PPAP Automotive Limited (532934) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to PPAP Automotive Limited Q3 FY '22 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. Abhishek Jain, MD and CEO from PPAP Automotive Limited. Thank you, and over to you, sir.

Thank you, Tanvi. Good evening, ladies and gentlemen. Welcome to our quarter 3 and 9 months financial year '22 earnings call. I'm Abhishek Jain. Joining me is Mr. Sachin Jain, the CFO of the company; and SGA, our Investor Relations adviser. I hope that all of you and your loved ones are safe and doing well and taking adequate precautions to limit the spread of the COVID infection. We have uploaded our investor presentation on the exchange, and I hope everyone has had a chance to go through the same. Before we start the discussion, I would like to inform you about sustainability efforts being initiated by the company. We are delighted to announce that the company has published its first sustainability report for financial year '19/'20. The report defines the initiatives which the company has taken in the areas of environment, social and governance. Following best-in-class ESG practices is our motive at PPAP and it is also ingrained in our culture, value system as well as day-to-day working. The report has been successfully uploaded on the Global Reporting Initiative, GRI portal as well. I'm happy to report that this first report has been judged in top 8 in Asia for first-time reported by Asia's Best Sustainability Reporting awards. I will now give you a brief about this report. On the environment side, PPAP has been taking initiatives for reducing energy consumption and GHG emissions by installing rooftop solar and introducing various energy-efficient technologies. PPAP is committed to improve waste management and water resource management practices at the plant continuously. The safe and responsible management of hazardous, non-hazardous and high-volume solid waste is crucial for our business. On the social front, PPAP is committed to constantly improve employee development in the skill and talent management cycle from employment growth and retention through training and user friendly technology. We are continuously appointing female workforce at the shop floor as well as at our corporate office to promote gender diversity and inclusivity. We also focus on human rights, hence, ensuring safe and healthy working environment for all our employees and stakeholders. The CSR initiatives are done through Vinay and Ajay Jain Foundation in the field of environment, education and healthcare for society. On the governance side, PPAP strongly believes that affected and good corporate governance practices build a strong foundation of trust and confidence, attracting human capital leading to sustainable and superior performance. There are various committees that play a crucial role in the government structure of the company and has been contributed to deal with specific areas and activities which concern the responsible business practices. Also, PPAP has a code of conduct for all employees, including the Board and senior management personnel. Now I'm starting with the operational and financial performance of the company starting with industry outlook. On the industry front, the auto industry was facing a severe semiconductor shortage, which has now started to ease with our customers now focusing on making more number of vehicles. There are several policy initiatives announced by the government, the PLI scheme for automobile and auto component proposes financial incentives to boost domestic manufacturing of advanced automotive technology products and attract investments in the automotive manufacturing value chain. The government has also proposed manufacturing of semiconductors in India. The industry appears to be on the verge of an electric evolution. The transition from fossil fuels to electric mobility is underway, which is quite visible in the 2-wheeler and the 3-wheeler industry currently. The government's proposal to implement a battery swapping policy for EVs with interoperability standards will benefit the entire EV ecosystem, particularly the 2-wheeler and the 3-wheeler segments. The government is supporting the industry and we feel that these policy initiatives are going to act as a booster to the growth of the industry. Now I will share with you the brief overview of our company and move towards financial performance. The company was established in 1978 and entered the automotive component business in 1985 with the start of operations of Maruti Suzuki in the country. Since then, the company has been expanding its customer base and adding new products to its portfolio. The focus of the company is to become a global level excellence company, which can inspire people to outperform their potential in order to exceed the expectations set forth by customers', society as well as stakeholders. The company's state-of-the-art manufacturing facilities are spread over 4 states: UP, Rajasthan, Gujarat and Tamil Nadu. In the past 2 years, we have restructured ourselves internally and identified 5 business verticals, which will be catalyst for growth going forward. The first vertical is the automotive part business, which is the core business of the company. PPAP continues to be the leading manufacturer of automotive sealing system, interior and exterior automotive parts in India. We have a JV with Tokai Kogyo for manufacture of rubber automotive sealing systems. The products manufactured by this vertical are engine agnostic and can be easily extended to the electric vehicles as well. This vertical today manufactures over 1,000 different SKUs, and we ship over 200,000 parts every day to our customers, which include the major OEM manufacturers in the country like Maruti Suzuki, Toyota, Honda, MG Motors, Volkswagen, Hyundai, Kia, Tata Motors, Renault Nissan, Isuzu, along with their Tier 1 companies. The company also supplies products to Suzuki motorcycles and Tier 1 companies in the 2-wheeler segment. We have always believed that latest technology plays a pivotal role in the overall business. And with this underlying thought, we have a technical collaboration with Tokai Kogyo since 1989 for development and manufacturing of automotive body sealing system and also with Nissen Chemitec Corporation since 2007 for development and manufacture of interior and exterior injection molding parts. We've also tied up with Tokai Kogyo Seiki to manufacture tools and dies complementing the automotive part business. We are continuously scouted for new customers and increasing our per car value for the existing customers. We are investing in new technologies, both on the part side as well as the process side to further develop technology prowess for the company. We are developing approximately 400 parts for our customers, which will be in production in the next 2 years. During the quarter under review, due to the ongoing semiconductor shortage, the sales for this vertical was impacted due to reduction of production by the OEM customers. The performance also has been impacted on the