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

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q2 FY '22 Earnings Conference Call hosted by S-Ancial Technologies Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Gyanchandani from S-Ancial Technologies. Thank you, and over to you, sir.

Thank you, operator. Welcome all to the Rico Auto Industries Q2 FY '22 Earnings Conference Call. From the management, we have today Mr. Arvind Kapur, Chairman, CEO and MD; and Mr. O.P. Aggarwal, Chief Adviser, Financial Accounts; Mr. Surendra Singh, President and CEO; Mr. Rakesh Sharma, CFO; Mr. Sandeep Rajpal, Vice President, Marketing; and Mr. B.M. Jhamb, Company Secretary. Now I request Mr. Arvind Kapur to take us through the key remarks. After that, we can open up the floor for the Q&A session. Thank you, and over to you, sir.

Good evening. This is Arvind Kapur. Thank you for joining us on today's call. And the last quarter has been a little tough, though, and -- primarily because of the popular word now is the 3Cs, that is COVID, the container problems and the chips problem, primarily the chips problem. And -- but some of our customers are done still well and we are very happy about that. And to -- just to give you a snapshot of what has been happening. In the 2-wheeler industry, we see a downturn, and we don't see much improvement actually taking place. And it's primarily because of the rural area income being low. And that is one area which is not impacted because of chips, but primarily because of the demand requirements. And -- but coming to the passenger vehicles, fortunately the demand is there. And here, the delivery was an issue and companies like Maruti and Mahindra and others, there's a waiting of almost 7 to 8 months to 10 months, depending on the type of vehicles that are there. Commercial vehicles fortunately are picking up, and we are very happy about that. And to -- just to give you a gist as to how we -- how Rico did compared to how the industry fared, if we look at the total industry, in the 2-wheelers, there was a de-growth from last year. And despite that, your company grew by 20% in the 2-wheeler industry. And if we look at the -- sorry, sorry -- there was a flat growth in the 2-wheeler. And if you look at the 4-wheelers, there was a growth of only 0.74% from the previous year. But your company grew by almost 49% in the 4-wheelers -- in the car industry. And this is primarily because of the Kia Motors, and Maruti also picked up a little, but they are lower than the previous quarters in any case. And if you look at the commercial vehicles, the industry grew by 25%, but your company, Rico, grew by 126% in the commercial vehicle. We see, it appears that this quarter also, we will see some growth taking place in the -- further growth taking place in the car industry. Maruti is picking up. They are managing to get more chips into the system. And we are hoping that this quarter should be better than the previous. The next 3 months should be better than the previous 2 months, definitely. But as a quarter also, it should be a little better. And -- but fortunately for us, our customer, Renault in Chennai, they have also picked up. And this quarter, I think they are doing pretty well. Hero, at the moment, the 2-wheelers are still down, and it is almost flat, but we are able to maintain -- we are very close to the budget that we have prepared for the surprise of the 2-wheel industry. We are around those figures only. And Toyota, the demand has gone up. And they are actually picking up more than what we had budgeted. And whatever demand that Toyota indicated, their schedules are much higher than before. So we're very happy about what is happening in the -- in some of the makers. And Maruti is also -- their demand is going up gradually as more and more chips are being arranged. Commercial vehicles is showing a very good sign, and we are shipping much more. And we are enhancing the -- diverting resources to meet the demand of the commercial vehicle requirements. In the electric vehicles, the demand is going up, and we are -- our sales has also gone up. And we are very happy that we are engaging electric vehicles in a big way. And we are engaging ourselves with all the manufacturers for further expansion to take place in the electric vehicles.

Sir, shall we open the floor for questions?

So what -- finally, what I would like to say is that as the chips requirement eases, the commercial mix -- the car industry is improving, the electric vehicles are improving further because even in the electric vehicles, what we've supplied to France, they had shut down the plant for a couple of weeks in the last quarter because of shortage of chips, but they've managed to arrange chips. Now the -- the PSA plant in France is running pretty well. So we are happy about that also. And -- but we are only hoping that the 2-wheeler industry sees a turnaround, and that is the only disturbing factor. So our 2-wheeler sale, like last year, quarter 2 last year, we were 41%. That was the share of our business -- share of the turnover. And this year, it was 34% only. The 4-wheelers last year was 39 -- last quarter was 39%. And this quarter, we are at 49% now. And in the commercial vehicles from 3%, we've gone to 6% of our turnover. And the other, we are about the same. So that's where the total mix is at the moment. And the expansion is taking place in the electric vehicles and electrification. The project for Toyota that we had announced in the last quarter, the investment that -- the investments are taking place. The building is almost ready. Some of the machines have already been placed. And the initial trials have also been conducted by Toyota and the components have been approved. And we are hoping that the project goes on time and we are hoping there is no shortage of chips as far as this particular vehicle is concerned, and the launch also takes this in time next year. So investments are taking place there and the machines and equipment are in place there despite the rains and the adverse climatic conditions that were there in Chennai. We are as per the commitment that have given to Toyota. That's from our side, and we are open to questions.

[Operator Instructions] The first question is from the line of Vibha Batra from FairConnect.

Question is on outlook for your top line and also on operating margins. Obviously, there have been some setbacks in 2-wheelers. But how do you view the demand? And also, you seem quite flexible in switching from supplying to 2-wheelers versus 4-wheelers. So in light of that, what would be the outlook? And also your EBITDA margins are in single digits versus a lot of auto components suppliers, which are in double digit. Do you think you can move higher on value chain going forward?

Yes. As far as the EBITDA margins are concerned, you're seeing a change here, but this was not enough this quarter. We actually lost about INR 100 crores the same in console. And that sale was there, our EBITDA margin would have been much, much, much better than whatever we have indicated here. And the next quarter, we are seeing the market actually improving. And you'll see the change as far as EBITDA margins are concerned. And if you also notice, the other one reason why our margins are coming down was primarily because of the air freight that we were incurring. And those have also come down drastically. And hopefully, by end of November, they should end. And the shipment, the shipments that were taking place by sea, those have increased. But the only problem is that the timing of 5 weeks from here to Europe, or 6 weeks from here to Europe, went up to almost 9 to 10 weeks. Now we see some improvement taking place there. And hopefully, our air shipments will also get eliminated, primarily because of the sea shipments also reaching in time. And the same thing applies for shipments to U.S.A. From 9 weeks to U.S.A., it went up to almost 13, 14 weeks. And now we see some improvement there. And the congestion at the ports there in the U.S. is there, and we are hoping that soon, that would also get cleared because there was a 7-day around-the-clock working that has started in most of the ports in the U.S. So we are hoping that also improves. But having said that, there is a shortage of truckers in the U.S., and that is also transporting the goods from the ports to the customer -- to our warehouses has also become a challenge. But anyway, we are facing that with aggression. You'll see a change coming into the -- into our margins. And this quarter is better and next quarter should be even much better. And the double digits, you will see it coming in the next quarter.

Okay. And what would be your outlook for FY '23, both on sales and EBITDA margins?

We can -- we'll share with you in the next quarter when we discuss about it. But we are hoping to get almost about 22% to 25% growth next year. That's as per -- that is if the market is normal. And if the 2-wheelers pick up, then, of course, the growth will be much higher, then we should be in the region of about 30%, 35%.

Okay. And what is your capacity utilization? Would that be a constraint, say, over the next 2 years?

The capacity, we keep on adding capacity as per requirement. But whatever capacity we add, we keep a lot of flexibility. To your previous question, if the 2-wheelers are down, what do we do with the capacity that gets vacated? We have a lot of flexibility in converting -- on changing those equipment for utilization into wherever the demand is more. Now to give an example, for Maruti Suzuki, one particular engine they kept on producing higher than whatever was we demand. So we did divert some of the machines from 2-wheelers into that capacity. So we keep on doing this. And like the commercial vehicles, all of a sudden that the demand started going up. So we did utilize the capacity that -- the surplus capacity we had in the 2-wheelers. So it starts right from the dye casting to the machining. So dye casting, in any case, is totally fungible with where they produce the commercial vehicles or where they produce the passenger vehicles and/or 2-wheeler components and also the electric vehicle components. So we -- that is a flexible capacity that we have. There are very few equipments, which are totally committed, mainly the construction equipment and the final assembly coupled with -- and test equipment, which gets committed only to -- for a particular vehicle. Others, by and large, we can maintain flexibility in our system.

Okay. And there is one more request. There are a lot of results over the weekend. And there are three con calls happening at 4:00 today. So -- unless -- it's very difficult to run over another and a lot of mid-caps also having a concall. If it would be possible to shift the call timing to maybe 10:00 in the morning when there are least number of calls, so that there are no conflicts, if it's possible?

We have no issues in shifting call, but we leave to our advisers who tell us that 4:00 is not the best time because the market will close, and the market is open, of course. And we are open at 10:00, at 11:00, 12:00, we are open anytime. Thank you for joining us today and choosing our company over the others.

