Rico Auto Industries Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Turnover hit by two deliberate, disclosed cuts: Revenue fell to ₹533 cr as Rico intentionally reduced supplies to Hero over a year-long pricing dispute and Renault slashed production ~25%, together masking growth elsewhere.
• Hero pricing settlement imminent, framed as a reset: A board-backed "tough call" to stop loss-making supplies should resolve in 10-15 days, and the stand has already unlocked new two-wheeler customers offering better pricing.
• Defense finally turning from pipeline to orders: Management described its first real excitement in years, with orders placed, bidding expanding, and ₹80-100 cr of defense revenue now built into the full-year guidance.
• Margins held double-digit despite wage and energy headwinds: A three-year wage settlement and summer power costs compressed Q1, but full-year EBITDA is guided to 11%+ (ex-other income), with solar and windmill investments lowering power costs from H2.
• What to watch next quarter: Whether the Hero settlement actually closes and volumes normalize, the pace of new two-wheeler customer ramp-ups, and any concrete defense order announcements around the AGM.

The Hero Dispute: A Deliberate Reset

• Loss-making supplies stopped: Every component supplied to Hero was being sold at a loss, with no end in sight after over a year of negotiations; the board approved cutting volumes to force a resolution.
• Two components affected: Aluminum beam and clutch assemblies were the disputed parts; clutch volumes have already bounced back, while the beam remains pending settlement.
• Settlement expected within 10-15 days: Management stated talks are ongoing and a price agreement should close in the next week to ten days; full volumes will resume the day settlement is done, with supplies currently at 80% of normal.
• Blessing in disguise: The standoff forced Rico to aggressively pursue Suzuki Motorcycle, Honda Motorcycle and Royal Enfield; all three have approved Rico's plans, sampling has started, and pricing from these customers is "a lot better" than from Hero. Supplies expected by end of Q3.
• Disclosure gap acknowledged: An analyst noted the dispute and Renault cut were not flagged in the Q4 call despite being two months into Q1; management admitted they should have disclosed it, but were repeatedly given false commitments by customers asking for "another 10-15 days."

Arvind Kapur: "We took a tough call and we did the bouncer of the board also and told them that our turnover will come down. We have promised better turnover but it will come down but the main reason is that we cannot sustain the losses which are coming in because there is no end in sight as far as the 5-6% now."

Customer Mix Reshuffling

• Renault dropped from 12-13% to 6% of sales: The Chennai plant cut production ~25-26% on both export and domestic weakness; management is pressing Renault to either pick up material or allow transfer to other programs, with no visibility on revival.
• BMW fell from 18-19% to 6%: A sharp decline, though partially offset by a new EV component order worth ~₹100 cr annually when it ramps up.
• Maruti and Toyota growing: Maruti sales are increasing with more components being added; Toyota volumes are also rising.
• Commercial vehicles and exports picking up: New sets of components coming in across both categories.
• Equipment fungibility provides flexibility: 85% of equipment can shift between normal, EV and hybrid components; only 15% is component-specific, reducing stranded-asset risk as the customer mix evolves.

Defense: From Pipeline to Revenue

• First real excitement in years: After a long gestation, big orders are starting to flow; the bidding pipeline and variety of items have increased, and orders have been placed in some cases.
• ₹80-100 cr built into FY24 guidance: Full-year turnover revised to approximately ₹2,600 cr (from ₹2,700 cr), with defense contributing ₹80-100 cr of that total.
• Supplies to new defense customers expected by end of Q3: Management indicated some supplies should commence by the third quarter.
• Partnership announcement pending: Waiting for orders to materialize; an announcement will be made immediately when orders come, possibly around the AGM.
• Margin uplift promised: Once defense kicks in, management stated margins will cross 14-15% "very easily," though this is not a formal near-term target.

Arvind Kapur: "But let me tell you, after so many years, this is the first time we are actually getting excited about the defense, what is happening in it."

Margins: Headwinds Absorbed, Recovery Expected

• Q1 wage settlement hit: A three-year union wage settlement fell due in Q1, compounded by government-mandated minimum wage revisions (e.g., Gujarat ₹4,700/month, over 20% increase); management did not lay off trained workers despite production cuts.
• Power costs seasonal, not structural: Summer drove higher air-handling and cooling costs, comparable to the same quarter last year; solar will be available in all major plants by October end, and a Chennai windmill by January end, reducing full-year power cost below last year.
• EBITDA maintained double-digit: Despite the turnover decline and cost headwinds, double-digit EBITDA was preserved; management is confident full-year EBITDA will be better than last year.
• Inventory build absorbed production: A ₹12.3 cr inventory increase (vs. a ₹50 cr decrease last quarter) means manufacturing volumes were similar quarter-on-quarter when adjusted; the P&L revenue decline partly reflects inventory movement, not just production cuts.
• Debt flat, reduction promised: Debt remains at year-end levels as working capital needs from the expanding business offset repayments; management expects debt to start coming down by year-end.

Guidance & Commitments

Key Metrics