back of uptick in the commodity prices, coupled with supply chain logistics cost. The chip shortage has also caused inventory pile up with OEMs We believe the chip shortage issue is easing out gradually, which will enable the industry to deliver higher sales going forward. Compared to last year, the quarterly production volume of the industry is almost down by 12.5%. During this quarter, we have started delivering parts for the newly launched Maruti Celerio as well as Skoda Slavia. The second vertical is the aftermarket business. This is a new area of growth for the company, which is being rolled out in Elpis Component and Distributors Private Limited, which is a 100% subsidiary of PPAP. The focus for this vertical continues to develop and supply spare parts as well as premium car accessories and cleaning products for the customers. Currently, the company offers 250-plus products as spare parts and 50-plus products for accessories. We are dealers -- we have already established a dealership network of 60-odd dealers in 35 cities and we have already set up a warehouse for catering to these dealers. The company has also established its online shopping portal, shopelpis.com and we are also selling our products through other e-commerce ventures like Amazon, et cetera. If you are an Instagram user, please like and follow our page Elpis Auto. The third vertical for the company's growth is Pail container business. This business was born out of identification of products for which we can utilize the spare capacity of our injection molding machines. We started supplying these containers to the agriculture industry. We already have 5 products to offer and are developing 15 more in order to expand to adhesive, paints, FMCG and lubricant industries. The fourth vertical for company's exponential growth is the electrical vehicle industry, as we've been discussing in the opening remarks also. We have established a new subsidiary known as PPAP Technology Limited to focus on this enormous opportunity. As you all know, the 2-wheeler industry is going through a massive transformation, the government policies are also supporting it. The expectation is that more than 50% of the industry may be switching over to electric vehicles in the next 4 to 5 years. We have made some headway in developing battery packs. Our in-house design and development team is currently working on 11 battery packs for our customers. We have already developed a portfolio of 34 products which are under various stages with the customers. We've established 1 assembly line with a capacity of 125-megawatt hour per year for making 20,000-plus packs and the second assembly line is under installation currently. This subsidiary will also focus on development of battery packs for storage applications. During this quarter, we have added 3 new customers in the EV 2-wheeler segment and one new customer for storage solution. We are seeing a lot of traction in this vertical and a lot of interest from the customers. We are very confident that this vertical will show promising growth going forward. Since this is a new initiative and a new company, the breakeven is expected to reach within this quarter. Apart from the battery side solutions, we started getting active interest from customers for plastic parts development as well as tooling development. We are also working on making plastic parts for the chargers. You can see the complete portfolio of our offerings in the presentation, which has already been shared with you and is available on our website as well as the stock exchanges. The fifth vertical for growth is the commercial tool room to manufacture plastic injection molds. Currently, this vertical can design and develop molds up to 1.8 meters. This vertical has the capacity to manufacture 80-plus molds per year. Currently, they do -- they make molds for our automotive parts business. Besides that, we are continuously adding customers from outside industries. During the quarter under review, we've added 4 new customers from various industries. Due to global logistic problems, we are seeing a lot of traction in this vertical from customers in automotive segment, white goods, electrical goods, medical goods, et cetera. Most of the companies who are buying exclusively from China have changed their policy to China Plus One in order to [indiscernible] and this is what is driving this business and is creating a huge opportunity for us. Now let me throw some light on the financial performance and key developments for quarter 3 and 9 months for financial year '22. For the stand-alone results, the revenue grew by 7.1% from INR 103.8 crores to INR 111.2 crores in quarter 3 on a quarter-on-quarter basis. Revenue witnessed a strong growth of 41% in 9 months financial year '22 against the previous year financial year '21. EBITDA remained flat at INR 11.7 crores on a quarter-on-quarter basis with the company achieving a double-digit EBITDA margin of 10.5% in quarter 3 financial year '22. EBITDA grew by 62.8% to INR 27 crores in 9 months of financial year '22 on a year-on-year basis. The margins are under pressure due to higher commodity prices, which have persisted during the quarter under review. Profit after tax witnessed a degrowth of 9.2% in quarter 3 and stood at INR [ 2.3 crores ] compared to INR 2.6 crores in quarter 2 of financial year '22. 86% of the revenue of the company is derived from sales of parts, whereas balance is derived from sale of tools and others. Maruti Suzuki continues to be the largest customer for us and it contributes 34% to the overall revenues. If you include Suzuki Motor Gujarat also in these numbers, then the total contribution goes up to 50%. PPAP, as I've shared with you earlier, we started supplying parts for the newly launched Maruti Celerio and Skoda Slavia. During this quarter, we have received Zero PPM award from our customer, Toyota and as well as from Hyundai. We've also been shortlisted for Quality Circle Competition and Kaizen competition, which is going to happen on a national level by our customer Honda Suppliers Club. The capacity utilization has improved and it stood at 65% in the current quarter. Our aim is to improve capacity utilization levels going forward and achieve operational efficiencies. For consolidated results, our aftermarket subsidiary has grown profitable and contributes positively. The EV component subsidiary, as just said, being a new company is expected to contribute positively this quarter. Just to summarize, we anticipate that industry tailwinds, the development of favorable policies and a vision for long-term and sustainable growth will provide us with numerous opportunities in the coming years. All these opportunities are technologically and strategically ready for us to capitalize on. Also, we foresee significant improvement in the performance of the individual business verticals, which will enable our company to scale new heights in the future. Thank you, everyone, for your patience listening. And now [ Tanvi ], we can open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of [indiscernible] securities.

