Precision Camshafts Limited (PRECAM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q3 FY '23 Earnings Conference Call of Precision Camshafts Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Shah, Whole Time Director. Thank you, and over to you, sir.

Thank you so much. Good afternoon, ladies and gentlemen. I would like to thank you all for being a part of this Precision Camshafts Q3 FY '22-'23 earnings call, which will be mainly focused on the business and operational performance of the company. In case of any detailed questions related to finance, I request you to mail your questions at [email protected], and we shall provide you with answers in a reasonable time. We've also submitted our investor presentation of Q3 FY '23 to the stock exchanges on the 28th of February 2023, and the same is also available on our website. Investors are requested to refer to the same. I will now start with an overview of the auto industry and get to the company's performance. It is expected that the global new light vehicle sales will reach nearly 83.6 million units in 2023, a 5.6% increase year-on-year according to the newest forecast by S&P Global Utilities. However, the auto industry continues to navigate through supply chain challenges while consented with several markets facing deteriorating economic conditions. Impacted by a blend of general economic impacts, higher interest rate, tighter supply chains and a general affordability squeeze, the forecast outlook remains mixed. We are approaching 3 years since the beginning of COVID, 2 years since the beginning of the semiconductor disruption and 1 year of the Russia-Ukraine war impact. Hopefully, the coming years will [ bounce ] from these global issues. I'm happy to share that compared to the last quarter, the total income at the company has increased by 4.4% to a INR 171 crores on a stand-alone basis and increased by [ 2.9% ] to INR 298 crores on a consolidated basis. The parent company has grown over 30% over the last year by better asset utilization of foundries, as well as machine shops. Several new camshaft and non-camshaft projects have been awarded to PCL, which have started serial production or are in the ramp-up phase. PCL India, the [ parent ] company continues to enjoy healthy margins and we have great visibility for growth over the coming years as we continue to invest in this business. MEMCO has been a slight decrease in income compared to the previous quarter. It posted a total income of INR 12.3 crores compared to INR 14.9 crores in the previous quarter. The management of the company is focused on adding new business from existing and new customers. Our company MFT in Germany has seen stabilization of business. However, we still see challenges ahead due to the ongoing crisis. They posted a total income of INR 45 crores in this quarter compared to INR 43 crores in the previous quarter. The team at MFT is focused on giving new non-engine components to its company portfolio. Our e-mobility subsidiary EMOSS registered significant growth in the last 2 years. EMOSS posted a total income of INR 70.77 crores compared to INR 65.9 crores in the previous quarter. There has been a complete reorganization of management at EMOSS. And the new team is driving the company towards newer customers and technologies. Our e-mobility developments in India continue to be on track. We are focused on building a high-quality, reliable [Technical Difficulty] trend for the sub 4-ton LCVs in India. The team is focused on deep localization and testing for Indian conditions. We are in the process of setting up our first EV plant in Solapur and have signed several MOUs with large customers across India. We will share more details about the [indiscernible] product and expect in the coming quarters. With a growing team in India, we do hope to build out a more [Technical Difficulty] business in the next 3 to 4 years. Coming to the financial performance of the company, starting with the stand-alone business, which houses the camshaft business. The total income in Q3 increased by 17.6% year-on-year to INR 171 crores. EBITDA increased by approximately 30% year-on-year to INR 40.6 crores. Our profit before tax was INR 31 crores and profit after tax was about INR 22.7 crores and EBITDA margin was 23.78%, whereas PAT margin was 13.31%. Total revenue contribution from exports was about 52% and the balance was domestic sales. Coming to the consolidated business, the business has -- income has grown by 21.83% year-on-year to about INR 298 crores. EBITDA increased by 22% to INR 46 crores. Our PBT was INR 25 crores, whereas profit after tax was about INR 17.8 crores. And the EBITDA margin for this quarter was 6.5%, and PAT was about 6%. Coming to our group companies revenues. MEMCO posted a revenue of INR 12.30 crores. MFT INR 45 crores and EMOSS posted a healthy revenue of INR 70.77 crores. With this, I conclude the talk, and I open the floor for question and answers. Thank you so much.

[Operator Instructions] The first question is from the line of Vishal Agarwal from [ Leo Capital ].

