Suprajit Engineering Limited (532509) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Suprajit Engineering Limited Q4 FY '21 Earnings 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 Share and Stock Brokers. Thank you, and over to you, sir.

Thanks, Steven. Good morning, all. On behalf of Anand Rathi, we welcome you all to the Q4 FY '21 conference call of Suprajit Engineering. From the management side, we have Mr. Ajith Kumar Rai, the Founder and Chairman; we have Mr. Mohan, MD and CEO; and Mr. Medappa, the CFO and Secretary. As always, we will have a brief review about the results, and then we will move to Q&A. I now hand over the call to Mr. Ajith. Over to you, sir.

Yes. Good morning to you all. Thank you very much for joining this conference call for the Q4 results of Suprajit along with the yearly finalized audit numbers. I would like to thank Vijay Sarthy and Anand Rathi for hosting this conference call for the benefit of investors. As usual, we will start with a brief on the operations by our Managing Director, Mohan; followed by a quick update on the financials by Medappa, our CFO; follow that, I'll give a short covering brief, and then we'll start the questions so that we could ask -- answer your questions as it comes. So with that, I'll hand over to Mohan to start the brief. Mohan?

Thank you very much. Very good morning to everybody. I'm very glad to report a very good set of numbers, both for Q4 and a reasonable set of numbers for the entire year. And I'm sure that Medappa will be taking us through the details there. I would also be taking you through the operational happenings at the various business units. So as usual, I'll cover both the business units and legal entities in their combinations. So let me start with our Suprajit Engineering Non-Automotive, or SENA as we call it, and Wescon. While the COVID scenario in U.S. was a bit benign, the ability to service the customer from Juarez was a challenge, mainly because Mexico was still reeling under COVID, and Juarez was declared as an orange zone. We were able to quickly revup the manufacturing in Wichita facility, and we started supplying the customers. The IC chip issue that there is one which goes into a sensor, and that became a problem. Therefore, there were -- we were constrained on the sensors. Along with that, we also had a follow-up from the Texas freeze, which impacted the plastic supplies. Having said -- with all these kind of headwinds that we had, despite all these challenges, I'm proud to say that the team delivered a good set of numbers in the last quarter. And also at the entire year, they did reasonably good. Now moving on to the automotive exports, which is our Suprajit Europe and Suprajit Automotive Limited. We find that there were been sporadic disruptions in the automotive industry, particularly in the EU region and primarily because of the chip shortages. The demand has been good. The final demand of the Europeans has been good, and they are still hankering for new cars. But the issue has been more from a supply chain perspective. But from our perspective, the new launches went very smooth. But the main problem that we had was a logistics issue, and we also still continue to have the Brexit confusion, which is bothering our business there. Like it has been announced earlier, We got Mr. Jim Ryan or James Ryan, who joined the senior management team, and I'm sure with his rich experience, he'll be guiding Wescon and automotive exports business, and we will be able to improve further both from an operational perspective and also from a new business point of view. Moving on to our bulbs, halogen bulbs, Luxlite and Trifa. That continues to be a challenge. Our inability to travel and meet the customers and also add overall insipid aftermarket conditions continues to bowl us down. While most of the main customer purchase teams like whether it's Hella or Bosch, most of them are operating from home as much as our sales team is also operating from home. Therefore, there has been, to that extent, hampering our business. Moving to Phoenix Lamps Division in India, it came out with flying talent. Both our Noida plant and our Chennai plant have very successfully supported the customers, be it Osram, Bosch or our new customer like Lumileds, which was earlier Phillips. So while we did very well in the last quarter and overall year also we did reasonably good, this quarter has a huge amount of headwind. And this is primarily because of the nonavailability of oxygen, which is obviously very critical for us because we melt the glass. And to melt the glass we use oxygen -- liquid oxygen. The government, of course, rightfully so stopped the diversion of oxygen to nonmedical use. So hence, we have to shut down some of the plants -- or rather, all the plants. But we have got a very active support by one of the major OEMs. And through their recommendations and through their health, we have been able to place an order on oxygen generators. And they are already being, I would say, manufactured, and it is expected to be commissioned by around June. In the meantime, of course, there has been some amount of leeway that has been given. In North, liquid oxygen supplies to our Noida plant has been resumed. Again, our aftermarket continues to give a stellar performance in our Phoenix Lamps Division. Now I move to the Domestic Cable Division. On the Domestic Cable Division, while we continue to hold the pole position, what is very, very important and I think we are proud of, is that we won the prestigious Honda Best Vendor Award. And this was completely surprised and a very pleasant surprise, and it was a vindication for the focus that we have been giving on the increased business relationship with this key customer. But that was not all. This was coupled with a very similar honor from our very first customer, which is TVS Motors. So TVS Motors also gave us the Best Vendor Award. So this goes on to prove that we continue to deliver value for all our customers, be it new or our traditional supporters. We also got a recognition as a Best Vendor from Kubota. So overall, it has been an excellent year with good recognitions from the customers. Moving on to our investments, our plan to expand the capacity at Narasapura, primarily for Honda, has continued, but it has slowed down a bit, primarily because of the COVID restrictions. Our Naya Annexure project, which is basically to modernize our Unit 4 or the four units that we have, has been completed, and it has been -- is being currently showcased to our customer in the north. Just apart from all the specific business units, our Suprajit Technology Center has moved ahead coming out with new products, which is electronic instrument clusters, CBS or combi brake systems and also the brake shoes. These are being well accepted in the marketplace. And particularly, we have got some amount of success in the EV segment. I think with that, I'll conclude my updates.

Thank you, Mohan. Medappa?

