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

Ladies and gentlemen, good day and welcome to 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. Good afternoon to all the analysts and investors who have joined us today. First of all, a very happy new year to all of you, and I pray and hope that all of you are keeping safe in these uncertain times. We are very excited to join you today to discuss the next chapter of the Motherson story, which we call Motherson 2.0. We are bringing all the Motherson together by simplifying our group structure at the behest of all the investors and also my specialists, my analyst friends. An improved structure will help us to grow further, create greater synergies and build more value to our stakeholders. We would like to thank the shareholders for their immense support in approving this transaction. We had an overwhelming positive response to this transaction with over 99.4% of the shareholders voting in favor of this in April '21. In this journey, we are going from 1 listed company, Motherson Sumi Systems, to two, Samvardhana Motherson International, which we, in short, call SAMIL, and Motherson Sumi Wiring India, which we call MSWIL. We have a good track record of providing returns to our shareholders with a 34% CAGR returns since listing in 1993. The best is yet to come. Each of these companies have a very bright future with exciting growth opportunities. In fact, we have performed 32 -- 35% year-on-year for the last 28 years. Raman?

Thanks, Vivek. SAMIL is already one of the largest auto component companies in the world with nearly $9 billion in revenues last year. With the restructuring, SAMIL will now own 100% of SMRP BV and still hold 13% of MSWIL, thereby being able to gain benefits in the best of both worlds. In addition, the new nonautomotive divisions like aerospace, health and medical, logistics, IT services will all come into SAMIL as well. India continues to be a primary market for us and accounted for 20% of revenues in H1. Profit-wise, this level is a bit higher at 40%, which, unlike many of you, believe is less than 20%. In addition, there are businesses, such as lighting and electronics, precision metals and IT services, which are also very much India based and focused. We believe SAMIL is well positioned to benefit from the global mega trends, such as the automotive electrification, across our product portfolio. Sales for EVs are already over 1,100 crores in H1, which is about 3% of our global revenue. In addition, we have won orders for EVs across all our key business segments. Overall, we are very confident that we'll keep reaching new heights. With this, I will hand over to Mr. Mital to discuss MSWIL.

Thank you, Raman, sir. Motherson Sumi Wiring India, MSWIL as we call it, will be an India-focused joint venture with Sumitomo-san to provide the latest and most relevant products locally in an expanding and fast-changing market. It draws from a strong parentage from both SWS and SAMIL for access to technology, market insight and localization strength built over several years. Our wiring harness business in India is a great example of increasing content per vehicle. It is well positioned to gain from industry mega trends, including the transition towards electrification. The revenues have increased 400x in the last 11 years when car production was up 30% in the same period. It has found its position as the most trusted partner with its customer. It has and will continue to invest in people, technology and facilities ahead of time to remain aligned with future needs and continue its efforts to remain the most deferred partner of our customers. I hand over to Chaand now.

Thank you, Pankaj. With Motherson 2.0, we are ready to continue our mission to be a preferred solution provider for our customers in a rapidly changing, unpredictable world with deep faith in our ability to shine. At the same time, we have our leverage levels wholly under control with an ability to tap into both debt and equity markets as need arises, which makes us well positioned for growth both organically and inorganically. Overall, we firmly believe that the best is yet to come. I hand over back to the MC for any questions and answers, if you have any. Thank you.

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

Wish you a very Happy New Year. My question was on the new businesses that we have talked about, lighting and electronics, precision metal and modules and some of the other ones like aerospace, logistics, health and medical, et cetera. So if you could just talk about, from your point of view, when we look at Vision 2025 where for SAMIL you see the highest revenue potential. And I do understand if you are looking at inorganic opportunity as well. So you can give some color on that, that -- whether you are including that or not.

