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

Ladies and gentlemen, good day, and welcome to the Q3 FY '23 Results conference call of Samvardhana Motherson International Limited. [Operator Instructions]. I now hand the conference over to Mr. Vivek Chaand Sehgal. Thank you, and over to you, sir.

Ladies and gentlemen, good evening, and thank you for joining us this evening. SAMIL Board has approved the third quarterly results and we are happy to report another improved performance. We crossed INR 20,000 crores in the quarter for the first time. Best ever quarterly results revenues yet, topping our earliest highest during quarter 1 and 2. We generated double-digit growth in EBITDA profit on Q-on-Q basis, nearly [ 5x ] bottom line on a year-on-year basis, enabled by improved performance by all divisions despite inflationary headwinds and localized challenges. We reduced the net debt. Net debt-to-EBITDA improved from 2 to 1.8. There is still some pain in the system, but the worst seems to be behind us, where that's cautiously optimistic going ahead. These results demonstrate strong fundamentals of the company and continued focus on operational upstream. Our teams have worked very hard to deliver this result. And with further improvement expected in business environment, we are poised to deliver greater value to our stakeholders. We want you to thank our customers for their continued trust in Motherson. As always, with me, I have Vaaman; and the management team comprising of Pankaj, Char, Rajat and Kunal. With this, I would like to ask Vaaman to walk you through the results. Vaaman?

Thanks, Papa. Good evening to everyone. The company has reported another set of record results with the highest ever quarterly revenue of over INR 20,000 crores. This is a 25% growth Y-on-Y and also an 11% growth on a Q-on-Q basis. All business divisions improved performance. Correspondingly, EBITDA grew to INR 1,680 crores, with a 13% growth sequentially and a 45% growth on a Y-on-Y basis. PAT was up 5x versus last year the same quarter and nearly 2x of the previous quarter. With chip shortage and supply chain improving in most parts of the world, production scheduling was much more stable and enabled recovery of volumes on a Y-o-Y basis, with industry volumes growing by 2% in light vehicles. All regions grew other than China. As you would expect, COVID-related issues caused China volumes to decline 6% Y-o-Y and 2% Q-on-Q. On a quarterly basis, industry volume for light vehicles were flat in North America, India and China, all showing decline really from 2% to 3%. We were, however, needed by growth coming back in Europe, which showed 15% growth. This highlights the benefits of a diversified business model. On commercial vehicles, there was a 6% decline on Y-on-Y basis, with China being the main contributor, though North America showed 3% growth. On a quarterly basis, China improved by 24%, although on a small base. Europe was also up by 18%, but North America was down by 6%, resulting in an aggregate industry volume growth of 5%. You can refer to Slide 5 for industry details. Our 25% year-on-year growth highlights significant outperformance versus industry growth of 2%. Even without considering the revenues from erstwhile SAMIL, which were not there in the previous quarter, we grew by about 20% in this quarter versus Q3 FY '22. Continuing trends on premiumization, electrification, commodity costs and sharing of inflationary costs, et cetera, continue to add content and value to our products. This was further fueled by a favorable ForEx impact. Even on a Q-on-Q basis, we grew by 11% versus a flat industry growth. You could refer to Slide 12 for more details on that. We are very grateful to our customers for their continuous trust and support in Motherson. We continue to work with them on sharing of these inflationary cost structures, and we've embedded some of the success in this quarter and continue to work with them to close out the remaining in the coming quarter. Given the continued volatile sales of variables in this world, we expect that this conversation will be a regular feature for some time into the future. On the CapEx side, we remain vigilant and in line with the guidance we gave last quarter of being at the lower to mid-end range of INR 2,500 crores plus/minus INR 250 crores, so somewhere between INR 2,250 and INR 2,500. The improved performance and focus on CapEx has decreased the leverage ratio to 1.8x versus 2x in the previous quarter. Net debt actually reduced by about EUR 50 million versus previous quarter. Although the ForEx changes had a negative impact of about INR 350 crores to INR 400 crores. We continue to carry elevated working capital levels given it's still early days to China removing the zero COVID policy and the geopolitical situation in new countries. However, we remain confident that by year-end, we should be able to normalize some portion of this working capital. This is also supported by improvement in global supply chain pressure index and some softening of commodity prices. You can see Slide 7 for more on this. Given this backdrop as well as the declining energy costs versus previous quarter, we remain confident of delivering continuous improvement in the ongoing quarter as well. This will enable us to deliver much more going ahead and aid our inorganic plans as well. We thus believe we have adapted ourselves well to the new realities and are cautiously optimistic on the way ahead. With this, I conclude the overview and we'll now open it for question and answers. Moderator, can you support, please?

