Talbros Automotive Components Limited (505160) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to Talbros Automotive Components Limited Q3 FY '20 Earnings Conference Call. This call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Talwar, Joint Managing Director of Talbros Automotive Components Limited. Thank you, and over to you, Mr. Talwar.

Good afternoon, everyone. A very warm welcome to our quarter 3 and 9 monthly earnings for FY '20. On the call today, I'm joined by Mr. Navin Juneja, our Director of the Board of Talbros and our Group CFO; as well as SGA, our Investor Relations advisers. The results and the presentation are uploaded on the stock exchange and the company website. I hope everyone has had a chance to look at it. Let me begin with a few updates on the industry. 2019 was the toughest year for the Indian automotive industry. Overall, automobile sales tumbled by 14% in 2019, due to numerous reasons like liquidity crunch, slowdown in the economy, weak consumer sentiments as well as pricing going up by almost 40% in the last 3 years due to BS-III to BS-IV, BS-IV to BS-VI new safety norms, new insurance packages, there has been a true impact on a vehicle, to about 40%-plus over last 3 years. As I mentioned to you that even the slowdown was further driven by the new BS-VI norms that are coming into force from April 1 onwards. And all vehicle manufacturers are trying to liquidate their BS-IV inventory with discounting. As per latest auto numbers published by CM the PV sales dropped 16% year-on-year, commercial vehicles dropped 21% year-on-year. And here, I would like to add, some of our biggest customers here like Tata Motors and Cummins, Volvo and Eicher declined by almost 35%, which impacted Talbros significantly because they are single source to several OEMs in CV space. Two-wheelers declined by 16%. Three-wheelers declined by 3%. The declining sales thus show no respite to the ailing automotive industry. You may have seen today that all the big automobile giants such as Pawan Goenka, Rajiv Bajaj, Mr. Bharghava are now trying to tell the government, as high time that they lobby for this industry before it's too late. To add fuel to fire, the outbreak of the coronavirus can impact the expected recovery of the auto industry because China is one of the largest supplier of automotive components. However, this does not affect Talbros Automotive in any which way. Yes, it can affect the carmakers or vehicle makers who are importing electronics, but we are not affected at all. And in fact, I see there's an opportunity going forward if we can try and talk to some of our customers overseas that we can help them run their lines in forging and gaskets. However, as per CM, the Indian automotive industry is expected to witness a revival, which can possibly seen only in second half of 2021. Because April, May, June, BS-VI prices will come into factor. People have already bought their vehicles this year to -- with this higher discounted BS-IV. So the true picture will only start in September of next year. However, if the vehicle scrappage policy is around the corner, that this will add some boost for sure to the CV space. The vehicle scrappage policy is basically a policy that aims at removing old and polluting vehicles off the roads, thereby boosting demand for new vehicles. The policy, if finalized, will give a much required boost to the demand, and help the sector to come out of the turmoil. As you're aware, that Talbros Automotive is a hedge autocom player, with diverse product portfolio and association with strong partners. Our focus has been towards increasing our export business, which we'll be talking about for the last several quarters and we stand by it. And that is one of our areas that we are constantly focusing on. Cost rationalization is something that you will see in the balance sheet, and maybe Navin will touch upon that also in his speech. We have managed to reduce fixed expenses and also increased our operational efficiencies and also worked on with materials, where there's a good saving that has come about in our P&L numbers. We have also managed to reduce breakeven levels across our plants by over 20%. Further, our endeavor to -- is to increase wallet share on existing client and to add new clients, thus diversifying our revenue stream and ensuring stable performance over the long run. Further, with the implementation of our BS-VI, we're very optimistic and upbeat about this for our products. I'd like to -- let me highlight one point out here. Your company, Talbros, is working very, very hard with all the OEMs for the BS-VI product lines, and we are proud to say that we are totally ready for the BS-VI launch. And in this, especially for our gasket business, our revenue per vehicle will actually go up by 2.5x in some vehicles and we are ready with this product line. So this actually favors our gasket business. I'll give you a small brief about our company. Our business is broadly divided into a stand-alone business, gaskets and forgings, and 3 joint ventures with global auto giants, in gasket suspension, chassis and anti-vibration components and hoses. Of our domestic sales, 40% is two-wheelers and three-wheelers, 30% is PV, 20% is commercial vehicles and 7% is agri and off-roaders and 5% is others. This depict our diversified client base in wide product range. Let me give you some details on the segment-wise business. Gaskets, in our stand-alone gasket business, we continue to hold 40% market share domestically. If I add our joint venture for Nippon Leakless Talbros, our market share is 50% in India. Our focus over the last 2 to 3 years has been on getting BS-VI ready for Indian automotive industry, which we have, and as well as focus majorly into exports. We have secured some good orders and interest from the export market from the U.S. as well as Europe. We have won some business opportunities, about $2 million to $2.5 million in our Gasket division, both in heat shields as well as in gaskets. We've been talking about strategic alliance with some of U.S. partners like Lidl for materials in the country. This is going live finally after all the testing that has taken place at Bajaj. And we should be able to source materials worth about $1.52 million next year locally. In addition, the post coating line, which basically relies on local material, will also -- is also live now and all the BS-VI variants of Volvo, Eicher and Tata Motors are going with this post coating. Regarding Heat Shields, I mentioned to you that Heat Shields is something of the future, and we have secured business about $1.5 million to $2 million from a European OEM. And this has already started supplies from January. Our forging business continues to perform well. We had a slowdown in the forging business because Europe went down, and our major suppliers are from Germany and Italy. And also as a factor, normally, October, November, December, the quarter 3, which is their quarter 4, is normally a slowdown. However, we are able to see Green Shoots in quarter 4 of 2021, which is their quarter 1. And here, there's a lot of traction that is happening in our forging business line. With a 50% market in exports, as already explained to you, we're now moving towards heavily value machine components, which will improve our margin trajectory. We have completed the installation of our 2,500 tonne press during the quarter. With this, we have become a player for forging plus machining between 750 tonnes to 2,500 tonnes. Coming to our joint ventures, Magneti Marelli Talbros has actually outperformed the industry and outperformed all our divisions. The company, in fact, had a growth of about 2% to 3% in the 9 months. And the reason being is that it has commenced the supplies to the European OEM, which started in quarter 2 and quarter 3 of last year. The JV had posted a positive performance in quarter 3 and 9-month FY '20, with a 25% and a 15% growth impact compared to last year numbers. So this is definitely an outlier. Talbros Marugo's Rubber division, our JVs in Marugo Rubber Industries in Japan, caters to OEMs such as Maruti and Tata for rubber components and hoses. Pending price settlements with domestic customers impacted us profitably, along with a decline in top line. However, we have secured orders worth $2 million from our JV partner for exports to Japan because we knew that Maruti is not launching any diesel vehicles, we will lose about $1 million to $1.2 million of sales starting April 1 of next year, because we were making diesel hoses. So to offset that, we have basically spoken to our partners, and they've agreed to buy back up to about $1.5 million. This will also come into effect sometime in September next year. We have revised our revenue and profit guidance during the previous quarter, but we are confident to achieve our revised guidance for FY '20. Now I request Mr. Navin Juneja to take you through the financials of the quarter.

