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

Ladies and gentlemen, good day, and welcome to the conference call of Samvardhana Motherson International Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. VC Sehgal. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen. It's my honor and my pleasure to welcome you to this investor call. I want to request Vaaman to please introduce subjects and also make the opening statement. Go ahead, Vaaman.

Thank you, Baba. Ladies and gentlemen, good evening, and thank you for joining us on the call. We are delighted to announce that SAMIL has announced 2 strategic acquisitions today. Firstly, the board has approved the acquisition of an 81% stake in Yachiyo's 4-wheeler business, which is a subsidiary of Honda Motor. We have been chosen by the customer for a strategic partnership, demonstrating Honda-san's trust for Motherson. With this 81:19 joint venture, both Motherson and Honda-san will drive the company towards a sustainable future and prepare for the next generation of products and technologies. The transaction has multiple steps to foreclosure. First, Honda-san currently owns 50.4% of the listed company Yachiyo, and will launch a tender offer to make it a wholly-owned subsidiary. In order to be successful, Honda-san must reach a minimum of 66.7% shareholding for the same. Secondly, then Honda-san would transfer the 2-wheeler business, which is Goshi Giken from Yachiyo, in order to consolidate this set of businesses. Then finally, we will then acquire 81% stake in the Yachiyo four-wheeler business. with Honda-san continuing to retain 19% with an active management participation. Just to give you a bit of color, Yachiyo 4-wheeler business has 13 facilities -- 13 manufacturing facilities and 3 R&D centers across 8 countries, which have very close proximity to Honda Motor plants across the globe. The business supplies substantially to all the sunroofs and fuel tanks to Honda-san. This business clocked revenues and EBITDA of EUR 824 million and EUR 94 million, respectively in FY '23. The transaction is taking place at an equity value of EUR 145 million or JYP 23 billion for the 100% stake. Correspondingly, we will be buying 81% for EUR 117 million or JPY 19 billion. Of course, this is all subject to the necessary approvals, and we expect it to close by Q1 FY '25. The company has a very strong pedigree of R&D and innovation. Having developed multiple products and systems jointly with Honda-san. We look forward to running this business together with Honda-san and, of course, pivoting and evolving as the auto industry needs. In light of this, Yachiyo has already started to work on the next-generation products such as light tailgate and hydrogen, which is type 4, storage containers focusing towards green mobility. Post successful closure of this transaction, Motherson will become the partner of choice for Honda-san. This transaction enables diversification in line with our 3CX10 strategy. And of course, this acquisition is also EPS accretive. This also provides additional opportunities for us to leverage our relationship with global OEMs and offer Yachiyo 4-wheeler product portfolio, such as sunroof and fuel tanks for them. And at the same time, the opportunity to cross-sell the entire suite of Motherson products to Honda-san. Motherson is a company built on trust. The acquisition of Yachiyo is a testament to the trust that our customers, Honda-san in this case, has on the abilities of Motherson. Simultaneously, Motherson has continued to explore other areas of diversification in order to create a long-term value for all our shareholders. On the second announcement which we have made today, we are pleased to announce that the Board has also approved an investment of USD 14 million via 12% optionally convertible secured notes of a company called Prysm Systems Incorporated. Prysm is engaged in designing and manufacturing of large format touch enabled display screens with embedded collaborative software based on in-house proprietary technology in laser phosphorus display. This is what we call LPD. This technology is very unique in comparison to the other technologies, and it is more power efficient and is able to provide much higher resolution for display the same sizes, which is more than 100-plus inches. This is the key part of the technology. That is for large-size display screen. Prysm System already has customer base with the installation of displays with various use cases, across meeting and board rooms against -- amongst other indoor applications. The investment is being made to support the development of the new generation 3 prototype for mass production. This development is supported by a strong engineering team in over 200 global patents. The successful development of Gen-3 prototype, which is a great functional specification associated with conditions will lead to a unique value proposition for large screen display users. Should the development be in line with our expectations, we will convert this debt into equity stake of not less than 72% and invest in this company for future growth. This is in line with our strategy to enter new market segments and align with nonautomotive diversification as part of our Vision 2025 Plan. Potential Spring Boot for technology and electronics vertical as divisions utilizes capability of electronic manufacturing and software development. With this, I would like to stop my opening statement and open up the floor for question and answers for you, please. Moderator, can you please...