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

Congratulations on a great performance for the quarter. My question is, firstly, on European operations. I just wanted to understand that, from a revenue run rate perspective, are we closer to the normalized run rate or there is still significant supply chain pressures and, therefore, we should expect further up in production run rates? And also on an inflation -- if you could just mention, we see a certain [ portion of other ] cost seeing significant cost inflation. So does this quarter fully reflect most of it? Or should we expect more increases in these line items?

Vaaman?

Sure. I think the production run rate that you talk about, we definitely had some instances starting up in post the December holidays, et cetera. But since there is more talking about the last quarter, we definitely do see an improved trend. However, it's hard to really comment with the ongoing macroeconomic situations in Europe. And you will understand more as we get closer to the summer and understand how things are flattening out. So definitely do see some catch-up towards that, for the missed run rate that we had in the previous quarters, but it's very much a watch closely kind of a situation. On the inflation side, we believe most of it has already been taken in. Of course, a lot goes to be seeing how things pan out the rest of the year. But definitely it's an ongoing discussion with the customers to see what's going on. It is a volatile situation that is there. It can move in any direction. And I think that's when we are making sure that we have close communication with our customers to be ready for any eventuality. But like I said, we are cautiously optimistic, but definitely, it's not clear of the woods in terms of volatility yet.

Okay. I have 2 sort of clarifications on the presentation. So one was on Slide 16, you have mentioned Wiring Harness division where there is a INR 61 crores favorable outcome on tax rate litigation. If you adjust for that, actually, margins are a bit lower on a Q-o-Q basis despite better revenues. So I wanted some color on this. And second is on the stand-alone results, we see that the other income has seen a significant increase on a quarter-on-quarter basis. So it was [ INR 144 crores, INR 238 crores ] from September to December quarter. So if you could just throw some color there.

Kunal?

Kapil, firstly, on the Wiring Harness side, you're right, you would have seen MSWIL results also yesterday, which had a slight decline. India in general has been, in Q3, lower than what was expected. You heard, I'm presuming, enough about the reasons behind it, the fact that production was missed, there were chip shortages still in India and so on and so forth. So while the capacity in the sector were there, but the production didn't really happen as much. So that is one of the large reasons why it looks the way it looks. On top of it, if you think about China, the -- as there was growth -- a little bit of growth, but it's still so significantly below previous levels. And the base is so small now in China that it continues to still make losses right now. So this dropped the margin profile really in Wiring Harness. If you look from another income perspective, the INR 61 crores that you are referring to, this is actually lying in that other income. And you are also aware that the rental income that SAMIL now charges MSWIL, that is also lying in this other income. The large difference is on account of the INR 61 crores booked in other income, and that's why we've highlighted that specifically as well. Going forward, we aim to reclassify some of these things to make it a little bit more clearer. And hopefully, next quarter onwards, this will become much more elaborate for you to understand this better.

The next question is from the line of Jay Kale from Elara Securities.

Congrats on a good set of numbers. My first question, sir, is you mentioned about the strong outperformance to the global industry via revenue growth. If you can just kind of break out down into how much of it is because of your content increase versus inflationary benefits as well as mix. Any flavor for that 11% outperformance, how much of that would be because of content increase.

Vaaman and Kunal?

Yes, I can start and Kunal can help. I don't think you've done the -- to that minute details. You can imagine, there are numerous new programs running, and there are launches and the diversified customers. So I think on an overall basis, we do feel that the diversification has helped where some customers would have obviously affected a bit more, some customers affected a bit less. And hence, we are not tracking exactly as the market, in fact, outperforming with the strong order book and the launch, and we had already shown how our content is increasing with the changes in the preference and days. So I think all of that has helped. But to give you an exact return, I think will be difficult.

