Pricol Limited (PRICOLLTD) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Margaret, the moderator for this conference. Welcome to the earnings conference call of Pricol Limited, hosted by Concept Investor Relations, to discuss its Q2 and H1 FY '22 results. We have with us today Mr. Vikram Mohan, Managing Director; Mr. P. M. Ganesh, Chief Executive Officer and Executive Director; Mr. Krishnamoorthy Pattabiraman, Chief Financial Officer; and Mr. Siddharth Manoharan, Chief Strategy Officer. [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, sir.

Thank you, Margaret. A very good evening, and greetings of the festive season to one and all who have participated in the call. We welcome you to the earnings call for H2 of FY '21 -- H1 of FY '21, '22. Before I start the presentation and go through the details of the financials, some of the key highlights I would like to present to you. As many of you know, there is a massive global shortage of ICs, electronic components and LCDs, which is one of the main raw materials for your company, Pricol. The automotive manufacturers also have been affected very badly by the chip shortage resulting in massive losses of production, which is having an impact on our company and shortage of raw material for our company has also hampered our production. And our sales is significantly lower than planned numbers at the beginning of the year. While there have been significant cost increases on account of this shortage and also freight cost and commodity price increases, we have been able to recover a lot of these increases from our customers. But in the interest of goodwill and business continuity, we have also absorbed some of these abnormal spike, thereby resulting in an overall EBITDA reduction of about 2.5%. We expect, not just us, but industry experts also believe that the crisis is going to reach its peak in the third quarter, which is October, November and December, and the industry will see its lowest production in this quarter in recent times and slowly bounce back from January and some degree of normalcy in supplies and supply chain of electronic components is only expected from September of 2022. So difficult times will continue to exist with these headwinds for the automotive industry as a whole and more so for companies like Pricol, which are very heavily dependent on electronic parts, ICs and LCDs as its raw material. This is a situation which is way beyond our control. And we -- our team is doing its best to mitigate the effects of these shortages, price surges and fast-changing scenario to keep the momentum going and keep generating cash in the company. You would be happy to note that one of the strategic objectives was to keep reducing our debt levels. And I had in one of the earlier calls said that the senior management has taken a pledge to make the company's term loan debt free and have only working capital borrowing, which we are still confident of doing even at the current level of sales and reduced cash flow in the next 12 to 15 months by March 2023 as promised. Now for the good news, we have continued to invest very heavily in technology, which is keeping us ahead of the competition. We continue to invest between 4.5% to 4.8% of our sales on both products and process technology relentlessly in spite of the downturn in the industry. And these investments are yielding dividends by increased RFQs, increased NOIs from customers and increased customer confidence, customer awards, which will result in business -- increased business and growth rates in the future once the company comes back to normal. With this introduction, I would like to go on to the presentation, which has already been loaded onto the website, and I hope all of you had a chance to see the same. Our revenue from operations over the previous period in FY '21 in this quarter has seen a marginal 1% growth. Industry has overall seen a degrowth, whereas we have maintained our share of business and have remained flat for this period. Industry saw a huge rebound last year in the July to September period post-COVID whilst there were no shortages. We have managed to maintain our share of business and maintain the same level of business as in the same period last year. And the total revenue being INR 387 crores and INR 389 crores, respectively, in the 2 quarters. And for the April to September quarter, obviously, we're at half year, we have obviously done much better because the first quarter of last fiscal year was a complete washout because of COVID. The first quarter of this fiscal year also, though not a washout, saw almost a month of closure of many of our plants, but we have still performed better, but much lower than our plans because of the shortages. The profit and loss from operations also remains more or less the same between the last quarter and -- of FY '21 versus the last quarter of FY '22. In spite of very, very steep price increases, we have still managed to control our costs to a great extent and maintain a decent cash flow from operations. The EBITDA, as