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

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Results Conference Call of Motherson Sumi Systems Limited. [Operator Instructions] I would now like to hand the conference over to Mr. Vivek Chaand Sehgal. Thank you, and over to you, Mr. Sehgal.

Thank you very much. Good afternoon, good evening, friends. I think Q3 saw a recovery in global production with chip shortages easing a little bit. I think it's been a very tough environment with a lot of moving parts. And the Board felt that the Q3 performance under such circumstances was much better than what was expected. [Technical Difficulty]

I would request participants to please stay online. We're just trying to reconnect the line for Mr. Sehgal. [Operator Instructions]

Sorry, friends, there was a disconnection. As I was talking Q3 had seen a recovery in global production and the chip shortages easing a little bit. However, supply chain challenges continue. And in such a tough environment, the Board actually felt that Q3 performance was very strong, and a 14% increase in both revenue and EBITDA on a Q-on-Q basis was well down. We have still more challenges to come with, but I think day by day, it's becoming better and better. We expect the global production trends to improve further in the coming months, which should help our performance globally. However, had costs and other moving parts like shortages, et cetera, are going to be a challenge, but we will do our best in the coming time. In this quarter, we have also received the final NCLT approval, which now gives us effect to the proposed reorganization path for future growth of Motherson, what we call, 2.0. I would like to thank all our shareholders and friends for their continued support. I'm sure Motherson 2.0 journey will be even more exciting for our shareholders. The best is yet to come. I hand you over for your questions, we are pleasured to answer them.

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

Encouraging to see sequential revenue pickup across verticals of Motherson. My question is on PKC. PKC's size, we've seen that the EBIT margins have actually compressed sequentially. Could you talk a little bit about that, that what part of it is actually sort of driven by mix and what is driven by any one-off costs or so?

Sure. Pankaj, can you take that, please?

Thank you, Chaand saab. Binay, Basically, in PKC, we've been hit in 2 geographies. One is in China. But if you look at sequential, it's more coming from North America, where the volumes dipped and the supply chain issues became more and more pronounced in the last quarter. And that led to a very erratic supplies of parts, both at the customer and as well as at our plants leading to higher costs. And China volumes remained low in both the quarters compared to the past by about 60%. After the changes, the volumes have not picked up to that level. As the inventories are in the market and we believe that in the next 3 to 6 months, those inventories should get exhausted and the market should come back. Thanks.

And sir, in absence of China recovery, where do you see margin settling? And also earlier in the previous quarter, you talked about 2 new platforms starting in PKC, so there were costs associated with that also, that came in, in Q1 and Q2. So those costs are not there in this quarter. Fair to assume that?

Yes. Those improvements have taken place and all the support which was given globally has been withdrawn. The plants are operating on their own. So those additional costs and [indiscernible] freights, which were there, they have been taken care of.

Right, sir. What kind of numbers do you expect then in case China does not recover and the U.S. -- because demand is much stronger on the U.S. side. So there is good visibility on recovery there in.

See, there are multiple challenges as you have seen in the market that the demand has been there. The demand is quite strong. And yet, the production is not -- it's quite erratic because of the material shortages. So that's taking the toll because sometimes the plants are running for the customers, and sometimes they have to go for shutdown. Secondly, there are certain issues which are relating to supply chain and the inflationary trends in the market, including the wages, which have been growing at abnormal rates in this period. We are taking care of them. So many of the challenges are being sorted out internally by optimizing the cost, and some of them are being taken care of with the customers by working jointly together with them to get to a normalized level.

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

My question pertains to PKC. So just continuation of earlier question. Would it be fair to say that China business is largely through JV and hence would not have impacted the EBITDA margin for PKC?

It does impact because out of the 3 JVs, 2 are consolidated.

Okay. Okay. So that. And would there be any copper price-related impact on PKC or rather for entire wiring harness business, would the peak of copper price impact be behind us?

Copper price impact has also been there because you know that the trigger is like every 6 months, the prices get adjusted based on the past trends. And still, the copper price has been at a high level. But the kind of impact, which is there in the past, say, 6 months ago is reduced, but still there is a copper lag, which continues and that has remained at a high level of around $10,000.

