Automotive Axles Limited (505010) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Automotive Axles Limited Q1 FY '27 Post Results Earnings Conference Call hosted by 360 ONE Capital Market Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sailesh Raja from 360 One Capital Market. Thank you, and over to you, sir.

Yes. Thanks, Larry. Good morning, and thanks to everyone for joining into Automotive Axles 1Q FY '27 Earnings Conference Call. From the management side, we have with us Mr. Nagaraja, who is President and the Whole-Time Director of Automotive Axles Limited; Mr. Raman. K, our Interim CFO; and Mr. Kishan Kumar, Whole-Time Director, Meritor HVS India. . So now I'll ask Nagaraja for an opening remarks, post which we'll open for Q&A. Over to you, sir.

Good Thanks, Sailesh. Good morning, everyone. Thanks for joining us for this FY '27, quarter 1 post results call. First of all, as you are aware, the market was relatively moderate. But even with that, we had really good results. If I can recall, this is probably one of the highest EBITDA percentage we ever achieved. What we will do is Raman will run you through the financials, and then we will open up for question and answers. Over to you, Raman.

Thank you. Good morning, everyone. Thanks for joining us for the earnings call today. So I'm happy to present the following set of numbers. So for the quarter -- for the Q1 ended June '26, the revenue from operations stood at INR 5,168 million. And we had our other income, which includes specialty and nontreasury income, which is about INR 103 million. So this was also like there was a lot of market recovery that helped us have a good other income in the quarter. And overall, our cost of raw materials, like overall, our metal cost was about 65% for the quarter. So this is kind of helped by some one-off that we had to a small extent and then also some favorable mix from the products that we have sold in the quarter. So -- and then in our employee benefit expenses came down when compared to sequential quarter mainly for a couple of reasons. In the last quarter, we had deployed a lot of workforce because the volume was quite significant. And then we had pulled back. And the other thing that we had in the last quarter was also when we had the long-term settlement, we had taken some impact in Q4 as well, which is now moderated in the current Q1. And our other expenses remain fairly in line with the revenue. So we -- other expenses stood at INR 813 million. So overall, the EBITDA stood at INR 702 million, which is at about 13.6%. In the last quarter, we reported 12.4% EBITDA. At the same time, last year, we had reported 11.7% EBITDA. As Nagaraja mentioned, this is one of the highest EBITDA that we have reported. And moving down, I think we had -- the EBIT percentage also stood at about close to 12% which is again, close to a 1% improvement quarter-on-quarter and close to 2% improvement year-over-year. So see, broadly to notice, there is a some bit of help because of the mix that helped us also in this quarter. And the momentum is that we'll try to hold on to this. Especially the other expenses, some bit of details are like we had some cost headwinds, especially with respect to the post war, during war the LPG, and we had some increases in the tools and consumable business. So all that we have been observing the cost, we are in the process of negotiation and all that. But at this point, this takes into consideration the cost increase that has happened in this quarter. And moving on, the profit for the year stood at INR 455 million obviously, net of the OCI, it is INR 452 million at about 8.7%. So again, this is -- and with the EPS of about INR 30. So I think in the Q1 in the last -- that is the highest quarter EPS that we have reported. So that's from me. I'm happy to take questions after Kishan's view on the market. Over to Kishan.

Thanks, Raman. Good morning all. So I would probably bring our attention to how we ended the last FY, especially the Q4, and then how we were looking at the overall FY '27. Most of this was -- the fact that FY '26 was at the peak going back to the FY '19 levels. And then usually, the Q1, we see a dip. Even though we did see a dip, almost like a 30%, but that quarter, Q1 ended up to be one of the highest in the past several years at almost 110,000 vehicles in the M&HCV segment. And just yesterday, the MPC was giving the further outlook for the rest of the year and quarters. But also, there was a very specific mention on how the manufacturing industry performed in Q1, which also ended up in a very high GDP growth rate of around 7%, outperforming the earlier forecast. So Q1 as such, the markets performed very well. There are a couple of tailwinds. The momentum was carryforward and the OEMs did a very good job in maintaining the production and sales in both retail and dealers. Overall, it was a product mix as well as the new products that we launched. All that helped us keep that momentum from Q4 of last year. And as a result, as Raman explained, our financial performance also showed up is no similar way. So with that, probably Sailesh, we can go for questions.

