Suprajit Engineering Limited (532509) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Suprajit Engineering Limited Q2 FY '21 Results Conference Call hosted by Anand Rathi Share and Stock Brokers. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Sarthy from Anand Rathi. Thank you, and over to you, sir.

Thank you, Inba. Welcome -- on behalf an Anand Rathi, I welcome you all to the Q2 FY '21 conference call of Suprajit Engineering. From the management side, we have Mr. Ajith Kumar Rai, the Founder and Chairman; Mr. N.S Mohan, MD and Group CEO; and Mr. Medappa, the CFO and Company Secretary. As always, we will go through initial remarks about results from management, key takeaways and then we will follow it up with Q&A. Over to you, Mr. Ajith.

Yes. Thank you, Vijay, and I thank Anand Rathi for organizing this call. Welcome you all, and good morning to you. This call is in relation to our Q2 FY '21 results. As Vijay said, we'll give you a quick brief from all the 3 of us on the operations and financials and let the questions come in post that. With that, I will hand it over to Mohan to give an operations review. Mohan?

Thank you. As you would have all seen that Q2 FY '21 has been the best quarter. In fact, I would like to say that it has been the best quarter in the history of Suprajit till date. So we have had a very good run in the last quarter. Of course, we had tremendous challenges. We had supply chain problems, both on the local supply front and the import front. And of course, the COVID protocols being adhered to added to the complexity of running operations. Having said that, I think we have managed wonderfully, and each one of our teams, be it within India or outside of India, have raised their bar and met those challenges. To start with -- let me start with Wescon, we had a flat growth but with improved margins. And this was under the threat of COVID, as I've been mentioning. We have got good order book there. OEMs are ramping up for their busy season. As you would already know, that it's more the second half which is our busy season here. It is cyclical in nonautomotive sector. Our Juárez-El Paso and Wichita have become hot beds of COVID. Therefore, we have a few of our management team who are sick, and it has been pretty much a challenge to keep the operations running and supplying. It's -- but it's the same thing even with our customers. Therefore, we are all sailing through the same boat in U.S., but it is becoming more and more rampant in the U.S. Moving to Suprajit Europe, both our Tamworth and Koper continues to give explendid service to the customers in Mainland Europe, and we have got good growth and reasonable EBITDA out there. Trifa, Luxlite has been a bit of an uphill task. And more specifically, with the second wave happening in Europe, I think we are facing some amount of uphill there. We are still moving through our restructuring efforts of operations, both at Trifa and Luxlite. Moving on to the domestic front on Phoenix Lamps Division, Chennai has recorded the highest production levels, as you would know that from October last year is when we acquired this facility. So we have completed 1 year. And in this 1 year, we have recorded the highest production levels, and we have also started catering to the market under the Phoenix brand in the Southern region from this plant. From our DTA, or domestic tariff area plant, which is what we call as A1, it's completely loaded. And in fact, I would say the -- if there is a problem, it is a problem of plenty. Our SEZ plant got audited by 2 major marquee brands, and the plant got approved for supplies from the SEZ. Moving over to the Domestic Cable division. We had a very good growth, both on the OE and the aftermarket front. We have tremendous pressure on the plants to ensure supplies, but I would say that the team is doing extremely well under these circumstances. Overall, we, at Suprajit, had put in a lot of efforts in reducing fixed costs, and I think those fixed cost reductions over the first quarter has paid off. However, we rolled back our salary cuts from September onwards, primarily to keep our teams motivated because everybody is working so hard. And I would say that between Q1 and Q2, it was definitely a clear V-shaped recovery with a very, very sharp upward slope. We see some challenges coming ahead like international freight issues, commodity prices, et cetera. But I'm pretty much confident that the team is going to meet these challenges. Thank you.

Thank you, Mohan. Medappa?

Yes. Thank you, sir. Good morning to everyone. We announced the quarterly and half yearly financial results for September 2020 yesterday. I will go through the quarter-on-quarter comparison since YTD numbers are not comparable due to subdued performance in Q1 2020. The overall performance at stand-alone and consol level for the quarter have been robust in terms of revenue as well as profitability. The consol revenue for the quarter ended September 2020 was INR 443 crores as against INR 398 crores for the corresponding quarter of previous year, recording a growth of 11%. Q2 2020 was the highest quarter in terms of revenue compared to previous quarters. The consol operational EBITDA was INR 73 crores as against INR 56 crores for the corresponding quarter of previous year, recording a growth of 32%. At stand-alone level, we have achieved a turnover of INR 312 crores as against INR 275 crores for the corresponding quarter of previous year, recording a growth of 13%. The stand-alone operational EBITDA was INR 58 crores as against INR 51 crores for the corresponding quarter of previous year, recording a growth of 13%. We are also happy to state that overall group debt level has reduced to INR 317 crores as on September 2020 against INR 380 crores for the year ended March 2020. For further results, you may approach me directly at any time, even after this investor call. Thank you very much.

