Setco Automotive Limited has informed the Exchange regarding Analysts/Institutional Investor Meet/Con. Call UpdatesWe hereby enclose the transcript of the Conference Call hosted by the Company on Tues...
“Setco Automotive Ltd 4Q-FY19 Earnings Conference Call” June 04, 2019
MANAGEMENT: MR. UDIT SHETH – VICE CHAIRMAN, SETCO
AUTOMOTIVE LIMITED; MR. J.S. GUJRAL – CHIEF EXECUTIVE OFFICER, SETCO AUTOMOTIVE LIMITED MR. VINAY SHAHANE – CHIEF FINANCIAL OFFICER, SETCO AUTOMOTIVE LIMITED.
Page 1 of 7
Setco Automotive Limited June 4, 2019
Moderator:
Ladies and gentlemen, good day and welcome to the Setco Automotive Limited Q4 FY’19
Earning Conference Call hosted by Perfect Relations. As a reminder, all participants' lines will
be in the 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 '*' then '0' on your touchtone telephone. Please note that this conference is
being recorded. I would now like to hand the conference over to Mr. Ashish Samal from
Perfect Relations. Thank you and over to you, sir.
Ashish Samal:
Thank you. Good afternoon and thank you for joining us on Setco Automotive Q4 FY’19
earnings conference call. Today, we have with us the senior management represented by Mr.
Udit Sheth – Vice Chairman; Mr. J.S. Gujral – CEO; Mr. Vinay Shahane – CFO.
Before we begin, I would like to add that some of the statements to be made in today’s
discussion maybe forward-looking in nature. We will begin the call with the “Opening
Remarks from the Management” after which we will have the forum open for “Interactive
Q&A Session.”
I would now request Mr. Vinay Shahane to make his Opening Remarks.
Vinay Shahane:
Thank you, Ashish, and good afternoon to everybody. On behalf of our Vice Chairman -- Mr.
Udit Sheth and CEO -- Mr. Gujral, I welcome you all to the discussions on Setco’s FY’19
financials.
In spite of subdued OEM demand witnessed during Q3 and Q4, strong aftermarket demand has
enabled the company to register overall sales at Rs.613 crores, growth of 20% over previous
year. Aftermarket sales have registered a substantial growth of around 35% over previous year.
This also shows the strength of company’s diversified business model having presence in
OEM as well as aftermarket which insulates company from the fluctuations in OEM demand.
It also enables the company to outperform industry growth rates.
EBITDA and net profits for current year are not on comparable terms to previous year due to
expiry of benefits and exemption benefits at company’s Uttarakhand unit, net impact of which
is around 200 basis points on sales from Uttarakhand unit; however, higher turnover with the
growth of 20%, improved operations efficiency, better pricing and better segment mix that
offset this advantage and enabled the company to report higher EBITDA at 14.8% for the year
which is the highest in last 7-years against 11% in FY’18. In absolute terms, the EBITDA has
increased by 61% against the sales growth of 20% which is a good sign of improved
efficiency. PBT for the year at Rs.53 crores against last year of Rs.36 crores, registering a
growth of 46%. With higher tax provision at Rs.17 crores against Rs.7 crores in the previous
year, for current year is at Rs.36 crores compared to Rs.29 crores in FY’18, still a growth of
25%. However, from cash flow point of view, company’s tax outgo will be around 21% of
Page 2 of 7
Setco Automotive Limited June 4, 2019
profits with balance liability being set off against MAT credit accumulated over previous
years.
We have been discussing the issue of working capital management and management action
plans on the same and management focus on working capital management has seen net
working capital cycle improving by around 18-days to 77-days in FY’19 against 95-days in
FY’18.
Rollout of BS-VI norms from April 2020 enter into tractor plus segment, robust aftermarket
demand expected for next two, three years and better exports especially in US markets shall
enable the company to register growth of around 25% in FY’20 with resulted improvement in
EBITDA margins moving northwards. On consolidated basis, EBITDA is close to century
mark at around Rs.97 crores against Rs.61 crores in previous year. Improved efficiencies and
better market outlook for Lava Cast and US operations shall contribute to improved
performance in current year, that is FY’20.
Board has also approved in the recent meeting the merger of Lava Cast with Setco w.e.f.
1.4.2019. Combined entity benefits by way of increased business potential, improved operating
efficiency and better financial strength. This is the summary of our highlight of the operations
of the company.
May I now request the forum to be open and request participants to seek clarifications, more
details on any points, we will be glad to address it. Thank you.
