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

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q3 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Hazel Rathod from S-Ancial Technologies. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone, and thank you for joining us for Rico Auto Industries Q3 FY '25 Earnings Conference Call. From the management, we have with us Mr. Arvind Kapur, Chairman, CEO and MD; Mr. Kaushalendra Verma, Executive Director; and Mr. R.K. Miglani, Executive Director; Mr. Rakesh Sharma, Chief Financial Officer; and Ms. Ruchika Gupta, Company Secretary. I now request Mr. Arvind Kapur to take us through the key opening remarks, after which we can open the floor for the question-and-answer session. Thank you, and over to you, sir.

Good evening. My name is Arvind Kapur, and I'm sitting in the conference room with my colleagues here. And I'd like to welcome all of you all today to today's Rico Auto's conference. We are meeting immediately after the budget. And fortunately, the focus of the budget this year was on consumption, and we are all very happy about it. And the tax exemption that the FM has given at a certain level. Hopefully, that will translate into more buying of our auto products, hopefully. And -- but if you look at the geopolitical tensions, they are still ongoing. We still have the issues. And there's a new change of guard in the U.S. and there are a lot of new things happening on a daily basis. Hopefully, Mr. Modi, who is going to be meeting the President of the United States today in the evening -- or today in another couple of hours, hopefully, India should not be majorly impacted as far as the tariffs are concerned. The aluminum tariffs which have been imposed, by and large, we might benefit by that in the sense that there would be more aluminum and steel available in the market and the prices of steel and aluminum hopefully should fall here in India. And we are hoping for that at least. We did participate in the Auto Expo. We had very good interaction with our customers in India as well as many customers from overseas and also the aftermarket. It was a very good exhibition this year. The auto component industry is growing, and hopefully, this should continue growing by 8% to 10%. And the 2-wheeler market has expanded and hopefully should continue like that. Newer technologies are coming in like hydrogen and others, and we are totally involved with our customers as far as these technologies are concerned. Even though the expectation is that the economy will grow by 6.7%, we are still hoping that it would be between 6.7% to 7%. That's what we are hoping. And we are very happy that the RBI has cut down the repo rates by 25 basis points. And hopefully, in the next quarter, there should be another -- they should be able to reduce it further, provided the U.S. also does take -- does move the rates there. To tell you what has happened at Rico, this quarter, the sales were not as per our expectations. We lost a lot as far as the exports are concerned. The exports have come down by almost -- our expectation was much higher and -- but the electric vehicles in Germany and in France, they just collapsed. They came down by almost 40%. And we have been supplying a lot of electric vehicle components to BMW and PSA and others and that had a direct impact on our sales. We see a traction taking place now. We see some improvement taking place, but we doubt whether the electric vehicles will ever reach the level that they had reached last year. And -- but we are hoping that there would be some -- this year, our loss of exports will be to the tune about between INR 100 crores and INR 120 crores. That's what we are expecting that this is a loss of sales as far as exports are concerned. In the domestic market, we have grown. We did manage to get a larger share of business from our current customers. But the new launches which are to take place, those were postponed by Toyota, [ Ikon ] and Musashi. And these are -- some are related to the electric vehicles, and some are to the hybrid vehicles where they were doubling the capacity. It is to be done in June '24. We have got the equipment installed, everything ready. And that got postponed to -- the hybrid vehicles got postponed to May of '25. And as far as the electric vehicle components are concerned, the new launches, which were to take place, those from July '24 got postponed to February '25. This has resulted in a loss of about -- another about INR 100 crores of business. And the investments are all in place, and we are ready to go. And the electric vehicle components, the production has -- will start by the end of the month. And there would be only 1 month of production this month, but in month of March this year. And hopefully, next year, we would be running a full blast as far as the EV components are concerned. Toyota would start in May '25 onwards, and that would also be a good volume increase that would happen. In the export front, it was basically both in the European market as well as the U.S. market. And at the moment, there is no impact as far as the tariffs are concerned, but we are waiting for the -- what happens in the meeting that our Honorable Prime Minister