Wheels India Limited (WHEELS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Wheels India Q4 FY '25 Earnings Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Vivek Kumar. Thank you, and over to you, sir.

Thank you, Sesha. Good evening, everyone. I would like to thank the management of Wheels India Limited for giving us the opportunity to host the call. We have with us the senior management represented by Mr. Srivats Ram, Managing Director; and Mr. P Ramesh, CFO of Wheels India Limited. I'd like to hand over the call to the management for the initial remarks, followed by Q&A. Over to you, sir.

Good afternoon, everyone, and thank you, Vivek. Welcome to the Wheels India Q4 press conference. The company has posted revenues of INR 1,195 crores for Q4, which is 2.4% higher than the sales of INR 1,167 crores in Q4 of March '24. And over the same period, the profit registered is INR 36 crores against INR 36.8 crores in the corresponding quarter of FY '24. So a marginal increase in sales, profit pretty much at the same level. At the same time, if you look at it on FY '25 full year basis, our focus on cost control, our favorable product mix and lower commodity prices led to a very strong profit growth. We were able to cross INR 100 crores of net profit last year. We did INR 105.9 crores as opposed to INR 67.9 crores in the previous year. This is a 56% increase in net profit, whereas for the full year, if you look at it, the revenues were less at INR 4,425 crores against INR 4,619 crores. This, of course, this revenue degrowth has been offset in the fourth quarter, and we believe that this trend will continue going forward in the coming year as well, where we do see some amount of growth. If you look at Q4 per se, we saw a marginal growth in top line in the domestic market, driven by a stronger agriculture tractor market. We make wheels for tractors and also a strong demand for air suspension systems for buses that we service. On the export side, the growth was led by sale of windmill components, which saw a strong growth in the fourth quarter. This is as far as demand in Q4 is concerned. During the year FY '25, we made CapEx of INR 250 crores, out of which the largest single project investment was for the tractor wheel plant for larger wheels. And we expect that in the coming year as well, the CapEx will be along similar lines, but the largest single investment in the coming year will probably be for components for the windmill segment. The company had a degrowth in exports last year, marginal about 8% degrowth from our peak exports in FY '24. And this is largely due to a drop in the second quarter of last year in exports. Subsequently, things are along expected lines. And in the coming year, we expect exports to also show some amount of growth going ahead. We are building a strong base, which should probably lead to some amount of export growth over the next 3 years. That base is being built now on which we can actually develop products and also show increase in export sales in the coming years. Lastly, I'd like to mention that the Board of Directors of the company met in Chennai today to recommend a final dividend of INR 7.03 per share. This is over and above the dividend of INR 4.5 per share, which was interim dividend, which was announced earlier during the year. That is it from my side. I’m now open to questions from all of you. Looking forward to your questions. Thank you very much.

[Operator Instructions] The first question is from the line of [ Rajkumar Vaidyanathan ], an individual investor.

Congratulations for the good set of numbers. Sir, just to start with, I just want to know what is the outlook for the exports because in the last call, you said some of the export programs are getting right shifted. So just wanted to know what is the -- if you could give some color.

I think barring all the talk of tariff demand remains reasonably strong, although I do expect that probably towards the latter part of the year, the full impact of tariffs will reduce demand at some point. But the company per se is expecting to show some growth in exports even in the coming year despite this. The outlook, as I mentioned, is quite positive. It is in a number of areas, the export of construction equipment wheels, hydraulic cylinders, aluminum wheels and wind mill components and tractor wheels.

And sir, any outlook on the domestic auto, including the tractor segment, what is the outlook you have?

No, I think each of these industry bodies have made their claims in terms of what the growth will be. If you look at the tractor segment, I expect a fairly reasonable growth, at least about 5%, 6% growth in the tractor segment. About 5% in the tractor segment, commercial vehicle segment, maybe about 3% to 4% and maybe 3% to 4% in the passenger vehicle segment. This is what we expect.

Just a couple of housekeeping questions. The first one is if you see the cash flow, the full year cash flow, I see items on account of obsolesce about INR 6.13 crores and nonmoving and provision for bad debt about INR 3.2. So that is what is shown in the current -- those are the 2 line items I want to highlight in the cash flow for the full year. And if I see your September cash flow, there is an item in negative of INR 5.2 towards I think for the provision for bad debt line item which means you would have provided about roughly INR 15 crores in the second half. Is my understanding correct, sir?

This is Ramesh. Negative INR 5.25 crores, I think we also clarified in the last call, it's the movement in the provision, sir. When provisions are made and provisions are reversed, that is the moment which is coming in the previous period. In the current period, these provisions are relating to obsolescence of fixed assets which has hit the P&L. And since it is a noncash charge, it has been added back, sir. Similarly, on the provisions, we have an accounting rule for bad debt provision. Based on the rules, a provision is being made. And since it is a noncash charge, it's again added back for the purpose of cash flow.

