PL First Cut – Divgi TorqTransfer Systems 2QFY24

PL First Cut – Divgi TorqTransfer Systems 2QFY24 – Himanshu Singh – Research Analyst, Prabhudas Lilladher Pvt Ltd

Divgi TorqTransfer Systems [DIVGIITTS IN| CP: INR1,045 | NR]

First Cut 2QFY24 results – Fast EV ramp-up impacts margins

Revenue declined by c2% YoY to Rs. 687mn, however, recovered QoQ by 22% largely led by ramp-up in the EV transmission segment. Standalone EBITDA margins at 20.8% (-570bps YoY and -c170bps QoQ) were impacted due to higher mix of EV business and start-up costs for the new EV facility. Gross margin was lower QoQ ~80bps and in line with PLe, COGS as % of revenue increased QoQ by c250bps while other expenses increased by c140bps, which were partially offset by lower employee expenses by c210bps. Other expenses came slightly higher than expected, however, employee cost came largely in line. Depreciation also increased sharply QoQ due to new Shirwal plant becoming operational and ramping up on operations for EV transmission units. Revenue has normalized and is back on track, growth expected from Q3FY24.

PL View:

While the revenue ramp was expected on the similar lines by us, EV transmission ramp-up has been better than expected reaching almost 15% of the total revenues while other segments have grown lower than expected sequentially. Ramp-up of EVs have impacted margins which should improve as the utilisation increases sequentially starting from 3QFY24 onwards. Multiple new products are expected to come under production in 2HFY24 and ramp-up over FY25 and FY26, which should help growth for the company.

Standalone Financial performance:

Revenue de-grew YoY by -2.1% to Rs. 687mn, grew QoQ by 21.5%

EBITDA de-grew YoY by -23% to Rs. 143mn, grew QoQ by 12.3%

EBIT de-grew YoY by -36.5% to Rs. 98mn, grew QoQ by 7.7%

PBT de-grew YoY by -5.3% to Rs. 145mn, grew QoQ by 60.5%

APAT de-grew YoY by -20.4% to Rs. 107mn, grew QoQ by 2.6%

EBITDA margin contracted YoY by -570 bps to 20.8%, and QoQ by -174 bps

EBIT margin contracted YoY by -782 bps to 14.2%, and QoQ by -190 bps

2QFY24 call highlights:

New EV facility at Shirwal has begun its operations and is now operating at 30% utilization and production at rate of 2.5k to 3k units per month (Capacity is 10k per month). Ramp up is expected hereafter as it has four new EV models in pipeline out of which Punch & e-Jeeto are expected to become operational by Q4FY24. EV business in Q2FY24 accounted to 15% of revenue and has impacted the margins due to lower utilisation and start-up costs. EV business has reported zero defect from OEM.

• Company guided its motive to be resilient and move towards main stream products with high volumes to safeguard business for longer term as currently it is playing in a niche segment and high customer concentration.
• Cost structure impacted by sales mix, startup costs and depreciation.-
• Gross margin impacted by product mix change, increased fixed cost at Shirwal plant and longer recovery cycle in defense business.
• Company guided taking a hit on gross margin in EV transmission to compete with Chinese and Indian suppliers.
• Company guided as the capacity utilization improves margin for EV segment shall increase.
• Inventory has gone up due to new ramp up program for EV which has also increased depreciation
• Transfer Case saw better realization due defense sales
• Capex for 1HFY24 was Rs. 439mn.
• Company has acquired multiple top of the line machinery for better cost of development. In house heat treatment plant to lessen variable cost and enhance productivity.

New Orders timeline:

• Reduction Pump for ford F150 at a production rate of 40k per month. It’ll generate a lifecycle revenue of Rs. 180cr over 5yrs. Production to start by February ’24.
• Transfer case for 5-Door Thar with production starting by January ’24 and will generate lifecycle revenue of Rs. 210cr over 5yrs.
• Production started of component part for Scorpio N and Bolero pick-up with a lifecycle revenue of Rs. 110Cr over 5yrs.
• Mahindra EV XUV400 and e-Jeeto production starting January ’24 with capacities already place.