Racl concall june 2022
1…Geography
52% @ Europe,
46% @ India and Asia Pacific and
2% @ USA
2…Financials
A…Debt-Equity Ratio rose from 1.00 to 1.25
B…Cash Conversion Days have also dropped from 106 days to 99 days in this financial year.
C…Low ebita
=Unfortunately the Geo-Political situation started deteriorating globally from January, 2022 and precisely there was big blast in February, 2022. So, that quarter was disturbed due to the sudden increase in input costs and volatility in the market and things went bad to worse. For the 1st month, there was no clarity and that created short term volatility.
= Also, the disruptions due to the said geo-political scenario and Europe, not only impacted RACL but all the component manufacturers that were mainly dependent on Europe. More so, the impact was not on account of the market, rather due to the volatility to the input cost price.
= But now, issues have settled down and we have made all the corrections and in the coming quarters, we will be back to our old normal.
3…EV
=For FY 21-22, we had a little over 2% of EV Participation which will now
increase this year to 4-5% and eventually it will increase around 6%, in the next year also.
4…New products
=Apart from EV, we have also diversified into, Chassis & Suspension parts also, which are not dependent upon, EV, Fuel or Hybrid, they have common application for
all the platforms.
= In the coming years, our EV and Suspension will grow more than 16% of our revenue and it will be not dependent on type of vehicle and this way we are preparing for the future.
5…Steering and chassis parts
=This product, for which mass production has already started, is a new product in the automotive field itself. Margins are looking good and impressive but since it has come into
mainstream production, very recently.
= So, let the production stabilize as, when we start the production initially, there are always teething troubles and then are always certain successes
and failures and challenges. Our estimations are that this product will give us good margins, but, let us wait for some more time that the production gets smoother. Then we’ll be able to have a clearer picture.
=This is a premium product and very complex. Of course, the margins are better, but you will also see that it is a competitive world and customers also know how to squeeze the suppliers,
so we have to draw a balance. But, you can also understand that why we are selecting these kind of products because there is no crowd of suppliers in this. We have put our best foot
forward and we will get the advantage of this.
6…New customer addition
=If we have to add 20-25% year on year growth to our top line, then our plan is to add a big customer in every one or two years, so that we can add 5-10-15% from it and every year the customer organically grows 2-3% with us so that in aggregate, we grow by 20-25%.
=So, if you see our past history, every 2-3 years we added a new, big customer, then we nurture them and bring them to a sustainable level so that they also are confident with us and we are also to confident with them and then we start adding new customers.
=We added new customer ZF in a big way past 2 years. So, that customer has still not added much to the revenue in the previous year, it will start adding to the revenue from this year.
=MAN Trucks was a new customer
and CF Moto is basically KTM. They have formed a joint venture in China and that was also added in last 2 years and it has already started adding to the revenue from last year.
7…A large global passenger
vehicle customer was being finalized for some engine agnostic steering and chassis part with a probability that the business could come to us.
=We have begged the new business, but due to confidentiality reasons, we cannot divulge much information.
8…Roadmap
=Our roadmap in earlier concalls, that by FY 2024-25, we plan to
become a Rs. 500 Crore Company. This road map was chalked out around 2-3 years back anat that time, it looked very aggressive and over optimistic.
=But now as we are nearing FY
2024-25, we are very confident that we shall be able to achieve it.
9…Vision
=BMW and all such customers, give us a business, they will not give us a business for tomorrow, they’ll give this business for after 3 years as they have a longer gestation period.
= At our operational level, we are discussing FY 21-22 and FY 22-23, but our development team is working for FY 24-25 and FY 25-26 with our customers.
10…Capex
=We did around 50 crore of capex last year and this year we plan to do another 50 Crore, so just a breakup of, how this 50 Crore was spent. A total of 100 Crore capex is a huge capex .
=Partly it goes to creating infrastructure, then it goes to partly to fund the new project and partly
goes to funding of our existing projects. Broadly, around 35% goes to our production activities and all the production machines.
=Capex has to be done very judiciously and have to spend money on where we need equipment precisely. And we have always shared that we will never make any capex until we have very clear business lined up for us. We always invest when we get the business. You may take it as a conservative approach or you may take it as a strategic approach, but we always believe that, it is always better to create a fully integrated and flexible setup, so then when the customer comes, you have that technology to produce sample parts, but for the
capacity expansion, but will invest only when it gives us an order
11…growth
= I will say whether you grow by 2% or 100%, it should be sustainable, because any short term growth will not lead any business to success.
