Gabriel India Limited (505714) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gabriel India Limited's Q3 FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Kolhatkar, Managing Director of Gabriel India Limited. Thank you, and over to you, sir.

Thank you. Good afternoon. And sorry, you'll have to pardon me for my throat. I'll be clearing my throat -- got a bit of throat infection. Anyway, once again, good afternoon to all, and welcome to our call after our quarterly results. With me on the call is Rishi, who's our CFO; and Nilesh Jain, our Company Secretary. We're all together here from Pune. And I hope you had the time to go through our results and the presentation, which are posted on the stock exchange after our Board meeting on 14th of February. So before I take you through the presentation, I'll just give a brief background of the industry environment which, again, most of you are aware. The challenge does not seem to be easing off at all. I think even the month of January, the downtrend continues. I mean while there was an expectation that there'll be a lot of pre-buy that will happen in the BS4, but I don't think it has happened to the level of expectations. While maybe, yes, there's a slight -- it's slightly better than December, but that's not a good benchmark for all of us, because December, again, cyclically has been always pretty low. So seven substance, it's -- the auto industry is reeling under its worst-ever sales fall in, in fact, in my career and in 30 years that I've seen -- I've not seen such an extended, prolonged and also to this magnitude, the downfall that we are currently witnessing. So it has affected again all the segments, right from 2-wheelers to 3-wheelers to commercial vehicles and including passenger cars. Only the segment that possibly has bucked the trend, to some extent, is the UV segment. But again, as I said, there's hardly any differentiation now between UV and passenger car. It's a very fuzzy line. Both are, at the end of the day, basically passenger car as far as the customer choice is concerned. The reason for the slowdown has been a mix of cyclical, structural and regulation-led. We also recently had the budget. And again, all of you have noted that the budget really has not come out with any direct benefit -- I mean or any direct measures that are going to benefit the auto industry in the short term. Long term, yes, I think we can look forward to increased spending in the road infrastructure as well as the focus on the rural segment. So that may bring in some results going forward. Again, it will all depend on how the monsoons come up. But at least those are the 2 plus points as far as auto industry is concerned when it comes to the budget. And if we talk about our GDP growth rate, again, that's also a known figure that it has actually come down to a very low figure. And IMF has recently lowered the forecast for 2019 to 4.8. And I mean personally, I don't think this will change greatly in the coming year. So we'll have to wait and watch on that front. Of course, a big impact that we all are foreseeing in the start of the year is the transition from BS4 to BS6, that's from April '20. This will definitely have an impact on the vehicle buying. We're already seeing launches by all customers. So the good part is all the customers are ready with their BS6 models, and they're launching them. So we are clearly seeing the kind of impact it will have. Especially in the 2-wheeler segment, the price increase has been in the range of 9% to 11%. The petrol car, there's a very small impact, which is just about 2% to 3%. But diesel vehicles, again, will have -- diesel cars will again have a huge impact of almost 10% plus and, similarly, for the commercial vehicle. So this definitely will post some challenge in terms of the sales, which again is expected by the industry from April onwards. Now we had expected something to be announced on the scrappage policy as far as the Commercial Vehicle segment is concerned. That did not happen, but yes, the Minister did mention that it's in an advanced stage. And we'll have to wait and watch on that aspect as well. So overall, if you see the 9 months for which we are discussing today, the industry has seen a decline of 13%. The sale of passenger car declined by 16% in April to December, 9 months. And in that, the passenger cars declined by 23% and the vans declined by 37%. I mean the vans mainly because the Maruti van, as you know, got discontinued, which was among the highest-selling vans in the country, got discontinued from April owing to the meeting of safety standards. The sale of utility vehicle actually increased, which I already told, it bucked the trend. It increased by 6.4%. Commercial Vehicle was the worst hit, a decline ranging from 20% to 40%, if you see the heavy commercial vehicles. This is mainly on the backdrop of, of course, lower economic activity. And we also saw the change of axle load norms last year, which has clearly increased the overall capacity available in the market. 3-wheeler sales declined by about 3%. And 2-wheelers, they also show -- did show a de-growth of almost 16% for the 9-months period. So this is the context that we'll have to look at the results from, I mean challenging times, really, and they continue. So the only thing that, of course, we can do is to ensure that we keep looking at tightening our ship, tightening our belts and raising cost month on month on month, which is what we have tried to do, as I had mentioned in the call in the last -- I mean after we did our -- I mean the H1 results. We did kick off a very aggressive exercise for cost reduction within the company. I think that has started bearing some fruit, which you can see, to some extent, in the results that we announced for. If you see Q-on-Q results, you'll be able to see that reduction bearing some fruit. So this is what is the summary of the 9 months. I will now jump to the presentation. I request you all to now refer to the presentation. And to start with, let's look at Slide #3, which is the financial highlights for the 9 months. So revenues of INR 1,445 crores in the 9 months of '19/'20 compared to INR 1,566 crores. Of course, last year was the best year that we had ever. So I mean of course, those volumes will take some time to come back based on market conditions, but we posted a revenue of INR 1,445 crores in this 9 months. EBITDA of INR 105 crores, almost, compared to INR 143 crores in the last -- in this comparable 9-month period. The margin of EBITDA has now just inched up to 7.2%. I'm talking of from the quarter perspective. A PAT of INR 58 crores in 9 months current year versus 70 -- almost INR 78 crores in 9 months of the past period. But the good part is the cash flow from operations remained healthy and remained strong. So you had cash flow to the tune of INR 110 crores in 9 months compared to INR 70 crores in 9 months last year. So this has been our focus, which we have also mentioned in the past. So this is as far as the Slide 3 is concerned. If we move to Slide 4, which is the P&L statement, while I'll not go through each figure, but certainly, you can -- if you -- if I draw your attention to Q2 FY '20 versus Q3 FY '20, so both the quarters of the current year, which is the first column and the third last column. So the sale has actually dropped from the Q2 of INR 472 crores, it has dropped to INR 455 crores for the quarter, so a drop of almost 4%. But due to the measures that we took to reduce our breakeven point and operation cost, we are able to report a slightly better EBITDA of 7.1% compared to 6.6% in Q2. So that's an improvement of almost 3% in EBITDA. So while sales were down, we did manage to improve our margins in this quarter. I mean of