Yes. Thank you very much. Good morning to everyone. We have announced the financial results for the year and the quarter ended 31st March 2021. The consol revenue for the year ended March 2021 was INR 1,641 crores as against INR 1,563 crores for the corresponding previous year, recording a growth of 5%. I go through the quarter-on-quarter comparison since YTD numbers are not exactly comparable due to subdued performance in Q1 2020 due to COVID last year. The consol revenue for the quarter ended March 2021 was INR 513 crores as against the INR 389 crores for the corresponding quarter of previous year, recording a growth of 32%. The consol operational EBITDA was INR 82 crores for the quarter as against the INR 54 crores for the previous year quarter, recording growth of 49%. Q4 2021 was the ever-highest quarter in terms of revenue compared to previous quarters. The stand-alone revenue for the year ended March 2021 was INR 1,112 crores as against INR 1,071 crores for the corresponding previous year, recording a growth of 4%. At the stand-alone level, we have achieved a turnover of INR 347 crores for the quarter as against INR 258 crores for the corresponding quarter last year, recording a growth of 35%. The stand-alone operational EBITDA was INR 58 crores for the corresponding -- for the year -- for the quarter as against INR 46 crores for the corresponding quarter last year, recording growth of 26%. We are also happy to inform that overall group debt level has reduced to INR 328 crores against INR 380 crores during last year March 2020. For further queries, if any -- as -- on the results, you may approach me at any point of time directly, as usual, after this investor call also. Thank you very much.

Yes. Thank you, Medappa. I just would like to conclude from our side saying that last year, we started with a huge gloom and doom, thanks to the lockdown that happened end of March 2020. So the first quarter result was more or less disastrous. But the way we were able to claw back during the year, the next 3 quarters has been wonderful work by our team, which in the end, we were able to actually clock a growth, both on stand-alone as well as on the consolidated basis. In fact, on the consolidated basis, despite first quarter of pretty poor results, we are able to actually improve our margins and in -- from 14% to about 14.5%. So that itself is a wonderful performance considering not only the first quarter being a write-off, but also the fact that there has been increase in commodity prices through the year, which you're all well aware. As far as this year is concerned, I think we have also given a commentary on the current quarter and in a sense of works to store. The lockdowns are in various stages in various states and in various customers, and we think that the first quarter would be materially impacted simply because business is at a very low key. How the rest of the year will pan out, it all depends upon how the pandemic pans out. So if the Q -- if the second wave gets over well and then enough people are vaccinated and the Q -- the third wave isn't bad then I think we still have a decent year ahead. But I'm concerned that with the vaccination levels where it is, and that typically the third wave comes maybe in -- after 2, 3 months, that would be the peak season for automotive business, that is September, October, November. If anything like that happens at the time, it could be something that could be pretty bad for the industry. So we're all keeping our fingers crossed, but we are concerned that the pandemic is not under control still. So subject to that, I think we'll continue to do well. All I would like to conclude is by saying, last year, Indian automotive industry shrank by nearly 14%. Against that, we have actually grown by 5%. So we technically had a delta of almost sort of 18%, 19% on the automotive industry growth, which is, I think, is a very creditable performance. With that, I now leave the floor for questions. Moderator, you can please open the question and answers, please.

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

Yes. Sir, congrats on decent numbers. So first question is that if I look at automotive cable margin this quarter dipped Q-on-Q, 20% to 15%, obviously 20% would have been the abnormal margin. But if you look at...

We can't hear you properly. Sorry.

Just a minute. Is it better now?

Yes, please.

Hello? Yes. Sir, if I look at automotive cable margins, it dipped quarter-on-quarter from 20% to 15%, obviously, 20% would have an abnormal margin. But if I look at as stand-alone other expenses, they actually increased from INR 19 crores to INR 25 crores almost in this quarter on a Q-on-Q basis. Is there a one-off in that?

Sorry I'm not able hear you. Can you slow down a little bit and come closer to the mic?

Is it better now?

It is better, but when you're speaking, it is disturbing. Okay. Please go ahead.

Okay. So if I look at the stand-alone other expenses, it increased from INR 19 crores to INR 25 crores on a quarter-on-quarter basis. Any particular one-off in that?

You're saying the other income has increased, is it?

Other expenses. Other expenses.

Other expenses.

Other expenses. Okay. I think one of the reasons other expense is probably slightly higher is that please understand that one of the challenges the group itself has found during the year was, to some extent, extraordinary freight expenses. See the shipment that normally goes by boats were all disturbed due to port congestion. There is Suez Canal issue and all kinds of stuff. So we had to resort a lot of air freights to make sure that -- because we are all single source for many customers. I think that is one, I would say, an element of expense, which was probably more than normal.

In the fourth quarter revenue, sir?

Yes, it's in the fourth quarter, too, yes.

And is that the reason why automotive cable margins dipped on a quarter-on-quarter basis?

Again, it's difficult to talk about quarter-to-quarter this dip because the variation can be -- there will be some sales reversal during the course of the particular quarter. Maybe to some extent, the margin may also have been because of the material cost that impact that it must ever had. So there are multiple reasons, but I think these 2 -- one or 2 things are also will add apart from the fact that there has been these freight issues.

And secondly, you mentioned that this Phoenix Lamp is more impacted in the current quarter because oxygen issues -- supply issues. So obviously, we have very large share in aftermarket as well. So like I said, is it that other competitors as well with a similar issue in their plant? And that's why maybe in the second quarter, we can recoup some of the losses that we've seen in the sales -- which we have seen in the sales in this quarter?