Sir, firstly, sir, the company's capacity utilization is maintained at 65% in Q3 FY '22, like previous quarter. When can we expect an uptick in capacity utilization?

Yes. Thank you, Mr. Shah for your question. See capacity utilization is a factor of how many cars are getting produced by the OEMs. So now since the semiconductor shortage situation is improving and our customers are building more cars, we see this numbers now getting improved in the current quarter.

Understood, sir. Sir, on EV front, do we have tie-ups with any 2-wheeler OEM.

What do you mean by tie-ups, Mr. Shah?

Sorry, hello?

Do you mean like technology tie-up or...?

Yes. Yes, sir, technology tie-ups.

We don't have any technology tie-up but based on certain commitments from the EV makers, we are developing battery packs for them by ourselves. And we have -- either we do it -- either this has been done by our in-house development team or is being developed by our tie-up with the [indiscernible].

Okay. Sir, any other products that we are developing on EV front?

Like I said, apart from this battery pack system currently we are extending our existing portfolio, which is plastic parts and tools to all EV 2-wheeler makers. So right now, we have RFQs from 2 of such makers for developing their complete plastic parts and tools also.

[Operator Instructions] The next question is from the line of Anil Kumar Sharma, Individual Investor. As there is no response, we'll move to the next question, which is from the line of Nisha Desai from Raga Securities.

Sir, I have a couple of questions. Hello?

Yes, please go ahead. Sorry, we didn't -- I didn't get your name.

Yes, this is Nisha Desai. Sir, I have a couple of questions. sir, I wanted to understand we are witnessing a pressure on EBITDA margins on sequential as well as on a year-on-year basis. So sir, what are the reasons for the drop in the margin.

It's primarily due to the commodity prices, which have unprecedently gone up in the last 9 months.

Right.

So operations side, we are quite efficient. We continue to be efficient. But this 9 months sudden and unprecedented prices going up for all the commodities, that has actually hit us quite badly. And we are in talks with the customers to find out some mutually acceptable solution to this whole project.

Okay. Sir, on a steady-state basis, what kind of EBITDA margins can the company achieve going forward?

