JTEKT India Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Margin recovery with asterisks: Consolidated adjusted EBITDA margin reached 10.6% in Q4, but the headline number was dragged down by a one-time GST provision and manufacturing rationalization costs.
• CVJ is the new growth bet: The recently launched CVJ product generated ~₹20 crore in FY23 and is now ramping toward full capacity utilization, with a second program for an electric SUV already being targeted.
• Capex cycle is accelerating: Management committed to capex exceeding ₹100 crore per annum for each of the next two years, funding expansion across CPS, manual gears, aluminium die-casting, and CVJ.
• Gross margin pressure persists: Gross margins have fallen from ~34% to 29% due to new-program cost structures and raw material inflation, a headwind that cost rationalization efforts have not yet fully offset.
• What to watch next quarter: Whether the CVJ ramp-up reaches full utilization on the existing line, any confirmed export orders from group company discussions, and whether gross margins begin to recover as VAV and localization efforts take hold.

CVJ: The New Driveline Platform

• Product launch and initial ramp: CVJ machining and assembly was set up at Dharuhera with total capacity of 4.5 lakh units (2.25 lakh sets) at a cost exceeding ₹80 crore; the product launched in September and revenue reached ~₹20 crore in FY23.
• Current customers: Supplying to Maruti Suzuki for the Grand Vitara and Toyota for the Hyryder; capacity utilization is now slightly above 50% after a slower initial pickup.
• Next target: The second CVJ business being pursued is for an electric SUV, with profitability expected to be far better than the first program.
• Market ambition: Management stated the company currently holds just ~3% of the total CVJ market and intends to explore "every nook and corner," with sales, marketing, and technical teams already talking to all major OEMs; the stated goal is a leadership position, mirroring what the company achieved in CPS and MSGS.
• Aftermarket deferred: The first priority is to establish JTEKT as a quality OE supplier and reach a sizable portion of the OEM market; aftermarket will be considered only after that milestone is reached.

Rajiv Chanana: "So introduction of CVJ in Indian market is actually a step towards company's aspiration to increase its product portfolio. So we are very serious about it and this is to gain an important drive line segment of the auto component markets."

Margin Walk and Cost Structure

• Headline vs. adjusted EBITDA: Standalone EBITDA margin was 8.5% in Q4; adjusted for the ₹5.64 crore GST provision and ₹0.77 crore in manufacturing rationalization costs, standalone adjusted margin was 9.7% and consolidated adjusted margin reached 10.6%.
• One-time GST provision: A ₹5.64 crore contingency provision was booked following a Supreme Court judgment on a GST matter pertaining to settlement of price; management believes the company has very good arguments and expects no cash outflow or ultimate loss.
• Gross margin compression: Gross margins have dropped from ~34% to 29%, driven by initially high costs when acquiring new business (cost rationalization via VAV and localization only begins after SOP) and the sharp raw material price increases over the last two to three years post-COVID and the geopolitical crisis.
• Fixed cost discipline: Employee cost as a percentage of sales has fallen from ~13.5% to below 10%, with strict productivity improvement targets set at all unit levels; other expenses also declined, contributing to the margin recovery.
• ROCE context: Overall business ROCE in FY23 was 14.5%, improving due to manpower efficiency, facility utilization, and high depreciation to begin with; management did not provide a payback period for the CVJ investment, instead pointing to this ROCE and noting that CVJ EBITDA margins will be similar to normal business.

Rajiv Chanana: "Moving back to the history, if I look at the EBITDA margins over the last 5 years, I think in F '18, 2018, we touched an EBITDA margin of around this level, slightly lower than. But at '20 onwards, you are aware the stress which the company has faced not only because of the declining sales, plus other reasons also. However, having said that, we are still committed to further improve the EBITDA margins."

Revenue Growth and Market Context

• FY23 top-line performance: Q4 FY23 revenue grew 13% YoY to ₹540 crore; full-year FY23 revenue grew 28% YoY to ~₹2,200 crore, supported by a domestic market that reached 24.5 crore units in annual sales, the highest in over a decade.
• Market drivers: The strong industry performance was attributed to healthy replacement demand, relatively stable semiconductor supply, and a pre-buy ahead of RDE Phase 2 implementation on April 1, 2023.
• PAT recovery: Q4 PAT improved over 90% YoY to ₹23.7 crore; FY23 PAT improved over 140% YoY to ₹79.2 crore, driven by sales improvement and strict fixed-cost control.
• Export mix shift: Exports to the US customer E-z-go grew 13% YoY to ₹47.2 crore, but overall export share has fallen from 6-8% pre-COVID to 3.5% currently.
• Tata wallet share growing: Sales to Tata increased from 2% to 4% of revenue, helped by HPS supply for the Harrier and Safari, plus driveline and case differential supply for Tiago, Tigor, Altroz, and Punch; the company also won business for the new Tata Ace and Yodha.

Capacity Expansion and Capex

• Capex commitment: Capital expansion is expected to exceed 100 crore (~₹100 crore) per annum for each of the next few years, with FY24 and FY25 both planned at upward of ₹100 crore.
• CPS expansion: Plans include adding one perfection line for each CPS product and increasing aluminium die-casting capacity with an additional 850-ton machine and a new production line for warm housing.
• Broader scope: Expansion will also cover manual gear capacity, PDC capacity, and then CVJ; once the existing CVJ line is fully utilized, the company will immediately start working on the next level of expansion.
• Capacity headroom: Existing facilities can accommodate expansion; on a two-shift basis, utilization can reach 100%, with a third shift available to temporarily meet requirements; lead time for expansion and product development are similar, allowing the company to expand alongside existing business.
• Dividend restraint: The dividend was increased from 40% to 50% of share capital par value, but further increases were restricted to fund the upcoming capex cycle.

Rajiv Chanana: "We are happy to share our profit with our esteemed shareholders. ... however we also need to continue to keep an eye on future expansion, which will add value for our shareholders. ... this decision of restricting it to 50%, increasing it from 40% to 50% and not increasing further is taken in the interest of the company to fund our capital expenditure for next year."

New Business and Product Pipeline

• Recent model wins: Supplying manual gear for the Maruti Fronx; will supply both gear and CPS (the whole steering system) for the Maruti Jimny.
• EV engagement: Working with various OEMs for future launches, including electric vehicles and electric SUVs; management expects to keep delivering new business wins from OEMs.
• Export discussions: Two active discussions underway with group companies; management expects to communicate confirmed business at the next meeting or earlier, but declined to disclose specifics until business is confirmed.
• Mahindra presence: Supplying steering columns and manual gear for some Mahindra models in the LCV segment.
• Kia/Hyundai absence: An analyst asked about Kia supply; management noted that Mando is the main supplier for the Hyundai/Kia group and the company currently does not have that business, though it remains open to the opportunity.

Guidance & Commitments

Key Metrics