Subros Limited (517168) Earnings Call Transcript & Summary

Good morning, everyone. On behalf of Aditya Birla Money, we welcome you all to Q3 FY '22 earnings conference call of Subros. From the management side, we have Mr. Pramod Kumar Duggal, CEO; and Mr. Hemant Kumar Agarwal, CFO and VP 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 the company faces. Now I'll hand over the call to the management for opening remarks followed by interactive Q&A session. Thank you and over to you, team.

Good morning, ladies and gentlemen. My name is P.K. Duggal. A warm welcome to all of you for Subros investor call for quarter 3 FY '21-'22. Let me all -- first of all, let me wish you all a very healthy, happy and prosperous New Year 2022 and I hope that you and your families are healthy and safe during this testing time. We entered into the new year with a very positive note, but very early week of January we saw a steep rise in COVID cases due to wave 3 and Omicron impact. But luckily this time the impact is not very fatal as compared to wave 2, a moderate impact or very low impact on our workforce, but everything is safe and secure. It's fair to say that this has been a challenging quarter for us having seen a solid recovery through the pandemic and coming out of the pandemic in last quarter, but shortage of semiconductor has impacted the industry and noise of third wave in India is also creating destruction. Apart from this, there are many other challenges in supply chain disruption due to high commodity prices, big increase in container costs, rising diesel prices, increased packing and other operational costs, which has a big impact on our financials especially on material sales ratio and EBITDA margin. The result of quarter 3 2022 has been shared with the stock exchanges and also posted on our website. So let me elaborate the summary of the result one by one. First, I'll update about the industry, which is relevant for our business. In this quarter, passenger vehicle industry has shown growth of -- degrowth of 12% on production basis in comparison with corresponding quarter of last year. However, on 9 months YTD, PV industry has registered a growth of 28%. Whereas in Subros PV segment, thermal product growth in quarter 3 is minus 11% in comparison of corresponding quarter of last year. However, it has grown by 35% on 9-month YTD basis. So we have done better than the industry performance due to model mix and impact of incremental business from Mahindra XUV700, which is doing well in the market. Commercial vehicle bus segment has registered 62% growth on YTD December '21 basis whereas Subros growth in this segment is 50% as compared to 9 month of December 2022 -- 2020. Though the tourism and school bus business and public transport is not still revived, but ambulance sales are still happening to fill up the deficit and also each government is improving their medical infrastructure to deal with emerging situation of COVID-19 in future. Further on commercial vehicle truck segment N2 and N3 categories, which is element for AC or blower industry for us, this has also started showing upside plans. The industry has grown by 71% in 9 months and Subros has grown by 70% in this segment on YTD basis. So growth is mainly because of AC equipment ratio has improved and consumer selection is also shifting towards AC trucks as compared to normal trucks. After extended lockdown in view of opening marketplaces in various parts of the country impacting home appliance sales, this sector is showing promising growth now. In this quarter home AC aircon sales has grown by 2% as compared to the corresponding quarter of last year and 120% in comparison of the last 9 months versus current year 9 months. Total sales in this segment is INR 66 crores. Revenue from operation has recorded INR 547 crores in this quarter, corresponding quarter it was INR 603 crores. Overall, 9% degrowth over the last year, but 3% growth over the previous quarter that is quarter 2 of this year. So overall in 9 months, there is 37% growth as compared to last year in our company's revenue. Let me explain each segment-wise contribution to sales during this quarter. In this quarter, car and non-car segment contributed 90% and 10%, respectively. Maruti Suzuki and Suzuki Gujarat has contributed around 84% of the total sales in this quarter. Home AC has contributed INR 25 crores in this quarter, which is approximately 5% of the total revenue. And our share of business in passenger vehicle industry has moved to 40% mainly because our largest share also drop the share of business in the market. Now I'll talk about the operational performance. As