Automotive Axles Limited (505010) Earnings Call Transcript & Summary

[Audio Gap] everybody and thank you joining us for Automotive Axles Limited Third Quarter of FY '20 Earnings Conference Call. During this call, from the management side, we'll be hearing from Mr. Thimmaiah, MD and CEO of Meritor India; Mr. Kumaradevan S, Senior Vice President and Whole Time Director, Automotive Axles; and Mr. Ranganathan, CFO, Automotive Axles. I would now like to turn the call to Mr. Thimmaiah for the opening remarks, followed by Q&A. Sir, you may begin now.

Hi. Good afternoon to all of you. This is Thimmaiah. As -- probably, I'll just give you a opening remark as then we can take more questions during the question-and-answer session. As you can see, the market still is very, very down for commercial vehicles and also going through a significant volatility due to the big disruption happening from 1st April, the emission transition, and also the OEMs are working on liquidating the inventory in the pipeline because they can't sell this from 1st April onwards. So the same impact of the market we are also seeing. We are operating very significantly lower capacity utilization, and that's getting shown up -- showed up in our financials as well. Then, we are actually, at least personally, I'm a little upbeat from April onwards, things should improve due to 2 reasons: one is the government working on improving the economy and the infrastructure spend; and also, the OEMs will start producing and filling the pipeline because the pipeline would be almost 0. With that -- with this, I'll hand over the mic to Kumar to take you -- Kumar and Ranganathan to take through the company performance.

Thanks, Thimmaiah. So good afternoon, everyone. This is Kumaradevan. I'm the Senior Vice President and Whole Time Director of Automotive Axles Limited. So I'd like to start the presentation with a brief about the company. As you know, the year 2019, financial year '19, we registered a growth revenue of INR 1,942 crore, with EBITDA margin of INR 228 crore at 11.7% and PBT of INR 181 crores at 9.3%. Our company has got 4 manufacturing locations: Mysore, the main plant; other plants include Jamshedpur, Pantnagar and Hosur. So these are the more -- 4 manufacturing locations from where we produce our products. This company is with a equity partnership with Meritor USA, a 35.5%; Kalyani Group has got 35.5%; and the balance with public at 29%. So we have a total workforce of 2,000 employees plus. Our major customers include all major commercial vehicle manufacturers, including automotive -- I mean, Ashok Leyland, Tata Motors, so on. And we also cater to the requirement of defense. So we make products for defense OEMs and specialty axles for those manufacturers. Our products include axles, brakes and also the suspension systems. As far as the market is concerned, I think we are the leading player. We are #1 in axles, independent and also #2 in brake segment. So this is a brief about the company, and our end markets include various applications, including truck, trailer, bus, off highway application, military specialty axles requirement, and also we are catering to the aftermarket requirement. As we said earlier, our major customers include Ashok Leyland, Tata Motors, Mahindra, Daimler, Caterpillar, Volvo, so all the leading manufacturers in the country, and also in the global scenario, we are -- they are our main customers. And we have a complete range of products, both in terms of axles as well as in brakes, covering various sectors, light, medium, heavy and extra heavy. So we have axles starting from 10x going up to 18x and also the requirements for the bus. Similarly, in terms of brakes, we have many products starting from 310 dia, 360 dia and so on. So this is a brief about the company, about our market and the customers. So now I request Ranganathan, our Chief Financial Officer, to talk about the financials.

