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

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Results 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.

Well, thank you very much. Good evening, ladies and gentlemen. Thank you for joining the results conference call of SAMIL. First of all, a very Happy Diwali to all of you and your family. I am pleased to announce that the Board has approved the results for quarter 2. Motherson has delivered a consistent performance against the backdrop of global uncertainties. We have posted highest ever quarterly revenues. All the divisions have shown a good double-digit growth. Customer continues to trust Motherson with the highest ever booked business of USD 77.2 billion. The environment is also offering us a lot of opportunities. We have announced 15 acquisitions since September 2022, and the team continues to explore more. This is definitely a work-in-progress quarter. And I have with me Vaaman, Pankaj, Kunal and Rajat to provide further business insights and clarify any of your questions. I hand it over to Vaaman. Vaaman?

Thanks, Papa. Good evening, everyone. So as Papa was saying, SAMIL has delivered the highest ever quarterly revenues of INR 23,500 crores, which is about 28% growth year-on-year. And with that, an absolute EBITDA of about INR 2,000 crores, which is 34% growth year-on-year. All the business divisions have performed well and were further supported by 4 acquisitions coming on stream in this quarter. These were SAS, the mirror business of Ichikoh, Saddles, and Rollon. Our ROCE on business excluding the greenfields and the M&As that were done in the current 5-year plan has improved from 12.6% in FY '23 to now 16% in HY/FY '24. As we speak, we have a solid booked business of more than USD 77 billion, which is up from USD 69 billion as reported in March 2023. All of this, we have been able to achieve in a challenging business environment, where wage inflation across key geographies, rising interest rates and geopolitical uncertainties continue to mount pressure. Thankfully, there is slight respite coming from energy and commodities stabilizing although these are at higher levels than pre-COVID. On the automotive production, developed markets were impacted by the annual summer shutdowns, disruption in supply chain for key European OEMs and labor strikes in North America. At a global level, production remained stable at 22 million, due to significant growth coming from emerging markets, specifically India. And now India and China comprise about 40% of global LV volumes. With the ever-changing and unpredictable external factors and evolving industry dynamics, we have taken several measures and initiatives to remain agile and breathe with the market. A few I would like to highlight. We continue to remain in constructive discussions with our customers as sharing of inflationary cost structures will remain a recurring feature in the short to medium term. At the customers' behest of acquisitions, we have added 22 facilities in Europe and 7,000 associates with the recently closed M&A. Given this footprint expansion, we have also announced a phased reconfiguration in a few countries in Europe. This is done to streamline our operations and improve efficiencies and deliver more synergies. Current quarter results include a onetime cost provision of about INR 250 crores, which would enable us to be competitive on a sustainable basis and capture future growth from our reorganized footprint. In emerging markets, specifically in India, there has been a spurt of growth opportunities for both auto and nonautomotive business. India is among the fastest-growing economies. And as you are already aware, most of the OEMs are now building new capacities to support this growth. We're also investing INR 1,500 crores of CapEx in India to set up 10 new greenfields. Few of them, which will come online this year and the remaining in the subsequent fiscal year. This includes capacity for both automotive and nonautomotive business. Therefore, we are revising our full year CapEx guidance to about INR 4,500 crores plus/minus 5%. This is done to support the growth that is coming out of emerging markets and CapEx outlaid for the acquired assets, which were not part of the earlier guidance. Our net debt has increased by INR 5,000 crores, but this is mainly driven by the payout for the acquisitions of nearly INR 3,800 crores, which were closed during the quarter, and the higher CapEx that we are going to put in to capture these growth opportunities. Consequently, the leverage ratio has also increased to 1.9x EBITDA. But please note, this is a temporary increase and well within our stated policy of 2.5x. As you can imagine, to capture these growth opportunities, we definitely do ought to invest in CapEx. I'm pleased to inform that we have announced 15 acquisitions in September 2022, which have a combined pro forma revenue of about USD 6.4 billion in gross revenues and about USD 2.6 billion in net revenue. Integration of closed transactions is progressing well and is completely on track. I would like to thank our customers for their continued support and trust in Motherson. And with this, I would like to conclude and open the floor to question and answers. Moderator?

[Operator Instructions] We have our first question from the line of Raghunandhan N. L. from Nuvama Institutional Equities.

Congratulations on the profitability growth and ROCE improvement, also wishing festive greetings to everyone. Sir, my first question on the stand-alone side, raw material cost as a percentage of sales is higher than the last 3 quarters, and even the employee cost is higher. What has led to this cost increase? Is there any one-off? Or -- and would you expect that RM cost to sale to normalize ahead?

