Alicon Castalloy Limited (531147) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the 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, Mr. Vaswani.

Thank you, Tanvi. Good day, everyone, and thank you for joining us on Alicon Castalloy Limited's Q3 and 9 months of FY '23 Earnings Conference Call. We have with us on the call today Mr. Vimal Gupta, Group CFO; Mr. Veerababu, Group COO; Mr. Shyam Agarwal, Chief Marketing Officer at Alicon Castalloy; Mr. Andreas Heim, Managing Director of Illichmann Castalloy; and Mr. Rajiv Gupta, Head of Domestic Business of Alicon Castalloy Limited. Mr. Vimal Gupta will cover the financial performance for the quarter, following which Mr. Agarwal will walk us through the operating highlights, in order to share the developments in both the global and domestic markets, Mr. Andreas Heim and Mr. Rajiv Gupta will provide insights on these areas. Following the comments from the team, our group COO, Mr. Veerababu, will give us a brief summary of the quarter gone by and encapsulate the strategic imperatives. Thereafter, we shall open the call for the 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 that have been shared with all of you earlier. I would now like to hand over the call to Mr. Vimal Gupta for his opening remarks. Over to you, sir.

Good afternoon to all our investors. Thank you for taking the time out to join our earnings call. I trust that all of you have had a chance to review our earnings documents, which were shared last Friday. We are delighted to share a strong set of results for the third quarter of financial year 2022-'23. As we have indicated earlier, 2018-'19 was the best year in the last few years for the global auto industry. Thereafter, it was [ received ] by multiple challenges as well as transition to EVs. Our assessment is that the domestic industry has reached a performance level of approximately 83% in the first 9 months of financial year 2023 of a level set in 2018-'19, while the international auto industry is at about 87% level in calendar 2022. At Alicon, our revenue performance in the 9 months for the financial '23 is under 24% of the benchmark that we had set in 2018-'19, clearly showcasing a different trajectory of performance when compared to global and domestic auto industry. This outperformance can be attributed to our transformation initiatives built up on our 5-pillar strategy. These include sustained focus on traditional IT business, addressing the opportunities from carbon neutral technology, including battery electric vehicles, hybrid electric vehicles, plug-in hybrid vehicles, fuel cell and hydrogen cell technologies. Third is the opportunity from structural parts of our technology-agnostic parts, which remain consistent, no matter which fuel technology is used to power the vehicle. Fourth one is nonauto business encompassing opportunities from sectors such as defense, energy, telecom, to name a few, where our competencies can be leveraged. And the fifth pillar in this strategy is enhanced customer wallet shared through value-add and combining products to offer customer one-stop solution. The traction in the current performance can be attributed to the implementation of this growth strategy. We have invested a significant effort in transforming our business model to merge as a more agile and diversified entity capitalizing on our core strengths. Our global teams have been engaging customers in deeper conversations to leverage capabilities around design, research and development and value engineering, while our track record validates the trend of our processes as well as our reliability as a supplier. This is vindicated by the sustained rise in our order backlog and addition of marquee logos to our customer set. In that backdrop, I will run through the financial performance, the highlights of our financial performance for quarter 3 of financial year '23, year-on-year [ are ]; revenues at INR 362 crores, which is higher by 29% year-on-year basis, EBITDA at INR 42.4 crores that is higher by 25% and post-tax profit of INR 15.6 crores, that is also higher by 28%. Our EBITDA margin in quarter 3 financial year '23 stood at 11.7% versus 12.1% in quarter 3 of financial year '22. The highlights of our financial performance for the 9 months ending December '22, against the 9 months period ending December '21 are; revenues at INR 1,084 crores higher by 43% year-on-year basis, the EBITDA at INR 124 crores, higher by 61%, and post-tax profit at INR 42 crores, that is higher by [ 280% ] year-on-year basis. Our EBITDA margins for the 9 months ending December '22 stood at 11.4% against 10.1% in the 9-month period ending December '21. The quarter 3 revenues are marginally lower than quarter 2 of financial year '23 during which we posted total income of INR 378 crores. This was mainly due to higher volumes at OEM to cater the festive season, demand in domestic volumes in quarter 2. In