EQUITY RESEARCH: Rico Auto Industries Ltd.

Rico Auto Industries Ltd is engaged inside the manufacturing of clutch and crank case. The Company is engaged inside the manufacturing and sale of vehicle additives for two wheelers and 4 wheelers. It manufactures and substances high precision and machined components and assemblies, each aluminium and ferrous, to original device manufacturers. Its merchandise include Oil Pump Assembly, Lube Oil Filters Heads, Exhaust Manifolds, Turbine Housings, Center Housings, Back Plates, Oil Pan, Intake Manifold Covers, Front Cover, Valve Cover, Side Cover, Balance Shafts Assembly, Gear Housing, Steering Knuckles, Main Bearing Caps, Flywheels, Engine Brackets and Differential Case Housings. Its services include designing, improvement and engineering services, research and development, Testing and Validation, Special Purpose Machines with computer numeric control (CNC) Controls, Tooling and Prototyping, Casting (Aluminium and Ferrous), Machining and Assembly, and Packaging and Logistics.

Rico Auto Industries Ltd.

ABOUT:

RICO is a renowned engineering firm that offers an extensive selection of completely machined aluminium and ferrous components and assemblies to automotive OEMs all around the world for use in ICE engines, electrified vehicles, and electric vehicles. It has robust internal R&D capacities. RICO is a popular supplier to the EV and hybrid car markets thanks to its several flexible, fully integrated production facilities that are equipped to provide the full range of services from designing to developing tools, casting, precision machining, and component assembly.

RICO has established a reputation as a trustworthy supplier of even the most intricate parts and assemblies. In order to meet the growing demand for electrification, it is dedicated to producing goods of the greatest calibre, upholding the highest standards of perfection. This commitment is supported by its capacity to create the most exacting products and supply massive volumes over the globe.

Rico operates 15 production facilities that are located close to important vehicle manufacturing hubs. There are around 100 high-pressure die-casting machines for aluminium available, with locking forces up to 2700 Tns. It has some of the most cutting-edge die-casting capabilities in India, including GDC and LPDC.

Subsidiaries & JVs

Rico Fluidtronics Ltd

Manufacturing water and oil pumps is a commercial activity for Rico Fluidtronics. It has secured the contract for the Maruti Suzuki Oil Pump & Water Pump (K15C), whose supply began in FY22. It reported a revenue of Rs 68.0cr and a profit after tax of Rs 5.9cr in FY22. Maruti Suzuki and other customers have given the company enough orders to push its revenue over Rs 130 crore in FY23. RICO owns all of the business.

Rico Jinfei Wheels Ltd.

With a production capacity of 1 million wheels, Rico Jinfei produces aluminium alloy wheels for two-wheelers. It has begun supplying Hero MotoCorp Limited with alloy wheels, which will help it boost its revenue and raise margins. In FY22, it generated a revenue of Rs 221.1 crore and PAT of Rs 2.1 crore. RICO owns 94.8% of the business.

AAN Engineering

• RICO wholly owns the subsidiary AAN Engineering. It is a 100% Indian company with a defence venture/business arm that is a world-class engineering group and supplies a variety of precision fully machined aluminium, ferrous, and certain non-ferrous metals and assemblies to automotive OEMs around the world. With an installed capacity of 25,000 units per month, AAN now manufactures machined metal components for Mechanical and Electronic Fuse Assembly. AAN recorded a profit of Rs 0.6cr and revenue of Rs 11.7cr for FY22.
• A completely owned subsidiary of Rico, Rico Auto Industries Inc., USA (RAII), trades auto components and offers storage and logistical support to Rico's Tier I and OEM clients for the American markets.
• In addition to selling auto components, Rico Auto Industries (UK) Limited (RAIUL), a wholly owned subsidiary of Rico, also offers warehousing and logistical support to Rico's OEMs and Tier I clients for the North American and Brazilian markets. Producing friction materials for clutches and other uses, Rico Friction Technologies Private Limited (RFTPL) is owned 70% by Rico.

SHAREHOLDING PATTERN:

FINANCIALS:

• Because of the steep fall in sales to Renault and Hero Motocorp, the company's revenues were reduced in Q1FY24. owing to lower sales of its automobiles, Renault's revenue share decreased from 12% to 6%, while Hero's revenue decreased as a result of a deliberate choice made by the firm owing to a pricing disagreement. In Q1FY24, total revenue decreased by 5.2/11.5% YoY/QoQ to Rs 534cr. Exports fell 1.5% to Rs 128cr, while domestic sales fell 6% YoY at Rs 410cr. EBITDA increased by 8% YoY to Rs 51r and the EBITDA margin increased by 120 bps to 9.5% as a result of lower raw material inflation and falling other costs.
• The management anticipates double-digit EBITDA margins starting in the second quarter since it is confident in a price agreement with Hero and increased volume. PAT decreased to Rs 6.6 crore from Rs 8.6 crore in the first quarter of FY23 as greater borrowing and the completion of the Chennai plant expansion raised depreciation and financing costs.
• Rico has been nominated for a new business programme value of Rs 57cr in Q1FY24 with an annualised peak value of Rs 198cr, as reported in the press release for Q1FY24 results. received orders totalling Rs 1880 crore with a peak of Rs 380 crore in FY23. For FY24, the management has forecast a capex of between Rs 60 and Rs 70 crore, mostly for maintenance and some balancing equipment. With the ability to switch manufacture between conventional, electric, and hybrid components, 85% of components are interchangeable.