Can you hear me?

Yes, sir.

It's Kunal here. So look I don't know if you're referring to employee costs, employee cost is a function of the nature of the business that we are in. If you look it as a percentage, employee cost has actually decreased on a quarter-on-quarter basis. It was 11.4% as I see for the 3-month period, June '23, and it is 11% for the 3-month period, September '23. The absolute value would obviously go up . Because there's more business that we have done. The top line has grown accordingly in that line. If you're referring to the cost of material, it's a mix of businesses, as you know, in stand-alone that we do. And it's dependent on how the commodity prices are, et cetera, et cetera. In this particular quarter, we also had the business that we had acquired, the DICV business, which has a metal component to it and then it varies depending upon how those commodity prices has played out. At an aggregate level, I think the margins in the stand-alone business has actually improved, and that's showing you the operating leverage that's there in the existing business also showcasing in some way how the growth in India is playing out.

Just to understand and sum up, so this increase in the raw material cost would be mainly because of the DICV metal components effect? And would there be any increase in input prices as well in this quarter, which you think can normalize in the coming quarter?

Look, it's a variety of different businesses. There's metal, there's polymers, there's wires, there's wiring harness. So given the variety of mix, it's very difficult to predict how things will go into move. And much of this is really a pass-on construct, at least in India, majority of it will have a pass-on element to it with some lead lag effects. So we don't really worry too much about it.

Got it, sir. So stand-alone, when we break it up, there is wiring harness, modules and polymers. When I look at the segmental reporting, these emerging businesses, how much of that number would be coming from the stand-alone?

We'll come back to you, very difficult to really...

No, fair point. I will take it off-line. Secondly, on SMP, profitability has reduced on a Q-o-Q basis. Would it be mainly due to lower volume and higher employee cost? Was there any one-offs?

Yes. So for SMP, as you know, the majority of the business is in Europe. So definitely, if you're looking at on quarter-on-quarter and not year-on-year, you will see differences because this quarter has a lot of the holidays in Europe and the shutdown, so it's not really the right reflection. You should look at it year-on-year. Apart from that, of course, there are multiple challenges in the Europe region, you know what's happening on the macroeconomic front. Not only that, some of the customers are also not hitting the volumes that they wanted on the EV front. Luckily for us, we are engine-agnostic, so where we might not be selling as much on the EV side, some of the platforms on the non-EV side are getting extended. So those kind of challenges are still there. You are seeing quite a bit of macroeconomic pressure still coming up, now the winter coming. A lot of things are still to play out over there. But like we mentioned in the report that talking to the customers and getting those discussions with them on support for capacities that were not filled up or for commodity prices fluctuations that are happening, they are ongoing. I think the good part is that their confidence is on us. They're giving us more and more acquisitions. We're taking on more assets there. So definitely in times to come, this -- once it stabilizes, we'll show a better result, and we are working closely with the customers to take support where we are getting hit for no fault of ours.

And the impact of wage increments, would that be already factored in numbers? Or is there any major increase expected in coming quarter?

So which -- for which -- are you talking about in general? Are you talking more about...

In general, sir.

Yes. So most of the wage increases are already -- has already happened have been factored in. There could be certain locations where there could be a certain event where the regulation changes or something like that, where we have to change it midyear, but most of them are already -- you're already seeing the impact of that.

Sir lastly, on the loss of net monetary position in Argentina, the net effect is INR 57 crores, right? And this should be one-off? Or is there any more impact expected in Q3? Excluding this cost -- excluding this the interest cost is INR 360 crores. Would that be the fair number to work with for coming quarters?

You're right. Look, in Argentina, it's a special situation where the Central Bank has disallowed ForEx payments for importing material and hence, you have liabilities sitting in dollars and euros, which we're unable to remit and as the currency has devalued, it's created a large ForEx loss. The impact of that, we have classified it in interest cost because it's -- there are corresponding cash that is there where we are earning interest. So this is the net monetary position, which is the income we are generating on the cash that we are sitting on versus the ForEx loss that we have incurred there, which is the INR 130-odd crore number given in August and September, there was a very steep depreciation in the Argentinian peso after this regulation came into play. Where things stand, I believe the new government is coming into play in November, the election will happen some time now. And by December, there will be greater clarity on how the monetary position will look like going ahead. So difficult to comment on it if it's one-off or not, but hopefully, after this depreciation the impact will be significantly less even if there is any. Secondly, on the interest costs, you're right on the INR 360 crores. That -- the number may be a little bit actually lower, because there would be other charges, et cetera, the upfront payment, et cetera, that is done for all the debt that was raised right now for all the acquisitions. Those would have also bloated up the interest cost to some extent. So I would say on a normalized basis, this would look more like INR 300 crores to INR 320 crores versus the INR 360 you are referring to.