Look, our targets for the group already include all the companies together. So whether it is MSWIL or it is SAMIL or it is those which are not part of Motherson Sumi Systems or Motherson Sumi Systems Motherson Sumi Systems Limited. But yes, I think we are very excited that the inorganic opportunities will be -- are increasing dramatically. As you see, the COVID has carried on now for the second year. In fact, the third year has already started. And we still don't see the end to this particular happening. So I think, yes, Motherson will get today a lot of opportunities for acquisitions also. But also, the growth per vehicle will continue in SAMIL for sure. But value enhancers, as Pankaj already alluded to, the electrification, the value enhancers for hydrogen fuel or whatever is your fancy, those particular things -- we'll have to deliver technology together with Sumitomo-san. So I think we will do quite well on that. Pankaj, Raman, would you like to add something to this?

[indiscernible]

[indiscernible]

Yes, go ahead, Raman, sir.

Yes, I think Vivek covered most of it. I just think that for the new businesses that we've already announced, the acquisition in aerospace, and we have good -- also the -- obviously, we have gone through a major restructuring. Now that the restructuring and everything has been done, we pretty much cleared the path for us to grow in these new verticals and, like Pankaj said, the best is yet to come. And now we are kind of -- we're free to go after some of these opportunities. And of course, we will only go through with them if we find the opportunity to get 40% growth.

Okay. So -- and if you could talk about one of the acquisitions that you have already done, CIM Tools. If you could give some color on what is the vision with which we have done this acquisition, what is the potential and value addition possible over here.

So are you talking about CIM, C-I-M?

Yes, that's right, sir.

Okay. Raman, can you take that?

So we had a specific call on that when we announced this acquisition. It was our first step into this aerospace division, and we said it's very important for us to showcase our customers that we are serious about this. And this is, again, our first acquisition that we have done which creates the path for much larger ones to happen in the future and also to establish ourselves as an existing supplier with the large aerospace players. We believe that in a 5-year period, we can grow this business substantially and also deliver a 40% growth. More will be disclosed once this acquisition is closed.

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

I Wish you a very happy new year. So my first question is regarding one of the slides on wiring harness of SAMIL, where you mentioned that you have got orders on the EV buses as well as passenger vehicles in India. So globally, EV buses, we understand that SAMIL could -- would have got it through PKC. But just to understand on the passenger vehicle cars in India, will -- shouldn't that be happening through DWH? Or is it that you've written that in the SAMIL portion because you have a proportionate share in DWH as well and then DWH would have got those orders? If you can just clarify our way forward for EV passenger cars in India for the wiring harness piece. So which entity would be getting those orders?

Pankaj, can we take this?

Yes, it's MSWIL for India. And you're right that when we consolidate it in a way when we put it up, it is as the whole company and -- since it's owned 33% by SAMIL. So that's the reason why it was put together.

Understood. Fair enough. And just on the second portion, also you've mentioned that on the mirror business, you have a 1/3 -- more than 1/3 market share in the EV side of it as of today. So if you can just provide some color that it -- this would be a little higher than your current market share in the mirror side, right? I mean you would be having around 24%, 25%-odd market share, if I'm not wrong, on the high side of it historically. So what differently are you doing on the EV space? Or is it just too early to conclude that you will continue to have such a high market share on the EV space since there are more OEMs coming into this space? Or are you -- there are some different solutions that you are supplying to the EV side of it because of which you are able to garner higher than your company average market share for the EV side? If you could speak just a little bit upon that.

I think you're answering the question also yourself. So are you giving us options? Are we playing KBC or what? Look -- on the lighter side. So I think what is important for you to understand is that there are a lot of new players that have come, and that's why the market share might seem to be different. But I'll still give it back to my expert commentator. Mr. Raman Singh, can you take this? Or Rajat? Raman?

