Sona BLW Precision Forgings Limited (SONACOMS) Earnings Call Transcript & Summary

Okay. Welcome, everyone. Ladies and gentlemen, good day, and welcome to Sona Comstar Q2 FY '24 Earnings Group Conference Call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] Some of the statements by the management team in today's conference call may be forward-looking in nature, and we request you to refer to the disclaimer in the earnings presentation for further details. The management will also not be taking any specific customer-related questions or confirm or deny any customer names or relationships due to confidentiality reasons. Please refrain from naming any customer in your questions, please. Now I'll hand over the floor to Mr. Kapil Singh, Head of Consumer and Digital Commerce Research India and Lead Autos Analyst at Nomura. Kapil, please go ahead. Thank you very much.

Good day, everyone. To take us through the Q2 FY '24 results and to answer your questions, we have the management team of Sona Comstar: Mr. Vivek Vikram Singh, MD and CEO; Mr. Kiran Deshmukh, Group CTO; Mr. Sat Mohan Gupta, CEO of Motor Business; Mr. Vikram Verma, CEO of Driveline Business; Mr. Rohit Nanda, Group CFO; Mr. Amit Mishra, Head of Investor Relations; and Mr. Pratik Sachan, DGM, Corporate Strategy and Investor Relations. I will now hand over the call to Vivek for his opening remarks and presentation. Over to you, Vivek.

Thank you, Kapil. And welcome, everyone, to the earnings call of what has once again been our highest-ever quarterly revenue, EBITDA and net profit. But before discussing our results further, I wanted to share an important strategic update. We've made a significant change to our vision statement, and this expanded ambition will now start reflecting in all our decisions going forward. This begins with our product and technology road map. So our vision is to become one of the world's most respected and valuable mobility technology companies for our customers, employees and shareholders. We believe mobility is a higher level of abstraction, which includes not just automotive, which is where we mostly play today, but all vehicles or devices that help transport humans and goods from one point to another. This expanded scope and expanded ambit demonstrates our growing ambitions and desire to use our technical prowess in either product or application adjacency. I will encourage all of you to look at our product slides, which are in the appendix of this presentation. That should give you a detailed mapping of our products across automotive and nonautomotive segments as it stands today. And hopefully, we can keep adding to this mapping as we move along. As I mentioned, in line with this changed vision, we have completely revamped and redone our product and technology road map. This has taken months of effort. And what we have tried to do is, in addition to the electrification megatrend that we've been addressing for a bit, we are now developing products and thought processes to capture opportunities in the other 3 areas of the EPIC future as well, which is personalized, intelligent and connected. We further added products that we intend to develop for the wider mobility landscape beyond automotive. This is easily the most extensive and elaborate product portfolio rejig we have ever done in the history of our company. We've added 7 new products to our road map this time, 2 each in the Driveline business and the Motor business, and 3 in the newly acquired Sensors business. We've also transformed how we represent our road map. So this diagram, I think, mirrors the reality of our product journey so far. Each product tree begins with one initial legacy product, which serves as the root for each of these business verticals. That's where we began. And from that root, have emerged live and evolving linear branches, which show how by organically moving only one logical step at a time, we have branched out into creating so many new products. This also has helped us add optionality to create many more products because the product tree can keep branching forward or sideways at every node point. And this creates evermore possibilities and opportunities for us as a product-driven engineering company. This truly is the power of compounding of technology and knowledge and innumerable iterations at work. Now I'll invite our group CTO, Mr. Deshmukh, to explain these changes better than I could and also the 7 new exciting products that we have added in more detail. Over to you, sir.