I mentioned before, there's a lot of challenge in supply chain, which has never been experienced by us -- by any one of us. Commodity price increase, logistic cost escalation has impacted the margin in a big way. Significant increase in lead time of import shipments, subsequent reduction scheduled by OEMs due to semiconductor shortage has impacted overall inventory level, which has increased by almost 15% to 20% and blocking cash flows. Commodity price fluctuations are on upside and ranging between 30% to 40% in last 9 months, which has impacted significantly on the metal sales ratio. Although there is a compensation formula with the major OEM, but it is on a quarter lag or a period leg. Further on nonregular commodities, which are used by our subsuppliers, there is a cost impact as well. We are in discussion with this one for compensation of such irregular commodities also. Container demand and supply imbalance causing peak price increase on import consignments and diesel price and other packing cost increase also impacted the margins significantly. The company has realized EBITDA of INR 40 crores in this quarter 3 as against INR 37 crores of last quarter, which had 8% more in this quarter. If we compare EBITDA margin against quarter 2 of current year, it has improved by 8%. If we compare EBITDA margin of 9 months versus 9 months, it has improved by 11%. And if we compare EBITDA with the corresponding quarter of last year, it is down by 43%. Profit before tax in quarter 3 is INR 11.56 crores, which is 2.12% of the net sales. If we compare PBT margin against the previous quarter, it has improved by 51%. If we compare PBT margin of 9 months versus 9 months, it has improved by 46%. Profit after tax in quarter 3 is INR 7.42 crores, which is 1.36% of the net revenue. So finally, the summary of financial results. Revenue of INR 547 crores in quarter 3, INR 1,565 crores in 9 months and 9-month growth is 37%. EBITDA of INR 40 crores in quarter, INR 109 crores in 9 and 9 months growth in EBITDA is 11%. PBT in this quarter INR 11.56 crores, 9 months INR 24.20 crore, which is 46% higher in 9-month period. On the business side, quarter 4 looks better than quarter 3 as per the customer plans shared with us now. Semiconductor availability and other challenges are still ongoing, but there are certain adjustments in model projections so that's how the impact is slightly lower. But still this unclear visibility will remain for another 5 to 6 months' time. Growth in this year is expected to be on increasing trend as compared to the last year. We'll watch the situation and keep ourself agile to the situation. Still we are expecting double-digit growth in this year as compared to the last year. On the new business and the product development area, there's significant success in securing new business from our customer. Most of the customer we have already finalized business up to 2025 and in this business negotiation, we have secured certain incremental business also. Business expansion in rail coach is also improving opportunity for us as we reported to the exchange that we bagged the first coach AC business for Indian Railway. This is the start in this segment and it is a promising segment for us, we'll see significant results in the future as well. Development activities on all new programs from all the customers are in progress and it is as per the schedule. As we reported in the last calls that we secured business from Maruti Toyota Alliance project, for which assembly of car will happen in Toyota plant at Bangalore. We are preparing our Chennai plant to supply thermal products for this project. This will improve the utilization of Chennai plant also and also add to the top line significantly. The SOP of this project is middle of next financial year. It is significant to mention that the start-up production of new Baleno has started in January '22 though this is late by 2 months, but it is important business for us as the new wind rotary compressor is getting launched through this model. This is a first line launch in India and we already started production on January 20 for this model. Also, heat exchanger manufacturing in Karsanpura plant. Gujarat is another key milestone this company has achieved by supplying heat exchangers locally manufactured in Gujarat for SMG projects. Our development program for electric mobility is also ongoing. As we understand, the public utility will be first aggressively pushed for electrification. So our products for bus aircon, railways are our first priority and the products are at final stage of evaluation. 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.