My question pertains to EMOSS. You mentioned that there has been a management team reorganization and a strategic realignment there. Can you elaborate a little bit on that? And how has the focus areas and growth prospects of that business changed? Has there been any change in management outlook on that?

Mr. Shah, I'm sorry, but we are unable to hear you.

Hi. Can you hear me?

Yes, we can.

Yes. I can hear you, sorry. Yes. I was saying that there is not a change in the management outlook of the company. We have a restructuring in terms of the professionalization of the management, where we have people who are running the sales and marketing, the technology side, the operation side, et cetera, who has been in this industry for long enough and who are driving growth now. We will continue to focus on the existing businesses that we have, which includes a lot of the OEM partnerships in Europe, but also look at the newer technologies that are developing in that part of the world and make sure that we are future ready.

Understand. And today for EMOSS, what percentage of our business is OEM led?

I would say, approximately 70% of the business would be partnerships with OEMs.

Understand. And sir, EMOSS, if you look at it, I know you refrain from giving short-term guidance, but if I look at it over a 3-, 5-year long-term period, what sort of growth outlook and the margin profile do you expect in EMOSS?

I am unfortunately unable to answer you what the outlook looks like. However, I think if you can look at where we have started just 3 years ago in terms of revenues, as well as the bottom line being read, just 3 years ago to making it profitable at this point of time, as well as growing at almost 4x in the last 3 to 4 years, I think the -- there is tremendous potential for this business, not just in Europe, but also as we expand in India.

Understand. So you do not think that the EMOSS business is flattening out? You think that the recent flattening out is more to do with the macroeconomic condition and other stuff around that zone. It's not a business which has become late stage and is now not on a fast growth trajectory.

No. I don't believe that. I think it's a lot of macro factors that are causing a little bit of flattening. But even comparison of this quarter to the same quarter last year, we've actually grown significantly.

Understand. And one more question, if I may, on the stand-alone business. I know the margins this year -- this quarter are slightly better again. On an ongoing basis, can we expect this sort of an EBITDA margin profile to continue? Or does this have some one-off receipts from customers regarding prior orders?

No. I think we have consistently been in the -- somewhere in the 22% to 24% EBITDA margin range. And I think we should -- this should be the consistent margins going forward. There had been some pressure in the past due to the raw material price increases and other such things. But these are typically compensated by our customers to us, but there is a lag.

Understand. This sort of a margin profile on an ongoing basis is sustainable in your opinion?

Yes. Yes. Yes.

Understand. And how you see the development of the non-camshaft business on the stand-alone side? I know the management has kind of articulated steps along that journey in the last few con calls. Can you share any progress around that? Or what are the plans around that?

Yes, we have developed certain new components using our existing infrastructure, both in the foundry, as well as the machine shop. And we have developed some engine components, which will go into commercial vehicle braking systems. I cannot speak a lot more about that right now, but the program for a large customer in Europe that we are -- that we will be supplying to will be ramping up quite soon. This is just our first foray into non-camshaft parts, but we continue to look for these opportunities.

Understand. And what percentage of revenue do you expect this program to contribute?

It would be really hard for me to share those numbers today. I think in the -- once the business has ramped-up, it would be more reasonable to share.

[Operator Instructions] The next question is from the line of Panjul Agrawal from Green Portfolio Private Limited.

Sir, I wanted to ask first question is on the retrofitting vehicles, retrofitting kits. So sir, if you look at it, even vehicles of same company can be very different depending on the model. So sir, how are you planning to deal with it? I mean, will it depend on scalability?

To answer your question, yes, we -- there are -- of course, the kit will be different for different vehicles, but we are focused on some of the 2 or 3 top selling vehicles in India right now that contribute more than 50% of the vehicles which are on the road. So I think that allows us to have deeper penetration with the customers that we are talking to. At the end of the day, we are saying that we would be the first to market to do something like this in India. And the idea for us is, at least for the next 2 to 3 years, build a good enough powertrain, which is running on the roads in India, and basically get us -- make sure that we have a reliable product out there, which allows us to take the next steps towards saying how do we actually look beyond just retrofitting.

Okay. So sir, have you started building up an order book for these retrofitting kits?

It's in the process.

Okay. So sir, we've already signed up MOU. So these MOUs are relating to these kits only, right?

