Pricol Limited (PRICOLLTD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I am Rutuja, moderator for this conference. Welcome to the Conference Call of Pricol Limited, arranged by Concept Investor Relations to discuss its Q3 and 9 Months FY '22 Results. We have with us today Mr. Vikram Mohan, Managing Director; Mr. Krishnamoorthy Pattabiraman, Chief Financial Officer; Mr. P.M. Ganesh, Chief Executive Officer and Executive Director; and Mr. Siddharth Manoharan, Chief Strategy Officer. [Operator Instructions] Later, we will conduct a question-and-answer Session. [Operator Instructions] Please note, this conference is being recorded. Now I would like to hand over the floor to Mr. Vikram Mohan, Managing Director. Thank you, and over to you, sir.

A very good afternoon to all of you, and welcome to our -- the third quarter of financial year FY '22 earnings call. As mentioned, I mean, on many occasions in recent times in the press and other communication as the one-on-one investors, we are perhaps going through the most difficult time in our company's operations in this quarter. Quarter 3 and quarter 4 of this financial year is perhaps the most difficult time for us, mainly due to external factors and no internal factors. We have seen huge disruptions in our supply chain, acute shortages of our key raw material, which is ICs, semiconductors, LCD, TFTs are key raw material. Lead times for our raw material has gone up to 54 weeks to 58 weeks. Freight costs have quadrupled and quintupled in many cases, inbound freight and schedule from customers have been extremely dynamic with changing schedules literally every day. Compared to many other companies in the automotive component space, your company, Pricol, has had a far higher impact being reliant on electronic raw material being imported from Taiwan, Korea, Malaysia, China and Japan. The impact on take-on has been far higher, and this has had an impact on both the top line and the percentage EBITDA of the company. On a normal basis, we should have comfortably delivered another 3% or about 14% EBITDA, whereas we have had a suboptimal EBITDA, because of increasing raw material costs, freight costs and constantly erratic production schedules. We have also lost at least about 20% sales per month, because of these acute raw material shortages. And in many of our raw material, we are working with literally 8 hours of raw material in stock on a hand-to-mouth basis. Under these conditions, I must congratulate our operating team for delivering the best possible results within these difficult operating conditions. The same operating conditions are continuing for Q4 as well, and we expect some breathing room to come in, in the coming quarters. The revenue from operations stands at INR 379 crores for this quarter. On a quarter-to-quarter basis, there has been a reduction compared to the previous financial year by about 13.55%. There has been no loss of market share of the company, this is a reflection of the industry itself going down because of the semiconductor shortage. Total revenue for this quarter has been about INR 392.84 crores. Next slide, please. The profit from operations for this quarter has stood about INR 18 crores. Amortization of intangibles is about INR 570 lakhs, which is a non-cash item. Profit and loss from operations has been about INR 23 crores for this quarter, which is again lower significantly, compared to the same quarter last year, because of the increased material costs as the third prices that we are seeing for such material. We have had an EBITDA percentage of about 11.16% and if not for these temporary price pressures and surge pricing, we should have enjoyed closer to about 14.5% of EBITDA this quarter. We have made a cash profit of about INR 32 crores this quarter and after CapEx, we have had a free cash flow of about INR 20 crores this quarter. This is an interesting slide to note, as of March 31 in FY '21, our long-term borrowings was about INR 230 crores. We have had a healthy amount of cash generation in spite of all these difficult external factors, and we have been able to substantially reduce our long-term borrowings, and we have been able to bring it down to about INR 100 crores as of 31st December. And this number has further reduced as we speak and as mentioned to you, in the next financial year, this entire long-term borrowing will be repaid even with constrained market conditions and weak automotive market. Our revenue from operations was about, on a consolidated basis about INR 395 crores. Here again, we have degrown slightly lower than the market de-growth, which means our market share has increased. And our total revenue stands at around INR 408 crores for this quarter. All of our subsidiaries are debt-free, all our subsidiaries have zero borrowings, all of our subsidiaries had -- are cash accruing at this point of time. Profit and loss from all the continuous operations for this quarter is about INR 27.80 crores, with a cash profit from continuing operations being far in excess of this. EBITDA overall, including the subsidiaries stands at around 12.11%, which would have been ideally about 15%, if not for these freight hikes that we have faced in this quarter and will continue to face in the next quarter or 2. The cash profit for the company as a whole, including subsidiary stands at INR 37 crores as against INR 32 crores for the stand-alone. Consolidated borrowings as well has seen a significant reduction with no long-term borrowings at any of the subsidiaries. Some of our recent product launches are the -- to be the digital cluster for some of our marquee customers like Hero Motors and TVS. Passenger vehicle and commercial vehicle clusters for Gurkha of Force Motors, the new Gurkha, and for Tata Motors commercial vehicle. Some tractor and off-road vehicle clusters of a new customer entry into Tata Hitachi for their off-road vehicles. And a new oil pump for Polaris for an ATV. Our new product pipeline continues to be very robust. Our LOI pipeline continues to be robust, we have a strong business order pipeline for the next few years. The next few quarters will continue to be under stress till the world comes back to normal and supply lines come back to normal. Industry experts believe some degree of normalcy will start coming back from September 2022 and by September 2023, complete normalization, especially with regard to IT, supply chains and PFK and electronic components will happen. Thank you very much for your patient hearing. We would like to now entertain questions from our shareholders and participants in the call. [Operator Instructions] Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal.

