Samvardhana Motherson International Limited (517334) Earnings Call Transcript & Summary

Because of the -- also the wide variety of the product mix, which is there in the India business.

[Operator Instructions] The next question is from the line of Pramod Kumar from Goldman Sachs.

Condolences to the group for the loss of lives due to COVID. And congratulations as well for the results. So my first question is pertaining to the CapEx and investment plan, given how strong the order books have been for us, especially on the EV side. If you can help us understand what could be the nature of CapEx paid from -- beyond FY '22? Because I understand for FY '22, the CapEx is going to be quite controlled. Just can you help us understand how do you see the CapEx trajectory for the next 2, 3 years shaping up at SMRP BV particularly?

Gauba, can you take this?

Yes, Pramodji, thanks a lot. And for FY '22, as you know, we come out with a CapEx guidance year-on-year. And you rightly said, the CapEx for FY '22 is also likely to be muted. But what is important is that the CapEx guidance we give year-on-year because when we get to more acquisitions or more new businesses, then we can see how Vision 2025 will be shaping up. And Mr. Sehgal also mentioned about the midterm review, which will happen in September 23. I think we will get a better guidance on the CapEx, also the reorganization plant should also get completed. So all the new verticals CapEx will come. For SMRP BV, for the existing order book, we are not adding any significant greenfield. Our CapEx is likely to be EUR 175 million plus minus. I mean they start with that, but the teams have always done better on the CapEx side by cutting down the expenditure, cost control. So I think you should wait for post reorganization when we give a guidance for the larger company. SMRP BV CapEx for the current order book, no significant greenfield or not likely to be much.

And sir, you are covering EVs as well. So in a way, it will be more of redoing some of the lines in existing funds rather than doing any big fresh CapEx. Is the understanding right, sir?

I mean, Pramodji, as you are aware, our CapEx for the specific program models, which is in terms of the tooling roles is customer paid for and which does mean that there is a working capital deployment. As you have seen, I think you would have noticed how efficiently the working capital of the company has been, and we have reduced the debt levels quite sharply even after the increase in the turnover. So therefore, the model program-specific investments, which is in terms of tooling will continue to be done by the customers. And we have been power agnostic, but this also indicates that we are completely aligned with the customers when they are future planning for more and more in these.

And the second question is to Chaand sir. Basically sir, now for a business like yours, which is Indian agnostic or power chain agnostic, and which is going to -- which has a long theme ahead of itself in terms of premiumization and lightweighting, the general understanding is that businesses like those have been valued at a higher rate going forward because of the lack of disruption or lack of -- or rather the visibility is what these business will offer. So given this, is it logical to expect that when there is more M&A opportunity or more targets which are out in the market, there could be more competition from rivals or new entrants who are trying to get these -- this kind of a piece of a business given that investors are generally kind of starting to value these businesses at a higher multiple? So how do you see that dynamic when it comes to M&A for anything which is related to plastics?

Yes, I agree with you. A lot of the people think that it's an easy boat to ride, so they are buying companies left, right and center. And even the big guys, they're all buying companies in the auto space and all that. But it's not an easy cake to eat. It takes a lot of time. It takes a lot of pain, and you're going to have a lot of money. And more than money, more experience behind it. Today, we are like 29 acquisitions. And other than one, every single thing is doing very fine. So I think we are patient. We have 5-year horizon. We don't have a 5 months' horizon or something like that. So we are patient. I'm telling my team, there are a lot of companies which are available. A lot of guys coming or private equity, which want to throw money on that. But it's not going to be easy. We need to have a very solid backing. We have to have a lot of -- I mean, we have -- in Motherson, we now have 5 Chairman offices all across the globe. So every single country is covered. The ability to move our people around is there. We have a great history behind us, and we capitalize on that. We've never moved the company. We've never moved a plant or something like that. So all these things do very well with the unions and all that. If somebody else wants to come, throw money at it, we'll wait. Another year, 2 years down the line in growth was much cheaper, we're okay with that.

