Sansera Engineering Limited (SANSERA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 and FY '24 Sansera Engine Limited's Earnings Conference Call hosted by PhillipCapital Private Client Group. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to [ Mr. Ronak Sabharwal ] for opening remarks. Thank you, and over to you, sir.

Thank you, Neha. Good morning, everyone. On behalf of PhillipCapital Private Client Group, I welcome you all to the Q4 and FY '24 earnings conference call of Sansera Engineering Limited. We thank the management of Sansera Engineering Limited for allowing us to host the call. From the management side, we have Mr. B.R. Preetham, Executive Director and CEO; Mr. Vikas Goel, CFO; and Mr. Praveen Chauhan, COO. I now hand over the conference to Mr. Preetham for his opening remarks, and we will then open the floor for a Q&A session. Over to you, sir.

Thank you, Ronak. Thank you, and good morning, and welcome to everyone. Thanks for joining this call. As told on this call, I'm joined by our CFO, Mr. Vikas Goel, our COO, Mr. Praveen Chauhan, and our Investor Relations adviser SGA team. The results and the presentations are uploaded on the stock exchange and the company website. I hope all of you have had a chance to look at them. We maintained our growth trajectory in the fiscal year 2024. We have reported a very healthy double-digit growth annually since our IPO. This growth is driven by our efforts to expand our emerging business segments, namely nonautomotive, Tech-Agnostic and xEV. We closed the year with our highest ever annual revenue and EBITDA, at INR 28, 114 million and EBITDA at approximately INR 4,800 million, respectively. For FY '24, I'm very happy to say that our Board of Directors have recommended a dividend of INR 3 per equity share. The EBITDA margin has improved from 16.4% in FY '23 to 17.1% in FY '24 on the back of business mix and operational efficiencies. Our quarterly revenue and EBITDA were also at record levels at INR 7,459 million and INR 1,268 million, respectively. Overall, the auto industry remained buoyant during the year, with growth coming across all market segments, including 2-wheeler, 3-wheeler, passenger vehicles, tractors and commercial vehicles. The 2-wheeler segment's growth was a function of both ICE and EV growth. Historically, Sansera has outperformed the industry growth by a healthy margin. Our performance in the past few years is a reflection of the same. In terms of business mix details, quarterly numbers are available in our investor deck, I'm going to focus on our annual numbers to share some strategic insights alongside. Our Auto-ICE segment delivered a growth of 17.7%. The growth of this segment is driven by both addition as well as expansion in wallet share of the existing customers, Bajaj, Maruti, Tata Motors, General Motors and TVS. Zooming further on Auto-ICE segment, both motorcycles and PVs grew by over 20% approximately at INR 9,521 million and INR 6,014 million, respectively. These are our largest end markets in the ICE space and continue to see traction amongst the global OEMs. With our manufacturing progress, we are able to address their needs in a swift manner. HCV segment grew by 10.7%, taking the total sales to approximately INR 2,616 million with growth spread across India and Europe. Two-wheeler scooters, which are transitioning into EVs at a fast clip contribute -- degrew by 10.8%, resulting in a sales of approximately INR 1,533 million. To offset this trend, we have built a solid portfolio in -- of Tech-Agnostic and xEV products, which registered a healthy 43.3% growth. Our Auto-Tech Agnostic revenues were close to INR 2,000 million. This segment offers a variety of products, including suspension parts, braking system, chassis components, stem comp steering, aluminium forged components among the other things. We have an interesting customer lineup over here, including premium 2-wheelers and premium manufacturers who are based across the world. On EV side, we delivered INR 1,243 million in top line, reaching a growth of 52%. This growth is largely driven by the commercialization of our orders for a marquee North American customer. Moving on to non-auto side. This business has been growing in an accelerated manner. We delivered a revenue of INR 3,239 million with a 25% growth in this segment. Aerospace and Defense segment registered 19% growth to reach a top line of INR 1,093 million. Broadly speaking, this business has doubled between FY '21 and FY '24. Despite experiencing a few minor setbacks this year, the business maintains a positive long-term look due to substantial interest shown by both existing and the new customers, and we are very, very positive on this segment. On the defense side, the validation cycles are fairly long. We have begun our journey in this segment with a few marquee projects. We maintain our growth positive outlook on the segment. As expected, the off-road segment surpassed a milestone of INR 1,000 million. In fact, we grew by 66% in this year to touch sales of INR 1,144 million. Agriculture sales declined to INR 556 million. Industrial and marine engine comps, which are an offshoot of CV comps are expected to be a major driver in a non-auto category. These components are typically larger in size than CV components for larger size engines. We have recently secured significant orders in this sector from prominent international clients. Taking a minute to talk about our Swedish subsidiary. Despite some changes on account of product share reorganization in the last year, we reported an 11% increase in revenues. As we mentioned in our last call, we had several discussions with our anchor customer. Resultantly, we have received orders for additional products in this facility. Now moving to order book updates. Of the new business with annual peak revenue stood at INR 15.9 billion as of March '24. This is after our annual reset. As you are all aware, we reset our order book at the beginning of the year. This mix of our order book is in sync with our long-term vision with respect to the business mix. On the CapEx front, the new 4,000 tonne press, which will be commissioned in the H1 is well on track. In fact, our team has just recently visited the manufacturer and cleared press. Along with this, we are adding 2 more presses of 2,500 tonnes and 1,600 tonnes, respectively, to increase our capacities for the bigger engine category of components. This will be very meaningful -- this will also -- there will also be a very meaningful addition to the capacities, lightweighting and aluminum components this year as well. Typically, these components, these aluminum forged components replace steel forging components to achieve lightweighting requirements as strong demand for these components is expected from premium vehicles, EV vehicles and also hybrid vehicles. Given the nature of these components, there is a potential to increase the revenue per vehicle by 4 to 5x compared to our ICE per vehicle components. We also foresee a large export opportunities with these components. Our diverse product portfolio is the cornerstone of our continuous growth over the years. With this portfolio able to pivot and evolve continuously to meet shifting market demands as well. With several years of efforts, Sansera has built a legacy on ICE side. We strive to create the same recall for ourselves in the emerging business segment as well. Now I hand over to my colleague, Vikas Goel, who will talk about our financial highlights.

Good morning, everyone. Thank you, Preetham. I will talk about the fourth quarter performance first, and then I'll cover the full year performance. So for the Q4, our revenue stood at INR 7,459 million, which is a 21% growth on a year-on-year basis, while both domestic and international business showed strong growth in the quarter. The international business outpaced domestic business resulting in gross margin improvement by 1.2%, including the continued improvement in remanufacturing efficiencies. EBITDA grew by about 32% on a year-on-year basis to INR 1,270 million. Growth in the gross margin flew through our EBITDA, and we achieved a margin of 17% versus 15.5% in the corresponding quarter of the last year. The finance cost for the quarter increased to INR 225 million, largely due to higher levels of debt. During this period, we also completed our investment in MMRFIC of INR 200 million. So the last installment was paid during the fourth quarter. We also invested in a renewables energy project during the fourth quarter, which will help us to improve our overall green power percentage in the total energy consumption. Profit after tax for Q4 stood at INR 465 million versus INR 354 million during the last year. On a full year basis, coming to the full year basis, the revenue from operations surged by 20% year-over-year to INR 2,100 -- sorry, INR 28,114 million. The growth in Auto-Tech Agnostic, xEV and non-auto, which represents our emerging business outperformed the Auto-ICE business at 34% versus 18%. So the growth in the focus segments of Tech-Agnostic, xEV and non-auto was at 34%, while the growth in Auto-ICE segment was at 18%. As Preetham mentioned, we have multiple levers in place, which will help momentum to continue in the foreseeable future. With the effect of operating leverage, we were able to deliver a superior growth of 25% in our EBITDA, resulting in EBITDA of INR 4,800 million with a margin of 17.1%, which is a much improvement against the performance of last year. The net profit for the year stood at INR 1,875 million, registering a growth of 26%. On the debt front, our net debt stood at INR 7.4 billion. On the cash flow side, our cash conversion remains good, and our operating cash flow generation improved from 11% of the revenue in FY '23 to 15% of revenue in FY '24. Also, the operating cash as a percentage of EBITDA improved from 67% to 78%. Our CapEx for the period stood at INR 3.4 billion, including 70% in plant and equipment, 15% in facilities expansion and balance in maintenance and other categories. On a like-to-like basis, our ROCE improved from 15.3% in FY '23 to 16.9% or close to 17% in FY '24. If you look at these numbers a bit differently by excluding the capital wise progress from both the periods because that generally is an investment, which is still to start delivering results. The ROCE growth will be -- will look like 17.7% from 16.2% of the last year. Our company is in a growth phase and a lot of investments that we have made over the past few years are not fully mature or in the process of getting mature. Hence, there is headroom for improvement or increasing the return profile over a period of time. I would like to conclude this presentation and open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Bharat Sheth from Quest Investment.

Congratulations Preetham and Vikas on very good number. Sir, taking ahead, I mean, if you can give a little more color on the -- first is on this aerospace and defense where we have been -- defense, of course, is not relevant, but aerospace numbers are not in the line. So how do we see? And second thing, we have a full potential of around INR 350 crores in the new -- from the new facility, we have order book of around INR 153 crores peak revenue. So how do we really see the growth of this aerospace? And what has led -- I mean in Q4 or FY '24, where we have not been really able to reach and depends also and give some more color?

Yes. Thank you, Mr. Bharat. Yes. In fact, during our previous 2 earnings calls as well, we had indicated that CR dependent on -- in the aerospace is largely on 2 OEMs, and especially on North American-based OEM through our Tier 1s as well as direct supplies is almost 65% to 70% of our revenue comes from them. Now a couple of programs, which were scheduled to start in the last year got postponed due to the regulatory approvals for the OEMs. So resulting in a push out of our orders to the subsequent quarter. So we expect that these -- all these -- because there are a lot of processes that have been put in place to strengthen a lot of supply chain-related issues as well. So we expect that things should be much, much better in this year. While the order book remains to be very, very strong, our expected revenue generation this year, again, is expected to be very strong, very close to 40% to 50% growth. But I would be guarded because a lot of things are happening in aerospace segment, which actually is all positive. But we, as a company, are very, very positive. In fact, all the capacities are in place. As you rightly said, this facility of ours is equipped to deliver at least INR 350 crores to INR 400 crores worth of revenue. And if you really look at our order book, is also quite strong. So we expect that this year would be a good year for aerospace, commercial aerospace. Now in terms of defense, as you know, that defense is a new segment for us directly through Sansera as well as through our newly invested associate company, which is MMRFIC. So there's a lot of exciting projects that we are working on, both with the Indian companies as well as with the government of -- Indian government of companies, which are like HAL and DRDO and all the government agencies as well, and also some very marquee foreign clients. So not much of information can be divulged on this. But our journey into defense has begun, and we are very quite bullish and excited on this.

So Preetham to add, I mean, color on this Aerospace, what are we doing to derisk upon this to North American OEM to -- are we adding the customer?

We have. Yes, go ahead.

And by '27, what is our vision for Aerospace to contribute what kind of revenue?

So we expect -- no, we have already added -- we are working on increasing not only increasing the value addition, but also increasing the product portfolio itself. We've added Saab as our customers where we have added Triumph Aerospace as our customer, where these are primarily to derisk our business. And then to further strengthen our offering in the aerospace field. The Board has also given a clearance to add a special process facility to our existing machine facility. This would mean that a lot of dependency which we have today on external those for special process, would be debottlenecked in terms of both in terms of capability and capacity. So with all these things, we expect that the entire -- what I said is this facility would be used fully by FY '27.

What kind of revenue do we have aspiration to take -- get it from?

When I say that this facility would be able to deliver INR 350 crores, and it would be fully utilized, and I'm sure we are looking at -- by FY '27 to fulfill this entire facility with orders. So we should -- we are looking at anywhere between INR 350 crores to INR 400 crores of revenue by FY '27.

Okay. Great. And I have a question for the Vikas on bookkeeping. See Vikas, if I am trying to bridge, I mean what you have given see FY '23 order book versus FY '24 closing order book. See in FY '23, we had a revenue of around INR 2,300 crore and INR 600 crore has moved into this year, say, into mass production. So it should work out something INR 2,938 crores. but our revenue is coming INR 2,800 crores. So does it mean that there was some kind of a dip in the -- from the previous customer and that has brought down these revenues? So how do we really see, I mean, order book playing out and then there's some kind of, I mean, some component moving out of our sales revenue. If you can give a little more color?

Sure, sir. So the process that we follow, as and when the particular product goes into mass production. And we have a reasonable certainty that it will continue growing, we excluded from the order book at the end of the year. Now this does not mean if we remove INR 600 crores worth of orders, it is not delivering INR 600 crores as of now. But INR 600 crores is the peak annual volume. So this will still take some time to reach the peak levels. So the growth in revenue that we see from last year to this year is partially through this order book and partly through other growth factors.

And to add to what Vikas has said, an order book, see, we do not take any kind of this is an LOI volumes that would be indicated by the OEM. So we generally take it as the same because we need to create capacities as well on that. But generally, when you look at this, this would also include their market expected projections. So there would be about 10% to 15% variation, both plus and negative side on each of the orders, depending on how the market receives those kind of models. So when we say that INR 600 crores is the LOI volume, so we should take some kind of haircut when we are -- we do that when we are creating the facility. So when we move the INR 600 crore order, it is partial contribution has come in the previous FY '24. There would be contribution in FY '25. And I think most probably this would peak out in FY '26. So that is how you should look at.

Okay. Preetham or Vikas, I mean you said that operating leverage is playing out. But that operating leverage is, I have seen that particularly in Q4. Our EBITDA has improved only because of improvement in the gross margin, but other expenses are -- I mean, as a percentage to sales has almost remained same. So how do we see the EBITDA if assuming that this gross margin sustain at this level? So if you can give a little more color.

Sir, there are 2 pieces in this. One is the product mix, which largely impacts positively or negatively the gross margin. Secondly, is the manufacturing efficiency or operating efficiency, the improvement projects that we are running on a regular basis in various streams for improving the cost efficiency. That also works. And of course, third piece of operating leverage or margin efficiency comes from the operating leverage when the volume increases, which is other expenses. So there could be in the fourth quarter, specifically, if you see, we had a slightly higher freight cost because of the Red Sea crisis. That was partially responsible, not fully responsible because not a significant cost. Similarly, there would have been certain other minor costs, but we've been able to maintain the cost not increase it substantially despite the growth in revenue.

[Operator Instructions] The next question is from the line of Abhishek Jain from Alfaccurate Advisors.

Congrats on a strong set of numbers. You said CapEx was high around INR 340 crores, and that's why the debt has increased to INR 890 crores. It has reflected also in the finance cost. So I just wanted to understand what is the -- what is your debt repayment planned ahead? And what kind of the CapEx we can see in the next 2 years?

Sorry, Abhishek, can you repeat your question and go a little slow.

Sir, what is your CapEx plan for the next 2 years? And what is your debt repayment plan going ahead?

See, we are a growing company, and there is a very strong order book especially on new generation of components, higher CC engines and the things. So this all requires -- and we are in a vertically integrated facilities. Generally, our kind of components also requires front loading of our CapEx. So this year, because we are adding some 4,000 tonne press, 2,500 tonne press, and there's a lot of front-loading of forging capacity is the thing. We are looking at approximately about INR 400 crores of CapEx this year. But going forward in the next year, it should be back to our normal range of between INR 300 crores to INR 350 crores, depending on the kind of order inflows that will be there. But since the order book is very strong, and we are also looking at adding capabilities. So there would be some front-loaded investment this year. We are quite confident that with our cash flow and has marginal increase in our debt profile, we will be able to -- we will be able to manage our investments. And in case there is -- and we are reasonably very light on leveraging. So we have not leveraged highly, so we have option of taking further debt in case it is required. We will keep our options open as to how do we go about this funding of this.

Okay. And sir, the current segment mix in non-auto segment is around 12.5%, so how do you see the growth aid? And what's kind of the mix you are looking for in auto versus non-auto in the coming year by FY '26/'27?

No, If you really look at our overall full year basis, our Auto-ICE is at 76%, and our other businesses of non-auto, xEV, Tech-Agnostic stands at 24%. But if you really look at the exit quarter, it is slightly higher. It is almost at 26% instead of 24%. So going forward, we have already said that on a longer mission, we intend to reach 40% of our revenues coming from xEV as well as non-auto and tech-agnostic components. And if you really look at our business order book, the future order book. It is very well acquired. Our businesses are flowing in that to actually say that, in fact, our order wins are significantly higher in this category of components. So we are quite confident that our vision, we are progressing towards achieving our numbers in that.

Okay, sir. And my last question on the other expenses side. So basically, it is quite high around 26%, 27%. And this quarter, you have impacted because of the Red Sea issues. So what is your plan to reduce the other expenses to change ratio and improve the margins?

So as I mentioned earlier, there are various projects which are underway currently in terms of improving the operating efficiency or the manufacturing efficiency in various areas. We have invested in the fourth quarter in a green energy or renewables energy project. which will further improve our ratio of renewable energy. So this not only helps us to contribute towards the sustainability. It also helps us to improve -- reduce our costs. Then there are various other projects currently under wait. We are sure that we'll be able to handle or keep other costs under control.

And what is the difference in the margin in international business versus domestic business? Because in international business, you are facing some issues in the Sweden and that's why it's back to margin as well So if you can throw some light over there, how -- what's your plan?

So Sweden business is a small portion of the total international business. Our total international business is about 32%, out of which, Sweden is hardly 6%. So 26% of our total revenue comes from export from India, which is a very, very fast-growing segment. So we are quite positive that this fast growth in the exports from India, which definitely is at the highest margin ratio compared to the other 2 segments will continue to help us positively.

The next question is from the line of Arjun from Kotak Mahindra Asset Management.

Congratulations on a good set of numbers. Sir, just continuing from some of the previous questions. Firstly, in terms of utilization, if you could just talk about that, where we are currently. And of the CapEx, you mentioned INR 400 crores for FY '25. How much is it for new capabilities? And what are the new capabilities that we are talking of?

On the utilization of the capacities that we had. We had spoken about that this year, we might reach around 69% to 70%. We are very much on track and slightly better than that. So as the existing business continues and as the domestic market grows, we will continue to improve this. We optimally think that the best in the auto sector could be 80% of capacity utilization because of cyclic behavior during the entire year. That's on the current capacities. On the CapEx side, typically, we are talking about close to around 40% growth going into Auto-ICE and most of the CapEx going into newer technologies, which could be aluminum and it could be tech-agnostic EV and non-auto. We are on track on a broad basis, and we'll continue to do so going forward.

In terms of assets...

Just to add to what Praveen has said that in the last year, we've added almost 26% of our capacity has gone into PVs and CVs on Auto-ICE. About 40%, that is 20 out of -- 40% has gone into tech-agnostic component and non-auto. Only about 15% has gone into auto 2-wheelers in the legacy components, but 15% also is for high-end premium vehicles category of investment. So mostly our new investments are going into, as I said, that into higher category of engine components like industrial engines and agriculture and heavy commercial vehicles and as well as 40% is gone into tech-agnostic and non-auto.

So essentially, this enables us to increase our addressable market?

Right, right.

Sure. And does this INR 400 crore also include overseas capacity?

No. No, it does not include any overseas capacity. There is some investment that has been done in Sweden facility to increase our automation levels for the new order that we have acquired. But that is to an extent of about INR 15 crores to INR 16 crores. Other than that, there is no other investment that is considered for any overseas facility.

Sure. Sir, and the second one, just on Sweden. So this year, just working on numbers, we are very close to the target that we mentioned in the previous conference call of INR 160 crores. Just wanted to understand what would our EBITDA margins be for the year for the overseas for Sweden? And in terms of our outlook for FY '25/'26, since we are investing for new capacities, is there -- what could be the size of the order win?

No, basically, I'll just first tell you about order win and then Vikas and Praveen can talk about the EBITDA margin and what we are looking at. See, when Arjun you -- like in the -- during the last year, we had said that Volvo has taken up this derisking proposal where we had -- wherever we were 100%, we have been cut by about 20%, 30%, 35%. And we have got similar order. So in that process, there are 2 lines, 2 kinds of lines were operated in Sweden facility. One is a high-volume, fully automated line in which we were 100% -- we were catering to 100% of Volvo's requirement. While the volume from that line was cut, and they have added new components, which was generally done on a mixed line, which was primarily not automatically. So if we have to continue doing that, then it will cost a lot of labor cost, and it would not be feasible for us to produce. What we have decided is since they have a 17-liter engine order has been confirmed to us, and this is what is going to take us back into the normal levels of revenue, which will be in excess of about INR 200 crores. So we are investing about INR 15 crores to INR 16 crores in automating the second line in order to ensure that it becomes feasible, and we are on track for about 10% to 11% of EBITDA. Now current year, Praveen, can you just take the current year numbers actually, see what we are looking at.

See, current year is a transition period. The investments have just started, and it may take around 3 to 4 months, at least to do that activity. And after that, only we'll start getting the benefits of that automation. So current year being the transition period, we expect a marginal improvement from last year's numbers, but the real margin improvement would happen in FY '26. So that's where we stand. On the overall business, we are on a growth track, as I think mentioned that we have acquired an order of 17-liter connecting rods in a 100% capacity. So that full volumes would actually appear in the next financial year, which is '26. So '26 would be an interesting year to see wherein margin improvements would happen and the top line growth would also happen.

So this year, we should expect between 5% and 6% EBITDA, Arjun.

And then move '26 to closer to 10%?

Yes, 11% -- 10% to 11% is what we...

And for FY '24, we would have done closer to low single digit 1%, 2% margins?

6.4%.

Okay. Sure. For -- so we are expecting flat margins '24 to '25?

That's right.

That's right. That's right.

The next question is from the line of Laxminarayan from Tunga Investments.