Thank you, Anuj. Good afternoon. And a warm welcome to all the participants. Let me begin with our financial review -- overview. In the Gasket division, including our JV, Nippon Leakless Talbros, for 9 months of FY '20, our stand-alone gasket sale was INR 203 crores as against INR 259 crores in 9 months of FY '19, a decline in sales -- due to a decline in sales to OEM segment by about 26%. Aftermarket by about 14% have resulted in the decrease in overall sales of that division. Revenue of NLK was INR 32 crores in 9 months FY '20 with -- versus INR 38 crores in 9 months of FY '19. This is primarily on the account of drop of sales of approximately 15% to 16% by Hero MotoCorp and Honda Motorcycles and Honda Cars, who has had a decline of 36% Y-o-Y basis. The segment saw a combined EBITDA of almost INR 31 crores for 9 months of FY '20. Now coming to our Forging division. The revenue in 9 months of FY '20 was at INR 101 crores as against INR 129 crores in 9 months of FY '19. EBITDA for 9 months of FY '20 was INR 10 crores versus INR 16 crores in 9 months of FY '19. Now coming to Magneti Marelli Chassis Systems Private Limited (sic) [ Magneti Marelli Talbros Chassis Systems Private Limited ]. Our share of total income for 9 months of FY '20 stood at INR 51 crores versus INR 50 crores in 9 months of FY '19 on a Y-o-Y basis. EBITDA stood at INR 5.5 crores in 9 months of FY '20 versus INR 5 crores in 9 months of FY '19. This segment posted a positive performance as they have a growth in sales to our top clients of the segment. Now coming to our Talbros Marugo Private Limited. Our share of total income for 9 months of FY '20 stand at INR 18 crores versus INR 20 crores in 9 months FY '19. EBITDA during 9 months of '20 stood at INR 1.4 crores as against INR 1.8 crores in 9 months of FY '19. Coming to the consolidated financial performance of the company. Total income including other income stood at INR 299 crores in 9 months of FY '20 and INR 97 crores in quarter 3 of FY '20. EBITDA including other income stood at INR 34 crores at 9 months of FY '20 and INR 12 crores for quarter 3 of FY '20. EBITDA margins for 9 months FY '20 stands at 11.5%, and for quarter 3 of FY '20 stands at 12%. Our margins have not been impacted adversely despite the tough industry environment. This is an outcome of our relentless efforts for improving efficiencies and keeping a tight control on our cost. PAT stood at INR 12 crores in 9 months of FY '20 and INR 4 crores in quarter 3 of FY '20. This is all from my side and I now would like to open the floor to the question and answers. Thank you.