Yes, yes, yes.

Sir, could you just share an approximate cost of 1 kit?

I cannot share that to you at this point of time because we are still in the certification process with the government bodies in India and until it is finally done, I'm unable to share at this point of time.

Okay. So sir, by when can we expect the certifications to be done, like all certifications?

I hope within the next 3 to 4 months.

Okay. Sir, what I see, there are losses in MEMCO subsidiary this year -- this quarter. So sir, what are the -- like what kind of expenditures have overtaken our profits?

It's a one-off expenditure, which was related to employee VRS schemes that we did at the company. And this is not an ongoing expense.

Okay. Sir, just could you tell me the current capacity utilization in our camshafts business? And what are the CapEx plans for the company?

We are at about 80% utilization at -- on the foundry level and approximately similar 75% or so on the machining side as well. We can provide you the exact numbers if you write to us. But in terms of CapEx, we are looking at certain new programs that have been awarded to PCL by OEMs from -- in India as well as overseas. And we will share this information with you as we have more clarity over the coming months.

Okay. Okay. And sir, just one last question. What I see is, in the last 9 months, if we compare it to financial year '23 versus financial year '22. Sir, the revenue growth is around 26%. Sir, what percentage accounts for increase in sales volumes?

Sorry, I didn't get your question. You said the revenue is 26%.

Sir, I said, revenue growth is 26%. So sir, how much percentage of the sales growth is on account of volumes, increase in volumes?

No, the sale increase is mostly because of increase in volumes, right? If you compare to FY '22 to '23, we've had much better utilization of our foundries, as well as machine shops, which is the increased volumes to the domestic customers, as well as overseas, and that's the main reason for the increase in revenue.

The next question is from the line of Aditya Sen from RoboCapital.

I just wanted to understand, if you want to change the proportion of machine camshaft and the cast camshafts. Because it's been trending upwards like from 2016 to 2019. So I just wanted to know how is it trending forward?

Yes, of course, I think our focus is completely on increasing sale of machine camshafts. That's where realizations are higher. That's where we have installed capacities for machining, and we would like to utilize them up to the highest possible degree and you should see an increase in trend of machining versus pure castings is being sold.

Any aspirational target in this regard?

No, I can't share number with you, unfortunately.

The next question is from the line of [ Vishal Agarwal ] from [ Leo Capital. ]

My question again is on the stand-alone business. In the stand-alone business are peak in 2015...

I can't hear you.

Can you hear me now?

Your voice breaking, I'm not able to hear you.

Are you able to hear me all right now?

Yes, this is better.

Yes. I was saying that on the stand-alone business in 2015 -- over 2015 to '17, we used to have a top line of about INR 500-odd crores. And this year, we are on a run rate to do about INR 600-odd crores plus. Given that the shift to electric vehicles globally, do you still see room for growth in the stand-alone business? Or the management's attention is focused on growing the company through other initiatives that the stand-alone business is pretty much going to be flattish from here on?

Not at all, actually. So just as much as focus we have on the EV business and other businesses, we are actually looking at increasing the business within the camshafts for -- at least for the next 5 to 6 years, we have that visibility. While there is higher EV penetration, if you still look at the numbers, I think last year, we are talking about 7% to 8% of all passenger cars that were electric and the balance, 90-some percent was still ICE. And as we look into the future, I think what is unanimously we hear from most OEMs is that, the pie will continue to increase as in the number of vehicles that will be sold on road will continue to increase. And while the EV percentage might increase over the next 5 to 6 years, there will be still a significant chunk of vehicles that will be gasoline or diesel driven. And if you look at our market share today, we are talking about 8% to 9% globally. And we actually see headroom to grow here.

Understand. Any rough sense on what kind of growth can one expect in this business?

I think at the end of the day, we should be looking at what the market is growing at. Indian market, the Eastern part of the world will be growing faster than, let's say, Europe and North America. And the camshaft business will, of course, tend to grow with the market growth, with the exception that when we are winning businesses away from competitors, that's when we see sizable increases. I can't quantify that, unfortunately.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Karan Shah for closing comments.

Thank you so much, everyone, for joining this Q3 conference call. I hope we've been able to answer most of your queries. And we look forward to your participation in the next quarter. Thank you again for joining us today. Bye.

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