Alicon Castalloy Limited (531147) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Q3 FY '21 earnings conference call of Alicon Castalloy Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir.

Thank you, Lizan. Good day, everyone, and thank you for joining us on the Q3 and 9 months of FY '21 earnings conference call for Alicon Castalloy Limited. We have with us on the call today Mr. Vimal Gupta, Group CFO; Mr. Shekhar Dravid, COO; and Mr. Rajiv Gupta, Head of Domestic Business at Alicon Castalloy Limited. Mr. Vimal Gupta will cover the financial performance, following which Mr. Dravid will walk us through operating highlights for the quarter and developments in the EV space and the export markets. Mr. Rajiv Gupta will then provide insights on initiatives towards the domestic markets, 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 presentation and our results documents that have been shared with all of you earlier. I would now like to hand over the floor to Mr. Vimal Gupta for his opening remarks. Over to you, sir.

Good morning, everyone, and thank you for taking the time to join our call. I'm pleased to inform you that we have delivered a solid performance during the quarter on the back of the recovery in economic activity and improving trend across both domestic and export markets. On a consolidated basis, total revenue from operations was INR 269.54 crores in Q3 FY '21 compared to INR 227.75 crores in Q3 FY '20, growing by 18% on a year-on-year basis. On a sequential quarter basis, revenue were higher by 31%. We would net improve traction with several OEMs in the domestic market, which led to higher volumes. As a result, domestic revenue during Q3 FY '21 grew by 33% year-on-year basis and 15% on quarter-on-quarter basis. Following resumption of movement of goods across international borders, export volumes have also inched up this quarter as we steadily recover towards pre-COVID levels. The revenue mix between domestic and the global business stood at 79% and 21% this quarter, compared to 78% and 22% in quarter 2. The revenue mix between the auto division and non-auto division stood at 89% and 11%. While all are well aware of the sustained recovery in auto volumes, we are pleased to share that even the non-auto vertical is demonstrating recovery. Coming to profitability, the EBITDA for the quarter under review was at INR 33.65 crores compared to INR 32.68 crores, improving by 3% on a year-on-year basis. EBITDA grew 26% on a sequential quarter basis. On a year-on-year basis, the EBITDA margin was at 12.5% from 14.3% in Q3 FY '20. We are steadily rebuilding our margin profile after the impact of the pandemic and been lockdown. In Q2, we reported an EBITDA margin of 13%, and this was slightly modest this quarter to 12.5% due to the change in the sales mix. We have implemented cost control measures across begins and are working towards bringing margins back toward the pre-COVID levels. Profit after tax for Q3 FY '21 stood at INR 11.45 crores as against INR 8.44 crores in Q3 FY '20, up by 36%, and PAT margin stood at 4.2%. So a quick word on recent developments. The union budget announced last week has many positive announcements and is very encouraging of manufacturing as one of the main pillars towards reviewing the Indian economy, the streamlining of the production linked incentive PLI. Scheme is favorable for manufacturers of the engineered components like us, the vehicle scrap policy, which incentivized replacements should provide a split in demand for the auto industry. In addition, measures towards enhancing liquidity in the system, building rail and road infrastructures and increasing spends towards FTR and farm sectors significantly contribute to a more enabling environment for growth. The Board in its meeting on December 2 approved a proposal 2 day funds up to INR 100 crores via equity. This is an enabling resolution allowing us to keep the option open to raise growth capital, which will provide the financial muscle to address our medium- to long-term plan. We are carefully monitoring the environment and plans for our customers to identify appropriate time to implement our growth plans. Overall, we have reported a strong performance during the quarter. We are confident that with further unlocking in the domestic and export markets and the improving macro environment, we will build on this momentum in the quarter ahead. On a note, I would like now to hand over to Mr. Shekhar Dravid.

