Rane Holdings Limited (505800) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Rane Holdings Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, sir.

Thank you, Rio. Good afternoon, friends. Welcome to the Q3 FY '21 Earnings Call of the Rane Group. To take you through the results and answer your questions today, we have the management team from the Rane Group, represented by Mr. L. Ganesh, the Chairman and Managing Director; Harish Lakshman, Vice Chairman of Rane Holdings Limited; P.A. Padmanabhan, President, Finance and Group CFO; Siva Chandrasekaran, Executive Vice President and Secretary of Legal Services; and J. Ananth, who is the CFO of Rane Holdings Limited. Please note that we have sent you the press release. And also we have sent you the presentation link of the deck of all the company. In case if any of you have not received the presentation, you could look at it on our website or even the BSE site of Rane, or you could write to us, and we'll be happy to send the detailed earnings presentation over to you. Before I start, I would like to state that anything that we say on this call that reflects any outlook for the future, or which can be construed as a forward-looking statement, must be viewed in conjunction with the risks and uncertainties that we face. These uncertainties and risks are included, but not limited to what we mentioned in the prospectus and subsequently in the annual reports which you can find on our website. With that said, I'll hand over the call to Mr. Ganesh. Over to you, sir.

Thank you, Diwakar. Good afternoon, ladies and gentlemen. Thank you for dialing in. I would like to welcome you all for this conference. Wishing you all at the outset a very Happy New Year in 2021. I hope that the worst of the COVID-19 is over for India and other parts of the world, and we can expect normalcy in our lives in a few months from now. You would have seen the Q3 FY '21 performance highlights of the group companies posted on our website. I would like to just provide a few comments on the industry. Q3 has been a good quarter with favorable demand environment across vehicle segments in India. This was better-than-anticipated recovery in the domestic automotive industry. The Indian economy, except certain sectors like travel and tourism, seem to have recovered well. As you are aware, the GDP estimate for India immediately after the initial lockdown was being talked about at something like minus 11%. Now the estimate is minus 7%, which is heartening. Based on the effect and this recovery, the auto industry achieved pre-COVID levels in Q3 in most of the segments. To compare the group's performance vis-à-vis the market, let me share a few details with you. In the passenger vehicle segment, the group had a slightly less growth than the industry due to the growth in the unserved models, particularly in utility vehicle segment. In the LCV, new business for steering gear from Rane resulted in a higher growth. In the M&HCV segment, better growth than industry was due to increased share of business and higher growth in multi-axle vehicle, where we had a higher PAT value. The growth in farm tractor segment, our growth was better than the industry, due to new business for power steering and cylinders. The lower growth in the two-wheeler segment is because, again, growth in the unserved market. At the market segment level, 69% of our revenue was contributed by Indian OE segment, and the international segment was about 21%. Better-than-expected growth in the Indian OE resulted in a change in the sales mix for this quarter. With these few comments, I will hand it over to Harish for his comments and then review our Q3 performance.

