Subros Limited (517168) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Bharti, moderator for the conference call. We welcome you all to Q1 FY '22 Conference Call of Subros Limited, hosted by Aditya Birla Money. [Operator Instructions] Please note that this conference is recorded. I would now like to hand over the floor to Mr. Vidrum Mehta of Aditya Birla Money.

Thank you. Thank you, Bharti, and good evening, everyone. On behalf of Aditya Birla Money, we welcome you all to Q1 FY '22 Earnings Conference Call of Subros. From the management side, we have Ms. Shradha Suri, Chairperson and Managing Director; Manoj Kumar Sethi, EVP; Mr. Pramod Kumar Duggal, CEO; and Mr. Hemant Kumar Agarwal, AVP, Finance. Before we start, may I remind you of safe harbor. There may be some forward-looking statements that have to be understood in conjunction with the uncertainty and the risk that company faces. Now I'll hand over the floor to the management for opening remarks, followed by interactive Q&A session. Thank you, and over to you, team.

Ladies and gentlemen, this is P.K. Duggal. Thank you, and good afternoon to all of you. I wish everyone good health, safety during this COVID times. A warm welcome to all of you for today's call. The results and the investor presentations are uploaded on the stock exchange and also on the company website. I hope everybody has had a chance to go through it. Although Vidrum has already mentioned about safe harbor, but still I'll reemphasize. I want to remind you that during the presentation or during the answering certain questions, [Audio Gap] certain forward-looking statements, these statements are subject to the risks and uncertainties and as described in the company's earnings release and other filings with the SEC. I would like to now share about few highlights about auto industries. With respect to the financial performance as we exited the quarter 4, we witnessed fall in domestic demand towards the end of April because of the COVID second wave and severe localized lockdowns, which happened as a result all across the country. As a result, May '21 was significantly impacted, but June, we started seeing some green shoots in the industry. On a year-on-year basis, the numbers are flattering because of very low base in quarter 1 of last year. So it would not be fair to compare the figures of quarter 1 of current year with quarter 1 of the last year. Post quarter 1, we are finding good recovery in passenger vehicle space. On one side, the challenge is to keep health and safety of our workforce and follow all protocols. On other side, managing the recovery topped up with the supply chain disruption in many ways. Commodity prices are on upside. Semiconductor shortage by many OEMs and other logistic costs, availability of all resources are the key challenges the industry is facing at this stage. This reflects uncertain future trends. With reference to the financial result of quarter 1 of '21/'22, let me -- first, I'll speak industry with respect to [Audio Gap] better, has grown by 452% on production basis in comparison with corresponding quarter, whereas Subros PV segment growth is 522% in quarter 1. Commercial vehicle bus has registered degrowth -- has registered a growth of 332% in this quarter. Although [Audio Gap] have not revised still, hence the growth in this segment is mainly in the Ambulance business. Subros has registered overall 380% growth in Bus AC as compared to the corresponding quarter. Revenue from operation has been recorded at INR 480 crores in this quarter against the corresponding quarter of INR 73.77 crores. In this quarter, the Home AC has contributed INR 28 crores as revenue, which is approx 6% contribution to overall revenue of Subros. So with a focused approach on non-car, we have achieved a share of non-car business at 11% of our total revenue. We also updated our share of business in passenger vehicle space [Audio Gap] although it is lower by 1% as against 2020/'21. On operational profit side, company has realized EBITDA of INR 31.61 crores in quarter 1 as against a negative of INR 28.82 crores in the corresponding quarter of last year. EBITDA is 6.59% of the net sales as against 39.34% in the corresponding period. Profit before tax in quarter 1 is INR 4.97 crores, which is 1.04% of the net sales. However, in corresponding quarter, it was minus INR 52.93 crores. Profit after tax in this quarter is INR 3.11 crores, which is 0.65% of the net sales. However, in corresponding quarter, it was INR 24.03 crores negative. Overall summary of the results. Revenue of INR 480.45 crores; EBITDA of INR 31.61 crores, 6.59% of the net sales; PBT of INR 4.97 crores, 1.04% of the net sales; and PAT of INR 3.11 crores, 0.65% of the net sales. On business update side, business outlook for next quarter is improving as of now, but we see certain challenges of supply chain disruption, especially in the semiconductor side. Although the growth -- overall growth estimate for the years are on the upside, but still we have to be watchful for [Audio Gap] in the country. Despite all challenges [Audio Gap] that we'll be able to do double-digit growth during the year. On the new product development side, development activities on all new programs with all new customers are progress -- in progress and they are as per the schedule given by the customer. Business negotiations are ongoing for the same for long-term businesses with other customers as per schedule. The new customer -- new business from customer is being engaged to secure future revenue [Audio Gap] the last time, the business arrangement for Maruti-Toyota joint projects is also concluded, and we shall be starting production in Chennai from '22/'23, and will be supplying through TKM Bangalore. This is a big milestone for the company to secure [Audio Gap] in the South region. On overall COVID impact, our transact assessment of COVID-19 is a continuing process. Given the uncertainty associated with the nature and duration, accordingly, the impact may be different from time to time. The company will continue to monitor any material change in the future economic conditions. That's it from my side. Thank you very much. Now we are ready to take questions.

