Subros Limited (517168) Earnings Call Transcript & Summary

Thank you, Lisa. On behalf of Stewart & Mackertich, I welcome the management of Subros for Q3 FY '20 Earnings Call. From management side, we have with us Shradha Suri, Managing Director of Subros; Manoj Kumar Sethi, Executive VP, Finance; Pramod Kumar Duggal, Senior VP, Business Planning; and Hemant Kumar Agarwal, AVP, Finance. Now I request the management to give us a small presentation regarding the financial performance of the company during Q3 FY '20. And then we can proceed for a question-and-answer session. Over to you, sir.

Hi. Good morning, ladies and gentlemen. A warm welcome to all of you on Subros conference call. With reference to financial results of quarter 3 2019-'20 approved by the Board of Directors yesterday, let me summarize the key points for all of you. First, I'll start with the revenue. Now almost 5 quarters where the industry is showing dismal performance, though the last quarter is still better than all previous quarters, most of the OEMs have liquidated their accumulated inventory during festive season. And there -- now there are signs of buildup of new inventory of BS VI vehicles. In quarter 3, passenger vehicle industry has de-grown by 8% on the production basis and 1% on domestic sales basis. And as far as commercial vehicle is concerned, truck industry has registered de-growth of 56%, which is applicable for our segment, N2 and N3, where the air conditioning or ventilation system is applied. And bus industry has shown a growth of 5%. So de-growth of automobile industry has impacted Subros' performance also. And our results are showing a de-growth of 9% in comparison to corresponding quarter. And revenue from operation has been recorded at INR 465 crores in this quarter and corresponding quarter was INR 510 crores. For 9-month results, though the industry has de-grown by 14%, Subros' negative growth is 4% only mainly because of sale of home air con, and our year-to-date 9-month sale is INR 1,545 crores as against INR 1,614 crores in the last corresponding period. We are happy to update that the company has improved their market share by 3%, and our share of business in passenger vehicle segment is 45% as against 42% last year. Our focus on non-car segment is increasing, and this year, contribution of non-car sales to the total sale is 15%. On the operational profit side, the company has realized EBITDA of INR 50.57 crores, which is 10.87% of the net sales. However, in the corresponding quarter, the EBITDA was INR 55.28 crores, which is 11% of the net sales. Change in EBITDA is mainly because of the product and model mix. Profitability in quarter 3 is better than quarter 2 of this year. The company has earned a profit of INR 19.62 crores as against a profit of INR 19.08 crores in the last quarter. Despite the fact that revenue has dropped by 6%, the reflection of cost optimization measures taken by the company has contributed to the differential profit. Overall, in 9 months, the total PBT is INR 101 crores, including exceptional items, which is 6.61% as against INR 84 crores in the corresponding period. On the business side, our Karsanpura plant is now fully operational. Formerly, this plant was inaugurated on 19th of November 2019 in the presence of Maruti and Suzuki Motor's top leadership team and also a leadership team of Denso Corporation Japan. This plant has a capacity of 750,000 units per year, which is sufficient to meet the Suzuki Motor Gujarat demand. We have started production of HVAC, ECM assembly and tube assembly in this plant location in this year. On the new product development side, the development activities of all our new programs, in line with customer schedule, are ongoing. Our progress in electric cars, thermal product development is also as per our schedule, and we are now -- right now in the business negotiation for such product introduction in Indian market. Preparation for BS VI is all complete now, and we have developed all these parts and supplies have already started to our respective customers. So finally, let me summarize the performance of quarter 3 and 9 months, a 9% de-growth in revenue in this quarter and 4% in 9 months, EBITDA of 10.87% in this quarter, PBT of 4.22% in quarter and 6.62% in 9 months, including exceptional items. So with this, I -- they say that the overall company has performed satisfactorily considering the adverse market conditions. Thank you very much. Now we are ready to take your questions.

[Operator Instructions] The first question is from the line of Varun Baxi from Equirus Securities.

Sir, my question is pertaining to our revenue. Like, if we see one of our main customer, Maruti, Maruti has de-grown by about 4% on production basis on a Y-o-Y basis and was flattish on a Q-o-Q basis. However, our de-growth has been, I mean, significantly higher than Maruti. So can you please throw more light on it? Like, have you lost any model? Or what was the main reason?

So when I say our total de-growth in passenger vehicle segment, this includes other customers also. So although in Maruti, quarter 3 performance is not so negative, but the de-growth in Mahindra and Tata is much sharper. And so because of this, the overall de-growth is there. And also, the impact of commercial vehicle segment is also high during this period. So that's why our overall numbers will have a differential versus Maruti performance.