Thank you, Vimal. Greetings to all. I trust all of you are well and . Following an unprecedented first half of the fiscal March by the lockdown, production constraints and the supply chain restrictions, the third quarter witnessed near-normal operations. Several high sectors indicators such as power demand, Railfit , ebates , GST collection and toll collections have demonstrated of recovery, pointing towards a fairly comprehensive return of economic activity. In the auto sector, the domestic market demonstrated resilience in the third quarter with almost all major OEMs reporting recent recovering volumes. What initially seemed to be a spike due to a combination of pent-up demand and the concerns has turned out to be a more comprehensive recovery predicted on a positive demand trends in rural and semi other markets. A lower interest rates on the vehicle loans and the heightened consumer preference for the personal mobility, these have been further aided by the inventory destocking across OEM dealer networks. Coming to the international business, most of our key export job in the U.S. and Europe reported healthy revival in demand despite long-term constraints in some parts of the Europe during the quarter due to concerns surrounding the second wave. We saw a sustained growth in volumes from our return subsidiary and supply components, and parts on this facility to many global clients during the quarter. Exports, including sales from Illichmann subsidiary, contributed to about 21% of our total revenue in quarter 3 financial year 2021. In quarter 3, financial year '21, we have added 16 new parts from our export customers, like malware and Tata and . So overall 9 months, in 9 months for quarter or 9 months for the year '21, we added 33 new parts with 8 export customers. Now a quick word on new business. Our engagement with the global OEMs in the U.S. and European market for our EV products portfolio remains strong, and we are continuously building a healthy reference base. In the international markets, we are seeing significant measures being announced by the Indian economies towards triaging the road transport and hosting the uses of green energy vehicles, which includes electric vehicles. Accordingly, we are accessing customers enhancing their focus on green energy models, such as electric and hybrid vehicles. Closer on, the auto industry is seeing increased impetus towards adoption of a clean and clean mobility, too. With TI , the policy time for the government of India is targeting 70% of all commercial car sales and 30% of all private car sales in India to be electric by 2030. We have also steadily seen a slew of measures being undertaken by the government towards accelerating domestic EV operation. There is a clear shift taking place towards electric vehicle across India, and Alicon remains a frontrunner to capitalize on this growing opportunity. Coming to our performance in this division for the quarter, total contribution of the electric vehicle segment stood at 3% in quarter 3 for the financial year 2021. During the quarter, we added 8 new parts from the customer Dana TM4 from U.SA. Looking at it, we are actively pursuing growth of positive business segments in the key targeted markets in Europe, Middle East and the U.S. In addition, there are significant and untapped opportunity given in the market of China, South Korea and South America, and we are increasingly growing our presence in these regions through our Illichmann subsidy. We are also marking a steady and gradual progress in finalizing new business wins with existing and new customers in the export markets with the COVID-19 vaccination gaining momentum across the globe, we expect that demand and the consumption trends will only strengthen in the months ahead. On this note, I would like to hand it over to Mr. Rajiv Gupta, who will cover the developments in the domestic market for the quarter.

Thank you, Mr. Dravid. Good morning, everyone. And sales in India delivered growth on month-on-month basis for the first trade month as of December. Tractor volumes have surprised on the upside with large OEMs reporting higher volumes. Volumes of commercial vehicles were not as small as we may witness accelerated decision-making, and that vertical sparkled by initial state of the vehicle scrappage policy. The only damper is the continued firming up of fuel prices. Most OEMs are now operating at near-normal utilization levels, and a nanometer of the increased confidence in the industry is a rapid increase in the prices to pass on the raw material installation. Now coming to our performance. The overall positive momentum in the domestic auto industry has had a favorable impact on the domestic volume uptake. Total contribution from our domestic segment stood at 79% in quarter 3 FY '21. During the quarter, we have added 11 new parts in the domestic segment from 3 customers: Dana, Eaton and Garett, of which Eaton an Garett was of the IC segment and Dana was from EV. Overall in 9-month cumulative FY '21, we have added 26 parts in 11 domestic customers. So on the whole, we have reported an encouraging growth in the domestic auto segment during the quarter, led by improving demand on the account of pent-up sales, such as push and higher preference towards personal mobility. As we look ahead, the domestic operating environment is gradually stabilizing, and there are positive indicators that the demand will only strengthen from here on. We are seeing a good level of inquiries and bookings in the market and are hopeful for improving macros will support -- will further support this momentum. Now I request Mr. Vimal Gupta to share his remarks.

