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

Congrats on a great set of numbers, sir. I just wanted to understand if I look at SMR revenue, which is hardly 10% below all-time high levels. But gradually, if one looks at EBITDA margin moving from 10% to 11%, now roughly stabilizing around that 13% level, barring Q4 seasonality. So from a long-term perspective, how to look at that and model in our numbers, where the equilibrium between your pricing and competitive intensity will come into play? Going by the track record, how SMR margins have been moving up. So how to look at that from a 3-, 4-, 5-year angle, sir?

Look, I think growth is a focus in Motherson, but not every company will be giving that growth at the same time. I mean, once we are making investments, some like SMR in the last few years, have been making very focused advancements on cutting their costs and making sure that the EBITDA margins are improving, while your top line may not be increasing due to how much they geared up to do an acquisition. So growth will come from different parts of the group at different times at any time, of course, like we said we are focused on growth. EBITDA margin play a part of it. But as long as we are doing better in the ROS, that's what we look for. SMR does 40% plus ROS, which is fantastic, and they continue. Now the next target is to grow more than 50%. So we will continue to expect that improvements will keep coming. And surely, they will also get a chance to do an acquisition, which will help their top line growth as well. Just like the other verticals have their own growth targets. So going for INR 26 billion, as you can expect top line growth with a very focused approach on the bottom line as well to deliver that growth.

And sir, if I try to understand, say, in the last couple of years, SMR...

Hello? Just a word to add. If you look at it in quarter-on-quarter and all that, you might see the flattish or small growth or something like that. When we acquired this company 10 years ago, we were at EUR 500 million was the turnover, EUR 524 million, if I remember right. Now there is about EUR 1.6 billion, EUR 1.7 billion. We've grown 4x in 10 years. So -- and delivered a phenomenal bottom line. So please keep that. All teeth are not meant to chew only. Some are supposed to bite. Some are supposed to digest. It is the natural cause, yes?

So as the EBIT side, sir. But I just was trying to understand that if I look at last 4 years, not 10 years, if SMR revenues were largely flattish, but the margins moved from 10%, 11% to 13%, 14%. So is it purely a function of cost-cutting initiatives as there is no operating leverage in play? Or the product profile has increased substantially or your pricing power has increased substantially. So from that angle, if you can explain, sir?

Yes. I think, of course, cost-cutting issues are always there. We have been doing -- and the mirrors are places where you're seeing a lot more feature content also come in. We talked about Logo lamps, CITAN, blinkers, power folds, actuators, more electronic content that will be coming over there. So that is there. And of course, we're also making inroads that do more backwards integration, increasing overall [indiscernible] we can do to continually improve, again, deliver the growth and do big buy decisions where it makes sense. Make the necessary investments. So it's a continuously -- it's not one direction. It has to be a multi-pronged approach to give that sort of a result even in a pace where the revenues are not growing as merchants understand that we get discounts year-on-year to the customer as well. So that is also there, yet they are maintaining their top line and growing top line and bottom line. So we believe it's okay, and we will also wait for a good time to do an acquisition. And again, sharpen the group really as well. So we didn't rush from our side. It's a group that we give a target for, not individual companies, and they will all go through different times where some will look to acquire and some will stay more focused on delivering the cost efficiency.

Sure, sir. Second thing, as for standalone business, DWS or even DWH, margins are roughly around that 15% level now, and whereas against your good level margins of 18%, 20%. So how to look at that 15% trajectory going back towards 20%? Is it a pure function of operating leverage scale or copper inflation? How to look at that, sir?

Gauba here. Sir, Raman sir, should I take on this?

You're too far away from the mic.

You're very far away. Your voice is breaking. I can hardly hear I don't know about the others.

Okay. Okay. Is it better? So I can take this question, sir. First of all, just to clarify, our EBITDA margin, I mean, though we don't really guide you on EBITDA margin, and we would rather look at the return on capital employed, is for the quarter, 18.4%, vis-a-vis, 16.9% on a like-to-like basis. Because as we have clarified, when you look at the DWH or non-DWH, when you will add up the turnover will go up because of the inter-company eliminations, which happens when the standalone is being consolidated. So that should give you a comfort that the margin and again, not guiding you on, but I want to make sure that all of us are on the same page, is 18.4%.

Sure, sir. And last thing, any risk of crude inflation on plastic business margin as such, down the line?

So again, I'll take this question, but these are all engineered plastics and all that we use. So it's not -- the crude is not so much of a [ effect ]. But yes, there might be something. So depending upon what will actually happen it will be either adjusted or taken care of. Unless your brand will take close to $100 or something.

The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

My question pertains to SMRP BV. So in this quarter, we have seen a very smart reduction in working capital, now it's at about 10 days. So is this more of a sustainable number? Or there is some seasonality to this?

Kunal, you want to take that?

