Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript & Summary

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rushad Kapadia from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Pavan. Good afternoon, everybody, and welcome to the Q3 FY '20 Results Conference Call for Ramkrishna Forgings Limited. We have with us from the management, Mr. Naresh Jalan, Managing Director; Mr. Chaitanya Jalan, Executive Director; Mr. Lalit Khetan, Chief Financial Officer; and Mr. Rajesh Mundhra, Company Secretary and Senior GM, Finance. I would now like to hand over the call to Mr. Lalit Khetan. Thank you, and over to you, sir.

Thank you, Rushad, and good afternoon to everyone. We welcome you to the con call hosted by our company for quarter and 9-month-ended 31st December, 2019. Just update on the numbers. The total operational revenues for this quarter has been INR 252.25 crore as compared to INR 491.47 crore in the corresponding quarter. The total operational revenues for the 9-month-ended has been INR 892.16 crore as compared to INR 1,363.42 crore in the corresponding period. The company has achieved an EBITDA, net of other income, of INR 47.51 crore for this quarter against INR 105.82 crore for the corresponding quarter. The EBITDA, net of other income, for 9-month has been INR 166.96 crore as against INR 290.18 crore in the corresponding period. The EBITDA margin for this quarter, net of other income, stood at 18.83% in this quarter as compared to 18.14% in the sequential quarter. We have achieved a total tonnage of 18,730 tons in this quarter as compared to 18,517 tons in the sequential quarter. We have achieved a domestic tonnage of 11,532 tons for this quarter against 11,498 tons in the sequential quarter. We have achieved an export tonnage of 7,190 tons, including VMI dispatches for this quarter as against 7,019 tons in the sequential quarter. The export sales for this quarter has been INR 107.42 crores, and apart from this, we have dispatched about INR 14.97 crore of exports material under VMI in this quarter as compared to INR 115.55 crores total sales in the sequential quarter. The company has achieved an increase in export realization by around 3.6% on a sequential basis. The company has uploaded investor presentation providing requisite details. We request the investors not to raise any customer-specific queries during the con call. Thank You. Rushad?

Should we start the question-and-answer session?

Yes.

Yes, we can start.

[Operator Instructions] The first question is from the line of Abhishek Jain from Dolat Capital.

My first question is relative with the domestic market. From last 2 quarters, you're outperforming your peers in the CV segment revenue. So are you gaining market share through introduction of new products? Or is it because of the change in the client mix? Please throw some light on it. And what is the outlook for the domestic CV industry given the scrappage policy may be announced soon.

To answer your question first, the first question, we -- basically, we have gained some market share, but we have increased our rupee spend per vehicle. And this has given us more tonnage in terms of supplies to the commercial vehicle market. And in terms of how the domestic market looks like post the scrappage policy, I think, it's a very hypothetical question. We are hearing for scrappage policy, I think, probably since now 8 months. So once the scrappage policy comes through, I think then only we will be able to have some answer to it. But we feel that the bottom is in place, and from here on, I think only market is going to go up. And how fast the market is going to go up, it all depends on how the infrastructure and other spend improves in the market.

Okay, sir. My next question is a little bit on the export, there was a sharp fall in the export during this quarter. As you mentioned in the last quarter, there's -- 350-ton was -- good in transit, which was to be reflected in this quarter. So can you give some sense, basically, what happened? And what is the outlook for the next year in FY '21?

In exports, I think, there is no fall. If you see quarter-on-quarter, I think exports have grown in. If you include the VMI number, we have done close to INR 120 crores plus exports vis-à-vis what we did in the previous quarter. And I think close to 950 tons, which values close to around INR 15 crores, are right now the current quarter VMI exports, which have been done.

So VMI means...

Going forward also we feel that the export market is going to continue to be robust for us with new geographies and new markets we are entering. I think, going forward also, we believe that our export is going to be always -- in next coming quarters also, and FY '21 also, our exports are going to remain robust for us.

Sir, VMI means, sir?

Vendor managed inventory. Basically, it is the warehouse, which we have created in the European market and wherein we are keeping -- shipping the material. And from there on, on GIT basis, we're supplying to the OEMs?

