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

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Gyanchandani from S-Ancial Technologies Private Limited. Thank you, and over to you, sir.

Thank you. Welcome to Rico Auto Industries Q2 FY '24 Earnings Conference Call. From the management, we have today Mr. Arvind Kapur, Chairman and MD; Mr. R.K. Miglani, Executive Director; Mr. Kaushalendra Verma, Executive Director; Mr. B.M. Jhamb, Company secretary; and Mr. Rakesh Sharma, CFO. Now I hand over the call to Mr. Kaushalendra Verma for opening remarks. After that, we can open the floor for Q&A session. Thank you, and over to you, sir.

Thank you, Vijay. My name is Kaushalendra Verma, and I'm attending this meeting from the Rico corporate office boardroom. With me are my other colleagues who are in this room. Once again, we all welcome you to our Q2 F '24 Earning Conference Call. Mr. Kapur is basically in a meeting with the high-level government officials. He's already connected over phone. Once he sits in the car maybe he will be able to participate verbally. This quarter, the good news is that the IMF boosts the India's growth outlook to 6.3%. And to this positive revision of 0.2% for 2023 is attributed to the stronger consumption in India in this quarter from April to June. What we understand that China Plus One Strategy is also happening. And in this regard, our team was traveling to overseas last month. And we've got meeting with the global OEMs in Europe and in North America. We got a very good response from all of our customers to participate in their new programs, both for the EV and the hybrid vehicles. You can see in this -- until in this year, our order book is close to INR 1,000 crores. And if I convert that as revenue per annum, it's close to around INR 200 crores revenue -- per annum revenue we have already booked. We are in the process of participating in a lot of new programs, and we are confident that another INR 1,000 crore program like business we will book by the end of this year. This quarter, the 2-wheeler -- sorry, this quarter, the 4-wheeler market has shown a positive sign. And we have also grown up in line with the market as for the Passenger Vehicle segment is concerned. The 2-wheeler is still a challenge, both for the Rico as well as for the market. But in the 2-wheeler, our major customer is Hero. And we were discussing with them for the price correction on various components. We have concluded the price corrections for one of the major components of alloy wheel. And they have agreed to our request, and this will impact our bottom line and the sales going forward in Q3. We are discussing with them further -- we are further discussing with them for the other parts for the price correction, which is in discussion. And hopefully, we will conclude with them in this quarter. Now we are open to questions to -- and we will be and the entire team sitting here will provide the answers and the clarification to the questions raised by our stakeholders.

[Operator Instructions] The first question is from the line of Deepak Poddar from Sapphire Capital.

First of all, this -- Hero that you mentioned that you have discussed the price correction for one of the part and other things are being discussed. So has the business with the Hero normalized? And what's the impact you see on the top line and bottom line that you just mentioned on the Hero parts?

Yes. We have basically concluded one of the discussions for the one of the parts, which is alloy wheel. And the profitability, overall impact on this product, if you talk about that, will be now -- currently, this product is around 2% to 3%. Now we will take it to 5%.

Okay. So this product is now 2% to 3% of your revenue right now?

Yes. Because we have different models of alloy wheel. And depending on the models, the profitability varies from 2% to 3%. And we were discussing with them to correct our price to take this profit margin to 5% in the alloy wheel, which we have concluded with them and which will have an impact going forward from this quarter.

I understood that. So 2% to 3% of the PAT margin can increase to 5% PAT margin in this product, right, because of this price correction?

Yes. Deepak, Mr. Verma is saying about the net margin that we get in that product. And as far as turnover is concerned, that will also go up. But as a percentage, it will not be a very big percentage. Currently, it is in the range of around 10% of our turnover that comes from wheel business.

Which is 13%.

Yes. So it will grow maybe by up to, say, 13% to 13.5%.

On top of that, we were holding ourselves to basically to give them a less supply on account of the product profitability. Now this has been concluded, and we are going to increase our volumes also with the Hero, which will take the major impact on our revenue for this alloy wheel business.

