Uniparts India Limited (UNIPARTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Uniparts India Second Quarter Fiscal Year 2024 Conference Call, hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Ms. Shrida Shah from Go India Advisors. Thank you, and over to you, ma'am.

Thank you, Alison. Good afternoon, everyone, and welcome to the Q2 FY 2024 Earnings Call of Uniparts India Limited. We have on the call with us Mr. Gurdeep Soni, Chairman and Managing Director; Mr. Paramjit Singh Soni, Vice Chairman and Executive Director; Mr. Rohit Maheshwari, Group Chief Financial Officer; and Mr. Vivek Maheshwari, Vice President, Financial Planning and Analysis and Investor Relations. We must remind you that the discussion on today's call may include certain forward-looking statements and must therefore be viewed in conjunction with the risks that the company may face. I will now request the management to take us through the financials and the business outlook. Subsequent to which, we will open the floor for questions and answers. I will now hand over to Mr. Gurdeep Soni. Thank you, and over to you, Sir.

Thanks a lot. Good evening, ladies and gentlemen, and welcome to the Second Quarter of Financial Year '24 Earnings Call of Uniparts India Limited. I sincerely hope that all of you are doing very well and having a pleasant festival season. Before we get into the details of the reported quarter, like always, I would like to reiterate the core of our organizational functioning is guided by the principles of passion, innovation, integrity, excellence and teamwork. The Uniparts team has worked diligently and with passion over the years to establish Uniparts as a preferred supplier to the global off-highway vehicle market. The world today is prioritizing food security as well as infrastructure build out and modernization more than ever before. These trends are likely to continue in the long term. And we, at Uniparts, believe that we have a robust global business model to cater to the strength through our off-highway focus and well-positioned product offerings and marquee customer portfolio. Uniparts is present both in the OEM and aftermarket segments in the off-highway industry with strong global operating model and wide customer base comprising of over 125 customers from across the globe. Our products are shipped to over 25 countries worldwide. With this, above background, let me spend next few minutes sharing my thoughts with respect to the current operating environment and business highlights of quarter 2 of the financial year '24. To start with the North American agricultural equipment market demand is soft in the short term, especially for smaller equipment. As guided previously, inventory destocking at customer end continued through Q2, destocking impact is expected to largely bottom out in Q3 and end market demand is being watched for further trend signals. The North American construction equipment market is performing well with infrastructure-driven demand. The demand from European-based OEM customers is stable and the demand in the Indian domestic sector market witnessed slight softness in the first half of the year. The festive period demand scenario would be key to the second half performance. With the foregoing reasons in the backdrop, the overall demand outlook is expected to remain on the softer side in Q3 of FY '24. However, Q4 is expected to be sequentially higher. The new inquiries, engagements, conversions owing to the China+1 theme continue to have a very good traction. The UTV 3PL project is progressing well for pilot launch in H2 of the fiscal. Pilot product shipments have started from India to U.S. warehouses. During the current phase of mixed external environment, we continue to focus on the following: one, closely monitoring the macro and micro factors likely to have bearing on short to medium-term demand; two, identifying opportunity to expedite new business implementation; three, investing for growth and ensuring readiness of our facilities and resources; four, operational efficiencies and costs; and five, augment the digital capabilities creating further agility and optimization to our operations. Uniparts has built a resilient business model and is confident to withstand the short-term challenges and emerge stronger and better positioned for future growth. We are focusing on utilizing current short lean patch by investing for growth and ensuring readiness of our facilities and resources. Our focus and efforts are aligned with the medium-term business plan for achieving the targeted growth in coming years. We continue to focus on our operational endeavors, leverage our competitive strengths and a strong financial profile to optimize the opportunities emerging in the swiftly changing and evolving operating environment. As large global players are increasingly looking beyond China, India's manufacturing sector is expected to benefit significantly from this and we continue to witness favorable impact of new inquiries to Uniparts India. With this, I would like to hand over to Vivek Maheshwari to discuss the details of our financial performance during the reported quarter. Thank you, and over to you, Vivek.

