PPAP Automotive Limited (532934) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '24 Earnings Conference Call of PPAP Automotive Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not 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. Thank you, and over to you, sir.

Thank you, Sagar. Good morning, everyone, and welcome to our quarter 2 financial year '24 earnings call. I am accompanied by our CFO; Mr. Sachin Jain, and SGA, our Investor Relations adviser on this call today. I hope everyone has had a chance to go through our revised presentation, which gives you the structure of the group as well as updates on how the businesses are being developed. Let me start with a brief overview of the industry. The automobile industry witnessed a marginal sales growth of 1% on a year-on-year basis from 1.42 crore units to 1.44 crore units during April to September 2023. During the first half of the fiscal year, the passenger vehicle segment grew from 22.76 lakh units to 24.18 lakh units, indicating a growth of 6% over last year. There is a silver lining with Maruti Suzuki, the India's largest car manufacturer, registered highest ever monthly sales in September and cumulatively crossed 1 million mark in the first 6 months of financial year '24. This growth can be attributed towards the new model launches coupled with an increasing premiumization trend. The 2-wheeler sales were flattish during H1 financial year '24, whereas 3-wheelers recorded a growth of 22% to 4.97 lakh units from 4.09 lakh units in H1 financial year '23. The overall commercial vehicle vertical witnessed growth of 4% to 5.26 lakh units from 5.08 lakh units. Medium and heavy commercial vehicles have registered a steady growth of 8% to 1.85 lakh units. The first half of this fiscal year witnessed lot of challenges in terms of inflation at elevated levels, geopolitical issues, subdued industry growth, et cetera. However, we have been able to demonstrate a resilient performance especially during the second quarter of financial year '24 and have been successful in weathering some challenges to some extent. We have been saying that financial year '24 will be a year of reckoning for the group and it is playing out so far. To improve our profitability, we have represented price increases to our customers. We worked very hard on reducing our internal costs with our suppliers. And we are still working on making the operations leaner. The investments done by the company in the JV company are yielding results. The aftermarket company has already developed a strong pan-India network and have started looking at markets outside the country. I am confident that all the hard work done by the company in the past 2 to 3 years will start yielding better results for the remainder of this year and we should be back on making the fundamentals of the company and the group strong and rock solid, so that we can continue to build greater value for all the stakeholders. Now let me briefly give you an update on the business segments. The company's core focus continues to be on the automotive industry. During the quarter under review, we started manufacturing parts of the Honda's new SUV called Elevate. In this segment, although we can see robust demand and sales coming through, we have developed a couple of premium products for our customers and these products have been well accepted by them and will come into mass production in the quarter 4 of this financial year. The capacity utilization stood at 80%, although the products being made by the company are engine-agnostic, however, for business sustainability, we have been able to secure business with customers who are planning to launch electric vehicles in the future. Maruti Suzuki continues to be the biggest customer for us in this segment. Raw material prices continue to stabilize, which caused a major hit on the margins of the company since the last year. We are continuously discussing about compensation of inflationary costs from the customers, and we are hopeful that within this quarter, we will be having some favorable judgment. Since few quarters, we have been saying that our margins will improve once costs are under control. I'm pleased to share that EBITDA margins, especially on a sequential basis, has improved from 6.6% in quarter 1 of financial year '24 to 9.4% in quarter 2 financial year '24 at a stand-alone level. As the material compensation was settled in first quarter in our JV company, it has started positive contribution in the consolidated results. Our second vertical for growth, the commercial tool room has a strong order book now. This year, we have an order book of 65 tools already and are discussing business for another 53 tools. We are quite excited that this business has started a positive contribution to the company from this financial year onwards. Apart from PPAP, this facility will cater to customers from Tier 1 makers of automotive component industry as well as electrical industries. There is traction coming in the Industrial Products segment as well. This year, as announced to you in the last meeting, we will start supplies for an export customer, which will be the first for the company. In this segment, we are focusing on application engineering solutions in the areas of plastic extrusion, rubber extrusion as well as plastic injection molding. For the aftermarket vertical, which is done by the subsidiary company, Elpis, our pan-India distribution network has a distribution network of 120 distributors in the country. We are continuously adding SKUs for our customers. Our current offering is for 700 different products and we will continue to enhance it every quarter. we are developing our strategy for exporting our products to geographies outside of the country. This particular business grew by more than 50% this year, and we expect the traction to continue. The lithium ion battery vertical continues to remain slightly under pressure, which has led to impact in the profitability. However, going forward, we are hopeful that we will be able to develop a strong order book and start supplying solutions to the customers. Our team was successful in getting the AIS-156 approval for its battery for 2-wheeler and 3-wheeler applications. We were also successful in developing solutions for other mobility applications as well as ESS and robotics application. On sustainability front, we are Bronze certified from EcoVadis. We are already complying with BRSR requirements on a voluntary level. We are a Great Place to Work certified organization. We want to improve our sustainability reporting process continuously to ensure that we meet the highest reporting standards and expectations of all our stakeholders as well as increase visibility of our efforts in creating sustainable value for all stakeholders. Our latest sustainability report for financial year '23 is available on the company's website. This is a new report, which reports on the group level sustainability status. I urge everyone to kindly go to the company's website and have a look at it. Through the company's CSR activities, there is a constant focus on enriching people's lives in areas of environment, education and health. The group supports various biodiversity parks by planting and sustaining native trees to improve the environmental conditions, especially during these times when Delhi is severely polluted and is considered as the most polluted city in the world. Now let me throw some light on the financial performance of quarter 2 financial year '24. At a stand-alone level, revenue increased from INR 124.2 crores to INR 140.5 crores in the quarter, indicating a growth of 13.1% year-on-year. Revenue also increased by 26% on a quarter-on-quarter basis. EBITDA has risen by 5.5% to INR 13.2 crores on a year-on-year basis whereas it has surged by 78.4% on a sequential basis. The company registered a PAT of INR 2.7 crores, a growth of 7.5% compared to corresponding period last year. Turning to the consolidated financials. Revenue increased from INR 128.5 crores in quarter 2 financial year '23 to INR 148.4 crores, indicating a rise of 15.5% year-on-year. The top line grew by 27.4% on a quarter-on-quarter basis. While EBITDA stood at INR 12.2 crores year-on-year whereas on a quarterly basis, there was a sharp rise by 94.6%. PAT stood at INR 0.5 crores. As I said earlier, we anticipate financial year '24 to be a year of reckoning due to multiple tailwinds in the automobile industry as well as the positive additions from new initiatives started by the company. Higher realization on account of better product mix, moderation in input prices and cost efficiency measures will support profitability. The CapEx spending will be in line with the CapEx of OEMs. The increase in capacity utilization, coupled with the tariff revision from the customers will put the company on a sound footing to grow in the coming years. Thank you all for your kind listening. We will be more than happy to answer any questions that you may have. Over to you, Sagar.

