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

Ladies and gentlemen, good day, and welcome to the Rane Group Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle. Thank you, and over to you, sir.

Thank you, Jacob. Good afternoon, friends. Welcome to the Q4 FY '22 Earnings Call of Rane Group. To take us through the results and answer your questions today, we have the management team from Rane Group, represented by 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 of Secretarial and Legal Services; and M. A. P. Sridhar Kumar, Senior Vice President, Finance and CFO, Rane Holdings Limited. Please note that we have sent you the press release and also we have sent in the presentation link of the earnings deck. In case and if 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 the Investor Relations team at Rane and we'll be happy to send the detailed earnings presentation over to you. Before we start, I'd like to state that everything that is said in the call that reflects any outlook for the future, all of 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 annual reports you can find on our website. With that said, I will now 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 teleconference. You would have by now seen our quarter 4 FY '22 performance highlights of the group company posted on our website. I would just like to add a few comments on the industry before we look at the company's performance. Despite the third wave of the COVID in India and supply chain constraints, the demand environment remained somewhat mixed in quarter 4 of FY '22. The Passenger Vehicles segment recovered in Q4 after facing a severe semiconductor shortage in Q3. Strong booking pipeline and inventory remained low because of lower supplies by the car companies. Commercial vehicles after 2, 3 years of slowdown saw a strong growth, infrastructure activities continued at a healthy pace and fleet utilization and replacement of some of the old vehicles seemed to be resulting in good demand. We saw some good movement, especially from segments like tippers. Farm tractors, which had a good last year saw continued sluggishness in this quarter and some decline on a high base last year. And higher deal inventory and production cuts by OEM led to a decline in the 2-wheeler segment. In terms of challenges, we saw 3 major issues on the horizon. One is, as you are all aware, the semiconductor shortage. We have been facing this for almost 2 years now and it continues to remain a concern. Though the gap between demand and supply seems to be narrowing, it will probably take another year or so to become normal. Meanwhile, we have to wait and watch the impact, if any, of the Russia-Ukraine crisis and the lockdown in China on this aspect. In terms of inflation, there has been a significant increase in various raw materials due to supply constraints and logistics challenges. We see some softening of prices in some commodities, but generally, the trend still seems to be a little vulnerable. The global economies are showing signs of slowing down. The inflation all over is leading to tighter monitory policies and the war in Ukraine is also causing turbulence in the world economy. The year 2022, therefore, is very critical with a lot of uncertainty. The industry is also going through a transition in focus to EVs, particularly in 2-wheelers and passenger vehicles. Although the Indian economy is showing resilience and our industry has shown some positive signs in April and May, I think we need to watch the developments of this year closely and steer cautiously. We are working towards improving our supply chain, customer suppliers to mitigate the inflationary pressure and we facing the various logistic challenges. I will with these comments, hand over to Harish for his comments and a review of the Q4 performance. Thank you.

