Rane Holdings Limited (505800) Earnings Call Transcript & Summary

Good morning, good afternoon, friends. Welcome to the Q2 FY '20 Earnings Call of the Rane Group. To take us through the results and answer your questions today, we have the management team from the Rane Group, Mr. L. Ganesh, Chairman and Managing Director, Rane Holdings Limited; Harish Lakshman, Vice Chairman, Rane Holdings Limited; P.A. Padmanabhan, President, Finance and Group CFO; Siva Chandrasekaran, Executive Vice President and Secretary of Legal Services; and J. Ananth, CFO of Rane Holdings Limited. Please note that we have sent the press release and also the latest presentation link of the deck has been sent. In case any if you have not received the presentation, you can look at it our website or even the BSE site of Rane, or you could write to us, and we'll be happy to send the detailed earning presentation over to you. Before we start, I would like to say that everything that is said on this call that reflects any outlook for the future or which can be constituted as a forward-looking statement, must be viewed in conjunction with the uncertainties that we face. These uncertainties and risks are included, but not limited to what we mentioned in the prospectus. And subsequently in the earnings reports, which you can find on our website. With that said, I'll now hand over the call to Mr. L. Ganesh. Over to you, sir.

Thank you, Diwakar. Good morning, ladies and gentlemen. Thank you for dialing in. I would like to welcome you all for this teleconference. You would have seen the Q2 FY '21 performance highlights of the group companies posted on our website. I'd just like to provide a few additional comments. We saw a gradual improvement in the demand environment with the opening of the economy. Different management teams effectively kind of rose to the occasion, handled the sudden ramp-up of production from Q1 to Q2 despite continuing supply chain and some labor availability challenges. The group continues to prioritize on cost reduction measures, pursued to minimize the impact on account of the quarter 1 lockdown, which still hangs on our half-yearly results. The group aggregate total revenue declined by about 1%. So effectively, we're just about flat. Revenue from Indian OE customers grew just by 1% on a whole. However, the revenue from international customers declined by 9%. And with cost control and lower employee cost, the EBITDA margin improved by about 166 basis points. And the aggregate PBT for the group was about INR 14.8 crores compared to a loss of INR 34.3 crores in the previous Q2 of FY '20. Turning to the companies, brief comments on the companies. The Rane Madras RML stand-alone, net sales increased by 8%, led by growth in all the segments, sales to Indian OE customers by 5%, international customers by 6% and a very robust growth in the aftermarket by nearly 29%. Fixed cost reduction resulted in a 168 basis point increase in EBITDA margin. The strong growth in farm tractor volumes is helping this business significantly in quarter 2. Turning to the Light Metal Castings India business is seeing good traction with new orders. In fact, I'm happy to share that in Q2 we won a new order of nearly about INR 36 crores per year from a leading European passenger vehicle customer. With the current order book position, LMCI business is likely to have a very decent performance in the year '21/'22. U.S. subsidiary, LMCA, the U.S. subsidiary, however, continues to face challenges based on lower volumes, and the cold impact in the U.S. market is much more than what we see in India and other parts of the world. Significant drop in sales and under absorption of semi-variable manufacturing costs resulted in higher loss in the U.S. subsidiary. We continue to see good progress in operational improvements. However, as mentioned earlier, the RML Board is closely monitoring the performance, the order books, the new orders, et cetera, to take a future call sometime by middle of next year on this business. REVL, the revenue decreased by 12% driven by a drop in volumes in domestic and international customers. This was partly due to commercial vehicle volumes not picking up and also some diesel engine production coming down among most of our customers. Plants continue to improve operational performance, much better fixed cost control and reduction in manufacturing costs due to improvement in operational performance like quality, productivity, et cetera, helped to mitigate the adverse product mix. And despite the volume drop, we managed the EBITDA margin at similar level as last year. Rane Brake Lining experienced about a 4% decline in revenue. Sales to OE dropped by 8%, and the aftermarket segment posted a marginal 1% growth. However, favorable material price movement and product mix helped in margin improvement. There was also a one-off selling price correction, which we got from the customers for prior periods and there was some write-back of provisions. So this also helped in this quarter. As you are aware, Rane Brake Lining announced a buyback. This decision was taken by the Board considering the cash reserves in the company and the fact that CapEx, not much of CapEx is required for the next couple of years, given the capacity utilization currently. So to utilize the cash reserves, at least, part of that addition was taken to buy back shares. This buyback is now underway. Turning to the joint ventures. Rane TRW had a 3% decline in revenue. Revenues from Steering Gear products declined due to some volume drop in the export business and also muted volumes in the commercial vehicle segment. Revenue from the Occupant Safety system increased on account of better schedules from international customers. [indiscernible] semi-variable manufacturing costs resulted in marginally lower EBITDA in this company. Rane NSK sales increased by nearly 8%. This was due to the better uptake in the sales models and as you know, Maruti Suzuki, a major customer, has done very well in Q2. Lower employee cost and reduction in other fixed costs helped in margin increase. There was an extraordinary expense of INR 20 crores which is an incremental provision towards product warranty claim. We remain cautiously optimistic about the sustenance of demand post festive season, we'll have to wait and see. But as of now, the indications are that Q3 schedules are quite good from customers. With these opening remarks, I take this opportunity to wish you all a very happy Diwali and a very happy and safe, festive season and hand it over to Harish for his comments, after which we'll take your questions. Thank you.