Moderator:
Sure. Thank you very much. Ladies and gentlemen, we will now begin the question-and-
answer session. The first question is from the line of Apurva Mehta from AM Investments.
Please go ahead.
Apurva Mehta:
Where Lava Cast is currently, and what are your thoughts for next year?
Udit Sheth:
Lava Cast is an extremely important part of Setco and it was set up with the idea of ensuring
that Setco’s requirement for casting does not have a fall short because that was having a direct
impact. So, in fact, we have taken a few positive steps to ensure that Lava Cast continues to be
a very significant part of our business and this year we planned good amount of about 65% of
our capacity utilization which is actually there at about 30,000 tons p.a. So, 20,000 tons this
year we are expecting to fill up our capacity at the minimum. From a business standpoint, we
started all our external customers businesses and a few exports have also started to US and UK
to Setco subsidiary. In fact, our confidence in the business continues to grow and we will
ensure that we have negotiated rather with our technology partners to buy over there 20% as
well as today we have mentioned that to get better operational efficiency as well as to ensure
better cash flows over a period of time, better buying power and also to cater to the demand on
Page 3 of 7
Setco Automotive Limited June 4, 2019
the OEMs to reduce your supply of coal, if there is one group, then do not supply unless there
is control. We are also going to be merging Lava Cast into Setco Automotive. So, the outlook
is extremely positive from a business standpoint and we are going to ensure that all kinds of
advantages especially on the raw material purchase side realized apart from manpower related
overhead as well. So, it is a positive outlook for the year.
Apurva Mehta:
If we go in FY’20, what would be captive and what would be sales realized from the other
parties?
Udit Sheth:
We are looking at about 75% or 16,000-17,000 tons of our total turnover to be consumed in-
house to Setco, balance we are looking at selling outside.
Apurva Mehta:
We are talking with lot of telco and we were talking with other. So, you are expecting only
3,000 tons to that other customer, are you …?
Udit Sheth:
We are expecting more but from a budgeting standpoint and outlook standpoint, we do not
want to give over-expected statement and we are being extremely conservative, we have
already started supplying to both Ashok Leyland and Tata Motors as well as some tier-1
company.
Apurva Mehta:
What is the monthly outgo for maybe Ashok Leyland and Telco put together currently on the
Lava Cast front?
Vinay Shahane:
It keeps varying because the Q4 and the beginning of this quarter has been quite constrained in
terms of OE demand. Castings are actually unlike aftermarket majorly OE. So, OE will play a
very important role in the way casting also is. It has not been where we expect it to be. Exact
numbers we can talk offline.
Apurva Mehta:
Currently, can you share how is the export for Setco for that Twin Clutch and your outlook for
the tractor industry where we currently stand and what is outlook for next year?
J.S. Gujral:
So, the first question is on Tractor industry. Like all segments, currently there is a little bit of
slowdown in tractor industry also but we have seen this industry over the last 30, 40-years, a
year or two it was down and then it is back on the growth path. The government is spending lot
of money on the agriculture or the farm sector side to get it back on growth. So, we expect the
OE volumes to come back to normal levels and the industry to cross 700,000 numbers in
FY’21. This year FY’20, the expectation is it will be around 600,000 tractors. So, this is as far
as the potential is concerned. Now, we have developed clutches which are the next-generation
clutches, the dual and double clutches which are growing at a faster pace than industry and we
will be practically the second source in the segment which is currently dominated by one
single player who is MNC and the response we have from all the customers is very heartening,
Page 4 of 7
Setco Automotive Limited June 4, 2019
all the products are under-testing and testing cycle in tractors is seasonal, so it goes for at least
a year. We are getting two approvals in June from two leading players and then every quarter
we will be getting another two and another two, that is how the testing cycle has panned out.
We expect this business to ramp up to around Rs.100 crores of our top line within three years.
Apurva Mehta:
This year what is our expectation – can we do around 25?
J.S. Gujral:
We will do between Rs.10 to Rs.20 crores depending on where industry is headed.
Apurva Mehta:
On the export front, what we were trying to export to US, how it has gone through last year
and what is your expectation?
J.S. Gujral:
We exceeded the market starting from three quarters back and so far the response has been
very strong. We have renewed interest from leading chains there for arrangement to source
from us and talks are under development in terms of the long-term agreement and so on and so
forth. So, with that big breakthrough is a leading truck player in the US, we expect very fast
ramp up with volumes but it will be three quarters away before the volume start sinking in. As
far as our sales in our own brand is concerned, we are selectively expanding in US geography-
by-geography and we are expecting this year to hit around 3,000 units of sale of this product as
against 1,000 units last year.