Sir, why sales growth is lower than the PV's industry growth as the Maruti sales growth was around 13% quarter-on-quarter basis and your growth is just 3%. So is it because of the inventory liquidation as that last quarter inventory was quite high? So what is the reason?

Yes. So what I found is on production basis growth and what Maruti is showing is on the sales basis growth that means the inventory liquidation has happened in this quarter. But for relevant for us is the production base and on which we have shown our results.

So what is the current situation of the inventory now? Is it at a normal level or below now?

Now it is getting normal level, but there will be some mismatching by model because of semiconductor preferences. There are certain models where the production has smoothened now. So there will be some imbalance, but now inventory levels are getting stabilized now. So in this quarter, we may not see such a significant variation.

And as you mentioned that you own the new business for the Baleno and is it for the compressor or HVAC supply?

So in earlier Baleno, we were supplying HVAC and compressor. So in this new Baleno, we got compressor with the new technology, HVAC business remains with us, heat exchanger business added to us.

So is there any increase in the content per vehicles?

It will increase by -- roughly INR 1,800 to INR 2,000 per vehicle content will increase.

Okay, sir. And sir, on the margin side, we have seen a material sales ratio is an uptrend from last many quarters. So how much parts you have already done and how much is the under recovery and how is the outlook ahead?

As I mentioned that there is an overall effect of roughly 2% on material sales ratio if you compare on YTD basis, more than 2.8% or so. So majorly, the contribution is on the quarter lag because the prices are every quarter increasing in the range of 10% to 15% and every time the next quarter recovery will offset the previous quarter impact and again still something will remain. And also, as I mentioned, there are certain nonregular commodities for which the negotiation is on for first time settlements. It is not part of our regular settlement formula. So that we have requested OEMs to settle in the different circumstances. So impact of total 2.8% is contributing because of these 2 and also aided by logistic cost increase which is almost INR 5 crores to INR 6 crores per quarter, there is a deal time effect. So I think the situation will be ease out by June quarter. That means quarter 1 of next year hopefully based on the assumption that the commodity prices will settle down now and that the recovery system will offset the previous quarter impact. So that's our hope and we need to wait for another 2 quarters.

So can you come back to that double-digit margin by the June quarter?

Yes. That is what the intent is. We are not very happy with the EBITDA margin of 7%, 8%. It has to come back to 10% to 11%. That's where we are working consistently on.

Okay. Sir, there are a couple of questions on other segments. There's a faster acceleration of the EVs in the bus segment. So have you started to supply ACs in this segment, and just wanted to know content per vehicle on these buses?

So on buses, see as I mentioned in my opening remarks, that the product evaluation, our final validation at OEM side is happening now, because still all OEMs are under process of finalizing the spec for EV versus air-con. So we are at the final stage of product evaluation and finalizing the specs. The moment that is confirmed, we will start rolling out our products, and hopefully, in the first quarter of next financial year, we will see sales start happening in this domain. The content differential between our conventional air con versus EV air con is almost 1.4x. So you will see 40% revenue -- incremental revenue coming in, as we move more into EV segment.

Okay. And sir, my last question is related with the Railway Coach, they have won the new business as well. So just wanted to understand, what is the quantum of order, and what sort of the opportunity size you are looking from this business?

So in railway, as we reported, this was our first very long based milestone that we need to get entry into the rail coach air-con, so we were under a facility set up for past few years. And finally now, it is at a final stage of RDSO approvals, but as a development order, we got order worth around INR 4.5 crores in this segment. That is the first initial pilot lot. And after that, I think every year, around INR 15 crores to INR 20 crores of coach air-con business, which is currently as on the current condition being tendered out, by Indian Railway for Train 18 for new Rajdhanis, or also for metro coaches also will be the opportunity. So it's a very promising segment for us. And maybe long term, 3 to 5 years' time, we will see between INR 60 crores to INR 80 crores revenue coming in from coach air-con itself.

Thank you, sir. [Operator Instructions] Next question comes from [ Pramod from Incred Capital ]. Please go ahead.

Yes, Hi sir. Wanted to check, did you apply for the PLI scheme, which just got recently open?

No. We have not applied for PLI scheme, because our product is not qualifying into PLI scheme, only relevant products which was there was electric compressor, which qualify into PLI scheme. And still, there was a very unclear situation of electrification for the long term, whereas the commitment of investment was INR 250 crores. So that was not making a viable sense of investing now and waiting for the revenue for long term. So that's why we had not applied for that.

And considering that it was also related to many of the EV-related parts, does the air cooling system and all related to EVs, which you are developing, that also doesn't fall into the PLI?

For aircon system, for EV, there is not much change in our existing product range. So very cosmetic change required for making these parts suitable for EV, other than the compression change. So rest part for EV relevance, there is no change.

Next question comes from Abhishek Jain from Dolat Capital.