See, historically also, if you see, we were quite comfortable. Maximum, what we've achieved is about 21%. But honestly, we are quite comfortable between 15% to 16% margins.

Okay, sir. Sir, secondly as you mentioned this commodity prices have been on a rising trend. I mean they've been increasing. So sir, how do you manage the rise in the raw material prices? I mean what steps do we take?

See, first of all, this is an unprecedented increase, which we are witnessing first time in the industry. Previously, we had contracts with the customer for foreign exchange price increase and all. So we were quite insulated from that point of view. But this sudden and unprecedented price increase in the last 9 months has hit us very badly. And this is now forcing us to have, again, discussions with the customer on how we can arrive at a mutually beneficial situation for both the customer also and for the company as well.

Okay, sir. So sir, like how much percentages rise in the raw material price, have you passed through to the customer in this quarter, Q3?

Yes. For the -- in this quarter, because if you see the major increase was in the Q2 in the raw material prices. So because there is a quarter lag on the part so that was passed on to the customer because they are 50%, 50% of the [indiscernible] the customer and 50% part we are able to pass on the material increase cost to the customer. So in this quarter, the prices has been a little bit stable. However, the impact which has come [indiscernible] in Q1 and Q2 that is reflecting in the Q3.

Okay, sir. Sir, then on the industry front, sir. Can you guide us through this current issue of the semiconductor chip shortage, which is going on? I mean I believe that, that issue is easing out right now. I mean, so can we expect a normal scenario for the same?

For the semiconductor shortage?

Yes. I mean, sir, if you could give us some update on that, I mean, what is your view on that.

There are a couple of issues why this semiconductor shortage happened. First of all, we need to know that automotive -- the global automotive industry is just a 5% customer of the entire semiconductors, which are produced in the world. So 95% of these semiconductors are used in nonautomotive applications like white goods or cell phones, laptops, computers, et cetera. In the past 1.5 years, it's -- so 1 factory, which was supplying semiconductors to the automotive industry in Japan. Unfortunately, they had an untoward incident because of which they lost out on some production equipment. And to meet the requirements of the automotive industry, they had actually ordered new equipment. But that new equipment instead of adding to the capacity got utilized in replacing the capacity, which got burnt out in this whole incident. Then during this whole first wave, second wave, the whole pandemic, there have been a lot of restrictions in Malaysia, which could not produce that many chips for the industry. And Taiwan side also, a lot of restrictions were there. But now that all these restrictions are being removed, things are now getting back to normal -- production of semiconductors is now coming back on track. In the meantime, a lot of customers have also been able to secure the semiconductors. So now things are getting much better. But we cannot say that we are completely out of the semiconductor problem. For this quarter, the customers have assured us that they have enough semiconductors to manufacture vehicles, but situation still remains uncertain. And it's only expected to ease out maybe by the end of this calendar year or by end of this -- end of the next financial year when some more new capacities are expected to come up in Taiwan also -- I think in Taiwan basically.

Okay, sir. Sir, just my last question, Maruti Suzuki is expecting like Q4 to be the best quarter in this fiscal year. So are you witnessing a similar scenario?

Well, Maruti Suzuki contributes 50% to our sales. So I think you can [indiscernible] with what Maruti is saying.

[Operator Instructions] The next question is from the line of it from [indiscernible] Securities.

I have a few questions. In the non-auto segment, how is the Pail container business shaping up and new development in this space?

For the Pail container side, we have started -- initially, we have started with the agriculture industry. So we have developed a certain product for the Pail industry. And further, we are developing more products for this lubricant side in the chemical industry.

Okay, sir. And first, can you tell us about the overall strategy at the group level? And what is the top line growth expected in the next 3 to 5 years?

Ms. [ Kothari ], we've already shared with you that the 5 areas of growth, which we've identified. So each grow, each area has a significant potential of growth and a lot of opportunities for us to grow. Putting a number towards this will be a little difficult for us because we don't want to give any guidance or something. But we are working hard, and we are quite positive in finding new opportunities in all these 5 verticals that we've been talking about till now.

Okay, sir. Sir, 1 last question. Coming to ESG initiatives, I believe PPAP has been doing great work on ESG part. Can you elaborate more on how the entire ESG ecosystem works?

How the entire ESG ecosystem works? I think we'll connect with you one-on-one as that's a very long topic. And we'll be happy to explain all the details to you. You can also access the report on our websites, the report which we have published.

