Rane (Madras) Limited (505800) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Rane Group of Company's Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Binay Sarda from Christensen Advisory. Thank you, and over to you, Mr. Sarda.

Thank you, Nirav. Good afternoon, friends. Welcome to the Q1 FY '22 Earnings Call of the Rane Group. To take you through the results and answer your questions today, we have the management team from Rane Group, represented by Mr. L. Ganesh, Chairman and Managing Director, Rane Holdings; Mr. Harish Lakshman, Vice Chairman; Mr. P.A. Padmanabhan, President, Finance and Group CFO; Mr. Siva Sandra Sekaran, Executive Vice President of Secretarial and Legal Services; and Mr. J. Ananth, CFO of Rane Holdings. Please note that we have sent you the press release and also we have sent you the presentation link of the deck. In case any of you have not received the presentation, you could look at in our website or even the BSE or you could also write to us, and we'll be happy to send the detailed earnings presentation over to you. Before we start, I would like to say that everything that is said on this call doesn't 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 report which you can find on our website. With that said, now I hand over the call to Mr. Ganesh. Over to you, sir.

Thank you, Binay. Good afternoon, ladies and gentlemen. Thank you for dialing in. I would like to welcome you all to this teleconference. I hope all of you are staying safe and healthy. You will have seen our quarter 1 FY '22 performance highlights of the group companies, which is posted on the website. I would like to provide a few comments on the industry before handing it over to Harish. Quarter 1 was a rather testing quarter with us weathering the wave 2 in India of the COVID-19. As we started the year on a positive note, our plants are doing nearly 100% plus in terms of capacity utilization and achieving plans. However, suddenly in May, as you know, the COVID problem started in a big wave, the second wave and shutdown, lockdowns, partial restrictions, et cetera, started affecting and the level of activity came down sharply. In June, there was some recovery, although not fully, and in going forward, what we find is from July, things are much better and the recovery seems to be on its way. Some of our plants build stocks during the first quarter because we could not aim, switch or plans in such an uncertain environment and also because commodity prices are going up, we thought may not be a bad idea to build fund inventory. The export demand was good. And this was despite some impact due to semiconductor chip shortage and otherwise, if the exports would have been even slightly better. The wave 2 results in lockdown has slowed down the economic recovery. Various agencies have moderated their growth forecast for India. The wave 2 was different compared to wave 1 on multiple counts. The national lockdown in wave 1 was a state specified lockdown in wave 2. This had its own challenges. Manufacturing continued in wave 2 catering to exports, but with many, many on the ground challenges. The pent up demand and lower level of inventory after wave 1 triggered a strong recovery, whereas recovery post wave 2 seems to be more gradual as we look at it today. In terms of inflation of vehicle prices, the fuel cost increased very sharp in the last couple of months, seems to be having a negative influence on weekly purchase. However, this has to be seen. In addition, the commodity price inflation is also affecting the businesses. We are working on recovering from various customers. But as you know, there is always a time lag. RBI seems to be extending its accommodatorary stand to help to revive and sustain the growth in the economy. We hope there will be no severe third wave, thanks to the vaccination coverage and better preparation by all the state governments. On the export front, the risk is further due to the impact of semiconductor chip shortage, we hope that we do not worsen further from what it is today. Subject to these risks, we hope to see a good recovery in the economy and the auto industry. I now hand it over to Harish for his comments and review of the Q1 performance.

