Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ramkrishna Forgings Limited Q3 FY '21 Results Conference Call, hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rushad Kapadia from ICICI Securities. Thank you, and over to you, sir.

Thank you, Inba. Good evening, ladies and gentlemen, and welcome to the Q3 FY '21 Results Conference Call for Ramkrishna Forgings Limited. We have with us from the management, Mr. Naresh Jalan, Managing Director; Mr. Chaitanya Jalan, Whole-time Director; Mr. Lalit Khetan, ED and CFO; and Mr. Rajesh Mundhra, Company Secretary. I would now like to hand the floor to Mr. Lalit Khetan for opening comments. 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 the quarter and 9 months ended December 31, 2020. The total operational revenues for this quarter has been INR 402.17 crores as compared to INR 250.69 crores in the corresponding quarter. The operational revenues for the 9 months ended December 2020 has been INR 770.49 crores as compared to INR 889.31 crores in the corresponding period. Company has achieved an EBITDA net of other income of INR 78.17 crores for this quarter as against INR 47.51 crores in the corresponding quarter. EBITDA net of other income for the 9 months has been INR 122.26 crores as against INR 166.96 crores in the corresponding period. EBITDA margins net of other income stood at 19.44% in this quarter as compared to 18.05% in the sequential quarter. However, due to shortage of containers and imports in this quarter, the company has to incur additional cost of about INR 3 cores on logistics during this quarter, otherwise EBITDA margin would have been higher by 75 basis points. We have achieved a total capacity utilization of about 82.9% in this quarter against 49.12% in the sequential quarter. We achieved a domestic sales tonnage of 17,366 tons for this quarter as against 9,620 tons in the sequential quarter. We have achieved an export sale tonnage of 8,048 tons for this quarter as against 5,951 tons in the sequential quarter. In previous investor presentation, we used to give forging sales quantity. Now we have revised the same to net sales quantity. Export sales for this quarter has been INR 155.80 crores as compared to INR 113.90 crores in the sequential quarter. Company has uploaded an investor presentation providing require details. We request to the investors not to raise any customized specific queries during the con call. Thank you. Over to Rushad. Rushad?

Sir, may we open the line for questions now?

Yes.

[Operator Instructions] Our first question is from the line of Basudeb Banerjee from AMBIT Capital.

Sir, congrats for good set of numbers. Just going by the breakups in the presentation, sequential domestic volume growth looks pretty strong, even more than commercial vehicle industry growth sequential. So if you could explain how that got actually through value addition or market share gain or new product customer addition? And if so, how much that is sustained in there?

I think we will not be able to exactly quantify in terms of how much. But basically, like in the last call, which we had said that we have improved in terms of content per vehicle with all our existing clienteles. So because of this content improvement, the domestic sales has improved.

So broadly percentage-wise from a same vehicle, if you can say, how much has been the rise in changing the [indiscernible]?

I think close to around -- if from the same vehicle, it should be close to somewhere around 20%, 22%.

That's great. That's great, sir. And that will only continue further enhance on that?

Yes.

And if you look at the realization per kg, the trajectory, which is roughly what not that good, is it purely on metal price movement? Or there has been some mix change per se? How to look at that?

Metal price exchange has not 100% been passed on yet. And basically, there is some metal exchange which is there as well as the value addition improvement which has happened is due to that also.

I was coming from -- because if I see a domestic realization is roughly flat sequentially, whereas steel price as for the move is up from like INR 38,000 a ton to INR 55,000, these are the prices. So when the house...

I think Mr. Banerjee [ HRC ] price do not dominate anything in terms of auto or steels.

Directionally, I'll just like to ask.

And I think we had a price increase of INR 4,750 per metric ton last quarter. And 100% of -- we have not been able to yet -- in terms of pass on, we have not been able to receive the amendments from the customer for 100% of that. Some of the customers, yes, we have got, but not from 100% of the customers.

So should one take that as the reason why your sales are up 200 basis points sequentially?