[Operator Instructions] First question comes from Abhishek Jain from Dolat Capital.

Congrats for a decent set of numbers in a tough time. Sir, how is the revenue outlook for the rest of the year given the shortage of the [Audio Gap]? Maruti is also indicating a disruption in the production due to this issue.

See, this semiconductor situation is quite critical, and we are not sure of how impactful it is on different OEMs. So since the recent development maybe in the last 1 week or 10 days are quite significant, but still we are watchful of the current situation and expecting the revised projection from the customer. Till last month, whatever projection we had seen, it was showing some recovery out of the loss, which we have made in the month of May. But still before commenting any number, we need to wait and watch and understand how impactful this is on the OEM, and we will update accordingly.

So monthly run rate will improve from the July and whatever the July numbers? Or it may be down from the July numbers?

See, July numbers for Subros, as compared to the corresponding period of July, is quite encouraging. And accordingly, the others' numbers are also projected. But again, since the information is quite recent, only yesterday, we need to assess the overall impact and only then we can make a comment.

Okay, sir. And sir, as you said that this quarter, passenger vehicle contributed around 89% and nonpassenger contributed around 11%. So in passenger [Audio Gap], revenue was from the radiator side?

I lost in between you. There was some miss in the words. Can you just repeat your question?

So sir, as the passenger vehicle contributed 89% of the sales, how much revenue was from radiator business?

Radiator, during this quarter is INR 67 crores, which is around 14% out of 89%.

And what is your guidance for the full year for the radiator business? As you -- in the last quarter, you had said that you're looking 15% to 20% growth. Will it be same?

As compared to the last year, we still maintain that this growth would be kept as informed before.

And sir, in nonpassenger vehicle side, how much is the other vehicle AC segment, including buses?

So in the other segment, out of INR 480 crores, INR 429 crores is from car segment and INR 51 crores is from non-car segment, including buses.

And out of that -- in INR 51 crores, out of that, Home AC segment contributed INR 26 crores?

Home AC is INR 28 crores. So INR 23 crores is contributed by other segments.

Okay, sir. Got it. Got it. Sir, this quarter, we have seen a quarter-on-quarter improvement in the gross margin. Have you fully passed on the impact of the RM inflation? And how much headrooms aid for the improvement in the gross margin in the coming quarters?

So as we have been informing before, it's a rolling claims. It's a 1 quarter lag. So whatever impact we had in the month -- in the quarter of 2021, quarter 4, that was compensated in quarter 1 this year. But again, the quarter 1 impact will go into quarter 2, and we are quite uncertain now on a commodity situation, whether it will stabilize or it will deteriorate. So -- but in any case, the reimbursement is there from customer side, but on a quarter lag. So that's a real situation.

And sir, during this quarter, we have seen a sharp increase in the employee expenses. So is there any one-off or this run rate will be sustainable?

Can you just repeat your question, please?

Sir, what is the reason of the sharp increase in the employee expenses in this quarter? Is there any one-offs there?

Employee expenses, you are saying there is an increase in this quarter?

Yes.

So this is normal. This is normal as part of our current employment contracts are there. So there is no major salary decline. So there's no abnormality.

Okay. And sir, how much is the current gross and the net debt of the company?

Gross and net debt.

So total debt as on 30th of June is INR 37 crores, is the long-term loan.

Sorry, sir.

INR 37 crores is the long-term loan. Short-term loan is [Audio Gap]

[Operator Instructions] Next, we have a follow-up question from Abhishek Jain from Dolat Capital.

Sir, I just wanted your view about this Home AC segment. Are you looking to apply for PLI scheme in the coming quarter? Do you have any CapEx plan for that?

Right now, there is no plan because PLI scheme, if you go through, the incentives are variable, that is progressive in 3 years' time, but it's also linked with the investment which we have to do in 3 to 4 years' time. So we are still under the assessment of this scheme benefit for long term because finally, it has to be a return on the investments. And if we invest and finally we get 4%, so -- and the cost of investment would be 9% plus, it is not making any sense as of now. But still, we have not closed this subject. We are evaluating this.

Sir, as the Home AC segment performance was weak in first quarter and the company has reported only INR 26 crores of -- INR 28 crores of the revenue, what is the outlook for the full year?