Thank you, sir. Good evening all. I would like to share the following financial and business highlights of the quarter ending 30th September 2023. Revenue from operations for Q2 came in at INR 294 crores which is a year-on-year change of minus 18.4%. Reported EBITDA for Q2 was INR 54.6 crores, which changed year-on-year by minus 32.9%. EBITDA margin reported at 18.6% for Q2. Profit after tax for the quarter came in at INR 33 crores, which is approximately 37.5% lower year-on-year. Other expenses were slightly higher quarter-on-quarter, primarily due to following reasons. For example, energy cost, operating deleverage, coupled with additional levy in the Vizag operations as well as frequent power disruptions in Punjab and Noida operations. Our freight and consumables due to new business pipelines filling up and additional trials for NPD and new machines, travel cost as an investment for growth, maintenance costs, additional preventive maintenance was taken up to make use of lean period and certain legal and professional expenses. So bulk of the above mentioned additional expenses are expected to be transient in nature. Operating cash flow generation for the reported quarter was at approximately INR 59 crores. The net working capital comprising of big 3 elements of inventory, accounts receivable and accounts payable as number of days of revenue from operations on TTM basis was approximately 150 days. Working capital comprising of big 3 elements improved in absolute revenue by approximately INR 16 crores. The business therefore continues to generate higher than guided cash flow. Uniparts balance sheet continues to be net debt free with group net cash position at INR 101 crores at the end of September 2023. CapEx for the quarter has been approximately INR 8.3 crores. Board has declared a dividend of INR 8 per share, totaling to approximately a little over INR 36 crores payout to the shareholders. Inflationary pressure on operating cost remains in the medium term, to be partially mitigated through operating efficiencies. Macro concerns over global economic slowdown, geopolitical uncertainties and impact of worldwide high interest rate continues to remain a key monitorable. With this summary, I would like to hand the conference back to the moderator for Q&A session. Thanks very much.

[Operator Instructions] Our first question today will come from [ Sourabh Jain ] from [ Sunidhi ].

Sir, my first question is, we have seen 4 quarters of consistent fall in revenue and you had mentioned on the last call that the down cycle usually lasts for 1, 1.5 years, and we are expecting Q3 would be somewhat better and Q4 would be good. Now that we have sailed through the first half, do you see more pain in the second half? Or would you say that the worst is behind us?

So this is Rohit Maheshwari. We feel the Q3 also will be similar to Q2. The major part of the inventory destocking will finish up in Q3. And the offshoot -- the green shoot will start coming in the Q4 of this coming year -- this fiscal financial year. So the [ base formation ] should happen by the end of the Q3 part of the financial year.

Okay. But in Q4, do we see some top line growth on a Y-o-Y basis? From your answer, I suppose that Q3, again, would be a degrowth on Y-o-Y basis, right?

So it will be a sequential growth of high single digit in the Q4 part of the year.

Sequential growth?

Yes.

On Y-o-Y basis?

Yes.

Okay. Sir, for the past couple of quarters of the downfall, we were able to maintain the margins, but last 2 quarters have started hitting our margins of course, because of the fall in absolute revenue. So where do you see this fall stopping now? I know in the medium to long term, you have guided for 21%, but we are now more concerned about near term as of now. So what number should we work with for the full fiscal.

So you're right, the lower revenue leading to the negative operating leverage, which is offset partially by the cost optimization. So we feel the Q1 current year margin should -- is a close indicator. We might end up slightly below 20% due to the operating deleverage, but potential is there to climb back as soon as the operating leverage kicks back in as such. So it will be closer to the Q1 '24 margin as such.

Okay. And finally, how are trends looking at our other products like hydraulics, PTO and fabrication. How well are we placed in terms of PTOs for UTVs and ATVs. Would you be able to give some numbers from these new products that you are looking at for next fiscal, for the full fiscal.

This is Vivek. So next fiscal, [ Sourabh ], I think, we will [ revert ] during the Q3 con call with a better estimate. But as Gurdeep Sir mentioned in the opening remarks, the progress on UTV continues to be good. Shipments have started from India. They would be reaching our U.S. warehouses in due course and for a Q4 pilot launch. So that is on track. And based on the response of the pilot loans, regular sales will happen in the following fiscal. But for that, we would be updating more towards the February or March of the following quarter.

[Operator Instructions] Our next question today will come from Miten Lathia from Fractal Capital Investments.

If we could get your comments on the inventory destocking, which you have been commenting on for the past few quarters, that will be very useful.

Yes, sure, sure. So the inventory destocking, it's been 2 quarters already. So in fact, Q2 also saw a similar amount of close to INR 25 crores to INR 28 crores, in that ballpark. Our estimate is that Q3 should see the last meaningful impact, which should be lower than what the impact has been in the last 2 to 3 quarters. And post that Q4 should have very minimal tail-end impact, if any, and then it should be completely behind.