[Operator Instructions] The next question is from the line of Chirag Shah from Edelweiss.

Sir, my question -- this is for Gaubaji. Gaubaji, how do we look at this interest expense because our net debt keeps on -- has been reducing significantly, but our interest expense is not really coming down. So how should we look at this, if you help us understand? Now is there other income really going up that fast?

No. We -- first of all, we are not putting the funds outside into -- so the funds, as you know, our larger part of the borrowings are in euro terms. And we have been borrowing at a very competitive rate. So when you see the gross debt reduction also, you don't see the impact because the interest rate, which we were -- is hardly anything. So many of the loans, including the NCD, which we took last year has been swapped into euros because that was all U.S. dollar. So the interest rate has been very, very low. But I am not in full agreement with you because our interest costs have been coming down. Particularly in rupee terms, they may not show up lower because of the very fact that the rupee has appreciated more so vis-à-vis euro, and so, therefore, the true saving may not reflect into the rupee balance sheet.

So it's more about translation rather than anything, yes. I just wanted to understand that, okay. And is there also the mark-to-market, if any, that happens, is also rooted in the interest tax file cycle?

Yes, that is also put as a P&L item, unless and until there is a -- harness is accounted, which is stated in accounts very clearly.

Okay. Yes, that is helpful. Sir, second question is for Vaaman. Vaaman, if I ask you to have a look back, the 3 model launches for which we had won orders over the last, say, 2 years or last 3 years back, have they got delayed because of COVID? And that's one question. And is there a bunching-up effect that we can expect next year of new launches, at least for the key models that you are supposed to start supplying?

No, nothing like that. I think those -- all those launches have happened, if you were looking at the plants, new plants and all of them, they're all doing their launches. So there really hasn't been significant delays. Of course, maybe a quarter here and there because of COVID situation or something like that. But most OEMs are launching their models with perhaps maybe, like I said, a slight delay here and there. But they are pushing models back a year or something like that? No, that's not happening.

Nothing now, okay.

Given the SMP experience and also the SMR experience, they will understand how the orders actually translate into the sales.

Yes. No, I was just wondering, is there any delay from the OEM side for launches, given the uncertainties and which, because...

Nobody is -- we have not heard even 1 delay other than what is in all the different matter, but because of COVID delay, no. In fact, basically, they are enough to catch up. So if you look at our order book last 6 months ago and to this year, I mean, there is an increment of EUR 4.5 billion so that's telling you how much of a hurry they are into service their models and things like that. Vaaman...

[Operator Instructions] The next question is from the line of Joseph George from IIFL.

I have 2 questions. One is with respect to the old so-called greenfield plants because I mean now you've stopped calling it greenfield, but if you can give us some sense on how the Tuscaloosa plant is shaping up because when we look at the commentary in the prior quarters, the understanding is that the Hungary plant has improved much more in terms of profitability and Tuscaloosa was slightly behind. If you can give some qualitative comments on those improvements, that will be great. And the second question is that when I look at the tax rate, there are some deferred tax reversals that is coming into the consolidated numbers. How should we look at overall tax rate going into FY '22 and '23?

I'll take the first bit. I think the commentary that was made earlier was that the Hungary plant is also older. I mean since they're both new plants, but they are -- it's slightly older than the Tuscaloosa plant. So that's why it was obviously ahead in its maturity. But it's difficult to compare those 2 plants. The customers are different. So even though the Tuscaloosa plant is -- was behind, it was also the larger plant out of the 2. But we don't really look at it comparing one against the other. We benchmark them against themselves. So if you look at that -- if you look at it from that perspective, definitely, both Tuscaloosa and Hungary are doing better. We've also won subsequent orders for the plant. So that is a very, let's say, hard problem to see that they continue the journey. And of course, now with the experience behind them, the launches will be that much better. And the teams are really delivering to the plans that they had promised of improvement. So it's really good to see that, that's happening even though we have this -- all these issues on the side, making some noise, but the teams continue to do better and drive better performances at these plants. Thank you. Gauba sir, if you can give some comments on the tax rate question, please?

