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

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Results Conference Call of Motherson Sumi Systems Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Vivek Chaand Sehgal. Thank you, and over to you, Mr. Sehgal.

Thank you very much. Good afternoon, ladies and gentlemen. In a very tough atmosphere, I think Motherson has tried very hard to come up to the expectations. I think the general headwinds continued very strongly in the second quarter also. But definitely, there are a lot of good things that have happened also. You've seen that our standalone results are very good for India. Our order book is again very robust. We do not see any headwinds as far as the demand for cars are concerned and vehicles of choice are concerned. So I know you would be very anxious to ask questions. So please go ahead. I stop to wait for your questions. Thank you.

So should we start the floor for questions and answers?

Yes, please.

[Operator Instructions]. The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services Limited.

My question is on SMRP BV, particularly. So what are you picking up from your customers with respect to the chip shortage. Are they indicating any improvement in production schedule for third quarter or second quarter and beyond?

Thanks, Jinesh. Look, the situation of the chips are improving. I think not so strongly as what one would imagine. But definitely, there are improvements. The numbers from the carmakers actually show that. But one would have expected, even larger allocations to the automotive segment, that it appears that every segment is at the moment having a huge demand of semiconductors. So gradually, yes, it's improving, but not to what desired levels would. Anybody else would like to add to this? Vaaman?

No, baba, I think you've covered it. The worst is behind us and hopefully it picks up from now.

Okay. And as a follow-up on that, the question to Vaaman is, primarily, given that OEMs have been optimizing the supply side issues with respect to improving their own mix. So have you seen similar benefits in SMRP BV with respect to enrichment of mix and in turn lesser impact, at least on the revenue side. Obviously, operating deleverage has its own impact on margin, but have you seen enrichment of mix?

Look, we are serving all the platforms. Yes, we do have a lot of exposure also to the premium platforms. But that's where our diversification strategy 3CX15 has really helped us to absorb some of this impact. As you can see in the presentation, the results, we showed the volume drop on -- that divides by the industry at large. But on our results, we were muted in that manner. So definitely being diversified, we'll be able to serve those different industries, we've been able to push in some of that in time.

Okay. And the second question is for PKC. So we have indicated we continuously impacted by elevated costs due to new launches. So what is the sense you're getting by when we should see normalization from the new launch cost impact perspective. Obviously, supply side is an additional problem here as well. But from meeting new launch programs after impactment, that should go away.

So I think it's a combination of new launches and as well chip shortages, et cetera. But I'd request Pankaj to answer this, please?

Jinesh, this is Pankaj here. So the new launch costs have started additional -- exceptional costs have started to recede. And by the end of Q2, they've receded to a great extent.

Okay. Okay. Got it. And lastly, any update on the ongoing restructuring? By when do we expect NCLT approval for demerger of DWH?

Jinesh, we've waited patiently two times. Once they said, they had outage of WiFi and then the other time, the follow through it was a mix item, but they still have to go for meetings. So the short [indiscernible]. Hopefully, 22nd of November, the court will make a lead and take up our case, and we hope that, that then sets the ball rolling. So that's what, as of now, the best information I can give you. Kunal, you want to add something?

Assuming we get to us around 22nd November, we hope that before the end of this financial year, the listing of MSWIL will be completed.

And we are all waiting very anxiously that we hope that we can start to roll out Motherson 2.0 and start the new journey that we want to have with our shareholders. So definitely, we're also waiting very anxiously.

[Operator Instructions]. The next question is from the line of Binay Singh from Morgan Stanley.

Just continuing on one of the questions asked earlier on PKC. Like when we look at the PKC run rate, it is largely similar to what other companies were doing last year in the December quarter. But the EBIT is obviously a lot larger. So could you give us some number on what exactly was the new launch related hit this quarter? And beyond that, was there any commodities at or mix impact with China slowdown or something that impacted EBIT?

Of course, Pankaj will answer this question. But very difficult to compare 2 different time zones in these very unusual times. So one must take what are the current problems that were faced in the last quarter separately from that comparing it with the last year last quarter. One -- sorry, Pankaj, can you answer that? And I think mostly onetime cost, isn't it. It's not every quarter kind of thing. Pankaj?

