Divgi TorqTransfer Systems Limited (DIVGIITTS) Earnings Call Transcript & Summary

Hello, and good afternoon, everyone. On behalf of Equirus Securities, I welcome you all on the fourth quarter FY '23 conference call of Divgi TorqTransfer Systems. From the management side, we have Mr. Jitendra Divgi, who is the Managing Director; Mr. Hirendra Divgi, who is the Whole-Time Director; and Mr. Sudhir Mirjankar, who is the Chief Financial Officer of the company. Without further ado, I hand over the call to Mr. Jitendra Divgi for opening comments, post which we can open up for Q&A. Over to you, Mr. Jiten, sir?

Yes. Thank you, Ashutosh. It's a pleasure. Welcome, everybody, here to this webinar. And we are pleased to present our first inaugural set of results post our IPO in March of '23. Without further ado, let's just dive into the details. So as you can see, we've had a very satisfactory year, and you can see that from last quarter and going back a year to FY '22, there's been significant growth in revenue, EBITDA and PAT. And this is sort of a consistent, as you will see in the numbers going forward in the presentation, with the sort of results we've had in the last 3 years. I'm happy to report that there is a good amount of progress in business development that is going on. And while there are some asymmetries in the composition of the business, I think we will make good as the year unfolds. And our business in EVs, exports and other transfer case customers bears fruit. In terms of continuing our asset acquisition for future growth, that is underway as envisioned in the prospectus, in terms of the objects of the issue. And I'm pleased to say that we are sticking to that focus quite well and making a good progress. Continuing on with the presentation. I think this particular slide is particularly illustrative and enlightening. And you can see that across revenue, EBITDA and PAT, we have sustained a very healthy CAGR. In terms of return on invested capital, I'm happy that despite additional investments and the growth, we have managed to sort of sustain ourselves in the ballpark range of the numbers that we've been operating in. And as the EV business, and we have some updates in terms of our facilities that are coming on stream, as that settles down, I think this growth path will continue. I just want to take a moment and dwell on statement of the profit and loss. And you can see again that, on a year-on-year basis, the growth numbers are quite encouraging. This is on an annual basis. And for purposes of generating a more informative perspective, we have set the numbers against the backdrop of the last 3 years going back to FY '20. For the benefit of members who may not have referred to the prospectus, we had given FY '20 as the starting benchmark here. And so we are measuring our progress relative to FY '20. A quick snapshot of our balance sheet, which continues to remain strong. We have a significant amount of investment that is going in. So you can see that reflected in capital work in progress, for a new plant that is intended to house our EV business and the work we're doing in automatic transmissions. The other thing is that the trade receivables, you can see are -- they reflect increased domestic sales with its additional GST component. And so the number looks inflated compared to previous years when exports were significant and the GST component was limited. But overall, you'll agree that it's a strong balance sheet and the right place to be in, as we go ahead. Any questions at this point in time?

We will have -- we'll first have the presentation then probably we'll start the Q&A round.