Thank you, Mr. Ganesh. Good afternoon, everyone. As Mr. Ganesh mentioned, Q1 was a challenging quarter for India and for the entire industry due to strong second wave of coronavirus. This coupled with the impact of the semiconductor shortage that was held definitely pulled back the growth momentum of the Automotive segment that too coming from a very strong Q4 of last year. I will now give a quick overview on the quarter 1 performance of each of our businesses, starting with Rane (Madras). The hydraulics business sees continued traction, and we achieved the highest production of cylinders. The light metal casting business in India continues to win new business, and we have recently won a new business worth about INR 43 crores. The U.S. subsidiary has improved the operational performance and they are experiencing a ramp up in the volumes with the overall improved demand environment in the U.S. as well as some of the new business kicking in. With the operational improvements, new orders and the emerging demand for aluminum components in the auto industry, particularly due to the electrification, the Rane (Madras) Board has desired to stay invested in this business for strategic reasons. Coming to RBL. The market declined due to wave 2, impacted some of the operational improvement initiatives. Nevertheless, we continue to prioritize on cost reduction and achieve breakeven at lower volumes. The company continues to focus on enhancing the non-auto customers. And today, the non-auto customers contribute 22% of sales, and we are hopeful of enhancing our order book further in this segment. Rane Brake Lining, due to the lockdown, the proportion of aftermarket segment to the sales dropped significantly. This impacted the product mix and resulted in a drop in profitability. RBL is continuing to enhance its presence in the export market, and we are recently expanded to Saudi Arabia and also introduced some new products in Sri Lanka and Bangladesh. Coming to Rane TRW. We continue to enjoy dominant share with the domestic customer for the steering gear products. However, the company is significantly dependent on the CV segment and the CV segment sales continues to remain muted. On the Occupant Safety side, the exports accounted for almost 67% of the revenue for this quarter. We also won about INR 78 crores of new export business to our partners ZF. Rane NSK, we have secured some new business with Maruti Suzuki for an upcoming UV program. The plant also struggled to meet demand due to some labor availability in the month of April and May. With the relaxation on restrictions post the wave 2, we are seeing favorable recovery in the demand environment in India. The export demand continues to remain robust, as Mr. Ganesh said, except for the semiconductor shortage. And we hope that wave 3 and the resultant lock down doesn't derail the growth momentum. The commodity price increase is another concern and our teams are working for the recovery. We continue to prioritize the safety of our employees and our focus on cost management to navigate these challenging times. With these remarks, we will now open for any questions that you may have.

[Operator Instructions] The first question is from the line of Ashwin Agarwal from Akash and Investments.

Sir, you mentioned in your opening remarks that for strategic reasons, the Board of Rane (Madras)has decided to continue with the investment in the subsidiary in the U.S. Could you highlight by when do you expect because of the new orders, the company to break even at the EBITDA level? And also the $3.8 million, which we received as stimulus, were there any stimulus' expected even for this year? Or there would be no stimulus from the U.S. government?

Yes, Sachin, I'll answer. Yes. The second question, yes, there is some more stimulus that we are likely to receive in the remaining part of this financial year. So we are still hopeful of receiving that from the government. As far as the position of the company, as I explained even in the last call and in this call, I think the operational turnaround has -- there has been significant improvement that's happened in the last 2 years. And the order book position is also improving. So as a result, we are not forecasting any further cash loss in the subsequent years. So there have not been significant cash loss. So therefore, what I'm saying is we are expecting us to be EBITDA positive next year.

Do you also expect to win further orders from the U.S. subsidiary as the outlook is improving there?

Yes. It is improving.

[Operator Instructions] The next question is from the line of Raja Kumar, an individual investor.

Am I audible?

Yes.

Yes, sir, you are.

Sir, just a couple of questions. So the first on the Rane U.S. subsidiary, I just wanted to know what would be the projected cash support we would be required to give for the next 2 years till they become cash breakeven?

So we don't have a clear number. Definitely, there will be some cash support that will be needed from India. But however, all of this cash support will be going towards either CapEx, which will fund the growth of the business or to repay some debt that is there in the books. But the numbers, I don't have a clear number as yet. But if you may be in the region of about $10 million over the next couple of years.

Sir, this is after baking in the projected support that you will be getting from the U.S. government, you mentioned that some more incentive we are going to get?

Yes.

Okay, sir. Sir, the second question is on the warranty provision in the NSK JV. I just want to know what is the unutilized provision as at the end of June? And also, do you expect any further provisioning in the current and subsequent quarters? And also, if you can give more color as to you must have had some more history, are there some more plans that would have come in. It is the last caller now. So if you could give more color on this, sir?

