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

Ladies and gentlemen, good day. And welcome to the Rane Group of Companies Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Diwakar Pingle from Christensen IR. Thank you, and over to you, sir.

Thank you very much, Janice. Good afternoon, friends. Welcome to the Q3 FY '20 Earnings Call of Rane Group. To take you through the results and answer your questions today, as usual, we have the top management of Rane, represented by Mr. L. Ganesh, Chairman and Managing Director, Rane Holdings Limited; Mr. Harish Lakshman, Vice Chairman, Rane Holdings Limited; Mr. P.A. Padmanabhan, President, Finance and Group CFO; Mr. Siva Chandrasekaran, Executive Vice President, Secretarial and Legal Services; and Mr. J. Ananth, CFO of Rane Holdings Limited. Most of you must have received the press release and the presentation link. In case you've not received the presentation, it's there on our website or the BSE site, or if you want, we can mail it to you too. The safe harbor clause. Before we start, I'd like to say that everything that is said 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've mentioned in the prospectus and subsequently annual reports, which you can find on our website. With that said now, I'll hand over the call to Mr. Ganesh. Over to you, sir.

Welcome you all for this teleconference...

Members of the management, you may please go ahead.

Thank you, Diwakar. Good afternoon, ladies and gentlemen. Thank you for dialing in. I would like to welcome you all to this teleconference. You should have seen the Q3 FY '20 performance highlights of the group companies posted on our website. Q3 FY '20 has been another very challenging quarter with significant drop in volumes both in India as well as some drop in schedules by international customers for various specific reasons. Drop in India was broad-based, as you all know, in all the vehicle segments, except utility vehicles, which is a low base, and it showed some growth. All the other segments declined in volume. The group aggregate sales declined by 17%. Revenue from Indian OE customers dropped by nearly 19% for us, and revenue from international customers dropped by 21%. However, in the Indian aftermarket, we could grow by about 8% on a comparable basis. EBITDA margin declined by nearly 170 basis points due to higher employee cost and lower fixed cost absorption. The aggregate PBT, therefore, dropped significantly. Before exceptional items, it declined by 68% to INR 20.5 crores. Just a few brief comments about the various companies. Rane Madras stand-alone experienced a revenue decline of 18%. Sales to Indian OE customers dropped by 25% and sales to international customers dropped by 28%. Lower volume and unfavorable mix resulted in a drop in EBITDA margin. The U.S. subsidiary continues to experience lower offtake across served customers and some of the anticipated volumes on our new program was lower than expected. So this, as we told you, is going to take maybe 1 year, 1.5 years to stabilize. We, of course, continue to invest in repairs and maintenance, preparing for the new programs, which will be launched in '21, and also, focusing a lot on operations, improving machine availability, et cetera. Those efforts are in place. Rane Engine Valve, the revenue declined by 23%, both domestic and international customers. The plants, while they continue to improve operational performance, steep drop in volume increased the losses this quarter also. REVL continues to have a strong traction in terms of new business, getting orders for new businesses. This will help when the turnaround plan once the demand environment improves. Rane Brake Lining experienced a 3% decline in revenue. Sale to OE dropped by 10%. However, the aftermarket, we could manage on almost a flat basis. The margin declined by about 129 basis points, again due to higher employee costs. Rane TRW had a 25% decline in revenue. This is the Steering Gear division mainly which is dependent on the medium and heavy commercial vehicles, where as you know, the industry continues to do very badly. The drop in domestic passenger car volume also affected and international customers, also, there were some inventory correction, so occupancy of the exports during this quarter was not on the same trend as the previous, but that was, we are told, only an inventory correction. The significant drop in volume resulted in EBITDA drop. Rane NSK's revenue declined by about 12% due to, again, the lower performance by the car companies, especially Maruti. The lower fixed cost absorption resulted in an EBITDA drop. There is an increase in the exceptional expenses, which is a incremental provision made towards a warranty claim which we talked about last time. Although for the entire period, based on a calculation on the technical kind of assessment we had done a provision last quarter itself, what we found was there was a recent trend on some increase in warranty numbers. So in discussion with the auditors, we have provided more during this quarter because of the recent trend in increase in warranty returns. NSK engineers, along with our team, are working on this very closely, looking at various aspects, like the design, vehicle dynamics, Indian operating environment, et cetera, because the root cause looks much more than just a process defect. So we are in discussion also with Suzuki Motor Corporation, Japan and MSIL, India to mitigate this. More details, hopefully, we will be able to share when we meet next time. As far as the demand is concerned, the signs are not encouraging still. You would have seen the confusion in the market place now because of the BS-VI transition and also the recent problems of some imports from China, causing lot of uncertainty, not knowing what exactly the last quarter is going to have. And we are just keeping our fingers crossed that it will not go below what it is already, which is also -- already a very bad situation for the industry. So with these opening remarks, I'll hand it over to Harish for his additional comments, and then we'll take your questions. Thank you.

