Varroc Engineering Limited (VARROC) Earnings Call Transcript & Summary

Dear shareholders, [indiscernible] to speak to you in the Annual General Meeting of your company, Varroc Engineering Limited. I hope all of you are in good health. Our company continues to progress towards [indiscernible] organization in [indiscernible] circumstances. Over the last 2 years, businesses and the society at large have been faced with unique and unprecedented challenges. We've been living in a VUCA environment, volatile, uncertain, complex and ambiguous. Looking at the past year, while we all [indiscernible] rapid recovery in volume, second wave of the COVID-19 pandemic struck, impacting both [Foreign Language]. Just as we were coming out of the second wave, we saw a worsening of the supply side challenges, particularly the semiconductor shortages, which is continuing and might take till the end of FY '23 to get normalized. Higher fuel prices, commodity inflation and tightening of financing have resulted in higher cost of... So ladies and gentlemen, sorry, I think I will start the meeting by wishing you a very good morning. I welcome you all to the 34th Annual General Meeting of the shareholders of the company. Due to the coronavirus outbreak and the resulting physical distancing guidelines, this meeting is being held through video conference in accordance with the circulars issued by the Ministry of Corporate Affairs. Live proceedings of the Annual General Meeting are also being webcast on the e-voting website of NSDL. We have the requisite quorum present through video conference to conduct the proceedings of this meeting. Participation of members through video conferencing is being reckoned for the purpose of quorum as per the circulars issued by the Ministry of Corporate Affairs and the Section 103 of the Companies Act 2013. The quorum being present, I call this meeting to order. Before we start the main proceedings of the meeting, I request my colleagues on the video conference to introduce themselves. Mr. Gautam Khandelwal will not be joining the meeting as he is unwell, Mr. Marc Szulewicz, Mrs. Vijaya Sampath, Mr. Vinish Kathuria, Mr. Arjun Jain, Mr. Dhruv Jain, and Mr. Rohit Prakash. If you could please introduce yourself.

This is Vinish Kathuria, an Independent Director of the company, joining on the video call from Gurgaon, Haryana.

This is Marc Szulewicz attending this meeting from Paris. I'm an Independent Director of this company.

Vijaya? Arjun?

This is Arjun Jain, Director at Varroc. I'm Joining this -- I'm joining the AGM from Singapore.

This is Rohit here, the whole-time Director of the company, and I'm joining this meeting from the board room along with the Chairman and the other people. Thank you.

Apart from them, we have key executives and senior management joining from their respective locations. Further, Mr. Paul Alvares and Mr. Mustafa Saleem, representatives of the Statutory Auditors; and Mrs. Uma Lodha, Secretarial Auditor of the company, are also present in the meeting from their respective locations. The company has taken all feasible efforts under the current circumstances to enable members to participate through video conference and vote at the AGM. I thank all the members, colleagues on the Board, auditors and the management team, for joining this meeting over video conference. I hope all of you are safe and are in good health. As a notice of the meeting has already circulated to the shareholders, with your permission, I take the notice convening the meeting as read. I would request our Company Secretary to read out the auditor's report.

Ajay, you're on mute.

