Uno Minda Limited (532539) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Minda Industries Limited Q3 FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sunil Bohra, Group CFO at Minda Industries. Thank you. And over to you, sir.

Yes. Thank you, Lynda. Good afternoon, and a warm welcome to all the participants. On the call today, I am joined by my colleague, Tripurari Kumar, SGA, our IR consultant. We hope you have had a look at our financial results and presentation that is uploaded on stock exchange as well as company website. I will briefly discuss about the industrial landscape and then update on our performance in last quarter, following which, we will be happy to answer your queries. During the festive season in the last quarter, the sector witnessed little pickup in retail growth for PVs and 2Wheelers, post which, there was a visible reduction in the rate of decline, which was supported with lower base effect and also is somewhat indicative of gradual demand revival. 9 months of FY '20 saw a double-digit decline in volumes at around 13% year-on-year. In the third quarter of FY '20, the 2Wheeler industry volumes declined by around 13%, 3Wheeler volumes declined by around 1%. PV volumes declined by around 8%, and CVs and off-road volumes declined by a sharp 36%. The overall volume decline for the quarter was around 14%. Given low growth rate and its consequent impact on government's revenue collection, there was general consensus that there was little room with the government for any large-scale stimulus. However, the automotive sector was hopeful that the budget will give it a much [Audio Gap] in the coming months, the volume recovery hopes are high from Q2 FY '21. Additionally, the government is working to bring in a scrappage policy, which will incentivize the purchase of new efficient vehicles against the scrappage of old vehicles. This incentive was introduced. It's also expected to aid the volume recovery in coming quarters. Favorable movement in commodity prices was positive for the sector. However, the benefits have been absorbed due to lower operating leverage. Slowdown scenario in the automotive space is a cyclical nature and has been long drawn. The cyclical scenario is showing signs of bottoming out. The worst seems to be behind us. However, a reshaped recovery is not envisaged. PVs are showing some green shoots. 2Wheeler transition from BS4 to BS6 is also catching up fast. Overall, it's difficult to forecast growth for next few quarters. We have taken hard calls in eliminating waste and aligning our variable costs to revenues and have instilled tighter controls on working capital management. Future growth investments are being examined in line with our long-term strategy while R&D expenses needed to secure our future are not compromised at all. Now moving to our performance. Despite significant decline across segments, we have been able to limit the decline to some extent due to our diversified product portfolio, customer mix and cost control drive. The management is continuously exploring opportunities to optimize overall revenue mix while being focused at enhancing the quality. In terms of our revenue pie, OEM business accounted for 86% of the overall revenue. Aftermarket business is around 14%. In terms of segment mix, 4Wheelers have contributed around 49% of the overall revenue. At a consolidated level during Q3 FY '20, the company registered a revenue of INR 1,327 crores as against INR 1,470 crores for Q3 FY '19 and INR 1,360 crores for Q2 FY '20. As communicated earlier, we have renegotiated our handlebar assembly business from previous quarter with one major OEM and are now building on [ job wall ] basis which has resulted in a decline of INR 33 crores in sales for this business. Adjusted for this, the revenue is lower by around 7%. New products have also started contributing more to the top line like Katolec, iSYS and controllers. Despite adverse business environment, EBITDA for Q3 was at INR 163 crores vis-a-vis INR 180 in Q3 FY '19 and INR 162 crores for Q2 FY '20. The EBITDA margin for Q3 is at 12.3%, which was same as recorded in Q3 FY '19 and marginally higher than preceding quarter, which was at 11.9%. The cost management initiatives and favorable product mix during the quarter has ensured margins on a higher side of our guided range. The finance cost has marginally decreased in Q3 FY '19 in comparison to Q2. The total borrowings were at INR 1,133 crores in Q3 FY '20 compared to INR 1,048 crores in Q3 FY '19. The increase in borrowings were mainly for investment in Delvis Gmbh, 2Wheeler alloy wheel and sensor projects. The net increase in borrowing is only INR 75 crores despite the incremental investment of around INR 200 crores, which includes the Delvis acquisition. Profit before tax before exceptional item for Q3 FY '20 was at INR 78 crores as against INR 108 crores in Q3 FY '19. The decline in PBT is largely on account of lower operating leverage at certain facilities and partial utilization of certain new facilities in Gujarat. Such additional facilities resulted in overall higher depreciation and interest charge. However, both depreciation and interest charge are broadly the same as that in Q2. The management is very cautious in making new CapEx decisions and is committed to its long-term expansion plan. Debt, attributable to MIL, excluding exceptional items, declined to INR 49 crores in Q3 as against INR 69 crores in corresponding quarter last year. Here, as you will note, the share of profit from associate and JV is lower at only INR 1 crore primarily due to delay in getting price increase approvals