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Third Quarter Financial Year '13 Results Conference Call of CEBBCO

February 4th, 2013

SPEAKERS: Mr Ajay Gupta - Whole-time Executive Director, CEBBCO


Mr Ammeet Sabarwal Dickenson Seagull IR

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Moderator:

A very good afternoon, ladies and gentlemen. I am Aanchal Rastogi, the moderator of this call. Thank you for standing by and welcome to CEBBCO Quarter Third Financial Year '13 Results Conference Call, organized by the Dickenson Seagull IR. For the duration of presentation, all participants' lines will be in a listen-only mode. And we'll have a question-and-answer session after the presentation. I would like to now hand over the conference to Mr. Ammeet Sabarwal from Dickenson Seagull IR. Over to you, sir. Thank you, Aanchal. Good evening, everybody. On behalf of Dickenson Seagull IR, let me welcome you all to the earnings call of CEBBCO for the quarter ended 31st December 2012. We have with us today Mr. Ajay Gupta, Whole-time Executive Director, CEBBCO. Before I hand over the call to Mr. Gupta, let me just take you through the brief introduction on CEBBCO and how the company has performed in this quarter before joining the call for Q&A. CEBBCO was started by Dr. Kailash Gupta in September 1979. And the promoter family is one of the largest distributors of TATA Motors, CV Division in India with the relationship extending more than 50 years. CEBBCO is one of India's leading designers and manufacturers of vehicle bodies for non-passenger CVs, accounting for around 35-40% market share. The company maintains very strong corporate governance with Deloitte as auditor since 2007-08, and private equity holding of 11% by TATA Capital. Deloitte has been our auditor and there has been no negative qualification by the auditor as such at any point of time. Our board of director comprises of seven members with more than 50% consisting of independent and nonfamily members, with some of the members being exTATA group as well as Indian Railways. Just to give a brief clarification on some of the rumours in the market, there has been no resignation from our top management employees and our top management team is in place completely.

Ammeet Sabarwal:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Also there has been rumour on the pledge of shares. We would like to clarify there has been no sale of pledge shares by the company. Only around 7% of the total shareholding has been pledged, that too also for working capital purposes. And there is no sale of pledge shares. Now just to give a brief about how the industry is performing and how CEBBCO is performing, we are well on track to achieve our guidance that we had given of 30,000 units. The company is operating at 100% capacity utilization and would further benefit from the additional 10,000 units of capacity which would become operational in Q4. The first nine months of FY13 have witnessed a complete delinking of growth from the CV cycle. CEBBCO's growth continues to be driven by the FBVs. So even if you see our complete growth, it has been done through a judicial mix of FBV as well as the replacement markets so in order to get a higher blended margin. There has been no concern as such from the demand from the OEM side. The company has strategically balanced its distribution among the CVs, OEMs as well as the replacement market. Now let us come to the quarterly performance of the company. Net sales have grown by 4.25% YOY driven by the business as well as from the replacement replica market. EBITDA margins have improved 463 bps point YOY to 18.8% benefiting from the efficient operating leverage as well as the judicious mix of the business. Even if we see the entire sales, the drop in sales is nothing but absence of the railways order that we had in the first two quarters, this was informed in the prior quarter conference call. Basically we had Rs 40Cr of revenues from the railway business. So if we remove that, the company has been able to maintain the revenues as well as the margins in the FBV business. For nine months ending December 2012, CEBBCO has reported an EBITDA of Rs 89.4Cr and a PAT of Rs 48.2Cr, which is higher than the whole year of FY12 EBITDA of Rs 70.2Cr and PAT of Rs 40.8Cr.