Yes.

And that lag effect of pass on can one expect to be implemented in coming quarters?

Yes, that lag effect, but we have already had one more price increase from January 1. So I think, like I said, should get neutralized completely, if there is no price increase in the month of April.

Understood. So in a quarter where there is no more price increase and the lag -- 2 lags of the price hikes happen, then the real gross margin will get reflected?

Yes.

And sir, last was from an export perspective if you look at the kind of effect of U.S. truck order book addition. So when one should expect the best case execution from truck -- export execution from your side [indiscernible]?

I think we are moving along with the market. And I think we expect to be on the upward trajectory and keep on -- in terms of capacity utilization improvement every quarter-on-quarter. So I think as of now, today, we are best positioned with our additions in capacities and everything to really ride the upward trajectory in the market.

And the last question, sir, any update on the new customer additions, which you have been speaking in Europe and expansion in the non-auto space any comments?

In non-auto space, company is dependent both only on Indian Railways and the oil and gas industry. And both are right now sluggish. We expect the recovery in Indian Railways only in the second quarter of FY '22. Till then, we don't expect any major recovery in Indian Railways. And in oil and gas, we are seeing some recovery, but I think by the next quarter, quarter 1 of FY '22, we will see a major recovery in oil and gas.

And then the stock in the passenger vehicles?

In passenger -- in complete automotive, we are doing extremely well. Passenger vehicles also, we have started in a great way. So I think overall in auto industry, we are doing extremely well.

So how much time is [indiscernible] from passenger vehicles in your total 25 [indiscernible]?

No. I think it is maybe only a minuscule of 500 to 600 tons in the last quarter. Going forward, every quarter is -- because passenger car size and volume, not too different things. Sizes are very small. So tonnage wise, which is not big. But in terms of volume, yes, it is big.

Our next question is from the line of Sanjay Dam from Old Bridge.

Congratulations for good set of numbers, sir. Yes, I had one question. So when I look at your best quarters in the past, you all had a top line of about INR 400 crores, and you all did almost -- sorry, INR 500 crores, and you had a INR 100 crores EBITDA. As I understand now, your content per CV has also increased. And so when one looks at a normalized like-to-like situation, would it mean that this INR 500 crores revenues and with your -- with some increase in capacity, this would be significantly higher when to next peak again?

Sanjay, I would like to sum up only with a small answer. We have just started the journey. And I think best is yet to come. We are not comparing in terms of previous quarter. I think we have just started the journey with all the cost reductions and other things, whatever we have taken. And I think in coming quarters, best is yet to come.

Yes. So basically, just to put things in context, sir, is that you're showing an 83% blended utilization, that brings INR 400 crores revenue and INR 80 crores EBITDA, yes. So I'm just comparing your last -- your previous peak was INR 500 crores revenue and INR 100 crores EBITDA. At that time, you did not have the higher content per vehicle, which you now have post-BS-VI. So yes, it was just a comment and a query in that perspective.

No, of course, Sanjay. I think in terms of 82% utilization is that at that time of capacity which is in place. But I think with our -- the project already getting completed in last quarter and the current quarter, my capacity is going to increase by almost 50,000 tons. So I think -- and as far as content is concerned, content has gone up considerably, very high. So I think INR 500 crores is not what we are targeting. We are targeting much better. I think every quarter, you see considerable improvement going forward. And as of today, we have not even seen what you are comparing today INR 500 crores when CV market was at its peak in 2018. So CV market is today not even 50% of that peak. So let the CV market come to its peak and then you can see where we'll end up with.

Yes, yes, that's our expectation, too, sir. The other question is that the interest cost, if you all could give some sense of how you see that kind of -- any kind of a directional guidance there?

No, interest costs are going to remain at this level, Sanjay. And because we have gone from a little bit of expansion and all these things. So but this is going to remain at this level. It is not going to increase from here.

