Rico Auto Industries Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Revenue beat, margin flat: Q1 revenue exceeded budget by 6–7%, but EBITDA margin held roughly flat QoQ at ~9.8–9.9% as the lagged pass-through of rising commodity prices kept material costs elevated.
• Two-wheeler share grab masks industry pain: Two-wheeler revenue jumped 34% QoQ by taking share from competitors, even as the underlying industry stayed at its lowest ebb; a sector recovery would push group turnover well past the ₹2,400 cr guide.
• Toyota ramp is the near-term catalyst: Production for Toyota hybrids has started, a 30–35% capacity expansion is underway, and two large die-casting machines are in transit; from next month supplies are expected at near-full capacity.
• EV contribution crossed 15% of turnover and is expected to keep rising quarter-on-quarter, with most new customer negotiations focused on EV components, mainly for exports.
• What to watch next quarter: Whether the promised double-digit EBITDA materializes, the pace of the Toyota ramp-up once the Italian die-casting machine arrives, and any sign of a two-wheeler industry bounce-back during the festival season.

Revenue Drivers & Segment Performance

• Two-wheelers: share gains in a weak market. Revenue rose 34% QoQ (₹119 cr to ₹192 cr) driven by taking a larger share of business from competitors, including major gains in wheels. The two-wheeler industry itself remains at its lowest ebb; if it bounces back, group turnover would exceed ₹2,400 cr.
• Four-wheelers: new models, new components. Revenue grew ~50% YoY on supplies of newer components for newer models at Maruti and Kia. Kia models carry a 12–13 month waiting period, Maruti new models also have waiting, and Toyota is doing exceedingly well.
• Commercial vehicles: steady growth. CV revenue grew ~12% YoY.
• Exports: rising EV demand. Q1 exports reached ₹130 cr vs ₹98 cr in Q4 FY22, driven by rising demand from the US and Europe, especially for EV components supported by European subsidies. No order cancellations reported.
• Capacity utilization: mixed by segment. Aluminum wheels at ~70%, expected to rise to 85–90% from next month on order inflow. Engine blocks at ~80%. Two-wheeler components running at only 40–50% because the industry is not doing well. CV at ~80%. Passenger vehicles: some models at full capacity, older models vacating capacity.

Arvind Kapur: "We hope to go to 3000 but we rather be conservative and cross that rather than give you a larger figure and then next year you will tell me, look you had told this."

Toyota Project: The Ramp-Up Story

• Production has started. Deliveries for Toyota hybrid vehicles have been happening for 3–4 months and are ramping up. From next month, the company expects to supply at almost full capacity to meet the demand.
• Capacity expansion underway. Toyota requested a ~130% capacity enhancement; the company is planning a 30–35% increase with minimal investment (₹1–2 cr to ₹5 cr) by improving efficiencies and adding bottleneck equipment.
• Two die-casting machines in transit. One machine shipped from Italy on the day of the call (arrives in ~1.5 months, production a month later); the second ships in December (production by February). Remaining CAPEX for the project is ₹35–40 cr.
• Additional order from Toyota subsidiary. A further ~₹50 cr order received for e-transmission, to be used for both hybrid and electric vehicles; production expected to start by FY24 end.
• Peak turnover trajectory. The Toyota project's peak turnover of ₹100–120 cr per year will increase by 30–35% with the new volumes starting next period, plus the additional ₹50 cr order from the subsidiary starting FY24 end.

Margins: The Lag Unwind

• Q1 margin held flat. EBITDA margin was ~9.8–9.9%, roughly the same as last quarter. Material cost as a percentage of sales rose from 56% to 61% QoQ because commodity prices are pass-through with a 3–6 month lag. For two years, commodity prices rose every quarter, so the lag compounded and compensation arrived much later.
• The tailwind is now. Commodity prices are showing signs of stabilizing, which should allow the lag to unwind and margins to improve. Management expects double-digit EBITDA in Q2 FY23 and an exit around 11–11.5%, possibly crossing 12% unless there are surprises like another war.
• Cost efficiencies are compounding. Labor cost reduced; power, oil and gas costs maintained despite a 20–30% gas price increase, through efficiencies and better equipment utilization. Higher turnover from the same equipment and manpower is driving savings. Other expenses reduced due to savings in packing and air freight; prior air freight issues with customers are now behind.
• Sea freight: compensation pending. Sea freight jumped from \$4,000 to \$14,000; compensation from customers is pending, which impacted results. Recovery is expected, it is only a matter of time. Airfreight compensation balance is expected by August–September maximum, with the remainder adjusted in pricing over the year.

Arvind Kapur: "We are at 9.8 approximately 9.9, 10 we will definitely crossover and hopefully by the end of the year, we should be around 11%-11.5% and if not more. Unless there are some surprises which come on the way like there is another war which starts off, I think we are line and this year itself, we might be able to cross 12%."

EV Strategy: Export-Led, Rising Fast

• EV contribution crossed 15% of turnover and is expected to keep rising quarter-on-quarter. The target is to touch 40% in coming years (FY23, FY24, maybe FY25) as orders are released for FY24–25 deliveries.
• Export demand leads. Most ongoing customer negotiations are for EV components, mainly for exports. Domestic EV growth is slower than in Europe and other places. The company has bid for the next version of electric vehicles and expects to get a fairly large share.
• Two-wheeler EV: cautious but active. The company has started supplying wheels to EV two-wheelers, though volume is currently low. Management noted market reaction after Ola and other EV fire incidents caused some pullback by customers. The company will continue to aggressively pursue transmission and electric motor component opportunities.
• IC engine longevity. IC engine components will remain for another 20 years, so the company is pursuing EV opportunities in parallel rather than pivoting away from its existing base.

Arvind Kapur: "Most of the courts and most of the negotiations that are going on with our customers is on electric vehicle components. And we are all excited about it. But it is mainly for exports in the domestic market. Unfortunately, the growth is slower than as what is happening in Europe and other places."

Guidance & Commitments

Key Metrics