mentioned in the earlier call, we said we will see an erosion of 2% to 2.5% because of these price hikes -- abnormal price hikes, which -- some of which we will not be able to recover from the customers and the EBITDA of about 12.5% or 12.3% is reflective of the same, which in normal circumstances should be closer to 15%. We have generated a cash profit of about INR 31 crores in this quarter against INR 44.9 crores in the same quarter in the prior period. That also primarily contributed by a higher tax expense and a tax credit in the prior -- in the quarter in FY '21. And we have generated a free cash flow after CapEx of about INR 26 crores this quarter, which has gone towards debt reduction. And even as late as in October after H1, we are able to significantly reduce some more debt. The long-term borrowing as on 30/9/2021 versus 31/3/2021 has seen a significant decrease. This number has further reduced as on today, and we are hopeful of bringing this number down to less than INR 100 crores by the end of this fiscal year. The working capital obviously has gone up as the sales of the company has increased, but it is well within limits our inventory stocks and our working capital management receivables and payables. On a consolidated basis, our total revenue again has marginally grown. This has been driven by the growth of Pricol Wiping Systems Limited, which has seen a bounce back and a growth since last year. And the forecast is for that company to keep growing, except in Q3 of this fiscal year where its customers are closed for about 50% of its time. So it will see a dip in its growth and then go back to a growth phase. Having said that, that company has no liabilities and is cash accruing. All our subsidiaries today are profitable and cash accruing to our bottom line with no liabilities in any of the subsidiaries. Profit and loss from the overall continuing operations, we used the word continuing operations for this financial year because we are comparing it to last financial year where for a small period, we had some of our overseas assets prior to their sale. So the profit and loss from continuing operations are pretty similar to what we saw in the same quarter of last year, in spite of all the steep price increases. EBITDA, again, is on similar level. The marginal increase in EBITDA for this quarter again is the bump-up provided by Pricol Wiping Systems on its growth path. Similarly, cash profit for this quarter is about INR 34 crores on a consolidated basis and about INR 62 crores for the half year ended September. We'll continue to generate cash, and this cash will be primarily used for CapEx and retiring debt in the ensuing period. Again, our borrowing at a consolidated level has gone down the long-term borrowings from about INR 245 crores to INR 142 crores and working capital borrowing stand at around INR 80 crores to fund the sales and the consolidated borrowings will continue to come down in a steady manner to -- at a consolidated level, we are hopeful of reaching a debt of below INR 100 crores by March 2023 -- I'm sorry, by March 2022 and become debt-free by March 2023. I stand corrected. Some of the recent next-gen products that were launched this quarter between July and September are some products for HMCL and TVS, which are -- these are just a few selection of products, next-generation electronic clusters with Bluetooth connectivity, et cetera, all developed in-house. An entry that we have made into the heavy commercial vehicle sector with multiple features with Tata Motors for our company, and the newly launched Gurkha of Force Motors for which even an appreciation letter was received for both of this from Tata Motors and Force Motors for support and developing these clusters. We have also started commence production of the oil pump for Polaris, which is an export customer. As I have mentioned in earlier calls, export continues to be a focus area for growth. And exports and deemed exports, we would like it to be 30% of our turnover by 2025 for which we are on track. Thank you very much for your patient hearing, and thank you for the trust in our company even in this difficult time. This too shall pass. And we believe in the next few quarters, the industry will come back stronger than where it was and what the difficulties it is going through currently. I have with me our colleagues, Mr. Ganesh, who is our CEO and Executive Director on the Board; Mr. Krishnamoorthy, Krish, who is our CFO; and Siddharth, our Chief Strategy Officer and Head of Corporate Communications. They will be taking all your questions with regard to this call, and I will pitch in wherever necessary. Thank you very much, and over to you, Ganesh, Krishnamoorthy and Siddharth.

Should we open the floor for Q&A session?

[Operator Instructions] Thank you.

[Operator Instructions] The first question is from the line of Jyoti Singh from Arihant Capital Markets.

So my question is, what is the current debt? And how do you plan to trim it down? And at what time would you target to become debt-free?