course, compared to last -- the last quarter, Q-on-Q, certainly the performance is lesser -- much lesser than what we would have expected. I'll move on to Slide 5, which is again, I mean the P&L statement for 9 months. We just discussed the broad summary on -- when I started on Slide 3. So maybe we'll move on to Slide 4 (sic) [ Slide 6 ], which provides the segment mix and the channel mix. So here, what has happened, of course, is our Passenger Car volumes have improved, so this has led to a little shift in the segment mix. So in fact, our Passenger Car segment has moved from 18% to 22%. And also CV has slightly improved. In fact, it is not that the 2-wheelers, we have lost any market share. It's just that the market has come down by almost 15%, but we still have managed to post a growth in our 2-Wheelers segment. We have -- so our steady share increase in the 2-Wheelers continues. If we -- I mean in terms of the channel mix, of course, for the 9 months, we can see the OE is still at 85%. Aftermarket is 13%, a slight improvement. Aftermarket, we have done really well, I must say, because I'm aware of what is happening in the industry. We also looked at our peer companies within the group as regards to the challenges in aftermarket. But we have -- Gabriel has been able to maintain a steady and good growth in the Aftermarket segment as well in the challenging conditions that prevail in the market. So that is now 13.2%. The export sale, yes, that has certainly been very low. This is mainly on account of one key market, which is Colombia, where we had good exports going to Colombia. So there are a couple of reasons that have made the change. One is the model that we are supplying in Colombia has got discontinued this year, but the new model is currently underway. So we'll see some sales starting in the next fiscal. And the second point is that one of the customers who used to buy from Colombia, so we used to export it to Colombia, now the customers are directly buying the same parts, I mean parts from us here in India and exporting it as a kit from their end. So there is a change of exports through domestic sales, to that extent. So these are the main aspects. But like I mentioned, the key point -- I mean we are also of course, concerned of this drop in export. We definitely want to -- this export part to be much bigger. So we are waiting for some good export orders. And like I mentioned last year -- last call, we got our first breakthrough in DAF Netherlands, which is Europe's #1 player. We've got our first order for their trucks in terms of cabin dampers and lateral dampers. In fact, the original business was only cabin dampers. We've -- they have also awarded us the lateral dampers based on a good response that we showed during development. So this will definitely improve our exports in the coming year. While the next year sale will still be not high, but it will definitely peak in '21, '22. The second export order, which was also mentioned, was the Volkswagen Russia order. That is also currently under validation. We have just sent our first proto samples for their testing -- for their winter testing. So this will also happen in the next fiscal, but towards the end of next fiscal. So these are 2 export orders which are very key. We have broken through the OE high-volume segment, if I must say. And of course, all -- both of these -- these are very, very demanding and very premium -- I mean good marquee clients. So we are sure if we deliver this, we'll definitely be looking at some breakthrough in export going forward. Now I'll move to Slide 7, which again presents the quarterly trend in the bar graph and the line chart. So just on -- if you see the EBITDA, which had dropped to 6.7%, 6.6%, we have, as I mentioned already, reversed the trend, and we have moved to 7.1% now. I will move to Slide 8, which is the balance sheet, which -- I mean basically, it's half yearly. So this is -- I mean we don't -- we have not put the 9 months, so I'll not spend time here, only suffice to say that, I mean our free cash flow position and balance sheet position continues to be pretty healthy, and our focus on that remains as always. If we move to Slide 9, you can see here that our ROIC, while it has definitely dropped from the best figure of 33% in '18/'19 -- '17/'18, we are still at a healthy figure of 22%, again, in the backdrop of the challenging conditions that I already mentioned. Moving to Slide 10 is, I mean again, the cash flows is again for the half year. So I'll skip on to the Slide 11, which is just a quick update on the award of the Great Place to Work. While I've shared this earlier, we recently just -- in fact, tomorrow, we are going to receive in a function in Mumbai the award for being the top 30 in the best places in manufacturing in India. So this is a very, very honorable position to be in because, finally, as we all believe very firmly, it is people who will make the difference. And we at Gabriel and ANAND Group, we focus a lot on this very important aspect. And we are glad that we are being recognized and that we can continue our journey on this front. So we will be receiving this award tomorrow. Slide 12 is on the other customer awards. So we just wanted to share that we won the -- probably India's most sought-after award as far as Quality Circle is concerned because this comes from Toyota. Our team won the Gold Award, that's the #1 award, winner's trophy in the Toyota Quality Circle competition. So this award, we'll be getting at the annual forum that Toyota will have in the month of April. So this goes to show only that the efforts that we are doing on improving quality and also on focusing on total employee involvement because Quality Circle is the way how we employ, how we involve each and every employee at the shop-floor level and keep them motivated and encourage them to do more and more on their voluntary basis. The good part of this Quality Circle, just to mention, is these are projects taken by our team of brilliant, young operating engineers who work beyond their normal work on their own and complete the project. So it's really fabulous to see them working with such great zeal and enthusiasm. So that's why I find this award particularly special, and that's why we've put this up. So this is practically the end of the presentation that we had. After this slide is the overall business overview, which is you all must have gone through already. So this is, in short, the presentation that we have to share. So to conclude -- well, of course, I'm keen to look forward to your questions and the feedback. But to conclude, the environment continues to be challenging, and we are looking at -- and the only prudent thing to do right now is, as I mentioned, to cut the cost, and that is what we are doing. We have touched each and every aspect of cost reduction, I think, right from raw material to variable overheads to fixed overheads to manpower, to improve our cash flows, so every -- every aspect. I think we have not left anything untouched, and this will continue to be the flavor even in this quarter. So we'll see how the market will pan out. The big if, and I have no, honestly, I have no answer, neither does anybody in the industry have an answer, how will the next couple of months pan out. We'll have to wait and watch. But yes, certainly, the overall voice in the industry is that after the festive season, things will start falling in place, and we should start seeing the market growing back. So until that time, yes, we'll have to be continuously looking at efficiency improvement and reducing our cost. So on that note, I would conclude my opening remarks, and I will hand it over to the moderator to open up for question and answers. Thank you so much.