Very good afternoon to all of you. Thanks for joining the Automotive Axles conference call. As a financial perspective, the sales for this quarter is going low as compared to the last year. We are 65% low compared to the last year. INR 463 crores what we did last year compared to INR 162 crores what we did this year. As far as EBITDA is concerned, with the continuous drive, we're able to uphold to a larger level at 10.6% for this quarter compared to 12.1% last year. The difference is largely impacted by the burden of fixed costs. And PBT, we are at 9.5% last year compared to 4.1% this year, again, the impact of the depreciation, the whole aspect is what it's -- you see the difference. And as far as the YTD is concerned, we -- the overall revenue is down by 45%. The similar time last year, we did INR 1,393 crores versus INR 765 crores so far. And EBITDA level is about 11.4% to 12.3%. And PBIT at 7.1% for the first 9 months versus 9.5%. As the outlook is concerned, this year, we expect that we may try to close it at INR 950 crores to INR 1,000 crores by March end as compared to INR 1,942 crores what we did in the year ended March 2019. We expect it to be down by close to around 49% to 50% in terms of revenue. EBITDA, we'll be somewhere around 11% compared to 11.9% what we did whole of the last year. PBT, we are expected to be at 6.5% compared to about 9.5% prior year. The key highlights, basically, the market de-growth, more or less, is around 54% year-on-year for the Q3. And the revenue for FY '20 estimated to de-grow by 49%. When compared to the market de-growth, this is close to about 45% to 47%. EBITDA year-on-year and quarter on -- we are able to bring a lot of productivity improvement in the material cost performances and the conversion cost performances. We are able to manage the EBITDA to a larger level. But the point is the fixed cost impact, we don't know things how will be impacting and pulling down the margins compared to the performance of last year. However, our strategic plan, we call us internally as our Mission 22 plan, which mainly focusing on improving the revenue and launch of new products, considering the BS-VI and also the various customer market requirements, and also improving -- the continuous focus on -- including material performances and also the various fixed and variable costs, which last 9 quarters we have been very, very closely monitoring and controlling it. That's one of the reasons the margins are not so dropped so badly as compared to the drop in the revenue. As far as PBT is concerned, again, the impact of EBITDA continues there, along with the impact of the fixed cost -- depreciation burden is impacting it. However, that's one of the factors which probably got improving when the revenue goes up in the future. Last but not the least, our continuous focus on the revenue, continuous focus on material performances and continuous focus on the fixed and variable costs is one thing which management at top level and -- we are very closely monitoring to ensure that we try to maintain the margin even at a low top line growth. So that's it from my side on the financial perspective.

Yes. So going forward, see, as a company, we are focusing on 3 major strategic areas. One is cost reduction. Second is product development. Third one is process optimization and automation. As we mentioned last time also, the company has launched major initiatives in cost reduction. We are driving cost reduction in terms of material, in terms of our manufacturing conversion cost, our supply chain efficiency and logistics, our manpower productivity and also other fixed expenses, including peripherals, travel, et cetera. There are various sub-initiatives launched under each one this category. In manufacturing conversion costs, our main focus has been to improve our process optimization, reduce our wastages, improve the optimization in terms of power, fuel tools, et cetera. So there are a lot -- number of initiatives under each one of this category. With all these initiatives, we could achieve a saving of -- a reduction of about 14% cost compared to the last year same quarter. Similarly, in productivity improvement, we have a major lean manufacturing initiative launched in the company. Through that, every single operation, every single cell is focused with productivity improvement activities. A number of wastages -- a number of activities where optimization can be done in terms of both men as well as materials are being done. With all these initiatives in place, we have also registered about 31% productivity improvement during this quarter compared to the last year same time. Similarly, under materials category, both under sourcing, where we are looking at sourcing optimization, alternate processes optimization, looking at supply chain efficiency, including logistics, so these are the few key areas where we are focusing on, through which we are trying to reduce the cost in terms of material procurement, and also, we are looking at a number of value engineering initiatives by which we optimize the process. We also optimize our material consumption, like yield improvement, also on weight reduction initiative, et cetera. So there are various subprojects and sub-initiatives going on under each one of this major thing, so with which we are very confident that we should be able to cope up with the dynamics what we are seeing in the market. Similarly, in the product development, we are trying -- while we have a complete range of product catering to our various sectors, we are also, again, looking at the specific gaps in our product offering, very particular to the latest requirements on the market. So a number of new products and variants are being launched. A lot of programs internally are being driven by our engineering and manufacturing department. And third one, as I said, it is about process optimization and automation. As I mentioned, so we are looking at number of ways by which we can optimize our process, which will reduce our cost, which will improve our quality. We are also driving major digitalization program through which we can improve our efficiency, we can improve our quality and reliability of what we can offer to the customer and also the service levels in terms of delivery performance enhancement, et cetera. So the digitalization and automation is the third major initiative that we are driving. So to summarize, these are the 3 major focus areas in the company: cost reduction, new product development and process optimization and automation. I think with these 3, we are sure that we will be able to meet the dynamics in the market what we are currently seeing. So that's it from our side. I think now we are open for question and answers.

