Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript

Yes. Subject to overall, see, it has to -- again, there has to be a lot of other things need to be discussed and subject to an agreement with the CoC, we are going ahead with this.

Okay. Okay. And the second thing is with regard to the shares of the promoter which have been pledged for raising the amount. So during this quarter itself, you had unpledged shares. And then there was a re-plugging also which had happened.

I think if you go with the document, which we have filed with the SEBI, you can very well see that the company has taken a working capital loan from IFC against which security has not been created. So till the time security has been created, IFC has taken pledge of promoter shares. Once the security is created for IFC, this promoter pledge is going to get released.

Okay. And sir, the entire promoter pledge will get released once the -- so the entire promoter pledge to be understood is with IFC right now if being favored?

No, I think around INR 2 crores or INR 3 crores is with other, which is getting -- going to get released in this quarter. By this quarter end, almost everything is going to get released in terms of promoter pledge.

Apart from promoter shareholding with IFC, there is around INR 12 lakhs right now under pledged. And most of the shareholding will be released within this financial year.

The next question is from the line of Mitul Shah from Reliance Securities Limited.

Congratulations, sir, for strong performance. Sir, my first question is on your export outlook for next 6 months. In terms of these 2 geographies, America and Europe, what is your reading, sir?

I think we will continue to grow and we find traction in the customers. So I think like in earlier questions, I've already told that we are looking at doing better than what we did in FY '20 in our exports in overall segments.

So for Europe also, you are confident enough to regain the momentum because Europe is still seems to be slow compared to recovery of other countries?

No, we are very confident to do full year much better than what we did in FY '20.

And second question is on, sir, what is your understanding after discussing with domestic OEMs? This Q2 number was reasonably strong. Production for CV for Q3 and Q4, any indication by OEMs?

No, right now, we don't have any indications. But I think we are on a right path in terms of our plans to maximize our revenues, and we are working towards that from the domestic industry.

Sir, lastly on this lag effect of passing on the cost inflation of steel prices going up as you said that from October 1, we have also taken the increase or there would be some lag effect?

No, we will first but it will take some time before it comes into the balance sheet. But from October 1, we will get this.

So Q3 will have entire quarterly effect of the price increase or it will have some effect for this and then spill over to next quarter?

Right now, we have already launched our claims with the OEMs, so it is up to the OEMs to decide when they will do, but we will get it from October 1. But it may happen that some OEMs give it in the month January also. It will be a cash flow thing for us. But in terms of balance sheet issue, I think we'll get in October 1. So there is no balance sheet issue in terms of getting the increase.

Okay. Sir, my next question is related to your new capacity for LCV and PVs, particularly. So if we try to understand broader parameters, broader financials, for this business compared to MHCV in terms of margins, return ratios, how we can -- what would be the right comparison approximately, sir?

Put in an approx number is extremely difficult for this.

The margin profile is more or less similar to MHCV or it is slightly...

Margin profile is similar to what we are doing currently. We are getting into value-add products and margins whatever we get, will be same as what we get right now. Only thing we'll be able to derisk part of our business getting into new segment.

Sir, initial utilization would be low, so that's why margin may not be as high as it should be.

Like in all the calls, we have continuously said the full utilization is going to be only by second half of FY '22.

So by that time, you will reach to the MHCV type of margins, right?

Yes, yes.

So sir, despite this type of attractive margins, why haven't we looked at LCV in past? Or is there any other constraint which we faced earlier, now we are...

Opportunity comes with time and whenever company feels that's the right time, company has invested into it. So I cannot comment to why we have not looked, it's extremely difficult. Why we have looked right now, we feel that there is an opportunity and we can do it. So we have done it.

And the same is the case with the PV business also, sir?

Yes. PV and LCV is same. And I don't think we have 2 different manufacturing lines. PV and LCV are same manufacturing lines, which we are going to come into production.

Okay, sir. And lastly, on non-auto side, apart from railway, any further update or any segments where we can see sizable revenue traction maybe in next 2 years?

Nothing favorable currently in our plates.

So non-auto mainly railway will be the only segment.

Yes.

The next question is from the line of Sachin Kasera from Svan Investments.

Congrats on a good set of numbers. Can you point on the month-on-month trend that you saw during the quarter? Is it that July was better than June and then August and then September? And how is it currently looking?

Sachin, every month has changed for the positive. From June, obviously July was very good. July -- August was better than -- September was even much better. And a similar trend is being seen currently also. But what we feel that right now, we are at a stable regime, and I think this is going to continue for next 6 months. I don't think market is going to just run away from here. But it is going to stabilize at this level before again picking up from here on.

Sure. Sure. Second question, sir, on this net debt. So it was mentioned that the second half, we will have minimal CapEx. So can we also look at some debt reduction in the second half of the current financial year?

