Gabriel India Limited (505714) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Gabriel India Limited's Q3 and 9 months FY '21 Results 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 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. Thank you, and over to you, sir.

Thank you, and good afternoon, everybody, and a very warm welcome to everyone present on call. I do hope all of you and your near and dear ones are in the best of health and safe. It's in fact, indeed, very heartening to note that the country started showing some really good progress with regard to this unfortune pandemic. I mean we are seeing the numbers go down. The mortality is going down, the vaccination is going up, the recovery is going up. So all in all, at least in a better frame of mind, I think all of us are today in the call. So thanks everybody for having taken precautions, and hope we continue to do the same. Joining me today, we have Rishi, our CFO; and Nilesh Jain, our company secretary; and of course, our IR advisers, SGA. They are also on the call with me. So welcome to all. I hope all of you had the time to go through the financial results and the presentation, which outline our financial and operational performance. So before we get into the numbers, I'll just give a brief backdrop of the economy and the industry. The quarter started, of course, October. So typically, the best month happens in October, when Diwali is in November, of course. So this is where it started. It started on a very positive note, and the government initiated the unlock 5, 5.0, as they call in October. So a higher recovery rate, and India's good fortune of avoiding a second wave meant that the economic recovery continued. Further, India launched its mass vaccination program for COVID-19. Of course, that is from January, mid-January. This should further alleviate the situation in the quarters to come. The government continued its calibrated approach towards relief and stimulus measures to help Indian economy. Government also approved the PLI scheme, performance-linked incentive scheme. As you all must have seen in the budget, there was allocation of INR 1.97 lakh crore towards this, to boost the economy, and the auto industry is, of course, going to be a major beneficiary of the same. As you must have seen our results, as also the results of everybody else in the auto sector, in the OEM space, auto component space and in fact, even on other areas, the V-shaped recovery continues very strongly for all -- in all segments on the back of pent-up demand and, of course, the festive season. Even the M&HCV segment, which is the medium and heavy commercial vehicles, started recovering fast with the economy and infrastructure recovering. I mean this was a little bit of a laggard initially in the first 2 quarters. But what we are seeing in terms of CV sales is month-on-month, there has been a consistent improvement in the figures. They have recovered almost to pre-COVID levels, led by strong demand for ICVs and tippers. The strong demand during festive season appears to be sustaining because after October, typically, November is the Diwali season and December is the last year -- or last month of the year, where cyclically, we are seeing the sales are low. But we had among the best Decembers you'll see ever. This was mainly based on a strong sentiment overall, liquidity from rural and semi-urban markets and rise in preference for personal mobility in urban centers. This bodes well as we are ramping up our operations in alignment with the customer demand. The outlook for Indian economy. Again, as you may have read several reports, IMS, RBI, IMF, Fitch ratings, what have you, all are indicating anything from a 9% to 11% growth in the fiscal year '22, which is again very good news. The union budget and RBI policies are also geared towards propelling underlying growth without giving into compulsion to short-term stimulus. So this budget was definitely a very, I must say, a progressive budget, keeping in mind the good growth that the country can achieve and what it needs to enable that growth. So on the whole, I mean, we are all seeing, of course, the stock market giving a very strong thumbs-up to the budget. We expect the momentum to sustain going forward on the back of robust rural demand with record kharif output, better cash flows, good reservoir levels in terms of water and an excellent rabi sowing. So all this bodes well for our mainstay, which is agriculture and rural economy from which everybody stands to gain. So while we are propelled into a V-shaped recovery, we continue to maintain all precautions across our operations with respect to COVID-19 pandemic. And again, I'm really happy to share that we have reached a level of only 2 active cases as of the moment at Gabriel across all our plants in India. So that's only 2 active cases, and both of them are doing well and should -- I mean should recover perfectly normally. So we continue not to let our guard down. We continue to follow all the precautions, right, from masking, distancing, hand washing, using sanitizers, so on and so forth, because we are very clear that it's still not behind us. Now moving on to the numbers. I'm happy to inform -- to report a strong improvement in our performance in Q3 FY '21. Revenue growth of 18% year-on-year and 17% quarter-on-quarter. Revenue of INR 536 crores on the back of improved customer sentiments and demand drivers, as I had mentioned earlier. This is, in fact, the highest quarterly revenue we have clocked in the 9 -- last 9 quarters since Q2 of FY '19. We have reported 22% growth in EBITDA in Q3 '21 of about INR 39 crores. Margins expanded by 20 basis points to 7.3%. There has been a significant increase in commodity prices, which again, most of you must have -- I mean are surely aware of, particularly in steel, where the industry is seeing actually almost off-season price increases demanded by the steel mills. However, with better operational leverage and strong results of our Core 90, which I had shared in the last 2 calls, Core 90 is standing for cost reduction in 90 days, which is a cost reduction drive across Gabriel. Due to the strong results of this and productivity improvement programs executed throughout the pandemic, we were able to offset part of the increase, PAT came in at INR 25 crores, up 40% year-on-year. Moving on to the balance sheet and cash flows. We continue to maintain a robust balance sheet position with a net cash of INR 283 crores. We have maintained our thrust on collections and continuously working on reducing our inventories. And mind you, we have, at no point, I mean, put our Tier 2 suppliers at any inconvenience