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

Ladies and gentlemen, good day, and welcome to the Talbros Automotive Components Limited Q3 and 9 months FY '21 Results 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 date of this call. These statements are not 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.

A very good afternoon, everyone, and a very warm welcome to our quarter 3 and 9 monthly earnings for the year '21. I hope everyone is safe and healthy. On the call today, I'm joined by Mr. Navin Juneja, our Director on our Board and our group CFO. We also have on the line SGA, our IR advisers from Mumbai. 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. The Indian auto sector has been facing deep and structural slowdown even before COVID started. Overall sales of the automobiles were already behind by many years in the fiscal '19/'20, while the pandemic slowed it even further. However, the industry is now picking up gradually, and it is delighted to see the kind of demand that we're seeing in the automotive industry across all segments, where Talbros is a player in every segment of the auto industry. The budget, too, was pretty interesting. After a long, long time, they did give -- finally spoke about the scrappage policy, which we all have been waiting eagerly for. As you know, we have a substantial share also in the commercial vehicle space where we provide products of BS-VI, which are high value-add components. So if this scrappage policy goes through, which I think it will go through, this will immensely benefit our company. The government has spoken about the PLI scheme, which is also very, very interesting for people like us who are export-oriented. As for the data published by CM, the total production of vehicles for 9 months ended December 30, '20, showed a degrowth of 29% compared to same period last year. However, October month showed drastic improvement in the performance. The total production of PVs, 3-wheelers, 2-wheelers, quadricycles in the month of October showed a growth of 36%, 1.7% in November and 9% in December. We strongly believe this momentum will still carry on. As we're already sitting now on the 8th of February, we have vision going forward that this demand is continuing, it is not stopping. Now I shall give you a brief about our company. Our business is broadly divided into a standalone business, gaskets and forgings and have 3 joint ventures with global autocom leaders. Again, for gaskets, for chassis and for rubber products. As I've mentioned to you earlier that we are a very hedged automotive company. Of our domestic sales, 38% is -- comes from 2- and 3-wheelers. You all have seen the momentum in Hero and Bajaj. We are single source to these customers, and that's taking the momentum even forward. 26% of our sales comes from the PV segment. Here also, we supply to the market leaders like Maruti and Tata. 20% in the CV space and 11% in the agri space. Let me just talk a little bit about our divisions in little brief. In our Gasket business, we have a majority share of over 50% in the country, focus on OE. Export business has helped us secure orders from established international brands on the Gasket business. Our strategy was very, very clear. We wanted to gain more market share and more momentum in the domestic market, where we went aggressively investing in the BS-VI technology, which will pay us dividends as we move forward. We are also working aggressively on the post coating line, which helps us reduce imports and savings. Within the Gasket business, we've always spoken to you about the Heat Shields business. The Heat Shields business is a futuristic product for noise, vibration and heat. We had signed up an exclusive contract with Sanwa Japan in the month of October to enter the PV segment. This is a very important point which I'm making because this will enhance the revenue going forward of the Gasket business. So in the gasket space, we continue our dominance in the ceiling of commercial vehicles, agri's and 2-wheelers. And in the Heat Shields space, which is light-weighting product with using aluminium, will help us move into the PV segment in our Gasket business. This is a very strategic MFO alignment and coexistence in the division. The Forging business has been an outlier for the last couple of quarters. The growth that which [ Mr. Juneja ] will talk to you about in the future presentation is very, very strong. In the Forging business, we have a fantastic product mix of almost 50% supplies to the OE export margin and 50% domestic. We're working again out here to try and increase our retail ratios out here by moving towards heavier machine components in the forging space. Coming to joint ventures, you all know that we have a joint venture with Marelli for chassis business. This is a 50%-50% joint venture. Here also, we are a dominant player in the domestic market and about 16% now come from exports from a European carmaker within this division. Again, like the Forging business, this division continues and will continue to grow at a rapid rate, maybe more than the industry also. Talbros Marugo is our smallest company. But again, it's a shining star. It's shown tremendous growth in the last couple of months. This is again a joint venture, 50-50 with the Japanese company called Marugo Japan. Here, we supply rubber conveners and hoses to the domestic car market. Here also, we are now exporting our components back into Japan with the help of our JV partners. Overall, I'm very happy to announce and share again where we have won multiyear order from large European car manufacturer. This is our second large win in the current financial year and a testimony to our capabilities of a trusted and a quality focused apply in the auto industry. This order clubbed with other pipeline further enhanced with revenue growth visibility and -- will lead to operating leverage benefits due to low level of CapEx required to fulfill this order. While we started off the year at a lower pace amidst the pandemic, during the third quarter, we've achieved the highest ever revenue numbers with a growth of 35% year-on-year and a 16% of EBITDA margins. This was made possible by us being very proactive in the month of March itself to work with all our presidents to reduce breakeven levels across all plants. Not to mention that a very favorable product mix of almost 25% of export revenues in this quarter has resulted in these kind of margins. Now I request Mr. Juneja to go through all the financials for the quarter. Thank you.