Yes, I can take it. And if you want to add anything, feel free to add. Definitely we want to be first movers to supply to the electric vehicle manufacturers. It was a key focus of ours because we also knew that we'd be more open to introducing a lot of new technologies. So we have, sir, definitely been there since the start, and we are growing. So definitely, as the other carmakers are catching up and introducing more electric, you have seen SMRP BV's order book also in the high 20s for electric vehicles. So this will continue to change as the electric gears up. But definitely, we have a very attractive portfolio for the electric manufacturers, and that's why we have already had a headstart in there. And we aim to continue to lead that segment.

Yes. So maybe I can add a little bit from here, Vivek. Add a little bit here. So look, I think as Raman said, definitely, we had the first mover advantage. We are there within the largest electric carmakers. And we are also adding more and more new EV OEMs into our portfolio. I think that is a continuous pipeline that we have. So we have gone out there taking the contracts, delivered. Well, there are different expectations of these OEMs as well. They don't have the technical capability to deliver the design themselves. So they're looking at people who can do it for them. There are also different requirements that they want to bring more features and more content because they want to create differentiation. I think that is, again, somewhere where SMR can add grow value. So all of these factors are coming together to reflect these numbers, what you see in our current market share and also the order book that we have.

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

My first question was to Pankaj, sir. Sir, continuing on the question for the EV wiring harness business, can you provide some color on the EV orders for the wiring harness, one, by company in India passenger vehicles? I mean currently, there are only a handful 3 OEMs who are selling EVs. Are we catering to all? What is the initial thoughts about the kind of content increase? If you can also talk about Sumitomo's capabilities in the global e-mobility segment. And whatever you can share will be very helpful.

Go ahead, Pankaj.

Thank you, Mr. Raghunandhan. Well, we can't share the customers specifically. But yes, I mean, as we had mentioned, that these are orders for the passenger cars, which will be the EV cars. And we are there not just on the passenger cars but in all of the segments as well, which includes the 2-wheelers or the buses or the trucks in India as well as globally. So that's how it is. And it is not just one carmaker. That's all I can say just now. So it's more than one.

Pankaj, sir, one more thing on DWH. DWH PPE or net fixed assets is around INR 156 crore in FY '21. In comparison, stand-alone net assets was around INR 1,700 crore. So from stand-alone business, less than 10% of assets is transferred to DWH. So does it mean that a majority portion of components is still supplied from stand-alone? Also, if you can give some color what could be the size of gross block for DWH and the CapEx requirements ahead for this entity.

So I would suggest that the finance team answer this. So Gauba and Kunal, can you please take this?

Yes. And, well, we can't -- yes, that is right. Happy new year to you and the entire team on the call. As you are aware, that when we had gone for approval to do a demerger and the merger, the organization plan, we had clearly stated that the land and building, which is where the facilities of wiring harness are housed, will stay with SAMIL.

Understood. Understood. So that would form the reason for the lower share of transfer of assets. And just sir, would you be in a -- I mean, would it be possible to share what could be the size of gross block? And generally, what would be the range in which the CapEx requirements are there at DWH?

I mean it -- at an appropriate time, yes, we will be sharing that. And as you know, we have in the past also discussed this, that more than 60%, 65% of the CapEx in India are going towards land and building, which is being kept for the existing facilities within MSSL. So as we move forward, we will share that information, as well the CapEx plan for each of the segment.

They'll all remain the same as what you -- what we have guided with it. It doesn't really change so much. Gauba?

Yes, sir.

Overall, the CapEx which we had guided earlier also will remain the same. It wouldn't change dramatically or something, right?

Not really. We had guided for this year for INR 2,000 crores. So we should be in the similar range, INR 2,000 crores to INR 2,500 crores excluding acquisitions because of the currency. And some of those aspects, it may be in that range. And the CapEx in India has always been lower at INR 200 crores or less. And the larger part of the CapEx, as was the case, will go into land and building.

I hope that helps.

Yes. Yes. That's very helpful. So can you give some indication -- my last question, can you give some indication of the regulatory process ahead? I mean 17th is the record date for demerger and then the merger. And finally, the listing is in March '22. So does it mean that temporarily, the shares would be not trading or suspended from exchange and they would resume trading in March? I mean is that the right understanding?

