Sarthak Metal’s FY24 Report Card: Building for the future in a tough year

Sarthak Metal’s core business of supplying certain consumables – cored wires and aluminium flipping coils – for the manufacture of steel continued to suffer headwinds in FY24. For the second year in a row revenue fell, coming down to Rs 305 crore in FY24 as compared to Rs 408 crore in FY23 and Rs 457 crore in FY22. In other words, the revenue is down around 33% from the peak of FY22.

Material costs are down by roughly a similar percentage, hence there is not much change in gross margin. However, EBITDA margins have come down due to impact of fixed overheads. EBITA was down 38% to Rs 20 crore from Rs 32 crore in FY22, the year of peak revenue. In percentage terms, EBITA margin was 6.5% in FY24 as compared to 9.8% in FY23 and 7% in FY22. It has been lower at 4.7% in FY21. In fact, in the last two quarters of FY24, EBITDA margin has been below 4%; 3.3% in Q3FY24 and 3.7% in Q4FY24.

Going forward, the company plans to focus on higher margin products in cored wires, and is hopeful of some uptick in margins. In Aluminium flipping coils the outlook is presently a little uncertain due to volatility in aluminium scrap prices. Kenya has recently banned export of scrap, which will continue to put pressure on global scrap availability.

On the positive side, Sarthak Metals ended FY24 with a healthy balance sheet. It remains a zero debt firm. Net cash increased to Rs 35 crore as on 31.3.24, compared to Rs 15 crore as on 31.3.23.

The new initiative of flux cored wires is showing promise. Sarthak Metals had put up a pilot line with a capacity of about 100 tons per month in FY24. It is now looking to add more lines; they will start reflecting in revenues from the second quarter of 2024-25. Flux cored wires find application in welding.

In the Biotechnology division, a new business vertical announced towards the end of 2023, Sarthak is currently has put up a pilot facility at Nagpur. It is working on biotechnology applications for Water treatment, Alternative energy and Health & Hygiene. Sarthak has received technology transfer from a government lab: CSIR (Council of Scientific and Industrial Research).

FY25 onwards, particularly once some commercialisation from the biotech division takes places, Sarthak Metals could start looking a differet company. From expore to steel industry, via its consumables, it will have an exposure to fabrication and welding business, as well as a very different sectoral exposure via its biotech initiative. The management was looking to diversify its business mix which had total dependence on one sector – steel. The two new initiatives of flux cored wire and biotech, both announced in FY24, are steps in this direction. The company has the cash to invest, its core business will continue to throw up free cash. If Sarthak is able to succeed in its new initiatives, then shareholders will reap rich rewards.

(Wisdomsmith assists Sarthak Metals on Investor Relations. We will be happy to address queries and arrange interaction with the Sarthak Metals management.)

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