We have our next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Few questions from my side. One is with respect to -- you've called out for organic growth of about 18% at consol level. Any color which you can give on either organic EBITDA or organic EBITDA margin for the quarter to have like-to-like comparison?

Sorry, could you repeat the question again, you're not very clear, Jinesh.

In the presentation, you have called out for organic growth of 18% at revenue level. Similarly, can you talk about what would have been organic EBITDA or EBITDA margin for the quarter?

The EBITDA margins for the quarter for the organic business, is that what you're asking for?

Yes, yes, yes.

So that if i remember I think it is 8.4% odd if I remember right. The number is there. I think it's INR 180 crores is what we need to reduce from the INR 2,000 crores. So that's the INR 1,820 crores number for the organic piece which should tantamount to roundabout I think 8.4% if I am getting the math right.

Got it. Got it. No, this is helpful. Secondly, we have also called out for restructuring in Europe. So is the large part of costs already reflecting in second quarter? Or we expect some more provisionings coming in coming quarters? And what exactly are we doing there?

Yes. Thanks for that. Look that is a -- the majority we're taking it upfront. It is -- as you know, we've added 22 facilities and 7,000 people. So obviously, a lot of those facilities that we have taken over are not running at full capacities as these were some troubled facilities that the customer asked us to take over, so we are looking at merging some of the facilities, really rationalizing footprint in that context. So we are really breathing with the market because we are growing significantly in that region. So that will again require some reorganization. These are all that we have already put into play. These were all parts of the acquisition when we took that over. So we are taking them all upfront. So majority is already there.

Jinesh, I had said in the beginning that this is a work-in-progress quarter. So we closed a lot of the acquisitions, I can't give immediately a magic this thing -- a bullet which will solve the problem. But give us 3 months, watch what happens next quarter...

Sure. Sure. Right. And lastly, we have talked about the booked business going up to $77 billion at a consol level and SMRP BV we've also shared the number. Would it be possible to share the net order book number of SMRP BV which we've to share which for March '23 was close to EUR 20 billion, EUR 19.7 billion to be precise. What it would be for September '23?

Jinesh as we have moved to the booked business construct, I think it give a wrong picture. I think the booked business gives you a better reference point to see how the trajectory is versus the revenue stream that you are seeing on a quarterly or annual basis as the case may be. So request if we live with the booked business construct.

Okay. So in that context, the delta in booked business over a period of time is the gross addition, right? That is a simple way to look at it?

You are saying is this gross revenue? No, so look, the order book -- the booked business moved from $69 billion to $77 billion, which is only automotive, right? On the nonautomotive side, at least on the aerospace side, you would see we've highlighted the fact that after the acquisition of AD Industries will be $1.3 billion on the aerospace side as well.

Right. So the $77 billion is the gross revenues, right? Not the net revenues as we report in P&L?

No, this is in relation to the economic revenue that is there, closer to the net revenue construct rather than the gross revenue.

We have a next question from the line of Arvind Sharma from Citi.

Sir, the first question would be on the broader demand scenario that you are seeing in the SMRP BV business. On the organic part, where do you see demand going on from here, both for industry as well as for SMRP BV? That will be the first question.

Look, you're seeing a lot of new launches that are coming up in the Europe region and I guess in the global in general, I mean, SMRP BV is not a global enterprise. So it's probably more helpful if we talk about the different regions. We talked about the immense traction that we're seeing in the developing economies. We're seeing a lot of stuff that's happening in India. So the demand is holding very, very strong there. Internationally as well, like I said, there are some challenges in EV with some of those models. Customers have spoken about that. But whenever that happens, if the customer comes back and even more facelifts and new model launches to capture the customer back. And I think our strategy of 3CX10, no customer, no country, no component is favoring really well for us because we're not overexposed to EV and with that engine is really agnostic. So we are seeing growth, even though there could be pockets where new demand could be a little bit weaker, Motherson continues to grow because of our diversification strategy.

Sure. And sir, just one clarification, I think somebody asked it previously as well. This INR 250 crores of onetime cost provision, is it reflected in the 2Q P&L anywhere?

Yes, it's coming as part of the exceptional items.

That's -- so this entire INR 250 crores is in the 2Q, is in the second quarter, the one which you reported?

That's right. That's right.

We have our next question from the line of Siddhartha Bera from Nomura.