Kunal, can you take that, please?

Yes, sure. So look, on 17th of March, the demerger will occur. For every 1 share in MSSL, 1 more share of MSWIL will be issued to the shareholders. And the ex price of MSSL would be available on 14th of January, the actual ex date happening. We understand from the exchange that the [ SMR ] side, the contracts will expire on the 13th, and MSWIL will come out with its new guidelines around it. And that is what we understand. On the listing side, MSWIL will then require an [ IM ] to be submitted to the stock exchanges, which could anywhere lie between 30 to 60 days. And hence, we are saying at the upper end, probably as soon as the stock exchange approves it, it's available for listing, which could happen anywhere between 30 to 60 days. SAMIL will merge on the 24th effective, and the price will continue. The share will be issued to SAMIL shareholders on the 24th, but the stock will obviously be trading from 14th onwards.

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

So just one question. If you can just throw some light on how the value creation for the SAMIL shareholders of the EPS accretion part that you've mentioned in your slide in terms of around 5%. If you can just give some granularity on what has been considered for that calculation.

Kunal, can you take that, please?

So Raman, do you want to start?

I can take that. I can take a look at that, yes. Look, with the reorganization at SAMIL, 49% of the SMRP will -- comes into this new entity now, what we're calling the new SAMIL. And also, you have to keep in mind that 33% of the wiring -- domestic wiring harness business of MSWIL is also retained. So in addition to the old SAMIL businesses which are coming into the new entity that we talked about before, the automotive lighting, the precision metals and also the nonautomotive new verticals of aerospace, health, medical, IT services and logistics, they all now come into the new entity of the new SAMIL. If you want to put this in perspective, if you take the H1 profit after tax of INR 455 crores, roughly about INR 90 crores is added from the 49% of SMRP BV coming in, and INR 60 crores was from the 33% stake in MSWIL. So the EPS accretion for SAMIL shareholders is roughly 5% for 12 months ending September '21. So this way, we believe the profit is higher by 5% after the increase in the share count. Overall, if you were just looking at the share of the minority shareholders across both the companies, SAMIL and MSWIL, this deal has added about roughly INR 200 crores in EBITDA attributed to the minority shareholding for the 12 months that ended in September '21. So those -- so there's been a ton of value that has been created for shareholders whichever way you guys want to look at it. Kunal, please add if I've missed anything.

No, that was perfect. No, nothing to add.

[Operator Instructions] The next question is from Ronak Sarda from Systematix Group.

My question is on the new entity, MSWIL, on the wiring harness side. Is there any clarity on the new line of management there? And also, will we have more financial information historically or more detailed financing information? Because we have the apprized financial information on the P&L side. But will there be more financial information to share?

I think definitely, we will keep as much as we can offer to all our investors, and you can be rest assured on that. Motherson is a very transparent company. So we maintain all the things that we have done in the past. Of course, there'll be some things which are being -- first time would be made available to all of you. And from there, we will take a feedback if we'll need more or if you'll more so we can base it on that. But definitely, transparency is our biggest weapon on that. Kunal, you want to add something there or Raman?

Look, we've just formulated these companies now. We will come back to you on the Board/management constructs, et cetera, as we progress from there on and come back to you with those structures, as we said. Some of the -- and [indiscernible] these were, anyway, spoken about earlier, if you'll remember, around, I think, April, May, June last year that we will finally construct the Board where the independent directors between MSWIL and SAMIL are different. That we will also ensure. The rest of the Board structure pretty much remains the same.

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

My question pertains to primarily the data points on what would be the gross block and net worth of SAMIL after the merger of the holding company.

Absolutely. I think all these things will be answered very soon once we get our auditors and everybody's approval on that. But Raman, can we give any color on this or we have to wait? Kunal? Gauba?

Yes.

Yes. We...

