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

Ladies and gentlemen, good day, and welcome to Sona Comstar Q3 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 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. I will now hand over the floor to Mr. Kapil Singh, Head of Consumer and Digital Commerce Research India, and Lead Auto Analyst at Nomura. Kapil, please go ahead.

Good evening, everyone. To take us through the Q3 FY '24 results, we have the management team of Sona Comstar: Mr. Vivek Vikram Singh, MD and Group CEO; Mr. Kiran Deshmukh, Group CTO; Mr. Sat Mohan Gupta, CEO of Motor Business; Mr. Rohit Nanda, group CFO; Mr. Vikram Verma, CEO, Driveline Business; and Amit from Investor Relations team, along with Pratik Sachan, DGM, Corporate Strategy and Investor Relations. Now, Vivek, I'll hand over the call to you now for the presentation and opening remarks.

So thank you, Kapil. On behalf of Sona Comstar, I welcome all of you to the earnings call of what has been our best quarter ever in terms of EBITDA, net profit, BEV revenue, BEV revenue share as well as order book. But first, as is our policy, when talking to our owners, our shareholders, we'll begin with the challenges. So first, the off-highway market, particularly in India, has been weak and production declined further in the last quarter. Given our high market share in this segment, this has affected the sales of our differential gears and differential assemblies to this market. Second, aggressive discounting by a few EV 2-wheeler companies has temporarily disrupted the EV 2-wheeler market and its market share, which has affected some of our customers' sales, thereby impacting the sales of our traction motors in Q3. We expect this to continue for few months, but we believe it is unsustainable beyond that. Third, the Red Sea crisis. While the current impact on our operations is negligible, if the crisis continues, we expect adverse effects due to the longer shipping time, higher freight costs and increased inventories. Fourth, we lost about INR 25 crore of revenue in October due to the UAW strike impact in the United States. However, the strike is now over and this production loss will partly reverse in the current quarter. The good news, as is usually the case, far outweighs the bad. So in financial terms, we achieved our highest ever EBITDA and net profit despite marginally lower sequential revenue. We have also introduced a new product that should improve electric powertrains for the EV 2-wheelers and we will cover this in detail later. As the calendar year has ended, we got new Ricardo’ estimates and as per them, we have increased our global market share in both differentials gears as well as starter motors in 2023. In terms of market, the European light vehicle market has recovered strongly this year. 2023 was also positive on a Y-o-Y basis for the U.S. market, and things continues to look good in both of these markets. The Indian market has been mixed across the 3 segments that we serve and will likely remove volatile over the next few quarters. On the ESG front, we continue to make progress on all of our sustainability targets, and I'm very happy to report that we reduced the emissions intensity of our operations by over 10% last year. Q3 of FY '24 was also one of our best quarters for business development. We won 5 new BEV programs and we closed our quarter with an all-time high net order book. Three of the new BEV programs, 1 out 3 innovative and unique powertrain solutions, which -- which more than anything reaffirms our position as a technology leader in the products that we make. Lastly, from where we stand today and what we see from where we are standing based on customer schedules and our strong order book, we are certain that electrification will continue to drive strong growth for us in the immediate, in the medium as well as the long term. Now coming to the numbers. Revenue grew by 13% while EBITDA and net profit increased by 22% and 24%, respectively. This is because our margins improved due to operational efficiency, better product mix and lower material costs. Our EBITDA margins have now been higher than our usual long-term range of 25% to 27% for the last 5 quarters running. So I guess I must comment on this, and I have to add that we expect to stay above 28% in the near term. Coming to BEV revenue grew by 28% in absolute terms, to the highest that we ever had, INR 222 crores, while the BEV revenue share increased to an all-time high of 30%. Coming to the 9-month figure, we've increased our revenue, EBITDA and PAT by 19%, 32% and 34% respectively. As I mentioned before, since this is the end of the calendar year 2023, we've got our global market shares calculated. Our starter motor market share improved from 4.1% to 4.2% as Europe and the U.S. market where we have higher market shares have grown faster than Asia. Our market share in differential gears has grown from 7.2% to 8.1% of the global volumes. Just to add some perspective here, this increase is the equivalent of adding around 1/3 of the entire Indian car market to our market share in just 12 months. Now our first strategic priority, electrification. In this, our BEV revenue share has increased from 25% in the first 9 months of FY '23 to 28% for the first 9 months of FY'24. Our BEV revenue is rupee terms has grown by 31% to over INR 