Sorry, could you repeat the question?

So for SMRP BV, we have seen operating working capital has come down to 10 days as against about 17, 18 days for same quarter last year. So is this the sustainable level which we are looking for working capital for SMRP BV? Or there is any one-off or any seasonality in this?

Okay. So look, if you remember in the last few years, we've been talking about the growth in the order book. And as those orders come into certification and they go into production, the tooling inventory, which was fairly high and in SMRP has reduced quite considerably. And that is really a function of how the order book plays out. As the new orders trickle in, some of it might go back up. But largely other than the tooling inventory, the rest of it is relatively stable state.

The next question is from the line of Pramod Kumar from Goldman Sachs.

Congratulations on a great number. Sir, my first question pertains to the production outlook, the way you're looking from your customers for the coming quarter. Because there's been widespread of, what do you say, investor communication from a lot of companies on this impact on semiconductor, some of that could be out of abundant caution. But the way you're looking at the production schedule from your key customers, are you seeing that directionally, things getting better or kind of the production levels taking a pause of the production sir? This is more of the consolidated global level, SMRP BV.

I think if you read Financial Times, I think yesterday -- or I think, today, they were actually talking about semiconductor and how it is responding with even more production and more [ to fill ] there. So I think each country will have its own pluses and minuses and all that. While a lot of our customers are facing some problems on that, I think it could be related more to the electronic portion of the car and all that. And I think people have already figured out what has to be done and changes have been brought in. But I don't think the numbers will be huge or something. But yes. I think, again, these are very short-term effects. These are not long lasting effects. As soon as the supply chain is figured out, I mean, of course, the inherent demand is there. So customers are pulling. So people will figure out then it could have an impact of 1 month, 2 months, but nothing that we see is going to have a long-lasting effect. And again, in the automotive space, 1 quarter is a very short period of time. So we're not so concerned about it in that aspect because, like we said, the more important aspect is where the inherent demand is that customers are wanting to catch up on the lost stuff that they -- all of us were impacted in last year. Everybody wants to catch up. So of course, this is a kind of a positive thing that there's shortage because the demand is so strong that people cannot supply as much and again, then the markets will figure out a way to solve that as well. So yes, immediate very short term, this is something that's an issue.

But also, I think if you think about it, the car maker is also diverting the chips and all these things to the more cars has given more bang for that buck kind of a thing. So look, you can look at it anyway that you want. There are cars don't use as much electronics and all that. But when you want to do the emission controls and all that in their time and all that, you need to know those things. So it depends upon the carmaker, the amount of electronics he is using or is required. But I can also vouch for it that along with the chip makers and all that and you would be much more knowledgable about this, I'm really working overtime to catch up with the demand.

Yes. That's perfectly fine. I think that's very useful color. The second question is to cover, sir, the commodity impact. We've seen that copper has had a maximum early this quarter, and you guys have managed very well on the financials. So just wanted to understand a bit more from Gauba as to how should -- how exactly you navigate the commodity bit? And in terms of the agreement with the OEMs, how does exactly the lead lag work in terms of transition, the transmission of the commodity price inflation to the customers?

I think for commodity, you had the question as well as the answer. As you are well aware that we have a pass-through, that when the prices are going up, there will be an impact. So when the price goes up, there is an impact. When the price comes down, it gets reversed. So I think we have to wait for the previous price to come down. But as of now, yes, the prices are going up. So whatever is the contractual are willing to continue.

Okay. And from the immediate next 3 to 6 months, sir, do you see anything else in terms of the commodity basket for you, barring plastic, which could be a bit of an inflationary pressure?

So I think it is very difficult to forecast what the commodity prices or what the oil price or copper prices will be. But as Mr. Sehgal said, as far as the plastics are concerned, we are using very specialized plastics, which do not vary in proportion to the oil prices and all that. And copper, we have already discussed. So we have to just look for the future and how the prices shape up. I don't think we have necessarily the know how to forecast where the prices are going.

So if they are going up in a big way, then you can -- your question was right. But just crude going up is not going to move the needle too much.

That's great to hear. And to answer, given the whole -- the bounce back from COVID has been so -- better than anyone's expectation globally. And then a lot of -- what do you say, distressed companies have got a lifeline and they probably have some more runway. And at the same time, you have issues like the semiconductor shortage, which again further reinforces the requirement for a solid supply chain and much stronger vendors. So given all this, do you see the next opportunity for Motherson in terms of as a preferred customer or a preferred company to kind of take out weaker players and kind of help out the OEMs. That kind of a pull being much more stronger than this time around as compared to where we were in your positioning with the OEMs post [ GST ]. How do you see that relationship, sir?

