Sundram Fasteners Limited (SUNDRMFAST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Sundram Fasteners Q1 FY '27 earnings conference call hosted by Avendus Spark Institutional Equities. As a reminder, all participant lines will be in the listen only mode, there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Mukesh Saraf. Thank you and over to you, sir.

Thank you, [Abhirup]. Good morning, everyone. Mukesh here from Avendus Spark. Appreciate everybody logging into this Q1 FY '27 earnings call of Sundram Fasteners. From the management team, I'm pleased to host Mr. Dilip Kumar, Chief Financial Officer, Mr. S. Bharathan, Executive Vice President, Marketing, Mr. R. Ganesh, Vice President, Finance and Projects. I'll now hand over the call to Mr. Dilip Kumar for his opening remarks, post which we'll begin the Q&A. Over to you, sir.

Thank you. Good morning, welcome to call on our Q1 results for FY '27. Want to inform everyone we have had a very good start in Q1. We have had 20% growth in the turnover, not only at the standalone, at the consolidated level as well. We have grown from INR 1,367 crore to INR 1,618 crore. The growth has been there in all the three key segments in which we have a play, both in OE, aftermarket, as well as exports. Exports, we have grown well in dollar terms, the Q2 outlook also looks quite strong, Q2 as well as Q3. We are quite positive about the coming months. Talking about the middle line, we have had challenges on account of inflation because of a rise in the cost of inputs, both direct and indirect materials, primarily because of West Asia conflict. As most of you know in our interactions that we have pass-through arrangements with domestic customers. In the aftermarket, we raise our prices, we are well protected there. Also in the indirect materials, all energy related indirect materials like LPG gas, everything has gone up. We are also in discussions with the customers to get a price compensation. The profit for the year has grown from INR 138 crore to INR 150 crore at the standalone level. Thanks to a greater degree of control over fixed costs, this helped us to post about almost 10% growth in profits. The subsidies also have done reasonably well with China leading the way. Strong momentum there in the construction segment. The U.K. subsidy performance has been satisfactory, the domestic subsidy, Upasana, has also had a reasonable run. Overall, it's been a good quarter. We are quite excited about the coming quarters. Thank you.

Thank you very much. We will now begin the question and answer session. [Operator Instructions]. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question is from the line of Sucrit D. Patel from Eyesight Fintrade Private Limited. Please go ahead.

Good morning to the team. I have 2 questions. The first question to Mr. Kumar is, from a financial point of view, want to understand 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 balance sheet strength, especially in areas like raw material cost volatility, receivables, and compliance. That's my first question. I'll ask my second question after. Thank you.

Yeah. On the financial strength, the company's debt equity, as you would have seen, is just about 0.11 or 0.2, I think. The stability and liquidity, the strength of the balance sheet has never been a concern. On working capital, the increase is in line with the operations. In fact, both in terms of number of days, our inventories and receivables have actually come down. In terms of challenges from finance perspective, there are none because the liquidity is available, the market, and as you know, the repo rate has been held, and we don't expect the interest rates to go up. So on our capital expenditure, our working capital can be financed out of internal accruals if necessary through borrowings. On the raw material and indirect material, like I explained in my opening remarks, in the domestic market, we have pass-through arrangements, so we are well protected there. With the settlement reached between the steel mills and the car manufacturers or OEMs, and we raise back-to-back invoices on the customers, and we also pay the steel mills. In the aftermarket segment, we protect ourselves by raising the prices. In the export segment, we are reasonably protected or well protected, I should say, because of rupee depreciation. This year, with the tariff behind us in a manner of speaking, I think we have also grown in dollar terms. Your second question, sir?

Thank you. My second question to Mr. Ganesh is, from a projects point of view, how are you aligning Sundram Fasteners capital allocation and project pipeline with long-term growth, and what risk do you see in execution timelines, financing or industry dynamics, and any steps taken to mitigate them? Just want to understand a forward guidance on this. Thank you.

With respect to the capital allocation, it's incurred towards enhancing our non-auto business. With respect to growing the auto business in line with the customer requirements, capital allocation is made, and the execution with respect to all projects are as per timeline. Given the West Asia crisis, whatever the imported content of machinery, that also we are monitoring on a case-to-case basis so that the receipt and commissioning of capital equipments are as per timelines. With respect to financing, we do not see any concern and overall, we are very positive about execution of all projects on hand, our CapEx is whatever we have planned.

Thank you and best wishes.

Thank you, sir.

Thank you. The next question is from the line of Rushabh Shah from BugleRock PMS. Please go ahead.

Hello, sir. Sir, in the previous calls you have mentioned that the growth drivers would be the new customers that you acquire. Just wanted to know any new customers that you have acquired in the last three to four years. On the same lines, how many new products have you introduced in the auto or non-auto in the past years? What is the contribution of these new products which you have introduced?

