Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Ramkrishna Forgings Q4 FY '20 and Full Year FY '20 Results Conference Call. We have with us from the management, Mr. Naresh Jalan, Managing 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 for his opening comments. Thank you, and over to you, sir.

Thank you, Rushad, and good morning to everyone. We welcome you to the con call hosted by our company for the quarter and the year ended March 31, 2020. The total operational revenues...

Sorry to interrupt. Sir, your voice is breaking up.

The total operational revenues for quarter ended 31 March 2020 has been INR 226.46 crore as compared to INR 444.11 crore in the corresponding quarter. Total operational revenues for the year has reached INR 1,117.83 crore as compared to INR 1,809.67 crore.

Sir, this is the operator. Sir, we're not able to hear you clearly. Your voice is breaking up.

Rajesh?

Your voice is cracking, sir, actually.

I think you should then open -- you should start the opening remarks from your side. [Foreign Language] You have that copy?

Yes, I have it, sir.

Now please speak from your...

Thank you, and good afternoon to everyone. We welcome you to the con call hosted by our company for the quarter and year ended 31 March 2020. I have with me Mr. Naresh Jalan, Managing Director; and Mr. Lalit Khetan, CFO, on this con call today. The total operational revenues for this quarter ended 31 March 2020 has been INR 226.46 crores as compared to INR 444.11 crores in the corresponding quarter. The total operating revenues for the year has been INR 1,117.83 crores as compared to INR 1,809.67 crores in the corresponding period. The company has achieved an EBITDA, net of other income, of INR 36.76 crores for this quarter as against INR 89.32 crores for the corresponding quarter. EBITDA, net of other income, for the year-end 31 March, 2020, has been INR 203.72 crores as against a INR 379.50 crores in the corresponding period. The EBITDA margins, net of other income, stood at 18.32% for the year ended 31 March 2020 as compared to 21.01% in the corresponding period. We have achieved a total tonnage of 16,089 tons in this quarter as compared to 18,730 tons in the sequential quarter. The lower tonnage is mainly to the lockdown imposed due to breakout of COVID-19. We have achieved a domestic tonnage of 10,284 tons for this quarter as against 11,532 tons in the sequential quarter. We have achieved an export tonnage of 5,805 tons for this quarter as against 7,198 tons in the sequential quarter. The export sale for this quarter has been INR 92.68 crores as against INR 107.42 crores in the sequential quarter. The company has uploaded an investor presentation provide all the requisite details. We request to the investors not to raise any customer-specific queries during the con call. Thank you.

Should we open up for questions?

Yes, I hand over to Rushad. Yes, we can open it up, yes.

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

My question is pertaining to the sharp expansion in the gross margin in fourth quarter. There's a -- and also there is a -- asset realization was remaining strong despite the sharp fall in the RM prices. So just wanted to know that is it because of the higher utilization from the heavy tonnage baseline or introduction of the new products?

Basically, there has been introduction of new products also and value-add improvements in a couple of categories, which have led to an increase in net realization.

So can you throw some light on those products which you introduced and you are getting a good margin there?

We cannot be specific to any products, but basically, the products, which we are already making, there has been a lot of conversions into assemblies or additional operations, which have given effect to basically increase in realization of the products.

Okay. So how do you see this trend of gross margin? Will it be sustainable ahead or -- and we can see some sort of the expansion in the gross margin front in FY '21?

We presume, as of now, actually regarding -- related to COVID-19, just lockdown and other things, we feel that this year, it's going to be stable and following year, there is going to be further increase in gross margins as well as realization.

Okay, sir. Sir, my next question is related to the Class 8 trucks outlook. So what sort of the recovery or fencing post easing of lockdown on the global market, especially for the Class 8 trucks?

Specific to Class 8 trucks, we are not very clear as of now. But what we feel that overall in the automobile sector in the export market, we will see traction in the second half of the year.

Okay. So what is your outlook for the export market for FY '21 and FY '22?

FY '21, we will be doing better than what we have done in FY '20 in terms of our export tonnage as well as export top line.

