RACL Geartech Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record quarterly sales, broad-based demand: Q2 delivered the highest sales ever, fueled by existing European and Indian customers plus the ramp-up of new customer ZF, which began contributing in June-July.
• Margins hit a multi-quarter high: Operating margin reached 25.30% and net profit margin 14.50%; excluding other operating income, the margin was a still-strong ~23%, which management deems healthy given inflation.
• ZF relationship is scaling fast: From one initial project, RACL now has six active projects with ZF, including a new rear-steering actuator for Porsche and a high-volume part for BMW, with most equipment shared across projects.
• Powertrain-agnostic strategy de-risks the EV transition: The dying 3-Wheeler segment will shrink to just 4% of revenue next year, while new passenger car projects are electric, hybrid, or chassis parts that are agnostic to the powertrain.
• What to watch next quarter: The pace of new plant construction and equipment deployment, the commercial start of the E-mobility Park Lock Wheel, and any update on the direct-supply approach from a luxury car EV platform.

Demand & Customer Wins

• ZF resourcing project landed in record time: ZF shifted production of parts it previously made in-house to RACL as a cost-advantageous measure; sample development, part movement, and SOP were completed within ~9 months, immediately improving utilization.
• New orders span premium ICE, hybrid, and EV platforms: Wins include a rear-steering actuator for Porsche (SOP mid-next year), a high-volume part for BMW, an entire transmission assembly for a 440cc Italian motorbike, and a Park Lock Wheel for 4-Wheeler Hybrid Cars (commercial production in a couple of months).
• A luxury car manufacturer approached RACL directly: Based on confidence from the ZF relationship, a luxury car company wants RACL to supply parts directly for its electric vehicle platform; the project is high-volume and an update is expected in the next six months.
• Domestic base expanding: Escorts-Kubota is now a customer following its merger, with new projects and SOPs expected next year; the domestic market's shorter transit times are also helping reduce debtor days to ~66.
• Customer concentration is managed: No single customer exceeds 20% of topline; even a 50% drop from any one customer would impact topline by only 10%, while a normal 20% decline would be a 2-5% impact.

Gursharan Singh: "Our hands are so badly tied down with the handling this automotive growth, we are not able to focus on other areas because fortunate for us, then we have actually got a huge projection and demands from our existing and new customers."

Capacity, Capex & the New Plant

• New capacity is filling faster than planned: About 70% of the capacity deployed last year is already utilized on average; customers booked the entire 3-year planned capacity in the first year of production. In November, 70 out of 100 deployed hours were used on new capacity, higher than expected because a second project sharing equipment was loaded onto the same lines.
• A 4th machining plant is under construction: The existing new plant is fully consumed, so a new plant of the same size and type is being built within the Gajraula premises; the building should be functional by March or April, with equipment deployment happening simultaneously.
• Capex is tied to confirmed business, not speculation: RACL invests only after securing orders, a philosophy designed to avoid customer pricing power over idle capacity; debt is raised only for projects with confirmed business scenarios.
• Not all capex drives turnover directly: Investments in part-washing machines, forging, or contamination control (e.g., a 0.2 mg dust limit) improve efficiency, supply chain, or meet customer specs but do not increase topline. Replacement capex on the 35-year-old plant, such as new gear-cutting machines that eliminated oil usage, reduces operating costs but may temporarily lower asset turnover.
• Asset turnover aspiration: Gross fixed asset turns were ~1.2x in 2022; the short-to-mid-term target is at least 2x, with a long-term goal of 2.5x, though the capital-intensive nature of gear manufacturing sets a natural ceiling.

Gursharan Singh: "Our Company's case, RACL will typically invest only when we get the business. Because imagine a situation that we raised 100 Crores, create a plant & machinery, create a good facility and then we approach the customers for business. Now, the customer will know that this supplier has already invested in the capacity and needs business and then they will start dictating terms. We don't work like this."

Margins & Working Capital

• Operating margin reached a multi-quarter best of 25.30%: Some other operating incomes boosted the figure; exclusive of those, the margin was around 23%, which management considers strong given the inflationary environment.
• High inventory is a feature of the niche business model, not a flaw: Inventory days run ~230 because RACL makes a huge variety of premium niche parts, some supplied only a few months a year; European customers produce 70% of their volume in 4 months, so RACL produces uniformly, stocks during lean periods, and sells from stock during peak. This model supports high EBITDA and profit margins; moving to mass-market products would lower inventory days but also erode margins.
• Debtor days improved to ~66: The expansion of the domestic market base, where transit times are shorter, is driving the reduction. Revenue is recognized on ownership transfer terms (FOB at Indian ports or at destination), with most customers on 60-day terms from bill of lading, though monthly payment cycles push effective days to 90-100.
• Debt is managed conservatively: Net debt addition to the books is very low because the company continuously raises and repays debt; capital reserves run much higher than debt. The traditional debt-equity comfort level is around 1.5, and RACL has never reached 1:1.5, leaving significant cushion. The company's A- credit rating is attracting new debt at very attractive interest rates.
• Natural hedges limit forex risk: 95% of raw materials are sourced domestically; most receivables are discounted with banks within the same month, and foreign exchange and raw material indexation clauses exist with customers.

Gursharan Singh: "At the end of the day, important for any business is the bottom line, because if you put in 100 crores or 1000 crores but if you earn 20% on 100 Crores and 5% on 1000 Crores, I think producing 100 Crores is better."

Revenue Mix & Powertrain-Agnostic Strategy

• 3-Wheelers, a dying segment, are being rapidly de-risked: The segment has declined from ~18% of turnover in 2017-18 to a projected 4% next year, while Commercial Trucks and Passenger Cars penetration is increasing.
• New passenger car projects are electric, hybrid, or chassis parts: Chassis components do not change whether the vehicle has an engine or a battery, making them inherently powertrain-agnostic. The company is bidding judiciously into projects with application in electric and hybrid cars to further de-risk.
• Two-wheeler exposure is limited to high-end motorcycles: These are not expected to turn electric for 5-10 years. Commercial trucks and off-highway agricultural vehicles are also not heavily electric-dependent. The only purely susceptible segment was 3-Wheelers, now shrinking to 4% of revenue.
• Europe is 58% of revenue, but end-demand is global: European customers produce for the rest of the world, not just domestic consumption; their biggest market is the U.S. The export mix outlook sees North America direct remaining similar, Asia Pacific increasing slightly (new projects in China, Thailand, Japan), and Europe staying similar as growth is broad-based.

Prabh Mehar Singh: "What it means is that Chassis will not change, if you put an engine in it or a battery in it. So, it's kind of agnostic."

Guidance & Commitments

Key Metrics