Gabriel India Limited (505714) Earnings Call Transcript & Summary

Thank you. Good afternoon, everybody, and a very warm welcome to all those present on call. And I sincerely hope that all of you and your near and dear ones are keeping the best of health and are safe and protected from this current pandemic that is going on. Joining me today, I have Rishi, our CFO; Nilesh, who's our company Secretary who joins -- who works in the office; and of course, SGA, our Investor Relations advisers. So we had our Board meeting in the morning, and we did put up the results immediately after that. So I hope all of you had the time to go through the results. It's a rather short time, but we had to do this because the Diwali break starts from tomorrow, so most of you would possibly not be available. So we -- that's why we had to have this call on the same day itself. So I do hope that you could -- you must have had time to go through results. Before I get into the numbers, I would start by providing a backdrop of the economic and industry scenario, as I always do. So you must be, of course, reading in the papers about the healthy recovery, the strong V-shaped recovery. In fact, when we plotted our figures of monthly sales against from the time of, let's say, March onwards to this period, it is exactly -- we could actually write the word -- write the letter V in that graph because it was so accurate. I mean it was absolutely a very strong V-shaped recovery, which is, of course, good news for all of us. I mean lots of positives to take from there. And in addition, the country has witnessed the best monsoons for some time. And a good part of monsoon in most of the country and in Maharashtra, for sure, is that the spread has been even. So that is even better. Areas which typically were drought prone for long periods of time, they -- all the dam catchment areas are full. So we can expect a very good crops, which, again, bodes well for the economy, particularly the agri economy. So going forward, while we have shared results for Q2, definitely, we had a good October. You again must have read the sales figures that the OEMs have posted for October, very, very robust sales figures. And November is a festive month, so that momentum should definitely continue. The automotive industry has worked hard during this COVID situation to increase production and sales, while safeguarding the safety of employees and the customers and -- I mean the supply chain as well. So it's been a very tricky situation for all of us. On one hand, we have to deliver record numbers; and on the other hand, you have to ensure that social -- physical distancing is maintained. It's been really tricky. Added to that fact, we had -- of course, we had our share of -- despite all the excellent precautionary measures done in Gabriel as across all ANAND Group plants, despite that we had our share of COVID cases. Fortunately, all of them are recorded. I think there's a slide on that as well, we have put up in our presentation. So all of them are recovered and the ones -- about 10 of them are still undergoing recovery, but they're all asymptomatic and doing well. So we have had -- generally, we have been able to take care. But what happens is once 1 person comes into quarantine, you have the Aarogya Setu app, all lists contacts, their app turns to moderate or high risk. And as a policy, we do not -- then we ask that those persons to contact tracing, also to stay at home and stay under quarantine. So that put a lot of pressure on managing the supply chain. But despite that, I'm glad to share that the team across all plants of Gabriel and our supplier partners did an excellent job, I must say, on delivering the numbers. Several factors that we have to see in Q2. One is passenger vehicles and 2 wheelers, both are positive. Although, of course, the base for last year -- as you know, from July onwards last year, the numbers started going down. Till June, the numbers are still okay. So we're looking at a small base of last year. So based on that, the numbers have been very strong. For the month of October, if you see the OEM figures, passenger cars has grown by 18%. Two wheelers have grown again in the average of same 18% to 20%. In fact, even commercial vehicle, while they have not grown year-on-year, but if you see month-on-month, September to October, even commercial vehicles has grown 15% to 20%. So I mean that's the only segment that's been a laggard. Even that has started early signs --showing early signs of at least the weekly rate of production going up. So that is something good for us. Now coming to 2 wheelers and 4 wheelers, especially entry-level passenger cars. I think we all know the reason demand for personal mobility is driving, I think, a large part of that. There was a lot of pent-up demand, naturally, people who were not stepping out for a long, long time. And then there was BS6 transition also. So people have postponed their decisions in the month of February, let's