Okay. So can you please split the revenue for what was the contribution for 3Q from CV, ECM, buses and passenger vehicles?

So I can give you overall 9-month figures of our contribution from bus segment. Bus segment has contributed roughly INR 27 crores, and commercial vehicle is around INR 30 crores during this period. Home air con in 9 months has contributed around INR 93 crores. This contributed to the overall revenue of INR 1,533 crores.

And related?

Pardon?

ECM?

ECM is INR 175 crores.

Okay. So across Home AC segment, are we still maintaining expected revenue guidance of about INR 115 crores for the year?

So we are expecting that this year, since we are now in the process of restarting for the next season, so likely, we'll be closing around INR 110 crores in this year. And based on our current commitment with the customer for the next season orders, our next season order, we will see around 10% to 15% growth on these numbers.

Okay. And sir also, in Home AC segment, if we see the sales from Voltas, Whirlpool, E-Durables, all these players have had a good growth in 3Q in their Home AC sales. But for us, will we not supply anything to them?

We supply only to Voltas. E-Durables and Whirlpool, they are not with us in this season. But our main customer during this season, that is up to 9 months, is Voltas and Havells.

The next question is from the line of Aditya Makharia from HDFC Securities.

Sir, just on this -- you said you are getting ready for the electric vehicle side. So are you supplying anything -- any of your ACs to these buses, which are currently being seen on the road by various states under transport undertaking? Or are you supplying to the Tata Nexon or the MG Hector, which has -- I mean this MG is new car which is coming with electric.

Not yet. So our electric vehicle validation process is in progress. So we have supplied our prototype to Force Motors. They are under testing right now. And on the passenger vehicle side, our negotiation with Maruti, Mahindra are still on. And in fact, in Mahindra, we have already closed one business, which will be SOP in '21. So at this stage, our engagement with customers is on for the -- all type of validation.

Okay. And just on the Home AC, you mentioned the contribution was not as much because supplies to Voltas were limited or because -- I mean I thought this festive season went up well.

Yes. So that's why I said that INR 93 crores is our first season sale in home air con. And if you see the past trend, we were doing around INR 5 crores to INR 6 crores. So a substantial growth has already been registered in Home AC segment. And also, the total revenue, it is contributing around 6%. So numbers are quite intelligent. So now we are preparing for the second season, which will start maybe in mid of March or so of our -- where our production will start and our supplies will resume.

Okay. So this year, I thought that we were targeting Home AC sales of about INR 125 crores. So then that would perhaps not be met?

So against INR 125 crores, I think we'll be doing INR 110 crores.

Okay, okay. And just a last question. On the group level, there have been some developments. So would you want to share any comments on the same?

No. I will restrict our discussion related to Subros. And so far, there's nothing related to Subros in this development.

The next question is from the line of Rishith Shah from Dhanki Securities Private Limited.

So just a basic question from an understanding perspective. So in the vehicle...

You have to speak louder. Your voice is not audible.

Yes. Can you hear me now?

Yes. That's better.

Yes. So for the basic understanding so for the vehicle segment, the ACs that we supply, so what is the gas technology currently being used? And is there any phaseout kind of thing that is in your model?

So we are at 1234yf. That is a new refrigerant which is coming in. Earlier, we were at 1234a refrigerant. So this is third-generation migration we have already done from R12 to this level. So the transition to 1234yf will be completing by 2027, but still, all export vehicles are already using this refrigerant.

[Operator Instructions] The next question is from the line of Kashyap Jhaveri from Emkay Investment.

Just one question. I missed out if you have sort of disclosed this, but what was M9 breakup of sales in terms of PV, CV radiator, ECM, Home AC and Railways? And the same for the same 9 months last year and...

So I already summarized this in 9 months out of total INR 1,533 crores of turnover. INR 175 crores is contributed by ECM, INR 27 crores from the Bus Aircon, INR 30 crores from commercial vehicle, and INR 93 crores from Home AC, and the rest of the sale related to passenger.

Sorry. INR 27 crores, you mentioned this?

INR 27 crores is from Bus Aircon.

Okay. And CVs, you mentioned, was INR 33 crores?

INR 30 crores.

INR 13 crores, hello?

INR 30 crores, 3-0.

3-0. And for M9 last year, if you have the number. And was there anything from Railways this year?

Railways would be roughly around INR 7 crores.

Okay. And same period last year if you have handy.

