Pricol Limited (PRICOLLTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY'21 Earnings Conference Call of Pricol Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikram Mohan, Managing Director, Pricol Limited. Thank you and over to you, sir.

A very good evening to all of you who have joined our call today to discuss our third quarter results. Joining me are also our Director of Finance, Mr. J. Sridhar; our Chief Marketing Officer, Mr. Ganesh; and our Director of Strategy, Siddharth. We'd like to take you through a small presentation on our performance, which has been uploaded on the website, and I hope all of you had a chance to go through it. I'll take about 10 minutes to give you a synopsis of our performance this quarter and the year so far. In the quarter ended 31st December 2020, on a sequential quarter-to-quarter basis between the same quarter in '19-'20 and this quarter in 2021, we have had a growth of 62% in revenue, seeing a total revenue this quarter of INR 454.82 crores. We had an EBITDA of 15% this quarter versus an EBITDA of 6.2% the same time last year in 2020 -- 2019, I'm sorry. The main reason for this increase in EBITDA is stringent cost control, process reorganization and a host of new products that have gotten through. In fact, revenue for this year, nearly 40%, comes from new product revenue, a lot of new programs, the good profitability that has been won by the company. We have had a cash profit of INR 54.75 crores this quarter in Q3 versus in -- INR 9.38 crores in 2019. We've had a free cash flow -- after our CapEx, we've had a free cash flow of INR 47.65 crores this quarter versus a negative free cash flow of INR 4.7 crores in the quarter ending in 2019. For the year so far, we have had a cash profit of -- in the 3 quarters, we have had a cash profit of INR 91 crores, CapEx of about INR 19 crores, and we have free cash flow after CapEx for the year so far of 3 quarters of about INR 72 crores. Our total revenue for the year so far, for the 3 quarters consolidated, is about INR 973.7 crores. This is for the 3 quarters ending December 2020. On a consolidated basis, our EBITDA for this quarter is 15.83% on a consolidated basis for the company for the quarter ending 31st December 2020. In terms of sales, industry versus our company on a quarter-to-quarter comparison, between October to December 2019 versus October to December 2020, the 2- and 3-wheeler segment has grown by 14.9% in the industry. We have grown by 56%. This is, again, because of a lot of new product introductions and also value of certain products going up. The replacement model value going up. Four-wheelers -- the industry has grown at 19.65%. Your company has grown at 85.7%. This is because we have made a comeback in 4 wheelers after our noncompete with DENSO and Visteon after our exit from the JVs. And we are starting from a low base and is going to see a lot more growth in the years to come -- in the quarters to come. Commercial vehicles, the industry grew at 12.05%. Your company grew at 153.59%. The reason, again, being, we have won a lot of new business, and this is the result of that. Off-road vehicles, we have pretty much 100% market share in the off-road vehicles in India. The industry grew at 32.76%. We have grown at 44.30% because of certain -- upgradation of certain model series from higher revenue realization. Tractors, the industry has grown at 26.60%, and the company has grown at 50.10%. Overall, on a quarter-to-quarter basis comparison, industry has grown at 16.06%, whereas Pricol has grown at 62.12%. Thank you very much. We'd be happy to take questions. [Operator Instructions]

[Operator Instructions] The first question is from the line of [ Abhishek Kapur ], an individual investor.

Congratulations on exceptionally very good quarter. My question is, we used to have vision in our earlier presentation. What is our vision for next 3 years or 5 years -- 2025?

See -- thank you for your question, sir. We have put together a strategy and technology committee in the company, headed by Mr. Navin Paul, who's our independent director, who has joined our Board recently. And this team is working on the road map for 2025, especially when EV vehicles are going to penetrate the market. And this committee will be presenting this strategy and technology report to the Board in September 2021, after which I would be happy to discuss this once it's put in place. Along with investments and what we intend to do, et cetera, I'd be happy to take up after that. Until then, we are looking at multiple new product lines. We are looking at technology partners. But it's early stages right now. And again, thanks to the pandemic, travel has been restricted, and our people have not been able to travel out overseas and vice versa, potential partners traveling in to this hub. So it is delayed. We were hoping to have this completed by March of 2021. But thanks to the pandemic, we have pushed it by 2 quarters, and this will be tabled before the Board by September 2021. In terms of capacities, we have created adequate capacity for the company to take us through for the next 2.5, 3 years, and we will be very CapEx-light for the next 2.5- to 3-year period. So at the current rate of cash generation, the company would be in good shape in the coming quarters.