And on your new product development, when could we see tangible sales come into the picture?

So on the UTV 3-point increase as mentioned, the pilot sales should start kicking in [indiscernible]. And on another account on the hydraulics side, the production and shipments have already started for certain part numbers. So that should also kick in H2 of current fiscal year. But -- the runway is long and certain product development is still happening. So more meaningful amount would be kicking in, in the following fiscal.

Vivek, this is Paramjit. In addition to this, I think even the Caterpillar 1, the dual sourcing project will -- you will see the first meaningful sales in quarter 4. And even the new customer we took on the aftermarket side with 700, 800 stores their first sales will also kick on in quarter 4 of this year. So hydraulics, UTVs, all the new business, you will see bunched together in quarter 4.

So if we sort of put this all together end of destocking and the new products kicking in, do you want to sort of give a ballpark on what FY '25 growth could potentially end up looking like?

See, as I mentioned in response of the earlier question as well. We would be in a better position during the Q3 conference call to do that. Because, see, although, yes, a lot of new business is kicking in, but the end market still remains a little volatile. So a better estimate would be available closer to that time, same thing, although it looks stronger as of now -- it is definitely looking stronger.

Our next question today will come from [ Vibhav Jain ], an independent investor.

Just a couple of questions from my side. So I just wanted to know the breakup of inventory in terms of raw materials, work in progress, finished goods and stores and stocks for this half year ended. And also, given the environment, given the demand environment that we have, are we -- have we taken any production cuts? And how is that translated to our stock balance?

So in terms of the breakup of inventory, I'll have to revert with specific numbers, but it is heavier on the FG side because of our operating model, which is the warehousing chains carry a lot of finished good inventory. More specific numbers I'll have to revert. Then due to the softer -- this thing, yes, the inventory has reduced a little bit, and that's what is also reflecting in the cash flow generation and -- because of the working capital coming down a bit.

[Operator Instructions] Our next question will come from Chirag Fialoke of RatnaTraya Capital.

Just one question on the quarter. You mentioned a INR 20 crores, INR 25 crores of sort of mixed sales from inventory destocking from end customer perspective. Is there any component of also freight in the current quarter sales where freight also has reduced sales and other expenses correspondingly, is there any element of that which was I think, last quarter. That's 1 question sir, and request sort of a little bit of high level commentary from the management on -- the next 2 quarters are fine, but how the next 2 to 3 years are looking like? What is it -- if you can quantify the change in RFQs and new business [indiscernible] now versus the past? How do you see that in terms of the sales?

Thanks, Chirag. So in response to your first question is, I think your question was apart from the inventory destocking impact of INR 25-odd crores. Was there any impact because of the reduced freight expected, right? So yes, because of write-downs on account of freight and maybe a little bit on account of raw material was a little over INR 10 crores impact year-on-year on that account. Yes, also for the second part of your question, which is how the next 2 to 3 years are looking like broadly...

Vivek, just a clarification on that is that INR 10 crores amount, would have been offset by exactly almost INR 10 crores in our cost also, right?

Yes, it's a pass-through.

Chirag, it's a pass through.

It's a pass-through. But optically, it looks like new from the top line, right?

Yes. The timing can change, Chirag. It might not come in a single quarter. It can be spread out over the period as well.

Understood.

And for the second part of your question, I would request Mr. Paramjit Soni to comment.

So Chirag, in terms of the future, looking in, in terms of the rate at which new RFQs are coming, I think we're seeing, frankly, a lot of robust movement. The run rate at which new business awards are happening has climbed up to an annual run rate of greater than INR 300 crores now. And even the execution of the business has stepped up of the -- with customers are taking on all the execution. So like I mentioned earlier, until the last quarter, we're saying, hey, is the -- the last quarter I think hydraulics had started, the Caterpillar 1 was supposed -- I always said it was scheduled to start in Q4. So that is on track. UTV is also on track to start in Q4. Like I mentioned, the other aftermarket customer is also on track, and we're seeing a very high robust traction currently from Bobcat, we're seeing it from Case New Holland. So a lot of this theme in terms of moving from China as well as the theme in terms of rationalizing and derisking the supply chain, I think, those themes are very, very embedded now. So to me, I think, the outlook is looking very strong on it. I think we've had -- the bulk of our problem with the market and the inventory correction and then the price corrections of the freight, the longer time that the freight was on the water. So all those headwinds are behind us now. The small tractor market, I believe, is while it remains poor, like, for example, it's still about 7% to 8% lower in the U.S. than what it was last year. But because of the inventory destocking, I think, we were taking like a hit of close to 25% on it, right? So I think as you go into the next fiscal, I don't think you will see that and the whole thing will climb back up. So for the next fiscal, I think, you will -- it's going to come out that you don't have the inventory destocking issue. You don't have the issue related to freight going down. And by the way, we've got a whole bunch of business coming in. I think we should be seeing back to double-digit growth from next fiscal onwards. The construction market remains good. With the way the interest rates are, I've started observing that some of the new home permits that I track in terms of, how many new homes are going to be built. I think you can see a little bit of softness starting to creep in, but nothing alarming over there. But if the interest rates [indiscernible] are going to probably see some things slow down in a year or 2. But for the rest, I think, it seems all right for the new business just now. And the traction of the major themes on China+1 remains robust.

