Suprajit Engineering Limited (532509) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Suprajit Engineering Q3 FY '23 Investors Call hosted by Anand Rathi Share and Stock Brokers Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Salt from Anand Rathi Share and Stock Brokers Limited. Thank you. Over to you, sir.

Thanks, Dovin. On behalf of Anand Rathi Shares and Stock Brokers, I welcome you all to the Q3 FY '23 conference call Suprajit Engineering. I thank the management for taking time out of this call. From the management side, we have Mr. Ajith Kumar Rai, the Founder and Chairman; Mr. N.S. Mohan, MD and Group CEO; Mr. Akhilesh Rai, Director and Chief Strategy Officer; and Mr. Medappa Gowda, CFO and company secretary. Request Mr. Ajith to give an introduction review about the results and then follow it up with Q&A. Over to you, sir.

Good morning to you all. Thank you, Vijay. I appreciate all of you joining our Q3 results conference call. Thanks to Anand Rathi and the team. We have been able to interact with you over the years and that continues. As usual, I would request our team to make a short presentation on the results of Q3 and 3 quarters. And then I will give you a short few wrap-up points, and then we'll allow the questions to come in. With that, I will first hand over to Mohan, who will talk about all the businesses, except LDC and STC, which will be done by Akhilesh. Medappa will cover the financial side of the presentation before they hand over to me. Over to Mohan.

Thank you very much. Good morning, everybody. As usual, what I'll do is I'll start with an overall assessment of the market situation. And then I'll move on to each one of the divisions. Well, generally speaking, October, December quarter, we generally get hit by the year-end stock corrections by the OEMs because they are closing their accounts at the end of their calendar year. And this is also accompanied by Christmas and year-end closures. Therefore, this is generally kind of a quarter, which is not great. However, moving on specifically to Indian market, Indian market has shown some resilience. The urban market has picked up and is borne by the fact that passenger car vehicles really went up very smartly. However, the entry-level segment of 2-wheelers did not do well. But the nonentry-level segments of 2-wheelers had done very, very well. That's primarily because of some rural stress probably. And also -- we are also seeing some liquidity tightness in the market. Moving on to China. China has come out of the COVID cold. Hello?

Yes. Go ahead, Mohan.

China came out of the COVID cold, and it has started warming up a bit. It's still plagued by supply chain issues. And particularly the Ukraine war fallout in China has also happened. This is particularly affecting the European OEMs in China, like BMW et cetera. Europe is reeling under an inflationary pressure, coupled with high energy costs and overall general uncertainty due to war. So that's what the scene in Europe. U.S. market is hit by, we all now, unprecedented levels of inflation in the recent times. And raising interest rates, which they are trying to tame the inflation, but has deflating effect on the consumption. And we have seen that happening pronounced the amount of business in that market. Now I'll take you through each one of our business divisions. At DCD or the Domestic Cable Division, despite the muted 2-wheeler growth, which incidentally hasn't crossed the pre-COVID levels, our growth has come. This is both on the revenue front and also on the margin front, we are pretty robust. We have been seeing some benign commodity prices but rather strangely in the last month, we have started seeing an upward swing again and I hope this will not turn into a trend. Our aftermarket fulfillment center, which is a comprehensive table aftermarket operations and warehousing, this we are going to start operations later this month. Moving on to the cable exports, the clouds of war, winter, energy, this has started affecting our overall business scenario. However, our consolidated sales and margin improvements is heartening. This is primarily because we have been able to get from our customers to compensate for the increased material cost. And this is coupled with also lower shipping and container costs. So together with this, I would like to say that our business pipeline has been pretty robust here. Moving on to SENA or the Non-Automotive Segment, the impact of inflation in the U.S. market, high interest rates, tepid housing market, all these things have not helped. This slowdown is expected to continue to another quarter the way we look at it. At Phoenix Lamps Division, the margins smartly bounced back. We clocked double-digit EBITDA margin. We -- as you know, we were testing the pricing elasticity in the Indian aftermarket, which I had been talking about it in the last few calls. And I think that has started yielding results. We have been making a few in-flight corrections, which were both responsive and proactive in the marketplace. And I think we had to show this agility, which we have done. This has been coupled with a laser sharp focus cost reduction measures at the operations, and that has continued to yield that result. We focused our attention and actions on streamlining and making our overseas subsidiaries in PLD, more leaner and cost manageable. As you all know that we have 2 warehouses, 1 at Trifa and 1 at Luxlite and that we consolidated into 1 at Luxlite. We thinned down the staff at Trifa in line with the business. Now we are in the process of voluntarily winding down Trifa. And these, of course, are subject to statutory and other necessary approvals. So in effect, restructuring at Europe for PLD has gathered momentum. These restructuring actions will, in my opinion, rightsized our business and also the infrastructure in Europe and, of course, bring the cost down on a long run. So this gives you an overview to what's happening in our traditional business, and I would want Akhilesh to fill in on the LDC and STP. Over to you Akhilesh.

Thank you, Mohan. In LDC update dated 25th July 2022 and 14th November 2020, we projected improvements in profitability despite significant headwinds in Europe, U.S. and China. Despite the unforeseeable headwinds of COVID as Mohan mentioned and related issues in China, we have still delivered our commitment of positive LDC EBITDA in Q3. This improvement was based on operational improvements, integration synergies and share price adjustments from customers. On an operational level, LDC in Q1 was a negative 4.5% EBITDA. And in Q3, we showed a positive 3.7% EBITDA. This 8.2% improvement is significant in the automotive context and is very impressive from work from the team there. In Shanghai, China, we had some severe disruptions in Q3 due to the China -- the COVID resurgence there, which led to a challenging environment for our Shanghai Lonestar plant. The team has done well to overcome these challenges, but we continue to see softer demand in China. In Siófok, Hungary, the team are doing well despite the continued slowdown in the automotive market there and inflationary trends in both labor and power costs. The operations have shown an improvement, but select customer pricing discussions in that region are continuing into Q4. We expect these issues to be closed in this quarter. And Mr. Mohan had visited these customers in Q3 to help bring discussions to a conclusion. In Matamoros, Mexico, the team has architected a remarkable turnaround, both operational improvements, group synergies and more timely customer price enclosures in the U.S. supported the team there. A strong pipeline of business is seen and the team are highly motivated to improve the business further. At our tech center, STC, the focus has been to commercialize some of the innovative products we have developed over the last few years. Our participation at the Auto Expo showed Suprajit in a very different light to our current customers and attracted many new customers as well. The market got a clear message that while we continue to focus on our core competitive control cables, we have a strong appetite of growth beyond cables as an R&D and innovation focused organization, be it into mechatronics, mechanical systems, braking systems or electronics. Finally, our electronics facility is scaling up production with most of the products focused on the EV segment and with the majority of India's leading EV customers. This facility is expected to be a material contributor in Suprajit's organic growth and profitability in years to come. Thank you. And with that, I hand it back over to Chairman.

Medappa?

Good morning, everyone. The consolidated revenue, including LDC for the 9 months ended 31st December 2022 was INR 2,053 crores, against INR 1,335 crores previous year, recording a growth of 54%. The consolidated operational EBITDA for the 9 months ended 31st December 2022 was INR 223 crores, against INR 190 crores for the corresponding previous year, with a growth of 17%. The consolidated revenue excluding LDC for the 9 months ended 31st December 2022 was INR 1,545 crores, against INR 1,335 crores last year, recording growth of 16%. The consolidated operational EBITDA for the 9 months ended the 31st December 2022 was INR 225 crores against INR 190 crores for the corresponding previous year, recording a growth of 18%. The standalone revenue for the 9 months ended 31st December 2022 was INR 1,092 crores, against INR 915 crores previous year, recording growth of 19%. The standalone operational EBITDA for the 9 months ended 31 December 2022 was INR 187 crores, against INR 157 crores last year, recording growth of 19%. The total group debt level was INR 604 crores, against -- as on 31st December 2022 and we have a surplus cash of INR 343 crores as on 31st December 2022 invested in mutual funds. The Board has declared an interim dividend of 105% for the year '22 and '23. For further queries, you can approach any time as usual. Thank you very much.

Thank you, Medappa. I think overall, what I would like to conclude is to say that we had a solid and good Q3 with solid improvements across our divisions within the group. For the first time in many quarters, PLD has done a double-digit EBITDA margin, which has been very heartening. Domestic cable division has done nearly 19%, again, one of the best in recent times. Suprajit Automotive plus Suprajit Europe, our original export group have done a good improvement in margins and also improvement in sales. SENA has been steady. LDC, as Akhilesh has mentioned, it has become EBITDA positive in the third quarter. Overall, I would say we had a good growth and a very good improvement in margin in Q3. Despite Mohan and others are talking about the gloom and doom, despite that, I think we have turned out an excellent performance. The Q4 is also expected to be fairly steady and good. We have made the comments on -- in our business update. With that, I will now let the questions to come so that we can specifically answer any of the questions that you may have. So I'll hand over to Dovin, the moderator to start the questions to come in. Dovin?

[Operator Instructions] The first question is from the line of Aashin Modi from Equirus.

Congratulations for decent margin performance. So sir, my first question is regarding PLD margins. So sir, you've talked about that the gross margin over here was hit by high gas prices. So if you could help us understand where are the gas prices now? And secondly, if you could also let us understand markets of Trifa and Luxlite in the last 2, 3 quarters and how...

Sorry, I'm missing on the Luxlite. What is the question on Luxlite? Hello?

Sir, the participant in the queue currently has dropped from the queue, sir?

Okay. I will answer for the purpose of others. I didn't understand the second question on Luxlite. The gas prices have come down, but it has not gone back to the historic levels. But what our operations team has done an excellent work was improve the efficiencies within the plant to get a better margin out of the entire operations. And also, of course, we have been able to pass on some of the price increases. And that's the reason why the margin at PLD has improved. So you can go to the next question.

We have the next question from the line of Mumuksh Mandlesha from Emkay Global.

Congratulations on our turndown in LDC and lamps margin, sir. So we visited the Suprajit pavilion in the Auto Component Expo and there you have showcased your wide range of new products such as mechanical disc brake display system, electronic throttles, actuators, speedometers and seeder gear boxes. Can you highlight how has been the response to the new products and particularly on the mechanical disc brake systems, which make use of sensors is particularly the cheaper than the disc brake systems?

Well, I think you're right. We -- in our Auto Expo, we have displayed our STC products. As I think Akhilesh was mentioning, there has been very good response from the OEMs. Both ICE and EV side of it. Specifically, whether it is MDBS, mechanical disc brake or the other products, there have been many discussions that have started now as well some discussions were going on. All I can say is with a couple of customers, our products are under testing at this moment. So these new product development is totally a new concept and also it's a patented concept and it takes a little time. But all I'm saying is that there's been an excellent reception for MDBS as well as other products that you mentioned. And we are all discussing at this moment with various customers.

Sir, if possible, can you say what has been the revenues from these new products this year and what is the expectation for next year with the products such as seeder gear box expo starting soon?

The seeder gear box is under the final test with the customer in Brazil. So it goes through a seasonal testing. So I think we'll have to wait for this season to be over. I don't really know when the season is ending, but our products are under the final round of tests in the field at the moment. That's ultimate decision maker. So we are expecting that certainly next financial year, the products to come into production. The volumes will depend because there are existing supply also. How the customer will share the business is something that we are able to negotiate so we are now in the final stage of product approval. In terms of commercialization and the value of it, I think we will wait for some time to comment on the electronics division and our new division specific product revenue. All I can say is that things like digital clusters, actuators -- electronic actuators and sensors are under production. There are certain levels of business. We are still scaling up more at the moment. So I think the next -- I mean, I would say this year we will go in our commercial operations to stabilize. I think then only we would like to give a comment on the numbers probably in the next quarterly update. But the -- all I can say is that the response has been pretty good. And we -- as Akhilesh mentioned, it will be one of the good organic growth prospects within our group in terms of revenue growth for the coming years.

And sir, on the non-auto cable performance, it has been weak this quarter. Can you guide the performance expectation coming quarters? And also, can you provide an update on the traction for in newer segments in the non-auto which the company was focusing on.

Sorry, what is the next -- second question?

On the new segments like the power sports, medical, marine...

Okay, within our non-automotive. Yes, Q3 has been slightly weak. Again, this business is all for the North American business under SENA. So there has been a slight degrowth as you would see for the quarter compared to last year's quarter. I mean U.S. market is going through a kind of a recession. The uptake from customers have come back. We've been able to have a flat -- more or less a flat business in the Q3. Thanks to some of the new business. Otherwise, it would have been a significant drop in volume, but that didn't happen. So in a sense, we are sort of managing that thing. So how will be the fourth quarter, as I said, I think also mentioned in our business update. Q4 also is likely to be slightly weak for SENA. So I think, hopefully, from Q1 of next year, things should start looking better.