Okay. So what we wish to do is I wanted to get to the meat of the presentation, which was the numbers and then give members an update of the progress that has happened this last 1 year and particularly in the last 4 or 5 months. So as many of you are aware, we are an old company based in Pune. We have 3 manufacturing plants and one of which in -- the fourth one is coming on stream about 50 kilometers south of Pune. And broadly speaking, we are in the business of making various types of gearboxes for the automotive industry. The scope of offering includes specialty components that go into these products. And the component business is an equally attractive offering that we have, not just in India, but globally. So as you might expect of a company like us, we have several market customers. And through some of the world's preeminent Tier 1s, we reach out to global OEMs as well. We have in place a technology license agreement with BorgWarner and a product development agreement with Hofer Powertrain of Stuttgart in Germany for DCT automatic transmissions. And right now, the big focus for us is EV transmissions that we are developing and launching for Tata Motors from our plant and Shirwal near Pune. So I just want to, not dwell too much on this, but highlight the point that we continue to have a very encouraging run since we separated from BorgWarner in 2016, infused private equity capital between 2016 and 2018, and then prepared ourselves for the IPO, and had a successful IPO, the first of 2023, on March 14, 2023. What I have done is in the most recent years, I've listed some of the highlights of new businesses that we have won. We have a significant transfer case contract from MG Motors in Halol. For the Gloucester SUV, we've been awarded EV transmissions, the contract for 3 different models for Tata Motors through TACO, Tata Automotive Components. We've been awarded significant new business for new model changes that are going on in the U.S. market through BorgWarner at their plants in Seneca, South Carolina in the U.S. and at Irapuato in Mexico. I'm also very pleased to inform you that both at a component level and a system level, we have a significant amount of business coming in from Mahindra for their EV segment. And to cap it all off, we have also won the transfer case business. for the Force Motors Gorkha SUV model. So you would agree that in the last 2.5 years, this run of continuous business development and market innovation, product innovation continues unabated. It's not listed here, but we are also in the middle of executing one of India's largest defense orders for new 4-wheel drive vehicles that the Indian Army is acquiring from Indian OEMs like Tata, like Mahindra and Bharat Forge. So these are new high mobility tactical platforms as they're called. And I'm pleased to share with you that, on several of these models from various OEMs, the common feature is the Divgi TTS 4-wheel drive transfer case. Post our IPO, our shareholding as it stands today, is encapsulated in the inset there on the bottom right-hand corner, and by way of information for our members, that is the current shareholding that we have. Very quickly, I want to just touch upon some highlights, not spend too much time, keep time more for questions. But I want to reiterate that we are one of very few Tier 1 suppliers who bring a system-level capability. We are able to do that because of an unremitting focus on research and development and trying to map that onto market needs. The long-term relationships we have with market customers obviously helps us in terms of the insights we need to sort of fuel and power our development. We match all of that with strategic investments in manufacturing. And I think being able to do a lot of this in-house helps us get competitive from a cost standpoint. And all of that is done under the overall sort of shepherding of a good professional team led by a highly experienced Board of Directors. And I think I've already touched upon the financial outcome of such an approach. So to quickly recap, we have 4 verticals or quadrants that we are working in, manual transmissions and synchronizers, 4-wheel drive systems, both on a rear-wheel drive and front-wheel drive. What the dual-clutch transmission quadrant basically reflects is our initiative in the automatic transmission space. And then we have offerings for electric vehicles. This is certainly a segment that seems to be surprising everybody, especially in the light of the success that Tata Motors has had in this segment. What I wish to state here is that we are not limited to the systems business. And the reason for that is the systems business has a longer gestation period. So to fill out the gaps that can emerge between winning new businesses, we have the ability to develop and market and sell, compose specialty components that go into products like this globally. And the investments we made for component manufacturing actually help us make our products more cost effectively. And I dare say that on a global scale, we are one of the most competitive at the volume levels that we are at. So -- and I think that gives us a sustainable basis for our business, the fact that we are globally competitive and at the same time, gives us the financial returns that I think are expected of us by the shareholder community. A little bit on our R&D. Some of you may be familiar with this slide. So we integrate many diverse knowledge and technology streams in the products and services that we offer, both in hardware and software. It's interesting that with the advent of EVs, this has been raised to a new high in terms of in-house testing capability and software-based simulation of designs that we are developing. And what it means is that we are able to develop products with shorter lead times and are an effective one-stop shop for the kind of full-service, end-to-end handholding that is required at an OEM today. With the advent of EVs, the