at one of our major JV, which is TG Minda. At ROKI Minda, we had exceptionally high [ SPD ] sales in Q2, which did not replicate in Q3, and also due to the significant drop in our volumes -- alloy wheel volumes at Kosei Minda in South, which were primarily due to lower volumes at Honda, Toyota, and Nissan. We had higher losses in KMA. Also Minda D Ten, which is a primarily infotainment business, which also the major customers are Honda and Toyota that also had a lower profit due to lower volumes, significantly lower volumes compared to the average. As you will note, there is an exceptional item, which is primarily relating to the cost incurred towards the Delvis acquisition. Moving to the product lines. First, Switching Systems. This segment achieved a revenue of INR 446 crores for Q3, contributing about 34% of the total consolidated turnover. Minda Rika has reported similar top line against Q3 due to better volumes with key OEMs like MSIL. 2Wheeler handlebar assembly has been restructured as we talked a few while back, which resulted in lower sale by INR 33 crores. We are delighted to inform that we have successfully started supplying our new product, which is a side stand switch, our patented product, to Yamaha and RE, which will be taken in their next model. Our 4Wheeler business has been awarded new business from MSIL, which is for the model XL7. Moving to Lighting Systems division. Lighting division achieved revenue of INR 312 crores for Q3, contributing 23% of our total turnover. We will be supplying headlamps to the new platform of Celerio by MSIL. Acquisition of Delvis has been completed in December 2019 and is expected to augment capabilities of lighting business in general and 4Wheeler lighting business in particular. 2Wheeler lighting business has added new customer, Yamaha and is also supplying all the lamps to recently launched Chetak PV by Bajaj. Moving to Light Metal Technology business as we call LMT business, which has achieved revenue of -- it'll be INR 184 crores for Q3, contributing 14% to our total turnover. Our subsidiary, Minda Kosei, has entered into a technical licensing arrangement with Dayou Global for manufacturing LPDC alloy wheels, which is low process dye casting alloy wheels in Minda Kosei, with an objective to provide entire gamut of alloy wheels across technologies and cater to wider OEMS, be it Korean or Western. We are happy to inform that we have secured one order from a large customer of LPDC technology wheels in their upcoming model next year, and we shall start our supply by end of calendar year 2021. Also MJCL, which is into dye casting parts has become a Tier 1 exporter for dye casting companies. Coming to acoustic or horns business. The division has achieved revenue of INR 158 crores for Q3, contributing 12% to our total turnover. The domestic business has been flat, and overseas business has been tepid primarily being in the Eurozone. Coming to others segment. The product lines have started contributing and are now showing good traction. As a whole, we achieved revenue of INR 270 crores for Q3 from other products. Most of the products in the segment are sunrise businesses. Katolec and iSYS have further added to growth of the segment vis-a-vis corresponding prior quarter. We also remain focused on our EV journey and have secured orders for smart plugs, i.e., chargers and DC/DC converters from leading 2Wheeler OEMs like TVS and Bajaj. Moving to business update on the recent M&A investments. The board has approved as part of the overall strategy to get all the business into MIL, the acquisition and amalgamation of Minda iConnect Private Ltd. limited into Minda Industries Ltd. at equity valuation of INR 17 crores, and it will be met through the equity shares of Minda Industries and will lead to dilution of 0.15%. The merger process will be taken through SEBI exchanges and course et cetera, and the entire process is expected to take around 10 months. As you all know, Minda iConnect is a pioneer in connected car technologies in India. It is credited with being the sole supplier to Honda Connect program 4 years ago when the technology was at its early stage. It has since then expanded into other areas like controller-based telematics and has developed capabilities for both hardware and software. Some of the key synergies of the transitions are: first, the product synergies that is product development and business synergies with our controller business and CREAT, product definitions are fading, with controllers and telematics getting integrated. Second, customer synergies wherein it will help leverage the long-standing and entrenched customer relationship of group, providing access to new/complementary customers, Minda iConnect established brands like iConnect and CAROT. Moving to Harita Seating Systems, the shareholder and creditor approval has been received, and the NCLT final hearing is scheduled on February 25, 2020. I would also like to highlight that on Harita acquisition, while it is still in process, we have started getting some traction from new potential customers, which we have been talking about and have secured business for passenger buses and certain components for 4Wheeler seating. On merger of 4 wholly owned subsidiaries, shareholders and creditor approval has been received, and NCLT final hearing is scheduled on March 16, 2020. As [indiscernible] results both the schemes are expected to be approved by NCLT by end of March 2020. Lastly, we are glad to inform that the Board has approved interim dividend at 20% of the face value. That's all from our side. And now we can open the floor to -- for Q&A.