[Operator Instructions] The first question comes from the line of Sucrit Patil with Eyesight Fintrade.

I have 2 questions. The first question to Mr. Mr. Nagaraja. Beyond the regular outlook, what are the top 2 to 3 execution priorities you're focusing on in the next few quarters? And alongside that, what we see as the biggest risk in demand shifts, regulatory changes or competitive pressures? And how are you preparing to manage them while strengthening Automotive Axles' position in the driveline and axle space? That's my first question. I'll ask my second question after this.

Okay. So the -- thank you, Mr. Patil. I will take the first part of the first question and then probably Kishan can answer the second part. So like we mentioned, our first priority is to ensure that we are ready with the capacity investment, what we have been doing to recollect that we are implementing a Phase 1 and Phase 1a of CapEx and nearly 40% of those investments are already done. And we have already started some level of production in that. So with this, we are expecting Q4 to be, again, a strong demand might be coming there. So we are preparing for our self. At the same time, like what Raman mentioned, one of the other area we are looking at it, how do we continuously improve our automation, bringing in more of automated lines, again, focusing on both safety, quality as well as improve our productivity so that we can continuously not only improve our top line, but at the same time, add to our already strong bottom line. Kishan, can you take up the second question -- second part of the question, please?

Yes, sure. Thanks, Nagaraja. Specifically the regulations and some of the trends that we have been very closely monitoring. If we look back probably 10 years ago, it was all about the emission norm, BS III, BS-IV and then there was also this axial load rating increase and some of the fuel economy norm. So we are behind that. All of our products today are protected and performing well for those changes. And then in the recent years, last 4 years, the BS-VI change and then the OBD1, OBD2 that followed with that. We do see a minimum impact on our clients because of those recent changes. Going forward in the next 4 years up to 2030, we are anticipating ABS norms and type 2 endurance breaking and the BS-VII as well. These 3 may not have a significant impact -- significant impact on our product lines, but what we are anticipating in addition is the more stringer passed by noise norms and HTF Phase 1. So both of these, what they mean is our products have to be more noise sensitive or should be having noise levels less than the current levels, what is in the industry. And other trends that we have seen in the industry is the increasing horsepower. There was a time when 60% to 80% of the market was within 120 to 180-horsepower that has significantly shifted over the several years, and it will continue to do so. And we will be in the range of 300-plus horsepower in most of the heavy-duty applications. And for that, our current product strategy and the products that we have launched recently and the ones in the pipeline are well matched. So with that, I think -- to summarize the regulations, we don't see a big impact on our product lines in the next 4, 5 years. Considering the market trend is, our products are getting bigger. There is a clear trend of higher HP and also shift towards the 4x2 tractor sellers, for which we already have a few products in the pipeline and in the market as well. Thank you.

My second question, again, Kishan yourself is. I just want to understand for guidance from a partnership point of view, how are you aligning Meritor's HVS Indian collaboration with Automotive Axles to drive long-term growth? And what risk do you see in global supply chains, technology adoption or industry dynamics? And how are you preparing to mitigate them? I just want to understand your guidance on this.