lifecycles of powertrains is also shortening, which means that Tier 1s, such as us, need to develop products with a short lead time and then be flexible enough and agile enough to adjust to both technology and market changes that can then come about. And I'm happy to say that the investments and the sort of moves we made early on in the last 6 years are standing us in very good stead as we go ahead. Now all this means that we are now in a position to offer solutions in these various segments. conventional ICE, manual, automatic and 4-wheel drive solutions. We have offerings in the hybrid space. We are one of very few suppliers in the country, mass producing components for hybrid powertrains built by Toyota. And these are supplied to their hybrid powertrain plant now in Bidadi, in Bangalore, and it's been in production now since last July, August '22. And of course, in the battery electric vehicle space, we have had a good measure of success now with the award of the business from Tata, and both at a component and systems level from Mahindra. And we continue to get RFPs globally in the space. And I think as time goes on, hopefully, you will see the results bearing fruit. What this does is, this is a market study that was done, I think, by CRISIL, and it was part of our prospectus. And I'm just sharing this again to give you a feel for what the market size is as we go forward. And we look at a long-range plan going forward from here. And what we've done is looked at the various product segments that we are operating in. And through the planning horizon in front of us, what growth prospects we are seeing. And I think this is the vision with which -- this is, mind you, not the addressable market, but the overall market size. And it's growing, as you can see, rapidly from around 15 -- it should be INR 15,000 crores to almost INR 30,000 crores. Here, just a quick word that not only do we have long-term relationships, but we get involved early on in the development of powertrains. And it's interesting that in the last 6 months, as our capability has advanced, we have had many customers approaching us, both in the passenger car space and light commercial last-mile mobility space for solutions on transmissions. In the EV space, I might add that a particular acute pain area for OEMs is noise, vibration, harshness of their powertrains, where our one-stop shop kind of integrated capability is a strength to help our customers solve these problems effectively and speedily. And I think that we feel is a distinct competitive advantage that we bring to the marketplace. So early involvement means you are integrated into the platform of the customer. So whether it's MG Motors, Tata, Mahindra or customers overseas that we are working with. And once you are part of that platform, you're likely to remain with it through the lifecycle of the product. Again, this is a slide that I think I've shared in the past, but it's updated and I'm pleased to let you know that a few weeks ago, we were again awarded by Toyota for quality and delivery. This time, specifically in the hybrid component development for the new hybrid powertrains that feature on the Grand Vitara and the Toyota Hyryder and Hycross. So I'm pleased to report that the appreciation that we get from the industry continues and we sustain that. And these are last 2 years awards that we have won at Toyota and Mahindra. Our investments in manufacturing capacities continue. And I'm just giving you an overall view of the capacities that we have put in. But of special focus is our new facility, which is now taking shape. It's practically ready, just finishing touches going on. And even as we speak, our new indigenously designed and developed transmission for Tata small cars is launching from this facility, in Shirwal in Pune. Our facilities in Pune and our plant in Sirsi, in Karnataka, this is the kind of equipment that has been invested in. And I'm happy to report to you that, in terms of state-of-the-art, this -- our company now brings capability and -- a capability that is basically second to none. The best of the brands from around the world; from Japan, South Korea, Taiwan, Europe, United States are available in our facilities. This is a shot of the -- it's a collage of the equipment we have at Shirwal to assemble and test our new family of EV transmissions. On this -- this line is flexible. It can build products from fairly heavy-duty SUVs to small 3-wheeler transmissions as well, and has a capacity of more than 100,000. This is the new transmission that we're launching on the Tiago, Tigor and Punch at Tata. So you can see the car, the packaging on which we are shipping product, and the transmission itself. So we continue to be led by our experienced Board, and for new members who are seeing this for the first time, but who are from the capital markets, Mr. Praveen Kadle needs no introduction. And most of our directors, as you can see, are nonfamily, external, independent directors. We have a professional management team. And what is significant here is that the majority of our team members are -- have been developed from within the organization. We have a very robust organizational development process. And the focus is to develop leaders for the future. And I'm happy to say that most of the people that you see here are -- started their careers with us as trainees. So in summary, I conclude and -- these are the sort of highlights that I think continue to keep our company unique. We operate at a systems level. We have unique offerings, strong R&D means. There's continuous innovation and invention. We are solution based tool for our customers. We package those solutions in distinctive products that we manufacture at world-class levels, with world-class equipment, and under the overall guidance of an experienced management team and Board of Directors. And I think that -- with that, I'll conclude my remarks and open up the proceedings for questions.

