Q2 24/25

Oct 28, 2024

Summary

Q2 and H1 profit rose sharply, supported by mix, productivity and cost control, while revenue declined amid weak CV, tractor and export demand. FY2025 revenue is expected slightly below FY2024; margins are expected to hold, with possible Q4 demand recovery.

Ladies and gentlemen, good day and welcome to Wheels India Q2 FY 2025 Post-Result Conference Call, hosted by ICICI Securities. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Vishakha Maliwal. Please go ahead. Thank you, Nikita. Good afternoon, everyone. Thanks to the management of Wheels India Limited for giving us the opportunity to host the call. We have with us the senior management, which is headed by Mr. Srivats Ram, Managing Director, and Mr. P. Ramesh, CFO of Wheels India Limited. I would like to hand over the call to the management for any initial remarks followed by Sridhar. Over to you, sir. Thank you. Thank you, Vishakha. Good afternoon, everyone. Welcome to our Q2 call. Wheels India has registered a net profit of INR 21.92 crores as compared to INR 5.24 crores in the corresponding quarter of last year. Of course, last year we had one-off expenses for pre-delivery inspection charges, which was almost close to INR 10 crores. That is why last year was low. This year, we registered revenues of INR 1,085 crores for Q2 as compared to INR 1,189 crores in Q2 of last year. There are a few reasons which I will also cover later on. For the first half, if you look at it, the company registered a rise in net profit at INR 47.29 crores as compared to INR 18.46 crores in the corresponding first half of last year. Again, revenues were INR 2,174 crores for the first half of this year, compared to INR 2,322 crores. Now, generally, if you look at it, I will come to revenue next. But first, if you look at profitability, very favorable product mix, notably increase in machining of windmill castings, where we ramped up actually in this year. Productivity improvement and cost control across units resulted in the good growth in profit that we had for the second quarter in succession. These measures that we have in place are likely to continue to maintain some kind of profit trajectory in the current year. On the revenue side, if you actually look at it, Q2 saw a drop in both CV and tractor requirements. As all of you must be aware, and it is also in the media, both these sectors had a drop. And for Wheels India specifically, there is a significant drop in the lift axle air suspension system business for trucks as there is a move away from multi-axle and towards trailers. On the export front, as I have indicated in earlier calls also, things are slowing down globally, both in U.S. and Europe, resulting in not only cutting schedules on existing business, but also delay in introduction of new products as customers have to exhaust their stocks. So while this year we are probably going to see a reduction in exports, we expect that the new products which have so far not come and which will definitely come in next year, will ensure some growth in export in the coming year. On the CapEx front, while obviously existing business CapEx when utilizations are low have not really happened, we are investing about INR 225 crores, notably towards the expansion of machining of windmill castings, agricultural wheels, hydraulic cylinders, and little bit in cast aluminium wheels. In terms of growth prospects, in the second half, we expect that CV, tractor, and to some extent, aluminium wheels will pick up in Q4. With that, I have finished my commentary on the Q2 H1 results, and now I am open to any questions or queries that any of you may have. Thank you. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a minute while the question queue assembles. The first question is from the line of Amit from SMIFS Limited. Please go ahead. Hi, sir. Congratulations for the good operational performance in Q2. Sir, can you please help us in understanding the export market situation at present, including the freight rates and the inventory situation or challenges over there? Also, if you can spend a few minutes and guide us on the outlook for the domestic market segment-wise, that would be really helpful, sir. Thanks. Okay. I can try my best. I think on the export front, actually Europe has been slowing down quite a bit over the years. Even recently I was in an expo in Europe, and even our distributors are saying that they have gained market share, but the volume has dropped. So it's a question of actually those markets have gone through a little bit of a trough, and we have to wait for those markets to improve. When the overall market improves, given our gain in market share, we should be able to improve. This is one example, but if you look at the U.S. also, U.S. is also showing signs of slowing down. It varies from segment to segment, and we need to understand, for example, that mining should improve in the coming year. Construction should also see some improvement, although I don't know what the U.S. results will have in terms of these various activities, but I'm just giving you the customer feedback. For us, exports are largely agriculture tractor, construction equipment, and commercial vehicles, and also alloy wheels. Agriculture tractors