Pricol Limited (PRICOLLTD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm [ Nirav ], moderator for this conference. Welcome to the conference call of Pricol Limited, arranged by Concept Investor Relations, to discuss its Q1 FY '22 results. We have with us today Mr. Vikram Mohan, Managing Director; Mr. Krishnamoorthy Pattabhiraman, Chief Financial Officer; Mr. P. M. Ganesh, Chief Marketing Officer; Mr. Siddharth Manoharan, Head, Strategy and Special Projects. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikram Mohan, Managing Director. Thank you, and over to you, Mr. Mohan.

Thank you for the introduction, [ Gaurav ]. On behalf of all the stakeholders of Pricol Limited and my colleagues present here today, Krishnamoorthy, our CFO; Ganesh, our Head of Marketing; and Siddharth, our Head of Strategy and Projects. I'd like to welcome all our investors and shareholders participating in this call to discuss the financials of the first quarter of the financial year FY '21/'22. The presentation has been uploaded, and I do hope all of you had a chance to go through the details that were uploaded. We have seen a significant growth over the previous quarter, over the quarter in the previous fiscal year. That is because in the last year at the same time, we had significant closures due to COVID and loss of sales. Nevertheless, this quarter also was quite a suppressed quarter as initially the western plants of the company were subject to lockdown due to the pandemic followed by closure of the normal plants of the company for an extended period in May, followed by a very extended closure for nearly 6 weeks of our southern and northern plants of the company, which resulted in significant loss of plant sales in the first quarter. This, compounded by the acute shortage of IC components or child parts in the electronics, has resulted in quite a bit of disruption in the automotive industry especially for companies like ourselves, which are heavily dependent on electronics compared to mechanical products, has resulted in significant raw material price increases, most of which has still offset, thanks to the gratitude and cooperation offered by other OEM customers. But some of it has to be absorbed by us, which has resulted in some degree of impact on the EBITDA compared to the previous quarters. We had EBITDA of 11.17% for this quarter. As I mentioned earlier, if not for the extended lockdowns in different parts of the country between April, May and June and the acute increase in raw material prices, especially on the electronics, we would have comfortably had an EBITDA of at least 300 basis points or 3% higher than what was achieved here. We have generated a decent cash profit in this quarter, and we have also started retiring our debt substantially. And my team and I are quite hopeful that by March of 2022, our debt levels would come down even further, putting us in a very, very comfortable debt equity position and the SCR. Our borrowings are shown in this slide. We have effected some new borrowings under the government-guaranteed scheme and also retired higher cost debt. But nevertheless, since we are going to be on a CapEx-light year, we expect to further reduce our debt and bring it down to -- significantly in the next 2 quarters. Our consolidated results are also in line with standalone results. The wiping business subsidiary based in Western India has started performing well and will show considerably good results in the next few quarters. That company has become absolutely debt-free and has started generating a healthy amount of free cash. Our operations in Indonesia have been affected very badly by the pandemic. As all of you may be aware that Indonesia has seen a major resurgence of COVID. Nevertheless, that operation continues to generate a small amount of cash for us and has also become completely debt-free. So both of our manufacturing subsidiaries are now debt-free subsidiaries and are positive cash accruing and positive both -- significant positive EBITDA. Our third subsidiary, Pricol Asia, which is our purchasing arm, has no borrowings whatsoever and is also generating free cash flows. Overall, that gives you the consolidated profit from operations for the first quarter that's gone by. And we have a consolidated EBITDA of about 12.3% which, as I mentioned, could have comfortably been 15% at least if not for the acute shortage of electronic components and price increases of anywhere between 300% to 1,800% of the electronic components in recent prices. Thank you very much, and I'm happy to, along with my team, to answer any questions that you may have.

[Operator Instructions] The first question is from the line of Amit Mehta from Sunidhi Securities.

Just a question on the sales part. You reported INR 316 crore of sales in the quarter 1. Can we know the breakup of the sales between the sales from the new products or from the 4 wheelers? Where you were restricted because of your noncompete clause with DENSO? And then how much is from export and how much is from EV vehicles? Can we get some rough color on this revenue mix?

