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

Hello, and welcome, ladies and gentlemen. Welcome to Nirmal Bang. I'm Hiral Dadia. We have Chairman, Rico Auto, joining in. A very warm welcome to the show, Arvind.

The first question coming to you over here is with regards to the kind of disruption that COVID-19 has had across economies, across countries. What's the sense that you pick up?

Well initially, I think it caught us all by surprise and shock, and nobody knew what is going to happen. And we started imagining that it's like the businesses will take a very long time to pick up. So that is one of the feelings that we had when initially it happened. And till the lockdown was there, this feeling continued, and we kept on -- in our association, that's the component manufacturers association, auto component manufacturers, we kept on debating as to what would be the demand after the thing opened up. So we -- every day, we were speculating the figures, and we would talk about [Foreign Language], but nobody was clear. So it was basically numbers that were being crunched without any logic and without any reasoning. And once we opened up in the month of May, so the first week, 10 days itself, it gave us some sense of feeling as to what was going to happen in the market. That, I think, was a very good sign. And to our surprise, the market actually started opening up. And the more the dealers opened up, the more the demand went up. And so that was a pleasant surprise. And then, of course, we did not want to believe those figures, primarily because we thought it was pent-up demand, and for 2, 3 months we had a lockdown and so people have not shopped enough and that could be demand. And number two, people are going out to buy vehicles so that they are independent as far as the movement is concerned. So these are some of the feelings that were coming in. Then we said, let's see what happens in the month of June, and to our surprise, the month of June was very good, much beyond our expectations. The budget we had taken -- I think we'll cross the budget by almost about 40% or something like that. And now, of course, we are all waiting for the month of July to be able to forecast for the rest of the year. But as of now, we are talking to FADA, which is the association for the dealers, and also SIAM, which is the society of automotive manufacturers. And so we made some estimates. Things seem to be good, and I think we'll go back to the pre-COVID days sooner than later.

Absolutely, there will be good news. And the sense that we're picking up right now is that the demand with regards to where the entry level and the mix segment is concerned, that's something which has been picking up pace if you have to talk about the 2-wheelers as well as the passenger vehicle category, whereas transportation has been spectacular right now. I mean that's the sense. CV is something which is slightly worrisome, but I think the government intervention probably could be needed. But if you have to look at the lockdown, if you have to look at what's happened and if you have to look at the Q4 earnings that have come in, if you could just help us understand how much of it has been priced in, in the fourth quarter of FY '20. And secondly, on the operational front, the expenses have been slightly higher.

See, if we look at Q4, we did not produce for the last -- we could not dispatch for the last 15 days. In fact, we had fairly large consignments for export as well as the domestic market, which got impacted. We would have crossed the sales of the previous year in any case and -- but unfortunately, the lockdown, and it was required at that time. There was no choice. And I think the government did a wise thing to do it at that time, though it was too sudden. And I wouldn't say they should have waited till the 31st of March and then gone ahead. But nevertheless, I think they had to do it, and it was good. I think it was okay. But our sales could have been better. And thereafter, we had to pay salaries for the month of March as well as the month of April and -- till the lockdown period was there. So these factors, of course, impacted the total -- the cash flows of the company. That has an impact. And we would have done much better. But last year, in any case, the investments we have done were pretty high, and our expectation of sale was also high, which we did not achieve. Even if March had -- we had operated normally in March, we would not have been able to achieve the targets that we had set for ourselves for the year. But this year, I think we are more cautious, and we are almost on a weekly basis looking at the figures for the months to come as to how the company would perform.

Right. And I think across sectors, that's the dilemma as to everyone is just taking it by the neck to understand what the demand is going to look like from here on. But any internal estimation, Arvind, that you have right now with regards to what is the kind of degrowth that could be expected in FY '21? Because now everyone is saying, okay, probably it's going to be a washout year kind of, so let's just directly plan for FY '22 and that's what all sectors are looking at right now. What's your sense?

We are looking at -- initially, let me tell you, that's what the thought was that this is going to be a washout. Now we say the first quarter is a washout. Now the fact still remains that the first quarter, I won't say, is a total washout because it came as a surprise. Month of June was really a surprise for us and -- both by way of 2-wheelers as well as the cars. Commercial vehicles, like you said, is a washout. That would remain like that for some time. But now we are fairly confident that our revenues, what we achieved last year, we should be able to be very close to those revenues. We might even exceed them. That's what we are estimating for this current year. But that is -- again, we are all waiting for July and August. If those months are good, then I'm sure the rest of the year is also going to be very good. So this is purely based on that, and it is based on the pull in the market. That's -- talking to FADA and a couple of dealers, they tell us that there is a pull from the -- there are customers who are coming there, there are customers who are coming to the dealerships, who are inquiring, and those inquiries are turning into actual orders. And fortunately, the rural area and the semi-urban area, those are the areas which have actually come up. Fortunately, our farmers don't read The Economic Times and these papers, and they don't see CNBC, et cetera. So they don't get rattled with, oh, economy is bad and all that. They have the money, they spend it. That's what happens.

