Expecting ROCE to be higher than 20% in long run: Sunil Bohra, Uno Minda – ET Auto

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Sunil Bohra, Group CFO, Uno Minda

“A lot of these plants which currently we have are running sort of closer to capacity and now for any further growth, there is no possible solution available by debottlenecking, etc, whatever was possible we have done,” says Sunil Bohra, Group CFO, Uno Minda.

I will just begin then with that land parcel news that we were discussing. This is in Kharkhoda for a greenfield alloy wheel plant. What kind of revenue potential are you looking at and what is the full utilisation you are expecting?

The land which we have bought is almost 95 acres in Kharkhoda and roughly 25% of the land is earmarked for the alloy wheel business. It encapsulates the project which is already announced, roughly 540 crore of investment plus also the next phase as and when the market needs more volume.

This 540 crore of investment we will be able to put a capacity of 120,000 wheels a month and it can generate potentially revenues of roughly around 650-700 crores a year, a lot also depends on the commodity pricing.

The residual land, definitely we are looking at a lot of other businesses because we have roughly 66-67 plants across the country, we have last year bought around 84-85 acres of land in Khed City in Pune, we have bought around 37 acres in south near Hosur and now this 95 acre.

So, a lot of these plants which currently we have are running sort of closer to capacity and now for any further growth, there is no possible solution available by debottlenecking, etc, whatever was possible we have done.

We know that land has been a scarce commodity and specifically in the areas or the auto hubs where we want. So, the idea is because land has in past been a big bottleneck in terms of capacity expansion, we thought it is better to sort of get a bigger parcel and plan for next 5 to 10 years of growth which can be absorbed in this land and also when you secure this kind of land, definitely your ability to create employment, improve the entire ecosystem and in turn discuss with the government in terms of some better incentives, everything sort of comes in together.

What is your current EV order book and whether or not the kit value has actually increased?

If you see in terms of kit value, we are already at the max kit value possible in the industry domestically. We have some strategic no-goes like battery or body or tyre, etc. So, if you see from that perspective, we have got almost everything which is largely possible into an EV from a component perspective.

Not that we want to get into a vehicle manufacturing, but if you have noticed we have actually made an in-house complete EV two-wheeler and a three-wheeler and a demo vehicle for a four-wheeler.

Two-wheeler, three-wheeler were something you can actually even sort of drive it, so not that we want to get into EV but that shows the competency which the group has and as I said in terms of kit value I think we are largely there and there is not much scope for growth in terms of specifically for two-wheeler and three-wheeler.

Now coming to four-wheeler, we are definitely working on our strategy as to what all products and components we want to get into as we all know that for four-wheeler EV, the volumes are obviously very-very less as of now.

There are less than 100,000 vehicles a year and we know there is a significant growth and considering the government’s various schemes, PLI, etc, there is a lot of focus, emphasis on localisation but for localisation you need volumes.

While there is a large investment, you also need some volume. So, we are maybe going in a very calculated way as to what all products we get into from a PV, EV perspective. We already have some components but maybe in another three months or so we should be able to come out with a clear strategy as to what all the group will be working on from the four-wheeler EV perspective.

Look at one data, which is ROCE, ultimately that is the benchmark for everybody, internal for the management and externally for shareholders. It was at 10% in 2020, it has gone to 18%. With the fact that you are moving into complex products, moving to EV, do you think there is scope for your ROCE to go north of 20% in coming years?

Absolutely. So, our current target for ROCE is 20% pre-tax ROCE that is what we look at whenever we approve our projects.

But as the businesses mature and assets depreciate, you do expect ROCE to improve but at the same time we also have a lot of new expansions going on.

We have roughly around 8-10 projects which are currently ongoing so that also dilutes ROCE a little bit because you do not expect those kind of returns in the first three years. So, overall, in long term definitely we are expecting ROCEs to be higher than 20 but in the medium term we do expect the return on capital to be in and around 20%.

And whatever expansion you would do, I am assuming that this would be a function of internal accruals, you will not going to be raising debt or equity?

Yes, so in short term we might have to raise some debt because we are doing a large-scale investment and we split that into two parts. One is the capex and another is the land bank. So, for capex, normally, I would say that we are very well funded from internal accruals.

We have got a very healthy free cash flows from the business and a very healthy, I would say, debt-equity also. Our debt-equity is less than 0.3. So, there is ample scope for short term, whatever debt is required to get from the market. So as of now there are no plans for equity, yes, there might be some short-term debt gap which we need to manage for this increased land which we are buying this year.

I want to understand that what is happening in the EV market because there was a time when the auto market was dominated by four or five players, four or five four-wheeler players, three or four two-wheeler players and two-three CV players. But now, the landscape is changing. MG Motors is coming. Murugappa Group is moving into it. A lot of new entrants are coming into the EV space, whether it is two-wheelers, three-wheelers or four-wheelers. How does that change life for you?

From our perspective, we are definitely working with the majority players, I would say the top tier I players. Just to put a context today, there are more than 250 registered EV two-wheelers in the country. So, definitely we cannot work with all of them. So, what as a strategy we have been doing is we have definitely been working on the existing players who are in ICE also and EV also, so that is almost like top seven-eight players.

On top of it, the new-age EV players who are specifically only in EV and not in ICE, we have sort of shortlisted top seven-eight of them whom we are working.

So, from that perspective, we are largely maybe working with 95% kind of volume which is currently being generated. So, as a strategy, definitely we do not want to work with all of them because then you have limited bandwidth and every customer needs the same kind of servicing and we do not want to falter on that.

So, yes, we might be a little conservative in terms of number of players who are currently into the EV business who are the new entrants. But we are definitely working with the larger ones and as the smaller ones also grow bigger I am sure the way we need them, they would also need at some point our services. So, from that perspective, it is a calculated call to work maybe with select few initially and we look at a strategy as we go along.

The other thing which is being talked about in the market is this recent acquisition of your land parcel that is kind of bigger than what typically you go in for, which is very need based. Any specific strategy here?

No, so what has been happening is, just to put things in context, one-and-a-half years back the board had approved expansion of our alloy wheel plant in Bawal and the land was available next to our government land industry land. But because of various reasons, there were significant delays.

By the time we could have actually completed the project, we were not having land in our hands. So, land was actually becoming a big bottleneck, as I said, and specifically in the auto hubs where the large OEMs are there.

Strategically, it makes sense to get a large parcel and as I said there are some of the businesses which are actually at the brink of the capacity and at some point in time we would need to move them in maybe in one, two or three, four years kind of a timeframe.

It makes sense that you make your own industrial park and maybe build capacities at a larger scale so that you also are able to get the economies of scale, the benefit from the volume growth which you normally do not get if you keep on putting small-small plants because the overheads also will sort of multiply in the same proportion and that does not have any impact on margins despite the volume sort of going up.

I think it is a big strategic call. Yes, it is a very large land for a component player, but strategically it was well thought of and we do believe that this will take care of our land needs largely in these zones for next 8 to 10 years or maybe more.

The other buzz, of course, has been Elon Musk coming to India, just wanted to understand what is Uno Minda’s Tesla opportunity, if any?

Definitely, we are engaging with, as you said, with all these new players and you took few names, it may not only be Tesla. Definitely Tesla, be it JSW, be it whosoever are the new players, we are definitely engaging with them and waiting for the right opportunities.

  • Published On Apr 16, 2024 at 05:03 PM IST

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