Subros Limited (517168) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Subros Limited 1Q FY '27 Post Results Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from 360 ONE Capital Market Private Limited. Thank you, and over to you, sir.

On behalf of 360 ONE Capital Market, welcome to Subros Limited 1Q FY '27 Post Results Conference Call. From Subros Limited management, we have with us today Mr. Parmod Kumar Duggal, Executive Director and CEO; Mr. Hemant Kumar Agarwal, Chief Financial Officer and Senior Vice President, Finance; and Mr. Sukhbinder Singh Gill, Vice President, Finance. I now hand over the call to Mr. Parmod Kumar Duggal for the opening remarks to be followed by question-and-answer session. Over to you, sir.

Thank you, Mr. Jayaraj. Good morning, ladies and gentlemen, and a very warm welcome to all of you on investor conference call of Subros Limited for quarter 1 of 2026-'27. The first quarter of FY '27 has been an eventful one. While the Indian economy continued to demonstrate resilience, the global business environment has once again reminded us how quickly the external conditions can change. During the quarter, we witnessed heightened geopolitical tensions in the Middle East, volatility in crude oil prices, disruption in shipping routes, fluctuation in foreign exchange and continued uncertainty in global trade. These developments have impacted the cost, material availability and supply chain planning across the automotive industry. Further, adding to the volatility, the industry also faced a significant manpower challenge, state elections in several regions, seasonal labor migration from Western India, and increasing wage expectation leading to shortage of skilled and semi-skilled manpower across the manufacturing sector. The addition of wage increase in UP and Haryana has added people expectation across other regions, further increased employee costs and created pressure on manpower availability. Rising labor costs remain an area that require a continued attention as we move forward. The automation is the only long-term solution to this. Despite these external headwinds, the industry -- automotive industry delivered an impressive performance during the quarter, registering approx 24% growth with the passenger vehicle segment growing about 23% against the corresponding quarter of last year. Strong rural demands, improving consumer sentiment and continued momentum in utility vehicle and electric mobility continued to be the robust growth driver. At the same time, customer expectations continue to rise with the faster model changes, increasing localization requirement and greater emphasis on technology, quality and cost competitiveness. Against this backdrop, our team at Subros responded with agility and commitment. We remain closely engaged with the customers and suppliers, strengthening the supply chain coordination, accelerated localization initiative and maintain a sharp focus on operational excellence. We at Subros have recorded a healthy revenue growth of 17.52% during the quarter, reflecting the confidence of our customers and dedicated -- dedication effort of our team. While our top line performance has been encouraging, the profitability remained under pressure. Escalation of commodity prices, industrial gases, logistic costs, manpower expenses had made an adverse impact approximately more than 1% on our EBITDA margin during the quarter. Coming to the financial performance. As we reported, the total revenue from operations, INR 1,032 crores during the quarter 1, represented a growth of 17.52% over the corresponding quarter. Share of business of Subros in passenger vehicle stood at 41% in passenger vehicle cars and truck segment, 41% and bus segment, it is 16%. Despite elevated commodity price and inflationary pressure during the quarter, the company has improved the profitability through aggressive cost optimization. Although there is an impact on EBITDA, EBITDA during quarter 1 was INR 86.9 crores, approx INR 87 crores. The profit before tax is INR 55.59 crores, while the profit after tax is INR 41.38 crores. From the strategic perspective, company continued to strengthen its presence in emerging mobility technologies. Besides from hybrid, electric and CNG vehicle thermal system, which contributes now around 25% of our total revenue and has grown 9% over last year. Our non-passenger vehicle diversification strategy is also yielding encouraging results now. Commercial vehicle business, which is mainly from the truck aircon side, has grown 77% during the quarter and bus also -- AC also has grown by 6% during the quarter. The railway business, in particular, continued to emerge a significant growth vertical for us. We have increased our investment in railway infrastructure and also the product availability, and we'll see the results in coming tenders, which are planned in subsequent period. Let me now elaborate to you about the ongoing expansion projects. Our Kharkhoda greenfield project is progressing well. Construction activities are almost at an advanced stage of completion. The facility has started taking shape. Machine readiness is underway, and we are hopeful now the SOP of this project will be in the third quarter of this financial year. In addition, we have initiated another greenfield project at Karsanpura, Gujarat focuses on compression manufacturing. This facility will be supporting the growth of EV and hybrid ecosystem while we are also expanding the mechanical compressor for ICE engine from this facility. We are happy to inform that in last week only, we have signed a technology assistance agreement for local manufacturing of e-compressor between Denso Corporation Japan, Toyota Industries Corporation Japan and Subros. We have updated this news to the stock exchange as well. Before I conclude, let me briefly summarize the key financial highlights of quarter 1. Revenue from operations stood at INR 1,032 crores, registering a growth of 17.52%. EBITDA of approx INR 87 crores with a marginal decline of 0.82%, primarily reflecting the impact of cost escalation. Profit before tax is INR 55.59 crores with a growth of 2.11% and profit after tax is INR 41.38 crores, recording a growth of 1.76% during the quarter as compared to the previous corresponding period. While the operating environment continues to remain challenging, particularly due to geopolitical uncertainties resulting into cost pressure, the strong growth in top line provides us the ability to absorb these temporary pressures. As long as we are growing our revenue and maintain operational discipline, we believe this situation will be manageable until unless there are certain extraordinary events occur. Thank you very much, and now we are happy to take questions.