So the unutilized credit available in the books is about INR 75 crores in that region. And as far as future is concerned, as I indicated in the last call, we are continuing to monitor the situation. We believe that we had provided for everything, but we cannot say for certainty for another 6 months. We have to observe how the reduction is taking place in the field, and the decision will be taken based on that.

Okay. So the INR 75 crores is as at the end of June, right?

Yes, as of June 30.

Okay. Okay. Sir, can I ask one more question or should I come back in the queue?

Go ahead. Yes, go ahead.

Okay. Sir, the third question is, I just want to know the -- you mentioned about inventory stocking because of the steel price increases, you have stocked more inventory in the June quarter. So do you also see similar behavior happening at the OEM level also that they also order more from you -- from suppliers like Rane Group? Basically, I want to know if the sales that we are seeing this is going to kind of tone down as the quarters come back?

Well in terms of inventory, what I meant was, there are 2 things. One is the quarter still was so uncertain unlike wave 1, where there was a total lockdown. Here, it was led to the state. So some of our plants worked. Some of our customers are working. Some of our supply chain was working. So the whole environment was slightly more complex than the previous year lockdown. So therefore, we could not respond so much to cut inventory or take decisions. So what we felt was since the commodity prices are anyway going up, it is quite safe to push up the inventory a bit, although it consumes some working capital. We are very confident that starting Q2, it will get consumed. So -- and that is happening. The schedules from customers from July has been very good, and that is happening. In terms of customers, I don't think so because the inventory at the customer end has been -- kind of keep track of that, although we don't have 100% accuracy. And inventory in none of the segments has been very high. So I don't think they have been because they had to make up and try to build up for the festive season. So I think the ordering is only for that. I don't think there's much of inventory buildup at the customer level.

Okay. Sir, just 1 related question. So this current quarter you said you are almost back to -- closer to pre-COVID levels. So if it's fair to expect that the current quarter will be -- that is the September quarter will be closer to your Q4 of last financial year?

No, I don't think if we fully come back to the Q4 level, but definitely, it will be close to it.

Both in terms of sales and the EBIT, right?

Yes. Yes. And I mean, I was only commenting largely from the sales standpoint. But yes, the EBIT is an automatic flow-through as a result of that.

[Operator Instructions] The next question is from the line of Sunil Kothari from Unique Management Service. Sunil, please speak a little louder.

Are you getting my voice now?

Sir, sounding low.

Okay. Let me -- basically, what I'm trying to ask Mr. Ganesh and Harish is sir, as we strategically decided to remain invested in the U.S. subsidiaries, we are planning to invest for further CapEx and expense and maybe around $10 million over long term. So would you like to talk something more about this strategic thinking, what what are the possibilities, what we can achieve from this investment and this season? That will be really helpful. I understand we, in the past, it has taken a little longer. But hopefully, it should turn around positively. So if you can throw some light on your thought process and your strategy towards U.S. subsidiaries?

Sure, sure, Sunil. See, if you recollect the fundamental strategy of why we expanded into North America was because of the growing market requirement there. One -- aluminum content on vehicle and the dye casting aluminum content continues to increase per vehicle. And with more electrification, it gets further accelerated. So that means an EV vehicle has even more aluminum dye cast parts compared to a non-EV vehicle. So Rane's fundamental strategy was to get into -- continue to grow our dye casting business even though it is capital intensive, we see continued growth opportunity there. And therefore the entering the North American market was the strategy. And that strategy by itself, nothing has changed. In fact, if at all, anything the aluminum contains going up further thanks to electrification because 4 years ago, none of us imagined that electrification will happen so fast. The second was we purchased consciously a distressed asset, and we thought that we can turn it around in 3 years. And we will also get a lot of new business by this acquisition. Both those assumptions went wrong. I mean the operational turnaround today in hindsight, if you look at instead of 3 years, it has now taken us 5 years. Just to share, 2 years ago, our premium freight bill alone was almost $1 million. Today, last 9 months, it is 0. So operational improvements, while there has been a delay instead of 3 years, it has taken 5 years. The new order books, unfortunately, also, we thought that we will get new business more quickly. That also didn't happen. And maybe there is also partly to do with the -- with the way the operations in the plant where maybe customers didn't see enough improvement. But now that has also changed. So if you look at -- if you go back to 5 years ago in 2016, when we bought the company, the fundamental strategy, nothing has changed. What changed was there was some delay in our assumptions in terms of operational turnaround and growing the business. And in that, we must recognize over these last 5 years, 2 of those years are -- almost 2 years is because of COVID, which significantly impacted the business last year. And as you can see, last year while the losses were close to $10 million. Today, you can see some of the government initiatives that were there by the government to support that is also slowly coming through. So we must look at the last -- especially last year loss, keeping in mind the COVID situation and the government support that has come for that. But clearly, government support is one-off. That is not going to keep on coming and saving the business. But we believe, as we told a few years ago that with this operational improvement and with the new business coming in, we are seeing EBITDA positive in the next financial year. And there is further opportunity for growth. So that is why the Board after a lot of deliberation, decided that taking any other decision of selling the business, closing down, et cetera, will hurt the company even more. So the best -- it is in the interest of the company to stay invested for the near future.

