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

Ladies and gentlemen, good day, and welcome to Q2 FY '21 Earnings Conference Call of Motherson Sumi Systems Limited. [Operator Instructions] I now hand the conference over to Mr. Vivek Chaand Sehgal. Thank you, and over to you, Mr. Sehgal.

Good evening, ladies and gentlemen. It's my pleasure to lead our team to the highlights of the second quarter performance of the group Motherson. We are coming out of a tough period of COVID and post-COVID world, but grateful to the teams for doing an amazing job. And I think all around, you can see there is a phenomenal fragrance of performance. Almost 80% of our facilities are running over 75%, another 5% we'll have to start greenfield performance within, but that's on the lighter side. But improved performance on the greenfields is something which is very heartwarming. We are EBITDA positive even in Brazil, where we've been having a lot of technical problems. But anyway, everything is on demand and doing better and better. So I know all of you might have questions as to what we have done. So I hand it back, and we are ready for the questions as we would like. Thank you.

[Operator Instructions] The first question is from the line of Puneet Gulati from HSBC.

Congratulations for great set of numbers. If you can elaborate a bit more on what really happened during the quarter, everything seems to have done so well. I think from our perspective just beyond imagination. The turnaround in just 1 quarter is just too good. Can you give more color on what really changed?

Well, I'd love to answer this question, but I give it to the guys who actually did the job. So Vaaman will take care of the polymer side, Pankaj will take care of the side. And I think that should be good enough for you guys. Is that good?

Thanks, Puneet. Puneet, I think, of course, this was the first quarter after the COVID lockdown, where there was some sort of normalcy in the operations. The volumes have definitely picked up from the pent-up demand that we had from the previous quarters and the shutdowns and lock down. And of course, that breathing time for the greenfields as well as the operations to come in sync with the new reality and reducing the cost, of course, there was no travel, et cetera. So there was very strong focus on the operational excellence. Again, a very, very strong focus on all the -- of course, the market coming back, the product mix, the take rates all helped and full effort done -- given by the team to deliver these results.

Okay. This is similar to what you used to do in the previous year itself. So has the business returned to complete normalcy? Are you seeing it continuing into the third quarter as well?

Yes. Well, so far, on the global side, at least, we see it continuing. Of course, different countries, a little bit up and down, is really happening. But the business is strong. The customers are not really even with the second lockdown that you're seeing right now, perhaps too early to really say, but have not really changed any volumes or anything like that.

Vaaman, if I can interject. In none of the geographies, has the factories been shutdown. I mean bars, restaurants and those kind of places -- the cinema halls, those kind of things have been shut down. But no factories have been asked -- at least we have not been. That's what...

That's correct. All plants are up and running. We have not seen any plant going to shut down with the second wave. And the customers are maintaining their schedules as of now. So as of now, all things are running normally.

Okay. That's great to hear. Secondly, on the debt side also you seem to have repaid or prepaid the debt. What is driving that? Do you need less debt? Or is it just finding some cheaper source of capital elsewhere?

No. It is a combination of the 2. You are absolutely right. The whole idea was to deleverage, and we have been saying this consistently that our CapEx cycle for the last 2 years after greenfield is already over. So we should see more internal accrual flowing in. And traditionally, as you will recall, September is a peak that period because of summer holidays in Europe. But coming from a low working capital in June, and we had said that it will get released. But I think the teams have done more greater job. And while we continue to maintain the liquidity of about even INR 11,000 crores, but we retired 400 million debt -- of USD 400 million, USD 375 million to be precise in September quarter, of which we used the cash on the balance sheet of SMRP BV as well. So the whole idea is then not only to just reduce the cost, but create a balance sheet where we are prepared for any kind of a growth or any further needs which the group may have.

And on the other business side, the India business also stand-alone industries, the markets have come back very sharply. And as a way to keep all our people, all our factories intact during the tough times and to work together with people paid off as we could smoothly transition into the high-volume growth phase again effortlessly and in an efficient manner. So that's what is reflected in the results. And on the international side, also, the teams did very well despite the market slowly gaining momentum. And our plants being in some of the countries where now government supports like in Serbia or in Mexico. And there while the market came back also for the levels in many of the foreign zones like Coahuila and Chihuahua we had to keep paying for the people. And we have supported all the people during this tough times. So that as the situation became better, they all could come back and meet the requirements of the business. The teams have done really well all across and kept their costs under control.

Yes. I think that was something which was heartening, wasn't it, Pankaj? You could actually see that the reason we didn't throw out people and all that, they actually came back and really supported our costs and so many measures, the productivity, realignment of the lines in warehousing side, how that particular thing was amazing, wasn't it?