Thank you, Vivek, and a great day to all of you. Since this is the first time we are sharing the technology road map's new format, let me explain its structure to you. As you would have noticed, we have revamped the road map that depicts the EPIC revolution's 4 zones. The zones overlap. So although we have shown the electric mobility in blue color, there are no fixed lines between the zones. The boundaries between them are indistinct and blurred. Let me begin with the Driveline division and its legacy product, the net formed differential bevel gears. Several years ago, we moved up the value chain and developed the differential subassembly for our off-highway customers. Recognizing the unique strength of our forming technology and design capabilities, we developed the final drive differential assembly for electric passenger vehicles and began supplying them in 2018. This new product opened up new opportunities for us in the EV space, and we developed 3 cutting-edge products: the spool gear, the electronic differential lock and the epicyclic gear train. We also moved further up the value chain from the final drive assembly and developed the intermediate gear and the rotor shaft. While the former branch shows how we spent up -- went up the value chain in the drive train of the electric vehicles, another branch evolved from the straight bevel gears on the back of our technology, consolidating our knowledge and competencies in net-forming straight bevel gears, our R&D-developed spiral bevel gears by extending those capabilities. Let me now move to the Motor division's legacy product, the starter motor. This product knowledge and the manufacturing know-how of the starter motor led us to develop the drive motor for electric vehicles. The first drive motor we developed was the hub-wheel motor for electric 2-wheelers. We then developed the mid-mount drive motor and low-voltage inverter for high-power 2-wheelers and 3-wheelers. We, after that, leveraged the strengths of the Driveline and the Motor divisions and develop the e-Axle for 3-wheelers. The competency that helped us develop the drive motor and the inverter that controls the motor led us to develop a product for intelligent and personalized mobility: an integrated motor controller for active suspension. This should explain how the evolution of new branches from a node of the tree has helped us create more unique, groundbreaking products for the market. All the products depicted in this chart, which are in blue-colored circles, are the products that are commercialized. These are tested and validated products, most of which are being supplied in series production and some we will begin delivering soon, for which there are commercial purchase orders. The product road map tree is further extended to include our future products shown in white circles. These products are under development in our R&D centers in Gurugram and Chennai. In the earlier technology road map, we used to show them in a white semi-circle. You can see the logic of the new way of showing the road map. The chart clearly shows how the new products are related to the products we are already making and how they contribute to the EPIC revolution. This quarter, we are adding 7 new products to our road map. The manufacturing -- manufacturers of electric vehicles are always looking for ways of reducing the vehicle weight to extend the vehicle's range. We are developing a lightweight differential with fewer parts and special alloys that are lighter in weight without compromising performance and durability. Our R&D engineers in the Motor division are busy developing a compact cost-effective inverter that is integrated with the motor, which takes less space and is easy to assemble on the vehicle. These efforts aim to make products that bring customers higher value and added convenience. In alignment with our new vision focused on mobility in general and not just auto, we are developing drive motors for nonautomotive mobility solutions, such as AGVs, bots, marine, et cetera. Taking our gear geometry and manufacturing competencies to the next level, we are developing very accurate, exceptionally precise and highly efficient non-involute gears for industrial robots. These efforts will help us enter the non-automotive mobility sector. As you know, we have added the third business vertical, the Sensors and Software division. Our core technology here is radar sensing and perception. Our competences include semiconductor chip design, radar sensor design, signal processing, perception and sensor fusion software. Our radar technology detects life presence, child presence and seat occupancy through vital signs, such as heart rate and respiration sensing. This technology will also be used for other applications such as optimized deployment of airbags, deliver driver monitoring and gesture control human-machine interface. The technology, when applied outside a vehicle, can carry out low-speed ADAS functions such as autonomous parking, 360-degree short-range awareness and pedestrian and bicycle detection. The core technology of radar sensing and perception also has other nonautomotive use cases. It can detect motion and presence for home, office and factory automation. It can monitor the safety of workers around moving automatic equipment, such as robots, and can help avoid collision while providing guiding functions for autonomous industrial vehicles. The new restructured technology road map reflects our efforts in addressing the megatrends of EPIC, leveraging the competencies built by us over the years. We will now use this framework to decide our way forward and communicate our intentions. With that, I will hand over back to Vivek.

