has two manufacturing facilities located in Karnataka and Maharashtra. KFIL’s manufacturing plants are integrated and strategically located in close proximity to iron ore deposits of Hospet-Sandur-Bellary belt at Karnataka.  

Business Analysis:

PIG Iron:

Pig iron is an intermediate product of the iron industry. Iron ore is allowed to run in moulds after smelting to solidify in the form of ingots or pig. Pig iron is of varied composition with 4% carbon, 2% silicon and smaller amounts of manganese, sulphuric & phosphorus. Pig iron is used in manufacturing of steel. 

Annual demand of pig iron in India is around 8-9 million MT; producers include steel companies like JSW, SAIL, RINL, Kalyani Steel and standalone pig iron manufacturers like Kirloskar Ferrous, Tata Metaliks etc. 

Steel companies were major sellers of pig iron in market with subdued steel demand over last few years. Steel demand has revived over the period, which led to increase in demand for pig iron. 

Pig iron is a difficult business due to dependency on raw material cost. Standalone pig iron manufacturers have expanded into high margin products to diversify away from pig iron business, ex - Tata Metaliks has been focusing on DI pipes. KFIL management plans to keep focusing on pig iron business; they believe KFIL will be benefited if competition diverts their attention from this good old business.

KFIL has Two Mini Blast Furnaces (MBF) with an aggregate capacity of 391,400 MT per annum for manufacturing Pig Iron with Hot Blast Stoves to pre heat the gases.

Competitive Analysis: 

Tata Metaliks pig iron operations are more efficient than KFIL. Reliazation (in cr) per kMT for KFIL is 2.3 in comparison to 2.5 of Tata Metaliks. 

KFIL's pig iron operation has remained sluggish with lowly production CAGR of 1.6% since 2010. Revenue increased at CAGR of 4.5% during the same period. Pig Iron realisation (in cr per kMT) has also significantly come down.   

Company faced challenges due to cancellation of iron ore mining rights and limited availability of good quality iron ore. Here is the timeline of mining issue which affected KFIL’s business adversely: 

2012: Stopped operations of one of the MBF in May 2011 due to unavailability of iron ore. Iron ore sourcing under e-auction was on an advance payment basis leading to increase in fund based working capital requirement. Cost of imported coke also increased on account of Indian rupee depreciation. 

2013: Ban on iron ore mining in Karnataka affected availability of good quality iron ore. Karnatake govt levied a forest development tax of 12% burdening the businesses. Steel manufacturers started dumping pig iron into the market due to the sluggish steel market resulting in lower market demand for pig iron.

2014: Due to closure of mines and demand supply gap, iron ore prices remained high. Available iron ore was of a low quality affecting both the productivity and the cost of manufacturing.

2015: Only end users for their captive use were allowed to participate in e-auction for iron ore mines. KFIL being the manufacturer of pig iron and grey iron castings became eligible.

2016: Government of Karnataka issued tender document for participation in mines auction. KFIL participated in auctions but didn’t win rights as the auction prices were high. 

During this turmoil, KFIL focussed on improving efficiency to remain competitive in the market. Here a a quick snapshot of the measures undertaken: 

2011: 4.5 MW power plant was commissioned in July 2010 at Koppal plant resulting in lower power cost. This captive power capacity was later expanded to 11.5 MW. KFIL started utilizing its waste heat gas which is generated during the production of pig iron to generate power. 

2012: Backward integration of pig iron manufacturing process by setting up a sinter plant resulted in improved operating performance. Sinter plant helped KFIL consume iron ore fines instead of lump ore and get benefit of price difference and reduction in coke consumption.

2014: New foundry at Koppal commissioned increasing pig iron capacity. 

2017: Commenced Railway siding project which is expected to be completed in FY2018. This will facilitate inward movement of raw materials and outward movement of pig iron resulting in reduction in cost of transportation and handling losses.

KFIL has upgraded its mini blast furnaces time to time to increase capacity and efficiency. 

Casting Business: 

KFIL has annual casting capacity of 192 kMT. The production of casting was 66 kMT in FY2017, capacity utilisation of meagre 34%.

KFIL has signed agreements for supply of castings with major auto OEMs - Mahindra & Mahindra, Tata motors, Toyota Kirloskar Auto Parts, Eicher motors, Escorts, TAFE, Carraro, Simpson & Company, etc

Casting business realisation is higher than Pig iron. While production has increased at 4% CAGR, revenue has increased at 10% CAGR since 2010. If KFIL can increase its casting capacity utilization, company can disproportionally increase its bottom line.  

Company has successfully undertaken timely expansion plans indicating strong execution capabilities. 

Project Implementation: 

2013 / 2014: Installed a high pressure moulding line at Koppal plant to enhance production capacity of castings by 48,000 MT pa in phase -I. Installation was timely finished in 2014.

2015 / 2016: Productionising castings for the Euro VI series engine block and heads and stabilizing the process to get stability in quality and delivery. Successfully developed EURO-VI engine blocks and engine heads in 2016. Company’s  ability  to  cater  to  large  and  complex  cylinder  block  casting  complying  with  EURO  VI requirements  provides  a  significant competitive  edge.  

2017: Commenced civil work for machine shop at Koppal Plant which is expected to be completed in H1-2018. Machine shop will be commissioned progressively in a phased manner based on the order position. Installation of fettling facilities for superior casting finish at Solapur Plant.