Thank you for this interesting question, Mr. Mehta. Mr. Ganesh, our Chief Marketing Officer, will answer your question.

A rough breakup is like last call also, we mentioned that our share of business at Tata Motors has been significantly going up. With also PSA as a new entrant into the 4-wheeler segment, our percentage -- as a percentage, the 4-wheeler would be about 10% on the total revenue of INR 310 crores. And also, our export has significantly grown during quarter 1, which stands at around 15% as of now. That would be the rough breakup.

And how much is from the new products? In fact, last year, it was 40% in FY '21 if I'm correct.

The new product, it continues to be at over [ 20% ], and this is expected to continue at the same percentage in the remaining quarters of this year.

And you know this -- we know that Q1 was -- there was -- because of the lockdown in the Southern Tamilnadu, the production was affected. How is the situation for the July month and the current August month? Are we at the normal level operational level?

Mr. Mehta, I'll answer this question. This is Vikram Mohan here. The lockdown has got lifted in Tamilnadu, Western Tamilnadu, which was acutely affected by COVID around the middle of July. So in July also, we had some suboptimal operation, but not so much due to COVID. But the overall pull from the OEMs have got reduced, not that our share of business is reduced because there is an acute shortage of electronic parts. And this has affected OEM production. So we are still -- this quarter also is going to be below plan but not because of lockdown, but because of overall OEM production levels going down, which I think is going to continue. And I think we are in for a third round of lockdown for the third wave, which is already starting to show signs in different parts of the country. So I think we will have another subdued quarter only. Normally, the quarter of July, August, September is a very good quarter for the automotive industry prefestival sales. But I don't think this year, it is going to be so. So we are taking a fairly conservative estimate for this quarter also, and we have estimated on the conservative cash flow. But what is more worrisome than COVID is the acute shortage of electronic components, which is not showing any signs of easing off. And it is affecting various stakeholders in the industry, which is affecting the industry, which I think is going to exist for some more time. When I think some more time, at least for another 4 to 6 quarters. Though our supply chain has eased off, our customer supply chains have not eased off, which is overall affecting the industry.

Okay. So when we look at the Pricol, the de-growth in Q1 is roughly about 27%, 28% or 29%, okay, roughly. Vis-à-vis, how is the industry de-growth in the Q1 if you want to compare Pricol versus other automotive component in the...

We have not de-grown, Mr. Mehta. We have de-grown compared to when can you please tell me?

Compared to the previous quarter or the normal period, de-grown means, compared to the normal situation. Yes. Not compared to the year-on-year because last year first quarter, the lockdown was much severe. And this year's first quarter, the lockdown is not as severe as we have experienced during the last year, yes. I'm just comparing the industry de-growth in the Q1 compared to the Q4.

See, that's an unfair comparison in the sense because, typically, Q4 is a high-performance quarter for the industry. Q1 is always a weaker performance. Then Q2 is a big highest performance, and Q3 is the weakest performance. This is how the automotive industry has been performing for decades today. So when you're comparing sequentially on a Q4 to Q1, it's not a favorable comparison. But having said that, we are in line with that. Under normal circumstances, we should have performed better than industry by 10% because of our increased share of business. But for Q1, whatever the industry grew or de-grew at, we are in line with that, okay? I expected a 10% better performance than industry because of our share of business increase. But because our southern plants, 2 mother plants in Coimbatore were worst affected in the first lockdown when we had 7 weeks of lockdown, we were in line with the industry.

Okay. You have -- in your opening remarks, you have -- you mentioned about EBITDA margin. You said that it could have been 3% higher than what we have reported. So then do you think that the Pricol can report EBITDA margin of about 14% in a normal -- at a normal level of operation? Does that -- do you mean that?