Right, right, right. Okay. Understood. Second question pertains to SMR. So we have seen a reasonably high impact here on margins. So this is primarily largely led by recent cost increases or anything else is there?

Sure. Vaaman, would you want to take that or would you want to give it to Rajat?

Yes, so I think Rajat can answer this.

Yes. So it's been a mix of issues. I mean, of course, the volume that has been impacted because of the chip shortage, and that's the primary driver. And then, of course, there are headwinds on commodities. So resin prices have gone up and aluminum also is a part of the commodity. So it's combination of previous factors. But as you see, quarter-to-quarter, we have recovery on the sales side. And you would also see, therefore, that the margins are also following the trend, and we have improvement there. So definitely, I think there are a lot of things that we continue to work upon in terms of optimization of cost internally and also working with the customers. And yes, I think we would see improvement going forward as we see the sales also going up. So I think this trend would show an improvement as we go forward.

Okay. Because, I mean, quite a few other commodities, including aluminum and maybe even the resin prices also might still see further increases given the increase in crude prices. So you expect near-term pressures to sustain on margins or because of operating leverage and improvement in production, there should be still a sequential improvement on SMR business, as such?

Yes, you're right. I mean we do see still, I think, in the last few months that this commodity price is still continuing to go up. I mean we've seen the same on aluminum, we've seen the same in the resins also. So we were all hoping that this would kind of stabilize in this quarter. We'll have to wait and watch how this plays out. It's anybody's guess at this point of time. But then we are on top of it and seeing what is the best that we can do to manage it internally as well as in discussion with our customers. So hard to say how it moves in the next few months, we'll have to see.

Yes. Sure. But clearly, we are seeing improvement in our production level in SMR and SMP because of underlying improvement at OEM level, right? That is the normal positive thing.

That is there. The volumes have -- I mean, the chip shortage challenge has not disappeared. It still is there in pockets, and it keeps on coming back in different shapes. So I think we would have still some continued pressure on that side. But overall, if you see the volumes have improved. I mean Q2 to Q3, the volumes have gone up. And -- I mean, what we can see in terms of EDI is also coming from the customers, it is showing a bit positive trend. So while the overall challenge remains in the industry, I think the trend is looking favorable.

Okay. And fourth quarter also ideally should be higher volumes because supplies are further improved, would that be a fair assumption?

For the immediate short term, what we have visibility in the EDI, it looks better. But as I said, there are surprises which keep coming all the time.

Sure. Sure. And then last question with respect to the financial reporting. So would we be reporting the new SAMIL financials going forward from fourth quarter given that last part of entire restructuring process we will be get done by the financial year-end. So the SEBI reporting which happens, would that be now be just for the new SAMIL.

Kunal, can you take that, please?

Yes. Jinesh, it will be for new SAMIL and MSWIL separately from quarter 4.

The next question is from the line of Raghunandhan from Emkay Global.

Good to see the sequential performance improvement. Sir, a couple of questions. Firstly, Europe gas energy costs seem to be going higher as highlighted by some of your peers. Has there been any impact on margins if any color you can share on how big is the impact? And are you seeing any reduction in these costs?

So well, I'll let Vaaman answer this question. But basically, we are not a huge power guzzler but Vaaman, can you take this?

Yes. So definitely, there have been energy cost increases, which have been substantial and definitely, the impact like power seen is different for different verticals, so why on our side not as much as perhaps some of the other verticals that are there. These costs are unusual and have spiked in the last couple of quarters. We do believe that in the longer term, this should -- the prices should come down and settle. But in the meantime, we are putting in place on counter measures, let's say, get efficiencies from other places to be able to came back the returns that we are losing because of the higher energy costs. But like I said, we believe that in the longer term, this should come back to a normalized level.

My second question is for the new SAMIL, pro forma numbers have been given, would it be possible to share the net worth and gross debt for the entity, was trying to calculate the return ratios?

Kunal?