Thank you, Mr. Ganesh. Good afternoon, everyone. We all know, I think Q4 was an eventful quarter in terms of growth. We saw strong growth and the revenue increased by 12% at a group aggregate level compared to the previous year's quarter. However, the material cost increases and higher employee costs and some other expenses resulted in a drop in our EBITDA margin. As you may have seen in the presentation that was posted on our website. On a full year basis, the aggregate revenue was for INR 5,440 -- sorry, INR 5,440 crores, which is our highest ever revenue. Basically covers each of our company and significant highlights on each of these companies. One is from Rane Madras, we secured an INR 18 crores per annum order for Rack & Pinion from an Indian passenger vehicle customer. Our Light Metal Casting India business focused on operational improvement and resulted in a reduction in internal rejections, improved machine availability, cycle time reduction, et cetera. Our casting operation in America has been able to sustain the operational performance with the continuation of our TQM practices and some positive results have been achieved in areas of improved customer deliveries, quality and zero expedited freight costs. There have been improvements in our tooling and consumable costs also, which helps sustainment of our various cost metrics. However, the business continues to face challenges due to the global supply chain shortages, largely the semiconductor shortage needing to deferment in the launch of a few new customer business and also some lower offtake from our existing customers. The focus for '22-'23 will be to build on our operational improvements, secure some more new business and hope for our volume enhancement of our current business to ensure the long-term sustainability of the company. In REVL, Rane Engine Vales, we continued improving the operational performance across plants and increase in material cost was mitigated through recovery from customers and cost-saving initiatives. We are working on multiple R&D projects with new customers and new age engines, such as CNG flex fuel and hydrogen fuel, et cetera. In Rane Brake Lining, the revenue growth was positive, supported by the strong OE demand. But however, the margins were impacted significantly during this quarter due to the commodity price increases. Coming to our joint venture with ZF, which, as you may all have seen, now the new company is called ZF Rane Automotive India Pvt Ltd. This is a 35-year relationship with -- we started with TRW and then ZF. And through this relationship, we were able to bring in advanced technology to the end customers. In order to enhance the cooperation for their automotive products in India, we agreed to transfer 1% stake to ZF in order to take the relationship to the next level. The enhanced cooperation is envisaged around 3 broad areas. One is bringing new products. Second is to enhance the localization of certain high technology products. And third is to leverage the relationship with Rane -- with ZF, for Rane when I mean Rane, I mean some of the other Rane Group companies to become a strategic supplier to ZF. As you all know, we already have quite a bit of exports going from Rane Madras to ZF. So [indiscernible] now [ ZFRA ] Originally established in 1987 to bring hydraulic part steering technology to the Indian market. The product portfolio has continued to evolve over a period of time and also enhanced by the introduction of new products such as seatbelts and airbags in the company. The name ZF Rane Automotive India Pvt. Ltd. reflects the transformation of the company has undergone from steering product to include passive safety system. The steering business benefited from the recovery from the commercial vehicle segment and the increased demand from M&HCV customers. The offtake from export customers was lower during the quarter for the Occupant Safety business. I'm also happy to share that we have commenced the construction of an inflator plant within our Trichy campus. I'm also happy to share that the Occupant Safety division of this company has got approval under the PLI scheme so that we can further enhance our domestic and export business. Coming to our joint venture with NSK, RNSS. We enjoyed good growth on served models largely with Maruti. However, the adverse product mix and increase in variable overhead impacted the profitability. As mentioned in the past calls, we are confident that the causes for the warranty issued have been identified and countermeasures have been put in place. We continue to experience warranty returns pertaining to the prior period to the countermeasures. This will start to come down as we go forward. The additional provisions during the quarter is for the returns during the prior period. As far as the financial burden is concerned, we are in continuous discussions with our joint venture partner, NSK and our customer, MSIL to solve this. As and when there is a significant update, we will keep our investors informed. We remain optimistic about the demand environment and the opportunities ahead. Obviously, India remains the fastest-growing major economy and is also expected to be the fastest-growing automotive market in the world. So we remain quite optimistic despite the various challenges that Mr. Ganesh talked about, the indications based on April and May volume also seem to be quite positive for the coming year '22-'23. With these remarks, we'll now open for any questions that you may have. Thank you.

Sir, should we begin the question-and-answer session?

Yes, Please.

[Operator Instructions] The first question is from the line of Abhishek Jain with Arihant Capital Markets.

Sir, if you can throw some light on which are the segments which are doing much better relatively in this quarter as the management has talked about April, May, and which are the clients like you are seeing much more traction on a relative basis?

Yes. I mean obviously, the commercial vehicle market continues to show robust growth in this quarter. Passenger Car is also reasonably strong. So businesses which are highly dependent on commercial vehicle. So for example, the steering division of ZF Rane, even the Rane Madras Steering Division, they are all benefiting from this.

Sir. And sir, how -- like if you can throw some light on how the margins are there right now because have you taken any hike with the clients right now in terms of the input price hike?

Yes. So this definitely is a significant challenge for us because the commodity prices have increased substantially during the previous quarters. And unfortunately, there is also talk of some more steel price increases coming in this quarter. It has not happened as yet, but there is a lot of pressure from the steelmakers. So this obviously impacts the margin. Even though we recovered almost all, if not all, the increases from our customers within a short time lag, it's still -- because of the denominator effect, there is a loss in margin. So therefore, we are looking at additional measures of cost savings, et cetera, to maintain our margins.

Okay. And is this impairment, any more impairments on cards sir? We have done in...Hello?

Yes, the impact for which business?

In Q4, we have done last -- okay, that was last year My questions have been answered.

The next question is from the line of Samarth Singh with TPF Capital.

Could you just give me the I guess volume growth or degrowth between FY '20 and FY '22?

Sorry, can you repeat your question? What difference between FY '20, '22? Sales, is it?

I just want volume growth or degrowth. I don't need the exact, just around...

