Automotive Axles Limited (505010) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to Automotive Axles Limited investor call organized by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note this conference is recorded. I would now like to turn the conference over to Mr. Sailesh Raja. Thank you, and over to you, sir.

Thanks, Pranali. Good afternoon, everybody, and thank you for joining us for Automotive Axles Limited First Quarter of FY '22 Earnings Conference Call. During this call, from the management side, we'll be hearing from Mr. Thimmaiah, MD and CEO of Meritor India; Mr. N. Muthukumar, COO of Meritor India; and Mr. Ranganathan S., 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.

Okay. Thank you, Mr. Sailesh Raja. This is Thimmaiah. So I will just talk on the Slide 3, if you have to start with. First of all, welcome to all of you. It's a pleasure to talk to you today with my team. I'll give an update on the company and the market and if any other questions you have. I want to give you a quick update on the COVID situation in our company and what we have done, which is Slide #3, and then I'll hand it over to Ranganathan to take the Slide 2 and then proceed. So all the protocols, whatever most of the companies are doing, we are all following that. And one good thing I want to inform is other than the curfew period, complete lockdown, whether it is wave 1 or wave 2, other than the curfew period, our company and our offices were fully operational all along. And we are not doing any work from home concept, again, other than those curfew period. All our employees, both factory and offices are coming to the office with all the protocols maintained, all through the pandemic in the month, and we are fortunate that we are able to sail through to at least at this point of time. As of now, we are -- 95% of our employees are vaccinated, at least 1 dose vaccinated. And more than 50% are 2 dose vaccinated. And within next maybe a month or so, 95% of our employees will be 2 dose vaccinated. So that way, we are doing good in vaccinating our employees and their families. In terms of the CSR activity during the COVID, we have set up a 86-bed facility in Mysore, specifically for the COVID treatment with the Government of Karnataka and the district administration. And this bed is 100% -- all the 86 beds are oxygenated beds, and came to a really big help in the city of Mysore. We have also donated 2 mobile testing laboratories, again to the government. These lab on wheels are going around in the rural area and providing the testing facility, mainly for the rural people, which is regarded as a very good initiative from the government and also from the general public. We have also donated around INR 3 crores to the PM Care Fund and we are donating 1 oxygen generating plant to one of the hospitals in one of the town nearby Mysore. All in all, I think we are trying our level best to see that -- how to protect our employees as well as do our bits into the society as well. With that, I will hand over to Ranganathan to take down the overall snapshot of the company.

Thank you, Thimmaiah. The next slide is about the standard slide what we generally have, the segment what we sell, the tractor, trailer, bus, off-highway and military market and also the customers that we sell that continue to be same. We continue to penetrate with the customers and try to see our presence improved day by day. So this is a standard slide. So I go to the next slide. Again, this is more about the product range that we have is also been presented in the previous investor calls also. Light commercial vehicles to the extra heavy vehicle [indiscernible] channel. We have the product range both for brakes also as in terms of axles. So with this, I give it to Mr. Muthukumar to take over the automation side on the plant.