[Operator Instructions] We have the first question from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.

Congrats on two acquisitions. A couple of questions on Yachiyo. Firstly, would it be fair to say currently, 100% of revenues will be coming from Honda or it would be lesser than that?

I can take that. It's about 90%...

Vaaman, you heard the question?

Yes, 90% plus from Honda-san. It does give us access to other customers as well, which we are excited about.

Obviously, I mean, now that your ownership won't be considered as a Honda subsidiary, so that should help us to diversify beyond Honda. And second clarification was on sunroof. In the presentation, its mentioned that has 9% market share. So that's for the overall sunroof industry or for specific type?

Could you tell us where you are reading that?

In the presentation -- just give a second. This is on #15 slide.

See, I can add, this is in relation to the global market share.

Correct. That's 9% global market share for Yachiyo.

That's right. The idea is also that they will have $2.5 million capacity -- 2.5 million unit capacity, which is spread over 6 units. We have complete technological capability for starting and all the way into high end, which is extremely exciting because as you know, more and more vehicles are coming with optionality of sunroofs, is becoming more of a standard, and we are able to bring the sunroofs into any customer.

The next question is from the line of Raghunandhan from Nuvama Institutional Equities.

Congratulations on both the acquisitions. So firstly, on the sunroof side. Currently, sunroof penetration could be about 25% to 30% in the global market, how do you see the potential size of opportunity both in terms of increase in the share of sunroof as well as increase in the content per vehicle because of the product upgrades, which are coming up.

Great. Thanks for that question. Of course, this company is very dear to Honda-san in strategic suppliers. So we believe that the opportunity, like you rightly have said, is to take this product to the other customers as well. We see a very strong correlation with sunroofs becoming more and more standard. And also as we see the SUV trend growing, we see a lot more growth in sunroofs and those vehicles as well. So not just on the premium side, but really you're seeing the sunroof penetration increasing, and we believe this will continue to grow with the new product offerings. Even on the EV side, you're seeing more and more optionality coming with sunroofs. So we're really excited that we can take this product and grow it with many other customers. As well as bring the product portfolio of Motherson to Honda-san as well. So very, very excited with this acquisition.

Very useful. My second question, can you elaborate on the potential synergies and in-sourcing opportunity? I know it's early, but any quantification of the potential synergy benefits in the coming years?

Yes. Look, we are waiting for the transaction to close. I think we will give you a lot more color in detail once that happens. But just so that you understand, we already have in the past experience with sunroof, we believe that, again, this was a product that will continue to grow together with the mechanics that's been there, the amount of other products that goes into building the sunroof, the mechanical parts et cetera. These are all places where, of course, we will look to drive our synergies within Motherson from our geographical spread of being able to take this to the other customers and leveraging, of course, our inner capabilities to support these child parts. And also with the tanks as well, I think, as you know, this will require a lot of plastic parts, elastomer, tooling machine parts. These are all things that Motherson already has capability. And of course, we will try to drive the synergies once the transaction is completed.

Got it, sir. On the transaction side, I mean do you see any risk in terms of completion of transaction like acceptance and tender offer?

Of course, there has...

Normally, Raghunandhan, once in Japan -- it's pretty common that once the customer has -- he has majority of course making the offer, very rare that the offer would not be accepted. So...

That's very helpful. And how much would be the debt in business, sir?

[indiscernible] I think. Kunal?

Yes, it's actually a net cash balance sheet.

I mean, so would it be -- I mean would you have the number handy, sir? How much would be the net cash.

So look -- if you look at what's there in the listed entity, if you look at the public disclosures that will tell you around about EUR 45 million of net cash. Having said so, that's for the whole group. Obviously, 2-wheeler business will get taken out of this and hence, it's the 4-wheeler business that we will be buying. But that will also carry a net cash. The transaction is expected to close in FY '25. So in reality, we will only come to know then what the net cash is going to look like. But we do expect it to be a net cash business when we are acquiring it.