say, from Jan to March, and then the lockdown happened. So even those people have decided to now buy. So all this put together, there has been a lot of pent-up demand, which is happening. Having said that, I mean, we also thought that pent-up demand will start showing some tapering off, but thankfully, we are not yet seeing that. I'm not telling that it's behind us, and this will sustain the way it is going. But at least we have been, in the industry, pleasantly surprised as to the sustenance of the volumes right from July then August then September then October. So it's so far -- I must say, so far so good. So that is on the industry. And of course, you all know if -- so there are 2 -- I'm sure many of you will have those questions about how does the outlook look for the next few months and next quarter. So there are 2 aspects. One is a clear and present danger, I must say, of a second wave. We are seeing what is happening in Europe. We are seeing what is happening in U.S. And India is no different. We can't, let's say, fool ourselves by telling that the second wave is not going to happen in India. It certainly will happen. And if you have seen the pictures going around or if you've seen the news coverage of the Diwali rush that you see on various roads in India in all the cities, I mean it's really frightening. So for sure, there will be a second wave. So based on the second wave magnitude, the government may have to take some actions. So we don't know which way it will go. So it's very, very difficult for us to predict what will happen. I think none of us, in the industry, are able to give any prediction. We'll have to take each month as it goes, that's what we are doing. So this is the negative side. And on the positive side, yes, there are some signs of -- again, we don't know, but there are signs of vaccines being reported being successful. And also, there might be some positive feel good factor as well. So both can happen. So it's -- all I'm saying is, it's very, very uncertain. It's very, very difficult for us to take a call on what will be the volumes. But as I said, it's so far so good. Now moving on to the performance of quarter for Q2, I'll get into that. I mean it's, of course, shared in the presentation. We had, of course, the Q1 was almost a washout. We did barely INR 120 crores of sales in Q1, which is less than our -- far less than our monthly sale -- normal monthly sales. But Q2 has bounced back to a normal sale level, at least. We did almost INR 460 crores, which is still 2.7% down compared to the same quarter last year. But then if we take the good part here, at least, it's come down -- come up to 450-plus levels. So this will definitely help us. We are able to sustain certain cost optimization and productivity enhancement measures implemented during last year. So in fact, like I shared in the past 2 or 3 calls, we had kicked off an initiative called Core 90, cost reduction 90 days in the month of July last year. So that we are revived, we are refreshed, we are reinforced. So that is clearly giving us some good benefits. So we were able to improve our margins despite a small drop in sale. So you can see that as well in terms of EBITDA and PAT is up by -- EBITDA is up by almost 16% despite sales being lower by -- EBITDA is up by 14%. Yes, despite sales being lower by almost 3%. And in terms of PAT also, if you see, PAT was up by 65.5%. Moving on to the balance sheet and cash flows. We continue to maintain a robust balance sheet position with net cash of INR 211 crores. And we have continued our focus on cash, which has led to a healthy cash generation to the tune of INR 111 crores during the first half of the year despite literally a washout of the first quarter, as I mentioned. Coming to segment-wise performance, which is on Slide #16. You can see our 2-wheelers is now forming 70%, again, a combination of the market dynamics because 2-wheelers naturally are doing much better that the recovery there has been the best, owing to personal mobility plus rural economy both factors. Passenger car is 18% and commercial vehicle and railway is only 10% as of now. In terms of the detailed performance in 2, 3-wheelers, which is on Slide 17. Here, I mean, our market share continues to be 25%. We have some new programs from TVS, our key customer, Bajaj. We are working on a new program with Suzuki. We are working for Suzuki 2-wheelers on a new program. We're working on a -- not yet [ well-thought of ], working with new program with even Honda motorcycles. So several new programs there. Also our engagement in electric vehicles continues with all the key electric vehicle manufacturers. The top 3 customers remain TVS, Yamaha and Bajaj Auto. In terms of passenger cars, our -- we had some really bad times, particularly in the last year when we lost out on the Omni and our WagonR going away. But then from there on, for the last 3, 4 years, we've been working on building up a strong pipeline. So I'm glad to share