Thank you, Ranga. Good afternoon, everyone. The technology is fast changing, and your factory or your company is also working on making our company Industry 4.0 enabled. The new facility that we had created on our final assembly line is already Industry 4.0 enabled and capable. All the management information system, the manufacturing system, the poka-yoke including the traceability and real-time monitoring is happening in the plant. A separate plant has been set and that's producing, which is potentially helping the organization in transforming the zero defect -- towards zero defect and working with all the OEMs. You could see that the company is also working on digitalization of 4.0 on the different assembly lines that we have to ensure that our products are highly reliable and defect free to the OEMs, whether it -- it is in line with the diff case assembly line or pinion assembly line, it is basically the manufacturing. Having -- going into 4.0 is our mission and the company is working on next 2 to 3 years horizon to make sure that the entire plant, which is 40-year-old plant, into Industry 4.0. Having said that, the company has also invested in terms of the technology initiatives. The slide -- the next slide. I'm talking about the welding, which is 1 of the fundamental for manufacturing of the [indiscernible] axle is getting a lot of technology initiatives like [indiscernible] system, which is a torch-assisted seam tracking system to ensure that there is no defect on the welding. In fact, we have introduced a lot of [indiscernible] with a high-speed cutting, which will improve substantially the product costing, and of course, the rate in which we produce. The gear manufacturing has a closed-loop gear manufacturing system. Gear is basically a heart of the entire axle and we have introduced a new generation gear cutting systems into our organization. Of course, as I told you earlier, the assembly line is what we are making [indiscernible] in all the operations, creating visualization, the data acquisition, traceability on migrating ourselves to 4.0. I think these are the key initiatives the company has taken up to move to the next level. With that, I'll hand it back to Ranga.

Very good afternoon, again, all of you. A quick snapshot on the performance of the last quarter. Last quarter, our revenue was around INR 256 crores. We have grown close to about 523% compared to last quarter the same year. Last year -- the first quarter of last year, all of you know that there was -- entire country was locked down because of the COVID. So EBITDA, we stood this quarter at 6.5%. Again year-on-year, it's probably not a full-fledged comparison, but still the EBITDA 6.5%, 23% improvement. EBIT is at -- stood at 3% and [indiscernible] 5% improvement over the last year the same period. So by and large, the margins and the revenues we are focusing to grow. And so alongside the growth on the top line, we'll ensure -- we'll also -- the margins also will have some potential difference. With that, I go to the next slide. It's -- again, we've presented earlier. I think broadly, we're having the business strategy more towards improving our revenue and share our business with the customers. That initiative is still working on with all customers. And this has been basically driven with the value product what we're giving to the customers with the new products and our continuous focus on Industry 4.0 and other manufacturing process automation that just Muthu has explained. Actually, the 2 aspects is about the operational excellence and the growth of business, the 2 major business strategies we are driving through the automations in the manufacturing processes. Costs continue to be a key focus on us is our key drivers for our margins. We continue to focus both on the operational cost versus the material, commercial and the fixed cost expenses. We'll continue to drive that. And though there are temporary challenges around it because the fluctuating market demand. And nevertheless, we will be definitely come back when the market improves. But our focus -- and a very, very focused approach towards these parameters of cost reduction has continued. We will continue to do that in the future also. Safety practices, our -- 1 of the key elements is about employee safety. So as Thimmaiah explained the initiative, the COVID case, what are the measures we are taking it. We continue to focus on it and the [indiscernible] there is -- we are going to have an impact on our [indiscernible] completely prepared and ensure that employees and society at large is well protected. Over [indiscernible] operational process safety is 1 of the key measures we are managing it and ensure that employees are completely -- given an employee with a complete safe working environment for all the employees in the organization. And the last slide is basically an outlook from 2013, '14, till now how we have grown. As you say that, in the last '19-'20 and '20-'21, the revenue [indiscernible] And we really see the market, as of now, 2021, we have 197,000 vehicle production as far as M&HCV is concerned. And this year, the expectation is close to around 240,000 vehicles as far as '21-'22 is concerned. Hopefully, our agenda -- our objective is always to grow the business slightly ahead of the market. So our focus will be continuously focused on the growth of business that will be there. So with our strategic initiatives of grow revenue, enhance profitability and win the new businesses through operational excellence and customer value. So that definitely will be our core strategy. So with this, the presentation is completed, we'll open to the question and answers.

[Operator Instructions] We have a first question from Mr. Rohit Suresh from Samatva Investments.

I just had 1 question. I just wanted to know the wallet share that your company has for Ashok Leyland electric buses versus the normal IC buses. If you could provide me some details on that?

