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

Ladies and gentlemen, good day, and welcome to the Talbros Automotive Components Limited Q2 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the 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, sir.

Thank you so much. Very good afternoon, everyone. A very warm welcome to our quarter 2 earnings call. I hope you all are staying safe and healthy. On the call today, I'm joined by Mr. Navin Juneja, our Director on the Board and our Group CFO. We also have SGA on the line, 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. Before I get into any details about industry and on our performance, I'd just like to highlight that we're extremely pleased about our performance in quarter 2. I will let Mr. Juneja talk in detail about these numbers, but it is a very heartwarming performance by our company. Let me begin with a few updates on the industry. The effects of COVID on the auto industry are still extensive. The entire world was chasing around to absorb the collapsing demand and the fall of supply chain. India's auto sector, which contributes more than 7% to the nation's GDP, was struggling with the extended slowdown when the lockdown happened. WHO knew that the safety of individual will be at the cost of huge impact on the economy. However, the human being is a smart creature, and he always finds a way out and adapts. The world has started living in the new normal, which is indeed transformative. There has been a fundamental change in demand by the consumers within the auto segment, which should not be overlooked by the industry, and must adopt to capture the market share. There have been several first-time buyers. A lot of shift has happened from shared mobility to personal mobility. And this, you will all see has resulted in the auto industry doing very, very well in the quarter. The automakers are emerging from the persistent downfall over the past few quarters. The festive season, linked with personal mobility and pent-up demand, has illuminated the demand, and the automakers are now hoping the recovery to last longer even after the festive season is over. As per the data published by CM, the total production of vehicles for quarter ended September 30 showed a degrowth of negative 7% as compared to the same period last year. While on a monthly basis, there were improvements in the performance. The total production of passenger vehicles, 3-wheelers, 2-wheelers got it settle in the month of July showed degrowth of 29%; in August, 3%; while September, finally showed a growth of 12% over last year September. Basically, even the quarter 2 is showing a decline of negative 7%. The real growth started coming in the month of September also with a little stagged growth. Firstly, it was the tractors which came to the growth, then the 2-wheelers and then finally the passenger cars. I'm proud to announce that in the challenging times, Talbros' counter efforts to build a strong order book is giving us fruitful results. We are in the process of executing our order book of $31 million over the next 5 years for both the domestic and the international market. We are constantly working on increasing our export percentage to our top line and which you will see in the presentation how it is moving in the right direction. Let me give you a quick brief about our company. Our business is broadly divided into stand-alone business that's gaskets and forging and our 3 joint ventures with global auto comp leaders for gasket suspension and chassis and as well as anti-vibration components and hoses. We have a very hedged auto component supplier. Of our domestic sales, 36% comes from 2-wheelers and 3-wheelers, 28% comes with the -- from the passengers car segment, 18% comes from the heavy-duty commercial vehicles, 11% comes from the agri and the off-loader. So we are part of the entire spectrum of the products that are manufactured within the country as well as internationally. Let me give you some details on the segment-wise business. Let's start with the gaskets and the forgings which is our stand-alone business. In our stand-alone Gasket business, we continue to hold a healthy market share domestically. We are the leaders in the country, and we are ahead of competition by a long way. Our focus on BS-VI product line and OE export business is really helping the cause of the Gasket division. Along with the joint venture, we hold a near 50% market share in this segment in our country. As mentioned to you earlier, we've worked very, very hard to move from BS-IV components to BS-VI components because, as you know, our gasket is a product that gets fitted on the engine, and all the engines have changed from BS-IV to BS-VI. We have successfully commissioned all our OEMs with our BS-VI product line, which also helps in adding some value-added and -- increase in value per component for our division in the commercial vehicle space. We are particularly focused towards increasing our utilization levels of post-coating lines, as this will reduce our imports and result in cost savings. Our continued persistence with our raw material supplier, called Lidl, is helping us getting local materials supplied to us from quarter 3 onwards, in India itself. This will tremendously improve in reducing the operational costs. It'll reduce working capital days and help in return ratios. I'm very proud to announce that we've made very significant inroads into the Heat Shields product line within the country. We've secured some large orders from domestic OEMs for the first time in India for the Heat Shields product line. This is the product for future. This is the product for noise, vibration and heat, and it is something which is going to be there for a long, long time. And we have secured orders from the 3 biggest car makers in the country. The Forging business is an outlier in this year and in this quarter, which Navin will take you through once he talks to you about the numbers. But we are getting a lot of traction from our customers both domestically as well internationally on the current businesses and going forward. Our Forging business has a market share of 50% in exports. This is an achievement that we are very proud of, that we're exporting -- almost half of the revenue is exported to all over the world. We are also now moving to heavy value machine components, which will improve our margin trajectory, which you'll also see in the numbers in the speech ahead. We have completed the installation of the 2,500 tonne press, and now we are a one-stop forging plus machine in-house from 750 tonnes to 2,500 tonnes. Coming to our joint ventures. We have a joint venture with Magneti Marelli, which is a very large predominant based on a dollar, which is for basically the chassis components. Even in our joint venture with Marelli Talbros, we continue to supply to the leading carmakers in our country for suspension components. And we also have our export percentage of about 25% from leading carmakers in Europe at the moment. Talbros Marugo is one of our youngest companies. This is again a joint venture with Marugo Rubber Japan. This company is -- manufacturers anti-vibration components and rubber components and hoses for the automotive industry. Here also, we're very proud to say that we did saved -- we did face a lot of headwinds out here with the diesel time band, as a lot of our products work for the diesel engines. But we very swiftly moved the product portfolio towards petrol vehicles, and we are supplying in a big way to vehicles and carmakers and also exporting back into Japan. All I can say is we are a multi-product company with -- and into multiple segments. Our strategy to gain market share domestically and to keep knocking on the doors of global OEMs is paying us dividends. I'm very hopeful that the growth that we saw in quarter 2, I'm very hopeful that the momentum continues in quarter 3 and quarter 4 because I still feel that the commercial vehicles are yet to pick up speed and where we are a dominant player. With this, I'll let Mr. Juneja update you on all the financials for the quarter. Thank you so much.

