Alicon Castalloy Limited (531147) Earnings Call Transcript & Summary

Thank you, everyone. Good day, everyone, and thank you for joining us on Alicon Castalloy Limited's Q1 FY '21 Earnings Call. We have with us on the call today, Mr. Rajeev Sikand, Group CEO; Mr. Shekhar Dravid, Group COO; and Mr. Vimal Gupta, Group CFO of the Alicon Group. Mr. Vimal Gupta will start and cover the financial performance, following which Mr. Shekhar Dravid will walk us through the operating highlights of the quarter. Mr. Sikand will then cover business developments, following which we will have the forum open for a Q&A session. Before we begin, I would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings documents shared with all of you. I would now like to hand the floor to Mr. Vimal Gupta for his opening remarks. Over to you, sir.

Thank you, Matt. Good afternoon, everyone. On behalf of the entire management team of Alicon Castalloy, I would like to extend a warm welcome to all of you on the earnings conference call for the first quarter of financial year 2021. I hope that you and your communities are safe and well. The quarter gone by was extremely challenging with an unprecedented level of disruption due to the nation-wide lockdown from March 24. We began the quarter with the complete shutdown of all of our manufacturing units. This was accompanied by challenges in logistics, constricted movement of material and manpower as well as high uncertainty of demand from the OEM customers. This has negatively impacted business operations as anticipated, leading to compression in volumes and revenues during the quarter. First to set up relocations to the lockdown were announced at the beginning of May, we restarted our manufacturing units at Binola in Haryana and at Shikrapur in Pune on 11th of May, losing roughly 41 out of 91 days during this quarter. Since our central plant was located in a containment zone, we were able to resume production in this facility only around the 8th of June, thereby losing 69 days out of 91 days during this quarter. So on account of this, effectively in April and for the last part of May, we recorded negligible volumes and sales. Soon after as our plants restarted production, we have been still simply adhering to the regulatory guidelines and are continuing operations with only 33% of the manpower as permitted. Since we are implementing distancing norms at these facilities, the productivity level during the quarter were at 60% of the pre-COVID level. Against this backdrop, we reported consolidated revenue of INR 53.66 crores in Q1 of FY '21. For the quarter, exports, including overseas revenues contributed to 40% of the total revenue, while domestic contribution was at 60%. Across verticals, the auto division contributed to 86% of the total revenues in Q1 of FY '21 and non-auto division was at 14%. There has also been a conservative focus on cost management. We have instituted cost optimization initiatives and efforts towards improving process efficiency, which resulted in an improvement in gross margins at 51.4% in Q1 FY '21 compared to 48.1% in Q1 of FY '20. This has also slightly improved by 56 bps from the gross margins reported in Q4 of FY '20, just a quarter ago. However, due to the lower volume, lower revenue-based operating leverage resulted in negative EBITDA of INR 23.4 crores, further with largely stable depreciation and interest cost and negligible taxes, loss after tax during the quarter stood at INR 44 crores. On the whole, our business fundamentals remain intact, and we are actively engaged with customers in order to be aligned to their requirement. The near-term outlook is uncertain, but we are confident that our offerings are highly relevant to BS-VI and electric mobility requirement. On that note, I would like to hand it over to Mr. Shekhar Dravid who will talk about operating highlights for the quarter.