Perfect. And between the last quarter and now we've -- our net debt has not gone up. Is it?

Yes. Net debt is almost at the same level as of last quarter.

Our next question is from the line of Ketul Dalal from Dolat Capital. We'll take our next question that's from the line of T.S. Vijay Sarthy from Anand Rathi.

Congrats for good numbers. Just had a small doubt on the reclassification of your volumes. Does it mean that the only forged volumes are not a part of this volume data that you share? Am I right on the understanding?

No, this volume are basically forged and machine booth. Now because whatever we are selling, this is the volume. Earlier, we used to give the forged volume only for the entire sales. Now we have gone for the net.

So when you say net, you mean forged plus machining?

Correct.

So only forged, so there might be some components where you do only forged components. Now is that included...

There may be some forged component also, yes.

So that's not included in the sales volume, right? That's what you mean by net.

No, no, no. Whatever we had sold, it's the volume for that. So it includes forged, also some of the components sold as forged taken for that and whichever as sold as machine, we've taken machine for that.

But why has changed in classification, sir? What is the reason behind this?

No, basically, we wanted to keep the quantity actually the sold quantity, not the gross quantity. Earlier, it was basically whatever is wasted also is getting classified in the quantity. So we -- that's why we've revised that.

Okay. Fair enough. And can you help me understand about your plan on the LCV exports and Class 5 trucks? What is the state? And how should we expect the trend going forward? Some color on that.

I think in both in LCV and Class 5, we are doing a very good work in terms of our exports. And I think the export growth itself shows there is an exceptionally good work going on over there. In terms of tonnage, I think like I said in my earlier question also because the LCV components are small, it can be derived in terms of the number of pieces of volumes we are doing in terms of tonnage, it is extremely difficult to drive any volume out of that.

Okay. And finally, on CapEx, what have you done till now? And what do you envisage this year and probably next year if you can help us?

Next year, budgets are not yet freezed actually. Next year budget, again, we'll be able to tell you only after -- but as of now, in this quarter, I mean, Lalit, would you be able to tell what is this year CapEx we have done?

See, we have done about INR 150 crores out of CapEx so far this year. We need to add another INR 20 crores, INR 25 crores in this quarter. That's the plan for this year. And next year plan, we will see some time later. So with this CapEx, we will be able to commence our new capacity. We've already commenced our capacity on a single line, and we will commence the production of 7,000 ton fresh line and railway facilities by March '21.

We'll take our next question from the line of Mitul Shah from Reliance Securities.

Congratulations for a good set of numbers. Sir, I would like to thank for giving such a detailed presentation and expect similar presentation to continue going forward in terms of revenue breakup and auto, non-auto segmental breakup also. Sir, again, some clarification on the reclassification of your volumes because if I look at the volume which you are giving now is nearly 15% to 20% below the earlier volume indication. So based on your comment, can we assume those type of 15% plus kind of a reduction were there and only this 85% of the finished goods, which we are selling to the clients? Or is there any other thing why this adjustment?

No, no, this is the actual quantity we are selling to the client. As earlier clarified earlier also, that was the basically difference between the machining and the forging. So that's -- that difference will be eliminated now.

Yes. So that is what the Vijay also asked that there might be some component, which you are doing only for -- is there any component which we are selling only forged component or everything we are selling forged plus machine?

No, no, we are selling just forged component also. So that forged quantity is included in this quantity.

I think I would like to more clarify you that like 70% of our products are going in machine condition. Earlier, what we used to do, basically, scrap was inbuilt in the tonnage which we were showing. Now what we have done, we have reduced the scrap content and it as condition we are selling, and that is the reason the presentation has been revised accordingly.

Okay. So next is -- my next question is on the -- again, LCV 50,000 in your presentation you have from this 150,000 as a total capacity. So what is the status of that another 50,000 which we are planning to start by December?

No. I think the we have already started. Lalit has already just now clarified. And the balance 7,000 ton fresh line is going to start, I think, somewhere in by mid-February. Before the end of March, all the capacity of 50,000 tons will be increased.

