PPAP Automotive Limited (532934) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Janice, the moderator for this conference. Welcome to the conference call of PPAP Automotive Limited arranged by Concept Investor Relations to discuss its Q3 and 9 months FY '20 results for the quarter ended December 31, 2019. We have with us today, Mr. Abhishek Jain, Chief Executive Officer and Managing Director; and Mr. Anurag Saxena, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gaurav Girdhar. Thank you, and over to you, sir.

Good evening, everyone. Thank you for taking time out for the Q3 and 9-month FY '20 conference call of PPAP Automotive Limited. We have with us today Mr. Abhishek Jain, Chief Executive Officer and Managing Director; and Mr. Anurag Saxena, Chief Financial Officer. We will begin the call with opening remarks by Abhishek, sir, and then we will have the question-and-answer session. I would just like to point out that certain statements in today's call may be forward-looking and we have already put out a disclaimer to that effect at the end of the presentation. So now I would like to hand over the conference call to Abhishek, sir. Over to you, sir.

Thank you, Gaurav. Thank you, Janice. Ladies and gentlemen, a very good evening to all of you. I'm Abhishek Jain. I welcome you all to the conference call to discuss our financial performance for the third quarter and the 9 months of financial year '20. Firstly, we will start with a short overview of the industry, followed by a brief about the company. After that, we would cover our financial performance. Along with this, today, we will touch upon some of the initiatives that we have taken in the past quarter to sustain our profitability as well as steps taken by us to derisk the company's operations from the current scenario. Ladies and gentlemen, you are already aware, the last quarter was, again, a challenging quarter for the overall auto as well as auto ancillary sector. The quarter witnessed a 7.6% degrowth in the production of passenger vehicles compared to the previous year and 5.6% degrowth compared to the previous quarter. The 9-month production also witnessed a degrowth of 13.5% compared to the previous financial year. The festival season has resulted in good sales growth for the industry. In the quarter under review, the sale of passenger vehicles recorded an upside of 26% compared to the previous quarter and almost stable sales compared to the previous year. The quarter saw a drastic reduction of inventory levels of passenger vehicles. The inventory, which had reached 65 to 70 days, saw a gradual decrease to 25 to 30 days' levels. Going forward, we expect recovery to take place in the industry due to the reduction of inventory levels and the launch of BS VI vehicles by the OEMs. The confusion over BS IV transition to BS VI is somewhat clear, with most of the OEMs now offering BS VI-compliant vehicles. However, high GST registration charges as well as insurance charges continue to damper the sales of the vehicles. We are hopeful that government will take prudent measures to ensure good growth in the automotive industry since this industry forms the backbone of the manufacturing GDP, to which it contributes almost 45%. The recent budget has reemphasized the focus on development of infrastructure, which should also result in higher demand of vehicles. Now just a small recap of what PPAP is about. So we manufacture polymer extrusion-based automotive sealing systems, interior and exterior injection-molded products. We have 7 facilities, which are established strategically in the key automotive hubs in India. We manufacture over 1,000 different SKUs, and we ship over 200,000 parts everyday to our customers, which include the Japanese as well as the other major OEMs in the Passenger Vehicle segment as well as Commercial and Two Wheeler segment as well. The company continues to focus on enhancing its per car contribution. We have a joint venture for making rubber parts in the Passenger Vehicle segment. Kindly refer to the presentation, which has already been shared with you. More details can be found in that presentation. In the current year, we have started supplying 102 new parts to our customers. We are supplying parts for models recently launched in the market like MG Hector, Tata Harrier, Renault TRIBER, Nissan Kicks, Hyundai Creta, Maruti S-Presso Toyota Glanza, among others. We have also started supplying parts for new Suzuki motorcycle, Gixxer, along with their scooters, Burgman and Access. We've also added parts for Honda scooters. We are currently developing 169 parts for 15 new models, which will be productionized in the next 2 years. We are also in talks with our customers for prospective parts for their new models, for which development will start soon. To derisk our sales, we have established a new commercial toolroom vertical in the company. As you know that we have been operating our tooling facility as a captive toolroom. But this year, we have converted it as a commercial tooling facility, where we will be manufacturing tools for our in-house purpose as well as for commercial sales purposes. Also taking advantage of the problem of reduced sales in the last quarter, we have established 2 new wholly-owned subsidiaries of the company. While one of the companies will focus on distribution of components and automotive accessories in the market, the other company will focus on development of electric vehicle components. For the distribution company, we will start designing and manufacturing of special products with our know-how and also explore the untapped accessories market. The focus here is to provide the customers with high-quality products at a competitive price. For the electric vehicle company and vertical, we will be focusing on products for the 2-wheeler and the 3-wheeler industry. Apart from development of the existing product range with these new customers, this vertical will also develop new products in the battery space. Now let's talk about the financial performance of the quarter ended 31st December 2019. In the quarter under review, revenue from operations on a stand-alone basis stand at INR 79.14 crores compared to INR 85.29 crores, witnessing a degrowth of 7.2% on quarter-on-quarter basis. Our part sales for the quarter stands at INR 76.38 crores as against INR 80.51 crores in the previous quarter. The EBITDA margins for the quarter stood at 13.4% compared to 12.7% in the previous quarter and the overall 9 months margin are at 14.3%. The profit after tax for quarter 3 stood at INR 3.52 crores compared to INR 4.32 crores in the previous quarter. The PAT margin stood -- stands at 4.5%, and the EPS for the quarter stood at INR 2.52. Looking at the challenging times, the company started a drive in August 2019 called Every Paisa Counts. The purpose of this campaign was to identify the wastages in the company and make the company lean. In this campaign, our focus was to extensively look at our cash flow management, cost management as well as reduction of breakeven levels. All the heads of department were required to come up with areas where there may be possibility of becoming lean. Discussions were held with various CFTs and many countermeasures were taken. Each key expense was critically reviewed like production process, material costs, manpower costs, power and fuel generation expenses, repair and maintenance costs, logistic costs, et cetera. The focus was to find the red behind the green. By doing this campaign, the company was able to maintain profitable operations in the quarter and improved the margin even though the sales were lower than the previous quarter. In difficult times, we remain fair to all the stakeholders of the company. We did not lay off any people. Everyone in the company shared the burden and contributed to improve the operations as one team. We are quite confident that with the strong cost awareness and mindset being developed during the troubled times, the company will bounce back to its financial performance as soon as the production of vehicles surges due to higher utilization of assets. Now just a recap for the 9 months figures. For 9 months in the current financial year, revenue from operations on a stand-alone basis stands at INR 256.48 crores compared to INR 311.84 crore, witnessing a degrowth of 17.8%. Our part sales for the same 9 months is INR 245.32 crores compared to INR 294.87 crores due to the slowdown and low production in the industry. For 9 months, EBITDA was INR 36.71 crores. The company reported a stand-alone PAT of INR 13.61 crores for these 9 months compared to INR 26 crores during -- INR 26.36 crores during the same period last year. The PAT margin is 5.3% for these 9 months compared to 8.5% and for the 9 months in last year. In spite of the challenging times, the company has paid an interim dividend of INR 1, which is 10% of the face value for H1 of financial year '20. The EPS for the 9 months stood at INR 9.72 as against INR 18.83 for the corresponding period last year. I hope you now have got a sense of the activities, which the company is taking and has taken to ensure future growth as well as to sustain profitability. Now I would like to hand over to the moderator for managing the clarifications that you may want to seek.