Thank you, sir. Masterful as always. Now back to the usual format of reporting our numbers. This has, as I mentioned at the start, been our highest-ever quarterly revenue, EBITDA and, most importantly, net profit. On a Y-o-Y basis, our revenue grew by 20%, while EBITDA grew by 35%, and net profit increased by 34%. Our margins have improved due to mostly product mix and also a little bit of operating leverage. BEV revenue grew by a solid 58% to an all-time high of INR 207 crores, and the BEV revenue share was at 27%. For H1, we continue to perform well on all 3 financial indicators: growth, margins and returns. Our revenue, EBITDA and PAT are up by 22%, 38% and 40%, respectively. Interestingly, our net profit in the first half of FY '24 is higher than the full year of FY '21. We've achieved this in the last 2.5 years of being publicly listed despite COVID, chip shortages, extreme inflation, high interest rate, geopolitical conflicts and more things that one could imagine. And while this may be surprising for some of you who have not been following us that closely, we have more than doubled our revenues every 3 years since FY '16, so FY '19 over '16, '20 over '17, '21 over '18 and so forth. And this resolute performance, despite any external event, is because of our tremendous, tremendous team. I'm the face of it, but it's the team that is behind us that helps us do this. And another thing I would add is the unrelenting focus on technology and innovation and on what is next, what will we be solving for 3 years later, we try and do it today. I think that mindset is the reason. On to our biggest strategic priority, electrification. Our BEV revenue continues to grow, and we continue to build on our EV order book. In Q2, 2 programs have gone into production, both in the Driveline business, so taking our active number of programs to 25, 10 fully ramped up and 15 in the ramping-up stage. We've also added 2 new EV programs in this quarter to our order book and 1 new EV customer. One program is from a new North American EV customer and another from an Indian OEM for traction motors for electric 3-wheelers. We will elaborate upon both of these in the next slide. So first, the order we won from a new customer, this is a North American new-age OEM of high-end electric cars. We will supply what we are calling rotor-embedded differential subassemblies for the customer's high-performance electric vehicles. This drivetrain is extremely compact because the differential has been directly integrated inside the rotor of the motor. It is and it was a complex problem statement to solve, but I'm immensely proud of our engineering team for having solved it. The second one is the traction motor program for electric 3-wheelers that we have won from one of the largest OEMs in India. They are an existing customer for the Driveline business, and we are happy to now have them as customers for our Motor business as well. This program is for their upcoming electric 3-wheelers, and this win further reaffirms our leadership position in the traction motors in the Indian market. Both these programs, as you can see on your screen, will -- should begin serial production in FY '25. Now this slide is, as always, a good visual summary of the reach and diversity of our electrification mission. This quarter, we added one new customer in North America while adding one program each in North America and India, taking us to 48 EV programs across 28 unique customers, which brings us to our order book. With the addition of INR 6 billion worth of new orders at the end of Q2, our net order book has expanded to INR 221 billion, and the EV portion is 78% of that order book. Our fourth key area is diversification, and this trend of increasing electrification and decreasing ICE dependence continues unchecked. In the last 2 years, we've seen the ICE-dependent revenue, frankly, shrink to only about 11%. So graphically, revenue mix largely similar to the last financial year. North America remains our largest end market, contributing 40% to our revenue in H1. The European light-vehicle market continues to recover strongly, which has contributed now 23% to our revenue. And India was our fastest-growing market last quarter, and its revenue share has increased to 30% in the first half. In the product mix, we've added a new segment, Sensors and Software. We completed in the first week of September, the NOVELIC acquisition. So we expect this segment's revenue share to increase rapidly over the medium term. Last quarter, if you remember, I said that traction motors would be our fastest-growing product segment despite the reduction and noise around the FAME subsidy. And I'm happy to revert that revenue share from traction motors for electric 2- and 3-wheelers has doubled from 2.5% in Q1 to 5% in H1, which means Q2 was obviously very, very good. New programs have started and are ramping up, which was always going to be the case, and it has now started coming in. Those of you again who have been following us, this at the time of our IPO was 0%. And one thing I wanted to add before I hand over to Rohit is, integrity is our first and primary core value. And as some of you may have noticed, we always share even the smallest bit of negative news and risks upfront. We did that for the FAME subsidy impact last quarter. We did that with the UAW strike impact announcement we made last month. What we would urge and request is that these announcements are received in the same spirit that they are made. Having said that, I turn this to our Group CFO, Mr. Rohit Nanda, to update us on our financials. So over to you, Rohit.