Thank you, Jitendra, sir, for the detailed opening remarks. Ladies and gentlemen, we'll begin with the question-and-answer session. [Operator Instructions] So we have our first question from Mr. [ Pradhumna ].

Congratulations on a decent set of numbers. So my first question is regarding the EV transmission business that we've won with Tata Motors. So when are we expecting this to commercialize? And on the same topic, like what could be the realization we'll be looking at and the wallet share for the particular models that we'll be supplying, how much would that be? And secondly, sir, more towards the outlook for FY '24 and FY '25. So are we like -- can you give some sort of guidance where our revenue and margins could look like? Or maybe some guidance on the order book which we might be having? And lastly, you spoke about certain EV components that we've won with Mahindra. So could you elaborate a bit on that as well? Like who were the existing suppliers we were replacing? And what kind of components we have won? Yes, these are my questions.

Thank you. There are several components to your question. So I'll go step by step. But if I slip up, please bring me back and I'll make sure that your question is systematically answered. So at Tata Motors, actually, we are in the middle of the launch process. The product, we have finished all the testing. And in the -- from June onwards, July, we will be seeing the ramp-up. The vehicle -- the target vehicles that we are on are currently in the market with imported content which will be obviously localized as we come aboard the supply chain. So you could say that the commercial realization is upon us. And Q2, I think I made a reference to that in one of the slides. Let me -- if you see that second point, Q2 FY '24, we expect this to pick up substantially. As I said, the capacity -- overall capacity on the line is over 100,000. Obviously, this will have a step-by-step approach as Tata sort of stabilizes its small car electrification program. As you are aware, the Tata Motors started the electrification with the Tigor sedan, and then the Nexon SUV. And a few months ago, they launched the Tiago, and there has been, in the social media, announcements that we are seeing also on the Punch and Altroz that are likely to come. So we are on sort of this space of Tata Motors. And the numbers are pretty substantial, as you said, which is why there is this capacity investment of 120,000. So it's essentially the nominal planning for capacity is at 400 per day, okay? That's -- so the program is upon us, the products are developed, and the business is up and running. We will see those numbers unfolding in time to come, hopefully, second quarter, we will have substantial results in terms of the fruition of this program in the marketplace. As far as the guidance is concerned, I don't want to sort of get into the specifics of this. But suffice it to say that if you look at our track record, there is a certain promise implicit in that. And over -- our mission, I feel, is that over a 2- to 3-year period, we want to sustain this sort of performance. Obviously, that has implications for the quarter-wise progress and annual progress. But in this business, there are -- there is a gestation period. We are, as you've seen from the presentation, unique in terms of the systems offerings that we bring. And our experience is that when you have high-technology, a complex bundling of technologies and features in a product that is integrated in a customer vehicle, these development cycles are a little long. They take some time. But once they're up and running, they will last a fairly long duration. And it's -- you are sort of married to that platform for the duration of its life cycle. A platform -- powertrain platforms in India tend to have fairly long life cycles, unlike in the West, Europe or North America. So that sort of is at the heart of our sustainability. So we are -- the other thing that I wish to state is that, which we've alluded to in this particular slide, is that we are seeing a strong revival in our exports, which last year was dented a little bit because of the Ukraine war. We had very good exports to Russia that were dented. And the geopolitics with China had also affected us. In the U.S., we are going through some lifecycle changes and the new programs are coming on stream now, with -- as I mentioned, with BorgWarner in the U.S. and Mexico. Our business development register or order book, as some people call it, is robust. And we are confident that exports will -- we will be able to bring exports back to around 25% of our portfolio over the next 12 to 15 months. And the asymmetry that is there in the business with respect to products and customers will settle down to a more balanced kind of portfolio as customers like MG, the Tata EV, our exports, and the work we are doing in the Far East with Toyota bear fruit. And I conclude by saying that, what I said, I think in our track record, there is a promise that is implicit. Those are historical numbers to which I think the -- it would be fair to say that shareholders will expect us to hold ourselves accountable to, to that kind of performance. And that, I feel, is our mission going forward. So maybe that's a long-winded way, but I think -- I'm sure I've answered your question.

Yes, so really comprehensive, thank you so much. Just one part which got missed maybe was with M&M, I was just trying to understand...

Yes, you said the -- I'm sorry, yes, that was the last component of your question. Yes. At M&M, the areas we are on, include components for their last mile delivery 3-wheelers. We are looking at components on the XUV 400. We are working on their light pickup trucks electrification and also complete systems for 3-wheelers. But there, again, not just for Mahindra, but the overall 3-wheeler electrification industry, which includes many start-ups as well. So the idea there is, and I think this is the advantage of being an independent developer and supplier, because we are able to bring our standard architecture to bear on the market and understand the trends in the marketplace, design our own architecture, and then develop specific designs within that. The advantage is that we are able to then bring these standard architectures to bear on solving problems at different OEMs. So the turnaround time for the customer, the overall investment required then in terms of engineering and tooling becomes optimized for our customers. It keeps us competitive, and at the same time, profitable. So I think the heart of this is being independent, being able to design and develop products for the industry. And as I said, the most acute pain area that we are observing for customers in the electrification space is noise, vibration and harshness. And these are problems which we feel the industry might be underestimating. And we have the solutions to handle these sort of acute problems that OEMs face. And that's what we are doing, I feel at both Tata and Mahindra.

We have our next question from Mr. Rakesh. Since there is no response, I will move to the other participants. We have our next question from Mr. Pramod.

So first question is with regard to the 3-wheelers. Considering the complexity under which you operate in the cars, don't you see it's much more dilution when you address the 3-wheeler market?