RACL Geartech Limited

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The call transcript from RACL Geartech Limited’s Q1 FY 2024-25 Earnings Conference Call, held on August 23, 2024, discusses several key points related to the company’s performance and outlook. Here is a summary:

Participants:

  • Mr. Gursharan Singh (Chairman & Managing Director)
  • Mr. Jitender Jain (Chief Financial Officer)
  • Mr. Prabh Mehar Singh (Vice President, Finance & Operation)
  • Ms. Neha Bahal (Company Secretary & Compliance Officer)

Key Discussion Points:

  1. Global and Market Challenges:
  • The management acknowledged global challenges, including economic slowdown, high inflation, and geopolitical tensions, which are impacting performance across the industry. The company expects these challenges to be temporary.
  1. Q1 Performance:
  • RACL’s revenue grew by 18%, but there was a decline in EBITDA and profit before tax due to various factors, including increased raw material costs, product mix changes, and customer inventory reductions.
  • The company faced unexpected order cancellations and inventory adjustments from European customers, leading to underperformance compared to internal sales targets.
  1. Operational Adjustments:
  • The company has implemented measures to improve operational efficiency, including reducing third-party manpower, optimizing equipment usage, and renegotiating payment terms with suppliers.
  • Investments in green energy initiatives, such as a 4 MW solar power plant, are expected to reduce power costs and enhance sustainability.
  1. Outlook and Strategic Moves:
  • Management anticipates a stronger H2 compared to H1, expecting a 20-25% increase in performance, driven by stabilization in customer demand.
  • Despite the current challenges, the company remains focused on long-term growth, with ongoing investments in capacity and technology to meet future demands.
  • New business opportunities are being explored, including potential orders from European and US markets, as well as growth in the electric bicycle market.
  1. Financial Health and Debt Management:
  • The company is aware of concerns regarding rising debt and is taking steps to manage working capital and reduce long-term debt. The focus is on balancing growth investments with financial prudence.
  1. Domestic Market:
  • The domestic market, though traditionally lower-margin, is showing growth potential. The company is engaged in discussions for a significant business opportunity that could positively impact performance.
  1. Investor Queries:
  • Investors raised concerns about the impact of deferred customer orders on growth and the company’s strategy to manage debt. The management reassured that these issues are being actively addressed and that RACL remains on a growth trajectory, albeit at a slower pace than in previous years.

Conclusion:

RACL Geartech is navigating through a challenging period with a focus on maintaining growth, improving operational efficiency, and exploring new business opportunities. The management is confident that the current global challenges are temporary and that the company is well-positioned for future success.

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I have attended the concall.
management has reduced the guidance of 550cr topline in fy25.
major reason is geopolitical issue

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Not geopolitical issue, but weak consumer sentiment in West and high inventory of automobiles lying at dealers.

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One silver lining as well that the management was candid enough to tell that multiple headwinds stuck at once and things could get better in the second half of the year. The management has proved its pedigree in the past and might be able to overcome these tough times as well successfully.

No holding and only tracking

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In the concall, management has listed down various initiatives to cut costs and reduce working capital requirements. While that would help to mitigate some pain, their biggest challenge is to bring down debt which will in turn bring down their interest cost. In Q1 FY 25, interest cost for the quarter is higher than PBT for the first time in the history! This is a worrying sign and I hope management would make efforts to strengthen the balance sheet by diluting some equity.

Disclosure : One of my largest PF holding. Transactions in last 30 days

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950a3746-d537-4465-a6a3-640f364cbfd1.pdf (146.5 KB)

To approve reduction
of the Annual Budget including Capex Budget of the Company for the financial year 2024-25.

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RACL Geartech -

Q1 FY 25 concall and results highlights -

Company’s product profile includes transmission gears and shafts, sub assemblies, precision machined parts, chassis parts and Industrial gears

Company has 02 manufacturing facilities in India (Gajraula and Noida) and 03 warehouses in Europe

Company has 22 active customers for its products ( globally )

Company has been awarded Tier - 1 supplier status by a premium German car manufacturer for manufacture and supply of parking lock mechanisms. Mass production for this is expected to start in Feb 26

Company has strong relationship with ZF group. In coming years, revenues from supplies to ZF group should contribute Double digit revenues for the company

Q1 Financial outcomes -

Revenues - 109 vs 88 cr
EBITDA - 20 vs 22 cr ( margins @ 18 vs 25 pc )
PAT - 4 vs 9 cr ( due higher depreciation and interest outgo )