Thank you, Anuj. Good afternoon, and a warm welcome to all the participants. Let me begin with the financial overview. In the Gasket division, including our JV Nippon Leakless Talbros, for Q2 of FY '21, our stand-alone gasket sale was INR 67 crores as against INR 61 crores in Q2 of FY '20, a 9% growth we achieved in the quarter. On a half yearly basis, we reported INR 98 crores revenue as compared to INR 134 crores in the previous year, the same half yearly basis. Revenue of NLK was INR 11 crores in Q2 of FY '21, same as Q2 FY '20. This segment saw EBITDA of around -- almost about INR 11.4 crores for Q2 of FY '21, 10% growth Y-o-Y basis. Forging division. The Forging business has continued to perform well. The revenue in Q2 FY '21 was at INR 42 crores as against INR 30 crores in Q2 '20, a healthy growth of 38%, which is the highest growth amongst all the products, segments of our company. Now coming to Magneti Marelli Talbros Chassis Private Limited, our share in the total income for Q2 '21 stood at INR 16.2 crores versus INR 15.8 crores in Q2 of FY '20. Coming to now the Talbros Marugo Rubber Private Limited, our share in total income for Q2 FY '21 stand at INR 5.5 crores vis-à-vis INR 5.6 crores in Q2 -- Q1 of FY '20. Now coming to the consolidated financial performance of the company. Total income, including other income, stood at INR 110 crores in Q2 of FY '21 as against INR 92 crores in Q2 of FY '20. Talbros reported double-digit revenue growth on a year-over-year basis during the current quarter and has more than doubled the revenue as compared to Q1 of FY '21. EBITDA including other income stood at INR 17 crores in Q2 of FY '21 as against INR 10 crores in Q2 of FY '20. Continuous focus on cost optimization resulted in positive EBITDA during these challenging times. Our PAT stood at INR 10 crores in Q2 of FY '21 as compared to INR 3 crores in Q2 of FY '20. From October onwards, against the various cost-cutting measures, which we've undertaken, we have -- one of the cost-cutting measure was our salary cut on a graded level among all the employees. We have reversed that cut from 1st October, and we hope that with the increased businesses from the -- which we're expecting from the commercial vehicle segment and with our balanced cost-cutting measures still in force, we expect that there will be hardly any marginal drop in our EBITDA level, but we'll continue to perform better than what we did last year. We'll continue to book orders and new set of customers along with the long-term relationships with our existing customers. This is from -- all from our side, and I would now like to open the floor to questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Arun Agarwal from Kotak Securities.

