Rico Auto Industries Limited ($520008)

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q4 and FY '26 Earnings Conference Call. [Operator Instructions]. Before we begin, this conference call may contain certain forward-looking statements about the company which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. From the management, we have with us today Mr. Arvind Kapur, Chairman, CEO and Managing Director; Mr. R.K. Miglani, Executive Director; Mr. Kaushalendra Verma, Executive Director; Mr. Naveen Sorot, Chief Financial Officer. I now hand the conference over to Mr. Kaushalendra Verma, Executive Director from Rico Auto Industries Limited. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and thank you for joining us for Rico Auto Industries Limited Q4 and FY '26 Earnings Conference Call. We are pleased to report that Rico Auto Industries achieved its highest ever annual revenue during FY '26, supported by healthy domestic and export demand, operational improvements and ramp-up of new programs across business. We are OEM supplier, and our export business in the U.S. and in Germany is growing despite of ongoing geopolitical issues. Our export to the U.S. and Germany will grow to 2x in next 2 years. Let me begin with the brief overview of the macroeconomic environment, which continues to remain supportive for the automotive sector. Despite global uncertainties, India continues to remain 1 of the fastest-growing major economies globally with GDP growth projected at around 7% for FY '27. Strong domestic consumption, government infrastructure spending and continued focus on manufacturing and localization continue to support growth across sectors. Moving to the automotive industry. The passenger vehicle segment witnessed healthy growth during FY '26 with production volume increasing by around 9% to an all-time high of approximately 5.5 million units while EV adoption also accelerated with electric passenger vehicle penetration, increasing to around 4.2% during FY '26 from 2.6% in the previous year. The 2-wheeler segment also delivered strong performance during the year with production volumes growing by around 12% to approximately 26.6 million units, surpassing the previous industry peak. Electric 2-wheeler adoption also continued to improve with EV penetration increasing to around 6.5% during FY '26 from 5.4% in the previous year. Looking ahead to FY '27, the industry is expected to maintain healthy growth momentum with passenger vehicles expected to grow by around 5% to 7% 2-wheelers by around 6% to 8% and commercial vehicles by around 4% to 6% and 3-wheelers by around 9% to 10%. EV penetration in the 2-wheeler segment is also expected to improve further to around 7% to 8%, which continues to create opportunities across hybrid and EV-related reforms. Talking about Rico, the business environment remained positive during the year, supported by healthy domestic demand and ramp-up of new programs across businesses. During the year, aluminum and other raw material prices remained volatile due to fluctuation in the global commodity market. However, healthy demand conditions and customer pass-through mechanism helped us to manage the impact with limited effect on margins. We are under discussion with our customer to renegotiate our RM settlement cycle and also discussing renegotiating on the components, which is impacting our margin. We are also reviewing our entire portfolio of our business, specifically identification of the low-margin products and we will be negotiating with our customer to improve product profitability. We also continue to strengthen our business pipeline with new orders across customers, including Toyota, Maruti Suzuki, Hero, Bosch, Cummins and North Ramsay. These programs across transmission, braking systems, engine and EV-related applications provide good visibility and are expected to support future growth over the coming years. Apart from the automotive business, we are also seeing encouraging traction in railway and defense. Supplies have started improving -- supplies have started improving gradually and these businesses are scaling up, utilizing our existing manufacturing infrastructure and engineering capabilities. Now I would request our CFO, Mr. Naveen Sorot, to take you through the financial performance of the company. Thank you.

Thank you, sir. Good evening, everyone. I would like to highlight that the growth during the quarter and the year was supported by healthy domestic as well as export demand, ramp-up of new programs and improved business across our key segments. Consolidated Q4 FY '26 highlights, revenue stood at INR 677 crores in Q4 FY '25, including an export of INR 102 crores. EBITDA stood at INR 47.8 crores with EBITDA margins of 7.1%. PAT stood at INR 6.9 crores. On a consolidated FY '26 highlight, revenue stood at INR 2,477 crores, up 12% year-on-year and the highest ever annual revenue for the company, which includes an export of INR 395 crores. EBITDA stood at INR 223 crores with EBITDA margins of 9%. PAT stood at INR 52.4 crores as compared to INR 19.2 crores last year. I'd also like to highlight that there were a couple of nonrecurring impact that had impacted the profitability in the current financial year. One, the labor core impact, which is almost INR 3.6 crores in Q4 and INR 11 crores for the entire year. Further, there was a lag settlement impact, which was INR 11 crores for Q4 and INR 19 crores for the entire financial year. On the lag impact, as K.V. sir has already highlighted that we are renegotiating with the customers to bring the RM settlements on a monthly basis, and I am glad to share that 75% of the customers by value have already accepted our request. On the segment-wise performance, aluminum business revenue stood at INR 155 crores during FY '26, contributing around 88% to total revenue. Ferrous business revenue stood at INR 322 crores during FY '26, contributing around 12% to total revenue. Exports for FY '26 stood at 16% as compared to 15% last year. On CapEx side, the investment in Hosur is progressing as planned. The facility is expected to become operational from September 2026 onwards and will primarily cater to hybrid and EV related programs, [indiscernible] OEM customers. Along with that, the company has also received an approval from Tamil Nadu government for a subsidy of around INR 39 crores, which will start accruing from current financial year and will be available for the next 10 years. The company has also secured new orders worth approximately INR 2,500 crores over a program life of 5 years, providing strong visibility for future growth. On the balance sheet side, we continue to maintain focus on working capital management and cash flow generation during the year. Working capital days improved to 7 days from 33 days last year, while the cash flow from operations stood at INR 331 crores during FY '26. Net debt as on March 26 stood at INR 686 crores as compared to INR 653.1 crores last year. Looking ahead, we remain optimistic on the business outlook, supported by healthy domestic as well as improving exports, strong order pipeline and increasing participation across hybrid and EV platform. Thank you. Now we are open the floor for questions.