So in that new capacity, you indicated nearly 500 tons kind of a numbers for PVs only were delivered during the quarter, right?

Can you repeat the question, please?

Sir, you highlighted that for passenger vehicle, our volume would be somewhere around 500 tons only in this quarter. So that is from the new capacity?

No. From the existing capacity only. New capacity for passenger vehicle, which is the warm and cold forging line, that is going to get commenced only by June 2021.

So in this 50,000 capacity, we have not done anything of maybe minuscule volumes only done during the quarter?

Yes, yes.

Sir, my next question is on the margins. Our utilization based on what you have given in the presentation was nearly 49% in Q2 and still our margins were above 18%. We have directly gone from 49% to 83% to utilization in this quarter and still margins highly improved by 100 basis point. So any understanding on this, if you can clarify?

I think Lalit in the initial comments of his presentation, he has already clarified that we have incurred freight cost of approximately INR 3 crores extra last quarter on account of premium threat for exports because of the availability of container. If we would not have -- we would have paid the allocated fares only, we would have increased our percentage by another 75 basis points. As well as in terms of exports, we have not been able to -- because there has been already a steel price increase of INR 4,750 from 1 October, the lag effect only comes after 1 quarter. So that INR 4,750 price increase is going to come into our balance sheet from 1 January only.

So if we adjust these both 2 parameters, one is the adjustment of the -- going forward, you will pass on the cost escalation to clients and this onetime freight cost additional of INR 3 crores, then according to you, what should be the margin?

It should be somewhere close to around 21%.

Okay, sir. And sir, on the ASP side, based on your presentation again, average selling price on a Y-o-Y basis, particularly for the export market, has declined by almost 7%. So is it again a lag effect? Or despite this currency, is it favorable this time? Particularly...

No, no, basically, you need to check the commodity pricing in 2018, what was the commodity pricing at that period of time. I think the current commodity pricing and the contract is as per the current commodity pricing, so commodity pricing changes every quarter. So I think this INR 4,750 coming in from this quarter, I think there is going to be that much of increase in terms of realization.

No, sir, my question is last year Q3 versus this year, there is a fall of 7% Y-o-Y in average realization or realization per...

Actual realization...

Per transforming product mix change?

No, there is no product mix change. Only thing is that there has been a little bit exposure increase in terms of Class 8 trucks and LCV. Wherein in terms of volume is there, tonnage is not there.

Okay. Okay. Sir, lastly, sir, gross debt is how much you told?

It is same as the last quarter.

We'll take our next question from the line of Raghunandhan from Emkay Global.

Congratulations on stellar performance. Sir, a few questions. Firstly, can you give some color on the revenue potential for LCVs and railways in FY '22?

No. I think, Raghunandhan, we will not like to mention anything in terms of projections right now in terms of LCV and railways in terms of top line. What we expect is that next year, railway business to be back from second quarter onwards, and we have already our capacities in place. And we have -- we have quoted in a number of tenders for railways. And we feel that by first quarter, we will have a robust pipeline in terms of railways work from our new projects, right?

All the best in those tenders, sir. If I remember correctly, the capacity you have for railways has a peak revenue potential of around INR 2 billion? And how would it be for LCVs?

LCV, Raghunandhan, in terms of -- we are targeting close to around INR 500 crores business every year from LCV, both domestic and export taken together. So I think we should be doing close to around 50% or 60% this year and substantially in the next year.

Sir, you indicated that machining has reached close to 70%. Last quarter, if I remember correctly, it was around 60%. How do you see this share increasing in future? Like I think the target was to reach 75% by end of the year. Would that stay?

I think we envisage that by calendar year '21 and maybe by March '22, we should be doing close to 85% to 90% of our production machine conditions only.

And how would it actually impact your -- margins will, of course, increase, but would the return ratios also see a uptick?

Yes. Both margins and return ratios, both will see an uptake.