Sir, my question is related to this home AC segment. You have done around INR 60 million revenue in this quarter -- in the last 9 months. So what is your target for FY '22 and FY '23?

So I think we discussed this subject before also. This year, we are targeting between INR 130 crores to INR 140 crores coming in from this segment. And next year also, we are targeting around 20% growth coming from this segment.

And you are taking a lot of the issues related with this, on margin side. So -- because of the increase in the commodity inflation and its very tough to pass on in this segment. So just wanted to understand, what is the outlook for the margin for the next 3 to 4 quarters in this segment?

So this industry, as you know, was very rigid in terms of price fluctuations. So first time we could negotiate with all our key customers for a back-to-back formula for all fluctuation on commodity side. So now all commodity fluctuations are settled on a monthly or quarterly basis with variable customer contract. So that is helping us to neutralize the inflation impact on our margins. So that's why we are able to keep the margins intact on that. But as you are rightly saying that, margin in RCCP, means the home air-con segment is not same as the PV segment. So that's why backward integration is the only solution to improve margins. So that's what we are now working on for next 2 to 3 years' time, we are looking at products which can be backwardly integrated with some technology tie-ups also. So there is a clear plan now. So we see improvement in this.

Are you looking for the in-house compressor manufacturing, sort of things?

All parts, we are not limiting to compression only, but we are working on a backward integration of all key aggregates which we currently buy out from either China or from any other suppliers. So to make this segment relevant for our business model, it is important for going for backward integration.

But, there is a need of huge CapEx for that. So are you looking for some JV partners or something...

Not JV partner, we look for either developing such products with our internal R&D capability, or for looking for some technology, which is available outside.

And...

We have not frozen on the CapEx and the investment opportunities as of now. It is at a feasibility stage.

Okay, sir. And sir, how much CapEx you have done till date in 9 month FY '22, and what is your target for FY '22 CapEx?

So this time, I think we have done roughly INR 70 crores of CapEx so far. And this year, we'll be closing roughly around INR 90 crores of CapEx investment. And the similar target between INR 70 crores to INR 90 crores will be there in the next year also, due to our now capacity expansion plan, and also for the new products, which are in line, as of now.

And my last question is related with the tax rate that has continued to be high. So just wanted to know, what would be the effective tax rate for FY '22 and FY '23?

Hemant, are you there? You can answer.

Yes. By the financial year '23-'24, it will remain 34%, the peak rate, and after '24, we will adopt the tax rate of 22%, after getting adjustment of our accumulation of max credit.

Okay. Thanks. That's all from my side.

So from a cash flow perspective, the tax rate will be 15%. But from a P&L perspective, it will be 35%.

Thank you, sir. [Operator Instructions] Next question comes from Shyam Sundar from Sundaram Mutual Fund. Please go ahead.

Yes. Hi sir, Good morning. This is Shyam from Sundaram Mutual. Sir, my first question is from an adjacency perspective, last quarter, you alluded to developing some tractor reducers. Just wanted to understand sir, that this can be a good large market as well, even Mahindra themselves, they do 3.5 lakh tractors give or take, a little bit here and there. So what is the size of opportunity we are looking at then -- is this also a very model dependent kind of a product?

Yes. So I'll answer this question into 3 parts. First of all, the tractor reducer which is developed by our in-house R&D, is currently being developed for the new JV alliance that is Mahindra and Mitsubishi tractor, which will be sold in India and also exported back to Japan and also to the U.S. market. So that is where this project is tied up now with Mahindra. So total size of the current business order, which we have is between INR 25 crores to INR 40 crores, this will be the range in the next 5 years, it will grow up. Second, answering your question, yes, tractor reducer is also not a generic commodity, it is by model development. And now, post our successful development of this K2, which is still under development and SOP would be maybe in January '23 or so. We are now sending our product profile to other customers as well, who are quite prominent player in the tractor market. Overall size of tractor market is very high, because every tractor requires a radiator. So that's why, we are looking at this as a significant product profile in our kitty. Hope I could answer your question, Sundar? I think we lost his connection.