So thank you, Rajiv. So today, I would like to introduce our Managing Director of 100 -- the subsidiary company in Europe. Mr. Andreas Heim, and he's also in the call. So he also looks after our global business. So Andreas.

So thanks for joining the call today. And great things for mostly...

Excuse me, sir, we lost the initial audio from your line.

Yes.

So may you please repeat?

Yes. So also thanks for joining the call today, and many great things from Austria side and thanks to Alicon team for the inspiration. Many thanks for that.

Thank you, Andreas. So now formally open for our question and answer.

[Operator Instructions] The first question is from the line of Yester [indiscernible], an individual investor.

Congratulations on a good set of numbers, and I hope all of you are well at Alicon. So I just have 2 questions, most of them are answered. The first one is the margin outlook going forward. Because our current quarter's margin was down on a year-on-year basis. And in addition to that, only the impact of -- what kind of an expected impact of commodity inflation do you expect to be on the margin? And the next one is how are we doing on the execution churn for the orders which we have received in the last 1, 1.5 years?

So thank you. Thank you, Yash , for the question. So first is that on the margin side, I'll just explain one is that your about the commodity. So commodity mainly is the raw material of ammonium we are having. So that is completely partial to the customers. So for that, there is no impact on the margins of Alicon. So there -- we have a system of settlements with all customers. So that is one side. Maybe some small impacts of the other commodities, like the fuel, energy or some other things, so that is also -- we always keep on renegotiating our prices with the customers. So that is an ongoing process that we have to follow. And on the other side, for the quarterly margins, what you're talking about, there was a little bit impact has come up because in the earlier call, we were explaining a lot of costs to continuously we were having. And that is -- it is in continuation, and we are doing that. But on the other side, the likelihood that there in the long-term . There was a lot of migration head of the people. Those who were working in our operations on the shop floor. So we have brought back all those people, but there is a change in the people. And this is completely -- a little bit tough working condition because it is a foundry. So -- and after joining the people there will be a lot of movement of the people were there. So when new people joined, then you know that then some skilled people are not there and new people, it takes time to learn. So that learning cost we had in that time because the Impact on our operating cost also, and you see that in this quarter. It's a bit some what were expecting on the employee cost side that was a little bit on the higher side. But now it is almost, it is under control. So things, because in the last quarter, we have improved on that side, and now things have stabilized. And in the coming quarters, we can see the improvements in the margins, and we will be back on our earlier on, and maybe that early in the previous quarter where we were explaining that. We will continue on our growth journey on that side. And for all of that, I will ask Mr. Dravid to explain.

Good morning, Yes. On update on the orders, what we received and which were declared in the last 1.5 years. The orders what we received from Daimler and JLR, we are online. The sample submission has took place as per the requirement of the customer. Validation has been completed, and we have towards the handful profit from second half of this year. So that is online right now. There is no issue on that. And whatever the orders, recently we received all the donor is under process. And we are quite confident to meet the time lines, which we have been discussing the customer, and those will be in a ramp up condition by '22, '23, as discussed in last meeting.

[Operator Instructions] The next question is from the line of Raghunandhan N.L. from Emkay Global.

Congratulations on stellar numbers. Firstly, for Mr. Dravid and Mr. Andreas. EVs are witnessing strong acceptance in global markets, as you alluded to in your comments. Can you indicate opportunity for Alicon in terms of existing size of business and potential opportunity. Existing, you indicated 3%. If you can give some color on how things might pan out in the future. Also, you had indicated complex products such as housing and with thermal cooling so directionally, if you can indicate whether margins would be higher than the existing business, that will be helpful.

