Rico Auto Industries Limited (520008) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saurabh Bhave from S-Ancial Technologies. Thank you, and over to you, sir. Mr. Bhave, please go ahead.

Hello. Good evening. This is Saurabh Bhave on behalf of S-Ancial Technologies. Welcome to you all to Rico Auto Industries Limited Q3 FY '20 Earnings Conference Call. From management, we have Mr. Arvind Kapur, Chairman, M.D. and CEO; Mr. O. P. Aggarwal, Financial Adviser; Mr. Rakesh Sharma, CFO; Mr. Sandeep Rajpal, Vice President Marketing; and Mr. B. M. Jhamb, Company Secretary. Now may I request Mr. Arvind Kapur to take us through his opening remarks, subsequent to which we can open the floor for the Q&A session. Thank you, and over to you sir.

Good evening. My name is Arvind Kapur, and I welcome you to today's conference call. Let me talk about the industry first. I think we are all aware that the industry is going through a tough sale. And these -- for the last 2 quarters, we've been hoping that the next quarter will be better than the previous one, but it's been more and more challenging. Earlier, it was because of various confusions that were created by some [ converter pressures ] regarding the electric vehicles, then came the confusion on BS4 and the BS6 vehicles, whether the BS4 vehicles will be allowed to be sold. And now, of course, the transition will take place from next month onwards. And this month, I think -- or this quarter, there is a lot of pressure on the council and also there's a lot of pressure on this council primarily because the people are waiting for right to the end of the month of March so that they can maximize these accounts that they are able to get from the BS4 vehicles. The feature -- what we feel is the confusion that is created by the electric vehicles, the announcements that are made, that has toned down slightly, and now people are clear in the mind and the government is also clear in the mind that the electric vehicle will take longer than what the government had predicted. They wanted 30% to 40% -- or about 50% of the vehicles to be electric by 2030, which is very, very difficult to achieve. We in Rico feel that the ratio of electric vehicles by 2030 would be about 20% plus/minus 5%, but that's what we feel it would be. But I would not call it electric vehicles; I would call it electrified vehicles. Those -- these will also include the hybrid vehicles. And hybrid will also pick up steam and more and more vehicles -- hybrid will be sold in the market. So this will happen, and then there will be new technologies which will also come in by the end 2030. There's a lot of changes and development that will happen. And it will take a long period for the electric vehicles to come in primarily because of the infrastructure to be placed and also getting the costs down to the level of the vehicles, which are normally bought by the customers in India, where bulk of the vehicles are sold. So this quarter will be tough, and now because of the coronavirus which is happening in China and impacting the globe, what ultimate impact it will have, I think we are all still trying to judge, but we all think that it will have a major impact. A, it could be a lot of logistics that will be impacted, a lot of important components which come in from China. Those would get impacted. And not necessarily the mechanical component, even the electrical and electronic component which come in from China, a lot of raw materials like silicon and other things which come in from China. So all this will have an impact, but we are all still trying to see where all -- it would be impacted. And so it all depends on how long it is going to last. It is estimated that for the next 5 to 6 months, we might not be able to control it, but we are hoping for the best. And we hope that in the next 1 or 2 months, there is some -- something found which can help the corona patients. Now coming back to the company. The turnover of the company, we have been able to sustain it. We've -- our drop has not been too much if we compare it to last year on a consolidated basis. The -- for 9 months, our total revenue has gone up slightly. We are at INR 1,085 crores and our exports have also gone up. This is -- we had a [indiscernible] [ in spots ], like I had said in the last meeting and the meeting before that. And the export orders that we get this year are normally for 2021, end of; 2022, beginning. So that's the circle of -- cycle of the export orders. So what -- if you see our exports going up, it's primarily because of the component orders we had won 2 years back and the investments we have made about 1 year, 1.5 years back. And that's why you see the exports going up also. Our domestic trend -- if you look at the domestic trend as far as our current -- some of our current customers are in the motor cycle industries as well, that our trend went down. That is primarily because our customers -- the motor cycle traders are about 15% lesser in the market than the previous year. And the car industry is also not doing too well, that is also the reason for a drop 15%, 16%. Commercial vehicles are again down 22%. And so whatever our supplies are to the engine vehicles we apply to commercial business, those are impacted. But having said that, we have been making investments in the last 2 years. And so with the new customers like Kia and PSA, et cetera. And so there, we are fortunate that sales are doing well, and we are part of that growth story of these companies. And that has also helped us in the domestic market. So we have been able to maintain our sales. But -- and the exports also -- as we've been to do that. And -- but one promise that we have made that we cross INR 2,000 crore this year, that -- in the last meeting I did say it'll be about around INR 1,700 crores, but it appears that we will not be able to cross more than INR 1,500 crores this year. We are sorry for that. And our teams are putting a lot of effort. The new components are coming in, and those are fortunately doing well, but the current components of the -- our older customers there, of course, the big challenges are there. And sooner the market improves, the better would be -- it would be for us to recover as well. On the -- I did mention that our focus was exports and exporters. Okay. We had mentioned last time that the total orders that we have in hand that we have been able to get for new components as well -- and new vehicles as well as some of the replacement vehicles as well. Replacement -- when I say replacement, I mean from BS4 to BS6. So some of the components has actually gone from one to the other. And the total components that we got was about INR 5,900 crore is total program value of the order. And if I divide it into per year...