6.1 billion in the 9-month period. The growth in BEV revenue for us has been more than double the growth in non-BEV revenue, with EV traction motors and EV differential assemblies being the fastest-growing product segment for us this year. We continue to build on our EV order book. In Q3, we have added 5 new EV programs and 2 new EV customers. There are 3 new Driveline program additions, 2 of our existing customers in the North American BEV market, which I'll elaborate upon in the next slide, and 1 is for the domestic electric off-highway segment. There are also 2 new motor programs for us, both for electric 2-wheeler makers in India. And one is the new customer, the other is an existing top 5 e-scooter maker. So yes, we want to highlight these 3 new EV wins where we will supply 3 of our new or recently developed products. which is always one of the most key criteria for us as we move along with our journey, that's how many more branches can we open up into our revenue growth? So the first one on your left is the EV order we won from a new customer. It's an Indian legacy OEM of ICE and electric 2-wheelers. We have developed a new product, an integrated motor controller for the customer's high-performance electric motorcycles. It's a unique design, and I'm very, very proud of our engineering team for having done that so quickly. The second one is the spool gear. You may have heard about it in our earlier presentations as well. For electric SUVs of a global OEM of electric vehicles, this is an existing customer. We will supply these spool gears for the 3 motor architecture of the customer's most advanced, and that's the highest, top SUV. This winl come after a year of joint hard work between our customers and our engineering teams and it will be one of the highest stock products ever made for electric SUVs in the world. This program will begin serial production in the current quarter itself. So that's a plus. The third is the EV order we won from another existing customer, North American new age OEM of high-end electric cars. Last quarter, if you recall, we had won the order to supply rotor embedded differential subassemblies for this customer. And now we've been awarded the epicyclic geartrain and rotor shaft as well. This win is kind of proof of how we are growing our content in a car by developing new products in adjacent areas of our focus area. Now these 3 wins also demonstrate our capabilities to offer solutions to customers for all types of BEV powertrains. I mean if the customer is looking to innovate and have a product-based differentiation, we are clearly the partner of choice for this. And this is the advantage that I think we've been talking about for a while that a technology-led company like ours has over -- those companies who build to print for standard parts. Now -- with new wins, we now have 53 EV programs across 30 unique customers. Exactly about a year ago, I think this number was 41 programs across 25 different customers, which means in the last month we've added 12 new programs and 5 new customers. As I mentioned in my opening statement, Q3 was also one of our best quarters for business development. And on the back of the 5 new EV programs I mentioned and the 7 new non-EV programs, the net order book has increased by 9% over the previous quarter to reach an all-time high of INR 240 billion. The proportion of EVs in the order book has also grown to 79%. With this, I come to our fourth key area, diversification. Now the strong demand recovery in Europe in the first 9 months means that the revenue share from hybrid and micro hybrid has been higher than in the previous years. This trend of increasing electrification and decreasing ICE dependence continues unabated and this year, we've seen the ICE-dependent revenue shrink to only about 10%. Coming to geographies. North America remains our largest end market contributing to 39% of revenue and this is despite the negative impact of the UAW strike that I spoke about earlier. The European market was the fastest growing market attributing 25% to our revenue. India remains our second largest market and its revenue share remained stable at 29%. In the product mix, the chart changed a little after the NOVELIC acquisition. We've added a new segment called Sensors and Software, which is small at the moment, it's just about 1%, but we hope to add to this as we go along in our journey. The fastest growth segments in products for this year have been EV traction motors and EV differential assemblies and although differential assemblies here seems to have come down by 1%, t is more the off-highway differential assembly business that has actually lagged not the EV differential assembly. Differential gears, of course, have also grown quite strongly and this reflects in the changes in the product mix, where you see that it's gone up from 32% to 33%. In the end market or market segment mix, we've added a new segment, semiconductors and embedded software. This is to reflect the non-product or the services revenue that we do in NOVELIC. The weakness that I mentioned in the off-highway demand has resulted in the share of nonautomotive revenue declining from 12% last year to just 10% in the first 9 months of this year. With having covered this, I'll turn to our group CTO, Mr. Kiran Deshmukh, to update us on the technology front. Over to you, sir.