Great, sir for a detailed explanation. One more thing is looking at our technical capabilities, stand-alone I'm talking now and our size, almost we are doing now INR 300 crores plus revenue but we are not able to reach a respectable double-digit EBITDA margin. So would you like your thought -- I'm not asking for any commitment, but will it be possible with our product range and our capability, cost reduction and opportunity to maintain and sustain double-digit EBITDA margin, maybe over wherever the feasible time frame?

Yes. Your question, again, it's overall RML, correct?

Yes, stand-alone.

Yes, stand-alone. Yes. So the answer is, yes. I mean I think if the market was supporting us and we sought out all our problems, whether it is capacity underutilization in the dye casting business in India, and we manage our operations well, our commodity prices, we're able to change [indiscernible]. Growing our export portfolio, definitely a double-digit EBITDA for Rane Madras will be something that we need to perform. So I think even various circumstances, that has prevented us from achieving that for the last 2 years. But I think the entire team and the company across all the divisions are working towards this.

Sir. And sir, last question on since long, we are proven globally very competitive in some of our product range, like Rack & Pinion, valve joints and all. So are you seeing now really sizable and scalable inquiries, orders and maybe execution over a time. Your thought process on exports opportunity because of this global supply chain realignment, some consolidation, some thoughts on those will be really helpful.

No. Definitely, I think exports continues to grow our new -- our order booking pipeline is looking very good. And I think even this quarter, you will see that the export business has grown substantially compared to last year's same quarter. And it will only -- this kind of growth is something that we see as maintainable.

[Operator Instructions] The next question is from the line of Raja Kumar, an Individual Investor.

Sir, you mentioned that we may have to invest almost $10 million in Rane U.S. subsidiary for the next 2 years. Just want to know how will you fund that, Rane Madras be able to generate so much cash internally and then funded? Or are you planning to sell any of the non core assets of Rane Madras?

No. As I said, again, this $10 million is just a number. I don't have the exact number, but we will spend that kind of amount over the next few years. The -- as far as the funding is required, definitely, we are not planning to sell any noncore assets. So it will be through other means, combination of internal generation as well as debt.

Okay. Great. And as regards to Rane NSK, how is the working capital situation there because last quarter, you mentioned because of warranty claims, there is pressure on the working capital. So are there any funding requirements for that JV?

The working capital is under pressure. You are right. But since the sales has improved this month and collections have improved, we are managing and also partners in NSK kind of helping us out. We've got a recent increase from one of the Japanese banks in terms of working capital limit. So we are able to manage. But yes, we would like to be much more comfortable, but that might take another 6 to 9 months.

Okay, sir. And lastly, sir, last call also, I asked this question. So any thought on consolidating Rane Group entities into 1 single entity?

I've mentioned many times before, this is something that we keep looking at. And I'm sure at the appropriate time, we will -- when we are clear on the way forward, we will definitely share with the shareholders.

[Operator Instructions] The next question is from the line of Manish Goyal from Enam Holdings Private Limited.