Yes. Joseph, I mean, I have said many times that we would like to have the normalized tax rate every year. At certain point of time, as myself follows a very conservative policy, and we had not recognized the deferred tax asset till the time we became very certain in terms of the recoverability of that. So we have required certain amounts, which we have given in the presentation for quarter 3 as well as quarter 4 in order to be transparent. But I think a good thing is that all the businesses are now getting positive. And we should see more stable tax rate coming up. And the auditors have also been looking at that the deferred tax asset been recognized because now there is better performance coming from our businesses. You can know the tax rate of most of the countries, they are somewhere in 25% plus/minus range. India is also 25% now. So I think depending upon year-on-year, you should have a tax rate getting more normalized 20% or even around that rate.

[Operator Instructions] The next question is from the line of Priya Ranjan from HDFC Mutual Fund.

Just 2 questions. One is on -- I mean, if you can throw some light if there would not have been COVID in the current quarter, what could have been our top line or, I mean, the top line run rate? And with the current capacity or whatever capacity we have, what kind of peak revenue potential and the order book we have, peak-related potential we can generate out of that? That is number one. And secondly, on working capital side, we have seen sharp improvement in FY '19, '20 and '21 in the SMRP BV. So number of days now has come down to around 5 and unbilled revenue has also gone down significantly. But with the new orders coming in, do you see some kind of uptick in unbilled revenue and then the working capital reversal?

Gauba, can you take that?

Yes, sir. I will. While on the revenue, COVID if had not happened, I will do the hypothesis which I would not like to get into. But I think you can see how the businesses have performed. In relation to the working capital, the company's focus has been very clear because we measure ourselves return on capital employed. And we have said in the past that a lot of new programs are coming into play. Yes, when the new order book as we start preparing the engineering tools and engineering work for them, there will be some increase in the working capital. But since this is, again, a short term, which goes up and comes down because this is how the customer risks have been identified, that model specific investments are done by the customer, I think there could be some temporary spikes, plus/minus. But it is more of a normalized business. And thus SMP has also grown to a stage where there is a significant base for it to not have the fluctuation so volatile.

So Gauba, could you also explain if the first quarter result was normalized, what would be the thing that was his question, the first part, I think you haven't answered that.

Yes. So you can see in the last 2 quarters, when we have seen the new capacities working, we have shown an EBITDA of INR 2,000 crores plus. So you can assume that if H2 was to replicate kind of a thing, we would have been in excess of INR 8,000 crores as an EBITDA.

And I think top line would have crossed INR 17,800 crores, so maybe about INR 35,000 crores approximately. Isn't it? If you bring back the topping into the CapEx. So maybe if you want to extrapolate, then you can do that. But I think the results have been phenomenally better, probably the all-time high.

Okay. Okay. And just on the working capital side, sir, should we assume now the 5, 6 days is the normal working capital is what we should assume?

I mean it is a function of, as I said, a particular point of time when you are measuring because it could be higher also. If the projects get launched in the month of May, June, then in 31st March, the working capital is high. But broadly, I think the teams are very focused on ensuring that the working capital, at least on the serial production or the receivable side is stable, and the engineering will depend on the launches.

Sure. And in terms of -- I mean, Vaaman or Chairman sir can comment on. So based on -- I mean, the order book we have, what kind of revenue potential we can see from the order book, whatever we have so far at the peak level, maybe in, say, 2 years down the line or 3 years down the line?

Three years down the line, it probably would be around $30 billion. So we'll give you a guidance for 5 years, it's $26 billion. So you can extrapolate all that yourself. But I think what's important for you to understand is the orders conversion as Vaaman said, takes about 1.5 years, 2 years. So they are only giving you the new orders that we have won. So really, we leave it to your imagination, which you have responsibility there. But if it helps you, the thing that I was trying to explain before is that in 2012, when we took over Peguform, which had a top line of EUR 1.4 billion. Today, it's sitting at about EUR 4 billion in spite of the weak first quarter. So that's the effect of the orders that we're getting. So it's actually grown 4x in 10 years or like 3.5x in 9 years, if that's what you to take at that. So the order book was very important for us to show you that there is good health, and these are harder commitments. I mean if the order comes from a customer, then for any reason, if it doesn't happen, there's huge compensations that we will get for that. And up till now, in our history, we've never seen orders being canceled just like that.