Thank you, Vivek. Good evening, ladies and gentlemen. We have been making the mid-mount drive motor and low voltage inverters for 2 and 3-wheelers as 2 separate products so far. This quarter, we have added a new product in our product portfolio, which is an integrated motor controller. With this development, we have come a step closer to developing an integrated drive unit, the x-Axle that we show on our technology roadmap. The integrated motor controller distinct from a separate motor -- motor and controller setup has several key aspects. It offers our customers matchless advantages and this slide shows some of them. Number one, compact design. The integrated unit combines both motor and controller into a single, compact package leading to a smaller overall footprint. Two, simplified installation and maintenance because with integration, the complexities involved in connecting and configuring separator and controller units are significantly reduced. This simplification can lead to easier installation and maintenance since there are fewer connection and components to manage. Three, improved efficiency and performance. Our integrated system is designed to optimize the interaction between the motor and the controller, leading to higher efficiency and better performance. This is due to the fact that controller is finely tuned to the specific characteristics of the motor. Four, reduced wiring and connectivity issues, since the motor and controller are contained within the same unit, the need for extensive wiring and the potential for connectivity issues is greatly reduced. This also enhances reliability and reduces electromagnetic interference, which is EMI issues. Five, cost effectiveness, due to reduced installation time, lower maintenance cost and improved energy efficiency. The overall cost of ownership of the new product is much lower. Sixth, customization and optimization, the integrated unit can be more easily customized and optimized for specific applications. We can design these units for a particular application of the OEM, ensuring that the motor and controller are perfectly matched for the requirement. Next, aesthetic and space considerations. Our integrated unit has a more streamlined and aesthetically pleasing design. It's particularly advantageous in applications where space is a premium since it occupies less room than a separate motor and controller. Eight, thermal management, in our integrated unit, thermal management has been more efficiently addressed since the system is designed to handle the heat generated by both the motor and the controller in a unified manner. Next, communication and diagnostics. Our integrated unit comes with advanced communication capabilities, allowing for better diagnostics and monitoring. This includes real-time feedback, on performance, predictive maintenance and more sophisticated control strategies. Finally, 10, functional safety. This new product is a high integrity system that meets rigorous safety standards and follows best practices in software development processes for the automotive industry. This ensures both functional safety and quality management in its design and implementation, making it reliable and suitable for critical applications. So in conclusion, our new integrated motor controller unit offers a compact, efficient and easy to install solution with improved performance, safety and reduced wiring complexities compared to separate motor and controller systems. On that note, I'll hand it over to Rohit to cover the financial update.