even during the peak of pandemic. I mean our payments have been on dot all along. And that's the philosophy we follow in Gabriel as well as in Anand Group. And as you are aware, we incidentally also are very well-known and well-regarded for this aspect of ours in terms of supporting Tier 2 vendors. The cash flow generation was to the tune of INR 204 crores for the 9 months, compared to INR 110 crores in FY '20 9 months. Coming to the segment-wise performance, we continue to see solid traction in 2-wheeler segment, with 20% growth year-on-year, led by efforts in terms of enhancing market share with key customers, greater efforts in terms of creating new products,and on account of strong recognition of end products in the market. So here, I mean, I'm glad to share that while, of course, we keep winning new programs with our existing customers, TVS, Yamaha, Suzuki, that, of course, are -- I mean, we are well on track for that. But we have also won the LOI from Ola Electric for their electric 2-wheeler, which is, again, you must have read about Ola Electric's plans of making 2 million vehicles in a place down south somewhere in -- near Chennai, in between Chennai and Hosur actually. We have won that LOI for both the front fork as well as the shock absorber. I'm glad to report year-on-year as well as a sequential uptick in our PC segment, which is the passenger car segment. As you are aware, our performance was impacted in the last few years due to discontinuation of some of the models that we were on, particularly Maruti due to the norms changing and Maruti not going ahead with those models, like the Maruti Omni. But we have been working hard, and I've been sharing that again on several of my calls, the previous call, on building a very robust pipeline. Glad to share that, that is bearing fruition. S-Presso, of course, is with us in terms of Maruti, we are also present on the new Alto, and we are working on a new platform, Maruti Jimny, which you are aware, which is in advanced stages of discussion, plus in addition, one more platform, which is again in advanced stage of discussion. So some good pipeline here. We are also on a new platform of Volkswagen. We also won a program as the second source, of course, in Tata Motors, where we had not done business for some time. So we are back into Tata Motors. The initial supplies are starting this month. We have also won the Peugeot Citroën, which, of course, the plants have got deferred, but we are there 100% on the Peugeot Citroën as well. Coming to commercial vehicle, where we are the market leader, the good news is the sales have picked up. The M&HCV is really picking up month-on-month, and there's a really robust demand from all the customers. We are on the Ashok Leyland's BADA DOST, which they launched during the COVID time. We are 100% source of that as well. Aftermarket continues to be a strong story. We have achieved -- we generated revenue to the tune of almost INR 70 crores in Q3, which is 18% up year-on-year compared to the last comparable quarter. We are successfully leveraging Brand Gabriel by launching new product lines. As I'd shared last time, we launched the brake pads, which is a very fast-moving item. And the response has been good on that new product. And we are continuously focusing on increasing our penetration in B and C class towns. And also the exports. Yes, exports aftermarket also, while on a small base, but it's showing good improvement. Exports in terms of overall exports, they continue to show a good -- exports continue to show good traction based on some -- again, some programs, which we have been working for over the last 2 years, now the supplies have started. We did share last -- in the last call, so Volkswagen Russia, we have been sending 1 container per week. This has been happening for the last 2 months now. DAF of Netherlands, we -- there also, we have started regular supplies. And that's only 1 part. We are working on 2 other products of DAF, which will start in this -- in the coming fiscal. So exports have started picking up for us definitely in terms of -- in OE space. So this led to a robust revenue growth of 140% year-on-year and 74% Q-on-Q to INR 22 crore of exports in Q3 FY '21. As shared, all OEMs are now focusing on the China Plus One strategy. So they are looking at how to derisk their strategy and develop some other source other than from the Chinese territory. So we hope to leverage on this and win some more orders, let's say, in the next year or 2. To conclude, post the initial disruption due to COVID-19, we have seen a strong V-shaped recovery. We remain cautiously optimistic about the sustainability of the demand. We are striving towards becoming a global top 5 player, which is our vision. We have a 4-pronged approach to achieve this vision. Exports is a key part of this. And yes, we are seeing some traction, as I just mentioned. Further, we'll look at domestic dominance in the sectors where we are operating. Commercial vehicle, definitely, we are the leader. And in 2-wheelers, we are improving our market share continuously. In passenger car, where we had lost out initially, but now, as mentioned, the pipeline is really good and strong. And the fourth -- and, of course, our pursuit of inorganic growth opportunities continue. We are actively scanning, and we will, of course, make the decision and the choice based on, of course, the best possible option. Lastly, the fourth important enabler is quality and technology. We are India's pioneer in this field, and we have probably the best research and development team that is there in India, I mean, definitely, with regard to that in terms of technology. And I'm glad to share that our tech center for 4-wheelers is almost complete, and we should formally inaugurate it some time in the month of March. The building is complete. The machines have been moved. And in fact, the offices are undergoing the final touches. So this should definitely give us some good -- give our engineers also a good encouragement and space to experiment and keep coming up with new products and new technologies. So this is, of course, our push, our own little push in terms of being Atma Nirbhar as being promoted by our honorable prime minister. So this is with regard to the overall quarter that we have seen. Again, I mean, in terms of the quarter going forward, I'm keen to listen to your questions, your queries, and I'll be glad to clarify any of those. And on that note, I'll come to the end of my remarks. And I would now hand over to the moderator to start the question-and-answer session. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Arun Agarwal from Kotak Securities.

So congrats on good top line growth and relatively decent performance on the PAT front. Sir, my first question is on your margins. So we understand that we have seen some commodity price increases. So we do have a pass-through clause with the customers, right? So when do you think we'll be able to pass through these cost increases? Or do we have to absorb some portion of that?

Yes, Arun, thanks for your compliments and observation. So yes, we have a pass-through clause. Like I mentioned, pass-through is for, I mean, almost 80%, 85% of our total part because everything is not exactly pass-through. And like I mentioned, some are quarterly, some are 6 monthly, and we also have the odd one, which is even yearly. So to that extent, in an increasing market -- in an increasing commodity market, which we are currently seeing, so we are settling currently now from October. So October 2020 onwards, so that is being settled. So there will be some lags, yes, for sure, where we do not have the quarterly settlement. I don't think there'll be a loss. It is only, if at all, there'll be some cash loss.

Yes. But I mean, maybe by next quarter end we should be able to pass on the increases that we have seen in this quarter? Or will it take maybe a couple of quarters for that?

The next quarter, yes.

Okay. And sir, the other question is on the cost control we talked about and we sort of laid a bit more emphasis on the cost controlling initiatives. So is it possible for you to quantify and maybe give some ballpark numbers as to how much efficiencies we have achieved over the past maybe few quarters?

Yes. Before I get to that, Arun, while I said quarter, it will be actually next to next quarter because we have a -- with many, we have a 6-monthly clause. So wherever it is quarterly, we will -- I would say, some part of it will get compensated in the quarter of -- I mean in the Q4, but some may go to Q1 of '21-'22. Okay. And efficiency, yes, we have been continuously working on that. But I think one good measure of -- simple measure of efficiency, what we do track is the breakeven point. So the breakeven point has definitely in terms of the sales percentage that has reduced from what used to be, let's say, 75%-odd to less than 70%. So that is what we have -- 70% of sales. That is what we continuously focus upon and the target is to keep on reducing this. So we have the Core 90 initiative, which -- where we hope we'll bring it down even further to levels of, let's say, 65%.

Okay. And sir, on the revenue front, I mean, we talked about 20% year-on-year growth in the 2-wheeler business, right, this quarter?

Yes.

But I think the 2-wheeler industry per se would have grown a bit more higher. I think the growth was higher on a year-on-year basis?

Yes. Because one thing is the growth of Hero has been good. As you know, Hero has really done extremely well in terms of sales. And unfortunately, Hero, we're not a source with them. That is one of the reasons where there might be a little bit of a difference compared to us versus the market.

Yes. And also due to -- is it due to 3-wheeler being -- we being the suppliers of 3-wheelers as well and the 3-wheeler market is down? And that's also...

Yes, yes, that's right. I was just coming to that, 3-wheeler, of course, is -- there are 2 segments which have borne the brunt and which have not come back. One is the 3-wheelers, and second is the buses. And of course, third is the railways, 3 segments. So 3-wheelers is really struggling. But now with the schools reopening, we'll start seeing some movement from this quarter onwards. Buses, with this announcement of the government, where they're giving some INR 18,000 crores towards this, you will see some movement in buses as well. So 3-wheelers, yes, has been a huge drop. I mean the drop has been almost 60%.

[Operator Instructions] The next question is from the line of Jeetu Panjabi from EM Capital Advisors.

Good to see you guys, seeing this big turn and seeing all the upsides. So congratulations on that. A few questions from my side. One, what's your sense on how long this may go. There has obviously been a spurt. In your sense, this is pent-up demand or you kind of think this has got longer legs to it and it continues? And also, do you kind of think that if Stage 1 was 2-wheelers, Stage 2 is cars and Stage 3 is probably CV, so this could go on for a couple of years from here without blinking. So more on the demand side markets have done pretty well, how you think about it?

Yes. Thanks, Jeetu, and good to hear from you as well. Yes. On the sustainability of demand, I think we are quite confident. Yes, pent-up demand drove the initial, let's say, Q2 and Q3, maybe to some extent of Q4 also will be that. But if you see the basics, I mean, the fundamentals driving the economy, as I said, the rural market, which is the base, is doing very well. And even in terms of future, you will see the sowing is good. So I don't see anything going wrong with that. The government in terms of its infra push also is one good sign. So that also is certainly a positive. Even if I discount the pent-up demand factor, clearly, there is a move towards personal mobility. So even that would add a bit of sustainability to this demand, at least for 1 year, maybe things may change after that. But till the vaccinations are completely deployed and the whole country gets covered and the fear also goes away from people, there will definitely be a personal mobility shift. So that should help offset this initial surge of pent-up demand. So all in all, I don't see why next year should not replicate these quarters. So that's broadly my sense. I may be mistaken. But as I said, and in addition, you've seen the budget scrappage policy. Of course, it's early days for anyone of us to take a guess because the details are yet to be out. But yes, again, take a longer-term view, at least, they have announced it. It's voluntary as of now. It's 20 years for passenger vehicles and 15 years for commercial vehicles. So the direction is right. Certainly, I don't see why the demand should go down. Again, and to top it all, we've seen the forecast of 10%-plus GDP growth being projected by everybody now consistently. So Jeetu, I think this demand should sustain.

No, no, I completely agree with you. I was just trying to see how you're thinking. My view is that this has got at least 18 months legs to it. And it's a long cycle and that 10% real is equal to a 16% nominal GDP and a 20% dollar nominal GDP. So if you put that all in perspective, a 20% dollar nominal GDP means your country is growing at over 20% in dollar terms, which is a big one for domestic demand. On a second question, how are you thinking about what's going to be new and what's going to be different besides normalizing and trying to get this new model and trying to get -- in the end, trying to make sure you get into -- besides what is normal for you guys, is there some completely new thinking in terms of what you want to achieve, what products you want to get into, how do you think of business differently?