[Operator Instructions] Our first question is from the line of Vimal Gohil from Union Mutual Fund.

Sir, just wanted to know the decline in -- just wanted to understand further the decline in share of associates. And we've seen quite a volatile trend in the last few quarters. So what is the outlook there? I mean, are we getting some more orders? Are we expecting things to improve probably in FY '21 or maybe it will take some more time? And then I have a few more.

Yes, definitely, we are expecting much better Q4 as compared to Q3 in some of our businesses. As you also mentioned that one of our biggest business, which is TG Minda, there were some price increase approvals expected, but could not materialize, which we are hopeful will come in Q4. And also there are a couple of businesses, which we are expecting to do a little better in Q4 than Q3. However, 1 business, which is Kosei Minda, which is the alloy wheel manufacturer in southern part of the country, that business remains challenging primarily because of the low volumes at its customers.

And what about the Onkyo business sir?

So Onkyo has been a little better in Q3 compared to Q2 while it's still in red. So we have been working in terms of localizing its components over the past few months, and we have had some successes. So over next few quarters, we expect that to materialize, and then it should be sustainably in green.

Right. Sir, my next question was could you just help me with -- I missed your -- what is the gross debt number right now and net debt number? Both the numbers, if you could help me with.

Our total borrowings are at around INR 1,133 crores.

Cash is around 150, so you can say [indiscernible].

Fair enough, fair enough. So basically, there's a INR 75 crores reduction in the net debt number on a quarter-on-quarter basis, right?

[indiscernible]

Yes, correct. Cash has gone up by approximately INR 40 to INR 50 crores because of more release of working capital.

Okay. Okay. So basically, we -- it reduced our borrowings by about 50%.

Short-term liabilities have been paid down.

Okay. Got it. Got it. Sir, and next thing I wanted to understand your performance versus industry. While you have always performed -- outperformed your industry production, you -- going forward, assuming that the passenger vehicle and 2Wheelers both grow at a sustainable level of probably 8% to 10%. Would you still be able to grow at probably double the pace? Is that sustainable? And what I'm trying to get to is that how much growth is left in that Kit Value per vehicle. On a blended basis, how much growth do you still have to come by?

Yes, Vimal, based on the current pipeline, what we have already announced, there are a lot of products, which will increase our Kit Value significantly. If I have to name the larger ones, the 2Wheeler alloy wheel straightaway will add roughly INR 3,000 to the Kit Value of 2Wheelers, it's a significant addition, which will start its trial runs from the first quarter of next fiscal. And gradually, it should start ramping up, which will take roughly a year because they have [indiscernible], so we will see its full potential maybe in a couple of years. Then we are currently working on sensor project, which is a total investment of roughly INR 275 crores. At peak, we expect its revenue to -- that business begins to cross INR 100 crores in next 3 years. Then we are also working on a few other products, which is light controller that will add significant volumes in the next 2 years. Then the Harita acquisition will add roughly INR 750 crores, maybe they do this year. So that straightaway come to the top line of MIL. And there also we are working to add fewer customers as we have said a little while back. We have added -- before the closure completion itself, we added 2 customers. One is in bus seating and another is a small business in PV. So these are the early sort of positive value additions. And there is a lot more in the future. We have just announced this entry into LPDC, alloy wheel. So that is, in the first stage, we are setting a capacity of around 25,000 wheel a month, which is around 3 lakhs wheels a year. Almost 1/3 of it we have ordered them from -- ordered from one of the major customers. And this is our first step forward, and we feel that this will open another leg of much significant growth in future.