So good afternoon, everyone. I'll just take a few minutes in talking about the performance of the various group companies. But overall, as Mr. Ganesh said, we saw a robust demand environment in the automotive industry, thanks to the opening up of the economy gradually after COVID, and also the support of the festive season across all the vehicle segments. The plant operations across the group effectively handled the production ramp-up despite some challenges in our supply chain and also availability of labor. The group companies continue to prioritize on cost reduction measures pursued to minimize the impact on account of COVID during our first quarter. Overall, at a group level, the total revenue grew by 26% during this quarter, and revenue from the Indian OE customers grew by 28%. The revenue from international customers also had a healthy growth rate of 28%, supported by strong offtake from our Occupant Safety business in Rane TRW and new business for Steering Products in Rane Madras. The revenue from aftermarket segment also increased by 8% during the quarter. The EBITDA margin improved by 275 bps on [Audio Gap] cost and fixed cost reduction vis-à-vis the Q3 of last year. The aggregate PBT was INR 58.9 crores compared to a loss of INR 15.7 crores in Q3 of FY '20. The RML stand-alone revenue increased by 42%. Sales to Indian OE customers grew by 37% and international customers by 82%, supported by increase in schedules for Steering and Light Metal Casting products. Sales to aftermarket also increased by 14%. The cost reduction initiatives and the higher volume helped to mitigate the unfavorable mix and some of the commodity increases that we had to face during the quarter. The Light Metal Casting India business is beginning to see good traction with new orders. In Q3, we won orders worth INR 32 crores per annum from various customers, both international and domestic. The U.S. subsidiary, LMCA, continue to face challenges on volumes, vehicle demand and the continued impact of COVID. Despite operational improvement, the drop in sales resulted [Audio Gap] in the U.S. subsidiary. In Rane Engine Valve, the revenues increased by 11.6%, supported by robust demand from the OE customers. EBITDA margins increased by 383 bps on account of lower employee expenses and reduction in fixed costs and higher volume. We also had an exceptional item of about INR 23.5 crores, which includes an income from profit on sale of land. And we also had some VRS related expenses of about INR 46 lakhs. In Rane Brake Lining, we experienced a 2.3% increase in total revenue. The sales to OE grew by 8% and the aftermarket by 3%. Here also the lower employee costs and fixed cost savings resulted in margin improvement. There was also a provision reversal on account of better collections in this quarter, whereas there was a one-off provision for bad debts during the previous quarter. As a result of this, there is a higher increase that you see in Rane Brake Lining. In Rane TRW, our revenue grew 30%. The growth was supported by strong offtake and higher share of business for Steering products in Indian commercial vehicle segment. The Occupant Safety products also experienced higher offtake from international customers. Again, here also better fixed cost leverage resulted in margin improvement. At Rane NSK, the revenue, again, had a healthy increase of 26%. This was supported by strong offtake in several models from Maruti. Better fixed costs resulted in margin improvement here as well. Based on the current warranty claim trend, we have provided an incremental amount of about INR 49.3 crores for -- towards warranty. Looking forward, the demand environment remains robust, barring some volatility in customer schedules due to the supply chain constraints, including the semiconductor, et cetera. We are definitely experiencing significant inflationary pressure on material costs, and the group companies continue to pursue cost reduction initiatives as well as seeking increases from our customers. With these remarks, we will now open for any questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam Sundar from Sundaram Mutual Fund. Sir, my first question is on NSK. We are seeing elevated levels of provisioning when compared to last quarter per se and then these being actual replacement of steering systems do result in actual cash outflows. Just my question is, sir, how much would have -- does -- has our net worth in Rane NSK as an entity come down from FY '18? Do you think it could be around INR 100-odd crores? And does that impact our ability to grow the Rane NSK business? If you can provide some -- your thoughts and perspective on that? And how do we look at the overall provisioning per se? So that is the first question, sir.

Yes, go ahead with your second question. Just looking at some of the numbers. Please go ahead.

Yes, sir. Yes, sir. And you've also talked about this new NSK order of INR 22 crores per annum. Is this from Maruti or any other new OEM that we have added under the NSK umbrella? That was the second question with respect to NSK, sir. And any commodity inflationary -- how much have you been able to pass-through in terms of the underlying commodity inflation pressures, if you can talk about that?

In terms of RNSK's warranty, the increase in provision -- yes, the claim trends are still kind of at a high level. Both NSK and ourselves have predicted that not much of significant provision will be required sometime 6 months ago. But obviously, it is going. The -- it is still related to periods of '19 -- 17/'18 production. So after the countermeasures, we are not getting too much of warranty claim [Technical Difficulty]. So it is the whole production. But still, the numbers have somewhat surprised us, to be honest. Therefore, we have made this provision. In terms of net worth. The net worth has gone down, obviously, to that extent...

INR 30 crore.

