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

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Limited Q1 and FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is recorded. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectation of the company as on date of this call. This statements are not the 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.

Great. Thank you. Yes. Good evening, everyone, and thank you for joining us for the Q1 FY 2017 Earnings Conference Call of Rec Auto Industries. Sorry. I hope that you have hidden the opportunity to review our financial results and the investor presentation, which is available on the stock exchanges and also on the company's website. I would like to start by giving a brief overview of the company and industry and company performance, post which Mr. Naveen will brief you on the operational and financial highlights for the quarter. The global economy continues to remain resilient, although geopolitical developments, commodity price volatility and changes in the global trade continue to create uncertainty. At the same time, the ongoing restructuring of global supply chain is creating opportunities for manufacturing economies that can offer scale, quality and localization. Coming to the automotive industry, the environment remains constructive. Q1 FY '27 saw strong production momentum while the industry continues to undergo a structural shift towards the [indiscernible], electrification and hybridization and a greater localization. This continues to create opportunities for Indian component manufacturers particularly as global OEMs diversify their sourcing and more reliable manufacturing partners. Against this backdrop, Rico delivered its highest ever quarterly revenue during the Q1 FY '27. reflecting continued momentum across our core automotive businesses. Our businesses continues to participate across IC engines, hybrid and EV platform with new programs at different stages of development and ramp up. There are 55 new programs in launch phase, out of which 28 programs already launched and are in ramp-up phase. These long-term programs for Toyota, Ford and BMW with program life of more than 7 to 8 years. All these programs are highly profitable, and we are a single source supplier for all these programs. Our focus remains on flawless execution of these programs and progressively scaling them up as per customer ramp-up plan. During the quarter, profitability was impacted by elevated of cost pressure, with the raw material price settlement lag being a key factor. We also saw elevated freight costs, particularly airfreight, as disruption in global shipping routes due to increase in ocean freight transit time from 5 weeks to 9 weeks, which led to greater resilience on the air shipments to maintain supply continuity. We are actively working and discussing with our customers to pass through some of these costs. Our new plant at Hosur is progressing and as planned, is expected to do the commercial production in September 2026. This facility will support our hybrid and EV related programs with the key OEMs. Alongside our core automotive business, we continue to develop our presence across adjacent sectors. Our railway and defense business are progressing supported by increasing localization, infrastructure, investments and the government focus on [indiscernible]. In railways, RDS approvals are progressing and supplies have started. We expected this business to develop progressively and add to the diversification of our businesses. Looking at our revenue outlook remains unchanged, and we continue to work towards our previously stated target of around INR 3,000 crores in this year, we will be clear confident we will be surpassing this and will be achieving a revenue more than INR 3,200 crores in FY 2027. While the current cost pressure and the timing of the customer settlements are likely to keep margins under pressure in the near term, our focus continues to remain on improving operating efficiency progressing the price settlement and driving the ramp-up of newer programs. We remain confident to the exit the current year -- current year near to our targeted full year margins through customer price revisions and continued improvement in operating efficiencies. With this, I would like to now hand over to our CFO, Mr. Naveen Sorot, to take you through the financial performance. Thank you.

Thank you, sir. Let me now take you through the performance for the quarter and provide some perspective on the key drivers of profitability. Rico delivered a strong revenue growth during Q1 FY '27. Consolidated revenue stood at INR 755 crores compared to INR 543 crores in Q1 FY '26, reflecting a growth of around 39-odd-percent. EBITDA for the quarter stood at INR 34.8 crores translating into an EBITDA margin of 4.6%. PAT stood at a loss of [indiscernible] compared with a profit of INR 16.7 crores in the corresponding quarter last year. From a segment perspective, aluminum casting continued to be the principal contributor accounting for 89% of the consolidated revenue, while the ferrous casting contributed the remaining 11%. Exports accounted for almost 15% of our total revenue during the quarter. While the underlying revenue performance remained robust, profitability during the quarter was impacted by elevated operating costs and certain temporary cost pressures as already highlighted by ED sir. Other operating expenses were higher by approximately INR 24 crores primarily due to a airfreight and sorting costs, which were around INR 13 crores in this along with the inflationary pressures across manpower, power, fuel and gas tools and consumables. We expect airfreight costs to peak in Q2 as inventory levels reach the desired position. Thereafter, the temporary requirement of air shipments is expected to seize with shipments progressively returning to the normal sea freight cycle from Q3 onwards. Profitability was also impacted by the lag in the raw material price settlements. This was particularly relevant for aluminum, where the prices increased significantly during the period. The settlement lag resulted in an estimated impact of approximately INR 10 crores during the quarter. Importantly, these cost prices are not structural in nature. We continue to engage actively with our customers for appropriate price revisions and cost pass-throughs. While the timing of these settlements will vary by customer and program, we expect the benefit to be realized progressively over the coming quarters. At the same time, we are driving productivity, operating efficiency and cost optimization initiatives across the group to mitigate inflationary pressure and improve execution. Looking ahead, the cessation of temporary airfreight progressive realization of customer price revisions and cost pass-throughs together with the benefit from our ongoing efficiency initiatives are expected to support a progressive improvement in the profitability from Q3 onwards. Our focus, therefore, remains firmly on execution, customer settlements, productivity and disciplined cost management while continuing to build on the strong revenue momentum and the programs underway. Thank you. Now we are open to the questions.