[Operator Instructions] The next question is from the line of Shashank Kanodia from ICICI Securities.

Sir, on the first point, you had quite prudently managed your RM cost, which has largely maintained the gross margins. So going forward, sir, over the next 2 quarters, do you foresee any pressure on the gross margin spend because of steep pricing commodities?

I would give it to Pankaj, I think probably a number is more about wiring harness. Isn't it? Or which division do you want to talk to?

Sir, let's say, on the consol basis, if you could give a holistic view as since everything is passed through to the customers, but still going over the next 2 quarters, do we foresee any pressure on gross margins?

So I would like to put one thought in front of your mind, if you agree with it, it'll be great. Today, the carmakers are struggling to produce the cars because of the tough conditions which are there. Everybody has his own reasons why they would have rather cut down of production for particular part or something, but not because of demand. If you understand that, you will understand why the next 2 quarters, I don't see them focusing on price or something like that at the moment. That's when all things are working fine and that's the time when their attention goes to that. Today, the purchase managers of any company that you know of, please have a chat with them. For them, at this moment, they are hand to mouth on components and they have freight issues. They have container issues. They have the raw material prices issues, everything going up. I will put it to you very clearly that I don't think they would, at this moment, be doing it. But hey, if you know somebody who's doing it, then tell us, but we are not facing any such questions. I don't see it in the next 2 quarters either.

Sure, sir. Sir, secondly, on the SMP front, right? So for SMP, we are clocking some 10% EBITDA margin, so SMR is above 2.12, 2.13-odd percent. So the next 2 years, sir, do we see SMP margins converging towards the SMR range?

Sir, we don't give a guidance on margins, but if you want a margin, basically, it depends upon how much of a margin you want to keep in a copy, we don't give guidance on margin.

Absolutely, sir, but directionally, obviously, since the greenfield...

Look, in the first this year -- in the last quarter this year, you were asking, is this sustainable? We've proven to you it's sustainable. We're also saying that it's improvable. See, please understand, today, the 275-plus facilities that we have, people are sitting in that plant, they are not moving out. They don't have pressures of anything. They are sitting and looking at how can they cut their costs, how can they improve their performance, how can they improve, every single thing is happening right there. So people are available. There are no holidays -- hardly any holidays or something like that over there. So definitely, you see plant efficiencies become better and better. So it's up to you whether you believe this or not, but Motherson, we have a thing which is known as C2A2C, which means cut cost at all costs. So we are enforcing that particular thing. We are asking our people to think out of the box to come up with good solution. So I personally believe that all my plants are actually working towards this. So those people who know Motherson very well, also know that I get -- every month, I get a thank you report from every plant, every. Plant manger writes to me and sends me what improvements he has done, how he's focusing on that. And you cannot imagine how much happiness I get when I see these kids working and the way they are looking at this particular period. So yes, it is something which we are very grateful for because they participate in this such an exercise. And every month, I reply back to each one of them.

The next question is from the line of Ankur Mittal from ICICI Bank Limited.

My question is, I'm not sure if this has been covered earlier. But my question is, was there any issue on the labor front in the second wave? And has that been subsided now? And do you think, would there be any issues going forward? And also, is there any plan that you might have in mind for any uncertainties in the future, like there are parts of third wave also coming up?

Is there a particular division of ours that you want to direct this question to?

Sorry?

Is there a division? You're talking about labor, right?

Yes, yes, labor.

Okay. So our labor is not migrant labors or things like that. These are very -- they are educated and they are received there. So any division per se that you want to know this information or are you just generally throwing it to the whole group?