Sorry. Thank you, sir. The Statutory Auditor's Report on the statutory -- on the stand-alone financial statements and the consolidated financial statements are available on Page # 128 and 214 of the annual report, respectively. Secretarial Auditor's report for the company and for Varroc Polymers Private Limited material subsidiary of the company, are annexed to the Board's report on Page # 95 and 99 of the annual report, respectively. The auditor's report, which forms part of the annual report and which has been circulated to the shareholders, does not contain any qualification, reservation or adverse remark on the financial statements for the year-ended 31st of March 2022. The Secretarial Auditor's report of Varroc Engineering Limited which forms part of the annual report, which has also been circulated to the shareholders, does not contain any qualification, observation or comment except for the following. Now I'll read out the said observation. The gap between 2 Risk Committee meetings, including the year 2021-'22 exceeded 180 days, which is not in compliance with Section 21 of SEBI LODR regulations 2015. The company submitted that the deviation was unintentional and would be taken care of in future. Management response to the above comment. The comment is self-explanatory. This deviation was unintentional and is being taken care by the company. Observation #2. As per regulation 54(2) of SEBI LODR 2015, the company is required to disclose the extent and nature of security created and maintained with respect to secured listed NCDs in the financial results. The company had received notice from BSE in this regard and vide e-mail dated March 31, 2022 imposing a fine of INR 53,100 , which the company paid on 4th of April 2022 vide UTR# 209413671694. Management response to the above comment. In view of the requirement of Regulation 54(2) of the SEBI LODR 2015, the company has taken rectificatory measures and has been ensuring adequate disclosure in the financials with respect and extent to the nature of security created and maintained for secured listed entities. During the year 2021, '22, the company has paid remuneration to Mr. Rohit Prakash, whole-time Director of the company in terms of Schedule V of the Companies ACT 2013 in case of inadequacy of profits. However, the explanatory statement in the special resolution for approval of appointment and remuneration of Mr. Rohit Prakash, which was passed in the AGM held on 14th of August 2020 did not include that information as required under Part B -- Part II, Para B of Schedule V to the Companies Act 2013. Management response to the above comment. The matter was -- the matter with respect to the payment of remuneration to Mr. Rohit Prakash, whole-time Director of the company, is now placed in the AGM for approval of the shareholders by way of special resolution. And necessary information disclosure as required under Part II, Para B of Schedule V to the Companies Act 2013 in case of inadequacy of profits are made to the explanatory statement to the special solution. Apart from the above, there are no further qualification, observation of comments. Over to you, sir.

Thank you, Ajay. Before we take up the first item of the agenda, that is adoption of financial statements, I would like to proceed with the Chairman Statement. Dear shareholders, it is my privilege to speak to you in the Annual General Meeting of your company, Varroc Engineering Limited. I hope all of you are in good health. Our company continues to progress towards being a sustainable organization in extraordinary circumstances. Over the last 2 years, businesses and the society at large have been faced with unique and unprecedented challenges. We have been living in a VUCA environment, volatile, uncertain, complex and ambiguous. Looking at the past year, while we all were anticipating a rapid recovery in volumes, the second wave of COVID-19 pandemic struck, impacting both the supply and demand side. Just as we were coming out of the second wave, we saw a worsening of the supply side challenges, particularly the semiconductor shortages which is continuing and might take till the end of FY '23 to be normalized. Higher fuel prices, commodity inflation and tightening of financing has resulted in higher cost of ownership of vehicles, impacting demand. We're also witnessing geopolitical issues like the Russia-Ukraine conflict impacting the global economic recovery. All this has made the operating environment for the business very challenging, impacting the profitability of the operations significantly. In the background of these challenges, the company took the decision to divest its 4-wheeler lighting business in Europe and Americas and signed an SPA with Plastic Omnium in April '22. We informed all the stakeholders that a transaction will get completed in 4 to 6 months. We are on track of closing this transaction in the first week of October '22, but the leftover equity value will be significantly lower than what we have emphasized earlier due to certain adjustments which we are finalizing with the buyer. And thus, the company will have borrowings in its books even after the transaction. This divestment will help the company to put its bandwidth in identified focus areas to drive future growth in the continued business operations. Our business model for continued operations remain resilient -- remains resilient. And our strategic interventions enabled us to consolidate and grow in a disruptive year. We achieved a revenue of INR 58,422 million in FY 2022 as compared to INR 43,739 million in the previous year, registering an annual growth of 33.6% for our continued operations. The past 2 years have witnessed immense structural shifts in the way mobility is experienced. Globally, the pandemic accelerated the push towards a more ethical mode of transportation with growing awareness among consumers about the carbon footprint generated by automotives. This has led to increased demand for the adoption of EVs, both by users and regulators. We have advanced our business operations to capitalize on the benefits arising from the shift with the incorporation of EVs into our product portfolio. To capture the growth from megatrends, we are happy to announce that the government has approved our application for the production linked incentive, and we will be investing around INR 2,800 million over 5 years under the scheme. At the same time, the policy environment is supportive towards the adoption of EVs with the Government of India launching FAME II amendments and the PMP scheme. Our EV product portfolio will help facilitate this transition, and it is a matter of honor to be able to work with leading OEMs for transitioning to a greener and better work. The VUCA environment we have lived in has automatically made us nimble and agile. We've initiated a strategic exercise to usher in an era of sustainable growth at Varroc. The future of mobility is changing, and we are changing with it. With the divestment of our 4-wheeler lighting business, we will have the management bandwidth and are ready to deploy our futuristic products globally. We plan to leverage the heavy investment we have made in R&D to expand our product portfolio and become a full system solution supplier for OEMs. We're ready to initiate and deploy digitalization, that is automation and IOT, to strengthen our manufacturing capabilities and enhance our supply chain management. This will ensure the quality of our products and also give us ability to scale up at the lowest possible cost. The external business environment is expected to further normalize by the second half of 2023. As we move ahead, we are confident that our business fundamentals remain strong and our operating performance is bound to reflect the resilience of our business model. We are focused on pursuing a combination of growth and margin improvements for our business units. There are several growth opportunities and favorable megatrends that will help secure our businesses. To this end, we will continue to focus on our medium- to long-term strategic priorities and growth pillars. Business units such as electrical-electronics and polymers in India and the electronics business in Romania are geared up to capitalize on specific growth opportunities. We are looking to improve the profitability of some of the business units like IMES in Italy, Metallic Business in India, 4-wheeler lighting business in India and in 2-wheeler global lighting business by a mix of improving internal efficiency, higher capacity utilization and price increases from customers. The future is ours. Together, we can usher in an era of sustainable growth. Together, we can make the Next happen. With this, I express my sincerest gratitude to our customers, employees, bankers and investors for placing their trust in our abilities through an exceptionally difficult year. I look forward to your continued support as we keep pushing boundaries to reach newer heights. Thank you. I now request Mr. Ajay Sharma, our Company Secretary, to provide the necessary instructions to the shareholders regarding e-voting and the resolution as set forth in the notice.