= Our ambition to grow 25% average year on year, is a very sustainable growth
=Beyond that, then the way out is that either we have some inorganic growth by mergers and acquisitions. But by creating your own facility, creating your own infrastructure, getting your own building, getting your own product model, then we have to invest a lot and it’s not only the money, the human
resources also, your technical competence
=Let the time come and our next generation is also preparing for the future. Let’s see if there are some bigger opportunities and there are any alternate methods of growth, we’ll
do that also. But right now our focus is on growing the way we are growing on 20-25-30%year on year
12…Customer concentration
=We always try that none of our customers should be more than 20-25%. When the dependence increases, the business
does not remain stable and there is always a level of volatility. Let’s say, you are dependent on a particular customer, say, 50-60% and something wrong happens to that customer, in that case, you get very badly impacted. Therefore, this strategy acts as a limiting factor, that even if that customer hits by 50% so net loss to us will not be more than 10-15%. For us, this strategy is doing very well, and we have tried and practiced it for the last 10-15 years and we found that this business model works.
=We have also seen our peers that they are dependent on a single customer by 60%-70%-80%, but when that customer fluctuates, then the ripples are much bigger on those suppliers. Whereas in our case, this is a safeguard, which we have adopted strategically. So, we never had this ambition to go beyond 25% of our revenue to any single customer.
13…Product development
Q=I’d like to ask that, are you involved in the product development or your team can do product development without your involvement at all?
Ans=We have a full-fledged team of engineers. Our product development team, as on today, has
30 odd engineers, working only on product development and the team is very capable. We only have to add value and we have a dedicated team doing it.
14…Slow down/war effect
Q=50% of our revenues come from Europe and with the war situation and
the interest rate hikes, going on, how do you see customer demand right now?
Ans=Everything is on track and in fact forget decline, we are getting increased numbers from our
customers. The reason is that we are not into the commodity segment, we are into the premium luxury segment
15…Luxury segment
Q…What percentage of the portfolio would you say is fairly resistant to the economic conditions because the end customer is the super-rich.
Ans…Almost 75-80% of business goes to premium and luxury segment and 25% goes to thecommodity segment.
=So, these business are not very prone to shorter hiccups. But, yes, if anything bigger happens, it will have an impact.
16…Asset turnover ratio
=As already mention that gear manufacturing is capital intensive industry and we can’t really
get very high number of Asset Turnover, but 2 should be our benchmark and we are
gradually moving towards that
Q= I notice that the fixed asset turnover for the company was closer to 2x, right now it is I think around 1.5x and we are going to do more capex. So, do you think that we will go back to that closer to 2 x or the nature of the business, the technologies that we are getting into, will bring the asset turnover down to this level 1.5x
or is there some operating leverage waiting to play out in the coming years
Ans=Your observations right, prior to 2017 our asset turnover was better. The reason is that, we
started operations in 1990 and there was a time when all our equipments became obsolete and we had to invest very heavily to change all those obsolete technologies to newer
technologies. So, that replacement costs were also adding to the assets which will not contributing much towards increase of the top line, but actually it was being utilized to
upgrade our technologies and replace the obsolete technology. And if you really compare our asset turnover ratio of FY 21-21, you see we have already improved from 1.47 to 1.52, and
then coming years, it will gradually increase.
17…Capital structure
=We did not generate much
operating cash flow last year and cash balance is also not there. So this incremental capex will have to be debt funded
18…Working capital management
=Our receivables in absolute numbers might have increased, but if you see receivable in number of days has reduced.
=Previously it was 98 days, now it has come to 89 and 89 days is a
very healthy receivable because until customer receives goods in his factory, he cannot pay me.
=Unfortunately, logistic time from India to European destination is very high because 1st of all, we are far from the seaport, almost 2000 kilometers away. So, the inland transit times
are higher and then the shipping time is very high because our ports are not so mechanizedthat the goods move very fast. As per our historical data, when the product leaves my gate
and it reaches my customers, it is around 70 to 72 Days and in 89 days, I’m getting the payment.
= So, technically the goods enter the gate and within 15 days, I get the money from them. So, nothing can be planned the better than this, except the Government improves our
infrastructure and there is a lot of focus on them, particularly, this Delhi-Mumbai freight corridor
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