Right, sir. Last question, interest costs, any reason for interest cost going up sequentially, sir?

Interest rates, my friend, I think it's affecting everybody. The interest rates have gone up almost by 200 basis points compared to last year and also on a sequential basis. So that's basically the reason.

We have the next question from the line of Ravi Purohit from Securities Investment Management Private Limited.

Congratulations on a good set of numbers. Sir, I think if you could just spend a little more time on some of the newer projects or products that we've been talking about. And I think you just mentioned that it will be difficult for us to kind of give what kind of revenue or how much contribution we can provide next year. But you could just kind of give us some color as to -- so for example, on the current businesses where we are doing our cables, right? A typical 2-wheeler will fetch us like INR 250, INR 300 per vehicle from a contribution from per vehicle point of view. Similarly you have 4-wheeler, it will probably fetches like INR 700, INR 800 per some cables contribution. But the newer products that we are working on what kind of change in realizations per vehicle can it kind of give us? So in a sense, does it expand our addressable market substantially from what it is today? And how does LDC product portfolio kind of fit into that? So if you could just elaborate a little bit, it would be very helpful for us to kind of understand some of these things.

Yes. Thank you, Ravi. I understood the point. I think one of the statements we have been making in the last couple of quarters is that the intent of STC Electronics Division, all the new products, not just electronics, but also mechanical product is with a clear intent that in the next 3, 5 years' time, our content per vehicle, I'm talking about the 2-wheelers, whether it is EV or otherwise, will increase from the current position. The current as you rightly said, let's say, there are INR 200, 4 or 5 cables in a 2-wheeler. Our intent is that in next 3 to 5 years, that content per vehicle should increase. That will only come from the new products. Now just to give you a comparative number, I mean just for the sake of give me some idea. Typical, let's say, digital cluster will cost anywhere from INR 600 to INR 2,000 in an EV or in IC Engine vehicles. So even if let's say 1 or 2 cables come down and we have an electronic cluster or, let's say, actuation -- lock actuator in a 2-wheeler, which is all required. In EV, it is like every vehicle, we'll have it. Each one of those just actuator will be INR 150, or say, INR 200. So MDBS is in a different league altogether. It's a much higher price. So these products that we are currently working on is commercialized, whether it is sensors, thumb throttles, they're all anywhere from INR 250 to INR 600, INR 800. So each one of those products. They are much more than the collective 4 or 5 cable costs. So I think that should give you the idea as to what these products will do to us in a longer term. In terms of what LDC brings to the table is certainly on the electromechanical actuators. I think we have been working with them both ways, how we can make it, let's say, more economically in India for them and how we can bring those technologies to India. We have been also in discussions with 1 or 2 customers growth in EV space and the automotive space, how we can work with them to introduce them in the Indian ecosystem of automotive business. So that's an ongoing process. I think it probably will take some time, but those products are very exciting for Indian markets also.

Sir, other point was, I think Akhilesh during his starting -- in his opening remarks mentioned about some of these products will be patented. So if you could just share some insights as to -- when you speak of patent, is it like patents that we have registered in India, but we have products work from LDC or we've actually developed them in-house and we are kind of -- so if you could just spend some time on explaining what has been like R&D progress? And what kind of patents are we working towards? And over a period of time, what kind of returns you would envisage these efforts you kind of bring.

On the patent scenario, I think I'll ask Akhilesh to answer. Akhilesh will give you some kind of a brief on the patent situation with the STC.

Yes, sure. So the STC team is now 40 plus engineers that are completely focused on R&D development. And in terms of patent, most of the products developed by STC have been developed [indiscernible].

I think, Akhilesh, you are breaking. We can't hear you. Akhilesh, you are breaking. But I think still, you're taking your -- maybe Mohan can give some feedback. Hello, Mohan.

Yes, sure.

Please go ahead. I think Akhilesh [ was somewhere ] on the STC and patent situation.