[Operator Instructions] We take the first question from the line of Devvrat Himatsingka from Bajaj Financial (sic) [ Bajoria Financial ].

It's actually Bajoria Financial. But yes, I was just wanting to understand how the auto market is placed in the next 6 months, like, what do you see? Because, like, do you see the inventory still there? Or do you see the inventory clearing out? Like do you think auto sales are going to -- for passenger vehicles, especially, since they're our largest customers? Or would they start picking up anytime soon?

See, from what I've been discussing with the customers, so most of the customers, they have a negligible inventory of BS IV vehicles in their premises. So most of the customers now have only BS VI vehicles available. And at the dealer end, there are still some BS IV vehicles being available, along with these BS VI vehicles. So inventory side, like the biggest concern what the industry had faced was this -- was the big inventory of BS IV post 1st April 2020. So that concern might not be there now because everybody has taken countermeasures and most of these companies have started producing BS VI vehicles. The overall inventory side you're talking about, inventories have already come down to 25 to 30 days, which is a standard inventory size for the industry.

Okay. And just one more question. I just wanted to ask then, like, do you think that -- do you see like a trend of like more orders coming in compared to, say, maybe the past 2 to 3 quarters where there's a necessary slowdown?

Well, this quarter is looking much better than what previous quarters have been. So we are quite hopeful that this quarter is going to be much better than what we've -- there is going to be a substantial amount of recovery in this quarter.

We take the next question from the line of Jaimin Desai from ICICI Direct.

My first question, I wanted to get a sense on the pricing environment. Has it improved in Q3 compared to Q2? And what is the trend that you're seeing in Q4? I ask this because the production numbers from the OEM side were better sequentially during Q3.

Mr. Desai, actually, production numbers were bad in Q3 compared to Q2. The sales were better, but production, because they had a lot of inventory piling up, piled up. So last quarter saw basically clearing of this inventory. And I'm not sure I understood your pricing concern. What exactly do you -- are you interested in asking?

No. See, the sense that I was trying to understand was have the OEMs sort of relaxed their pricing terms with you? Or does it continue to be slightly challenged still?

