PPAP Automotive Limited (532934) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PPAP Automotive Limited Q1 FY '23 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, Managing Director and CEO, PPAP Automotive Limited. Thank you, and over to you, sir.

Thank you very much, Aman. Good afternoon, ladies and gentlemen, and welcome to our Quarter 1 Financial Year '23 Earnings Call. My name is Abhishek Jain, and I'm the Managing Director and CEO of the company. Joining me on this call is Sachin Jain, who is the CFO of the company, along with the team from SGA, Mr. Akash, our Investor Relations advisor. I hope everyone has had a chance to go through our investor presentation, which includes the strategy for making the company and subsidiary companies stronger, resulting in higher growth going forward, along with financial performance for the quarter ended June 30, 2022. The fiscal year 2023 has begun as the dawn of the new beginning all over the world, as the effects of pandemic is receding and people are experiencing normalcy in the post-COVID area. The global economy is witnessing a paradigm shift in terms of macroeconomic factors, such as elevated crude oil prices, with inflationary pressures and other commodities, interest rates, et cetera. On the industry front, the automobile sector has shown resilience despite multiple headwinds in the economy. We are witnessing a healthy demand scenario in passenger and commission vehicles on the back of pent-up demand and replacement demand. The Passenger Vehicle segment has grown by 33% between April and July against the same period last year. The Electric Vehicle segment is also growing at a promising rate. By 2030, it is estimated that 30% of the overall industry volume of 10 million units may be attributed to EVs led by 2 and 3 wheelers with passenger vehicles contributing 5% of it. India is expected to feature among the top 10 EV markets globally. The Indian auto component industry is in a sweet spot and will grow on account of increase in vehicle production and exports. There has been a significant thrust by the government in terms of battery stopping policy, PLI scheme, promoting semiconductor manufacturing in India. Auto component industry is expected to see 9% to 11% of its revenue coming from electric vehicles by 2027 amid increasing electrification. We are pleased to share that in this quarter, we have [indiscernible] scheme, which is called PPAP Employee Stock Option Plan 2022 to reward the employees of the company, including the subsidiaries, associates and JV companies, subject to the approval of shareholders. The group continues to grow strong in its core businesses as well as the new initiatives which were launched in the past 2 years. Now, I would like to take you through all the new initiatives and the new businesses that we have been doing in the last 2 years and where we are playing. So the core business of the company, which is the automotive parts; in the automotive segment, we have been proactively scouting for new customers and increasing our wallet share in the existing models. During the quarter, the company began supplying its product range to newly launched vehicles of Maruti Suzuki's Brezza and Honda City Hybrid. We are developing approximately 400-plus parts for our customers, which will be in production in the next 2 years. As you know, that our automotive parts business is engine-agnostic, so apart from IC engine, we are also now developing parts for the passenger vehicle related vehicles. We are currently in process of developing parts for 3 models, which are going to be launched by our customers. In the aftermarket initiative, our aftermarket segment focuses on development and sales of parts and accessories and is done through a 100% subsidiary called Elpis Components and Distributors Private Limited. In the quarter, we've been able to increase our product range to 350 plus as spare parts and 50 plus for accessories. We have also been able to increase our presence to 90 dealers spread across 35 cities across India. The third vertical for the company growth is the pail container business. This business was born out of identification of products for which we can utilize spare capacity of our injection molding machines. We have started supplying these containers to agriculture-based industry. Now we have almost 10 different type of products to offer, and we are expanding to adhesive pails and FMCG and lubricant industries. The fourth focus for our growth is the commercial toolroom, which can design and develop molds of up to size 1.8 meters based on injection molding, plastic injection molding technology. This vertical can manufacture 80-plus molds per year. This division manufactures most for our automotive parts business. And as for customers in other automotive segment, white goods and medical segments. Due to global logistic problems, we are seeing a lot of traction in this vertical from customers from all segments, including white goods, electrical goods, medical goods, et cetera. Most of the companies who were buying exclusively from China have changed their policy to China plus 1. And that is why this business is emerging as a huge opportunity for the group. The EV segment is the new world order for everyone globally. PPAP forayed into the manufacturing of EV components for electric cycles, two-wheelers and 3-wheeler applications. We manufacture battery packs for all these applications. We've already established 3 assembly lines, making our capacity of 60,000 packs per year. The focus on development of battery pack for storage applications like solar streetlight, mobile tower and energy storage solution is also in place. As I was telling you earlier, apart from focusing on electric cycles, 2-wheelers and 3-wheelers, we are also getting a lot of business from passenger vehicles for our existing product range of automotive parts and we are developing 3 -- we've got 3 projects for our customers, which will be launched soon till about -- for another 2 years. Now let me throw some light on the financial performance and key developments for quarter 1 financial year '23. For stand-alone PPAP, revenue grew by 47.8% from INR 78.6 crores to INR 116.3 crores in quarter 1 financial year '23 compared to year-on-year basis. The company clocked higher sales during the quarter under review and improved capacity utilization, which has resulted into an EBITDA margin growth of 255.5% to INR 12.5 crores in the quarter. EBITDA margin has witnessed a sharp uptick from 4.5% in quarter 1 financial year '22 to 10.7% in quarter 1 financial year '23. 93% of this revenue is derived from sale of parts, whereas balance is derived from sale of tools and others. Maruti Suzuki continues to be the largest customer of PPAP and Maruti Suzuki and Suzuki Motor Gujarat, put together, contribute about 50% of the total revenues. During this quarter, we have received some appreciation from our customers as well. We received the delivery award from Toyota for meeting all their delivery requirements, and were also awarded timely deliveries from Somemiya Corporation, which is a Japanese company, for our good quality and good supplier of tools from our commercial toolroom division. During this quarter, the capacity utilization stood at 72%. We will continue to improve our capacity utilization going forward and achieve operational efficiencies. In this quarter, we are also witnessing -- the commodity prices are also losing steam. So with higher utilization and with commodity prices losing steam, PPAP should be in much better position than what it is today. For consolidated PPAP, we reported a revenue growth of 56.5% from INR 78.8 crores to INR 13.2 crores year-on-year. EBITDA increased from INR 2.5 crores to INR 13 crores, and the EBITDA margin stood at 10.6% in the first quarter. Just to summarize, the 5 business segments will act as growth levers for the company. The semiconductor issue, which has been [indiscernible] the growth of the automotive industry is easing out now and sooner than later, things should become back to complete normalcy. The China plus 1 strategy is evident and India is well placed to reap the benefits occurring from that opportunity. The commodity prices are steadily losing steam. The CapEx plans of auto ancillaries are aligned with that of OEMs will drive the demand over the next few years. We are excited to be part of the manufacturing space in the country and PPAP is at a cusp of spectacular growth journey going ahead. Thank you for your kind listening. We will be more than happy to answer any questions that you may have. Aman over to you for starting the question-and-answer session please.