[Operator Instructions] The first question is from the line of Shikha Mehta from Equitree Capital.

I just have a couple of questions. We've mentioned that the industry scenario was started on positive in the second half of FY '21. So how do we expect our numbers to look considering our order book, et cetera, for FY '21?

Yes. FY '21, I think we'll be in a better position because we are still -- OEMs have not given any indication, but this is our personal assessment. And so far, we are concerned, quarter 4 will be -- definitely is better than quarter 3 of this current year. When the BS-VI will be implemented, I don't know the -- how the market will react, whether when the scrappage policy will come, whether it will have any impact, we are still not very, very sure about that 2020 -- next financial year. But for this financial year, whatever guidance we have given, I think we should be near to that.

Right. So are we already seeing -- are we already starting to witness some BS-VI traction and impact in our sales?

Yes, a little bit. Forging is doing quite better in this quarter. We can see a good growth in Forging division. And in gasket, of course, it will be better than quarter 3. And how fast OEM will start manufacturing the BS-VI engines, we have to see that. Our main new business with Wire Harness, Cummins will start from April, and it will give a good boost to our top line and bottom line.

All I can add to what Navin has said to you is with BS-VI, we'll add some more revenues because our value percentage is per vehicle, and also some exports like what we did last 2 years, we will start off, starting -- already started in Magneti Marelli joint venture, we've started in our gasket business also. Forging is going to do well. So we'll start maybe by doing a little bit better than the industry, probably, April onwards. But like you said, it's like a -- it's really a gamble. If they launch the vehicle scrappage policy, things get much, much better. I think our country is more based on sentiments than actual facts. So that's -- but we can't predict it right now. We can't give you an answer today.

Today.

Okay. And sir, you gave some guidance on our raw material. Has the coronavirus situation affected any of our raw material prices or anything so far?