Let's talk about the next 5 to 10 years horizon for the CV industry, mainly in M&FC. So there are a couple of things. One, as I said, the regulation, the product makes which is difficult for any industry and that Indian industry also following. The advantage for us is we already have products in the Western world, which have gone through these changes. So it's about a matter of bringing them to India, 2 specific applications because our OEMs still operate in a very different powertrain segment. So when that happens, it's bringing the product here. So the technology is available, the timing is important. Second one is this is more on how we are working as 2 companies working together to serve the market, how is the demand shaping up in the domestic market? And what kind of changes in the product will impact the capacity and the investment, what AAL is making -- planning to do. This is not new for us. This is something we have been doing for several years since the formation of both the companies. And we are continuing to do so. One other aspect, which we also touched about is, we are also looking at as an overall global supply chain for Cummins drivetrain systems, how India can play out. So this is, again, not new. But with the new investments coming in, we have been more deliberate on what actually is our strength and where India can play a major role in contributing to the rest of the Meritor and drivetrain systems. So both of them together, which is more for commercial vehicle and the export scenario. We are also looking at the other industries, like defense example, and defense is a very totally different ball game. It requires a lot of patience. The gestation period for the products is much longer. And since they're all tender-based, they require a totally different set of mindset, even though there may be some overlap in the products, but we also need some certain unique features and unique, I would say, the demanding applications that depends poses we need a differentiation in the product. And then the last piece is the aftermarket, where there are things that we are doing within the MHCV we are selling through our distribution, the captive Meritor products. And also, we are -- this is more for MHCV. We are also increasing our oil mix product range, but that also will grow with the EBITDA market. One watch here is as we get into new products, the end market and the application demands more reliable products. That means that will have some way at -- starting from maybe 5 years from now, we'll see because of the increased reliability, the part that used to get replenished probably within like 1 year or 18 months, will probably extend to 3 years, 6 years. So this is bound to happen with the technology progression that we are seeing.

[Operator Instructions] The next question comes from the line of Milan Jan with Green Portfolio.

My question is around the CapEx line, of the INR 120 crores...

I'm sorry to interrupt, Milan. You're not quite audible. Could you please use your phone on the handset mode, in case if you're on handset. .

Hello. Am I audible now?

Yes, a little bit.

So my question was around the CapEx line. Of the INR 120 crore program, the question is that roughly about how much is the genuine growth capacity versus the equipment replacement? Because I'm asking for the guidance of the MHCV volumes broadly being flat, about 5 lakh till FY '20 -- FY '30 and the shift of it by 2x2, [indiscernible] shift is actually long. So I want to understand what's the break above the CapEx program?

So it is a little bit now challenging to split it in that particular way. The way we are doing is, obviously, when we are putting up a new CapEx, it is to either to upgrade the existing line or equipment or to completely replace that with a fully automated equipment. So the bottom line is we are putting up enough capacity to see the next 2 years to 3 years, whatever the market growth is going to happen. And like Kishan mentioned and also keep us ready so that the peak volumes, which comes in a particular month or a quarter and also the opportunity available for the potential exports we will be having there. So roughly, again, the capacity depends on the product mix. Roughly, I would say that we are looking at anywhere between 25% to 30% capacity improvement.

Okay. All right, sir. And so my second question was around the next CapEx phase, that in this partly on the export outlook and also the other that has required the American Axles Indian business. So I want to understand that how our exports and OEM opportunities are included between American Axles and Automotive Axles?

Again, we did mention during our last several -- last couple of investor calls, American Axles and Automotive Axles, we are competitors. We don't have much information about what American Axle is doing. But we are focusing on the our existing customers and trying to get additional -- increase our share of business and also acquire new customers. And customer -- and exports is to the mainly for the other CDBS global entities. So that way, our focus is on what we already have and how we can go up on that. We don't have -- we cannot comment on any of our competitors' strategy or their plans.

The next question comes from the line of Saket Kapoor with Kapoor Company.

Hope I'm clearly audible to you? Hello?

Yes, please.

Yes. Yes. I joined a bit late. So if you could have explained in the earnings -- opening remarks also, there is a margin expansion on Q-on-Q basis. So is it a result of any price hike that we have received that has been factored into? Or what explains this margin expansion? And going ahead for the current financial year, what should be the steady state of the PBT margin or EBITDA margin that we envisage?

