Rico Auto Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Revenue up 24% YoY, margin recovery underway: Two-wheeler rebound and strong festive demand drove the top line, while the painful raw material lag that compressed gross margins by 3–4% is now reversing.
• Two landmark EV/hybrid orders won: A single-source BMW EV export order and a similar AISIN electrification order were announced, adding to a Toyota hybrid ramp where Rico is the first supplier outside Toyota-owned entities.
• Dharuhera plant closure removes a drag: The loss-making plant, which was bleeding ₹20–25 crores, has been shut, and the Rico Jinfei Wheels subsidiary turned profitable this quarter.
• Defense tender in chaos, but not abandoned: Trials were completed and Rico was the lead, yet the process is being recalled amid allegations the private sector is being bypassed for PSUs; management has escalated to the highest levels.
• What to watch next quarter: Whether the raw material lag reversal actually lifts gross margins back toward 47%, the pace of the promised 0.5–1% quarterly EBITDA margin improvement, and any resolution on the defense fuse tender.

Demand & Revenue Drivers

• Two-wheeler rebound: Almost 25–30% of turnover goes to the two-wheeler industry, which rebounded for the first time in a long time; Rico is growing faster than the industry itself.
• Passenger vehicles still supply-constrained: Whatever Maruti, Kia, Hyundai and Renault-Nissan produce is all selling; semiconductor availability has improved as production volumes rose and work-from-home equipment demand fell.
• Exports growing 22%+ YoY: Freight costs have come down and stabilized; customers compensated for extra freight during the spike period. September pickup was softer because of European holidays.
• Rural sentiment improving: The monsoon has been good overall, though some crop destruction occurred from late rains; management expects a positive rural impact.
• Festive season pull: Automobile sales did very well during the festive season, and customers remain bullish into December, which is normally a softer month.

Arvind Kapur: "Fortunately, the market is good, and we are all very excited about all the possibilities. Every quarter, you will see the profitability going up. And hopefully, we should be around 12% soon and we like to make further improvements."

Margins: The Raw Material Lag Reversal

• The problem: For 2.5 years, commodity prices rose every quarter, creating a cumulative lag impact of ₹20–30 crores per quarter hitting margins; in some cases the pricing change lag reached 6 months.
• The damage: Gross margin fell from 47% to about 43%, a 4% compression driven primarily by this raw material lag.
• The reversal: Commodity prices have started stabilizing and coming down; the lag advantage will start flowing from next quarter onward as the 6-month lag begins reversing.
• The target: Management expects the 3–4% gross margin reduction to "certainly come back," targeting EBITDA margins of around 12% in the first phase, then up to 14%, with 0.5% to 1% improvement almost every quarter.
• Margins have been improving for the last four quarters, though at a low pace, not a fast pace.
• Export margins are above 15%, but the average comes down because of older components supplied at lower margins.

New Order Wins: BMW, AISIN & Toyota

• BMW EV export order: Announced three days before the call; Rico is the single source for electric vehicle components with accuracy requirements much higher than earlier BMW components supplied since 2008.
• AISIN electrification order: A similar order for electric and electrification vehicles; samples to be given by early next year, production to start next year.
• Toyota hybrid ramp: Volumes ramped from around 11,500 to 16,500 components per month; this is the first time hybrid components have been given outside Toyota-owned entities. Additional investment for the volume increase will be minimal, not even 10% of total investment.
• EV contribution ambition: Management hopes to touch 40% of components for electric vehicles by next year or the year after; EV margins on exports are definitely better, while domestic EV margins are better than other domestic items but not as good as export.
• Investment discipline: Capex for BMW and AISIN will be done next year and the year after, always backed by an order; management never invests in advance of an order.

Arvind Kapur: "This is the first time this hybrid components have been given outside the correct source or the Toyota owned entities, this is the first time these components have been given outside. So we are very happy that Toyota trusted our skills, our capability and engineering skills."

Defense Tender: Chaos & Escalation

• The tender: A fuse tender where trials took place; three companies remained in bidding: Rico, HFCL, and one Hyderabad-based company; one had withdrawn earlier.
• The chaos: The private sector is being bypassed in favor of PSUs; the tender is likely to be recalled and everything will start fresh. Management has represented the matter up to the Prime Minister's office.
• The stakes: Management asserts Rico would have definitely won the tender and was the lead; they are not going to leave it. The issue involves both fairness and soldier safety, with a meeting ongoing at the Defense Ministry on the day of the call.
• Defense business timeline: It is a five-year cycle before you really get the business and start thinking of returns.
• Defense margin expectations: Management will try to keep 20% margins but ultimately only after production will know; 15%+ in any case. Working capital requirements are expected to be manageable, with around ₹100 crores in advances expected when the tender comes.

Arvind Kapur: "If a blacklisting problem occurs, if it all blows up, there will be a lot of heads which will have to roll. Let's see what happens because we have represented right up to the PM and also to everybody. Even today there is a meeting going on in the Defense Ministry. And we have told them that one is fairness and number two is you cannot risk the lives of our soldiers."

Operational Efficiency & Asset Utilization

• Foundry utilization is only 60% today versus 70% five years back, but turnover is higher because of efficiency improvements and new technologies; 30% of capacity was freed up.
• Equipment flexibility: 80% of equipment is flexible and can switch from one component to another by changing only fixturing and tooling, allowing better asset flocking.
• Toyota project agility: When equipment suppliers delayed deliveries, the company utilized other available equipment to start producing components; investments are being carried forward.
• Asset turnover potential: Revenue can reach up to about ₹3,200 crores on current assets with only balancing equipment; incremental capex this year will be around depreciation level, not ₹150–200 crores like last year.
• AISIN order capex efficiency: Management is trying to take out at least 50% of the investment inside the plant by using existing flexible equipment.
• Gurgaon land: 26.5–27 acres is on the market for sale; prices have gone up a little; the company will act on the opportunity whenever possible.

Subsidiaries & Consolidation

• Consolidated H1 performance: Revenues grew 32% YoY and net profit grew 208% YoY; subsidiaries are also doing well, though percentage increases are still low.
• Rico Jinfei Wheels: Turned around and started making profit this quarter; capacity utilization is getting better and profitability is expected to improve further next quarter.
• Dharuhera plant closure: The oldest plant was closed because most programs had ended, volumes had come down, component prices were terrible, and a huge workforce was being paid for, causing losses of ₹20–25 crores.
• Tax rate transition: The applicable tax rate is around 34% but actual cash outflow is around 18% under MAT; within two years the company will switch to the new scheme, bringing the effective tax rate down to around 23%.

Guidance & Commitments

Key Metrics