Absolutely. In fact, I think that's going to be one of the sectors, which is really going to help us in these difficult times as well, if you have to look at the GDP contribution this year. So that's something which could be positive. But overall...

See, the other thing is that the financing -- the bankers have also come forward now. The government has actually pushed the bankers to come forward. So the funding is also available now for the vehicles. So that's also helping us.

Right. So with this, if you can just help us understand, in the fourth quarter, we have seen an impact with regards to the VRS expense go for the Dharuhera plant. Now what is the additional expense that we will have to accommodate for in the coming quarters with regards to VRS?

VRS, I think, is going to be a very small content in the Dharuhera plant mainly. That's going to be the main plant where the VRS -- there are 119 people we're looking at -- we are questing them to prematurely lay them off. And so that is one plant, which was making huge losses, and we wanted to put an end to that. And -- because we've been trying for the last almost 4, 5 years to revive the plant, but it didn't happen. And so we've got to lock it down once. By September, I think we'll close it and then maybe look at other possibilities for that plant. That's what would happen there. So VRS is mainly the Dharuhera plant. And to some extent, there would be some people from maybe the Gurgaon plant. That's -- we are looking at reducing our costs, et cetera.

Right. And with this, have you already faced any issues with regards to what the labor force goes with the migrant community that has already gone back? Because now that they've gone back and when everyone is looking to restart, do you think to call them back, there would be a requirement of additional wages or there would be a spike on that front?

There is a shortage of labor. The demand is more -- is outstripping whatever we are producing. And so that is giving us -- a lot of thought process is going on as to should we change our style of operation, as to our style of manufacturing, should we actually produce more with less number of people and so go for automation, low-cost automation and also reduce our costs by -- wherever possible, we should be able to manage the labor. That is one. Having said that, a lot of labor did migrate to UP and Bihar and Jharkhand and other areas. And we are in touch with our people there. Even in the time of lockdown, we were in very close touch with our colleagues. And so we had about 75% people with us in town, about 30% or 35% people, depending on plant to plant. In some plants, there were 40% people who left; some plants, there were only 15%, 20% of people who left. So we are trying to get most of them back. In fact, we've arranged transportation also from UP and other places so that we could get the people back. We've had good successes there. And we are also hiring -- we are also looking at new possibilities of manufacturing. So all these things are happening. At least, the mind is in operation now.

Right. I mean that's something which is good. And with this now, now that the plant that's most loss-making will be shut down completely by September, I heard your call as well where you've clearly indicated that around INR 20 crores, INR 25 crores is the kind of loss that was incurred on that plant. Now once that goes out, what's the kind of room for expansion do we have on the margin side there?

See, one is that we'll be saving about almost INR 20 crores, INR 25 crores a year on that -- I would say about INR 22 crores a year, but there will be some other expenses, which would still remain on these plants. And so that would be a net saving. And some of the products that we produce there, we've, obviously, started producing in other plants more efficiently. And so that will also help us to improve some of the margins. And -- but as far as expansion is concerned, over the last couple of years or last 3, 4 years, we've actually expanded in our new plants, which is in -- which are in Bawal. There are 3 plants in Bawal and then in Pathredi, which is in Rajasthan, and also in Chennai plant. These are the 3 focus areas that we are -- where we are focusing on and where the expansion is also taking place.

Right. And with this, if you could just help us understand -- how do you see the breakup of segments happening in terms of the revenue profile? So for example, what I'm trying to ask you is that if you have to look at 2-wheelers, passenger cars and CVs, do we see a shift in the contribution of revenue from these segments for the current year?

2-wheelers -- we are pretty strong in the 2-wheelers, and we continue expanding our capacities for the 2-wheelers. We feel very happy when our customers are doing well, when Hero is doing well, and we supply more to them. So we do keep on expanding our capacities there. And we normally keep enough capacity surplus, so that -- because their demands peak up and we need to meet those demands -- those spike demands that they have. And we are also -- we've invested heavily on -- for the cars and for the new vehicles as well as -- that includes Marutis as well as Kia Motors, which is going to be a major customer. And also PSA, and PSA is mainly for exports. They are assembling the powertrain here in India and exporting it. And so there'll be a lot of expansion there also. So we've done a balancing act as far as the 2-wheelers, cars and commercial vehicles are concerned. In commercial vehicles, our linkage is primarily to the engine side. That is to Cummins -- to Tata Cummins. Tata Cummins supplies engines for the commercial vehicle market. There, of course, we see a slowdown. But there's some composition that's come by way of exports to Cummins. So that's also taking place at the moment. But if you look at the total composition, our commercial vehicle is barely 5% or 7% of our total turnover.