Okay. So these tonnage are -- it seems goods-in-transit or something what?

It's a goods-in-transit.

Okay. So how much it is?

It's worth INR 15 crores, close to around 950 tons.

950 tons. So what is your revenue target for FY '20 for export, revenue or volume target, sir?

I think already 9 months are over. And I think in this quarter also we should be doing what we have done in quarter 3.

Okay, sir. And sir, what was the contribution in export, especially from the North America versus Europe?

We don't actually -- in totality, I think, contribution, Lalit has already spoken in the starting, what is the realization pattern. Basically, we don't calculate separately in terms of what is there in Europe and what is there in the U.S.

Okay. Sir, my next question is related with the -- you are also entering into the LV segment in the North America. So how much incremental revenue from this segment in FY '20? And as you have already received an order of around $8 million per annum, so what revenue we can target -- you are targeting in FY '21 as well?

FY '21, we target to achieve the full quantum of order, which we have received. This year, we should be ending up close to around or near about $1 million only. But next year, we will be achieving the full volume, whatever order we have received.

And in the passenger vehicle segment, what revenue you are targeting in FY '21 because of this?

Passenger vehicle, we are not there in North American market. We are in only LV and MSCV.

Okay. So, in passenger vehicle, you are only into the European market? And just...

No. And we are not there in passenger vehicle market anyways.

So as you mentioned earlier that you are targeting to enter into this European and the other export market into the PVs as well from the second quarter of FY '21, so...

No. Basically, like, we have said in our earlier call, we have deferred -- earlier, that was basically with the CapEx, which we were doing. And the CapEx, now we have put in a slow cycle. While we are continuing to do the CapEx, CapEx has been put into a little bit slower trajectory looking into how the market shapes up. So I think probably this should be 6 months delayed to getting into passenger vehicle market.

Okay. Sir, what is the current status of acquisition of the Amtek Auto's asset. Can you throw some light on the purchase consideration and the asset turnover from this business?

See, Amtek Auto right now is pending with the approval -- pending approval of NCLT. This -- before NCLT for approval, and that the hearing is going on, and we expect this approval should come within 1 month time. Although we had expected a little earlier, but the court process takes time, so we can't anticipate exact timing of that, but we expect another 1 month, we will get the approval.

So what is the acquisition cost of this business?

We have to pay a total of INR 85 crore upfront for this business. And there is a deferred consideration also for INR 24.5 crore.

INR 25 crore. So total would be around INR 110 crores, right?

Yes, INR 109.5 crore. That has to be paid over a period of 5 years, so INR 5 crore per annum.

Okay. And what is the peak revenue from this business?

See, [indiscernible] but we expect a good amount of revenue under this business. Earlier, when the Amtek group was working, they have done a big revenue of about INR [ 350 ] crore from that, at 5-year back prices. So from the current, whatever we can achieve very easily [Foreign Language] at the peak INR 700 crore, INR 800 crore from this business at -- when the operations optimize.

Okay, sir. And sir, my last question is related with the margin -- gross margin, which has improved significantly in this quarter as well. So what is the reason? Is it because of the fall in the RM cost only or because of the cost-cutting and change in the product mix?

It is both equally contributors. Basically, raw material price as well as the cost savings what we have started since last 6 months time. If you see the previous quarter also, there is significant improvement in gross margins. And I think, this is going to continue going forward also.

[Operator Instructions] The next question is from the line of Vijay Sarthy from Anand Rathi Financial Services Limited.

Sir, I just wanted to check back on exports. So mid of FY '19, we were highlighting lot about customer acquisitions in Europe, hiring of components in U.S. and all that. But we seem to still not even reach the FY '19 numbers. In that light, how do we expect FY '21 to be in export in terms of tonnage? Do we really see materialization of some of these acquisition -- customer acquisition in Europe and additional components in U.S. to materialize?

