Precision Camshafts Limited (PRECAM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Precision Camshafts Limited Q3 and 9-Month FY 2020 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 guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. Participants for this call from Precision Camshafts Limited are Mr. Karan Y. Shah, Whole Time Director, Business Development; and Mr. Ravindra R. Joshi, Whole Time Director and CFO. I now hand the conference over to Mr. Karan Shah, Whole Time Director, Business Development. Thank you, and over to you, sir.

Thank you. Good afternoon, ladies and gentlemen. I'd like to thank all of you for being a part of this Precision Camshafts Q3 and 9-Month FY '20 Earnings Con Call. Along with me today, I have Mr. Ravindra Joshi, Whole Time Director and CFO of our company. I'd like to start with an overview of the auto industry and then get to our company's performance. After an unprecedented slowdown, the Indian auto industry is pinning on hopes on the next financial year for a turnaround, banking on a host of new and upgraded models slated to make their way to the market. The industry's hopes are also in line with expectations that the economy would finally come out of this slump and draw people back to the showrooms. Yet, the challenges of transition to the stricter BS VI emission norms and compliance to new safety norms, thereby making vehicles costlier, are lurking around the corner. 2020 will be an interesting year with BS VI getting implemented and entirely new platforms being available in this market. The Indian economy is expected to revive early next year, which along with the low base of last year and availability of newer models, should support growth in the auto sector. Coming to our company, the Precision Group, along with its 3 group companies, which are MEMCO, MFT and EMOSS, has now truly become a global company with manufacturing facilities in India, Germany and the Netherlands, with global automotive OEMs in our clientele list. It's because of this global presence that our company has not only been able to tackle the slowdown but in fact, posted very good performance on both a stand-alone as well as a consolidated basis. Our core camshafts business has grown by 12% year-on-year despite the slowdown in the Indian market. This is mainly because of increase in the sale of niche machined camshafts to export customers in Europe, USA, Mexico and Brazil. Our Indian subsidiary, MEMCO, which is acquired from the internal accruals of the company, has grown in revenue in spite of the sluggish market situations in India and has major customers like Bosch and Delphi on its client list. Our international subsidiaries, EMOSS and MFT, which were acquired with a combination of internal accruals and debt, have also registered growth in sales during the last 9 months. As a company, PCL is increasing its management bandwidth for its Indian as well as overseas subsidiaries for better profitability and growth in the years to come. Starting with the stand-alone business performance, which houses the camshaft business, the total income for the 9 months in FY '20 increased by 12% to INR 351 crores, and for the third quarter, it increased by 4.9% to INR 118 crores. EBITDA for the 9 months FY '20 increased by a strong 24% year-on-year to INR 91.8 crores. And for quarter 3 FY '20, it increased by 32% year-on-year to INR 35.3 crores. The total income and EBITDA has increased on the back of improved products, that is higher volume contribution from the more profitable machined camshafts as we have always desired. EBITDA margin expanded by 260 basis points year-on-year to 26.1% in the 9 months and by 620 basis points in Q3 to 29.8%, again, backed by the strong cost optimization efforts by the company. Profit after tax increased by 126% to INR 50.6 crores in the 9 months and for Q3 increased by circa 206% to INR 24.8 crores. Our strategy to increase more profitable and value-added machined camshaft is now fructifying and is also leading to better utilization of our facilities. Total camshaft volume for the last 9 months stood at 5.86 million units, of which, machined camshafts were 1.89 million, which increased by 27% year-on-year, which has been exactly in line with our strategy. Castings camshafts volumes stood at about 3.96 million, which was down about 1% year-on-year. Our new machining facility has seen increased utilizations and we expect it to run at peak utilization in the next 2 years, hence further improving our product mix and further increasing profitability of the company. Now coming to the consolidated business performance. The total console income for 9 months FY '20 increased by 14.5% to about INR 585 crores, and Q3 FY '20 increased by 7% to about INR 197.8 crores. Consolidated EBITDA for the 9 months increased by 15% to about INR 102.5 crores and for the quarter 3 increased by 14.3% Y-o-Y to INR 38.1 crores. Consolidated PAT for the 9 months increased by 254% year-on-year to INR 33 crores as compared to just INR 9.3 crores for the 9 months last year. The consolidated PAT for this quarter Q3 increased by circa 200% to INR 16.3 crores as compared to just INR 5.4 crores in the same quarter last year. Now coming to our group company's individual performances. Revenue of MFT in this quarter was about INR 44 crores and for the 9 months was about INR 129 crores. Revenue at MEMCO for quarter 3 was about INR 10 crores and about INR 30 crores for the 9 months of this year, and revenue at EMOSS was about INR 25 crores for this quarter and about INR 74 crores for the 9 months. I'd like to state that all of our newly acquired group companies have started registering growth in sales. We expect them to be a bigger part of our business in the years to come. There is an immense growth potential for each of these companies in terms of cross synergistic opportunities across our different businesses, and we are making every effort to scale these businesses and that too profitably. With this, I would now like to hand over the call to Mr. Ravindra Joshi, our Whole Time Director and CFO, who will walk you through some of the financial highlights of this quarter and the 9 months of the financial year, after which we will open the floor to Q&A. Over to you, Mr. Joshi.