Okay. I got it. Understood. And for the remaining products, by when you are expecting things to normalize? I mean, you have discussed for other parts?

Yes, we are constantly discussing with our customer. And now we are happy that at least they have concluded for one of the major products where we had a lot of pain. And we are also in a advanced discussion for the other products, and we are confident that this will be concluded within this quarter.

Okay. Fair enough. And secondly, on your guidance front. I mean, in the first half, I think we have done close to about INR 1,100 crores of top line. We are targeting INR 2,600 crores. So how do we look that and 11% margin? So we are behind on the margin front as well. So any change in the guidance, sir, that you would want to guide?

If you'll see that our margins are better than the previous quarter from the Q1 to Q2, both on the standalone as well as the consol front. Going forward -- let me talk about profitability. Going forward, once we have got the increase from our customers for this one of the products, definitely, this will help us to grow our margins further. We are in the process of optimizing our resources in line with the overall sales so that we continue to improve our margins on the profitability. Absolutely, as to sales, we have some challenges with the -- even after customer, if we talk about the passenger vehicle, Renault. Renault offtake is much less as compared to their forecast, which is basically the area of concern. But we are working with other customers to increase our share of business. And we have increased our share of business with one of the major domestic OEMs, Maruti Suzuki. If you see in this quarter, we have increased our share of business from 8% to 12%. We are basically a single source to them for one of their products, which is the water pump and the oil pump, which goes into their K15C series engine. All the cars, which you see on the road at this point of a time, they have our product on the 1.5 liter engine. They started with around 1,200 parts, now that volume has gone up to around 2,100. And there are further requesting to enhance this volume to 2,600. We have basically -- without any investment, we have freed up the investment from the -- our internal resources by basically identifying the equipment, which are producing -- only using for the low-volume product. We have requested our customer to take the complete material for their 1-year requirement, so that we can utilize the existing resources for the high-volume product. And that's the way we have reached from 1,200 to 2,100, which is in terms of the revenue to talk about from INR 75 crores to INR 150 crores and overall year. They have requested another increase, which will have the total revenue of INR 200 crores. And for that also, we are finding that if we can release the capital -- existing capital to capture this revenue, and we are working on that. Our focus is that we are trying to free up our existing CapEx, which is engaged in the small volume programs, where we are requesting customer to take the materials in one shot, or we will build some inventory, keep them for, and we will supply to them once they need them. So we will have a better utilization of the capital.

But what I was thinking is that, are we still targeting to INR 2,600 crores this year or are we targeting a reduced target somewhere in '24? Because what I heard is...

Our target is still INR 2,600 crores and we are working towards that.

Okay. Because that ideally means that in the second half, you had to do INR 1,500 crores kind of a top line and the INR 750 crores kind of a run rate. I mean because these things do take time, right? So is it a very difficult challenge for you? I mean INR 750 crores per quarter in the second half in terms of execution?

Yes, definitely. We have forecasted this growth based on the new programs, which we were supposed to do the SOP in the different months of the year. There are a couple of programs where we have completed our development and the customer is validating our parts. And once they do the SOP, then these volumes get realized. But the only challenge is that a little bit depends on the customer SOP also. But we are on -- we are targeting INR 2,600 crores.

Okay. And in terms of margin, you mentioned -- I mean 11% also, we are still maintaining excluding other income, right, in terms of EBITDA margin? Because first half, I think it was close to 9.6%, 9.7%, excluding other income, your EBITDA margin?

No. If you see the consolidated results at present also, we are earning in double digits. This quarter, it has been good. On consolidated front, it would have been better. Like Mr. Verma said that we have negotiated prices for alloy wheels for our Rico Jinfei subsidiary. And -- but the effect of that has not yet come in our sales and obviously on profit margins also. So in Q3, that will be there because the procedural things are done, and the purchase order for that will be released by maybe in the December beginning or November end. So that is the way if you see profitability is on track. In fact, we -- in standalone, we have already crossed 11% this quarter.

Yes. So on consol basis 11% margin excluding other income for FY '24 is on track. I mean that's...