No, I will not be having 9-month figure. I'll be having only for the full year figures. But there are corresponding growth in a few of the segments but other than passenger vehicle and truck segment where there is a negative growth.

Okay. And within the PV, what was Maruti's share? Or was it almost only Maruti?

So Maruti is contributing around, in 9 months, INR 1,030 crores.

The next question is from the line of Mahesh Bendre from Stewart & Mackertich Limited.

Sir, Maruti, yesterday on the call, has highlighted the fact that they want to exit the diesel portfolio next year completely. So how this will influence our business with them given that we are into -- mainly into petrol?

So diesel vehicle exit by Maruti will not impact our business substantially because this transition is happening for last almost 9 months now. And our products between passenger vehicle, petrol and diesels have already been settled. The migration to petrol vehicle, wherever they are switching from diesel to petrol, is already done. So now I don't think there will be an impact on us.

So we'll be able to further expand our market share in Maruti going forward since we are reducing...

Of course, because if the petrol penetration will be high, it will be positive for us.

So out of 80% of Maruti's petrol car sales, we will -- what percentage we will have in petrol and just any ballpark number?

So I can give on the overall Maruti, we have around 70% business share on the overall trade. So you can proportionately allocate between petrol and diesel. Petrol, of course, the share would be high and diesel is low.

Sure. Sir, what are the capital expenditure planned for next year, next 2 years, if possible?

So in next year?

Yes, sir.

So we are still preparing the projection for next year but it would not be widely varying from the current year. So current year, we'll be closing around INR 55 crores to INR 60 crores. So it would be in this range only.

Okay. And sir, I just want to know the -- what are the export -- I mean, Denso, I mean are there any business opportunity we are expecting from the Denso on international side?

So domestic engagement with Denso is already going on and we are supplying through Denso Kirloskar and Denso Haryana in India entity for their customer. For export, right now, there is no outlook available with that. So we'll update you as and when there is a substantial progress on this.

The next question is from the line of Abhishek Jain from Dolat Capital.

My question is pertaining to your current SOP with the different OEMs in passenger vehicle segment. And you had also won a few business from the -- I know in the last quarters. So what is the current contribution?

So our share of business with passenger vehicle OEM, as I mentioned, with Maruti, we are at around 70%. Mahindra & Mahindra, we are at 25%. And same is the case in Tata Motors, we're at around 25% of total thermal buying by them. And Renault Nissan is around 28%. So that is a broad allocation of our total revenue from passenger vehicles.

Okay. And in passenger vehicles, basically in the radiator part, what is your current capacity and capacity utilization?

So in radiators, our current capacity is around 1.2 million, and we are utilizing roughly 80% of the total capacity.

And what is your revenue guidance for radiator business in the coming year?

So we already said that in 9 months, we have done around INR 175 crores. So this year, we'll be closing around INR 230 crores. So after that, it will be following the proportion of the overall growth by the OEMs. So it would be -- between INR 230 crores and INR 250 crores would be the range based on the OEM growth projections.

And as there is some traction in the bus business in quarter 3 and quarter 4, so what is your revenue expectation for commercial vehicle segment?

So Bus AC started showing some positive trend now, as I just summarized before. So this year, projection would be -- around INR 40 crores will be contributing from bus segment alone.

And from commercial vehicle?

Commercial vehicle, we still need to watch because there is no sign of industry revival so far. So let us wait for more time.

Okay. Sir, in Home AC segment, what is your long-term target, medium to long-term target? And what's sort of the CapEx required to achieve this target?

So Home AC, as we have been discussing this for last 2, 3 quarters now, so this year, as I -- before that, summarized around INR 100 crores, INR 110 crores would be our indication for this year. Going forward, based on the current customer engagement we have, we see between INR 140 crores to INR 150 crores will be realized in short-term view. And finally, we'll be crossing INR 200 crores in 2 to 3 years' time.

And what's sort of the CapEx required? And what is your total investment right now in Home AC segment?

So Home AC total investment required for doing a business of size of INR 200 crores, INR 250 crores would be around INR 40 crores. So partially, it is already tied up, and the rest related to the technology or the product development will be done as and when the requirement would be there.

So you will start to work on that compressor side in Home AC segment? Or you will continue to import all these materials?

First, we'll settle down in this segment. Backward integration would be the next phase of our improvement activity, but let us first stabilize in this segment.

So what is the current value addition in Home AC segment from your products?

So for value addition, if you see, it would be -- around 15% to 20% is the value add, which we are doing.

And what is your target for the next 3 years? Hello?