globally is going through a little bit of a recession. Not so much India, but the rest of the world, volumes are down about 30%. So it's a cyclical business, and at some point the cycle turns and then the volumes grow by an equal number. If you look at the domestic market, CV in Q1 was actually quite good. Q2 has been quite negative. While Q3 is not likely to be worse than Q2, we think we'll have to wait till Q4 to actually see an improvement in such CV market. Tractor, on the other hand, has been fairly neutral, but we expect that due to the fairly decent monsoons, Q4, which is again because of this whole harvest season which happens from mid-January, we expect that the Q4 will be strong on tractors. On the passenger vehicles side, I would rather wait till post-Diwali and see how the sales actually have happened before I comment. But customers seem to be still confident of meeting annual numbers that they predicted. I hope this has answered your question. Yes, sir. This is very helpful. Sir, secondly, basically, export is about one-fourth of our business, which is expected to decline in this fiscal. Yes. The domestic demand doesn't look very healthy for the commercial vehicles, and that's another 25% of the business. Yes. Considering all these things in the picture, how much revenue possibly can achieve in FY 2025 and any aim for FY 2026, please? See, FY 2025, the way I look at it, I think the revenues will be slightly less than FY 2024. Pretty much whatever you've seen in the first half is what you can expect in the second half. Maybe Q4 may be slightly better. But pretty much what you've seen in terms of the company's results in the first half are likely to pan out for the balance part of the year, with some improvement possibilities in Q4. Okay. And sir, you have mentioned in your comments that new product introduction in the export market. Can you please explain what exactly is this? So there are a couple of areas where we are looking at. One is hydraulic cylinders, where we are seeing a lot of potential. Some of the business that we are looking at may take between one to one and a half years to justify. But at least within one year we will get in some kind of committed state with the customer. But it may require expansion, in which case it takes one and a half years. The other area which we are looking at is actually widening the range of products that we have on agriculture tractors, because when we are going to export markets, people are saying, "Unless you have the entire range, we can't look at you as a replacement supplier. We can't look at you as a supplier who can take over existing people." So we are widening the range of products. That is the second area that we are looking at. The third area is that there are some products from construction where the development or testing cycles are physical and very long. As a result of which, while we have developed the product, for it to go through all the testing and come out will probably result as, not in this year, but in 2025, 2026 or even 2026 and 2027 is when the volumes will come. So some of these products that we developed are quite profitable. Understood. And sir, lastly on the alloys side, so currently alloys is on the LPDC technology. Yes. Sir, how much is the current capacity, and are we planning to increase the same? See, it's a little because if you ask today, I'll say probably about 40,000 is current. 40,000 is let's say 500,000 per year is the annual capacity. We'll be increasing it by about 10,000 a month by end of the year. It's more debottlenecking as opposed to expansion in aluminum. And sir, also continuing with this, if you can help us on the current utilization levels of this alloy and any orders in hand and which clients we are serving. Sure. Yeah. As you probably know, we don't name our clients, but I can give you some hints. When we started supplying, we had one MNC based in Chennai who was very low volume. We have now started supplying to one of the top three manufacturers, not based in Chennai, but one of the top three car manufacturers. That customer has said that he will increase our volumes on a month-on-month basis and hopefully take us close to 20,000 for that single customer itself. Wow. Yeah, 20,000 per month for the single customer. This is in addition to our export business as well. How much alloy goes into domestic and how much is in exports? Domestic, it is very less. To give you an idea, let's say, instead of saying what it is today, let's say if I go forward to probably, say, April or something of next year, we will be about 25,000 in domestic and maybe about 50 in export. Okay. Lastly, on the margin side, we are very happy to see the margin turnaround in the industrial business segment. Yeah. Can you please elaborate the same and the sustainability, please? Sure. One thing is, yes, of course, it looks very spectacular to go from a marginal loss to a profit. Last year, we had a one-off charge of almost about, I think INR 9.8 crores or INR 10 crores, which is pre-delivery inspection charge. Purely based on the fact that this year we do not have it, you should have had a INR 10 crore swing. Added to that, this machining of windmill castings is quite profitable, and we have actually ramped that up quite