And in the -- sir, like gross debt is closer to INR 11 billion. And how do you see the reduction happening going forward?

No, right now, the overall gross debt is at INR 10.5 billion. And I think every year, repayment is going to be close to INR 100 crores. In this quarter itself, we are going to repay close to around INR 25 crores of debt. And as the business is performing, I think we have a robust strategy now to go ahead with the reduction of debt in the next quarter -- next year, sorry. Next year, we have a robust plan to reduce the debt from whatever margins we are making. But I can tell you that debt has peaked out at this level.

Wonderful, sir. One last question. Company has been renegotiating in terms of acquisition for ACIL. Any update on the acquisition process?

So the -- still the hearings are going on at the NCLT levels and certainly some progress has been made as the matter is sub-judice. So now I can't update on that what is going on in the court. But yes, we are seeing a progress there, and we are looking at the solutions in the next 6 to 8 months.

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

Sir, in the domestic trend, how was the contribution from LCV versus MHCV in third quarter?

Can you repeat the question, please?

Sir, in domestic trend, how is the contribution from LCV versus MHCVs in third quarter?

I think it is too small for us to right now take out that. We have not really worked out on the contribution level in terms of domestic LCV versus MHCVs as of now. I think it will take some more time before the business and largest for giving you that exact figure.

So in the last quarter, you had mentioned that it was around 20% of the total sales of domestic sales. So is it the same line number? Or...

It has the same line numbers.

Okay. And these are the incremental numbers?

Yes.

Okay. Sir, in export, what was the geography mix, North America, South America and Europe? And how is the order book pipeline?

In our presentation, we have already given you the breakup of our exports.

So -- but you have a started supply component to a customer in South America from the last quarter only. Now you have not mentioned any numbers from the South America?

No, I think we have already mentioned all the 3 geographies. I think we have mentioned Europe, North America and other export continents.

So I'm talking about the South America opportunity, which business has started last quarter only.

No, the opportunity right now, last quarter only, we have told you that it is going to be close to an $8 million to $10 million business. We have started from last quarter. And slowly, that business is going to grow in next couple of years. Now it's not going to be that first year itself, we will be able to $8 million to $10 million.

So okay, sir. So what was the number in this quarter, sir?

I cannot give you an exact number right now.

Okay, sir. Sir, what was the domestic versus export mix, if you take the gross sales tonnage number? Because earlier, you were providing only gross tonnage numbers. So our model is based on that number only.

I think we have not worked out on the gross tonnage anymore. So we have revised the numbers of earlier quarters even for that. So I will not be able to give you any exact number to that.

So would you be able to provide us the earlier financial year's numbers, so it will be quite helpful for us?

Earlier...

Public domain only. In the earlier presentations...

In the presentation, I think if you go, all the details have been put there.

But that number is matching with the production number. So earlier, you are giving the numbers that was the -- that is matching with the current production number, not from the sales number.

No, the earlier presentation...

No, no, that was...

You have in the presentation.

Okay. Sir, how do you see the scrappage policy for your business apart from the pickup in the OEMs volume? So there are 2 possibilities that, first, it might be that recycled metal should be at a cheaper rate, and that can help to reduce your RM cost or other possibilities maybe that axle and other parts can be reused in vehicles, and that may be negative for the -- your business. So please give some color on it.

First of all, no OEM is going to use the recycled part for the fresh vehicle. That is absolutely ruled out because everything has a sell [indiscernible]. And after 15 years or 20 years, if a vehicle is scrapped, obviously, that [ axle ] cannot come back to the system on a new vehicle. And to answer your question, see, what we see for our business, I think we have not built our business model right now on the base of scrappage policy. As and when scrappage policy comes, the shape and way of scrappage policy is going to determine the future of how we think about it.

[Operator Instructions] Our next question is from the line of Nishant from ICICI Securities.

