Rico Auto Industries Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Double-digit EBITDA milestone reached despite seasonal headwinds: EBITDA margin entered early double digits in Q3 even as revenue was suppressed by a 15-day OEM shutdown and deliberate export destocking. Management promises further improvement in Q4.
• Export growth masked by inventory correction: YoY export growth looked muted because the company is deliberately burning down excess warehouse stock in the US and Europe from nearly three months of cover toward the required one month, to cut warehousing costs and avoid part deterioration. Underlying customer pickup remains normal or slightly higher.
• Ferrous casting turnaround is a material margin lever: Yield improvement from 40% to 60%+ on the ferrous side is transforming a near-zero EBITDA business; only 7–8 of 20+ patterns are done, so the benefit has further to run.
• FY24 revenue target of ~₹3,000 crores backed by visibility: Management cites a ₹1,600 crore order book, Toyota ramp-up, export growth, and new EV business; 20% growth is confirmed as a fair assumption, with defence as an uncounted bonus.
• What to watch next quarter: Whether the Q4 margin expansion materialises as promised, the outcome of the BMW next-gen component decision in March, and any announcement on the "very, very large order" that management is close to securing.

Margin Trajectory & Profitability Levers

• Gross margin expansion: Raw material gross margin expanded approximately 300 bps QoQ, helped by stable commodity prices and lower raw material consumption. The raw-material-to-sales ratio is expected to stay around 70–72%.
• Ferrous yield transformation: Iron casting yields have moved from 45–50% to 65–70% in some cases, significantly lifting margins and freeing up capacity. Similar yield improvement work is now underway in aluminium.
• Ferrous rollout cadence: About 7–8 patterns have been completed out of over 20 needed; a new pattern is introduced every week, so the process is ongoing and the full benefit is not yet captured.
• Scale effect on margins: As quarterly revenue scales from ~₹550 crores toward ₹650 crores, margins will improve further; new products always carry better margins than older ones.
• Manpower cost one-off: Part of the manpower cost increase came from replacing older, expensive people with younger, smarter people, plus a one-time ₹1.5 crores charge for clearing accounts.
• Internal margin ambition: Management has an internal target of more than 12% EBITDA margin, though not for this year; Q4 is assured to remain in double digits and every quarter will show improvement.

Arvind Kapur: "I do not want to make any announcement now, but I will rather surprise you and you will be happy on that."

Export Dynamics & Inventory Normalisation

• Deliberate destocking underway: The company pushed a lot of material earlier to avoid air freight when shipment times to the US and Europe had tripled. It now has excess stock in US and European warehouses and is deliberately slowing shipments to normalise inventory from almost three months (in some cases four months) of cover down toward the required one month.
• Why the overstock happened: The company prioritised shipping heavier iron components by sea to avoid airlifting them later, since iron components are three to four times the weight of aluminium components and airlifting would be far more costly.
• Cost of excess inventory: Extra warehousing costs and the risk of rust and rework on iron parts, plus white rust on aluminium parts, made the inventory overhang expensive to carry.
• Normalisation timeline: By March, the company expects to address most of the export inventory overhang. Q4 will therefore see less shipment from India even though customer pickup remains normal or slightly higher.
• FY24 export expectation: ₹600 crores plus, built on 20% growth from existing customers, some new orders from customers besides BMW, and EV ramp-up with BMW, PSA and Reno.
• Europe demand holding: Despite the war, the European market remains surprisingly good. The Euro, which had crashed from ~₹79 to ~₹70, has since bounced back.

Revenue Growth & Order Book

• FY23 revenue: Management is comfortable reaching ₹2,300–2,350 crores plus for the full year; the ₹2,400 crore target remains in sight despite two-wheeler headwinds.
• FY24 revenue target: ~₹3,000 crores, with visibility to a quite large extent. A 20% growth assumption was confirmed as fair.
• Order book: Increased to ₹1,600 crores during the year, with ₹250 crores added in Q3 alone.
• Very large order pending: The company is very close to getting another "very, very large order"; March is the deciding date.
• Toyota ramp-up: Supply from the new Toyota plant contributed ~₹40 crores this quarter and is increasing every month. Toyota wants another 50% capacity increase; the company is trying to accommodate most of this within current machine investments with minimal additional capex.
• BMW business: A ₹100 crore annual EV components order is already won but not factored into next year's export growth; it contributes the year after. Separately, an audit for four to five next-generation components was excellent, with a decision expected by March.
• Two-wheeler clutch expansion: The company is negotiating with all other two-wheeler makers in India beyond Hero and hoping to gain business share; no investments are required, as existing capacity can double output immediately.
• EV contribution: Expected to be around 17% of revenue next year.