Thank you. Good morning, everybody. Just a few more comments from my side relating to the market. The past quarter, Q2 was an extremely challenging quarter, and in many ways, the exact opposite of Q1 where we struggled to ramp up volumes and meet customer demand because of the strong recovery in the domestic market. To compare the group's performance vis-à-vis the market, let me share some details around the vehicle segment. Our performance is better than most of the major vehicle segments, except the Farm Tractor and small commercial vehicle, where our presence is less than 3%. In the Farm Factor segment, the reason, although we had a positive growth rate, the growth is lower than industry rates due to the lower growth of manual steering in tractors compared to the power steering. While we are there in both segments, our share of -- our market share in manual steering is much higher. So hence, the growth was lower. In the passenger vehicle segment, the higher offtake in the served models helped us perform much better than the industry. In the LCV segment, the increase in penetration of power steering resulted in higher PAT value and higher growth from Rane TRW. And then in M&HCV segment, we also managed to increase our share of business, which helped us achieve better performance in the industry. The growth in two-wheeler segment was driven by share gains with some of the key customers as well as better offtake in some of our served models. At the market segment level, our sales to the Indian customers grew by 1% over last year. Revenue from Indian aftermarket grew by 9%, whereas our sales to international customers declined by 9%, specifically coming from engine valve train business that we supply from our REVL and some of the hydraulic costs heading from RTS as well. As per Q2 FY '21 sales, our international business is about 23% of the total group turnover. So with these few words, we'll now open up for any questions that you may have. Thank you.

[Operator Instructions] We have a first question from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

Sir, wonderful performance on TRW per se. You have highlighted in the presentation of increase in share of business in the commercial vehicle steering side, if you can comment on that? And secondly, how much was exports this quarter? And how are we looking at exports? We've also commented on a new export order win to Russia. So if you can give some perspective on both of these points, sir?

I mean the first one is, yes, because of good work done by the management last year in terms of ensuring our power steering models that are engineered on all the BS-VI vehicles, as you know, from April 1, the production has all moved to BS-VI. So that helped us achieve a significant increase in share of business. Of course, I think eventually, competition will catch us and will, maybe it will be difficult for us to sustain this kind of share. But any -- but of course, we will continue to be the market leader so I hope that answers your question. As far as export, I will ask Ananth to answer. What is -- what are the [indiscernible]

The total export of RTS is close to INR 110 crores.

Okay. And which means this is very close to what we were doing last year per se, on a like-for-like basis. Right. Sir, last year, we did around INR 115 crores odd?

Yes. Correct.

Understood, sir. And you also commented very strong export momentum. So this will -- this revenue per quarter from an export will increase going forward into the future quarters. Is that a fair understanding? And the new export order win to Russia will also start by this fiscal year itself?

I mean, the answer to your first question is yes, it will continue, but not in this fiscal year. I think it starts next year.

'23.

Sorry, I stand corrected. That Export is Russia is 2023.

Understood. And secondly, just on the NSK side, sir, you spoke about I mean our revenue momentum has been better than the underlying production. So one is on the served models where Maruti has done better for us. Secondly, LCV also, is there any pickup from that side also from -- for NSK?

Yes. Rane NSK, the manual column for commercial vehicles, we are extremely well positioned. So like Rane TRW, what Harish mentioned, so happened that we proactively worked on all the BS-VI models. So we are extremely well positioned. So as the commercial vehicle business picks up, which is expected to happen in the second half, we will benefit from that. And on the LCV with Ashok Leyland, Tata Motors, we are very well positioned. And with M&HCV also, gradually, all the new generation vehicles will have our columns.

Understood. And generally, on the fixed cost initiatives. In RBL, also, we saw very good fixed cost reduction similarly on the Rane Madras stand-alone. If you can comment on how much we expect these -- will these costs normalize as the business momentum normalizes in the second half of this fiscal year? And specifically on the RBL Rane Brake Lining, on the gross margin, we have very, very good improvement there. So you did comment on the lower commodity prices and price hikes. So this commodity benefit we can assume to sustain there? Is that a fair understanding on these 2 points?