We have reported 14% to 15% EBITDA margins at normal levels of operation. And barring the surge pricing in the electronics, when I mean surge it's not by 10% or 20%. It's been between 200% to 1,800% price increases. We are operating at this margin level. This -- so -- yes, so we will suffer this 2% to 2.5% EBITDA loss till the electronic prices come back to normal. We are taking internal cost control measures, which have helped us deliver good EBITDA. And hopefully, with some more measures and hopefully COVID not being so impactful to the third wave and hopefully, the electronic shortage is not affecting the volumes. There are too many hopes and external factors that we are not having under control. We will perhaps to excel, deliver a better EBITDA, definitely not 15% or 14%.

Okay. Can I continue more questions? Or shall I come back in the queue?

Yes, please continue.

So the export is almost 15% during the current year, which is approximately INR 45 crores. Is that correct in Q1? So -- yes. So can we say that we are inching towards INR 200 crore annual export revenue going forward?

We are actually aiming for in about 3 years' time strategically for the exports to be about 20% of our annualized revenues when we are at around INR 2,000 crores of . And we are on track for that. Let's not take it quarter-by-quarter because there have been a lot of shipping disruptions. There have been a lot of Suez Canal closures, which is all putting things into nonpredictable manner. But a lot of export business has added committed business. Capacities have got created, and we are on track for it to be 20% of our business in 2 years' time. But hopefully, things come back to normal, and our turnover should be somewhere in the region of about INR 2,000 crores to INR 2,100 crores.

Okay. And regarding the 4-wheeler, where you have already -- you are on the Tata platform and one more company use said? I think Peugeot you said, correct?

Yes.

Yes. So right now, it is 10%. So...

Mr. Mehta, 4-wheeler, there are 2 segments. We are very strong in the 4-wheeler and commercial vehicle segment. We are now talking about 4-wheeler passenger vehicle segment, which is specifically car, where from the real market share, we are building up.

Okay. Okay. Okay. And the last question is on the debt repayment. We were INR 170 crore of debt as on March '21. So what is the current -- as on 30th June, what is the net debt we have?

It is there in the presentation showed. We were not at INR 170 crores. We were much higher than INR 170 crores. And the presentation has clearly the net debt movement figures and also what debt we added and what we reduced.

[Operator Instructions] The next question is from the line of Khush Gosrani from InCred Asset Management.

Can I request you to move on to the next person on the question queue, please, from PhillipCapital?

Due to no response, we move on to the next participant. The next question is from the line of Dhiral from PhillipCapital.

Am I audible?

Yes, sir. You are.

My question is pertaining to the driver information system. So what are the new development which we are doing into that segment, particularly, sir?

There are a lot of technological improvements that we have done in the driver information system. I will let our Chief Marketing Officer, Ganesh, take that question, please.

Dhiral, on the driver information system, the significant change in technology is the TFT. Earlier, we had NCD, which is a static information. Now we have moved into a lot of dynamic information using the TFT technology. This is number one. Second thing is we have moved significantly into the connected vehicle solution. Starting from the Ntorq in 2018, where we were the first to launch the connected vehicle solution into the 2-wheeler. Thereby, we have launched a number of vehicles into the 2-wheeler, including the recent Suzuki, which you would have seen, which is a connected vehicle solution, again, done by Pricol. So the new technology is all the TFT and the connected vehicle solutions.

Ganesh, can I just request you to talk about the dark mode clusters also that have been launched?

Yes, you would have also seen in the recent Tata Motors launching the dark edition, where we have developed the instrument cluster. You can see the shade of dark matching with the internal environment of the vehicle, which is the state-of-art technology done by Pricol.

Okay. And any new...

Also on the EV and of the telematics, which is linked to the DIS, can you throw some light, Mr. Ganesh, for the benefit of all our investors?

Sure. There has been a recent launch done by PSA for export to Morocco. This is one of their first of kind of EV vehicle, which they have started building up at their Morocco facility. So we are supplying a EV car cluster, which is exported to PSA Morocco. And also, we have launched a number of electric vehicle solution for the EV 2-wheeler as well. You would have seen the recent iQube, which has been launched by TVS, which is with a TFT connected vehicle EV solution.

Okay. And any...

We are in the cluster technology. All the forms also we continue to work on the constitution and the controls we are working on new technology. Our technology spend continues to be a robust 4.5% of our sales, which is going to keep us ahead of the competition in the coming years.

