Expect 200-400 bps margin improvement in medium term: Atul Auto
Nigel: I was just going through your business model. You are looking at some petrol passenger three-wheeler segment currently. You have recently launched it. Could you give us some targets? What kind of a volume trajectory are you looking at? Which states are you looking at selling this new product?
A: As of now, it would be a little premature to talk about the volume and numbers, but best I can expect is that once we seed product correctly, there is a huge potential for gasoline three-wheeler within the domestic front as well as on overseas front. What I expect that going forward, once we get the correct kick-off, we will be able to put definitely good numbers.
Reema: How has the festive season been for you? I was looking at your November sales numbers and that showed a decline on a month-on-month basis, your total sales were at 4,000 units versus nearly 4,600 units in October. How has December been? Have we seen a pick-up? Has there been festive cheer?
A: Not yet. We are yet to test that jerk in the market. But what we can say, things are stable. Fairly, for Atul Auto, the year has turned out on a positive note in spite the industry remaining flat. Now, what we expect that once we are done with this fiscal, next year, we definitely expect good numbers form the market. But this year, particularly, if you talk about the month of November, October, since it was a festive season, November, there were a few expectations from the market and in particular, Diwali festival, was not turned out as expected.
Reema: And December will it be lower than November?
A: Likely to remain flat in line of November only.
Nigel: Looking at your domestic numbers, that is what we just chatted about, but what about your exports? How do you see it grow? It has been growing at a very fast pace. So, what kind of numbers are we working with may be in the next couple of years? That is point number one. And secondly, could you tell us what kind of a difference are you getting in terms of margins on domestic sales as well as on export sales because I believe that export sales give you a higher margin?
A: Let me reply number two, first. Yes, exports, there are a little more incentives when we send the dispatch the material overseas. But, again, it is not that wide compared to domestic one.
About the exports strategy, as I said, the entire overseas market is scattered by gasoline three-wheelers, and now, we are going to launch that particular vehicle. Till now we were addressing to rural and semi-urban side with 0.5 tonne diesel three-wheeler. We were not having the right product to address that market. Since the product is ready now, we started seeding it in overseas market. We got few of the distributors, who has already imported few numbers and once the market clinic is over, we expect good numbers going forward from quarter one or quarter two of next fiscal.
Nigel: Could you give us some numbers of what is your current percentage, you domestic sales and export sales?
A: Very negligible. It is around 4-5 percent.
Nigel: And you are looking to push it what level?
A: In a medium-term, definitely, we expect above 25 percent surely.
Nigel: And that could give you much better margins?
A: Absolutely.
Nigel: Could you give us some numbers, 200-300 basis points? What could it be like?
A: Will be in a range of definitely somewhere between 200 basis points to 400 basis points. Anywhere between 200 basis points to 400 basis points.
Reema: That will be the improvement in margins in FY17, 200-400 basis points?
A: No, not in FY17, in the medium-term.
Reema: What about closer back home? What should we expect in terms of margins for the rest of FY16? Is there any scope for improvement because we have seen raw material prices come down?
A: If you consider my results for Q2, we have improved substantially. We expect that this improvement will continue in Q3 as well. But, on a broader basis, what I can tell you is on a yearly basis, it will keep on improving somewhere between 50 basis points to 100 basis points.
Nigel: In terms of market share, you have done so well in the last few years, moved from around 1-2 percent, currently you have moved to around 8 percent. That is primarily because one of your big competitors has lost market share. Are you facing any kind of pressure that 8 percent, you can maintain it? Until which level do you want to push your market share? What are your targets?
A: As of now, we are benchmarking our own numbers and growth. What we expect that there is a huge space in the market and we can keep continue our growth momentum barring few quarters or a year or so, when the sentiments are negative. Otherwise, I am quite positive and bullish about our growth. We expect that we will be able to keep continuing this double digit growth momentum in times to come as well.
Reema: Have you been affected in anyway by the restrictions on Diesel vehicles in the Delhi and National Capital Region (NCR)?
A: Not largely. Firstly, we are into a very small micro-commercial three-wheeler segment.
Reema: But, they are diesel vehicles right?
A: Yes, these are diesel vehicles, but as I said, we are ready with our gasoline three-wheeler as well and Delhi in fact, we were not available over there in the past.
Reema: So if you had o give us a few numbers, what percentage of your volumes would come under the impacted diesel vehicles in the Delhi NCR region? Any numbers, if you could give us.
A: Hardly anything.
Nigel: Could you tell us what exactly is your capital expenditure (Capex) over the next couple of years, how do you plan on funding it? I know you are a debt free company and secondly, what kind of free cash flows can we see in the next couple of years?
A: As of now, we are committed for a Rs 150 crore Capex for Greenfield three-wheeler plant which we are going to have close to Ahmedabad. Land is already acquired. Close to Rs 40 crore, we have already incurred through internal accrual. We expect that production will be rolled out sometime in FY17-FY18 and by then, through internal accrual, we are going to fund that particular Capex. About free cash flow, I have generated somewhere close to Rs 45 crore last year and we expect that with the improvement in business in current year as well, we will be able to generate close to Rs 45-50 crore every year. So, it would be definitely going to meet up with my Capex plan.
Disclosure: Invested from lower levels.