Okay. So what sort of the growth we can assume in FY '21 because that -- things are quite uncertain right now. So...

No, there are two -- a couple of things in terms of export market for us. There is addition of new customers in Europe and lot of customers in Europe has preponed their launches, which we were supposed to have in FY '22 has been rearranged to FY '21. All this taken together, we feel the second half of the year, H2 of FY '21 is going to be much better in terms of exports from wherein we are confident that we will do much better than what we have done in FY '20.

Okay. And sir, my last question is related with the face cost. You have like INR 300 crores in the -- on operational front plus INR 70 crores, INR 75 crores on interest costs. So -- and most probably that the company would see losses in FY '21 if things will not recover significantly. So how much debt you need to increase in FY '21 to service your -- for your working capital needs?

See, it all depends upon how this year pans out. So right now, we are seeing this year, we are going to do better next year. So if that turns out, we will not need any additional debt. My debt level will not increase for FY '20. If this pandemic doesn't ease off and the economy doesn't improve [Technical Difficulty] we don't think the debt level will need to increase.

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

The first question is again on the CapEx and debt level. By when do you think sizable reduction in debt as earlier pointed out, FY '21, will be very tough in terms of cash flow. So what we are doing for that? And what is our CapEx plan for next 2 years, '21 and '22? Hello?

On -- yes, on the debt side, you can see right now, our debt level is INR 950 crore as of 31 March.

Sir, your voice is breaking out.

Yes. Now, is it better?

Sir, little better. Thank you.

Yes. So our debt level, INR 950 crore as of 31 March. What we have planned for this year [Technical Difficulty] that our debt level remains the same. It is not going to increase.

Sir, voice is not coming clearly. It's making -- double voice is coming.

Just wait. Yes, so on the debt level, what I'm trying to say is my debt level at either 31 March is INR 950 crore, and it is going to remain at that level if the working -- what we are -- we have worked on the revenue path, it works out as per the plan, and there is no further damage done by this pandemic. And on the CapEx plan, certainly, we are reassessing and recalibrating the plan as per our need. Wherever those things which will be critical or will be required by the customer first, we will put up both equipment first, and we will try to downsize the CapEx as per the need.

So what was CapEx in '20? And how much reduction do you expect?

See, that is still work in progress. I cannot comment on the number, but certainly, we will go to all the -- we will optimize it as per requirement.

Yes. Sir, I asked about FY '20 CapEx.

FY '20, we have already done about INR 185 crore of CapEx. That is still work in progress.

So irrespective of this current year slowdown, what should be the usual annual CapEx for next 2, 3 years, do you think? '22, '23, whatever since '21 is ongoing.

The level of CapEx will be in the region of INR 10 core, INR 15 crore only. And from the project CapEx, that, again, I've said, we are working on that. And we will do, and that is as per requirement, and we will keep on reassessing that. So right now, the number has not been increased for this year.

Sir, and what is update on our -- these new facilities related to this PV and LCV, which we were already expanding since last 2, 3 quarters? What is status on that?

Yes. That is our extension project to what you are talking.

Right.

I think the LCV and both PV projects are on the verge of completion. I think probably by October onwards the production is -- in both the sectors is going to start.

Okay. Sir, lastly, update or can you give more deals on this Amtek Auto related division? What is status on that and...

That is still at NCLT, and we have filed for revision. Due to this COVID, we have asked for some relaxation. So probably, we have yet to hear because NCLT court has not yet started working.

No any ballpark time frame or anything on this, probably '21 will not be materialized?

I think the legal matters, you are well aware that in this system, we cannot put a ballpark. We hoped that it should have been over by February, but it is still prolonging. So obviously, we are -- we cannot comment on the Indian legal system by when things -- the ballpark can get completed.

Okay. And sir, lastly, on the European region, since long, we have been indicating contribution in export from the Europe will increase sizably over next few years. So where do you see after this situation contribution of Europe in overall revenues?