Since there's no response. I'm moving on to the next question, sir. We are having a follow-up question from Abhishek Jain from Dolat Capital.

Sir, can you throw some light on the new business you won in the last couple of -- last couple of months, especially for the Maruti Suzuki and Tata Motors?

So for the new business, I will not be able to spell out the model specifically, because this is in the confidentiality as of now. But I can only mention that the new business, which we have tied up till maybe '24, '25, roughly the amount is roughly around INR 550 crores or so. Out of this, there are around INR 250 crores as a replacement business, where we are already supplying and there will be [Audio Gap] will be launched, and we will be present in that model, and INR 300 crores roughly is the Delta business, where we don't have the scope as of now, but we will have new products coming in from the new business. It is cumulative for all customers who are associated with us.

And are you also supplying to the SUV 700?

Yes, we are.

So you are supplying compressor or HVAC?

We are supplying HVAC and compression for this segment.

Okay, sir. And sir, in PV passenger vehicle AC segment, what is the current inflation rate? I mean to say that, what is the quantum of the price increase versus the last year?

So price increase because of the commodities and so I think it would be roughly 4%; 4%, 4.5% is the price escalation which has happened, if you compare prices of March '21 versus December '21.

And what will be the average utilization for the sale of passenger vehicle AC segment, including the HVAC and compression?

So overall, I think it would be roughly 10,000 to 11,000 per vehicle, is the average utilization in PV segment.

And what about the CVs -- CVs and the bus segment?

So in CV, a combination of blower and AC will be on average out of 9,000 to 9,500, and bus aircon with the small bus, with the medium size bus and large size bus would be roughly 140,000 or 130,000 in that range.

Okay, sir. And sir, can you please provide a revenue breakup for the last 9-month passenger vehicle aircon radiator, CVs and Home AC?

So 9 months, if you take on the PV side, we have roughly INR 1,200 crores is coming from passenger vehicle aircon products and roughly INR 190 crores coming from Indian pulling module, and rest is coming from all CV and home aircon. Home aircon as I mentioned, around INR 66 crores, and this would be from bus, truck, rail, tractors and these all.

[Operator Instructions] Next question comes from [ Vibhishan ] from Canara Mutual Fund. Please go ahead.

So you mentioned that your product is still under development for EV bus segment. Just wanted to understand, who's currently supplying these products?

Right now these products are either imported or coming from heavier or -- there are a few Chinese players who are right now supplying this product, but it is very early stage, because as I mentioned, that, still specifications are not finalized for the long term, because it has to be customized for Indian environment. So right now, most of the EV vehicles, which are on road, either in PV or in CV, they have some carryover product claims coming in from any other country. So it is not tuned for the localized environment. So that's why we are taking a pause right now, but the specification would be settled, so that our investment don't go waste on that.

And sir, what is our current market share in Maruti by demand -- I mean wallet share?

In Maruti's business, we are currently roughly 74%, 75% of Maruti's thermal business is with us.

That's on revenue basis, right?

On revenue basis.

Okay. Okay. And I think I missed that number, if it is possible. Can you just tell me what was the CV revenue on a YTD business, CV, bus or railway?

I spelled out, this was also -- as I mentioned, INR 190 crores is the ECM and roughly around INR 1,200 crores is from the PV. So it is INR 1,390 and INR 1,565 crores is our total turnover. So a difference of around INR 270 crores is coming from this...

Thank you, sir. [Operator Instructions] We have a question from Sriram from Sundaram Mutual Funds. Please go ahead.

Sorry, I got dropped last time. Hope I'm audible now?

Yes, you are.

Sir, last quarter, you spoke about tractor radiator supplies for M&M. Broadly, what is the opportunity size, sir? And the reason I'm asking is, is it also a fairly big market? Of course, not as big as the car market per se, but nevertheless, how -- what would be the radiator content for us pursuing a tractor?

I think you missed out my answer completely, or you heard something initially?

Oh, you answered that? Okay. No, I missed out completely. My apologies.