Thank you, Vivek. A very good day to you all. It's my pleasure to share our second quarter and first half results with you. Second quarter was our best quarter yet as we clocked our highest-ever revenue, EBITDA and PAT at INR 791 crores, INR 223 crores and INR 124 crores, respectively. Our revenue has grown by 20% year-on-year, whereas light vehicle sales in our key markets of North America, India and Europe grew by only 14%. Our BEV revenue grew by 58% to INR 207 crores and was 27% of our total sales. Against revenue growth of 20%, our EBITDA has grown by 35%, mainly on account of better product mix. Our adjusted PAT grew by 39% to INR 128 crores, primarily due to higher EBITDA. The PAT adjustment here is for exceptional expenses that we've incurred for NOVELIC acquisition. This quarter's consolidated results include NOVELIC financials for 1 month only as we completed acquisition of 54% stake in NOVELIC towards the beginning of September. Coming to the first half results, our H1 revenue was INR 1,523 crores, a growth of 22% against 15% growth in the underlying markets of North America, India and Europe. Our BEV revenue grew by 33%, and it now constitutes 27% of total sales in the first half. Against 22% revenue growth, our EBITDA grew by 38% to INR 427 crores, mainly due to better product mix. Our adjusted PAT grew by 44% to INR 242 crores. That's also mainly due to higher EBITDA. The adjustment to PAT here also is related to exceptional expenses that we've incurred for NOVELIC acquisition. Moving on to our cash flows for the first half. During this period, we have generated INR 300 crores of cash from operations, out of which we spent INR 141 crores for CapEx, and therefore, our free cash flow generation for this period was nearly INR 160 crores. The other large cash outflows during this period were primarily NOVELIC consideration of about INR 210 crores and dividend payment of INR 90 crores. Next one, please. The last slide is on key ratios, and I'll only talk about the notable changes here. The first one pertains to our net debt-to-EBITDA ratio, which, as you would notice, has turned positive after NOVELIC acquisition-related payment, although it continues to be extremely low. Besides this, we've seen an improvement in our return ratios compared to the last year. With this now, we have come to the end of our Q2 earnings presentation, and I'll now hand the proceedings back to the Nomura team. Kapil?

Yes. So Ronald, can we make the announcement for Q&A?

[Operator Instructions] We do receive a question coming from online. The first question is coming from investor, Jinesh.

Congrats on a great performance. So a couple of questions from my side. One is on NOVELIC, given the acquisition is complete, can you give us an update on how business has progressed since we first talked about it and how their order book has shaped up over the last almost 9 months since we acquired them? Initially, we talked about it.

Yes, business is progressing well. I mean, it's been 1 month since we acquired it. Next quarter, I would say, I know capital markets are not very long-term focused, but 1 month is too small to give you update. At the end of next quarter, when we completed 1 full quarter, we will try and integrate that into our -- how we -- in our order book and other reporting metrics.

Okay. Okay, okay. No, I was referring to when we had originally announced about the acquisition earlier during this calendar year versus now how it has progressed. Nevertheless, we will take update next quarter.

But even at that point, I doubt we would have shared order book or revenue forecast.

No, we had not. We had not and, hence, we needed if we can -- but nevertheless, we'll wait for next quarter when the complete quarter is behind us. Secondly, on the impact of strike of UAW in the U.S. So any sense on what percentage of our revenues are impacted by this strike in U.S.?

So hard to say because, as you know, this isn't a general strike where all of the customers are impacted, right? So it's plant by plant, and every day it changes. Like yesterday, I think 2 more plants have been struck. So I doubt -- and that even Ford or GM could answer this question, as of today, that what it will be. What it was for the last quarter is already reflected in our numbers. Let's see. I doubt that next quarter, there will be too much discussion on this. Most likely, this strike should resolve itself by now. We did a little bit of reading, like I'm sure you would have done. The longest strike is 113 days 78 years ago, and the most recent one is 45 days. We are on day 40 of the strike. So I would say, we are closer to the end of this strike than the beginning. When we were at the beginning, we did issue a statement and put it up on the exchange so that people will be aware. But till now, as you can see in the results, the impact is not very high. Yes, we would have perhaps been over INR 800 crores, we're not, but that's okay. We can take it. And again, like I said about the long term versus short term, regardless of what happens, right, even if the strike goes on for another month, there may be some financial hit, but it will be just for this quarter. It is a very temporary thing to have. I mean, we are not spending that much time as a management team on this.

Got it. Got it. And lastly, with respect to our EBITDA margin trajectory, so now we have crossed 28%. From current levels on structural parameters basis, what are the push and pull factors you're looking at from an EBITDA margin perspective?