has with the President of the United States. And if all goes well, hopefully, business should expand. We have been able to pick up new businesses, confirmed businesses. And in the domestic market, the business that we picked up from Maruti and other domestic customers is to the tune of about INR 510 crores a year. And the export business is INR 210 crores a year. Now this comes to about INR 720 crores per year increase in sales, this is the peak sales that I'm taking. The production of some components would start by February, they are starting. By the beginning of next year, they will start -- the production will start. And -- but the peak will come in the third year. So we will achieve the INR 710 crores by third year. But there's a caveat here. These are confirmed orders where advances have been received, dies are getting ready of components and the preparation is taking place. But some tariffs should not impact us as far as the exports to the U.S. are concerned. That's one worry that we have in mind. And we are looking at internally as to what is to be done in case those tariffs are imposed. And the second thing is that the customers don't postpone the launch of the new vehicles. That's -- we experienced it last year. We did experience it year before last year also, but we are hoping that there would be no postponement. And so this is the growth that would happen. And these are the new businesses that we have acquired already. And by March end, I think the INR 720 crores figure should go to almost about INR 80 crores, INR 815 crores. That's what we are estimating. The turnover has been lower than we had estimated. A month of December is always slower normally, both in the export front as well as in the domestic front. And -- but it has been slower than what we had estimated, whatever we had budgeted. And -- but we are hoping that to recover all this, even though the investments are all made. We have been able to free a lot of capacities as far as our castings are concerned, both in the iron as well as aluminum. At the moment, in the iron side, we are running at about 50%, 52% utilization. I'm talking of the casting area. And this current coming year -- the next year that we should be able to go to almost about 70%, 72%. And the year after that, it should be around 85%, 89%. That's what we are estimating. This is as per the confirmed orders that we already have in hand. And the share of the iron components will go up from 15% to almost 25%, 26% and we are hoping to grow this further. In the aluminum side, we've improved our technologies. We've improved our productivities. And earlier, we had -- we were utilizing almost 80% of our capacity, but now we've been able to free almost about 15% of our capacity. So we have that equipment available for further expansion on -- for newer orders, et cetera. So that's a new development that has taken place, and this is a lot of R&D that my teams have been doing and also the learnings that we've had from Toyota and our customers. So in the year '27, we had said we'll be touching around INR 3,000 crores. That still stands. We should cross that. And in '28, we should be around INR 3,200 crores. And the export front, this year, we are losing a lot. Last year, we were INR 422 crores. This year, we would be in the region of INR 360 crores. And next year, we should be crossing INR 500 crores. That's what -- as per the orders that are in hand, as per the investment that have been -- that have taken place. And now these are the commitments of the customers. If there are tariffs imposed, that is one thing we are all waiting for. By tomorrow morning, I think there would be total clarity on this. But we are hoping that this would stay. Otherwise, we'll have to look at alternatives as to what else we need to do so that we do get our goods into the U.S. market. If you look at quarter-on-quarter from the previous year and this year and both in consolidated and our domestic sales has gone up. This could have grown more than whatever has been indicated here, but because of the postponement of some of the programs this year did not materialize, but those are materializing now. That we see a very clear traction there. Your company has also decided to switch to the new tax regime that -- we made that announcement this time. And there has been one -- in the consolidated, the other expenses, including onetime impact of INR 6.8 crores on account of unused fixed assets which are sold. So that's a loss that -- this is a onetime loss that we have incurred. So I wanted to point this out so that there's clarity on this. This is what I wanted to say, and we are open to questioning. And please ask us any questions on the results. Thank you. One other thing I'd like to add is on defense. We -- I did mention last time that we are making shooting ranges for the defense. The production has started. We started shipping them now. We've shipped about 9 containers already. And hopefully, 24 we'll be shipping. And next year, I think the target is to ship about 100 containers. And the setup is ready and the production is on the defense side. And besides that, there are a lot of other things that are also happening now in the Make in India program in defense.