Honestly, you're right that the amount of the funding that the company got did give them a little bit of how do you say, a lifeline, if you want to say that. But if you look at it all periods of time, they actually became weaker, the debts have gone up even more and things like that. So there is a small disturbance from the -- these companies that were hit very badly. So that's the reason why Motherson has strived to become very strong in the balance sheet, reduce our debt, reduce everything, operating margins. If we will be a losing money, how do we fix it. And these kind of key -- and as I've told you the [ adjustors ] have done a brilliant job, all of them. Burnt the midnight oil to make the company very strong. So definitely, we are waiting. But one very clear thinking in Motherson, which is shared by us oldies and the youngsters is that we are not going to wake up in the morning to decide what do we have to buy or what do we have to see. We will wait on the time-tested model of waiting for the customer to tell us, Chaand, have a look at this or, Raman, have a look at this. That kind of a mentality is definitely worth being maintained. So while a lot of great bankers come and tell us, this is very big now. See, we don't get excited by that.

The next question is from the line of Kapil Singh from Nomura.

Yes. Sir, just one follow-up. On this EV order book, can you share what are the top products which are there that we have been successful in applying?

So the SMRP BV order book that we're showing for [ wheezy ]. So interiors and exteriors, so bumpers, dashboards, low grills, complete modules and of course, mirror design.

Raman, could you also share some flavor in terms of when we have these mirrors or dashboards or bumpers, how are they different from the traditional IT vehicles?

Sure. If you think about it, I think if you look at what customers are trying to see with the EV, they are obviously trying to sell a more feature-rich car, a lot more electronics, a lot more like a futuristic sort of a concept into these cars, which, of course, drives up the value in it. And so you see a lot more electronics, a lot more lighting, a lot more materials that are used that are focused on lightweighting. The car really has a strong focus on lightweighting. So those are the kind of things that we see that are slightly different from the traditional combustion engine variants. But that doesn't mean that they don't want to sell combustion engine cars. Of course, the bread and butter right now, still the majority of the cars. So the features also trickle into that and continue to grow. We see value content growing in that as well. But of course, the EVs are a little bit different in that we would get very much positioned for the future.

Okay. And this order book does not include PHEVs, MHEVs kind of product, right? And it also doesn't include the EV variants of existing cars. Is that correct?

That's right. It's pretty much focused on EV. The other variants, et cetera, because for us, our products are engine agnostic, the new products that have overlap or might have slight differences. So we don't really get into those details and that doesn't really affect us that much.

Okay. Okay. Would you have an idea like how much of -- if you were to include those, how much does this go up to?

We'd have to look at it. Maybe we can try to look into that and come back with more color next time. We thought we will try this as a first to give you a flavor. But we take your feedback and we look into it.

The next question is from the line of Chirag Shah from Edelweiss.

Congratulations for good set of numbers. My question is for Raman on SMR. So from here on, if you have to look at the growth in SMR, would it be more driven by getting to new customers? Or it would be more driven by products? At least from this 3-4 year perspective, I know camera-based system is something that we are waiting for. But beyond that, how should we look at SMR as far as growth is concerned? And also, how does cross-selling, which is helping us because we may not see that in SMR, the customer profile of SMR and even SMP is slightly different. So how is the cross-selling early days? If you can share some light there.

So definitely, Chirag, I think SMR is looking at avenues of growth. We talked about acquisitions being one part, where are we under-penetrated, which customers, for example, on the [ company ] side. We still have relatively low presence over there. So again, these are all avenues that are open for us. We are very, let's say, focused on being a higher [ risk ] there. So better margins and not trying to just go for growth there, sacrificing ours. So it's quite focused. There would be plays of acquisition. There will be days when the markets where we are not significantly present, so Russia, Japan, South Africa, just again to give you some ideas that there's still a lot of opportunity for us to grow. We talked about Turkey with the acquisition that would give us a solid play in that country. A lot of growth opportunities there we believe we will be able to take advantage of the acquisition. So I think all these things are going to play out in this 5-year period. We are definitely looking to increase the top line with the bottom line, but we're not willing to sacrifice the bottom line for that top line growth. In terms of selling, of course, when you're having one company is very strong with one customer, you get an opportunity, of course, to showcase your entire product portfolio. And that is happening. I think the great gains that SMR, SMP are making -- we're always talking about, which is the new plants that they're setting up? What are the new possibilities to bring in more supply? Do we think it take some of the investments? So I think the reorganization is going to be a big part of that as well, bringing everything into one platform. So again, this is something which is a big growth opportunity for us in this 5-year period, and hopefully, it should play out much better once we have the entirety of the organization done and one platform being there for the ability to cross-sell and increase our customer penetration.

This is helpful. Secondly, on the semiconductor, as far as -- to come back again on that. Between tracking the cars and because we also have PKC. At PKC, where is a bigger challenge at least from short term perspective? Is it more on the SMRC side on the car side? Or is the challenge is more on [ CPCS ]? Or is similar in Asia for both the businesses from the end customer perspective?