Thank you, Anuj. Good afternoon, and a warm welcome to all the participants. Let me begin with a financial overview. In the Gasket division, including Nippon Talbros, for Q3 of FY '21, our standalone gasket sale was INR 84 crores as against INR 65 crores in Q3 of FY '20, a growth of 28%. On a Y-o-Y basis, we reported a revenue of INR 184 crores as compared to INR 203 crores in previous year 9 months. Total revenue on Nippon Leakless was INR 25 crores (sic) [ INR 26 crores ] in Q3 of FY '21 as compared to INR 23 crores in Q3 of FY '20. This segment saw a combined EBITDA of INR 16 crores for Q3 of FY '21. Now coming to the Forging division. The Forging business has continued to perform well. The revenue in Q3 of FY '21 is INR 49.5 crores as against INR 33.3 crores in Q3 of FY '20, a growth of 48.8%, which is our highest growth among all the product segments. Now coming to Magneti Marelli Talbros. Total income for Q3 of FY '21 stood at INR 41.3 crores versus INR 36.8 crores in Q3 of FY '20. Now let's talk about Marugo Rubber Private Limited. Total income from operations for Q3 FY '21 stands at INR 12.7 crores versus INR 12.4 crores in Q3 of FY '20. The above-mentioned value numbers of all the JV businesses are the total revenues, including our share of business. Now coming to the consolidated financial performance of the company. On Slide #5 of our investor presentation, we have recorded consolidated revenue based on 8 years. Our total income, including other incomes, stood at INR 132 crores in Q3 of FY '21 as against INR 97.4 crores in Q3 of FY '20. EBITDA, including other income, stood at INR 21.1 crores in Q3 of FY '21 as against INR 11.7 crores in Q3 of FY '20. This is on account of continuous focus on cost optimization, which has resulted in positive EBITDA during these challenging times. And we are confident that we would continue to give similar margins in the periods coming forward. PAT stood at INR 10.6 crores in Q3 of FY '21 as compared to INR 4.3 crores in Q3 of FY '20. We continue to book orders and add new set of customers along with our long-term relationship with our existing customers. This is from -- all from our side, and I will now like to open the floor to the questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Agastya Dave from CAO Capital.

Congratulations for a very decent set of numbers, again. Anuj, my first question is, like, 3 years back, you had already started developing some of the BS-VI products, if I'm not mistaken, 2 or 3 years back. And now that we are in that phase where BS-VI is being implemented, are you satisfied with the progress you have made? How much ground have you gained? And how much more remains to be conquered?

So the BS-VI components, which went through a transition were in the engine space in the Gasket division, again, for the commercial vehicles. Here, we have converted all our products, whether it is for Tata Motors or Tata Cummins or Marugo, we've converted to BS-VI. We've converted Hero also and Bajaj also on BS-VI compliance. And the commercial vehicles give you a larger value per vehicle.