The next question is from the line of Rajesh Agarwal from Moneyore Investment Advisors.

Sir, my question is are we done with all the write-offs? Any write-offs still pending or any subsidiary write-off still pending? And what is the status of raw material prices which have gone up, availability of semiconductor and all? And can this profitability be sustained going forward?

All write-offs are completed. All nonperforming subsidiaries are sold. We only have 2 subsidiaries, the wiping business in India, which is being merged into the company. And we have the operations in Indonesia, which is growing, and we have one new business. All the subsidiaries are value accruing and not value depleting, as you would have seen from the consolidated results as well. That's first part of the question. You have a very interesting second part of the question. Yes, I think you have a very, very valid point, Mr. Agarwal. There are 2 things. One, there is an acute shortage of electronic components, semiconductors, ICs, LCVs. There is a global shortage. In fact, the lead times have increased to as high as 9 months. So the industry per se is going to suffer quite badly, even if not because of Pricol, because of various other suppliers. I definitely think -- I have been talking to the heads of various OEMs over the past 2 weeks, and it is quite unpredictable. And we definitely think that there will be some loss of production at the OEM end because of shortage of electronics, and we are already seeing that happen. We are also anticipating some loss of sales because of nonavailability of raw material. We have planned for some sales moderation based on this. And also a bigger cause of concern is the steep cost escalation and premium pricing that has to be paid to commandeer certain raw materials. I'm again using the word "commandeer" raw material because that is what many of us are doing because of limited raw material in the market. We are trying our best to pass on some of those costs to our customers, but this will have an impact on earnings. We have done some simulation, at the worst case, what is our sales going to be and what is our EBITDA quality going to be. Do not worry. We will not dip into the single-digit EBITDA regime. But EBITDA will have an impact, and we will be in the very low double digit worst case if the industry suffers and we suffer, and we are not able to pass on these costs to our customers.

And sir, what is our debt currently now? Net and gross.

Mr. Agarwal, can I just request you to come back on the next round of questions? I just -- to answer this question, since you've asked it, but request everyone to restrict to 1 question and then come back so that everyone has a chance to ask question. The current debt is about INR 270 crores and the long term and the working capital currently is about INR 80 crores is what we have drawn. So we have got INR 350 crores. But we are steadily paring down the debt. You would see significant debt reduction in the next 2 quarters because we are generating a fair bit of free cash, and we have very little planned CapEx. So there will be significant debt reduction in the next couple of quarters.

[Operator Instructions] The next question is from the line of [ Anubhav Mukherjee ], an individual investor.

Sir, can you please give some more color on what has driven the much higher than industry growth for us in this quarter? In fact, in the past 2 quarters. So what were like -- some more details will be very useful.

I would like for our Chief Marketing Officer, Mr. Ganesh, to take this question because I think he and his team should be given a lot of credit for this growth. So I'd like to give him the privilege of answering this question.

Okay. I will go to the slide where the 2- and the 3-wheelers, if you see, has grown by 14.9%, where our biggest sale is coming from. And we have grown by 56.02%. The reason being is, there has been a conversion of some of the existing instrument clusters, whatever we have been doing. As you are aware that there has been an emission change from the BS-IV to BS-VI, which has given us an opportunity to upgrade our instrument cluster into the next generation of instrument clusters, thereby, there is a big value addition. That is the reason why the selling price of those instrument clusters because of the value addition has gone up. It is one of the reasons. Second is we have introduced some new range of products for the BS-VI, like the fuel pump module and certain sensors, which are mandatory for the BS-VI regulatory -- regulation. And that is also the reason why our sales have gone up much more than the industry. This is common across all segments of the market. And the commercial vehicle, wherever you are seeing 12.05% the industry as against 153.59% is a very significant growth, as you can see. We have entered into all the big commercial vehicle manufacturers, all the instrument clusters with the next generation of technology and a lot of value addition has been done to meet the BS-VI, and that is the reason you find a significant growth in our wallet share.

In addition, we have also taken away a lot of business from competition. And we have also improved the profitability of the business by some downsizing and a lot of tightening the belt and trimming the fat, for want of a better word, to improve the margins.

And sir, this -- the value addition and increase in like realization of these new products, this is something obviously sustainable and will continue in the coming quarters?

Yes. Because whatever we have now developed for the customers are platform products. We call it as platform products. All the platform has undergone a major change since April 2020 because of the new regulation. So this is going to continue for a few quarters.

[Operator Instructions] The next question is from the line of [ Vipul Shah from Sumangal Investments ].

Congratulations for a very good set of numbers. My question is why our contribution for 4-wheeler is so low?

Again, I'll probably repeat myself, Mr. [ Shah ]. We had a noncompete with DENSO and Visteon. If you're aware of the history of the company, the company had joint ventures with DENSO and Visteon many years ago, which got over. And those joint ventures were bought over by DENSO and bought over by Visteon. So we had a noncompete for a certain period after the closure of the joint ventures. So we were not present in the 4-wheeler sector. We have restarted our business in the 4-wheeler sector this year after the noncompete period. And that is what I had mentioned. We have won a lot of new businesses. In fact, I'm happy to inform you that Tata Motors is doing very well with a lot of new platforms. And the same time next year, Pricol will be the only supplier to all platforms of Tata Motors, their -- not only their cars, but even their commercial vehicles. We have also made an entry into Peugeot Citroën for the export market itself. So on and so forth, we are increasing our market share in the 4-wheeler industry, for which we also had to do a lot of technological upgradations because car cluster is a lot more complex compared to the 2-wheeler cluster or a commercial vehicle cluster. And those heavy investments in technology in the last 3 to 4 years is paying dividends right now.

So may I know what is our product line in 4-wheelers, sir?

Instrument clusters.

Instrument cluster, mainly. Okay. Okay.

The next question is from the line of Sachin Kasera from Svan Investments.

Yes. First of all, congratulations to the management for a very good turnaround and cleaning up of the balance sheet in the last 12 months. My question was carryover of what you're mentioning regarding the balance sheet, wherein you mentioned that going forward, the focus will be debt reduction and low CapEx. So if you could give us a little more specifics as to what is the type of CapEx that will be there in the next 12 months? And what is the type of debt reduction that we are looking for?

The CapEx plan, both in terms of technology upgradation, debottlenecking, tools for new products, productivity improvements, plant upgradation is about INR 50 crores. Debt reduction, I will not be able to comment because it will be a forward-looking statement because it's dependent on industry sustainability. And as I mentioned to one of the participants earlier, the industry is quite uncertain going forward, both in terms of sales and in terms of margins. Having said that, we have simulated the worst case situation, and we are still doing a double-digit EBITDA thankfully, even with the worst case with prices, we are not having price recovery. Planned CapEx is INR 50 crores. So minimum debt reduction would be INR 70 crores, if not higher. If things are not as bad as we expect them to be, then we expect significantly higher debt reduction. But the bare minimum debt reduction would be INR 70 crores. But as a management, we are hoping for far higher numbers and hoping that some semblance of normalcy in price policy compensate this too.

Sure. And just one clarification on this, that this INR 350 crores number you mentioned that is stand-alone? That's a consolidated number, sir?

This is consolidated debt.

[Operator Instructions] The next question is from the line of [ Anubhav Mukherjee ], an individual investor.

Sir, what has been the use of the proceeds from the rights issue? Has that been used for any debt reduction? Or is it still on the balance sheet?

Mr. [ Mukherjee ], we had -- as stated in the objective for the rights issue, this was meant for use in -- for working capital. The business of the company had significantly grown. And we needed working capital funding, and we did have stretched working capital by a rights issue because of the increase in business and the cash flow resulting from the losses in the first quarter of this financial year because of COVID and everything being closed. So the entire amount has been utilized only for working capital, which is why you would notice, our working capital limit drawn for the current level of sales is much lower than industry average.

Get that. Sir, do you see like any requirement of further fund raise or equity dilution in the near future? Or like internal accruals...

For the next 3 years, we do not anticipate anything Mr. [ Mukherjee ]. As I mentioned, we have done a heavy round of CapEx a year ago and 1.5 years ago, new plants, new capacity, which will take us through for the next 2.5 to 3 years. Once our strategy and technology road map is in place and we are also, as a management, hoping that with the current level of business, we will be a nonleverage debt-free company in the next 2 years, then it will give us some leverage on our balance sheet. And always debt is cheaper than equity. But if need be, at that time, if we are going to have a very aggressive growth plan, perhaps we may consider equity. But at this point of time, I do not foresee the need for that.

[Operator Instructions] The next question is from the line of [ Vinod Kothari ], an individual investor.

Sir, congrats for a good set of number. In this quarter, maybe I can see we have paid some tax, right, so around INR 13 crores. So I was wondering whether any deferred tax assets available to us because we have incurred losses in the past quarters?

You are not very audible, sir. Can you repeat your question? Until now everyone is audible. We could not hear what you were saying.

My question is regarding, do we have any deferred tax assets which could have been utilized to not pay any tax in this quarter? Because I can see profit before tax is INR 34 crores and profit after tax is INR 21 crores. So we have paid some tax, right? So I was just wondering whether we have any deferred tax assets given we have made losses in the past few quarters?

I'll request our Director of Finance, Mr. Sridhar, to take this question.

Sir, do you know that we have not deferred any tax assets. Only thing during the pandemic period, they gave us that moratorium, 6 months. That thing is only deferred. No other debt has been deferred. During the moratorium of 6 months, what the government gave, one of the installments only was deferred.

I think Mr. [ Kothari ] is alluding to our profit after tax. We have paid tax. So he wants to know do we have any deferred tax because of the past losses that we can use to reduce tax.

See, whatever tax we have calculated earlier this year, there will not be any cash outflow because we have got MAT credit available for us to utilize it. We have got more than INR 55 crores of MAT credit available. So the net cash outflow because of tax will not be there. And deferred tax assets and liability will be going on changing, you know very well. And you know that we have borrowed certain debts for settling the debts in the foreign countries, which interest will not be allowed for the income tax deduction. That has been added back to the profit. So there may be a slight increase in -- if you look at my tax rate totally, it will be more than what is the government is 33%. It will be around 44%, mainly because of this. Hello?

Yes. Yes. So at stand-alone level also we have made losses, right? So those are also not available for future profits?

Sir, can you be a little clearer? Only we are not able to hear you. We are not -- none of us are able to get what you are saying.

Yes. So what I'm saying in the -- if you look at stand-alone level also, we have made losses in the past few quarters, right? So from an accounting point of view, those losses cannot be set off against the future profits?

No, no. You are talking about the loss incurred in foreign subsidiaries. This is a capital loss. It is not a revenue loss.

And we have done a diminution in value of investments and written down our net worth, if you noticed, when we sold our foreign subsidiaries. It was not operating losses. It was diminution in value of investments and reduction of net worth of the company.

[Operator Instructions] The next question is from the line of [ Vipul Shah from Sumangal Investments ].

Sir, how did we source the technology for this BS-VI in this cluster? Was it in-house or we licensed it by paying some fees?

There's absolutely no royalty. We did not get technology from anywhere. In fact, our own shareholders and investors have questioned me why are we spending 4.8% of our revenue on R&D. So the result of that spend on R&D for 3 years straight is the rewards that we are getting now as turnover and EBITDA, and without paying any royalty, and that is giving us an edge over competition because everything has been developed in-house. As a matter of fact, we have 220 R&D engineers in the company and continuing to do a lot of work for product upgradation and next-generation products. Out of our total 800 strength of white-collar employees, 1/4 is R&D engineers, and that is what is giving us an edge, and it is paying dividends right now.

The next question is from the line of [ Karthik Radhakrishnan ], an individual investor.

So my question is regarding the O2 sensor development that was JV with Kedia Technologies. Do we have any update on that?