Apurva Mehta:
That will turn into what kind of turnover with the units?
J.S. Gujral:
Approximately it is around $300 per unit.
Apurva Mehta:
What is your outlook for the OEs for medium and heavy for the current year?
J.S. Gujral:
Like our CFO, Vinay outlined, dependence is around 40% of our turnover and depending upon
how that segment grows, we grow a bit faster or we grow a bit slower. Our real business is the
aftermarket which in Q4 was as high as 57% of our turnover. That continues to grow at a
healthy 25% plus growth. And we see this trend for the next three years because lot of trucks
which were sold in the upcycle over the last three years will come one-by-one for replacement
in the next three years, particularly, as far as OE is concerned, we all know we are migrating to
BS-VI. In all previous migrations there has been a huge pre-buy and therefore the market is
expected to pick up from Q2 and peak in the Q3, Q4 would be higher than last year because
this year we had bad Q4 but because of the new regulations no one would want to carry any
stocks. So, the production in Q4 would mainly be for BS-VI vehicles. That is the indication we
have. Our estimate is the market will grow between 7-9% depending upon the extent of pre-
buy.
Page 5 of 7
Setco Automotive Limited June 4, 2019
Apurva Mehta:
So, you have guided for the overall growth of 25%. Can you break up how you tend to achieve
because OE will grow at 7-9%?
J.S. Gujral:
For the last three quarters, our aftermarket growth is 35%. We are giving a guidance of 25%
plus but there is enough scope and headroom in the aftermarket to grow further both in our
own brand as well as through our spare parts and exports we have spoken, so that also will
grow at a higher pace on a smaller base.
Apurva Mehta:
But that is at around what you are doing 3,000 sets. That would be hardly any turnover from
there for exports?
J.S. Gujral:
If you do the numbers, you will see it because 35% on 57% and 12% on 40% plus there is
tractors and then there is exports which the numbers are close to double. So, all that will total
up to 25% average.
Moderator:
Thank you. The next question is from the line of Ashish Sood from Vishudh Capital. Please go
ahead.
Ashish Sood:
I want to ask that where are we standing with regards to the pledge ratio, so how much years
are pledged and has management released any pressure? My second question is regarding
today’s press release. There is inter-transfer of shares from promoters to the company. So, any
specific reason for the same?
Vinay Shahane:
At present the pledge ratio is around 77% of the promoters holding and it is expected to come
down to around 40% within next two to three months, some actions already planned in
pipeline.
Ashish Sood:
Today, there was a press release around 12, there was a transfer of shares holding from Mr.
Udit Sheth to the Setco Automotive Holding, any specific reason?
Vinay Shahane:
It was not to Setco Automotive. It was inter say promoter group transfers which have taken
place. There is nothing to read much into that.
Moderator:
Thank you. The next question is from the line of Harshil Shah from Anvil Research. Please go
ahead.
Harshil Shah:
Can you explain me the rational for giving out dividend when you yourself are looking outside
for funds?
Udit Sheth:
That is a good question and this is something that we have discussed and company is very
clear that we would like to maintain a dividend policy which will showcase the positive
outlook of the growth of the company and profitability over a period of time. Promoters at
Page 6 of 7
Setco Automotive Limited June 4, 2019
some point will make its own arrangement to raise capital at promoter level and that is not a
problem. We see positive outlook going into the future for the organization and at a personal
level as well and maybe over the next 90 to 120-days we will be seeing positive change in that
direction.
Moderator:
Thank you. That seems to be the last question for today. I would now like to hand the
conference back to the management for closing comments.
Udit Sheth:
Before Mr. Shahane sign off, just to reflect a little further on the dividend policy question that
was asked earlier, the company also reserves a certain amount to be infused back into the
growth of the company year-on-year, that is also something we need to balance while keeping
the dividend policy constant, hence that was one of the additional reasons that we did not
mention.
Vinay Shahane:
Thank you all the participants and we hope to continue our interaction on a regular basis with
the investing community. On behalf of Setco Automotive management, we now conclude this
conference. But before I conclude formally, we emphasize our welcome to all of you visit to
Setco’s factory at Kalol in Gujarat. At any point of time we can arrange the visit at a mutually
convenient time. Thank you again for joining us and we may now close the call formally.
Moderator:
Thank you very much. Ladies and gentlemen, on behalf of Setco Automotive Limited we
conclude today’s conference. Thank you for joining. You may disconnect your lines now.
Page 7 of 7