[Operator Instructions] The next question is from the line of Manish Arya from ICICI Bank.

My question is on the capacity. We have seen there has been a lot of significant CapEx done in the last 4 years by the company. It's like almost like more than INR 150 crores that has been spent already and there has been additional capacity in the CapEx of INR 105 crores more in the company '22 and '23. And considering there has been not much traction, I do understand because of the fact that there has been slow down in financial year '21 and there was COVID impacted year '21 predominantly. However, we just want to know how traction in the coming 2 years -- because I think there has been a lot of spare capacity available to the company. And also the second question was since it has been -- there has been significant increase in the debt level of the company from [indiscernible] it has gone down -- coming to be around INR 80 crores by financial year '22. So how the margin will be [indiscernible] coming in the company and also considering the fact that there has been an investment of around -- investment in the PPAP Technology, which I'm sure is going to be higher in the coming 2 years as well. So how the company is going to cope up with these? I just want to have an idea, sir.

Thank you, Manish, for your questions. Regarding the CapEx. If you see the CapEx is mostly done in line with the customer requirements. So in the last -- if you have followed our company in last 5 to 7 years, 7 years back, we were present in the North area internally in the UP area. Then '14/'15, '15/'16, we expanded in Pathredi, Rajasthan area because Honda and Maruti, there was a new further requirement for that. Then we have set up an assembly facility in Chennai. And then we expand it to Gujarat. So after that, that assembly then we created our own facility in Gujarat also and the Chennai side also. So that way, the CapEx as planned and done based on the customer requirements. And as we also shared that there are 5 more initiatives, which we started in the last last 2 years. There is a commercial toolroom, there was an investment in that business also. However, due to this COVID situation, you're right, the traction was not there, the capacity utilization was not up to that level. However, considering the future requirement and the customer business in hand, the CapEx is being done. Regarding the debt level. The debt is -- as per the business plan, we review the situation and that [indiscernible] accordingly to meet our requirements. It's still -- our debt equity ratio is quite comfortable. It is around 0.2.

Sir, is it to leverage the investment that the company has been making in the group company as well? Is it like that? Or how much.

Yes, there are some investments in the PPAP Technology also. There is a good prospect in that company. So there are investment in that company also.

Okay. So how much is the more investment that you are taking in the coming 2 years in this PPAP technology?

Yes, that we mentioned [indiscernible] requirements that we are making internal business plan and accordingly we take the decision based on the plan of respective vertical.

Okay. So margins will be like under pressure probably in the next 2 years.

Yes, from the margin side, already mentioned that there's a pressure with unprecedented increase in the commodity side. And we are [indiscernible] with the customer, how customer can support us in this way. So we understand from the next year Q1, there should be improvement in our margins.

[Operator Instructions] The next question is from the line of [ Viraj Sona from NM Securities ].

Sir, what is the content per vehicle for our top 3 customers?

Yes, content per vehicle varies across customer to customer, for example, [indiscernible] Maruti along with [indiscernible] around INR to INR 2,500 to INR 3,000. In case of Honda, it is approximately INR 8,000, [ MG ] it is INR 4,500. Tata, it is around INR 1,400.

And sir, are we taking any steps for increasing the content per vehicle?

Yes, we are taking the steps. We regularly [indiscernible] the customer to [indiscernible] more products which we are part of our portfolio and we are not supplying to the particular customer. So this is the regular activity of BD department to take up with the customer and showcase our capability and the products which we make for all the customers to get more business and increase the value per car.

Okay. And sir, as you mentioned in this page, we have started supplying our parts to new models like Slavia and Celerio. What is the content per vehicle in both of the models?

Yes, it is difficult to share the model -- particular model-wise content per vehicle.

Okay. Sir, apart from Slavia and Celerio, have you begun supplying products to any other models?

These are the new SOPs or the new model launches by our existing customers.

As there are no further questions from the participants, I now hand the conference over to Mr. Abhishek Jain for closing comments.

Thank you, Tanvi. I thank everyone for taking time out of their busy schedules to attend this conference call today. Please feel free to get in touch with us or SGA, our investor relation advisers with any questions that you may have. We will also be more than happy to show you around our excellent facilities that have been created to service the customer. Thank you, everyone. Stay safe and a good evening to everyone. Thank you.

Thank you, all.

Thank you. On behalf of PPAP Automotive Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.