Yes. Because of BS-VI engines, my contribution in Cummins has gone up by approximately 3x, I must say. It was initially INR 1,000 per Gasket. Now it's around INR 3,000. My contribution in Volvo has gone up by price wise -- and prices have gone up by 60% in Volvo because of BS-VI. And Tata Motors has gone up by 20%. So -- and the commercial vehicle has just started, just started a little bit. So we can at least -- this traction, which is going on with the scrappage policy, et cetera, it will be -- of course, the result will come little later. But the things have started moving in the BS-VI of the commercial vehicles in a big way. We are expecting good volumes from February, March, April. So we see a good collection in this segment of BS-VI. And there is no call my products, all approved, all passed, all tested, there's no issue for us.

So here, you are still a, like, more dependent on commercial vehicles because if I look at the auto volumes from high-water mark for individual segments, right, our PVs are still down some 25%, 30%. CVs are, obviously, down much more. So in that scenario, basically, you've just converted and your content cost has gone up, but the volumes are still not there, right, compared to the previous peak for the industry?

The CVs are starting right now. CV -- the growth is not started so much in the CV space. So the growth that you see in today -- in Talbros today is basically 2-wheelers, passenger vehicles and export segments. The CV is yet to start. And I think before announcing the budget with the scrappage policy and also the infra spend that they're doing and maintaining a large fiscal deficit, you will definitely see the CVs to pick up very, very soon and we are seeing that today in the order...

We're seeing -- yes, our order book for the company -- we used to be around 5,000 engines, they're talking about 10,000 now, 11,000.

Sorry, can you repeat that statement?

Yes. I'm saying that my -- Cummins, who are a major Indian manufacturer in India, [indiscernible] Cummins, Tata Motors, we see engine everywhere. If volumes start, worth 3-month at 4,000 -- around last month, I think somewhere it crossed 7,000 -- 6,000 to 7,000. Now February, they're talking about 9,000; March, they're talking about 11,000 numbers. So that -- from that perspective, we can see a good traction going forward in commercial vehicles.

Great. Great. And Anuj, one more question. On the CapEx side, what can be expected over the next 2 years? And what are our current capacity utilizations?

Yes. I can give you a broad idea for next 1 year, easily, because 2 years, we are still not sure what will happen in 2 years. Of course, we can consider some 1 year. I think next 1 year in Gasket, we are expecting a CapEx of about INR 8 crores to INR 9 crores. In Forging, we are also expecting a CapEx of INR 7 crores to INR 8 crores in the machining, basically machining.

Right. Right. This includes the maintenance CapEx? Or this is purely growth category?

Sorry?

This includes the maintenance CapEx? Or this is purely the growth CapEx?

Both, both, both.

Both put together. Okay. And what are the capacity utilizations?

Capacity utilization in Gasket is around 85%. And Forgings, we have machine -- in Forging, it is around 82%, 83%; in the machining, it is 90%.

Basically, now you see all the hard work, all the capital done, and we also put up a new plant for Marelli Pune. So now incremental CapEx will give you exponential growth as long as the industry is in a upswing.

And like new order of Magneti Marelli, we are talking about INR 14 crores per annum, it's quite a CapEx of INR 4 crores to INR 5 crores, that's all. That will be done, and it will be there till the life of the product. And this machine can be used for other products also.

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

Sir, congratulations on a good set of numbers. Yes. Sir, my first question is on the Forging division. Now with current capacities and maybe you also talked about doing a CapEx of around 8 -- INR 7 crores, INR 8 crores more in Forging. What sort of peak revenues can we achieve with these kind of investments, say, by FY '23?

Arun, this, at present, I'm producing around INR 15 crores, INR 16 crores per annum. In Forging, I have a capacity to produce up to INR 20 crore-plus easily, okay? In machining, the problem is I'm outsourcing, what I'm doing, is to put the major investment in machining. Lot of things are being outsourced outside, okay? Lot of machining is done out, might be outsourced. First of all, I'm trying to bring it inside to reduce -- improve my quality, lead times, et cetera, et cetera, plus I'm enhancing the machining capability, so I can see if I produce INR 20 crores in Forging and in machining, I can -- this CapEx, I can easily achieve INR 22 crores, INR 23 crores per month.

