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

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. [ Hazel Rathod ] from [ Angel ]. Thank you, and over to you.

Welcome to Rico Auto Industries Q4 FY '23 earnings conference call. From the management, we have today Mr. Arvind Kapur, Chairman, CEO and Managing Director; Mr. Kaushalendra Verma, Executive Director; Mr. R.K. Miglani, Executive Director; Mr. Rakesh Sharma, CFO; 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 the floor for the Q&A session. Thank you, and over to you, sir.

Thank you. Good evening. My name is Arvind Kapur, and I also have my colleagues here, Mr. Verma, Mr. Miglani, Mr. Rakesh Sharma, Mr. Jhamb, and Mr. O.P. Agarwal, Mr. Sanjay Bhat, who is the marketing chief, and Mr. Surendra Singh and Mr. Jagdish. We are all in the same conference room. I welcome you all to the quarter 4 '23 and also the financial year '22-'23 earnings call. [indiscernible] says that India is almost the third largest automaker in the world. We just overtook Japan, but I think that's about the same numbers as Japan, very close to them. And to become the second, I think it will take us a couple of years because U.S. is almost 5x the size. But I think we are heading towards that. And the other good news is that the GDP is likely to grow by about 7%. And I think that's the good thing that will happen to our economy. We are really fortunate that the Indian economy is doing pretty well. On the company front, the mergers all have been completed, and those have been factored in our books, and we've consolidated everything. And this year, we've also given a better dividend than last year. On the challenges that we are facing, one is, of course, the Russia-Ukraine war, which continues, which shows no signs of ending, which I think is impacting the economy of Europe, and also many other countries. And besides that, there is semiconductors, the production is enough, but the type of semiconductor that is especially required for a particular vehicle, we do face those shortages now and then and thereby, disturbing the whole production run for Maruti also the other automakers. And that also has an effect on the total volumes that are produced. And the good part is that the Indian government is supporting it and there is a large investment that are taking place in the semiconductor industry. And we are hoping that in the next 3, 4 years, 5 years, we would be less dependent on, I won't say self-sufficient, but it will be less dependent on the imports that we are totally dependent on at the moment. We also have an issue as far as the crude oil is concerned, the fluctuations can be seen on a daily basis. And we are hoping that these prices stabilize, but we feel that this is probably the direct impact of the war that is taking place. In the EV space, we do see changes happening. There are a lot of companies, we see more and more vehicles being sold in India. Even though there are some challenges as far as subsidies are concerned in India for the 2-wheeler industry and also for the car industry, there are some challenges, and there are some reductions which have happened, and we will see what was the reaction of the reduction of subsidies in the 2-wheeler industry probably in the next quarter. There have been some challenges for the 2-wheeler industry, the electric vehicle industry. On the regular motorcycles and the scooters, the IC engine, we are hoping that this year, they would be better than last year. And we did see some improvement in the 2-wheeler industry volumes last year, we are hoping that this year, there would be further improvement. That is we expected that most of us in the industry have. Commercial vehicles fortunately are doing very well. Passenger vehicles are also doing very well. The waiting is still there but we have noticed that more expensive the vehicle, the more the waiting that there is. And we hope that this waiting comes down. The other thing we noticed is that the customers have started actually looking at vehicles which are in the [indiscernible] sector. The cheapest vehicles that were sold or available off the shelf and the demand is on the investor side, but the better vehicles, and so that shows that the aspiration of people is actually going up, which is a good sign. And this is what happened in China, this is what happened everywhere else. And we are hoping that this year would be a good year. This last year that we are discussing today, our sales did go up by 24% and we clocked INR [ 2,020 ]crores. But I would like to apologize here, in the conference call, we had spoken about INR 2,050 crores and INR 2,350 crores. And in some part, we had also discussed INR 2,400 crores, that we could be pushing towards that INR 2,400 crores. We could not achieve it. There were a couple of reasons for that. One is, of course, the shortage of chips that had some impact. And the other is that we changed our method of shipment for exports. Earlier, we were shipping CIF U.S. and/or Europe. Now in most of the cases, we have actually started delivering FOB India. So the freight amount has come down. That has an impact of about almost INR 30 crores in our total turnover. But we did it because the fluctuation in the freight rate was so much that started impacting the profitability. This year, we are fortunate that we could cross the INR 2,320 crores. Our EBITDA has, if you look at the quarterly results, we crossed INR 609 crores turnover and the EBITDA is at 12%, which we had promised it every quarter, you'll see some improvement, and we have touched 12%. And we are hoping to retain this for the whole year and also make further improvements in our EBITDA levels. That will also have an impact on the PBT as well as the PAT in the quarterly and the annual results. And this is on the consolidated front. And what we are expecting the budget that we have for this year, we are expecting a growth of about 15% to 16%. That's what we have factored at the moment. Even though our internal target is to cross 20% and or be close to whatever we did last year. But at the moment, the visibility up to 15%, 16%. So we are factoring that for all our calculation, but we can assure you that we will cross the budget that we have factored so far. Our [indiscernible] are doing well and last year, we were at INR 460 crores, in this current year in discussion, we have touched INR 504 crores. This is despite the reduction of those INR 20 crores, INR 25 crores, which we had the freight adjustment that has been done. And in the quarter 4, you will see the [indiscernible] coming down, but the shipments are more [indiscernible] they never reached their destination. So we had to knock off those sales. Otherwise, our exports were consistent in all the quarters. That's all I have to say at the moment, and I think we can open it for questions.