Thank you, sir. In compliance with the provisions of the Companies ACT 2013 and the rules prescribed there under and the SEBI LODR regulations, the company has provided the facility of remote e-voting to the members. The remote e-voting commenced on Monday September 26, 2022, at 9 a.m. and concluded on Wednesday, September 28, at 5:00 p.m. In compliance with the rules on e-voting team framed under the Companies Act 2013, voting at the AGM is being conducted by the same e-voting system of NSDL which was used during the remote e-voting. Members who have already cast their vote by remote e-voting are not eligible for voting again at the meeting. Members who have not cast their vote may please visit the e-voting page on the NSDL website and cast their votes during the meeting. Mrs. Uma Lodha, practicing Company Secretary has been appointed as scrutinizer for the remote e-voting, including the e-voting at the AGM. Since the AGM is being held through video conference, there will be no proposing or seconding of resolutions. The result of remote e-voting, including the results of e-voting at the meeting would be declared on or before October 1, 2022. That is within 48 hours of the conclusion of the AGM and will be placed on the website of the company and on NSDL website which will also be announced to the stock exchanges. Now with the permission of the Chairman, following resolutions as set forth in the notice are being taken up at this stage. Agenda Item #1a, adoption of audited standalone financial statements of the company for the financial year ended 31st of March 2022 and the reports of the Board of Directors and auditors thereon. Agenda item #1b, adoption of audited consolidated financial statements of the company for the financial year ended 31st of March 2022 and the reports of the auditors thereon. Agenda item #2, appointment of Mr. Rohit Prakash as Director who retires by rotation. Agenda item #3, approval for payment of remuneration to Mr. Rohit Prakash, whole-time Director of the company. Agenda item #4, approval for reappointment and remuneration of Mr. Tarang Jain as Chairman and Managing Director of the company. Agenda item #5, approval for reappointment and remuneration of Mr. Arjun Jain as whole-time Director of the company. Agenda item #6, approval for reappointment of Mr. Vinish Kathuria as Independent Director of the company. Agenda item #7, payment of remuneration to nonexecutive directors, including independent directors, but excluding nominee directors of the company. Agenda item #8, ratification of remuneration of cost auditors of the company. Agenda item #9, issue of nonconvertible debentures on private placement basis. And agenda item #10, which is the last item, which is for appointment of Mr. Dhruv Jain as a Non-Executive Director of the company. The text of the resolutions, along with the explanatory statement, is provided in the notice which has already been circulated to the shareholders. Thank you, shareholder. There have been certain questions that we have received. We will request the management to probably answer them one after the other.