that, that pipeline is now coming up with -- that's doing very well with Brezza, also doing very well of Maruti. We have one more new platform called [ Vizura of Maruti ], which is a replacement of Alto. So we are working on another new platform, which we are very lucky to win with Maruti. It's a 2 new platforms. And another program -- I mean, Volkswagen, the new India vehicle, that is already with us. So that's -- right now, we have given all the prototypes already. And the development is on, and so we should start in the month of March. We are also now on Tata Motors program. Initial few supplies have just begun for this -- larger lot will happen for next -- I mean, calendar year '21. In terms of commercial vehicle, we continue our strong position in the market. So practically all development, but the key that I want to mention here is Leyland launched the Bada Dost, as you all must have seen, a very nice vehicle. So Bada Dost is 100% with Gabriel. Aftermarket. Well, I mean, the pull has been good. We certainly have been trying to push as much as possible in the aftermarket, and things are moving up, certainly. In fact, for the first half, we did INR 107 crores of sales. We've added many new products. We did share last time that we added the brake pads. So we are widening the dealer network and the presence across the country for this very fast-moving item called brake pad. Initial response has been good. But yes, of course, we'll have to keep a watch for this year on this product and then build upon those for the coming years. Another positive development is the exports, which I've been sharing for so many -- I mean, actually so many years, I must say. We've been working on this, and we finally won those orders. And I'm glad to share that the deliveries have started now. Volkswagen Russia, we have already dispatched almost 6 -- every week, we are dispatching 1 container. So that is going on the regular stream. We have already done 6 or 7 shipments, and that continues all through the year. And of course, on the DAF Netherlands, those supplies will start from somewhere the end of this month. So even that will be done. So in fact, we had -- on a single month basis, we had among the best export months in OE business in the past month. Just the picture of those 2 products is on Slide 22, which I mentioned, DAF and Volkswagen Russia. Talking about our overall vision as to what we are planning to do. We had shared that we want to be definitely in a global top 5. We had kept ourselves an aspiration of 2025. Yes, now that 2025, of course, will, owing to this COVID, the whole thing, in terms of time line, does shift. But in terms of our direction, we are firmly on this, and we're all working towards how to get to be in the global top 5. The key drivers being: one, we have to increase our exports. Two, domestic dominance in each segment. It's not only commercial vehicle or only in, let's say, in aftermarket or -- we should -- we are going to try to do our best in every segment so that we achieve domestic dominance. The third lever, of course, is inorganic growth, for which we are actively scanning. We had advanced discussions. But -- not sounding to give an excuse, but yes, certainly, COVID has, again -- because the volumes have gone down, so people are wary of valuations, and they are -- many of them have put the discussions on hold. So that's what we -- we will have to wait for some more time. A good part again here is the bounce back is good. So we should quickly restart these dialogues, which -- where we left off. And the fourth and most important is quality and technology. This is something that we pride ourselves upon being completely, if I may call, Atmanirbhar player. We are completely an Indian company. So we have our own R&D, among the best qualified team that we have in the country. If you see the next slide, we -- I shared with you that we are building our tech center. So the building is almost steady. What you see here is an artist impression. This is on Slide 24. But yes, the building is almost ready and should be complete by the end of this year or -- I mean we should be ready with it by January '21. The machines have already moved to this new building. And we also added a new ride trailer, this is very important for our business, particularly passenger car and commercial vehicle. So we have added -- we had 1 ride-tuning bus. Now we have a ride-tuning trailer as well, which is -- glad to share that, again, both these ride-tuning vehicles are booked for almost 365 days a year. So that is the kind of pace of development that is happening in addition to, of course, increased demand for development time of customers. So both these are on technology front. So this is in short what I wish to share as regards to the presentation. I would now open it up for questions. Certainly, I'll come back at the end of the questions and maybe try to sum up based on the questions that all of you ask us. So thank you, and over to you.

