SG Mart: Q2-25 Earnings Call Highlights
Growth driven by all verticals: metal trading, service centers & distribution. Expansion in service center segment. Steel price volatility a challenge in Q2. Confident in achieving long-term targets
sgmart.co.in | BOM: 512329
1. Key Takeaways
1.1 TLDR
SG Mart Limited reported strong revenue scalability in Q2 FY25, surpassing INR 1,800 crores on sales volume exceeding 350,000 tons. This growth was driven by expansion in all three business verticals: B2B metal trading, service centers, and distribution.
SG Mart demonstrates impressive growth momentum and strategic expansion, particularly in the service center segment.
While steel price volatility posed a challenge in Q2, the company's low-inventory model and efficient operations helped mitigate losses and maintain positive EBITDA.
The management remains confident in achieving its long-term financial targets and delivering value to shareholders.
1.2 Operational Highlights:
Strong Revenue Growth: Despite a slow start in Q1, SG Mart surpassed INR 1,800 crores in revenue for Q2, driven by scalability across all three revenue streams: B2B metal trading, service centres, and distribution.
Service Centre Expansion: The company continues to aggressively expand its service centre network. Three centres are currently operational, with two more slated to open by December 2024. The company aims to operate 20-25 service centres by FY27.
New Service Centre Opportunities: SG Mart has identified two new opportunities within its service centres: solar profile structures and products for the PEB construction industry (purlins and deck sheeting).
Inventory Loss Impact on Margins: The sharp decline in steel prices during Q2 resulted in an inventory loss of approximately INR 17-18 crores, eroding approximately 1% of EBITDA. The company maintains that this was a once-in-a-decade event and expects margins to recover in the coming quarters.
Guidance Reaffirmed: SG Mart maintains its guidance of INR 17,000-18,000 crores in revenue by FY27, with a 2.5% EBITDA margin.
1.3 Key Themes:
Revenue Growth and Scalability:
Q2 FY25 revenue significantly increased from Q1 FY25, exceeding initial expectations.
The company achieved a monthly sales volume of over 120,000 tons and aims to reach 160,000 tons per month in FY26 and 250,000 tons per month in FY27.
"So, all the three revenue streams in SG Mart scaled up to pretty high levels and the scalability encouraged us to go further aggressive on the service center front and tying up for more steel supply with steel mills."
Expansion of Service Centers:
SG Mart currently operates three service centers and plans to have five fully operational centers by December 2024.
Aggressive expansion plans include establishing ten new service centers throughout 2025, targeting 20-25 operational centers by FY27.
New service centers will cater to diverse user industries, including solar profile structures and PEB construction.
"So, our idea is to work on the land acquisition and start the service centers one by one throughout 2025 calendar year. So that once we enter in FY27, we should be operating minimum 20, 25 service centers."
Impact of Steel Price Volatility:
Q2 FY25 experienced a significant 15% drop in steel prices, impacting margins despite maintaining a low inventory of eight days.
The company incurred inventory losses of INR 17-18 crores due to the rapid and consecutive price drops.
Management believes the sharp price correction was a rare event and expects margins to recover in subsequent quarters with stabilizing steel prices.
"The margins, if you look at, were a bit soft, mainly because of highly volatilized steel prices, which crashed by like 15% from July to September quarter."
Business Model and Margin Guidance:
SG Mart emphasizes a high-volume, high-churn, low-margin model with a focus on return on capital (ROC).
Management maintains the full-year EBITDA margin guidance of 2-2.5%, despite the Q2 impact of steel price volatility.
The company believes this margin range is sustainable due to minimal debt, high asset turnover, and low risk of debtor write-offs.
"So, these 2% to 2.5% EBITDA margin will generate 25%, 30% ROC, which we are chasing."
Financial Performance and Outlook:
The company reported negative net working capital due to the ongoing ramp-up of service centers.
Strong operating cash flow generated free cash flow and increased cash on books.
SG Mart maintains its revenue guidance of INR 17,000-18,000 crores by FY27.
"Because of strong operating cash flow, we generated free cash flow. And the cash on books also increased marginally. So, which keeps us on our toes to spend heavily on the setting up of new service centres."
1.4 Key Quotes
On Margin Resilience: "Despite having such low margins of 2%, 2.5% and such a sharp fall in steel prices we still had positive EBITDA."
On Inventory Loss: "15% crash in steel prices is once in a decade kind of event, and still we came out of it, right?"
On Service Centre Contribution: "We expect service centers to contribute 40%, 50% to our revenue in the next 2 years."
On Future Growth: "So for FY27 our target is INR18,000 crores revenue... Assuming 20 days of working capital cycle plus 30, 35 service centers which shall be operational. So that will help me fund the growth for the next few years."
SG Mart Limited Q2 FY25 Earnings Call FAQ
1. What were the key highlights of SG Mart's Q2 FY25 performance?
Despite initial slow growth in Q1 FY25, SG Mart demonstrated significant scalability in Q2, exceeding INR 1,800 crores in revenue and selling over 350,000 tons of steel. The company successfully navigated challenges such as steel price volatility and weak construction activity. All three revenue streams – B2B metal trading, service centers, and distribution – witnessed growth.
2. What is SG Mart's strategy for expansion and growth?
SG Mart is aggressively expanding its service center network. With three currently operational, two more are set to launch by December 2024, bringing the total to five. The company aims to operate a minimum of 20-25 service centers by FY27. SG Mart also plans to introduce solar profile structures and cater to the PEB construction industry through its service centers, further diversifying its offerings.
3. How did steel price volatility affect SG Mart's Q2 margins?
Steel prices crashed by around 15% between July and September, leading to inventory losses and softer margins in Q2. Despite holding only eight days of inventory, the rapid, consecutive price reductions resulted in a loss of approximately INR 17-18 crores.
4. What is SG Mart's outlook on EBITDA margins for the remainder of FY25?
Despite the Q2 margin dip, SG Mart maintains its full-year EBITDA margin guidance of 2-2.5%. The company believes this is achievable given the stabilizing steel prices and the inherent resilience of its low-margin, high-volume business model.
5. What is the composition of SG Mart's team, and how is the promoter group involved?
SG Mart is led by a team of seasoned professionals, including Mr. Shiv Bansal, Joint Managing Director, and Mr. Amit Thakur, Director, both with extensive experience in the steel industry. A team of 120 professionals is divided across the three business verticals. The promoter, Mr. Sanjay Gupta, plays a key role in steel sourcing, leveraging his expertise and relationships.
6. Is SG Mart pursuing any collaborations with its sister concerns, SG Transport and SG Finserve?
SG Mart operates independently from its sister concerns. Logistics are entirely outsourced, and while customers have the option to utilize SG Finserve for supply chain funding, it is not mandatory. SG Mart prioritizes upfront payments and does not engage in related party transactions with group companies.
7. Has SG Mart made any significant changes to its business model based on its learnings?
While the business model itself remains robust, SG Mart continually refines its operations. Key learnings include further optimizing inventory churn, enhancing risk management practices, and adapting to customer behavior. This includes identifying new product offerings, such as expanding into semi-processed steel profiles for the PEB construction sector.
8. What is SG Mart's volume guidance for FY25 and FY26?
SG Mart projects to sell over 1.2 million tons of steel in FY25 and exceed 2 million tons in FY26, demonstrating its ambitious growth trajectory.
Source: Link to Earning Call Transcript
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