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

With this, I believe I've given a decent introduction to the company. I would like to hand over the call to Mr. Ajay Gupta to take you through the quarter and how the company has performed before going through the Q& A process. Over to you Mr Gupta. Ajay Gupta: Thank you very much, Ammeet, and thank you to all the investors and the shareholding community that have taken time out to participate in this call. On behalf of the management and the promoters, I would like to state that there is nothing wrong in the company. We have been running normally and in the most efficient manner. Our results came out just two days back and which has been pretty much in line with what we have been saying. There is just no problem whatsoever. And I am personally and on behalf of the management at complete loss of words as to why the stock price has taken the shape the way it has in the last two days. I have also been very worried for my entire shareholder community and the investors because we are not happy with the stock price fall. Whatever has happened is because of probably the market forces. So, my request to everyone would be that please don't go by rumours, please study the results of the company, please look at the fundamentals and then take a conscious call or whatever you feel correct to do. With this, I would like to hand it over for questions. I mean if somebody requires an explanation on anything, I am most free, most happy to answer. Moderator: Thank you so much, sir. Participants, we will now start the question-and-answer round. Any questions from any participants, you are requested to press "0" "1" on your telephone keypads and we will announce your name. I repeat, any questions from any participants, you are requested to press "0" "1" on your telephone keypads. Okay, we'll take the first question from Mr. Sameer Shah from ValuesQuest. Sir, please go ahead and ask your question. Hello? When is this 10,000 capacity getting added?

Sameer Shah:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Ajay Gupta:

There has been a small delay in the expansion. I am personally confident that it should happen in this quarter. We're trying to pick up things faster. Will it be available for the whole of FY14? Yes, that is what I believe. And these OEM sales which we have diverted to the replacement market, how would the OEMs take it, because as I understand there was a lot of demand from the OEMs itself and the whole capacity expansion is based on their push. So how would OEs take this? If you see the transcript of the last quarter also, I had explained that we are trying our best to increase the replica numbers and at the same time maintain the relationships with the OEM, which is pretty historical in nature in our case. And we are only doing replica to the extent where it doesn't impact CV -- FBVs, you know, our customer relationships. And sometimes we would have to compromise on replica for FBVs, we would do that. We are just handling it with extreme caution and care and taking it on a day-to-day basis. So, you know, not creating an impact. But again, just for the understanding, the market would be growing, right, for the FBV? Yeah, the market is growing and that's one reason why you haven't seen our numbers fall even though CVs have fallen. Yeah. I'm saying if we take replacement out of the market, OEM market would also be growing? Yes. Our problem is we are constrained we capacity. So that business would have gone to competition, right? Yes, probably to competition or probably we would have sold chassis. Okay, okay. So, but we don't anticipate --

Sameer Shah: Ajay Gupta: Sameer Shah:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Ajay Gupta:

And I don't have the data with me. No, I don't have the data with me of us refusing an order, what happens to it. I'm sorry. Okay. So where I'm coming from is, you know, Exide, for example, it is -- I don't know, it may not be comparable but Exide had big OEM sales and, you know, when you divert from one segment, then it becomes difficult to again regain the market share. That problem has been -I don't see that as a problem for us, honestly Alright. Thanks a lot. Thank you, thank you very much. Thank you so much, sir. Now the next question is coming from Dheeraj Sachdev from HSBC Global Asset Management. Sir, please go ahead. Hi Ajay. Ajay, can you just explain there was -- December 1st SEBI order in relation to interstate transfer between promoters, where you had not accepted the takeover in case there is transfer between the two promoters within three years. Yeah, sure. I'll just explain to you. Dheeraj, you know, the intention of that order was completely different from what the market is understanding. Our idea was as a family to create a family trust. And for a family trust, the shares have to be gifted by one settler. Now, we decided that let Dad become the settler, that is my father-in-law, and that all of us would shift the shares to him, give to him and in turn he would give it back to the trust as a settler, and all of us would become beneficiaries of the trust for a long-term tax planning because family trust is far more tax-efficient. And the lawyer suggested that it's better to just, you know, take an informal guidance from SEBI so that tomorrow there is no issue on that. And so we wrote to SEBI I think sometime in, if I'm not mistaken, September or October. And SEBI said two things. One that under the rule that we had asked for the approval, they don't have the authority to give the approval

Sameer Shah:

Ajay Gupta: Sameer Shah: Ajay Gupta: Moderator:

Dhiraj Sachdev:

Ajay Gupta:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

till three years of us being listed, which gets over in October 2013. Secondly, there is another rule which clearly states that interstate transfers between family members and relatives don't require SEBI approval and can be done even one day after the company is listed. And so honestly speaking, we can do that even today, but we just thought that let's just wait because unnecessarily we got quite a few phone calls from the market that, you know, rumours per se, about Dad and myself. So we said let it be as it is, let it continue; and that's what we are doing currently. Dhiraj Sachdev: So right now there is no transfer that has happened between the two of you? No, currently there is no transfer that has happened. But yeah, I mean the intent would be to create a family trust in the long-term. But for the time being, as on date it has been put on hold because we don't want any wrong messages going out. Okay, okay, and that's fine. And well, the second thing is on entry tax regarding the state of Madhya Pradesh which has been levied and which you have challenged it. What is the extent of this liability in case it is against you? No, there is no liability against us. If the order, if we lose also, in the future because we paid up all of it under protest. And we continue to deposit it under protest. So there will be no cash flow impact on us. Sir, I believe the aggregate amount is about 10.15 crores, right? Yes, it's there in our balance sheet, Dhiraj, but I can you give the exact amount as on date probably tomorrow. Okay fine. And that's it from my side. Thank you so much, Ajay. Yeah, thank you. Thank you so much, sir. Before moving on to the next question, I request to press "0" "1" on your telephone

Ajay Gupta:

Dhiraj Sachdev:

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Dhiraj Sachdev:

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Dhiraj Sachdev:

Ajay Gupta: Moderator:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

keypads. I'm getting the next question from Mr. Ravi Mehta from Money Logix. Please go ahead, sir. Ravi Mehta: Hi, good evening. Just a few questions, one on the volumes, can you share on the FBV front, what volumes you've done in the quarter? We actually don't share volume details publicly. But we have run on full capacity. Sir, last time we recollect that you had shared that you have a firm order book of 2000 crores. I just wanted to know what is the order book now in hand. No, let me explain to you how the order book works. And I don't remember saying exact, this figure. But anyways, you know we have open orders from all our OEMs, which are blanket orders. Now those orders are basically very large in nature but they don't give you an exact look of the way the business is going to transform. And we basically sit the OEMs at the beginning of every month and finalize the order for that particular month. So, even though the order book could be of any number, I think thats not a right indicator and I would request you not to look at that. Okay. Sir, one thing on the shift from OEM to replica segment, sir, on one end you said that there is growth in the OEM space and then you are also stating that you maintain the relation in terms of you are not annoying anyone by, you know, undersupplying or something. How are you maintaining that? We are able to remove quite a few of the -- You know, we are trying our best to manage it. I mean, sometimes we definitely do upset a few people. I am not going to say that we are absolutely perfect because there are pressures from every end. But, I think, its relationship management what I would call. Okay. And, sir, any specific reason of your FBV capacity getting delayed to fourth quarter, I mean, I think it was expected long back?

Ajay Gupta:

Ravi Mehta:

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Ravi Mehta:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Ajay Gupta:

Yes, it was expected in the end of third quarter but it has got a little delayed. So, I am sorry for that. I will apologise personally on that. And, sir, on the inter-model railroad trailer MoU that you had signed, any progress on that front or anything -No. We are still negotiating the terms for supplies, and we are getting stuck with the supplier on terms of payments. And we just want to be a slightly conservative on that front. But we are hopeful of trying to tackle that immediately, shortly in the near future. Okay, okay, sir. So, thats it from my side. All the best. Thank you very much. Mr. Pankaj Chopra from Reliance. You can please ask your question. Yes. Hi, Ajay. How are you doing? Fine, Pankaj. How are you? Good. Ajay, just a question on this strategic shareholding by Tata Capital; can you just throw some more light on, you know, when this was done and what are the terms, I mean, this was a private equity transaction I believe before the IPO? Yes, Tata Capital runs a couple of private equity funds. This is also private equity fund which has invested in us. This investment happened sometime in it was a pre-IPO deal, sometime in July-August of 2010 just before our IPO, it happened about two or three months before we did the IPO. And they have picked up about close to 11% stake in the company. And they also have a director on our board, which is Akhilawasthi, who was a very senior management person. I think, he is the MD of that fund. He is a senior partner or the managing partner of that fund. And he has been on our board right since the day they invested. He is also on our management committee and the audit committee. So he overlooks all the aspects of the business sitting under various committees that he does.