Arvind Kapur: "We would like to grow by minimum our internal thing is that we should go minimum by 15% year-on-year but this year of course we are growing higher than 15% we will be around 25% plus and next year also I think that even though 15% was the internal target we will grow more than that."

Subsidiaries, Mergers & Capital Allocation

• NCLT merger orders: The merger of RCL into Rico Jinfei was approved on January 5, 2023, with an appointed date of April 1, 2021, requiring reinstatement of all previous quarters. The merger of Rico Investment, RAFA and RASA into Rico Auto was cleared by NCLT approximately half an hour before the call.
• Merger impact on financials: Mergers will reduce other income going forward, but the profitability of the merged companies will start consolidating into Rico Auto.
• Rico Jinfei performance: Capacity utilisation is at ₹0.22–0.23 crore out of ₹0.45 crore total; the unit is EBITDA positive and adding Honda and scooters to its existing Bajaj and Hero customer base. Capacity will be further increased.
• Rico Fluidtronics performance: Turnover is doubling from ₹60–65 crores last year to ₹130–135 crores this year, with new orders from Maruti being executed; the unit is EBITDA positive and further improvement is expected next year.
• Debt trajectory: Debt has not yet come down because fresh debt was arranged for capex and working capital needs. Debt repayment of ₹90–100 crores is expected next year, and debt levels will start declining after about four quarters.
• Land monetisation: The Gurgaon market is improving and the company has started talking to potential buyers. Management states this will eliminate debt, not just reduce it.
• Capex outlook: Only maintenance capex of ~₹40 crores is planned for next year; no large capex programmes. Depreciation is expected to run at ~₹30 crores per quarter.

Arvind Kapur: "That will eliminate our debt not reduce."

Defence Opportunity

• Fuse testing breakthrough: The Ministry of Defence has agreed to allow private players, including Rico, to participate in fuse testing after earlier throwing them out despite the tender being meant only for private players.
• Trials and timing: Fuse trials must take place in both summer/desert and winter/snow conditions; winter testing timing is a problem causing delays. The army needs fuses very urgently, but the tender was supposed to come out almost four years back and is delayed by four years.
• Sales timing: Defence sales are expected by and large next year (FY24), but the army is very unpredictable. Defence revenue is not factored into growth numbers; whatever comes will be a bonus.
• Navy opportunity: The navy's fuse requirement is approximately one-third to one-fourth of the army's by volume, but value-wise might be more because the demand is tougher and prices are higher.
• Defence margins: Defence margins are always much better than auto industry components; historically 22–23% where reported last year, with some items at 25%, some at 22%, some at 28%, and traded items at a flat 10–15% pass-through.
• Other defence orders: The company is expecting some orders for various shooting ranges and is gaining confidence, penetrating defence, navy and paramilitary forces.

Arvind Kapur: "The army needs the fuses very urgently that is the other side of it, but this is as far as the fuses are concerned."

Financial Housekeeping

• Finance cost: The increase included a ₹1.5 crores one-time hit from Euro volatility booked on an MTM basis; the rest of the movement reflects accounting adjustments from the merger reinstatement. This one-off will not repeat in Q4.
• Interest cost headwind: The RBI increased the repo rate at least five times in the past few quarters to the tune of 225–250 bps, which has impacted interest cost. Some reduction is possible in Q4, and if the RBI starts reducing rates, interest costs will come down.
• Tax rate mechanics: The P&L tax rate remains ~34% because deferred tax liabilities are still being utilised; actual cash outflow for tax is much lower. After 2–2.5 years, when deferred tax credits are fully utilised, the company will move to the new 25% regime.
• Depreciation increase: Depreciation rose because of capitalisation of projects during the later part of Q2 and during Q3. A ₹30 crore quarterly run rate is a safe number for next year.
• Working capital: The export payment cycle is ~110 days (30 days shipment, 30 days stock, 30+ days payment); as exports go up, working capital requirements increase. The company is attempting to improve payment terms and has already succeeded with one customer.

Guidance & Commitments

Key Metrics