[Operator Instructions] We take the first question from the line of Nikhil Upadhyay from Sec Investments.

Congrats on a decent recovery. Sir, my question is basically on 3 parts. One is, as you mentioned that last year, we had this loss of the Omni and the WagonR business. Now with the kind of the new business wins, which we have with the Tata Motors and everything, do you think that these new businesses will compensate the loss of business, which we had because of WagonR and Omni? And overall, how are you -- what is the outlook you are getting from the OEMs in terms of the next 2 quarters in terms of the order booking and all? If you can share any thoughts on there, not any number specific, but qualitatively, what -- how are you looking at it. That is on first. Secondly, on exports. I understand like we -- it's good that the VW Russia and the order has started moving, but there was also one product relaunch in Colombia, where we were earlier supplying and that product were discontinued. Any updates on that or if you can share any thoughts? And with the -- now the product -- now we being supplying to DAF and VW Russia, and you also mentioned that in order to be the top 5, we have to increase our exports, how do you see the export time lines maturing or improving for us because now we would already be supplying to 2 large players? So if you can share your thoughts in terms of getting new order wins in exports, how do you see the time lines improving for us?

Okay. Yes. Yes. Nikhil, you asked basically 4 questions. So first, thanks for your compliments. So on the question of Omni and WagonR, yes, the new orders that we have got will certainly compensate because one is the -- I mean the S-Presso is kind of a segment, which is -- it is a little new; and the Alto, which is going to come. Currently, Alto, we share only some part of the business. But the new Alto, we share 100%. So that definitely should help us, more than compensate what we have lost. Yes, it will happen over the next year. It will not happen this year. But certainly, next year, we'll be back to where we were in terms of passenger cars. We also have won the Peugeot Citroen business. So that development is also going on. You know that we are on the new Thar of Mahindra, so that you know that they have stopped the booking because they've already crossed 20,000 bookings, which is almost 6 to 8 months production time for them. So that vehicle is really good. So we are 100% on that. We are 100% on the new XUV of Mahindra given that promises to be a good vehicle. So yes, we will definitely compensate for the loss and, in fact, do even better. In terms of outlook of business, which was your second question, I did try to answer that while the hit rate continues, good in November as well, there is Diwali break. So to that extent, there'll be 4 days of loss of production and sale because the whole country is off for those days. But the hit rate is better. And in December also, the schedules that we have got -- as regards, the hit rate is quite good, but yes, many -- actually, most of the Japanese OEMs go for a shutdown in the month of December. So to that extent, again, in December, we will see, let's say, the last 4, 5 days of December, there will be no sale typically in most of the customers. They all go for an annual shutdown. But come January, at least the schedules that we have got, some of the OEMs I've shared, it is very clearly that the hit rate is going to continue in the Q4 as well. So right now, I don't want to second guess or try to put my own judgment on that. We'll stay with that, but it looks generally good. But the other 2 questions were on exports. On Colombia, yes, glad you remember that we said that our vehicle has gone out of production. But yes, the new model will be starting in the next financial year. So we are on that, and we should restart our supplies with them very soon. On the export time lines, which is your fourth question, now that we have won Volkswagen Russia and DAF. I did mention that it took us -- for DAF, it took almost 6 years for us to get into this business. So it's a very, very long lead time. But again, we get one, then you get the second one easier like -- while we are discussing these 2, we are already in an advanced stage of discussion for another OEM for an export order. So one has a positive effect on the other, and now the time lines will not be like the earlier. And definitely, the time line will reduce real further on exports.

[Operator Instructions] The next question is from the line of Jay Kale from Elara Capital.

Sir, I have 2 questions. First is if I just look at your 2-wheeler, 4-wheeler and CV revenue contribution. And over the next, say, 2 or 3 years, passenger vehicle, you mentioned 18% market share. So how do you see the market shares in these individual segments? And what would be your assessment of the pecking order of growth rates ex of the market growth? But from a client -- new client addition wins or increasing content, which segments within 2-wheeler, 4-wheeler and CVs, do you see the highest growth potential for you? If you could comment on that, that would be my first question.

Okay. So Jay, on the segment-wise, clearly, passenger car, our share is very low. So actually, the upside there is -- while the market growth is one part, but for us to expand or grow, the upside is the best. So naturally, that's what we want to do. And we have some good programs lined up. So I'm sure that the passenger car growth rate will be -- should be healthy. And coming -- commercial vehicle, we have kind of saturated. We'll have to go by what the market grows. In 2-wheelers, again, I think we have some room to grow. Certainly, we are only 25% of the market share. Yes, there are some market dynamics. But again, there is a chance for us to grow there as well. So both these segments are clearly possible. In passenger car, in addition, we also have the other export play. So in terms of growth of the total business in passenger cars can definitely be quite good.

Sure. And just one question on the PLI scheme that has been announced yesterday. If you could comment -- I know it's too early to get the controls of the scheme. But any potential benefits that you would -- you're likely to get out of your -- in conversation with any of the customers who would kind of start sourcing from you or any kind of localization that you would do for some export markets, which could become viable now with this PLI scheme? Are you looking at it constructively?