Thank you, Medappa. Before I let you all ask your questions, I just wanted to end with a quick summary in the sense that it was easier to lockdown, but unlocking and scaling up was the biggest challenge. I think the operations team had a phenomenal task of managing the COVID situations, dealing with sporadic incidences of COVID within our operational units and then at the same time, scaling up to meet customer requirement. This also required our vendors to scale up the issues relating to manpower because a lot of the migrant labors were not available a few months ago, although situation has improved now. And then there are all challenges of commodity price increases, supplier not able to scale up and then the global transportation issues with containers not being available. So we had multiple, multiple challenges and not being able to visit customers on any issues. They were all absolutely new challenges for the team, but I must say that the team has stood up to the challenges and has done well. So the results speaks for itself. So without any further ado, I would let the questions to come in, and we'll answer as much as we can. Thank you very much.

[Operator Instructions] We'll take the first question from the line of Nikhil Kale from Axis Capital.

Congratulations on a very good set of numbers. So my first question was on the Automotive Cables division. Very -- excellent performance on the top line, 12% revenue growth Y-o-Y. So if you could just provide us some color on what's driving the outperformance versus the industry? You mentioned in the press release that there are certain couple of new products -- projects which have gone online. So just wanted to get some more color and understand going forward what kind of outperformance are you looking at versus the industry production?

Thanks, Nikhil. I think the situation in the Cable division is this. The Indian automotive OEMs have been scaling up the production. As you know, the numbers are all there, particularly the passenger cost as well as 2-wheelers have done well. There are other things that we have mentioned in earlier calls as well that there has been slightly higher content for 2-wheeler in the -- due to the BS-VI situation. So that has also helped us to get a little bit of a tailwind on that. And most importantly, I think it is the aftermarket also because that's where we had a very robust growth. The reasoning is that during the lockdown there has been hardly -- a lot of these shops were closed and then they were selling during the second quarter and they wanted to refill their shelves. There is a talk of reduced imports from China for the -- as far as the cables and competition is concerned. There is also an issue of great players slowly winding up, and that is also giving way to well-known, well-branded customers -- I mean suppliers like us. So they're all multiple levers, I would say. And as far as the new businesses, I think, I was mentioning probably more about the -- for the automotive exports. Despite globally, there is a degrowth in automotive business. Those cable businesses that we have won for the newer platforms and the new businesses, they've all gone into place, although the original volumes of our existing business has come down. On top of it, the new business has sat on it. So the overall growth has been good there as well. So there has been interesting overall dynamics, which has helped us to clock that kind of a growth.

Okay. On the domestic cable aftermarket, would you give us some numbers on what was the growth in the segment?

I think if you see the pie chart that we have provided, all it says is that our -- compared to last year, we had just 23% as our aftermarket on an overall pie, that has increased to 28%. Although I must say that first quarter has been a very bad quarter. So it may not be an entire reflection. But that 23%, which is last year's number, is certainly going to be 25% or 26% by the end of the year. So that means to say that to that extent, our growth has been more. So on a comparative basis, I think -- we have got multiple products, we've got cables, we've got halogen lamps, we've got other products, speedometer. They're all in the aftermarket. So I would say, overall, I think the growth has been about, I don't know, probably 20%.

Yes. Okay. And then, last question was on the margin front. Extremely strong margins across the divisions. So I just wanted to understand how sustainable do you think the margins are especially at Phoenix and the nonautomotive division going forward?

Well, I think 1 quarter really cannot be taken as a benchmark. I think we are also very happy and excited about the margins that has been come out in this quarter. But we also must realize that there is a huge commodity price increase that's happening. So there is also customer unusual requirement of price reductions from time-to-time, et cetera, et cetera. So overall, I will say that I don't want to really get carried away by 1 quarter's margins. I think we have -- in the beginning of the year, we have actually scaled down our margin expectations. But, I think, it certainly is better than what we have said in the beginning of the year. I think overall, on a consolidated basis, I think, 13% to 15%, 16% is possible. The range where it will be, it all depends upon the volumes as well. So we need to watch how after end of November when all these holidays, I mean, the festivals are over, how the demand scene is. If it is robust, I think we'll have a good year. But otherwise, we still have to see. So we are going to give a big range of anywhere from 13% to 15%, 16% as the range for the -- on a quarter-to-quarter basis. But for the whole year, it probably will be even lower than that. Yes, we probably will be around 13% by end of the year, I think.