Yes. So there are 2 things in this. One is that last year was another story because at this time, the market had been growing and new launches have taken place. So it's on a growth path where more capacities get created to cater to the customers' requirements. And also in this quarter, China saw a very big dip in the volumes because before this quarter, we would have seen that China was growing at a very fast pace and the Euro 6 implementation that has fall in. And in terms of exceptional costs on the new launches, which we have incurred in this quarter, they would be ballpark about EUR 9 million of exceptional costs.

Okay. And so then I think the -- there's quite a sizable impact for other segments that have actually hit EBIT, it seems like that. Just the second question will be on the raw material side. In the press release, you mentioned that there will be a gradual pass-through. Could you remind us what kind of raw materials pass-through contracts do you have, both in India and overseas?

So I would encourage Gauba to take this question. But by and large, there's a lag. It's all about lag of 3 months to 6 months, depending up on the customer. Well, Gauba, can you kindly elaborate this?

So what happens is in terms of the copper, the adjustments are done either 4x in a year or 2x in a year because it does not necessarily matches to the calendar period, what we count, depending upon the customer convenience. So this lag changes is coming down and it's applied consistently. So when the prices are going up or going down. So in an increasing market trend, which was the case, or sometimes even in September, October, we still saw some increases. This becomes an impact on this. But as the raw material prices are set at a high level, but -- and the steep increases, which we saw earlier, is not there. So the impact is getting lesser and lesser the lag.

And sir, this will be applicable in global businesses also, in SMRP BV and PKC?

In case of PKC, yes, it could be -- but frequency to twice-a-year or something like that in some of the businesses. In case of SMRP BV also, there could be some contracts where it could be based on a negotiation, some contracts where it will be time bound.

This is very helpful. Lastly, just Tata Motors in their recent presentation has highlighted Motherson as one of the suppliers on the EV side. Could you share what exactly are you doing with the Tata Motors on this? Which part of business in India is working with them, which segment?

So while we don't answer customer-specific details because we are tied to a lot of secrecy and things like that. So I am sorry we will refrain from answering this question. But we have said it then it's already public. What do you want us to say we supply this, we supply that, so there are multiple things...

I just wanted to know more that is it wiring harness or is it a non-wiring harness related content in India?

I am sorry I can't elaborate much over there. Pankaj, are we -- we are bound right, not to explain what future model [indiscernible].

Yes, sir.

The next question is from the line of Siddhartha Bera from Nomura.

Yes. Sir, my first question is on this order book. We have seen some moderation in terms of the new order wins to EUR 2.1 billion in the SMRP BV. So I just wanted to check, is there an impact of chip shortages, even in the orders also, or on a normal basis, it could have been higher? So some of your thoughts on that?

Vaaman, do you want to take that?

Sure. No, there's no -- these are new orders that have not started yet. So they will start at least 2 years down the line. So this has no correlation to order books. This is in fact the virgin order book that we have. And we are all assuming that in 2 years' time, this problem will be long past gone. So there could be timing issues, some new contracts could this will be coming up in this quarter, but we don't see any significant downward movement because of the issue. This is all the order book that will start in the next 2 years.

Understood. And if -- I am just basically focusing on the order wins, it's about EUR 2.1 billion because our EV share is going up, it has even gone up as compared to the last reported March quarter. So would it be fair to say that a large part of this order wins will be EVs only? And the ICE order book will be much lower?

I don't think so. I think it's a little bit dangerous to second-guess the customer. But the wins on electric vehicles is very, very valid. But the rate of changeover is much slower than that. So we now -- we are seeing similar models having 2 options of engine. So in that sense, we see both. But we don't really -- cannot really say who gets what the market wants and what the people are buying.

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

Sir, just wanted to understand on the working capital. I mean like you've mentioned that because of the irregular production thing, it's gone up. But I mean, wouldn't -- I'm just thinking that in terms of -- given that the production is lower this quarter, won't be working capital requirement to be sort of lower this quarter given that the, I mean, whatever credit period you're extending to the customer. So just trying to understand why the step-up in working capital in this quarter on a sequential basis?

Gauba, can you take that, please?