substantially compared to the same period last year. A little bit about this business. We are tied with a large casting manufacturer, a multinational company, and they are currently operating at, say, 25,000 tons a year. They have a plan to expand this to 45,000 tons in the next couple of years. As they expand that, we also expect that our volume and our business there will also increase. This 7.5%, can we assume it is sustainable? Yes. Okay. Sir, lastly, there was some margin fall observed in the auto segment on a quarter-on-quarter basis despite having the flattest- CV -volume. CV volume has dropped. Understood. Okay, sir. All the best. Thank you so much. Okay. Thank you. Thank you. Participants who wish to ask a question, please press star and one. The next question is from the line of Rajakumar Vaidyanathan, an individual investor. Please go ahead. Yeah. Good afternoon, sir. Thanks for the opportunity. Good afternoon. Sir, just a couple of questions and then couple of housekeeping questions as well. Of course. Yeah. The first one is, on the previous call, you mentioned that you are working on some export programs that will translate into revenue in Q4. I was just going through your press release, where you are saying that there will be a drop in export. I just wonder with that is also getting right-shifted and we will not see that revenue. Yeah. No, that is absolutely right, because what has happened is, because their overall schedules have reduced, their time to deplete inventory and commitments they made to existing suppliers has extended. As a result of that, our program starting has gotten pushed by actually one or two quarters. Okay. So we will not see that revenue in this financial year. That will get right-shifted to- That now looks like April, May, June is when it launches, yeah. Okay. Yeah. Thanks for the clarification. Sir, if I see your this quarter number and the previous quarter number, it looks like your margins have kind of stabilized, whereas the revenue is kind of dropping because of the slowdown in demand. Is that a correct assessment? No, that's a fair assessment. We can expect that the margins to be maintained in the subsequent quarters, whereas the demand could be soft or it could recover as things progress. I believe so. Okay. Of course, one thing that I need to say is, any sudden increase in steel price, it could hamper the immediate quarter. Okay. Got it, sir. Sir, I am also Because export price corrections are prospective and not retrospective. Yeah. Thanks for clarifying that, sir. Sir, I am also going through your press release. You are saying that, in the very last portion of the release, where you are saying the measures will continue into the second half, and you are hopeful of maintaining the profit growth in this budgetary in the current year. Can you please Profit percentage is probably more accurate. That is probably, as you said, the EBITDA margin, maintaining that is probably more, because growth depends on which reference period you are taking. Yeah. That is the reason I wanted to highlight that. You are saying the EBITDA margin will be maintained? Yes. I am telling it will be very difficult to show any significant or any growth compared to last year Q4, as it was kind of a bumper period. Okay. Sir, usually you show a good Q3, and Q4 generally is supposed to be good for you because you get some discount and all that you mentioned in the previous call. Is it safe to assume that those things will come even in this financial year? No, I am a bit cautious on that because in the last year Q4, we actually had a price reduction. Whereas this year Q4, if there is a price increase, that price increase may take away that volume, whatever you call it, that discount. Okay. There will not be any something, so basically, the current margins will be kind of maintained. Yeah. I am a bit cautious on this because we do not know what will happen in Q4. But the indications now seem to be suggesting that is why I am factoring it in. Before planning ahead, by the way, I think I don't want to give a near-term 200% margin going to maintain. That's the basis of the question. I have to appreciate Kumar on his ASM numbers. I'm sorry. Can you repeat that? It broke off in between, so I couldn't follow you, sir. No, I was just saying that if I just No problem at all. Yeah. Sir, the next question is, I think that your inventories come specifically compared to the previous similar quarter, down 16%, 15%. So this is again a function of the slowdown demand that is going to fall 15%, or is it a combination of both? No, I think here probably some credit should go to the team managing the inventory, who've taken it as a target and have found ways of reducing it. Oh. Okay. And just two housekeeping questions. The first one is actually, I see like a non-cash expense of INR 55.2 crore shown in the cash. It can account to- Sorry for interrupting you, sir. But your voice is not clear. Could you please use handset? Yeah. Can you hear me? Yeah. Sorry about that. I just one thing, first is on the cash. If there is an item of INR 5.2 crore in provision too, so it is an expense, but a non-cash expense. It could give some thought as coming from the previous quarter as cash. I am not entirely sure I