Alicon Castalloy Limited (ALICON.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Alicon Castalloy Limited's Earnings Conference Call. [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, [ Youssef ]. Good afternoon, everyone, and thank you for joining us on Alicon Castalloy Limited's Q1 FY '26 Earnings Conference Call. We have with us on the call today Mr. Vimal Gupta, Group CFO; and Mr. Shyam Agarwal, Chief Marketing Officer of Alicon Castalloy Limited. Mr. Vimal Gupta will provide an overview of the operating and financial performance for the quarter and following which Mr. Agarwal will walk us through the developments in global markets and insights on domestic business. 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 earlier. I would now like to hand over the call to Mr. Vimal Gupta for his opening remarks. Over to you, sir.

Good afternoon, everyone, and welcome to Alicon Castalloy's Quarter 1 FY '26 Earnings Conference Call. I will start with some exciting developments that reflect our commitment to growth. There have been 2 recent additions to our senior leadership team. Mr. Manish Kapoor has joined us as our new Chief Operating Officer, COO. His extensive industry experience of over 30 years and strategic acumen will be instrumental as we continue to enhance our operational capabilities and drive forward our growth agenda. Further, Mr. Harshvardhan Gune joined us as Head of DAR, which is the Defense, Aerospace and Railway vertical. Mr.Gune has over 30 years of experience in the industry and will be spearheading our efforts to build our business from defense, apace, and railway industries. Together these 2 appointments mark a significant step in strengthening our leadership team and expanding our management bandwidth to seize new opportunities and accelerate growth. Turning to some of the key developments in the global industry. This quarter has been marked by a complex and dynamic operating environment. Globally, we are navigating volatility while domestically market signals remain mixed. One of the most impactful recent developments has been announced. Announcement of new tariffs by U.S. On Wednesday, a 25% tariff on goods imported from India was confirmed, along with an additional 25% penalty tariff for trade involving Russia, effectively 50% tariff. These measures rolling out from August 7 and August 27 have prompted widespread cautious across industries with global supply chains. Anticipating these changes, customers had already begun reassessing purchasing decisions and reevaluating supply chain strategies awaiting clarity on specific rates. As a result, we have already experienced a slowdown in demand from our export customers in U.S. and Europe. And with this announcement, there is likely to be further impact as customers will now respond to the implications of these announcements. The other significant global development has been the restriction on exports of rare earth materials by China. While China is stating national security concerns as a key reason, it is believed that this is largely a response to the increased U.S. tariff on China. Our discussions with customers indicate that China has introduced complex procedural requirements and extended clearance processes, thus elongating the time period of shipments of rare earth materials for even [ genuine ] players. The impact is most adverse for supply of magnets for motors and towards requirements of EV players. OEMs are now urgently exploring alternative sources and technologies to reduce or replace reliance on these materials. These supply chain disruptions are already causing production delays and shutdowns with the effect expected to intensify in quarter 2 and beyond. We expect these recent global developments to primarily affect short-term demand. While the evolving landscape may present new opportunities, initial disruption in both demand and supply are likely and early sign of this are already visible in the current quarter. Now let's turn to our performance for quarter 1 of FY '26. We have reported a revenue of INR 419 crores in quarter 1 of FY '26. Revenues are lower by 5% year-on-year compared to INR 440 crores in quarter 1 of FY '25. However, the operating backdrop in quarter 1 of FY '26 very different compared to quarter 1 last year. Our year-on-year performance reflects both the challenges we have faced and the strategic resilience we continue to demonstrate. On a sequential quarter basis, revenue are lower by 2% from INR 