Rohit. This is Thimmaiah. Compared to the IC buses and electric buses, the volume percentage, overall India market as well as with Ashok Leyland, is very, very small. During the pandemic, of course, the bus market is not doing well overall. But in that, if you see that Ashok Leyland is producing the buses in 100s, not much, right, in a year. So it is not the right comparison that way. But that said, we are very well positioned in Ashok Leyland's electrical bus product. So the -- most of the buses what they are supplying, which is electric buses is with our axles.

We have next question from Mr. Sunil Kothari from Unique Investments (Private) Limited.

Sir, my question is on the way you talk about productivity improvement, cost reduction. We're continuously working on material costs, lowering and all those things. So would you like to talk some quantitative things, maybe over 2, 3 years, what type of cost reduction we are targeting, something in terms of margin, that would be really helpful.

Yes. Okay. So maybe Ranga also can add up and Muthu also can add. But I'll just tell you, Kothari ji. If you see the quarterly performance and then last yearly performance, even though we have gone through a significant downturn and a pandemic, the market, if you really see the market, last year, the market went down -- last 2 years, the market is not seeing at around 50% level, right, which compared to the peak. And even in that kind of a market where the market fell by 50%, we are able to continue to show decent profitability, and that's only coming because of the cost reduction activities we are doing. We are -- and also this will continue to be so, and we will continue to do the cost reduction activities. Why we are little hesitant to put a number and tally is, I'll give you our story or the concept of our cost reduction. Our cost reduction runs into mainly our work streams. The work streams includes, 1 is engineering cost reduction, which means we redesign our product to reduce the cost. Second is sourcing. We -- all the way we will -- ongoing basis, we optimize our sourcing activities in finding alternators, working with the supplier to do a value engineering along with the suppliers. The third is operational cost itself, which is mainly the productivity improvement from the manufacturing setup. The fourth is mainly the logistic cost reduction. These are the 4 areas of cost reduction. We continue to work. There is a dedicated team working on this. We do -- every other month, we do a brainstorming session to generate ideas and we run through a very systematic IL, we call idea implementation process, [indiscernible] stage 5 and take every idea through that. So why I'm a little bit elaborating on this is we have a process to do it. But unfortunately, as we can't put a number and say that, okay, because of the cost reduction, this is what is going to happen to the profitability, there are a couple of reasons. Number one, the commodity, the fluctuation. You all know how volatile the commodity market is. Even though we have back-to-back arrangement with the customers, but when the commodity prices goes up, that will have an impact on our profitability. Even though our -- the 100% recovery happens from the customer, but percentage terms, there is a drop happens because of the -- when the commodity goes up. That's not in our control and we have to absorb that and ensure that we -- even with that problem, we continue to demonstrate our good profitability performance. The second is at some point of time, at -- on some cases, when we do an engineering cost reduction activity, some of them we have to pass it on to the customer. There are 2 reasons why we do it. One is we also want our customers to be successful, so we pass it on and see how can we enable them to penetrate into the market, like mainly Ashok Leyland and other customers. And the second thing is they will also insist that when we do an engineering cost reduction that some of the savings should be passed on. So this is an ongoing negotiation and discussion we have. There is no fixed policy here. It's all based on the negotiation it happens. That is why we can't put a finger and say that, okay, we will -- this is what we will expand the margin because of the cost reduction. On top of it, the market is also so volatile that will also have its inheritance, little bit of cost problem. The only thing I would tell you is you see that we are operating at around not even 50% capacity utilization. And I'd say, last quarter, if you see, INR 256 crores is less than 40% capacity utilization. Even at 40% capacity utilization, we are able to demonstrate a 6.5% EBITDA. That is our strength. And you -- again, I can't give you a number, but you can imagine this INR 250 crores a quarter, there's a very high possibility that, that can go to INR 500 crores a quarter, right? Because of all the -- once the pandemic is over and the economic activities restarts and all those happens. And we have done INR 500 crores a quarter during '18, '19. And I'm very confident that it is just a matter of maybe a year or so, it will come back to that level. And you can see that when that happens, we will see the lot of benefit of cost reduction and all the -- our breakeven reduction activity, what we have done is going to show a significant benefit into the bottom line. This is a long answer Kothari ji, but...