Okay. We are in the same boat as any other supplier of this particular product. But everybody needs oxygen, and they're all depending upon oxygen being supplied by inoxes of the world. And we are now setting up our own oxygen plant, which probably should be in place in June. So I think we should be back to a reasonable level of production. But let me also say that the pressure -- let me give a larger perspective that oxygen produced in India either are sufficient and enough oxygen available in that. There is no supply issue. There is no issue of meeting the demand, but there is an issue of supply in terms of logistics, now where the oxygen plants are and how do you supply to them. All of them have been sort of resolved by now with all -- by road, by train. You hear of trains taking oxygen containers all over the country. So the pressure has come off from the -- some of the key suppliers. For example, Inox has started supplying to us already. So the plants are back in normal. How has it affected? Yes, it has affected some production for us. But has it affected any of the customers? No, it hasn't because most of them are anyway on shutdown. So we are now getting back to normalcy. So it did affect some production. So we'll pick up the production when things are needed. So if the rebound in the aftermarket, to answer your specific question, comes in, let's say, June, July, August -- I mean June will be still a month where we'll have to see how exactly lockdowns will be lifted. I think we'll be very well prepare. There's no problem.

The next question is from the line of Deepan Sankara Narayanan from TrustLine PMS.

Firstly, I wanted to understand what is our expectation of U.S. and European market performance this year. Considering they are benign in terms of second wave of COVID? And also, are we seeing the status on new models of our new customers? Is it running smoothly or it is getting delayed?

Okay. In terms of new introduction, there has been some delays. SOPs have been delayed. The volumes have come down. But having said that, we have won some -- quite a few contracts as we have been seeing in the past -- in the last 2, 3 years. One of the reasons we are able to continue to grow despite major disruptions in Q1 was largely because some of these new contracts have started its production cycles. So that has helped us to sort of be where we were, which will continue this year also. In terms of overall volumes, it is not just a COVID that is bothering the automotive industry. It's also this IP, which Mohan just mentioned. If you sort of -- if you're seeing the global news, both whether in U.S. or in Europe, I think right from Volkswagen to BMW to GM to Ford, they all have sporadically shut down 1 week, 2 weeks, 3 weeks, this plant, that plant. So overall, the assumption is this year, let's say, this calendar year, automotive industry worldwide will not grow, it will actually shrink, whether it is 5% or 10%, depends upon how these shortages will actually pan out in the next 3, 6 months' time because the general feeling is that through this year, this IC shortage will be there. It is not going away because there is an over demand and undersupply. I mean the capacities are full. So having said that, if there is no other issues, I think we will continue to have, because of this increase, what I would call as business due to new businesses, we should be able to do decently well.

Okay. Okay. And on India business, sir, so sadly, we had a very low base last year on Q1, particularly. So are we guiding anything on that? So will we be meeting last year numbers or it will be lower than that?

Difficult to say. But all I'm saying that our April was reasonable. May was -- is bad. June, it again depends when everybody starts scaling up. So overall, I would say that Q1 would be something like last year first quarter. Hopefully, a little better, I think. It depends upon June.

Okay. Okay. So on these current conditions and commodity prices going up, so are we expecting some pricing get passed on to our customers? Are we facing difficult times to pass on the pricing to customers?

I mean generally, in India, there is a recourse to customers. We are in discussion. We have got certain price increases, certain price increases are still under debate. It's an ongoing, what I would call, a debate and deliberations with the customers. Customers understand because this time the price increase is not 1%, 2%, I mean the steel prices have gone up by something like 30%, and so are many other materials. So I think customers are understanding the situation. There will be always a timing gap between the actual impact of price increase and the actual impact of when the material price has gone up. To that extent, there will be some, what I would call as a timing issue. But otherwise, I think we are doing every effort to make sure that we get compensated. There will be always some difficulties at some point. But overall, we should be able to manage it, I think for the Indian market.

The next question is from the line of Amit Hiranandani from East India Securities.

Sir, first of all, many, many congratulations to the whole management team for the exceptional set of numbers in this tough time.

Thank you.

Yes. Sir, my first question is basically the nonauto cable margin for the quarter is substantially improved. Just want to know the reason and whether can we sustain this high level of margin in the coming years? And on the other side, auto cable margins substantially dropped Q1,2? And any one-offs in it?

I think my basic answer would be that I don't want anyone to go by 1 quarter number, whether it is for the automotive or for the nonautomotive. There are various reasons. There could be some -- so for example, a pending price increase which got affected in that quarter, so it's showing in a skewed number. And also probably under Q4 in automotive exports, we had huge air fleets that we had to do because of all the -- what all happened in the Suez Canal up to all the issues at the various ports. So that has also been a big problem. So I wouldn't go by a quarter. All I want to say -- I mean particularly on the nonauto -- automotive side, as if I think 1 quarter a couple of percent. But if you look at the whole year, they are more or less at the same level. I don't see much change on that overall scenario. Coming to the nonautomotive, I think what is -- what I'm happy about is that Wescon seem to be turning around slowly but steadily. I think last year is a year where they consolidated, they improved their operational efficiencies, certain amount of new businesses have been won. So to some extent, I think the last quarter was a good quarter for the -- in terms of sales. When the sales exceed certain level, I think it also obviously has its effect on its bottom line. So that did give a pleasant surprise for the quarter. That, apart from whatever the other thing that I mentioned. So is it a trend? I think overall, nonautomotive business, which had been clocking lower margins in the past couple of years seem to have stabilized and seem to be only on the trend up. So we are happy that it's in a good double-digit now. So that the idea is to make sure that we continue on that path.

Great. And sir, can you please throw some light on the new products? And any plans for getting into making EV products or potential opportunity on the table?