Regarding EV, basically, we are steadily moving towards, as we expressed in last meeting also. Right now, whatever the orders what we banked in this sector, that is specifically from Danfoss than which is from Dana Group. And you know the , which is in India, and that has started going up if you recently, they put up that plant of capacity of 400,000 vehicles for the manufacturing also. So they are ramping up production to around 33 cities now to be patted , plus whatever the component what we are supplying, we are ramped up for 400,000 number to be supplied to them every month. So there is a definite growth and that is contributed towards this 3% of our total sales in quarter 3. We are anticipating the growth of around continue to be at 3% to 4% in this sector coming down. Right now, we have developed more than 48 components. And for the 127 components, we are working on, which will be coming near future, we will close it, and that will be under development. So we are looking at the strategy that by year '25, '26, we should end up with our EV penetration within our business plan, so around 9% to 10% of our total sales are now what we are planning it. So we are -- so total, right now, whatever the developments are going on. So we are adding new components from Dana Corporation. Recently, we have bought Garett. They have come up with their e-mobility sector coming into. We have bagged an order for key sector from Eaton. We are working on that. So there are recently an Indian OEM, Mina , we have developed, I think housing, which is our first Indian volume domestic for Mahindra & Mahindra, which will go and ramp up by second half of this year. Also from , we have bagged an order. We have got a repeat order for some new developments from Danfoss, which was previously UQM, and we are working on those products. So as I mentioned, the 47, 48 products, were already target and under development and further 127 components, we are in discussions with customers to convert it into sales of .

On the expanding global business, if you can highlight efforts relating to strengthening the global marketing team and like how having Europe presence is helping in terms of gaining market share with global customers?

Yes. Basically, you know that -- you're aware that CRE Japan, we have our partners and they maintain this business. They are helping us out to reach where our global customers is there in pence. Also, we declared last time that we appointed a marketing representative In Europe, and they will be representing Alicon in the European market. There, we put able to buy from PSA cylinders business for India, as well as now we are working with them to have a global business from PSA to have on the Board. So the third one for the U.S. market, we have mentioned last year again and our representative that is and TDS has invested to penetrate the global business in the U.S. and Europe, in line with the global business strategy. They are a team size of 8 people, 8 key account managers with more sale support in manpower they're having. And we are seeing a lot of new introduction fund inquiries and RFPs are getting generated while CPS, and we are working on that. Definitely, this will enhance us to a sizable amount of business, global business. So this is again in line with our global policy, and expanding our global position. As you know already, as an individual represented marketing representative for Alicon is working in the U.K., and he's also very active. So that is what, at this moment, but with TBS team , we are trying to assess North America, Mexico and Germany also, as TBS has got good connectivity in this market. Also, earlier we are trying to take its TBS team. So we are expanding with these schemes allocated globally. We are trying to expand our global business, and this is in line with our global business increase strategy.

Last quarter, that is in Q2 con call, you had indicated lifetime orders of INR 2,800 odd-crores. Just wanted to get an update on this. Would that order book have increased given the new addition of orders, which you indicated?

Basically about that, right now, around INR 250 crores of new orders has been inducted last quarter, make it to around INR 2,000 crores on total lifetime orders comprising to the average yearly business of around INR 600 crores. That has been -- so last quarter, we were able to engage INR 250 crores for the lifetime business to INR 2,800 crores last time what we discussed with you.

For payments, sir, sir, on a 9-month basis, gross margin has improved. In Q3, gross margin is slightly lower, and you alluded to sales mix in your commentary. Can you please provide some details?

One is that sales mix because there are some complicated parts because we have started, that is one part. The process is very Because we are now on new part whatever we are adding that machine part maybe in the earlier quarter and explaining because the changeover is happening from the casting parts to the completely or fully machined parts. That is the increase in the process. And secondly, as I explained with the question from [Mr. Yash] That explained about some impacts in the quarter due to this migration of the labels. So that we brought back. And then that has caused a little bit in the quarter that has impacted on the margin side. So the cost of the new people and then the process because their training cost, and then there are efficiencies that we can't see immediately when they start working on the shop floor. So that has impacted a little bit on the margin side. So that is now in the quarter to be stabilized. So we can see that the things are normal in the coming quarters.

Got it, sir. Sir, working capital reduction has been a focus area and like that BS IV, BS VI changeover and all this COVID pandemic related issues had led to some increase in working capital in the, say, beginning of the year. So just wanted to understand how has been the efforts on a reduction of working capital, if you can give some qualitative color on that?

This is quite that because you know that the impact when lockdown was there. So there was a pressure on the cash flows. And you know also that the kind of about quarter 1 has impacted on the cash flows of the company. But I'm happy to say that there is -- we don't see any increase in the on the debt side during 9 months, at the end of the 9 months. And on the front of reduction in the working capital, that is continuous. So this process is going on. And maybe in the one you see the final financial for the year of March '21. There, you will find that a sizable reduction on that side. So the process is on because we are more focused on the receivable side and that -- how to increase how to reduce our working capital cycle.

