Rico Auto Industries Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Revenue missed guidance, but for technical reasons: FY23 sales of ₹2,320 crores fell short of the ₹2,350–2,400 crores target because chip shortages hit volumes and a switch to FOB export terms removed ~₹30 crores of freight from the top line.
• Q4 EBITDA hit the promised 12%: Margins improved sequentially as guided, with other expenses falling ~300 bps to partially offset a ~400 bps gross margin compression from higher aluminum prices and the merger of a commodity-heavy entity.
• FY24 growth budgeted at 15–16%: Management sees visibility to ~₹2,700 crores and expects to exceed that, hoping to cross ₹2,800 crores, with both domestic and export revenues growing at similar rates.
• The order book is tilting electric: New program wins took the total order book to ~₹1,900 crores (peak annual ₹380 crores), and 53% of orders in hand are now EVs or hybrids.
• What to watch next quarter: Whether the promised Q1 gross margin recovery materializes from the lagged aluminum pass-through, any news on the defense fuse retendering, and whether the BMW order pipeline converts further.

Revenue & Shipment Dynamics

• Chip shortage drag: Volumes were impacted throughout the year by semiconductor unavailability, which management hopes will ease as India builds domestic chip capacity over the next 3–5 years.
• Freight method change protected profits: The switch from CIF to FOB India for most export shipments removed freight from reported revenue, shrinking the top line by almost ₹30 crores, but was necessary because freight rate fluctuations had become severe enough to hurt profitability.
• Q4 export revenue understated: Exports appeared lower in Q4 because shipments that had not reached their destination by quarter-end could not be recognized as revenue, even though raw material had been consumed and the goods shipped. Management stated underlying shipment volumes were consistent across quarters.
• U.S. logistics normalized: Earlier port delays and shipment backlogs in the U.S. have resolved. The company had previously sent extra shipments to avoid premium air freight, then tapered shipments at year-end to avoid building excess inventory in the U.S.
• Russia-Ukraine upside: Management noted that an end to the war would give a further flip to exports and other markets.

Arvind Kapur: "Even though our internal target is to cross 20% and or be close to whatever we did last year. But at the moment, the visibility is up to 15%- 16%. So we are factoring that for all our calculations, but we can assure you that we will cross the budget that we have factored in so far."

Margins: Compression & Recovery Path

• Gross margin fell ~400 bps QoQ on aluminum and mix: The standalone raw material increase was only ~120 bps, but the consolidated jump was driven by the wheel manufacturing facility (Rico Jinfei), where raw material content is higher, and by selling more wheels to Hero at a lower contribution margin versus other customers.
• Other expenses provided a ~300 bps offset: The sequential decline in other expenses partially cushioned the gross margin compression, helping Q4 EBITDA reach 12% as promised.
• Q1 FY24 gross margin expected better: A one-quarter lag in aluminum price pass-through means compensation for the Q4 increase arrives in Q1, and a minor exceptional cost increase will not recur.
• Full-year FY24 margin ambition: Management wants to retain Q4 levels and improve further, with internal benchmarks tougher than last year. Gross margin improvement alone is expected to add ~100 bps to EBITDA margins versus Q4, implying full-year EBITDA margins higher by at least that much.
• An analyst flagged competitive underperformance: Other aluminum casting competitors showed gross margin improvement while Rico alone saw a reduction without a product mix change. Management attributed the gap to the wheel plant and offered to clarify later.

Arvind Kapur: "We would certainly like to retain whatever we achieve and maintain whatever we've achieved. But our internal benchmarks are even tougher than whatever we had done last year. And we are hoping that our margins should be better quarter-on-quarter."

