Motherson Sumi Wiring India Limited (MSUMI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Motherson Sumi Wiring India Limited, MSWIL Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. V.C. Sehgal. Thank you, and over to you, sir.

Thank you. Good morning -- sorry, good evening, ladies and gentlemen. Welcome to the conference call of MSWIL. We had a wonderful quarter. And I know you would be having questions. So I'll hand it back. And please ask your questions, and we will answer to the best of our capability. Thank you.

[Operator Instructions] We take the first question from the line of Kapil Singh from Nomura.

On the results, firstly, I just wanted to check, we have seen an improvement in raw material to sales ratio for the quarter. Does this reflect a drop in commodities or cost reduction? And going ahead, what is the outlook on both cost reduction and commodity prices?

Thank you, Kapil. Anurag or Mr. Chhabra, who's going to take this?

Right, sir. Anurag, this side, I'll take this question. Kapil Singh Ji, as you have requested for this raw material costs. See, it is very -- because product mix is different from one quarter to another. So what we make or manufacture the harnesses from one quarter to another quarter, the requirement of the customer and product mix is very different. So it's not easy to say that -- it's -- apple-to-apple comparison is a little bit difficult in this. But as said, that raw material, there are many other things which we are taking actions internally, say, on localization -- and on the localization front, which is actually going to give a benefit to us in the coming times.

Okay. Understood. But if you could just explain this reflects more in your view, mix? Or did we realize anything from commodity prices softening or you expect that to come in future?

Yes. This is Mahender. So this is mainly related to the product mix and the content mix of that. As far as commodity prices are concerned, one of the main components that we use is the copper, for which we have pass-through arrangement with our customers with some customers at a quarter lag and with some customers at a half yearly lag. So it's more to do with like the products that we are doing, the mix of the content -- the components within that product.

Okay. And second, in the press release, we have also mentioned that there are inflationary pressures on wages. So does the current quarter reflect the full impact of that? Or should we expect more wage increases also to come through the year?

Yes. So good question. So as far as wages are concerned or manpower cost is concerned, I mean there are some external factors which control it, which is basically related to minimum wages, which are governed by the state government and there is something which is internal. So as far as external factors are concerned, it's slightly difficult to comment on that, whether there will be another increase in the minimum wages and if yes, which state or how many states, but it all depends on that. Otherwise, whatever the increase has been there effective 1st of April, that has been considered into these numbers.

Okay. That's helpful. And also, we have talked about initiating supplies to 2 leading players in the EV commercial segment. Could you just throw some light that which type of product is it? Is it a light commercial vehicle? And are these high-voltage wiring harnesses or inverters, what all does it include?

See, this is very specific to the customer. So we are unable to tell you the customer names into that. But these are related to the high-voltage harnesses only where we have started supplying. Though electric and high-voltage, we are in all the segments, whether it's the passenger vehicle, commercial, two-wheeler and buses, so it's across, but there are new segment customer also adding as well as the established customer also, we are supplying these parts.

Okay. So EV commercial segment means LCVs? Just the category, I wanted to understand.

This -- Kapil Ji, I need to check and I'll -- offline, I can confirm it.

[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal.

Just a clarification on the RM cost side. So as we see some moderation in the RM cost on Q-o-Q basis or on Y-o-Y basis. This will be passed with the lag. So when you pass it on our RM cost as percentage of sales are declined, right?

Anurag?

Sir, I would request Jinesh Ji to repeat the question again, please.

Yes. What I'm asking is, when we pass on the RM cost to our consumer based on the contracts, it will have implications on RM as percentage of sales for us, while absolute impact on EBITDA may not be there.

Okay. What I understand from your question is you are saying that at the time of start of any business, the RM cost mentioned into the product is -- actually, Jinesh Ji, I'm sorry, I will not understand the question.

Okay. Let me put it the other way around. Our RM cost as percentage of sales which we see on our financial statement on a quarterly basis or on an annual basis, that does get influenced by RM cost pass-through contracted, which we have not covered with our customers. The reason I'm asking this is because we have seen a good moderation on Q-o-Q basis for our RM cost as percentage of sales. And you're broadly indicating this is because of the mix-related changes. So would there any influence of commodity costs on this number?

See, as far as commodity is concerned, particularly on the RM cost, as Chhabra Ji has also confirmed that whatever the impact of, say, for the commodity for, say, copper or for the exchange rate that is being on the pass-through. And so we take it -- it's a straightaway pass-through. So there is no as such of a very big impact of these commodities going to impact anything on the raw material cost. Is that the right -- is this the question you are asking?

No. Maybe I'll take it separately with you. No worries. Second question is with respect to the CapEx side. So can you give an indication of what kind of CapEx-related investments we'll be doing this year considering the order wins have been also quite strong on the EV side? Would we need to incur further CapEx for this growth?

Yes. In this year, '23-'24, we see a CapEx of approximately INR 125 crores. And this does not include land and building, and this is mainly for the -- directly, as you said, customer increased demand. And as you know, that land and building, we have taken on rentals from SAMIL. And for the future investment, this depends upon the availability of land and all that will be done by the appropriate company.