Okay. And will this also lead to some improvement in margins once we do in-house machining? Or it's just to improve the quality and the lead time?

I'm not working on improvement in margins because basically, product quality has to be slowed, my rejection will come down, my transit time, et cetera, my inventory will come down. Because inventory is at my vendor end also, my end also, so I'm trying to consolidate all those stuff.

And sir, given the -- how the exports are doing for you all and recovery where we might see in the CV segment as well, how do you see the Forging division doing, say, over the next 2 years, say, FY '22 and '23 for you all?

Our plan is to that Forging division should end up at about INR 135 crores -- at about approximately INR 135 crores to INR 140 crores this year. So we are -- my target is within next 3 financial years, it should be -- touch INR 300 crores easily.

You see, this is definitely a growth driver for us because the kind of traction that we're seeing today with the customers, both [indiscernible] and overseas, it looks in that direction, for sure.

For sure.

All right. And sir, in terms of your third quarter margins, can you share your thoughts on how much impact was on account of, say, product mix change? And how much was on account of cost-saving measures you would have undertaken over the past few quarters?

I think it's very difficult to bifurcate the 2. Cost saving measures result in a sharing of manpower by 1.5%, product mix add value, but currently Mr. Juneja answer that on our behalf.

To dissect it, salaries were reinstated [indiscernible]. It has an impact on salary wages. The best part in last quarter is my Forging product mix. Forging product mix was 54% export and 50 -- balance is [indiscernible] 50-50. In the last quarter, you saw 54%, number 1. Number 2, there were material increases also in the last quarter. You should not forget that, in the both Gasket and Forging, we had a big impact on material price increases. And of course, with its good product mix, we are able to show put results in the Forging EBITDA also. But I foresee this -- of course the price really has been -- majority has been recovered in the Forging division. In the Gasket division, OEs has some -- majority OEs has given, balance OE will give in this quarter, plus aftermarket increase, we also launched for 1st February. Going forward, I think, in spite of this and product mix going haywire by 1% or 2%, we think we should be able to maintain EBITDA of around 50% easily.

Okay. And sir, on your gross debt, if you can help us out, how much is the long-term and short-term debt -- gross debt here?

Gross debt -- if I'd say, my working capital is INR 90 crores, my term loan is INR 35 crores, which includes the maturity of -- including money, the maturity also is there.

Sorry, how much is the long term, you say?

So when you show the industry in the balance sheet, balance sheet shows short term, short-term includes 1-year maturity of term loan also.

Okay.

If I do that way, it's INR 100 crore my short-term borrowing and INR 25 crore is my long-term borrowing.

Sir, this quarter, we -- I mean, this quarter was a good quarter for us. So we would have generated good amount of cash this quarter. So did you see any -- because I don't see any reduction in -- on a quarter-on-quarter reduction in debt levels. So do we have some cash in our books or how, sir?

Short-term debt has reduced, but we borrow money for our -- I think we borrowed INR 2 crore, INR 3 crore for our machines, borrowed another for Gasket also in this quarter also. Plus, you must see, the cash has just started. In the first, just 6 months, we were just at INR 1 crore profit only.

Yes. No, sir, I'm just comparing it from September 2020 to December 2020.

More or less same level. It has not gone up. Not gone up. Not gone up.

Sir, this is the operator. Sir, the audio is not coming clear from your line, sir. There is a slight disturbance coming.

Okay. Now it's okay?

Sir, it's still the same.

Same? [Technical Difficulty] Now?

Yes, little bit better, sir. We'll take the next question from the line of Sunil Kothari from Unique Investments.

Very hearty congratulations for such a good performance.

Thank you.

Thank you. Thank you, Sunilji.

Sir, but my question is that a little bit -- your view on a larger scale. It seems that the industry has taken a very positive trend towards not just revenue growth, but in terms of exports and profitability also. So what's the change strategically happened? It is structural or it is temporary? So I wanted to understand your view looking at way during the last 3, 6 months, industry has grown, you are growing and your confidence seems to be very high. So what is it? Is there any -- business competition has been removed? Or is unorganized sector has been removed? Or what has happened? If you can a little bit explain here.