425 crores in quarter 4 of FY '25 to INR 419 crores in quarter 1. Again, with the operating challenges having intensified in quarter 1, we are pleased with the resilient performance. We have overcome headwinds by ramping up volumes with some existing customers and with the addition of a couple of new logos. The appropriate way to look at our performance is that there has been a significant bounce back from the sudden dip in quarter 3 of FY '25, and Alicon is stabilizing the trend of revenues of over INR 400 crores per quarter once more. Our gross margin for the quarter was 45.9%, a decline of 165 basis points from 47.5% in quarter 1 of FY '25. This was due to a combination of price increase of aluminum and a change in the sales mix given the dip in export volumes. Additionally, our new technologically advanced plants are not yet operating at scale. and the fixed cost recovery is yet to reach optimal level. On key costs heads, we saw a slight increase in employee cost on a quarter-on-quarter basis as the annual increments and incentives took effect in quarter 1. Our cost optimization efforts are showing results, and we also benefited as certain onetime costs incurred in quarter 4 did not reoccur. As a result, other expenditure was lower by 13% quarter-on- quarter in quarter 1. This throw effect was visible in our EBITDA for the quarter, which stood at INR 50 crores with an EBITDA margin of 11.9%, compared to INR 48 crores and 11.2% margin in quarter 4 FY '25. After the sudden dip in our performance in quarter 3 of FY '25, which we have indicated was a bottoming out of our performance trajectory, we have now reported an improvement in EBITDA margin for the second consecutive quarter. Depreciation increased by INR 2.5 crores to INR 24.8 crore in quarter 1 from INR 22.3 crores in quarter 4, a direct result of our plant investments in machinery, tooling and automation that are crucial for our future capabilities. However, lower finance cost has helped us to offset some of this increase. As a result, pretax profit was higher by 16% on quarter-on-quarter from INR 13 crores in quarter 4 of FY '25 crores to INR 15 crores in quarter 1. Just to highlight is on a sequential quarter basis, top line was slightly lower at INR 419 crores compared to INR 425 crores in quarter 4. However, EBITDA and profit before tax, pre-exceptional, has shown healthy quarter-on-quarter increase for 4% and 16%, respectively. We reported an exceptional item of INR 2.5 crore in quarter 1 and after adjusting for tax reported a net profit of INR 9.3 crores in quarter 1. Largely stable on a quarter-on-quarter basis. Had it not been for the exceptional items, we would have reported a higher profit after tax as well on a quarter-on-quarter basis. This clearly showcases an improved performance in a very tough environment. The CapEx during the quarter, we have deployed INR 30 crores towards CapEx. Our target for the financial year '26 remains impacted INR 155 crores to INR 170 crores. Looking ahead, the challenges are plenty. However, we are focused on ramping up volumes for some of our customers. Further, new logos added this quarter will help add incremental volumes. And we are in discussion with our prospective customers, too. We are seeing promising opportunities in defense, aerospace and railways industries. These industries present a strong case of casting to do well given the variety of requirements. We think there is a space for a meaningful market share of casting there in these industries much like success achieved in the automotive industry. Our initiative to form a separate business vertical and industry head of vertical to spread our growth indicates our demand towards establishing this is a key pillar for our business over the medium to long term. Our healthy order book of INR 9,100 crores, which spans for financial year 2023 to '24 to '28, '29 along with the new business wins and strategic initiatives like the DAR vertical, position us well to capitalize on opportunities and deliver growth. We are committed to navigate these headwinds with discipline and agility, and we remain focused on our four strategic pillars, product diversification, market expansion and leadership in hybrid technologies. I'm confident that these efforts will deliver sustained growth and create long-term value for all our stakeholders. With that, I will now hand over the call over to Mr. Shyam Agarwal, who will walk you through the operational highlights for the quarter.