Great. Just one last question related to this. So what would be your -- would it be possible to give out your blended Kit Value and the things that you just mentioned, how much will that contribute to the present Kit Value. If you could just mention these 2 numbers.

Yes. So Vimal, what we do is we update our Kit Value on an annual basis. So when we take the exercise somewhere in April, so when we come up with our next quarter financials, you will be able to see the Kit Value increase year-on-year on both -- actually both PVs and 4Wheelers and across segments.

Fair enough. Sir, lastly, I just wanted to understand the reason why the EBITDA numbers are not given for the products this quarter?

So what happened, we had discussed internally also a lot. There has been a feedback that this is information, which is not -- it's actually not doing good to the company. In fact, there has been pressure from the customers and investors also. We have spoken to a few investors one-on-one as well. And there was a general consensus that it is fine as long as we give overall margin and specific if we are able to give segment volumes, we will not give margin. Because at the end of the day, whatever we do should not have any ramification on the business.

Our next question is from the line of Ronak Sarda from Systematix Shares.

Yes. Sir, first, quickly on the new orders and you have highlighted 2. Just want to check on 2 things. One is the lighting plant in Hosur. Can you highlight what kind of top line can we achieve in that plant at full level of utilization? And who are the customers?

Sorry, I think plant in Hosur, Ronak, is more shifting of business from Pune. Because Pune, we were getting stressed on the capacity and the customer was in south, this was primarily area, et cetera. And also to take advantage of the freight, we had to set up this facility in Hosur. So as of now, it's more of a business transfer from Pune, but definitely, it creates a platform for future growth, which you are constrained at Pune.

Right. Okay. Sure. And sir, on the Light Metal Technology, as you highlighted, a new order win in LPDC. Is it for the Korean supplier -- Korean manufacturer? And in your opening remarks, you mentioned end of CY '21. Did you mean CY '20 or CY '21?

CY '21.

So that's almost 24 months from now?

Not 24. Because what happens here, we have just signed a technical licensing agreement. Then we have to get into the technical scoping. And then we have to procure CapEx, which will be roughly around INR 50 crores of CapEx. And CapEx procurement, installation, testing, all this will take roughly 18 months. So you'll see a [ business ] commission from end of year '21, that is also linked to that model launch of the customer when we have further business.

So is it -- can you highlight? And can you...

It is one of the Korean customers.

Okay. Sure, sir. On a related question on the Light Metal Technology, I mean, the INR 23 crores decline in top line Y-o-Y basis? I mean, how is the volume there? Is it like similar...

LMT, one part, which is the die casting business, which earlier was there, so there, the volume drop is a little more, primarily because it is supplying components to 2 critical new customers, TVS and Honda. And both of them have got a big impact, which is more than the other average and also to [indiscernible], which is primarily CV.

Okay. So Minda Kosei is to [indiscernible] contribution to the [indiscernible] industry is still increasing? Or how is that business going to be?

It's almost flattish, I would say.

In the inventory, the contribution is still increasing, right. And sir, on the others part of the business, sensors and all you highlighted, growth, which would come over the next 1 year. How is the ROKI Minda business doing? Have we achieved the kind of orders when we were taking off for the BS6 regime?

Actually doing very well. And ROKI is one of our business who have actually achieved their budgeted profitability. So ROKI, fortunately, is one of the business where we actually are spending less time. That gives you a message.

Right. But sir, I mean, next year, what kind -- Q4, I mean, we could start seeing the BS6 benefit as most of the OEMs have transitioned to BS6. So what kind of growth can now -- can we see in that business? Finally, now we have the real numbers.