Understood. And also on the energy costs, you did called out in the last quarter as well that you are in talks, and in this quarter also in the presentation, you mentioned earlier in talks with customers who are getting a pass-through for the energy cost price. So just wanted to understand where are we on those stocks? What percent of customers would have given you that energy cost increase? Because if we see our energy costs as a percent of sales for SMRPBV, in this quarter, it has moved up on a quarter-on-quarter basis. So just wondering, going forward, are we expecting that in future quarters? And if at all, we get that competition, would it be reduced from other expenses line item. Or it will be added to revenues as a compensation?

Yes, I can start this and others can support. Again, I think it was a conversation to have with the customers. The energy prices, specifically in Europe, has been quite volatile. Although I think we have seen the past peaks behind us, there was definitely more softening in December and Jan. We definitely did have those conversations with the customers. Again, it depends on the customer, depends on the program, depending on the location. As you can imagine, the energy prices have not stayed stable for all of Europe. Different countries have different impacts. And that's where the support has been spoken to with the customers. And again, it's completely varying depending on the location and the product. That was also only up to the point of December. So in January, again, we have seen some softening compared to where the levels were in December but still elevated levels as compared to where it is normally. And those discussions, as we mentioned to you before, are a continued path where we will continue to talk to our customers, show them the impact and hopefully have some support if it is quite large this quarter as well. But the good news is that it's on a negative trend from the peaks that we saw but still at elevated levels. For the accounting, I'll request Kunal to answer the question.

Yes. So look, I think the number obviously elevated in quarter 3. The peaks we've seen in October, November. Since then, it's on a declining trajectory, though still continues to be volatile. Where we stand right now and whatever outlook that we have on the -- in the current environment, it does seem that energy prices would be lower in the ensuing quarter.

Okay. Understood. So just to clear that, since energy prices are actually declining, you may not require those kind of price increases from your customers, which are, what, wanting maybe 3, 4, 5 months back since already it has started on the deadline. That would be the understanding, right?

Let me just put it this way. This is not the only thing that is under discussion with customers. When you're discussing with them, then you're discussing as a comprehensive package across commodities, across inflationary pressures, across supply chain issues, across working capital issues and so on and so forth. So it's not necessarily a like-to-like on a single aspect only. So when it is -- it is really about sharing the pain. These are not factors that were built by anyone. And hence, it's the sharing of aggregate payment. That's how the customer discussions are.

[Operator Instructions] Next question is from the line of Kumar Rakesh from BNP Paribas.

I have just one question around your customers. So Volkswagen, which reported pretty really good numbers, can you talk about working capital pressure, which they saw especially towards the end of the December quarter and the last few days. And they talked about inventory being type of finished goods as well as [indiscernible]. Do you see some of that impacting your March quarter as some of your customers start rolling out their stack inventory and possibly the production needed from our side may be lower?

Vaaman?

Look, we did see -- again, I can't go into customer-wise specifics, and I'm not answering for Volkswagen, I'm just talking in general. We did see some delayed starts from customers. But again, we do hope that catches up. Usually, you do see more strengthening happening as people are coming out of the December holidays, January holidays. So we definitely do see a better pickup in February and March. So look, there's something general that we see. I think it might not have been extra special this year in particular. But like I said, some customers definitely did take some time to clear out some inventories. But that was also because of building up some of the semiconductors, which still continue to play havoc in some programs. So it could also be that -- we are making sure that the inventory levels are stocked to a good level for a more level production until the end of the year. So again, we are optimistic that it should be caught up. But yes, is there -- was there some effect to that, we definitely did see that in the Jan start. But hopefully, it should be caught up.

Got it. Just one clarification, sorry if you already answered that. How much would be energy as a percentage of share cost?

I think it will be ballpark somewhere in the 2.5% to 3.5% levels.

[Operator Instructions] The next question is from the line of Basudeb Banerjee from ICICI Securities.