[Operator Instructions] The first question comes from the line of Kunal Patel from Equilligence Capital.

Congrats on good set of numbers. Sir, first question is regarding exports. So you said INR 122 crores for FOB, am I right?

You are not very clear.

Yes. Can you hear me now? Clear?

No, I can hear you, but it's muffled up. No, carry on.

Okay. Sir, my first question is regarding our export numbers. So you said INR 122 crores for the quarter, but that is FOB, correct?

Yes.

And that is compared to, what was it last year same quarter?

We started in the month of February. So it is not complete amount is FOB. Some amount of this is FOB...

Okay. So for FY '22 and FY '23, what would be the comparable number if I exclude the freight cost?

See, previous quarter should be around 110 or so... See, I think the total freight comes to about almost on annual basis comes about INR 35 crores to INR 40 crores. and in the current year, there would still be some separate where they will be paying for the freight but the customers have not agreed. But by and large, most of the customers have agreed to on FOB terms.

Okay. Clear, sir. Sir, how is the situation in the U.S. now? Are you facing any problems there like it was there in last quarter. Are there any delayed shipments or any other problems...

No. That has improved a lot. And because of that, for the quarters before, say 2 quarters before that. 2 to 3 quarters, there was a problem as far as the delays at the ports was concerned. That is not there anymore. But when the shortages were there when the delays were there, we were required to set more shipments so that our goods are there in time for the customers. And so that we don't have to use any premium air freight. And as a result of it, later on at the end of the year, we had to taper down the shipments so that we don't have excess stocks in the U.S. [indiscernible] and the situation there, there are not many delays that are happening there.

Understood. Sir, my second question is regarding Toyota. So how is the capacity ramp-up for Toyota. I remember you said they have asked us to ramp it up by another 50%. So are they asking for another ramp-up? Or what is the current commitment, based on the current commitments, how much of revenue can be generated from Toyota in FY '24 [indiscernible].

At the moment, we are running on full capacity what was factored at the time of placing the order. And now the further enhancement that they want, we are working on that, and that would start, I think [Technical Difficulty] that is supposed to start in 2025.

Okay. Sir, how much revenue are we generating from Toyota right now roughly...

110 crores...

Sorry, I could not hear you.

No [indiscernible] about INR 100 crore, INR 110 crores now, and it will go up to about INR 135 crores. Then we would be adding [indiscernible] which will also go into Toyota, which will ultimately go to Toyota, but as Toyota program. That is for the e-transmission, that also would be [indiscernible] that's for next year, that is what [indiscernible].

Okay. Sir, can you talk about new orders inflow this quarter? And the related segments, that is electric vehicles and ICE. So if you have any split of the order book.

Can you repeat your question again, please?

Sir, can you talk about the new order inflow this quarter, also the split between EV and ICE?

Okay. Out of the total orders that we already have confirmed orders that we already have in hand for which in some cases, we already started making investments. The 53% of the total orders we have in hand are EVs and the balance is for the ICE engines. But that also includes the wheels, et cetera for motor cycles et cetera, which would be about 21%.

Okay. And what is the total order book?