So outlook is also dependent on the commodity prices because this -- as you know, that this particular industry has very sensitive prices. So in last 5 to 6 months, the commodity prices increase is very sharp. So unless we get a proper adjustment of all such price inflation, there will be stress on overall sales performance of this segment. So as of now, in the quarter 1, we have clocked around INR 28 crores and, of course, throughout the year, this performance will be better than the last year. Last year, I think we clocked around INR 88 crores or so. It would be better than that. How much...

Sir, in the last year, there was an impact in the first quarter, and there was a new sales. And despite that, you had done around INR 88 crores. In FY '22, what is your target for this -- from this Home AC segment?

The target is to cross INR 100 crores. It has to be more than INR 100 crores, INR 120 crores. But again, it depends upon how the commodity prices will settle down.

And is there any margin pressure there, as you are saying that there is some pressure on the commodity prices? So are you able to pass it on to the end consumer?

Yes. This is what we are negotiating right now with the OEM. Unless there is a compensation model agreed for that, we can't absorb this in this business because it's a low-margin business. So we have to adjust all these inflations to -- with OEMs.

Okay. So sir, my next question is related with the new business win. Can you throw some light on the new business you won in the last 2 quarters, which can give a boost to the sales in the coming quarter?

So the business cycle in Subros kind of business which are thermal products, the development cycle itself is between 12 months to 18 months. So whatever business we have got in the last 6 months cannot be realized in the next 6 months. This is how the life cycle is. So you have to double AC, you have to double tooling and then the customer plan has to be there for evaluation, and then finally, that's what will happen. So although we have got around INR 300 crores to INR 400 crores new business in last 6 months' time, which will get materialized between financial year '22 and '23.

Okay. Okay, sir. Sir, my last question is related with your JV, Denso Subros Thermal Engineering. Can you throw some light on the kind of the business you are doing under this JV? And what is the outlook ahead?

So this JV is actually application services company. So they do application design based on the global design, which is available through Denso as part of technology assistance agreement. This company is a service company. So that means the revenue projection will be only for the service fee, which they are getting on the job, which they are doing not only for Subros, but all Denso companies in India and also abroad. So not only this company is doing a turnover of between INR 15 crores to INR 25 crores, this is a range in which this company is operating because it is more of service industry.

So many of this communication are technology charges?

Yes. This is only the application fee charges for the design work, which we are doing in India.

[Operator Instructions] Next question comes from [ Hitesh Mehta ] from B&K Securities.

I have a couple of questions. Can you talk about what is your import content currently? And how are we working on reducing it?

So import content, as of now, it's 20% of our net sales is our import. And as we reported last time also that we have planned to reduce by around 5% in next 2 to 3 years' time. So still that plan is maintained.

Okay. And any change in our share of business within PVs, like higher in PVs or higher in UVs, can you talk upon that?

In share of business, as I mentioned before, that in PV segment, we are around 42%. There's not much change -- significant change in that. But in truck business, we are at 45%. There is some shift of AC trucks in the market. Earlier, it was optional that AC installation is by the OEM, but this share is increasing in the market. So blower in any case is mandatory, but people are opting for air-con trucks now in N2, N3 category.

No. Actually, my question was within passenger vehicles, how is our share in passenger cars and UVs basically? Because in recent times, the UV share is growing up. So do we have the similar market share in UVs as well? That's my question.

Can you be clearer on your question, please?

Okay. My question is basically within PVs, how is our market share between car segment and utility vehicle segment?

Car and non-car, on the total revenue or sale of business you're referring to?

No, no, no. I'm asking, like -- now you talked about Maruti. I'm asking within passenger vehicles, how is our share of business for car segment that is hatchback and Sedan versus utility vehicles?

Okay. If I understood correctly, you're referring to passenger vehicle segment's share of business with car other than Maruti?

No, sir. Actually my question is basically, within passenger vehicle segment, there are 3 subsegments, right, car segment, utility vehicles and van segment. So my question is basically what is our market share in car segment? And what is our market share in UVs, utility vehicles?

In UVs?

Yes.

Utility vehicles. Okay, okay. Just hold on. So in UV side, overall market share in PV is around 42%. But if you take UVs, we are around 55%.

Okay, fine. And can you just help us understand what is the increase of -- increase in content due to AC trucks? And what is the current share of AC as content within trucks now?

Sorry, your voice is very heavy. We are not able to hear you properly.

Okay. Can you hear me now?

Yes, you have to be a little bit softer on this. Yes, tell me now.

Okay fine. So can you tell us what is the potential for increase in content to ACs in trucks? And also, what is the current percentage of AC versus blowers in trucks in India?

I'm sorry, again the same status.

[Operator Instructions] Next question comes from Vidrum Mehta from Aditya Birla Money.

Sir, so just wanted to understand how will CAFE and other regulatory norms, which are coming up impact us in terms of -- will there be any requirement to modify or update our products, which could result into higher realizations? Hello?