Sir, this is the operator. We cannot hear you.

Yes. So I -- no, I am just -- so the new -- the total orders we bought this year are INR 1,300 crores. And in that new vehicles are INR 965 crores, and the replacement is about 335 crores. INR 1,300 crores.

Analyzed peak value.

Analyzed peak value, yes. this is the analyzed peak value. And -- but if I look at the program value, which is INR 5,900 crores, this is the total value that we are in at the moment. With a confirmed order where we see some advances in some cases, we have to see the [indiscernible]. And we only hope that the global markets are not impacted for too long with the coronavirus. So then, of course, this would stand. The -- our profitability was impacted in this quarter and the last quarter and the quarter before that also primarily because of the premium freights we obtained for the new components we have developed. And we were behind schedule as far as our supplies are concerned. So we had to push sales by air, and we continue doing that. However, it has reduced a lot -- it reduced in the last quarter and in the fourth quarter, again, it will reduce further. And we are hoping by March end, April middle, we will get off the air freight, the premium rates that we think which has directly impacted the bottom line. The total -- we are in the region of -- the total air freights alone in the region of about INR 11 crores. I'm talking about the difference between the sea freight and the air freight. So that has impacted our bottom line as well. In the meanwhile, we started up a [ premium ] class. The production has started, and Toyota is our main customer there and the [indiscernible]. We also have Musashi and other customers who -- and Renault -- from where we are supplying. And the other plant which started was the Halol plant, that is primarily for the CBS, the combined braking systems for Hero and to be supplied to their plants in Halol. We are expanding further in Bawal and also in Chennai, these are the 2 large players that where we are expanding. The Board has sanctioned INR 112 crores for this year, which we will be -- the total investment that we will make this year will be in that region only. Our oldest plant is Dharuhera, and we are struggling there and that is pulling us down. In fact, last year, we incurred a loss of about INR 25 crores. And so we have decided to take drastic actions by -- in the next meeting, I think we should disclose what all is happening there. And we should be able to get over this loss that we incurred there in that particular plant. This will again impact our bottom line. The CapEx for the years to come. Now we would be in the region of the depreciation that we have. The last 3 years of our capital expenditure, our -- the investment has been fairly high, primarily because of the new class of components that we're getting and the [indiscernible] the component which are produced on 2,700 very large die casting machines, and they will be very [indiscernible] in India. And so our investment has been in -- mainly on those large machines. We would be getting one more machine in that class. And there are -- so that we are out of the normal competition that we face on a daily basis on smaller die casting machines. On the monetizing front, the Gurgaon [ mach ] that we have spoken about earlier, we have professionals in place. They're getting all the documents and everything perfected. The market -- of course, situation is pretty poor at the moment. So at the moment, we do not have any -- we've not really come into the market. And hopefully, the market should improve in about within a year or so. And then, of course, we will get aggressive on that front as well. That's it for me. And I'll open to questions.