So the first question that we have received is with respect to -- on the Indian 2-wheeler lighting side, what is the breakup of the revenues between LED and traditional lamps? Or is the mix shift expected to change with the advent of EV? Could I request Chairman to take this question?

So if I could talk about FY '22. We had a total revenue -- as we're talking about, I presume on the India 2-wheeler lighting side, not on the global 2-wheeler lighting side. So on the Indian 2-wheeler lighting side, we had a revenue of INR 340 crores in 2-wheeler lighting in FY '22. Of this, 55% of our revenues came from the LED side. And this, in fact, is an increasing trend due to the premiumization of the 2-wheelers as well as the adoption of EVs. With the case of 2-wheeler EVs, we can only use LED lighting because of the light weighting. So we see -- so we see an increasing trend and -- you know towards LED lighting as we move forward. So this 55%, we increased it to grow as a percentage. And we also not only with the incumbent customers, but also we are discussing with -- on the EV side and also the premiumization side with a lot of these new EV players as well as the incumbent 2-wheeler players. So we will see more use of LEDs which would benefit largely a company like us. We are a significant player in this category.

Thank you for your explanation, sir. The next question is a hypothetical one. It states, if a complete shift to EV was to occur tomorrow, what percentage of Varroc revenue would be lost to the disruption?

So here, what I would say is that on our total continued operations basis, which was last year about INR 1,500 crores, about 12% of our business shares from scooters and 3-wheelers. Out of this, I can say that 70% to 75% of this 12% is engine-agnostic, so we are affected, which means that only 3% to 4% is at risk. But here, what I would like to say is that, that 3% to 4%, frankly, when it comes to electric 3-wheelers, here is where we have a significant EV product portfolio like traction motors, motor controllers, DC-DC converter, throttle position sensors et cetera, whose content is more than 6 to 7x of that in an IC engine. So if there's a transition to the EV that our company actually, in fact, stand to benefit much more than a loss. And the loss also is only to the extent of 3% to 4% in this category.

Thank you, sir. The next question, again, is on the EV part of it. How many 2-wheeler EV players does Varroc cater to currently on the lighting side? And what percentage of the revenue does the segment contribute currently?

So presently, I can say that we are dealing with 2 big incumbent players on the EV side lighting. And we are in discussions now with both -- all the incumbent players as well as some of the new players to increase our market share on the LED lighting side.

Than you, sir. Now the non-EV questions start coming in. The IMES, which has been a drag on the company's financials, given the turnaround of IMES' operations, any plans to find a buyer and getting out of the business?

So what I can say about IMES is, IMES is a company which we had acquired in January 2007. Yes, it's not a core business, being not part of the automotive segment. So yes, we are open to finding whatever is the best solution going forward. But presently, I would say that our team in IMES in Italy is working very hard to improve the performance there so it doesn't become a drag on the overall company.

The next question is, what are the financial parameters as a company you would want to achieve?

In terms of revenues, I think year-on-year, we would like to grow 8% to 10% more than the market growth. In terms of EBITDA, we want to move toward -- this is for the total continued operations, we want to move to a double-digit EBITDA within the next 2 to 3 quarters and around -- and at about 12% plus on or before FY '25. In terms of ROCE, we want to achieve also a 22% ROCE before or by FY '25. For this, we want to deliver on a consistent basis as a coming -- in the coming quarters. And all steps are being taken so that we can achieve on our above targets.

So a continued question from that one, what would drive the growth of Varroc?