I see, I see. No problem. So as I mentioned before, I'll just repeat it for the benefit, the K2 tractor, which we got a business from Alliance of Mahindra and Mitsubishi, this tractor will be for India market, also exported back to Japan and also export to U.S. So we got a secured business for all these 3 areas. So the size will be starting with around INR 24 crores, ranging up to INR 40 crores in the next 5 years time, that's how the projections are. Second thing is...

I am sorry sir. Please go ahead.

So in addition to that, you asked about whether it is model dependent? Yes, all retailers are aligned to engine and model. So that's how the heat exchanges normally work, and it has to be aligned to the model and applications. So that is answering 2. 3, the size of this opportunity is large because each tractor requires a radiator. So opportunity is very high and normally tractor radiators range between INR 900 -- starting from INR 900, going up to INR 2,200, based on the configuration. So that's the opportunity. Now after having successful development of K2 Mahindra, we are now working with other key strategic players in the tractor market, and based on our product development and their need for localization of these radiator, we will progress further.

Sure, sir. And is this segment -- I mean, is this a double-digit margin segment, or is the margin in tractors generally lower, because we have not done this before? Just trying to understand, is there any reason why we have not done it earlier? Is it because of lower margin, and now since you have capacity, so we are trying to utilize our capacity there? How should we…

So there is no major differentiation on the margin side for heat exchange are related, definitely, it's a very competitive market, because it's not very organized market. There are some who are very small based, and there are players who are very heavy, in large base. But it's not very bad. It's reasonably good. The reason why we started late because, as you know, that we entered into passenger vehicle radiator also in 2015, after we got the investment production contract with Denso and after their technology got transferred to us. So our experience on regulatory development started very late, and after successful venturing into passenger vehicles, then we started working on commercial side. And to start with the commercial side, we started with off-road to start with, that is on tractor. And then as a long-term roadmap, we want to cover all CV segments for radiator business. So that's how the long-term strategy is.

Understood, sir. That was very helpful. And one other question I had asked on the Tata Motors EV side, any roadmap to gain share or increase share of business there, sir?

Yes. We are working with Tata now for the future models which are coming in, and because Tata is very aggressive now in terms of EV roadmap and also to upgrade their existing vehicle as well. So we are working closely with them, for finding suitable technologies for that range of products. Still at a very initial stage of technical sign-up first of all, and then we will move to the commercial negotiation. So please wait for another maybe 2 quarters to get a very fruitful solution on that.

Sure, Sir, and one last question, this margin drop, the gross margin dip that we have seen. That is primarily because of the home AC segment that you spoke about, where the contracts are little inflexible, which is now changing? Or even on the OEM side also, we are facing under recovery percentages?

No. As I mentioned in the initial part, only 2.8%, which is the impact of only metal sales ratio, and that is the almost impact on the margins also. So majorly, the impact is on 3 parts; one is the quarter lag impact, definitely each quarter, the commodity prices are increasing significantly, so the recovery is not happening in the quarter. So only the recoveries of the previous quarter and the current quarter is still exposed to the financials, that is one. Number 2, the logistic cost increases are significant, and which is not part of our regular compensation. This time, we have started now asking customers for compensation of logistic costs increase also, which is under settlement. So almost 30% we have already recovered, 70% are at the final stage of our negotiation. And third, of course, the [ RCP ] business has some challenges, but it is easing out now. As I mentioned that we started now a formula with the OEM for settlement of commodity fluctuation every month. So that will help in recovery fast. But it is a cumulative impact, but it will take another maybe 2 quarters to settle down.

Understood sir. Thank you very much. I'd fall back in the queue. Thank you. Thank you, sir. [Operator Instructions] Sir, there are no further questions. Now I hand over the floor to the management, for their closing comment.

So thank you very much for your participation today. So as I mentioned, things are now getting back into the shape and probably fourth quarter, we'll see some positive sight of the recovery and also the next year, projections are also looking very promising as of now with the current situation. So we see a good start now on recoveries now, and we are very optimistic now, that things will be in shape going forward. Thank you very much. Thanks for your participation.

Thank you, sir. Ladies and gentlemen, on behalf of Aditya Birla Money, this concludes your conference call for today. Thank you for your participation, and you may disconnect your lines. Thank you, and good day.