My question pertains on the P&L side. We have seen a substantial increase in other expenses on a Q-o-Q basis. So is this a reflection of higher freight costs, because our revenues have been more or less flat -- I'm talking of stand-alone numbers?

Yes. As mentioned, Jinesh, we have been paying a huge amount of premium freight to get materials invert. Freight costs of almost quintupled and quadruple import space and freight cost increase is primarily the reason for cost increase.

And we're not seeing any signs of that moderating at least for fourth quarter?

I don't think there will be any let off for the fourth quarter, Q3 and Q4 are going to be the most difficult quarters and we don't see freight rates coming softening or at least supply chain for electronic components, and we are still bringing in everything in by air freight as against sea freight, which not just for Q4, even for Q1 of next year, it is going to be -- continue to be on air freight basis, even as of last week, one of our key ESG suppliers have announced shutdown of their plants in China on account of COVID for 3 weeks, and this was going to result in premium freights for the coming 3 months. So I don't expect the premium freight to soften for the next 5 to 6 months still supply chain normalcy happens.

The next question is from the line of Hiren Trivedi from Axis Securities.

Just wanted to understand on your plans to increase your exports going forward. So could you give some more color on the plans to increase the exports going forward in the medium term?

I will request our CEO and Executive Director, to comment about the export business increase plan for the next coming years.

Good afternoon. Our exports have been growing at a fair pace. In fact, barring Q3, we have grown by 40% in the first half of this year, when compared to the previous year, because of semiconductor shortage during Q3, we have shown a growth of only 7% in the exports. But as the semiconductor is going to soften up, I think we will go back to the growth in terms of export. There exactly our growth is going to come is on the pumps and mechanical product. I've explained this in the previous investor call also that our focus is going to be on the largest task, addressing to the niche market, primarily the recreation vehicle, off-road vehicle, tractors and higher CC motorcycles, this is going to be the area of focus. So we have got confirmed the business in our exports for the next 3 years. And also, we have entered into the personal passenger vehicle segment for large export of our next generation of oil pumps to a personal passenger vehicle, manufacturer, one of the largest in Europe. So our growth momentum in export is going to continue in the same case, what is happening currently for the next 2 to 3 years. Also, our vision is that by FY '25, '26, close to 20% of our revenue will come from the export market.

Export and deemed exports.

The next question is from the line of Nitin from Augmen Capital.

Sir, I just had one question. How do we see our production schedule from the OEMs going forward? Could you shed some light on it?