Sir, first question is on this acquisition. So means what we understand is in the past this company used to do about like 11.5% margins. I understand we are in the process of restructuring. So any color how much improvement can we do potentially, say, in a year when we are done with this entire restructuring process and the business is making normal -- is happening in a normal pace.

Sir, which acquisition you're talking about? We've done 15 since September '22 so...

This is the SAS, which had come for 2 months in the quarter.

Right. So SAS is a running business, there they -- and it is a profitable business, so it is very different to some of the other acquisitions that we have done. So some of the reorganizations are more towards the other acquisitions, which were not performing as well and which we need to restructure, but SAS is looking more towards growth. We've actually added the CapEx in there for growth. There's not much restructuring or one-offs that are happening over there. There could be a small exception, but in general, we are seeing that as a growth business. Kunal, do you want to add something there?

Yes. So if you're referring to the margins of SAS, please bear in mind, it's 2 months, August, September. August is where the summer shutdowns have been. So this is not necessarily reflective of assets' capability is the way to put it. We do anticipate things to improve as in quarter 3, quarter 4 when the production levels are much more normal. And from a restructuring perspective, as Vaaman was mentioning, right now, we see a lot of synergy benefits, lots of areas where it can grow. And the business is structured that -- on a more variable cost structure versus some of our other businesses. So we see some of the places which are unviable at least in SAS, it's a lot more easier and flexible to move the production centers around. So it's relatively a more flexible manufacturing construct.

Yes, it's important that you understand the real synergy of Motherson SAS because whatever Motherson SAS is assembling right now, Motherson currently produces. So the synergy benefits are tremendous and we hope to play them out in coming quarters. It's just been 2 months. Please give us some time, but we believe it's a very exciting opportunity and really transforms us to a Tier 0.5 and gives us a lot more ability to grow on the assembly side as well.

Understood. Understood.

In just 2 months, we're already transferring one from SMP to SAS, isn't it? Because...

I am sorry sir, your voice is not very clear. Can you come closer to the microphone, please?

Vaaman can you?

Yes. So already, you saw that there are some movements of business from our SMP or polymer business into Motherson SAS. So we're already starting to push through the synergies and like I said, please give us some quarters and a lot of that will play out down the line.

That's great. Sir, second question is on the CapEx number of INR 45 billion now, shall we assume that this will be the normalized CapEx going ahead? And does this factor in the CapEx for the new acquisitions also which we have done?

Yes. So that's the exact reason, Siddhartha that we are highlighting the revised CapEx. We had highlighted INR 3,000 crores plus/minus 10% earlier, now we're revising to INR 4,500 crores which includes a portion of the CapExes for new acquired assets that have been assimilated in this quarter. Also, it includes the 10 -- actually 11 greenfield, brownfield that is being set up in emerging markets, 10 of them in India, 1 of them in China. If you remember 7 of them we had anyway highlighted to you in March '24 (sic) [ March '23 ], which was part of the INR 3,000 crores that we had talked about. There are 4 new ones that have been -- for which we have got the orders now and hence, is under the execution stage for which the additional CapExes will be required. So the INR 4,500 crores really carries a lot of growth CapEx into it, given how the Indian environment is, given how we are seeing a lot of traction on the nonautomotive side of the business as well. And hence, you would not say it's a normalized maintenance CapEx is the way to put it. That number will probably be half odd or so of this number.

We have our next question from the line of Pramod Amthe from Incred Capital.

Is there a scope to get this increased CapEx split across divisions? All your overall INR 45 billion, if you have to split across your 4 verticals so that we can get some...

Pramod, we can't hear you too well.

Mr. Amthe, can you please use your handset mode?

Yes, I'm on handset. No, what I was asking was the INR 45 billion CapEx, which you guys have called out. Is there a scope to give it by division wise, so that we can -- that can help us to build the revenue profile or growth profile going forward?

Don't have the details right now. Maybe we can add some of those details going forward. But I think as I mentioned, you should consider half of it as, give or take, regular maintenance which will flow in all the divisions in the respective places. The new one, we can give you more color as we go ahead. We don't have it right now.

Sure. And the second question is with regard to the broader industry related trend for wage costs. The type of negative surprises, some of the auto OEMs faced in U.S. Do you see that falling through for the -- some of the Tier 1 and Tier 2 suppliers also as increased wage cost when you renegotiate? Or second, considering your global operations and inflation being pretty high in many of the countries, you expect some repercussions of the same in many other plants?

So look, as far as we are concerned, we have already closed this year's increases. And we are doing it year-on-year. So we don't have a pile up of 3 years and then putting together as 1 contract, which might be there in more unionized environments. So for us, I think it's a regular -- we've already been talking about the inflationary pressures in the last year and this year as well. So more or less, we are already to date on such increases. Now how does that affect all other companies, really, we can't comment.

