RACL GEARTECH
(Material is collected from annual report concall,valuepicker)
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GROSS BUSINESS PROFILE
47%@ two wheeler
16%@ Tractors
70% export
57% Europe
43% asia pacific
A=40-45 %
2 wheelers niche, high end bikes of 600+ cc,
B=20%
agri mainly exports,
C=13%
=New segment Recreational vehicles like snow scooters, snowmobile
1= gears (majority)
2=suspension, Break and handle parts.
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MOATS
1…Pricing power
A=: International business
Domestic OEMs face challenge on pricing. We also face some challenge. But in overseas OEMs the issue is different. Our market is niche and unlike domestic market OEMs, we don’t face that much issue. 1% - 2% doesn’t matter much.
=Whenever we sign an agreement with new customer, we also sign an agreement with customer to reduce pricing for first 3 years but after that there is not such issue.
=Focus on higher margins International business- RACL’s concious shift from domestic to International OEMs has insured higher margins & lesser competition which it would face in domestic auto industry. RACL generates Operating Margins of 20% plus which is very high for an Auto Component company. 70% of revenues generated from exports
B=Quality
Our MNCs customers are not much under price pressure. There is not much issue here. . Foreign buyers are more focussed on quality than prices. Their risk is more on quality as they procure product 7000 kms away. In India, there is not the case. Overseas buyers takes 3 – 4 months for procurement. They will never hurt you for 1 – 2% price. Their risk is more on 100% of confirmed quality and delivery.
2…Niche/Luxury product
=As a product, we chose niche product like luxury markets which doesn’t slow down. Our product is for bikes of 1 liter and above. It doesn’t cost less than 30,000 – 40,000 EUR. The person buying such product is not salaried class.
3…Quality and Timely delivery
Operating in niche space, quality and timely delivery is key which they are proud of.
=Its very imp
Their labour costs are high. If line dries up for 1 hour, they loose
millions of dollar.
4…Promoter-Technology guy
=How did we acquire such prestigious customers? Main advantage is that top leadership, is an engineer. Normally, other cos have top management who just talk about numbers. BMW (for bikes) got confident meeting me. For those customers, main issue is the right product at the right time with right technology. We were offering them solution. We work with the customers to make product cheaper without compromising from technology. It always starts with humble nos.
5…Technology know-how and core tech team
…Core technical team
has been with them for 2-3 decades. Technical capability doesn’t come overnight. It comes with sustained effort. This has happened because we nurture our people. We give them a positive work environment. We create a kind of a family culture. And this leads to technical capabilities.
(Corporate culture as a moat… Probably hard & time consuming for somebody else to replicate)
…All clients are biggy
Typically, in such situations, the supplier gets squeezed. But this is not what happened in RACL’s case, indicating there is something more to this business than being just an also-ran auto ancillary player.
=Lets think about it. Why would multi-billion dollar companies let a tiny supplier like RACL make high margins and high ROE, when they might as well go to other auto-ancillary co’s and give them lower margins?
=Know-how is a competition reducer. The longer it takes to learn how to do what your company is doing, the fewer competitors will be around to do it for less.”
=Basically, they were saying, employees at their manufacturing plants have built their skill set over several decades. Plus, the machinery is prohibitively expensive. Even if another ancillary co. does put up the money to buy costly machinery, they will need to go through a learning curve, which could take many years.