Thank you, Vimal. Greetings for our investors. I trust all you're well and staying fit. Across the globe, economy and enterprises alike are facing disruption and volatility on account of the COVID pandemic and resultant actions. In India, even before COVID-19 hit, the domestic auto industry, as you all are aware, was hitting a slowdown as a result of weakened consumer sentiment, sluggish demand, liquidity issues in the market and the onetime transition impact to BS-VI norms. This was then further magnified due to the adverse impact of COVID-19 on manufacturing operations. Supply chain and transport. We see this for the first time ever in April 2020, there were 0 auto sales registered in an entire month in India. Although manufacturing operations and business activities for most auto companies partially resumed in May and June, the demand and sales only picked up from mid-June onwards. These unprecedented circumstances in Quarter 1 of financial year '21 severely impacted our business performance and those of our customers, too. As Vimal already discussed, we lost several operational days across all our clients. And even when production was restarted, it was at a reduced scale. In addition to this, supply chain issues also derailed performance in quarter 1 financial year '21. In such times of extreme ambiguity, as a company, we deployed a state of focus agenda to be able to effectively navigate through some of these operating constraints. Let me share a brief synopsis of what we have done in the course of this quarter. First and foremost, employees' safety and wellness continues to be our utmost priority. And accordingly, we have deployed stringent safety and hygiene protocols across all of our clients and offices. Currently, our units are Binola, Shikrapur and Chinchwad in Pune are operating roughly at 50% utilization level, and we are gradually ramping up production across these clients. Secondly, from a supply chain standpoint. We have undertaken quite a few strategic initiatives to restore and maintain momentum of goods through leadership networks and vendors in an otherwise tough environment. In July, the supply chain has marked a slight improvement, and we are currently at about 60% to 65% of a normal level. Our inventory level also continues to remain stable. On the international business front. We saw slight revival in the demand from May onwards, as soon as the international market started reopening. So we supply confidence and parts from our Illichmann facility in Europe to many global clients during this period. Further, at the ports that are opened in India, we also reported resumption of export sales from the month of June onwards. Across domestic and international markets. Our client engagement remains solid, and our customers are committed to continue with development programs while the broader and micro situation stabilizes. During the quarter, we are continuing to engage with all our customers through frequent virtual interactions that have, therefore, been able to maintain continuity in delivery to the existing customer and make progress against a new lease, even in this challenging environment. Overall, we have made ourselves agile as an organization to efficiently adopt to any change in the operating environment and ordering patterns in these uncertain times. I'm happy to share that in auto, we have had 2 prestigious orders in this quarter mainly from Toyota globally and another one is from PSA globally. I would like to mention one thing. Since the inception of the Toyota, this is the first time ever that Toyota decided to go for the outsourcing of cylinder headlight business and Alicon has got this opportunity in India to grab this opportunity. Also, during this period of lockdown and pandemic situation, we have constantly worked with our customers and I'm further track to inform all that we could be able to increase our share of business with the customers as compared to our share of business during BS-IV regime. This will help us in the coming quarters as well as for the years to come as the increase of business in the auto sector due to increase of share. On the e-mobility and non-auto business plan. We are seeing an uptick coming in from international markets, and we will continue to monitor these developments closely through the course of Quarter 2 FY '21. Here, I would like to mention that Alicon has added 3 new logos in e-mobility like Danfoss, Dana Group, Garrett, which is a group company of Honeywell Transportation, previously Honeywell. So these are the 3 new logo that's been added along with the existing customers like Ather, from where they bagged the orders for e-mobility. In case of non-auto, we have had already shared that further a few conferences we added from ABB and with existing customers like Siemens and the GE Energy, we could be able to back further orders into our city. Operationally as well, we optimized the cost across our business model and brought in higher efficiencies that enabled us to report improvement in the gross margin profile during the quarter. Looking ahead, we are hopeful that the scenario across the country will stabilize in the month ahead. In a month of July itself, we have seen a good amount of uptick in demand and consumption in the domestic market with improved response emanating from rural and semi per regions. There is a positive sign that this momentum will also strengthen in the coming months, and we are hopeful of a solid revival in sales on quarter-to-quarter basis in this quarter's alone. In addition, a gradual recovery in economy led by normal monsoons in India, a good rabi season and kharif crop sowing should further aid growth in the domestic market going forward. As far as international business is concerned, we are now seeing some initial levels of activity returning especially across the international divisions with U.S. and Europe economic, making efforts to reopen and restart the heightened precautions in place. Our discussions with several domestic and global customers are at all stages, and we believe that on the macro situation normalizes, we should be able to deliver healthy growth from the International division in the quarter and the years ahead. I will now request our group CEO, Mr. Rajeev Sikand, to share with you in perspective of the quarter.