It's on track, yes, yes. This quarter also, it would have been 11%. But one sale increase for whatever price we have got, that has not been accounted for in consolidation. So that will come in the next quarter.

How do we see on the order front? I mean in the defense sector as well, if you can throw some light what sort of order book traction we can see on the defense side and overall on the business front?

Defense, we are working very aggressively on various programs, which we mentioned in our previous calls. . But currently, we are not basically able to size them. But we are in the advanced discussions and talking to them and pushing them so that -- and one of the programs we can do the enterprization and the SOP. We are working on various fronts in the defense. Once any of the programs will get materialized, we'll give the news to all the stakeholders.

Okay. Okay. So what is the order book range we are initially targeting in terms of in the Defense sector as such. I mean there must be -- I mean INR 100 crores, INR 200 crores or INR 500 crores, is that the size we are looking at or higher? So some sense do we have on that?

See, in case of Defense, like we have been telling earlier also, it's very unpredictable till the time we get the final order. Because you never know the timing, how much delay it can happen. So as far as target is concerned, the bids are very high. But once we get, because we have been following up with the Defense for last 5 to 7 years, I think, 5 -- to 6 years. So -- but that has not materialized. So that is why we don't consider that as of now. So target will depend what type of order we get.

Understood. Fair enough. And just last thing as a clarification. You mentioned, sir, there INR 1,000 crores order book. So what exactly you mentioned there? I mean is it -- which order book you're talking about here? Is it in the export program?

I'm talking about that this year with our various customers, like domestic and the global customers, we have already awarded a business of close to INR 1,000 crores over a program life. We consider a program life from 5 to 6 years, depending on the customer. So if you convert them into peak revenue per annum, it is close to around INR 200 crores per annum revenue. We have already booked with our customers, which will get into SOP in the next 6 to 12 months.

INR 1,000 crores is the order book inflowing program, which is a life of 5 to 6 years?

Yes, INR 1,000 crores over the program life, considering 5-year program life. If you convert that, it's going to be around peak revenue per annum is INR 200 crores per annum.

[Operator Instructions] The next question is from the line of Aman from Astute Investment Management.

Hello, can you hear me? Hello. My name is Arvind Kapur. Sorry, I've just joined. I've just got out of the meeting. I just sat in the car and joined, and the meeting has started, I know. And I will also participating along with my colleagues. Sorry, I'm not sitting with my colleagues. Today, I'm in the car and apologies. Please carry on.

Sure, sir. My first question is on our export business. So if you can talk about the run rate we did in H1, was it as per your expectation? Was it lower than your expectation? And what is the outlook for the second half?

Our export business is in line with our target which we have set for ourselves in the H1. And our forecast is also similar. And we will -- whatever we have targeted for ourselves, our export sales will be in line with that.

But having said that, I'd like to make one comment. Whenever we give a guidance on export, we normally give it much lesser to this. And there's always a pull from the customer. But this the first time we've noticed that they've actually taken holidays in month of September. Normally, in September holidays, they are working. So one does start suspecting [Foreign Language]. But at the moment, they're picking up at whatever they have promised, and it's absolutely in line with whatever we have projected.

Sir, what is our target for this year and next year in exports?

KV, Can you say something?

Checking on this, sir. Until H1, we have completed a 22% export of our total revenue, and our target for the next half is 26%.

So for the full year, we are targeting around INR 600 crores?

Yes.

And for next year, sir, what is our target in exports?

For next year, we are -- as I mentioned in my comment that we are working with the other customers to -- with both on our new business. And we are trying to basically -- in discussion with various customers for their hybrid and the EV programs product. And we are very confident that the figure which I have told you about, INR 1,000 crores business or the order book which we have -- on which we are currently discussing with our customer, that will definitely increase our export sales going forward for the next year.

So when we look at exports, there are 2 things that we look at. One is also the new orders, which are going to come, that will take about 1 year or 1.5 years for them to actually come into production. But we also look at the volume increase that we can by taking a larger share of the business. And in some cases, it has happened. And we are pushing the other customers to do the same.