Good afternoon, everyone. Just a few more comments to add from a market standpoint. As Mr. Ganesh said, it was an extremely challenging quarter. I want to give you a quick comparison of the group's performance, vis-à-vis each of the market segments, which is already there in the presentations covered in Slide #3. So in the passenger car segment, the overall group performance was better than the industry performance. This was largely due to our better offtake in the models that Rane serves in and the entry of some new models that we launched some products. However, in the utility vehicle segment, our performance was worse, largely because of higher growth in the unserved models, which resulted in a minus 11% compared to 28% in the industry. In M&HCV segment, the volume with the higher tonnage vehicle, the multi-axles and the heavier side, they declined more than the other categories. And therefore, this resulted in lower PAT value and hence, higher revenue decline for us. And in the LCV segment, share improvement resulted in a slightly better performance than the industry. In the case of 2-wheeler segment, our drop was partially mitigated by the new business for friction materials. I think we had mentioned this in one of the earlier calls, with the increase of ABS in the 2-wheeler segment, Rane Brake Lining's business increases towards the 2-wheeler. So now there are 2 companies, both Rane Engine Valve and Brake Lining, who have sales going into the 2-wheeler segment. And then the drop in the farm tractor segment also was higher than industry, driven by the decline in this again served customer end models. The power steering models registered growth versus a decline in the manual models. And as you know, the power steering is supported by Rane Madras. But, however, our presence in the Power Steering segment is not as dominant as it is in the Manual Steering segment. On the -- unfortunately, on the international customers front also, there was a decline from last year by 21%. Of course, this particular quarter was worse than even some of the earlier quarters. This was largely due to the lower offtake in steering engine valves as well as occupant restraint products, the seatbelts and airbags. The only segment where we had a decent growth was in the aftermarket segment, where there was an 8% growth over last year. So with these few words, I'll now open the floor for any questions. Thank you.

[Operator Instructions] Next question is from the line of Viraj Kacharia from Securities Investment Managers.

Just had a couple of questions.

Sir, this is the operator. I'm sorry to interrupt. Requesting you to please speak a bit louder, sir.

Yes, sure. Am I audible now?

Yes, thank you.

I just have a couple of questions. First is on Rane NSK. Just trying to understand when does the provisions actually stop because I think even last time our own thinking was that we've kind of conservatively provided for the -- warranty for next 2 years. So is this now pertaining to only 1 model? Or does this kind of extended to other models, which we supply to the customer?

Yes. You had 1 more question. Is that it?

I'll just -- I mean if you're okay, we can just take it one by one.