Ladies and gentlemen, the line from the management has got disconnected. [Technical Difficulty]

Are you able to hear me?

Yes. Your voice is okay.

Okay. Sir, my question was related to your value addition in the Home AC segment. You just mentioned that value addition is around 15%. So what is your target now to increase your content in the Home AC segment?

So as I mentioned, that is -- to start with, it was 15%. We'll try to increase it to 20%. So this is a range where we'll be playing in this segment.

Okay. Sir, my last question is related to the pricing environment in AC segment. How much pricing and/or realization increase we have seen in the last 1 year in Home AC segment?

So pricing pressure from OEMs is a continual or a regular process. So we see every year pricing growth between 2% to 3% in the new RFQs. So this will continue and this will be compensated by our effort on material cost reduction. So both are going in parallel.

Okay. Sir, last -- my last question is related with the passenger vehicle capacity. So you have increased your capacity by 750,000 units annually from Gujarat plant. So what is your total current capacity and capacity utilization?

So we have not invested into complete new capacity in Gujarat. So it is a balance between Manesar and Gujarat. So the incremental is just 0.5 million. So total capacity as of now, we have for HVAC, is around 2 million.

And compressor?

Compressor is 1.5 million.

And what is that capacity utilization right now?

Capacity utilization in HVAC would be around 80% and in compression also is around 80%.

Okay. So are you looking to increase your capacity for the next -- for the demand -- fulfilling the demand of next 2 to 3 years?

I think industry will take more time to recover the loss, which is registered during last year. So we'll see and monitor the industry growth, and accordingly, we'll take decision for capacity expansion.

Okay, sir. And what is current net debt of the company, sir? And what is your debt repayment plan going ahead?

You need to repeat your question again.

What is the current net debt of the company? And what is your repayment plan for the next 2 years?

Current debt is INR 226 crores. And by the year end, it will be around INR 210 crores to INR 215 crores in between.

Okay. And next 2 years' plan for repayment?

Next year repayment...

It should be less than INR 180 crores.

The next question is from the line of Aditya Bapat from Research & Ranking.

Apologies if I missed this one but what is not very clear to me, like since we had 0 revenues from the Home AC segment, is it more like a postponement from some of our clients? Or how is it exactly?

So first season when we started, we started late and it was in the March when we purchased assets for running this business. So we completed the first season. And after that, the process of shifting our asset with our respective plant and finally settling down our facility for manufacturing, that is taking longer time. So as I mentioned before, we'll be starting somewhere in March and try to recover some part of the revenue in this year. But the next season, which will be starting from April to July, that engagement with customers for finalizing the contract is already on, and a few of them are already completed.

Okay, okay. Got it. Okay. My next question is for the Railways segment. You said it was around INR 7 crores in 9 months for this Railways. As well as for the refri, I mean are we seeing something, some traction? Or how is it?

So in Railway, because of some reason, the contracts were on hold from government side. Tenders were floated but business award was not there. So now we got a few tenders which is awarded to us. So maybe in next 6 months' time, you will see a retro-fitment in current engines, which are already there. And for the new engines also, contracts have been awarded. So next year, the performance would be better. In parallel, we also started product development in coach air con and maybe by middle of '20 or '21, once we get the regulatory approvals for coach air con, that segment will also be added to Railways and we'll see quite substantial number coming in. Addressing your second part on refrigeration. Still, this market is not growing the way we expected. Most of the OEMs are doing prototyping or they are doing certain experimental marketing for refrigerated trucks. So our engagement is on. Product development activities are going on. So next year, we can see a different picture, but right now, the situation in refri is not very good.

Okay, okay. Any ballpark numbers for Railways for FY '20 and '21?

Railways, this year, I think, would be closing around INR 11 crores. But next year, I think we'll be closing INR 15 crores or so.

Okay, okay. And my last question is regarding the margins. Now given that the Home AC segment would have, say, lower contribution to the overall revenue, what kind of exit margins do we expect for Q4 and the trajectory in guidance in FY '21, if any?

So FY '21 would be difficult to predict at this stage. But our margins, as we are in the range of 4% EBITDA at this stage and 10.87% of EBITDA in quarter 3, we'd like to maintain this number for quarter 4 also. Industry signs are better as compared to quarter 3. So there will be marginal improvement against this, but I think it would be a positive from the quarter 3 results.

The next question is from the line of Arun Agarwal from Kotak Securities.

So my first question is on -- again, on Maruti. We talked earlier in the call where Maruti will be moving completely to petrol for time being. So for specific models in Maruti, which were purely on diesel, like Presso and S-Cross, were we present on those models? Or are you not there on the diesel...