Sir, if we talk about business-wise. Let's talk about Gaskets. Gasket BS-VI is giving me a good -- because we are one of the only players in the gasket industry, who are BS-VI approved from all OEMs. OEMs are showing after the lockdown is over and the country is opening up, they are showing very good traction, very good traction because people are still avoiding to go to metro, share mobilities has come down drastically. So we want to -- it is resulting in the growth of every segment by 2-wheel, 3-wheeler, 4-wheelers. Maybe commercial has just started, commercial scrappage policy is here. So the momentum is very good. And being a single source, we are showing very good traction in this. Plus, aftermarket has started picking up in the last quarter also. We have seen a growth in the aftermarket in our business in the last quarter also. And this quarter, we are seeing a strong recovery in the aftermarket business also. Plus thirdly, my commercial vehicles. There, I was -- I'm BS-VI approved. So their growth had just started again. I just told earlier in the call, the Cummins, which are my major Indian manufacturers, it was 3 months back, plus 4,000, 5,000. Last month, they are around 7,000. Now they are for 9,000, 11,000 engines. So my -- when my product is BS-VI approved, it's giving me immense opportunity to export the same product because all over the world, there is no other standard except BS-VI. There is no BS-VII there. So my products are also at par with the world-class products also. So there is a good traction. I am seeing good -- we are having -- in the advanced stage of having good order book of our exports also in the Gasket business alone, I'm talking. Now coming to the Forging. Forging, of course, you are right. Domestic, it was -- till September, domestic was on the lower scale, then the 2-wheelers started. We are supplier to Musashi for 2-wheelers gears. In that period, my export was customers like GKN and JLR, their schedules were fantastic. In fact, GKN has doubled their schedule on us because they are -- because they have got the order of Volvo from China also. And my component, which was -- we used to go there has doubled the -- they have doubled our capacity. So -- and that's a very, very good traction. And this is not temporary. We asked them. And this is going on still -- it's going on steadily. Plus JLR. JLR has -- have started in a very good note. And now they have approved -- added 1 or 2 more products. So we -- and JLR is just now opening [indiscernible] now [Foreign Language] as everything is online. We expect very good traction from them. That's why I am putting up more machine line, bringing it in-house, so that my -- I can produce the product in time with good quality because quality is a very, very important factor there. So now this month, we are -- my Indian OEM has started doing their schedule. [indiscernible], they used to be INR 30 lakh, INR 40 lakh per month. Now they are talking about INR 2 crore per month also. Now the domestic will start. BMW, the whole year went very well. They are -- BMW never came down.

There is demand. There is demand, we have not been able to understand. Like, Tata Motors is going crazy. [indiscernible] our presidents are like, sir, how do we produce so much. Even February, they're not stopping. Maruti is doing well, Hero is doing well, Bajaj is doing well. There is demand. There is [Foreign Language]

Great. Great. So sir, as you rightly replied to the previous question about Forging you'll be targeting to achieve INR 300 crore in next another 3 years from maybe INR 150 crore current year. What should be the -- because Gasket division is coming out from the sluggish last 2, 3, 4 years, heavy vehicles demand and all these things. So looking at the improvement in tractor, heavy, agri, construction equipment, Cummins, Gaskets would be, what is the achievable target over the next 2, 3 years?

Sir, Gasket, if we add this year, it should be around INR 250 crores -- around INR 245 crores to INR 250 crores in between that. I easily see in next 2 years, going up by 20% per annum approximately.

Okay. Okay. Because suppose, sir, if heavy...

We are looking at very, very good export opportunities in our Gasket business, please. Now it's BS-VI, we are BS-VI, world over is BS-VI. So previously, we were BS-IV, world was BS-VI, we couldn't export much. Now we are BS-VI.

Our exports also in Gaskets have now come up to 16% from our 10%, 11%, historically. So I think there are a lot of positive talks that are happening with the OEM in the U.S. and us. Maybe next couple of weeks, we'll give you a better idea. But definitely, what Mr. Juneja said, it'll be achieved because there is some strong lobbying happening out there for export business.