Yes, yes. We have to wait for some time because as you know, the transaction was just approved in the last week of December during the Christmas holidays. So we are in the process of doing our purchase price allocation. So you will have more information on this one soon. I mean in terms of transparency, you have -- already have MSSL balance sheet as well as SAMIL annual report in the public domain. And each quarter, we have been giving more information included on DWH. So as you know, these are very long-drawn. Our accounting process has become far more complicated than it used to be earlier in merger accounting.

[Operator Instructions] The next question is from the line of Amyn Pirani from JPMorgan Chase.

My question was actually on the way that you have actually reported the vertical on a consolidated basis because historically, we have seen your reporting being more on a legal entity basis. But this is a new way of looking at the company, which is actually quite interesting. So I just wanted to get a sense. Is this the way you would be reporting? And is this the way you want us to look at the businesses and the company going forward?

Very good question. And Raman, Kunal, Gauba, please?

Yes. I can start. And you can add. Definitely, this is a slight change. But I think you have to appreciate that we have quite large targets moving forward. And for that, we will be doing multiple acquisitions. So constantly only going back by giving them entity-wise do not give you the biggest side in the picture. We believe that the way we are driving the business with these verticals and these divisions is becoming what is key -- should give you more insight into how Motherson is working. And surely, we're open to hearing from you the improvements and things that we can make. We can always consider that. But it's no different to how the rest of the global auto components are. As with [ every ] business, as we grow larger, it gets much more difficult to go entity-wise. And we also appreciate as SAMIL comes together as one whole, definitely we'll also reduce the number of entities that are there. So this will, we believe, will give you the clearest picture on how business is doing, and we're very open to get your feedback.

Look, if I may just add. If we were to look back, this is the first time when the entire group has been unified and the fact that there are different pieces of capability that were developed in different parts of the group for a variety of different reasons that you are aware of. But putting it all together and now giving you a vertical view, we are able to tell you how we have added value in the different verticals. And that hopefully will give you a better appreciation of the way the businesses are being run in the family and for you to be able to see a continuous improvement along these verticals. Again, this was also -- as Raman put it, we would appreciate if you guys have any feedback around it. We'd be very happy to consider those. But the prime objective was to give you better color, better transparency on the direction of the business across these respective verticals.

Sure. No, this is -- I mean, I would agree this is a very interesting way of looking at the divisions because then you get to understand what you are doing globally in every division. But my only thing is that I think if not entity level, I think people will still want to know what's happening in the major countries. But I'm getting that you will continue to give the country -- broad country basis on a quarterly basis that you're doing for SMRP BV. I mean will we get a sense as to how India is growing and how Europe is on a high level?

Yes. Amyn, it's there in the presentation as well, even the country basis, that we have provided, which we do intend to continue as well.

Amyn, do you have any follow-up questions?

No, that's all from my side.

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

Sir, congratulations for finally closing out the legal hurdles on the deal. A lot of effort has gone into this. Sir, just one question, and you explained things very well. So the new presentation that you have shared is really encouraging, and it is something very different way of looking at it. So the vertical breakup that you have given, if possible, please continue with that. And if possible, if you can share some historical data also on this. It would be helpful for us to understand the various businesses in this particular way, the way you highlighted. That's one feedback, sir. Sir, second question is just an accounting question. So when you give the SAMIL number that you have shared, the pro forma in wiring harness, say, for example, H1 F '22, which is like INR 10,754 crores, now this includes 33% of MSWIL also?

Kunal?

Yes, the revenue numbers will include because it's for the group as a whole. The profit will obviously take out the minority interest.

Okay. So now -- but if you only have 33%, right, you will not have gained tariff, correct? The wiring harness revenue and EBITDA numbers that you are saying, they are proposed right there, right?

No, no. So in case you have -- you could refer to Slide 20, which gives you a picture of what's the aggregate is, which includes the 100% of MSWIL at the top but then reduces it to bring it back to the reported numbers.