Understood, sir. Pretty clear. Just 1 follow-up on this INR 300-odd crores of new business awards in a year, that's what you're getting right now? Say 12 months back or 15 months back what would that number have been? Typically, new business awards would be closer to just 8%, 10% of sales. Is that how I should think about it?

The same number of INR 300 crores, I believe, was in the -- for the previous fiscal was more like INR 160 crores, INR 170 crores, right, the annual award. So it's almost doubled from where it used to be earlier. That gives you a sense of what the pipeline is looking like going forward because I think your question was more on the future. So obviously, the pipeline is full now. So you will see the implementation come with the delayed fuse on that.

[Operator Instructions] The next question today will come from Utkarsh Katkoria from Avendus Asset Management.

Just 2 questions. Just on the INR 300 crores new orders that we are winning, is this the quarterly average rate that we are getting was my first question. And second question was on more longer-term outlook. Let's say we come out of this inventory destocking and globally things look better and the rates start moving lower, what is your long-term sustainable revenue growth rate and margin profile that we are looking at the EBITDA level?

So to mention on the inventory correction and all, like Vivek already mentioned, I think, the bulk of it is behind us in Q1 and Q2. Q3 will see a certain amount, but Q4, I think I should be completely done with it. So this is going to be history pretty soon, all right? In terms of the future growth, I'm still maintaining that we will be -- our business model had suggested the 16% growth and 20% growth in the EBITDA level year-on-year. I think we will be back on track to that in our medium, long term, that -- the fundamentals of that haven't changed. You've seen a short-term correction, and most of the bulk of that is now behind us.

Sorry, on revenue growth. So revenue growth can be 15% to 20% on the longer term?

Absolutely. That's the organic growth. This doesn't include acquisitions. But yes, the organic growth is going to be in that region.

And we can maintain our EBITDA margins at the current level.

Yes. I think the 20% to 21% is something that I had said that we will maintain. We are currently seeing it slightly lower in this quarter. Because we get a little bit of operating deleverage and you find this switch on and off the organization, but always at Q4, you will see some higher sales. So you should see that kind of correct, right, because we can already see that happening.

Right. So just 1 follow-up. So what would be, let's say, our key raw materials and what is the pricing environment there for those raw materials?

The primary raw material remains steel. And I think so far in this year, while we -- the prices have remained stable or actually have started coming down a little bit. So I think we don't see any inflationary impacts coming from the raw material side just now. So to us, in any case, it's a pass-through. So I normally don't think too much about it, the larger implication to us over the last couple of years had been the sea freight, which frankly, is now cycled back to pre-COVID days. So I think even that is behind us.

Yes, that's also a positive impact in that sense. That's right.

Yes, which is why you're seeing and frankly, even the lead times with the transit times, containers would take almost -- the average used to be from our facility in India to the U.S. maybe 55, 60 days have gone up to even 80, 85 days, 90 days and the extra working capital was being used there. All that is cycling down, which is why if you see this year, I think our cash flow has been way higher than guidance because a lot of those things are coming out of the system.

On the INR 300 crore order that we're talking about, that is a quarterly run rate?

Yes. See, no, that's my annual run rate at which we are getting new business. So every quarter, you get business award. The way we look at them is we look at it more as what is the value of the business for the full year RFQ quantity, right? The customer tells us this is the annual quantity, right? And based on that is how we measure it. So when I tell you INR 300 crores, INR 300 crores is the annual run rate every year of that business.

Yes. And just to add that this is more like a TTM number, it's a trailing 12-month number.

Trailing 12-month number. And at the same time, what is happening is if you look at the trailing 12 months, sequentially every quarter, it's going up. So it seems like I said, if you had looked at it 12 months ago, it was between INR 150 crores to INR 160 crores, and it's been jumping up.