Financial Analysis: 

KFIL sales increased at meagre CAGR of 5% over last 10 years. PAT increased at CAGR of 7%. Operating profit margins have improved to 15% as compared to 9-10% due to increased contribution from casting business.

KFIL generates healthy operating & free cash flows. With continuous external challenges, KFIL has followed a cost conscious conservative strategy.

Cost of material forms significant portion of KFIL’s expenses. As %ge of sales, cost of material was in mid 70s which came down to low 60s over last 2 years. This ratio jumped back to 73% in Q1-2018 due to high levels of iron ore and coke prices. Q1-2018 was a complete wash-out (quarter EPS of .09) for KFIL leading to profit after tax of just Rs. 1.2 cr in the quarter. Iron ore prices eased in last 4 months which reduced the ratio to 56% in Q2-2018. 

KFIL has been participating in e-auction of iron ore mines, but are yet to be allocated any mine. Management seem to believe that other market participants are bidding aggressively. Management expects to get mines at reasonable price in near future. 

Q2-2018 has been an interesting quarter for KFIL. While the profitability is yet to recover fully (Q2 EPS of 0.79), there were some positive takeaways which may lead to better performance in coming quarters. Here is quick overview of performance: 

1. Increase in inventory from Rs. 122 cr in Mar 2017 to Rs. 193 cr in Sept 2017. Increase in trade payable from Rs. 164 cr in Mar 2017 to Rs. 344 cr in Sept 2017. KFIL seems to have taken benefit of low iron ore prices by purchasing in large quantities. KFIL has been able to negotiate better terms with its suppliers which is evident from significant increase in trade payables. The material cost is expected to remain low in coming quarters.

2. Increase in trade receivable from Rs. 196 cr in Mar 2017 to Rs. 277 cr in Sept 2017. KFIL has limited bargaining power with clients. While they have been able to increase sales, the receivables have increased significantly. 

3. Reduced short term borrowing from Rs. 97 cr in Mar 2017 to Rs. 84 cr in Sept 2017. 

4. Reduced short term loan and advances from Rs. 35 cr in Mar 2017 to Rs. 63 lakhs in Sept 2017. Advances, balances with VAT authorities and customs contributed to the short term loans and advances. Company seem to have realised these proceeds.  

KFIL has maintained low debt levels despite sustained capital expenditures in pig iron & casting businesses.  

The fixed asset turn-over has reduced with new capacity in place which is yet to be fully utilized. Other operating parameters have remained more of less stable.  


Independent directors constitute more than 50% of the board members. Management of KFIL include the following: 

1. Atul C. Kirloskar, Chairman: Atul C. Kirloskar is also director in other Kirloskar group companies - Kirloskar Industries, Kirloskar Pneumatic, Kirloskar Oil Engines, Toyota Kirloskar Motor. Mr. Atul has shareholding of 1.04% in IFIL.  

2. Rahul C. Kirloskar, Vice Chairman: Rahul C. Kirloskar is director in Kirloskar Oil and Kirloskar Pneumatic companies. Mr. Rahul has shareholding of 1.04% in KFIL. 

3. R. V. Gumaste Managing Director: Mr. Gumaste salary in FY2017 was Rs. 4.4 cr, including commission of Rs. 3.25 cr. MD's renumeration is within regulatory ceiling. Salary has increased at CAGR of 18% since 2011. H1-2018 has been subdued so far; it'll be interesting to see the effect on MD's salary in FY2018.  

4. A. R. Jamenis Independent, Non Executive  Director A. N. Alawani, Non Independent, Non Executive Director

5. B. S. Govind, Independent Non Executive Director 

6. R. Sampath Kumar, Independent Non Executive Director 

7. Nalini Venkatesh, Independent Non Executive Director 

8. Y. S. Bhave Additional Director

Majority Shareholders:

Promoter group own 59.6% shares in KFIL, of which Kirloskar Industries Ltd. (KIL) accounts for 51.5%. KIL marginally increased its stake in March 2017 as per exchange filings. While the acquisition was small, this may indicate management’s positive intent towards business.    


KFIL’s market cap is ~Rs. 1073 cr as on 11th Nov 2017. Company realized sales of Rs. 1134 cr in FY2017. KFIL business is available at Price to Sales (P/S) ratio of less than 1. P/S ratio is less than 1 is attractive for investors. 

KFIL could muster earning per share of Rs. 6.6 in FY2017. H1-2018 (especially Q1-2018) was subdued for the company due to high iron ore and coke prices. KFIL’s EPS for H1-2018 is Rs. 0.88 against Rs. 4.4 in H1-2017. PE ratio on TTM basis is ~25. High levels of PE leaves low margin of safety for the investors.  

If KFIL sustains the pig iron business and increase the casting capacity utilisation to 70%, the revenue could increase by Rs. 520 cr (casting revenue is Rs. 519 cr at 34% capacity utilization).


KFIL business dependent on four wheeler and tractor industries. KFIL will be beneficiary of demand revival in these businesses. KFIL is also dependent on the vagaries of raw material cost prices. 

Casting business could offer significant operating leverage to the business. KFIL developed unique capability of EURO VI grade diesel engine components, which they could leverage in near future. There is little doubt about the project execution capability of management. 

KFIL is a traditional business in a boring industry with a number of external headwinds but equipped with a experienced and capable management. 


All data has been taken from public sources. I'm invested in KFIL. This may have biased my analysis. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer’s. This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.
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