Got it. And lastly, would it be possible to share what would be our revenues from EVs now given that we are seeing a good traction? Would it be possible to share as a percentage, what kind of revenues we get from EVs?

Are you asking of the order book that we have? We are not disclosing that number.

Not the order book, of the revenues.

Are we giving that, Pankaj? Are we giving that sort of number from MSWIL?

Similar to what we give in SAMIL, so I was wondering if...

That's what I'm thinking because SAMIL we give.

yes, we haven't shared yet.

But I don't think we are giving it in MSWIL.

Sure. No worries, if you can consider sharing it later, that will be helpful.

Anurag, take a note of that. If we can, from the next time, we can give them what's the EV number. But EV number is normally very, very small.

Currently it's very small, I understand.

Yes, As Mr. Sehgal has suggested that we don't give these EV numbers separately.

Because it's too small, if you want. And I'm sure they can work it out. But anyway, as you all desire, so we'll try if we can give it from the next time.

Yes, that would be great.

The next question is from the line of Sonal Gupta from HSBC Mutual Fund.

Sir, just wanted to -- can you hear me?

Yes. Yes.

So just wanted to understand, one, like -- I mean, like in Q3 last year, you had guided that we'll get the margins back to normal levels by Q1, but yet we see that the margins are still quite low. So I'm just trying to understand that what has changed since then in terms of what was your understanding then versus now, which is leading to sort of margins remaining at extremely low levels?

When you say extremely low, what is the margin according to you? Because we never guide you on margins.

No, sir, you didn't put out. I mean, like absolute margin number, but I believe, I mean, if I look at the presentation as well as...

How are you saying it's extremely low? Extremely low because of your thinking or because we had guided you?

No. So you guided for margins to improve, right, more towards the average like if I look at FY '22 was closer to 13%. And that is where -- I mean, like -- so it would be closer to that sort of level was what I would expect. I mean, when you're saying margins will normalize back to previous levels.

Fair enough. Can you remember? So who guided you at that time in the second quarter or last third quarter you're talking about, 6 months back?

Yes. So I believe Mr. Gauba was on CNBC talking about that.

Okay. As far as [indiscernible] is concerned, Gauba is now not the CFO anymore. So we would have to -- Gauba, are you on the line, because still some time is there. Is Gauba there on the line? No. So Mr. Chhabra will get back to you. I don't remember us guiding you for the margins, but I'm sure we'll try and find out from Mr. Gauba because he's still here till 31st of August. So we'll find out and then get back to you, okay?

Okay. No, so the point was -- I mean like you highlighted certain factors, right, like that the new plant capacities are ramping up, and there were certain cost pressures that you were in negotiations with the customers to pass those on. So -- and I mean, given that you have expanded capacity by almost 25%. So I'm just trying to understand like where are we in terms of those like absorption of those costs and the ramp-up that we expected? Like you've talked about in the annual report also that you're supplying for 23 new models, including the changes, et cetera, which are going to be a significant part of the overall revenue. So I'm just trying to understand like where are we in terms of that journey? Is this -- I mean, is there still a lot of distance to travel in terms of that ramp-up and cost optimization?

Yes, definitely. Sorry, go ahead.

When you wanted to check Mr. Gauba is with me. We have just got ourselves unmuted from the host. So very sorry that we were trying to speak and we couldn't get to at that time to answer Sonal's questions.

No, I know you're in Dubai, but go ahead, Gauba if you can answer?

Yes. Sonal, I'm Gauba this side, I am sitting with Mr. Mital. First of all, we have always said and maintained, including on CNBC. We never guide on the margins. What we talked about, you subsequently try to cover that. And the new capacities, which we have established, will start getting better utilized from -- by end of quarter 1 of next year subject to customer pickup our customer plans being met as per the scheduled plan. So there was no guidance on the margins. As far as we are concerned, we have only been guiding on the return on capital employed. Definitely, if you look at the quarter 1 of this year, the performance compared to quarter 2 and quarter 3, when we started expanding our capacity and introduction of new models, the performance is far better and improved compared to those, if you will look at in terms of the operational performance.

And just to add to the point that if you know from the market information and as we have also mentioned in our release that there have been, in this quarter, block holidays with some of the customers -- main customers. Some of them were planned, some of them were not planned. And as we would have seen from the market information already that many of the models couldn't achieve the volumes which they were envisaged to achieve due to some of the supply chain issues as well. So the capacities which we have created are currently not in full use. They will continue to get ramped up over a period of time with these ups and downs in the market.

Got it, sir. And just lastly, like in terms of the annual report, you also mentioned about the increase in cost of some of the components like connectors, et cetera, which you were in negotiation with customers to sort of being able to pass on these costs. So I just wanted to understand like, because we were quite optimistic over the last 2 quarters that we will get some sort of a pass-through. I mean like how do you see that? Are we able to pass on these increased costs? Or as of now, a significant portion is still sort of under recovered?

Anurag, We have [indiscernible] on that? Or shall we?

Yes. Sir, this is -- I just want to answer. Sonal Ji, this is our continuous process as we are under -- these are work-in-progress with our customers. We are on a regular basis. Whenever such things are there, we are discussing regularly with them and we are recovering also. So it's a work-in-progress in ongoing activity, actually.