By about INR 30 crores compared to 31st March. So that's not a significant problem for us. The issue is, in the short term, it upsets the working capital cycle, as we kind of clear these claims. So we have the borrowing ability in the balance sheet. So we are arranging working capital funds so that the operations which are also growing is not affected. But hopefully, we should see the end of this sometime in this year, 2021. And thereafter, it should not have any impact on the growth prospects of this business. That's second. The third is commodity increase across the business, not only in RNSS but other companies, as Harish mentioned. So we are kind of back to back trying to pass it on to the customers, and we will, with a time lag. But yes, commodity prices are going up at an extraordinary rate. So this is a matter of concern.

Sir, on the new order win in NSK, the INR 22 crore per annum order win, is this from Maruti, sir, or any other OEM that we have added there? And when does this order begin execution, sir?

Yes, it is from Maruti. Obviously, we can't disclose the model name, et cetera.

Okay. Understood, sir. Sir, in TRW, sir, we have spoken about a new production line being added at Trichy for the seatbelt and airbag. So these are -- we are also exporting to ZF from there. So far, I'm just trying to understand how much have we invested in this Trichy plant, sir, including the first phase and now? And on the steering side, you have mentioned there was a -- we have increased share of business. Is it because of competition, ZF not been able to supply on time? Or any other reasons behind that from a steering perspective?

So the first question -- yes, the investments that are happening in Trichy, the addition of line is for both export as well as for domestic. Did you ask for a specific investment number, how much we have invested?

Yes, sir, so far how much have we invested, including the first phase?

Let me see if we can pull the data out. And -- but in the meantime, I'll answer your question on steering. On the steering side, the growth -- the increase in the share of business is because of partly our competitor not being able to supply and more importantly, because when the vehicle move to BS-VI, there were some engineering work that we have to do on the steering side as well. So we have been ahead of competition in completing all our engineering work prior to April 2020, before the BS-VI launch started. So we were better prepared technically to support all our customers. So that has also helped increase our share. One second.

Sir, and what is the current market share in the M&HCV steering, sir?

You are asking in total commercial vehicle segment, including small, light, medium, et cetera?

No, no. Whatever we supply from the TRW perspective, what is your market share, sir?

Yes, that's what. So I will be answering you by combining SCV, LCV, M&HCV, everything put together will be about 60% of the market.

60% of the market. Understood, sir. Sir, while you are pulling out that investment number, on the compulsory dual airbag measure that has come out, sir, we understand that few customers, M&M, Ford, mostly have all models with 2 airbags, except maybe Bolero may not have. So with respect to this regulation, have you received any new inquiry for the airbag from some other customers, maybe Maruti or other -- some Hyundai or so? I think as a second supplier per se, how are we seeing that? And if you can provide the split between Occupant Safety and the Steering for the quarter?

So the -- as far as the regulation is concerned, Shyam Sundar, we'll be -- see, the regulation we knew it was coming. And as you rightly said, even before the regulation, 70% of the passenger cars in India were already having passenger airbags and driver airbags. So it is only the lower level model in a Brezza or S-Presso or Wagon R where Maruti or other OEMs were offering a model which only driver airbag. Now what will happen is those models will just go away. And now the base model itself will become the next model, which has driver and passenger car airbag. So therefore, there is no direct inquiry as a result of this regulation. But the OEMs were always aware this regulation was coming. So future models anyways is being planned with driver and passenger. That is as far as your first question is concerned. On split between Steering and OSD for the quarter, what was the split? And by the way, unfortunately, the investment number is not readily available, just the Trichy investment. One second, I'll -- we'll tell you the answer for your other question. So the Steering division had a revenue of INR 155 crores for the quarter and the Optical Safety had INR 174 crores.

INR 174 crores. Okay. Okay, sir. Okay. Sir, one question is, when I see, on TRW export, sir, sequentially, there seems to be a drop there. Is this because of some catch up that happened in second quarter, which is now normalizing? Or is it because of some container availability issues that we are not able to...