See, actually, Sundram Fasteners has a clear metric for the new product growth. On a 3-year basis, we have a metric of achieving at least 20%, and we are almost there on the new product front as a percentage of the total revenue that we earn in a year. Over the years, all our verticals have added new products as well as new customers. In fact, in our venture to expand the portfolio other than North America, we have had good customer expansion or good customer base in Europe as well. In India, almost we have participated with all the new projects that have come up in the recent past. This way, I think all our new pipeline is protected. In fact, we are having over INR 1,000 crores pipeline of new projects, and about an equal magnitude is awaiting under discussion.

Okay. Sir, my second question is on the non-auto side of the business. Just wanted to know your thought process as why did we choose to expand and what is the thing like Defense. As we know that it takes a lot of time to get a product approved, and we are working with the Defense industry. Is the reason that the margins and returns ratios are slightly above or slightly better than the auto business? Just wanted to know your thought process of entering into such kind of business.

Sir, with respect to non-auto business, our key drivers at the moment are working on wind energy fasteners, aerospace fasteners, and fasteners for industrial applications. With respect to Defense, while we are pursuing the business, it's more on a startup, and we also understand that the Defense business goes through a long cycle with respect to validation and approval. The pursuit of non-auto business is to avoid or beat the cyclicality which the auto business goes through, whether in terms of CV or passenger car. We are also well aligned and poised for growth in the automotive segment as well. It's like the twin engine of driving both auto and non-auto. That is how Sundram Fasteners is pursuing its growth story.

Okay. Thank you so much.

Thank you. [Operator Instructions]. The next question is from the line of Sahil Sanghvi from Monarch Networth Capital. Please go ahead.

Hi, sir. Good morning, and very happy to see a very strong set of numbers.

Good morning.

My first question is, on the exports front, on the standalone numbers, you've done a upwards of 20% growth. If you can give some more details as to what has led to this number with respect to the constant currency growth, with respect to the underlying industries that have contributed to this growth, and also a comment on how is the demand with respect to class 8 trucks and overseas segments that we cater to. That will be very helpful, sir. Then I go with my second question after the answer.

See, more than the Forex and other elements, there has been a clear uptick in the demand on our exports front. If you look at the car segment on the export front, for the past 2, 3 years, probably there was a pushback and there was a setback in terms of the EV projects not taking up. Now, that's behind us in the sense that the ICE engines have come back. They're back on stage, and we see volumes picking up as far as the passenger car segment of North America is concerned.

When we move to the truck segment, there is a good rebound that we see on the on-highway segment and especially the class 8 trucks have come back. In fact, the primary order levels are at least 20%-25% more than the corresponding period for the last year. In fact, today capacities have again come into the focus and backlogs have gone on a 38-month high as it stands on June. I think the class 8 trucks have been doing well and primarily the demand comes from construction and also the replacement of old trucks because of the aging of the fleet and also a mild pre-buy on account of the EPA27 norms. These three aspects are helping the class 8 trucks to grow. On the vocational side of the class 8 as well, we see good project-based investments that are happening which are driving the demand. When it comes to engines on the North American side, we see all the heavy-duty segment being triggered by the on-highway and the off-highway demand while the medium duty is also marginally better than it was last year. On the high horsepower side, if I may say so, these are mainly driven by the power generation because of the AI compute loads as well as the data center loads. I think the customers are very upbeat about this demand and for the next 2, 3 years they see the order books full. On the whole, we see all the parameters are good and the North American business is going great as it stands today. Definitely the Forex is helping us to boost this demand. On the Europe side also, we see a lot of improvement with customers whom we are supplying to on the cooling side and the temperature control side. Overall, the aspects are in our favor. It is not that we are oblivious to the downside risks, but while we are cautious, the positives I think far outweigh the negatives here.

Got it, sir. That's a really detailed answer. Secondly, I wanted to understand this year what could be the revenue that we can get from that EV business from General Motors. I believe we are looking to scale up that business now, so any rough understanding on where we can be this year from that business?

No, on the EV business it is scaling up nicely and we expect to do about INR 200-250 crores this year from that customer.

What was the base in FY '26? Negligible, right? I mean, nothing meaningful, right?

Last year was negligible, less than INR 50 crores. The current year plan, our plan itself is high and we are on track based on Q1.

Sir, this business can ramp up to INR 500 crores, INR 600 crores run rate by FY '29. Do we have that visibility?

Yeah, we will take one year at a time, but in the initial projections we had even talked about INR 750 crores at its peak, but we are happy to take this at this point in time.

Right, sir. What kind of traction are we seeing from the Stellantis business?