The production schedule seems still very erratic for this quarter, Nitin. We expect some degree of normalization to happen from Q1. But really speaking, we expect stability only from September of this year. And this is the industry feedback. We have not lost any business share, our share of business and market share continues to be good and growing. But stabilization, I think we are at least about 6 to 7 months away.

The next question is from the line of Jinal Fofalia from Turtlestar Portfolio.

Sir I have 2 questions. Sir first thing, what are our utilization base as of Q3?

Pardon me. Can you repeat yourself, we are not very clear, please, Jinal.

What is our utilization rate as on Q3 and 9 months?

See actually, our capacity today is -- we can do quite easily at INR 200 crores per month, anywhere between INR 180 crores to INR 200 crores based on the production mix. So we have done about INR 400 crores against the capacity of between INR 550 crores to INR 600 crores.

So INR 400 crores against the capacity of INR 500 crores to INR 600 crores, right?

INR 550 crores to INR 600 crores based on the product mix.

Okay. Okay. Understood. And sir, second is, what are our plans to expand geographies in different geographies in the coming quarters?

We don't expand beyond our existing geographies in the coming quarters. We have a healthy pipeline of new business. Our MPD pipeline, our new product development pipeline is very strong. Our LOI pipeline is very, very strong. We are not planning for any greenfield plants in the coming quarters towards the back end of the coming financial year, we will be adding capacity in the Western region to cater to the increase business we have won, and we are also not looking at any expansions whatsoever. Two of my articles have been covered recently by Autocar professionals by Mr. Murali Gopalan, a very senior editor, which you may go through to understand what are the growth prospects of the company, which are the segments we are planning to go into and which are the new segments and how is our technology road map, which is quite a mix for quite elaborate reading.

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

So can you elaborate more upon your plans of bringing a JV partner in each of the regions and probably regarding the business between the 3 segments, because some of the media articles also point of you going into a big CapEx segment of INR 600-odd crores and targeting some INR 4,000 crores of revenue over the next 2, 3 years. So any plans on that?

Yes. Our plan is to hit our turnover of INR 4,000 crores by calendar year '25 or FY '26, which will -- our current capacity will take us to about INR 2,400 crores. So we will be adding capacity both in terms of technology spend, as well as our buildings and visionaries to the tune of about INR 600 in 3 product verticals to take INR 4,000 crore. So we have granular details into each of the business divisions. This is more of a top-level picture, because our capital intensity typically is about 1:3 for every crore of investment, we get about INR 3 crores of turnover. So with about INR 500 crores of investment, we should be able to garner another INR 1,500 crores of turnover with about INR 100 crore capacity investment on technology. And as we speak, we have just commenced work on a world-class technology center and laboratory in Coimbatore at a total cost of about INR 60 crores, which will get commissioned in the next 18 to 24 months.

Sir, what would be the line of business for this is incremental of INR 600 crores of CapEx?

If I may -- just again request you, sir, to read that Autocar professional article, which is available and has been widely circulated. I have gone into granular detail into the new business verticals and the technologies and what is the market share that we are planning to garner in each of these segments, because that will take for a very long explanation, if you don't mind.

Sir, same article mentioned you going for the expansion in the ratio of 50% debt and 50% equity, right?

In the INR 600 crores, we are looking at around 50% debt and 50% equity. We will be completely debt free in the next couple of months with our current cash generation and then we will go for a new round of debt raising, not in this financial year, but in the subsequent financial year.

Sir, this is a tad divergent from your initial remarks, right? Some 2 quarters away we wanted to first get to the optimum utilization levels of the existing plant and then go for CapEx, which was beyond FY '23 or maybe '24?

Yes, that's exactly. I said I will be not doing any CapEx, will be very CapEx-light till FY '23. And we will be CapEx light till FY '23 and open the taps on CapEx only in FY '24 and '25, resulting in INR 4,000 crore top line in FY '26. It's exactly in line with my statements that we will be on sustenance CapEx for 2 to 3 years.

