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

Ladies and gentlemen, good day and welcome to the Q3 FY '21 Earnings Conference Call of Rico Auto Limited. [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.

Thank you. My name is Saurabh Bhave. On behalf of S-Ancial Technologies, I welcome you all to Rico Auto Limited's Q3 FY '21 Earnings Conference Call. From the management, we have Mr. Arvind Kapur, Chairman, CEO and MD; Mr. O. P. Aggarwal. Chief Adviser, Financial Accounts; Mr. Surendra Singh, President and COO; Mr. Rakesh Sharma, CFO; Mr. Sandeep Rajpal, Vice President of 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 up the floor for the Q&A session. Thank you, and over to you, sir.

Good evening. My name is Arvind Kapur, and I'm sitting here with my colleagues in Gurgaon. I also have Mr. Sethi and Mr. Jhamb, who are also here in the room, along with Mr. Rakesh Sharma, Mr. Sandeep Rajpal, Mr. O. P. Aggarwal. This quarter has been good. And by and large, the auto industry has been faring very well. The tractor industry has done exceptionally well. And the 2-wheeler industry is showing ups and down, but the car industry is doing exceptionally well. The commercial vehicles have also picked up. And so by and large, there is a lot of pull in the market. And at Rico Auto also, we -- our consolidated revenues from last year third quarter to this year third quarter, we grew by almost about INR 100 crores. And from the second quarter to the third quarter '21, we grew by about -- almost about INR 47 crores. And -- so we fared better. The premium freights that we have been discussing in every conference call, they have come down drastically. We -- no, sorry, the last quarter, they were -- we had mentioned that we would be touching a figure of about INR 13 crores. And we actually -- there's about -- we spent about INR 13.5 crores. And that INR 0.5 crores of extra mainly because of the availability of containers coming on time, number one. Number two, the ships which are sailing from here, they are not touching the ports on time. They are bypassing ports. And so all these shortage of containers and also the ships bypassing ports is happening. And because of that, we had to spend about INR 50 lakh extra to what we had budgeted for the third quarter. For the fourth quarter, we had estimated that we will not be spending any money at all, but we've done our calculations. There's more pull from the market for the exports. We would be in the region of about INR 4 crores to INR 5 crores. That's what we are estimating would be the expense that we'll be doing on premium freights. And that would probably be the last. And we are hoping that even if there are shortage of containers, we would have shipped enough material to maintain stock so that if at all there's any scheduling change by the shipping companies, that does not impact our shipment from here. So we are -- we have factored INR 5 crores, but we're not -- hopefully, we will not be spending so much. But this is what we have factored for the fourth quarter. The run rate that we have today, we would be crossing -- by March, we should be crossing whatever sales we have done last year. This is despite the first quarter being almost a washout. And we -- the run rate that we have today is close to about -- if you look at the quarter turnover that we have, we would be crossing INR 2,000 crores next year definitely. And the market seems to be very -- there's a lot of pull in the market, and we are hoping that this will continue for a longer period. And with the vaccine coming in, I think there's more confidence that's coming in, but on the other side is that there are also rumors that there could be another wave of COVID that could hit India. We are hoping that we all remain healthy and remain safe and remain away from COVID so that there are no lockdowns which come in again into the country which could be very, very damaging for all of us. So the exports have also been good. We've grown our exports this year to about -- close to about INR 111 crores in this last quarter, and the market is growing even further. And we are shipping more and more. And of course, the challenges of containers is always there, but we are managing to produce more and ship more. We are hoping that with the -- when these premium freights come in, when the air freight start coming in, we had a choice last year. Rather than spend money on the premium freight, we could have actually taken advantage of the COVID situation and told our customers, but the customers had also -- we could have told them that sorry we cannot ship because of the COVID situation. It's a force majeure. And the customers had also written letters to us or force majeure that they may not be buying enough. But looking at our relationship with customers like BMW and Cummins and GKN, we thought it right to ship the goods since the requirement was there and rather than not ship the goods and lose -- we've been in relationship with BMW since 2006. And our shipments have been -- our business has been growing since 2008 with them, and we would have lost this relationship. But because of this extra effort that we have put in, we have been awarded new businesses from both from GKN as well as BMW. And that is the confidence that we should actually build with our customers that we are there for them. We were happy that the requirements were there. But unfortunately, because of various situations which happened there, one is, of course, the migration of labor, that -- where we got stuck a little. And number two, the change of labor, the training of the new people, all this consolidated and this resulted into a lot of air freights that we had to do. And we are by and large also right now, it is only the emergency that actually takes place. And hopefully, from -- this will be the last quarter that we do the -- see this air freights. So next year, the turnover we're expecting is above INR 2,000 crores. The profitability would be better primarily because, a, the air freights will not be there. Then besides the premium air freight, there was a lot of extra manpower and the extra equipment and extra resources that had to be put in because we wanted to get out of the air freight situation as soon as we could. And so as a result of which, our cost of production actually went up. And with now things normalizing, we will see, one is, of course, the premium freights getting out of the system and also the cost of production coming down. Our manufacturing cost has also come down from the previous year. And we will also find the other costs, better utilization of equipment, et cetera, for the coming year. We have been compensated to some extent by the customers, and we are still debating it. We are actually talking to them. And I think in about 2 months' time, the travel will also start from here to Germany and et cetera, and we will be talking face-to-face with our customers and discussing to what extent they can compensate us. We have been compensated to some extent. And in some cases, they have adjusted the peak prices. In some places, they have given us the compensation. But in many cases, we had to bear the cost of the premium freights. The commodity prices are -- have been going up for the last almost 6 to 8 months now. And in fact, there is -- the profitability this month, if I take into consideration the commodity compensation that we would have got, the profitability would have been even higher because there's always a lag of -- in the case of all the customers -- most of the customers it's 3 months. In case of Hero, it is 1 month. And Bajaj, it is 1 month. But in case of Renault, it is 6 months lag that we have. And that's going to have a major impact on the profitability. But it takes almost a 6-month cycle to recover most of the commodity price increases that -- now because it has been exceptional, we are talking to Renault and requesting them to compensate us for the commodity prices in this quarter rather than do it after -- yes, rather than giving us an average of 6 months which they normally do. So commodity is the one thing that is hurting us at the moment. Profitability would have been better by at least about 2% if the commodity prices had been compensated in this quarter. That's what I have to say, and I think I'll open it to questions and answers.