[Operator Instructions] Our first question comes from the line of Sucrit D. Patil with Eyesight Fintrade Pvt Ltd.

I have 2 questions. The first question is on certain [ guidance ]. I just want to understand the forward guidance from an operational point of view. What are the key priorities you are driving in terms of manufacturing efficiency, supply chain strength and compliance? And what risk do you see in global sourcing or industry dynamics? And how are you preparing to mitigate? Just want to understand for guidance on this. That's my first question. I'll ask my second question after this.

Okay. Thank you so much. It's an interesting question. So there are 3 key drivers within the organization now. One, to manage the disruptions. Because these disruptions will be now new normal. So we need to prepare ourselves from 3 aspects. One, our plant has to be more automated so that the dependency on human side should come down. And there has to be a balance between man and machine efforts, point one. Point two is to push for localization so that we are insulated from global disruptions. And that's how the localization push, which we did last 3 years has started resulting at least not significantly becoming a risk element for them. The third element, which is more on the global side, which is contributed through the foreign exchange or the raw material availability. In that area also, we are working aggressively along with the collaborator as well as the OEM to start developing raw material locally so that not only derisking from the material availability point of view and also there would be substantial saving on the foreign exchange spend, which can derisk us from the economic condition variation. I hope I am able to answer that.

My second question to Mr. Agarwal is, from a financial point of view, what key risks or challenges do you anticipate in the coming quarters? And what specific measures are being taken to manage margins, cash flow and strengthen the balance sheet, especially in areas like raw material cost volatility, the receivables and again compliance?

Okay. I'll answer that also. From financial prudence point of view, there are 3 actions which are very important for us. While this disruption or volatility in the geopolitical subject is a temporary phenomenon, our investment for building up capacity, engaging with the customer for long-term business engagement is ongoing. To insulate the margin side, on foreign exchange, we have consistent hedging policy, which is not significantly impacting us on day-to-day volatility. Our cash flows are intact, whatever internal accruals we are doing, we are reinvesting into the business, except for the strategic project where we have already taken approvals for long-term funding for Kharkhoda as well as Karsanpura project so that once these projects will be operational, the cash flow to support the repayment of loans, et cetera, can be worked out. On receivable side, there is no challenge because all our customers, there is no threat on the cash flow availability, and we are getting all our payments as per the agreed terms.

[Operator Instructions] The next question comes from the line of Mayur Parkeria with Wealth Managers.