[Operator Instructions] The next question is from the line of [ Geeta Kapoor ] from Mehta Investment.

Sir, I have just one question. What are the new client additions we see during this quarter?

What is the new, sorry?

Client addition we did during the call?

We have added a lot of new platforms for our existing clients. Our focus continues to be on our 16 clients and not adding any new customers. We are adding more business with our customers now.

Okay, sir, understood.

The next question is from the line of [ Vipul Shah ] from [ Shubh Mangal Investor ].

Sir, congratulations for a reasonably good performance on the client circumstances. My question is regarding the pass-through of commodity crisis and credit cost. We have seen substantial inflation on both these fronts. So are we able to pass-on these increases to the customer? Or we are absorbing it short-term through our own P&L?

About 60% to 65% we are passing on to the customer and we took the time lag, which you are seeing an impact. About 35% to 40%, we are absorbing based on customer goodwill, because the customer is not able to pass on the entire team to hit end customers. So about 65% is being passed on to the customer, 60% to 65%, about 35% to 40% we are absorbing, which is what is having a 2.5% to 3% EBITDA impact for us.

And sir, your CapEx of INR 600 crores, so it will be broadly distributed and -- means through which verticals instrumentation cluster or fuel pumps?

It will be for the DI vertical, Sensor vertical, Connected Vehicle Solutions vertical and our Mechanical Product vertical or now what we call it Activation and Control Systems vertical. It will be spread over all the 3 to add both the revenue of about INR 1,500 crores to INR 1,600 crores. And the investments would start in the back end of this year, but really of the coming years and a lot of it is going to be in FY '24 and FY '25.

And it is same EBITDA of around 14%, 15%?

Yes, steady-state EBITDA of about 14% to 15% is what we are expecting.

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

Yes. Sir just one quickly on the margins front, so you alluded to this PAT for the next 2 quarters is going to be in the same way as what we put in this quarter. So starting from Q2 of next year, could we see 14%, 15% margin profile in turn back for us?

It's very [indiscernible], Shashank, we are not able to predict. We didn't look, for example, we never expected a key supplier of our raw material to shut down for 3 weeks in February for a government directive in China. I think till the world is able to bring this corona subject, now they are talking of a new variant emerging in Wuhan. So it's going to be very -- in a steady state, we can deliver a 14% to 15% margin comfortably. That steady state god alone knows when that steady state is going to come. I really wish I knew.

Okay. And sir, lastly, are you considering any of the newest EV OEMs supplying any of our products.

Almost we are engaging with every single EV player, big or small in the country barring Honda who we're engaged with, but with everyone else, we are in advanced stages of discussion or LOI.

Okay. Sir currently you are present in the top 5 maybe, Hero, Okinawa, Ather, these kind of players were not present, right?

Barring Ola, we are working with everyone.

Engaging with everyone?

Pardon me?

We have already started supplying our products today or we are engaging with them?

We are under development, where we have received LOI and in some cases, it is between the RFQ and LOI stage.

[Operator Instructions] The next question is from the line of [ Chirag Jain ], an Individual Investor.

Sir, I would just like to -- this news in the market with regards to Pricol being merged with another listed entity, so would you clarify on the same?

So this is news to me to the best of my knowledge. I have no -- we have no plans to merge with any other listed entity. In fact, we are on a growth phase now, and we are planning to separate the company into 3 under one listed entity. So there's no question of merging under any listed entity. In fact, we are on the verge of signing multiple partnership agreements and JV agreements at this point of time.

So going forward, would it be that Pricol would be separated into 3 different entities? So 3 different entities would be listed?

Three business verticals under one listed entity.

Okay. One listed entity, 3 separate verticals. And if there is no -- you are clarifying that there would be nothing of merger with any other big entity in the market currently?

No, that is news and a surprise to me also.

No, because it was out in the media, so I thought that better if I would just ask you on this, so it is better to know from horse's mouth, that's why I asked.