[Operator Instructions]

Until the questions come in, we can just add a little here. The railway business is coming up fast and RDSO has given us approval and more components are also getting approved. And in fact, the first lot was dispatched just about 4, 5 days back, and this should continue even further. And we are hoping to do pretty well as far as the railways are concerned. Even in the defense, we are pushing these defense. And besides whatever we are manufacturing, that's mainly the shopping ranges, we would also be adding more to the portfolio. This will be for this particular year. The exports would grow by almost about 15%, 20% this year. Sorry, the exports will grow by 32% this year and primarily to Germany and to U.S.A. And the domestic market would also go up this year. Unless, of course, the global -- the geopolitics, which is happening and that brings about some disaster, I think we are ready to reach the levels that we are talking of now.

The first question is from the line of Deepak Poddar from Sapphire Capital.

So just first, I wanted to understand, I mean, just something on the margin front. I mean, fourth quarter, we saw a sharp decline in our EBITDA margins and even gross margin. So what are the key factors that affected it? And how should one look at your growth and margins for FY '27?

So Deepak, as I reiterated in my initial speech, there were 2 nonfactoring impacts which are there in our profitability. So if you look at on a consol level for Q4, the impact of labor code is almost INR 3.6 crores, and a lag impact of INR 11.22 crores. So if you include these and look at the EBITDA, the EBITDA margin from 7.6% rising to 9.8% for the Q4.

Sir, can you repeat, this INR 3.6 crores impact was on labor code?

In Q4, INR 3.6 crores is the labor code in Q4, and the lag impact of raw material is INR 11 crores in Q4.

On raw material, that is the lag settlement...

There is some disturbance in the line.

I mean, I'm able to hear it. Yes. .

Okay. Carry on.

So if you include these nonrecurring impact, which is there in Q4, I guess the EBITDA, which is currently appearing at 7.6%, will rise to 9.8%. And similarly, if you look at the entire year, currently, the EBITDA is hovering at around 9%, wherein the impact of labor code is INR 11 crores and the impact of lag settlement of raw material is around INR 19 crores. So if you exclude these onetime impact, the margin increases from 9-odd percent to 10.25%.

Okay. So for the entire year, this figure is INR 11 crores and INR 19 crores, right?

That's correct. Your adjusted margin is 10.25%. Yes, as against 9% last year.

And how should we look at the FY '27? .

So currently, what is happening, there are a couple of renegotiations, which are happening across customers and K.V. sir mentioned that we are reviewing our business covering all the portfolio, looking at low-margin products and there will be renegotiation, which will be happening around those products as well as settlements of all other conversion costs, which has also seen an inflation other than the raw material, which in any case gets settled. So we expect that we should see an improvement in the overall margin levels as well going beyond 10.25% that we have achieved last year, if we exclude the impact -- onetime impact.

Okay. So higher than 10.25% is what we would be looking at in FY '27?

Yes. If everything else remains as.

And how should one look at your revenue growth?

So revenue, I guess, we're just concluding our budget. But if you look at, I guess, on an overall basis, we are expecting to cross INR 3,000 crores.

Okay. And something on the order side, I mean, you mentioned INR 2,500 crores order, right, that you have got over 5 years, right? So this FY '27, this new order will give us INR 500 crores incremental?

This is basically the program which we have launched this year. The ramp-up will happen for those programs, plus we are going to launch a couple of programs, which will bridge this gap to INR 500 crores.

So the investments for the current program, which have been launched, the investments started actually last year and even the year before that, like getting the land, building and all that. And -- but from this year onwards, we will start seeing the revenues actually flowing in. And that's what this year and it would peak next year. That's what -- yes. So there are almost about 40 launches which are taking place at the moment and all new products, and you'll see the impact coming up in the coming quarters. Actually, end of the third quarter to fourth quarter.