[Operator Instructions]

Before the next question, perhaps I can -- this is -- again, Arvind Kapur, I'll just brief you about the investments, which are taking place. So the primary -- the main investments that have taken place now are for the Toyota project, which is being set up in Chennai. And the equipment and the building, as I mentioned earlier, is in place. And the further equipment will also come in before the production actually comes in. The low volume production prices have already taken place for 4 components -- 4 out of the 6 components -- no, sorry, in Pathredi out of these 6 -- so the investment is in Chennai and partly for the iron components in Pathredi plant. And those are also -- those are, I think, everything is taking place now.

Everything is done for them.

For all the components?

No. For...

For Pathredi.

[indiscernible] this much because of the range, it has...

Okay, okay. So we are ready for there for the LVPT, that is a low-volume trial that is taking place. I think next month onwards, the high-volume drivers also start taking place, somewhere in December and January. And the Toyota teams are there, sitting in our plants and helping us, supporting us and also monitoring whatever the progress is taking place despite the heavy rains that have taken place there. Pathredi has already done the LVPT and now we'll be ready for the high-volume production trial.

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

And congratulations on a good set of numbers. Sir, my question is on the new business front, on the media development. Can you throw some light on the protection business with the customer under discussion?

See, the -- you're talking the new businesses in [indiscernible]?

Yes, sir.

We are constantly discussing new business with our customers. But for your information, this year, we've actually already picked up businesses -- the program value of about INR 700 crores. And it will take a year, it is about INR 160 crores and INR 170 crores will be the turnover and on turnover once these businesses go into production. These businesses have already been picked up. We've received a letter of intent and everything. And so this is taking -- this is a constant exercise of expanding our customer base and also expanding our businesses with our customers.

But also, right now, further discussions for new projects is going on with GKN, with BMW, with Knorr-Bremse and some others, even face of nonautomotive, we are trying to pursue one customer. So let's see how the progress happens in the coming years.

See, you must also understand that there is a subtle change that is taking place. People who are sourcing from China, they are actually diverting their attention to India. And so that is also having an impact. And we will see that fructifying by next year, definitely.

[Operator Instructions]

One other thing I would like to add here is that this year, we had mentioned at the beginning that we would be crossing INR 2,000 crores. And we are in that ballpark. And we should be, despite the chip shortage and the 2-wheelers not performing as said and what we have taken on budget, we are still in the ballpark and we should be INR 2,000 crores plus/minus 5%, that's what the range is.

[Operator Instructions] As there are no further questions, I will now hand the conference over to management for closing comments.

Well, thank you so much, and we were actually hoping to have more interactive session. But the last quarter was very difficult, primarily because of the chip shortages and the passenger vehicle sector. And the chip shortage is -- the availability of chips is improving and -- but it is expected that the shortage will continue to almost the middle of next year. And -- but there's an improvement that one sees on a daily basis. And it has actually come down to a daily basis because Malaysia, the plants have started working. And then the other -- Malaysia, they have shut the plant mainly because of COVID. And now those plants have started working and the other plants in Italy and other places are also working now. And so availability is improving, but the demand is also going up tremendously. So what has happened is they say that it should be close to normal somewhere in the middle of next year. And -- but -- so the extra demand for the cars and Maruti production going up and Kia and others also -- Renault also increasing the production and the electric vehicles in Germany as well, BMWs, where we supply and also PSA, where we supply and Renault for that electric vehicles, their demand is also going up tremendously, primarily because of the CAFE norms that they are required to meet in Europe. And -- but they are hoping that in the next 5, 6 months' time, their volume should go up and the availability to be even better. But the demand is going up tremendously and the stability would probably come after the middle of next year. And -- but we are hoping that sooner the better and -- because -- and the other thing we are hoping is that the oil industry starts bouncing back. There has been -- we expected it to bounce back in Diwali time. It did come back, but not with the expectation that we all wanted at least. But I will say that in the 2-wheelers, we have been able to increase our share of the business with the current customers. And we are very close to whatever we had budgeted for the supplies through them. And we are still working on it, and to see whether we can increase -- further ship so that we actually exceed the budget that we have done. But if the market improves, of course there will be a tremendous improvement that will take place. Thank you so much for joining us today. And any other questions you can write to us, and you can -- we will respond immediately, and we can also have a one-to-one talk with you all. Thank you so much.

Thank you very much. On behalf of S-Ancial Technologies Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.