Sir, on the margins front, just like we are witnessing commodity inflation and then sort of supply chain issues. So are we able to kind of get price hikes from our OEM customers and meanwhile, are able to pass it in the aftermarket. Do you think that that exercise we have been able to achieve in the quarter 1 and going forward?

Yes. So by and large, yes, Manish, we have been able to get commitments from our customers in terms of absorbing all the commodity price increases. But there will always be that lag effect. Okay, there are many customers, there is already a back-to-back arrangement. They will take in the next quarter, they will adjust the price based on the previous quarter commodity increase. So that is one standard model that exists with many OEMs. With some OEMs where there is no back-to-back contract, we negotiate and even those negotiations, we've been, by and large, successful. But net-net, there will always be a lag. And similarly, that lag will also become favorable as and when if the commodity price stops softening, we will only pass on to the customers the following quarter. So over a long term, it gets kind of evened out. As far as aftermarket is concerned, yes, across all the group companies, we have passed on the price increases to the aftermarket, so which can take place. Of course, many of them happened during Q1 when the sales was poor due to the lockdown that we have done.

Sure, sir. And sir, on margin funds basically what even Sunil was asking on Rane Madras. Now with the domestic dye casting, getting enough business and kind of expected to operate on a full capacity in the current year. So overall then, definitely, and also, we are seeing very good exports pick up in the Rane Madras, even the annual report has been talking about very strong order book and prospects building up. So ideally, it should not be like quite challenging to achieve double-digit margin in near future, right, sir?

I mean, overall, definitely, yes, Manish. But as Mr. Ganesh and I also mentioned, the only headwind we are seeing the problem with the export business is we are -- in the short term, we are getting more impacted because of the semiconductor shortage which was unanticipated. Actually, our performance in Q1 would have been slightly better. And even in Q2, we are losing out on sales because of this chip conductor shortage, which is more noticeable when you are exporting to European market and U.S. market compared to even India.

Okay. Okay. And sir, in Rane Engine Valve, would it be possible to share as to like even last call, you mentioned that we are looking to increase nonautomotive business. So what is the percentage in total revenue, which is nonautomotive and what we aspire in probably next 2 to 3 years?

Yes. So as I mentioned already today, as we speak today, 22% is already nonautomotive which is all non -- off-highway, power generation sector, things like that. So it is already 22%. I think we are aspiring to grow that to about 28%.

Okay. Probably in the next couple of years?

Yes, 3 years.

Right. And sir, would it be possible to share Rane TRW revenue breakup between, say, steering products and Occupant Safety products, sir?

Yes. Steering was -- the steering was INR 105 crores.

As compared to last quarter, how much?

INR 22 crores, INR 22.4 crores. And occupance was INR 159 crores, INR 160 crores. INR 160 crores compared to INR 159 last year.

Okay. And total exports, sir, in Rane TRW?

Total is [ INR 107 crores plus. ]

Sorry?

Yes, one second. About [ INR 114 crores ].

Okay. And you have already shared that exports accounted for 67% of the Occupant Safety. So fine, I'll work out those numbers. Sir, why not is it possible to like share this number? Because now Occupant Safety is a significantly large portion. Maybe if you can share the revenue breakup of sharing and Occupant Safety in the presentation itself, so it becomes a bit easier for us to monitor how things are growing because exports over here is growing very strongly. So that helps us to kind of not always ask the question, sir, in the quarterly call. And also one last question on like annual report also specifically talks a lot about growing exports as a group like we are aiming for roughly almost between 25% to 30%. So which are the companies which will -- no doubt, we are seeing Rane TRW is doing well. So -- and probably Rane Madras. So how do we see exports growing as a group going forward, sir?

Yes. I mean your first point, Manish, we will definitely review about sharing the steering and occupant, this thing and we'll come back on that. This, the export definitely Rane Madras TRW and Rane Madras are the key 2 main companies, which is driving all the international sales, followed by an Rane Engine Valves. And also REVL, obviously, the base is also lower. Rane Brake Lining has just started. We are spending quite a bit of business development as well as some engineering and research, R&D money towards enhancing exports. But that will take another maybe 2, 3 years before we can see the results.