On the new products and EV opportunities, I'll ask Mohan to answer. Mohan?

Yes. Thank you. Well, on -- let's split it into 2 different things. One is the new product. When I say new products, for example, breakthrough is a new product for us. You know that we have entered into the segment. We have got a very, very good technology in place, that's called as the NC2 technology, and we have already commissioned the plant, and we have done all the trials and commercialization of the plant is done. We also got our one first major OE customer, and we have already started supplying to this OE customer. We have approached other OE customers for product validation and move ahead. In the process, we have also feed it back into the aftermarket, and we have started selling it to the aftermarket. So this is on our new product, which is other than, I would say, the cables and the halogen bulbs. In terms of EV segment. We are getting into a completely different ballgame here, and that is into the electronics cluster. Else in the last call, we were talking about that we have started our Electronics division, and we have -- we need to migrate from our instrument cluster, which is mechanical instrument clusters, into electronics. And we have a very clear product road map. And we call it a Supra 1, Supra 2.0, 2.5, 3 at different levels of electronic versions, and some of these have already got good market acceptance. And here, very specifically, our target has been the EV space. So we are working with a couple of EV players to supply electronic instrument clusters to them. Other than that, we also have the combination braking system. That, again, is being targeted with some of the EV segment 2-wheelers.

Just to add what Mohan said, we're also working on electronic throttle controls for some of the customers' requirements. So Suprajit Technology Center, which has now been sort of augmented with more number of engineers. We have a couple of senior people joining the team. So we think that in the next 2 to 5 years' time, we'll have multiple products coming out and commercialized for the overall good of the company's future growth. Thank you.

Great, sir. And sir, can you throw some light on orders from Osram. Are we getting it for the European order and the aftermarket?

Yes. Yes. I mean Osram there is a buyback agreement. In fact, I mean without getting into the numbers, I can say that last year, we exceeded their own requirement -- I mean original buyback commitment because they wanted more and we were able to deliver them more. And the understanding continues. The requirements are robust. We continue to deliver Osram's agreements.

Great. Sir, one last question, we earlier had plans to further diversify the Non-Auto division geographically as well as product-wise. So where are we on this plan?

Again, I'll ask Mohan to answer this question. Geographic as well as product-wise on nonautomotive.

Yes. Thanks. On the nonautomotive side, we are very clearly again, looking at electronics, like what Ajith was talking about, the electronic throttle control is one of the key products. In fact, this was being supplied already by Wescon to some of the customers there. But they were buying a lot of those equipments from -- or parts from other suppliers. So for that, we spent in for a back-ended localization that we are going to do here in India, and supplied to Wescon and through Wescon supply to these customers. So one of the key shift that has happened is -- or is going to happen is going to be from mechanical control cables to electronic control systems. So we are positioning ourselves there. Other than that, there are quite many other devices like, for example, our gear shifters, which are again being positioned there, in the U.S. market, which will be back-ended produced here in India.

Mohan, maybe also on the gearboxes that we are working, maybe that would be great.

Thanks for reminding. Yes, one of the key products that we have now commercialized, and it's undergoing a lot of testing by some of the OE customers in Brazil is for a gearbox. This is an interesting product where we were making the cables for that, and we were supplying cables for that. Now at the end of this, one end of this cable, there is a specific gearbox which goes for a seeding unit, that needs to plant the seeds in the agricultural equipment. So this gearbox is something that we locally designed here in India, and we tested everything, and we have started giving it -- seeding it in to the Brazil market. And in the aftermarket, it has already been given. But more importantly, for the OE market, it is being tested by one of the OEMs there.

Thank you, Mohan. And to add that in terms of -- we are also looking from the nonautomotive point of view to not only get into newer products. But also, these are all the products that have been developed at the STC, Suprajit Technology Center. But to add to that, what we are also trying to do is to get into new customers with our existing products as well that means cables and whatever we are currently doing. I think the Wescon team, in fact, recently, we had a strategy session and a 5-year plan. So we are very clearly focused on starting to work now already has -- some work has happened which will make us to enter into some of the newer customers for our current products as well. So that has also been clearly rolled out. So in fact, I can say that first quarter Wescon numbers are pretty good, largely because the efforts made to get into existing customers, newer business, new customer, existing business. I think both are starting to break the ice. So some of those orders that we have won in the last year is getting into production. So in fact, first quarter of this year, which is typically the lowest or the weakest quarter for Wescon is turning out to be quite interesting from the point of view of scale. Thank you.

The next question is from the line of Nikhil Kale from Axis Capital.

My question is on the nonauto cable side. So I think you have mentioned...

I'm not getting you properly.

Mr. Kale, if you can use the handset, please?

Yes, just a minute. Yes. Is it better now?

Yes.

Yes. So my question was on the nonauto cable side. I think at the start, you mentioned that there were a couple of challenges, specifically in Mexico and also with respect to the sensors. So just wanted to understand, was there any loss of revenue because of these issues? Or were you able to recuperate whatever revenue goes down by shifting the manufacturing?

Yes. The point is when you ship to a Mexico production to Wichita, there is a cost, right? I mean there is a cost issue. But we have not been able to -- we have not let any customer lines down, and that's the most important part in our business. Have we -- could we have delivered more and added another 0.5 million sales? Maybe answer is yes. But we have been able to work with the customer so that we make sure that the lines are not down. We'll deliver some how or the other run time, largely because Mexico was in -- actually started with red and it has gone to now orange I think. So there is no other issue other than that. In terms of sensor again, see, customer is fully in the picture in terms of sensors. So for example, a couple of our major customers, they know the problem, and they know which suppliers are using particular sensor or the IC. And they work with the supplier together with us and then they allocate their budget quantities. depending upon their production schedules. Accordingly, we receive. Typically, we would have produced more and kept a stock or send more to customer. That is not happening. It is going just in time. So we have been able to manage the customer so far. But then this is as for the nonautomotive. Whereas automotive, it's a much larger problem and a bigger problem. The customer has taken a decision on many occasions to just shut down the plant.