Thank you, Mr. Vimal, and good afternoon, everyone. In quarter 1 FY '26, the global automotive industry experienced a year-on-year increase of 1.7% in production volumes. However, the key geographies and product categories we serve within the broader industry landscape have experienced a year-on-year decline of 3.8%. So allow me to provide further context here. Growth of 1.7% for the global industry covers all regions and much of this growth has come from geographies such as South America, China and South Asia. Since we do not have major exposure to these regions, our top line performance should be viewed in the light of 3.8% contraction in the markets that we do serve. In the same period, the Indian automotive industry witnessed a 1.5% growth in volumes. A closer look at the growth across segments reveals 0.7% growth in 2-Wheeler segment, 3.4% increase in Passenger Vehicle segment and 2.6% growth in the Commercial vehicle segment, all on a year-on-year basis. Looking at the industry landscape, we saw several key trends in quarter 1 FY '26. 2-Wheelers. There was a resilient demand from festive and marry season. However, this seems to be easing out due to financing constraints, early monsoons and persistent inflation. Within category, sales of motorcycles is lower by 1.3% and moped is down by 8.3%, while the sales of scooter is up by 5% and hence, the 2-Wheeler segment is only marginally up by 0.7%. Passenger Vehicles. The PV market felt the pressure from the heavy monsoon, tight liquidity, which weighed on the conversions despite various incentive schemes. As a result, inventory levels remain elevated at around 55 days. Utility vehicles continue to be popular with customers and reported to increase of 9% in volumes. Passenger Cars, on the other hand, reported lower volume of 5%. On aggregate, production volumes of PV were higher by 3.4%. Commercial Vehicles, while the CV segment reported year-on-year growth in production volumes, the pace of growth is slowing due to reduced infrastructure spend. Volumes of medium and heavy vehicles were up by 8.3%, while volume of LCV were lower by 0.7% and the total segment is higher by 2.6%. Against the performance by industry, Telecom has reported the following: Contribution from PV business has increased from 38% in quarter 1 last year to 39% in quarter 1 FY '26. For 2-Wheelers, the contribution has increased from 37% to 40%. Our sales to CV segment, which were 18% of total sales in quarter 1 last year, have declined to 15% in quarter 1 FY '26. On the smaller categories, we have seen mixed trends. Revenues from 3-Wheeler have increased from 1% quarter last year to 2% quarter for the Non-Auto business has been dipped from 6% quarter 1 last year to 4% now. As Mr. Vimal indicated, there are a lot of headwinds in the operating environment. Despite this, we have reported revenue of over INR 400 crores this quarter. This has been achieved by adding new wins as well as ramping up with some of our existing customers. Coming to business wins. During the quarter, we have added 7 new parts from 5 customers, including 2 new logos. This includes 5 parts from structural businesses, 1 part from customer for the ICE business and 1 part from the non-auto businesses. Out of 7 parts, 5 parts are for international businesses and 2 parts are for domestic business. The new business during the quarter include 2 parts that we are developing with a prominent European customer. This is a well-known Italian company with a focus on the segment of premium sports cars. The 2 parts that we will be manufacturing are technology agnostic in nature as they pertain to structural solutions. We have added a structural part with a domestic 2-wheeler OEM. This solution has the potential to open the door for us to win similar businesses from several other domestic OEMs. Further, we have won cylinder head business from an Indian OEM for the non-auto business. These businesses will showcase capacity and capability of both existing and potential customers. In terms of ramping up volumes with existing customers, the outlook is favorable as with one of the prominent Japanese OEM, we have started supply of cylinder heads to one of their models, but the ramp-up for second model was slightly delayed. I am pleased to share that production line issue have been fully resolved, and we expect our production to steadily ramp up over the next 3 months. With another prominent Japanese OEM, we are witnessing steady volume offtake, and they have indicated production ramp-up from October onwards. For the Indian business of European OEM customer, there were some issues with the manpower, which had impacted ramp-up. This has now been resolved, and they are set to increase volumes. We are installing a second production line in November, which will allow us to ramp up volumes further on. All of our [indiscernible] business pertain to supply of the cylinder head for PV clients. This is aligned to our strategy of increasing higher value products to CV and PV customers. I have already shared the contribution has increased from 38% in quarter 1 last year to 39% in quarter '26. And with the further ramp-up scheduled over next 2 quarters, this is set to increase further. In our Indian operations, ramp-up of prominent European OEM is underway. We are supplying around 40 to 50 sets of a key part each week and have been trying to ramp up steadily. However, we faced some production challenges which delayed the ramp-up. We have resolved the challenges and now progressively stepped up the production to 150 sets. Going ahead, we anticipate that this will further ramp up to 600 sets per week from January 2026 onwards. To support this ramp-up, we engaged a casting expert from Germany, who has since joined our team. His technical expertise has been instrumental in streamlining our processes, enabling us to scale up the volume efficiently. This in turn has helped lower our breakeven point and improve overall operational effectiveness. As part of our drive to elevate manufacturing excellence, we are integrating digital process control and leveraging AI and IoT technologies across our operations. These advancements are enhancing real-time supervision, generating actionable insights and enabling smarter decision-making. The result has been marked improvement in productivity and a reduction in rejection rates, contributing to a more efficient and resilient manufacturing ecosystem. While the initial phase of implementation has led to higher depreciation and fixed costs, these strategic investments are expected to yield long-term benefits. As production scale, we anticipate a stronger margin profile, reinforcing our path towards sustained growth and operational excellence. Our customer base is undergoing a meaningful transformation, marked by the successful onboarding of several prestigious global OEMs and Tier 1 suppliers. This milestone reflects Alicon's growing prominence in the global automotive ecosystem and reinforce our ability to meet the evolving expectation of world-class customers. Our business composition is increasingly defined by our strength in design, R&D and value engineering, while earlier wins were driven by reliability and cost competitiveness. Today, Alicon is being recognized for its innovation, technological power and design excellence. This shift positions us as a strategic solution provider rather than just a component supplier, reshaping how customers perceive and engage with us. We are also making steady progress on our sustainability goals. Our captive solar plant in India is now operational and complemented by solar panel installed at the European facility. These initiatives are helping us transition to a cleaner energy mix and reduce our environmental footprint, further aligning our operations with global sustainability standards. We can now open the floor for questions.