Already components addition in the U.S. market from this quarter onwards, it's already in place. And I think first quarter of next year will be one of the much needed improvements in terms of tonnage, in terms of exports. In terms of Europe, we had already very clearly said in the mid, call it, 2019 that the customer acquisition and converting them into top line is going to be at least 9 to 12 months away, because at this stage we are only giving samples and field trials, and testings or other things are going on. So obviously, we can see some significant revenue coming in from these customers only in the second quarter of FY '21.

So should I assume that the INR 700 crore -- 700 tonnage, rather 700 run rate of exports, say, from INR 110 crore, INR 112 crore should move back to INR 120 crore, INR 130 crore level by first quarter FY '21?

This quarter also, if you see, it is already INR 120 crores per quarter. [indiscernible] plus INR 15 crores of VMI...

So do we go back to INR 150 crore level, what we did in FY '19 mid?

I think, obviously, by FY '21 third quarter onwards you'll be able to see INR 150 crores of top line coming from the U.S.

And this should primarily be from European customers and the new components?

Yes. Addition of top line is going to be from new customers in Europe and the addition of components in the U.S. market.

Okay. The other thing is that the risk of when this -- so we did domestic tonnage, we did close to 1 lakh amount in FY '19. And we will probably be half of that or a little over that this year. Now, do you have a sense of where -- when do you think that you will reach to this 1 lakh. Now, what are you guys thinking? What are you planning? What is your budget?

We are keeping our fingers crossed. Budget, we are still on the process of finalizing our [ AVP ], I think, in the next fortnight. And we can only come up with the [ AVP ] numbers only after our Board approvals are over. But, as of now, we are just keeping our fingers crossed. And basically, whatever we discuss on [ OEMs ], we believe that the worst is behind us. And going forward, after this transition of BS-IV to BS-VI, probably which we are only 30 days away. We would see green shoots coming back into -- see this market may not go straight away to the top, what we saw in 2019 -- 2018 probably. But yes, there will be significant improvement from where we are. And if at all, we see the green light of the scrappage policy. So presumably, I think next 4 to 5 years, we should see one of the best markets in India for the entire auto industry.

So the other -- I mean, adding to this point, sir. So if one were to look at for reason that this 1 lakh tonnage would take another, say, 2 years to come by. What do you think you will have to do in the company to ensure that you maintain profitability or you maintain profits? What is that you'll have to do?

At current -- if you see at the current juncture where we, I think, are doing less than even 15% -- 50% of the utilization, making profits may not be significant, but yes it's remaining in green. And it is being able to service the debt and other commitments well within the -- within time.

But you'll also have overheads going by, right?

No, I think, overheads, if you see overheads have not declined or overheads, whatever cost controls we have done, they are basically in terms of processes, not in terms of cutting down on overheads. So whatever -- it is not that tomorrow when the market is going to go up and these overheads are going to come back and increase from -- and going forward also, whatever process improvements or cost-cuttings we have done, going forward when the market, again, comes back may -- as you say, next 2 years, probably company is going to be in a better operating margins at that period of time.

So, finally, in FY '21, is it fair for me to look at exports tonnage of at least FY '19 number? Or do you think now the situation is very bad?

Can you repeat the question, please?

So, in FY '21, should I look at exports tonnage close to 33,000, which is the FY '19 number? Or things are looking even bad?

No, in exports, I think, like I said into my -- to your earlier question and to earlier investor question. We are looking at FY '21 to be one of the good years in terms of exports.

[Operator Instructions] The next question is from the line of Mitul Shah from Reliance Securities.

Sir, my first question is on your average realization for export, which has improved from almost 164,000 to 170.5 sequentially. So how much contribution is from the currency benefit? And how much -- is there any price increase or any value addition? Can you give some detail on this?

I think see Lalit will be able to answer in terms of currency...

Currency, it's very nominal this quarter. We have total -- I have not calculated on the tonnage of our ton basis, but it's about 1/4 total gain, 97 lakh to be precise. We have gained on the currency side. Rest is from the price.

Right, product mix and price.

And in terms of major increase in the product side or we -- are we adding any value addition to the product going forward?