[Operator Instructions] The first question is from the line of Sunil Kothari from Unique Investment.

Sir, really, sir, remarkable to see this type of cost reduction, productivity improvement, such a low level of top line and you are maintaining this type of EBITDA margin. So if you can broadly make us understand this 14% cost reduction, 31% productivity improvement, how this is possible and how sustainable things are? And as things change, this can, I think, convert in a remarkable improvement in profitability and performance. So your broad thought process, not any guidance.

No. Maybe -- this is Thimmaiah. I'll just take this question. I think one is, we are utilizing this downturn where our lot of management people are available to really do the re-layout and apply the lean principles and drive the cost reduction and productivity improvement activities. And our approach is to ensure that these things are sustained during the upturn as well when the market comes back. But as you can also understand, most of the -- like any other automobile industry, during the downturn, we do lot of cleanup activities and when the upturn happens, lot of fab gets built into because -- in the name of serving the customer. So we believe portion of whatever the activities we have done is going to carry forward and should ultimately result in a better improvement in overall cost and profitability in the long-term perspective. But again, as you rightly said that we can't give the guideline because -- guidance because a lot of other things will happen in the market, the customers are always demanding in terms of the reduction. So we will wait and see that how do we approach the market when the market comes back.

Great, sir. And sir, second point is, this -- due to this recent China event, do you see any change in sourcing base or maybe some starting point, maybe some other manufacturing countries can be a part of the supply chain? Are we getting any inquiry or any thought process at our parent level? If there is no China or less Chinese products available, can Indian companies like Meritor or Automotive Axles can become base for this type -- any just general change in thought process from a customer point of view, global auto majors?

Yes. Maybe I'll try to answer that in 2 different ways. One is how it impacts us and what is the effect of it and how generally the industry -- it impacts the industry. In terms of us, I don't see a major -- or I don't see even a smallest impact because -- of us because all our competition, we -- I don't think we buy any of these -- our kind of products or subsystems are coming from China in the Indian market. That's number one. So to answer directly, I don't see a impact directly to us, unless the overall vehicle production reduces because some other components, which is not part of our portfolio, availability will be an issue, which is we are seeing that it could be. So no impact to us. But if you really see the other side, I think more and more companies are thinking about shifting the base from China to countries like India. One is the U.S. and China trade activities and now the coronavirus. I think people are getting a little concerned, and that's really a good news for us. In -- mostly, in automotive business, if you see that people would have alternate source. So even though for other OEMs, we might have, as an industry, a little bit of impact because of the China, but immediately, they can ramp up into other Indian sources quickly. So even if there is an impact that could be according to my view is a short-term impact. And I -- and you're absolutely right. There a lot of things are working against China, which is probably a good news for us. People would have -- would now start thinking about having India as a source for the global as well as the local market.

Okay. And sir, in terms of Meritor, any change in attitude towards maybe India? India becoming sourcing base for our parent company.

We already are the sourcing base, but we are very, very regionally established company. Most of the markets wherever we are present, we try to manage regionally. China -- caters to China. We have operations in China, caters to the China business. We have operations in India, cater to the India business. We have operations in Europe, caters to the Europe business. We have operations in Australia, caters to the local market. So yes, there is always a focus to improve and increase our export out of India to other Meritor facilities, but the scope is not very high because we want to serve -- because of the bulkiness of our product, we want to serve the local market from the local establishments.

Correct, sir. Again, congratulations for such a good effort towards cost optimization.

Thank you.

[Operator Instructions] The next question is from the line of Apurva Mehta from A M Investments.

Congrats on good margins and cost reduction. Just wanted to know about the slipper suspension, which we introduced this year. So how is it going? And what is the response of customers? And can you throw some light on that?