Yes, Jinesh, on that, we will stick with the same answer I have given even since we went public. We will like to remain in the range of 25% to 27% for the medium term. That's our target range. Anything more is great, but that's our target range.

Next question is coming from Gunjan.

I had 2 questions. Firstly, on the technology road map, now these 7 products, can you give us some sense on what are the sort of ongoing customer engagements as to how soon these products are due for commercialization? I'm just asking this question because a lot of these, inherently, I assume were in works for a while, right? So is it something that I look from a next 3- to 5-year perspective? Or is it something that can convert within the next 12 to 18 months? So a little bit more color on these 7 new products that have been added and where you feel most excited about.

Okay, again, an answer that's not going to make you happy, but you already know what the answer is. We have no way of actually knowing with certainty that whether they will convert or not also. So probability, as always, is between 0 and 100. And time lines could be as soon as the next few quarters to maybe never. And that's one of the things we are always upfront about when we develop new products that there is no guarantee for success as you saw and you would have now known us. 2.5 years ago, if you go FY '21, when we had only 3 products, DA, starters and differential gears, all other products combined were less than INR 50 crores. This year, in the first half, 10.5%, as I shared in my presentation, have come. So about INR 160 crore in the first half itself. So if you analyze that, INR 320 crores. INR 50 crores has become INR 320 from other products. But at that point, if you -- and you did ask me at the time of IPO, and I didn't know, and that's the truth that we don't really know which one will succeed and by how much and how soon. All we're trying to say, this is our impact and this is our intent. And 3 to 5 years is safe. Yes, that we will -- if it is not developed within -- and commercialized within 3 to 5 years, we will much earlier than that drop it, and we will publicly announce that we are dropping it and it won't happen. And about excited, that's a -- I'm excited about all of them, frankly; otherwise, we won't be doing them. In our strategy workshop, about 40, 50 new product areas are discussed by the teams, and they bring them up. My painful, painful job is to say no to many of them. So these are the 7 that made it. So these are the 7 we are truly excited about. Lightweight differential, if we can reduce the number of parts that go into a differential assembly, can be a game-changer, right? I mean, no part is a good part is what is said, but obviously, then auto-component guys will go out of business. So less parts is a good part is what we're trying to do that instead of having 10, 12 moving parts, can we reduce it a lot more? That is very exciting. Very excited about, I would say, the integrated motor controller. I think it's an idea that should have been done long ago. I don't know why nobody did it, that why don't we put motor inverter, everything into one body and sell it as one product, right? It just makes so much sense from a thermal management, from a space, from lightweighting, everything perspective. Sensors, I think there is a great opportunity in the in-cabin, of course, we have discussed, but in the short range also; so all 3, I would say. Robotics, I would say, started earlier than these other 3 because they are more closer to where we are. The other 3 are slightly further from where we are. I don't know if I helped you at all.

No, at least giving me these 3 where you clearly see a big business case from an OEM perspective, that helps. And I'm assuming, you mentioned during the integrated motor controller that the competitive landscape also here is not doing a product which is out there and competition is doing it in a big way. It's relatively niche. I mean, that's what I understood from your comments.

Correct. That is the thing that it's an opportunity that we noticed. And if we can get it and get it with the customer, that would be cool.

Okay. Just the second question is on this revenue ramp-up that we've seen in this quarter on the EV -- BEVs. Is there a little bit color that you can give us in respect of is it coming from an existing OEM ramp-up or the new programs that have commissioned in the last 2 quarters, including this one itself, like a bit more color in the execution? Have we seen any new large BEV OEMs starting to kick in?

Rohit, you want to take this? I think only one traction motor program had ramped up. Apart from that, it's all same program, same customers.

Correct. It's essentially because of one large program for traction motor that has ramped up during this quarter. So Q-on-Q, there's a growth of 12.5% actually, Gunjan.

[Operator Instructions] The next question is coming from Arvind.

Just a question on Equipmake. You have said that product launch [ will come in 2025 ]. But is there any detail on the -- on sort of an order or something that you can share on Equipmake?

I didn't get the question at all, actually. Did somebody else?

I am sorry. Can you hear me, sir? Vivek, can you hear me?

Yes, yes, I can hear you. You don't have to call me sir, please.