The other option is to poach a ton of employees from RACL, which is less likely because a lot of RACL’s employees have been around for decades and seem to be quite loyal to the co
6…The supply chains of global customers are considered super-efficient. A BMW or a Kubota, would want their suppliers’ plants to be in and around their own plants. But that is not the case with RACL. Forget being close to the customer’s plants, their plants are not even close to the port. RACL’s plants are located around Delhi, which is hundreds of kilometres away from the nearest port. If large OEMs are okay with a gear vendor being located hundreds/thousands of miles away (which is reflected in RACL’s growth over the last few years), it tells us something about RACL’s competitive advantage
7…High entry barrier
=Gear manufacturers is most difficult post CrankShaft, plus heavy investment + technology. High barriers to entry. Hence 30 years in company, we understand fully and not many enter this space
=Opportunity for growth is tremendous as more outsourcing is the way forward, gear manfg is highly capital intensive,
8…Low cost
.India has competitive edge due to low cost and labor competitiveness ,
9…USP/ Differentiation of RACL
=Approach for competetion - competetion exists in China, Japan, Thailand and EU etc in all sizes - RACL takes competetion specific approach - e.g. Japan is too slow in prod dev(4+ yrs), China has quality challenges/perception, EU is not cost effective any more - India and RACL at advantages
10…R N D
=We develop the product with customer R&D, which gets good value for money to customer + margins to us. We also give our own ideas so that we get value addition, we have team of engineers. We are not doing Product R&D, hence u may not find R&D as major expense. We invest in process R&D and invest in people where 15% work here.
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FUTURE GROWTH
(500 Crs revenue @2025 guidance is a safe target and we are on track.)
1…New customers
=Add a new big customer every 2-3 years. Develop a customer - Build a relationship over time - Develop technology for them - Then comes the boost in sales from the custome
=Every year we keep on adding new customers. Last year we added Schaefler which is a big company. All our clients are growing and none of our clients have left us. They are scaling up organically.
=One more important point I feel is that till date the growth were driven mostly by the old customers, as their business were growing or they were adding more parts from RACL. The revenue will start flowing now from the new customers, and this will drive the next phase of growth.
=We 1st get customers, then do capital investment
=We are always hungry for new customers
=Domestic market: 2021
Added
A…Escorts Kubota (agri tractor),
B…TVS (in their apache bike + 300cc BMW bike) and
C… Kawasaki (which earlier had joint venture with Bajaj; now manufacturing alone) in Indian business segment.
Export market additions: 2021
D…CFMOTO (2-wheeler, KTM has tied up with CFMOTO to enter into China market, RACL had relation with KTM and are providing fully furnished gearbox to them),
E… Moto Guzzi (2-wheeler high end Italian motorbike company, owned by Piaggio, they have had a long relationship with Piaggio),
F…ZF (new client; biggest auto parts manufacturing company globally; entered Chassis component of passenger car (for both electric and conventional cars) which is a new segment; first Indian company to supply fully finished parts to passenger cars to ZF),
G… Man trucks (Europe’s second largest CV manufacturer); New capacity: 50% will go to ZF and rest will go to Man trucks.
MAN Trucks (old client till the time they exited India) - RACL have huge order from them and the capacity expansion shall be utilized for them too. Trucks are not going to get converted into Electric anytime soon, as management indicated.
H…We created Entire drive or kinematics of the e-scooter for the european scooter is something we are working on. They came to us few years ago this was outside our competence zone back then but in last 3 years we ramped up. We invest where customer demands. This electric scooter will be on our drive train. We will be a single source for the next 10 years. If they are saying certain volumes, they will commit to it
I…For EV, We are working with client whose details will be out in next 3- months and the whole world will know , cant specify which country the client belongs to, they are big player and has presence in Europe, USA, China, Japan and in India too (most likely could be Toyota or VW)
2…New products
=They mentioned in the opening remarks that they do chassis, braking & suspension components apart from gears
=New Initiatives- Entered into an agreement with a European 4 wheeler player as a Chassis Supplier. Tie up with domestic 2 wheeler player for gear components.
=Our core competence is gear manufacturing and the size of operation we are, as of today, we
really want to stick to our core competence or allied products, which are very similar to our
core competence. We’re producing gears so some precision parts or break parts or suspension
parts, which requires critical machining. And, incidentally, this area is where it is capital intensive,
3…New segment
=We have already invested capital expenditure for new
projects and futuristic technologies to enter into the Premium Passenger Car segment through one
of the largest players in the market.
4…Scalability
RACL has several multi-billion dollar clients. BMW, for example, sold bikes worth 21000 Crs in 2019. And RACL’s annual sales is a paltry 1% of BMW’s. And this is just from one client. Will RACL be able to scale up their business multi-fold across geographies and across clients? Time will tell.