[Operator Instructions] The first question is from the line of Arun Agarwal from Kotak Securities.

Sir, my first question is on the new businesses that we started during the quarter. Could you just throw some light on those new models that we started this quarter or maybe in second quarter?

Thanks, Arun. Good to hear you again. We did start in the third quarter, of course, the S-Presso the Maruti S-Presso. That started -- I mean that was the SOP. So the volumes are doing well. It's almost 10,000 to 12,000 per month. While it was not a new product, what also did change, I did mention that Passenger Car segment improved from 18% to 22%. The Brezza, the diesel Brezza, which was -- where we are single-sourced, that really started hitting with -- I mean almost record numbers from around the month of Diwali. Suddenly, I think people realize that this -- the diesel model is going to go -- I mean get obsolete after the month -- after April. So there's a sudden uptick in demand, and that continues even to date. Brezza is doing quite well, though it's not a new launch, as I mentioned. And the other new launch was, I mean of course, is the Activa with the front fork, the new-generation Activa of Honda, so where we are supplying the front fork. We started supplies from the -- from our Sanand plant already. We started supplies, let's say, bulk supplies that started in the last week of January.

Okay. And is the share of business different in front forks and versus the earlier Activa 5G?

Meaning?

Our share of business, we are supplying front fork to Activa 6G, right?

We are supplying Activa the normal shock absorbers?

Yes, to the new Activa?

Oh, yes, to the new Activa.

So is the share of business in this front forks and the earlier shock abs used in the early Activa, is it different now or...

It is different. Yes, we had a much higher share in this -- the shock absorber type of Activa. But with this front fork, our business is -- I mean the share of business is lower. The value of the part is definitely much higher.

Okay. Okay. But net-net, you're not gaining anything extra in terms of revenue or anything?

No, we will. Certainly, we will, yes, yes.

Okay. And any model got discontinued from our end during this quarter last year as we lost some business, in the past, maybe third quarter or fourth quarter, in January or something?