We can't guide, we don't even know what will happen.

[Operator Instructions] We have a question from the line of Joseph George from IIFL.

Just a couple of questions. One is when you look at our debt level at the end of September and think of how it will move the next 6 months, can you please guide us on the pluses and minuses that will come through in the next 6 months, maybe more acquisitions or payment against more acquisitions, working capital moving up and down, et cetera. Just some guidance there would be helpful.

Let's put it this way, we can't really guide on acquisitions, difficult to predict when it will happen. But needless to say, there is a strong pipeline. There is a lot of...

Okay. Can I just interrupt you there, sorry. So when I said acquisitions I was referring to payments for the acquisitions that have been announced and yet to be made so that's one and whether you expect some reversal of the working capital et cetera, going into the second half of the year?

Yes. So organically, if you're referring to I think we should continue our deleveraging path organically. Even after considering the INR 4,500 crores of CapEx guidance that we have spoken about, I think working capital, if you would have seen our presentation earlier in March, we had highlighted roundabout INR 2,000 crores of additional inventory. That number is down to INR 1,500 crores. So directionally, things seem to be improving. As we synergize with some of the acquired assets, we do expect quarter 3, quarter 4 to play out better. That's how traditionally, our business has been where quarter 3 and quarter 4 have typically been better than quarter 1s and quarter 2s. So with that construct, we do expect some amount of deleveraging to happen. Vaaman, you want to add?

Yes. Look, I just want to reiterate that this is a really, really exciting time for us here at Motherson. We have patiently waited for the last 4 years waiting for this moment really in a sense where the customer is asking us to go and take up all these acquisitions. When interest rates were extremely low, and a lot of deals were happening, we were patiently waiting and deleveraging. So we have come down significantly because we knew that we have to grow at -- when the time will come, there will be opportunity for us to really do large acquisitions and increase our footprint in the customers' portfolios, and that's what exactly is playing out. So it's not that we are looking at these numbers and saying the numbers have gone up significantly. This has been planned for us. We deleveraged from our erstwhile levels because we anticipated that this growth -- there will be a window of growth. And if you can understand, we are literally the last man standing in that sense, where the customers are saying, please look at some of these acquisitions and support, and we have the headroom to be able to do it. So this was an event, which is really setting us up for the future. A lot of growth will come in. As you can see, we're putting in a lot of investments for these acquisitions and the growth opportunities and this would play out in the coming quarters. I mean, 15 acquisitions in 12 months, that is a pace that we really haven't seen before. And like I said...

Never before.

Yes, and we were -- we are prepared for it.

Sure. Got it. The second question that I had was in relation to CapEx. So you have upgraded the CapEx number to INR 4,500 crores for this year. But this wouldn't include CapEx that you would incur for some of the acquisitions, which are yet to be completed there because there are some due to get completed, I think in 4Q or so, which will add another INR 1 billion or so in terms of revenues. So would it be right to assume that FY '25, we should look at a CapEx number, which would be higher than what you've guided for FY'24 because some of those acquisitions will happen towards the end of FY '24?

Joseph, I think Vaaman highlighted 10 new greenfields which we are setting up -- for which we are spending INR 1,500 crores. That's nothing to do with any of the acquired assets. So I don't think this is normal CapEx levels that our business will be carrying going forward. These are growth CapExes more specifically in India, just given the trajectory of what's happening in India. If you see every OEM has announced expansions. And as vendors to them, we too need to be ready to be able to cater to these expansions that are happening in India. Plus on the nonautomotive side, there is a great amount of traction to set up facilities in India and showcase our strength in there. So that's the organic part. You're right to the extent that the assets which we haven't closed, the CapExes associated with that is not embedded in this number. And as they close, we will have better color and we can come back to you with whatever changes that needs to be done around this. But for the current set of business for the current quarter, we do anticipate this INR 4,500 crores this year should be more than sufficient.

[Operator Instructions] As there are no more questions, I would now like to hand over the call to Mr. VC Sehgal for closing comments. Over to you, sir.

Thank you all very much. I would again request you to understand that this is a work-in-progress quarter. We are always seeing that traditionally, the second quarter is always where the holidays come in, in Europe. And then coupled with the UAW strike in U.S., it sort of dampened the whole particular this thing. But I believe that the quarter was phenomenal, and the results, the teams worked very hard to deliver this superlative results that are there in front of us. Thank you very much and wish you all a very, very happy Diwali and all the festivities. Thank you. Bye-bye.

Thank you, sir. On behalf of Samvardhana Motherson International Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.