So yes, as far as fixed cost is concerned, I mean, I definitely -- this kind of savings is not sustainable as -- because as it was already covered in the media about 4, 5 months ago, many of us in the industry, including in Rane, we -- all the management and in many plants, even the unions, took a salary cut, which flowed into the Q2. So salary -- and now we have started restoring compensations because of the -- market is close to coming back to normal. So a large part of the fixed cost is also salaries of employees. So obviously, that savings is not sustainable. But many additional cost-saving measures that the company undertook, we definitely see several of those initiatives continuing even into the coming quarters. So therefore, while one significant portion will not continue, there are some certain other initiatives that will continue. As far as RBL is concerned, I think we had also mentioned after the quarterly results in the media, that one of the main reasons in a -- of course, in addition to the commodities, the main reason was there was a one-off price settlement with 1 of our customers that was recognized in that quarter. That is the main reason. Now commodity has -- but to comment on commodities, we are definitely seeing pricing is hardening. Steel, iron, scrap, everything is starting to go up. We are just starting to get pressure from our suppliers for price increases. And of course, we have already started engaging in conversations with our vehicle manufacturers on the same. So I think commodities, we will start seeing an increase in the coming quarters, especially if the demand continues.

Understood, sir. One last question, if I may squeeze in. From MSK perspective, on the warranty provisions, if you can give some comment, we thought that probably the first quarter would have been the last quarter of provision. So from that perspective, how are we seeing that now panning out for the remainder part of the year? And what is the outlook there per se? And for any new order wins per se from NSK that you would like to highlight at this point?

Yes. No, as far as the warranty is concerned, some warranty returns still continue, although we are able to identify most of them through the pre countermeasure production. So some bunching up also perhaps happened during the lockdown, we were not getting anything. Now after that, the vehicle usage has started increasing. But we are not fully clear, but some pre countermeasure claims continue to come. Hopefully, this should start coming down now. We are watching this very closely. We will get a better picture in the next 2 months. But as I mentioned in the last time also, the impact will be nowhere near 2019/'20, it will be much less. But it has not completely disappeared. Claims still are coming. So as an abundant caution, we made a provision this quarter also. New orders kind of continue. We bid for businesses, we get some. So fortunately, so far, this has not affected any of our new orders, although recently, there have been no big order coming from many of our customers, but we are, as a routine, winning orders for new platforms.

[Operator Instructions] We have next question from the line of Pratik Kothari from Unique Asset Management.

So my question is on the RPDC part, where you mentioned that the Board will take a view somewhere in the middle of next calendar year. If we just talk about internally, what are the parameters that we are looking at which will either decide as to either continue with this decision or to flip it? Just quantitatively, if we can quantify what are the things that we're looking at?

I mean, it's a very difficult question to answer the specific parameters. It's a combination of so many things in terms of customer order booking, efficiency improvement in plant, interest rates, et cetera, et cetera. But ultimately, the key metric will be sustainable profitability and ensuring that we can get a return on the capital that we are employing there. So that will be the ultimate metric. So we need to have the visibility for that. So that is what Mr. Ganesh said, that we will take a view in the middle of next year, whether that visibility is there or not.

If I just so like you said, 2, 3 points that I said you look at combination of everything in terms of visibility. So in terms of -- if you look at visibility today, what should change 6 months later that will help us change the view? Because I believe, currently, we don't have enough visibility on that part at least. What should change in the 6 months at least in terms of customer booking, et cetera, that will help us make the decision there?

Yes. So the key is customer booking, where there's some new contracts that we are winning, many are undergoing negotiations. And also, there are -- I think we have already announced, there are 2 new businesses that we are launching in Q4 of this year, that is January 2021, between Jan, Feb, March, that quarter, we're launching some new customer programs, how they take off, it could do much better than market. So those are the things.

This is on the non-auto part, right? The one we are launching in Q4?

Sorry?

That is in the -- that is on the non-auto section?

One is auto, the other is non-auto.

Fair enough. And just to reconfirm, the middle of next year is when we'll decide, the Board will decide during July next year?

Yes. We will take a view at that time on what the future is for that business.

[Operator Instructions] We have next question from the line of [ Naresh Ranka ], an investor.

And hearty congratulations on decent results, and thank you for the opportunity. Sir, I would like to know, I mean, currently, what will be the capacity utilization of all the plants basically Rane NSK and Rane TRW? Currently, what will be our capacity utilization levels?

