RACL Geartech Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Strong top-line, margin blip: Revenue grew 32.43% YoY, but EBITDA fell QoQ from ₹18.95 Cr to ₹15.57 Cr as a sudden geopolitical shock in February 2022 spiked input costs. Management says the volatility has settled and margins will normalize.
• Premium niche shields demand: The company serves the premium luxury segment where upper-strata liquidity remains strong, insulating it from recession and interest rate hikes hitting commodity segments.
• A new global OEM win, details sealed: A new global customer was won for engine-agnostic steering and chassis parts, but disclosure is blocked by a confidentiality clause until the customer’s vehicle launches.
• ₹500 Crore ambition now a confident target: Management is “very confident” of hitting the ₹500 Cr revenue mark by FY 2024-25, a roadmap set 2-3 years ago, with EV and suspension diversification driving the next leg.
• What to watch next quarter: Whether the promised margin normalization materializes, any disclosure on the new global customer win, and the pace of EV revenue ramp-up toward the 4-5% FY23 target.

Top-Line Performance & Margin Shock

• 32% YoY growth, export-led: Exports contributed 68% of total sales, with Europe alone accounting for 52% of exports, driving the strong year-on-year expansion.
• QoQ margin hit from input costs: EBITDA dropped from ₹18.95 Cr to ₹15.57 Cr and PBT from ₹9.51 Cr to ₹7.19 Cr because a major geopolitical blast in February 2022 caused a sudden, clarity-less spike in input costs and market volatility for the first month.
• Volatility, not demand: The disruption was an input cost price volatility event impacting all Europe-dependent component manufacturers, not a demand problem; customer orders remained intact.
• Corrections made, normalization ahead: The issues have now settled, corrections have been implemented, and management expects a return to the old margin normal in coming quarters.
• Working capital tightening: Receivable days improved from 98 to 89 days and cash conversion days dropped from 106 to 99 days, supported by reductions across inventory, receivables, and payables days.
• Leverage rose with asset build: Debt increased to ₹163.45 Cr from ₹107.12 Cr alongside fixed asset additions, pushing the Debt-Equity ratio from 1.00 to 1.25 and Debt to EBITDA from 1.94 to 2.67, while interest coverage declined from 6.50 to 4.93.

Gursharan Singh: “The reason is that we are not into the commodity segment, we are into the premium luxury segment. And in the premium luxury segment, the demands are growing, because on 1 side, there is recession and interest hikes and on the other side there is a good liquidity and cash flow, particularly among the upper strata of society.”

Customer & Product Diversification

• New global OEM win under wraps: A new global customer has been won for engine-agnostic steering and chassis parts; management cannot disclose the name or details until the customer’s vehicle is launched, per a confidentiality clause.
• ZF ramp begins this year: Customer ZF, added in a big way over the past two years, will start contributing to revenue from FY23.
• MAN Trucks and CF Moto added: MAN Trucks is a new addition, while CF Moto (a KTM joint venture in China) was added in the last two years and has already started generating revenue.
• Steering and chassis mass production live: Mass production has already started for a new steering and chassis product, with margins looking good and impressive, though a clearer picture will emerge once production stabilizes.
• EV and suspension diversification: The company has diversified into chassis and suspension parts with common application across EV, fuel, and hybrid platforms, reducing dependence on any single powertrain type.
• Customer concentration capped: Strategy dictates no single customer exceeds 20-25% of revenue, a safeguard practiced for 10-15 years to keep the business stable and limit volatility from over-dependence.

Gursharan Singh: “In the earlier calls, we have mentioned that, as a business strategy, 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.”

Growth Algorithm & Capital Discipline

• Growth composition in FY22: Of the ~27% net growth, a little over 15% came from new projects from existing customers, 5-7% from organic growth of existing products, and 2-3% from new customer ZF.
• Customer addition cadence: The plan is to add one big customer every 1-2 years contributing 5-10-15% of revenue, while existing customers grow organically 2-3% per year, aggregating to a 20-25% annual top-line growth target.
• Capex only against orders: The company will never invest in capacity expansion until a clear order is received; it maintains a fully integrated and flexible setup to produce samples, but commits capital only when business is lined up.
• Asset base can carry revenue to ₹400 Cr: After FY23 capex, the net block of more than ₹200 Cr will be sufficient to reach ₹400 Cr conservatively, with some current capex planned for years beyond the current year.
• Asset turnover improving: Asset turnover dipped after 2017 due to heavy investments replacing obsolete technologies, but has already improved from 1.47 to 1.52 in FY21-22 and is gradually moving toward a benchmark of 2.
• Inorganic growth as the next lever: Organic growth ambition is 25% average year-on-year; growth beyond that would require inorganic moves via mergers and acquisitions, as building own facilities, infrastructure, and human resources would need heavy investment.

Gursharan Singh: “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.”

EV & Suspension Trajectory

• EV revenue ramp: EV participation is expected to rise from a little over 2% in FY22 to 4-5% in FY23, and around 6% in FY24.
• Combined EV and suspension share: In coming years, EV and suspension together will grow to more than 16% of revenue and will not be dependent on the type of vehicle, providing powertrain-agnostic diversification.
• Production cuts are supply-driven, not demand: Any production volatility stems from chip or sensor shortages (raw material availability for electronic components), not from weakening customer demand.

Receivables & Infrastructure Tailwind

• Receivables efficiency despite long transit: With 70-72 days of logistics transit time from India to Europe, payment arrives within ~15 days of goods reaching the customer, which management considers near-optimal given current infrastructure.
• Delhi-Mumbai freight corridor benefit: Once operational, the freight corridor is expected to cut transit time from dry port to sea port by 7 days, reducing receivable days from 89 to 82 days.

Gursharan Singh: “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...”

Guidance & Commitments

Key Metrics