See, in terms of Jeetu, the vision that we have crafted for ourselves, which is being the top 5, that itself is definitely, a lot of work to do for us to get there itself, and it certainly is quite a challenge to get there. Secondly, in terms of different -- I mean, we have clearly charted out what the strategy is for getting there towards a vision. I did share the 4-pronged approach. So I don't see anything different. But what -- within the segments in India, what we are doing is we are trying to focus on the electric 2-wheelers, where adoption is going to be really fast. It's going to be quicker than we think. So that's one focused strategy that we have taken and ensure that we are engaged with definitely the 2-wheeler electric makers. In passenger cars, it's still we are there on some, but we're not very well entrenched in that space because even in passenger cars, the move -- shift will happen, but that will be a little slow. But 2-wheelers, certainly, that is something different that we are trying to do in terms of focusing on this segment, which is going to change the game.

Okay. And one final question, if I may ask, with Volkswagen Russia exports, I remember it was 2 years ago when...

Sorry to interrupt, sir. Mr. Panjabi, your audio is breaking. We are not able to hear you clearly.

Okay. Is this better?

Yes.

Sorry about that. So 2 years ago, in your factory, we talked about -- in your office, we talked about Volkswagen for potentially coming with some international factories, orders coming in, and you're seeing that happening. Can this -- from what you're seeing and what possibly can happen, could this be -- become a very big part suddenly? Like can this scale up very suddenly?

Well, Jeetu, nothing happens suddenly in auto business. Certainly, it takes time. But yes, I mean, just to tell you, we -- when -- I think when you guys visited, we had done a very small order of Russia. Now that small order has blown into a full-fledged container that we are sending, like I said, one container every week. In fact, just last month, we got additional 20% volumes. So -- and if I just connect the dots, yes, it certainly can grow. And if our performance -- one leads to another. So if our performance has been good on this Russia, which is so far, that's what it's good, I'm sure it will open up opportunities for us where they might ask us to, can you supply in Europe or wherever with the last-mile assembly, whatever. And we are open to that. So all I can say is it's in the right direction.

The next question is from the line of Shashank Kanodia from ICICI Securities.

Congratulations on a resilient performance. Sir, my question is pertaining to even going forward, we are the leaders in CV space and CV cycle is expected to bounce back sharply over the next 2 to 3 years. So is there a possibility that we can really clock 10% kind of EBITDA margins in the next, say, 2 to 3 years time, sir?

Yes, Shashank, I definitely would think so, yes. Why not? I mean with all the efforts that we are looking and now the volume is going up, we can look at double-digit margins -- EBITDA levels, yes.

Sir, any specific time horizon that you're looking for? Or any targets internally?

Well, I mean all I can say is that a 3-year time line should be a good bet.

Okay. And sir, traditionally, what kind of pent-up margins do we realize in the CV domain, vis-a-vis the 2-wheeler or the 4-wheeler pack?

Shashank, as you know, we don't share the segment-wise margins. But yes, CV has decent margins, yes. So what we are trying to do is, Shashank, recently, in CV, since we are dominant in India, we are trying to leverage that to take our reach globally. And that's where DAF, we had got the CV order, but the CV volumes, unfortunately, were not -- did not mature to be very good volumes. We continue to export to them. No issues on that front at all, but their volumes are not so good. So DAF was a very important step for us. So we have just started supplies. And once we see some good success on this, we have another 2 products with DAF coming up, and DAF is part of PACCAR group. So that may open up doors. And we definitely wish to take CV global.

Right. Right. Sir, secondly, since you mentioned in the 2-wheeler part, Hero is not a key customer. But now since TVS and Bajaj are reporting better numbers, so can we really outperform the industry going forward, at least by immediate term, next 3 to 6 months?