KEY FEATURES:

• EV growth momentum remains strong

In the second quarter of this year, India had a 120% increase in electric cars (EVs), led by a 400% increase in hybrid vehicles. Over 5% of passenger cars are anticipated to be fully electrified and ADAS-equipped by the end of this year. Rico anticipates that the EV segment will contribute an increasing percentage of the company's revenues going forward, with the EV segment's share of revenues expected to rise by 4-5% annually. In 2023, BMW, a significant export customer of Rico, plans to treble its EV sales worldwide. By 2023, it wants battery electric vehicles to account for 15% of sales.

• Revenue from the defence vertical to pick up

The aerospace and defence industry's "Manufacturer of Precision Machined Components and assemblies is Rico's subsidiary AAN Engineering. AAN is accredited and registered with the Special Products division of Electronics Corporation of India Limited (ECIL), Hyderabad; Bharat Electronics Limited (BEL), Pune; Bharat Earth Movers Limited (BEML), Bangalore; Engine Divisions of Hindustan Aeronautical Limited (HAL), Bangalore; Army Base Workshop; Army Directorate of Indigenization; Heavy Vehicles Factory (HVF), Avadi; and various Ordnance Factories.

AAN has been designated by BEML as a new supplier for FY23 and has been shortlisted to submit a bid for the delivery of Track Link Assemblies for T-72 tanks. Additionally, a Memorandum of Understanding (MOU) for the assembly and supply of Special Mobility Vehicles (SMV) to the Indian Army's Infantry division has been signed. The company is now the Indian Army's preferred OEM as a result of this specific technical engagement for Make in India procurement.

In FY24, the management has forecast a defence segment revenue of between Rs 80 and Rs 100 crore. With the Indian government pushing for Atma Nirbhar Bharat, it's expected that domestic firms would receive an increasing number of defence orders, which might result in a substantial increase in defence vertical revenues over the next years.

• Expansion of alloy wheel capacity

Rico Auto has boosted the number of alloy wheels it can produce from 3.5 million to 4.5 million. The corporation might make 500 crore rupees from expanding its capacity. Rico Auto has boosted the number of alloy wheels it can produce from 3.5 million to 4.5 million. The corporation might make 500 crore rupees from expanding its capacity.

• EBITDA to reach double-digits

In FY23, Rico recorded EBITDA margins of 9.6%. However, the management is optimistic about generating double-digit operating margins starting in FY24 thanks to the stabilising of material costs, the pass-through of historical raw material inflation, an increase in volumes driving higher capacity utilisation, and improved efficiency. In FY24, it had predicted income of Rs 2600cr (down from Rs 2700cr previously).

Risks & Concerns

• The slowdown in the automobile industry: Rico provides parts to the auto sector, so any slowdown there could have an effect on its expansion.

• Concentration risk: Despite the company's efforts to expand its clientele, supplies to Hero Motocorp accounted for roughly 25–30% of its revenues, placing RAL at danger due to concentration.

• Currency fluctuation: About 22% of RAL's revenue comes from supply to clients abroad, primarily in Europe and North America. The company's earnings could be impacted by any changes in the exchange rate.

• Delays in merger of subsidiaries: To better manage costs, RICO is trying to integrate its subsidiaries with itself. Delays in combining the subsidiaries could increase costs and require more management time.

• High Leverage: For a plant in Chennai that serves the Toyota Group, Rico has undergone expenditure of Rs 135cr, which was mostly financed by debt, coupled with maintenance and other capex. Due to capex and insufficient returns, their debt-to-equity ratio increased from 0.5:1 to 1.1:1 between FY19 and FY23. There must be a solution to this problem.
• Low Return ratios: Due to its poor fixed asset turnover and low PAT margins, Rico has low return ratios. It is working to make both better.

VALUATION

With a track record spanning more than three decades, Rico Auto Industries Ltd. (Rico) is a recognised participant in the auto ancillaries market. In its two main product categories, high-pressure aluminium and ferrous die-cast components, it holds a dominant market position. With greater sales of PV and CV, the domestic market is performing well. After a break in August, the monsoons have resumed, which should help 2W sales over the festival season. There have been changes in the export market as well as a lot of sampling that will lead to significant export orders in the upcoming years. Additionally, the new hybrid SUVs from Toyota and Maruti that were introduced have been well welcomed (components provided by Rico; capex was paid for this). Toyota has already mentioned increased sales. Rico Auto is putting itself in a position to take full advantage of the potential in the EV industry while still retaining a strong presence in the ICE market as a result of the rising demand for electric vehicles and the government's drive for EV adoption.

As opposed to its primary client Hero, Rico has secured approvals from Suzuki, Honda, and Royal Enfield at lower prices. Additionally, it has made progress towards renewable energy sources like solar and wind, which will lower power and gasoline costs. All of its plants would start using solar energy in Q3 and its Chennai plant would start using wind energy in Q4. In FY24, the management projected revenue of Rs 2600 crore, including defence revenue of Rs 80–100 crore and a double-digit EBITDA margin.

Rico's ability to see revenues is still robust thanks to consistent order wins. The stock's decline from recent highs is between 25 and 30 per cent. The company has profited from its capacity to create novel, crucial car components for a variety of automotive markets and from its long-standing commercial ties with a wide range of clients. The company's business acumen has enabled it to serve as BMW's and Toyota's only supplier for a number of automotive and semi-electric vehicle (EV) components. Efficiency gains from stabilising previously incurred capital expenditures and management's focus on producing high-value key components would further help an improvement in operating profits. Given the substantial growth potential, the valuation appears to be reasonable. We have 104 Rs over the next 2-3 quarters.

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