Yes, we were present on those model. And the migration to petrol also, we are present there. And product validation has already been completed and SOP would be starting by middle of February.

Okay. But do we see any increase in market share or business post these models coming in petrol? Or the share of business in these models will remain the same?

It will remain same because we were present 100% in diesel and 100% in petrol. So that switch will not impact overall share of business.

Sure. Sir, my second question is on the BS VI changes that we made to ACs we talked about earlier in the call. So we have already started supplies. Did we see any pressure from the OEMs in terms of pricing for these BS VI products?

So luckily for our products, the change in BS VI -- due to BS VI is only in hose and pipe. It's why compressor and condenser is not changing because of BS VI. And that set of BS VI, hose and pipes, is not very expensive. So we don't see any pressure coming in from OEM side specific to hose and pipe.

Sure. And my last question, sir, is on the gross margin. So we did see improvement in gross margins in this quarter if you look over the past 2 quarters or so. So this gross margin improvement has to do anything with the product mix or has to do something with the commodity price change or...

So it has the impact of 3 elements. One is product mix favorable for the overall gross margin. Two, the commodity prices also started coming down and since we have a 1-quarter lag settlement contract with the customers. So it is a positive. And three, there are certain actions which were triggered in quarter -- after quarter 1 performance and assuming the industry size will go down. Some actions which has resulted into positive margins, so there's a cumulative impact of all 3.

The next question is from the line of Jaimin Desai from ICICI Direct.

My questions are related to the automotive side of the business. Is it possible to provide a client-wise revenue contribution for the automotive revenues?

I already spelled out by segment, by clients. Out of that, Maruti's available -- other than that, it would be difficult to...

We cannot disclose it. It's not possible. I'm sorry.

Okay. All right. In terms of segments, would you be able to share ASPs either on 9-month or full year basis or for the quarter?

9 months, I just now mentioned before. I've already spelled out. Again, I'll spell out. ECM has contributed 9 months around INR 175 crores; Bus AC, INR 27 crores; and commercial vehicle, INR 30 crores; Home AC, INR 93 crores. That's the broad thing I have just summarized.

No. I meant our average selling price for these segments.

Average selling prices vary between each product. So there is no generic average selling price coming out of the total revenue in the part because we are supplying many different components. So there's no reference of average selling price in our side of things.

Okay. And sir, you were just speaking about BS VI transition. So given that the impact on our business is going to be fairly minimal, is it fair to assume that all the models that we had with our various OEMs for BS IV, we are retaining those for BS VI as well?

Correct. There's no change in business coordination.

[Operator Instructions] The next question is from the line of Kashyap Jhaveri from Emkay Investment.

My question is on our bus and CV segment revenue. If I look at bus production over the last 3 quarters or, let's say, on M9 of this year, I mean at 10,000, 12,000, it's been sort of flat for 3 quarters. In CV, the last 2 quarters had been half of what we did in the first quarter in terms of CV production as an industry. But the drop in our income from that segment seems to be slightly sharper than the production cuts across various OEMs. So have you lost any market share over there?

No. The relevance here with what you said is bus production of 10% to 12%. Our product goes into AC buses, and AC fitment ratio in all OEM is different. It is ranging between 7% to 9% of the total production. So it depends upon the tender or the business, which OEM is getting, whether it is with AC or without AC. So that impacts more on our kind of business.

Okay, okay. And in CV also, the drop on -- let's say versus quarter 2 seems to be slightly sharper, whereas the production was actually flat in second or third quarter...

So in CV also, the relevant segment which required a blower or ACs, N2 and N3, so it is not relevant for N1. So -- whereas we see these numbers for the complete segment of CV. We need to differentiate a decline between N2, N3 and so...

The next question is from the line of Sonaal Sharma from IDBI Capital.

Could you please help me with the non-car 9-month revenue for the year?

So non-car revenue is roughly INR 170 crores in 9 months, which is around 11% of total revenue.

Okay. And the PV revenue for the 9 months?

Would be around INR 1,360 crores.

Okay, okay. And sir, on Maruti side, you said we have about 70% market share, right?

Yes.

Okay. And what would be our revenue shares?

So it would be -- of our total turnover, around 67% is coming from Maruti.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Mahesh Bendre for his closing comments.

On behalf of Stewart & Mackertich, I thank the management of Subros for giving us an opportunity to hold the conference call. Thank you, ma'am. And thank you, sir.

Thank you.

Thank you.

Thank you.