So it's a combination of 2, 3 things. One is some inventory correction at customers end, that is one reason. Some COVID-related delays as well as some container issues. So everything put together, there was a slowdown in the quarter, but it is temporary. There's nothing else alarming in the underlying business that has changed.

[Operator Instructions] We take the next question from the line of Sunil Kothari from Unique Portfolio Management.

Hearty congratulation for a -- after a very long time, we are able to provide a very, very good set of numbers and profitability. Sir, my question is, this quarter has surprised everybody, OE, auto components supplier like us, exports market, some orders which you were speaking previously and now it is materializing, maybe related to Rack & Pinion, this steering products, joints and die casting also. So my question is, sir, with this challenging time which we faced during last 1 or 2, 3 years, how prepared we are for maybe a positive scenario in terms of exports, international inquiries, domestic demand picking up? Maybe Korean players are very positive about passenger vehicles. BharatBenz is speaking lot positively about having commercial vehicles. So largely, my question is related to Rane Madras. So broadly covering all these things, what possibility of positivity and how prepared we are?

Okay. In terms of preparedness, as you know, in the initial part of this year, we had completely frozen all CapEx, and then gradually started releasing the CapEx in the second and third quarters based on specific programs. So in some products, we are now coming towards that threshold of 85% to 90% capacity utilization. So with the next year plan around the corner, '21/'22, we will plan appropriate CapEx to catch up wherever because of the good orders, as you said, which we've got, and we are on the threshold of capacity, 85% to 90%, we will -- we've started doing the homework. And wherever necessary, we'll build that into the next year plan of CapEx.

Great, sir. And sir, previously or some 2, 3, 4 years back, we were expecting some very big orders from international markets. And slowly, we started receiving in a small basis. So if you can throw some light on this Rack & Pinion and ball joints opportunity globally because we are a very globally competitive player, which is already proven by some consulting agency and you've already spoken about this. So if you can little bit -- maybe a little bit a long-term viewpoint of you in terms of this die casting opportunity from India and these 2 other products?

Yes. So as far as the Steering Rack & Pinion opportunity is concerned, Sunil, the good news is we have started shipment last quarter. So just before last quarter, towards the end of Q2, we started, which is why I think I had also mentioned in Rane Madras, we are seeing almost an 82% increase in exports vis-à-vis last year. So that has been a positive development. That is a large Rack & Pinion order, which has started, and it is increasing month-on-month. So we are in the ramp-up phase right now. On the die casting side also, the order booking as well as revenue -- I mean there has been new order booking for the next 12 to 24 months as well as some orders that we secured last year have gone into production, which is why even the casting business, I think, has almost doubled compared to Q3 of last year. Correct, the LMCI? Has almost -- there's been a...

68%.

68%. There's been a 70% growth in the casting business. So overall, I think we are cautiously, but definitely optimistic about the casting -- India casting business because we were struggling for the last 2, 3 years with order booking, and now we are seeing clear visibility with whatever orders we have in hand as well as what is under pipeline that whatever investments we have made in the assets will be completely utilized in the next 18 months. So we will see that translating into the margins of that business. And on ball joints, we have already secured lot of orders during 2020. And many of those programs will go into production in 2021. So overall, we are optimistic about Rane Madras, both steering and casting, based on the domestic market, if the domestic market continues in this way and some of the new export orders we have secured.

The next question is from the line of Venkat Subramanian from Organic Capital.

A lot of the bad news with respect to our U.S. subsidiary is there in the numbers. What kind of positivity are you seeing? We also know that last quarter numbers were not all that interesting in terms of volume. What are the silver linings that you see there? And how is it unfolding there?