Yes. Because we are usually manpower intensive, customers were worried whether people will be able to come back and join the plants and do the production. But in most of the geographies, the work done by the teams was so good that everyone felt safe coming to the factories, the way the factories were designed, the re-layouting was done and safety was kept as the paramount -- of paramount importance. And even people supported them at their homes to support them in terms of maintaining all the safety measures, so that they feel highly aligned to the company.

[Operator Instructions] The next question is from the line of Siddhartha Bera from Nomura.

Congrats for a great set of results. Sir, my first question is on the SMP business. So we have done a very good performance on the greenfield. So just wanted to understand, in general, if -- as and when we scale up going ahead over the next few quarters even from these levels, will we return to the earlier cost structure -- elevated cost structure? Or shall we expect that benefits will flow in, in terms of better EBITDA margins going ahead? If you can give us some color on that.

Sure. Look, the improvements that we have made in the organization are there to stay. We talked about like the last call as well, where we had reduced a significant amount of people, the inefficiency, all the OEs of the paint shop, mold shop, assembly shops are all going in the right direction. That is what's definitely helping. Of course, the lockdown, a lot of support from the customer to re-layout to increase our usual time that we had to supply. So really working together with the customer during the tough times and working on the efficiencies. And of course, the time that we had to make a very, very comprehensive plan for improvement and now that the volumes are coming back, executing that has led to this, and we hope that this will continue. We do have more plans as the product mix and the takes continue in the next quarters as well. We hope that this continues in this direction moving forward.

Also Vaaman, don't you think like we were discussing just yesterday, that with the new kind of government change in U.S., our original plan of bringing the Mexican and the American plants, which are very close to each other, together, and that could bring tremendous amount of benefit for our new Zitlaltepec and Tuscaloosa, isn't it?

Definitely. As we have -- will have more launches and variants that are coming up, getting the support for the launches will be -- should be that much better. And of course, the plant is also doing much better because we have put in a significant plan. So we hope that this improvement continues in the coming quarters.

Okay. Got it. So just to summarize, basically, we should not see the sharp jump from the ex PAT costs or worker issues coming -- going ahead if the revenues ramp up from where it is currently?

I'm knocking on wood, yes. It should not.

Unless the new President has new walls to make...

Got it, sir. And second question is on the order book. So now in the first half, we have got somewhere about EUR 1.7 billion of orders. So how to think about the CapEx? I mean is EUR 13.1 billion order book, if it stays at these levels going ahead, implies that the CapEx we are doing should be sufficient? Or by when do you think CapEx needs to go up to service the orders?

So as of now, no real new plant from the horizon for these orders. It should be serviceable from our existing plants. Of course, the maintenance Capex, et cetera, will be there for making sure that the equipment is always in line with the customer expectations. But as you've seen, the CapEx trend is going down with the new greenfields, and it should continue to taper.

I think also, you must keep in mind that the tooling is always owned by the customer. So we might have a working capital usage of the same, but normally you don't have -- we don't have -- envisage big capital spend.

The next question is from the line of Nishant Vass from ICICI Securities.

Congratulations for the improvements across the company. Sir, my first question is towards Vaaman for Tuscaloosa, just in focus. Obviously, this number in terms of revenue is historic high. So just trying to understand, is the production from the customer eased out? Or you think there is more possibility from a revenue standpoint? And also associated on the productivity, obviously you've seen a significant improvement. But if you obviously, you have high benchmarks in the organization, but where do you think you are right now in terms of trying to see where you would want to be for Tuscaloosa? So if you can shed some light on those 2 points.

Yes. Look, there are still variants and models that are yet to be launched. So we believe, of course, there is still room for growth over there. And also it depends on the take rates of the customers. What are the -- are they picking up more of the AMG versions or non-AMG versions? It really depends on how that is there. So small fluctuations will be there, but there are still more to come over there in terms of growth.

And also, I hope in the -- because we have a huge facility right next to that plant, so I'm not writing off that we won't get any more orders from them. I mean there's more cars, more things that are being produced. The only plant that they have over there. And we're very ideally placed. So I think as our operations become better and better, there will be much more opportunities.

And then the second part, on the productivity side where you would think you are right now, if you had to look at from an expectation basis on an structure?

We are never satisfied. So no matter which plant you talk about, we will say there are further improvements to be had. Of course, coming from where we are, I would say that the low-hanging fruit has all been picked up. But now to reach really a benchmark world-class levels is the effort of the team. We built a very solid team over there, a very cohesive team that is taking the charge and the lead and continue to promise more improvements as the quarters go by. So we're encouraging them. And hopefully, they will have that success.