Our next question is from the line of [ Chaitanya Shah ] from [ Silverlight Partners ].

Sir, my question is broadly regarding the global scenario that's happening right now. I mean I first wanted to understand what is the total addressable market for cables globally that is addressable by the company? And just a color to that, what is currently -- what part of that market is currently served by China? And are you seeing any anti-sentiment against China translating to orders for you or [indiscernible] to ancillary sector in India?

I'll give you a general answer. I think it's difficult to be specific because the cable requirement across sectors, across regions, across geographies is very difficult to assess. But I would say that our assessment done 3 years ago say that the total addressable cable market of various kinds would probably be anywhere from, let's say, $2 billion, $2.5 billion to $3 billion. What is the Chinese content on that? I think it will be fairly significant. But there are a lot of players also in China doing local business as well as few of them doing global business. So there are at least 3 well-known Chinese names who are in the global market, competing with people like us, the Koreans or the Japanese or the Americans and Europeans. So they are very much there. The competition is all part of the game. In terms of China plus one, I mean there is a lot of talk. There is -- I think right now, everybody is fighting the pandemic. I think the challenge today for any supply chain manager is to procure the material for their normal things. Even the existing suppliers have challenges to deliver to customers. So I would say that right now, the challenge is to meet the requirement of their individual requirements currently. And I think in the longer term, I think whether there will be better opportunities for suppliers outside of China, it's a -- I would say it's a positive for us. But are we seeing a great move at the moment? I don't see it. But we have enough business to do. That's a different matter.

All right. And sir, my second question is regarding an intangible asset on the balance sheet. I saw an intangible asset was around INR 100 crores for customer relationship on the balance sheet. I just wanted to understand what this asset is. And I think the useful life of this asset is mentioned as 10 years as per your annual report. So I just wanted to understand the logic behind it and what this means?

Medappa, would you like to comment on that? What it is?

It's a goodwill arise at the time of acquisition. It is absorbed over the period of 10 years, and we are allowed to take tax benefit also under that. It's ongoing accounting entry.

But it's mentioned as separate from goodwill. So is there something...

It's bifurcated into customer relationship and goodwill. It's actually basically goodwill only, customer value.

Our next question is from the line of Viraj Kacharia from Securities Investment Management.

Congratulations for good set of numbers in such a challenging environment. I just had 3 questions, primarily to Phoenix Lamp and play in that segment. A couple of quarters back, you briefly gave an idea on how the industry is seeing consolidation and us looking primarily to complete at a certain price point in a bit to accelerate that consolidation in the lamp segment. At the same time, we were also trying to piggyback on Osram and now Philips and cater to the lamps business. This is a segment which we internally also think that over the next 5, 7 years, we don't see a terminal risk yet. So one is, how is the overall consolidation phase now within the industry? Is that now accelerated? Has the price moderation now settled? And do you see enough opportunities in terms of capitalizing those either with Osram or Philips? That is one. And second, what we've seen in similar product lines and other industries internal item that over a period of time, the industry kind of decays and the investments which one makes initially, one eventually has to take some kind of impairment or write-off because of the shift, say, in your being towards LED. So how are we kind of dealing -- I know it might be too early even to talk about it, but when we're kind of looking at expanding and investing, how are we kind of dealing with that aspect in mind?

Thank you, Viraj. The consolidation is an ongoing issue. I think it's not only in halogen, I think even in cable business, there is a consolidation happening as we speak because customer wants somebody who has got the wherewithal to deliver anywhere in the world. So not everybody has it. So consolidation is on. Is the price pressure is off? It is not. We are still fighting the price war. But as you've seen in the numbers, despite those price wars, we are having a fairly decent steady margins in the business. So yes, we are fighting a price war, but, yes, we also are able to manage our margins. That is largely because our scale of business has gone up. As you've seen, the volumes are growing. We have added the capacity from Chennai now. So it all is helping us to be recognized as a true global player. So that helps in convincing the customers. And that's exactly happened with those 1 or 2 names that you mentioned. And we are continuing to do more and more business. In fact, Chennai had an all-time high production in the last couple of months, considering their own historic 20 years of production because that means we were able to get new things on the table for Chennai plant. So in terms of the impairment, we are -- we have already sweated the equipments since we bought 5, 6 years ago. And in fact, today, the problem is not about impairment, problem is about capacity. We probably will have to invest more in at least certain parts of our requirement of capacity because the demand is outstripping our ability to deliver to customers. I mean our -- some of our HS1 lines are now running 3 shifts, and we still don't have capacity. So I think we are far away from that kind of a thinking at the moment.