So even as we mentioned in the past calls, we had 2 problems there. One was the operational performance of that business, which, today, I can say, is probably contributing to 20% to 25% of the problem. And the remaining 75% problem is with the order book. The operational problems, I think, we are making steady improvement month-on-month. Compared to 15 months ago, the kind of inefficiency that we had in operations versus now what we see, there is a good improvement. Having sent team of about 5 people from India over the last 18 months is definitely paying dividends. Unfortunately, the order book has been very unsatisfactory. Partly, we couldn't get some orders. And partly, there has been delay due to COVID, and the COVID is right now hurting because we've made investments -- as you know, we invested about $8 million about 15 months ago for a new program -- 2 new programs with 2 different customers, both have gotten delayed because of COVID. So therefore, the situation is bad, and it will continue to be this way for another 5, 6 months, after which we will start to see marginal improvement because these new programs kick in. As far as the silver lining is concerned, as I've said in earlier calls, we are still reviewing the future opportunities for this business, what it entails and what it means for Rane. So later part of this year, we will come back on the future for that business.

On some of the larger vehicle class like trucks, et cetera, there has been a fairly significant uptick. On the addressable market for our operations, how is the market addressable opportunity per se? We heard that 2 customers have had delays, et cetera. What is the status with respect to them and the market opportunity as well?

Almost the entire automotive business of our U.S. subsidiary is in the passenger car segment, but in the utility vehicle, not in the car segment, so -- which is a good thing. So almost all the models that we supply to is going to the utility vehicles in U.S., which is doing reasonably well. Of course, there has been a COVID impact. But the general outlook is that the market is going to pick up again. But we are not in the class -- we don't have any business in the commercial vehicle segment. As far as the delay is concerned, it is just the postponement of program launches by the customer because of COVID. What was supposed to start in November, December, they have pushed it by about 4, 5 months. There's no other threat to the business or anything like that.

The next question is from the line of Manish Goyal from Enam.

Hello, can you hear?

Yes, Manish-bhai.

Yes.

Okay. Sir, on the Rane NSK, on the warranty provisions, maybe if you can just clarify that why the provision levels have increased? Did you refer to some provisions related to 2017/'18 models? It was not clear. So if you can highlight that. And also, we would like to know going forward, what can we expect there?

So now 2 things I wanted to clarify. One is the NSK had used certain models -- statistical models to forecast what could be the claims. And based on that, we had made the earlier provision. And even I had made -- mentioned in one of the conferences about 9 months or 12 months ago that we don't expect any further significant provisions. But unfortunately, that model has not really worked out, and the claims have been more than what even NSK forecasted. That is one. The other point I was making was, the positive thing is that although the numbers have increased, those claims are all referring to a period before the counter measures were put in place, so still relate to the production of the 2017/2018. When they reached a mileage, they give a problem and they are replacing. After the countermeasures date, the -- such a problem is very, very miniscule. So hopefully, that's why I said we should see the end of this sometime this year. I'm not able to exactly tell you because we had forecasted using a model, we are continuously watching this. So hopefully, this year, we should see the end of this sometime in this year.

So sir, like have we -- like in last call, you had mentioned that we have identified the problem and are looking to rectify it. So what is the status on that now?

So all that has been completed. As I said, this -- the countermeasures have been put in place. And all the claims, which are coming even now, are related to a period of production before the countermeasures. By end of '18, we have completed all the countermeasures, 2018.

Okay. So now the dispatches what we are doing right now is with the corrected steering system. And on this, we don't foresee any future liability coming up?

We are not seeing any big numbers. Very, very insignificant, which is a normal warranty, even less than that we are seeing after the countermeasures.

Okay. So ideally, this quarter provision is largely due to some higher-than-expected numbers, which were modeled and also related to before the countermeasures. So going forward, in Q3, Q4, the provision number ideally should not be large provision, maybe small number?

Yes, hoping so. Yes. Yes. That is our expectation. Let's see.

[Operator Instructions] The next question is from Sunil Kothari from Unique Portfolio Management.

Just 1 more question is on -- sir, we being a very cost conservative technically also, so how prepared we are to face, say, this raw material cost escalation or cost price increasing? And what is the scope to improve the margin in Rane Madras, which we achieved at a very -- on a really respectable level? But looking at many other auto ancillaries also, everybody has taken a very good jump in operating profitability. So how sustainable it is? And which other cost measures we have scope to improve this margin?