We didn't hear you clearly.

Yes. Your question is not clear to us.

For Rane Brake Lining, given that FY '21 was an odd year, I just wanted to compare the growth in volumes between FY '22 and FY '20.

Just hold on 1 second. Unfortunately, we don't have the exact data readily available. We're not able to pull it up. Obviously, there has been a growth, except in the aftermarket, the growth has been fairly muted, but we don't have the exact data.

Okay. And could you just please provide some color around margins for this business? I understand that because the denominator is going to grow substantially, the percentage margins are coming down. But even on just on EBITDA -- absolute EBITDA number, we are -- it doesn't seem like we have been able to pass through all the cost increases. So if you could just give some more color just on what is going on in the industry and with Rane Brake Lining in terms of ability to pass through cost increases.

Yes. So I mean, yes definitely it's a concern for us as well that the margins have come down because of the commodity price increase. And we have not been able to pass on all the increases to the customers. Rane Brake Lining, as you also know, is a substantial portion of that comes from the aftermarket almost 45% to 50% of the sales of the company. So that the ability to pass on increases the aftermarket is also a function of what's happening, the competitive space in the aftermarket. So sometimes it tends to have a longer lag effect. However, I must also caution that '19, '20 and '20, '21 was also beneficial for REVL because of some of the past commodity price declines that happened to -- in the company the previous 2 years. So we had some extraordinarily good margins in those years. And now unfortunately, the pendulum has swung the other way. But we are hopeful that the margins should start improving as the commodity prices stabilize.

Okay. And when you say stabilize, you don't you believe that even if they don't come down as long as they maintain, you will be able to pass on these cost increases?

Yes. Yes. gradually, we will be able to pass on. And in terms of -- so we just found the answer to your earlier question, there has been 12% increase in production across all the brake-lining product lines, and including lining [indiscernible], production-wise, we are up about 11%.

Okay. That's very helpful.

The next question is from the line of Pratik Kothari with Unique Asset Management.

Sir, my question on the Rane Madras side, the U.S. subsidiary. I believe there are 2 major challenges that we are facing sir, one was on the operational side and another was getting new orders and expanding our revenue base. Can you just throw some light of what is the status there currently?

Yes. as I said in my opening comments, the operations improvement is definitely going according to plan. And all the inefficiencies that we used to have like expedited freight, over time, and also unexpected machine downtime losses, there has been significant improvement. And as I said expedited freight has been 0 throughout last year. So I think operationally, a lot of improvement has been made. Now the question is about booking new business and launching new business. During the previous 2 years, for '22, '23 also the booking of new business has been reasonably decent. But unfortunately, as I said, one of the businesses that was supposed to launch during early part Q1 of '22, because of chip shortage, the customer is delaying the launch. So that is impacting us. And second is the existing book of business. There has been some up and down some about 5%, 7% loss of sales, again due to chip shortage. So both are external factors. So we are hoping that with the chip shortage situation improving during the later part of this year, the sales will start coming back to as per our plan. In addition, we are also working on some new businesses that we are quoting for the subsequent years, and the pipeline is looking encouraging as of now.

Sir, sir, would you like to share what kind of top line numbers we are expecting to see in FY '23 on the RPDC side?

Yes. Looking at 31 million -- so I think some 33 million.

Okay. So we did 25 million this year, we expect to do 33 in the coming fiscal?

Correct.

Okay. And this is -- I believe this is good enough to breakeven EBITDA?

Well, no, it won't be because we must also remember that while there is volume growth, there is also substantial aluminum commodity increase that has happened. So a lot of the growth is also happening due to the commodity increase. So to that extent, the breakeven point doesn't change, because some of that growth is coming due to the commodity increase, not due to business growth.

So where would that new breakeven number be at?

I don't have that kind of a number readily available.

Okay. Fair enough. And sir, my question at the group level, we have presented on one slide what the India's volume growth is and what our sales growth are. Now if you account for some commodity price increase of price that we would have passed about 10%, 15%, 20% that you have seen across industry, we seem to have undershot the India's volume growth on the auto side. So you have comment on that, sir, across segments.

Sorry, I didn't follow your question properly. Can you just repeat that?

Sure. So as per Slide 8, we have shown that India's production growth in Passenger Vehicle was 2 versus Rane at 17, commercial at 16 versus 20. Now I would assume that there will be at least 10%, 15%, maybe 20% of price increase that would have -- that you would have seen in this year. So subtracting for that, if you only look at volume growth for Rane, it seems to be much slower than what India as a country has done. So just your comments on this.