Right. So what does the order book look like with regards to where the exports go, especially with [ BSC ] and BMW?

Exports are pretty good. And surprisingly, after the opening, we were worried that Europe might be very slow, but surprisingly, they've opened up pretty well. And we are supplying to their electric vehicles, where in -- both in Europe, they are required to meet some CAFE norms. And for that, it is important for them to introduce the electric vehicles. And so that's the market that we're expanding at the moment, and that's where we are supplying a lot of components.

Right. So are you seeing the demand picture better in terms of the export markets or the domestic markets?

Both are good at the moment. The -- our focus is on exports primarily because, in India, if you look at the total turnover, we are barely 2% to 3% of the global turnover. And so the opportunity for all the Indian component makers is actually in the export market. It's a little tougher, but definitely the rewards are better. We are focusing very heavily on exports, but our focus on the Indian market is also there. But having said that, the other thing that is happening is that there are global platforms, which are also coming into India now. So if Kia is making a vehicle here, they are also making a similar vehicle in Africa or some other place in the world. So some components are very common -- are common to those vehicles. So they would export the engine or transmission from here to those countries. So that also -- that we don't add into our exports, but that -- those goods are also exported. Similarly, with Renault, there's a common platform here, Turkey, Morocco and other countries. And so the common parts are being supplied. And we've become the focal point for a couple of components.

Right. And with this, if you can look at capacity utilization, where are we in different plants on an -- I mean on a blended basis?

See, like in Chennai, we would be running to almost about 70%, 75% capacity. And we are adding more equipment there, and we would be 70%, 75%, and probably by the end of the year, we would be around 83%, 84% utilization in Chennai. And in Bawal also, we would be in high utilization of capacity primarily because of exports and also higher tonnage die casting machine that we have there. And -- but if you look at our Gurgaon facility, the aluminum die cast facility, that would be running to about 80%, 80% capacity by the end of the year, but the iron capacity would be at about 50%.

Right. And with regards to expansion plans and all, where do we stand right now on the CapEx?

This -- last year, we did about INR 112 crore of expansion, and that's the -- last year it was almost INR 155 crores, INR 160 crores. And this year, the budget is to -- not to cross the depreciation and -- but the Board has also put a restriction that we're going to check it on a month-to-month basis depending on how the market is responding. If the market is responding well, then we'll do the expansion. Otherwise, we'll keep on postponing till the last minute.

Okay. And with this, what's the kind of impact that you've seen, Arvind, on the supply side -- your supply chain side of the business? Because that's something which everyone was struggling with and that's something which actually got in a spot in terms of costings as well. So how have you seen that picture pan out in the last probably 2 to 3 months? And secondly, what are the plans with regards to where rationalizing costs go?

See, this COVID period, I think, gave us enough time to actually sit down and think, where we put all our heads together, all my colleagues, all my senior colleagues. We did a lot of brainstorming in this. So thanks to Zoom calls and the other calls, we could actually interact a lot, and we had a lot of time at hand also. And we have identified a lot of places where we would be doing a lot of cost-cuttings, and the implementation has already started. The first thing was that everybody volunteered to have a cut in their salaries. It's graduated. It starts with 30% and goes down to about 5%, which we promised to return in case the company does well this year. That's a promise that we've given to our colleagues. And so that's one area that -- and then the efficiency level of the workers, et cetera. That's the other area we're working on, automation, the other thing, there we would be making some investments. So all these are happening. Besides that, last year, we incurred very heavily on premium freights. And this year, we hope to minimize it, if not eliminate it this year. And then there were also some quality issues we had last year, which have been fixed up. And this year, I think we should be doing a lot of saving. So net-net, there would be a major saving that will come in this year.

Right. And with this, another concern was -- I mean, another concern all this while that everyone was facing, especially in the auto industry, was with regards to replacement demand that was being fulfilled by a lot of Chinese imports that kept coming in. Now that imports are expected to go down. What's the sense you have? Do you think there is a possibility that we could see a spurt in demand in terms of where the local markets are concerned and on the back of which there probably would be a need to expand capacities across the sector?

See, as far as the aftermarket is concerned, I think, let's be honest there, there would always be a demand for the Chinese product, and there would always be demand for better products and quality products and maybe European products. So there would always be a demand there. And if you think that the Chinese supply side is going to die down, at the moment, the emotion, the sentiments are against China. I don't think it's going to die down. After about 6 to 8 months, I think things will go back to where the imports were earlier. And there would be some changes. There would be some -- like aluminum wheel is one thing that we would be expanding our capacity. And -- because, a, we are competing with the Chinese, we are -- quality-wise, we are as good, if not better. Price-wise, we match them. So there's no reason why somebody should risk supplies from China because there you face the problem of currency fluctuation as well. So in India also, all the suppliers want stability as far as supplies are concerned. So you see these changes coming. There would be some changes that will happen, and there would be a lot of localization that will happen, and a lot of new development of components will take place. But the aftermarket, in any case, is going to be challenging for everybody because aftermarket cheaper goods actually come in. And whether they come directly from China or they come via Thailand or Taiwan or some other country, we don't know. And there would be -- that would continue. We will continue -- we will be supplying to the upper quality and the guaranteed quality level.