INR 380 crores per year at the [indiscernible] program value would be about INR 1,900 crores...

INR 1,900 crores. Okay. So incremental INR 300 crores of order book orders we have last quarter. So 1,600 was in Q3, if I remember correctly.

Yes. The balance has been added.

Okay, okay. And final question, sir, what's our guidance for FY '24, '25, given the visibility we have, both for top line and margins. You have already alluded some 15%, 16% growth. So if I do a rough math, that comes to around INR 2,600 crores, INR 2,700-odd crores, if I remember correctly, in Q3, you were targeting some INR 3,000-odd crores. So why there is downward revision of guidance? And also you can talk about margins.

For the next year, we were always talking around INR 2,800 crores, but now it's coming to about INR 2,700-odd crores. But let me tell you, this is the visibility we already have in hand, and we will definitely exceed it, and hopefully, we'll cross INR 2,800 crores. But at the moment, we are submitting a 16% growth that will happen this year.

Okay. And on margins, sir.

Also realize that freight separate which we have reduced, that would do about INR 30 crores, INR 40 crores, I think would actually be knocked up in the sales in any case.

Okay. sir. And regarding margin, sir?

Margins in the last quarter of the, we did have EBITDA 12%. We hope to retain it, and we hope to do even better. like last year, every quarter, you will see the results getting better. We are hoping to work hard and also improve the results to make them better.

Next question comes from the line of [ Darshil Zaveri ] from Crown Capital.

Congratulations on a great set of results, sir. Sir, we've done fairly well right now. So I just wanted to ask, are there any other noncore assets that we can monetize and reduce some of our borrowings or something? Is there like some land assets or something that could potentially help reduce our borrowing costs that can improve our profitability?

We spoke about the land, the land bank that we have in Gurgaon, we have large factories running here at Gurgaon, which is a very prime location. It is on the Delhi-Jaipur highway, and this is about 27 acres, approximately 27 acres. And we have been talking about this. Even in the earlier conference calls, we had mentioned about this. And we are actively looking at somebody who can, we need a person who can give us a fat check. That is the important thing and a single take. We don't want to break up the amount. And so we're looking for, we are already in the market for that. We are discussing with various people who could be investors here. And as the information comes in, we will certainly let you know.

Okay. And sir, with regards to the defense orders that we've been looking forward to. So what would the time line now be for those?

See, we have been on defense for the last almost about 8 years now, 8 or 9 years. But let me tell you the process is very, very tedious, to change the mindset of all the people in the Army, the generals and also people down the line and the public sector undertakings and also the Ministry of Defense very, very tough but we are on it. And hopefully, I think there will be a good breakthrough probably in the next quarter, we'll share some information with you.

That's very heartening to hear, sir.

It requires a lot of patience to...

Yes, I can only imagine...

Next question comes from the line of Anand Agarwal from Balaji Investments.

First of all, very, very congratulations for the wonderful set of numbers. I hope you remember. So hello, can you hear me?

Yes, I can hear you, and we remember you very well.

Yes. Yes. So nice of you. So I think most of the questions have been answered. So just one question. I mean, as far as this EV is concerned, if I remember in Q3 you were of the view that the EV contribution will increase going ahead. How do you see this year? And how do you see the EV contribution this year in terms of the revenue percentage and the margins?

See, the EV is definitely growing, but it is growing at a slower pace than what the many other people were discussing or talking about primarily because of the problems as far as charging, et cetera, and also the cost of the vehicle and the cost of the batteries. And the EV vehicle has got to come down and price to the price of the normal IC engine vehicles. That time, it will actually do the tick off. But we are constantly working on EVs and also picking up orders on the EV. If you notice the new orders we picked up, 53% of them are from the R&D EV space. EV we are also including the hybrid vehicles, which is also in the huge demand now and so we are very fortunate to be in that space supplying to Toyota. And on as the volumes pick up and as the availability of components of Toyota is made available from Japan and from China, I'm sure this volume will be almost double or whatever we are putting in today.

How do you see, I mean, I just want to know a broader picture, 3, 4 years, 3 years...