[Operator Instructions]

Before the next question comes in, on the CapEx front, I'd like to say that we had said that our CapEx would be in the region of -- it's normally, the depreciation that we have -- that is what we normally spend. And this year, the spend will be about INR 10 crores more than the depreciation, primarily because Maruti -- the investments we have thought for making Maruti in the next year, that's in the month of May, June and July, they preponed their requirements. And so we were required to make urgent investments for the Maruti line. And the productions have already started. The equipment which came in, they're utilizing, started immediately. So that's the -- on the CapEx front. Next year, we are expecting the growth is primarily from the side of Toyota. And if you look at the total businesses that we have got this year, that is financial year '21, the total business we've received FY year is INR 363 crores. This includes from BMW, from GKN, from Maruti Suzuki and Toyota and Garrett, Knorr-Bremse. And these are some of the customers that we have acquired business from. This is only for financial year '21. I'm talking of these 10 months. And the total business that we acquired from '18 to '21 is about almost INR 8,000 crores. And annualized, this would turn out to be about almost INR 355 crores a year and -- sorry, INR 1,308 crores a year. And out of which about INR 355 crores would be replacement. INR 355 crores is replacement that's all been implemented. So that has already replaced the current businesses. Out of 308 -- many of the businesses have started, but most of them would start from '19, '22 onwards. So like Knorr-Bremse, we will be starting now. BMW, of course, is ongoing. Renault, there's new businesses. Maruti Suzuki -- they have preponed a lot of their businesses that we were supposed to start delivering from next year. And Greaves and Cummins, all these are new businesses which have already started. Toyota will be starting by the end of next year, but the investments would start coming in, somewhere in the month of May for Toyota. Tata is -- we've added both business for Tata as well as including Volkswagen and Daimler. These are some of the new businesses that we acquired this year.

[Operator Instructions] The first question is from the line of Sachin from HDFC Bank.

Sir, congratulations for a good set of numbers. Just a small query on premium freight you're talking about. As we remember from the last call, there was a cost of INR 5 crores in Q1 and then INR 18 crores in Q2. Just want to ask, first thing, what is the cost in Q3? And this premium freight, just because of nonavailability of containers in the shipping? Or is because of the quality of the teething issues that we faced for our new components that were exported?