Raman,, do you want to take that?

I'll take that. See, like our top line kind of varies along with the market. So if you see in the last quarter, I think we had reported about INR 669 crores of revenue. This time, obviously, the market was at the peak. This time our revenue stands at around INR 527 crores. So -- but when you asked about -- on a percentage terms, that is the range, somewhere between 7.5% to 8.5% is the margin range that can at least as an overall band that you can take. So we will be operating at that level. And I obviously mentioned the PAT, not the EBITDA. So I think this is something that we have as a target, and we'll be working in this range.

Okay. Sir, even on the 2030 road map also this is what the margin range will be or we will improve upon with the product introduction also and our capacity also moving up? And second point is, sir, I think for the current year, we would be -- there will be an additional capacity that will come into play. So how will this current year shape up in terms of the volume understanding if you could throw some light?

Okay. See, I think your previous question was about the next few quarters, right? So that's why I gave the broad range for the quarter. But when you see a 2030, obviously, again, the market is expected to move up not as well as we are also increasing our capacity. So that's going to bring in some economies and the scale benefits. So obviously, we will be moving up the ladder in terms of the margin, keeping 2030 aspirations in mind. So I think -- I believe that answers that part of the question. And second thing on the capacity expansions, see, like overall, when you see our return on assets has always been pretty strong. So I think we'll be continuing to focus on that maintaining our return on assets or rather the return on capital employed and trying to improve that upon. I hope that answered your...

I'm trying to get some more sense of how are the incremental volumes likely to pay -- play in the ensuing year? And also with our new product introduction, I think so and also with the incremental capacity, how are things shaping up for Automotive Axles for the year '26-'27? If you could just give some more ballpark understanding in terms of some quantitative number that would surprise.

So I think we try to avoid giving kind of a future guidance. But partly, as Raman mentioned, as we bring in capacity, there is a certain business if you are not able to address either because of a capacity constraint or otherwise, those are all the potential addressable business opportunity that we will be looking into. But at the same time, like Raman mentioned, if the market volumes like a previous year, if it goes slightly higher, we'll be able to do a much better conversion at a much better margin compared to the existing one. So the bottom line is capacity we are putting to make sure that we are ready when the opportunity comes. Otherwise, in the industry, if we don't put the capacity you cannot even go after any potential new opportunities. So we continuously, like Kishan mentioned, looking at adjacencies, looking at the defense segment and all other areas, and also increasing share of business with existing customers. So the prerequisite is, we have the required capacity, not just at internal capacity but also through the supply chain.

Okay. So the small point which I'm trying to make understand, given the current business environment, what are the likelihoods of our company performing in comparison to the previous financial year in terms of volume growth? And secondly, sir, I think with some notification from the state government bus department in terms of some floor height and all who are pending when you address for investors in the last call. So any further clarification on the same and the introduction of those axles into the buses, what's the road map? If you could just articulate these 2 points?

Kishan, can you take that, please?

Yes. I would probably answer that much more broadly. So we keep talking about the product mix impact and product mix is something that is pure end market demand. For example, there are seasonal demands, for example, the buses, school buses specifically. They all get into the order board just before the school starts the replenishment. But today, what we are broadly seeing this year and maybe most part next year, the demand is through the replacement cycle for the overall industry. So the vehicles that were sold, let's say, 2017, '18, and then there was a blip in between because of the COVID. They are now getting into this 8 years -- 7, 8 years, 9 years service period from the customer. So that is going to be a big shift in the volumes that we are seeing. But when that happens, in 2017, '18, we did not have the heavy tonnage VW vehicles. So today, the end customer has an option to upgrade to probably, let's say, instead of 2x6, we can go straight away to a 10x2 or a 4x2 tractor. So this is where we are focusing right now. So we want to ensure our capacity and the products available for the demand, they are balanced so that we hit the numbers with the right product mix. The second is, which is a segmental shift, which is what we were talking about in the earlier investor calls is about bus axle. As I mentioned last time, the floor height is probably every OEM has a different way of addressing that. So which is good news because most of the cases, there is no need for a completely different product. So it's like within the existing product portfolio, whether it is with us or not, OEMs are able to manage it. And our plan for the product launch in the bus that is still in the pipeline, the validation is going through. And I mentioned about the noise requirements, the noise level, lower noise level requirements. That is where we are focusing. We don't want to do another iteration knowing that there is a passerby noise regulation that is coming in. So we want to ensure the product that we launched has everything powered in terms of regulation and also marketing. I hope that answers very broadly what you are trying to ask.