Okay. Great, sir. And sir, regarding aftermarket, actually, currently, also, we are just 6% of our revenue. Our other division is definitely growing well. But do you see any major scope to enter the aftermarket very strongly with very high profitability? Because nowadays, it seems a small players, unorganized players because of this demand and after it is GST and with COVID, 2 sectors and those small players are out of the market, they are not capable to cater. So do you see any opportunity in aftermarket?

Sir, aftermarket is not a huge market as well because a lot of OEMs have also set up shops their in the aftermarket, like Tata has their own outlets in the aftermarket. They are buying through us and supplying there. Maruti has own outlets. Everybody's own outlet is there. So -- it's indirectly -- I said to OE and OES also. OES is what? It goes in the aftermarket. So the growth will be at 10%-plus easily, 10% to 15% growth will be there.

And sir, would you like to comment on the -- any major growth possibilities in JVs, any, Nippon Leakless or maybe...

Any what?

Any -- or joint venture, Nippon Leakless or Magneti Marelli or Marugo Rubber?

Can you repeat the question? We lost your voice.

Yes. Sir, basically, I'm trying to understand is what is the scope of growth for all these our 3 JVs over the next 2, 3 years?

2 joint ventures, Marelli Talbros and Talbros Marugo is exponential. The growth that we are seeing in quarter 3 of Marelli and Marugo, where export orders picking up on JLR and Japan, and even the domestic business where they are supplying to Maruti and Tata is definitely going fabulous. You will see the numbers in quarter 4, but there is a growth -- good, very good potential, like, Forging, Marelli Talbros also in the next 2 to 3 years should...

Should be targeting INR 250 crores to INR 300 crores.

So we are targeting about INR 250 crores to INR 300 crores. And Marugo Rubber should touch INR 100 crores in -- within 3 years. So that small company, INR 30 crores, INR 40 crores, now you're seeing this also. Nippon Leakless will only remain a player with Hero MotorCrop in HMS side. [Foreign Language] that will be the growth. As I told you earlier also dedicated Japanese transplant, this was to make this. So you'll see growth from Marelli and Marugo, both.

Right. And sir, my last question is which Korean players are becoming very strong in India, Hyundai and Kia, both. How we are connected with them? And any new tie-up, new product range from either Kia or Hyundai?

Yes. We have -- I told you, and I think we have announced that we have -- in the Heat Shields business, we have received the order from Hyundai Motors, which is under development. I think by the next 6 months, the supply will start. After that, we are expecting some good orders from Hyundai. And Kia, Kia engines are also made by Hyundai. So we will enter both Kia and Hyundai through this Heat Shields.

Great. Great. Because both those players seems to be very promising and very highly successful during last 1 year, if you look at.

We are working on that. And we had a -- Anuj had a long chat with the Hyundai team, I think 1 month back. I think he will visit them shortly also. So we see very good traction. First -- this is the Heat Shields they have made -- developed -- made in India. They were importing all heat shield. This is the first one. After that we'll get -- we are promised to get more. Don't worry about that. We are working on that.

I'm having a high-level meeting maybe after some time, now things are opening up, they're inviting you back to meet them. But yes, I think Hyundai and Kia are a good target for heat shields along with Maruti also. Like I mentioned to you earlier, PV business in Gasket is low, but this should make us enter that segment. So we'll keep you posted. Good traction happening out there.

Congratulation for your approach for what you are taking and wish you all the best, sir.

[Foreign Language]

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

Most of my questions have been answered. I just have a few more. Could you give us some guidance or tell us a bit about the demand on the sales, like current order book or how we've done this quarter in that department? Just something to give us a flavor of the demand.

There was no OEM/OES demand for more than a couple of months, is there. Since you are a single source, you are a good vendor with that, as soon as they grow we will grow. But broadly, this quarter, which is -- we are expecting the fourth quarter to be as good as third quarter, maybe slightly better. And first quarter, as per today, also seems to be a better -- good quarter.

But she's talking about Heat Shields.

You are talking Heat Shield?

Heat Shields, yes.