Okay, 100%. The wiring harness revenue has 100% of the MSWIL revenues?

That's right. Because look, we are looking at it in 1 5. I mean when the business is being run, we are not looking at the legal structure to say, this is 33% owned and that is 50%, 100% owned. It's being run as a business division, which does not take into cognizance the shareholding pattern that it has.

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

Sorry, a follow-up on the earlier question. So DWH will be consolidated in SAMIL as a subsidiary or as an associate? I mean would it be just the share of profits will be added? Or it would be line-by-line consolidation like a subsidiary?

Yes, Jinesh, it will be on equity method.

Go ahead, Gauba.

It will be on equity method.

Okay.

But as Kunal explained, when we are managing the wiring harness business, we are managing the full turnover. We are not there as an investor. So while from an accounting point of view, because of Board composition or so many other factors, it may be accounted on an equity method. But from a revenue point of view, the full revenues are being consolidated, including [ Sumitomo ] joint venture or the other joint ventures. And then we have given the reconciliation to reported number by saying that these are the JVs which are consolidated or equity method. Those revenues are the -- shown on Slide 20.

Sure, sir. So when you report going forward, it will be on equity method, share of profitability, consolidated. Got it.

Yes.

[Operator Instructions] The next question is from the line of Joseph George from IndiaInfoline.

I have two questions. One is, could you tell us what the headcount of the stand-alone entity was before the demerger and what will be the headcount of DWH? I mean how many would transfer into the DWH entity?

Does anybody have these numbers? Gauba? Or [ Raman ]?

I'm sorry, Joseph, we will get back to you because it will not be fair to just give a number. Sorry about that.

We've just got -- okay.

No problem. And the second question that I had was on the previous PPTs that you had shared. I remember seeing an EPS accretion number which was 8% or 9%. And here in this PPT on a trailing 12-month basis, I think 5%. Any particular reason for what -- why the accretion has come down? Is it because of fall in SMRP BV profits in the last quarter? Or if you can attribute any reason.

Sorry, I -- yes, go ahead.

George, those were for the quarter. This is for the LTM period. So there is a period difference between the two. And obviously, there has been a hit on account of how the revenue streams have played out in the offshore businesses relative to the onshore businesses. So the operating leverage is obviously much different in different parts of the world.

Sure, sure. So does it also mean that -- in Slide #16, you've highlighted that India accounted for 20% of revenues and 40% of PAT. So when those overseas businesses normalize, this 40% number will come down? I mean it's a corollary.

Look, it's a moving piece. Your guess is as good as mine. I don't know what tomorrow is going to look like. So we will only be looking at this to understand how our business is performing. What is amply clear is that 40% number at the bottom line, in my view, is not going to shift by more than 5%, 7% plus/minus. The top line number can obviously undergo a humongous amount of change depending upon how the revenue stream in the offshore businesses play out. There is a fair amount of bought-out components that also exist on the offshore side. So those also start playing a role into it. So many, many variables, difficult to predict. What is clear is profit is what I can tell you as well as the fact that India continues to be a very important market. It's the home market. It's where majority of the new SAMIL businesses have also popped in. And it's traditionally been our market of testing things out, learning and then going from there on. That importance of India is not going away in our strategy.

[Operator Instructions] As there are no further questions, I will now hand the conference over to Mr. Vivek Chaand Sehgal for closing comments.

Thank you very much. Thank you all for all your questions. We hope we have been successful in trying to let you understand what the future is going to be like. I think with the separation of these 2 -- or the start of these 2 companies from now, a new chapter begins. We have been kind of held back because of all the, how do you say, government regulations and things like that. But as soon as we come back to our normal, we think you will start to see that the best is yet to come. Wish you all the very best. Keep safe and keep healthy. Thank you all. Bye-bye.

Thank you very much. On behalf of Motherson Sumi Systems Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.

Thank you.

Thank you.

Thank you.

Thank you.

Thank you.