[Operator Instructions] The first question is from the line of Piyush Parag from Nuvama Wealth.

Congratulations for a sharp improvement in the -- on a quarter-on-quarter basis. So sir, I would like have 2 questions. The first question is if you can give some more color on the Maruti because that still holds 52%. And if you look at on the quarter 2 to this quarter, it's almost -- revenue contribution is similar to 52%. And so given that, there are 2 questions. So first, if you look out on the revenue side, SUV is the major key growth driver for Maruti, but how it has actually played out for you in terms of content per vehicle. So if you can give some light on that. And the second question, as we understand through our previous discussions, the margins are not -- relatively with other customers is not that great with Maruti. But being on the similar side, we see a good improvement in the margin. So what has been the key contributor for the margin. So it would be really great if you can just throw light on these 2 questions.

On the revenue side, Maruti continues to be our biggest customer and our average content per vehicle to Maruti is roughly between INR 2,500 and INR 3,000 per vehicle. Sorry, I didn't -- what else did you want to know about Maruti on the revenue side?

Yes, yes. So my question was like for Maruti, as overall the scheme, if we look at SUV has been a key growth driver. For you in terms of your content per vehicle, let's say suppose 3 quarters previously the 3, 4 quarters, do you see the improvement happening for you with Maruti's content per vehicle and in future, how do you see is to improve further? Or it could be on the similar trend. And as you said, that even Maruti is being helped by the premiumization trend. So how this is actually playing out for you? So the idea is to...

We are continuously getting business from Maruti for all Maruti models. Even SUVs, like Jimny wherein we say this INR 2,500 to INR 3,000, when it comes to Jimny, it is slightly higher than INR 3,000. I think it's somewhere around INR 5,000 or something. We are present on the Vitara Brezza platform as well. We are present on the Grand Vitara platform as well, our Chennai plant supplies those parts to the Toyota facility where all these cars are getting manufactured. And now we are discussing with Maruti for the new models, which will be launched in the Kharkhoda plant. So we are targeting not only SUVs, but every model which is being launched by the customers. And for your SUV specifically your question, like Tata Motors is leading the segment right now with their range of SUVs. So we are already present on all the platforms for them. And they are planning to launch a new SUV. You must have heard about this CURVV SUV which is supposed to come out in the first quarter of this -- quarter 4 of this financial year. So in that model, we have a higher business with Tata Motors. I think it's roughly in the range of INR 6,000 to INR 7,000. And in that model, we are going to launch a lot of premium products that we have developed by our own efforts in the company. And Elevate, you already know that Elevate is also launched from Honda side, and as informed earlier, our per car contribution is somewhere between INR 6,000 for that.