Thank you, Karan, and good afternoon. I would like to highlight on the EBITDA of the company. The EBITDA of PCL -- currently, the EBITDA of PCL is in between 24%, 25% to -- in between 24% to 25%, and our aim is to achieve EBITDA at 30% in coming years. What -- the measures we have taken is increase in machined camshafts sales where the margin is more, and we are working on the purchase of power through captive consumption where the proposed rate would be around INR 6 per unit as compared to the INR 8.64. We believe we can save substantial money by adopting captive consumption. This is as far as PCL is concerned. MEMCO now present -- the EBITDA percent is 19%. Our target is to get it to 25%. Measures, what we are going to take is concentrating on sale of higher-margin components like [indiscernible] and reduction in labor cost. Presently, the CTC ratio of the company is in between 25% to 30%. The company will announce VR scheme to get rid of higher salary workers and also the present suppliers of the companies are directed and approved by customers, therefore, is not able to do any negotiation, we are trying to source the similar [Technical Difficulty] so we can negotiate and reduce the prices. This EMOSS now present -- at presently, the EBITDA percentage is between 1% to 5% and the company has an ample opportunity to increase the EBITDA to the level of 10%. And the management on the company is confident to achieve this level in coming years, that is by increasing sale volume, reducing the purchase of battery cost and reduction in labor cost and reduction in other expenses. Right now, in MFT, our EBITDA percentage is between 6% to 10%, and our endeavor is to get it down to 10% to 15%. So measures we are taking there in MFT is to reduce the labor cost -- to reduce the raw material cost, labor cost and also the interest cost is in between 4% to 5%, and we are -- we want to get it down to 1%. This as far as the EBITDA is concerned. Now the borrowing. The PCL has only INR 28 crores of borrowing of working capital, where we are taking this loan for our post-shipment credit. And as far as this future expansion is concerned, we are going to expand -- we are going to invest near about INR 60 crores in next 2 to 3 years for expansion in the machine shops. And CapEx for MEMCO, we are going to invest near about INR 20 crores from our internal source, half from borrowings from the bank. And MFT, we have already invested near about INR 58 crores for the expansion in machine shops where the revenue and EBITDA will increase. And as far as the IPO funds are concerned, we have utilized all the INR 240 crores in our machine shop in Solapur. Karan, this is -- this is from my side now. Now the question-answer is open for all the invitees.

[Operator Instructions] The first question is from the line of [ Shweta Kumar ] from [ Smriti Investments ].

I just want to know what is the price difference between foundry and machined camshafts?

Can you repeat your question, please?

Sure. The price difference between foundry and machined camshafts.

Yes. The foundry, the average realization is in between INR 300 to INR 350 and machining is between INR 800 to INR 1,200.

Okay, sir. And what is the margin difference?

In between INR 400 to INR 500.

Okay. And the current capacity of utilization would be?

In foundry, it is 70%, and on machine shop, it is 75% right now.

Okay, sir. And 90% utilization, what revenue can be expected?