Ma'am, I had exactly mentioned that in my presentation. The current long-term debt is, as we speak, is about INR 125 crores. It will become about less than INR 100 crores by March 2022. And as promised, by March 2023, we expect to pay off our entire long-term debt. Working capital will be a function of the movement of sales of the company and goods. And this is on a consolidated basis, including all subsidiaries.

Okay. And sir, another question on how does the production schedule from the OEMs look like? And second question also, how is the semiconductor situation panning out? When do you see the supply side constraints easing off?

Can I request you to restrict to 1 question and come back on to the queue as requested, ma'am? Thank you.

[Operator Instructions] The next question is from the line of Deepan Shankar from Trustline PMS.

So firstly, wanted to understand, so our -- this 2-wheeler industry is under pressure for growth. And also, we see scooters are transitioning to electric vehicle. So how are we confident of achieving this INR 2,300 crores kind of revenues by '24? So could you throw more light on the growth drivers, which we expect to achieve this kind of revenue targets?

I'm Ganesh. 2-wheeler, unlike last year, did not see a v-shape recovery. This quarter has been a little sluggish. That is why you find a marginal degrowth in the 2-stroke 3-wheeler segment. But as we have told during the previous calls also, Pricol has been increasing their value on the clusters. Thereby the value per cluster has been increasing. About 3 years back, we had 70% of our revenue coming from mechanical clusters. Now 70% of the total instrument is coming from electronic clusters are moving up the value chain. And most of them are moving into the high-end digital cluster called TFT clusters. We are also working with a number of EV manufacturers, including start-up companies. And thereby, they are asking for high-end digital clusters along with the IoTs. So Pricol is engaged -- actively engaged rather with most of the EV makers today in India. Did I answer your question?

Yes, sir. Also on the pump side, also, can you throw some light on growth drivers?

On the pump side, actually, we have been migrating into the larger pumps as a part of the derisking strategy because, again, 3 years back, we were primarily on to the smaller pumps used for 2-wheeler. But in the last 3 years, we have been migrating steadily on the larger pumps and on the export front as well. Our first business, Caterpillar, which is a very large water pump, which we'll be exporting to U.S. In fact, each pumps would weigh somewhere around 100 kilograms is going to start the production from April '22 onwards. Similarly, we are focused on export on the larger pumps where we do not see an EV disruption. So the pump business will continue to grow.

[Operator Instructions] The next question is from the line of Venkatesh Subramanian from LogicTree Capital Advisors.

I have -- the question is an extension of the previous one where we are looking at a top line of INR 2,400 crores by FY '24. So the 2 things that I wanted to ask. What is it -- what kind of competitive advantage or strength that we have, especially when we are foraying into new segments, and targeting EVs, what is it that's going to help us get there? And what kind of -- where do we -- when can we start seeing the traction, which is in our pursuit towards INR 2,400 crore top line, which quarter should be the inflection point for us to start looking at quarterly run rates?

This is Ganesh here again. To answer your question is that Pricol has got its own in-house design and development capabilities. That has been the USP for Pricol. All the products, whatever has been launched for the BS-VI, has been from Pricol local design and development, okay? So this is one of the key strengths for Pricol. Thereby, we are quite flexible in our design and development. Also, we have got our in-house capability on both the tools and also on the die-cast parts. So thereby, we have got a large backward integration, which gives us the flexibility on the design and development, okay? This is number one. Second thing is we are moving up the value chain as we explained to you, and more and more electronic clusters are coming into the fray. The value addition also has been increasing on the digital front. Like, for example, some of instruments whatever we have made in the recent time, is almost like 5x to 7x of the mechanical cluster. So we are moving up on the value chain. So -- and also the new products like the telematics, which now we are launching with the 2-wheeler and also with the 3-wheeler front gives us a lot of opportunity to grow on the IoT space as well. And also on the larger pumps, the export business is growing. So by 2025, 20% of our revenue is going to come out from the export business.