[Operator Instructions] The first question is from the line of Piyush Jain from Hansraj Virendra Capital.

Congratulations for a good set of numbers. So my first question is on you have announced the ESOP 2022 plan. Can you just elaborate more in terms of detailing how long this is going to last and what the P&L impact that would be having?

Yes. Thank you for the question. So basically, broadly same considering the next 5-year requirement of the company. And the overall limit, which we have captured is around 5%. So the grant decision, which is taken by the Compensation Committee based on the recommendation of the management time to time, considering the company's requirement and the individual profile of the employees, whom we are going to give those employee stock option.

So if I understood correctly, you are saying 5% of the total outstanding share capital that we are having.

Yes, yes.

And is that front loaded, means the first year would be having the higher effect? Or I mean, I'm just trying to figure out the P&L -- exact P&L impact that it would be having on the company in the next 5 years?

Currently, it is difficult to disclose the initial loan because that will be finalized based on the internal discussion and after the recommendation of the Compensation Committee. And as we already mentioned that [indiscernible] post that we will be in better position in Q2 to inform that how much utilization goes, capital or expense side of the P&L.

Fair enough, sir. Okay. So my second question is on the new segment like other than the plastic extrusions that we are having. So let's say, in the next 3 to 5 years, how much percentage of our revenue we see with respect to the revenue split between the old business and the new business, which we have entered into the last 1 or 2 years?

So we are looking to have at least 25% of business from these new initiatives, which we have taken in the last few years.

Okay. And the margin profile would be higher on this business compared to the existing business or it would be in line with the existing business itself?

It always depends on the business. For the 2 new sites, it could a little bit higher. After market site, it will be better. EV component is more or less the automotive industry, so it will be in line with our current margin structure for the company.

[Operator Instructions] Our next question is from the line of [Arjuna Shah] from Ashar Investments.

Thank you for this opportunity, sir. If you could just throw some light on how the aftermarket segment has been performing? And also, what would be your EBITDA margins in the segment, sir?

Aftermarket, last year, we closed a sale of around INR 10 crores. And that was almost like the first full year of operations. So going forward, because the base is very small, so we expect that we should be doubling the sales at least for the next 2 to 3 years every year.

Right.

[indiscernible] currently because the sales are kind of low, so the margin is somewhere between 7% to 8%. But we expect that when we achieve this critical mass, then we should be able to improve the margins in aftermarket businesses.

So sir, how big would our EV business be? And if you could tell us how it is shaping up, are we adding customers in this vertical?