Yes. It is predominantly only 1 model while there are some issues, very, very small numbers on some other models. We are trying to understand whether it is the same cause or sometimes when the customer complains, they are not technically qualified. So when a particular warranty has been announced by Maruti, everybody comes under this heading. So there is some confusion there. But it is still predominantly this problem is only on 1 model, while some small numbers have been reported in other models. So it is predominant. The reason we have increased the warranty provision is, we have made an estimate of the numbers based on past data and the trend that are going and cover the entire warranty period, which is what I mentioned last time. But the trend in the last quarter, November-December was slightly higher than what was happening in the past. This also, we are trying to understand. There seems to be more to it than just -- it's a very complex problem. So seeing those numbers, in discussion with the auditors, we've increased the provision. But we are in active discussion, as I said, both Japan and with MSIL to mitigate this. Hopefully, we'll get some mitigation. But on a conservative basis, seeing the higher trend, we have increased the provision this quarter.

Okay. Sir, what kind of trend are we talking about? And the reason why I'm asking you is just trying to get a sense how much more one can see in terms of provisions. So that is one. And second, how does this -- how should one really understand business continuity from this key customer going forward? Continuous scaling on the warranty.

Okay. Yes. I mean in terms of trend, what we mean is the number we are getting on a monthly basis from Maruti to replace, so that is the trend I mean. So November-December was slightly higher. I mean, January was slightly lower. But seeing November-December number, we provided, based -- we changed the extrapolation for the remaining period of the warranty. That's what we have done. In terms of future business, as I said, hopefully, this will not affect the future business. In fact, we have won 1 or 2 more new platforms, which we -- in Maruti for the future. So this should not affect the future business. And the discussions now are going more than -- it doesn't look just like a process defect on our side. So as I said, that's why in my opening remarks, they are examining. NSK team is here, even as we speak, along with our team there at Maruti. They are examining the design, Indian operating conditions, many factors, vehicle dynamics, et cetera. So it is clearly more than just a process defect, which is what we thought in the beginning.

Yes, because the operating conditions are by and large same for all the competitors and us. Even for other models which we supply, they seem to be...

That's right. That's why the combination of design and operating conditions and the kind of vehicle dynamics is what is being looked at. It's only 1 model and the new gear that's causing a problem, that's why they are looking at the whole thing holistically now. We'll -- hopefully, by next time when we talk, we'll be able to give you more clarity on this.

Sir, we've stopped production of that particular model variant or model, so that the...

No, no. We continue to supply. We continue to...

But then we changed the process with and then hence -- so is that a way one should understand or...

Sorry?

Is there a change in the process or there is a new...

No. The process correction which was done -- that has been done a long time ago. Complaints are coming even after that. That's why we are looking now at the whole design and other vehicle dynamics. So it is not just clearly a -- just a process defect. So we continue to manufacture. We're supplying this even as we speak. We continue to supply.

Second question was on PDC. What you said in the opening remarks and also in the presentation is this, a slight -- I mean, there's low offtake of new volume. So is there any order deferment, I mean, of the INR 35 million, INR 36 million order book which we have? Is there any deferment or any cancellations in that order book?

No, there is no cancellation. Some of the new programs that we had anticipated, the volumes have been lower than what the customer had forecasted. So for multiple reasons, it has not happened. We are still in conversations with the customer and trying to see how we can recover from the situation. But largely, it's because the volumes have not been as forecasted by the customer.

Okay. So in terms of new business and the scale which we were expecting eventually to drive the margin or the profitability improvement somewhere in the second half of FY '21, does that get pushed back even further? I mean, is that the way one should understand?

So it's still too early to comment. Everything -- the businesses are all secured, right? Now the question is the volume that the customer had forecasted and their ability to deliver on those volumes. So that is what is under discussion. There is a drop in one of the nonautomotive customers, but it is not concluded that the volumes will remain like that forever. We had replaced an imported part in the U.S. Basically, one of the customers set up a plant -- nonautomotive customer set up a plant in U.S., and they were trying to localize the parts in the U.S., which is the business that we won. Now for some reason, the volumes have not been as anticipated. And it appears that they continue to import from their origin country. So that matter is still under discussion, and we are hoping that we can reinstate the volumes -- I mean reinstate the volumes to our forecast.

