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

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Results 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, sir.

Thank you. Good afternoon, ladies and gentlemen. Welcome to the call for our first quarter results of Motherson Sumi, in spite of having lost almost 20, 21 days of production under the unfortunate circumstances of COVID, I think Motherson has delivered very strong results. If you look at it from the perspective that you've lost almost a month, has almost gone without any production, almost globally. And we still achieved INR 16.7 thousand crores worth of top line and our EBITDA and our debt -- this is actually debt to EBITDA has actually come down to 1.1%. Under these circumstances, the Board actually congratulated on these results and said, great job done and we have to be very cautious and focused on the next quarter, the current quarter and the next quarter that is coming. I think all of you already know about the business and all that. So I would ask Vaaman, Pankaj, Kunal and Gauba all of you, applies to also participants in [indiscernible] any doubts which you have in me. And thank you very much, and stay safe. Handing over back to you.

Sir, should we open for Q&A?

Yes, please go ahead.

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

Sir, my question is related to the operational updates that we have given in the press release. So one broader question is whether when we look at the margins for the company, are there any structural factors in your view of these are all operational challenges. In particular, we have shared that greenfield performance has improved. So if you could share some color over there as to where are we in terms of profitability for greenfield because the profitability for greenfield, I understand, has been lower than rest of the business. And therefore, even if the performance improves there, the mix -- plant-wise mix could be negative. So that's one area I wanted to understand. And similarly, for PKC, we've also mentioned about certain operational challenges. So this copper price pass-through, this takes place with how much lag? And higher logistics and product launch costs, if you can share some color on that as well.

Okay. This is going to be answered in 3 parts by Vaaman and then Gauba and then Pankaj.

For the greenfield plants, the [indiscernible] greenfield, I think, they have now stabilized quite a bit, so they become part of our normal operation. So to give you an idea, we talked about, of course, cash commit in Alabama in the past. These 2 have done well and they continue to improve. The profitability leverage and they're on a good path. Quite satisfied in how to look the management team is continuing to build the capability over there and continue to show better performance. Out of these 2 plants, I think Hungary was a lot more effective with the customer let's say, rearrangement of the program mix and extended shutdowns because of the semiconductor shortage and other issues that we were facing. Alabama was slightly less, but yes, also affected. So we definitely did see an overall effect in all our plants, but these plants continue to hold ground strong and we're able to beat with the market as well and could limit the impact. So there is customer feedback that they would like to catch up in the following quarters post this August break, catch up on that lost production. And we're quite optimistic that we're moving into Q3 and Q4, like Vivek said, we have to be quite vigilant and the situation is quite dynamic. But we are hopeful that there we will be more stability in the following quarters. And we are not seeing any different impact on just these 2 plants or something like that. It's been an overall effect in all the plants. And that's for SMP, and I'll hand over to Pankaj sir and Gauba sir.

Thanks, Vaaman sir. Kapil, just to add, there is no structural change in the business model. And then the business model remains the same. As you have seen in the last quarter, the copper price reached the peak. And as Pankaj sir had explained in the previous call that the copper content in case of a commercial vehicle is much, much higher while there is no general rule in terms of the customer pricing lag. But normally, you have 6 months adjustment kind of a situation in the commercial vehicle segment. So if the copper price remain stable, I mean, that is a question. And then you will see a good part of it being recovered from this quarter onwards. Pankaj, sir, you would like to go on sir?

Generally, it's like 6 months average. So let's say, from December to May, it'll start flowing in from 1st of July. That's how it was, different customers, different models, but generally more or less 6 months averaging. And at current copper prices, it would mean that about 80% recovery would be there. And then coming quarters, 6 monthly impacts get negated. And in this period, we also had supply chain constraints, component shortages, which have been for very reasons impacted by the special polymers from Texas, hurricanes, which have destroyed some of the facilities and the suppliers of components have not been able to come back. And from there, as well as we had 2 new orders, one was supposed to start a year ago, but due to pandemic, the launch got delayed and the second launch was to happen this year, both of them finally coincided and with -- coupled with supply chain constraints had a very big impact on us, so -- which also took higher manpower costs and logistics costs, which were -- which are like onetime, which should slowly get eliminated through this quarter.