So that, for us, there is nothing much impact from BS4 to BS6 transition. It is only a small spec change et cetera, which is primarily in some electronics and filters. Only major addition which comes to -- through BS6 is our sensor businesses where there are new sensors, which are required only in BS6 and not in BS4. Other than that, there is no material impact to us for transfer from BS4 to BS6.

Okay. Because you're highlighting there would be some gain in the carbon canister business because of the BS6 transition.

But Ronak, I think we have to also keep in mind that ROKI does not get consolidated in the top line. So while it may have a little better profitability, it will come only in...

I agree that, yes. And then also on the switch, your latest [indiscernible] switches is flat, with mainly the decline in the 2Wheeler switching adjusted for the handlebar assembly. No major impact on the 4Wheeler Minda Rika business?

Yes.

Okay. And a final question on the Harita Seating merger. So you highlighted the last hearing date in Feb. So what would be the process post that? When does this merger finally close?

Once we get this hearing, then normally, courts take roughly 30 days to pronounce their merger orders. So after that, it's more a company's -- the decision is taken. It's for a process. So what in this Harita case, there is one more step, which we have -- if you remember, we have given adoption of equity and preference. We have to issue notices to the shareholders of Harita and give them some time to tell us what do they want. Do they want pref shares or do they want equity shares? So that may take another month. The entire process, that may take another month or 2. But for more technical purposes, once we get approval, we will start consolidating Harita to our financials.

So in Q4, we'll have the entire consolidation done while the real merger -- or could the share comes -- or maybe it could directionally happen in April?

Yes, that's what our understanding is currently.

It could take another 2 months from date of announcement from NCLT. Change of shares.

Sure. And sir, finally, CapEx guidance for what was the spend until now? And full year CapEx spend? And by next year, if any?

So Capex, Ronak, we have been in line with what we have been aiming, which is around INR 350-odd crores to INR 400 crores max for project CapEx and around INR 150 crores of sustaining Capex. So we are in that guiding range only.

And next year, sir what we [indiscernible], mainly the CapEx or...

We will give at the year-end results, Ronak.

And sir, one question if I can squeeze...

Yes, because -- as of now, the things are evolving fast. And you know that we have just announced this LPDC that will also add roughly INR 50 crore of Capex. Now [indiscernible] how much in the current year, how much in next year that all [indiscernible].

Mr. Sarda, may we request you to return to the queue please, there are several participants waiting.

I have just one question, on the 2Wheeler CapEx and the plant commission. And because of the decline, we won't see any major hit to our business, right? [indiscernible]

Yes. So that is on schedule. Maybe sometime in Q1. Just to tell you, we had -- we were expecting some support from the equipment provider from China. And you know that as of now, travel from all Chinese inbound is banned. So that may have some impact in terms of our commission timelines. But in terms of execution, we are on schedule.

[Operator Instructions] We'll take the next question from the line of Sunil Shah from Turtle Star Portfolio Managers.

Yes. One question that I have is, one of the trends which is emerging is that Chinese car manufacturers are entering India in a big way. Sir, what is our role? Are we supplying to any of these? [indiscernible] it's like MG right now. Are you working -- could you give us some indication? Because over a period of time, maybe these guys could really gain huge market share. So what are we working? Or could you give me some update on that, please?

Yes, sure, Sunil. So as of now, the only Chinese car manufacturer which is present in India is MG. And we are in discussion with them. However, as you know that currently, most of the parts are imported from China. So normally, what happens, anybody who comes to India, he comes with his products because to develop your entire supply chain takes time, and we are working with them. And let's see that -- how much of our products we can get into the upcoming models. But as of now, most of their products are imported.

Okay. Sir again, on the EV side, [indiscernible] AutoExpo, which is going to showcase so many [indiscernible] as well. Instead of [indiscernible] there, where we are working closely with the new [indiscernible] right now even in the prototype?

Yes, yes. So as you have observed that while all of -- or most of our products are agnostic to EV or [indiscernible] and be it on light switch, seat, everything, what we have other than filters you need in EV or a non-EV. On top of it, we have just communicated that we are successful in getting 2 products commissioned or not commissioned, getting order wins from specifically EV perspective, which is smart plugs, i.e., chargers and DC-DC converters from a couple of 2Wheeler OEMs.

Right. Okay. And even on the passenger vehicles a bit?