Very useful.

It is important to understand the process we are adopting and what is the inheritant complications in the process because of the commodity and also freight rates and also some of the things need to be passed on to the customers. But our endeavor is how can we continue to expand our margin. We want to grow faster than the market. Market is not under our control, but we want to grow faster than the market and also continue to expand the margin.

Very, very detailed and very useful, effective answer, sir. So what I understood is these efforts we will be sharing with our customers, but definitely, we will also be benefited by something in margin over a steady state of business and at a higher capacity utilization, right. And sir, my next point is related to this only. We are marketing and sales are done by our parent JV with Kalyani, Meritor VHS, may I not be taking correctly. So what is our terms and condition with them. This is a cost-plus method or we decide the price for the customer? How it works if you can a little bit explain in detail this tie-up with our marketing joint venture.

Yes. This is not the cost-plus model. It is based on the end market pricing. There is a discussion that happens between the 2 companies. And to ensure and derive at a right product pricing which means Automotive Axles discusses with the MHSVL and decide the product pricing. They do an offer to the MHSVL and decide the product pricing based on the market, end market price and all those things.

Okay. So whatever customer pays, that is decided by -- between HVS and customer, not between Automotive Axles and customer?

No. This is also a little bit of involvement is there because, see, whenever the customer pricing is decided. MHSVL go and do a pricing, it is important for them to understand the cost structure also. Otherwise, they don't know how much to shoot on. So it is like end pricing is like a biparty kind of an arrangement to say that, okay, what is the best price we can offer to win the business. And then they work backwards to really see that what should be the cost we should drive towards. So that's how we do it.

Sir, sorry for my, I mean, repetition. But very plain and straight question is, are we getting benefited by the -- all the efforts we are taking or it's a cost plus some method and when we deliver this product to a JV and they sell it to customers. So are we getting benefits for all these efforts we are taking and may not be now, but over a period it will be reflected in numbers? That is my question. Or this marketing joint venture will -- or they will have more benefits of our efforts? That is my very straight question.

I will also probably give you a straight answer. Very clearly, all the cost reduction and any activity which is derived to reduce the cost, the majority of the benefit is going to sit in Automotive Axles. Because we are the ones who are working on it, and they are the ones who are reducing it. So most of the benefit will be sitting in Automotive Axles.

All right, sir. And, sir, just last question is last year, we have changed 1 methodology of reimbursement getting from our -- this joint venture entity regarding freight cost. Previously, we were getting reimbursement from wages. But I think last year, we haven't taken those reimbursement. So is there any policy change? And are we reasonably compensated for those costs, additional which we borne?

Ranga, you want to...

Yes. I will take this question. Yes, I'll take this question, Mr. Kothari. Yes, till '19, '20, the cost to cost getting -- we're getting reimbursement. And in 2021, it comes as part of the pricing itself. So the costs are booked at the gross value of the respective expense line items, and it is completely come in the product revenue. So that's the reason -- that's only change you can see in '19, '20 and 2021.

Okay. So the product price has been reasonably compensated?

Yes.

The cost of -- okay, okay.

It's just a presentation. In a different -- little line items have changed. That's it.

[Operator Instructions] We have next in queue Mr. Khush Gosrani from InCredAMC.

Am I audible?

Yes. Very much.

Sir, recently, Ashok Leyland has announced a deal with Dana where Dana has been selected as a preferred supplier for their electric drivetrain components for EV bus and EV vehicles, EV LCV. So how will this affect us and our EV strategy? And will it impact our order book with Ashok Leyland?