Okay. There are 2 questions. So the question one is, the current patents, is it LDC or is it FTC based? Most of the patents that Akhilesh talked about has been completely developed in-house here in Bangalore at STC. So these are the patents that we are talking about. That, I think, answers the first part of the question. Second part of the question was in terms of -- what was the second part? I think I missed it out. Can you repeat it?

Yes. Basically, how -- what period of time can we see benefits coming out of the -- some of these patented products or some of the things that you developed, right? In the sense what I'm trying to understand is how have we kind of gone about developing these products? Because the customer came to us with a problem, are we solving or we kind of developed an in-house by looking at products that we have already?

It's a mixture of both, to answer your question. There have been certain things, for example, let us say, the gear box, where we have taken a paced on the way it is mounted and the way it is connected, et cetera. Now this was an existing product, and there were some issues from what was posed for the customer. Therefore, we address those issues came out with solutions. And therefore, we took a patent on those solutions that we have provided. So that's 1 category. The second category is where that kind of a product does not exist at all. It is a completely grounds up idea at STC, telling, okay, why don't we make something in this direction? And why don't we produce something -- a product or an application in this way. So in the first one, it is obvious because it's directed by the customer who throws a challenge at you and you come out with a solution, therefore, it becomes easy. Whereas in the second portion, taking it to the customer, involves selling the concept itself, it is not selling a product. Therefore first you need to demonstrate your concept, then proof of concept, then going for showing them a proto, et cetera. So I think we are upping the game here within Suprajit world. And I would say it's learning exercise as we go forward, and it evolves. But we have been moderately successful in the second one already, I would say.

I think just to add on to what Mohan said, I think, for example, our mechanical disc brake is in their second segment, where we thought that okay, why can't we come out with the mechanical disc brake instead of hydraulic one. So that's entirely our thought processes, it has been done. It has been established. It has been patented. So it has been tried out by more than a few customers already. So -- there are both ways of looking it, yes.

Thanks a lot. I'll get back in the queue. Thank you.

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

Congrats for decent set of numbers despite tough quarter. First question is from cable division. So where margin was decent despite slowdown in the 2-wheelers. So is it because of the price hike in European cable operation or fall in the RM prices? And is it sustainable, as going ahead, you need to pass on the benefit of the fall in RM prices to the clients?

We hope we can be able to maintain it. But you're right to say that these price increases and material cost increases and decreases are kind of a pass-through mechanism. So certainly, we had some tailwind on that in the last quarter, but there would be some amount of savings that we'll be able to continue to hold on and some will have to pass on. Having said that, one should not go by again, just one quarter performance. But if you really -- even if you look at the 9-month performance, we are generally ahead of the previous year in terms of margin on the cable division. So we are hoping to maintain it. Let's see how it goes.

And sir, in automotive cable business, how was the mix for the 2-wheeler versus 4-wheeler and how do you see improvement in the 4-wheeler business in the coming quarters?

Yes. I think purely from an Indian perspective, the 4-wheeler business side of our business has improved quite a bit because obviously, passenger vehicles have done well. Whereas the 2-wheeler markets have -- the OEM market have not been doing all that greatly, which we all are aware of. That has been offset by our ability to push more in the aftermarket segment. So that's why the reason for growth is one is passenger vehicles and also secondly due to aftermarket as well, where we had a very good and robust business. Globally, I think all our business is more or less is in the passenger vehicle. So that has -- as Mohan was saying, it has had its own challenges. Despite that, LDC has done a decent job. So LDC business and SAL, SEU business also has grown, which all is because of the new businesses we have. But the current business on the existing platform, the volumes have come down, but the new businesses, which we have been able to commercialize is responsible for the increase in business volume and also improved margins.

So in global business, as the supply side issues easing off and order backlog is very much strong in the passenger vehicle segment. So how do you see growth in the coming quarter because the most of the company has increased your guidelines for the production in the 4Q. So can you shed some more light there?

India business passenger vehicle business is solid, there's no question everybody knows about it. Globally, I don't know if anybody has really said that they're going to increase their volumes. I think as we know, there has been probably a minor uptick, but it is nothing material as we see it. It is still the growth compared to, let's say, previous year in Europe and U.S. And also in China, for example, China has had not a very good quarter and also didn't have a good January. So the volumes are not really growing. I don't know whether anybody has said that it is otherwise.

Okay, sir. And my next question is the SENA division. So is the top line was impacted with the inventory correction in this quarter?