Sir. One last question relating to Prysm. How do you see the revenue potential for Prysm going ahead. As of now, the revenues are small at $6.5 million, but the investment costs suggest that you are baking in strong growth over the medium term, any revenue targets or potential you can indicate for the next 5 years?

Look, I think what's most important is that development of Generation 3, which is the latest technology offering with the most advanced features. I think once we are closer to that Gen-3 being completed, we could come back with you with a more solid state of what the businesses will do but to be -- to potentially give you some more color around it right now, I think you have to understand that as we're going to work mode or from more people working from home also a lot of collaboration. I think the potential of this product is significant. I think the software is superior allowing people to collaborate real-time. There's 32 people that can be touching the screen at one location. The quality of the screen is absolutely immaculate. It's much higher than in resolution and what there is really out there in the other offerings. There's a price advantage. And on top of that, this is a completely green product being manufactured -- is being able to be manufactured in any country that brings a lot more as you can imagine local manufacturing for this product. It does not use any harmful chemicals, which is normally associated with the television manufacturing and we believe it's a much cleaner and better product and also the screen is completely rollable and foldable, which means that you can really take it to and install it in any location. So we really see a lot of advantages in this product. Of course, we need to make sure that Gen-3, which is the latest offering with the technical specs, which brings it a much superior. The [indiscernible] on the market is completely finished. That should be in about 6 months, 7 months' time. And then I think we will come back with a further update on how we look at the business plan once we have been able to cross that important heat of having that product ready exactly how we envisage it.

We have the next question from the line of Chirag Shah from White Pine Investment Management. Mr. Chirag Shah?

Am I audible?

Yes, you are.

Congratulations for fantastic acquisition sir. Two questions I have. One, just a clarification or rather, I'm presuming that there are no restrictive covenants on use of technology for non-Honda customers. Whenever you start approaching them, both for sunroof and fuel tank, especially sunroof. So there is no such covenants, right?

You are right, absolutely. We will own 81% of the company. And Honda-san will be very happy. One of the reasons that they are looking at Motherson is because we're a global company, global customer base, and we have unspecified [indiscernible] with our other customers.

The second question is, I wanted to understand on the fuel tank business that you have also acquired. So any thought process on that or sunroof is the primary area and fuel tanks, you will develop as it comes across. Is this is the right way of looking at this acquisition?

Good question, Chirag. The thing is that -- of course, it's known that my views on electric vehicles and all that. But also the fuels like mixed fuels, also hydrogen fuel and all these particular things will require a plastic. Especially the mixed fuels, ethanol and all that. It doesn't accept steel or iron fuel tanks because it will corrode it. So plastic fuel tank is the answer for that. And just that we have tremendous technology of doing that. So I'm -- we're not worried about it all. And for another 10, 15 years plastic fuel tank is going to be good business.

Absolutely. And if I can just add to that. I think Chirag what's really exciting for us is the R&D capability that Yachiyo has, 3 R&D complete facilities. And this company has had a lot of strategic importance to Honda-san and has developed it over the years. In fact, in the past, not just for the fuel tank they know -- they've been doing fuel tanks since 1977, so one of the earliest in the industry. So as the trends evolved towards alternate fuels that Papa was saying, they have complete capability to be able to design and develop our tanks for hydrogen, ethanol, et cetera. Not only that, they've also done complete vehicle assembly in the past. That's how innovative and how strong this company is in engineering. And of course, we haven't even tapped the commercial vehicle market or the other offshore vehicle market, which is, again, huge possibility with this business. And on top of that, again, we have complete technical capability to develop, of course, not just a fuel tank, but pretty much anything, even the tailgates in plastics. So this is a very innovative company. It has survived over the years and is a very dear company to Honda-san and has very strong R&D capability, engineering capability, which, of course, we will harness within the group. That is -- the solutions are multifold, right? Not only can we bring other Motherson products now into Honda-san as an offering because we have the local footprint. We have, of course, the connection. And now we are serving them in a meaningful way. But take these products to other customers as well. So really, it's a very exciting opportunity. It's a partnership, which we are extremely honored to have and will really open up the gates to do a lot more with this opportunity, and we believe that there is very strong growth ahead for this company.

