Kirloskar Ferrous Ind. - Casting and tubes outperform, spreads spoil the show | Company Update

We lower our target price to Rs 620 (previously Rs690) and retain BUY rating for Kirloskar Ferrous Industries Ltd. (KFIL). The decrease in TP is mainly to account for weak commodity spreads and realization across end products . KFIL’s 2QFY26 performance was best to MNCL revenue and estimates, supported by improved offtake for castings (especially Oliver engg.) and tubes. Weak pricing for pig iron and alloy steel limited the growth on revenue and full-fledged expansion of spreads. The over-supply scenario in the domestic steel market is expected to continue, weighing on margin expansion for rest of FY26, which is the reason for cut in valuation multiple. On a longer term, we expect margins to rebound once prices turn benign. Remain positive.

Beat on revenue due to high offtake on tubes and castings:

KFIL reported 5% yoy growth in consol. revenue at Rs17.6bn, beat to MNCL estimate of Rs16.9bn. Despatches of pig iron (132kt; +2% yoy), castings (36.7kt; -1% yoy) and tubes (49.6kt; +24% yoy) were main drivers of revenue growth. However, realisation corrected (yoy basis) for all products, due to weakness in domestic steel prices and adverse product mix in tubes, in turn impacting the revenue growth. Additionally, Rs460mn was the revenue from Oliver engg. at an offtake of ~5000 tonnes resulting into a strong ramp up in casting segment.

Weak realization and adverse product mix dent margins:

Lower realization for alloy steel and pig iron compressed the spreads to weak levels despite some benefit on raw material due to captive iron ore and reduction in coking coal cost. Adverse product mix in tubes further led to weak gross margins. With some savings from captive power and low employee cost, KFIL reported margins at 12.2% (+60bps yoy; -60bps qoq) and consol. EBITDA of Rs2.1bn in Q2FY26.

Looking forward to volume growth and cost savings in FY26:

2QFY26 was a quarter affected by weak commodity spreads and weak pricing for tubes.  KFIL reported strong ~15% margins on castings but was barely breakeven on pig iron. Going ahead, improvement in steel prices will be a major trigger for expansion in margins. Further, tractor demand has improved meaningfully starting June. This along with offtake from newly started foundry at Oliver engg. and Solapur, is expected to considerably ramp up casting offtake sequentially. Going ahead, we expect significant growth in EBITDA due to factors like i) full year impact of captive iron ore leading to Rs400mn in savings ii) Addition of 35MW green captive power in FY26 iii) Ramp up of casting offtake and iv) margin improvement in tubes on winning the order from ONGC. These factors drive our outperform thesis in KFIL but an oversupply in pig iron and scrap market has led to elongated weakness in spreads leading to cut in earnings and multiple.

Valuation and Risks:

We ascribe 9x multiple (previously 10x) on Sept’27E consol. EBITDA to arrive at TP of Rs620/share (previously Rs690/sh) and retain BUY rating. The decrease in TP is due to cut in realizations across products. At CMP – Rs 477/share, the stock trades at 8.1x/ 6.4x FY27/ FY28E consol. EV/EBITDA. Key risks: weak commodity spreads and delay in cost saving projects.

Company website: https://www.kirloskarferrous.com/

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Analyst:

• Sahil Sanghvi - Research Analyst, Institutional Equities (NISM-201900004744)
• Uvais Khatri - Research Associate, Institutional Equities (NISM-202300049054)

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