quarter 3, planned annual shutdown in domestic market and holiday seasons for overseas customers in end December led to the gap. [ As it transit shipping ] times have reduced post the impact of pandemic, overseas customers, volumes have also started to reduce the higher inventory level maintained earlier when shipping times were disrupted. During the quarter, we also witnessed some [ pooling of ] in the input prices, but these remain substantially higher than the corresponding period last year. While most -- the input prices are passed through for us, there is some time lag in getting the price adjusted for these increases. Some element of pass-through impact from prior quarters, combined with the improved product mix have helped us to largely protect our gross margins, despite the sharp rise in metal prices on year-on-year basis. In line with our strategy, the share of business from passenger vehicle, commercial vehicle, export and carbon neutral technologies has grown enabling a richer product mix, also the focus on machine parts has enabled us to realize better margins. The initial benefit from this approach has added to the momentum this quarter. We will look at the split of the fresh order received during the first 9 months of financial year '23, in terms of 5 pillars. So EV represents 56%, IT represents 28%, structural 8% and nonauto 8%. This is with the big order win of JLR EXL in EV segment in quarter 2 of financial '23. This is in line with our strategy of higher share of business from EV and 4W. From the perspective of market segment in 9 months, the order book is represented by 4W at 89% and nonauto is 8% and 2W is 3%. While our endeavor to improve margins through rebalancing product mix is being proved, we continue to face challenges while we had shortlisted a [ 6CM ] framework with the new challenge of a recessionary environment emerging, we have now categorized the challenges facing us internally as the [ 7CM ] framework. A COVID impact, the chip shortages issues, cost of new product and development, the conflict between Russia and Ukraine, global cost-based inflation, supply chain challenges as well as the challenge from the recessionary environment. Kaizen principle-based initiatives that we have adopted have helped us bring in optimization across all methods of our business model right from the inventory management, employee expenses to power cost optimization among others. We have seen a notable reduction in fixed expenses as well as streamlining of overhead due to these initiatives. The improvement in EBITDA level are indicative of the element of enhanced value addition and enriched product mix. As we have shared earlier, our 3 to 4 years target is to improve EBITDA margin to a level of 14% to 15% on the back of growth initiatives combined with cost efficiency measures. On the CapEx front, we have developed -- deployed INR 27 crores during the quarter and have deployed a total of INR 66 crores during the 9-month period. This is in line with our plan to deploy around INR 90 crores in financial year '23, which includes maintenance CapEx and new machining capacities. In quarter 3 of financial year '23, our plants in India and Europe operated at a utilization level of 65% to 70%. To summarize, we are continuing on the positive momentum and are confident of delivering better financial and operational performance during financial year '23. Our focus continues to be on improving margins, return ratios and streamlining our working capital cycle. We are confident of delivering strong and sustained growth in the quarter ahead. On that note, I would like now to hand over to Mr. Shyam Agarwal, who will take -- talk about operating highlights for the quarter.

Thank you, Mr. Vimal. Greetings to all of you. The domestic auto sector saw improved volumes during the quarter, with growth of 5% on Y-o-Y basis. And within this, passenger vehicles grew 21% on Y-o-Y basis. Commercial vehicle grew 12% on Y-o-Y basis. The improved growth was driven by the pent-up demand, improved availability of semiconductor, new product development. And in case of commercial vehicles and heavy vehicles factors such as increased infrastructure spending, mining activities, logistics growth and assumptions of offices and schools added the demand. 2 wheeler volume [Technical Difficulty]. We are on track to achieve 20% to 22% from carbon neutral technology by financial year 2025-'26. There are certain ongoing discussions with global customers, which hold potential to drive these targets higher. To achieve the share of carbon neutral revenues, our teams are working on executing the orders from Tata Motors and Dana in the domestic businesses. We also have continued traction in our project with JLR, Danfoss, [ Ghani ], Rimac and Bosch in the international business. On that note, I would like now to hand it over to Mr. Andreas Heim to throw light on the global business. Andreas?