No. I think, Sachin, this year, we are not expecting any debt reduction. Debt reduction majorly is going to come in FY '22, wherein we are -- with the incremental top line, we are working on reduction of debt close to INR 100 crore to INR 150 crore. Like Lalit has already said, we are looking at close to INR 150 crores debt reduction in FY '22 from the current levels in spite of having -- projecting higher revenue in the next year.

Sure, sure. Is there any debt-to-EBITDA level that you would want to achieve over the next 2 years? Because currently, the debt-to-EBITDA, obviously, because of the lower revenue and lower opportunity is very high. But once things stabilize after, say, 2, 3 quarters down the line, beyond '22, '23, what is the type of debt-to-EBITDA that you think you are very comfortable with going at?

See, Sachin, this is a continuous process. And like we were in '18 to '19 -- '18, '19, we were less than 3 debt-to-EBITDA. So certainly, we will go back to the same level. It's a matter of time, it's -- or we may achieve that number in FY '22 also.

So my ultra question was that -- sir, is it that you would want to achieve a very strong debt-to-EBITDA before we now undertake any large CapEx? Is that the way we can look management's view at least for the next 2 to 3 years' perspective?

Yes, I think before we embark on any further new CapEx, large CapEx, we would like our debt-to-EBITDA less than 1.5.

That is very, very heartening.

The next question is from the line of Kush Joshi from Kitara Capital.

Sir, I just want to understand what kind of product will be manufactured for LCV?

I will not be able to tell you any product-specific names. We have defined that sector, basically, and I would not like to name a particular component...

Okay. Fair enough. Fair enough.

Hello?

And -- yes, that is fair enough. Hello?

Yes.

Yes. But -- so currently, we are doing 20% of our volumes from LCV, right?

In domestic market.

Domestic market, domestic market. Yes. So going forward, what kind of ratio we see in domestic market between MHCV and LCV?

Our aim is to get to 70-30, with the incremental revenues, which we feel that by FY '22, we will have. But it will -- we will be able to update you on quarterly basis. Right now, we are working towards getting 30-70 ratio in LCV and commercial vehicle market difference.

Okay. So -- because what I'm trying to understand is that is the gross margin reducing because of increased share of LCV in our portfolio? Because...

I can't understand your question, Kush.

Yes. See, my question is that as our LCV portfolio is increasing our total volume share, whether our gross margin also be reduced to that extent or proportionately because the margins are not as -- looks like as not high in if we compare...

Like in other -- earlier, my question, what I replied, we are working towards same margin. But I think gross margin is -- there has -- more of with raw material price increase and decrease, both. So it is extremely difficult to tell you because if tomorrow raw material prices continues to start falling, you will see gross margin increasing also. So right now, what has happened over last quarter, the price -- steel price has started hardening. While we have not been able to pass on still the price increase.

Understood.

However we are going to pass on the steel price increase.

Understood.

You will see gross margin changes in this quarter.

Okay. Because we do, I think, every 6 months, the reset of the price, right? If I...

In exports, every 6 months; and in domestic markets, as and when the raw material price is cleared by the OEMs, we'll pass on the same to the OEM.

Yes. And as far as debt, you mentioned that next year, the plan is to repay with increased turnover also, we propose to pay off INR 150 crores to INR 200 crores next year.

INR 100 crores to...

So INR 100 crores to INR 150 crores, sorry, yes. So whether the same run rate will continue for more couple of years or how it is -- what is your strategy with regard to that?

Just a question before that, I have answered any major CapEx we undertake, we are looking at a debt-to-EBITDA ratio of 1.5 before we embark on any large factors going forward.

So we have -- okay. Understood. Fair enough. And what was the share of revenue -- Europe revenue in the total exports?

Hello?

What was the share of Europe revenue in total exports?

Europe revenue, like I told, I think 2.5% is South America, close to around...

25% is Europe.

25% is Europe, Kush.

25%?

Yes, yes.

[Operator Instructions] The next question from the line of Sachin Kasera from Svan Investments.

Naresh Ji, one of our key issues have been the high dependence on the domestic CV cycle, which is a little cyclical. With this new capacity, how do you see the mix of CV, domestic CV versus exports and non-auto say, 3 years or 4 years down the line? Do you think we can significantly derisk ourselves?

Our right intention behinds this CapEx is basically derisking ourselves from the entire global MHCV. So railways, which is going to become one of the main pillars behind it. Going forward, the next 2 to 3 years railway will become a big business. In domestic industry in terms only MHCV, we are adding large portfolios of LCV. So LCV domestically will derisk -- LCV and railways will derisk majorly or its dependence on local domestic MHCV. In exports, we are adding new geographies. We have started our supplies to South America, which is going to become one of the big opportunities for us in going next 2 to 3 years as well as Europe is growing very fast. So with that, our exports are going to get derisked our dependence on North American market.

Sure. And secondly, once we commission this new capacity of 30,000, 40,000 tons, is there going to be a significant increase once again in the cost structure? Or is it because of the nature of brown field, the current cost will not see a major increase?