And these are basically provisions which are being reversed in your calculating cash flow because it's not a real cash out?

Yes, they are noncash items.

Sir, the next question is, I see your inventory has come down from INR 880 crores to INR 770 crores. Is it due to the efficiency measures? Or is it due to poor demand for the upcoming quarter?

No, We have cut our inventory. Not to worry about it. It's not related to demand. The answer is it's not related to demand. Demand remains reasonable at the moment.

And the last one, I want to know the reason for declaring 7.03 as a dividend, why the difference 0.3?

Basically, we went through dividend policy and probably we could have come up with a number like 7 and we took 25% of the profits for distribution. That's the reason. There is no any specific reason for that.

The next question is from the line of [indiscernible], an individual investor.

Congratulations on very nice bottom line, which you've shown, which you said was a result of cost control, product mix and commodity pricing. Sir, do you think these kind of margins will continue going on to the next year? And what kind of -- absolutely I realize that the top line will depend on commodity prices and product pricing. But could it be safe to assume that we will have a 10% growth over the absolute number from here on, sir, and the margins will be maintained at current levels?

To answer you, I think the margins will be maintained. Demand from what we see, we see positive growth, but it will not be double-digit margin. It's very difficult for us to show a double-digit margin when all our customers are talking much lower percentages of growth. If you look at the PV sector, Sam's reference is 1% to 2% growth. If you look at commercial vehicles, people are talking about 3% to 4%. If you look at tractor, they're talking 5% to 6%. So given that the underlying industry segments are not growing that much, it would be difficult for us to expect a double-digit growth. At the same time, I would say healthy single-digit growth should definitely be possible.

Let me put it another way, sir. Would it be safe to assume that we can touch that INR 5,000 crore mark this year, sir and [indiscernible]?

If commodity prices is helping, maybe. Margins, I think we'll maintain. I think the overall profit will be maintained. But honestly, it doesn't look like commodity prices will increase too much this year given that everyone is talking of doom and gloom.

Coming on to the next question, sir, is Wheels India has in the past, I think since I've been tracking 4 to 6 quarters has introduced windmill components. Do you think that the pace of the company can change from maybe as some people view a metal converter to an engineering company, sir?

Yes, essentially, we've been looked at as an auto component metal converter, as you put it. But actually, if you look at the company sales, if you look at automotive wheels per se, it is 55% of our sales. And if I include the air suspension part of it, it is slightly over 60% of our sales. Then you have construction equipment wheels, which is different. You have hydraulic cylinders, you have the windmill components, you have some fabrication, all these which are not essentially your auto component type of category. So the company has been very different from a pure auto component player actually for quite some time, but it is enlarging because the opportunities here seem to be larger. So we basically grow as our customers give us more opportunities. And it looks like globally, if you look at it, we are getting more opportunities on the non-auto side.

If I may, sir, what would be the debt on books as at the end of March '26 with this INR 250 crores expansion and your whatever payback you do during the year?

See, if you look at our debt, the debt on the book is about INR 704 crores. And if you look at our debt on 31st March '24, it was INR 708 crores. So our plan is to maintain the debt around the INR 700 crores. And we will be using a discounting of around INR 400 crores to INR 450 crores. So debt will remain at the present level, while we continue to invest on the business at the rate of around INR 250 crores. One thing that I need to highlight here is that, for example, the CapEx that we do is very often not for the year in question, but for the year after that, if you understand what I'm saying. So that is actually one thing that you have to bear, especially when you look at these large industrial componentry, the lead times are about 12 months for capital equipment. So I just wanted to highlight this for your understanding.

[Operator Instructions] The next question is from the line of [indiscernible] from JUS Enterprises.

I just wanted to understand if you can just give a quantitative number on the top line growth and margin for the next full year?

As I said, we are governed by what our customers will end up doing as demand for our product is really very much a derived demand. Broadly speaking, commercial vehicle is talking 3% to 4%, PV is talking 1% to 2% and tractor industry is talking about 5% to 6%. So I would say a single-digit growth probably on the higher end of those numbers.

Sir, second question, I just wanted to understand the export situation with regard to the tariff and everything. I just want to understand like I think one of the competitor mentioned that wins don't come under the tariff. Is that the right thing? Or we are still under the tariff?

No. Wheels India has got so many HS codes. There are some HS codes which are under 232. Clause 232 is a tariff based on 25% of input material. There are some tariffs which are on complete product grouping. So there are numerous tariffs which apply to Wheels India. Let me put it this way. A lot of the products are actually FOB. So the customer takes on the tariff.