Thank you, Shekhar Dravid. I welcome all our investors. Thank you for joining this call. I hope you and your family members are well and safe. My colleagues have shared with you the details of our performance and cover a few pointers on the steps we have taken to counter the impact of COVID-19. I would just like to add here that we are very confident of our growth potential and opportunities across auto and non-auto and e-mobility space in the medium-term. In the near-term, against a challenging context, our business fundamentals remain intact, and we are engaging with the customer will show we revise economic activity as fast as possible. We have undertaken several measures to make our manufacturing and value chain more resilient in these times, and our teams have done a fantastic job in quickly adapting to the next normal. We have also directed improved focus towards cost effectiveness to boost our financial sense over our financial position and cash flows remain strong. Strictly, that are likely to engage as a result of this pandemic. That would be of immense benefit are we foresee a shift towards personal mobility. Even as interactions have shifted to virtual more, we expect a moment of individual resume, there will be a clear shift towards personal mobility. Cost-cutting and focus on higher efficiency will be a big agenda for global OEM. They will need to protect margins due to increase in cost every year elsewhere throughout their operations and in order to enhance value proposition in the post COVID world, which is likely to witness downtrading by customers. Lastly, a focus on light-weighting of components which will enable reduction in input costs as well as fuel efficiency is a trend that we expect to accelerate. Die-casting as a process will stand out due to inherent strengths and becoming an increasing viable and relevant solution not just to automobiles but across multiple sectors. I would like to reiterate that we are future-ready as an organization and as a domestic and international operating environment gradually improved, we are positive that our product segments will record a strong recovery in months ahead. We would be happy to take your questions now. Thank you.

[Operator Instructions] The first question is from the line of Saurabh Jain from Sushil Finance.

I have a couple of questions, sir. First is thing here in the domestic market seems to be improving -- somewhat improving, looking at the latest numbers, but I would like to know how is the scenario in the international market? Is the momentum resuming? Which are the top 4, 5 countries to which we export?

Basically, yes, international market started opening in the month of May. But looking at the economies taking in U.S., as you know, still the COVID cases but are going up, but they are going with the stringent norms and the productions are coming to the normal one now. We are looking for that. And also the schedule, which have become now stable. I will not say that there is a hike, but there are stable schedules, which have gone down as far as the international market is concerned. In domestic market, volumes, what we are looking at right now, which are really increasing, and we are keeping our watch on that going forward.

Okay. Sir, if you can mention the top 2 countries, which we -- where we export?

We are exporting to U.S., then in Brazil. Then we are exporting it to Austria. We are exporting it to Germany.

Okay. Okay. So that's okay. And my second question is about the receiver of cost. You have mentioned in the previous call that with the rising share of exports, our working capital requirements will keep on rising because of a higher number of base debtors in the exports order. So how do we plan to tackle that situation? And do you see any risk to receivables in that case?

Yes. Sort of -- we are mainly focused on that, how to -- because with the payment terms with the overseas customers, it is real excellence for us also. But we are in negotiations with the customers when we are making the settlement scheme, how we can recover the money early. So hopefully, we will be able now, maybe, I think, in the coming time, you will see the improvement on that side also.

Okay. Sir, what would be the peak level debt -- peak level of debt that we can expect over the next 2 to 3 years considering the rising share of exports, which will patch our working capital requirement as well? And although for the time being, we have kept the CapEx plan on back burner. So I assume that over the next 1 or 2 years, we are not looking at expanding. So considering these 2 things, what would be the peak debt level that we can expect?

So you're talking about the peak debt? That's what you're talking about?

Yes, yes.