Like I mentioned, it was a combination of -- one is our manpower which has migrated. These are the people who come in from Bihar and UP and other places. The trained manpower that we had, so new manpower had come in, and so we had the quality issue because of the new manpower that we were required to hire to meet the customer requirement. That's one. The shipments, of course, is a big challenge these days, and it has been a challenge for the last couple of quarters now. And the freights have gone up dramatically. And getting the containers is so difficult, so difficult. And normally, it would take us 5 weeks -- I'm giving you an example. Shipments from here to Europe, it takes us normally 5 weeks to 6 weeks for the containers to reach there. This is from India to the country. And these days, it's taking us almost 8 to 10 weeks. And many times, they skip the ports. And so when just now to give -- last week, what happened, there were 12 containers on 2 vessels and both those vessels bypassed the port. And so to meet the urgent requirement, we had to make an air shipment immediately so that the lines don't stop. We -- since we are single source supplier to our customers in Europe and in America, so we need to have the lines running at any cost. So that's what our obligation is and our -- that's the least that they expect from customers like us. And we -- because if you stop the lines, they don't say that Rico is bad, they say that the Indian suppliers are bad and that is obliged. And so we had to -- that is the main reason for our air freights.

And what is the cost you incurred in the third quarter? Like fourth quarter, you said INR 4 crores to INR 5 crores.

At the start up and the last conference call that we had, we had said that we'll be incurring premium freights for about INR 13 crores. The total we incurred was INR 13.5 crores.

INR 13.5 crores in this quarter.

The next question is from the line of Chandra Govind from Ashmore.

This is Ashwini here. Decent numbers in a very challenging environment, I suppose. So two, three questions. Like you correctly mentioned, the labor costs are a huge challenge because they used to be roughly about 13% of revenues in the past, 12% to 13%, which is now 15% to 16%. So obviously, it's a function of the retraining and the high turnover and absenteeism, et cetera, et cetera. But will it go back to 12%, 13%? Or will it now remain stable at these elevated levels?

No. In most of the plants, like in Gurgaon, the labor cost was touching close to about 14.5%, 15%. In the last quarter, they've actually come down to about, I think it's 10.5%, 11% that they've achieved. And this current quarter, our target is to come down to 9% there. So we are controlling that labor. We put in extra labor everywhere, partly because of the fresh labor, partly because of -- in Bawal plant, where most of the air freights were actually incurred, it was a desperate situation to see that the goods go out. So we did not want to fall shortage on labor. We did not want to produce less. And that extra labor we started removing now. And/or we are producing more than before, with the same level. So all that balancing out is taking place now. You'll see the labor costs coming back to about 13%, 12%. That would be the overall average. In some plants, it will be less than 10% and some plants it will be about 13%, 14%.

And sir, if I just look at the slightly long term, I mean 2, 3 years ago when we used to speak, the whole objective was to get to closer to INR 2,000 crores, to get exports as a percentage of revenue to 30% or higher and therefore move your EBITDA margins, which was stuck in single digits to 12% or maybe even 14%. I mean, do you think that's possible? Or maybe those kind of numbers are difficult and we should stay put with same 9%, 10% even in an optimistic scenario? Because there are things that keep happening. Sometimes material prices go up, sometimes shipping costs go up, labor availability. So how do you feel about -- in the past, you used to be very optimistic about your margin outlook. How do you feel about it now?

The labor portion was an exception this year because of migration that took place. It doesn't happen -- it's not happened -- I've not seen it before, the extent of migration. It was almost about 40% to 50% of the labor that went away. There were times there were only 20% who went. But then when they opened up all the transportation, like all the rail link, et cetera, all of a sudden, there was a drop of another 30%, 40%. And so that actually shook everything. So labor is not a regular piece as this happened as an exception this year. As far as the exports are concerned, most of the export components are in the region of about 18% to 20% to 22%. That's the range that we are normally working on. And this year, because of the air freights, there has been a total chaos. But thank God, we kept up to the commitments that we had given to our customers which was very, very important. It's critical to give them the confidence that we would -- we are there. They knew -- we were very transparent with them as to what all we were going through, including the change of labor, et cetera, and also inefficient running of the plant also because of the new labor that had come in. So we were totally transparent with our customers, and they -- but thank God, we never stopped anybody's lines, be it PSA or be it BMW or be it GKN. We kept all the lines running. And the demand was good, and we kept up pushing the goods. But this was -- we thought long term, and that's the reason we carried on this year. And -- but I think this quarter itself, we'll see the difference in percentages that will come about. And I'm talking of the Jan-March quarter. You'll see a change that will happen. But next day, you'll see a dramatic change that will take place. And the commodity prices are pass through in any case. The only thing it doesn't lag. But this time, what has happened is normally there's a variation of 3%, 2%, 5% in the -- as far as the aluminum prices are concerned. This time, there's a change of almost 30%. And in steel prices, rubber prices, the price has gone up dramatically. So that is having a major impact on the balance sheet itself. Now we're waiting for the time when the prices start coming down and then we get advantage of that 1 quarter or 2 quarters. But that seems to be far away. This quarter, again, the prices of aluminum have gone up. So the lag is actually increasing. That is what is happening at the moment. But this has been exceptional. I think the jump has been -- there's no reason for -- it's not that the demand for aluminum has gone up. I think it's only the investors who are -- who put in a lot of money in aluminum and in iron and in other places where -- why the prices have gone up. Others, there's no reason for commodity price to go up to this extent. And we are -- the other thing that happened was, at the time of COVID, a lot of shipments of aluminum and aluminum alloys had been done from overseas. And a lot of Indian companies here did not honor those contracts. And as a result of which, a lot of material had to be diverted to other countries, et cetera. And because of the divergence, there was a shortfall of this aluminum in India. And then for the shipment to restart again and to bring the confidence back into the shippers who are shipping the aluminum from overseas, the traders here -- like it took them a while before they actually had to pay cash payment, et cetera, to pick up the material. So that also led to the shortages of raw material, which is stabilizing now. Now at least the materials are coming in. Our lines are not stopping because of raw materials. There was a time that we had, for a couple of months, the line was stopped because of shortage of raw materials. So that phase is also -- we have all gone through that phase. The importers, they were abrogation of some contracts, et cetera. So all that has happened. But that's in the past. Now things are seeming more normal than before. And -- but as far as the pricing is concerned, they are pass through, but there's a lag. The lag this time is having more impact on the bottom line than ever before.