So do we have a risk of margin coming down bearing the cost? So what is our outlook ahead in this?

Yes, per se, maybe marginally, but as I mentioned, we expect to be able to maintain our profitability in the coming year as well.

The 7% EBITDA margin is sustainable on a year basis?

Yes. We are confident we can do that.

I just wanted to understand the hydraulic cylinder business, how is it doing? I mean you mentioned there are strong prospects on it. So how do you think about this business from next year?

I think we will probably need to wait till the second half of the year. So I'll just tell you what the prospects are. One is we are looking at doing some contract manufacturing for cylinder works of a large OEM. Still the discussions are not finalized. We are more in the sample submission stage. Second prospect is actually tying up with a Korean cylinder manufacturer, which we started negotiations, but I think it will take another 3, 4 months for it to happen. Thirdly, we are working with one of our large customers who is looking at making us more competitive and also improving the quality system so that maybe a year down the road, he will look at exporting more from us.

So was there any prebuying notice in this 90-day period, like we had some export or it didn't happen?

We really didn't see it. What you're talking about whether people rush to order as much. We are not seeing it actually. We didn't see that. It was pretty much they give us 3 months’ notice, 4 months, it's all as per what they've given earlier.

[Operator Instructions] The next question is from the line of [ Rajkumar Vaidyanathan ], an individual investor.

Sir, the question is on the margin for Q4. Generally, I think in the previous year Q4 call, you mentioned there were some steel discount and something because of which there was a bump up in margin. So do we also get similar such thing in this Q4?

Yes, we did. But as Mr. Ramesh explained earlier, there were also some provisions which we have made.

So in that case, this margin of 8% that you are seeing, so that will be a steady state because even with that, you have still done well. Compared to December quarter, the margin has moved, I think about 30, 40 basis points, it has moved.

Of course, I need to also highlight in this that in the event of any escalation in steel price, it will put pressure on the margins as there's normally some amount of lag effect that takes place when prices go up.

That's the timing difference that you are talking.

Yes. Correct. Last year, we were fortunate that there was no real increase in price. It was only reduction or no movement.

So do you anticipate any increase, sir, based on your current discussions there?

Yes. We believe there will be some marginal increase in the first quarter based on the fact that the government has put safeguard duties on steel. So there would be some increase in the first quarter, which is coming up, but we don't believe it will be substantial.

Sir, any other margin levers that you'll be working for this financial year, given that you've already improved your margins for this financial year, this Q4. So what is the target you have there?

So a couple of areas which will play a key role is our ability to ramp up cast aluminum wheel production, which unfortunately will happen probably more from December onwards because start of production of programs that we have won business are only from that period. So from that period, we should definitely see a ramp-up of the cast aluminum wheel project. Secondly, we believe that also the -- in the second quarter onwards, we feel that the windmill business is normally down in the first quarter, second quarter will be higher. So that should also help in higher margins thereafter. First quarter is the low quarter in the seasonal business of windmills.

So what you are seeing essentially your margins will improve, but it will improve in the second half of the year compared to current Q?

Yes. Probably, let's say, from second quarter onwards, it should improve. First quarter is always a little bit strained. April, May, June is not the same as January, February, March. So the first quarter will be slightly lower. After that, it should improve from first quarter levels from the second quarter onwards.

How much it will improve, sir, like you have 100 bps?

I'm not even 100% sure of what will be customer offtake in this month. So it's very difficult for me to determine exactly what will be the increase in profit. All I know is that the product mix change in the second quarter should help the profitability. And slightly unfavorable mix in the first quarter.

So the reason is you have got a very huge top line. So even a small improvement in margin will show a big change in your bottom line.

No, I appreciate the idea behind it.

Sir, any color on your subsidiary because last time you said the subsidiaries turned around and we can see the…

The subsidiary made a loss for quite a few consecutive years and the subsidiary has become profitable. Ramesh, I forget the net profit numbers. Do you have the net profit number of...

Sir, on the consolidation, subsidiaries loss was INR 20 crores in FY '24 has become INR 6.65 crores in FY '25, sir. Positive PBT. So that is reflected in the consolidated financials.

Any reason we are not consolidating the subsidiary, sir, because you will get the benefit of your carryforward losses.

No, we are consolidating. It's there in the consolidated.

No, I'm talking about merging that entity because given that the entity has substantial losses.

No, there's a joint venture partner. So that's why we're not it.

Sir, last question, I understand many of the PV companies are kind of moving out of location. So just wanted to know, is India considering moving out of its location and any chance of monetizing those lands?