Okay. Okay. And sir, on -- just one more product like on manual steering in Rane NSK, how is the progress on that product? And it was anticipated that we -- likely Indian operation to become a sourcing base for NSK. So any development on manual steering, sir?

Manual column? There is some...

Yes. Manual column. Sorry.

Yes, some work that is going on, and we are in early stages. There is some -- we are seeing some opportunities to supply to Europe. But it will all be in the INR 50 crores range. So gradually, it will build up. Manish, I had one question for you. When you look -- since you're asking for steering and occupant restraint separately as a company, when you compare Rane TRW in the industry, is there any peer that you look at who is comparable to Rane TRW?

Not really, sir, because ideally, the portfolio what Rane TRW has in the seatbelt and airbags, on the listed entity, we are not able to have a comparable because we have both steering and Occupant Safety whereas Rediff which is listed is only the steering gear part and is owned by Bosch. Anyway, sir, I will definitely look into it and get back to you, sir.

Yes. Okay. Thank you.

[Operator Instructions] Next question is from the line of Sunil Kothari from Unique Portfolio Management Service.

Sir, just one of your thoughts on -- we are hearing from many auto companies, auto component companies that there is a very growing and good opportunity happening because of everybody's auto value, automobile manufacturers focus is on now EV. So they don't want to do much development or R&D work or the manufacturing work on IC engine related products. So can it be a possibility and opportunity for us for maybe for the next 3, 5 years? Any of your -- I mean, thought process or anything should we understand from you that this is a possibility for us or not?

Yes. So I'll answer the question in 2 parts, Sunil. One is, as you know, other than Rane Engine Valve in the Rane Group, every other product is there in electric vehicle. And however, there is a lot of focus that the business development teams of all the companies, including Rane Madras, et cetera, is looking at targeting specifically business in electric vehicles. And I can assure you that we have already booked a lot of business -- export business for electric vehicle platforms. So that target and focus is trying to latch ourselves on into more EV vehicles because the growth will be even faster. The second is whether we can do some other products through a portfolio expansion for electric vehicles. That, by and large, will probably only be through an acquisition process. And as you know, given the performance of the group in the last 2 years and the overall financial position, there is nothing in the immediate. But once we achieve [indiscernible] around and improve the underlying profitability. Definitely, we will be looking at more opportunities.

[Operator Instructions] The next question is from the line of Raja Kumar, an Individual Investor.

Sir, my question is on the telematics. So just wanted to know how big is the opportunity because I see a lot of other companies getting into the services space, even if you take Tyco, I heard that they they are almost having 300 software engineers to focus on the EV and the ADAS side. So is Rane looking at those spaces?

Yes. So right now, our -- the company that we have into Rane Holdings, they are focused on telematics solutions for the transportation logistics sector as well as mining sector, et cetera. We are not directly doing solutions being a supplier to OEMs for their vehicle content. Now as far as the telematics in the logistics and transport sector, there is a lot of opportunity. Clearly, we are seeing our opportunity, but the competition is also quite intense because the market -- there are many, many players. And obviously, there are different types of sectors, even in the e-commerce boom, there is a lot of opportunity, but also a lot of players. So we are working on capturing trying to get a few more enterprise customers who can generate revenues for us. But in terms of doing something on ADAS et cetera, for vehicle manufacturers, this company is not equally equipped for that, but that is not something that we rule out in the future.

Yes. Sir, given your experience of -- many decades of experience, so would it not be good if you pay some of the software companies because most of the software companies are into this space of ADAS and all that. So even if we are not able to do it on your own, I think, I'm sure, we know you can be of greater help and that can be also a avenue for generating revenue for the company?

Sure. No, we'll definitely look at it.

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

So thank you very much for your time. And as we said, things are kind of looking up now. We are hoping that there'll not be a big severe third wave, and we'll be able to manage the economy and the industry will, therefore, recover better. Exports subject to this problem of semiconductor chips. we have good order book vision. So we look forward to better quarter in Q2, and we look forward to seeing you later. Thank you.

Thank you very much. On behalf of Rane Group of companies, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.