Good set of -- congratulations on good set of numbers. Sir, firstly, on the revenue side, could you help us out how do you see revenue growth going ahead in terms of -- how do you see, under various divisions, the revenues could be over the next, say, 1 year, 1.5 years kind of thing?

I can -- I can't -- if you see -- talk about our division-wise, okay, let's speak -- come out with the gasket division, first. We see that quarter 3 and quarter 4 should be at the same level, not -- it should be at the better level, not below the second quarter, we foreseeing. October was very good, normal seems to be okay. And we foresee, because of the commercial segment, yes, yet to pick up. We should be able to achieve better results as compared to second quarter in Gasket division. And next year, if I think with the medicine will be announced, it will come to India by that time, definitely, we'll see a better growth in the next year, FY '20 -- FY '21/'22, with the new businesses also coming in force by that time. So we see a double-digit growth in that business definitely. Now coming to Forging division, the order book is strong till now. And what we have achieved in the second quarter, I think, we will be able to match in the next 2 quarters also. And next year, on a full year basis, we should be able to achieve a growth of minimum 15%, 20% in this business. So Nippon, JVs and this -- coming to MMT, MMT should also able to perform even better in the second half because regular business which was lying low in the first half, will -- is now picking -- started picking up, and we should see a good growth in that business. And from next year, we are expecting one of the orders which we received, the implementation of that order will start from next year. So we'll see minimum double-digit growth in that business also as compared to this year, let's say, in FY '21/'22. Now coming to Marugo Rubber, the buyback of product has started -- will start from January onwards, and we are very, very hopeful that we will do buyback of more than INR 10 crores, Marugo will take from our JV. So next year, I see a double-digit growth in this business also. That is what we can -- I can say about my businesses as of today.

Sir, on exports, we sounded quite positive. Could you help us what are the opportunities we are looking in exports?

Like we mentioned to you earlier, we are -- we've secured orders about $30-odd million next 5 years. That's all on track. We'll also get from some other OEMs with some newer order book, which we'll probably have more clarity after November. So all on track and very positive, and I think we should continue the momentum going forward.

We are in the process of growing some good businesses with our export customers. But we may announce the same as soon as they are closed in -- I think, maybe in a couple of quarters...

Maybe next quarter.

Next quarter, we'll do that.

Okay. And sir, how is the aftermarket doing now post gradually opening up of the economy now?

Yes, aftermarket from October has started picking up a little bit. Yes, in this quarter, we'll see definitely growth as compared to second quarter, definitely.

Great. Sir, on the margins, we reported pretty good margins. Now you talked about maybe salaries have been restored from October, so we will see some increase in employee cost going ahead. But as respect to certain cost initiatives that we have taken, could you just help us what are those costs cutting -- I mean cost items that where we are looking at, which will be sort of come down going forward on a structural basis?

Yes. It's regarding -- one of the stuff is import substitution, that is where we'll impose pull forward from 1st January, okay? And second is our other measures, travel, entertainment, business promotion, we have small stuffs and which we'll enforce till the end of the year. And where our diesel productivity, et cetera, we have taken PAV activities, that is we are full focused on that. So all these measures, products are increased in top line and good product mix, export being good, going to a better share of export in the total sales, we're hopeful that, of course, we'll be able to maintain good EBITDA levels.

And sir, lastly, on the localization of the raw material cost that you talked about, could you help us how much positive impact could we see on our working capital cycle because of that? Any numbers you could just...

I'm talking about the Bajaj, which is approximately INR 18 crore per annum. It will start full from 1st. Partially it has started, but in full force it will come from 1st January. If you see our calendar year, INR 18 crores will the impact, plus my rubber -- I have localized the rubber, that is the impact of around INR 5 crores, INR 6 crores of that. This INR 20 crores, INR 25 crores, it will reduce my stock levels by approximately minimum 6 -- INR 7 crores to INR 8 crores because it -- I did not need to keep inventory for 2 months, 3 months time. It will automatically result in -- increase -- reduce my bank borrowings and the interest from working capital. That level you are seeing -- you can see from the balance sheet, my stocks have come down already from March to September, you can see that.