Sir, I just wanted a general overview. If there was any migration of labor in the second wave because we saw a migration of labor in the first wave on the industrial level?

India focus, right? Yes. Migration labor is India focused.

Yes, sir.

Pankaj, can you take?

Yes. Sure, sir. What we do is we -- even after the first wave, we could ramp up efficiently. As you would have seen, our customers' volumes went up sharply and we have had no issues because we have kept all the people together. Unlike many other companies who let go of their people, and we keep very close communication with our people and take care of them during this period when some customers are close. So we haven't seen any big issues. I mean in some plants during some days, there could have been an attendance issue. But barring that, this is all manageable. We have not seen any major issue.

The next question is from the line of Naresh Suthar from SBI Life Insurance.

Sir, my question is, again, on the EV content per vehicle, which you might be seeing in over medium to long term. So sir, wiring harness, like you said because of higher voltage, you may have higher content. But for SMP and SMR, there, if you can help me understand what kind of content increase can see in whenever EV portfolio comes for execution?

Just very simply, it's very difficult to gauge it because we are costing of a wide range. But in the electrical cars, we meet the plastic part, which constitutes a huge portion of the weight of the car. We are not using normal plastics like PP and things like that, which uses engineered plastics. Engineered plastics are more expensive and also they are lighter, but also they are stronger. If you understand what I say. From a normal plastic -- from a normal PP part, if they would actually go into more engineered plastics, that plastic part is actually lighter by weight and has to be stronger by strength because the electric cars are supposed to have very high speeds and features like that. But also, there are other aspects to it like pedestrian safety, people just in case god forbid if a car hits a pedestrian then what happens? So there's a lot of study on those particular things. And that's the reason why electric cars are more expensive than a normal car. So that's helps?

Yes. But -- so again, on the same side. So if the contained impact of raw material cost would be -- also be higher for margins would be a little lower comparatively if you supply the same material in IC engine or, I mean, not same part I'm saying?

Boss, I never told you to buy an electric car. You could a bought IC car. That's also okay. But look, that is the need of the design of the car. So I can't say that why they are changing that. That's up to the carmaker. It's the need of design. It's the need of their law, and they have to take care of all these particular things. So I just said to show you that the same part if it was made for an IC engine will be a bit cheaper. And then when you make it for electric car, it -- actually the price goes up because we want the car weight to be lighter. You heard that the battery packs and all that are very, very heavy. So we are trying to remove as much as the weight as possible. Even if the price of the component goes up, they don't mind because eventually, it gives a longer battery life for the EV vehicle. That's all points that I'm trying to explain here. And you can't use the same mold for the 2 parts because mold is designed to the raw material, so if the -- because the shrinkages and all these particular things are different. So a lot of issues. They will have to actually...

Participants please stay connected. Line for the speaker got disconnect while we rejoin back to the call. [Operator Instructions]

Hello. I am sorry, I didn't -- did you lose me?

Yes, sir, your line got disconnected.

Okay. Did I answer the question or...

Yes, yes, it is now clarified.

Ladies and gentlemen, that will be the last question for today. I will now hand the conference over to Mr. Vivek Chaand Sehgal for closing comments.

Thank you very much for the call today. I hope we could answer all the questions and remove the doubt if you had any. The company Board was very, very saddened by the loss of Mr. Tripathi, the Independent Director who has guided us for the last almost 10 years. We also regretted that a lot of the companies globally had a few deaths, which we lost very key people in our group. But other than that, I think the performance of everybody, as everybody mentioned, was better and better. The good thing about the results is that it is something which is giving us a very clear indication as to what will happen in the next coming quarters for this particular year and the years after that. Motherson is always focused to be on its toes and exactly deliver what the customer is asking us to deliver. And in that particular thing, we are becoming more and more precious for the carmaker, and we are very grateful to a huge 150,000, 160,000 people globally, which are doing this particular thing almost seamlessly. Thank you all very much. Please stay safe. Please stay healthy. And thank you very much for listening.

Thank you very much. On behalf of Motherson Sumi Systems Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.