Okay. Okay. Got it. And if I look at the annual margin, sir, I think the margin improvement has been very good from around 11% to almost 14.5%. So I just wanted to understand. One is in terms of our mix of productions, I think we were also doing a lot of direct exports. So how does it stand today? How much are we manufacturing in say, Mexico, Wichita versus direct exports from, say, India? And how do we see that going forward?

Okay. You are talking about nonautomotive I think?

Nonautomotive. Yes.

So I think slowly but steadily, the -- there are more production will happen. I'm slur -- I'm not talking about 1 quarter, let's say, I'm talking about next 2, 3 years. I think quite a bit of the new business will happen out of India, number one. Number two, a reasonable amount of business will also happen out of Juarez because delivery times are much shorter. And customer is willing to pay a slightly higher price. So both are happening. So the business, in essence, is not likely to grow in Wichita plant, per se, but it will probably grow in Juarez and India, I think. Yes.

Okay. Okay. So to that extent, I think margins should -- it would be fair to assume that margin should remain in this region or maybe improve only?

No. What happens is that when you move the business to India, customer also knows it is Made in India. So they are equally smart. So they also ask for a -- not the same level of pricing that we get at Wichita will come through the other plants. So it's a debate. But yes, currently, I would agree with you that the products made out of India has a higher margin, and that's where the growth is. But customers keep on pushing for prices so, we'll have to see how it pans out. At the moment, yes, I mean probably 1 of the reasons that you saw some margin improvement as well in the last quarter.

Okay. And just lastly, would it be possible to maybe quantify some numbers or give us some numbers on maybe the order book that you have maybe in the north side or even on the automotive cable, so that would be very helpful?

You can touch offline because we don't really get into this much of detailing in terms of providing the data. But I think some basic data, I think Medappa can provide to you offline.

The next question is from the line of Abhishek Jain from Dolat Capital.

Congrats on a strong set of numbers. Sir, as the retail base is quite weak in 2-wheelers and system inventory is high, how do you see impact in the -- your stand-alone business in first half...

I'm missing your questions. Abhishek, can you repeat? I got some problem to hear you properly.

Are you able to hear, sir?

Yes.

So at retail sales is quite weak in 2-wheelers and inventories is quite high. So how do you see impact in your stand-alone business in first half FY '21? And what is your revenue guidance for the core cable business for FY '22? So can we see the growth in the aftermarket business as well due to the disruption in distribution channel?

I have a little difficulty to understand, but let me try to answer. You are saying about the, I think, OEM business about the pipeline stocks and thing.

Yes.

And I think in terms of -- okay, let me answer the second part, I think you heard it properly. The aftermarkets business, if the distribution, our dealers and distributors sort of open up, I would think that the business will be back to normal and has been good last year when there was a reopening, there was a bust of business, which came up quite nicely. It could again repeat for some time. But then will there be that much of pent-up demand like last year? I doubt it because it has been a good year for growth. So there would be an uptick, but how much, I don't know. Secondly, I think the rural economy and rural distribution was good last year simply because the COVID didn't impact the rural economy. This year, I think it has impacted the rural economy. So I don't know what would be the outcome of that. Would it mean that there will be reduced sale of 2-wheelers or whatever? As well as whether there'll be -- you're also in the same business, so you are -- your guess is as good as mine. In terms of OEMs. I think when we looked at March and beginning of April, there was a feeling that there was an increased pipeline stocks in the 2-wheeler dealerships. And then, of course, the lockdown has happened. And some of the customers, as you know, have shut down their plants sporadically and changes in schedules have happened. Now how much is the stock? I don't know. There are people talking about 6 to 8 weeks stock. If it is so, that is a little bit on a higher side. So I think we'll all have to see how -- somehow there is a feel of discomfort for me. And it's more on a -- by a personal view, when I am -- I hope and pray that I'm wrong, that this time, the effect of COVID has been deep-rooted. I think we all would agree, if somebody we know some relation, some friends, some have the serious effect of COVID. So it has happened also in the rural area. So how the economy will pick up and the business will pick up, I have a little more concern this time than the last time around because it impacted certain area and went away. This time, it has got a deep-rooted impact. So will the economy really pick up and the 2-wheeler or 4-wheeler business will pick up? I have some concerns. That's why we have been a little conservative and little cautious in our outlook for the year, and I still hold that view.

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

Yes. First of all, sir, I hope everyone at Suprajit are safe and healthy and congratulations on such a remarkable performance in such a challenging time, so all credit goes to you and the team.

Thank you, Viraj. I appreciate.

I just had 2 broader questions. I mean not just looking at next 1 or 2 quarters. But if I have to look at, say, next 3 to 5 years. First is, if you look at '21, as you said, we have seen a considerable outperformance compared to the Indian auto production. And that is an outperformance we have been maintaining for last many years or decades. And if I have to look at the next 3 to 5 years, where will that outperformance come to us if it is exports, if it's domestic? If it is exports based on the kind of inquiries or any color you can give, how is the inquiries, how is the conversion looking right now? Or the pipeline looking right now? So that is one. And in relation to that, since the PLI scheme is now out and open, is there any benefit we can take and leverage upon? So that is one. Second is, largely, as you said, we had seen some impact into the production, say, for Phoenix, and that is something which can happen to any company or supplier either in India globally. But is there now a thinking which we are looking at ending up derisking the supply chain not just in India but probably at a global level? And how does that kind of equate with our value proposition with respect to the cost, which we have always kind of pride upon. So these are 2 broader questions I had.