Okay. Sir, what I meant by impairment is maybe not now, but maybe, say, 5 years or 7 years down the line?

By the time assets would have been sweated down to whatever the base value. There is nothing to impair actually.

Okay. Just 2 follow-ups on this. First is, you said the pricing pressure is still on. And given the kind of liquidity pressures, most of these smaller guys elsewhere outside in India would have seen. One would probably think that a lot of capacity would have already consolidated. So what is still driving this price moderation in the industry? That is one. And second is on, say, Osram or Philips since we have now proved them that we are kind of much more capable and cost competitive player and we're seeing a good amount of supply consistency from our side, what is the kind of opportunity size we can cater to in terms of the global requirement? So any color you can provide in terms of opportunity size from them? And how are we looking to scale that up? Because incrementally, they are also kind of looking away more and more towards contract manufacturing and focusing on the LED part of the business.

Yes. I think these customers are happy. They are buying more and more -- I can easily say that the customer from where we bought the assets in Chennai are buying more today than a year ago, so -- or 6 months ago. So I think that the opportunity is certainly there, and we continue to capitalize on that. So pricing, as long as the volumes are possible, some of these people from the -- whether it's China or even Korea, ultimately, they -- as much as possible, they try to keep their plants operational. So they just accept the price and try to manage. But then there are probably quite a few of them probably are in the red, which we know are in the red. But then they keep operationally at least alive their plant. So it takes some more time. These things don't happen in a year or 2. It's a slow right to oblivion, if I may say, for some of them. But some of them will stand on. So there will be still a few players in the market. So it is just that, at the moment, in terms of purely margins and cash, we are the strongest in this business. So we'll continue to stand strong and see what happens in the market.

Mr. Viraj Kacharia, we request you to return to the queue. [Operator Instructions] We will take our next question from the line of Abhishek Jain from Dolat Capital.

Congrats for the great set of numbers in these tough times. Sir, revenue mix during this quarter has improved for the 4-wheeler. Is it because of the strong export growth or addition of the new plants in the domestic front?

It's mostly exports, I think. If you see, our exports have -- I mean automotive exports have improved nicely.

So what is your current revenue mix in the export side, domestic versus export?

I think you please come off-line with Medappa, he will be able to provide. I don't have it immediately, I think.

And sir, what was the growth rate in export during this quarter in 4-wheeler side?

Our -- between Suprajit Europe and Suprajit Automotive, the growth has been about, I think, 15% or 18%. Medappa, do you have that number in mind?

18%.

For the quarter, yes. 18%, as he said.

Okay. Sir, we have seen sharp expansion in the Phoenix Lamps and SENA division margin. Is there some one-off? Or is there some supply disruption of your competitor? Could you give some sense -- more color on the margin expansion on these 2 entities?

Phoenix Lamps is it, you're talking about?

Phoenix Lamps and SENA division both, sir?

Yes, they are together, actually. So yes, there is an increase of [indiscernible] about 100 basis point increase. It is just volumes, efficiencies. Mohan, do you want to comment on this?

Yes. It's primarily efficiencies which are driving because after you cross a certain threshold, it's a pure volume play. And that's what we have done. It's a pure volume play now. Therefore, that's what has kind of kicked in. In terms of material costs also, we have been able to shave up a percentage point. So overall, I would say, it's more how we have run the operations.

So although the SENA division revenue grew only 7%, but there's a half expansion in margin in Q2. So I just wanted to know that this sort of the margin expansion?

Yes. On the SENA side, I think what is happening is that at the Wescon level, I think the margins are where it was at the similar level as last year, whereas the Unit 9, which is the one that exports from India through to Wescon customers, I mean, they're all now -- group's customer now, I think that business also has grown. Since it is made in India, I think the margins are much better here. So that has helped us in increasing our tailwind. Going forward -- again, these are all the question of product mixes. So year-on-year, in -- particularly in the nonautomotive business, the product mix also counts a lot. I think it is just also add -- helped us with the kind of product mix that we are currently having. So whether it is sustainable at that level only time will tell, depending upon what the product mix is. But I also must tell you that right now, the material costs are a big issue, whereas, particularly in our global customers, there is no price escalation possible. So with the significant increases in steel prices, et cetera, there will be some margin pressure on this division as I see it. Whereas in domestic OEM market when the price increases happen -- rather commodity price increase happen, there is a mechanism to pass on, whereas in exports, it isn't. So to that extent, I would caution saying that, okay, it is a great quarter, but the product mix and the commodity price are a matter of the reason why it can change going forward.