I'm audible?

Yes, sir. You're audible.

Thank you, Shyam. A warm welcome to all of you. I will briefly cover the development on our international business. PV witnessed a strong performance during the quarter due to the prevailing macroeconomic situation [Technical Difficulty]

We'll just reconnect you. Your voice is not clearly audible. Just give me a moment, please. We have the line for Andreas reconnected. Sir, you may go ahead, please.

Thank you, Shyam. A warm welcome to all of you. I will briefly cover the development on our international business. PV witnessed a [ strong ] performance during the quarter due to the prevailing macroeconomic situation due to the Ukraine war. This lead [indiscernible] in the supply chain for manufacturers based in Europe. These gas reserves being carefully monitored as well as higher energy costs. Our customers has find it challenging to operate plants at high utilization levels. Further, with the sharp price in inflation and pressure on household expenditure, there has been reduced volumes in the European market. Added to that has been the holiday season towards the end of the year. Despite this, the global business contributed [ to 21% and 22% ] of the total revenue during the quarter and 9 months in the financial year, respectively. However, we believe that the customers are now poised for an improved performance after absorbing the multiple challenges of the prior year. Input prices have stabilized after [ picking out ]. In recent weeks, we have seen prices of gas also is out into slightly lower levels, leading to lower energy costs. The supply chain [ prices ] and logistic challenges are easing and [ constraints ] from chip availability has also moderated. Our customers are being to sound more optimistic about their production shareholders. In the backdrop of improved chip availability, Jaguar Land Rover has indicated better volumes for the calendar year 2023. Bosch has indicated an improvement in the full year offtake of the back of new additions in their customer set. Further, we have added one new part in one logo with the addition of iCAD, a premier manufacturer of e-scooters in Europe. With this order win, we have entered into a new segment in new market. We have also spoken of addition of Ducati to our customer who said earlier and there are indications that the SOP after path awarded will commence in September this year. Overall, that we have entered 2023 with far more optimism. Customers are [ showing thanks ] of having adjusted to a challenging systems [indiscernible] of the previous year and are indicating in the improved outlook of the months and the quarters ahead. On this note, I would like now to hand over to Mr. Rajiv Gupta, who will cover the development in the domestic business for the quarter.

Thank you, Andreas. Good day, everyone. The Indian automotive sector had a moderate growth of 5% year-on-year basis, impacted by the flattish growth in the 2-wheeler segment, which was impacted by the OBD regulations. Fortunately, there was better traction in passenger vehicles and commercial vehicles due to increasing level of economic activity and higher level of infra spend. The contribution from our domestic business stood at 79% during the quarter. The momentum of 2-wheeler dipped this quarter as the OEMs offtake has moderated due to the introduction of onboard diagnostics regulation by the government. The OBD systems provide self-diagnostic functionality incorporated into the engine control system, which can alert the vehicle system about potential problems that can impact the vehicle. These contribute to emission -- better emission management and also prevent potential long-term complications. With this various OEMs were affected, especially 2-wheelers. And we noticed a decline in schedules towards the year-end to reduce inventories as the models without OBD will not be permitted to be sold post April 1, 2023. We see -- we are seeing good inquiries in the market for new technology applications and are optimistic that strengthening macroeconomic conditions will help us sustain this momentum. More importantly, domestic customers are evaluating suppliers based on capacities and track record in the EV offering. Alicon is well placed in this regard with rich experience in this space uncompatible track record of 94 parts with 17 customers till now. Our European subsidiary IllicAman, which has been supplying EV components as 2017 has been a key contributor to our growth competencies in this space. In the nonauto business, our order for a prestigious telecom project under Atmanirbhar Bharat is progressing well. In the nonauto business, there is further traction as we are in discussion with the Department of Defense for the supply of further products catering to different requirements. On this note, I would like now to request Group COO, Mr. Veerababu, to share his perspective on the Alicon performance.

