Kennametal India (KIL) is 75% controlled by Kennametal USA. The leading manufacturer of hard metal products and machine tools caters to industries such as transportation, general engineering, aerospace and defense, energy, power generation equipment, earthworks, mining and construction.
Customers are provided a variety of standard as well as customized products including special purpose machines, metalworking tools, customized tooling solutions and other engineered solutions.
The dual brand strategy of Kennametal and WIDIA ensures complete separation of customers and distributors. Kennametal serves directly and indirectly customers of specific components and other high-end solutions, while WIDIA serves customers through distributors, focusing on standard products.
New distributors have been brought on board for both the Kennametal and WIDIA brands to make sure that each brand is adequately represented across the country. Some of the initiatives such as productivity optimization services and tools management services have met good success in obtaining new business as well as retaining the existing business.
The intention is to build competency in certain key components of high volume manufactured by the customers. The objective is to "own" these key components through the development and application of "total solutions" (production process input, tool supply and appropriate service support) required to effectively and efficiently produce them for customers.
The overall long term strategy is to have more than 40% of the sales from new products. Close to 42% of the revenue from hard metals came from new products, i.e., products introduced in the last five years, in the fiscal ended June 2014 (FY 2014).
The effort is pursue localization of inputs and use India as a low-cost production location for exporting to other markets, particularly Asia. Besides improving capacity utilization, this measure should help in foreign exchange risk mitigation.
The acquisition of US-based Allegheny Techlologies’ tungsten materials business (TMB) and the Bolivia-based Emura by Kennametal Inc will provide access to high quality raw materials and the latest carbide recycling technologies. The TMB acquisition has brought in the Stellram branded product, which will provide better market share in the energy and aerospace sectors. To move up the value chain in the infrastructure side of the business, the focus has been on value-added products and phasing out of commodity products with lower profitability.
The operating profit margin (OPM), which was in the range of 20-27% but fell to 7.9% in FY 2013 and 9.2% in FY 2014, is likely to get back to the traditional levels of over 20% going forward.
The OPM improvement to 9.2% in FY 2014 from 7.9% in the previous fiscal is despite increase in raw materials costs to Rs 9 crore on account of the rupee deprecation from to the Rs 61 level in FY 2014 from the Rs 55 level in FY 2013. The improvement in profitability was driven by leveraging volumes and supported by many cost containment initiatives taken up in FY 2014.
Sales grew 8% to Rs 284.03 crore and the OPM improved 140 basis points to 9.5%, boosting OP 28% to Rs 27.05 crore in the six months ended December 2014 over a year ago. Profit before tax (PBT) was up 46% to Rs 17.24 crore.
Extraordinary loss was nil as against Rs 10.10 crore. Thus, PBT jumped 897% to Rs 17.24 crore. Provision for taxation stood at Rs 4.71 crore as against Rs 18 lakh, which restricted the PAT growth to 708% to Rs 12.53 crore as against Rs 1.552 crore a year ago.
With the new government taking charge with a clear mandate from the electorate, investor sentiment has improved. The government has also initiated the process of clearing the massive backlog of stalled investment projects. There will be benefit from the government’s Make-in-India initiative, too.
After years of negative growth rates, the medium and heavy commercial vehicles segment of the auto industry, a key user, is posting gradual recovery. We expect KIL to register sales of Rs 620.08 crore and PAT of Rs 30.66 crore in FY 2015. On an equity of Rs 21.98 crore and face value of Rs 10 per share, EPS works out to Rs 13.9. This EPS is likely to jump to Rs 31.8 in FY 2016. The scrip was trading around Rs 881 on 23 February 2015.
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