I'm not saying to do with -- TACL has nothing to do with China. And nothing to do with coronavirus. No, not at all. We are not affected. Just we are learning from people that OEMs, electronics are not available to them, maybe the -- it may affect their production. But for TACL, forging, gasket -- I mean, no nothing has been impacted. We are not importing a single piece from China.

Right. But I think of certain raw material prices were getting impacted due to the demand and supply situation due to China, but we aren't facing anything of that sort?

What I'm saying is that there is an opportunity for Talbros. Some of the customers overseas...

Who buy from China.

Who buy from China and they have been affected, maybe we can enter and say, we can supply you in the interim. That's what I meant.

Right. So -- but I mean, from a raw material point of view, stable for us as of now, right?

Nothing at all. Nothing to worry about.

The next question is from the line of Arun Agarwal from Kotak Securities.

Sir, my first question is now since given the uncertainty around guiding on the growth for FY '21, but could you help us out, which are the new businesses that will start in FY '21? And what sort of revenue can we get from those businesses next year?

In the Gasket division, Wire Harness gasket has been technically approved by Cummins. The samples have already gone, already approved. The -- I think the bulk supply will start going from April. And as for the projection given by Cummins, this business can see a revenue of INR 18 crores to INR 22 crores in next financial year. That is one. And -- but before gasket, we are also in the final stages of, I think, passing the test, et cetera. And can -- we can see a volume of around INR 7 crores to INR 8 crores of that starting from July, August.

Sorry, I didn't get this. INR 7 crores to INR 8 crores is from?

Of...

Some other gasket, nothing of Cummins.

Cummins, export one.

Export gaskets.

It's another process of price validation and we can see from July, August that supply will start and it will create a revenue of INR 7 crores to INR 8 crores of new revenue. We are in the advanced talks with Jaguar for our next-generation of Heat Shields business also, I think, which will be closed by the first quarter of next financial year. And we can expect the supply of Cummins from January of '21 of that. And in forging business, we have one new order from our European customers, that will -- supply will be started very soon, and it is around INR 8 crores to INR 10 crores order. We are negotiating, I think, good orders from our export customers and something should come in the -- by the first quarter that some good money -- good top business should come in the next financial year because of that. These are 2 broad things I can say. In Marugo Rubber, Anuj has just told you. We have won the -- we have got the order of approximately INR 8 crores to INR 10 crores from our buyback from our joint venture partner, that supply will start from July or September onwards. For that, it will be there. And now Maruti is also talking to us for -- Maruti is now also working on diesel car hoses.

Hoses.

Hoses for diesel cars. Because now they said they will not make any diesel BS-VI vehicle. But now they are considering that looking into the, who the competition, et cetera, because the competition prices in diesel vehicle has not gone much, 5% to 6% increase there. And they have started working, and we are the official -- of course, we are the only choice for them. I think by the year end, we should start some Maruti new diesel hoses business also.

Okay. And anything on Heat Shield? Any new business that's going to start on Heat Shield business?

Yes. Yes.

We are talking to a few customers. I mean as you know that JLR already started, should be worth INR 15 crores this year from the calendar year...

Yes. This year, it will be INR 15 crores new JLR business, which is around INR 2 crores, INR 3 crores -- INR 1 crores or INR 2 crores this year.

We are talking to other supplier -- other big players in the -- in Europe, where we received tech review go ahead. So when they give you a tech review go ahead, means they start -- they want to develop with you. So give it some more time. I can't give the answers today, maybe ask about another 30 days for more clarity, but we're on track. We're on track. Like as Navin mentioned to you, we are looking at a little bit of an exponential Heat Shield business also from the carmakers. So in another 30 more days, we have more clarity.

Okay. So effectively, sir, what we are talking about is getting close to somewhere, say, INR 35 crores to INR 40 crores of additional revenues in gasket from new businesses that we're going to start? And I think last year, with some INR 333 crores of gasket revenue and this year maybe a bit more. So this is irrespective of whatever volume growth we get from the industry revival? This is something that we...