Thanks, Mr. Deshmukh. A very good day to you all. It's my pleasure to share our third quarter and 9 months results for FY '24 review. In the third quarter of the year, our revenue grew to INR 777 crores, which is a year-on-year growth of 13%. Compared to this, the underlying industry growth was 11% in our key markets of North America, India and Europe. Our BEV revenue grew by 28% to INR 222 crores and it constituted 30% of our overall sales for the quarter. In terms of EBITDA and PAT, it was yet again our best quarter at INR 227 crores of EBITDA and INR 133 crores of PAT showing a growth of 22% and 24% respectively. Growth in EBITDA was higher than revenue growth, primarily due to better operational efficiency and lower input costs. EBITDA adjusted from ESOP costs under the newly approved ESOP scheme of 2023 comes to INR 233 crores. And if we were to deduct adjusted EBITDA growth, it was 25% year-on-year. Similarly, adjusted PAT at INR 137 crores is higher by 28% year-on-year primarily due to higher EBITDA. Coming to the 9 months results. On a year-to-date basis, our revenue for 9 months grew by 19% to INR 2,300 crores against 14% growth in our key markets of North America, India and Europe. Our BEV revenue grew by 31% and it now constitutes 28% of total sales. Against 19% revenue growth, our EBITDA grew by 32% to INR 654 crores and PAT grew by 34% to INR 369 crores. Growth in EBITDA was higher than revenue growth, primarily due to better product mix, operational efficiency and lower input costs. EBITDA adjusted for ESOP costs similar to what I have just spoken about for the quarterly results grew by 33% to INR 661 crores. Our PAT adjusted for ESOP cost and exceptional expenses in the previous quarter grew by 37% to INR 380 crores, mainly due to growth in EBITDA margin. The exceptional expenses were on account of acquisition of NOVELIC. Coming on to our key ratios, we have seen improvement in our return ratios primarily due to improvement in our margins. Our working capital turnover ratio has also improved due to better efficiency in the working capital. Our VA/employee cost and net debt-to-EBITDA ratios are largely similar to the March level, whereas fixed asset turnover ratio is slightly lower due to higher capitalization during the last 9 months. This brings us to the last slide in our presentation, which is on ESG update. So this is the first time we are providing you with an ESG update. So we have recently published our second sustainability report and it's available on our website. I would like to share the key ESG highlights for FY '23 with you. The first one means we've been rated by Sustainalytics as a low ESG risk category with a score of 14.4%, which puts us in the top 9% of more than 15,800 companies rated by them. On the environment front, like Vivek mentioned earlier in his comments, we have improved our energy intensity per rupee of revenue by 10% and water intensity by 2%. Our Gurugram and Manesar plants have won silver medals in India Green Manufacturing Challenge this year. Coming to the social aspects, we were certified as a Great Place to Work in 2023 for the first time and in fact, we've been recertified in January of this year, again as a Great Place to Work with a higher rating than last year. As part of our social initiatives, we are also incubating startup innovating for sustainability in partnership with IIT Delhi and IIM Ahmedabad. Through our other initiatives to provide sanitation and other facilities to school kids, we have positively impacted nearly 5,000 student lives. On the governance side, the highlights include the winning of Golden Peacock Award for corporate governance in 2023. In terms of board structure also, we are going beyond what has been mandated for us. So we now have 5 independent directors and 2 women directors in an 8 member Board. The promoter of the company holds the office of Chairman in a nonexecutive capacity, which is also not so common in the Indian listed space. So these were the 3 highlights on the ESG side. With this update, we have now come to the end of our Q3 earnings presentation, and I'll now hand the proceedings back to Nomura team for Q&A.

[Operator Instructions] We will now go on to the first participant [indiscernible].

Congrats for a decent set of margins. My first question was on your integrated motor controller. If you can little speak about how has been the journey in terms of the product approval? How much time does it take to get this kind of product approved? And what is the pathway to -- you've spoken about this getting adopted in the premium motorcycle, what is the pathway to get adopted in the more of a mass market product going forward? If you can answer first question, I'll get back for the second.

Mr. Deshmukh, I think you'll be best placed to take [indiscernible] , I just wanted to add is aside that almost 30% margins are more than decent.

And your excellent margins it was an understatement, I agree.

Mr. Deshmukh, sir, do you want to talk about the product development process and approval element?

Yes. So this goes to -- I mean, in automotive industry, there is a process of approval, testing and validation by the customers, typically it takes its own time. But in this particular case, and today, with the electric vehicles, this cycle time is much shorter. But still, this is a traditional 2-wheeler manufacturer in India. So it did take its own time and this is the work which has been going for the last almost 3 years that we started working on this. So in terms of time line, you can say this, but now having developed this product, we can quickly develop products for different applications because this is sort of a modular design that we have developed. Having said that, to address your second question, for the mass manufacturing, again, it depends on the layout and the space constraints that the particular vehicle requires, typically mass produced 2-wheelers have hub wheel motors. This particular application is for mid-mount motor. So there are certain differences between -- or specifically applying this particular motor for a mass manufacturing -- mass manufacture of 2-wheelers will not be reality because the type of motor which is used there is quite different.