[Operator Instructions] The first question is from the line of [ Neha Sharma ], an individual investor.

So I just had one question like going forward, what are your expectations? And how do -- how should we see FY '26? That's it from my side.

We expect FY '26 to be much better. And our -- the sales expectation is around INR 2,600 crores. That's what the budget that we are preparing. It's a little short of INR 2,600 crores, but our target is to cross INR 2,600 crores in '26. And in the export front, like I mentioned, from INR 360 crores this year, we should go to about almost INR 500 crores. And in the domestic also, the orders in the hand, we should be touching about INR 2,600 crores. But having said that, because we've been able to free up capacities in aluminum, we are trying to get a larger share of businesses in the current components that we are supplying to our customers. And hopefully, we should get about 5% to 7% increase in there also, but which we have not factored in this INR 2,600 crores. And having said that, we also -- if you look at the result, we have been able to save power primarily because of the changes that we made in our melting areas and also the solar energy that -- solar as well as hybrid, the -- and in the manpower cost also, we've been able to -- we've started using our repo production system, which is very effective where we have been able to reduce manpower a lot. And as the production goes up and the new lines start adding, you will see a further reduction in the manpower cost. So we are -- as far as the cost is concerned, we are working very diligently on these costs, and there would be further reduction in these.

The next question is from the line of [ Bhaskar ], an individual investor.

Sir, like last quarter, you mentioned that the margin will improve in this quarter, right, Q3 compared to Q2. But again, we are back to 8%. So could you please tell me why we couldn't able to reach like double digit that you mentioned in last call and what we can expect in Q4 on margin side?

Yes. See, one thing you would have noticed in the address that MD was telling you that our exports have come down substantially. So normally, we have been talking in past meetings also that our exports give us better margins as compared to the domestic sales. So because of that reason, there is a pressure on profitability definitely. But in stand-alone, some improvement is definitely there. And we hope that we'll do better in Q4. But yes, there is a pressure on profitability.

No. Our target is still the same. It is a 30% margin that the Board has given us a very clear direction, and we are working in that direction. All the new components that we are talking of the INR 720 crores of new orders that we've got, the domestic supplies are in the region of 13% to 14%. That's the EBITDA margins in those. But in the export front, we are in the region of about 17% to 20%. So that's the range that we are working on. And if it is lesser that we don't take the orders. And as those start getting into production, you will see the change that is happening in the balance sheet. And having said that, another -- if we had managed to remain as per our budget of INR 150 -- another sale of INR 150 crores or INR 200 crores, the percentages would have changed absolutely. We would have been in the region that we had showed you last time. But this time, there was a total collapse in the export front. That's what actually let us down and the postponement of the Toyota and [ Ikon ] programs. Toyota was postponed primarily because there was some die issue that happened on homologation and so there are some issues that happened. And because of that whole thing collapsed. But now they've given us a green signal and we are ready for the volumes to be given. So as these components start adding up, you see an absolute change in the total thing.

Okay, sir. And also, you mentioned like in defense side also, we would be able to deliver at least 4 containers, right? So do you have that revenue in Q3 or we didn't.

We delivered 9 containers already, and we'll be delivering 20 more containers by the end, total revenue, I'll be able to tell you later. that's…

Okay. How many we actually delivered in Q3? Not in Q4, only in Q3, like October, November, December period.

Fully started.

Delivery has started now this month. After all the engineering and everything is done, the delivery has started. We have shipped to Cochin and we ship it to other places as well.

Okay. How much we can expect revenue from defense side in this quarter, Q4?

Defense, we are going to grow dramatically. So the problem we could have delivered many containers in the last quarter as well. We could not deliver them because they were line ready, only the inspection people were -- the defense people they come and inspect the whole thing. That got delayed and delayed and delayed. It was for us also first time getting it done. But now we are in it, and hopefully, we should be able to ship more and our internal target is to cross INR 40 crores, INR 50 crores as far as defense is concerned. But let's see what -- how many containers get cleared.