Secondly, I wanted to also know when we look at the performance for Q2 and Q3 onwards, is the situation getting better? Or how would you like to guide us in terms of this whole issue that we are facing because some of the OEMs have come out and said that they are facing very large shortages as well in Q2. Would you see Q2 to be better or worse compared to Q1? And then are we getting a sense that from Q3 onwards, things will start getting better?

Good question. Kapil your guess is as good as ours. But there are 2 trends which are helping Motherson. One, whatever shortages are there, they are -- it's generally seen that the car makers are pushing it towards the higher upper end models that they have because they have better realization with the same the semiconductors or other things or whatever shortages that they are. But having said that, we all have to be on our toes and the product of Motherson are very wide. So everyone has listened. But if we have more questions on this, then tell me, I'll direct you to whomever you want.

No, I mean we're in August, so you will have some sense of how July and August are looking like, just directionally?

Okay, which product?

No, overall revenues.

Then I have to tell you -- I wouldn't be able to help you on that. But if you're looking for some more then Pankaj can...

Let me rephrase. I mean what I'm saying is that we saw supply chain disruptions in June quarter. So -- Is that a similar problem in the September quarter? Or it could be -- are you seeing it to be a bigger problem in September quarter than the June quarter without mentioning [indiscernible].

August is mostly holiday in Europe. So definitely there will be some relief over there, if you can understand that. And that should allow us to also and all the car makers to also make sure that won't be shortage of any inventories that are mission critical to build up, so that cars can be produced. I think the positive sign is, at least, the demand is very much there, just in the standard way. And even if you look at the IHS forecast and anything that you see the same sort of the reports that we get, it saying that Q3 and Q4 should ease up. So I think definitely, the last quarter has been -- first quarter has been challenging. The second quarter continues to give a little bit because of the holiday session and everything that we have. And that's why I think they are saying that from September onwards, things will get better. But it's a very dynamic situation. It's not something that we have visibility to and we think that the car makers at this point. So we believe just waiting for this August month for the holidays to finish, September to start and that's when we will look at this thing. But we are working in the meantime to breath with the market. Definitely, you've seen the impact of that in Q1. I think, again, we're coming out of a global pandemic. So the first quarter compared to last year, as you can see it already is in a much, much better situation. I don't think people would have imagined that where we were sitting last year. So things -- we are optimistic. Things are getting better and being a better and we will benefit of the situation is when things open up in September till then it's your guess is as good as ours.

[Operator Instructions] the next question is from the line of Nitin Arora from Axis Mutual Fund.

You touch base on the model part that a lot of the OEMs want the higher-end models to be made in the scenario of chip shortages are there. So just continuing with the Kapil's questions, and sorry for that. I mean just to understand one more thing on it. If I have read this correctly, more of the higher-end luxury cars are getting made across the plants versus the lower end. And given your cost would have not moved quarter-on-quarter, you cannot shut down the plant because it's a very dynamic situation. Cost cannot get cut on a quarter-on-quarter basis. Is it more of mix issue also which has -- I mean the cost would have been higher and the higher end getting made, lower end is not getting that much made and the demand also is a little weak in the lower end versus the luxury. So cost would have been hitting you more. Is that the right way to look at it? And this mix issue should start getting stabilized in the second half?

Well, there are 2 moving parts in your question. So very difficult to hypothesize as to what your real question is...

Okay. I'll put it this way, sir...

Yes, go ahead.

Okay. I'll put it this way, sir. That if higher-end cars, higher luxury models of, let's say, any of your clients would have been made more because a lot of the OEMs are saying that because of the lower chip shortage, we are making the higher-end models because the demand is very strong at those higher-end models. And at the lower-end models, the demand would have been less. And I'm assuming your cost doesn't get a portion according to the model which we are making, that must be at the plant level only at the plant-level cost. So I'm just trying to understand that once situation normalizes, when the chip shortage goes away and as you rightly said, it's anyone's guess. So I'm just trying to understand more of a question, is Q2 a cautious part is just on this aspect. Nothing changes structurally.