Yes, sir. Sonal, thanks a lot. There are 2 aspects to be aware of. Number one, as you know, July, September period is the summer holidays for Europe. And you can look at all the quarters, except last year because we were coming out of COVID situation in '20. There is an increment in working capital, which gets dropped because of the summer holidays. The second reason, which I think we have tried to explain, that there have been unplanned disruptions. While -- when we look at the forecast, the forecast had been that the production would be high. So as a consequence, the procurement of the inventories, and this is very much clear from the balance sheet also, that the inventory levels have gone up, which could also be -- which will also be partly because of the higher commodity prices. You are right in terms of receivables if the sales are down, though in our case, on a consolidated basis, sales are down only by 4% compared to same period last year, the receivables becomes less.

Got it. Got it. And just in terms of the other question I had was we've seen -- while we've seen a very commendable performance across in the European operations, despite the decline in revenues and production. But we're seeing a sharper drop in SMR in terms of EBITDA margins versus SMP. So just trying to understand as to if there's some one-off in SMR?

Sonal, I would just want to add one thing to what Gauba just explained. Also the predictability of the order book, which the customers are giving us, the orders that they're giving us are for productions, has a little bit of uncertainty to it because of multiple reasons. So the general inventory holding of the Motherson Group is actually on the higher side. And we have allowed that to happen because that allows a little bit of flexibility. But on this one, I think, Rajat can you please -- Rajat Jain, the COO of SMR, is able to answer this question, please.

Yes. Sonal, see on SMR, again, what perhaps has to be understood is that we are present in all the markets with all the OEMs and also in all the segments. So what you see as a sales drop is more reflective of the overall global vehicle volume drop that has happened. So you see the vehicle volumes have dropped by about 20% from last year to this year, and we have an 18% drop in SMR. So this is, I think, because of the spread that we have and the market share that we have in SMR. And I think the bulk of the impact is coming from the sales drop. I mean, obviously, there are other headwinds that we've been talking about, like the commodities and their freight issue as well. But I think the most significant impact is coming from the sales drop. So I think if the situation on the sale side starts to improve, we will start to see the gains coming back very quickly.

Got it. Got it. And just last question. I mean on an overall basis for the international operations, would you be able to -- I mean like highlight, I mean, what portion of the commodity cost has sort of been passed on? I mean, like -- or is there a -- I mean, what sort of an impact are we incurring because of the -- I mean, like because of the resetting is still some time in the future. I mean like is there any way to quantify that?

So very difficult to answer that question because of the huge variety that we deal with. But by and large, our team is very well entrenched to make sure that they get back every venue that we have. But here and there sometimes time delay and all that. And anybody else would like to add something to that? But I think [indiscernible] impact because so many different raw materials, so many...

Sorry, so just on a -- like on a company-wise basis for SMR, SMP, if there is a way to quantify, or PKC, I don't know.

So the maximum consumption of this year have been -- and at least we are all working together with the customers to get some -- to get that.

[Operator Instructions]. The next question is from the line of Vibha Batra from FairConnect.

My question is again on the raw material price hike, the lag that we have. You've highlighted the increase in copper prices in one of the slides. So in a normal situation, when the raw material price hike is not very significant, it's okay to have a lag. But when the hike is very, very significant, which we have seen in recent times, is there a merit in tightening our risk management policy or the underlying contracts with the customers, where we are a significant supplier so that this pass-through is quicker, and it is maybe milestone-linked?

Definitely all efforts have been there, and I must say the customers have been very conscious of the fact that the increase of copper pricing had been very, very steep. But I would ask Pankaj to help me out on this. By and large, we are getting huge support from the customer base. So generally, that's the case. But Pankaj, would you like to add on this?

Yes, sir. Yes, and customers are very supportive, as Mr. Sehgal said, and it's -- since these contracts are long-term contracts. So even when the prices drop down, then the same contract continues, but within certain geographies, we have had more issues because it was also impacted together with currency or any other issues. So customers have been supportive and also we negotiate and come to certain conclusions wherever there is a need.

But despite this, your margins have actually shrunk, despite customers being really supportive.

Yes. But what we have mentioned here is that as the prices become stable, then the gap between the compensation, which is based on average of past many months, it starts to get receded. So it just starts to reduce. And that is what we are seeing now. But the gap is still there, but the gap is reducing.