The EV business, first of all, we are present across all the segments. So passenger vehicle side, whatever product range we make for the IC engine, all those costs can be made for the electric vehicle as well. So as you know, MG has already launched its ZS EV and Tata already has Nexon EV. So both of them, we are -- we supply parts for both these models. And one more customer, I'm not at liberty to name, but they are planning to have to launch a big EV in the next 2 years. So we already have a business for that model, and we're developing almost 20-odd parts for them. For the battery side, our focus is on 2 wheelers and 3 wheelers primarily, along with providing storage solutions for solar application and all that. And in that segment, we have 4 to 5 customers already who are doing business with us. And about 10-odd products are under development with potential customers.

All right. Sure, sir. That was very helpful.

The next question is from the line of Saral Seth from Indsec Securities and Finance Limited.

Congratulations for a good set of numbers. Sir, my first question is, as we've highlighted in our press release that we are venturing into Honda Hybrid and Brezza, so how is the traction there, sir? And with these higher premium cars, are we seeing increase in our realizations? So I'm trying to understand, are we benefiting from the premiumization of Indian passenger vehicle market?

See, these are 2 models which have been launched by our customers in this quarter. So the reason to name them was to give you a sense that new model launches, PPAP is present in it or not. Your second question regarding premiumization. Of course, it will benefit us because specification of our products change when you get into a premium kind of a product -- premium segment of vehicle. So that results in an increase in sales also and somewhat increase in margins as well, just because the price is higher. And price is higher, not just because it's a premium model, but the basic specifications of that product is different. For example, in a low-end vehicle, you see only black stretch on the door of the vehicle. But when you get into a premium vehicle, you see a stainless steel type of finish or a bright type of finish or different kind of finishes. So that is what drives the premiumization of our products. The specifications change.

Understood, sir. And all your key customers like Maruti, Honda and Tata have been continuously guiding for increased production amid better outlook and easing chip shortages. So are we prepared to handle such kind of increase in production? And where do we stand in terms of capacity utilization currently?

As I explained, so first quarter, our capacity utilization was about 72%. So whatever customer is projecting us to deliver, we are completely ready to get all those supplies together. We are completely geared up.

Okay. And what are our CapEx plans for FY '23?

For this year, we are looking at add around INR 35 crores to INR 40 crores.

Would that include maintenance as well or the maintenance is separate?

Including the maintenance, replacement and [indiscernible].

Okay, sir. Sir, our gross margins have improved sequentially in a very high rising input cost environment while others have shown sharp decline. So what is the reason for that, sir?

Basically, there are 2 reasons. One is the better capacity utilization in this quarter. We have -- if you compare with the Q1. And also on the commodity side, there are some pulling of the prices after May. So there are some effect of that also.

Okay. Sir, if I carefully look at your numbers, our depreciation remains to be extremely high, which is impacting our bottom line, though on the EBITDA front, we are doing extremely well. But when it tickers down to the PAT level, our depreciation is impacting our PAT I feel so. So do you feel so, any color on that, whether it's because of continuous CapEx-intensive nature of the business?

Yes. One is the nature of the business is capital intensive and the last 2 to 3 years as we are spending our revenue like commercial toolroom we have started. And we also expanded ourselves in Gujarat and [indiscernible] to the customers. So we have to create facility and do some expenditure on that part. So more or less, the expansion side, we have completed. Now the CapEx will be more on the balance equipment side, maintenance replacement CapEx side. And going forward, as the capacity utilization would improve, then automatically, if you see the current percentage is around 7%, it will come down correspondingly in terms of increase of the higher revenues. Better utilization of [indiscernible] .

And sir, what is the asset turnover in this business of extrusion and automotive ceilings, sir?

Current [indiscernible] , what you are talking about the current [indiscernible].

Yes, sir. Broader indicator, sir.

It is almost 1 in this quarter.

One time. So it is actually CapEx intensive, sir. Sir, what is interesting to see that you've been increasing business with Nissan and other segment also. Can you throw more color on others, because now that is a big segment or a big portion of the entire mix. Is it tooling, I think, tooling also goes into this, sir?

Sorry, we didn't understand your question. Can you please repeat it once again?

Yes. So what I'm asking is the Other segment has now become 22% of your business. So what is driving the other segment? And is tooling part of Others?

22%. What is this 22% you're talking about?

Yes. So I'm asking, in the entire customer contribution as on FY '22, Others form around 22% of your total revenue mix, Others segment?

In FY '22?

Yes, yes. So Maruti, SMG, Honda, Tata, Nissan and then we have the others, which is a big sectors.

Yes. Others includes Volkswagen, TKML, Hyundai, MGI and 2-wheeler segment also. So they have mentioned a broad customer mix. So if you see the Others, Others would be 3% to 4% only.

Okay. So with that can be -- is it fair to assume that the dependence on Maruti and Honda is reducing and it is expected to go down further or that's not the case?