A couple of questions, sir. One, if I look at your SMP [ first point ], SMP and Plastic business margin, which used to be in good pace, somewhere 8% plus. So now because of various cost inflation items, as Kunal mentioned, plus crude was also elevated at $100 per barrel plus, so it is now down to 5% to 7% level. So how much -- just to understand this group down to $80 and the polymers which you are using for the plastic product business, so is there any lag effect of input cost of polymers for that business? And with crude, that it should help the plastic business margin inch up? Or how to look at from that angle, sir?

I can take that. Look, we are talking about highly engineered plastics. So while there is a correlation, I don't think it's a direct correlation as you do see it. So even when the oil prices went significantly higher, even though our raw material costs did move up, it's not always in the same balance to 1 level, as you can imagine. So definitely, as it's moving down, it eases some of the pressure on us, on our suppliers. But is it an exact repression of it going down, not specifically because these are very specialized engineered plastics. And anyway, we have processed with the customers that if there is a significant proof point, I mean, there is a range in which we have to absorb it so the customer absorbs it. But after that range, there is a discussion to be had with the customers. So like I said, I think most of these quarters, we are staying very, very close to the customer of being completely transparent, showing the things that are not in our control, trying to pass on the volatility as much as possible and getting good support from the customers as well where it is a reasonable impact. So definitely, like I said, it works both ways for us in our discussion with the customers. But should it help? Definitely. To what context? We'll see because it -- we will probably know only once we've seen the entire quarter go through.

Sure. Second question is, which Kunal, as you mentioned, not only with respect to power cost inflation but freight inflation, wage inflation, working capital, cost, everything combinedly on a holistic basis where you discuss with your customers in terms of price contracts. So on that overall basis, any scope of price depreciation from annual contract base is currently as such?

Okay. I can take this as well. Kunal, maybe you can support. Look, some of the things which are operational for us definitely have to be observed by us, obviously, making our own efforts to improve operational efficiencies where the costs are, how does the control have spiked for reasons that are out of our control. We definitely do have those conversations with the customers, including volume changes or shift cancellations or anything like that. Like I said, but for like small items, like logistics, et cetera, to some point, we have to observe it up to a certain level, which is why you've seen the results where they were in the last few quarters in this tough environment. And as these things are easing and as we are getting support for items that are reasonable enough, I think we are doing better. And I think we should not take away from the operational teams that are working extremely hard to deliver on higher efficiencies in the business, removal of that and making sure that we can sustain and keep standing during these tough times and continue to support our customers with the highest quality and delivery even in such conditions. And I think that's what's appreciated by our customer. The rest, I think, again, it's a continuing dialogue that we have with the customers, and we can really have a very good relationship with them that we can discuss how to deal with some of these things in the next quarters as well.

Sure. And last question from my side. If I look at on a sequential basis, euro terms, revenue was up some 3.5%. In Indian terms, it is higher because of currency movement. But even in the quarter with lesser working days, on a sequential basis, your revenue was up, that's quite commendable. Just wanted to understand the trajectory where SAMIL has been moving for the past few years where better mix, rising EV mix, et cetera, where value per car has been moving up compared to volume of car service. So how that has been moving because, even on a sequential basis, revenue increases quite incredibly.

Thank you very much for that. I think, again, it's commendable to the teams that are winning the new business orders, and we continue to invest in technologies that even as to increase our value content. We had shown some of that in our Investor Day, how the future of our business is positively affected by changes in preferences of consumers, whether it be, again, some of the buzzwords that we talk about or general preferences in the sizes of cars that they want and the luxury segment also growing. And I think that's a combination of all of that and having a well-diversified business where we have the opportunity to have launches even in tough conditions because we are with all the customers and part of the new launches. And we always strive to increase the value of the new launches compared to the previous ones. So again, whether it is materials, whether it's processes, whether it is adding more technology, adding more electronic content, adding more features, all of that really goes in. And that's the key reason why we are able to grow even in a depressed market.

If I might add to that, that's why we keep saying, please look at absolute EBITDA. So your first question on [ interior ] polymer, 8%, 9% margin, et cetera, it will just be useful to look at absolute and hopefully, we will continue to do better every quarter.

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

My question pertains to the inflationary pressures on the commodity side. Have you started to see that moderating in our numbers now or that is yet to translate into our P&L?