So firstly, sort of, I think we should divide into the 2 parts. One is the working capital, another is the CapEx side. So when we took for the working capital that I explained to you, we are more focused to bring it down because maybe that's the one we are going to increase the exports, so that will be challenge for us, and I explained earlier also. But now we are in negotiation with the customers as well as some other solutions we are trying to find out with the customers, see how to reduce this credit period. So hopefully, my idea is that maybe as a number of days, you will find in the coming period that those -- as if number of days going down instead of increasing. In spite of when you will see that there is increasing the share of exports. That is one part. So that, I think I answered your question for the debt side of our working capital. And second is the CapEx. So CapEx, yes, when Mr. Dravid has explained to you that, okay, we are having the new projects, so CapEx requirement will be there. And this year is challenging that we will not be able to generate the cash flows for funding the CapEx side. So that may be some little money. Now we are in discussions how to fund that part. So maybe a little increase you can find on the long-term debt for the short period to -- over some -- this critical situation of this year.

Okay. Sir, what would be that amount -- CapEx amount that you have budgeted for next 1, 1.5 years?

So this year, we are estimating approximately INR 40 crores to INR 45 crores.

Okay. Yes. So that has not changed. This is as you had mentioned in the last con call also.

Regular business, these are for the new projects. So new projects are on time. So then we leave that.

So that doesn't include the maintenance CapEx?

Yes. Everything. Maintenance CapEx is including and obviously, Mr. Dravid has explained about Toyota, PSA, so those are the very big orders. So for that, we need to build up the capacity for those particular projects.

Okay. Fine, sir. Can you just quantify the order size of Toyota Global approximately?

This is roughly around INR 80 crores per annum.

The next question is from the line of Saurabh Shroff from QRC Investments.

Sir, just a couple of questions. First, on the cost front. What measures have we taken? And what is the cost level that you will be comfortable as or this current level of expense? There are -- we understand I'm just trying to get a sense for when that business breaks even and what measures that we are taking?

On the cost side, that is a very big challenge because when we go on the cost, so either one is variable and under fixed cost. So major challenge comes for the fixed cost side. So we are taking many measures to control, especially big challenge in the fixed cost always like in the founding, manpower and energy. So many measures to reduce the manpower cost, especially by improving the efficiencies, the output that we are more focused, how to increase that. So that is the main criteria to reduce our cost of command power as well as that -- if we improve all these things, output from each machine and overall. So then we can say manpower as well as on the energy side. And the many other things, commercial side, negotiations are with like some captive power or some power trading stuff. The many areas we are finding over the solutions to reduce our costs. So -- and on the operation side, when we complete the variable cost. So when we come to the variable cost side. So then we have to reimagine out of our thinking. So like major cost when we talk about is raw material, aluminum. So what are the different options we have in the chemistry or some other solutions? So how -- even you know that we will even be improved by 1%, it has a major impact. So those things we are doing on the process cost, and therefore, process efficiencies. So in every area, we are focused to improve. And because now committing to the site, what we are talking about that. So first is when this -- the top line goes down. So that becomes a challenge. And to maintain that cost what as a percentage to the sales? So our major focus is how to maintain our cost as a percentage to sales for this year, particularly. So even after having a relation in the top line. So this is the way we are working.

So if I may probe a little bit more. So this quarter, you have an employee cost of about INR 30 crores, which is down from some INR 37 crore, INR 38 crores, previous year and previous quarter. Is this a base that we should work with? Or is there room for this to go down further? Similarly, on other expenses side, I guess, a lot of the variables are down. But what I want to understand is that what is your fourth quarter, let us say, minimum fixed cost? Or what is your target to reduce fixed costs that the business bounces back faster as and when the recovery comes from the external environment?

So on the fixed cost, first is that when we are talking about the manpower. So first of all, like when we go -- because you are talking about INR 30 crores for the consolidated basis. And when you see because there will be no lockdown in our European facilities. So that cost will remain for the euro. For the India, then our fixed cost, this for the employees, around INR 22.5 crores. So earlier, we used to be approximately INR 28 crores, INR 29 crores for this stand-alone basis. So then when you go for the manpower costs, there are 2 challenges. One is that you know that in India, always minimum wages increase every year from the government side. And second is some increments or other things we have to take care. Maybe it is challenging in the current year is the challenging year, so maybe we will not go for this increment. But going forward, we have to take care of all these things. But our -- on the -- when we improve on the operations and the productivity improvements are there. So then we can see the effect on this. And we are targeting at least to not to post whatever manpower cost we are having in the previous quarters in spite of increase in the volumes, like when we take March quarter, when we had a sale of around INR 169 crores, and we had a cost of INR 28 crores of the manpower. So maybe when we grow this to a top line. But of course, we are targeting to remain up to 20s or below that. That is our target we are keeping, right?