Exports:Domestic sales @ 68:32

Company had budgeted for a Q1 sales of aprox 125 cr. Could not achieve the same due to last minute inventory rationalisation by some clients in Europe resulting in order cancellations. Company had produced the finished products but did not ship them. Hence the tooling costs, costs related to Third party vendors are all booked in Q1 but the sales are not booked. Hence the operating deleverage and resultant compression in margins

Also, the growth in India business in Q1 was strong. India business has lower margins. All this has contributed to EBITDA margin compression

Their customers in Europe ( catering to EV space ) are facing a demand slowdown and hence their projections / demand forecasts are going haywire. This is resulting in order cancellations for RACL from their EV focussed customers

Customers in Europe that were focussing heavily on EV, have again started working on ICE and Hybrids. Overall - the auto industry in Europe is in a state of flux

Company is hopeful of a demand revival in H2 ( more so in the domestic mkt, where the demand is as such holding up ). Their earlier guidance of 550 cr of sales in FY 25 is not going to materialise - because of the disruptions mentioned above

Company has tightened its belt ( earlier they were quite liberal as the company was growing rapidly ) wrt various operational costs to tide over this demand uncertainty

Have operationalised 4MW (off-site) + 1.3 MW (on-site) of solar power plants - should result in energy cost savings

NEW BUSINESS PROSPECTS -

(a) Company is in advanced discussions with a European PV maker for new business related to their new EV/Hybrid/ICE platform - likely to be a big ticket order ( incase the company gets it )

(b) In advanced discussions with a Tier 1 European customer for Pedal - Assist - E Cargo vehicle ( discussion in final stages )

(c) Have received new business from a German customer for additional parts for their E-Bikes ( will be made at Noida plant )

(d) In advanced talks with 2 Indian OEMs for their Sub 400 cc motorcycle gearbox - again, likely to be a fairly large order

(e) Have received orders from Tier-1 clutch suppliers namely - FCC India, Alder Italy for supplies to US/Italian 2W OEMs

(f) In final stage negotiations with on of the domestic OEM for award of substantial business. The business is for a component which is identical / very similar to the component they were supplying to a European customer. The result of negotiation / final ward of business should happen by end of Q3

Company has again started to focus on the agri-segment ( due to the disruptions mentioned above in the export - PV segment )

Company continues to be upbeat on the China + 1 story. The Europeans are increasingly being more stringent wrt imports from China and are increasingly imposing higher import duties. This augurs well for Indian manufacturers

Escorts - Kubota is a big domestic customer for the company. As Escorts - Kubota becomes more aggressive wrt their India business ( which they are becoming ), this again is a good news for RACL

Disc: hold a small position, will add more only if I see a business recovery, not SEBI registered, not a buy/sell recommendation

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Did the management gave any guidance instead of 550, any concrete number ?

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yes
mgt had reduced capex guidance of 60cr to 38cr
also mgt had reduced topline guidance to 460-490cr from 550cr

Notice link -

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Update Regarding Strategic Business Relationship With BMW AG For E-Mobility

image
image789×767 152 KB

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Sharing Solidarity Investment Managers note on RACL Geartech
Happy to discuss critiques, I am reachable at as@solidarity.in

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Q2 concall notes below:

FY25Q2
• Achieved revenues of 106 cr. (vs budgeted of 113 cr.), maintained gross margins as they were able to pass on steel price increase
• Their European customers are facing tough competition from Chinese OEMs, also EV market hasn’t picked up as expected because of lack of charging infrastructure and high energy prices. Their customers are sitting on high inventories
• Nominated for supplying drive train parts project for an electric sports car from BMW (expect commercialization in mid of 2017), second big nomination in 6-months for passenger vehicle. Getting traction in passenger vehicles and this will be the next lever of high growth
• Project Titan line completion expected in January 2025, their sample was accepted within 6 months, second trial phase will be in February 2025 and commercial production in August 2026
• Domestic margins are lower but receivable cycle is also smaller
• Yamaha and Piaggio are their major domestic customers, all gears in Piaggio RS 457 bike is from RACL
• Capex of 22 cr. in H1
• 3 warehouses in Europe

Disclosure: Invested (no transactions in last-30 days)

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It seems Company will have muted performance in next 2 -3 quarters as it will take time to resolve Europe problem and to find new customers in USA.
@Anirudh_Shetty Who are their competitors and how are they performing…

Disclosure : Invested at higher levels at around 1300

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First time company is visiting Mumbai to conduct meeting with analyst/institutional investors. List includes Valuequest, Malabar and HDFC Mutual Fund…Looks like QIP is on the cards…finally…

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