Fuel tank revenue contribution is almost similar to sunroof, it's reasonably big in overall [indiscernible] . That's what I was asking -- thanks for the clarification.

You're right for that right now, but as we said, I think having Honda-san there together, we are committed to growing the company. So even if in the worst-case scenario, we see one product declining, there's so many opportunities with the other businesses, that we see that I just talked to you about, the plastic tail gate, the sunroofs, the vehicle assembly. I mean, there's so much engineering capability here that we believe the thing will continue. And even if you just look at the fuel tank itself, I think it's a stable business for at least 10 years to come while growth. We can all debate, but we believe that it will continue to grow.

So I couldn't agree more on that side on the EV transition fair point. Last question, if I can, this is for Kunal. Kunal just for clarification, so the equity value that you have indicated business value of around EUR 145 million. Whatever cash is there on books post this demerger and when the acquisition closes, so the EV actually goes down, right, to the extent of cash on books. Is that the correct understanding?

That's right.

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

Sir, first question is on the R&D point which you just indicated about the strengths for, any percentage of revenue it can share how much they are generally investing on the R&D.

We can come back with that number. But I think, again, from our side, the R&D is split into many forms of development. Not just, of course, for the sunroofs, which is the leading product, but all depends exactly on what is the requirement of Honda-san for the new vehicles. And I think we will continue to maintain that as per the direction, of course, of Honda-san, what is it that they want the company to continue to invest in? And what we feel that we can use this expertise to further spend our time and money on, I think we're going to be using these capabilities because this R&D facilities, the 3 of them, 2 being in Japan, 1 in U.S.A. has been extremely successful in developing new products for Honda-san, bringing them to market and being first in the market. So as the normal philosophy of Motherson, we do not go by spending a certain percentage or something like that as a guideline because we believe that is not the right way to look at it. It depends on program specific. So it can be 1%, it can be 4%. It again depends on the customers' requirements and what it is for the region, and we will continue that trend to make sure, of course, that we're developing products and maintaining profitability and doing it at a way that the customer wants us to do.

Got it. But sir, generally, trying to understand, for example, if you take sunroof, is there any sort of technological advantage, which they have compared to other suppliers right now, which will help us to penetrate more clients in the future? So just...

They have more than 200 patents on these technologies. And you can understand why the lion share of Honda-san business has been with this company. They have been completely focused on Honda-san. Honda-san is known in the market, to use very, very good technology and quality. They have a very, very strict technical requirements, one of the toughest in the industry. So this company really ranks quite high, and I'm sure that once we take it to the other customers as well, we will be happy to absorb this technology. Of course, we have to wait for the closing. We have to get into it. We have to get in front of the other customers. And as you can imagine, this is a listed entity in Japan. So we can only do all of that once the transaction is closed, but extremely optimistic about it. Again, we will come back to you with more color once this transaction is closed, and we could talk about more traction then. But we are very confident that other customers will take it. I mean already, there are customers in Yachiyo such as [ Toyota-san], [indiscernible] [ Jiangxi Isuzu ]. So Again, some of the best customers are already there, and we don't see any reason why we can't continue to grow the customer base.

Got it. Sir, second question on the transaction side. Now generally, if you look at it in the past, we have generally acquired entire entity. This time we had acquired around 81% stake. So why is this slightly different this time? And is there any thought to maybe acquire 100% at some point in the future?

Look, again, I think the -- go ahead, Baba.

I was just saying that 19% shares having 100 times a partner, you'll think that it was not worth isn't it? But it's your way of thinking but in our way to have Honda-san as our partner can you imagine what it will do to Motherson in all the products that we are making. There's so much more that's there. So rather than looking at what we bring, think of the opportunity that you are local. We are allowed to be partner with Honda-san.