Yes. Understood. Okay. Okay. Got it. And then just one last thing on -- I mean, if the renegotiation, which is happening across customers, is it just in case we do not get the required the increase or the escalation that we are looking for. So does that mean that this 10.25% margin is what we would still be able to make or we'll see some pressure there?

So Deepak, 10.25% is the situation as is. So whatever further negotiations that we are able to do and conclude the customers will be over and above this.

We are fairly confident that the commodities, of course, the other consumer items that we use in our system, which are imported by the -- because of the dollar price change, they've gone up. The customers recognize that and the oil usage that we have, the gas usage we have, and we are already in discussion with the customer for those.

[Operator Instructions] Next question is from the line of Parag Thakkar from Fort Capital.

So basically, I just wanted to ask you that this INR 11 crores when we are saying it is nonrecurring in Q4 and INR 19 crores for the full year, it is from the raw material prices which has gone up, which we are negotiating with the customers, right? And you said 75% of that is accepted?

So what we have said is that, see, generally, what is the practice is to have a prospective settlement which are happening with the customer on a quarterly basis predominantly. So since the raw material is increasing quarter-on-quarter, we are always doing a catching up job. Now we are renegotiating with the customer to cut down the settlements on a monthly basis. And for that 75% of the customer by value have already agreed to effect. And the negotiations for the loss which has already happened is parallelly going on.

So this INR 11 crores for the quarter and INR 19 crores for the full year, it will be automatically increased in FY '27, right?

So there's one, whatever price which will move in a monthly basis, which will settle with the customer on a monthly basis. Second, the negotiation is for the loss which is already incurred for the Q4 as well as the entire year. So that discussion is parallelly. So the monthly settlement is already agreed, whereas the recovery of the loss which was incurred last year is parallelly going on. So whatever amount that we are able to negotiate will directly flow to the bottom line.

Correct. Understood. But what is the probability that whatever amount right now we are saying which we have lost in FY '26, and so you are adjusting EBITDA margin accordingly. When you say that if you normalize it, then your EBITDA margin would have been, say, 9.5% or whatever for the full year. So what is the probability that this INR 11 crores for the quarter or INR 19 crores for the full year will 100% come in FY '27 in your PAT number?

So when we say that our EBITDA, if you remove the onetime impact, was actually 10.25%. So that 10.25% remains protected once we have agreed for monthly settlements. If we are able to negotiate on settlement of our last year losses, that will add on to the EBITDA margins that we are currently discussing.

Okay. Okay. That is very clear. And railway and defense, what is the revenue opportunity or addressable opportunity for us over the next 2 to 3 years? How should we look at railway and defense playing out for us?

Railways, I think, is moving much faster than the defense because the clearances come much easier and faster than the defense -- I think the defense requirements are more sensitive, and they take a little longer for testing, et cetera. So does railway also -- they do a lot of testing, but we also do a lot of testing for them in our plants. And we are hoping that this year, in the railways, we should be crossing INR 100 crores as far as the railways are concerned. And that's what our internal target is, and we should be able to achieve that. Defense is a little slow, and we are targeting -- we are trying to see how do we cross INR 50 crores this year. And next year, how do -- in the next 2 years, how do we double it further. Now this is on the current systems that we are producing and supplying to the defense. But the railways, we are more aggressive and those clearances are coming much faster. And as railways are modernizing and INR 200,000 crores are being invested on modernization of the total railways, that includes the lines and billing of lines, et cetera, et cetera, we are going to be major participants there.

Sure. And sir, when we are saying this current year revenue of INR 2,480 crores is going to INR 3,000 crores. So it is almost around 25% jump. Why we are saying that 2-wheeler is going to grow at 6% to 8% and others also are growing at below 9%? Am I audible?

Yes, yes.

So when OEM sales are growing at below 10%, and we are confident of achieving more than 20% revenue growth, is it coming from products with 40 products?

Yes, Parag, the projects we have taken up 2 years back and last year, where we have started investments and those are fructifying now and those are for the exports as well as the domestic market. So that's the -- in those items, we are single source supplier to all the customers. And so that -- and those items are going to see a major growth. And that's both for the exports as well as the domestic market. And so it's a program which we actually started investing a couple of years back, which are fructifying now. And it is not -- we are not talking of just a linear growth that customers are growing by 5%, but we are also growing by 5%. What we are saying is we are getting the largest share of the market and also we are picking up newer components like for hybrids and electric vehicles, et cetera.

Sure, sir. Great. And sir, railway and defense orders are coming at what kind of margin? It should be better than the current automotive margins, right?

We've just started supplying. So give us some time, they are obviously better than the auto margins, but we will -- I think give us 1 or 2 quarters, and we'll actually tell you about the margin.

And sir, one last question from my side. How should we look about net debt? Is it going to reduce or you are comfortable at current levels?

So if you look at overall, I guess, we are hovering at around 3.75x the leverage. And if you look at repayments which are scheduled over the next 2, 3 years is almost INR 110 crores annually. So I guess we are pretty comfortable even with the debt, which is there in the books as of today, but we are still seeing a downward gliding path going forward. So INR 120 crores in any case will get knocked off every year over the next 3 years.

Okay. And sir, one last question, just to squeeze in, that we had this property also, right, land on which our plant is there, and we have -- there were some discussions that we can -- there were some offers -- bids in the market for that property. So any update on that, if you would like to give?

Well, discussions are carrying on. And like I mentioned last time that we were offered INR 700 crores, and we had said no to that. And because we were looking for a much better price -- a much better value so that we could actually reward our shareholders. And so we are working on that, and we are getting better offers than whatever we had before.

Okay. And so any time line you are looking at over next 1 year, what can shareholders expect some...

We don't get the right price, we are not selling it.

Next question is from the line of Hiten Boricha from Sequent Investments.

Sir, my question is you mentioned we are going to target INR 100 crores from railway and INR 50 crores from defense this year. So if you can share the number, what was the revenue from railway and defense in FY -- and sir, also, if you can throw some color on what kind of products or components we are selling to railway, if you can share some thoughts on that.

See, railways, we had just started and the revenue was just about INR 3 crores to INR 4 crores last year, but those -- all the approvals have come. There are, I think, 7 different types of assemblies and components that we are working on. And we've got approval for 1, 2, 3 or 4 of them already. And the balance, we should get the approval in about another 2 months' time. The teams are visiting us regularly. And in that, the requirement is huge with the growth that is happening. And once the approval comes, I think that approval should come within 10 or 15 days for the which we have just -- the samples which we have just dispatched. And once those start off, those are huge numbers -- and in the defense, we are still struggling around INR 20 crores to INR 30 crores, and we want to cross INR 50 crores this year.

Okay. Okay. And sir, what kind of products we are supplying to railway?

Basically, these are bearing adapters, cast iron inserts, which goes into the track.

Railway lines and the railway line, what do you call Track adjusters and distant blocks, there are many items.

Okay. Okay. But sir, if I'm not wrong...

Basically, where the investment is minimal, and we are using our current capacities, which are available with us.

Okay. Okay. But sir, I think in last con call, you mentioned we are targeting something around INR 60 crores, INR 70 crores of revenue from railway and defense in FY '26 itself -- so I think...

In the railways, even though we were ready with the production, the approvals took a little longer time since now the approvals are there. So that's the confidence that we should be around INR 100 crores.

Okay. So now the approvals are in place, yes.

Yes, yes. It's a constant exercise. We have approval of about 5, 6 different types of component assemblies and further approvals as we're getting more and more approvals.

Understood. Understood. And sir, my second question is on the capacity. So what is the current capacity utilization as on Q4, sir, for both aluminum die casting and [indiscernible].

In the iron side, our capacity utilization is in the region of about, I think, 65%, 70% -- and in the aluminum side, it's also in about the same region. And of course, it could vary from the smaller capacity machines where the utilization is close to 95%. And the higher capacity machines, higher tonnage machines, we've been able to free capacities. And there, we are -- we would be adding more components there. That also includes the capacities that we've freed for the capacity that will be required for this year with the expansion that has taken place and the requirement of both the iron as well as the aluminum components.

Next question is from the line of Deepak Poddar from Sapphire Capital.

Just one clarification. Now because this was one-off and fourth quarter adjusted margin was close to 9.5%, right? I mean -- so from first quarter onwards also, we'll see that trajectory, right? I mean that 9.5%, 10% kind of margins because this was one-off that we saw in first -- fourth quarter.

Yes, we will -- Deepak, as I said, that even the lag settlements are getting agreed with the customers, 75% have already agreed. So we should see the kind of margin going forward starting from Q1 itself.

Okay. So from Q1 itself, we will see 10% plus kind of a margin. I mean, would that be a fair assumption?

Yes. That's correct.

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

Okay. Thanks, everyone, for joining today's call. And as we committed that, we remain focused for our business growth. And we are basically in a close coordination and discussion with our customer for the recoveries with respect to the RM and the lag impact. And we have already set the monthly ration, which will help to mitigate the lag impact going forward in the FY '27.

So one more thing I'd like to add here is that besides the railways and the defense, we have been making machine tools for a very long time, CNC machines, 14 axles, 16 axles, 5 axis, 8-axis machines. So earlier, we would build up only for ourselves. But now since we had created capacity, we've also started selling them in the market. And we've just done our first sale very recently. And hopefully, I will not be able to give you as to what would be the total sales that we have this year. But by next quarter, I think we'll be able to share with you some figures in that. On INR 130 crores. Thank you so much.

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