Okay. Sir, my last question is related with this channel inventory. How much channel inventory is lying with you right now?

What do you mean by channel inventory?

I mean that inventory that is from the old RMs so you can get a benefit of lower RM prices in the next quarter?

Typically, once -- we are mostly OEM, right? Of course, we have a good aftermarket. But then OEMs, it's day-to-day. So there is no channel inventory with the OEMs. Whereas in the aftermarket, there may be some pipeline stocks maybe there at the distributor, which has been sold at the old price. But I think all those are not really material in our P&L, I think.

Our next question is from the line of [ Kinari Shah ], an individual investor.

Congratulations on a very good set of numbers. Since I'm a new investor to this company, like I just wanted to understand from you that we did acquisition of Wescon Control like in order to diversify from a one -- like have a diversification. But I would want to understand that why did we select this particular company? Like what triggered our interest in this particular company?

See, Wescon is in nonautomotive business. When we wanted to derisk our business in getting into multiple segments, that was a basic philosophy with which Suprajit has been and continue to work on. We have been strongly in automotive business. So we wanted to derisk the automotive business. So we wanted to get in -- but the cables are used in nonautomotive business as well. So Wescon was a company that was available, whatever, 3 or 4 years ago, for us to acquire in those days. And they had very good customer base, including the John Deers of the world and all of them. So it was a perfect fit for us so that it helped us in getting a strong route in North America, it helped us to diversify our product mix from the automotive to a little bit more into nonautomotive. And I think that's basically the reason why we did the acquisition.

Okay, sir. And sir, one more question that 48% of Wescon sales, it just comes from 3 customers. So do you feel like there's a lot of concentration risk over there? Or we are trying to reduce that?

Good point. But again, we look at our customer exposure from a group perspective. There is no single customer of Suprajit who has got more than 10% exposure to the group on an overall sense. And the customers that you say 3, which are 48% Wescon, only one of them are in the top 10 of our Suprajit group. So from an overall perspective, there is no risk. And with these customers, our relationship runs strong for many years. So we don't really see it as a big concern. And we continue to look at increasing our share of business with them as we look for new customers also.

Ms. Shah, could you please return to the queue. There are several participants waiting for their turn. We'll take our next question from the line of Ms. Resham Jain from DSP Investment Managers.

So I have a few questions. So first is, when we look at Wescon margins of around 15% and as you mentioned, we are doing a bit of exports also from India. So I'm sure the overall margins in India will be much higher than the average. And hence, do you see any bigger opportunity of increasing the nonautomotive pie to India? We have been doing this since last, I think, 2 years since you acquired. But are there more green shoots on that front of exporting out of India?

Yes. You're true. You are very right. I think today, when you look at our Unit 9, which is -- when we say Wescon, we are actually talking about SENA division, which has got 3 plants, Wichita, Juarez and Unit 9. The growth is actually coming from Unit 9 within the SENA division. So more and more is produced out of India, which is at a higher margin. So that is -- the answer is yes. But at the same time, the -- some of the customers are wanting to have it from Juarez or Wichita plant. So there, it continues to be a situation that we need to produce there, where typically the margins are lower. Obviously, assembly costs and labor costs are much higher. So going forward, the plan is that we've given, let's say, look at next 5 years, we should be making a lot more in India compared to what we are currently doing in Juarez or in Wichita. So -- but at the same time, we are also now starting to getting into the competition with China as we are getting in more and more making inroads into the U.S. customers of the nonautomotive. There are -- others also understood our strategy of 3 plants, and they're also trying to offer from lower-cost geographies. So that brings in some competition, but this has been one quarter where we have suddenly seen some interesting products being commercialized having a higher margin and some probably positive movement of currencies. There are a lot of things that has aided to get into that 15% from the 7%. So we'll have to wait and see for a couple of quarters to see what is more sustainable actually.

Understood. So my second question is, and this has been a question since last many quarters, but now we have almost like INR 350 crores cash and this year, you mentioned in Q1 call that FY '21, we don't have any major CapEx. So we will further accumulate cash in the second half and maybe next year as well. So our cash balance maybe by the end of next year will balloon substantially and which will pull down the overall ROCs of the company. So what are your plans? I know there will be inorganic opportunities which you are always looking at. But anything which you can see right now?