Okay. If I understand correctly, based on our previous con calls, defense, at least we will have some 18% to 20%, right, margins?

Yes, we'll have 18% and 20% margin, but that comes in -- see, we made investments there, the land building and everything is there. And the volume has got to go up. And so as -- once we cross, say, about 80 to 100 containers a year, you will see the total change. The margin will be even more.

Okay. At the moment, at least in Q4, do you think we would be able to see at least double digit -- low double-digit margins in defense side? Or that is also difficult…

Can you repeat your question, can you repeat?

In Q4, because you would be able to deliver at least 20 of them, do you think you would be able to see at least lower double-digit kind of margins? Or that is also difficult because of the investments?

It is definitely on the positive side. There's nothing material there. But we will be delivering 20. And hopefully, we'll get the inspection also done of the 20, and we'll try to do even more than that. And because next year, we're going to deliver more than 100. The margin will be there, but I will not be able to comment at the moment on the margins.

Okay. And there is -- I usually ask this question in every con call, but just want to ask one more time. Is there any movement on the Gurgaon site?

I did explain last time that what we were getting was not enough and the shareholders actually don't benefit by that. And the difference is only about INR 300 crores after all the adjustments of shifting and new buildings and everything, the advantage is only about INR 300 crores. So for INR 300 crores, the Board also said there's no point in doing it, the shareholders will not benefit by this. So we have a market of about INR 1,000 crores, certainly, we'd like to do it. And we are talking to people, but it's a large piece of land. It's about 27 acres. And so there are very few buyers who -- and we want everything above board. So that's a bigger challenge.

Okay, sir. One last question, like in this quarter, we have other expenses like somewhere around INR 36 crores, right? Because you mentioned like onetime expense INR 6 crores. But coming quarter, I mean, like the running quarter Q4, do we see any surprises like that or is kind of a more [indiscernible]

It's onetime only.

Okay. So basically, you usually have like around INR 20 crore, right, INR 20 crore to INR 24 crores will be the ballpark usually have other expenses.

Around INR 25 crore, between INR 25 crores, INR 28 crores, yes.

Okay. Usually, this is more of a subsidiary-related expenses, other expenses means like if you don't mind.

Yes, yes. This particular thing relates to one of our subsidiaries.

Okay. There is no way that we can reduce the cost, other expenses less than INR 20 crore or it's kind of a…

No, we have been reducing. In this quarter also, there has been a reduction in selling and distribution cost. So -- but because of this onetime item, this shot up that you are observing is there.

In future, there is any chance that it can go down to less than INR 20 crores?

No, I don't think so because we'll be increasing our volumes continuously. So I don't see in absolute terms, it will go down whatever expense we have been incurring. But yes, there is a variable portion in this, which is relating to selling and distribution expenses. In percentage terms, it has been coming down. And in future also, we expect that it will come down further.

And besides that, there are new launches taking place, which was supposed to take place in the month of July last year. Those will also take place by the end of this month. So 1 month of sale we'll have this year, of course, the benefit we'll get next year. So we'll be utilizing our equipment better than before.

Okay. One last question, sir, like what is the progress of that new plant for Toyota, I think...

It's in progress. We have got to have the building ready by month of June because -- when does the production start?

October '25. October this year. October.

In October, we got to start delivering from that plant to -- see, we -- the samples have got to be submitted from that particular plant in the month of October. And the whole volume production will start by the end of the year. And so for the sampling, the building has got to be ready and the machinery has got to be in place there.

Okay. So we will see some revenue from that plant from October onwards?

It will be lesser revenue mainly because of sampling and prototypes and other things it will go. The production starts in which one?

Mid of next year, 2026.

'26 starts. Both Toyota as well as [ Ikon ].

Yes, it will be supported right from Chennai...

Those will shift there. Okay. So some of the volume which will be -- which are required to be produced there, we will support it from our Chennai plant and then shift it from the Chennai plant to Hosur also, we'll do that. And -- but the full volume comes in from middle of next year.