No, not that I know of. I think -- no, only thing is we -- in fact, we might, I mean gain an entry in the Tata Motors Tiago. That will happen -- we expected that to happen in this quarter, in the current Q4, but that might get shifted to one more quarter.

Okay. And we are present in the Brezza petrol as well, right?

Yes, Brezza petrol is 100%.

100%, right?

That's right.

Okay. And sir, my other question is on the cost side. So we talked about the cost-reduction initiatives that we talk about, and I look at this quarter, the raw material cost has seen almost around a 200 basis point decline on a Q-on-Q basis. But our other expenses seems to have increased despite reduction in revenue. So any specific line item where we saw higher other expenses?

Yes, of course, in terms of -- on manpower front, if you see, the expense has gone up slightly because manpower is always a fixed and a variable, and you can't just reduce manpower. While we have definitely done some rationalization, we have reduced our manpower on all fronts, but that effect will only come later. And to make matters worse, its percentage to -- I mean if you look at the percentage to sale, and our sale was lowest in this last quarter. So that has taken up the percentage a little higher. And so manpower is one reason. And in terms of -- we had a little higher expense towards the commissioning of the Sanand plant. Those 2 reasons mainly took these other expenses higher.

Sure. So the 7.1% margin that you did this quarter, I mean even if the revenues remain at similar level, should we see some more improvement with the cost-reduction initiatives that we have taken? Or is this something that we'll sustain at 7%, 7.1%, something?

No, I mean target certainly is to take -- look at a better number.

Okay. Any ballpark figure you could...

Arun, there's no -- we don't have that. But yes, clearly, we are looking at improving our EBITDA further, certainly.

Sure. And sir, could you help me out with your CapEx for 9 months this year and what we intend to do next year?

So Rishi, maybe you can take that.

So the CapEx for 9 months is roughly around INR 400 million. And for this year, the rough estimate is around INR 70-odd crores.

For full year, INR 70-odd crores this year. This is for '20 or '21 you talked about, INR 70 crores?

'19/'20.

'20. So in fourth quarter, we are going to add around, say, 30 -- INR 30 crores more, right?

Yes.

And next year, we you have any figure?

For the next year, we are right now currently in the midst of making our budget, but the figure will be in the same range of INR 70-odd crores, but maybe a little higher because we are actually also looking at investing a little -- I mean some amount towards automation. So that's a key focus area that we have taken partly this year and also going forward in the coming year. So we'll be looking at a figure which is slightly higher than INR 70 crores, yes.

[Operator Instructions] The next question is from the line of [ Kunal Koladiya ] from Anova Capital.

Sir, my question pertains to our exports. So like as you mentioned in your opening comments that we are seeing some pressure in the export market, especially Colombia. So just wanted to check, like are you targeting any new geographies on the export front?

Yes, Kunal. So we are targeting new geographies. So one is, of course, this -- as I mentioned, the 2 OE orders because finally, the volumes come from OE orders. So we are going to start the supplies in the next fiscal of these 2 new orders: DAF of Netherlands for commercial vehicle and Volkswagen of Russia. So both these are -- I mean one is in the Russian market, one is European market, that is one. Second is Colombia, as I mentioned, the model that we are supplying has got now changed and then this is a Yamaha model. So this will also start in the next fiscal. So that is the Colombian market. In addition, if you talk about aftermarket, we are certainly looking at geographies across the globe. I mean again, in Colombia, I recently had a meeting with the Honduras dealer, and he's really very, very positive about how things will happen, I mean in terms of our sales in that region. So Colombia remains a focus market. And yes, I mean our sentiment remains a key market as well. We also have some good exports in U.S. and Australia. I mean both of them, they are not -- I must say, they are not growing, but they're starting, yes.

And sir, how -- well, as you mentioned that the 2 of our clients are from Russia and Netherlands. So how have been the order flows there? Like are we seeing good traction?

This is a OE order -- I mean this is a OE customer. So I mean once you get the order, you get the entire order. So I mean traction is, of course, 100%. The only if is how will their product do in the market? That is the only if. Otherwise, we have, for Volkswagen, we have 100% of the share. For even the DAF models, we will be moving to 100% of the share.

Okay, sir. And my next question pertains to like, as we are seeing BS6 transition from 1st of April, so like on a macro front, like are we seeing any inventory stack up from the OEM front? And like just wanted your view on that.

Inventory of BS6?

Yes.

So yes, people are -- and they have started -- I mean of course, most of the orders now, for us, the shock absorber remains the same. So in many, many cases, it's the same shocks that go to the BS6. In some cases, it does get changed. But however, knowing what is happening in the industry, they are building up stock for BS6. But I mean the stock levels are -- definitely, all OEs are really cautious about the stock buildup that happened pre-Diwali period. So stock buildup is still being controlled, and I must say it's in a healthy level currently.