Okay. It's, I would say, a more generic answer than being specific. We've always outperformed the automotive industry, that continues to be our stand. We have always said that we will do 5% to 10% outperformance. With 5% growth this year in sales, which means it's almost like a 18%, 19% outperformance to your Indian automotive industry. Now how will it pan out for the next 3 to 5 years? I think the growth will come. We believe that globally -- it is my view and our internal view that there will be consolidation of vendors. You are right when you said the supply chain derisking. Today, customer do not want 10 suppliers of cables. They want 3 or 4 who have the ability and financial standard to deliver them when they want despite whatever the problem they have. So that's where we step in, and we have done, as you know, in the past 2, 3 such acquisitions in this space. There continues to be opportunities, and we will -- we have already made that clear that we'll continue to look for such opportunities that will augment our outperformance. That's number one. Number two, globally, we are still a pretty small player. So I think the opportunities globally will come in automotive as well as in nonautomotive business. I think to add to our strength with Jim joining us, who has been in the automotive cable business for 30 years and led teams in the so-called global majors in cables, I think, gives us a lot of strength additionally to make some more inroads beyond what we have been doing ourselves to continue to go on this path of outperformance. So this is where we are looking at on the cable side. And also on the -- even on the Phoenix Lamps side, I think the kind of strategy we are striking with whether it is with Osram or whether it is with the Lumileds and our now ability to even deliver to the OEMs. I mean we have -- last 1 year, we've successfully delivered to a Chinese OEM, and we are working with some more. So all these things will -- our new business is for us. It is not the existing businesses. So that will all add to our ability to outperform the business. So I continue to believe that we'll outperform. And added to that, what the STC is doing. I think we are still, we are not talking too much about STC today, but I think in another 2 years' time, some of the products that are in the final stages, Mohan talked about it quite a bit. Some of them can easily take off. So we have a lot of hopes in that. So all this will add on to our outperformance. PLI on the non -- on the auto component industry, we are yet to study well, I think it has still not come out in clearly. So we'll have to see it what exactly it means, and we'll see whether we can use it to our advantage for sure. Supply chain derisking. It's a perennial issue. I mean we always have managed to do derisking of suppliers. We generally have 2 suppliers most of the times, and unless there is a reason to be a single sourcing. So we never had -- as you know, we today supply to most of these customers something like either we have a 70% supplier as many a times, the 100% suppliers. So we have been able to manage the supply chain well. And we have a fairly good link within the supply chain to make sure that whenever there is, let's say, 1 supplier is a problem to switch suppliers and manage the situation. So we haven't had that problem so far. And I think our team is well to deal whenever such crisis has happened. I think we should be able to deal with that.

The next question is from the line of Pratik Kothari from Munich BMS.

So again, in continuation of your earlier comment regarding for the next 3, 5 years, just wanted to get your sense on our preparedness to capture the opportunities which might come to us again over the next 3, 5 years. And I asked this in the context that for the last 2 quarters, we are currently operating at almost full capacity that we have adopting utilization. And the CapEx that we had announced last quarter only adds about 2% to 5% of the installed capacity that we have. So any major CapEx plan? Any thoughts around that? How do we -- once the opportunity comes, are we ready to grab the same?

Yes. I mean good point, Pratik. I agree with you. But let me also say this that we have generally have the capacities in place. We have 300 million capacities. I mean cables about 100 million to 110 million lamps whereas last year, of course, let us not -- even if you -- taking the first quarter number, we are only at about 60%, 65% capacity utilization across our capacities. And then we are now augmenting with some specific capacity to meet a specific requirement or a specific segment. For example, we had just won a shortage of capacity. So we are adding 1 line. And we are getting new business from Honda, so we're adding additional facility in Narasapura. So that is selective. But one thing is very clear, we have enough bandwidth to install capacity in our existing facilities because the infrastructure has been set for a higher ability to deliver or put up additional plants. So we will look as and when there is a -- one of the things in automotive industry that if you win an order today, it is not for today, it's for a year down the line at least. So we have a fairly clear road map as to when we need -- our capacity needs to be augmented, and we work accordingly. I think -- so there is enough time for us to deal with it. And there's no issue on finances, as you know, we are quite cash surplus. We don't foresee any problem to meet these new businesses that we are going to win.

Fine. So sir, our approach would be, once to get this order, and like you said, it will be at the 1-year time line, and then to put up capacity. So we are not aggressively going out and adding some huge capacity?

Yes. I mean one of the things that Suprajit historically done is that it is not that from 100 million, I'll go to 200 million and wait for the order to come. We have been continuously increasing our capacities, assessing closely what is our requirement for the next 1 to 2 years. So that's what we have done when we went from 225 million to 300 million. Because of the last year being COVID, it didn't utilize the capacity. So we are still reviewing very critically today to see what is required for the next 2, 3 years. So we sort of look at 2, 3 years in a bucket and see when we need to enhance our capacities. And I think that has worked very well. So that it also helps us in capital allocations in a very optimal or a very efficient way rather than just setting up and waiting. So it has worked well, and I think it will not be a problem.

Absolutely. Fair enough, sir. And my second question, we did a lot of cost optimization or cost cutting whatever this year because of COVID. We have spoken at length about it in quarter 1 and quarter 2 calls. So if you could just talk about how would this be reflected in our numbers going forward?