90%?

Yes.

90% utilization, if you see, 90% utilization, in machine shop, revenue will be up in between INR 450 crores to INR 500 crores.

[Operator Instructions] The next question is from the line of Ritesh Poladia from Girik Capital.

Company got some damages of INR 11 crore. Can you elaborate like what are the basis of this calculation and what happens to that order from the...

Karan?

Can you hear me?

Yes, I can hear you.

Yes. Okay. So I can't give you details regarding the calculation of this number because it is confidential with our customer. Basically -- in short, there was a cancellation of 1 order for which there was a compensation paid by the customer. Suffice to say that this business has not gone away, it has been replaced by another business from the same customer. So in terms of volumes and in terms of forecast, as we have planned, stays as is. This is just an exceptional cancellation from the customer which have been compensated for.

Okay. You said your utilization of foundry is 70% and machine facility is 75%. So when do you see the peak utilization coming? And what are the new orders which can help you to take this there?

Yes. See, on the foundry side, we are -- a good utilization is about 80%, 85%. We can't reach 100% on the foundry. So we are looking at that in the next 2 years or so, which is also when we will have a peak utilization at our machine shops. This is backed by orders which we have released in the past, mainly from Ford, General Motors and some other customers in North America and South America as well. So these are -- the investments that have gone into our machining plant will be fully utilized in the next 2 years.

Can you give us profitability of the 9 months of the 3 subsidiaries separately?

Yes. I think Mr. Joshi just briefly mentioned the profitability of the subsidiary companies in terms of EBITDA. What we're saying is the Dutch subsidiary, which is EMOSS, is under 5% EBITDA, but this is also a very high growth company, and we're investing a lot of resources into growing the company very fast. MFT is in the range of 8% to 10%, and our Nashik subsidiary in India is about 18% to 20% right now, EBITDA.

Can you give us the exact numbers, please?

Joshi sir, can we give them the exact numbers? Or maybe we can get back to you with the exact numbers?

Yes, we'll get back to them.

Okay. And our stand-alone and consolidated working capital position?

Stand-alone working capital, what we're utilizing only INR 30 crores. That is PCFC, that is foreign currency [indiscernible] for shipment.

Yes. In terms of receivable days and your inventory days?

Okay. You're asking on receivables. Receivables -- overseas receivables is 100 days. And stock is in between 10 to 15 days. This is raw material plus finished goods and WIP.

And oversees receivable is 100 days. What would be the domestic?

Domestic is 60 days.

And for subsidiary?

For subsidiary, you mean to say, for MEMCO, it is 30 days from Bosch. And for EMOSS, we take the advanced money based on their -- based on the requirement. And as far as MFT is concerned, it is again between 45 to 60 days.

Any new domestic wins you got in this financial year?

Can you repeat?

Any new domestic order wins in this financial year in 9 months?

Karan?

No. We have -- in terms of the Indian business for camshafts, we -- like we have said that we are almost a single source to most of the OEMs in India. So we continue to be with them. There is -- at this point, we've not disclosed any new orders that we have received from the Indian market, but we have over a 70% market share here in India. So that kind of answers.

Okay. I -- this might be a stupid question, but can we go to the -- can we expand to the commercial vehicles or tractors or something or our focus is only passenger vehicles?

Our focus is certainly passenger vehicles. [Technical Difficulty] used to manufacture camshafts for CVs, tractors, railways, 2-wheelers, everything. But as the company has progressed, we focused on passenger vehicles for a few reasons. One, this is the highest volume globally. We're talking about 100 million camshafts that are required, 100 million to 110 million. We do about 10 million, so we've 10% market share, but we have tremendous potential to grow there. These are the most demanding customers and, therefore, also good on the price side. And this continues to be our focus to grow with the larger OEMs around the world. But having said that, we do supply camshafts to the Indian farm agriculture segment. So to all your tractor suppliers in India, we do supply camshafts.

Okay. The reason to ask is the electrification would first attack the passenger vehicles, that's where we are headed. So definitely, your EMOSS is pretty small to compensate whatever business loss we can have. So how do you see the future going forward for the camshafts in passenger vehicle?