The one is, on all the vehicles being fitted with slipper-type suspension, the customer feedback is extremely positive, I can say. There are fuel efficiency benefits our customers are noticing. And also more than that, the significant tire-wear problem resolved. We have very good results from the field on reduction in tire wear because of our slipper-type suspension, reduction in maintenance activities, and we are seeing a very good feedback from the drivers and operators about the vehicles which are operating through the slipper-type suspension. So very good feedback, I would say. Now the OEMs mainly, our customers are now applicating this into more and more models. You will start seeing this going in newer models from the BS-VI vehicle configuration onwards.

So any new customer addition in that side, apart from our major customer Ashok Leyland?

No, not at this point of time. Once this goes in bulk from April, we're expecting to work with other customers.

Okay. And what kind of revenue can we expect coming from slipper suspension in maybe next 1, 2 years?

We do not give breakup of our segment-wide financials. I'm very sorry for that.

Okay. Any percentage or view of sales or something like that? Or just ballpark figure, we can just have some thought on that?

Again, I can't give you that figure. But I can only tell you that this is going to be -- a good portion of our overall percentage is going to go -- come from slipper-type suspension over next 3 to 4 years.

Okay. And on the export side, any -- when we were talking to lot of things foreseeing and anything, any breakthrough for -- in that side for our export of any different parts or anything for any customers, non-Meritor and Meritor customers?

Again, this is a very significant work we are doing to enhance our export, both Meritor as well as non-Meritor. We are working on multiple RFQs in various stages. Again, RFQ, we are working on how much will materialize or not, we'll see. But I can only say that the pipeline is very good.

[Operator Instructions] The next question is from the line of Ankit Gupta from IndiaNivesh.

Sir, in your opening remarks, you said that from April, you think personally that OEMs will start production to fill up the inventory. Sir, can you tell us that what is the current state of inventory? Are they not producing BS-VI vehicles in a good number? Or how it is going?

If you really understand the market, there is a transition happening from 1st April. BS-IV will transition into BS-VI, and no BS-IV vehicle can be registered from 1st April, which means the entire -- normally, if you see the market, between 30 to 45 days of inventory is available at dealers place and at you call various stocking areas of OEMs. So normally, the 30 to 45 days of inventory is always there in the pipeline. So that has to come to technically or theoretically to 0 by end of March. So that's one of the reasons you are seeing, probably, if you notice, the end sales and registration of commercial vehicles are more than the production. So they're trying to liquidate the inventory. And we are expecting that by end of March, theoretically, this has to become 0, otherwise, they can't register from 1st April. So that's why if you see the production levels of OEMs are very low, which is impacting us as well because, for us, the customer is OEM production. So let's see how the -- from April onwards, which means you are starting from a 0 base, which is no pipeline inventory. So I think OEMs, even the demand start picking up, also pipeline has to be filled up. So people will start producing definitely more than this. This is what our hypothesis is.

Understood, understood. And sir, secondly, in BS-VI, do any proportion of our products change, like more heavy axle is required or anything else? Do our value addition increases in any of the products because of BS-VI?

No, not yet.

No, sir. Okay.

[Operator Instructions] The next question is from the line of Sanjay Shah from Alphaline.

Sir, I need to understand that what are the steps taken by the management to mitigate the cyclicality of this commercial vehicle segment?

One is, we have -- export is one area we -- always we work on. We also have an aftermarket business. We are now increasing our focus to off highway and military. That said, majority of our revenue is going to, in any case, come from the on-highway truck and bus segment, even if you diversify into off highway, military and export and aftermarket. Cyclicality will impact us for sure. Our endeavor is, how can you ensure that we do good work in terms of cost productivity and still breakeven at very low capacity utilization, like the way we are doing. And then diversify and grow on the other segment in the long term -- medium-term and long-term perspective.

Diversifying means, you're talking of any new product addition?

Yes. We are talking about new product addition, like some independent suspension programs, the multi-axle vehicle for military, construction equipment segment, et cetera.

[Operator Instructions] The next question is from the line of [ Ankit Gupta from Bamboo Capital ].

Sir, can you tell us how is the CV market looking for next year? Or it's too difficult to assess at this point of time?