[Operator Instructions]. First question is from the line of Jyoti Singh from Arihant Capital Markets Limited.

Just wanted to understand like you have given contribution from auto and non-auto. So if you can bifurcate on the revenue mix side. And after that, this time, domestic auto industry growth at only 5.5%. So how does you are seeing demand recovery shaping up for Q2 and H2 FY '26?

Yes. So Jyoti, first of all, thanks for the question. So out of the revenue mix for the automobile, so 2-Wheeler is contributing 40%, 3-Wheeler, 1%; Passenger Vehicle, 39% and Commercial Vehicle 15%. And remaining is the non-auto. And regarding your second question about the growth of the Indian automotive industry, you rightly mentioned that demand is subdued, and it is much lower than what all OEMs have predicted or released the schedule to us. And there are various reasons also, which we all know. However, we are seeing some couple of customers where it is not linked to the growth of the automobile industry, like one of the Japanese OEMs, where we are supplying. So that we will be eating the share of their own foundry. That is the first thing. Second thing for one of the European customers, they are assembling the engine and exporting out of India. And earlier, they were having some manpower issue. So that has been resolved, and we are seeing the good schedule from the July onwards. So there, we will see that we will supply the more parts than the industry is calling for. So in some of the areas, we are seeing the good demand. However, we are seeing with some couple of customers, the demand is not good. But as you know, we are dependent on our OEMs to sell the vehicle and then we can supply the parts to them. So we have to wait and watch for that.

And sir, on the export side, it was subdued. So what is the current outlook from global customer, particularly in Europe and U.S.?

Okay. Jyoti, for -- if you are talking about the U.S. tariff, so this announcement has come a couple of days before. So we also need to take some feedback from our customers that what is their strategy and other thing. But as you know, on the short term, these tariffs, what Trump has announced like 25% from 7 and another 25% from 27. So these are only on the short-term basis. It is not the final tariff number. So every OEM, they will wait that what is the final contract signed between Indian government and the U.S. government. That is the first part. But if we see, like in all our supplies to U.S. customers, duty is paid by the customer. So Alicon is not directly impacted because of the increase in duty. However, in the long run, we have to see the competitiveness of the India vis-a-vis the tariff on the other countries like China, Vietnam, Canada and Mexico. So once it will be finalized, then only it will be more relevant to see the strategy from the OEM side. And until we have to wait and watch. However, we will stay in touch with our customers.

Next question is from the line of Yash Dalal from Sushil Financial Services Private Limited.

So I have a few questions. The first one is, what is the reason behind this exceptional loss that is reported?

That exceptional loss actually we are having a legal case in U.S. court with one of our sales agent. He was claiming some additional commissions and that case was going on for the last 1 year, more than a year. So you know the cost, everything in the U.S. when you deal for a legal case. So at the end, we made an out-of-court settlement with them. And finally, it was agreed of $300,000 as a onetime compensation to that. So that is a cost we have taken as an exceptional cost.

Okay. My next question is with the rollout of the new product SOPs from the second half, how do you expect these to impact the company's growth trajectory and the margin profile?

Thank you, Yash. So as we mentioned in our con call also, like we have lots of new products. And for that, we have already done the [ PPA ] with the customer. And now we are working on the ramp-up plan for the customer. So that is already we have planned and everything is going as per the planned ramp-up with the customers. It includes both domestic customer as well as the export customer. And this order wins for the products, which we are launching in the second half of the year or the next year. So as we mentioned, our strategy is to work more with the passenger vehicle or the commercial vehicle side, so we can increase our margins. And we are working on that and major volume will come from the passenger vehicle and the commercial vehicle side. So definitely, in the coming quarters, you will see that our PV and the CV numbers will increase. And definitely, the margins will also improve. So that you will see in the coming quarters, Yash.

Okay. Got it. And just in the earlier previous question, you spoke about the impact of tariffs by Trump for Alicon. So just to add on to that question. Is it possible -- could we route exports through Illichmann to mitigate the tariff impacts? If so, what could be the implications?