Adding to that. And I think Sat can add further. The same concept can be applied to a hub drive motor also, but you've to understand there that this has to be led by the customers' requirement and demand because when you're redoing the powertrain of a vehicle, you are in a sense redesigning the whole vehicle itself. So you have to start from scratch and then say, what would an ideal electric 2-wheeler look like? And that's the stage at which we typically get involved. But Sat you can shed some light on applicability of integrated motor controller, not just for mid-mount but for hub wheel as well.

Yes. I mean, it opened up a lot of opportunities to read across some of the learning what we have on mid-drive and integrated motor controller on our hub motor technology. And so -- it can be useful for a motorcycle as well as our scooter operations. And also on the timing, one point is, I mean, it also depends how much validation and what's the development stage the OEM is and how much validation they would like to do before they go to SOP. And based on our experience, I mean, that time, it's very, very different between OEM and the amount of validation each and every OEM does to validate the product. And it's not only the validation of motor controller, it's the complete vehicle validation they do.

Jay, you have a second question as well?

Jay, do you have your second question? No, I think he just on mute -- he just omitted himself -- erased the question, sorry. Kapil. Can I go to you, Kapil?

Yes, sure. Thanks, [ Deanna ]. So I also wanted to check on this margin guidance, you have changed the guidance or increased it to some extent from earlier range of 25% to 27% to 28%. If you could just talk us through the factors why we have done this?

So as in all things, we go by data, 5 quarters if the guidance is not true and you are doing more than what you said, you should [indiscernible]. So that's the real reason, we don't see -- so why we said 4, 5 quarters, if you go back actually and read our transcripts, I think about 4 quarters or 5 quarters ago, I said that, I think it is going to stay above 27%. So that's kind of held true for 4, 5 quarters. Most of it, Kapil, is material price. So we have seen enough of these cycles to know that when material prices, especially steel and copper start going up, your revenue grows much faster than your profit. And when the reverse happens, your profit grow much faster than your revenue, which is the natural cycle. So it's more a percentage thing, and we don't see any indication of steel going up to where it was in 2021, et cetera, anytime soon. This is why for the near term, we will hold to it. If it changes, of course, we will also change. As they say, when intelligent people are presented with the new data, they change their opinion.

If you could you also talk about profitability profile of your business, the way things are shaping up? Is that also something that has contributed to this margin yield because we've heard some concerns that, for example, some of the motor business could be less profitable. So some of your thoughts on this would be helpful.

Yes. So obviously, look, all products are not alike. All customers are not alike and all markets are not alike. There are low-margin products. There are low margin markets and there are low-margin customers. And it is a mix. As a management team, your job is to balance it and try to solve for absolute profit growth. The percentage is, frankly, an outcome, and that's what eventually, at the end of the quarter is what you realize that, that's what it is and then you try to explain it, we don't try to set out to do that. The solution or what we are solving for in the equation is how can we sustainably grow our absolute profit at a rate that we want while not taking any decision that affects us in the long term. Because all of these decisions have a bearing, which is very large in the 4 to 5 years period. So that's the goal. Because see, eventually, if you do discounting of price, you can do growth, you can optimize growth while sacrificing a little bit on margin. You can maximize margin by sacrificing growth. So it is a balance that you have to play. I think we are fairly worse with it now, and we continue to play that. These ups and downs in market segments will happen. They are out of our control. So let's say, like this quarter, I said that there are 2 weak ones, electric 2-wheeler market is a lower profit segment market and that our customers sales are lagging so that is also a contributing factor.

And I have 1 more question on the bus opportunity. We have recently read a lot of news flow that the Indian government is quite keep to increase the EV bus adoption in India. And there are various kind of orders being discussed as per news flow. As far as you're concerned, you have a tie-up with Equipmake for bus motor, right?. So just in terms of how this opportunity is likely to evolve, what is your view? What kind of discussions are happening with OEMs, if at all, just some views on that would be helpful?