The next question is from the line of [ Vipul Shah ] from [ Shubh Mangal Investor ].

Our spend on research, which is 4% to 5% of our revenue. It is directed towards mainly electric vehicle business components or highest engine components. So if you can clarify it would be helpful.

See, we are going to be lease disrupted by electric vehicles, Vipul, because our primary business is sensors and driver information systems, which is common to an electric vehicle or a non-electric vehicle. So we are not an engine component company or companies, all our components are relevant to whatever form of propulsion. So our spend of about 4.5% to 4.8% of our spend on both product and process development or engineering is going to all facets of the business. In fact, over the next 2 years, I see ourselves more as a technology company and less of a component manufacturer, because technology is changing at a very fast pace. In fact, out of our 850 staff, 370 staff are in product and process development, and we are one of the highest in the Indian automotive industry. As I mentioned earlier in the call, we are building a new world-class technology center and test labs also at an investment of about INR 60 crores, which will be commissioned in the next 18 months. So this is not specific to EVs or it's for technology, it's for software, for hardware for all categories of vehicles. And our product categories, our products will apply to all categories of vehicle and it is not EV-agnostic.

Okay. Okay. That is really helpful. And this R&D spend is -- will it be on upward trajectory -- are you going to increase it to 7% to 8% of our revenue or once your -- this technology center becomes operational?

No, it will continue to be at 4.5% to 5% as our revenue is growing, so the absolute rupee spend will go up as a percentage of spend will remain at 4.5% to 5%.

The next question is from the line of Dhiral from PhillipCapital.

Sir just wanted to know how we have performed as compared to 2-wheeler, 4-wheeler and commercial vehicle? What is our growth across the...

I'd request our CEO to answer that question, sectoral performance versus Pricol's performance. Our CEO will answer that question.

Actually, we have been better than the market. The market actually has degrown by 19% on the Q3 comparison, and we have degrown by about 15%. So we have better the market. In all segments of the market, we have been better than the market in 2, 3-wheeler, we have better by about 2%. Parcel passenger vehicle, we continue to grow with the new increase with some of per-passenger vehicle like Tata Motors and Piaggio. And commercial vehicle is there, we have significantly grown, because of our entry into the medium and heavy-duty commercial vehicle into all the 4 key players, which is including Tata Motors, Volvo Eicher, Ashok Leyland, and also SML. So overall, on a Q3 basis, we have bettered the market.

And in 2-wheeler?

Yes, 2 stroke, 3-wheeler, we are better by about 2%. 4-wheelers, we are also better. And then the commercial vehicle is there, our maximum growth has come, when compared to the market growth. Overall, the industry has degrown by 19% of all segments put together and we have degrown by 15%.

And sir, second thing, what are we doing differently in the export market, which is helping us to grow, as you said, 40% in first half? And you want it just to continue also.

Yes. Export growth is primarily coming off the new product on -- primarily on to the pumps and mechanical products into the restatement which I explained like the recreation vehicle, off-highway vehicle and also into the higher CC motorcycle, where our growth is being there. And the next 3 years also going forward, we expect the growth momentum to happen. That's what we explained that by FY '25, '26, our total percentage of export over the total revenue would be about 20%, which is export and deemed export.

And sir are margins are higher in the export as compared to domestic market?

Marginally higher.

The next question is from the line of [ Sharat Sharma ], an individual investor.

Sure. Sir you have mentioned 350 people of 850 or approximately 4.5% of spend in R&D. What proportion of this is capitalized? Is anything capitalized or is it [ P&L-izied ]?

It's all revenue expenditure. There's nothing capitalized here.

[Operator Instructions]

I think in the absence of any questions, we'd like to thank all of you for participating in this call and for all the questions which we enjoyed answering. And we look forward to meeting you after the completion of this quarter at our next earnings call. Thank you very much. Stay safe and Jai Hind.

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 us e-mail to [email protected] or [email protected]. Ladies and gentlemen, you may now disconnect your lines. Thank you.