RACL Geartech Ltd Q4 FY2023 Concall Summary

Key Takeaways

• FY23 delivered broad-based outperformance: Sales grew 33% YoY to ₹367 Cr, EBITDA rose ~50%, and operating cash flow swung from ₹10 Cr to ~₹60 Cr, all while net debt addition slowed sharply.
• Capacity is the binding constraint, not demand: The dedicated Ojas plant hit 95% utilization a year after commissioning, with customer pull at 120-130% of its capacity, forcing the company to expand again to avoid turning business away.
• A new forging business line opens a second growth engine: The first external forging order, for yokes from a European two-wheeler OEM, marks the start of selling forgings directly after a decade of treating the forge purely as an internal feeder.
• The game-changer project was lost for Western markets on cost and NAFTA sourcing rules, but the China nomination is still alive and the same customer is now evaluating RACL for a new product line, with a visit this month.
• What to watch next quarter: Whether the China game-changer nomination closes by end-July, the pace of inventory normalization after the one-time logistics correction, and initial revenue contribution from the two new businesses starting commercial supply in June.

Growth & Capacity

• Three-year compounding at 25-30%: Turnover has compounded at that rate over the last three years, while fixed asset deployment grew 15-20%, lifting fixed asset turnover from 1.2-1.3 to ~1.6.
• Strategic COVID-era investment now paying off: The company invested in growth when the world was cautious, and those assets are now running at full capacity two years ahead of plan.
• Capacity is overbooked across the board: 95% of business demand is for 120% of deployed capacity; the Ojas plant (dedicated to one customer) reached 95% utilization within one year of commercial production starting in June 2022, with customer demand at 120-130% of that plant's capacity.
• The Shakti plant is still ramping: Built for new projects and new businesses, it is currently only 20-30% effective, leaving a large untapped revenue base as those projects come on stream.
• Land bank supports 3X expansion: With available land and infrastructure, the company can scale up to three times its current level before needing to acquire more land.
• Management will not let business go elsewhere: The stated posture is to pick low-hanging-fruit opportunities that require less investment for higher revenues, while continuing to expand.

Gursharan Singh: "30% year on year growth cannot happen forever. Okay, but this is also very clear that whatever jumpstart we have taken this jumpstart will continue at least for quite a long time and growing in an organic way, 25-30% is one of the best growth industry can have it."

New Business Lines & Customer Wins

• Forging yokes: a first external forging sale: RACL began supplying forging yokes (a propeller shaft component) to an existing 15-year customer, entering a product category it had never produced before. Once forging supply stabilizes, the customer will hand over machining as well, and RACL will supply finished yokes. Every vehicle has 2 yokes rather 4 yokes in steering 4 yokes in propeller shaft, including EVs.
• Aprilia gearbox assembly win: A new order for motorcycle gearbox transmission assembly for a CC motorcycle, to be exported directly to Italy, diversifies the two-wheeler customer base geographically.
• Two ZF projects started this year: One is the highest-volume project ever at ~800,000 units per year; the other is a low-volume, high-technology steering shaft for a reverse steering mechanism on a sports car, described as possibly the only company in India doing this work.
• Two new businesses starting June 2023: Commercial supply begins from June onwards.
• Forging business evolving from feeder to competitor: For 10-12 years, the in-house forge was treated only as a feeder facility with little focus on efficiency or technology. The company is now entering a new stage of competing with the outside world on forgings.

Gursharan Singh: "We felt forging just as a kind of feeder facility to us. So to be very honest we always felt it is our own baby who has to really, nurture our existing plant only so efficiencies or technology up-gradation or such stuff we did not really focus."

The Game-Changer Project

• Lost for Europe and the U.S. on cost and NAFTA: The previously discussed game-changer project was not awarded to RACL for Western markets because the main volume was destined for the U.S. and the customer wanted a NAFTA-based supplier for price advantage.
• China nomination still open: The China launch was ~6 months later; RACL remains in the race and a decision is expected by end of July.
• New product line discussions with the same customer: Active discussions are underway for a different product line; customer representatives are visiting within the month for an initial evaluation. Management signaled that once RACL is in with this customer, other doors will open.

Gursharan Singh: "if 1 door is closed another opens, we are again in active discussion with the same customer for 1 new product line, and those customers from new product line, their representatives are visiting us within this month only for initial evaluation."

Margins, Cash Flow & Balance Sheet

• Operating leverage drove margin expansion: EBITDA margin improved from 22% to 24.6% YoY; PBT margin improved from 12% to 13.97% YoY, with PBT growing ~90% YoY in Q4.
• Cash generation transformed: Cash from operations jumped from ₹10 Cr to ~₹60 Cr, driven by higher operating profit and better margins.
• Debt growth decoupled from revenue growth: Net debt addition slowed to 23% versus 50% a year ago, despite 30%+ turnover growth, because of significant repayments. Total debt rose from ₹160 Cr to ₹200 Cr.
• Inventory spike is temporary and deliberate: Inventory rose ~70% YoY for two reasons: 30-35% sales growth required matching inventory, and the company deliberately procured extra steel to safeguard operations amid volatile prices and supply shortages. With steel markets now stabilized, management expects gradual optimization.
• One-time logistics correction inflated closing inventory: Transit time to Europe was reduced by 22 days (from a 72-day ordering basis to 50 days), creating 22 days of extra inventory at various stages. This reduced Q4 sales by a few crores and will have a slight impact in Q1; Q2 onwards returns to full requirements.
• Management sees ample debt headroom: Comfortable with current leverage ratios and confident in the ability to raise more debt, noting that debt raised against business with customers like ZF or BMW is not a bad thing.

Gursharan Singh: "1 thing is very clear that between the business and debt is the battle for the company and for business if you take debt it is not bad. The only thing is, you are raising debt on which business. If you raise debt on companies like ZIA, ZF or BMW and other like that is not a bad thing, you know."

EV Positioning & Revenue Mix Shift

• EV risk is structurally de-risked: The car segment growth is concentrated in vehicle/suspension category and critical safety applications, components that are agnostic to IC engine versus EV. EV gears are very precise and high-cost, and the plant is fully equipped to produce them.
• Passenger car mix to double or triple: Car business, currently 5-7% of revenue, is expected to rise to 10-15% over the next 2-3 years, diversifying the mix away from two-wheelers.
• Two-wheeler dependence not increasing as a share: Absolute two-wheeler revenue will grow, but new businesses from different segments will reduce its proportion of the total pie.

Gursharan Singh: "our business is de-risked from this category because we are into vehicle category, and they will always remain. So this is how we have planned our pie."

Certifications & Sustainability Edge

• TISAX certification achieved: A stringent IT-systems certification now permanently required for working with any automotive company in Europe; RACL believes it is among the first few in India to obtain it, requiring significant investment in IT resources, infrastructure, hardware and software.
• ISO 27000 certification achieved: Noted as rare among peer companies, strengthening the IT and quality management credentials.
• Solar PPA signed for green energy: A 25-year power purchase agreement will enable running on renewable sources from next year, positioning the company ahead of customer expectations (customers had given 3-4 years to comply) and providing a competitive edge.

Guidance & Commitments

Key Metrics