Sir, this quarter marks the fourth quarter in a row where our margins have not kept up to what is normally was expected. While we understand that there are a lot of global situations which are panning out when we look at many companies otherwise around, that has not been as severe as what particularly Subros has gone through and surely because of the situation in Haryana and not the labor cost, which we see across sector and across companies impacting. So a couple of things coming in for us. I just wanted to understand one more detail if it is possible that while global and certain external situations have been not in our favor, is it that the composition, the fact that aircon have also started during the same period? Just wanted to understand that is it possible that the segment growth, which we are seeing in that, that has also -- the mix has an impact on the margins, which is slightly more structural in nature as we go ahead. Does that have also a role over here?

I will say partially. But as you said, there are 4 elements which has impacted on the margin. And last 3 to 4 quarters, we have seen the upside only. And if, for example, we have indexation formula with all our customers for commodity and foreign exchange on a quarter lag. So now if it is a quarter lag and the trends are up and down in a mix, so that means within 2 to 3 quarters, the impact will be nullified. But last 3 quarters, the trends are only on the upside. So whatever recovery we did in subsequent quarter related to previous quarter, the impact of increase is much higher than that recovery. That's why it is not reflected in the ratios which we could see on material and other ratios. On manpower cost, this change was sudden, and this change reflected in quarter 1 of this year only when Haryana first announced increase of rates roughly 30%, 32% and followed by UP matched that with around 26%, 28%. This was an extraordinary impact, and this was not budgeted for or not part of any planning ever because this was more driven from a political side. So still now we are working very aggressively to counter this situation, working on productivity enhancement, cycle time improvement, also going for automation in a gradual way so that the impact on cash flow as well as investment is not extraordinarily high. But addressing your second part in aircon thermal business, there would be impact of the model mix. There would be impact of segment mix. And also because the raw material for thermal is mostly coming from the import cycle. So that would be impacting if the geopolitical issues are not settled or they are becoming more risky to the business.

Right. Sir, I have one request. And while again, reiterating and clearly understand there are things which are there outside our thing. But from an internal perspective as far as communication and guiding is there, we have been maintaining a double-digit margin from quite some time. Can we clearly say that, that is something which is still off the table at least for next 12 months? At least that much can we see because what happens is the expectation continues to remain high because as you rightly said, while there's a trending market as far as commodity pressures and other things are going up, the expectation is that we would recover many of those in the next quarter or post that quarter, but it continues to lag the expectation for quite some time now after -- and it's been almost 2, 2.5 years now that our 12% aspiration margins continues to get pushed out. I understand you had mentioned that it is a medium to long term. But can we say that, that outlook is still -- it is pushed out by another 12 months so that the expectations are quite reasonable in that? Or do we believe that the bottom is -- the worst is behind us and now we should see improvement?

No, I'll say with the current circumstances and the condition what we have as of now, this will take time. If the situation recover politically, still it will take time between 3 to 6 months to streamline the whole ecosystem and the supply chain disruptions get eased out. So of course, we are not seeing in a short term moving to the double digit, whatever aspiration was available, it is slightly pushed out for the period.

Sir, just one last clarification from my side, sir. When you mentioned the aspect of increase in wages on the Haryana and other side, UP side, and your commentary, if I'm reading it right, does it also mean that the indexation -- the cost indexation understanding which we have, this particular element of such a sharp rise is not happening -- is not getting recovered anytime soon because this was not an even base and this is going to be more structural and now this has to be recovered only by way of our productivity and internal measures. Does that mean that it will not be getting reflected in the pricing for us?

No, it will be because our discussion with all our customers to compensate this sharp increase because business cannot absorb this 25% to 35% of wage increase in a short term. So our discussion with our customer to compensate that is ongoing, and there are certain positive signals to settle this very quickly.

[Operator Instructions] The next question comes from the line of Mihir Vora with Equirus Securities.

So sir, my question basically was on our overall revenue growth if we see. So in the last 4 quarters, if we compare production for the PV industry or production for Maruti, which is one of our bigger customers, we have been slightly underperforming on that front here. So can you just throw some more color whether it is more of because of the product mix changing? Or is it that there is a slight shift into the market share here? Sir, just some color on that?