Okay. Sorry I want to see one more question. Apart from the containers, do you have any other orders from defense? The reason I'm asking is like we will see more margin in defense for that is the one which will improve...

We are bidding for many items. And in fact, we've got the license for almost 20 items. And we also have DRDO collaboration for some of the items. And so a lot is happening. But -- okay, another thing I'd like to add is the railways. That's the other field that we have taken up. And there are a lot of castings and other components which go to the railways where we are also looking for orders. And hopefully, the railway business would be faster than the defense start-up, and we should be able to -- we'll probably start delivering in another 2 to 3 months' time, I think some -- we'll give you an update on this.

Okay. So we are creating another subsidiary, sir, for this one for railways or it's kind of only…

No, no. We are trying to merge all the subsidiaries into the main, and we don't want to create any further subsidiaries. Not on the rail -- see, in the defense side, we had to create a subsidiary because some of the foreign companies don't deal with companies which are dealing in defense. For that reason, we had to make a separate defense subsidiary. And -- but for the railways, it doesn't matter. We'd like to do it in this company only.

[Operator Instructions] The next question is from the line of Rahil Shah from Crown Capital.

So firstly, on this defense product, what did you mention? What is it exactly that you are shipping and have already shipped?

These are shooting ranges, tractor shooting ranges where the Army, Navy, the DSF, the CIF and the police, Air Force, they all need to train the people and shooting. Normally, you have these open shooting ranges where people are shooting and we could hear the bullet sounds early morning. In Delhi, we hear it. And -- but now there's a restriction on that, and these are totally enclosed ranges with electronic controls and everything on the target. And the decimal level is below 80 when you fire a shot, even you fire a light machine gun, it is -- so it's contained in that container, the sound and everything is -- so in this, the ranges -- the sizes vary. 26 footer, 28footer to almost 40 footers, then it goes up to 150 feet also. Then those are the assembly of containers that actually happen there. So these are the -- and every force needs it for retraining their forces.

Okay. And which size of container are we shipping -- making and shipping? Is it varying for us also?

Quantity -- the next 40 feet. We started shipping the 20 footers and then the next going to be 40 footers.

Okay. When you say 20 to be shipped soon and then next year, you expect 100 ranges. So these are confirmed orders? Is there a certain order book for this?

100 are confirmed also, and there's 20 already in production.

Okay. So 100 is the current order book for next year is what we can assume?

We'll be getting more also, but this is what we have in hand.

Okay. Okay. Any idea on like opportunity for this kind of product overall in the -- from DRDO and how big you like?

See, I'll give you an example. The Navy alone has a requirement of order 300 ranges immediately. And so I'm only talking of Navy in particular. This is the first order that they are trying to get out. And we are bidding absolutely on that. And -- but the Army would have much more because Army is located everywhere and everywhere they need not one range, but they need multi ranges. Similarly to BSF, similarly CISF and all the forces would need. Border security forces, they will need it, everybody will need it. Air Force also. And then let me tell you another thing. There are -- even the amateur people who participate in Olympics, et cetera, they also need the ranges to actually practice. So we do see that also coming up.

Okay, sir. And next, you mentioned something that INR 720 crores of new orders. Can you explain the nature of those orders to me? And like what does it consist of?

Yes, yes, we can give you complete details of that. This is a breakup for exports as well as domestic. In the domestic, it is INR 510 crores. So in this, we have Maruti, [ Ikon ], Toyota, GKN, Tatas, Knorr Bremse, Bendix, Maruti 2-wheelers as well and Case New Holland, Musashi, Cummins, Daimler, Greaves. So these are the names I'm taking. The orders are from these companies.

What is it for?

The INR 720 crores are totally for auto components. I'm not including the defense and others in this.

No, no. Got it. Got it. This is the new order of auto components. Okay.

These are new confirmed orders.

Yes. And lastly, you mentioned the margins, you expect 13%, correct? So by when do you expect to touch those numbers? Like what is the trajectory by FY '27 when you expect INR 3,000 crores of revenue?