And sir, you alluded to this swing in depreciation because of Maruti bringing forward some of their programs, which required you to make some investments on a very urgent basis. So this depreciation number, which used to be quite stable at about INR 20 crores, has now gone to INR 23 crores. Now is this a one-off? Or now it will stabilize at INR 23 crores, INR 24 crores going ahead?

For quarter, you're saying INR 20 crores. Normally, it's around here only. And the -- for Maruti, we made an investment, which we're acquired to be done in the month of May, June. And what they did was they had first announced that the Gujarat plant, the expansion, et cetera, will not take place for a while. Now they've started expanding all of a sudden, and they want materials to be shipped from here. And so are there -- from 1,200 numbers a day, they jumped up to 2,400 numbers a day. Now they want 3,200 numbers a day. We love this business, love Maruti business because the growth takes place -- the investment takes place immediately and then the turnover also starts getting impacted immediately. It is the export business where we invest almost 1 year in advance, and then the turnover comes 1 year or 1.5 years later. In case of Maruti, we were very happy to invest for Maruti in advance. So what I said was that normally we invest up to the depreciation that we have every year, which is between INR 60 crores, plus/minus INR 10 crores that's what the investments we normally make. And this year, we had to prepone the investment that was required in terms of Maruti, so our investment would be about INR 10 crores more than the depreciation that we normally have. So that is what I had said.

Okay. Okay. No, but then why has the depreciation suddenly increased from trend of about INR 20 crores a quarter to...

That is the CapEx that we had -- we are doing for other customers where the turnover actually comes in much later and sampling and this and that, small production start. But the peak of their requirement comes in year later. So you'll see the percentage dropping dramatically next year.

But this INR 23 crores, INR 24 crores will stabilize here?

Yes, yes. Around here only. Yes. Thanks. You'll see the margin changing this quarter also. And also the -- from next quarter onwards, hopefully, everything will be behind us and we should come back to our normal and even better than normal.

Okay. No, I really wish you all the luck because it's been a very tough period for you. So I hope things start to play themselves out.

No, you said the figures are good, but they should be much better. We're expecting much better results than this.

The next question is from the line of Jyotivardhan Jaipuria from Valentis Advisors.

So one of my questions got answered. But if you just look at the last 3 years, I guess due to various factors, our plans have not got achieved. And if you look at ROE, ROCE, they're quite poor. So one way it will go up is, obviously, if margins come back to a higher level. But is there something you think you need to do in terms of the business plan, change it a bit, change your focus on something else or you think you're fine? Because if I look at your competitors, some of them have done much better in the same period.

