Rico Auto Industries Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Margins inflected, more to come: Consolidated EBITDA margin hit 11% (ex-other income), and price corrections from Hero and alloy wheel customers are still to flow through in Q3.
• Maruti Suzuki share jumped to 12%: Rico became the single source for water and oil pumps on the K-Series engine, and Maruti is asking to enhance volumes further.
• Alloy wheel overhang cleared: The long-running alloy wheel price dispute was settled with increases backdated to 1st April 2023, removing a key drag on profitability.
• Renault offtake is a live concern: Renault volumes are running well below forecast, creating a headwind that partially offsets the margin recovery story.
• What to watch next quarter: Whether the Q3 price corrections actually land in reported margins, the pace of Renault recovery, and any progress on the defence fuse re-order.

Margin Recovery: Price Corrections & Operating Leverage

• Hero wheel margin reset: Rico concluded discussions with Hero MotoCorp to correct margins on one wheel part to 5%, a net improvement that will help grow margins further.
• Alloy wheel settlement backdated: Price increases for alloy wheels were granted from 1st April 2023, and the company expects to book the cumulative benefit by year-end, with the procedural purchase order expected by late November or early December.
• Resource optimization underway: Management is actively optimizing resources in line with overall sales to continue improving profitability, and freed up investment capacity by redeploying equipment from low-volume products to reach higher volumes without fresh capex.
• Consolidated EBITDA on track: The 11% consolidated EBITDA margin (excluding other income) for FY24 remains on track, and the price increases not yet accounted for in consolidation will come in the next quarter.

Kaushalendra Verma: "We have basically concluded the discussion for one of the parts which is the wheel... We were discussing with them to correct our margin to 5% in the wheel, which we have concluded with them."

Customer & Product Wins

• Maruti Suzuki single-source status: Rico became the single source for the water pump and oil pump going into Maruti's K-Series 1.5-liter engine, helping lift its share of Maruti's business from 8% to 12%.
• Maruti asking for more: Maruti Suzuki is requesting Rico to enhance volume to 2,600 units, signaling further near-term upside.
• Export order book building: Rico is working with customers on an order book of approximately Rs. 200 crore, which management says will definitely increase export sales going forward into next year, with a target of Rs. 10 crore over four years for the export market.
• EV mix already material: 15% of turnover already comes from EV and hybrid vehicle components, with the company supplying these parts for the last 4-5 years and expecting to continue growing in this segment.

Management: "We are basically a single source to them for one of their products, which is 'Water pump' and 'Oil pump' which goes into their K-Series engine."

Headwinds & Risk Factors

• Renault offtake shortfall: Renault's actual offtake is much less than their forecast, an area of concern that management flagged explicitly.
• Defence fuse order cancelled: The total order for electronic fuses got cancelled after the government sheltered the procurement following protests over favoritism; the ammunition order went to incumbent suppliers, and Rico became a sub-vendor to them instead of a direct supplier.
• Fuse inventory defused: Rico had around 1,000 fuses lying at its facility that had to be defused, with vendors transferring the cost since trials had not succeeded and the company had not paid for them.
• No greenfield capex planned: Management stated there is no plan for any new greenfield project as of now, which may constrain medium-term capacity headroom if demand accelerates.

Arvind Kapur: "The total order got cancelled and the government has sheltered absolutely because there was a lot of favoring things that may be protested against... they have given it to the current suppliers of the ammunition and we have become sub-vendors to them."

Defence Sector: Reset but Not Abandoned

• More active across forces: Rico is now more active on the defence side and sees "light at the end of the tunnel," working separately with the Army, Navy, Air Force and other forces on products management described as very interesting.
• Fuse supply contingent on re-order: Once the company gets a fresh order for defence fuses, it will supply; the capability and intent remain intact despite the cancellation.

Management: "On the defence side; we are more active now and now we see the light at the end of the tunnel and also with the Army and Navy separately and the Air Force and the other forces also for these products that very interesting products coming out."

Guidance & Commitments

Key Metrics