5…china effect
=lot of shift is happening from China where environment issues and increase in labour costs have caused lot of shake up.
6…Futuristic projects
A=On ZF- this product that they are doing wasn’t there in the market till 2015 and they want to be “big” in this. This product is vehicle agnostic.
A new, EV/ICE agnostic, product in which they want to be big and have taken BMW as the first customer and have “2-3 more projects” for a different end customer, with ZF in place. Discussions with other customer
also going on. This says a lot!
B…E-Scooter- They worked with ‘a European major’ for the last two and a half years and have developed this with them.
And now they are saying that value addition in this product is higher than the fuel.
A contract for 10 years that too single source is massive. This highlights the OEM’s trust in RACL’s quality and supply reliability.
These are futuristic projects with the world’s largest and best OEM’s. They are making themselves EV immune brilliantly.
Associating with such OEMs and a company like ZF, they should remain ahead in the curve. These product developments with ZF for BMW and “a European major” are a testimony to that.
C=Austria ZF client, chassis components, top end premium car. BMW 7 series car. We are entering in car segment. This will be futuristic 2022 car. (this is their entry into premium passenger car market)
7…Export
export% of sales increasing
2010@17%
2013@31%
2016@50%
2019@58%
8…Long term contracts
Many of these contracts are very long term nature contracts running over say 10 years with commitment towards volumes.
9…For BS VI, we have already developed products and technology. Quality levels will improve for BS VI. Business share has increased because of that. We in fact got more business because of BS VI.
10…EV
=By next year, 3-4% of our revenue will be from components which end up in EV. One of our clients is launching e-scooter in Europe
=EV gears are going to be high precision, higher technology required for manufacturing. Gross profit margins will be much more. Technology is different. Investment is also much higher. All our New technology and capex is EV friendly
=For EV, We are working with client whose details will be out in next 3- months and the whole world will know , cant specify which country the client belongs to, they are big player and has presence in Europe, USA, China, Japan and in India too (most likely could be Toyota or VW)
=…E-Scooter- They worked with ‘a European major’ for the last two and a half years and have developed this with them.
11…Margin improve
One key difference that has happened in FY20 & FY21 is on margin front - reaching to 25% from mid teen -
A=biggest factor is export mix increasing and
B= .Outsourcing of capital intensive jobs( heat treatment, forging press etc
=40% work for forging press work is done now in-house (earlier 100% were outsourced), improving raw material consumption and cost efficiency. Management are thinking of adding some more internal capacities.
=Heat treatment have high cost and having higher overhead, they are mostly oursourced.
12…Cyclicity
=Another aspect that stands out is decoupling from industry cyclical nature - Last 3 years has been good for them both top line
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CAPEX
=We have planned a Capex of Rs. 50 Crore for FY 22. We did 50 last year and we are going to do another 50 for Capex this year.
=The ongoing expansion is on account of the
new orders received by the company from new customers in export market. The installation of the machinery is in line with
order specifications provided by the new customers.
=Expansion: Plant is already ready; end of 2021 will start production. Volumes will start coming in 2022
=…Normally companies will first invest and then they start hunting for customers. RACL
doesn’t do this. We first hunt customers and then make investments so that our investments
are never idle, although there’s a little bit of gestation period.
= Capex is 3 fold,
A… first of all it is for creating capacity for existing product,
B… creating capacities for
new customers and
C…modernization of existing plant and machine.
=Let’s not forget we are a 30 years old organization, so we have to continuously upgrade our existing equipment also, we
have to take care of the life of the machine also. If we carry the dead machines with us, or we
keep on spending extra money on maintenance then we can claim to be a high technology
company.
=
EXPANSION
A=Incidentally, we are not much present in low end cars or low end bikes. We deal in luxury
segment and premium bikes. So, the utility of our present capital equipment, for the next 10-
15 years will be fairly in these areas itself.
B=The new investments are being done in a judicious
way that all those equipments should be adaptable to EV also. And that’s how we have created the product mix.
=Our free cash flow has been on weaker side because we are doing capex. WC is on higher side.
For manufacturing, why keep free cash, invest in capex. Keeping money in banks not healthy for shareholders.