Yash, we thought about these options also. We have an entity in Europe. But it will be too early to decide anything until anything is signed off because you know how we changed the decision. Initially, he started with 10%, then 20%, then again came 10% and now the 50%. So we should also have something robust for the long term, and then only we can decide.

But, Yash, definitely, what option you are saying, that is we are also open for that. And we will take a call later on when we will have the reality in our hand, and with the customer agreement.

Understood. Understood. And just one final question. So beyond achieving INR 2,200 crore revenue target in FY '27, what is the long-term growth strategy and vision for the company?

Yash, you asked very relevant question. But now you see the current environment is quite challenging, both on the domestic as well as on the global level. If you see the domestic market growth is not coming as much as we were anticipating like Finance Minister has given the relief for the interest rates -- income tax and also the interest rate is coming down. So everybody was expecting with the more liquidity, the demand will increase. Same way for the Europe and U.S.A., it was -- last 2 years, we were struggling and everybody was hoping that this year will be a good one. Yes. But still, we are seeing the demand from all the 3 reasons, India, Europe and U.S.A. is not that good. And considering the various warlike situation in the world and also now the Trump tariff. It is becoming more and more challenging for us to talk to the customers on the long-term perspective and [indiscernible] our strategy. Internally, we have made the plan for 3 years and 5 years, but it can only be further reviewed once we get the final numbers for the tariff, we talk to our customers, get their strategy on the long term for India, then it will be more realistic to give you more idea about our long-term planning. I hope, Yash, you can also understand these things.

I was just saying, Yash, due to this global volatility. So maybe it will be better in the next quarter, we'll talk about. We will have more clarity that how the things are moving.

And also, yes, I would like to add here, we have already mentioned earlier in our speech also, we are also seeing the rare earth issues like Indian EV players, they are not getting the magnet from China. So their production is also getting impacted out of that. So lots of lots of issues are coming. So we should see that first these issues are settled down, then we can see what is the customer strategy to build our own strategy and the plan.

[Operator Instructions]. Next question is from the line of Preet from InCred AMC.

My first question would be on the line of revenue and margin guidance, which you gave in quarter 4 that you will be -- you are targeting to achieve INR 190 crores of revenue with 13%, 13.5% margin. Obviously, there have been a lot of headwinds in the industry. What is your current estimation for the internal targets for the current year, current target?

Yes, Preet, thank you. Thanks for the question. So you rightly said like we've given the guidance in the last con call. But now you can see the things have changed a lot from the last con call, and we are seeing some strong headwinds from the U.S., Europe and also the domestic market. So of course, the numbers will change definitely. And how much lower it will be, that can only be determined once the things will be settled down. So Preet, we have to wait and watch the next number -- set of numbers from the customer and how the tariff situation will be rounded out.

Sir, will be there any change in the CapEx number, which you have guided that we are doing INR 320 crores of CapEx in the next 2 years or maybe INR 170 crores of CapEx in this year. So is there any change in the CapEx plan that we will be doing?

No, Preet. We are not changing our CapEx. We are not changing our CapEx plan. We are very firm that we have to make the investments so that in the coming years, we can fetch the good revenues and the margins for the company. And we have -- we are really making very strategic investment so that we can fetch new orders from the customer and also ramp up the current businesses which are in hand. So there is no change in the CapEx.

Okay. My last question would be in the line of margin differential. If you can give the difference or margin difference between export domestic or PV, CV and 2-Wheeler. Obviously, PV and CV has higher margins, but what is the difference between and also EV and non-auto if you can provide?

So, Preet on the margin side, you -- when we were talking, I think, from last 3, 4 quarters by improvements. So you can also see that quarter-on-quarter now improvement is coming. And on the -- definitely, we are having the good margins in the Passenger Vehicles as well as on the Commercial Vehicles, but maybe some headwinds were there in the quarter 1 and maybe we saw that some decline in those what we were expecting. But on the other side, we just see kind of improvement we are handing in our operations also. When the things will maybe a little settled down, so our manufacturing cost base now started going down based on our lot of cost-down initiatives that we have started that we were talking about these initiatives from the last 3, 4 quarters. So that has started giving the results. And maybe that will be our lever for this year. Maybe we will not see a big jump in the top line, but we will see the impact of our cost reduction initiatives that will give the -- at the end the results of this.

No, sir, I was asking about the margin differential in export and domestic, means what are the difference in the margin between export products and domestic products? What are the difference between PV, CV and 2-Wheeler products?

That I think you can take.