[Operator Instructions] Next question is from the line of [ Ram Krishnan ] from Equity Intelligence.

Sir, this Maruti, are we replacing the whole system or only the parts we are replacing with the Rane NSK? And are we supplying to Kia or MG Motors?

In terms of warranty, we replaced the entire steering column. That is what we are doing now. So the entire steering column is replaced. In terms of Kia, the only part which -- only product which Rane has be supplying as of now is engine valves. We have got the order recently to supply to Hyundai also. Other products, we are not into Kia as of now.

[Operator Instructions] Next question is from the line of Viraj Kacharia from Securities Investment.

Just to follow-up on PDC. So if one were to understand this a bit better. We were looking to invest another $15 million, $20 million over the next 1 to 2 years in this entity. So given the kind of signs we're getting in terms of probably some deferment or lower than expected in terms of volume scale, is the investment in some way kind of linked to it? Or are you kind of at different phases it will be looking at rethinking in terms of further investment?

See, the investments that we are making into RPDC can be broken into three. One is investment into fresh capital equipment for a new program -- for new business, which there is no change. That business is supposed to kick in sometime towards the end of 2020. So a bulk of the capital, almost 65% of the total equity investment that we have done is towards this business. There is absolutely no change in that, and we are expecting the volumes to be as per plan, and that will kick in towards the end of this year. The second is the funding the losses. So that obviously will continue. And if for some reason there's a slight drop in sales, automatically the losses, there will be some higher than anticipated, but we're still managing it within the overall investments that we have taken approval from the Board and the shareholders. And the third is the repayment of the loans, the earlier loan. So that also, there will be no change. So to answer your question, the investment that we have made in the last few months, there is nothing adverse that has happened. Whatever existing capacities that we had, and we had booked a new nonautomotive customer, there has been a setback in terms of realizing the volumes. And that is under discussion with the customer right now.

Okay. Third, on the -- so I had another question on Rane TRW. So you said there's an inventory correction. So is this more of a onetime in nature? And are we now seeing the volumes or the schedules on a monthly basis back to the normal run rate, which was in Q2? Or are we still seeing some pressure in terms of demand?

So honestly, if you'd asked me this question 3 weeks ago, I would have told you that it's a one-off thing in this quarter. There was some inventory-related adjustments that were happening, as a result of which, in December, the export sales were reduced significantly. Now having said that, I think, right now, because of the impact of coronavirus, as you know, most of the seatbelt and airbag export is to Korea for Hyundai, Kia. So what is the impact of the virus and how much that will impact our sales for this coming quarter is still not clear.

Okay. But if we -- okay, understood. But is this -- I mean apart from that, is the weakness largely to do with the end market weakness? Or are we seeing any pressures in those specific models which we were expecting -- we were supplying, and we were expecting to scale up?

No, I don't think it's anything to market-related. One was just a -- it was a one-off inventory adjustment, I think, in some of the previous quarters, the customer took more stock. And even now, I think if at all, there is a shortfall in sales, it will be driven more because Hyundai depends on certain parts coming from China and they're not able to build according to their built plant.

Okay. But we were expecting -- we had done a CapEx for the new plant. And we were expecting a few more orders to commercialize, so there is no deferment or cancellation on those...

No, no, no. Nothing. Everything is going according to plan, except, obviously, this coronavirus can temporarily reduce the volumes.

Okay. And last question was on the tax rate. In a lot of entities, we still have close to 30%, 35% tax rate. So how should one look at that going forward?

See, we are examining the taxation in each legal entity, each company. Some have this R&D benefits, some have MAT, et cetera. So each company has to take a call depending on their situation and in the next 2, 3 years, how we look at our tax incentives, et cetera. So we think by March, we will take a call in each of the companies. Meanwhile, the budget also has added 1 or 2 new clauses, I'm told. So we are examining the whole thing. By March, we'll take a call in each of the companies.