So again, it varies from plant to plant, depending on the customer mix. But I would say for Rane NSK, and Rane TRW, I think on the steering side, maybe in the range of about 70% to 80% would be the utilization levels. Whereas for -- on the occupant safety side, it's probably closer to 90%.

Sir, just 1 more question. So generally, we have seen that for auto ancillaries, if they have more share of business in the aftermarket, it is more profitable. I mean, but I feel that our Rane group share of business in the aftermarket is lesser than our competitors, like when we see QH Talbros and others. So are we doing anything to increase our presence, both domestic and international aftermarket business, sir?

See, our aftermarket, you're asking specifically on steering or general?

Generally, sir. More -- because steering will be the major components, steering and suspension will be the major component.

Yes. So generally, Rane has a reasonably solid presence in the aftermarket. In fact, our #1 product line is brake, Rane Brake Lining, the products that we make in Rane in Brake Lining. I think almost 45% to 50% of that company's revenue is aftermarket. And Rane Madras also, it is substantial. We definitely are a market leader in many of our product lines. I would think we are even significantly larger than QH. As a percentage, it may not be comparable because Rane Madras has a lot of steering products that we do, we do exports to multiple countries, et cetera. So aftermarket as a percentage of RML may be smaller because OE per thing is bigger and because of exports, et cetera. But I would think aftermarket-to-aftermarket comparison, we should be even larger than QH.

Because what I can see from the stats available, I think maybe we are a little, let's say, especially Rane Madras, I think we have 15% of the business is maybe aftermarket. Okay. So is there any more potential to increase because Rane TRW Rane NSK I think, almost lower presence in the aftermarket?

Rane -- no.

It could be component.

Yes, Rane TRW and Rane TRW, the steering side, definitely, there is some aftermarket potential, but it will not be as large as what we see in Rane Madras or Rane Brake Lining. And of course, on the occupant safety side, the aftermarket is almost nonexistent because we make seat belts and airbags. And even for Rane NSK, there isn't a significant opportunity.

Even the loose components cannot -- they don't have a potential, the...

Correct.

The loose components?

Yes, very little, very little. I mean, as I said, in Rane TRW, on the steering side, there is some, and which -- yes. But it's not significant.

[Operator Instructions] We have next question from the line of Ashwin Agarwal from Akash Ganga Investments.

Sir, last time when we had met in Bombay, Harish had mentioned about INR 80 to INR 90 crore per annum order for General Motors through next year for Rack & Pinion. So has this business commenced or when will it commence?

Yes, it has commenced. That's the good news, Ashwin. It has commenced from last month.

And the size remains the same?

Sorry? Yes, yes.

Value size of INR 80 crores to INR 90 crores per annum remains the same?

Yes. As of now, it is looking to be the same.

You spoke that if this goes well, we can get additional orders of the same product. Is there a possibility?

I mean, definitely, there is a possibility. There's no firm order booking as yet because, obviously, they want to see our performance, but there is a lot of discussions going on, and the pipeline is looking healthy.

Sir, you had also spoken about some ball joints orders from Daimler and few other customers. So have those orders commenced and what is the status?

I'm not clear which one, directly to Daimler? Or...

Sir, I don't know, Daimler, you said some ball joints orders have commenced or you have secured some orders.

No, I'm not aware.

No, Daimler, we have not got any direct export orders. But other ball joint export orders, we have been getting but not as in terms of value, not so high as Rack & Pinion, but we are getting export orders in ball joints.

So what can be the exports of Rane Madras in next 2, 3 years because of the domestic COVID scenario and also our subsidiary, which we already spoke about, how can we scale up our exports? What are the ideas or what are we planning to do so that we can make this big?

Yes, yes. So Ashwin, clearly, export is a major focus area for Rane Madras and I can tell you that the way the order -- current book of orders, firm orders that we have on hand and the pipeline that we have, I think there is visibility that it will grow faster than the domestic market. Of course, now if the next year, the domestic market starts growing at 25% or something like that, then it's a different matter. But let's assume the Indian car market is going to grow at 10% to 12%, and commercial vehicle market is going to grow at 8%. If that happens, the export will be even higher than that.

And this will continue for the next few years.

Including the Casting business also, India Casting. As Mr. Ganesh said, I think as far as the India Casting business, the worst is behind us, and the order books are now good, and production has started, et cetera. So that is also part of Rane Madras.

Yes. And sir, we had a capacity of around INR 170 crores of domestic die casting. So what can be the revenue next year from this? This year, I'm not looking at next year maybe.

INR 170 crores is not domestic. Total value capacity that is there is about close to INR 170 crores. Next year, we should be very close to that number.

Next year?

Yes, next financial year.

And the cost-cutting also a lot of measures we had taken on that front?

Correct.