Sure, sir. So in the initial part, you were talking about INR 1,000 crores program over 5 years. So can we assume that INR 200 crore additional per year in exports will come from next year? So the INR 600 crores will go at least to INR 800 crores.

No, no.

That INR 200 crore is both for domestic and the...

Yes. See, the INR 600 crores will go to INR 800 crores, maybe it'll won't go next year, might be another 2 years or 3 years, it will definitely go in that direction. That we are very clear in our mind. We are targeting INR 1,000 crores in next, possibly 3 to 4 years, for the export market. That we are very confident with the new programs which are coming. But this INR 200 crores that we are talking of is both domestic as well as the exports.

Sure, sir. This helps. My second question is on margin. So we are talking about taking -- we have gone with our customer and looking for some adjustments in pricing in terms of alloy wheel. So if you can talk about are there any other products remaining in our basket where the margins are currently low and where we expect a price rise? So my question was also to basically from when do we see that 10%, 11%, 12% of consistent margins on our overall consolidated business?

Yes. Let me complete on the alloy wheel. Then maybe KV and Rakesh, you can take it up. The alloy wheel, the price increases that have been given to us are from 1st of April?

1st of April this financial year, sir.

Yes. So the prices we get is from 1st of April. And hopefully, we'll get into that probably by end of this month or beginning next month. That hasn't been finalized, that is frozen. And the other parts that we are talking of with the clutches, et cetera, et cetera, there we are seeing marginal increased prices there also. And hopefully, those sort of issue also will be settled. But it's taken us over a 1.5 years to set the prices for EV, which is hurting us the most earlier. But the other, hopefully, we'll do it before the end of the year. But let's hope they'll do it soon because we were really hurting as far as the alloy wheels is concerned. But now alloy wheel has been centralized, that's behind us now and we are pushing for the other component as well.

And to add to our MD's comment, if you see our EBITDA margins in a standalone basis, it is already in H1, we have achieved 11.3 percentage. And if you see in consolidated also, it is in the double digits. Like we have said, that 11% is our target to achieve this year. So that we are on track, and we are confident that we'll be able to achieve that on a yearly basis, on consolidated basis.

Sure, sir. My next question is to Arvind sir. Sir, 2, 3 quarters back, you had talked about an update on the electric fuse orders. Basically, the whole process will be done again. Any update on that part? Because we have been waiting for, I think...

Okay. On the electronic fuses and on the fuses in general also, that total order got canceled and the government has shelved it absolutely because there was a lot of favoring and everything happening and we protested against that. And now what has happened is that the government obviously needs the ammunition in any case. So they have given it to the current suppliers of the ammunition and we have become sub-vendors to them. That's what we had mentioned as part of the details, whoever gets the order will have to buy from us in any case. So that tender got canceled. But the government for its major requirement -- the defense people for their major requirement have started giving direct [Foreign Language] these are the orders that they've given to those current people until they come up with the next scheme. Now when they come up with the next scheme, with the defense people very difficult to really understand the timing. But on the defense system, at the moment, we are bidding for orders of about INR 1,000 crores at the moment. And it is for various ranges. One is shooting ranges, I'd mentioned last time. That we are hopeful. We are talking to the Navy, Army as well as the Air Force. And also the BSF and CISF and all these, for them to buy new ranges. And hopefully, that should -- next quarter, we should be able to give you some results on that.

Sure, sir. Sure sir. But on the testing part, the trials part on the fuses, that is still -- you have to do it again, whenever the new tenders come? Or that is done? Because we had like 1,000...

We put a lot of money. Our laboratory has also sent fuses from their manufacturing facilities and everything and all those have to be diffused. So that was a very tedious cycle we went through. Because we can't just sell fuses in the market. And so we have to be diffuse in the government -- in the purview of defense people. But they're testing it, in any case whenever there's a new tender coming in, even the current suppliers have to got to go through the testing process, everybody goes through the process.

