Rico Auto Industries Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Flat quarter, defence excitement building: Revenue was flat YoY as Hero supplies were restricted for two quarters and Renault Nissan pulled far less than forecast, but the Hero price negotiation is now settled and defence orders are in hand for the first time.
• Margin base set at 11%: Operational efficiency, not commodity prices, drove the improvement, and management expects every quarter to improve from here, with labour cost gains visible by March.
• Defence is the new growth vector: A 10-year TBRL licensing deal for Baffle Range is signed, initial defence orders are being processed, and the company is aggressively bidding for ₹300-500 crore turnover businesses.
• Equipment reuse funded the Toyota project: Freed capacity from Renault Nissan and discontinued programs covered ₹70-80 crore of investment, avoiding new debt.
• What to watch next quarter: Whether defence billing begins and hits the ₹100 crore potential, the pace of the promised sequential margin improvement, and any clarity on the fuses opportunity for private players.

Revenue Performance & Customer Dynamics

• Hero recovery now underway: Price increase negotiations with Hero have been concluded, all increase purchase orders received, and material is now being pushed; two-wheeler revenue is back in line with industry growth.
• Renault Nissan drag: The customer pulled roughly half its forecast, and management is not confident of a doubling in requirements; capacities have been withdrawn and machines shifted to other customers since the equipment is fungible.
• Shutdown pattern shift: Normally customers pull more material ahead of yearly shutdowns to cover monthly requirements, but this time the pull was lower than forecast, adding to the quarterly revenue miss.
• Projection risk acknowledged: Management noted that projections are based back-to-back on customers, and sometimes customers let them down; the company tries to cover the gap by selling to others.

Arvind Kapur: "We are not very confident of Renault Nissan actually doubling their requirement. So, that the reason we pulled out the equipment's so that we can utilize it elsewhere."

Margins & Operational Efficiency

• 11% as the base: Management stated 11% margin can be considered a base, with a better number expected next quarter; improvement is driven by operational efficiency, not commodity price reductions.
• Labour cost gains in progress: Manpower cost improvements are ongoing, and by March further improvements will be visible.
• Equipment reuse avoided new funding: Old low-volume programs and Renault Nissan equipment were freed, covering ₹70-80 crore of investment needed for the Toyota project without requiring new funding.
• Red Sea logistics impact: Transit time to Europe and the US has increased by two to three weeks, and shipment costs are higher, but no premium freight or airlifting has been needed; extra freight costs have been negotiated with customers for recovery.

Arvind Kapur: "And that extent will help us to cover up almost INR 70-80 crores of investment that was required to be done for another project for Toyota. And that we have been able, we didn't need to fund that at all and the equipment could be pulled up from the current."

Defence: The New Growth Engine

• First defence orders in hand: Orders from defence are being processed; this is the first time the company is executing such orders, and management is excited but cautious, saying "till everything is done it's not done."
• TBRL licensing agreement signed: A 10-year technology transfer agreement with TBRL (DRDO) covers a product called Baffle Range; the company will set up one Baffle Range in one of its plants.
• Bidding pipeline is large: Management is aggressively bidding for ₹300-500 crore turnover defence businesses and says the company is "right in the forefront"; the total Baffle Range opportunity over 10 years could be ₹6,000-7,000 crore, per management, though this is a bidding process with no confirmed order value.
• Fuses strategy is dual-track: Management remains hopeful of being the first private company to get into electronic fuses; if a direct order is not received, the company will supply components to DPSUs instead, though management prefers the complete fuse order.
• Previous tender withdrawn: The earlier ₹10,000 crore defence tender, later reduced to ₹7,000 crore, was withdrawn after four years; the overall fuses opportunity is still pegged at more than ₹10,000 crore, but clarity on whether private players will get multi-year contracts is absent.

Arvind Kapur: "This is the first time it's happening. So, it depends on the quality checks and the other issues and all the formalities that we are going through. So, that we are very excited about. And now, the only thing is that till everything is done it's not done and so, we are not including the defence orders as yet."

Balance Sheet & Capital Allocation

• Debt reduction on track: ₹85 crore repayment is planned by year-end, with a similar amount next year; the downward trend in debt will continue.
• No new debt planned: No new debt is planned except possibly for greenfield projects if new business requires it.
• Greenfield scouting for Toyota: The company is scouting for a location near Lancer; Toyota and their ancillaries have asked the company to set up a plant close to them.
• Land sale in progress: Two to three companies are working on the land sale; nothing solid is in hand but the asset is in the market.

Export & Domestic Growth Pipeline

• Export share to improve next year: A couple of programs for export customers will go into SOP by mid-next year, driving an improvement in the share of export business.
• Domestic wins also launching: The company has won a lot of domestic businesses which will also be launched.
• Election impact on tenders: New business tender processes may be impacted during the election cool-off period, but existing orders and revenue/capital procurement will continue.

Guidance & Commitments

Key Metrics