Okay. Okay. Fine. And on the second, how much visibility do we have in terms of -- sorry, 2 questions. I actually have 2 parts in this question. How much near-term visibility do you have? Like you mentioned this Toyota order, if you could also quantify the PSA order and the regular business because I think in the presentation, you have mentioned the Jaguar and the other orders which will sort of kick in 2023. But between FY '21-'22, how much visibility do you have on the current order book as it stands?

Yes. Basically, specifically on PSA, the start of our production will be in '21-'22 last quarter. And for Toyota, the start of the production will be second quarter of '22. So these are the businesses what we are talking of, which will be ramped up in '22, '23, where the whole value, as I already said, for PSA, it will be around INR 120 crores per annum. And for Toyota, it is around INR 80 crores per annum, with the big volumes, what has been shared as the customer details. So definitely, we are looking for this gradual growth next year for these businesses. Jaguar has already been acquired and the sample submission and everything has been completed. And the ramp-up will start from the end of 2021. So that is the fourth quarter. So it will give us a ramp-up business for the next year as far as January is concerned, which is already initiated in '18/'19. Have I answered your question?

So for FY '21, I guess, let's say, if we were to assume an 80%, 75% utilization, let's say, for the entire industry. I'm just trying to understand that do we have any additional figures that we could outperform the domestic auto industry growth? Or regrowth, like if the industry was down 25%, could we be down maybe 15% or 18%? Do we have some visibility either from some orders, which are starting or some export opportunity or whatever may be the case? And I think linked to that is also -- you mentioned that in BS-VI, we have a bigger role to play. So I just wanted to understand how much does the content per car increase for us in the new BS-VI environment energy?

Yes. This is Rajeev here. I think there is -- we are seeing a very good market in the 2-wheeler and in the small car and small LCV, where we are also shared. There are 2 factors to this. I think right now, the supply side factors are working, let's say, till September. And the demand side incentive should hopefully kick in from October. Otherwise, you may actually see a downturn after the festival season. So because a lot of the current purchase by the OEMs is also, one is going towards their direct sales and slowly building for the festival season, which they normally build much earlier. So these are 2 factors on one side. The other side is the story of with COVID itself. How does it play? How does the lockdown play? What happens on the other side? And we have made internally our projections. And we see that we are in that line with our projections for the year -- for the -- at least this quarter, going forward, and what we have projected in May and for this quarter, we are in line. And I think a lot is going to evolve. So this is going to be a very challenging and evolving year. And it is best to utilize your -- nobody projected a demand to come back so quickly. So there is a shortage of as to say in all companies, and every effort is being made to get them back. And also, you're right, we are taking all the opportunity, which we can grab from the other sources we're not able to supply so let's ship it. So that's what we are doing at this moment.

Okay. And on the BS-VI part, how much is the increase of content per vehicle for us because of this?

It will be around -- at this moment, 18% to 20% is per vehicle increase. Because if you see these increases, some of the conference, which were not there in BS-IV. We are already into our kit for all this. So this will have per vehicle increase also with the customer as well as the share of business. Existing share of business has been increased. It's a very strategic and specific customers.

The next question is from the line of Bharat Gianani from Sharekhan.

Yes, sir. Just continuing on the earlier question. In the Quarter 4 call, you highlighted that in FY '21, we might see a decline of about 20% in the overall revenues. So what is the feedback that you're getting on ground from the customers, both in the domestic and the export market? Will you -- are you still maintaining that position? Or do you see that the revenue potential drop could be higher than what you had guided for in the earlier call? That would be my first question.