So there are certain areas where we feel will drive our growth in a much more significant way. One is our aftermarket which is doing extremely well and continues to grow in a significant way. Then, of course, the introduction of new products, whether it's on the electronics side or on the EV side. Other is, we are looking at -- with the current customers to increase our share of business. Also, we are expecting a lot of content increase in our product portfolio due to the premiumization and due to regulatory push and scaling of business for EV products and also electronic business in Romania will also help drive this overall growth. For this also, we are now strengthening our key account management structure in our sales to help achieve more customers for products and more products for customers. On back of this, we are confident that in the coming quarters and years, we will be at least 8% to 10% higher than the customer growth. As a company, we're not only looking to grow our revenues, but the growth should be value-accretive, implying that the revenue growth should drive higher EBITDA margins, ROCE and free cash flows.

Thank you, sir. The next question is asking for the rationale for the disinvestment of the 4-wheeler lighting business.

I think seeing the overall environment which we are seeing in the last 2 years, and I spoke in my speech about the VUCA environment, I think this divestment will be beneficial for Varroc. First is, of course, it will greatly help in deleveraging our balance sheet. And at the same time, I think it is only fair to say that it's good that this business is in hands of a larger player, a larger global player. And that's what I feel will happen through the acquisition by Plastic Omnium of this business. Although this actually freeze up the bandwidth, the management bandwidth of the -- of our top management which can now utilized -- which can be utilized now to kind of focus on the continued business where we see a huge amount of growth, as mentioned earlier, especially in India.

Thank you, sir. The next question is pertaining to why do you think that the growth momentum in aftermarket would continue?

Aftermarket is -- for us, has been a high-growth business and also a very profitable business. If you look at quarter 1, we achieved a revenue of about INR 150 crores, which was 46% more year-on-year. And we expect that the aftermarket business for us over the next 3 to 5 years will grow at least 20% CAGR. What we are actually focusing on to achieve this is that -- I mean we are focusing -- we have a focused approach at a target market for demand generation. We have also already worked on minimizing regional disparity in sales, maximizing sales in potential cities and [ product lines ]. We have maintained and are maintaining a very good contain -- a very good connect with the primary, secondary and the tertiary market. We are introducing and introduced a lot of high potential parts through product line extension. And we are also now focusing in a greater way on the export side of the aftermarket. Further strengthening the brand Varroc in the aftermarket by using newer products augurs very well for the group as a whole going forward.

Going forward, the next question is also with respect to what's the management focus as far as the company is concerned?

Overall, I think the focus is definitely like on, -- like I mentioned, on sustainable, it should be sustainable growth with the right level of governance. We want to, for ROCE, free cash flow purposes, we want to do the right capital allocation going forward. We want to be extremely consistent in our operational performance, we want a much improved operational performance and we have set out strong targets in this regard for each and every plant of ours. So continuous improvement, like I mentioned, in EBITDA, ROCE, free cash flow. Probably there will be probably a very detailed and regular reviews on these parameters as we go forward. Also, the kit value per vehicle will go up, which will also help increase our market share. More customers for products and more products for customer is something we will be focusing on. So these are the major areas of focus for Varroc as we move forward. So of course, the most important is that whatever we do, all our improved performances must be sustainable. And that's what we are going to be focusing.

Thanks for the explanation, sir. We have tried to answer all the questions, which have been raised by the shareholders to the best extent possible. I now hand over the further proceedings to the Chairman.

Thank you, Ajay. Now the shareholders who have not cast their vote on the items set out in the notice of the AGM are requested to exercise their vote through e-voting facility available on the NSDL platform which will be available for the next 15 minutes. Members who have not cast their vote yet are requested to do so. Further, I hereby authorize Mr. Ajay Sharma, the Company Secretary, to disseminate the result of the voting and place the results on the website of the company. The resolutions, as set forth in the notice, shall be deemed to be passed today subject to receipt of requisite number of votes. With your consent, I and other board members would like to now leave the meeting. I thank you for all your participation, valuable suggestions and comments.

Thank you, sir. Can we have the 15 minutes time on the screen?