Yes. You're referring to the slide on the investor presentation we have put where we're seeing our growth -- if you see our growth in most cases, is better than the industry growth.

But that could account a lot of price increases also, right? Because we are comparing volume growth of India to sales growth of Rane, I'm trying to compare volume growth for India and Rane.

Right. No, that's a good point. Yes, obviously, the commodity price increases has -- is included in this whereas the production column doesn't conclude. So -- but even if you remove that effect, there is still growth for us. Obviously, and my understanding is it will be still better than the industry across almost all the segments. For the reasons mentioned in the below -- we mentioned the reasons mentioned below.

The next question is from the line of Ankur Jain, NRI Investor.

I want to ask for Rane NSK, are the provisions related to the old claims or there has been a new claim related to new products?

Yes. As I said, it's all pertaining to the old claim.

Okay. Got it. And my second question will be, as you mentioned, we sold 1% of Rane TRW or Rane ZF to ZF right? So when will this transaction be concluding in which quarter?

It was already concluded on December 31, 2021.

Okay. It's already reflected in Q3?

Yes, yes. That 1% transfer was reflected in the accounts -- Rane Holdings account of Q3, correct?

The next question is from the line of Yogesh Mittal, an individual investor.

My question is regarding the Rane Brake Lining on the research and the development expenses. Can you please help me understand the kind of the nature of expenses we do there? And what we are trying to achieve? And also, if you can give me some indication on the percentage of the absolute terms, just a ballpark number, like what are we looking ahead in the years to come in terms of the expenses? Yes. This is my question.

Which number from where are you -- can you please tell me which number you're referring to? I'm...

No, I'm not referring any number. I'm just generally asking on Rane Brake Lining, as such, the research and development in general, because this seems to be an industry where we are seeing that there are changes happening in terms of the technologies being used. But just wanted to understand basically, in general sense that what are the research and development expenses we do and what are the kind of activities we are doing and basically trying to achieve? And what kind of percentage in terms of the sales or just a ballpark number if you can give me. I don't want the exact color. Yes.

Sure. I thought you were asking for some specific numbers. No. So for sure first of all, the good thing about Rane Brake Lining is we are extremely well positioned in the domestic OE market, whether it is passenger car, SUV, even 2-wheeler slowly with ABS coming, there is friction material [ dispatches ] also coming into 2-wheelers. So across multiple segments, we are already #1 and well positioned. And in the last 3, 4 years, if you go back and look at the annual reports of RBL, significant investments have been made in our R&D. In fact, and I think if I look back at '19, '20, '18, '19, we invested even up close to 7% of our sales towards R&D. A lot of these went towards being in the big investments like dynamometers, which help do very quick testing for our customers and many different types of testings, which we had to earlier depend on other countries. So Rane Brake Lining has been using the profits that the company has been generating to invest in R&D, keeping in mind the next 5, 7 years. And we believe that these investments have further strengthened our position as a market leader for friction material. So therefore, we are quite confident that these investments will help us as we go forward in the future. And of course, just to add, I mean, as you know, we have a good relationship with our partner, Nisshinbo. And a lot of these localization of these R&D investments is happening with their support.

Okay. Great. So if I can just ask that these activities for the R&D are happening basically in-house.

Correct. Yes.

Okay. Okay. Wonderful. Okay. That's it from my side. I wish you all the best.

The next question is from the line of Chetan Phalke with Alpha Invesco.

Sir, I think, just answering to one question prior to this one, that the warranties are being -- NSK warranties are being paid out on old claims. So just wanted to understand what is the cutoff base when we say old claims as in vehicles that are sold prior to 2021, vehicles that are sold prior to 2020, is there any year, any month or something like that?

So I'm not able to give you an exact date, but they're all prior to 2021, 2020, 2019, that period. So they are all the old ones, yes. No new ones.

Okay, okay. And sir, please correct me if I'm wrong. So from what I understand, there is a 3-year OEM warranty whenever I buy a vehicle and then there is an option of having the 2 years extended warranty. So in total, the warranty period is up to, let's say, 5 years. So given the -- I just wanted to understand the way our -- the warranty contracts are structured. Is there a chance that we may have to pay warranties beyond these 5 years as well? As -- are we paying any warranties on vehicles that were sold more than 5 years back. Is there a chance or are we paying?