No, we are not thinking of that at this moment. Actually my office is in Patti. So at least I have not been told that we're moving out because I still go to the same place every time.

The next question is from the line of [indiscernible] from Nami Publications Limited.

Sir, you highlighted on this incremental opportunity on cylinders that we are focusing on just now. And you said that you're working with some Korean company to be able to advance into this business. I would like to learn more about this in terms of what kind of cylinders are these? The same ones that are required for storage? Or are those particular tanks which go into industrial and medical applications.

No, the Korean cylinder manufacturers are actually making cylinders for construction and industrial equipment, more heavy-duty type of cylinders. They are the leading manufacturer of cylinders in Korea. And really, they are looking at using us as a source for new businesses that they win so that they don't need to ramp up in Korea, and they can use our capacity to produce in India for the new business that they win. So this is a negotiation which is going on. It's a question of royalty, how much royalty, what is the period. So the legal part of it is going through. As and when it gets updated, we'll also keep you informed.

Sir, if I may, and if it's okay to share the name of the potential Korean partner, their current revenue and the kind of profitability we would make on outsourcing because cylinders, as I understand, is a slightly more difficult, complicated business depending on the industry that they cater to. So this will be purely outsourcing only relationship? Or will this be a technology sharing where they will assist you to manufacture to their quality requirements?

So I'm sorry, I'm not able to share the name because the agreement is not yet signed. So I can't share the name. But basically, it is a technology type of agreement where we also get technology. It's not just an outsourcing agreement.

So with that technology, sir, if they are not procuring from you beyond their requirement, can you start manufacturing using that technology and know-how for your requirements to sell in India or elsewhere in the world? Or will that be restricted to manufacture only for the Korean partner in specific?

I think these are the details that will get fleshed out in the agreement. As the agreement is not yet signed, I'm not at liberty to speculate on what will happen either.

So is it a fair assumption that these should materialize into something meaningful in the next financial year? Or could this be a much longer gestation kind of thing?

No, I think it's reasonable to assume that it will start -- okay, again, by next financial year, it depends on when we come to an agreement with the Korean party. But I'm hopeful that sometime in this financial year, we'll be able to come to some understanding and following that, there should be some start of production. The impact may come more in the next financial year as opposed to this one.

Sir, if I may extend this further, what size of an opportunity would this mean for the company in terms of manufacturing for them as partners or for your own interest? And is this coming because of the China Plus One realignment of supply chain or some capability or confidence that they have in the engineering and conversion skills of Wheels India? How does one really look at this?

They have already started buying cylinders from us. So they have bought cylinders from us, and they have experienced our quality. And based on the fact that they've had a good experience, they are looking at some kind of agreement. From their side, they want to want a supply agreement. From our side, we want a technology agreement.

Do we have an ideal capacity to be able to cater to them because as I've been following the company for a few years now, and I see our utilizations are towards the higher of 80% mark on a continuous basis and all incremental CapEx, like you also suggested of INR 200 crores, INR 250 crores, we keep doing that in part to be able to meet our own growth needs.

We tend to not have too much of spare capacity. But rest assured, it will not result in any CapEx in the current financial year over and above that INR 250 crores because, again, they will not start at full volume. They'll slowly ramp up. So if it does materialize, hopefully, it will come into the CapEx for the next financial year.

But we don't have an arrangement where they will want to separately set up a unit with us, which will also involve some kind of CapEx commitments coming from them or anything like that?

No, nothing like that.

So whatever capacity expansions have to be undertaken to cater to the needs will be borne by Wheels India then?

Yes, will be borne by Wheels India. And again, as I said, this agreement is more a discussion which is going on at the moment. It is not yet fructified into anything material.

Sir, last one from me. The INR 200 crores, INR 250 crores of CapEx, which you indicated with the lead of the next 12 months and hopefully coming into play in FY '27. Is it fair to assume a similar asset turn? And if I may ask, what area of business is that getting dedicated to?

So that actually is a significant part of that. So basically, I said that the total investment is about INR 100 crores, which is really in windmill components. So out of the INR 100 crores, there's at least INR 66 crores, which is a long lead time asset acquisition. And that INR 66 crores will have more of an asset turn of 1, but it is a very profitable business because it is a conversion business. It is not a material-based business.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Ladies and gentlemen, thank you so much for your queries, and I hope I've been able to clarify all the points which have been raised. As I mentioned, the company, despite the fairly murky economic environment, especially in the international markets, but also the subdued economy that we have in our country at the moment, the company is hopeful of positive impetus in terms of having a sales growth in the coming year. And we are also confident of maintaining our profitability. Thank you so much for all your support and look forward to interacting you in the near future. Thank you.