Kennametal India Limited

Kennametal India observes significant robustness in the Indian manufacturing sector, driven by private sector capex expansion, capacity additions, and modernization. The domestic CNC machine market, in particular, experienced a substantial 46% growth last year, a level not seen previously. This strong domestic momentum is expected to continue, with the economy projected to remain strong and the manufacturing sector expanding across various segments like automotive, construction, mining, and aerospace.

Exports remain soft, primarily due to headwinds in developed countries and China, with hard metal exports experiencing a 15-16% decline. While China's market has bottomed out, significant sequential recovery is not yet observed. To mitigate this, Kennametal India is increasing its focus on the domestic market and exploring new geographies like Southeast Asia (outside China) and the Middle East, which show promise due to localization and manufacturing investments.

The company has introduced new product categories, such as Vertical Turning Lathes (VTL), which is a large category in India. This initiative is expected to increase the total addressable market (TAM) for their machine business by an estimated 1200-1500 crores. They are also looking into other new product lines for sectors like oil and gas valve manufacturing, energy, and auto components, with further announcements anticipated in the next six months.

Kennametal India has demonstrated sequential improvement in its PBT over the last four quarters, attributed to operational excellence and better utilization of its facilities. The company had previously communicated a large capex cycle inventory, and now operations are streamlined, leading to efficient cost absorption. The cutting tools business is expected to see a 2-3% benefit from volume leverage, while machine business margins fluctuate around 5% due to domestic market focus.

The royalty agreement with the parent company has been renewed, with the rate decreasing from 4.75% to 4% effective April 1. This new agreement includes a worldwide license, allowing Kennametal India to manufacture and supply to group entities globally if required. The company also benefits from a constant review and transfer of new technologies from the parent's R&D team to enhance tool performance and update local product portfolios.

The company has improved its market share in hard metals by 250-300 basis points over the last three years and aspires to grow at 1.2 to 1.3 times the market growth. While they face intense competition, particularly in the machine business, they maintain a strong position in high-end, specialized machines, with pricing typically in the 65th to 70th percentile. Imports of cutting tools have seen a minor increase in competitive intensity (1.5% in one portfolio), but overall, the impact is limited.

Kennametal India emphasizes its focus on high-end and specialized machines, not competing in the lower-end segments (e.g., small turning machines of 20-40 lakhs). Their product range includes turn cutter grinders starting from 90 lakhs up to 2 crores, and large VTLs costing 3-4 crores. This strategy positions them in segments where they can leverage their technological capabilities and compete effectively against international players, with a preference from customers for 'Make in India' products of comparable quality.

Management acknowledges the existence of 'white spaces' in their product portfolio, including electronics (e.g., micro drills for tablets, mobile devices) and specific chemistries like Ceramic Tools and PCG tools. While they currently do not participate in the electronics segment, these areas represent future growth opportunities that the company is evaluating and will communicate about upon launch.