No, cost, I don't think vis-à-vis in terms of percentage to the top line achieved, it will be on the lower side because of the FX.

Okay. Okay. Because see, now we are achieving 18%, 19% EBITDA margin, even whenever utilization is hardly 30%, 35%, so going down, say, 6 or 8 quarters down the line to see 18%, 19%...

As the utilization improves, as the capacity utilization goes up and the new investment also sticks off, the percentage to cost is going to go down because of utilization, better utilization.

The next question is from the line of Karthi Keyan from Suyash Advisors.

A couple of questions. One, I logged in slightly late, so excuse me, I'm repeating. Can you explain the relatively high receivables number? I don't know if this was explained.

Yes, the receivable, we can see whatever we have sold to Tata Motors, what has happened this year, we have revert back to bill responding system with Tata Motors. Earlier, we were doing with a -- on other bank where it is not added to our balance sheet. So the Tata Motors bills are being added to our receivable numbers, which is actually not receivable and a similar number of bill discounting has been added in debt. Debtor is also higher by that amount. So that's why it is looking higher. Otherwise...

That's like INR 55 crores, right? So what I understood that's about INR 55 crores. Even otherwise, the number seems to be fairly large. So it's roughly equal to the entire 6 months sale. So even if I exclude that on the receivables number, it's slightly on the higher side. Virtually, the entire 6-month sales are sitting as receivable. So how to interpret that number? And is there a trend that you can guide for on this?

See, basically, due to the COVID, the exports process were not there or very less process were there in the first quarter. So that's why the receivables are aging almost more than 6 months. So that's why this number is looking higher in terms of total sales. But going forward, this number will not increase to sale, and you can see the traction in total receivables in terms of top line.

Right. Right. The other question is, can you talk about what percentage of your revenues would be from, say, engine components and transmission components and other components, just for a perspective.

From an engine -- we have close to around 10% revenue from transmission and close to around 10% from engine components.

Okay. Okay. Great. Great. Just one thing I explaining the question asked by an earlier participant. Would 24%, 25% EBITDA margin at full utilization be an aggressive assumption, given the operating leverage that seems to be available?

I think we will not have a number to the EBITDA right now. But as per whatever we have done over last several years in terms of cost-cutting and other things, we feel that we will be able to maintain a very healthy margins going forward as the utilization improves.

The next question is from the line of Kush Joshi from Kitara Capital.

Sir, can you just give us -- throw some light on the opportunity in the South American market and how we are -- what is the strategy for growth from that segment?

No, we have started supplies to axle components to South American market, and that's a big, huge market in South America. The economy is coming back. So it is one customer right now we have started our supplies to. And going forward, he alone -- they alone by the current customer close to around INR 300 million worth of forging every year. So if I am able to get even 5% or 10% of that, that's a big sum for me.

Is it -- so which country basically in South American region is pertaining to customer...

I don't -- I would not like to name any particular...

Okay. Okay. Okay. So will be supplying currently axles to that customer currently?

We make parts of the axle. We don't make...

Correct. Correct. Okay. And so axle parts you're sending. So it's an assembly form or is it just a...

It's a component.

[Operator Instructions] The next question is from the line of Paras Nagda from ENAM.

Sir, I had just 1 question. What is the kind of machining mix that we are seeing? And if you take a longer term view of the business say, 2, 3 years, how will the machining mix change from the current levels?

As of now and if you go by the last quarter, it is close to around 60-40. And our target quarter-on-quarter, I think, as the mix improves, as the market improves, in terms of our installed capacity or in terms of utilization, our target is by this year-end to reach close to around 75% in terms of machine components.

[Operator Instructions] The next question is from the line of Raghunandhan from Emkay Global.

Congratulations on a good set of numbers, especially when industry is going through a tough time. Sir, my question was to understand -- so if I look at the results, there is a marginal fall in volumes versus last year. And when we are looking at the underlying industry, be it MHCV in India or be it the North America Class 8 production, there has been a steep fall. So the gap between our performance and the industry performance. Number one is led by that contribution, which has come from LCVs. LCVs was 0% last year; and this year, within the domestic, it is 20%. Second is Europe, which was 20% last year, has come to 25% of exports this year. And third is, there is some contribution from South America. And also, fourthly, there is some contribution from the railway segment. Can you highlight whether these would be the main factors or whether there will be additional factors which are helping the performance for the current quarter? And like you have already given the flavor for the next year. So just wanted to understand for the quarter performance.

I think current quarter, it is extremely difficult to comment on what is going to happen in this quarter. Last quarter, we did well because of the mix we have changed, and we are very confident that going forward, the similar mix is going to give us better top line.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for concluding comments.

Thank you, participants, for attending the call in the evening time. We thank you on behalf of the management for attending our call. Thank you.

Thank you.

Thank you.

Thank you, ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference.