Samvardhana Motherson International Limited (MOTHERSON.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '26 Results Conference Call, hosted by Samvardhana Motherson International Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. VC Sehgal from Motherson. Thank you, and over to you, Mr. Sehgal.

Good evening, ladies and gentlemen. Thank you for joining the SAMIL results conference call. I'm pleased to announce that Board has approved the results of the second quarter of financial year 2026. The company has delivered a strong performing -- operating performance across all business divisions. The teams have worked very hard to ensure bottom line growth and realize the benefits of some of the transformative measures undertaken. Vaaman will talk more about this. I'm very happy to see that the early milestones we have achieved our industry-agnostic capabilities, built on a strong platform as we start the journey of the seventh 5-year plan. We are seeing strong momentum in our aerospace and consumer electronic businesses. Our 3CX strategy continues to augur well for us. Further, our booked business stands at USD 87.2 billion as of September 2025. We are thankful to our customers for their continued trust in us. We also appreciate your continued support and confidence in Motherson. I would like to hand over to Vaaman and the team to provide a walk-through and business insights. Over to you, Vaaman.

Thank you, Papa. Good evening, ladies and gentlemen, and thank you for joining the Q2 earnings call for FY 2026. As Papa was saying, SAMIL has delivered a very strong performance, reflecting solid operational momentum and financial discipline. The company reported revenues of INR 30,173 crores, EBITDA of INR 2,719 crores and a normalized PAT of INR 856 crores. SAMIL had outperformed the industry during the quarter with 8.5% growth on revenue on a year-on-year basis. The growth was contributed by volume and content and as well addition of an acquired asset Atsumitec, which we informed you all earlier. I am pleased to share that we have delivered double-digit growth across normalized EBITDA and PAT over the same period last year. Our performance is particularly noteworthy when viewed against the backdrop of an evolving production landscape and bouts of volatility in the broader external environment. I would like to now provide a brief walk-through on the profitability side. As trade dynamics continue to evolve, a greater degree of clarity and stability is now emerging within the manufacturing ecosystem. We continue to engage in constructive discussions with our OEMs and as of this quarter, there is about $10 million of tariff-related costs on our P&L, which will flow albeit with a lead lag effect. The transformative measures for Western and Central Europe announced earlier this year are beginning to bear fruit, especially in the polymer business. The profitability of the polymer business moved from 6.4% to 7.4% on a sequential basis, demonstrating these improvements despite the quarter being a seasonally weak quarter for Europe with the holidays. During the quarter, we have booked provisions of approximately INR 36 crores as an exceptional item in addition to approximately INR 136 crores that we booked in the first quarter. Majority of the transformative actions are in place with some bids to follow in the second half of the year. We do anticipate further acceleration of improvements in performance during the second half of this year, especially in the modules in Polymer business division. If you look at the production scenario, the global light vehicles industry grew by approximately 3% year-on-year, reaching a production volume of 22.2 million vehicles. This growth was largely driven by emerging markets, particularly India and China, while Europe remained broadly stable, and North America witnessed modest incremental gains. You can look at this on Slide 7 in our presentation. Looking ahead, we expect production momentum to strengthen as most premium automakers are nearing completion of their platform transitions and are all set to roll out a series of new models. This optimism is also reflected in the upwardly revision global production forecast for the full year, now converging around the 90 million-plus mark. We continue to invest to support our growth emissions with a large part of our CapEx going towards setting up avenues for growth. Two new greenfields have been operationalized during the quarter, and 10 more are at various stages of completion with the majority expected to come on stream in FY '27. You can see this on Slide 11. We have also spent approximately INR 2,600 crores of total CapEx in the first half. And for the full year, would still be within our annual guidance that we have provided earlier, although we would be on the upper end of the scale, INR 6,000 crores plus 10%. More details on this are on Slide 10. Despite the large growth capital inflated working capital and transitory impacts on profitability in the first quarter of the fiscal year, our leverage at the end of the second quarter remained stable at 1.1x net effective debt to EBITDA. We expect the leverage ratio to be around 0.9 by the end of the year contributed by improvement in the business profile, better free cash flows and reduction on the working capital front. You can look at this on Slide 12. On ROCE, we are at 14.2% as at the end of September 2025, impacted by the transitionary impact on profitability in the first quarter, early-stage ramp-ups of all the new greenfields as well as the inflated working capital. This should creep up again as performance normalizes in the second half of the year. In our Investor Day on the 5th of September, we spoke about our ambitions for the future and evolution as a design, engineering, manufacturing and assembly powerhouse. I'm pleased to report significant strides we are making on this DEMA journey. Consumer electronics business continues its sharp growth trajectory, having operationalized one of the facilities in this quarter, total 2 plants are operational now. The largest one is left to come on stream in the later half of FY '27. Based on the September run rate revenue, Q2 demonstrated a 36% growth over the first quarter. This will further pick up pace in the second half of the year. We also expect this business to be positive in profit in the first year -- first full year of operations. that itself speaks a lot about the operational excellence that the teams have been able to deliver on this very significant project for us. Aerospace business delivered a 37% revenue growth in the first half of FY '26 on a year-on-year basis. We became Tier-1 to Airbus earlier this year, and that is already giving us desired results. We are in advanced discussions for complex and high-value large packages. Book business between consumer electronics and aerospace is already now at a whopping USD 3 billion, up from USD 2.7 billion in March 2025 and is further expected to see a sharp ramp up by the time we next report this figure to you. We're also further enhancing our capabilities on the technology front. We are wanting to add more than 5,000 engineers in the next 5 years, building and bolstering our competency with global business services that we have built in-house and our AI platform. A new building will be coming up in the latter half of the year to support this growth. You can look at more information on this -- on Slide 15 and 16 in our presentation. I'm extremely excited about the journey ahead of us, and we have entered into our next 5-year plan and next 5-year chapter with momentum, opportunity and strength of our DEMA capabilities that we have built as a platform. We are really geared up now to seize these opportunities and push the boundaries as we move forward. With this, I would like to conclude my remarks and open the floor for questions. Moderator?

[Operator Instructions] Our first question comes from the line of Kapil Singh from Nomura.

Pretty solid quarter. I wanted to understand on the Modules and Polymer division, we have seen a pretty good step-up during this quarter, probably a lot ahead of expectations. If you could articulate what are the -- just this journey, what exactly are you doing? What are the steps? Where are we in this journey? How much has happened and how much more is left? Just some color there would be helpful.

I can take this question. Look, in the last couple of years, we've been on a transformative journey, apart from the large number of acquisitions. You've seen that the European zone has been reading from the EV not being as successful as anticipated. So a lot of extra capacity A lot of things were built up for that reason. While Motherson had a balanced approach, we were asked by the customers to take over a lot of these troubled suppliers and we have done so, and we've had a plan of reorganizing ourselves so that, of course, even our capacities can be further orchestrated by this addition that we have or for example, companies like Dr. Schneider, et cetera. And I really look to combine forces to see where we can be operationally more efficient and drive some of the changes. We also had a complete management team change over there, and that management team is now fully in grip of the complete operation. We will have Christophe in the subsequent calls coming up because now he has completely taken control of the Modules and Polymer division as a new head over there. And together with him and the new people that we brought on board, including engineering, HR, et cetera, we've really built a very strong team over there that are looking at all the plants and making sure that, again, we convert all those red units that we had and those underutilized units to combine with all the acquisitions and have a very, very efficient operation going forward. We also restructured some of the operations. We have moved -- relocated business from different plants to, again, drive more synergies and just overall bringing a lot more focus on the shop floor delivering these programs with low levels of scrap and high level of quality, and also invested in our plants by redoing like paint shops, et cetera, to make sure that we are again relevant and some of these assets that had not been invested in, in the past from the prior ownership. So we have done all of that. And that's what you're seeing is taking fruit. Of course, some of the older programs are still in the system as they wean off and the newer programs which have been won at better margins and better grip over the launching of the program, this should continue. And we believe that the large part of the restructuring is behind us and the performance will only improve from here as long as the numbers, of course, hold up. And we're very excited about the new programs that are going to be launched from these facilities. And if we do a good job there, we definitely will see much better performance coming up. So the transitory work is done. And I think now from quarters on from here, you should see improvement.

Okay. And that's great to hear. So a large part of the transformative work is done, can we say about maybe what, 75%, 80% of that is done?

Yes. Look, it's a continual process. It's not that we will do it and stop. We will continue to look at ways that we can still be more and more efficient in those countries. There's a lot of pressure from the customers who are looking at sourcing from East Europe, North Africa, I'm just talking about the Europe zone in general. So we have to be really on top of things and continue to focus on AI, automation, GBS, which we spoke about, that should deliver again, more efficient operations for us. So it's not something that we will stop. I think the first plan that we had, yes, is 75%, 80% done. But next year, we're going to think of how we can continue to push even more and build a completely new plan and continue to drive efficiencies in the operation.

Okay. Great. Second question I had, you talked about hiring 5,000 engineers and also expanding capabilities in Gen AI. Can you articulate a bit more. What exactly is the vision here? Or what is your thought? What are the opportunities here from your perspective that you are trying to tap?

Papa, can I take this?

Yes. Vaaman, go ahead please.

Yes. So look, of course, we are seeing a lot of progress that has happened in the last few years in terms of automation, in terms of software, having intelligent capability. And we are ourselves having a lot of strength. We already have about 5,000 design and software engineers in the group that are able to, again, give us our information systems. That's one of our key strengths for when we do acquisitions that we can get access to relevant data and create strategies of how we can improve the operations of the plants that we acquired, et cetera. So we think that's a huge strength. And now we're wanting to double down on that. So with partnerships as well -- external partnerships, build out ourselves and our own capability and a strong foothold from the India side where we have strength, that's something that we are really wanting to, let's say, double down on. So we will give you more and more information as we develop on this journey. But first few results are very promising. We're looking at very, very interesting software that can make the workloads that much more efficient, faster to respond and it's also about communication and how quickly that we can get some of these things on our response time to our customers' engineering lead time. So there's a whole bunch of things that are to happen. Each of the different verticals and the plants are focusing on that. So please do give us some time. This is -- this was announced at this part of this 5-year journey. So we do have 5 years to get there. But we will be giving you regular updates, but it's extremely exciting. And our vision is to eventually be able to really do a lot of the production in a very a good automated way and using our people to value and skill them up into doing even more things for the group. And going from 27% to 108%, that's a lot of growth. There'll be a lot of things for people to do, and we want to be efficient while we grow and use our existing people for this growth.

Just 1 last one. You mentioned that premium car makers, they are going to come up with a significant launch plan. By when can we expect a ramp-up of this plan?

No. I think you have to see the carmakers results for that and their commentary on that. I think the second range of EVs, I think the first range of EVs, of course, was really come up -- really came up in a very fast way because of the entire environment pushing EVs to come. But the next round of EVs, which are coming now have had a lot of time for development, and they really stand apart from the first time that they tried their hand at EV. So I think that the new range that's coming up will be significantly better. Of course, we've always said that, look, EV will take its time and we will have a balanced approach and our exposure to the engine or the EV is still in a very, very balanced way. We are not taking large bets on EV or something like that. But what we are seeing is that the capability of the carmakers as they are getting more experience with the EV, they're coming out with products that are more relevant and cost effective and attractive to the customers. While we still believe there will be a healthy mix, there will always be ICE, there will be hybrids, there will be EVs. There will be a mix of all of this. And I think our portfolio is totally geared to take advantage of all the different types of vehicles that will be over there, and we won't be hurt by one or the other being more. What I was trying to say is that there's a lot of exciting new models that are coming up, and you can look at any of the carmakers commentaries, whether it's the German ones or the Japanese ones and even the American ones, everyone, including the new age ones, which are anyway launching a lot of platforms, and we are pretty much partnering with all of them. So it's a very exciting time for us, and you can see a lot of their products in the auto shows.

Our next question comes from the line of Raghunandhan N. L. from Nuvama Research.

Congratulations on extremely strong numbers. First question is on the order book. Order book is large at USD 87 billion for the next 5, 6 years. Within this order book, would it be possible to indicate how would be the breakup between all new orders and replacement orders and how much is the current EV share in your revenue? Would you see EV share also reach over 20% of revenue in 5, 6 years, similar to the order book share of 22%?

Thanks Raghunandhan. Vaaman, who will take this particular question, please?

Kunal could support me on that. But definitely, look, we are wanting to keep a balanced approach and definitely, whatever is there in the market, I think that will reflect in some of our businesses compared to the others. But we do see that EV in the middle has tapered off, but we have significant wins in the new platform. So I do see that growing as the market grows. What's interesting for you to see is that a lot of the new platforms they are being offered by the carmaker in EV and non-EV as ICE variants as well. So regardless of which one really takes off, they're kind of also hedging their bets by offering it and seeing what the consumers want. Well, of course, there are, of course, some EVs that are being launched as well. But a lot of the platforms are also coming in both variants. And I think we will really win from that because our content will go in both the platform. But Kunal, maybe you can add on.

Yes. So just to give you a context from a number perspective, the USD 87.2 billion, we don't have the breakdown right now between new and this. But needless to say, you could take the 5, 6 years to get a good sense of what the trajectory is going to look like. Our EV revenues right now is 11%, and in the order book, you see a dip from 24% to 22%, which is largely reflective of what Vaaman was saying in terms of new launches that are happening along with non-EV powertrains as well. And hence, the share has shifted plus the pace of growth anticipated in EVs has ebbed and accordingly recalibrated the volume trajectory associated with it thereby bringing the 24% down to 22%. Directionally, is this reflective of the industry somewhat though obviously, we are one among the industry participants. So I don't know how others are shaping up on this account. But at least the movement from 24% to 22% is largely the nature of the industry that it shaped up now.

Very helpful. Secondly, on the emerging business, profitability has improved to 9.5%, 110 bp improvement Q-o-Q. Can you indicate what's led to this improvement? What's the one-off cost in Q1? And also please talk about efforts to further expansion of profitability.

Kunal?

Yes. Sure, sir. So in quarter 1, we had highlighted the fact that we assimilated Atsumitec for the first time in that quarter, which on a relative basis, were a lower-margin business as one end. Two, we had started ramping up our consumer electronics business, which as you can imagine in the initial space is obviously not profitable. As the ramp-up of the consumer electronic business has happened together with some improvement in the Atsumitec business, you are seeing the trajectory move up. You would see more of this as aerospace is also ramping up as some of the other Indian businesses that are there with the tailwind now on Indian growth as well, you should see overall this number to move up as we move through H2 as well.

On the aerospace side, 37% growth in H1 is a very strong number. And has there been improvement on the profitability side, there was some pressure on AD profitability. If you can indicate directionally, how is the improvement even on the EBITDA? And if you can share revenue and EBITDA, that would be great.

I can take this and Kunal, maybe you can support me as well. Look, I can tell you from the directional side, we are definitely making a huge amount of progress, which the customer is also recognizing. And I think, again, we have taken a bold step by increasing the CapEx in that facility because in the past, it really was not invested on something that I was telling you for our CapEx numbers in my opening notes, that we have to make some of these CapExes that will upgrade the facility and make us feature ready for the next 20 years of orders that we can get from these facilities. These are extremely critical parts. These are propulsion parts, engine parts and the customer only trusts very few suppliers with things like this. So I think the transition journey is on. We are obviously pushing the teams to do more and more. Never satisfied and in a normal way. But the teams are working extremely hard and the direction is of a constant improvement. Last couple of months we have been seeing that. And of course, in the next quarter, I hope that, that will come up even stronger. But most importantly, like I said, is we have the customers' trust. We are winning orders, as you saw, and the customer really does have confidence in our capability. We have to continue this momentum. But overall, it's a very, very good picture, and we believe we are going to grow even further with this and have even more opportunities. So overall, very pleased with the performance, but we need to keep pushing from here.

Our next question comes from the line of Gunjan Prithyani from Bank of America.

My first question is on the order book that you mentioned of [ 3 billion ] for consumer electronics and aerospace. Can you share a little bit more on how is the split between the 2 businesses? And what sort of conversion time lines should we be looking at for this order book?

Vaaman?

Yes. Look, we can't give you specific breakups. We are tied by confidentiality norms. But what I can tell you is that, of course, on the consumer electronics side, a lot of that is ramping up already in the next year for that order since their order books are much shorter and the aerospace business is obviously more long term. So I think we take your direction, and we will see if you can come back next quarter and try to come up with some more details around it. But at the moment, we are not able to disclose more details. But like I said, it will ramp up quite fast next year for the consumer electronics side and the aerospace is a more consistent order build-out for the next decade.

Sure. No, I appreciate that. I mean the reason I asked that is as an analyst, I'm honestly grappling with how do I think of the revenue ramp up in this business? In the consumer electronics specifically. I mean, of course, profitability and all is something which will follow through. So I'm just hoping for a little bit direction from you, but how do we think about the revenue line of this segment?

Sure. I appreciate what you're saying. Please allow us some time, and we will come back to you and see how we could show you more color on that in the next quarter. Like I said, the ramp-up is still coming next year. So we have some time but we will -- we would see what -- how we can give you some more information. Right now, we'll have to make sure again that from all our contracts and everything that we are -- what we are allowed to say and what we are not, we have to make sure that we are in line with what we have contractually signed. So please bear with us.

Okay. No problem. My second question is on the commentary that you sort of called out second half will be better. I'm just trying to understand, when you think about second half, is it acceleration both in terms of revenues as well as margin improvements from the transformation program and the reason I ask that is there's a little bit of uncertainty around this whole Nexperia impact on the production of the European OEMs, right? So in that context, how do we think about the revenues in second half and the profitability, of course, is covered from the transformation program.

Go ahead, Vaaman.