At some stage, need to invest keeps reducing. Today Asset turn is 1.4x, in future, it will move up. % of capex at some stage will go down
=Capacity expansion during an industry down cycle
The co. announced Capex worth 50 Crs in FY2020 AGM. This is at a time, when their fixed assets were 100 odd Crs. Why would a co. that sells non-compulsory goods, increase capacity by 50% during a pandemic? It is not like they are selling roti, kapda, makaan, or anything close to that.
I think it is because they have high visibility for future orders, from clients, which is why they are taking such a huge risk of putting up 50 Crs, that too, 3/4th of it through debt.
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…EV IMPACT
=EV risk management was made clear in this concall(DDIT V)
1 ) Delay
2) Diversify
3)EV technology(precision+noise)
4) EV investment
5)Value
A…DELAY
…Delay impact through
a) Right customer segment selection : Premium bikes , off-roaders , Heavy Commercial etc
b) Relentless reduction in cost to ensure RACL is last man standing even in declining industry
=In EV also, throughout the world when it comes – it will come in phased manners like public transport, passenger vehicles, commercial vehicles and then tractors (we are not sure if it will come or not).
.=.We are present in tractors and luxury bikes. When you bike 1.5 liter bike, you don’t buy for price or mileage, you buy for acceleration and noise. I asked the same question to BMW – they said that we have supply for the contract till 2033.
B…DIVERSIFY
…Diversify into product segment which are fuel neutral
a) New/ incremental capital allocation to Chassis and Suspension system - ZF
b) E- axle drive for scooters - beyond Transmission system to motor and power electronics ?? - A bit surprised as this is very R&D intensive
C…EV Technology
C1…EV has gears
=Fortunately for us, even if EV comes, EV is not without gear. Even E – rickshaw has 4 gears. They have reduction gears. We are supplying to EV cars model of the largest tractor manufacturer of India. We are supplying them gears.
C2…Precision of gears
will increase manifold in e-vehicles. Investments have been into doing precision gears which makes less noise which is required in EVs
…In ev, since the gear operates at higher RPMs and torques than ICE, it would need higher precision
C3…Noise
=Value will come down for gears in EV but quality is many folds higher. Noise has to reduce for EVs. That is the reason we are investing a lot in technology. Even in fueled emission, noise emission is also a norm in EU and developed cos.
D…Investment for EV
…We are investing in that so that when EV comes, we are present. We always think 2 - 3 years ahead of competition
…Incidentally, we are not much present in low end cars or low end bikes. We deal in luxury
segment and premium bikes. So, the utility of our present capital equipment, for the next 10-
15 years will be fairly in these areas itself. The new investments are being done in a judicious
way that all those equipments should be adaptable to EV also. And that’s how we have
created the product mix.
E…Value
Less volume,more value
My last question is that as you have earlier mentioned that as the gears shift from ICE to EV,
the precision etc., that goes up substantially and hence, the value of gear is higher. But also,
I believe the number of gears reduces substantially between an ICE and electric vehicles.
Gursharan
Singh
…So, that is a great thing that I have to produce less and earn more, then what is the harm in
that. ICE gear, I’m selling at Rs. 100 and an EV gear I sell for Rs. 500. So, that is a great thing
EV RISKS
A…LESS VOLUME IN EV
=How does view EV disruption in RACL : no of components that EV requires is far less than Traditional vehicle
"An electric car doesn’t need a clutch, it also doesn’t require gears. Electric vehicles don’t feature a multi-speed gearbox like conventional petrol or diesel vehicles. Instead, they have just one gear. This is because they can achieve much higher revs than a standard fuel engine. A conventional car can usually reach around 4,000-6,000 revs per minute (rpm), whereas an electric motor can achieve up to 20,000 rpm.