Okay. So this is about...

[indiscernible] because I didn't understand.

It's about Equipmake.

Okay.

Yes. Any details that you can share on any sort of order win or any clarity on the revenue stream? I know it's still far away, but anything that has happened over the quarter?

Yes, sure. So it is a licensing agreement, as you know, and Equipmake has been winning orders. I think they are a public company, so have to be also like us, so we have to be careful on what they have disclosed and whatnot. But they have disclosed, I think, recently a win on motors from a customer, a North American off-highway customer. So that can be found out. But like I said, they have their own investor relations things on their website, details must be there. But on our end, so there are 2 parts of that agreement that we have signed. One is we're manufacturing motors for them for their production, and we're also developing and selling new in India and Southeast Asia. On that, I think we had given the time lines, but it can't be before 2025. Sat, do you want to add anything to that?

Yes. Thanks, Vivek. I mean it's a -- Equipmake product, I mean, our launch is sometime in last quarter, calendar year '25 or first quarter calendar year '26. And right now, as soon as the development is concerned, I mean, we are validating the design and the motors to suit the Indian conditions for our customers' expectations. So I mean, as far as the revenue for us is concerned, it will be in FY '26.

Next question is from Hitesh.

Congratulations on a very good set of results. My first question is housekeeping actually. I just wanted to understand, the other expenses on a Q-on-Q basis have come off, which has led to this margin expansion on a Q-on-Q basis. So can you explain that, what is the reason? Rohit, if you can give some more color?

Sure. So Hitesh, like I said, this is primarily because of the product mix. So there are certain products, which we -- basically, there is an assembly part of the business. So when, let's say, revenue from the assembly part of the business goes up, then typically, the other expenses tend to go down, whereas material costs tend to go up. So it's primarily because of that.

Okay. And any color on the PLI incentives? Have we started to get some color from the government on PLI? Because some companies have started talking about it, so I just want to get some color.

Yes. So I mean, in a way, I'd say, we are in touch given the sense we are going through the process that's been outlined by the government. But we'll let you know once we have all the approvals in place. So we have put an application. And as you may know, there is a separate application for each of the products. So it's a slightly long-drawn process. I'll say, we are in the queue. Once we have all the approvals in place, we'll inform you guys.

Hitesh, to add to that, we'll talk about it once it's done, as is our usual practice.

Sure, sure. And my final question is, our team is also globally writing a lot about EV adoption slowing down. I mean, it could be temporarily because the prices of battery costs went up, but the production costs are also going up globally. So anything on that front? Although you are actually adding more customers and growing much faster, but any color on that, what are you seeing on the EV side?

Fascinating question actually. Hitesh, this is a much longer answer and a very long discussion. And I will draw reference to at least 20 other industries, and we tried to study what happens from single-digit to 90% plus when technologies change and in a 15-year period. And there always comes this point where it seems to stagnate just before it's coming to that 10% to 15% mark, every single time. And most often or more often than not, it gets corrected in the next 18, 24 months, and then it starts its upward journey again. So it is a long discussion. There are lots of factors at play here. Geopolitics is certainly one of them. I mean, the post-COVID geopolitics shifting is one of the reasons this graph is not an uninterrupted straight line at a 45-degree angle, right? Second is also the new, I would say, social dynamics playing out, for example, with the UAW, et cetera, and the European unions. So yes, it's interesting times, longer discussion. We are covered regardless because we always try and prepare for growth on our own steam, which means industry tailwinds shouldn't be your primary factor of growth. And we've succeeded more often than not again. But yes, it is a very interesting discussion and perhaps we'll get some time to have it. It is going through this thing because of the battery cell cost not going down. Like if you remember, even in the solar industry, the exact same thing happened, solar panel. They went down almost like a straight line, the cost, and then it kind of straightened for a bit before starting to go down again. I think here also, the move to a better, cheaper cell technology will be what will make these tassels go away and, again, that acceleration will start. And I think it will happen. And you need a period where it seems everything is against you for this to break out or the breakout invention to happen, and I think it will. Semisolid stake, maybe some other chemistry, maybe instead of LFP, we pick another one from the first column of the periodic table because any of those elements could theoretically do the job; so maybe sodium, we don't know. But yes, it will be interesting to see.