Yes. I think there have been -- you're right. I think we have elaborated in the first couple of quarters updates. But let me also tell you now there is a -- what is happening is that the COVID scene is adding to the cost, in a sense, because now we have to work on simple things like making sure that everybody is vaccinated at our part, we are making sure that we operate with less capacity as much as possible to make sure the social distancing is maintained. And if somebody is quarantined, is out for another 2, 3 weeks' time, but we still pay them. These kind of challenges, one is the cost optimization in a pure operating situation. But then there is also parallelly cost add-on like this comes up. So ultimately, it's a question of being most optimal in our business compared to the competition. I think that is where we feel that we are ahead of the race, and that's why we will continue to perform okay. But in terms of challenges, there are still some challenges while some of the cost optimizations we have done last year will stand good this year. There are also some cost add-ons coming, not just because of COVID, sometimes also because of some of the cost push inflationary pressures which is not easily transferable to customers because customer will give you a still price increase. But we may not give you a corrugated boxes price increase, I mean, just to give you an example, which is difficult to pass on. And those kind of things also will be there. So we have to juggle multiple balls. But I think we'll still work out our guidance of growing ahead of the industry and maintaining certain level of margins, I think that still stands to I think similar.

Fair enough, sir. And congratulations to your new team for the certain excellent numbers. All the best, sir.

Thank you. I don't know how many questions are there on the question and answer. We'll take another 2 questions, moderator, if it is okay. Hello? Moderator? Hello? Hello? Did I lose?

No we can hear you.

Can you hear me?

Yes, yes, we can hear you, we are online. I think the moderator is not able to respond.

Yes, we can hear you.

Hello? Disconnected?

Sir, hello?

Yes, what happened?

The next question is from the line of...

Yes, moderator we'll take another 2 questions. I think it's already 10:55 -- 11:55 so -- another 2 questions we'll take, yes?

Sure, sir. The next question is from the line of Rohit Balakrishnan from [indiscernible] PMS.

Yes. Am I audible?

Yes, you are.

Yes. Congratulations to the Suprajit team for a stellar performance this year. Sir, just most of the questions have been answered. I just had 2 questions. One was, could you talk a bit about your efforts in the U.S. markets for both Phoenix and the automotive cable business? That was question number one. And sir, the question number 2 was in continuation what -- of the previous question that was asked, slightly longer term, in terms of your growth in terms of the next 3 to 5 years, you talked a bit about the new products, and you were also saying that probably you're quite excited about your technology center. So I mean any broad -- I don't want numbers, but just in terms of opportunities that you see that -- I mean in terms of the products that you have, in terms of what keeps you very excited on that front? What are the things that you are very excited about in that? And just as an offshoot of this in terms of capital allocation, you continuously said that, that is a part of your growth strategy. Given what is happening in terms of diversifying supply chain and overall markets being quite volatile, just want to understand, I mean, is there any merit in going a bit aggressive there? These were the 2, 3 question that I have.

About our business in U.S., both for Phoenix and automotive. I'll ask Mohan to answer. How it is panning out. Mohan?

Yes, sure. I'll take that. Let me start with the lighting or the bulbs area. That's a very huge market over there, and we have been trying to knock into that market. And very recently, we have had very successful, I would say, audits by some of the U.S. customers of our plants, and the audit reports have gone. But again, due to COVID restrictions, the whole transaction has not been very smooth because they had to ask somebody in India to come and do the audit for us -- for them rather, and that has been very successful. So we are in the process of getting into it, of penetrating into the U.S. market. Moving over to the automotive. As you know that almost about close to 5, 6 years back, we got one gentleman out there to specifically look into the automotive market. And even I have been there many times knocking the doors of many Tier 1s and the OEMs. And that has been successful, and that's the reason we have got some amount of success over there. Moving forward with Jim coming onboard and with his contacts and networking -- and I'm sure that, that will get even more, I would say, accentuated along with Gopal, who has been doing his job. Therefore, we are pretty much gung-ho on our penetration into the U.S. market.

On the other 2 points that on STC, I think it's difficult to say which product will really click. As Mohan has explained, at least 4 or 3 or 4 products are under OEM what I would call as approval phase. And hopefully, in the next 3, 6 months' time, there will be a decent development. The market size of them are quite large, but then giving a market size and hoping that we'll get 10% in the next 2 years, I think it would be a little bit over optimistic statement. So we do not want to comment. I think things like electronic throttle controls or the gearboxes we are developing or the ABS -- I mean CBS product that we are planning to launch or even quite a few of the other things that we are doing, they are all very exciting products to us. So we are working closely. It is something that we started 2, 3 years ago. It has come to some stage where we have now been noticed by the customers. The approval will take some time. And so telling that we'll do INR 50 crores, INR 25 crores, INR 100 crores would be little premature for us, but then we are quite happy with the progress so far. I would leave it there. In terms of capital allocation. I continue to believe that consolidation of auto component manufacturers is a given issue. I think it will be there. There is no place for, let's say, cable maker making USD 25 million or only focused in U.S. It will not work simply because today, any product launched by, let's say, a GM or a Volkswagen or whoever it is, it's a global platform. So the supplier should have the ability to really reach out to customer in all these markets. And that very few of us have that ability. So such suppliers will eventually either get acquired or will fold up. And it has happened already in this business. So we are looking at opportunities. And I think some of the capital allocations will go in such opportunistic players who will give us either a geographic fit or a manufacturing footprint or new customers or a combination of this, and that's part of our strategy anyway. Thank you. One last question, moderator, if it is there.

We take the last question from the line of Saket Kapoor from Kapoor & Company.