Okay. And sir, the new collaboration which we are planning or which we have entered into for upgrading our technology or technology know-how?

I'm very proud to inform you that I'm in line with the [ DM's ] message of [ ARPU ] in manufacturing. We are [ ARPU ] members in technology also. I'm proud to state that we have not had any technical collaboration for technology. We have paid no royalty for technology compared to our competition. All our technology is developed in-house, which is why we spend double of what our competition spends on product and process development, and -- which is what is giving us results and helping us increase our market share.

Okay. That's very good, sir. And lastly, about the debt, sir. Any time line to become a debt-free company?

If all goes well by December 2022, but definitely by March 2023, provided the world does not have any surprises for us.

The next question is from the line of Shashank from ICICI Securities.

Sir, in the initial remarks, you mentioned that you had to absorb some amount of price hike because of raw material costs whereas the numbers on the consol basis that you report, there is an expansion in gross margins. So can you please help us understand why there's a difference between your commentary and the numbers we put it?

The -- if not for those absorption of the surge pricing, commodity prices have been -- we have an integration system with our customers. Though we have an impact, it is going to come back after 1 or 2 quarters. So I'm going to split that into 2 parts. There is a surge pricing and there is because of the electronic commodities, which if not for our internal cost control measure, our EBITDA would have taken a much bigger knock. So what you are seeing is next up on improvements what we have been able to absorb. Otherwise, we could have comfortably delivered another 200 to 250 basis points of EBITDA or 2.5% of EBITDA. That's what I'm alluding to.

So for RM cost was probably in the range of 70%, right? For this quarter, not...

Not very clear. I'm not able to hear you, Mr. Shashank. Can you be a little more clearer, please? Your voice is garbled.

Yes. Sir, the raw material cost for us in last quarter was roughly 70%, right? In this quarter, it is 67%. So is this a sustainable run rate going forward for us? Is there any one-off?

No. This is also dependent on the product base. It's because of the exports more importantly, where our margins are higher. And it is becoming a little unpredictable, the raw material cost, okay? Because -- especially the ITs and electronics because we are forced to take premiums and buy what is available in the market. So like I said, the price increases have been anywhere between 200% to 1,800% increases for the ICs, which is -- I mean, we are not able to plan for that situation.

But sir, on the [Technical Difficulty] right? So we are able to [Technical Difficulty]..

All our other parts to all [Technical Difficulty] will impact significantly.

Secondly, sir, in one of the earlier participant's response mentioned that the scale is roughly [ 20-odd percent ] right? In last fiscal, it was to let you know [ 45% ]. So...

We added a new product line in our system module, which was the regulatory product when we moved from BS-IV to BS-VI regime. This year, it is ahead 20, 25 percentage.

Okay. And sir, lastly, what kind of debt reduction are you planning for this year?

Like I mentioned, if all goes well, we want to be, I don't want to put a firm figure, but we will be significantly lower at least by about 25%, 30% compared to operating debt by the end of this financial year.

The next question is from the line of Khush from InCred Asset Management.

Am I audible?

Yes, you are.

Yes, Khush.

Sorry for the earlier thing. I just wanted to inquire whether since you have indicated acute shortage of IC, have the lead times expanded from last quarter? Have they increased? Or have they remained at that level? Any indication on that part?

Have what increased? Sorry, I couldn't hear you.

The lead times for -- to get these ICs to our plants?

The lead times are out anywhere between 12 to 18 months, Khush. So we are working closely with our customers to predict orders for the next 18 months and placing forward orders. And we are also buying off market. And that is one of the reasons our working capital has gone up and our inventory has gone up. And which is what is showing the stress on the -- which will continue to show some stress on the bottom line.

Okay. Okay, sir. And just on the broad picture, what would be the percentage increase in our market share over the last 3 to 5 years in DIS if you are able to quantify?

We have been flat in the last quarter, but over the last 3 years, in 2-wheeler DIS, we have gone from 35% to about 52%, 53%. In commercial vehicle and off-road vehicle segment, we have gone from about 45%, 50% to about 78%, 80%. And in the passenger vehicle cars, we are going to inch up from about 0% to about 8% to 9%.