And Sonal, you should also just remember that it's a never-ending process at the moment, it appears because the components and all that are increasing on virtually a quarter-on-quarter basis kind of thing. So by the time you get a recovery for the last thing, you already have another one, negotiations started for the next particular thing. So there are many moving parts in that. The currencies, the components itself, also electrification and a lot of these things are moving parts. So I think the best thing is that we look at the end of the year. That's the time when all of them come into some sort of a culmination hopefully, and let's hope in this high inflation kind of a thing we can give you guys some more guidance.

[Operator Instructions] Next question is from the line of Kapil Singh from Nomura.

Just wanted to check, we've talked about supply chain issues at customer end and this issue has been going on for some time. So what is the visibility that you have now in terms of for Motherson Wiring as well as for customers? Are you seeing that these are largely easing off? Or by when do you think where we can see production levels at the desired levels by the customer?

So there is no lack of intention by the customers to produce. If they can produce even one car more, they will. But there are so many moving parts, Kapil, and that's something that you have to understand we have a war going on. We have China factor, we have -- I mean, I can keep on trying to explain the whole thing. But I think the will from our customer size from the supplier side is to provide as much clarity as we can, but things go wrong without you are even knowing, but it goes on. But Pankaj, do you want to add something on this or Anurag?

No, actually you're right, sir, and Kapil, the point is that these are sometimes so unforeseen that even the customer is not able to predict. So these are all making best efforts and trying to do the best. And to put it in perspective, yes, the supply chain issues are not completely over. So they keep coming back and hitting sometimes.

And I just want to add one more thing that as a company, we are getting ready for that because at times, they change the plan also, but we are there to service the customer so that they should not have any interruption into their supplies also. So we get ready at our end to make sure that we continue supplying parts to them.

Okay. So at this stage, it's not possible to say whether we are likely to see better production in coming few months? Or is there enough visibility right now or not?

On the contrary, I'm saying if the carmakers can make even 1 more car, they're willing to make it. In fact, the thing is so volatile in the world at this moment that we are doing everything possible to make. And I don't think you will hear this kind of commentary from the carmakers that they're not able to sell or something. It's more about supply chain, and they can supply, definitely, they will sell. So according to me, the contrary is true.

[Operator Instructions] The next question is from the line of Basudeb Banerjee from ICICI Securities.

Sir, a couple of things. One, if you can explain what has been the favorable change in mix, which resulted in improving gross margin so that one can understand that these are the segments of better margin going ahead just from a mix perspective?

Are you talking about production? You're talking about -- what are you talking about, sir?

You said because of favorable mix and not because of any commodity movement, gross margins have turned favorable. So if you can explain, sir, which are the segments where mix improved, resulting in better gross margins?

You mean we should tell you about the customers? Is that the question?

Segment mix. Which segment revenue mix improved?

Segment means what? Pankaj or Anurag, can you please, it's not -- I didn't understand the question.

Anurag this side. Banerjee, the thing is that as you are seeing that sequentially, we are growing up, and we don't talk about margins. We always remain on the monitoring of ROCE and as for our group philosophy, we have to be more than 40%. We have given more than 40% last financial year, and we are very much on the track. So we are just monitoring that part only. Is that the one you're looking for?

Sir, the word favorable mix, so just wanted to understand what turned favorable? From that angle only, I'm trying to understand what a favorable mix to be, I'm trying to understand?

So favorable mix, maybe he is referring to the comment that was there in the commentary, maybe that.

Yes, sir.

The favorable mix was actually that in spite of shorter days, in spite of the closedown with the customer and all that, and they were selling a bit more of the luxurious side. So I think that might be the favorable mix that you're looking for. Yes. As you see the entry-level cars, almost everywhere are underselling. So that's probably should explain it to you.

Sure, sir. But anyways, entry-level car weakness has been there for a long period. So this quarter, I don't think there is any change particularly from that angle. But leaving that aside, and second thing, sir, those new facilities, which were added last year. And as you explained that gradually, they are ramping up. So what is the level of utilization on those new facilities now?

Anurag?

Yes, sir. See, the efficiency, the utilization of the plants -- one of the plants has reached to around 55% plus at this moment. And we are seeing that in Q2, that is going to grow up to another 10% to 15% going to add over there. The other facility is already reaching to approximately to 80%. So majorly, only there is 1 plant left out, which is still at 50%, 55%, which will grow in the coming quarters.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to Mr. V.C. Sehgal for his closing comments. Over to you, sir.

Thank you very much. I think the Board congratulated the team for doing a great job. All the customers are at the moment, very busy trying to get all the supply-related issues and all that thing sorted out. Some cases, semiconductor is also still an issue. And I think all of you are aware of the logistic challenge and all those things are available across the world. But in spite of that, I think Motherson has done a phenomenal job, and MSWIL has performed very well. All the customers have been taken care of to the best of their abilities. Whatever the demand was, they were met. So thank you very much for joining. And I hope we answered all the questions that you are wanting. Thank you very much. Have a good day.

Thank you. On behalf of Motherson Sumi Wiring India Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.