The straight answer is no. The reason is Ashok Leyland is actually the Switch Mobility, which is a different company. They have added arrangement with Dana in terms of electrical items. Mainly what we believe is based on our interaction, Dana is also into electric motor manufacturing, et cetera. So that is related to those, and axles perspective, we have a very good understanding and agreement with Ashok Leyland that what axles will go to which application, and I think we are protected from the axle perspective.

We have next question from Mr. Yash Mandawewala from Mandawewala Family Office.

Am I audible?

Yes, sir. Yes, sir.

Can you just elaborate a bit on the growth levels that the company has that are mentioned on Slide 10? So what exactly are the new business wins and opportunities that we are talking about? And can you also talk a bit more about what are the new products that are under development?

The number 1 is we are developing the brakes and also axles, which are not part of our current portfolio. We have developed and we are applicating it under ICV and medium-duty segment, intermittent commercial vehicle segment, and medium-duty vehicle segment. That's 1 way we are penetrating. The second is we are developing a medium-duty hub reduction axle. That's the new product, which is going to come in the market. The third important new product development, what we are doing is most of the OEMs are now looking at upgrading their axle portfolio into the higher-performing axles. For example, I'll give you in our nomenclature, 1 of the applications which used to use our 160, which is a little -- the highest at this point of time, biggest axle at this point of time. The engine is getting upgraded and they are going for a higher horsepower engine. With that, we are talking to them to also upgrade the axle from 160 to 185, which is 1 size bigger. At this point of time, that's not exist in the Indian market, and we have already bought that axle in the sense, really, from our global stable to India localized it. So that's the other area we will penetrate with higher size of the axles. That said, we are working on many new activities. Number 1 is our off-highway and military segment. We are considering that as a new vertical and we are developing new products, either for dump trucks, TLBs, wheel loader, RT cranes. So these are 1 area we have identified as our growth area, mainly on the off-highway side. The other is on the military side, multi-axle military applications is the other growth area we are working on. And then also on top of it, we are evaluating few other product lines. I can't give the names at this point of time. At least 3, 4 new product lines we are evaluating. And whenever -- and also are going through various levels of feasibility study, and it will -- you will see in the coming maybe a year or so, some of them will get start up production levels. And 1 thing I would mention is we are also working on providing an IoT solution for the axles and brakes. That's going to be 1 of the offerings we are going to do very soon. which means that on the brake side and axle side, we are going to provide sensors and IoT solution for ease of maintenance and also to ensure that the right time the preventive maintenance of the vehicle mainly from -- for our product happens.

Got it. Just 2 follow-up questions on that. So as a result of this, how much is the content per vehicle going to increase? That is number one. And for the military application products that we are working on, how far away are we from launching that? And how far away are we from seeing revenue from those items?

Muthu, you want to answer on the military thing?

Yes, Thimmaiah. Thank you very much. In terms of military, the company is working mainly with Ashok Leyland as a customer. And at this point in time, there are 8 different platforms wherein our axles have been tested, approved by the defense. There is a visibility of the schedule that has been given between 2021 and '22, '23, '24, '25, and we are progressing as we did. For example, whatever Mr. Thimmaiah was telling you, and last 3 years the efforts what we have put in to get this product approved by the defense. And today, our actions are approved in those products, which is mainly a multi-axle and vehicles that are exported from India to countries like Africa where our actions will go in. I can't name the model of the vehicle, but these are the platforms that we are working on.

Got it. And sir, on the content per vehicle, not for military, but for the axles and the brakes that we are working on for the current business?

So the content wise, at this point of time, the -- only the upgradation of the vehicle level, what is happening which is a little increase -- improvement in the overall percentage or content. It's not -- because we've not yet launched any new products outside of axles and brakes to improve the content. At this point of time, it's only because of our higher axles, what we are launching, and that is what is giving us an incremental content, which is maybe 3%, 4% more than what we are doing.

Got it. Sir, and are there any levers to increase our market share on the axle side? Have we been able to crack the business from Tata?