We actually don't see much of a reduction in combustion engine, at least for the next [Technical Difficulty] we get. We are very close to the ground with OEM customers. We see what their forecasts are, their investment plans for production engines. So if you look at it, we have a solid plan for at least the next 5 years in terms of new orders that we have from around the world. If you look at it, electric passenger vehicles are [Technical Difficulty] of the global new vehicles that are produced. So to us, this is not a short or a medium challenge or a threat for our camshaft business. It is down-the-line type of issue. But I think with EMOSS being part of PCL now, we are actually growing the company very fast. When we acquired the company, it was about, say, INR 50 crores of sales. We are talking about more than INR 120 crores of sales this year. So it's very fast growing. I think the commercial vehicle space has been quite [Technical Difficulty] in terms of electrification. So we have a good hold in that market right now at least.

If I get it right, in EMOSS, we convert the diesel commercial vehicle into the electric. Can you run us through what are the incremental cost? How old vehicle -- means what would be the age of vehicle when you convert? And what are the benefits?

So there are 2 models. One is what you mentioned is the retrofitting. So if you have an older vehicle, we would retrofit it with a completely electric drive [Technical Difficulty]. This is -- we continue to work on this business model. And a typically, it's really hard to put a [Technical Difficulty] cost to convert because it depends on the type of vehicle. It can be a 20-seater up to a 2 -- or a 50 tonne truck, so it really depends...

Sir, whichever is your higher selling model, if you can...

Say about EUR 50,000 to EUR 60,000 to convert one. But in Europe, given the strict norms on pollution and such, so we have a return on investment in less than 5 years for -- because of the lower cost of operation. So this is on the retrofitting side. But the newer business that we are really developing very fast is the kit model [Technical Difficulty] to the OEM directly. The OEM then assembles it onto their vehicle and sells it as an electric bus from the start. So it's not conversion, but rather a new vehicle for which the driveline is supplied by EMOSS. So this is a very active model, where we are working with very different types of OEMs, niche OEMs. I'm not talking about the MANs or the Scanias or the Daimlers of the world, but rather the smaller OEMs who make niche commercial vehicles, for say, airport buses, post office buses, delivery vans, things like that.

Any models launched, if you can give us a name?

We can give you -- there is a chart which will tell you 1 name, but if you are able to access the EMOSS website, which is -- you should see a lot of [Technical Difficulty] on there. But very, very different type of business, that is.

Sure. Also in MFT, I believe there was some synergy benefit that the foundry can be supplied from India and MFT will be the machining. What are the progress on that?

We are taking steps towards that. It's -- unfortunately, we have to have approvals from the end customer, et cetera. So it takes a little bit longer than we would like, but there is -- there are steps taken towards that, for sure.

I think MFT was acquired for assembled camshafts. So has that been launched in India?

No, no. MFT doesn't do any assembled camshafts. So MFT is a machinist [Technical Difficulty] different automotive components. So camshaft is actually a very small part of their business, maybe 5% to 10%. The other 90% comes from different components like balancing shafts, tow ball bars, bearing caps, all types of different components which require very precision [Technical Difficulty].

Okay. And I believe India never had a balancing shaft. So what's happening there?

No, [Technical Difficulty] that require balancing shafts. So we are in talks with our [Technical Difficulty] this solution as well. So if I have to summarize, in the last 1.5 years, we have gone from a camshaft to [Technical Difficulty].

Sir, sorry to interrupt. Karan sir, your voice is breaking. So...

Okay. Can you hear me?

Yes, sir, but in between, it keeps breaking.

Okay.

Karan, it's like after 5 words, there is a pause.

Yes, sir.

Okay, okay.

So, can I disconnect the line and call you back?

Sure.

Thank you. Ladies and gentlemen, I would request you to please stay connected while we connect Mr. Shah back. Ladies and gentlemen, thank you for patiently waiting. We have Karan, sir, connected. Sir, you can go ahead.

So no, I was saying that we are now able to provide to our customers a complete solution rather than just a single product as camshaft. So we are in talks with all of our customers for balancing shafts, for different prismatic parts, injector parts, et cetera.