Yes. The gross debt numbers can be imputed from, I guess, what's there on Slide 24, which is the net debt. And if you look at Slide 18, which has the gross debt component, the net worth piece is something in the words. It just happened on December 31. So we will come back to you in Q4 with those details.

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

Sir, my first question is on the margin performance in the stand-alone business. So if I look at trend between stand-alone ex MSWIL margin performance and MSWIL margin performance, it seems then the difference because the stand-alone margin seems to have dropped quite sharply on a Y-o-Y basis, flat Q-o-Q, but DWH performance has been or MSWIL performance has been much better. Any thoughts here? Why is that? And what can be the sustainable margins to look forward to?

Kunal, would you take this or Gauba?

Yes, sir, I will try. And so Siddharth, DWH is catering to the domestic market customers, where we have a pass-through of the copper as well as of the foreign exchange. While in the quarter 3 also you have seen compared to quarter 2, there has been an adverse impact of copper, but the impact is minimal. At the same time, globally, some of these contracts are half yearly or have a different tonnage. Also, you have seen the euro has weakened in the last quarter. So the overseas business margins move in a range because of the fluctuation in the foreign exchange rate. So that is where you can see marginal change in those rates. But on the business side, I think the business continues to perform well. There could be increased in freight cost, both incoming and outgoing, which will have a larger impact on the export business.

But in general, sir, in the stand-alone ex MSWIL business, also a large part comes from India only, if I see, 10 billion out of 13 billion. So is there any difference in the product profile margin between these 2 businesses also?

No, sir. There will be the sale of wires, which will also get accounted for in the ex DWH business on a gross basis. So when the copper price has moved up, while there is a compensation coming from the domestic customer growth, both MSSL and KIML to the wire factory. But as a percentage, it will show mathematically decline. But from a business point of view, there is no change.

Okay. Okay. Got it. And second question is, again, on this stand-alone business. So like we have shared in the SMR business our EV share of revenue is closer to 3.5%. And we have shared in the past like 25% of our order book is coming from EV. In the India business, will it be possible to share any of these numbers either in the order book or in the revenue [indiscernible], if it's possible?

Siddharth, we're in the process of relaying out our presentations and how we will present and that is in that direction. We have also presented you the EBITDA margins over different business vertical. And so we take your inputs and would look how we can give data without impacting our strengths.

Okay, sir. Okay.

And if I might add, I hope you have taken note of the EV data we have provided in terms of it now being 3.5% or more than 3.5% of our consolidated sales. So what was around about INR 1,100 crores in H1 is more than INR 1,900 crores now.

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

So when I look at the consolidated numbers, there are 5 single brand stand-alone, SMR, SMP, PKC and others. And in the others, there is a significant -- I mean, it's a small segment, but there is a significant deterioration in profitability. Does this others primarily include MWSI, which would have seen a similar trajectory or similar impact as you have seen in PKC? Is that a correct conclusion to make?

This related -- you're talking to about wiring Harness? Is it? So Kunal, can you?

So Joseph, are you referring to the SAMIL details?

No, I'm talking about the segmental revenue and segmental results as per SEBI format. Where you have 5 segments: Standalone, SMR, SMP, PKC and Others. So my question is, is the biggest component in this Others, MWSI and has MWSI seen a similar margin impact because of operational costs, et cetera, as we alluded to in the context of PKC time handle is not here, but the rest of it.

I mean this is the rest of the world. So the businesses which are in 100% subsidiaries, not MWSI. So they have a decline in the profitability, particularly from Europe, but we will get back to you in detail on this.

Joseph, the thing is we have now virtually 4 wiring harness. So your question is pretty vague on which one are you asking about. But we have domestic wiring harness business, which has now come out with a different company. We have PKC. We have MWSI, then you also have a wiring harness business, which is supplying to our own companies and also exports out of India. So that's the reason you have to be a bit more specific. But I understand you're referring to one of the our own presentation, okay?

Sure, sir. I'll get up with the team one-on-one.

Yes, yes, yes.

[Operator Instructions] The next question is from the line of Chirag Shah from Edelweiss. As there is no response from the current participant, we move on to the next question from the line of Binay Singh from Morgan Stanley.