Sir, if we take the comparison of our performance from December to the March quarter, that is the preceding quarter, therein only, we have seen a dip in the revenue and both the top line and the bottom line. Sir, how would you explain this? What factors attributed to the sequential decline?

So I think the automotive industry itself is cyclical, you must realize. Typically, the third quarter is the best quarter because that's where the most of the festival season is. Both the OEMs do well and beyond that, the aftermarket also does well. So September -- I mean October -- from September to November are the peak months of festival in India. So which is not there in the last quarter, typically. So also, we have a lot of aftermarket schemes which sort of end in December, et cetera, et cetera, so that we sort of strategically position it. So that's all the reason why Q3 number has been higher. Whereas on the consolidated basis, I think it's still the highest because our subsidiaries did much better in the Q4, which have typically overseas contact. So for them, It's a different situation. So typically, in automotive, Q1 is the worst quarter and Q2 and Q3 sort of gather speed and Q4, sometime is same, sometimes slightly lower than Q3. This is historically how we see such.

Right, sir. Sir, last year, we have also -- I mean last not last February, the Board approved this buyback part also INR 20 per share. And sir, now since SEBI has also come up with a projection shipper of -- in fact, the dividend distribution policy to be mandated by the top, say, 1,000 companies or something of that sort. Sir, what should be the ideal -- ideally investors should be looking in terms of this buyback? And the dividend part buyback being now also have been taxed at 20% and dividend being taxed at the hand of recipient. So what is the way forward for your industry?

Okay. I mean I think we made a small commentary on this in the last quarter business update as well as in the call. I think what the Board has decided -- not in this Board meeting in the previous Board meeting itself that typically Suprajit has been distributing between 20% to 30% of the net profit to the shareholders. That has been the historic number. The historic average has been about 23%, 24%. So in that last Board meeting in February, the Board took a decision that we have been only doing dividend distribution. And as a part of broad-basing our distribution policy, we should also start doing the buybacks. The reasoning being simple that these are the 2 ways of rewarding the shareholders and let us do it both ways. And also that we should increase our distribution on an overall basis over a period of time. So buybacks probably will not be happening every year. But if you look at a 3-year perspective, as a matter of argument, there's no Board mandate to this, but let us assume you do 1 buyback once in 2 or 3 years, if you look at the 3-year block, the distribution that Suprajit will do between buyback and dividend distribution should go from 20% to 30% to 30% to 40%. That was a decision that has been taken by the Board, and this is what I explained in the last con call also. So we will be working on that premise going forward.

Sir, since you articulated that the entire ecosystem has been disturbed by the second unfortunate COVID wave. So sir, as this same received, sir what factors actually, we investors should look forward that will start again the journey where the way it started in the second quarter last year? I mean what are the factors that we should look forward. In terms of...

In terms of how we'll repeat last year Q2, Q3 and Q4?

Yes, sir. Just an adjusted...

How will we be able to redo what we did last year, 3 quarters?

Yes, sir. Yes, sir. You told that this will be different than what it was last time, and it's very true in your assessment.

Last year, after the lockdown, there was no -- technically not much of any disturbance. It was an open market in India, and world was generally okay anyway. Whereas this year, we are still not through the second wave. We are still struggling, the debt rates are high. And the challenge is whether the third wave will be -- and if it comes, how bad it will be. Typically, with no protection in place, which I would still think that 10% or 15% or 20% one shot is not good enough for us. And this time, it has gone to the rural areas. So there is a little bit of uncertainty compared to last year. But I am hoping that if a good amount of vaccination happens in the next 3 months, the third wave may be reasonable, may not be too bad. But will the third wave come? My view is it will come. How bad it is? I don't know. I'm not a medical expert, so if those things do not lead to shutdowns of plants and lockdowns of towns and cities, I think we should be okay, actually. We do believe that there is an underlying demand. But if that happens, then ultimately it is a question of confidence of people also. Today, if there is somebody who is in the household, somebody already had a core then these uncles, aunts and brothers and sisters had it, the discretionary spending will come down. That is what I'm worried. Last year, it didn't because rural area was solidly supporting. This year, rural area also is affected. So it's a very difficult judgment. I don't know. I'm hoping that it won't be bad and it will be back to normal, but we all have to be mindful of the possible dangers. I think it's a very generic answer. Sorry, I can't answer any better, I think.

Yes. Definitely, sir. The last point was sir, that this year, I think so the second wave -- and its harmful impact is fact domestically only. I think so globally, things are very different than what...

I think globally, we are better off, but let me understand that. Globally, right now, there is a different problem. The IC chips problem is a problem. Let us face it. I think automotive industry in calendar this year will do less than last year calendar in terms of volumes because that IC chip shortage is not going away. Today, if I place a new order for IC, it is 36 weeks delivery. So where do you go? So that problem will bring down the volumes in automotive. But having said that, we have 1 new business so we will grow. My only term is -- I would just summarize saying that, yes, these are all the challenges, but we will outbid the market, whatever it is, how the market will grow, we are all waiting and watching. Okay?Thank you very much. Thank you. I think I would like to say that thank you very much for all of you for your continued interest in Suprajit. Our team has been working tirelessly. We have 2 strong challenge today. One is to try to excel operationally, but at the same time, manage the forward situation. The team is doing a great job, and we really appreciate all the good words which we'll pass on to our team. And as usual we'll work towards making sure that we come out with as good results as we can under these circumstances, and we appreciate your continued interest in Suprajit. Thank you very much, and have a good day.

Thank you. Ladies and gentlemen, on behalf of Anand Rathi Share and Stock Brokers, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.

Thank you.