So Chirag, again, this is a very short-term immediate issue that you're talking about. Definitely, the car makers are being more local about -- at this time. But again, if you're looking in the short-term situation, yes, there is an impact, of course, because the car makers are saying so. But again, we don't see it playing out in a long period of time. So we would really not comment so much about something that's only going to affect us for a 1 month or 2.

And lastly, from India's perspective, any -- on -- while wiring harness, we know very well. But the plastic components that we have or the polymer product business that we have, if you can share some light as to how to look at the growth in that business? Any new wins that we have done where we can see a significant jump in that part of the business?

The Indian polymer side?

Yes.

Yes. So the Indian polymer company is MATE. Of course, that continues to, of course, as well show good results, grow in the Indian context. The capability has been, let's say, enhanced because of the acquisitions of SMP, SMRC. And all of these are part of our polymer vertical now and very well, being integrated and talking about if you grow together, share capacity, share investments. And again, that's going to be a big part of the reorganization, but being that, that volume that group has won is a key focus for us, and it continues to do well. I think they communicate extremely well together and have already shown a lot of progress, saving of costs and CapEx by being able to share. And we see a very bright positive outlook on the India side.

The growth in mix would be higher than wiring harness -- that developing wiring harness. Is that right assumption from future perspective?

Sorry, can you please repeat?

Chirag, can you please repeat the question?

Yes. I was asking that from India perspective, the growth in MATE business could be far higher than the wiring by this business? Because maybe a market share is also lower over there as compared to the wiring harness side. So can that business really grow much faster? And given the way user polymer is improving?

Yes, Chirag, you are right. This is Chaand here. So that's a hypothetical question. But one of the biggest advantages that Motherson has is we have a lot of international knowhow. So SMP, SMRC and a lot of companies that we have taken over. So MATE is a natural beneficiary of that because he can -- he doesn't have to pay for all those knowhows and technology, if you understand. So in that case, yes, you are right.

Next question is a follow-up question from the line of Basudeb Banerjee from AMBIT Capital.

Will it be right to assume that in the initial comments, you said Kecskemét [ escaloosa ] are at PBT breakeven? Because I remember last quarter, they were almost EBITDA breakeven already.

Yes. No, we were talking about EBITDA. The next goal for them is to be PBT breakeven. They haven't got there yet. But we're hopeful that they will get there in the future as well and the performance continues to improve.

That's great. That means without these greenfield, your margin moved up. So core existing plans did remarkably well. And the second question, sir. If I recall, 3 quarters back during COVID times, Sehgal sir was saying that it is tough to acquire companies in Europe because local government support has been there to get sold out to achieve valuations. So what is the state of that aspect now as such? Is it now normalizing? Or still that support from local governments are there?

Yes. I think the support has kind of ended now that the industries, et cetera, have all come back online. So wherever -- and obviously, it depends from country to country. I mean, for example, in Germany, et cetera, where they're still on the furlough scheme or things like that to support short-term working. So every country is pretty much making its own kind of support systems. Definitely, like we have said that all the plants have remained open on this time. It's not been a complete lockdown where the manufacturing side has shut down. I think all the countries have realized that it's important to keep that going. And wherever people are taking advantage of that definitely they should to keep the thing going. But from our side, all our plants are open. A lot of them have reached pre COVID levels. Again, we highlighted a bit on semiconductor bit, which is a short term effect, but we see that it should come back, and we're optimistic about the future.

Sure, sir. And last question, sir, can you some kind of a guesstimate on the time line for the greenfields becoming PBT positive or breakeven from EBITDA breakeven, sir?

Look, I don't want to comment on individual plants. But I can assure you that going quarter-on-quarter, we will always see a better performance. That's something for our entire team internally as we go through the budget round right now and figure out the next year's plan, which we are doing right now on a very focused basis to make sure that we get there. But with more than 270 plants in the group now, we'd like to keep the focus on the group, not individual plants. I think, as I said, we have broken in with those plants. We are pushing for profitability as part of the natural process now. There are no real issues to be concerned about over there, so I think that, that period is behind us. You should look at the overall growth of SMT moving forward in the top and bottom line, but not only the greenfield plants, but -- now since they are no longer classified as greenfield plants. They are classified as normal plants now, all of them doing better.

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

Thank you all very much. Thank you to the team, an amazing job done. I want to reassure all of you that other things being the same and no untoward thing happens in the coming time, you will see Motherson doing better and better. We are sure that you will also understand that if we do take over companies and pay for that, well, we'll start to fund all over again. And we will go through this because I think that's what Motherson does very well, how to turn companies around. So I hope all of you, your wishes are there for us to take over more companies and to hit our target of 36 billion. Thank you all very much. Bye-bye.

Thank you very much. Ladies and gentlemen, on behalf of Motherson Sumi Systems Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.