No, we still are confident. I think there has been considerable increase in European activity with -- from RKFL. And I think last year, we did well as per plan. And I think this year, we are very confident that in the second half of the year, European activity is going to contribute to our sustenance in export growth vis-à-vis FY '20.

So in both Europe and North America, do you think inventory is still sizable and production will take time even if the demand will recover? Or what is the situation of that?

Basically, if you see inventory, whatever it was there, but because of no shipments happening for almost 2.5 months from India, so inventory is right now being eaten up by when the fresh inventory reaches the warehouses.

Yes, sir, I'm talking about MHCV inventories in the system in both these regions.

No, I don't think...

The finished product.

No, I don't think so. I think demand, we had already indicated in our earlier call that there is going to be around 10% year-on-year reduction in terms of Class 8 trucks volume. But that 10% may go to 15% to 20%, but I don't think there is going to be any sizable because of the amount of liquidity, which has been put into the system. And everybody in -- specifically North American market expects a V-shaped recovery. We expect things to be much better going forward and specifically in the H2 of the year.

Because, sir, that ACT Research and all those reputed research houses are indicating 65% decline in Class 8 sales this year.

I think ACT Research only last 10 days back, which has come, which very clearly shows that they are also seeing a V-shaped recovery. And they do not see that market is going to crash what was indicated going by their earlier presumptions.

[Operator Instructions] The next question is from the line of Sanjay Dam from Old Bridge Capital Management.

I had just 1 question. Is that the Amtek, the ACIL, you guys are still going ahead? I just wanted to confirm that.

Yes. We have -- Sanjay, good morning. We have already given a fresh petition in NCLT court regarding revision in terms of payment terms as well as the valuation because of this COVID-19. But as of now, we have not backed out of the proposal, neither we have any thought process of coming back -- coming out of that proposal. Well, yes, we would like to renegotiate the terms and conditions of the proposal.

Sir, and on the year that went by, so the domestic market was always a bit dicey, right, relating to the extent of the decline. Well, the extent did surprise all of us, I guess. But there was a thought that in the export market being relative -- having a relatively very small presence and adding more clients, adding more parts per existing client, that would not -- that would do far better. But when I look at the year gone by, our export tonnage is falling almost as much as the domestic tonnage has, a little bit -- give and take, a little bit here and there. So your comments on that, sir. Did you expect that?

Sanjay -- no, Sanjay, I think, first of all, I would like to correct you. There has been not in terms of fall, in terms of what we added in domestic market, in terms of export market. In export market, obviously, when you get new clients, there is a gestation period which we will need to follow in Europe. While in India, we are more -- things move very fast, but in North America or in Europe, things do not move as fast as what you presume. There are limitations wherein you can bridge between approvals. You cannot create that fast, so that has taken time. Obviously, we have added very -- lot of new clients and a lot of new components in the export market. And presumably, one of the best OEMs from the European market have come into our umbrella in terms of our export potentials going into second half of the year. And you will be able to see in the second half of the year, I think there is going to be a lot of traction from these new customers, which we have added in terms of our growth and sustenance in terms of export tonnage as well as export realization going forward.

Sure, sure. I hope so, sir, wish you all the best on that part because the domestic -- and any views on the domestic tonnage, sir? If I look at it on a quarterly basis, where we stand, I think...

The first quarter has been a complete washout because of...

Yes, that is -- yes, that, we understand, sir. I mean...

But yes, we are seeing volumes returning back into the tipper side of the market, in the domestic market. Tractor division is doing quite well. So we feel that second quarter is going to be much better than what we had expected. And second half of the year, yes, we think that at least we will be able to come back to the pre-COVID levels.

Sure, sure, sure. And lastly, would you go ahead and complete the buyback program? I mean at a time when resources are scarce, I mean would that be an allocation that you will complete?

Yes, we will complete the allocation. We are not going to go back on the buyback side as well as we have already completed almost close to INR 9 crores buyback. And we continue to look at it very carefully. And as the price demands, we are ready to invest and buy the shares because as a management, we feel that long-term value still has a very good potential in terms of going forward in the next couple of years, overall market and the performance of the company.