No. Also, this year, it should not come down from last year. That is the only thing.

Like, you know, I was at the Cummins the other day. So they showed their guidance to be a little bit negative for this year. So currently, let's wait another 30, 40 days for this whole scrappage policy. If that happens, then we can relook at our numbers, what's coming along.

But sir, do you foresee any probability of delays in starting of these orders, which you talked about right now?

No.

No, no. We have delays a few days here and there.

No, no, no.

Okay. Okay. And sir, my other question is on the margins. We talked about the cost-cutting initiatives that we have taken. Now this quarter, the gross margin saw exceptional increase. So could you highlight what exactly the reason could be for that?

Our gross margin has...

Or your raw material costs actually came down significantly this quarter. So...

Yes, that's because there are 2, 3 reasons for that. One is the product mix, number one. The product mix is more favorable toward us. As compared to OEM export and aftermarket, this is more favorable. Number two, we have -- because we have got all the price increases, the effect is really we can see now of that. You can see slowly the effect of that. We are negotiating -- all the price increases, which we are working on that has been completed, 100%. Now it's -- some effect is because of that. Thirdly, we have some -- negotiated some material prices because of the CRCA coming down, et cetera, which we have not passed on to anyone. So one is the effect of that. And the material also -- the euro price also be pulled out a little bit because of import, because we are importing some stuff, and that price also come down on that. Some one-time discount we have got from customers, year-end discounts from overseas customers, that has also been incorporated in this.

Okay. So, I mean, this actually ideally should increase going forward?

No. Not...

No. Not drastically.

Yes. But some increase should be there because one thing we talked about is the material price negotiated which you have not passed on, so that could be one thing and the year-end discount factor?

No, no. That is for other customers, aftermarket and export customer did not have passed.

Okay. Okay. All right. And sir, but the other expenses have seen a good increase, if I look from second quarter was INR 18 crores -- INR 18.5 crores to INR 22 crores.

Other expenses are the -- is a mix of a lot of other stuff. We have -- because of the -- this is some of the accounting entry also there because we have manufactured tools for the customers, some customers BS format -- BS-VI tools. We have sold the tools and the -- all the material costs for that was resolved in other expenses. [ Maybe some next ] quarter. It's abbreviation that's all.

So broadly what sort of margins are we looking at going ahead?

Actually, we should be able to -- I can talk about our last quarter only. I can't comment on next year, because we have not finalized it for next year. I think from -- my EBITDA margin for the last quarter should improve by 0.25 to 0.5, I think so.

Okay. But do we expect some improvement going forward in next year or looking for similar sort of margins what you have done this year?

It really depends on the volumes. It depends on the portfolio of the -- on the BS-VI impact and the product mix. It all depends on that.

So I think in the next call, we should be able to give you a very clear picture on that.

Sir, could you also talk on your exports? So I think that's one thing you're highlighting. In different divisions, how are we seeing the growth? Or I mean, how things shape -- are shaping up in exports?

I think our goal for 9 months on a group basis is around 21% to 22% of our total business if I talk about. And our target is to take it to 25% over the next 3 years.

Yes, next 2 to 3 years.

3 years. I think we are right on the track. And you can -- you will see next year this 21% going to about 22% plus minimum, 22% plus. These are more -- we are quite confident. Our target is 3 years, 25% of our total business.

And we were again in that past also.

Okay. And how that would stand in gasket and forging separately, exports?

So gasket we are about 13% -- in gasket we are...

12%.

12%. It will be around 15% to 17% within the next 3 years. In forging, it will be around 50% -- 48% around, which is already there. The export will increase in Magneti Marelli and Marugo Rubber.

And really, for example, 2 years back the export was 0...

Exactly 0.

Now at this year end up at almost about...

About 10%, 12%.