Order Book & Program Wins

• Order book expanded to ~₹1,900 crores: New orders added during the quarter brought total program value up from ₹1,600 crores in Q3, implying peak annual revenue of ~₹380 crores from the total order book.
• EV and hybrid orders dominate: 53% of total orders in hand are for electric or hybrid vehicles, with IC-engine programs making up the balance and motorcycle wheels at ~21%.
• BMW win adds ~₹100 crores annually at peak: One order has already been received, with additional orders still pending and management waiting for news on them.
• Toyota ramp-up running at full capacity: The program is operating at the originally ordered level, with a further enhancement requested by Toyota to start in 2025. Revenue is expected to rise from ~₹110 crores to ~₹135 crores, and the AISIN e-transmission program, ultimately destined for Toyota, also begins from 2025.

Defense: A Slow-Burn Opportunity

• Fuse retendering triggered: The preference previously given to a public sector undertaking has been withdrawn, and retendering is expected on a "war footing." Management cited a failure rate of almost 40% on the incumbent's product and described the process as plagued by "a lot of monkey business."
• Timeline is long: A decision is expected within months, but allocation of business will take approximately one year because full summer and winter trial cycles will be repeated, and re-pricing is needed due to higher steel prices.
• Tender size revised to ₹3,500 crores: The original ₹6,000–10,000 crore tender has been split into categories, with outdated fuses removed.
• Other defense products nearing announcement: Management expects news on additional offerings in the next quarter, after an 8–9 year effort to navigate what it called a "very, very tedious" process of changing mindsets across the Army, public sector undertakings, and the Ministry of Defence.

Arvind Kapur: "Finally, I think our voice has been heard, and the preference that was being given to the public sector undertaking has finally been withdrawn. And so now that we think that there's going to be retendering on the fuses because there was a lot of monkey business going on there and a lot of support that the current companies are getting from the government, despite the fact that there was a failure of almost 40% of whatever they used to produce."

Capex, Debt & Capital Allocation

• FY23 capex deviated sharply from guidance: ₹200 crores was spent versus an earlier indication of ₹50–60 crores, because the Toyota project was capitalized during FY23 and ~₹50 crores of prior-period commitments kept getting postponed and finally landed. An analyst pressed management on why guidance changed so dramatically between Q3 and year-end, and the communication gap was acknowledged but not fully resolved.
• FY24 capex disciplined at ~₹100 crores: Planned investment of ₹55 crores plus ₹35–40 crores for dies, totaling ~₹100 crores, which is below depreciation of ~₹110 crores. Management stated no other areas need immediate investment and no orders are pending with suppliers beyond one die-casting machine for the AISIN project.
• Debt reduction is the first priority: Debt is expected to start coming down from the end of FY24, with reasonable reduction anticipated and a commitment to do better than last year.
• Land monetization in progress: The company is actively looking for a single buyer for ~27 acres on the Delhi-Jaipur highway in Gurgaon, but no timeline for deal closure has been set, and shifting operations would take ~1.5 years after an agreement.
• ROCE improved ~150% year-on-year: Management attributed this to finally realizing benefits from earlier investments, and stated the improvement will continue.
• Dividend payout increased: The payout ratio rose to ~21%, with a stated policy ceiling of 30%.

Arvind Kapur: "I agree with you. But if you see our ROCE percentage, it is now almost 150% improvement is there as compared to last year's numbers. So ROCE improvement is there, and that will continue. So if ROCE improvement is there, that is on account, because now we are realizing the benefits from the investment which was made earlier."

End-Market & Industry Outlook

• Two-wheeler recovery expected: Management hopes FY24 will be better than FY23 for IC-engine motorcycles and scooters, with some improvement already seen last year.
• Passenger and commercial vehicles strong: Waiting periods persist, especially for more expensive vehicles, and customer aspiration is shifting upward to category B and C vehicles.
• EV adoption seen at 15% ±5% by 2030: Management believes the two-wheeler EV space will grow fastest, while passenger vehicle EV adoption is currently slower than many expected due to charging infrastructure, vehicle cost, and battery cost constraints.

Arvind Kapur: "By 2030 in the car space, we expect I've always maintained, it will be 15% plus/minus 5% would be in the passenger vehicle space."

Guidance & Commitments

Key Metrics