Thank you, Rajiv. Good day, everyone. We have reported strong results during 9 months of the financial year, current financial year. We have marked an uptick in client engagements and have demonstrated strong progress against new orders. The order intake momentum has substantially improved in recent years by leveraging on research and development, design excellence and value engineering. We have demonstrated to customers of our deep value that we can provide them as a supplier of [ review. The notice ] to now ensure robust execution of these orders to provide customer products that are delivered on time, aligned to their schedules and add the quality standards and technical certification that they have specified. An important element that we are focused on is the deeper footprint on technology. We have tried to automate certain process of our operations. Further, we are ensuring optimum utilization of our resources by focusing on driving efficiencies, where addressing costs across our business model and enhancing is, we further elevate our competitiveness. We are actively working towards increasing our substantially footprint and ensuring commissioning of our captive solar plant, which will meaningfully transform our energy mix. On this note, I would now request to moderate to open the forum for any questions or suggestions that you may have. Thank you.

[Operator Instructions] The first question is from the line of [ Yash Dalal ] from [ Sushil Finance. ]

Am I audible?

Yes, you're audible.

Yes. So my question is, as we can see your revenues are up, but your interest costs have remained the same. So we want to understand your capital efficiency of working capital, has it improved? Could just probably throw some light on that?

Yes, there is -- definitely, we are focused on the improvement of the capital efficiencies because you compare it for the 9 months, it is almost equal to the last year, 9 months cost. So maybe some impact of the QIP, but we have the impact of the higher interest rates in this year. But definitely, we are focused on the investment side as well as that on the -- how to improve our balance sheet and especially on the negotiation of the interested with our bank costs as well as to control the debt.

Okay. And just another question is your depreciation is high. As you can see, so your profit has been low, but your cash profits are increasing. Do you think this trend will continue going forward?

Yes. Definitely, we are more focused on to improve. One is that profitability as well as mainly that how to improve further the cash profit, because cash is the reality. So definitely, like in the piece, we are explaining how we are improving, how we are setting our goals, the targets in the coming years. So along with the numbers of the revenues, the profitability, the main focus is how to improve our cash flows.

Okay. And another question was, would you give us some revenue guidance going forward for the next year?

For the next year -- one more point I would just miss to address that based on like you have there is the issue of the question on the cash flow. So our -- we have the rating agency CRISIL. So they have also improved our rating from A Stable to A Positive. So they have also [ identified POP ], there is improvement in the cash flow management in Alicon. So coming to this, the revenue -- so it is a forward-looking statement, but definitely like we are explaining that for the next year, we are expecting at this movement of 15% growth against the current year of '22-'23. So let's see that how we will close because the base is also increasing, continuous improvement in the quarterly performance of the current year. And at this moment, in the 9 months, there is an increase in the 43% in the revenues. So definitely, there is -- we are putting up a higher base for the next year. So we will have a more clear picture in the next call. But at this moment, we are estimating that approximately 15%, we should achieve our growth in the revenues in the next 3 years.

Right. So -- but let me go 15% [Technical Difficulty] would be your estimation for next year in revenue?

That you can work out, because we cannot give the numbers. So definitely, but this is based on the new orders, we are improving continuous new order booking is there. And now like from the last 2 years, we are giving the new order books. So those are converted into the real numbers. And we are furthermore focused on resourcing business, especially like where the ready business is available because the new orders generally we go, then there is a development lead time of 1.5 to 2 years. So to improve our numbers in the next year, so one focus area is resourcing business. So ready business is available, so how to shift to Alicon.

So that's good to hear because it just going by the numbers, if -- in this 9 months of this year FY '23, your EBITDA has been at INR 124 crores. So just maintaining the same margin if we do add around 12%, then you say our EBITDA would increase quite a bit, maybe by 50% next year. Is that correct?

I think you are forcing me to give some forward-looking statement. So, right. One is that revenue growth, another we are focused on to improve our margins. So our target for the next year is at least to improve 100 basis points in our margin. So on that basis, you can work out. So maybe that you are good in the number.

Okay. Just, sorry, one more last question. Also, you spoke about your onboard diagnostics, the norms that are scheduled to take effect soon. So what are the new opportunities and challenges that will throw, how will it affect an impact in the coming quarters next year onwards?

