RACL Geartech Limited

Co has uploaded the presentation & concall recording to exchanges.

preso: https://www.bseindia.com/xml-data/corpfiling/AttachLive/aeb1676d-2f50-461c-886d-b57d635ad68f.pdf

Concall: Recording: http://www.raclgeartech.com/pdfs/Audio%20Recording%20of%20Investor%20Concall%20held%20on%202nd%20December,%202022.MP4

I think this has been an eye opening call even for investors who have been invested for long; on multiple fronts. Rather than give a blow by blow account of the concall, let me summarize some new things I learned about the co in this concall.

1. [Margins]: One might wonder why RACL has 20-25% OPM & 70% GPM when most auto ancs have 10-12% OPM & maybe 40-50% GPM. There are a few diff reasons we understood in this concall for this outcome. Firstly, RACL being in a niche space, some customers do production once a month, some only produce once a year. Many European OEMs do 70% production in 4-5 months then do 30% prodution in rest of year. But RACL cannot work that way, can it? Because it needs to run its plants at some constant utilization levels in order for it to make economic sense. Thus, they overproduce during lean periods of european production (my guess is winters) & underproduce during summers (eating up from inventories). But this is the business model of the co. Due to the seasonal & small volume/niche nature, the competition in this space is also far far lower which is precisely what enables RACL to command premium prices & margins for each part. The inventory & margins need to seen in conjunction. CMD says that the they are more than compensated in this biz model. Is it better to be in mass market low margin lean inventory supply chain or high margin high inventory niche supply chain? I think the cross-cycle ROCEs speak for themselves.

2. [Growth]: Recession, demand destruction, Europe energy crisis. What is going on? I think of key learnings for me personally over last 2 years has been the intangible value associated with a co belonging to 1 supply chain versus another. Let me explain. Imagine 1 co makes gears that go into mass market cheapest cars. In such entry segments, demand destruction is very much imminent every few years leading to cyclicality. This can be seen in india with the entry 2w markets, the global auto markets. GM, Ford. The end user’s ability to pay is tightly linked to labor market conditions, inflation, wage hikes, interest rates. Because it’s a P&L purchase. Most discretionary purchases for lower & middle class are P&L purchases (Funded by P&L of the end user). Now contrast this with a gear maker who is a part of a luxury or high end auto supply chain. Porche, BMW, KTM & the likes. Person buying porche typically does not take an auto loan with 5 year EMI to buy it. These are typically bought by people who do balance sheet purchases. This strength of the value chain & purchasing power of end consumer is under appreciated here imo. This actually shows up in larger orders, more orders, ZF bringing in bmw, porche , a large high volume ev OEM (my guess is Volkswagen based on the indicated figures). The capacity created in 2021 is already running at 70% utilization in November. If racl manages to grow well next 2 years while global auto industry suffers it wil further strengthen investors confidence in their end consumers buying power. It was also very interesting to hear about higher asset turnover on account of better utilisation for profit side assets (like a cleaning machine etc which don’t add topline but add profitability). China+1 Europe+1. Zf, GE running after racl : you make the gears. We make it more expensive. You’ll have it cheaper. Very interesting.

3. Investors way of thinking vs owners way of thinking: as investors we always have some picture of an ideal company and we want every company to conform to that ideal. One such thing is on debt to equity ratio. Debt to ebitda ratio and so forth. Of course if racl continues to grow at 25% or more they will have to take on debt since their roe cannot support that level of growth intrinsically. I think investors should be open to evaluate each company on its own merits. And be able to take a co specific call. In this case given the above two points , given that RACL only does a capex once they have revenue visibility. I think one should be very excited about the capex. The world is full of ever evolving subjective factors. Risks like zf or ktm facing 30% annual degrowth. Such risks need to be adjusted in our position sizing depending on our subjective assessment of these risks. @msandip has been doing some of this but some of us need to chip in & do a better job tracking racl clients & their growth prospects. Racl is definitely grabbing wallet share. But we also need end market growth in order to have sustainable growth beyond immediate 5-7 years.

On whole i think this concall has been eye opening. I am tempted to increase allocation despite this already being a 10% position (I’m not a big fan of excessive because often we over estimate our ability to understand & predict companies futures)

Disclaimer: invested, biased. Do your own due diligence