Okay. So given there are winter trials and summer trials, it will maybe take another maybe 2 years, 1 to 2 years for...

That is a cycle. But let's see where we are on it We'll get it one day. We are determined to do that.

Yes. And sir, sorry, you mentioned the word sub-vendor. We have become sub-vendors to the suppliers. So are we...

Yes. So we supply the main bodies and other components of the thing to those people because they are unable to meet the requirement till they have a strong supplier base. And we were doing it earlier also, and so we started supply to them. Okay, we are in the process of doing that now.

But the fuse part, they are procuring from outside India or some place. They are not buying from us?

They're basically doing assembly. So they are importing the fuse portion from South Africa and the batteries also coming from there, whereas we've taken up the responsibility of making the batteries and fuses, everything electronic in India.

And sorry, last part on this, you have talked about we have like 1,000 fuses lying in our facility. So what happens with those? Will those get wasted?

No, we didn't pay for it because our collaborators are also involved. And we had -- it is a very clear thing on the success of the fuse is when we pay. So losses, we tried, but there is no success. Obviously, the vendors -- our suppliers didn't ask for the money. But we have them diffuse, get them diffuse, that's what we have to do. So that's nothing left of the fuse. But on the defense side, we are more active now. And now we see the light at the end of the tunnel. And so -- but Army individually and Navy separately and Air Force and the other forces are also going for these products, very interesting products coming out. Once we get the order, we will actually put it on the website also.

And you're talking about indoor shooting ranges, right? Or any other product also?

Yes. The outdoor shooting ranges -- shooting range can be put anywhere. It's a [indiscernible] . It can be put anywhere, and you can start off. There is no sound or anything from them. We have it displayed in one of our factories.

[Operator Instructions] The next question is from the line of Sneha from SKS.

I just wanted to know your overall outlook for H2, not just exports. Would you think of H2 and next year, FY '24?

Note on the export or...

Overall outlook for H2?

For H2?

H2, yes, second half.

Now I don't have the figures in front of me, but I'll give you some broad picture, in any case. Now, like at the annual meet, the last quarter, we had mentioned that we have cut down our production intentionally because we were making -- we were not very happy with the prices of the wheels. And we have been pestering them for over 1 year, 1.5 years, and they were delaying it, delaying it, delaying it. And so we finally said that, sorry, we can't do that. And that not only we said it, the other wheel suppliers said that this is a monkey business, we all are losing money. And finally, now the prices have been settled, our volumes have also been almost -- they want us to double and even triple the volume supply that we can do. So that is one possibility that we are looking at. But we want to be sure that our dependence is not only on Hero, but it's on -- we supply to Honda where we are negotiating and to Suzuki. Bajaj, we are already supplying and we are also talking to Enfield, et cetera, et cetera. So we will be supplying to all. And there would be a subsequent ban on the import of wheels. So that's what we are working on. And so that volume will go up dramatically, which we have not factored the old volume so far. We were not sure whether Hero would actually double their volume requirement. So that was on the wheel front. On the -- my colleague, Mr. Verma, had spoken about the oil pump. from the 1,100, 1,200, we went to 2,100. Now they want close to 2,600. And similarly, there are other components like for the EV, electric vehicles as well as the hybrid vehicles. One example I must give you is again supply to Toyota, we were supposed to spend INR 70 crores for this new product that we have developed already. But like Mr. Verma mentioned, what we did was we've done a lot of cleaning in our shop floor. We've taken out the equipment that was not being fully utilized. And some of the components which had come down dramatically at the end of the life of the components, we've given the supply for the whole year, taken out the component. Now instead of INR 70 crores we will be putting in only INR 10 crores of investment for that particular project. And the turnover would be about INR 150 crores. Same thing goes for the oil pump. Whatever we had put in earlier, they utilize the same and/or take around the capital from inside itself to put in the production. So we are trying to get a maximum capital to put out of the system and use it for new products and/or expansions that are required. KV, please carry on.