Yes. We have -- in this quarter to our existing customer itself, we have started supplying some components in much higher value-add condition. So there has been an increase in the realization per ton.

Sir, can you give ballpark details in terms of last 1 year client addition or geography addition and product additions. And even for next maybe 1 or 2 quarter point of view wherever you have visibility, what kind of products you can add to the existing customers?

I think in terms of geographies, like, we have already said, we have added a lot of LV components in the North American market, which is basically going to reduce the pressure on the Class 8 trucks for us. Whatever denominator the Class 8 trucks goes down also, but LV market is quite stable. And we feel that we'll be able to club the similar revenue from the Class 8 market -- LV market. In terms of Europe, we have already in our previous calls, which has happened in 6 -- quarter 2. We have already explained the 2 new customers we have acquired in Europe, for which the components are in right now testing or in the sampling stage. And these customers -- in FY '21, second half, this are going to get converted in terms of revenue. In terms of opening of new geographies, yes, we are trying very aggressively to enter the South America market. And probably, we will have some good news in coming quarters in terms of our entry into South American market.

Sir, finally, on the CapEx, what would be for this year and for FY '21?

I think CapEx plan remains unchanged, whatever CapEx plan we have guided in the previous quarters. We are a little slow in implementing the CapEx, but gradually, as the market -- we see the market, we continue to invest in terms of our capacity addition into the new geographies, which we are trying to enter or new ventures, which we are trying to enter.

And for next year?

Next year, CapEx plan is not yet freezed in terms of refurbishment and all. I think with the [ AVP ], I think that's going to get freezed. In the next conference call, probably we'll be able to give more numbers to it.

And sir, in this your export revenue from VMI, then it is a vendor management. Our margins will remain same for this? Or it will be slightly lower compared to normal export?

Margins will remain the same.

Okay. It will not change. It is purely manufacturing margins?

Yes.

And sir, last question is on this acquisition, INR 85 crore we need to pay upfront. So how do you plan to fund it?

See, we will tie up the date for this and -- for 75% of this amount, and INR 20 crore amount will be infused from RKFL as equity.

Okay. Through internal accruals only?

Yes, yes. And that will be in the SPV. The debt will be in the SPV, not RKFL. [ Balance sheet ], we will try to have the debt in the SPV only.

[Operator Instructions] The next question is from the line of Aditya Makharia from HDFC Bank.

Just on U.S. Class 8, how is the demand currently? Because this year we were expecting 15%, 20% fall, right?

We are still expecting a 15% fall in this year.

Okay. But there was some improvement in the order inflow, so I was just wondering...

If we look at the backlogs, what we feel that probably being in -- this year we expect whatever -- what we have got feedback from the OEMs over there, we expect a 15% fall in the Class 8 truck market. And accordingly, we have budgeted for our sales.

Okay. And just one question on VMI, that is income which we have already booked, right?

No.

No. No.

The income which we've book -- we will book only when we sell to the end customers.

[Operator Instructions] The next question is from the line of [ Sagar Parekh ] from [ One-Up Financial ]

Firstly, just continuing on the previous participants call. So if the income is not booked then why have we included this in the tonnage number?

Because this quarter, the dispatches are more than the last quarter, that's why we wanted to show the export tonnage has not gone when compared to last quarter. That's the total point we wanted to project.

Okay. So if I have to adjust that, so I have to adjust that in the export volumes for this quarter, right? The amount which was there in VMI?

Yes, VMI -- 950 tons you have to adjust it from the 7,000 tons, which we have indicated as export dispatches. Basically, 950 tons have to be reduced.

7,198 is the number for Q3. So that I reduce it by 9...

Just 900 tons.

Okay. Fair enough.

950 tons.

950, got it. And what is our debt number as of December?

Around INR 930 crore.

Okay. So that has gone up a little bit.

No, INR 5 crore, INR 10 crore here and there, I think. Last quarter it was INR 915 crore or INR 920 crore, I think.

Okay. And do you expect debt to -- so since we are recalibrating our CapEx based on the demand, do you think this debt is the peak debt number? Or you think with this acquisition and the CapEx debt will go up?