The 2-wheeler space will definitely be faster than all the other vehicles. I think that sector will keep on picking up. Unless, of course, the subsidies are absolutely removed because of whatever issues that have come up between the government and some operators here in India. But the EVs will continue despite the subsidies and the subsidy [Foreign Language] EV will still sell. And hopefully, in a couple of years' time, the battery prices will come down, and hence the cost of the vehicle will also come down, as far as the scooters are concerned. Then we'll see a lot of changes happening in the bus space, mainly because these late comers are investing in the buses, the central government supports it. And even the buses are expensive, but the state governments can definitely afford it, primarily, they are doing it for improving the general pollution level on the large pice. That's the reason that the investment will take place. The car space and others, we feel that it will take a little longer than, firstly, you see the aggregators actually getting into the EV space. Those are the taxi guys and others. And the private sector, it will be a second vehicle to start with, but once the maturity level is achieved as far as these cars are concerned, I'm sure the cars will also start picking up. By 2030 in the car space, we expect I've always maintained, it will be 15% plus/minus 5% would be in the passenger vehicle space.

Okay. Okay. One last question from my side. I mean, just want to know a broader picture for next 4, 5 years, can we have a kind of a INR 5,000 crore revenue company, maybe 5 years down the line, since we have a huge population of 140 crores and since EV and everything is there. So can we see that kind of growth?

[Foreign Language] But anyway, we should...

5 years. I'm talking about...

[Foreign Language] 5 years is a long time. so hopefully, we should achieve it before that.

Next question comes from the line of [ Mukesh Modi ] from [ Modi Fincap. ]

Good afternoon, Kapur Saab and the team Rico for the excellent performance. Most of the questions have been asked, sir. Only thing is, sir, this year, what will be our CapEx. Last time you said it will be very less, but I mean, what kind of CapEx we envisage for this year?

Yes, depreciation is about INR 110 crores, but the CapEx investment this year, I think we are including the maintenance CapEx, we think it should be in the region of about INR 55 crores.

How much, sir, INR 55 crores.

About INR 55 crores. And in the current year, we are talking about current year.

Current year, yes, yes. So sir, are we expecting any reduction in debt, debt repayment for this year?

Reduction of...

Debt repayment...

So debt repayment is going as usual, but debt amount will start coming down from end of this year.

By end of this year.

Yes.

Okay. Okay. And also, you said that you are in talk about the land acquisition and all. But sir, any ballpark time are we expecting to be finishing this first half of this year? Will it be...

This is a long-term thing because there's a plant which is running here. There are almost 2,500 people working here. And the shifting would take, what we reached an agreement with somebody, we will start getting it after that. And it will be a cycle of almost 1.5 years before we can vacate the place.

It will take 1.5 years? Okay. Okay. I think most of them are answered. Thank you very much and wish you all the best, sir.

Next question comes from the line of [ Krishna Kukreja ] from [ Lucky Investments. ]

I just had a couple of questions. Firstly, on the gross margins for Q4, we've seen aluminum prices come down, but don't quite see the effect on the gross margins yet. What would be your insight here, where can we see this go in the next couple of quarters?

[Foreign Language]

Can you hear me?

Carry on.

Yes. First question is on the gross margin, sir, for Q4, even though aluminum prices have come down, the effect on gross margin wasn't seen as much. So what is your insight on that? Can we see gross margins come down further from here? And how come the gross margins are much higher in this quarter?

Yes. Because the average aluminum rate of the previous quarter was as compared to the current quarter, average rate in the current quarter of aluminum is more as compared to the previous quarter.

The overall prices have come down, but there was a slight tick in prices in the last quarter.

All right. Okay. And sir for the CapEx for this year, you said it was INR 110 crores. Can we get the guidance for what will be in the next year or the year after that as well, if possible?

In the current year, like I said, our depreciation is INR 110 crores, but we would be investing about around INR 55 crores would be the investment, that takes place. But this is as for the production planning that has already been decided. This is as per the budget.

Next question comes from the line of [ Rikin Ramesh Kobani ] from [indiscernible].

Sir, firstly, I wanted to understand sequentially, if I compare to Q3, the gross margins are down almost like 400 basis points. So if you could help understand what is driving because I don't think just the aluminum price increase was so sharp that it could lead to this. So if you could help understand the difference between Q3 and Q4 on the gross margin.

You're talking of Q3 and Q4... No?

Yes, sir.

Yes. Okay. In Q4, the difference of price of aluminum, the price of aluminum has gone up by [ INR 14 a KT ]. So that's the average price we had for this Q4. That is the main reason for this change that has happened.

