Kirloskar Ferrous Industries - Pricing power yet to fully reflect in spreads | Company Update

Q4FY26 was a miss to our revenue & EBITDA estimates, due to lower than expected sales volumes and pricing across several products. This along with high operating expenses has led to miss on EBITDA estimates. We expect substantial part of price hikes in alloy steel, tubes and pig iron to add up in 1HFY27E which should elevate spreads in FY27E vs. FY26, despite the risk of high coking coal cost. Improved demand from tractor and CV 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 EBITDA growth due to i) full year impact of price hikes; ii) Addition of (70+25) MW green captive power in FY27; iii) Ramp up of casting offtake along with start of 2-part foundry; iv) margin improvement in tubes on execution of ONGC order and v) higher production of pig iron post debottlenecking. On a longer term, projects like the steel plant in Koppal, debottlenecking and PCI/oxygen injection at Hiriyur and start of captive mines, are all factors that will structurally drive increase in profitability. We have downward revised our FY27E/ FY28E earnings by 11%/ 15% respectively to account for reduced spreads vs previous estimates, revised pricing and RM cost expectations. Remain positive on KFIL.

Sales volume and realizations - a mixed bag of surprises:

KFIL reported 4.6% yoy growth in consol. revenue at Rs 18.2bn, a miss to MNCL estimate. Despatches of pig iron (128kt; -6% yoy) and casting (38kt; +20% yoy) were lower than expected due to slow ramp up at Hiriyur blast furnace and Solapur foundry. Tubes (51.1kt; -1% yoy) and alloy steel (24.8kt; +20% yoy) were in-line with expectations. Realisation of pig iron, tubes and alloy steel missed our estimates and were lower than market pricing due to delayed price hikes and adverse product mix (for tubes); except castings where realization grew 3% yoy to Rs 1,31,790/tonne. For FY26, KFIL reported a 5% growth in revenue at Rs 68.9bn.

Partial impact of realization aids margins:

Partial price hikes in pig iron and castings uplifted the spreads for KFIL in Q4FY26, partly offset by adverse product mix of tubes and weak pricing of alloy steel. This resulted in 77 bps increase in margins at 12.4% and a 12% yoy jump in EBITDA at Rs 1.2bn. For FY26, spreads were largely compressed due to weak pricing across product lines. However, cost savings projects helped margins to improve by 70bps to 12.2%, resulting into 11% growth in EBITDA at Rs 8.4bn. Adj. PAT for FY26 grew 27% to Rs 3.7bn, supported by reduction in finance cost and high other income.

Looking forward to volume growth and improved spread:

After a year of weak pricing, the steel market has witnessed strong price hikes at the far end of FY26, which is expected to fully reflect in KFIL’s spreads, especially for alloy steel and tubes starting 1QFY27E. Despite the risk of high coking coal cost, we expect the spreads to be higher in FY27E vs FY26. Further, both tractor and CV demand has improved meaningfully. 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 price hikes; ii) Addition of (70+25) MW green captive power in FY27; iii) Ramp up of casting offtake along with start of 2-part foundry; iv) margin improvement in tubes on execution of ONGC order and v) higher production of pig iron post debottlenecking. On a longer term, projects like the steel plant in Koppal, debottlenecking and PCI/oxygen injection at Hiriyur and start of captive mines, are all factors that will structurally drive increase in profitability. We have downward revised our FY27E/ FY28E earnings by 11%/ 15% respectively to account for reduced spreads vs previous estimates, revised pricing and RM cost expectations. Remain positive on KFIL.

Valuation and risks:

We ascribe 8x multiple (unchanged) on Mar’28E consol. EBITDA to arrive at TP of Rs 525/share (previously Rs 570/sh). We maintain BUY rating on stock due to the sharp correction in share price. The downward revision in TP is largely due to cut in earnings. At CMP – Rs 451/share, the stock trades at 8.1x/ 7x FY27E/FY28E consol. EV/EBITDA. Key risks: weak commodity spreads and delay in cost saving projects.

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

Click to download the full Kirloskar Ferrous Industries Ltd 4QFY26 Company Update

Analyst:

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

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