Detailed Narrative
Q3 FY23 Operational Headwinds and One-Time Costs
Kennametal India experienced significant operational headwinds in Q3 FY23, primarily due to the slowdown in China. Exports of CNC machines, which constitute approximately 5% of the company's top line, were impacted by 75-80% for the quarter. Additionally, the company incurred a one-time📎 expense of ₹3.4 crores (₹34 million) related to the movement and reinstallation of approximately 140 machines within its Bangalore campus, associated with the new master insert plant. Employee costs also saw a sequential increase of ₹3.4 crores in the quarter, attributed to the annual merit cycle effective October 1st.
Capacity Expansion and Modernization Initiatives
The company has completed a significant expansion of its master insert plant, which involved new civil infrastructure and the modernization of old processes. The physical infrastructure is now capable of supporting double the current capacity, with machinery additions planned modularly as demand grows. This modernization aims to improve product quality consistency and enable the manufacturing of new-age products, reinforcing the company's long-term growth strategy in India.
Raw Material and Margin Management
Raw material prices, particularly for tungsten and cobalt, have strengthened, impacting the cost structure. While the company has generally been able to pass on price increases due to its strong market position as a technology player, the PBT was affected by a mix of factors including raw material costs, the export market mix, and the one-time📎 machinery movement expense. Management's endeavor is to improve upon the FY22 EBITDA margin, which was implied to be around 18%, by focusing on productivity improvements and operational excellence to offset internal inflation and wage increases.
Market Strategy and New Product Contribution
Kennametal India estimates its market share to be around 25-26% in the hard metal industry, though management believes the real market size is larger. The company's strategy for market share gain is centered on delivering productivity and cost-per-component reduction to customers, rather than discounting. New products launched in the last five years consistently contribute between 20% and 25% of the company's revenue, highlighting its focus on innovation and product portfolio expansion.
Export Markets and Emerging Growth Segments
Exports currently account for 18% of Kennametal India's overall revenue. Beyond China, the company is exploring growth opportunities in Southeast Asia (Vietnam, Indonesia) and selectively in Eastern European and Middle Eastern countries. Domestically, Kennametal is well-positioned in high-growth sectors such as defence, aerospace, Electric Vehicles (EVs), and energy (including wind), which are expected to outperform traditional segments. Aerospace, in particular, is anticipated to grow at 'multiples in terms of percentage,' albeit from a small base.
Global R&D Integration and Supply Chain Resilience
Kennametal India benefits from a globally integrated R&D structure, with fundamental research conducted at the parent level and new products launched simultaneously worldwide. Technology transfer occurs for local manufacturing when a sizable market exists. To mitigate global supply chain disruptions, the company increased its safe inventory levels during the COVID period and expects to normalize these levels back to pre-COVID status within approximately six months, ensuring consistent supply to customers.