XYZ LIMITED: EXPANSION OR DIVERSIFICATION

On 5th July 2021, the Steering Committee, headed by Mr. Murthy, MD, XYZ Limited, a
leading jobbing foundry, was engaged in a brainstorming session to explore growth avenues
considering the rapidly changing landscape of products on offer that are driven by
technology, regulations and customer choice. The company has over the years aggressively
pursued cost reduction as a major driver to improve bottom line. It has established its superior
position amongst discerning customers by ensuring QCDS (Quality, Cost, Delivery and
Safety) and timely scaling up of capacity ahead of demand. The company has been ably led
by the Mr. Murthy for over 2 decades, who developed internal talents to lead the business
units. He has developed a robust process of identifying and fast-tracking high performers. On
top of it with recent developments in technology, this industry is undergoing rapid changes
like adoption of EV or Fuel cell technology that could disrupt the existing vehicle
architecture including IC engines and robust transmission systems

The company has set for itself a goal of achieving a half-a-billion-dollar turnover by 2027 in
the casting business and has to grapple with challenges on sustaining and growing the
existing businesses as well as exploring new business areas to be able to stay relevant and
grow. The present turnover of the casting business is about USD 135 million. This translates
into growing almost 4 times in 6 years. The opportunities before the company are to a.
Expand capacity and improve sales by adding new products and new customers including
exports, b. Increase value add through machining & c. Diversify products into SG Iron/CG
Iron/ Aluminium to ensure achieving the target topline.

XYZ Limited

XYZ Limited is a leading jobbing Foundry in India with complete forward and backward
integration. The customer base of the Foundry is from the Tractor, Auto (PV&CV), Engines,
Off-Highway/Construction equipment segments and supplies Engine Blocks, Heads and
Housings to most major OEMs in India. Few OEMs also export the Blocks and Heads after
processing to their counterparts in Europe, Brazil, SE Asia (deemed exports).
The Foundry presently has capacity of 1.55 Lakh MT/annum and this being scaled up by
addition of one Foundry taking the total capacity close to 2.0 Lakhs MT/Annum. The present
order-board for the company is about 1.25 Lakh MT and in pipeline are orders from
customers that total up to 1.50 Lakh MT by 2022-23. The company is aggressively setting up
capacity ahead of demand to cater to emerging customer requirements and also to add new
customers and products. The company presently is supplying castings for the Powertrain in
Automotive and Off-Highway segments and can also venture into Railways, Compressors
and Heavy Earth Moving segments to grow its share of pie.

Industry
The casting industry in India is fragmented with over 4500 jobbing foundries with few major
players focusing on critical castings like cylinder blocks, cylinder heads, housings, brackets
etc. which are typically produced from high pressure molding lines with minimal manual
intervention (Exhibit 1 & 2). The industry is plagued by very high investments, low
utilization, high rejections, low skill, low profitability owing to multiple reasons such as
escalation of material, power and labor costs, inadequate compensation by customers,
ineffective process controls, low tech tooling and machines etc.

India is the 2nd largest casting producer in the world with 10.2 Million MT in FY21. Various
reports indicate that the casting production would increase to 17.2 Million MT by 2026 at
CAGR of over 11%. Out of the 10.2 Million MT 8.0 Million MT is Iron and ~ 1.25 Million
MT is Aluminum. With the shift towards EV there is higher demand for Aluminum for light
weighting in not only the Powertrain (Engine & Transmission) but also replacing steel
structure of passenger cars. By 2026 out of the 17.2 Million MT it is forecast that Iron casting
will be ~13.0 Million MT and Aluminum 2.40 Million MT. (Exhibit 3) . One other point is
that the installed saleable capacity of the large foundries in the Block, Heads and Housings
segment is ~ 1.5 Million MTPA and the utilization levels are at 60% presently.

Mr. Murthy was also aware that the industry is undergoing rapid technology changes that
have ramifications for the survival of the companies running their businesses with the present
technologies.

The Dilemma
Mr. Murthy knew that the company can also explore getting into production and supply of
spheroidal graphite and compacted graphite iron castings (presently not made in India)
besides expanding reach to customers across the globe. Alternatively, to counter the
challenge of EV and related technology penetration the company can also consider getting
into non-ferrous metals like aluminum or magnesium metal to offer light weighting solutions
to its customers.

Mr. Murthy was brooding over the significance of these changes and was concerned about
whether the company should expand or diversify its businesses. He had the following points
affecting the industry as well as his company to be considered before he takes the decision.
● Electric Vehicles are entering in market, a threat for existing Cast Iron Block & Head
Business
● Existing capacity & speed of development is not meeting the customer’s frequent
change of demands and projections.
● Shorter product life cycle leading to frequent changes in design/parts
● Foundry is capital intensive and has low capital turns.
● Challenge in availability of skilled & knowledgeable manpower in Foundry operation
for expansion and capacity additions.
● Inconsistent demands in models and numbers
● Project Lead time in setting up a new foundry is around 2 years and requires around
4-5 years utilizing its full capacity.
● Higher penetration of EV in 2 wheeler and Passenger Vehicle segments. Existing
suppliers for these will try to capture our existing business
● Current production rate is 1.2 lakh MT/Annum and we have lined up a capacity of
1.95 lakh MT/Annum by October 2022.
● Payback period in the foundry business is over 10 years at the minimum.

Case questions

1. Can XYZ Limited with expansion in the same field with the above conditions beyond
1.95 lakhs MT? If yes, what must be the installed capacity that they can target and by
when? The aspiration of y-o-y growth the reach the target sale volume and revenue
will remain intact. Do they need to diversify the business towards EV sector
opportunities and when?
 2. The possible addressable market size for Grey Cast Iron, SG Iron, CG Iron and
product groups that has growth prospects, are import substitutes or have high potential
for exports. List the possible product groups and target companies that need to be
targeted for growth in each of the businesses listed above with reasons thereof
3. Is there a potential for XYZ Limited to get into aluminum/ light weight castings?
If yes, what should be the strategy and alternatives for the company to pitch for and
garner the same?
4. Suggest risk mitigation/fall back plans to achieve the suggested strategy of expansion
or diversification.
Exhibit 1: Foundry industry overview

XYZ presence
nce

Source: Mordor Intelligence

Exhibit 2: Foundry market segmentation by application

Source: Mordor Intelligence

Source: Mordor Intelligence