No. I mean there's very, very little that comes beyond 5 years. There has been some in the past. And even that has stopped, so there is almost 0 now that is beyond 5 years.

Okay, okay. But still there is a slight chance that it might come.

Yes, I would say very, very little chance. I mean critically, yes, but I'm quite hopeful that they will be nothing beyond 5 years as we go forward. There has been some in the past a few years ago.

Okay. Okay. And sir, given the fact that we have provided for almost INR 470 crores over the next -- over the last 3 years, just wanted to understand, in your estimate, what percentage of vehicles sold are covered under these warranty, I mean, under these warranty -- under the provisions that we have done? I just wanted to understand where are we in terms of provision? Are we towards the high end? Are we in the middle of that?

Yes. No, no. I believe that this number, we are hoping that this covers all aspects that we know so far. And so as I think we have mentioned in past calls, the warranty returns from the prior period is anywhere from 4% to 5% of the total vehicle sales of those particular models. So this factors in what is estimated to happen in the future also, like as you rightly asked, there is some vehicles still made in 2019 or 2020 but that could be in the third year or fourth year, when it comes up for warranty claims. So that -- so this takes into account all of that.

Okay. Okay. But can we say we have crossed at least halfway mark when it comes to the provisioning?

Yes, yes. I mean we are hoping that -- I mean, I know that we have changed our own estimates at least 3 times in the last 2 years. It's unfortunate that, that has happened. So we believe that it will not go further. But I think as we go along, we'll see.

Okay, okay. And sir, you're mentioning about some...

I'd like to see that this is -- we are hoping that this is going to be 100%. It's not 80% plus, not [indiscernible] up for sure.

Okay. Okay. That was helpful. Just one last thing. In your opening commentary, you were talking about some negotiations being done with our partner. Can you throw some light on it with respect to volume?

Yes, I'm not able to say anything more other than the fact that we are in discussion with our partners. As I've said in the past calls, this is a very complex issue because there are 4 different legal entities involved, there is NSK in Japan, which is responsible for product and process engineering. There is Rane NSK, the joint venture which makes it, then there is an approval by Suzuki Motor Corporation in Japan, who then licenses their vehicle technology to Maruti Suzuki. So trying to resolve this between 4 entities and not being able to travel to Japan at an engineering level as well as at senior management level, to kind of discuss this issue and reach a conclusion has been challenging. I think but of COVID maybe we would have progressed on these discussions faster. That's the only thing I can tell you right now. What will happen, how would lend we can't comment at this stage.

Okay. Okay. Any chances of something getting announced during this financial year?

As I said during my opening comments, as and when there is an update, you can be rest assured we will immediately inform our investors. Now obviously, this has been abatement for all of us.

The next question is from the line of Jigar Shroff with Financial Research.

In an earlier call, you had mentioned this Rane NSK warranty provision is pertaining to sales made from April 15 to October 18 of approximately INR 1,900 crores, am I right, sir?

Yes. Correct. Yes, correct.

Yes. And -- but how much is the aggregate provision we have made, sir?

Around the INR 470 crores, INR 490 crores actually. 490 is the exact number.

INR 490 crores. And since you mentioned, these all pertaining to vehicles sold back to 2020, realistically, should this warranty claims continue to about '25 because since you said that they can come to 5 years?

Yes, theoretically, yes, but it will completely significantly drop off. You will not see this level continuing as we go forward. Because a lot of countermeasures to solve the quality problem, more than 90% of the issues were sorted out in 2018 itself.

Okay. Okay.

So a lot of quality corrections, whatever is the product and process that happened, they all happened in many years ago 2018. But unfortunately, we are dealing with a lot of vehicles that were produced before that period.

How much have you provided in FY '21 and '22? Sorry, if you could tell me, please?

INR 146 crores -- INR 161 crores.

That's for FY '21?

Correct. '22 -- March '22.

No, no, for the full year, sir?

Yes, yes. From April to March -- April '21 to March '22, we have provided INR 161.6 crores.

And FY '21, sir?

INR 177.1 crores.

Sure. So you expect this to taper off significantly, sir, I mean, going ahead?

Yes, yes.

And sir, second question was in an earlier call, you had alluded, sir, that you may look at merging all the group companies, except the joint venture at some point of time to create shareholder value, which you said it's in the work, so if you could shed some light on that please?