We'll move on to the next question. That is from the line of Barbara from FairConnect.

My question is on the equity raise that you proposed. So does one expect significant CapEx in the company? And when you undertake any significant CapEx, what kind of return on capital employed do you target? And also a request if in your presentations, you could add, apart from the operating margins, the line on return on capital employed and return on equity. And also, if possible, give outlooks on those.

On the equity risk side that it is in process, and the equities are going on because you know that when we go for equities , so a lot of compliance parties there. So that is on. And maybe we are expecting the end in the month of March . So it will depend on the completion of the processes. So at that time, we will take it all.

What is the purpose? Is it a significant CapEx that you plan to do?

I'll be coming to that as explain my cash flow for the current year. Generally, you see that they've been both in the history of value point. So when CapExes are there, so parts comes through our internal approval. So it is a continuous requirement than when we are talking about the new orders and the growth plans are there. So continuous requirement for capacities have been fair. So to fund that. So this time, there is a shortfall from one is on the part of the internal approvals. And in the coming year, then because the sudden jump in the volumes will happen in the coming years. So for that, we have to put up the specific capacities for those customers for those products. So majorly part will go into the CapEx side of this equity for the plan. Yes.

Okay. And return on capital employed. What is your target when you make these project plans? What is your targeted return on capital employed?

I think it is a forward-looking statement. So at this moment, so I cannot give these figures. But we can see because all the activities because what we are doing, that is more focused on both sides only.

But what is your threshold level of return when you make these plans in undergoing the CapEx? Obviously, there will be a threshold return on capital that the Board would demand. What is your threshold return on capital employed?

I'm saying that you will see the improvement on that side. There is a good improvement you will see in this.

Okay. And in the presentation, if you can include ROCE line, it will be really helpful.

Okay. That I will.

We'll move on to the next question. That is from the line of Apurva Mehta from AM Investments.

Congrats for a great set of numbers. Just wanted to know the visibility for next year. What kind of visibility we have on the export front and if you can throw light on the domestic?

Looking at the present scenario domestically, this is the one thing right now the government initiatives would have been generated that has some momentum in the market. And also, we are anticipating good numbers in coming quarters. And for third quarter of next year, we have, whatever the schedules and what was the discussion going on with the customer right now. That shows there is a -- in line with the V-shaped recovery. But it will be too early because the market is so dynamic right now, and it is difficult to predict for the next quarters. So we will keep wait and watch, and we will keep our watch, growth watch in this. Regarding this, whatever we are talking of next year, we are anticipating a good growth. And we are making ourselves ready for handling that growth and it yearly comes in. So that is what I said and market growth in domestic. I will request -- I call in Andreas to give some focus on the global business and a whole global scenario, to answer your question. Andreas?

Yes, I'm here.

You got the question? What is for the next year that is '21, '22 looks to you for the global business. That is the question. I answer for the domestic action plan for the global business.

Right. So for the global business side, at the moment, there's a lot of new potential customers in coordination to get new business on board, especially in the EV market on which we are seeing a huge potential for Alicon on the global side. We are going under discussion with new technics like from auto housings to implement steel parts, to convert aluminum housing into light white parts and in broadcasting on such projects. We are working, for example, with Bosch in Germany and for the customers, we are doing these trials with them continuously in order to bring new projects on the table and the same for better rehousings , these integrated cooling systems in order to optimize the thermal cooling. So on such kind of new innovations, we are working on the global business side in order to be preprepared for our future into getting business on board.

Just to put you in the prospective, in March 2019, we were at almost INR 1,200 crores. So is it possible to outpace that INR 1,200 crores of turnover next year? And by what kind of visibility they have?

It will be too early to comment on -- we have our internal plans, but it is too early to comment on any precise figure to be discussed. I think we should wait -- we have waited for 1 year. We should wait for 1 more quarter, so that this we can come into complete figures.

And currently, we have exports of around 20% currently. And then this we will shift in the next year when we can see this able to shift towards more of like 25% of turnover coming from export.