It is INR 8,000, you said that INR 8,000 is also there, right, for Honda -- for Elevate.

It's around INR 6,000.

Okay. So I just wanted to understand also from the perspective of the margins from your customer profile, if what I have understood till now is that Maruti has not been that great for the -- in terms of the margins. Your contributions, revenue share from Maruti is 52% again in the Q2, as it was in Q1. But there is a sharp jump in the Q2. Can you give a specific for the margin improvement probably from the customer side? What has led to that?

Primarily, we got price increase from the customer for a few of our parts that have been taken into account. There are some old issues with the Maruti that have come into place now. And few are more pending, which should get implemented within this quarter. So that should help the margins now going forward.

The next question is from the line of Rajvi Shah from Bright Securities.

I just had 2 questions. The first is how is the EV business shaping up? Can you throw some light as we haven't seen much progress there? And the second question is Maruti is going to launch facelift of S-Cross and Ciaz. Have we received any order flows from the same? If yes, then what should be the content per vehicle?

Sorry, which model did you say? S-Cross and Ciaz?

Yes, S-Cross and Ciaz.

Actually, madam, our -- whatever parts we supply, they are not affected by any minor model changes that the customer makes. So our business per vehicle will continue to be the same for as it was earlier. And I'm sorry, but I don't have specific information right now about these particular models, how much is the content per vehicle. As far as EV business goes, on the passenger vehicle side, we are already doing business with a lot of customers like Tata Motors and MG. We have overall about 10 electric vehicle customers who we are working with. Maruti also, you must have heard, they are launching a new vehicle in next year, an EV. So we are present on that as well. So we are -- so it's a conscious focus for us to get into all the electric vehicles that are getting produced in the country. Technology side, our products are engine agnostic. So it really doesn't matter for us if it is an ICE engine or an EV engine, product technology is very similar. And in case there is some difference, our company is very well equipped to deal with it by ourselves in-house. We have an RTDC team, which focuses on new projects, technology development and all. And they are continuously launching new products to meet the customers' requirements. As far as our subsidiary company, P-Tech is concerned, wherein we are doing the lithium-ion battery business for electric vehicles, that -- there is still some pain left in that company. We were expecting 2 models to start during this quarter. But unfortunately, the customer has delayed the launches. So we will have to wait for more time to get good results out of that company. But on the other side, we have developed solutions for the ESS application, and we are currently contacting all the people who do these energy storage solutions and trying to get our products into their portfolio as well.

[Operator Instructions] The next question is from the line of [ Karan Mehra ] from Mehta Investments.

I have a couple of questions from my end. First is, like the margins are improving sequentially. So congratulations on that trend. Just wanted to understand like at what level can we see the margins on a sustainable basis if you can throw some light here?

For this particular current year [indiscernible] there was some impact on the margins due to lower yields. So this year, it should be in the range of 10%. However, going forward in FY '25, there should be an improvement in the margin in the range of around 12% to 13%.

Other question, just wanted to understand the order book for Honda Elevate. And if you can throw some light on what is the content per vehicle for the same model?

It's about INR 6,000 per vehicle.

And the order book for the same?

Honda, I think, is planning about 35,000 vehicles in this financial year, in the balance 5 months and they are going to start exporting this vehicle to Japan next month. They've already started exporting to South Africa. And in December, most probably, they will be starting export to Japan. And this Elevate is going to be called WR-V in Japan.

[Operator Instructions] The next question is from the line of Yug Mehta from AP Capital.

How is the commercial tool room business performing? Have we received any large orders here?

As I explained in my opening commentary, we already have an order book of 55 tools, which we are going to do this year. We have a total capacity of making about 100 tools. So in the first 6 months, we have an order book of almost, you can say, 55%. Balance is about 45, but I think apart from 55, we should be able to get orders for another 10 to 15 tools more. So this year, we should be making around 70-odd tools in our tool room. So that will be almost a capacity utilization of 70-odd percent.

Okay. Lastly, sir, where do we stand in terms of exporting our products? Is there any update on that front?

So this month, we are going to start our -- send our first order to U.S. for our industrial product division. And it's not a very big order. It's a small order, but this month, we are starting deliveries. So it's a cycle. So once these parts are received by the customer there, they are inspected, put to use, confidence and trust building happens then we'll start getting more orders.

[Operator Instructions] The next question is from the line of [ Preeti Mehta ] from Mehta Investments.

So my question is how much of the top line comes from aftermarket vertical? And what are the margins in that segment?

So top line from the aftermarket is roughly 3% of our total turnover and margins are currently in the range of 9% to 10% of EBITDA.

And I have one more question. How do you see the demand in H2 of the financial year and FY '25?

So demand side, currently, the market is robust and we are getting good production for the customer or the production volume for coming quarter. So we are hopeful that likewise in the H1 there was automobile growth of around 6%, we are hopeful that, that will be maintained in the Q2 also -- H2 also.