Sure. So as you would seen in our presentation also for the last 3 years, we've always maintained that the 2 segments that are likely to electrify fastest in India are electric 3-wheeler and electric bus. Just because of the way the industry is structured, it's an economic asset, and if you run it for more than 5 or 6 hours, the payback is far faster in an electric vehicle then a ICE vehicle. So it's just economically sensible to switch and we believe in that opportunity. Electric 3-wheeler, I would say we are moving very fast, and we've done very well. We already have a few orders. In bus, we have partnered with Equipmake to develop, test, validate and launch those products. We are still in that journey. We haven't reached that journey that we can go offer it to customers. Sat you can add on where we are and when is it likely that we can start seeing some revenue from that segment.

So, as far as the bus motor and controller is concerned from the Equipmake design, we are right now in the validation stage of those motors because we need to tune those motors for Indian conditions. And our launch is in the last quarter of calendar year '25 or the first quarter of calendar year '26. So that's what we are targeting to work on it.

So [ Deanna], I'll hand back to you. I think there is a follow-up question from Jay and then we can take some Q&A from the chat box as well.

Thank you, Jay. Thank you, Kapil. Jay, we are now going back to your second question.

Sorry, I wasn't able to unmute earlier. So my second question is regarding, of course, in your inflationary scenario, you had mentioned about your top line getting benefited, but that was an empty sales kind of thing. And now with the deflationary scenario we've had a 13% odd revenue growth, how much of that would be because of the deflationary scenario? Or maybe if you can just split between volume and the reversal of that empty sale?

That's hard to do because we don't do it. It has very little -- see all analysis, especially for management at least, has to have some purpose. If an analysis does not lead to a specific or actionable output it is not very meaningful. The fact that steel prices have gone down has led to price that was empty sales, as you correctly said. How much, we haven't really, I think, tried to figure out. Rohit, you may have this answer, I certainly don't.

This impact was around 1% I would say.

Okay. Understood. And just on your electric 2-wheeler side, you mentioned about pricing pressures -- sorry, volume pressures for some of your customers in the third quarter because of the pricing actions by many of the competitors. How should one look at the suppliers' profitability in that context going forward? I mean you did mention about this continuing for the next few months, but then reversing. But is there an incremental pressure on the pricing of suppliers because of this so-called price war? And in that context, with our cost structure and our efficiencies, does this also provide an opportunity of a little bit of market share gains, if at all, or consolidation of the traction motor market with more efficient suppliers getting larger shares with better cost structure?

The very short answer is no, because, Jay, I think there is a lot of recency bias in the way we analyze information. This thing that has happened is only about 1.5 months, and at max it'll go on for on for 3 months. Sat just told you about how we develop products with the new customer, it took us over 3 years to develop and lunch it. These are longer items and in automotive industry, especially if you're doing critical items like the motor or any powertrain or the drivetrain part, you are playing what are essentially long-term objectives with other long-term players. These things don't happen in a haste. No one is coming to us and talking about pricing for motor et cetera. I think everybody knows that this is not sustainable. These actions and they will not be there for too long. Cash burn has never been a great strategy for the automotive market. I mean, history is replete with examples of people who tried and failed at this. But yes, we will wait and see. So far, it has affected volumes for us, but no other impact. Sat, anything you want to add to it, like what you've seen or heard. I don't think our customers have even brought this up, to be honest.

No, it's not a discussion actually either with our customers or with our suppliers? Because I mean, most of us, I mean are in automotive business for so long so we understand these ups and downs. So it's very normal.

Yes, none of us actually in the industry talk in quarters, right, we all talk in years and quite a long time, it's like 7 to 10 years is the conversation you have. Because let's say, you get [ sourced ] on any project the model will always runs for 5 to 7 years, and then you have to keep spares et cetera, to supply the vehicle parts. So you are entering into almost a 10- to 15-year marriage type of situation with the customer. Thinking in quarters does not lend itself well to the way our industry is structured.

So we'll go on to the next participant, his name is Gunjan Prithyani.

Her name is Gunjan Prithyani.