Okay. And yes, there was a question. Where do you think that the turnaround quarter would be where we start looking at traction?

Actually, Venkatesh, we have been continuously growing. If you see, barring the market conditions, we have been steadily growing at a 15% to 20% year-on-year. So there is no particular quarter where there's going to be an inflection point. So we are going to continuously grow and the RFQ pipeline has been quite healthy. If you see even during the last quarter, we have launched a slew of digital clusters for our domestic customers and also export pumps.

Correct. Correct. Yes. Okay.

In spite of -- Venkatesh, in spite of degrowth of the market, we've been able to keep it flat. But realistically speaking, I can understand where you're coming from. This is not me speaking, but also with inputs from ACMA and other peers in the industry. We expect that inflection in the industry as a whole is not going to be earlier than September of 2022.

[Operator Instructions] The next question is from the line of Nitin Deveriya from Augmen Capital.

Sir, I just had 1 question. What was the contribution of exports to our top line for the current quarter?

About 10% of our revenue came from export during the last quarter.

The next question is from the line of [ Palaniappan Meyyappan ], an individual investor.

This is [ Palaniappan ]. See, there is a jump in the employee expenses by 13 percentage. Can you throw some light on that?

Yes. In the current quarter -- this is Krishnamoorthy, CFO, speaking. In the current quarter, the increase in employee expenses is fully in line with the increase in operations. In addition to that, there are 2 other factors which contributed to the increase in employee expenses. We had taken up the increase in salaries, which was provided for -- from July in the current year. This is towards the increment in salaries, which are essential and also the variable compensation pay, which was taken up despite the challenging market conditions to keep up the morale of the employees. This normal salary increases contributed to the predominant value of the increase. In addition to that, by the end of September, we also did an actual evaluation of our gratuity and the termination benefits, which was first time we did, and we decided to take that liability proportionately in the current quarter. So these are the 3 reasons why there is an increase in employee cost, which is just in line with our operations.

This is Vikram Mohan and further to add to what Mr. Krishnamoorthy said. In FY '21, which is last year, our employees also made a huge sacrifice by forfeiting their salary increases and going through a lot of hardship and supporting the company to recover from COVID and bounce back. So we felt it was prudent to reward them amply to keep the morale up and to reward the growth, which kicked in from this year. So it is an above normal increase to compensate for no increase or salary cuts for last year. That is also -- and that's in line with what the industry or our peers in the industry, the electronic space, have done and to reduce attrition.

[Operator Instructions] The next question is from the line of Venkatesh Subramanian from LogicTree Capital Advisors.

So my question is, since we are on a growth path, and we also want to reduce our debt, what kind of growth capital or CapEx would you need for the ensuing future for the next 3 years? And do you have any plans of doing a stake sale to raise some money or a QIP, something like that? And apart from that, if at all, the company needs growth capital, do you have any assets in terms of land or other things that you may want to monetize over the next couple of years?

This is Vikram Mohan. And as mentioned in my prior call, the last couple of quarter calls, we will be CapEx light in FY '22 and FY '23 because we have created enough capacities and in our tech center to cater to our growth for this period. But in the fag end of FY '23, we will start a cycle of capital assets and expansion to keep our growth drivers growing, by which time we hope to be debt-free and then have an unleveraged balance sheet, which will give us some leverage. We do have some investments planned for this year and next year. And what is the debt reduction plan is net of these investments. So after taking care of investments for the next 18 months or so, we will still be able to take care and pare down our debt, and we have a deleveraged balance sheet. And basis our growth and some of the new products that we are working strategically to enter, basis quantum of funds required in the growth plan, there could be some equity or fundraising, but not before March 2023, by which time, I'm fairly confident that we will also have a completely deleveraged balance sheet.

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

Sir, in the presentation given by the company, there was a mention that the company spends close to 4%, 5% of the revenue on R&D. So could you help me understand like what percentage of this -- the sales that we are having today with the benefit of the R&D which we have done in the recent past, maybe 2, 3 years down the line, if you go back, the R&D expense that the company have made, so today, what kind of revenue company is able to generate from those R&D expenses?