heard you properly. Ramesh, would you like to take this question? Mr. Ramesh? You need to unmute. Yeah. Sir, can you repeat the question, please? Your voice was breaking. Ramesh, in cash flow, you see there is an item called- Sorry to interrupt you again, sir. Rajakumar sir, your voice is not clear. It is breaking. Yeah, I will just unmute. Still it is not audible. The line for Rajakumar has seemed to be disconnected. We will next to the next question. The next question is from the line of Vikas Bansali, an individual investor. Please go ahead. Good afternoon, sir. I am Vikas Bansali from Angel One. Sorry, I just said. Yeah. Thank you. Sir, just before 3-5 years ago, I took our shares at the price of. Our company is doing very well. The growth is very well, but the investor didn't get any return from the last 3-4 years. So what's your I am looking to improve the profit. The price of the stock market, that's not in my control, unfortunately. But I would imagine that if we continue to show this improvement, there may be some difference in the stock market. As an investor, really, I have. Other stocks have done very well. The market has done well. Our company's growth is good. Even after that, the investor is not getting a good return. So is there a problem or is there some pain? The company is doing very well, yet why is it like this? That is a question for the investor. So what will you give us, sir, in the future? The company's growth is already happening, but some return prospect is not being received. My question is that, sir. You are talking more about the stock price, no? That is what you are asking. Yeah, sir. Meaning, after good growth, there is a good return in a good company, and ours is a very good company. That is why I have been holding it for a long time. But sir, as an investor, I have not been able to get any return. The entire stock market has also grown well, our company has grown well, despite that. No, I understand your question. I understand. I also agree with you that beyond a point, financial performance improves, then the market should also price it. That should happen. Pricing should happen. I think- Other peers have given very good returns. Like NKP has given a very good return, it has grown, it has also performed, and the investor has also got a return, sir. But in our company, sir, I have made very good investments, I have invested for a very long term. But as an investor, it is a complete pain, sir, that I have not been able to get a return. So what can I expect next? Our performance has just improved. The only thing I can say is that if you are a little patient, then something will definitely happen. But I can't make any commitments on what will happen to the price. We cannot do anything more because of this investor call. No, right, sir. Thank you, sir. Thank you very much. Thank you. Thank you. The next question is from the line of Rajakumar Vaidyanathan, an individual investor. Please go ahead. Yeah, sir. Thanks for the follow-up. I was just asking this question on cash flow statement. There is an item of 5.2 crore shown in negative as non-cash expense. If you could give some color on this. Mr. Ramesh, can you take this? Yes. Yes, sir. These are the movements in the provision. Because every quarter, when we do the book closure, we either increase or decrease the provision based on the assessment of what needs to be provided for. The movement in the provision, it is a non-cash item, basically. This is what is reflected here. Okay. This provision is against what item, sir? It could be against inventory. Okay. Inventories and receivables. Yeah, got it. We have certain norms in our company. Receivables above a certain number of aging or inventory above a certain aging, we tend to provide for. Okay, got it, sir. Sir, the second housekeeping question is, if I see the profit numbers standalone vis-à-vis the consolidated, basically, I just see that the subsidiary number has moved from negative INR 1.9 crores to positive almost break. Yes. Is it fair to assume that the subsidiary has got turned around or are there any- Yes. My apologies for not mentioning this in the press note. You are very right. Your observation is right. The subsidiary from the first quarter of this year started turning around, and now we are confident that for the full year, we will maintain profitability and hopefully going forward as well. That is very useful. That is excellent. I can give you the number of that, sir. Last year, H1, the subsidiary had a minus INR 7.73 crore, and the current year it is plus INR 2.92. Okay. Yeah, that's an excellent turnaround, sir. Congratulations for that. Thank you. That's it, sir. That's it for now. Thanks a lot. Thank you. Thank you. Participants who wish to ask a question may press star and one. The next question is from the line of Amit Hiranandani from SMIFS Limited. Please go ahead. Sir, can you just help us with the current gross debt level? Ramesh? Sure. Yeah, sir. Sir, as on March 2024, we had a debt of about INR 708 crores, which comprises of a long-term debt of INR 62 crores, a working capital facility of about INR 401 crores, and a public deposit of INR 244 crores. This has moved down by INR 10 crores on September 2024. The long-term loan has gone up to