[Operator Instructions] The first question comes from the line of [ Darshil Jhaveri ] with Crown Capital.

So sir, I just wanted to ask about the freight cost, like I think you said 15% was exports had that would roughly turn out to write, I think we did INR 100 crores plus INR 120 crores of export. So right airfreight cost was higher by 10%. That is something that I'm trying to reconcile, right? Like airfreight would only be for exposure, right? So if exports was such a small amount, then if we had so much airfreight in Europe all the exports order would be a loss-making order for us, right?

Yes. Our export in this quarter was around 10% to 12%, and this cost is related to that because we need to ship the parts to meet the supply continuity because these are related to the new program launches, where we are the single source for the customer. And we had some issues with the quality quality correlation, where we need to do some certain kind of a correlation in the measurement with the customer and our visiting instrument. So that has basically put some parts on the hold, which will be used in the future, but we need to maintain the -- we need to ship parts to maintain the supply continuity.

So sir, we were the exclusive supplier, they did give us some kind of benefit like have we received some kind of because if you like our margins would be what we are losing in airfreight? Like I just wanted to understand that how do we reconcile ourselves.

This airfreight is an exceptional thing and mainly because it's taking almost 9 weeks for ship from here to from India to the U.S. And earlier, we should get the goods there in about 5 weeks time. Now we have extra inventory orders we -- in the seat, that's almost 9 weeks of inventory in the CN plus 1 month inventory we are required to maintain that. Now because -- this is one. And secondly, there were some issues in our correlation with -- as far as the specs are concerned., Those have been sorted out. So this is a temporary phase that we had to go through for the new components that we are shipping overseas. And since the customers are BMW and Toyotas being I think as we can -- our commitment is to the customer to see that the lines keep on running. And that's the reason we had to resort to airfreight. We are negotiating with them. And in fact, 1 of the customers has agreed to pay us the freight and which would be accounted for as and when we get it. and that's almost 50% of water will be already incurred. But we have not taken that into position at the moment because that will come over time. And so we are talking to our customers, and this will be done. And this extra time of sea time that is taking that is impacting our supplies at the moment. So the capacity that we build up is as per whatever the requirements are. Now all of a sudden, we had to almost increase the capacity by 25% to 30%, so that we could make larger shipments to the U.S. and to Europe. And we are doing that, and we are pulling out a [indiscernible] from wherever possible so that the deliveries are taking place in time and the lines of our customers keep on running. And we also build -- so this is a onetime thing that has happened. And we are very bullish about the exports. The margins are much better. The customers are the best customers that 1 could dream of and very supportive. And so 1 of the customers already agreed, but others we are trying to convince. Besides this, the price increase is that because of the inflation of the [indiscernible], all the other imports, the prices have gone up, and we've also taken up that with overseas as well as a domestic customers which is under negotiation at the moment. This is over and above the raw material prices that we are talking about.

Okay. Okay. sir. And sir, just wanted to understand, I think our last call was in June, right, 2 months of Q4 would have already been passed. And I think we said we can do 10% plus EBITDA. So we would have known about the situation that's happening, right, then why would have we still guided for 10%? Like I think that is something that I think people didn't like. So could you just clarify that what was the issue like did it come later on or what -- we would have known about this, right, it would be going the wars been going on the lead time but have increased. So why we gave the guidance of 10% EBITDA. I mean we knew that there were extra cost pressure. Even if we are going to recover, but at that time, it was not stated, right? So could you just help us with that, sir. .

The war started, and we were making shipments from 5 weeks that went up to 6 weeks a week. So we were comfortable with the 7-week thing. Then all of a sudden, the time went up to 9 weeks and 9 plus 1 is 1 week. It goes up to 10 weeks sometime and also close to 8 weeks. So these are things that we did not factor -- and -- but having said that, the customers are talking to us, and we are talking to the customers and we would -- we had to take in the books at the moment because at the moment, we do not have a [indiscernible] those component for these extra fees. But when it comes, those will be factored in, that will show an extra profit in the right. But the -- that is one. And number two, we had the initial launch issues when we started shipping and with so much material in the sea. And as a material right there, there were some deposits staying in the sea for a longer period, there were also some rust issues started coming up. And normally, in 4, 5 ,the components are only protected. So those started showing up and so we had to change our packing and everything and then -- but we have to keep the lines running being a single source. So we took this it was a difficult call, but having the commitment to the customer, we had to make the shipments by air.

Fair enough. And this issue is going to continue in Q2, right? So we can see similar kind of performance in Q2 in terms of margins? .

The margins will be better. And if I remove the orders, we are actually in the region of -- now like in the month of July, our turnover is around close to INR 300 crores and so by that, we are actually going up to almost about INR 3,200 crores, INR 3,300 crores, or close to INR 3,500 crores, but we are playing it stable. And we are talking of INR 3,250 crores would be our turnover by the end of the year. So we are very excited that we are wrapping up. We're excited that the business is growing. And -- but this is 1 pit we've had as far as the airfreights are concerned, which would cover up. And in Q2 also, there will be some airfreights and Q3 onwards, of course, we should be back to normal. And we are hoping and wishing for the last orders a couple of months now that the war ends and the shipping comes back to normal and the freight rates also come down.

So just to add to it. I guess, 1 of the query that you raised is why we not pre-informed the market. So if you recall, I guess our discussions happened sometime around early June. A major proportion of this air freight has happened post that call, so the later portion of June when the situation has cleated. So that is how it is. But yes, the discussions are continuously carrying on with the customers. I guess the priority was to stabilize the supplies and then start negotiating with the customers and settling whatever airfreight that we can settle with them.

Okay. Okay. Fair enough, sir. And sir, just wanted to ask with regards to railways and defense, right? So I think we had previously guided like railways could be INR 100 crore revenue segment and defense also, we are trying to get in. So what about these segments like development effect, anything happened in this quarter, so a good guidance for that such .

Railways, we submitted our component for inspection and all. So that -- so that the RDSO approval. And we are in the cycle, it's a cycle over 2, 3 months before we kept those emissions. We are in that cycle, and there are new component, which will also be submitted to the railways. But indirectly, we are already supplying to various customers who are supplying to the railways but for the intricate more profitable components, we want to supply directly and through the railways, and that's the reason we [indiscernible] RDSO. And on the defense side, we -- like we had mentioned earlier, we're making the shooting ranges, factor ranges for -- these are computerized ranges in containers. There could be 40 footers, 60 footers, 30 footers and for training purposes. And that is going on. I think we go to supply what are the numbers?

Total 200 this year.

We will be supplying 200 ranges this year and our containers. Like that, we are also giving consultancy for -- Baffle Range, yes. That is also happening. That's not going parallelly.

So that's really great to know sir.And sir just .

See, just to add there is progress, it is slow, but it is surely there.

[Operator Instructions] Our next question comes from the line of Sunil Kumar Daga with Sunil Kumar [indiscernible].

This is Sunil Kumar Daga. My question is with respect to this -- just in this sense, sir mentioned that there was a INR 10 crore increase because of freight up and down. But the freight percentage to sales is 67% this time as compared to 53% in the last quarter. 10-12 -- if there is only 10%, there is a difference of, I presume, more than 13% in the cost of materials.

So can you repeat the query?

My query is with respect to -- my query is with respect to purchase as compared to sales. March quarter, it was 67%. It was 53%. And this quarter, it is 67% similar June quarter, it was 55%. In the con call just now, we had -- you said some -- there was a 10% increase because of some rising cost and all. But this INR 10 crore increase is not reflecting the 13% cost, which has been -- or extra costs which has been shown in the published account for the June.

These are 2 different questions. I guess, you have combined both of them. One is regarding the cost on the airfreights and the sorting side, which was almost around INR 10 crores. So that amount other expenses side and not in the raw materials. And if you look at both airfreights and sorting, I guess, INR 12.8 crores construed almost 2.2% of the profitability. On the raw material side, if you look at the way the aluminum has moved up, if you compare Q1 current year versus 2 last year for a specific grid, the increase is almost 57%. So even if, let's say, these increases are passed on to the customer, you will find that in terms of percentages, RM as a percentage of sales will move up.

Okay. So this is only...

On the aluminum side, it was INR 230 or INR 240 somewhere last year. And this said, it's also INR 345 or something demand

INR 349.

INR 349.

INR 222 Q1 last year.

INR 222 last year. .

That is an increase that is there and which is to be passed on to the customer, then there's a lag in that. And that's why you see the raw material on the higher side at the moment.

How do you foresee future? .

Fortunately, in this quarter, it is coming down slightly. And we hope that it keeps on slightly down. And -- but we don't know what the U.S. decides to do is they can deal with the war. Again, there could be a spike. But at the moment, there seems to be a relief from that.

We might have done some hedging for the aluminum prices at all? .

We don't do hedging on the aluminum supply because it is decided by the customers, and they are the ones who announced the price, and they are the ones who actually negotiate with the various vendors and suppliers and they announce the price.

And what is the forecast for Q2, considering the -- since you have already crossed 45 days or so? .

Like I mentioned that in the month of July, we have done almost INR 300 crores, and we are heading for a plus

INR 840 crores.

How much?

INR 840 crores or Q2.

Can you repeat again .

Yes, yes. We will be crossing INR 840 crores for Q2 and the total comes to about INR 3,250 crores plus. And Q3 will be crossing INR 850 crores and then Q4 is about INR 900 crores.

So that is the revenue number.

Sunil sir, please rejoin the queue.

I have not -- I have not yet

I request you have already asked 2 questions -- 2 to 3 questions .

That does not matter. Let him ask, please. Yes Sunil.

Yes. Sir, you shared projection -- projected numbers for Q2, Q3 and Q4, how do you see EBITDA-level and PAT levels considering we are value plus interesting...

So Q2 PAT will be better. But Q3, we'll come back to normal because there will be no premium rates and that would be -- we would have [indiscernible] for the raw materials and also the price increases that we've demanded for the labor, et cetera, for the domestic suppliers as well as our overseas suppliers. So we have a certain figure, which we have not factored in at all at the moment, but that's quite a substantial figure which we are taking into consideration. That includes the gas and oil and et cetera, et cetera, everything and also the carbide inserts, et cetera. But we'll surprise you by the end of the year. Despite the airfreight which we'll get to some extent would be we will limit for the customer. We will stand by what our commitment is.

Our next question comes from the line of [ Saurabh Jain ] with Sunidhi Investment.

Just a small clarification before I ask my questions. So EBITDA margin during the quarter stood around 4.5%, 4.7%. And you say, by Q3, assuming the things settled down on the West Asia crisis, but -- so we'll come back to our trajectory of around 10%. So can we expect Q2 be somewhere in between? .

Yes, it will be in between.

Okay. And sir, my first question is on growth. You have done wonderfully well, with 39% growth, and you have actually increased your guidance from crossing INR 3,000 crores to INR 3,200 crore or INR 3,250 crore for this fiscal. So just wanted to know how much of the 39% growth has come from high metal prices? .

I think it's about INR 100 crores, INR 200 crores in this, which is it could be because of high -- the exact picture I can share with you later, but there also.

So in this Saurabh if you look at standalone for the company, the impact of raw material is almost INR 100 crores. So the INR 581 crores that you are looking at, if you net off -- and if you, let's say, take the same base as well even last year, this number will be somewhere around INR 481 crores.

Stand-alone. Yes. .

On a consol basis. So it would -- are you saying INR 100 crores of the impact due to metal prices, higher metal prices, so around INR 650-odd crores.

So this is on a stand-alone number. So you can increase that INR 100 crore by another INR 10 crores, INR 15 crores to give you a consoled number.

Okay, fine. Fine. And sir, what would be your CapEx guidance for FY '27 and '28.

Okay. We -- at the moment, the projects, 54 projects that are in hand, we are making investments there, but we are also curbing the investments. And -- but having said that, after this, I think for 1 year, we are going to invest only wherever absolutely necessary. And otherwise, we'd like to stabilize and be able to run all the assets to full capacities. And once we stabilize, then thereafter, we will look at some larger projects. But it's only the small expansions of capacity increases to our domestic customers and our overseas customers, that is what we'll do at the moment. But newer projects after these 54 projects are over, we will first stabilize and then make the investments.

Sir, if you can just quantify for FY '27 and FY '28, it would be really helpful, including your maintenance CapEx and all what is the usual.

We will share with you.

Okay. And my last question is on -- in the presentation, you have just published Slide #30 about the digital transformative initiatives. Can you please provide some more color what kind of investments are we planning here? You have put several points on the slide and what areas are we going to invest and how it is likely to play out in terms of profitability and all?

See, one is, of course, we are learning more and more about AI and our people are getting engaged in that. And we're looking at how AI can be used for improving the productivity. And we have started using for designing and also for --Okay. A lot of information and also trying to improve our manufacturing capability and ability and productivity on the machining lines. We're also adopting it for designing of dyes, et cetera, and that's a nascent stage, but we are in the process of doing that. And we are also connecting all the equipment so that the monitoring can be done very effectively and the machines can be utilized very efficiently. We have already done this on a couple of lines. Those are very successful, and we are further trying to improve that. And then we will replicate that across the board for all the lines with the information available readily to us for every line and also the losses and with this, the advantage we get is that productivity improves, we'll be able to control the losses or loss of time, et cetera, very well.

Our next question comes from the line of [ Hiten Boricha ] with Sequent Investments.

Sir, my first question is on the railway and the defense. So have railway or defense contributed anything in Q1?

Yes, going regular.