No, no. There are a lot of changes that have -- we've brought about. And there are -- we've identified many businesses, which are very old businesses, which we have told our customers that either price increases or we're getting out of the businesses. So that actions have started. And we hope that before the end of March, all -- we will have decisions on these. And the newer businesses that we are picking up, we are actually saying no to the old businesses that are with us. And there's a clear case that we have built up and giving to the customers and Maruti as well as Hero and others, we are discussing with them. And either there will be an improvement in the pricing and/or we would like to get out of those businesses. The newer businesses are all -- we are very happy with those businesses. Those are all -- the domestic businesses are at lesser EBITDA. They are at EBITDA of about 12% to 14%. Whereas the export market, those are 20% plus/minus 2%. That's what the range is normally. Our export is going up, and we are hoping that at the moment, we are at about -- direct export is at about 25%, 25% to 30%, that's the range that we are in. But the indirect export -- when I say indirect export, those are the exports which we were doing directly earlier, but now the consolidation is taking place in India and then the companies are shipping out. So if you include that, we are in the region of about 34%, 35% export. So that's what the export trend is. But as more and more companies consolidate in India, then, of course, the -- our export becomes indirect through those companies. The other thing that has impacted the margin is that the MEIS, which the government of India, they put a restriction of INR 2 crores that we could get this quarter. And we should have got INR 3.5 crores, but we got only INR 2 crores. We are fighting with the government to give us those incentives in any case because those are the incentives that the government has committed to us. Actually, it is in the month of March, we should actually get those incentives. And they have not been replaced by the new incentives which we are hoping that they will replace very soon. Till then, we are hoping that the government would actually give us the incentive which are actually due to us. So these are some of the changes that have been taking place. But these are challenges, and that's with the government that we'll keep on fighting and try to get our rights back there. These will be -- a lot of these loss-making items or the old items which are very, very -- their maybe EBITDA is around 3%, 2% or 4%. Because there some items are 15 years old. And that's -- as they come down to -- and today we might not be able to get down to 14%, 15%, but we'll be able to get them to 10% plus/minus 2%. So you see that having a major impact on this.

[Operator Instructions] The next question is from the line of [ Yash Choudary ] from Param Capital.

Sir, just wanted to know like what will be the CapEx for this particular financial year, like FY '21? And what is planned for next year, FY '22?

FY '21, we should be -- we have done INR 55 crores. And I think about INR 65 crores -- INR 60 crores, INR 65 crores, I think that's what we expect for this year.

And for FY '22?

For next year, there could be a major investment for Toyota. And there, we expect around INR 80 crores to INR 90 cores.

Okay. So INR 80 crores to INR 90 crores for next year, that would be the CapEx figure. So what is our long-term and the short-term debt level is?

See, our debt-to-equity ratio today is less than 0.5, 0.47, 0.48. And the total limit we have is about -- about 4.49 is what we are utilizing. That includes long term and short term.

So 4.49 is both long term as well as short term?

Yes, yes, yes.

Sir, you were just mentioning about some figures earlier on this call, like INR 363 crores for BMW and INR 800 crores something replacement related. So can you just repeat that for me again?

Just a minute. Let me pull up paper. Yes. These are the new businesses that we got. See, this year, I'm talking of -- this year from April onwards with the size of COVID time, our people have been -- marketing people have been very aggressive and they're still talking to our customers over Zoom calls, et cetera, et cetera. And we picked up per annual business per year is to the tune of INR 363 crores, we've already picked up till now. These are the business that come and start next year. I think Maruti has guaranteed something. Hero has started to some extent.

Some has started. Some is in development.

And then BMW is next year. Toyota is next year and every year after that. And Maruti...

Some has started, some will start.

In Maruti, some places has already started and some places have already an increase of business of the current components that we are producing, right from 1,100, it went up to 2,200 and now 3,200 they're looking at. So those have already started and where we've started making investments. And the other businesses, they would start from next year onwards and some, of course, the year after that. That is INR 363 crores a year. That's the business that we picked up. They're all new businesses. These are not replacement businesses. And if you look at the program type, this comes to about almost INR 1,700 crores for 5 years term that we normally consider as the life of the business. So this is the business that we picked up this year. And besides that we have picked up almost INR 6,250 crores of business from '18 till last year. And in that case, many have already been implemented. The replacement business has all been implemented which is to the extent of INR 355 crore. So these are basically shifting from BS IV to BS VI. So those business have all been implemented. And that annualized business was in the region of almost about INR 1,000 crores per year. Out of this, INR 355 crores was the replacement business. That has been done already. And on the new businesses, there are many of them which have started getting implemented as we've stated deliveries. And -- but most of it would start by middle or end of next year. So as I -- when I said replacement business, this is replacing the BS IV and/or some other components we were making into either BS VI and/or newer components were made. But it is replacement of a component which we were already manufacturing. When we say new business, it is an absolutely additional business that we're getting in the company.

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

My name is Bhaskarabhatla. I'm retail investor. I've been investing in Rico Auto since 2012, that is when I started actually every year I'm actually investing some amount from aside. Since last -- especially last 3, 4 years, we haven't delivering actually...