RACL Geartech 16/12/2023

Will operating cash flows pick up?

I read the latest concall today. The management seemed pretty prudent to me. They kept guiding for a revenue growth of 20-25% even though a lot of people on the call kept asking them to enter into multiple new areas like aerospace to get more revenue growth. The promoter kept pushing back and kept saying that his philosophy is to first get good at something and only then scaling it up. For example one of his customers asked him to start a paint shop. And that is what the promoter is doing for that individual customer. Now in the future the promoter will also offer the same thing to other customers.

Also the promoter mentioned how he is looking to solve the pain of his customers. For example he mentioned that how earlier one of his buyers in Europe was doing to unloading of the products at the dock himself. Now the promoter went and spoke to this customer and offered to instead set up a warehouse on his own in Europe. As a result the buyer now does not have to get into the hassle of coordinating with the ship which is bringing the product to Europe. This took away the pain of the customer in dealing with this company. I am assuming that this would have also meant better margins from the buyer. But the point is that the promoter was sounding very logical in the way he was answering questions.

One more question was about debt. The promoter said that he is not interested in raising equity right now because having equity leads to waste as the money is just lying around and therefore gets misused. Whereas when he takes on more debt then he has to also spend money every month in order to service the debt and that makes sure that the promoter is not wasteful with the money that he is raising as debt. He said he enjoys the pressure that debt creates on him because it keeps the focus on extremely good execution.

Now they are undertaking capex. And this should mean that revenue growth should continue to happen for the foreseeable future. The only thing I am worried about is the operational cash flow. They need to give a lot of credit to their customers. Sometimes even 90 days. Therefore even though they are booking a lot of revenue growth but one needs to keep an eye on how much of that revenue is getting converted to operating cash flow and then how much of that operating cash flow is going towards future capex. The CFO mentioned that they also are focusing on improving the operating cash flow. In the latest quarter YoY they have improved the operating cash flow from 3 crores to roughly 10 crores. Let’s see if they can continue to keep the momentum on this.

I will be watching out for future revenue growth triggers.