And my second question is on PKC. Just to understand where are we in the cycle in terms of the customer orders. Obviously, production is still is picking up. So just could you shed some light as to when do you think that the customer production more on Class 8 starts to pick? And can we expect next year to be quite robust on that?

I think you're right that it's picking up. And as you would have seen in these report that the bookings have been quite solid in the last few weeks. So we do hope that it continues to keep picking up. That's what we are seeing that internationally, mobility is a factor, which is we're never satiated and there has to be a continuous growth in this sector.

And sir, specifically in China, the joint venture, are you witnessing because the underlying market is seeing quite strong growth. So any sense on that? Could you shed some light in terms of how you're progressing in China in PKC?

Yes. We are growing very fast. I mean, in the last 6 months, as you would have seen, I think, in the results, China has been a big factor, while Europe was down about 29%, U.S. was down 40% in terms of the truck volumes and Brazil was down; one, the volumes were less; and also the currency was very weak. But China has been growing at a very fast pace, and all our 3 joint ventures are very well placed. And they have expanded themselves to meet the customer volumes. So we are very well placed in the sense that we are also aligned to the global truck makers in a way that as they bring in more in the times to come, so we supply. Dongfeng, they're a major supplier, which is why the JAC as we have joint venture with them. They're the parent company has now the partnership of Volkswagen. And we have the joint venture with [indiscernible] which is also supporting on "Diamler" joint venture and open up another facility as well. So we are very well placed in China and growing.

[Operator Instructions] The next question is from the line of Raghunandhan from Emkay Global.

Congratulations, sir, on strong set of numbers and SMP turnaround. Sir, my first question was on the utilization side. Utilization is strong, as mentioned in the presentation, over 78% and 80% of facilities. Can you provide some color on region-wise trends?

Sure. Look, I think everywhere -- because Q1 was difficult everywhere, so Q2 has really been the first couple of months where things have been some sort of normal. But we, of course, understand that in Q2 is where we have holidays in Europe side. So you see a little bit of lesser utilization over there. But as September finishes or comes to an end, activity starts to pick back up, which we are seeing. All of -- Americas, again, a little bit of a limbo because of the elections time. I think that's now past. So we will see activity pick up there, again. India has been fairly strong. You've seen all the numbers that are coming from all the OEMs, has been quite strong and continues to be right now so far. China has, of course, went into lockdown early, since then has had a very solid performance throughout. And I guess, yes, those are the major places. So till now, we are seeing that things are on track, better than what we forecasted, perhaps at that Q1 level, and that consistency is there. Now we will have to see definitely post Diwali, what is the situation, and the couple of months in Europe as this second lockdown that is there, how that affects. But as of right now, everything is intact. The customer numbers and everything is still strong in all the regions that we are present in. So no different direction coming from many customers right now.

The greenfield plants have achieved EBITDA breakeven, considering healthy order book and improvement in underlying industry. When do you see these plants reaching optimum utilization levels?

So look, I think next couple of quarters is also going to be key. Definitely, as we had promised to all of you that we will first get it to EBITDA breakeven, which has been achieved. And now the push is all towards achieving higher profitability levels. So we're very proud of the team, what they've been able to achieve. We're still a way to go. If you would give me another few quarters, and let's talk about that.

Sure. How much would be the margin for SMP excluding greenfield plants and SMRC, if you have it handy?

No, at the top of our head. SMRC, we don't give the data separately anyway because that is a critical part of SMP. And for greenfields, we have given the revenue number as well as the EBITDA number. So I think -- if it can be completed from there.

We are always guiding you on growth, so don't ask us margins.

Fair point, sir.

I think it is important to see the team efforts which has gone during the lockdown period to really bring the operations on stream and maybe we will not require to even know what are the greenfield-s because we will be giving 1 number which you will always like.

And I think moving forward now, these are no longer greenfields because they have now been a part and they have broken even so they will now be considered as normal operations for our group.

Congratulations on those wonderful turnaround. One last question from my side. Cost reduction efforts have supported margin performance. Any color on how big has been the savings or targets for this year? And would you expect benefits -- all the benefits to be sustainable or any part of these cost reduction efforts like which may not sustain in the coming quarters?

Very good question. But we have already achieved the numbers. I don't understand why it would be that we would allow it to slip. So barring any unfortunate thing like COVID happening or something like that, we can only improve from where we are. That's my this thing for it. But after having suffered COVID in February, March, I don't want to take bets and calls anymore. So I'm not -- it shouldn't happen. I think we should only improve from there. But look, I'm not going to be God, if you understand what I'm trying to say.