[Operator Instructions] The next question is from the line of Sandip Verma from Axis Bank.

Sir, a couple of questions from my side. What is the current level of operations? And how you have dealt with the Q1 fixed cost, especially employee costs, sir?

See, in the Q, right now, current level, we are operating at around 40%, 45% capacity. And we have done a reduction of employee cost to the extent of 10% to 20%.

Okay. And which is the new customer that you are talking about, sir, in Europe?

We cannot name any specific customer. There have been 2 new additions in terms of customers in last 90 days, and they are going to be very significant to the balance sheet going forward in FY '22.

Okay. Can you give us some idea like what would be the value of sales that it will be generating?

The contract is for 4 years, and each year is close to around $35 million.

Okay. Each year is $35 million. Okay, okay.

The next question is from the line of Abhishek Jain from Dolat Capital.

Sir, just wanted to know that what is your current capacity, including commercial vehicle, passenger vehicle, LCVs and railway segment?

Our capacity remains same, Abhishek, what we have declared will be 50,000 tons per annum, so there is no change in the current capacity.

But in last 2 years, you have done at a CapEx of around INR 500 crores. That is for the...

That CapEx, that will add basically 50,000 tons of capacity from October 1, 2020.

And that is for the passenger vehicle and LCV?

PV and LCV.

And what is the -- our capacity in LCVs versus PV in the 50,000?

No, basically, there is no bi-furb because the same equipments are going to get used for PV and LCV, both.

Okay. And what can be the revenue opportunity from that incremental capacity?

We expect close to around INR 600 crores of revenue at 100%, almost 95% utilization.

So you have done a CapEx of around INR 500 crores for the increasing capacities?

No, no, we have not done INR 500 crores CapEx.

See, Abhishek, what is happening [Technical Difficulty] before FY 2019, what you are looking at, that is more on the machining side. So we have added machining equipment in FY '19, so that was for the maintaining existing capacity, adding on machining for the existing capacities only. In FY '20, what you're looking at INR 200 crores, that is for the new expansion. So those are 2 separate expenditures.

Okay, sir. Sir, my next question is related to the non-auto side. Right now, how much is contribution from the non-auto side? And what is the outlook on it?

Non-auto side, Abhishek, I think as far as oil and gas is concerned, that is a subdued market as of now. And from railways, we are still bullish, and we still continue to invest a lot of our energy and time into railways in the past and in the going forward. And I think railway will surprise going forward in FY '21 and '22.

Okay. Okay, sir. And so what kind of the revenue you are targeting from the railway because sir, I think then in last year, you have done around INR 9 crores? And FY '20, what is your target for the railway?

FY '19, we have not done -- FY '20, we have not done INR 9 crores, I think much more than that.

Last quarter, INR 9 crores was for the last quarter.

FY '19 for railways is at INR 45 crores.

INR 45 crores. Okay. So what is your medium-term target from the railway? And what is the margin there?

We do not calculate any margins separately for any sector. But overall, we feel that we at least will double our railway operations in -- going forward.

Okay, sir. Sir, my last question is related with this buyback of shares. So just wanted to know your thought process behind buyback at this point? Why this money was not utilized to reduce debt because debt is a big concern right now.

Debt is a concern one. But in terms of equity value, also, we saw that there is a lot disruption in terms of equity value, and we feel that the long-term value, equity value of the company is going to be very strong. So company, as a management, we thought it is prudent to support the equity price as well as this was the right time to buy back and ensure that the market is supported at the right time.

[Operator Instructions] The next question is from the line of Sachin Kasera from Svan Investment.

Yes, sir, just one question. You mentioned that you've got 2 European customers, and you also mentioned that you are expecting $35 million of each customer?

No. For both customers. It was cumulative of 2 customers.

Okay. And it's every year, both should contribute $35 million?

Every year, together, both should contribute $35 million.

And it would start in second half, you mentioned?

A part will start in second half and FY '22 onwards full production.