INR 3,000 crores is '27. I didn't mention INR 3,000 crores, we've got to cross 13% definitely because the Board is monitoring it on every quarter basis.

So in the next 2 years, slowly 13% by FY '27?

Yes. No, you will see the same even the current year -- we would have been in the region of 12% this year, definitely, we could not achieve the sales. That's where we got stuck.

What kind of improvement one can…

Now if I look at the exports, we are -- in some components, we are at about 22%, some are 18%, some are -- then in the domestic and some of them, we are 18%, 20%. Okay. In the Maruti component, we are at 13%. Maruti and the Heroes are top customers.

Basically, gradually, we can move to 13% in 2 years. That's what we can assume, correct?

Certainly.

That's all I wanted to know.

[Operator Instructions] The next question is a follow-up question. It's from the line of [ Bhaskar ], an individual investor.

A quick question on -- if you remember, like I started investing in this company in 2012, around 2012, we actually diluted some equity, right, for -- to pay back loans and all. Is there any chance in the next 1, 2 years to buyback? Because if you remember in 2012, we diluted, right, at least if I remember correctly. Is there any chance that you can buyback some shares just to give some returns to investors like me who stick to our company almost a decade?

This is a debate that carries on in the Board also, and there's a discussion that takes place every time. And when it happens, we'll definitely inform you about it.

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

Well, thank you so much, gentlemen, and thank you for -- ladies and gentlemen, for participating. And we do apologize for not having been able to achieve the results that we had promised. And -- but hope -- there's a delay, but it is not a permanent situation at the moment. The programs had -- they have not been delayed. We were ready, investments in place and production in place, samples given, samples approved, everything done, but the supplies could not take place because the customers did not want -- they were not ready because of their own internal matters. Those have got sorted out now. And hopefully, we'll blast out from next month onwards. And the INR 2,600 crores that we are talking over next year, we are confident that we will exceed that because we have become very aggressive both in domestic and the export market. Export market, by and large, wherever we are supplying, we are single source to companies like BMW and GKN and Bremse. And the domestic market, normally, there are dual sourcing. In Maruti and Hero there, we are trying to increase our share of business. And hopefully, we'll increase. This year, if you notice our Hero sale has gone up dramatically. Even our Maruti sale has gone up dramatically. There's a lot of push in that direction. We will exceed this. And fortunately, we've been able to free a lot of capacities in the plant in the casting capacity. So the investment in casting will not be required for the -- maybe for the next 2, 3 years. And actually not required in the next 3, 4 years. And we've been able to free a lot of capacity with the new technologies that we've introduced in our die castings and with better quality, lower rejections and higher speeds. And the capacity buildup, whatever would be required would be primarily for the machining side and the inspection side. Otherwise, the investment would be minimal. So we are very -- the free time that we had in the last almost 6 months, we've been able to utilize that for improving our efficiencies and our technology and taking our technology level to a next level, both in the casting and also in the machining area by reducing our manpower by utilizing the manpower better and making the lines more smooth. We will continue doing this. You will see the cost reduction taking place every time. And the moment we cross INR 2,500 crores, INR 2,600 crores, you see the margins change dramatically also. So hopefully, next quarter onwards, from the first quarter of next year, you'll see the margins improve dramatically. And we're looking for -- we only hope that the U.S. President doesn't impose major tariffs on India. And if that goes well, I think the orders we have in the U.S. are huge. And because of China Plus One, we are seeing a lot of traction taking place between us and the U.S. companies and also the European countries. Germany is in a slowdown at the moment. And so -- but we do see some growth taking place in BMW and others. And they might not come back to the volumes that were there about 2 years back or 3 years back, but we are seeing newer components being introduced and the volumes picking up slightly. And hopefully, if Mr. Trump manages to end the war in Ukraine, hopefully, the economies would come back to the previous economies. We're looking for a good year the next year, and we are hoping that there would be better margins and further cost reductions will also take place. Thank you so much for attending the conference call, and we look forward to giving you better results the next time. Thank you so much.

On behalf of Rico Auto Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.