[Operator Instructions] The next question is from the line of Nishant Vass from ICICI Securities.

Can you shed some light in terms of the kind of order book? I just -- I know you don't give a lot of details on the order book per se, but I just want to get a sense of the inflows, kind of what are you seeing in terms of -- are you seeing these new customers or existing customers, the larger share, you've seen increased the ramp-up on those customer relationships? Or even from a region basis or technology basis, if you could shed some light on the inflows, that would be helpful, just to get a sense.

Sure. But you know that these are SMRP BV orders, right? We are not guiding on Motherson and PKC and all that. So that's all extra. But all throughout the last 6 months, we've been telling you that we are getting a lot of -- our engineering people are working from home and some plants and looking at new business. So I just want to tell you that all our customers are looking for newer models and all that because they want to catch up. If possible -- the numbers if possible. It's very difficult, then they want to come up with new cars, new things like that. So the order book is actually trading with the new orders that we got is actually telling you that what we have been seeing and maintaining is true. The customers are very eager to come back to their numbers. And even more important, they want to catch a bigger market share. So yes, the progress is pretty good. And the orders are mostly from Americas and Europe and things like that. So -- and some portion in the Asia side also, but that's about it.

Okay. And sir, my second question is on SMR. Obviously -- it is obviously one of the most mature business, but continues to deliver surprisingly robust margins and keeps on the upside. So any inputs on that in terms of how you have been able to sustainably improve it to a next level, going into the mid-teens now, 13%, 14% kind of a margin level. What are the key elements that you are seeing? Because even with the revenue drop, you've been able to improve and create the structure. So can you shed some light on the things that you focused upon or changed?

On the lighter side, Vaaman and my traveling bills have been -- not been given to them because we are not traveling. No, that's on the lighter side, on the joke side. But I think -- look, we have never wasted a crisis. We've gone through multiple crisis up till now. Asian financial crisis. We've had the Y2K, the 9/11, we've had the last one in the Lehman crisis and blah, blah, blah. There are so many crisis. So whenever we have a crisis, we guys have a unwritten rule that we have to look at our plants, we have to improve our productivity, we have to improve every single thing that we couldn't do when the whole full production is on. So that is something which is -- it's a written rule in the group that you have to use all crisis, all particular problems to your favor. So I think the teams have done a phenomenal job and SMR is no exception. They are a master when it comes to cost. They're really focused on that because, look, their whole idea has been always don't look at too much on the top line, keep focus on the bottom line, keep on improving, and they've done a marvelous job. So I'm sure that they will be easily looking forward to the coming burst of growth that they will have. And they will use this to their advantage. But I really can't give you more color on this. Vaaman, do you want to add something?

No, no. I think you mentioned it. They have very, very focused projects in every plant of reducing cost. And again, this COVID time has allowed us to take some time and make sure that they are really pushed through. So the team has done really, really well.

The next question is from the line of Prashant Kothari from Pictet. [Operator Instructions] We take the next question from the line of Basudeb Banerjee from AMBIT Capital.

Congrats, sir, for good set up numbers. So just continuing with the earlier question, we see that SMR EBITDA margins are typically seasonally very high during Q4 of the year, and there is almost 200, 300 basis points more than the rest of the quarter as such. So will it be right to then pose this kind of cost restructuring exercise, rest of the quarter's new normal margin maybe 13, 14, and the Q4 spread of 200, 300 basis points can result in higher numbers. Will it be a right assumption, sir?

[Foreign Language] But we'll try and do better than that. But as I said, [Foreign Language] I hope what you're saying is true. But we don't give guidance on these numbers, please, sorry.

Sure, sir. Second thing, presently DWH, as you have done the restatement and separately given DWH numbers. So how much of DWH is India passenger vehicle now, sir?

Sorry. Once again, the question, you want to know...

What percentage of DWH revenue is coming from domestic passenger vehicles?

100%?

100%. And Maruti will be what percentage of that, sir?

You are asking that out of the DWH revenue, how much is pass car, is it?

How much is pass car? And how much of that is Maruti?

Okay. All right. So we don't we think -- I think DWH is 100%. That's what meant when I said 100%. Not -- how much of that is Maruthi and how much of that is that because we are supplying to everybody...

So sir, if then...

2-wheeler, construction equipment, everything, you know.

Sorry. Hello?

You were saying something? We didn't get it.

No, no, sir. Continue, sir. You were saying 2-wheeler construction equipment, et cetera.