So these are at least, can we assume $10 million, $15 million, sir?

At least $8 million to $10 million.

Okay. And next year should be closer to $35 million?

Yes.

The next question is from the line of Mitul Shah from Reliance Securities.

Sir, I have a question on -- again, on the CapEx. As you said, around INR 15 crore, INR 20 crore is a normal CapEx, and we are building this new capacity of 50,000 tons by October 2020. So what would be bare minimum CapEx for this new plant to be operational, apart from our regular CapEx?

No. Already for the new plant, the CapEx has been done in the last -- like Lalit has already explained that is therein already in the WIP. So only very small portion...

Yes, that is my question. So what would be the bare minimum that's small, how much we can expect this year?

I don't think -- maybe INR 15 crores, INR 20 crores already, like Lalit has expressed. We are not looking at any large CapEx spend in this year. Only thing what we are looking at is what is their minimum required to whatever installed capacity is, whatever we have put up to start all those capacities.

Okay. So maximum part, we have already incurred. This year, we'll not have any impact of that?

Yes, yes.

And secondly, on the non-auto side, in earlier con calls, you indicated our non-auto to be roughly 15% by end of FY '21. I guess it will be around 5% to 6% right now. So do you still think it can reach to like 12%, 15% by end of this financial year?

We are confident that at least 10% to 12% this year, this financial year, we'll be able to have on non-auto side.

So that would be entirely from railway? Or is there any other non-auto segment we are exploring or we are at some final stage?

We are already in -- like oil and gas also is there, railways is there then earthmoving is there. So there are a lot of sectors which are there, in totality, non-auto will be close to around 10% to 12% of the balance sheet.

Sir, any order book on this from any of this segment confirm order book type?

We have partial confirmation from order book from railways as well as from the earthmoving side.

So can you share what would approximate this be?

No, I think we will not be able to share the exact details of that.

And any new areas in non-auto we are exploring over next 2, 3 years point of view?

No. Right now, we are -- our entire concentration is -- in non-auto sector is Indian Railways.

Okay. On the new product side, anything new we are about to launch or we have done on that in either of these segments wherein we can say that value addition is very high?

That is always ongoing in terms of value-add and in terms of launching new products, company is always in the lookout. So obviously, I cannot share more than that, but we are -- continuous -- our endeavor is to improve the value-add and in terms of increasing customer satisfaction by adding more new components from the customer.

Okay. Sir, lastly, on the -- what is our effective rate of interest on overall debt?

On -- if you look at the total blended cost, it is about 7.5%.

The next question is from the line of Sanjay Dam from Old Bridge Capital Management.

Yes, sir, just 1 small clarification. Given the kind of realization that we did for FY '20. On that, if we were to -- so we are moving to about 2 lakh ton of capacity, right, by October? So what would be the peak revenue that we can generate out of this 2 lakh capacity, sir, whenever that happens?

Given it is, Sanjay, it is extremely at the current juncture to comment on when the utilization is going to improve or what is going to be the peak revenue from the peak utilization, it is a very hypothetical question or a hypothetical answer I will be able to give. But in terms of realization, I can only tell you the company is targeting only higher realization activity going forward. And we feel and are very confident that we will be able to improve the realization what we are in. And going forward, with the new addition of capacities, with new value add, I think company is targeting higher revenue from higher realization basically.

Right, right. So -- okay. And in terms of working capital days, net working capital days, what did we end FY '20 at versus FY '19?

So it remains almost at the same level of what we were there in the FY '19 and FY '20 because you can see, whether it has a little bit increased on account of stock, later it has contracted in terms of sales but the stock remains static due to that we wanted to move it on the sales. So you can see a little bit elongation on working capital cycle in terms of the stock. Otherwise, it has been for account in terms of revenue.

So in number of net, net number of days, what does it stand at?

Sanjay, it is about 148 days.

148 days. And this is post whatever discounting we do, that...

Yes, yes. After assessing everything.

[Operator Instructions] The next question is from the line of Sachin Kasera from Svan Investment.