[Operator Instructions] The next question is from the line of Piyush Parag from Nuvama Wealth.

A follow-up question. Can you throw some more light on the EV business more in terms of the revenue contribution for the last 2, 3 quarters? And how do we expect in FY '25 and '26 that contribution to be improving?

Sorry, we didn't understand your question. Could you repeat it, please?

Sure. So my question is the share -- revenue contribution from the EV business currently in the last 2 quarters, how this has been improving. And how do we expect by the end of FY '25 and FY '26 to be -- the trend to be? And where do you expect things to be like in kind of a balanced growth for the EV business? So that would be helpful.

Piyush-ji, as I said, this passenger vehicle EV business for our -- for this automotive business, we are targeting all the customers and we have got business from Tata Motors as well and MG as well and Suzuki new model, which is planning to come, that's also a business we have been able to successfully get. So -- and the other biggest customer for passenger vehicle is Mahindra, whom we are discussing. So I think this business will pan out as the market grows. We don't have a separate projection or something for the EV business. Our basic parameter is that whoever is making the EV today, we should be present with that customer. That's the parameter which we are measuring. And as I've already explained, for the lithium ion battery business, we still have to wait and watch. Two customers were supposed to start production during this quarter. But unfortunately, that they could not start production and it has gotten delayed. So we have to wait and watch to see how things pan out.

[Operator Instructions] The next question is from the line of [ Sonu Harsana ], who's an individual investor.

So my question regarding since Tata Motors contributed -- is our third largest customer, and they have launched Tata Nexon. And there is no mention in the presentation that you are supplying to Nexon or Harrier or Safari. So any clarification on that?

Yes. In presentation, we don't mention all the models which we are supplying. So we are supplying, I think, a number of model for each customer. So we mentioned the model, where we started the supply of the new models coming up from the customer side. So we don't mention all the models. We are supplying in the Harrier also and Nexon also and other 2, 3 models also we are supplying to the Tata Motors.

And I have one more question. Since like last financial year, you are telling us that the margin -- EBITDA margin will be somewhere around 15%. Then you reduced it to, let's say, 12%, 13%. And now you are saying that 10% EBITDA margin for this financial year '24. Since all the commodity costs are going down, so why we are downgrading the EBITDA margin? And we are also talking about like some price appreciation for our customer. So like why downgrading the EBITDA margin then?

So about EBITDA margin, so we have not really mentioned that we will be able to do 15% kind of thing in the next financial year. This is just a guidance based on the particular situation and expectation on the commodity prices, how they will move for the particular item which we are using and the negotiation with the customer. So it is a dynamic thing. So based on that, it depends. So based on the current situation and how the prices are there and the negotiation is going on with the customer, based on that, we have saying about the EBITDA margin.

One more further question. Like let's say, in the first 6 months, first half of financial '24, we produced somewhere around INR 20 crores to INR 22 crores of cash from operations. And like we invested almost INR 16 crores to INR 18 crores of cash in plant and equipment and all that. So my question is, is this a growth CapEx or just maintenance CapEx?

So it is a combined CapEx. So if you see -- because when any new model comes up, there would always be [indiscernible] CapEx. So it combines the both. Sometimes you need to invest in the tooling also for some model where there's amortization in there. So it is combination of both. Some of it is maintenance CapEx and some the -- I would not say exactly that increase in the capacity, but to the balance CapEx requirement or the [indiscernible] requirement for the customer new models or the new parts which we have developed.

And one more question if I maybe allowed.

Yes, yes. Please go ahead.

Gross debt is somewhere around INR 150 crores. And 3, 4 years back, it used to be INR 20 crores to INR 30 crores. Obviously, we started some new business and they are not contributing as of now as they should be. So my question is like the debt level where are we going to maintain because we already have INR 150 crores of debt. That is almost 50% of our equity, and that is a lot of debt. And we haven't invested anything in the part business that contributes 90% to 95% of our revenue. So if these new businesses have all the debt, and they are not contributing at all, so like how do you -- like going ahead, like where should be the debt.

Yes. On the debt side, we are also quite watchful. It is not like that the whole money is invested in the other initiatives which company have taken. So there are certain requirements in the automotive business also, like in the Gujarat area or the Chennai area or in the current plant also to meet the customer requirement. And about the debt level we are very -- quite watchful and we try to maintain the debt at the current level only.

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

Well, thank you, Sagar. I thank everyone for taking time out of your busy schedules to attend the conference call today. Please feel free to approach us with any questions that you may have. We'll be more than happy to show you around the excellent facilities that have been created to service the customers. I thank SGA Advisors for organizing this call. Last but not the least, a big thank you to the team at PPAP for supporting this call. Thank you very much.

Thank you.

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