=The gear volumes would go down, nobody made any comments about that. Transmission would only need 1 gear we have known this for many months now (please check out the RACL concall notes or transcripts). Conclusion being drawn is that since the gear operates at higher RPMs and torques than ICE, it would need higher precision
B…GEAR OBSOLETE
=There are six major alternative of power drive configuration …
In 3a both transmission and differential gear system are required , in 3b , 3c , 3d etc gear component keeps on reducing
while in 3 e and 3f design power drive system it is nearly gear less
It is too early to understand how transmission system will evolve … but it is declining industry and hence ZF etc are outsourcing big time to smaller players …
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NEGATIVES
1…Domestic growth
=Domestic sales haven’t grown for us. Reason for it? The main reason is that we were late into Hero’s and Bajaj’s of the world and these companies have their family member’s company supplying to them. They have been established since long and we were in trouble in 1990s and 2000s. All OEMs are doing vendor consolidation. We missed boat because of that. When we took over, all these vendors had already consolidated.
= We have also taken strategic decision to not enter domestic mass markets in big way. There are few things where there is discussion happening. End of the day we have to ensure growth.
= Our focus is equally on domestic market also. Coming year, domestic market shape has to change in a big way. Electric mobility will come big way in mass bikes.
2…Receivable days have increased and debt has also increased?
=Receivables have increased coz of exports proportion increasing in sales because 60 days is the shipping time for exports. Receivables are including of GST leading to higher receivable days.
=Being located at north part of india, it takes 15 days for material to reach the port.
3…Equity dilution
=Company has diluted 8% equity during the past 2 years. Most of the capex has been funded through debt, however, the company has also repaid significant long term debt taken for earlier expansions.
=The Company has issued and allotted 5,00,000 Equity Shares of the face value of 10/- each on Preferential allotment basis through Private Placement on 3rd July 2019, at a Price of 72.50/-
4…Working capital intensive nature of operations
=Being in auto ancillary industry, the operations of the company are working capital intensive in nature.
=The company has to
maintain inventory of around 3.5 months with large product range (more than 500 products under regular production).
Significant inventory (around 50%) levels are in the form of stores and spares. These are mainly consumable being used in
production process and are reusable; however having a life of less than 1 year. Also, to cater the demand of major
customers, company stocks inventory at its warehouses near customers’ factory for uninterrupted flow of products with
minimum transit time.
=Credit period of close to 2 months is allowed to domestic customers, contributing 30% of total
operating income, while collection from overseas customers, which contributes 70% of total operating income, usually happens in 3-4 months
5…Cyclicality nature of the automotive industry
=The automobile industry is highly cyclical in nature and automotive component suppliers’ sales are directly linked to sales of
auto OEMs. Furthermore, the auto-ancillary industry is highly competitive with the presence of a large number of players in
the organized as well as unorganized sector. While the organized segment majorly caters to the OEM segment, the
unorganized segment mainly caters to the replacement market and to tier II and III suppliers.
7…Customer concentration
…RGL has moderate concentration risk with top five customers contributing ~85% revenue in FY20 (PY: 71%).
,
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FINANCIALS
1…Cfo>pat
Cfo=140cr
Pat=83cr
2…fcf%…capex
2021=(-)/50cr
2020=2.8%/28cr
2019= (-) / 31cr
2018= (-) /14cr
2017= 2.1% /6cr
2016= 3% /6cr
2015= 1.8% /2cr
2014= (-)
3…ROE
2021@24
2020@20
2019@14
2018@14
2017@11
2016@11
2015@11
4…OPERSTING MARGIN
2021@25%
2020@20%
2015@15%
2014@13%
2012@10%
2010@12%
5…PAT(avg) growth rate
Last 5 yrs@>30%
6…Sales growth rate
Last 5 yrs@15%
7…D/E RATIO@1
= our Debt-Equity Ratios are very healthy. I think we are still less than the industry
norms, we are only 1.00. Even banks say that 1 - 1.5 should be the Debt-Equity Ratio and we
are still hovering around 1 which is healthy. And as we have told time and again that we are
a capital intensive industry and produce high technology products for which we need
matching technology. So, that way, we are at a healthy level, and we intend to maintain the
same place
8…receivables%
2021=27%
2020=25%
2019=27%
2018=30%
2017=27%
9…debtor days
2021=99
2020=92
2019=98
2018=109
2017=98
2016=27
2015=58