Well, it continues to be the same as what it used to be. There is no change in pricing agreement or something between us and the customer. So we are already -- like we've got foreign exchange contracts with the customers wherein they compensate any foreign exchange increase or decrease. So that is -- those contracts are already in place. There's nothing changed for that. And there's been no extra pressure on us, just because the market is down that we have to supply our parts at a cheaper cost or something to the OEMs.

All right. Secondly, sir, I wanted to understand the margin improvement that we've seen on a Q-o-Q basis, how much of that can be attributed to the cost initiatives that you spelled out? And how much of that was due to other factors? If you could give a sense on -- in number terms.

See, most of it was based on this initiative. For example, I'll share with you some initiatives which we have taken. Like for energy cost, so like all 7 plants, we've got a certain amount of connected load for which we are paying minimum fixed charges every month. Now during this period, we reviewed all the connected load, and we could reduce -- we could identify that in some plants, we've got extra connected load. And we've gone ahead and reduced that connected load from the, some days, power companies, which will reduce our fixed cost when it comes to power, energy. So that is like one initiative which we've taken. Then logistics, like our number of deliveries going to the customer was -- remain the same. But in every truck, the number of parts was -- were reduced because timing-wise, it's remained the same, but quantity-wise, it was reduced. So earlier, we were sending like dedicated trucks from each plant to the customer. But now we are doing like a truck pooling between our plants and making sure that the truck is completely full load and then sending it to the customer. So this kind of system has also benefited our bottom line. Then we've looked at maintenance costs, like we bought same machine in different plants. So we -- maybe there was a need of keeping spares and inventories in older plants, so we combined our spares store. And we are managing now inventories within one plant only for all the other plants. So that reduced our inventory in the spares space side. Then we've looked at the EMC, which we are -- we were giving for all the equipment that are there. And we reviewed it, whether we require that or not require that. Then the maintenance schedule, which we were doing for our machine -- machines, was basically on a time-based schedule that we've shifted now from a time-based condition to a condition-based system. So there's a lot of initiatives like this which was taken by the whole group, which has yielded this reduction of costs.

Great. And finally, you spoke about past ambition to increase our kit value with the OEM customers. Could you give us a sense on what it would be at present? And how much is it going to put, this [ cable ] practice?

See, currently, our kit value for Honda vehicles is the maximum, where we do about INR 6,000 to INR 6,500 per car. And when it comes to other OEMs, it varies substantially. Like with Maruti, it used to be about INR 1,100 range. Now we are trying to make it up to INR 2,500 or something by adding more injection molding products. So every customer, we are doing the same thing. So now our focus has been on increasing this further with Maruti.

[Technical Difficulty]

Sorry, your voice is breaking up. I couldn't understand the question.

Mr. Desai, your audio is breaking up.

Yes, am I audible?

Sir, I'm sorry, we are unable to hear you. Requesting you to please rejoin from a different number. The next question is from the line of Sunil Shah from Turtle Star Portfolio.

Yes. Sir, I have one question. We are catering to various different car models. We are big time with Maruti, I mean all these new companies as well, meaning, MG Hector and all the new models. Sir, can we get a sense of the actual sales which are happening? How many different types of vehicles have our product? So what is our penetration level of the total market? Can you give some indication you'll be also doing for Wagon R and Etios and Ciaz or whatever. So I just want to get a sense of -- so my thought is that when the cycle turns, how much we are already there in terms of the marketplace?

See, with Maruti, when it comes to extrusion products, so we have almost -- in plastic extrusion, we have almost 85% market share. And we are present all across every model. Maybe one part, we're not supplying or something like that, but we're present in all -- present all across all models of Maruti. And same thing for Honda also whatever models are produced in Honda -- by Honda in India, we are present all across models. Same for Toyota, same for Nissan, Renault also whichever models are being developed in India now. So we have presence at -- in all the models together.

So to just put it in that perspective, meaning if Maruti, Honda and all these guys, they have about 70% market share. Is it fair to assume that, of the total sales which are happening, you'll be having about 80% market share in all the models which are there?

Sorry, I -- can you repeat that, please?

Okay. Of, let's say, 2 lakh cars which are getting sold in the country from all the companies put together on a monthly basis, just hypothetically. Now in that, maybe [indiscernible] for Maruti we are almost there for all the vehicles. Likewise, for Honda, we are there for all the vehicles, even Toyota. So is it fair to say that of the 2 lakh, maybe about 160,000 or 80% of models will have our products across all companies put together?

I would say 75% because, out of this, I think 20% is basically Hyundai. And Hyundai, we are present only in 1 or 2 models only right now. So if you exclude Hyundai -- and like Hyundai and Kia, basically, so I think these 2 companies put together, they would be contributing almost 20%, around.

Right. So barring that, we are there, you mean. Okay. How about...

Yes. Rest of it, we are there.

Yes. How about at the Two Wheeler side?

Two Wheeler side, we've just started venturing into it about 3 or 4 years ago. So we're just present in, I think, 1 or 2 models of Honda and 1 or 2 models of Suzuki. We're not present in Hero at all.