Ravi Mehta:

Ajay Gupta:

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Pankaj Chopra:

Sure. Are there any terms in terms of sort of a lock-in that might has been there at the time. No. Honestly, I mean, as per SEBI laws, there is no lock-in. There was a lock-in of about one year post IPO which is now over. But typically the rule is that if you are a director on the board and you have a financial stake, and a substantial financial stake, then if you ever decide to sell it you would pretty, you know -- standard operating procedure is that you would resign from the board actually three months before or at least two or three months before you start selling your stake. Okay. So nothing like that. I mean, when you said the selling of the stake, that means a significant sale of the stake? Sorry. Can you repeat the question? I am saying when you decide to sell the stake, you are talking about the significant or the complete sale of the stake that you resign from the board before that? No, I think, you will resign even for a small stake because you dont want to get caught with any of the insider trading laws of SEBI. So typically the practice followed by Tata Capital and all the private equity funds is that they resign from the board and then two or three months later start selling even if its a small stake so that it doesnt appear that they were ever in information which is more than what is available in the public domain. Sure. Sir, thank you very much. Thank you very much. Now the next in line is Mr. Rajesh Nandu from Nandu Finance. Sir, please go ahead. The next is now from Priyanshu from New Warren Company. Sir please go ahead.

Ajay Gupta:

Pankaj Chopra:

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Moderator:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Priyanshu:

Hi, sir. My question is in the last -- in first two quarters we generate more revenues because of railway order which wasn't there at third quarter. But, I think, we were operating at full capacity so Was it your factory or was it the clients where the railway order was executed? Sorry. But just repeat the question, Priyanshu. I have got confused a little. Yes, sir. Since -- I mean, you have been operating at full capacity in all the three quarters. And most of the railway capacity is fungible into the CV capacity. No, no Priyanshu that is the difference. Okay. I have understood your question. Just one second. Look, we operate at full capacity which includes the fungible capacity. And the order from Braithwaite was actually executed in their factory, not in our factory. Yes. That was my I just wanted a reply for that. Yes. So, whatever we executed in our factory remains constant in the first three quarters and the top-up was what we executed in their factory which was substantial portion in Q1 and then minority portion in Q2 and that completed the order, and thats the top up. So its actually over and above what we have as installed capacity. Thats very helpful, sir. Any change in, you know, how the margin is looking the new order book that you are getting We havent got any new orders from Railways. We have bid for quite a few. We are hopeful whenever we get them then, I think, we will execute. CVs? CV is the ongoing business, Priyanshu. There is no significant change in that? No. Definitely not. Okay. Thank you. Thanks a lot.

Ajay Gupta:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Ajay Gupta: Moderator:

Thank you. Thank you so much, sir. The next question is coming up from Mr. Amin Tehrani from Deutsche Bank. Sir, please go ahead. Hi, sir. Thanks for taking my question. Sir, just wanted to understand so because of this delay in capacity expansion, in your estimate how much sales would you have lost? Because it seems that your revenue from your commercial vehicles, including both commercial vehicle and replica, seems to have stabilised at a certain level. So just wanted to understand ki once this 10,000 comes in -I mean, I think, on a quarterly basis we would do about two-and-a-half-thousands. So -Okay. Compared to How much you -- these last two quarters in terms of -30,000 about 7500 or 8000. 7500 or 8000, you mean on a quarterly basis, right? Yes. Okay. So, its around 25-30% higher? Yes. I mean, whatever that number is. Yes. And, in terms of the so what I want to understand is that this flat-lining has been completely on account of capacity or replica also will take some time to ramp up? No, we dont have a problem in ramp up. Its the capacity thats a contraint. Okay. And -- okay, okay. I will come back with more questions later on. Thanks. Sure. Thank you very much.