Yes, sir. You have rightly said, sir. And for all this additional volume increase and the revenue increase, we are trying to minimize our CapEx by freeing up our existing CapEx, which is currently engaged with the low volume program. So that is basically giving an advantage to be competitive with other competition and better margins on the profitability.

Okay. And sir, if I rightly heard, you guys increased your business with Maruti from 10% to 12%, I guess. So what I've generally heard from various like auto component people, like Maruti's margins are a bit contracted compared to other people. So will that also impact our margins?

Yes, you are right. We have increased our volume -- share of business with Maruti from 8% to 12%. And this is for their new program, their latest engine K15C series engine, which goes into most of their cars currently which you see on the road. Our -- this is a new program which we quoted to them almost 3 years back and this came into the SOP last year. Yes, Maruti, we have to settle with the tight margin, but we have won this program on a reasonable profit margin and will not impact the further increase in the volume on our profitability, but it's improved.

[Operator Instructions] The next question is from the line of Bhaskar Addala.

Sorry, apologies for the delay. And my question is on the land assets that we are planning to sell near Noida. Any update on that?

See, I think you're talking of this Gurgaon property, I think you're talking. So that way, these things means we don't have anything in hand as of now. But any progress is there, we'll definitely let you know.

Okay. Is there any new projects that we are planning to introduce, especially specific to electric vehicles in coming years? Or any kind of collaboration with some other companies? Because as you know, like the market is growing rapidly, the technology wise and everything. So investors want to know how we are actually improving our products?

See, our marketing teams are already on the job, and they are meeting so many international customers also and domestically also. So if the need be, we may -- means we will not shy away from, say, maybe erecting new greenfield project. But as of now, there is no such plan. But we are already supplying to -- that we are doing. As far as EV vehicle component supply is concerned, that we have been doing for the last maybe 8 years or so. And our -- 15% of our turnover is already coming from EV and hybrid vehicle component. So that will continue to grow, definitely. But if need be, we'll go for greenfield project. As of now, there is no such plan to go for any new greenfield projects.

Okay, sir. On the last call, Arvind Kapur sir mentioned that you're going to have some kind of tie up with some company if I remember correctly. Is there any process on that?

Yes. Talks are on with so many -- for many businesses. But we -- as of now, there is nothing that needs, maybe sharing with the stakeholders as of now.

Last question from my side is the -- for the next financial year, are we looking at reaching like somewhere around INR 3,000 crores that we mutually estimated next financial year, not this one. This one, anyway we had some trouble with Hero, et cetera, because of that we lost some revenue. Are we able to see some clear road map for the next year orders without any kind of hiccup like we had this year?

Sorry, can you please ask again. We were not able to very clearly listen to your voice.

I'm just asking about the next financial year. Like this year, we had some hiccups, right? Like last quarter, we had some issues with Hero, et cetera. But for the next financial year, do you have a clear road map? And are we able to achieve like around INR 3,000 crores kind of revenue?

Yes, yes. That's very clear. In fact, this year also, it is -- everything is on track only. As far as Hero thing was concerned, that was very temporary affair and that is over as of now. And as far as negotiations with customers is concerned, that keeps on happening, but that's not going to hamper our maybe growth. Okay. So negotiations will keep on happening. That was a one-off case that we had to stop for some limited period, some supplies have to be stopped. So these type of things normally don't happen.

And as we mentioned that we have already got the business award for a program like of INR 1,000 crores. And some of the programs are also getting the SOP in the next financial year, which will help us to basically increase our top line.

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

Thanks, everyone, for joining today's call. And next quarter, as we mentioned that, and we update the team on all the fronts on the revenue and the profit margin as well as the new awards. And as Mr. Kapur said that, we are working very aggressively on all the fronts, including the defense. And in the next quarter, we will give you the better results as committed with respect to our own internal targets. And if -- and as mentioned that, we will definitely will give you more news on the new awards and the new business, both on the fronts of the EV and the passenger vehicles and the other things. Thank you so much for joining the call today. If there are any further questions, you can always e-mail us. We will be more than happy to answer that and clarify and provide the clarification.

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

Thank you.