Right. And if you have to look at the breakup between exports and domestic sales, in the next 3 years, Arvind, where do you see it moving to? Because, as you mentioned, I mean, we're still 2% of the total global market. But as a percentage of revenues, from here on, to what extent are we equipped to increase it to? And secondly, how is that going to aid our margin profile as well?

If you look at the exports, today, if I look at the total exports, including the indirect exports, when I say indirect exports, I don't take into consideration the cars which are exported, I only take into consideration the components, which are exported. Like, for example, we sell to Kia, and Kia exports those components as such to their overseas market and/or even maybe assembling into an engine and export. Renault, they pick up the components, and they ship them all over the world. And those components, if I include as part of our exports, not the components which go into vehicles, but components which are exported as components. We are already at about 35% and -- but direct exports is much lesser. It would be around 28%, 30%. And our target is to be 50%. That's very clear. And export is going to be a very -- a major market for us. The returns are definitely better.

Right. And very lastly, my last question coming to you is with regards to where fundraising plans and the debt picture goes? If I'm not mistaken, INR 400 crores, INR 450-odd crores is the kind of debt that we are sitting on. Any reduction plans? Or is this a comfortable level?

This is the total debt, including the working capital.

Correct. Correct.

Yes. If you look at our debt/equity ratios, we are very comfortable in those ratios because there you're taking the long-term debt into consideration. At the moment, we are looking at this possibility, but we've not finalized anything at all.

Okay. And -- but are we -- I mean, you're saying on the -- and anything on the fundraising plans?

At the moment, we are discussing it. We are looking at various possibilities, but we've not decided on anything. Nothing concrete has come out so far.

Right. And very lastly, if you have to look at FY '22 and '23, what's the kind of CAGR growth that you -- I mean, Rico Auto is looking at?

Well, the -- if you look at the order book and what we -- the investments that we do are almost 1.5 to 2 years ahead. What we invested last year, we would have -- the turnover would start happening by the end of this year. So last year we invested. By end of this year, the last quarter of this year, we'll probably start supplying components to our customers. So the investment is actually almost 12 to 18 months before the turnover actually takes place on those equipment. So whatever we invested the year before that, that has come into production. And whatever we invested last year, in some cases, that has come into production; in some cases, it will come into production by the end of the year. And whatever we invested last year, that will come into production next year. And so if you look at the order book that we had for the program life, till March, we had almost about INR 5,000 crores -- above INR 5,000 crores of order book in hand. Program life is about 5 to 7 years of the life of the component. And even last year, we picked up about almost INR 1,200 crores worth of components. And out of INR 1,200 crores, INR 500 crores would be replacement components like BS4 to BS6 change and all that, but INR 700 crores were new components. But both of them to be supplied in 2021 and 2022. This year, we received an order after the COVID from Germany, and those supplies would take place in 2022. So that's the -- and the investment would start by probably the last quarter of this year. So we look at -- so the -- next year, in any case, we'll be crossing INR 2,000 crores. But -- and -- but the growth would be -- we are expecting about 20% to 25% increase next year.

Right. And very lastly, any guidance that you're getting with regards to the production schedule given by customers? At what level are 2-wheeler players operating in June?

We get a surprise almost every second day. We get a new mail, and in that mail, it's always that we further jacked up our production requirements. So I think the pre-COVID production of the 2-wheeler guys would probably be there in the month of July. So -- if not July, August definitely. So they are increasing their capacities, their productions very rapidly. Of course, there are some constraints as far as supplies are concerned because the supply chain has been impacted because of labor, et cetera. But it's a good problem to have that we are struggling to meet the customer requirement. And -- but I'm sure we'll all get over it. We'll soon be over with it.

Absolutely. I mean everyone is hoping to get over it. And when you hear positive news of businesses picking up, I think there is nothing better to hear anything like that because the last 60 days, we've just been hearing of what the impact -- what the negative impact of COVID has been. But now it's good to hear even everyone come out and say that, yes, things are improving, demand has been picking up, and that's something which will -- probably will be supporting all of us as well. Thank you, Arvind. Thank you so much for joining us. It was a pleasure having you. Great insights that we've picked up. I hope you enjoyed the conversation as well.

Thank you so much. Thank you.