My question has already been answered. Thank you.

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

Am I audible. Hello?

Yes. Go ahead, please.

Yes. Yes. Sir, so just a follow-up question on SMRT or SMR and SMP profitability. to assume that the drag-on margins when we look at on Y-o-Y basis or versus the historical performances is largely because of commodity? And if that is the case then if you can help us understand how does the pass-through arrangements work? And when can we see this underrecoveries neutralizing or normalizing, assuming there is no significant further cost inflation?

Vaaman, would you like to take that?

Yes. Chirag, it's different by the different product group, as you can imagine, and you know that different countries, different customers, different product groups. So contracts are different in those different geographies and companies. Definitely, for -- at least I can start by talking more generally and the team can support for the individual company if you have more questions. But generally, the thing is, Chirag, that the end of the year, we go back, of course, with the customers, and then we talk about the movements in the prices of commodities, et cetera, over the year. And of course, that happens on a measured on a quarterly basis. But depending on volumes, depending on these price movement, depending on agreed price downs, et cetera, all of those are covered in and talk happens with the customers to see what is and what is right and a balanced approach is taken. So we do envisage that again towards the end of this quarter, a lot of those things will come back to normal. And moving forward in this -- at least a huge aberration that we have seen not only in the commodity prices, but like Pankaj, sir, was talking earlier about labor increases, et cetera, these are all things which are really out of our hand and out of the suppliers' hands and these are that normalized in discussions with the customer. And they are a negotiation that takes place at the end of the year. So we are moving from a period of high volatility and hopefully, some of the worst is behind us. We're moving -- we've always said that we are cautiously optimistic, and you have seen that uptick in the quarter-on-quarter. And we hope that, that trend continues and there is more stability moving forward. But this is quite unusual time with everything kind of spiking in the last couple of quarters and those and the customers are definitely open to having those discussions with us and seeing a fair outcome of what happens down the line.

So but -- this is helpful. Vaaman, sir, would it that generally Q1 of the calendar year is the year where you have been discussion with the customer or a large part of customers given different geographies?

It is a running discussion, but it is -- happens more because there's a lot of other things that are also happening, right? The price downs for the year-on-year, the -- so those kind of all those things happen generally towards this -- during this time and they take a balanced view for the entire year. But of course, during the year, there is a couple of quarters where there is extreme movement, we have those conversations then at that time as well.

This is helpful. And the second question was if I take SMR as an example, there was a time that we were doing EUR 400 million consistent quarterly revenue, so in your assessment, by when can we go to that number, given the supply chain bottlenecks and your interactions with your customers, when that normalization could be achieved? Because before the COVID -- pre-COVID, we were consistently in EUR 400-odd million revenue plus or minus. So based on your best assessment or best guess, let me use that word, is it a 12-month away scenario or how should one look at it?

Look...

I think 3 to 6 months. Sorry, go ahead, Vaaman.

I think you've mentioned it. We are hoping that, again, in the next 6 months, things are a lot more stable as where we see them right now. There's still a lot of stop and go because of the semiconductor shortage, et cetera, which is still there. We'd also said that in the last call that we do see hanging around for another couple of quarters and hopefully, by then things should be a lot more stable.

This is -- by H2, let's hope that most of the issues are behind we are steady run rate if not better.

We hope so, too, Chirag, that rate things become a lot more moving forward.

[Operator Instructions] Ladies and gentlemen, that was the last question for today, I would now like to hand the conference over to Mr. Vivek Chaand Sehgal for his closing comments.

Yes. Thank you very much. Look, I think this quarter under circumstances was very tough, but yet we have delivered better-than-expected results. And I think the effort is going to continue even harder in the last quarter that's coming up now. We are generally seeing positive response coming from the customers. Also, the opportunities on acquisitions is increasing day by day. So let's hope we can share some good news. And Chirag, just for the reference, we've said, I hope it comes back to normal where we think it's going to go beyond normal, so wait and just see, the best is yet to come. Thank you very much.

Thank you very much. Ladies and gentlemen, on behalf of Motherson Sumi Systems Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.