Mr. [ Saket ], this is Ganesh here. We are seeing that there has been a major transformation from the BS-IV to BS-VI, starting April 2020. More than 60% of our revenue growth has come from the new product, primarily starting from April 2020 onwards. In other words, 60% of the total sales is contributing to the new business. Some of the existing products have been replaced also by new product. So that is the leverage that we got by investing in R&D to the extent of 4.5% to 5%.

And this is Vikram Mohan. I'd like to further add to this. This year, also nearly 25% of the products are new products. And being in electronics, and we are becoming less of a product company and more of a technology company. The pace of change of software and hardware is so rapid that we are the only Indian company, let me proudly say, in our area where we are not dependent on any one for technology or any sort of collaboration or any sort of royalty. And that is what is giving us the edge and steadily helping us increase our market share. So which is why I stress, we will continue to spend this 4.5% of our sales on those, I wouldn't call it R&D, I would call it product and process development rather than -- we don't do pure R&D like a research institution. We do product and process development to be completely ahead of the market and keep increasing our market share and be the market leader and maintain our lead. And that is what is going to keep our growth engine going ahead of the market. We are more of a system player than a product player. And that is the edge, which we are getting from the -- because of the -- from the customers and the customers are recognizing that value. Just to give you an emphasis, we have a total of 800 white-collar people, of which 320 are in product and process development or R&D. And 60% of our total wage bill for staff go towards product development, which is among the highest among Indian companies, which is something that is what the customers are seeing as value with Pricol.

Another question which I have, from the past con call, if I'm right, I maybe wrong. I've heard that you told that many of the Tata Motors passenger cars, the display system has been provided by our company. Was that right or is there anything mistake in this?

You are very right. About 80% of Tata Motors cars will have Pricol in them. It's not just a display system. It's now complete driver information system. It is not just a display because there's a lot of sensors involved, electronics involved. And about 80% of -- let's say, 3 out of 4 Tata vehicles, not just cars, 3 out of 4 Tata vehicles will be with Pricol's products over the next few months.

Okay. That means for the commercial as well as the passenger vehicles?

It will be across all product verticals of Tata Motors.

In fact, we have been -- 2 years running as the vendor to Tata Motors also.

Okay. So sir, what percentage of our sales would be dubbed to Tata Motors as of today?

What percentage of our sales will be Tata Motors as of today? It is about 5% of our revenue comes from Tata Motors.

Okay. So like as far as we are seeing Tata Motor doing good nowadays. So do you think how much it can increase to over the period of next 2, 3, 4 years, if you can have any estimate or any idea?

We are adding products to Tata Motors apart from driver information system. We are moving into other products as well. So we expect maybe in the next 3 to 4 years, we should be about 7% to 8% of our total revenue will come from Tata Motors because our revenue from other customers are also steadily increasing.

Yes, yes. So the company has been saying there's been this chip shortage that is affecting our sales?

Would you mind going back to the queue, please, and restrict, because we said 1 question for 1 person.

[Operator Instructions] The next question is from the line of [ Ramanathan Subramanian ] from [ Varam Investments ].

Congratulations to all of you for delivering another very good quarter. This is Ramanathan. So my question is regarding the tax provision you have made INR 11-point-and-odd crores for a profit of INR 22-and-odd crores. Can you please throw some light on this, sir?

The effective tax rate before the deferred tax is around 56% And the deferred tax benefit we have got around 21%. So it is close to 35% is the net effective tax rate. So which is in line with the tax rate for listed companies above -- around our turnover. So this is not high. But when you compare to the same quarter of last year, the tax provision is higher because last year, we made profit -- we made losses year-to-date. And therefore, the tax provision was a benefit to the bottom line. Whereas this year, we have made profits, therefore, in terms of absolute value there is an increase in tax provision.

Last quarter, we didn't have this kind of provisioning, sir, June quarter.