Amin Tehrani:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Moderator:

Thank you so much, sir. Next question is coming up from Mr. Uday Shah from Sales Essence. Sir, please go ahead. Good evening, Mr. Gupta. Good evening, sir. If you are running on full capacity right now, so what will be the growth in revenues and bottom line in FY14? Sir, we dont give any guidance in terms of revenues impact, we only give volume guidances and we will be coming out with that in Q4. Okay. And what is your current order book? Sir, we have a very large order book, but thats not a clear indicator because the order book is mainly open orders from OEMs. We typically sit with OEMs at the beginning of the month and finalise what we are going to execute in that month. So I could give you a figure for the order book, but I dont think thats a correct indicator or that should not mislead you in any manner. And do we see more orders from Railways? Yes, we are hopeful of getting more orders from Railways, definitely, we have invested a large chunk in the railway plant and we are aggressively following up with areas of opportunity that exists in the railway space. So we are just in the process. But till the time it doesnt materialize, you know, to share something with you would be wrong. But, we have definitely bid for quite a few tenders. And, the margins in the railway business would be more than CV business? Yes, I would assume so. Okay. Thank you, Mr. Gupta. Thank you, sir.

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Moderator:

Thank you so much, sir. Now, the next question is from Mr. Sunil Shah from ENAM Securities. Sir, please go ahead. Yes. Good evening Ajayji. Sunil here. Good evening Sunil. Hi. Sir, just one question is on the dividend payout policy. We had formulated a policy of paying 20% of our PAT as dividend. That continues as on date as on -Yes, there is no change in that. There is no change in that. Okay. Sir, so basically we will -- you know, if I just look at the numbers and try to do little bit of analysing, then despite, you know, not taking the tri-fac number, will closes here around 60 to 64 crores. So the dividend could be in the range of about 12-13 crores coming out, and that translates to about Rs. 2.50 or something of that type on the shareholding, sir its working out to a yield of about 5% current market price meaning, is my maths correct on that one, sir? It sounds correct, but I am not going to confirm or disconfirm your PAT figures -Just the policy. -- because I am not allowed to do that. Your calculation is correct. That I can confirm to you as on -So, the 20% payout is what we will stick with, right? Yes. Thats the board policy as on date. So thats what it is. Okay. And, sir any sense on the tri-fac numbers that could come in the fourth quarter? No. My team was busy with making the audit preparations. And we have now started with this thing, we have now started making the applications for tri-fac. We will come back to you on that one.

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Sunil Shah: Ajay Gupta: Moderator:

Okay. Thank you, Ajayji, for taking this question. Thanks. Thanks. Thank you so much sir. And the last question for the day is coming from Mr. Siddharth Bera from MK Global. Sir please go ahead. Sir, thanks for the opportunity. Questions; first is the interest cost in this quarter has been sequentially slightly in the lower side. So, I mean, what will be your debt or working capital levels if you can guide us? I think working capital levels would be similar to what we had in September balance sheet numbers and thats what it is. Okay. And the overall debt levels, any change? No, there has not been any significant change. No. Okay, sir. Okay. And just on your railway side, if I see your railway revenues from the refurbishments, they have been pretty on the lower side, I mean could you give us some outlook on how is it with respect to the what is the visibility on the refurbishment business? No. Like I told you we have bid for a couple of tenders but we havent got any confirm order yet. We are hopeful of getting. As soon as we get we will inform the stock exchanges and thereby inform the public at large. Okay. Sir, I mean, like the tenders are mostly for the wagon manufacture. Is it also for the refurbishment part? No, the new wagon tender has not come out yet. So most of them are for the refurbishment bid on it. Okay, okay, okay. Okay sir. Thanks a lot. Thank you very much, sir. Thank you so much, sir. You can take over the floor for final remarks now, sir. There are no further questions.

Siddharth Bera:

Ajay Gupta:

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Third Quarter Financial Year '13 Results Conference Call of CEBBCO February 4th, 2013

Ajay Gupta:

Yes. I would like to thank all the investors for having attended the call. We know that all of you all or some of you all must definitely be under pressure because of the sad events that have taken place in the stock market in the last two days. But I can only assure you that the company has been running normally. There is nothing abnormal or anything which is a negative shocker or something that justifies the stock price fall. I would request you to continue to have faith in the company. And we are all of us are there and will continue in our endeavour to try and meet all your expectations and continue to do well in the business. And if there is anything else or if anybody wishes to have a call -- if anybody in the management -- please feel free to let us know we are all available for you. Thank you very much. Thank you. Thank you everyone. Thank you. Thank you so much, sir. Thank you so much participants. With this we conclude the conference call for today. You may all disconnect your lines now. Thank you and have a great day. Thank you.

Management: Ajay Gupta: Moderator:

Ajay Gupta:

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