I mean yes, TVS is really doing extremely well, what you said is right. Bajaj is doing very well, especially in the export segment. Honda, where we had kept on winning new orders, and we also got the front fork, unfortunately, their volumes are a little low. But I'm sure they'll look -- they'll pick up too soon. And with Yamaha, Suzuki, our story remains quite strong. Very well embedded. So yes, I mean, certainly, we can aim for going ahead of the market, which we had done last year. In fact, in '19-'20, we had grown better than the market. So in 2-wheelers, yes, we can certainly aim for that.

Okay. Sir, lastly, our other income has been quite high for the last couple of quarters. So is there any one-off or is it a normal usual run rate that should continue going forward? It has never been so high.

Shashank, I'd missed a few words, can you repeat?

Yes. Sir, the other income that we realized, which was INR 6 crores for this quarter or INR 4 crores for last quarter, has never been so high on a quarterly basis. So is there any one-offs? Or this is a normal new run rate?

Shashank, this is Rishi here. So yes, you're right that there was one-off of some refunds being received from the tax authorities.

Sir, what would that quantum be for Q3 and Q2?

So the extent of INR 20-odd million.

Sir, sorry, I didn't get that figure.

INR 20-odd million for the quarter.

INR 20-odd million, INR 2 crores.

Yes.

Okay. Yes. Sir, lastly, sir, towards your vision of being into top 5, any inorganic acquisitions that you have finalized or are progressing ahead? Or any color you'd like to share with us?

Like I'd mentioned, yes, we were looking at something, then probably because of COVID, things were kept on the back burner. But yes, we are pursuing. And well, nothing more that I can share as of now. But yes, our pursuit is definitely on.

The next question is from the line of Nikhil from SiMPL. [Operator Instructions]

Congratulations on a very good set of numbers and on the great cost control, which you have displayed. Sir, I have 2 questions. One is on the 2-wheeler segment. Now if we look at the 2-wheeler market construct, between Bajaj and Hero, the -- you've mentioned multiple times in your calls also that market share in Bajaj can be -- is limited to a certain percentage. We cannot go beyond that. So if I have to understand if we have to increase our market share in the 2-wheeler segment, how do you see opportunities evolving for us? Is there more room for us to gain wallet share of the players where we are not present? If you can just help me understand that part.

Yes. So Nikhil, certainly, there is some, I mean, upside in terms of increasing our share of business even though within existing players, like TVS that used to buy from China, which they have now shifted to the source which moved -- I mean it is KYB Japan, who set up shop in Chennai, in the Yamaha Vendor Park. So they buy from that. So there is some room which we can certainly look at increasing our share of business within TVS, certainly. There are some models where we are still -- I mean presence is low for whatever reasons, there can be some upside of that. In Bajaj, yes, we have told we have kind of cap. But again, you can never -- I mean, I'm an optimist, and you can never say how things can change, even a few percentage points improvement can make a difference there. And then as I said, we are looking at totally new customers, which is the EV segment. So Ola, we are the single source, Okinawa, we are a source. We are there with Ather, which is you're seeing a lot of publicity on Ather currently. So we are with them. We are with Ampere. We are with several other electric 2-wheelers and 3-wheelers. So that's where the upside will come because naturally, these EV will replace some amount of normalizing in scooters. So certainly, with that being well entrenched with them, will give us that upside.

Sir, another question was like recently in one of the competitor's call, we understood that Hero was looking to diversify their supplier base. If you don't mind, would you share why -- were we participating in that business or we structurally took a call that we don't want to participate because that's a big business, which could have taken the scale to a larger level. So I'm just trying to understand what was the reason for not participating or anything if you can share?

So I don't think we, even as late as the, let's say, a couple of weeks back we are engaged with the Hero. We have continuously been engaged with Hero. They had thought of -- they were going to start the Andhra Pradesh plant, as you would know. So their plans changed. Otherwise, we were in really advanced discussions with them. So there's absolutely no call whatsoever from our end that we can't address. In fact, we are obviously very keen to be part of Hero. Our pursuit continues. And even as late as last week, as I said, we are continuously pursuing with them.

The next question is from the line of Aditya Makharia from HDFC Mutual Fund.