Last year, we had a loss. Last year same quarter.

For June quarter, I'm asking this year.

For June quarter -- see, the tax provision is made taking into account the projected profits for the full year. So there is not much of change in terms of percentage from last quarter -- the current year to the current quarter. It is always the same percentage.

The next question is from the line of [ Saket Saraogi ], an individual investor.

Sir, I had 1 question on the amortization of the intangibles. So sir, there is a charge of close to INR 22 crores last year, and this year also there is fixed charge. This charge is -- it continues or it's part of the R&D expenses that we are amortizing?

This is amortization of intangibles and goodwill, which was re-written when we did a reverse merger. So this is a noncash item. So this is actually cash accruing to the balance sheet, [ Mr. Saket ].

So this is continuing till when? Is there any time line till when it will get exhausted or?

Another 5 years if I remember correctly. So it's a noncash item, much like depreciation.

Predominantly it will be depreciation.

Okay. Sir, one more thing. Earlier, the company was projecting kind of INR 1,500 crores, INR 1,600 crores of revenue this year, right? So -- and due to the shortage that you told that there was some hit maybe on the sales. So going forward, maybe 2, 3 years down the line, what kind of revenue growth company is targeting?

See, we should have, on a normal basis, done around INR 1,800 crores this year. And I see us losing somewhere about INR 1,750 crores, INR 1,800 crores, if things were normal, and that was what's predicted by the customers, but we will see a drop of at least 20%, 25% on account of the slowdown in the industry and the chip shortage. And we expect on a normal basis we would have seen -- continue to see the same level of growth going -- INR 1,800 crores going to about INR 2,200 crores next year. But as I said, we are in a very, very uncertain time. Until September, we are not even able to predict -- for December, let alone next September. But like I said, these headwinds are expected to continue all the way until at least next September.

Okay. Sir, 2, 3, 4 years down the line, sir, what kind of revenue growth the company is seeing? If you can just share.

I think I need to be kind of Nostradamus to predict into the future. But we have a capacity to do for a product mix of anywhere between INR 2,200 crores to INR 2,400 crores. We have an order pipeline to take us to INR 2,200 crores to INR 2,400 crores. We have the assets, both the people and the manufacturing assets to take us to that number and the pipeline. So if industry comes back to normalcy, supply chain comes back to normalcy, demand comes back to normalcy, I think comfortably, we should be on the path to do about -- if things have been normal without any of the situation, we were anticipating about INR 1,800 crores of sales -- INR 1,750 crores to INR 1,800 crores this year and about INR 2,200 crores of sales next year. But obviously, it is going to be about 20% to 25% lower than that. And what we are going to be doing for FY '23, I frankly don't know and I don't want to talk about this because even the best of industry pundits are -- their predictions are going wrong.

The sales -- the market is going to slow down, that is more because of the chip shortage or because the demand is lagging the 2-wheeler part, particularly?

No, it's a chip shortage with a slackening of demand due to economic conditions. It's a combination of both. And prices have gone through the roof, raw material prices, especially electronic parts but also commodity. The impact of price per vehicle has also gone up. But having said that, some vehicle makers have done very well like the TVS. Some vehicle makers like a Hero have not done very well. So it's not just sectorial things. There are certain players that have done extremely well and some players that have not done well.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Vikram Mohan for closing comments.

I hand over to our Head of Corporate Communications, Siddharth, to please place the call -- for closing comments.

Thank you. Thank you all the investors for participating in today's call. Looking forward to connecting with all of you once again in the next quarter. And if you have any clarifications, please do write to our Investor Relations e-mail ID, and we will be happy to respond to you. Thank you once again.

Thank you. On behalf of Concept Investor Relations, that concludes this conference. Thank you for joining this conference call. If you have any further queries, please send an e-mail to [email protected]. I repeat the e-mail ID is Gaurav, [email protected]. Ladies and gentlemen, you may disconnect your lines now. Thank you.