So just to conclude here. So the reason which we were very about is now behind, and now the product introduction will happen as per the plan. So that understanding is correct because there was some ambiguity. .

We need to understand the regulation. That's it.

Okay. And lastly, sir, on the incremental -- on the volume increase. If you could just give us some sense how is the current market dynamics from the OEM shaping up in terms of their program schedules? And also with new product introduction from our side, what should investors look forward in terms of the volume growth because turnover is a concern of RM conversion. And secondly sir, did we lost some market share from our main OEM Ashok Leyland for this quarter in terms of -- in terms of the total price, these 2 points, if you could throw some more light, sir.

Okay. Let me give a very high-level outlook. So beginning of this year, we had a production which was 15% to 20% lower than the last year. And now the revised forecast, which is also what the industry is speaking about is, it could be less than 5% to 10% compared to the last year. And just for reference, last year, the industry volume was 480,000. So if you do the math, we should be north of 450,000 best case same as last year. So that's how the rest of the year may pan out. And Q4, as expected, is going to be another peak quarter for us, barring the headwinds that we see, the geopolitical tension and the monsoon effect. These are the 2 things we are watching very closely. However, currently because the delayed monsoon. That is helping the industry because there is still a good amount of freight movement and the replacement is also happening. Coming to the other part of the question, share of business, product mix impact definitely has some impact, but that is not meaning for this year. That is all this. So then there are more buses, and that is exactly the reason we want to launch the bus axle. We do see a slight dip -- but it's not a loss of share of business is basically how the market relates.

Only sir, there then to conclude. So Q2 is also in line with what exactly we have exited Q1 since you said that delayed monsoon and all have kept the demand engine on the uptick only, and this is what should be the the steady state of deliverables for -- since we are now in the month of August. If only if you could give us some qualitative number of how the environment has shaped up post the exit of the first quarter..

I'm just thinking, already I answered in terms of the overall industry outlook. The best case is matched last year. And the trend will be very similar, reasonable Q2 increasing demand in Q3 barring the monsoon question that I had and then Q4 ending at a peak. And that's how we see as a qualitative overall year.

[Operator Instructions] The next question comes from the line of Samarth with Janak Merchant Securities.

Sir, I'm audible?

Yes, Samarth.

I have only like 2 questions. First is our overall sales growth has been lower than the CD production in the country for quarter 1. So have we lost any market share to our leading customers. And going forward, as even American Axles enters the larger trucks, larger truck axle, do you see any potential loss of market share after 2, 3 years?

Thank you, Samarth ji for the question. The answer but largely is the product mix and how we were able to convert some of the increase in the market in the last year -- last quarter. So combined to that, maybe you do see a dip. But if you really look at how we performed from the previous quarter of last year to this quarter with a 30% lower market, we were actually better than 5% as for what Raman has already given the financials. And also the conversion of the new business, the products that we launched, that also contributed largely to the bottom line there. Coming to the second question there. The company that you are referring, it's not new in the industry. They have been there in the several years. And both of us are doing businesses in the same segment with some customers similar for the customers. So for us, our strength is our product strategy and the manufacturing capabilities that we have in the country. So I don't see that as a threat. It is any to competition, how they would play out in the market and which is independent in this case.