Acquisition debt will be separate. And we are continuously monitoring the debt with our performance. And we will try that the debt will remain at -- currently at this level only.

[Operator Instructions] The next question is from the line of Abhishek Jain from Dolat Capital.

Sir, what is your plan to increase your revenue from the industrial side, where the contribution is quite low right now?

No. We have no -- basically, industry -- what do you mean by industrial side actually?

So, it's basically in the mining side. Mining and the railway.

No. We are already doing with mining. But railways, yes, we are looking at increasing our revenues from the railways. And I think from a level of INR 2 crores per month, we have already touched INR 5 crore per month revenue from railways. And going forward, we expect railway revenue to keep on increasing continuously.

So, how much revenue was in the last 9 months from the non-auto side? How much revenue was from the non-auto side in last 9 months?

We had about INR 11 crores from the Railway. And apart from that, only we have about 8% to 9% revenue from the non-auto side.

Okay. And in oil and gas space?

We don't -- I don't have a specific number.

Okay. Sir, my next question is related with your subsidiaries. So you -- I just wanted to understand your -- what is the business model of this Globe Forex and Tours and Travels because the profitability is also increasing in last 9-month from INR 34 million to INR 45 million. And so what is the outlook of this business basically?

See, on the Globe, hello?

Yes. Yes, sir.

Globe Forex & Travels which continuously -- steadily is growing and is basically in the corporate and -- corporate ticketing and tour business. And we are just working on that to improve the company and the profitability. And we are seeing almost -- we are targeting at least 25% decrease year-on-year in the profitability of this company.

[Operator Instructions] The next question is from the line of [ Himesh Satra from Sequent Investment ].

Sir, my question is that in the previous call, you said that we are planning to reduce the debt. But on the other hand, our debt has increased. So what are the plans going forward to reduce the debt?

No. I think, last call we had never said that we are planning to reduce debt. We are -- we had clearly said that we would like to continue with our CapEx and remain at the current debt levels and ensure that the debt levels do not go up. With the current condition with CapEx, it's not that we have absolutely stalled the CapEx. CapEx, while the pace of the CapEx has been slow, we have invested in the CapEx to complete our railway project. And that is the reason you are seeing about INR 10 crore increase in the total debt.

Okay. So -- and what would be the cash position as of now?

See, what you mean by cash position, which means whatever is our level in terms of our limits?

Yes, and in bank.

Yes. We are very comfortable there. I cannot give the number, but we are very, very comfortable there. You can see that there no -- utilization has gone up that way. From the last quarter to this quarter, there is no such a change in that limit.

[Operator Instructions]. The next question is from the line of Kunj Bansal from Acepro Limited. As there is no response from the current participant, I have muted the line. [Operator Instructions] The next question is from the line of Rushad Kapadia from ICICI Securities.

This is Nishant. Sir, couple of questions. One, there is -- there are news reports from the Amtek resolution that is happening with Deccan. Just wanted your thoughts on how do you see possible new entrant in terms of resumption or, let's say, and competitive intensity shaping up due to that. That would be my first question. And the second question is, would you look at tapping into a lower cost debt in foreign geographies to kind of improve your cost structure on the debt side?

Nishant, I think, first of all, regarding this Amtek resolution, as you know, it's -- right now, the resolution is as per -- as an ongoing concern. So Amtek was never out of the market, and it was -- it has been sold to Deccan as an ongoing concern. So I don't think it possesses a significant challenge. And going forward, it is going to be extremely difficult for them to reshape the company into entirely a -- today -- in today's world as a modern setup. And it's a time lag, I think maybe 2 years or 3 years before we see significant -- anything coming up from their side. And in terms of having low cost debt, yes, we are working on some models. And I think it's too early for us to comment on this, but, yes, we are working on tapping low-cost foreign debt to bring down our total debt cost significantly from hereon.

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

Thank you. We appreciate that you have spent your time and have attended our call. On behalf of the entire management, we would like to thank all the participants who have attended the call. Thank you very much.

Thank you. On behalf of ICICI Securities Limited, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.