Okay. So on a steady-state basis, what kind of EBITDA margins can one expect?

We don't guide on EBITDA margins.

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

Sir, again, coming to the raw materials contract, given the revenue increase that we have seen. So generally, in this kind of environment, is it right to assume that the lag or pass-through could be even as high as 6 to 9 months also, because this -- probably we have not seen this over last decade. Post GST, this kind of side help has not been seen. So the lag pass-through effects could still drag on for a longer than the normal discussion that we have as in normal circumstances. And this question is both for India as well as for our international business.

Chirag, you have to have patience when you're supplying to carmakers. They have a lot of challenges. And we can't behave like a crying child or something like that. We have put in our point to the customers. Our bulkers also reiterated that the customers have been very, very supportive. I don't know why we are assuming that 6 to 9 months way long and all that. But normally, if you -- you know our company very well for a long time, always the March quarter, we will have the maximum adjustments coming in. Also, just remember, many of the customers today take it that they will have [ forward ] contracts. So they're buying copper and all these things at [ forward ] contracts. So we have a stable supply of that. So one thing that's in play there and new ways and needs are happening, which are actually reducing it. Pankaj, you want to add something here?

No, sir. I think you have covered most of it. No.

Second question I had both with respect to PKC and China. Pankaj sir referred that there is a slowdown in China post Euro 6. Is that downward adjustment done or there is still scope of some negative surprises on the demand in China? And also, given the tender demand environment in China, the way they're taking steps, is there a risk in general to the optimism around the volume recovery in China?

Chirag, can you please repeat your question? The voice is not very clear.

I'm sorry for that, Sir. So I'm saying that on China, first for PKC on the CV side, you mentioned that there was a drop in volumes in China post the Euro 6 implementation. So is that adjustment done or -- and can we expect the momentum to review? Or if you still -- there would be some lingering effect of that downward adjustment that you're referring to?

So what I hear from you, you were saying that is that the volume drop has ended or we expect it to linger on for more time? Is that your question?

Yes, yes.

See, it's not very clear. So it is month-on-month. So even when the volumes went up, they were not predictable that the volumes will reach that high in China. So we watch the situation very carefully. What we do is have short-term, medium-term working and also working together for growing the market and growing with new customers as well. So that's how we are playing it out. I think in the next few months, we would come to know how the market grows.

Yes. This is helpful. And if I can just squeeze in one last question for India [indiscernible] China?

Yes, there are different things which are playing in China. It's in [indiscernible], I mean very difficult to figure out what's happening -- really happening in China. But think about it, they are going to have the Beijing Summer Olympics -- Winter Olympics over there. There's a lot of issues on coal and power and all that particular things with it. So a lot of the regions are there, which are affecting what China is doing. But we have learned over our experience that we don't really question too much. Just wait and see, things fall into place at the right time. Most of our brand cultures are with the truck makers itself. So we are not overtly worried about taking care of, if you understand what I am trying to say.

Sir, one question for Gauba sir. In standalone, there is a huge jump in other income. So -- but it is not necessarily getting expected in consolidated in that way. So is there any intercompany adjustments or something like that because it was worth INR 222 crores and generally it is rendered anywhere around INR 40 crores, INR 50 crores in standalone items, stand-alone basis.

Yes. So Chirag sir, this is a dividend income. So in our presentation also given. In the cash flow also, it is shown as separate line item.

Chirag, we actually made a special mention that there is general income, which [indiscernible]. So hope you see that. Go ahead, please.

[Operator Instructions]. The next question is from the line of Jay Kale from Elara.

I joined a bit late. So sorry if this question has been asked. Just if you can throw some light on the housing cost fund raise. I mean the NCD that you have raised a few days back, what would be that for? If you can just throw some light on that.

Okay. Kunal, will you take that on?

Yes. Jay, the INR 1,000 crore approval that we have sought is an in-principle approval from the Board. As and when we launch the transaction, I guess, you will have more color on it, you will proceed the sector.