Sir, my question is more on the Class 8 side. And there are, obviously, initial programs for some of your key European customers, including -- and American customers, including manual where they're looking to introduce in the next-generation Class 8 trucks on the electric side. So are you guys evaluating as to how you can benefit from that trend change or how the content per vehicle kind of changes between traditional vehicle electric vehicle, electrics? Any thoughts on that? Even hydrogen, for that matter, many of them are...

Nishant, we are working with our existing customers very closely on the electric vehicle side. And I think it is very early right now to comment in terms of what can be the potential growth because right now not even samplings have started. But yes, we are working very closely. And I think if it -- all Class 8 trucks or the European model of hydrogen, if it goes through, this can be a very big opportunity for RKFL.

Sir, from -- just from an understanding perspective, when you see opportunity, it will be on new products or on the existing product lines that you built?

It's on new product lines.

Okay. And the existing product lines, will that...

Typically, I want to sum up your question, I think what will happen because if at all the electric vehicle comes through, we are right now in a big way present and [indiscernible] vehicle can change will be always there. The major component which is going to change is the engine and some of the steering components, wherein we see a huge opportunity in terms of machine fully finished jobs, which can create a new market and new geographies for us.

Okay. Okay. So that is a longer-term positive trend for you guys?

Yes. We are already in talks and working already with -- closely with our existing clienteles, both in Europe and in North America.

Okay. Okay. Yes. And on exports, sir, obviously, you talked about passenger vehicles, but what -- are you looking at plans for passenger vehicles on the export side as well in the same...

No, no, passenger vehicle yet not in exports. We are not looking at exports right now. We want to first concentrate in India and build up our base before we target export in terms of passenger vehicles.

We'll take our next question from the line of Mitul Shah from Reliance Securities.

Sir, I have a question on this what is your understanding based on initial discussion for this current quarter, how Q4 should be looked at compared to Q3 on the domestic MHCV side as well as on the Class 8 truck side?

I think we are pretty well placed in terms of capacity utilization. And I think order books are almost full. And we cannot put any numbers to it, but I think we will do better than what we have done in quarter 3.

And sir, my next question is on the client addition or a geographic addition. During last 9 months YTD, any major client addition we have done on the export side?

I think South America, we have already said that we have added a major client in the COVID times. And that is it. And we are continuing with our existing clients and revenue optimization from the existing clients.

Apart from South America, no other client addition, either from the Europe or from North America?

No.

And any new geography we are looking at from next 2 years' point of view?

We are -- 2 years from now? I think...

1 to 2 years, are we targeting any new [indiscernible]?

As a company, we are always in look for new customers and new opportunities. So that's already built in. So I think putting a detail on that is not possible for us. But obviously, we are looking -- always we look for new customers and new geographies.

Our next question is from the line of Sanjay Dam from Old Bridge.

Just a housekeeping question. How should the export incentives be looked at, sir?

In terms of -- I did not understand, Sanjay.

Sir, going forward, so basically, you hit INR 3.4 crores, you get -- it came from export incentives, 9 months, INR 11 crores. How should we model it going forward?

Sanjay, I will answer -- let me answer some of this question. Because -- see, export incentive, there is a change coming from this quarter, the [ ROD ] Treaty in place of MEIS. That's the only change on the export incentive. So MEIS also, the provision -- government has given a very limited scope for this quarter. It was about -- they have limited revenue until December and that also not at the full potential. So in terms of, I will say, provisions we have accounted -- not fully accounted for what we accounted for the earlier quarters. Now the [ RODPT ] rate is not rates out, but we are looking at the similar kind of incentive what we are getting in MEIS, and there should not be any major change in the export incentives going forward.

Got it. So it shouldn't make any difference to us, yes?

Yes. It's largely same, yes.

[Operator Instructions] As there are no further questions from the participants, I now hand the floor back to the management for closing comments. Over to you, sir.

We take this opportunity to thank all the investors for joining us today. We wish all the persons are very blessed and good weekend. Thank you.

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