And typically it would take about how many weeks or months to say, execute an order of this size?

These vary based on the market segment, for example, some can -- they can be as low as 6, 7 months in the aftermarket to maybe 2 years to 2.5 years on the OEM side, depending on the start of the project.

The next question today will come from Anuj Sharma from M3 Investment.

My questions have been answered.

The next question today will come from [ Somil Shah ] of [ Paras Investments ].

I have joined in a bit late, so I'm sorry if this question was previously answered. So I just wanted to know the second half of this fiscal. Would it be better than the second half of the previous year? Or how can you, I mean, give a guidance to that?

So this is -- the Q3 is expected to be in the similar range. And bulk of the inventory destocking pain should be behind by the end of the Q3. Q4 is expected to be sequential growth of high single digit. So on the question that it will be better than the last year. On this basis, it should be ending the year on that.

Okay. Okay. Because I think in previous calls, you did mention we were expecting single-digit growth over previous year, if we compare it full year. So now looking at the current half, would it be possible single digit growth?

No. Our high single digit to double digit is -- it will be a degrowth for the business. You will see on the annual plan business.

But at least second half, we can expect better, no, than the first half?

The baseline will be set from the Q4 for the sequential growth to happen from there as such.

Q3 will be muted. Q4, I think you will start seeing the higher numbers come in. So because inventory destocking is behind us and even the price corrections on freight are behind us now mostly.

So Q3 muted, you were speaking in sense of the previous Q3 of the last year or the Q2 of this year.

It will be similar to Q2, but I'm talking from previous year, Q3 will obviously be lower. But when we get to Q4, I think, we will start to see the growth.

[Operator Instructions] The next question is a follow-up from [ Vibhav Jain ], an independent investor.

Just a follow-up question with respect to what one of the earlier participants asked. So you've always maintained that you will be a 22% sort of EBITDA margin company, 14% net profit and a 7% free cash flow generating company. So in that context, once we go through this lean patch, do we -- with the new orders coming in of the UTV, do we expect the same kind of margin profile? So is this 20% to 22% on a blended basis? Or how do I look at it?

Yes. So I've always said it was 21% EBITDA, 14% PAT and 7% free cash flow, I think that will remain. So you'll just see this lean patch just now. And even now if you look at it, even with the degrowth and all you're still at the 19% and almost 2% is going into your operating leverage itself. The moment that changes your backup in any case because the fundamental issues in terms of recovering raw materials, freight, inflation and all that kind of stuff. I think the business remains robust. The fundamental quoting process and getting business awards at those margins that remains robust.

Once the deleverage starts to end of what we are seeing sequentially, it will start moving in that direction.

So just to understand, the UTV has a similar margin because in FY '22 and '23, we've done a 21%, 22% sort of an EBITDA margin. So even the UTV has the same margin profile.

UTV actually has a higher margin profile, but we are barely seeing any sales of that in quarter 4, the pilot is starting. So UTV when it's in full flow in the next 1 or 2 years, that product segment has a higher margin profile than the others.

Right, right. And sir, in terms of the difference between your 14% net profit and your 7% free cash flow. So I'm assuming, if there's no changes in the working capital as our revenue grows, our CapEx will also keep increasing. So I just wanted to know what are our CapEx plans on that behalf.

When I'm giving you the 7% free cash flow, that is after the capital expenditure. And typically, our capital expenditures to maintain our growth of between 15% to 20% top line growth. Our capital expenditure remains less than 3% of our sales.

Right. And where are you planning this CapEx exactly over to sort of increase our -- I'm guessing it will be to ramp up your capacity. So is there any.

So the last one, we are executing already the project in Ludhiana. So there's a new facility which is coming up in Ludhiana just now.

The facility has already started. It's -- now the ramp-up needs to be done on that.

Due to time constraints, this was our last question, and we will conclude the question-and-answer session. I would now like to hand the conference over to management for closing remarks.

Thank you, everyone. And so as mentioned, we are focusing on utilizing current lean period by investing for growth in ensuring readiness of our facilities and resources. We remain committed to maintaining our high-quality standards and delivering exceptional outcomes. Our focus and efforts are aligned with the medium-term business plan for achieving the targeted growth in coming years. With this, I would like to thank you all for taking off the time today, and I wish very happy and healthy Diwali to all of you. Thank you all for attending the Uniparts call. Thank you.

On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.