[Operator Instructions] We have the first question from the line of [ Vaibhav Sanghvi ], who's an individual investor.

So the question I have is that the oldest plant which you just mentioned, I just missed the number. That what was the total lost last -- total loss last year as well as the loss number for current year 3 -- I mean current 9 months?

Last year, it was about -- in the region of about INR 35 crores. And last to last year it was 36 -- INR 35 crores and last year was INR 30 crores. And this year, we are estimating a loss of about INR 25 crores. And this year, we will make it INR 0, and hopefully, by April.

Okay. The other question I have that from the electric vehicles...

I think it would be by May end. Sorry.

Okay. Sir, from the electric vehicles point of view, how many components [indiscernible] will supply for electric vehicles?

At the moment, we have 3 customers that we supply electric components. And those are 3 very prominent ones, BMW, PSA and Renault. And they need to buy. Yes, [indiscernible] whatever we make. So there is a -- quite a huge numbers. And numbers are growing faster than whatever they had estimated.

Sure. No. What I -- my question is that how many components we supply for electric vehicles?

Around 12 components as of now.

How many? 12 components?

12 components as of now.

And any plans to sort of increase this...

Yes, yes, yes. Of course, the focus is there. And we are, at the moment, we are supplying components. We are also looking at the possibility of supplying systems, so for their assembly. So we are working on that.

Because these 12 components also have different volume ranges from 150,000 till 350,000. So starting -- which some have started this year and some would be starting in April and some starting next year. So it's a mix. And parallelly we are working on more programs with our customers at the quotation stages. So many programs are under discussion in the pipeline also.

So would you be able to give some kind of a -- sort of idea about the EBITDA margins for EV component versus non-EV components?

We -- not valid individually, but we are better priced primarily because when we see the other components that is [ the vital ] of the IC engine. And the components [indiscernible] Those are large volume 0.5 million, 1 million, that way. And in this case, the one is the less. And with lesser volumes, obviously, the prices are a little higher.

So margins are higher in EV engines?

Yes, yes, yes, definitely.

And by what percentage is that? Some rough idea?

Well, to be honest, it is around 7% to 10% higher than the other components.

And this margins is like just the end of the cap margin?

The margin is already [10% ] provided they pick up the quantities that we are promising. That is the challenge.

So I understand. So I think currently, with the current volumes, you're saying it's about 10% higher. So if we improve the -- if the volumes are increased, right, in future, this margin will increase further?

We have as the volumes go up, then the customers starts demanding more competitive prices. So we have a larger variety of components. And that's what our intention would be. Yes, pricing is always a fight between the customer and us. So I will like -- our attempt is to always be around 20%. And what we land after that is a second story, but our attempt is always to get a better price.

Understood. So last -- one last question is that for Hero, right, the Q1, the Hero had 7% [ industry ] growth, right? In Q2, they had 7% decrease. But our share of Hero, 11% up in Q1 and 7% down in Q2. So what -- how does it -- where does it stand in Q3?

Overall, Hero, if we talk about 9 months basis, they are down by almost 13%, 14%. And considering the kind of components that we are doing, and we are in the process of migration from BS4 to BS6. In BS4, we had some limitations in certain plants where we were supplying. We were only supplying for one model. And now in the BS6, we have been able to capture multiple models. So going forward, I think this year, despite Hero being lesser, our percentage would be not as much [ that we would still ] better off based on whatever we have been able to harness till now.

Okay. Can you give me the number for Q3 that how much down they were and what was the -- our share?

Q2 -- as compared to Q2, they were down by almost 10% or 11%, while we were down by around 10%.