But could that explain the 400 basis point change in gross margin? Or is there some mix change? Or is there some restatement because to that same extent, I see other expenses going down by about 300 basis points. So are there any other reasons because INR 14, so you cannot sort of explain such a large reduction isn't it?

Yes, that's right. In fact, in this quarter, there is the effect of merger also. So our other entity, which normally produces some other commodity, there also prices have increased. So that impact is also appearing here because this is after merger. So your observation is right that because of that merger also, there is some impact.

So sir, how should we look at these numbers now from FY '24 onwards, where we see at least now the aluminum prices being actually even lower than what they were in Q4. How should the gross margins trend for you? And at least yes, please.

Yes. Q1, the gross margin would be better as compared to Q4 because there is a lag of 1 quarter. So we will be getting compensated for this quarter's increase in the quarter 1. And this very minor exceptional increase, but that also will not be there in quarter 1 onwards. So there is definitely going to be a better gross margin next quarter.

Okay. But just to sort of understand there is no impact because of any product mix change in this, correct?

No. No, not much. [Foreign Language] the product that we have is a fairly constant consistent supply of products that we have. There is nothing else that has happened in the numbers.

Because in a way, even exports have sort of as a percentage to sales come down compared to last quarter. So is that also causing some impact in this you think?

There is almost about INR 17 crores, INR 18 crores of exports, which have been shipped from here, but which did not reach the shores of America. So those sales were knocked off. So both product [Foreign Language] because the raw material has been consumed, we've already made the shipment from here. And until the sale is made to the customer, it is not booked.

So that gets slipped over to Q1 because it got then shipped and sold in Q1?

That will happen. [Foreign Language] at the end of the quarter, whatever shipments have been made further knocked off in case we have not reached the customer.

Right, sir. Sir, just secondly, in terms of your sales outlook for the next year, this growth of 15%, 16%, do you see both domestic and exports delivering similar kind of growth? Or what is your sense?

The growth has been both in the export whereas the domestic as well as domestic industry as well. More so, I think it will happen more and percentage-wise maybe equal for the export as well as domestic. But number-wise, definitely domestic will be larger.

Of course, understood. So both the segments should deliver similar kind of percentage growth in FY '24. Sir, next question is to understand the CapEx that you have delivered in FY '23. At least from our interactions over the last 3, 4 quarters, the understanding was that you will spend about INR 50 crores to INR 60 crores CapEx in this year and next year, given the capacities that you already have in place. In that context, you're spending INR 200 crores in this year and actually debt level is going up. If you could throw some more light on the reason for the same? And how confident are you that next year will not be more than INR 50 crores.

'22, '23 was mainly for Toyota. That's what we have done. And subsequently, there was carryforward of almost INR 50 crores, which we kept on postponing until the last minute, which we carried forward into this [indiscernible] under discussion. And this particular year, running year now, for '23-'24, we are talking of INR 55 crores as an investment. Now this does not include the investment in dies and dies are in some cases, they consume within 3, 4 months in some cases, they might last 1 year. And very rare cases, they go up to 2 years the life of the die. But that is a constant thing that we keep on investing to keep on running our machines. We need to upgrade the dies that are running regularly.

So if you want to include that as well?

These dies in any case are amortized we get. And in some cases, we can advance from the customers in advance payment for the dies like Toyota and Renault and others that give you advance payment and Maruti amortizes and Kia is upfront again. Hero is amortized again.

Okay. So if you want to incorporate that also for next year, then including that, what would be the CapEx number, INR 50 crores you said...

Another INR 35 crores, INR 40 crores.

Okay. So all including, it could be about INR 100 crores kind of a CapEx. So in that, just a follow-up here, given what you are seeing in terms of revenue growth and margins, you could end up with at least INR 300 crores kind of an EBITDA and possibly therefore, reasonably strong free cash flow. Then what will restrict your ability to reduce debt in this year?

No, no. Our first attempt will be to reduce the debt. That's very clear. And we are hoping to do better than whatever we did last year. And the EBITDA margin would be definitely around 300 plus. That's what we're hoping to receive. And so whatever extra cash available that we're going to knock off the debt, very clear in that.

So there should be a reasonable reduction in debt that we should expect in FY '24.