So it depends upon the customer, but look if you look at the basic difference between what is a smaller car and the bigger car, you can't say the smaller car demand is not there. The demand is there, but just that the customer allocates this more towards the higher end thing because he gets more realization in the same effort. So it's just related to that, I'm not saying that the small car makers are going to go out of business.

No, I think I'll just give you some more color. I think just to understand that we're not taking a static part, right? We are making insulation panels, door trims, wire harnesses, mirrors, so there is a lot of different products that are really going in and that's why we've always said that, look, we don't believe in just looking at the margin, we believe at looking at ROCE because even some of the high premiumized vehicles for us naturally moved, bought our parts for that. So you may think that the margin looks lesser, but actually, the return on capital is higher. So it's a very complex question which you're asking because of our diverse portfolio, if you look at our customers split, if you look at our geographies split, we're extremely diversified. So whatever you're trying to infer do not have a direct impact was because of the advantage that we have of diversification. And as you can see that even though the volumes perhaps have come down substantially in the OEM side, our volumes have not come down as in the direct correlation of that because of the diversification of products that we have. So generally, what you're trying to say does make sense but it's not applicable in Motherson because of the high diversity in parts and customer portfolio and locations that we have. So we would need some really 3D computers to compute which models, because you have to understand we're supplying to pretty much all the models out there. We have some part of the other going in. So it has to take the pressure off when certain models are not doing well, even if they are in premium models or lower end because we have access to the other models as well.

Okay. And second, in terms of July and August, versus an average of last quarter, what's the visibility OEMs are giving in terms of production, I mean, if you can throw us some light in terms of in this situation. So for example, if earlier the production visibility was OEM was giving 30 days. And I'm just putting a raw example, if you can help us in that way that right now, the production visibility is less than 10 days because of this chip shortage or it's closer to an average a month. So if you can throw some light on that, that will be really helpful. [Technical Difficulty]

Can you hear me now? Is it without break now? So there's no change in the way the customer is giving us the outlook. So they were giving us 30 days, they are still giving us 30 days. So there are changes that happen within those 30 days which is dynamic and what we are seeing. So it's not that they stopped giving us outlooks, but we are also saying, look, the chip situation is a bit dynamic. So what we are giving you for 30 days is changing, they're giving it. So we give 30 days, they give a week, they give daily. For us, we're also receiving every 2 hours for some of the exact specs that we need to make. So there's more uncertainty in what's changing. And that's what's difficult for us to plan around because you can imagine the workforce's sector, you need time to be able to be more flexible, breath with the market, rearrange shifts. But if you get a change in the morning shift for the night shift, it's very difficult to go around and change all of that. So it's a dynamic situation. And again, it's not something that is usual and what they are seeing is that this should settle down as we move into the next quarter.

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

So my question is with respect to SMR and SMP. See, when I look at sequentially the revenue that SMR, SMP has done is far better than the volumes that your and their customers have done at their end. So is it that because they have their focus on premiumization, our value addition content has gone and it has helped us? Or is it driven by more bought-out components for us? How should one look at it? Because your revenue profile and as well as your margin profile seems to be better than sequentially as compared to your customer?

Again, very tough question here, but I'm sure Vaaman has a good answer for that. This is one additional fact, which actually alludes to the fact that premiumization is happening. So that's what we have been saying. But anyway, I think Vaaman go ahead.

I mean again, it depends -- it's hard to give you an answer when you don't tell me which customer you're looking at, which product. And again, you have to understand that the customers in SMR and SMP are supplying to, there are different platforms. It doesn't -- the same platforms are not being supplied by SMR and SMP. It depends on that location. It depends on how those things are doing. SMR has a lot of more business, for example, in Korea, which SMP doesn't have. SMR has much more business in India, which Korea doesn't -- which SMP doesn't have. So it's very difficult to look at SMR as compared to SMP because, again, the number of bought-out parts definitely the premiumization is definitely happening. And that business has been with us also slightly lower than SMP. But difficult to compare SMR and SMP. But the SMR management team is very, very the entire SMR, the backbone integration that we have, the entire variants and plastic parts, actuators these all parts that we are doing ourselves, in SMP, there are still more bought-out parts. So I mean, it is difficult to compare the 2, but SMR as the team has definitely congratulated that they have navigated this terminal time with a lot of control and being able to breathe much after in the market.