Can you hear me, please? Hello, Vidrum?

Yes, sir.

From regulatory perspective, there is no much change required in our products. So from that perspective, we are insulated. Regulatory changes, which are expected, CAFE norms or RDE norms in '22 or '23, '24, there's not much change in our products. So there's no impact.

Okay. And I wanted some data points with respect to what are CapEx plans for FY '22? What is our current capacity in utilization level and Maruti share to our overall revenue?

So on the CapEx plan, we have a plan for INR 100 crores to INR 110 crores in this year, that is '21/'22. So that is majorly going into the new capacity, new technology which we have to launch in this year. Broadly, that 60% will go for capacity and technology and 40% for the new program management also. So that is broadly the allocation of CapEx. Answering your second question on the share of business of Maruti on the total revenue, so Maruti is currently 82% of our total revenue and 17% -- 18% is from other customer other than Maruti.

And current capacity and utilizations?

So capacity utilization as of now is around 90%. So we have 10% capacity available for meeting the fluctuation. But that's how we are now investing into new capacities, which are required for next 2 to 3 years' time.

And sorry, I missed some part of your opening remarks with respect to new business or new project with respect to Maruti, which we have got and will be probably commencing in next 1 or 2 years. So if you could throw some light on that?

This project, which we have got is the Maruti and Toyota joint projects of launching TKM plant, Toyota Kirloskar plant. So this project we have got, which will be SOP in '22/'23 financial year. And this business will be supplying in Bangalore, but will be manufactured in our Chennai plant.

[Operator Instructions] Next question comes from Varun Gupta from Augmenta Research.

I just wanted to ask you how much in advance does Maruti need to place an order for their production?

Can you be clearer, please? Your voice is again heavy. Just be clear. How much...

Yes. How much in advance does a company like Maruti need to place an order for you to produce? What is the lead time between those 2 points?

It is between 12 months to 18 months.

[Operator Instructions] Next question comes from Arjun Khanna from Kotak Mutual Fund.

Sir, I just wanted to understand our road map for localization. So which part do you believe possibly we could localize going ahead? And what is our road map is for the next couple of years?

So I think I answered this question before. Right now, we have 20% of our revenue is coming from import, and we have a road map to reduce around 5% in next 2 to 3 years' time. Broadly, the parts which are eligible for localization is the blower motor, thermistor, transistor, registered blower or certain raw materials, which we are importing as of now from either China, Thailand or Japan. So that are the broadly categories of parts, which will be localized in subsequent 2 to 3 years' time.

And what would be the path that we're actually trading in? I understand there would be other parts also, which we have import. So is there any time line? Or is there any technology issue, maybe it's a partner Denso? If you could elaborate on that?

There are certain raw materials, which are basically from a scale perspective not viable to localize in India because the users are not many, and they are very high-grade material. The global application is much more as against India. So those parts will be a constraint of localization. Second, whatever are the proprietary parts which are coming from Japan, where the supplier is not willing to part technology with any core supplier in India, so they will also continue. But other parts which are generic in nature or the functionality or application is into thermal application, that we are able to proceed.

Sure. Sir, just want to understand, so in our car division, R-134a or which HFC are we currently using? And in terms of technology road map, maybe after 5, 7 years, the shift to HFOs, are you ready for the same?

I've not understood your question correctly, but you're referring to the product technology used in the past?

I'm talking about the refrigerant gas that we use for our automotive, which is used in our product, in the automobiles? You referred to the Kigali agreement in a previous question. So I just curious as how long do you expect to use HFCs? And which particular HFC are we using right now?

So basically we are using 1234yf as a new refrigerant. Right now, it is 234a, R-234a. So this migration has started happening now. And I think the final date would be 2028 as per the agreement. So still, whatever products are being exported as of now, they are using the new refrigerants.

Sir, it's 134a or is it 234a. I understand it's 134a.

No, no. 234a is currently being used. 123yf is the new refrigerant.

[Operator Instructions] Ladies and gentlemen, that would be the last question for the day. Now I hand over the floor to the management for closing comments.

So overall, as I mentioned before, the industry [Audio Gap] critical phase where the uncertainty is quite high, we are watchful of each month performance now rather than waiting for the quarter to respond. And we are trying to adjust whatever we can do within the month as part of our strategy action, but we need to be watchful of next 2 quarters. They are crucial, both from a logistics point of view, supply availability, semiconductor point of view and also on the risk of COVID. So 1 to 2 quarter, I think they'll be very green side on the other quarter in the subsequent year. So let us wait and watch. Thank you very much from our side.

Thank you, sir. Thank you, everyone. Ladies and gentlemen, on behalf of Aditya Birla Money, this concludes the conference call for today. Thank you for your participation, and you may disconnect your lines now. Thank you, and have a great evening.

Thank you.