Yes, sir, just one follow-up question on this working capital. So you mentioned it was 148 days at the end of March. But considering that now the level of operations have come down quite a bit, do you see that this year, there could be some cash flow generation from a lower working capital cycle?

So it depends. It depends. This is a very difficult question to answer right now. So it's too early to comment on that. So if everything works according to the plan, certainly, it will generate.

What is the status as on June because I think April, May the activity level was very low.

It's only a total washout, you can understand only 2 months is washed out, out of 3 months.

Yes, yes, I know, I understand, sir. So I'm saying since there is not too much of activity there and June only some activity has started. So I'm sure the receivables would have come down, and we would also be focused on reducing the inventory, and that's so...

Sachin, I don't think, Sachin, receivables also has got stuck because what has happened, the consumption as well as the shipments because of very, very poor carriage outward, the shipments also got stuck midway, so all the shipments have started reaching now. So obviously, all -- everything has been in disarray, which has started coming into -- to -- in motion with last 15 days' time. So things have started improving last fortnight. And we feel that whatever -- what the question you are asking, I think in the next quarter, you'll be able to see much better receivables also as well as inventory also.

Sure. And you mentioned that railways, we did INR 45 crores last year, and you mentioned about doubling it this year?

Yes, doubling it this year.

And how much was -- so you mentioned non-auto, so INR 45 crores of railways, what was other than railways contribution, sir, from non-auto -- minus non-auto?

Sachin, we are doing -- there are many things which we do in non-auto in the current juncture that is earthmoving as well as supplying to power sector, supplying to coal mines, then there is oil and gas. So we don't have any exact bifurcation as such into which other sectors we do and what else we do, but...

No, I'm saying what was the total non-auto including railway, sir? Railway was INR 45 crore. What was the total non-auto? That's my only question, FY '20.

Total non-auto should be close around INR 75 crores to INR 80 crores.

Last year. Okay. So which means railway was INR 45 crores and INR 35 crores, INR 40 crores was other segment, other than railways?

Yes.

[Operator Instructions] The next question is from the line of Bharat Bhagnani from Tasha.

Sir, I just want to ask that some portion of the promoter shareholding is pledged. So does that still remain pledged as on March?

Considerable -- as of today, I can tell you, there has been considerable reduction in total pledge, but we have not yet got it cleared from the...

See, the loan on spending has been reduced considerably, but we have not got it at least released. So in terms -- if you want, the pledge can be released quite considerably so -- but we are waiting -- just holding on that due to the share prices, we don't know in this time share prices move up or down. Otherwise, the loan has been considerably reduced.

So sir, can you just quantify how much of the percentage -- as a percentage of the promoter shareholding or is that percentage of the company's pledge? And what is the loan outstanding against it? Just for clarification.

It's about INR 15 crore of loan altogether at the promoter level right now. INR 15 crores loan.

1-5? 1-5?

1-5. And their pledge value is about INR 60 crores, INR 70 crores. As on date, we keep -- as for requirement, we need to keep INR 37 crores of pledge against that, so balance we can get released.

The next question is from the line of Kush Joshi from Kitara Capital.

Sir, just need 1 clarification. This CapEx of 50,000 tons, which is commencing from October, so is it with respect to a domestic market or export opportunity?

Both.

Both. And the LCV will be more focused on Class 5 in U.S.?

We are -- basically, LCV does not -- is not Class 5, and neither we would like to denominate as Class 5. Basically, LCV, PV is in small car or a small commercial vehicle segment, which we are targeting.

The next question is from the line of Sanjay Dam from Old Bridge Capital Management.

Sir, is the ACIL assets to go through, if you could just tell us again, what would be the capital commitment from our side, sir, whenever it goes through?

So it's still yet to be decided, Sanjay, because we have put it for renegotiation, so it will depend upon the outcome of that renegotiation.

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

I, on behalf of the management, thanks all the participants who has taken the precious time and participated in our conference call, investor conference call today. I wish them all a good day today. Thank you.

Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.