Second question is on this bought-out component, [indiscernible] this components that you have that [indiscernible] a lot of fitment would be going in, in cockpit or something like that. But why generally that the bought-out component share goes up when there is a higher premiumization in our revenue and vice vera? It would be helpful.

So because there are camera systems, for example, in -- we talk about mirrors to give you a very simple example for you to understand and seeing the low entry level cars are not having as many camera systems or actuators are powerful, they're more on the manual side. They don't have EC glass, which is the reflective glass, which is a bought-out part. So it depends, as the summer is also going and doing back to location, we started making some of our own glass, for example, in certain areas where it makes sense, some places will buy it. So if we look at those examples of where it makes sense to do it, some of them that are IP protected, for example, the EC glass is heavily IP protected. It's very difficult to break into that and you buy that part. But in SMP, there is that much more part because the parts are much bigger. So there are a lot more child parts and some of the child parts are smaller and something that they were well integrated from the start. So again, very difficult to compare SMR to SMP, but SMR is quite vertically integrated, and we do have a lot more control over the entire bought-out parts at least on the lower side. As we go to premium, of course, like I said, EC glass and all those kind of other electronics, which we have not presenting, they're all bought out parts in that sense.

But even in SMP, can we presume that as premiumization happens, the bought-out component tends to increase or in essence, it is largely stable because child parts would be common, whether you make the high-end version of a client or a, say A3 versus AC, the child part would be largely similar, in SMP?

Yes, sure. No, you would add more sensors, the radars, cameras, grills. So there's a lot of parts over there that as you go more premiumization of those parts, you're also doing more bought out. Because if you look at it, these are more outside facing parts so the more electronics, et cetera. If you look at the premium vehicle, you have a lot more sensing technology than some of the other ones. But yes, the painted component, the child part is plastic parts where that is most of the difference comes more in the electronics features.

Next question is from the line of Sonal Gupta from L&T Mutual Fund.

Sir, just wanted to understand your statements around the PKC that you've mentioned in the presentation, and I think Pankaj sir has already talked about it. But could you give some more color? I mean like primarily trying to understand this new product launch-related costs. So I mean, like is this a regular feature for you? Or is this something really a one-off. I mean just trying to understand that -- or are these some newer facilities where these products have ramped up and therefore, there is a higher cost per launch-related cost?

Both, actually. But I'd give Pankaj the chance to explain. I think just understand that under these circumstances, we actually transported almost about 400 people from different parts of the world, majority coming from India to serve wherever this problem happened. It's a one-off thing. But Pankaj if you can explain it quickly, then I think everybody understands.

Sure. You mentioned that -- sorry, can you hear me, sir?

Yes, yes, go ahead. Yes.

So as I mentioned earlier that we had got new orders. These are the OEMs and the products which we were not supplying earlier, those products. And one launch was to happen a year ago and the other one was to happen at this time. And somehow due to COVID challenges, the launch got delayed and both launches happened at the same time. So we got into challenges mainly because there were supply chain constraints, there were component shortages during this period and which compounded the problem. And that's why we had these as a one-off. These are not -- your question, is it normal, no? These are not normal and that are not supposed to be normal because both the launches would have been about a year difference, 12 months difference. So one launch happens and then the next launch takes place. But this compounded the situation and that's why we had these additional costs which [indiscernible]. Supply chain constraints on the other hand, the supply chain constraints are still continuing, and we do still see supply chain constraints happening. So it's not just linked to -- this launch has got compounded with that, but otherwise, supply chain constraints have also impacted our efficiency in other parts of the world as well.