So there are 2 distinct points which we need to understand. When Maruti announced their results in terms of quantity or the revenue, it is on the sales basis, whereas what we respond is on the production basis of our customer. If you follow SIAM data on the production basis between April to June, the overall growth is around 16.8%. And from -- secondly, the reason is on production basis in June, there was 8 days of shutdown by our largest customer, Maruti. That is on the last week of June for the annual maintenance. So we always track on production basis KPI. And also, there would be slightly impact of the model mix, model which we are servicing to the customer and model which we -- our competition is servicing to the customer. There would be a slight impact of that as well. But if we see the dealer inventory during the quarter also has come down because of the higher retail sale or wholesale sale, which has happened in the market. So this whole impact is a cumulative, say, reflection of all these key drivers.

Right. Sir, when I see the SIAM data itself, the production mix for total PVs, so that roughly shows a year-on-year increase of around 20%. Maybe I'll check my data, but that is -- which is in front of me. So that is the reason I was asking this. But that said, sir, in terms of content, what would be the sort of difference between a small car and SUV right now in the current circumstances?

Maybe between 8% to 10%.

Okay. Okay, sir. Got it. So sir, secondly, it's on the segment-wise revenue mix, which you give away every quarter. Can you share that?

Yes, sure. I will do that. So over a total of INR 1,032 crores, INR 695 crores is coming from the AC products, which we are supplying to Maruti. ECM products is around INR 135 crores and INR 200 crores plus is for other segment, which is other than Maruti, that is Mahindra, Renault and all others. This is on overall revenue split. But if you talk about the segment part, passenger vehicle has contributed roughly INR 930 crores and INR 100 crores is coming from other segments, which includes buses of INR 12 crores, trucks of INR 75 crores and rest is to other segments.

[Operator Instructions] The next question comes from the line of Annamalai Jayaraj 360 ONE Capital.

This is for somebody concerned to, I have one of the presence there. Sir, now Maruti is increasing the capacity. So already they have gone for 2 new plants and more they are coming up, I think, in 4Q. So whatever our capacity coming up, we'll be able to meet those requirements sir?

So Mr. Jayaraj, 2 aspects to that. One is Maruti capacity increase 1 plant coming up or already there in Sonipat, which has an overall plan of 4 lines. But right now, we are with 2 lines. So to match this capacity requirement in North side, especially in Sonipat, we are coming up with a new plant at Kharkhoda, where we are starting with around 4.75 lakhs of capacity as Phase 1 and then another 4.75 lakhs total capacity of around 9.5 lakhs in Phase 1 and Phase 2 to match the requirement of Maruti Suzuki in the north side. In the West side, another announcement of Maruti to come up with a new plant of 1 million in somewhere in around Sanand area. So we are also in discussion to finalize the timing of the SOP and the line installation in that area and making our plan to set up one more -- another plant in West side. But this is at a very initial stage, matching it with the customer plan and completing the feasibility and finally taking necessary approvals, we will let you know as and when this is [ fixed up ].

Very helpful, sir. On the railways, of course, you briefly touched upon. So can you just explain a bit more on -- I mean, what is our current order and how it is likely to shape up going forward, sir, railway business?

So railway business is our key focus as of now. So we have gradually increasing our footprint in railways. Last year, we completed a large order of around INR 32 crores. This year, we already have 1 firm order of around INR 31 crores. And in addition, INR 50 crores of AMC business, which will spread into 3 years, 4 years' time. A few large orders are in pipeline right now. So our guidance on railway segment to cross INR 100 crores in next 3 years' time, still we are pushing very aggressively on that because this segment, government is also laying down a lot of investment on modernizing the railways and also to making aircon coaches, aircon driver cabin, et cetera. So we are very aggressively pursuing this segment. You can go to the queue, operator.

The next question comes from the line of Mayur Parkeria with Wealth Managers.