Yes. So we are just discussing before the call, PLI is too new for us to actually gauge what are the details. I think we'll have to wait for that. So I really can't answer that right now. But it's a good thing to happen. Also automotive components share a big, big portion of the total PLI. But yes, we'll have to wait for the details. Unfortunately, I don't have it right now.

Sure. And just if you could just comment, what is the potential market share of passenger vehicles that you could look at in the next 2 years from the 18% currently? I mean you spoke of huge opportunity, but could it be like 30%, 40%? I mean any -- directionally, what is the kind of opportunity you see in the orders that you are having currently?

Well, I mean, internally, we had drawn plans. But yes, I mean, at least get to 22%, 23%. What you can see is we have grown from the last, 15% to 18%. We can have 23%. And going forward, I can see definitely even 25%.

[Operator Instructions] The next question is from the line of from Sandip Verma from Axis Bank.

Sir, just one thing. This EBITDA margin improvement, what I can see is a part of improvement has came on account of commodity prices being benign. Now that the commodity prices have started moving northwards, will you be in a position to maintain this kind of EBITDA margin in Q3 and Q4, sir?

Sandip, this is Rishi here, and thanks for asking the question. Actually, with the change in commodity cycles, either downwards or upwards, we've seen over the past so many years some amount of that does get impacted positively and negatively. But by and large, we have a back-to-back arrangement. So there may be some timing differences or some index differences. But by and large, we are insulated from the movement on a long-term basis.

All right. And from the export side, sir, how do you see things panning out given the second wave being experienced in Europe and in the U.S.? So are you experiencing any kind of challenges in your exports?

Honestly, Sandip, we are not seeing any challenge. I think the schedules -- in fact, we just received the schedule right up to March from the Russian customer. So they're pretty steady. And neither in these last few months we have seen any cutdown in any plants. So I presume they are somehow managing the issue. You also are aware that in all these places, the economy is still being, what you call, continued reasonably well despite there being lockdowns.

The next question is from the line of Saurabh Shroff from QRC Investment Advisors.

Just coming back to the margins. I mean if I look at the slightly longer-term trend on just before the slowdown began last year, we were sort of more in the vicinity of 8.5% to 9.5% kind of EBITDA margin. So while we've seen a sharp recovery quarter-on-quarter, obviously, and maybe almost 100 bps plus year-on-year, when do you think we get to that 9% margin? And one could hope that, I guess, if we get back to that INR 520 crores, INR 550 crores kind of run rate quarterly, we should be higher than that. And if that is the case, what will sort of drive it? What are we doing in terms of cost control, et cetera? Because otherwise, if I look at it, most of our cost items are within the 5%, 7% range, as last year.

Yes. So I mean you said it right that if we cross this INR 500 crores level, naturally, our margins will -- the EBITDA margins will [ hit ] that, what you call, bump up. Certainly, we can expect to be in the 9% range because we are built for volumes. We have capacities installed. So naturally, anything that is above INR 500 crores will certainly help us. In order for that INR 500 crores to happen on a sustained basis, till that time, we have clearly made an elaborate plan for this cost reduction activities. We still have some several ideas in our hopper -- construction hopper as we call to ensure that we continue on this cost reduction rate. 9%, 9.5%, I mean, I see no problem getting there. But yes, we need some tailwind of volumes.

Sure. And can you maybe elaborate a little bit more on how much -- I guess COVID would have put a bit of [ planner ] on the cost-reduction plan. But at least how far -- because we've been talking about this now for, I guess, almost last 4 quarters. So how much did we manage to get done? What is our focus? By when do you think we can have some quantifiable savings?

We had, clearly -- if you see, even if I take just a, let's say, the last quarter -- comparable quarter last year, Q2 to Q2 this year, you can see my margins are -- I mean my top line is still low by 3% but my sales is up by 14%, 15%. So even in this -- and mind you, we also have some added costs put on us due to COVID, like the masks, the sanitizers and then maintaining a distance. So productivity also takes a little bit of beating. So all that you roll in also in that. So clearly, this cost reduction exercise has helped us shave off good percentage points from each of our costs, right, from raw material to fixed overheads to variable overheads, in every aspect. Rishi, you want to...