INR 109 crores, whereas the working capital loan has come down to INR 337 and public deposits at 251. Okay. Broadly INR 700 crores is approximately gross debt level. What is the cash and investment currently? Sorry, what is? Cash and investment. Yeah. You are talking about the. You are talking about the balance sheet in terms of the cash as per. Yeah. The current thing is net debt. See, its investment as of September 2024 is about INR 21.37 crores, and the cash and cash equivalents is about INR 10.8. Understood. Sir, looking at the expansion plans of CapEx for INR 225 crores, annual working capital requirements. Can we assume the debt would remain at the same level for the next 12 months, at least? Yes. Ramesh sir, it may, well, not by March 2024, but it may reduce going forward because the profitability of the company is also improving. As a result of that, it is likely to come down unless we find new opportunities for investment. Understood. On the CapEx guidance, in Q4 call, you had guided for INR 200 crore CapEx, but now it has increased to INR 225 crore. Can you please let us know the breakup of where we are going to spend? Also if you can also suggest the FY 2026 CapEx as well. FY 2026, it is difficult for me to tell you. But roughly speaking, I am leaving aside all this maintenance CapEx and all that, but there is about INR 40 odd crore, I think, in this machining of large windmill castings. Maybe about INR 30 odd crore on balancing equipment for cast aluminium. On agriculture tractor, again, maybe something like INR 40 crore, INR 50 crore. Hydraulic cylinders may be about INR 15 crore. Ramesh, have I left out any? This is roughly the buckets. The material preparation CapEx would be? This is the other thing. This year we are looking at CapEx also from a viewpoint of improving our margins. One of the projects that we are looking at is whether we can reduce our material preparation cost. Earlier, it is basically make or buy. Some make or buy decisions are being taken where earlier we were buying. We may make it if we feel that there is a financial gain. Sir, commenting on your last line on material preparation cost, are we taking any steps to take our EBITDA margin to any internal target of 9% or something? Any midterm internal midterm targets? See, in the last two, three quarters, we have seen a kind of stabilizing of the EBITDA margins and stuff like that. Next year, I do not even know how the domestic economy is going to be, and even global economy, I know to some extent, but as we get closer, we will have a better idea. Assuming it is not doom and gloom and has some positivity in it, yes, the margin should improve. All right. Thank you, sir, and all the very best. Thank you. Thank you. The next question is from the line of Rajakumar Vaidyanathan, an individual investor. Please go ahead. Yeah, sir. Thanks for the follow-up. Sir, I am just looking at your segmental reporting. I see that the automotive component segment, the profit has come down compared to the June quarter, and similarly, the industrial component has given a significant increase in bottom line. Is there anything to read into this? No. I actually answered one of your colleagues that asked a very similar question. Automotive coming down is largely due to the fact that CV has come down. CV had a very good first quarter, but CV in the second quarter came down quite a bit. So that explains the automotive profit part of it. On the industrial, there are two reasons. One is last year in the second quarter, we had a one-off charge of about INR 9.84 crores towards pre-delivery inspection. And the second is we have ramped up our machining of large castings, which is profitable. So combination of these has created that kind of negative to decent profitability. Okay. Got it, sir. Lastly, sir, any guidance on the interest line item? Will it be flat-lined? Because you said that there will be some reduction there. You are in Mumbai, Mr. Rajakumar? No, I am in Bangalore. Okay. I guess the Mumbai guys will have a better feel for that since they are closer to the government. One point you can add, we were enjoying a subsidiary on the packing credit, which impacted roughly about INR 1.5 crores a quarter, and it was withdrawn from 1st of July. Given that Interest subvention now is only permitted for MSMEs. Earlier, all companies used to benefit. For us, that going away, the additional cost of that is about INR 6 crores. That is one of the impacts that we have this year. Okay. But that said, one of our long-term goals is to look at improving our credit rating to the point that it actually has a bearing on the interest cost that is charged to us. But it may not happen immediately like this year. It may take two years, but we are working towards that. Okay. Excellent, sir. Thanks a lot. Thank you. As there is no further questions, I would now like to hand the conference over to management for closing comments. Thank you very much for all your queries. We continue to make improvements although the market has its challenges. We really gain a lot from our interactions with you. Look forward to our next interaction with you. Before I sign off, I should wish all of you a happy Diwali. Thank you. Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.