The next question is from the line of Samarth from Fort Capital.

In our -- for the ICs that we procure, do we have any minimum order quantity for this? And generally, how much was the normal inventory that we used to hold earlier versus the situation now?

We are holding about 25 crores additional inventory compared to -- we typically have about 12 inventory turns. So I don't want to give a figure. It's base of sales. It's about 12 inventory turns, but about 25 crores additional inventory we are holding on account of the IC shortage.

Okay. Do you -- by when do you see the situation improving on the IC shortage side?

Overall, for the industry, indications are showing it is going to normalize between -- after about 6 quarters. These are we are predicting.

Okay. And sir, on the gross margin side, do the products that we supply in the electric vehicles generate more gross margin than the ones we are supplying for traditional IC engine vehicles?

No, not necessarily. But we have to up the value chain. So it has higher fixed cost absorption in the newer generation vehicle, and our exports continue to give us good gross margins. And it is -- when you move up to value chain to connected clusters and TFT clusters, margins per cluster rupee value was higher compared to a conventional mechanical cluster.

Okay. And the gross margins that we have reported means they are seeing the raw material situation. The numbers seem to be quite well at 33%. Do you see this continuing going forward, between 30 -- 33%, 34% range earlier -- compared to earlier, which was 30%, 31%?

With a plus or minus 2%, we will see a variance base on the product mix. Based on what OEMs is going to sell because, for example, in the month of July, TVS and HMCL, what they predicted to what they sold has been so different. So this is going to keep going because they are getting because of the IC shortage. So neither is the customer able to predict nor are we able to predict. It's a very, very peculiar situation. I've been in the industry for so long now. My Head of Marketing has been in the industry for so long now. And we have never seen a dynamic situation as we see today.

[Operator Instructions] The next question is from the line of Manish Srivastava from Amla Management.

I just wanted to understand a bit more on the balance sheet side, 1 or 2 issues. One, I noticed that your standalone debt has gone up by about INR 31 crores, gross debt. And consolidated gross debt has gone up by about INR 14 crores only, okay? So which basically tells me that about INR 17 crores or INR 18 crores of debt has been repaid at your subsidiary level. And that was all that the debt was there at the subsidiary level. So is it right to assume that all the debt at subsidiary level has been paid off? Two, is it the Indonesian subsidiary we are talking about? And in general, what is the operating plan at the Indonesian subsidiary? Because clearly, to fund that debt payoff, you would have moved more money from there. So there would be some thought process on the operating side in terms of what I'd be looking to do there at the Indonesian subsidiary level. So what's the plan there? That's one. Two, from the debt increase...

Manish, let me take one question at a time so that's easier rather than have a question queue. Yes, we have -- from the date of some of the debt in our subsidiaries because we want to exist certain banking relationships. Certain banks that were not supportive during our difficult times in the past 2 years, we rejigged our portfolio. So we decided to exit certain banking relationships. So certain monies have moved to our subsidiaries in both our subsidiaries, and they paid off to bankers overall consolidated, you'll see a movement at the debt. And standalone, the debt would have gone up. I will talk to you about our plans, both for our Indonesian subsidiary as well as for our other subsidiary in India, which is the 3 subsidiaries. One is only a buying house based in Singapore, which only does all our buying of our parts for only the Pricol Group. There is no external business. So that is going to be completely tied to the fortunes of Pricol, where we are getting some cost out of charges of buying in Singapore and lower costs, lower LC rates, et cetera, which are giving us some benefits overall. The Indonesian subsidiary will continue to remain flat. We'll continue to generate very little amount of cash significant to write home about, at least for another 2 years because we don't have visibility for very big new business there for the next 2 years. We have started some exports business from Indonesia to America on pumps for Harley-Davidson and also to BMW because of the prepay agreement between Indonesia and the U.S., thanks to the anti-China rhetoric. It started off at a small base which will grow in the coming year, but it's not going to be very substantial. But it's not going to be a loss-making subsidiary. It is not going to suck up any cash. It will accrue a little bit overall to the EBITDA. Whereas interestingly, the subsidiary in India, the Wiping subsidiary, which though not a core business, I must commend my team on a remarkable turnaround there. And that has also significantly seen some business increases and also free cash flows coming back to the parent company. That is going to see some significant developments because a lot of new business has been done. We will be putting some investments to cater for that business, but that will be catered to by that business itself and will not require, hopefully, any funding from the parent. But if the business increase is going to be far in excess of what we anticipated, then perhaps some funding to cater to that business increase is going to be done. That's with regard to the Indian subsidiary, the Wiping subsidiary based in Western India.

Great. That's very, very useful. All right. The other question I wanted to ask was like there is already a lot of cash sitting there in the subsidiaries. So again, is it like -- is it about like supporting the exports to U.S. that you're keeping the cash there? Or any other strategic plans on that? What's the thought around that?

There is no spare cash sitting in the subsidiaries. Manish, we are running tight ships in both the places.

Okay. Because what I saw was in fiscal '21 accounts, the balance sheet, if you looked at the cash, that was their cash/deposits or whatever, which was then the standalone accounts versus the consolidated account. It sort of suggested that there was about INR 45-odd crores of cash actually lying there in the subsidiaries. So I don't know. Maybe that's the wrong way to look at it. But at least there was that difference in consolidated cash and the cash in the standalone books. About INR 46 crores was the difference.

It's definitely not so. I think if you can send a specific query to our CFO, he'd be happy to answer that because I know we run very tight ships in both the places. And in spite of the small operations, that's why we're able to generate money. Again, if there was spare cash, I would have used that to further bear down debt.

Manish, there is no idle cash. There's no idle cash. Since it was a snapshot on the last day of the quarter, we have received some cash, and that gets consumed in a subsequent basis. There's no idle cash at all. As our MD said, we are working on a tight schedule in our cash situation. And whatever I have said a couple of that we have used it for repaying high cost loans.

Okay. Fair enough. That's good enough. And the third thing, sorry, if I may ask about the working capital side. Clearly, like, we haven't really spent anything on CapEx here in this quarter, but we have taken more debt and the business did generate at least profits. I don't know cash. So clearly, working capital has gone up during this quarter. Is it because you have paid off our vendors very aggressively? Or it is just inventory and receivables increased, which has driven that significant increase in working capital?

It's not a significant increase. Our working capital, we brought down to 0 in March. But there is some amount of working capital deployment, but it's all 3 reasons. Vendors have been kept and there are receivable delays. That's a combination of everything while we have managed our working capital.

[Operator Instructions] The next question is from the line of Shashank from ICICI Securities.

Yes. Sir, depending upon the sales that you get from your OEM clients, what can -- what are the growth prospects for us for this year at least for the industry and for us?

As I mentioned, I don't know about industry because like I said, we are in such a VUCA situation, where I'm not able to predict next month compared to my -- the customers are not committing to next month because it's such a VUCA situation. But we will grow at 10% over industry if there is no further severe lockdowns which is going to hamper production.

Okay. Okay. And sir, what about -- we are targeting some INR 2,000 crores of sales, right? So you mentioned is by FY '23, right? Or FY '24?

Pardon me. Pardon me.

Sir you're targeting something like INR 2,000 crores or INR 2,100 crores of sales, right? So this is by FY '23 or by FY '24?

FY '23.

'23.

[Operator Instructions]

I apologize. Sorry for the last addition. FY '23, '24, we will reach INR 2,100 crores.

[Operator Instructions]

Since there are no more questions, can I...

Yes sir.

Thank you all for having participated in investors call on behalf of my team, and thank you all for your questions and your patient sharing. And we look forward to meeting you all after our quarter 2 results, which we hope and pray would be much better than quarter 1 for all of us. Thank you.

Thank you very much. On behalf of Concept Investor Relations, that concludes this conference. If you have any further queries, please send us an e-mail to [email protected]. Ladies and gentlemen, you may now disconnect your lines. Thank you.