Yes, yes. Down again, yes.

Yes. My borrowing has also a little bit come down from March level, you can see that also.

But sir, apart from these, do you see any other measures or measures we might be taking where we could see capital overall cycle coming down in the next maybe a couple of years' time?

Yes. We are constantly working on that completely, whether it's localization, whether it is, for example, post-coating line, maybe in acting capacity in post-coating line. So it's a constant endeavor here. Can't pinpoint right now [Foreign Language] how many days I will buy, yes.

Yes, because of -- we have 2 major customers like Volvo, Eicher and Tata Motors. BS-VI gasket, which we are offering our post-coating. Previously, it used to post -- pre-coated gaskets. So my import of the pre-RCM which is pre-coated steel are also coming down very heavily on that.

The next question is from the line of Shikha Mehta from Equitree Capital.

I just had a few questions. So our margins this quarter are at around 15.5%, which is even better than what we were expecting around 12% to 13%, is the guidance we have been given. So is that 15.5% something that's sustainable? Or is it a one-off this quarter and from next quarter maybe will be going back to 12%?

Yes. I told you earlier because of our last quarter cost-cutting measures, including salary cut, has resulted in that. Of course, we have reversed the salary cut from 1st October. I'm hopeful that going forward my EBITDA level should be around 14% -- 13% to 14% -- 14 -- around 14% -- between 13%, 14% will be there. Not -- it will not come to 12% levels, don't worry, it will not.

Right. And even like our PAT level this quarter, we've done around INR 10 crores, which is better than our peak level before the entire auto situation worsened and stuff. So is this a run rate we're looking at maintaining or...

No, no, PAT is -- because of the lower tax, because we had the losses in the first quarter, so it's -- because of tax thing, tax thing is not permanent, you know that.

Right. All right. Sir, can you give us some guidance...

We should link to the EBITDA. And we tie -- we should work on EBITDA, balance is nothing else, but the interest and depreciation. Interest, we are constantly working to bring it down, don't worry.

Right. And sir, could you give us some guidance on the CV space? Most people were expecting it to improve by the festive season. So anything on that front?

Yes. CV space, it's definitely improving. The business of Volvo has improved. That is now continuously improving. It has really doubled from the level of others. We have received 2 days back the projections of Cummins till March. And they are talking about 8,000 engines per month as compared to 4,000 to 5,000 earlier. That what we can say. It seems to be on the [ co-intelligent ] trajectory.

I think it's going to be very positive going forward. All our presence have told us that January, February, March looks to be bumper for the...

For the commercial vehicles.

For the commercial vehicles. And let's all hope that this scrappage policy comes out also because that is something that has been in toss for the government and the industry for quite some time. If that happens, I mean that will be a double bonanza, Diwali bonanza, whatever you want to call it. It will be like...

Right. And sir, could you give utilization for forging and for gaskets?

Yes, I will give you. My gasket utilization on an average -- because we have 3 facilities, on an average it is 81% -- around 80%, you can say. In the forging -- we have forging capacity and the machining capacity. In the forging capacity, it's around 80% to 85 -- 82%. And the machining capacity is around 87%. You want JVs also?

Yes, please?

Yes. In MMTC, it's around 80%; and Nippon Leakless, it's around 75%; in Marugo Rubber, in the anti-vibration, it's around 80%; in the whole business, it is around 35%.

[Operator Instructions] The next question is from Sunil Kothari from Unique Investments.

Sir, just wanted to congratulate you for all the fronts -- on all the fronts, the way you are really doing good job on cost, cost measures, cost cutting. Overall, the way we sold our cash flow, this -- in a very tough time, we have reduced our debt by roughly INR 10 crore. We already invested in property, this -- I mean new plant and equipment. So it's a really great job you people are doing. So just congratulation for all these things.

Thank you, Sunilji.

Thank you.

Okay. Sir, second, just wanted to -- I mean ask or maybe just I want to understand is...

Sir, your voice is very low. We cannot hear you.