So I think I ask Rajiv to explain this.

So we are noticing volume reductions, especially 2-wheelers, the 2-wheeler OEM on the account of OBD, which was clearly explained in our speech also. There is marginal or no change in our path with this drive by the government, especially for the exhaust system. But we noticed the volume drop that is in late quarter 3 and also in quarter 4 is expected as OEMs need to curve the production numbers as post 1st April '23, they won't be able to sell the existing vehicles. So one is, yes, there will be an effect in quarter 4 with this area. But if you talk about the opportunity, there is opportunities, especially in the quarter 1 in next financial year, because we see -- because the OEMs will try to start building the stocks, which they have planned to deplete in quarter 4. So we are working closely with OEMs, how to further build those inventories at their end. So that is what we could work out at this moment.

Okay. I'll jump back in the queue for any further questions.

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

Congratulations on a strong set of numbers. Welcoming Mr. Agarwal and Mr. Veerababu for sharing thoughts for the investor community. Sir, my first question was on the order books, can you indicate what is the size of the order book to be executed by FY '26? Last quarter, you had indicated around INR 3,400 crores.

So Raghu, I think a little bit one more explanation we would like to give, because all these order books what we are discussing and explaining, those are as on the date of -- that is the means '25, '26. So this is almost 2 to around 3 years. So whatever the new orders are coming, those real volumes, we will be able to see post '26. So I think now maybe some new numbers will start giving from this call. But definitely, we will link with the earlier numbers also, so it will not be some confusion for you to understand. So when we talk about like till '26, so we are at approximately INR 3,500 crores of the order book. And yearly average is coming around INR 750 crores. And like in [ '22-'23 ], we are expecting the execution of INR 500 crores to INR 530 crores in that range. And further jump because now, these orders were booked a year back or 2 years back. And in next year, our estimation is for the execution of around INR 700 crores to INR 750 crores in that range. So that is based on the old numbers. But definitely, we would like to now give us some increase in the number of yes, because now we are talking about '25-'26 in the last 2 years. So we have converted our numbers -- our order books till '28-'29. So that is -- give a real picture of the next 6 years. So if we go for that, so our order book stands at around INR 7,000 crores to INR 7,500 crores in that range. So INR 7,400 crores, we can take a number on this. And yearly average sales is coming around INR 1,050 crores over the next 5 to 6 years. That is the incremental sale we are talking about. And if you can add our regular sales, that is in the range of INR 1,200 crores to INR 1,300 crores, because this number what we are talking about, INR 7,400 crores, that is base year is [ '22-'23 ]. So we are not including the orders already executed in the previous years. So I hope, Raghu, you are able to understand what we are explaining.

Yes. This was very helpful actually. And a strong -- thanks so much for sharing the strong pipeline. So just one clarification. I missed the part when it was initially explained, the carbon neutral of the EV share in sales and order book. I think the earlier target was 36% by FY '26. Did I have heard correctly that in the opening remarks that was mentioned, [ 20% to 22% ].

Yes. Basically, if you see in this portfolio, we having a close watch -- we are having a close watch with our customers also what we can see. There are a lot of alternate fuels also coming apart from the pure EV when we talk about, like the hybrid solutions, which recently Toyota has come up with a model of Hyryder and even Hycross. And also actively OEMs like Daimler. Ashok Leyland recently with Reliance is coming up with hydrogen cells. So what we could understand very clearly. And also like Maruti is aggressively working on the CNG hybrid. So what we can sense that this particular share will be supported by these alternate fuels also. So nothing about our projections by, for [ '25-'26 ] years, we were a bit confident of touching 36% share by '26. And if you see with the current order booking and the orders in hand, they've already touched somewhere around 20% to 22% for the year '26. With strong discussions with our customers going forward in next 18 to 20 months, we are a bit confident of touching this number.

That was very helpful. On the subsidiary side, the performance seems to be under pressure. It looks like a revenue growth of 9% and EBITDA margin at 8.1%, I'm taking subsidiary performance by deducting consol minus stand-alone, how do you see the performance ahead, especially should margin improve with the reduction in the gas prices?