But this year, even if Hero does the same sale as last year, our sale to Hero will go up. That's primarily because we are getting into larger -- a bunch of components and also one additional is the clutch. And there earlier, we had a JV, but now we are independent. And the cooling period -- the cooling off period is also over, and we are working on a much larger share of vehicles now. And that would have a major impact on the sales to Hero. And all this effort is part of the in-house R&D that we've actually spent in the last 3 years on the clutch.

[Operator Instructions] The next question is from the line of [ Mukesh Modi ] from [ Modi's and Gap ].

This is Mukesh Modi. So this -- the revenue of -- you reported. Can you give -- can you please give the bridge between export and domestic this quarter?

This quarter, the exports are INR 88 crores.

Export, how much, sir? INR 88 crores, okay.

This quarter only. And the second quarter it was INR 76 crores.

Second quarter was?

And 9 months consol is INR 253 crores.

INR 253 crores for 9 months?

Yes, yes.

Okay. And so this rate of depreciation, shall we continue for this quarter also?

Yes, yes, yes.

Because what has happened, sir, if you analyze the quarterly performance, the entire benefit of the raw material cost has been eaten away by other employee or other expense and all these things. So ultimately, on EBITDA level, we are quite down as compared to y-o-y basis.

Here's the deal. Price cost primarily is the addition for the -- we are trying to keep the employees about 3 to 6 months before the -- before we are supplying. So basically, training the people and also that the customer comes and audits all that. And this is all for the supplies that are going to start commencing from April onwards. And in some cases, they've already started also. And so that's the reason you'll find in Bawal plant and in the Chennai, there will be combined plants. And Pathredi is a new plant. So that's where the [indiscernible] is also there. And there are reductions in our -- if you look at plant-wise, our high-pressure die-casting plant, there we've reduced about 150, 170 people. And if you look at Dharuhera, we've already reduced about 111 people. And we are -- our next target is 257 people. So that -- this express going on. And [ demand product ], this is primarily wherever the business has grown or is going to grow. So the [ consult ] of Chennai. What is that [indiscernible] around Chennai?

Around INR 150 crores.

And next year?

Next year, INR 300 crores for Chennai.

So if you look at the sales impact that will happen about the [indiscernible] and next year, this year, we'll be INR 180 crores. And that was in Chennai alone. And next year, we will be achieving INR 300 crores. And if you look at our power facilities, these are the 2 plants, which are mainly [ planting ]. There, the sales -- the sale will be INR 265 crores. And next year, it will be over INR 400 crores.

Okay. So the planned benefit of the sale will come in next year or this meant already [indiscernible]?

Yes. Yes. So you see the [ mach part ] at this time, and the other is Pathredi, which is a brand-new plant and where we remove people who have actually come in. So that process started on the 1st of January, and you'll see the impact of this coming this year onwards. And other than you have [indiscernible] our Pathredi plant. And in our Chennai plant, we are fortunate that our customers are doing well. We are doing very well, and so we are [indiscernible] suppliers with them.

But from Pathredi plant, what kind of money we must have invested by this time?

Until now, we've invested about INR 60 crores, INR 65 crores there in Pathredi.

INR 60 crores, INR 65 crores. And what is the revenue from Pathredi plant on this quarter, sir?

[indiscernible] 1st of January.

Okay. So when will you -- during which month will you be able then?

Yes. At the moment, it's around INR 40 crores. And next year, it's INR 40 crores. And the year after that, it's about INR 100 crores. Yes.

INR 40 crores. And sir, next year, that is '21, revenue is INR 100 crores?

Over INR 100 crores, yes.

Okay. Okay. And sir, the -- another one is on the charges which you were telling about the analyst team. I think all the other expenses which have increased only because of that?

Yes, that's really the [indiscernible].

So that is only going to last only for this quarter. Then on, it won't be there, right?

No. No. No. Not at all. We don't like it. It's -- we need to have [indiscernible].

Even we also don't like it, sir. It's from the bottom line.

Sorry for that, but we are getting out of it.