Understood. And also, if you can maybe just qualitatively talk about how are you seeing the inorganic opportunities coming through. We did mention during the COVID times, things that become difficult because of the fund help from various governments. How is that situation panning out currently? And where are we in that cycle? If you can just throw some qualitative color on how things are right now versus 1 year back?

Well, I think almost all the help that was being given by the government is almost dried out. And true to our what we had guided you earlier. The quantity of companies, which are getting out of business is appalling, it's really a lot, and huge opportunities for us. That's all I can tell you at the moment. Kunal, you want to add something here?

No, sir. You're absolutely right. The pipeline is extremely, extremely strong. It hasn't looked strong for a long time. So as you rightly said, the COVID special situations are being withdrawn, many of the assets, the difference between the men and the boys are becoming more and more visible.

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

So my first question is on financial. So interest costs seems to be a little higher than on a quarter-on-quarter basis, which we expect it to kind of trend down. So is there any one-off setting in the interest cost line item you guide us on how this we should be expecting about it?

Nishant, your voice is a little bit muffled. Which point are you talking about?

Sir, I was talking about the interest cost line. So on a quarter-on-quarter basis, there has been an increase in that. So is there any one-off setting in that cost because we were kind of expecting this cost to trend down with the refinancing that we did. So can you throw some light as how we should think about this going ahead?

Now Kunal and Gauba, could you just take that please? Kunal first.

Kunal, you are taking...

No. Go ahead, go ahead, Gauba sir.

See, Nishant, I think it is in the similar range because the finance cost also increased the exchange fluctuation. So it is INR 131.32 cores. And in the quarter 1, we have also distributed the dividend of about INR 500 crores, which means to that extent, there will be a 1-month earning additional for the group, which would have been there, which would get settled as we move forward from the cash approvals.

So Gauba sir, so in second half, we should expect this to trend downwards, I would presume.

Market grows, we will grow the sales. We have more [indiscernible] spending up on what a particular point of time the borrowings are based on the market operations.

Understood. Understood. My second question...

Rate of -- average rate of borrowing has come down, that I can say.

Okay. Okay. Okay. Yes, that's what I was kind of thinking around. Yes. Second question is on the order book. Obviously, we can see that even your incremental order share of electric is going up and globally, electric as a share of sales is also going up. So can you give us some construct as to where your SMRP BV revenues contribution coming from electric? Has it touched early single digit, high single digit? Is there anything that you could throw some data point at us?

Sorry. On the order book, we can't give any details about this. We just calculate the percentages and put it in and seal off, and the customer appreciates our ability not to disclose much because their own strategy and it really depends upon all this. So I would appreciate if you understand the sensitivity for us not answering this question.

So sir, I don't know if -- I was referring to the revenues of, say, the first half of the year. So is that not possible for you to quantify?

Sir, your voice is cracking up. I couldn't hear you. Can you repeat it, please?

So sir, I was not asking from an order book standpoint. I was asking from the revenues that we reported in the first half. Would it be possible to look at electric contributions because you are already highlighting the same for order book, if you can -- if that is available. If it's not available, then it's fine.

I don't think we do that calculation. I don't know you would like to add?

Nishant, we can come back to you. We don't have it at this time.

Nishant, if it helps you, the top 10 electric vehicles sold in the world, I think, we have supplied to 5 of them, if that helps you.

[Operator Instructions]. As there are no further questions from the participants, I now hand the conference over to Mr. Vivek Chaand Sehgal for closing comments. Thank you, and over to you, sir.

Thank you very much. Thank you very much for your questions, and I hope we answered them to your satisfaction. We are limited in our liberty to disclose the facts, especially in the new orders and all that, because it exposes the OEM's strategy, what they are thinking and what they're doing. So please bear with us on that. We are anxiously waiting for this NCLT to hear our case and give the final notice. This is the third time that they have given us a date. Hopefully, the judge will [indiscernible]. And I can promise you, we will start what is called Motherson 2.0, hopefully, within the near -- within a month, 2 months after that NCLT approval. We should be in a very interesting position. Watch out. I think we have said the third quarter, we still see a lot of headwinds and all that. So our teams are going to work very hard to do better and better. And I hope and pray that you take care, all of you, your families stay safe in these troubled times. Wish you all the best. Thank you very much.

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