See, with respect to Stellantis, while we have contracted for both ICE, PHEV and EV, I think the ICE and PHEV platforms are picking well. As Mr. Dilip had mentioned, I think we should see an uptick in this INR 200 - INR 250 crores comprising of both General Motors and Stellantis.

Got it, sir. Sir, lastly with respect to the margins, now what kind of price hikes are we trying to get over here and assuming that all our negotiations go through as expected, what kind of sustainable margin levels do you envisage post these price hikes, say for the second half of the next year?

You said price hikes. Can you just clarify what you mean by price hikes?

Sorry, sir.

You said price hikes. What did you mean by that?

Sir, the pass-ons on the back of the RM pressure.

RM pressure. Yeah, okay. See, as far as RM is concerned, there is no actually negotiation because it is provided in the contract. It is a pass-through arrangement where we have with OEMs. Whatever the steel mills and the OEMs agree, we are informed and we in turn collect it from our customers and also pay our suppliers.

Accounting for all the input cost pressures, the indirect cost also that we are trying to pass on, what kind of price hikes can we expect or what kind of impact on margins can we expect? Can you ... give a rough range on the sustainable number on margins?

Currently the impact is there. As you can see, we have reported EBITDA of 16.1 and from here onwards I expect it only to go up. Maybe we will finish closer to 16.5. See, on the direct materials we have pass-through arrangements. The indirect materials is more by way of negotiation. That is something going on and once that is accrued and accounted, that should expand the margin in Q2.

Sure sir. This is helpful sir. I'll come back in the queue, congratulations to the whole team sir on very good set of numbers.

Thank you so much.

Thank you. [Operator Instructions]. The next question is from the line of Mukesh Saraf from Avendus Spark. Please go ahead.

Yes, sir. I'll just ask a few questions as the question queue kind of builds up. Firstly, you had made some comments on Europe. I think even last couple of quarters you've been talking about Europe doing better. When we see other companies in the auto ancillary space, which are into machining, forging, casting, basically the metal side of business, they're all commenting that Europe is kind of getting really strong. Could you give some more sense on this? How is our new customer base in Europe? How is the revenue growth there? Any order book? Because I remember even the Sri City plant, we had kind of earmarked it for a few customers in Europe for some hybrid components. It'll be good to kind of understand how Europe is doing for us and what we can look forward to there.

Europe, we have had good business acquisitions now in the recent past, Mukesh. One is on the machined parts for turbochargers from Garrett Motion. Also we are already, as you said, the Sri City is working with ZF. On the Europe side, really our percentage as a part of the whole export business has really grown in the past 2, 3 years. At least 2 of our divisions have acquired business from Garrett Motion. That is definitely improving our Europe base. We also see RFQs coming from other customers. Maybe a bit early to spill the details, but definitely, as you say, Europe is growing strong.

Of the overall exports, how much would Europe be now, just approximately?

Mukesh, it's sub 20%, and we are working to increase the European presence.

Got it. Just one more question from my side before I again go back to the queue. We're seeing a lot of new launches in India from, I think, next year or so, multiple launches across OEMs on multiple powertrains as well. There's a lot of hybrids as well in the pipeline. How are we placed with a lot of these launches? I think in the past, we had been having a higher exposure to the small car segment, while SUVs we didn't have as high as a contribution there. Now that there are upcoming launches, are we seeing some kind of traction there, improvement in some of the wallet shares there? Thank you.

Yes. Certainly. See, I think many of our product lines or the parts, many of our parts are almost fuel agnostic or transmission agnostic, I would say. Whether it is our powertrain division, whether it's metal forms division or fasteners, I think not much depends on the type of fuel or the transmission that is used. It's only we need to just dovetail the products to suit them. That way, I think we are well-placed in the new products that are coming. While in the past, as you say, our exposure to small car was good. I think over the years, we have also improved our multi-utility segment presence, especially with our fasteners and metal forms division getting into quite a lot of new parts there. Even in the future launches, as you say, on the multiple fuels or the multiple transmission that's coming, I think we are well poised to reap the benefits.

Great. All right. Thank you. We'll go back to the queue, sir.

Thank you.

Thank you. The next question is from the line of Naveen Vijay from NS Capital. Please go ahead.

Good morning, sir. Thanks for the opportunity. Sir, my question is, out of the 20% revenue growth, how much is it due to the raw material inflation? If you could provide a volume growth also, that will be helpful, sir.

In volume growth, we've had about 13% in terms of tonnage. In terms of the raw materials inflation, roughly about INR 20 crores to INR 25 crores may be there in the top line.

Thank you, sir. My second question is on our powder metallurgy setup. Are we making any inroads into precision engineering projects? If so, in what sectors are we pursuing those, sir?