So you know this, if you see the performance from June onwards, as the ramp-up has started, we have seen a very bullish sales in the rural and small towns. It's not only agriculture, it's the whole industry, rural industry, which has -- seems to have picked up. And as a base for everybody in this business. On the other side, the COVID cases are going up, and you're seeing the whole story on that side. So as we are seeing now in this quarter, going forward, we still stick to that, our original -- what we have answered in the last meeting. And hopefully, we can try to maintain that. Things are looking positive as of today. But as I said, this quarter, there's also a lot of supply side incentives are working as we see it. And hopefully, demand side incentives should come in and from October onwards, that is something -- because there is a festival season, of course. And hopefully, that can also see through -- get us some additional sales.

Okay. Okay. Fair enough. And one more thing is that what is the order book for -- I mean, the export orders that you pointed out for INR 800 crores, that order book that we had, that would be -- that would start execution from FY '23? Is it -- or like what is the exact time line when the orders will start getting reflected in our revenues?

INR 800 crores, which one you're referring to?

Yes, the INR 800 crore order book that we pointed out earlier that we had secured in the export order book that we had from the major automotive.

Yes, this will come into the production from FY '22 and ramp-up will be in FY '23. So it is already as per the target, and it is online. There was some disruption due to this pandemic, but we are catching up with that, and there will be no change in the final timelines for that.

And if I may ask, this INR 800 crores is executable over what time frame? The order book?

5 years.

5 years. Okay. Fair enough.

The next question is from the line of Dhiral Shah from Phillip Capital.

Yes. Sir, my question is, again, maybe repetitive in nature. So this -- for auto, order, this is how much you are, sir, how many years?

This is for again, 5 years. But it is INR 80 crores is for the annual -- for the year, it will be INR 80 crores.

And same for the PSC order, sir, for 5 years?

This order is also for 5 years, and that is amounting to INR 120 crores per year.

Okay. And sir, you just mentioned that in BS-VI, your content per vehicle will go up by 18% to 20%. Do you think this will drive the overall growth in FY '21 itself?

No. It will come in FY '22 because these are all new developments. And basically, these are the substantial part where we will not increase the domestic business initially. With BS-VI, we have started entering into that. So this increase will come in year '22.

Okay. So there is any positive impact on margin or margin remain the same?

Can you come again? I just missed your word.

Sir, this BS-VI content, which will be supplied, are these products high margin in nature or the margins would remain the same?

It will be slightly, but it will be average of to the other business in auto sectors.

Okay. Okay. So, sir, in FY '22, we have a good visibility of Toyota Plus, right?

Yes.

Okay. FY '21, there could be a delay. But again, FY '22, we have a good order book for that.

Yes.

Okay. And sir, lastly, on a non-auto business, what is the current scenario?

You must understand that Toyota order, which Dravid has explained, this is one-time in the history it has been done. Toyota never outsources its cylinder. It is the first time a very small foundry in India got this order. And this is because Toyota, we have supplied 1 part for 4 years, very high quality. And the Japanese, the entire technical team has been working with us from August last year. And when I met them initially on the 6th of August in Japan, they said the possibility was virtually 0. And then we convinced them with the samples and visits. More than 80 people from Toyota have visited us. So this is not an opportunity, which happens every time. This is a lead probably. You can understand when you have a batch of Toyota. So it's a lot of responsibility also on us, and our partners, Enkei, have supported us. So all this culminates into this kind of thing and if we do well, it doesn't stop us to get more business from Toyota in future or their other localization programs. And PSA is not -- also I like to explain that PSA, normally, they follow their global source. So they have their global source in India, 2 of them. But because earlier of our work with Renault and our exports to Renault Brazil, these guys have seen because buyers shift, as you know, in the auto industry, people shift from one company to the other. The technology and approval engineering solution, which we have given to PSA has made a breakthrough plus we had appointed a French office -- a French marketing office last year. So these all factors put together has brought us the PSA. And the other part of the story maybe was missed the EV components for especially these countries like Dana, and various branches of their Danfoss. So there is another development of more than 30 parts in the EV, which we have now going ahead. So that is something we will not dwell very deeply, but it's something, which is also very exciting with the time as it may come.