MINDACORP — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
EXECUTIVE OFFICER · MR. R. LAXMAN – EXECUTIVE DIRECTOR & GROUP
MR. R.
LAXMAN – EXECUTIVE DIRECTOR & GROUP CHIEF FINANCIAL OFFICER MR. NEERAJ MAHAJAN - GROUP MARKETING OFFICER MR. BIKASH DUGAR – LEAD INVESTOR RELATIONS
ANALYST: · MS. PARVATI RAI – KRCHOKSEY RESEARCH
MS. PARVATI RAI – KRCHOKSEY RESEARCH Minda Corporation Limited August 14, 2020
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to the Minda Corporation Limited Q1
Thank you very much.
We will now begin the question and answer session.
The first question is from the line of Ronak Sarda from Systematix.
Please go ahead.
Ronak Sarda
Hi Laxman, first question on the capacity utilization, so what would that be in 1Q and how has that changed let us say in July and August so what would be our utilization levels now and part two of that question is the cost measure, how cost is increasing when ramp up is happening are we seeing substantial benefits once we are at let us say around 85%?
R. Laxman
I will answer the first part of the question and then I will request Mr. Minda to give his views on July onwards.
We tried our best to measure capacity utilization for Q1, but then we gave up because it has to be then measured month-on-month, because an average gives a very different picture so for example April was zero, May was a very small number and basically from June that we started ramping up in terms of our utilization of capacity and then going ahead.
So it will be fair to assume that in June it would have been roughly say 50% odd and July the number has again significantly improved, that is the quick take on the measure Ronak.
Mr. Minda if you would like to add anything on this question?
Questions and answers
16:46:43 +05'30' · Research Analyst
Minda Corporation Limited
For Minda Corporation Limited · Research Analyst
Thank you Parvati.
Good afternoon ladies and gentlemen.
I welcome you all to the Q1
So as you asked about July onwards, Yes, OEM’s particularly in two wheeler as well as tractor segment that we discuss between these two segments and this segment is definitely helping us during this time and this is continuing to happen at least till the time of the festival then we will re-evaluate after the festival time.
In the aftermarket, in June we have increased 18% growth in comparison to the previous year and same in July, so we expect to catch up significantly in Q2 FY2021, this is what I think so.
Ronak Sarda
Roughly Ashok Ji will it be like almost 85% on an average of the last year revenue run rate for July and let us say mid August?
For Minda Corporation Limited · Research Analyst
We are thinking that overall, until unless something does not happen adversely, it will be 70% to 80%.
R. Laxman
On the cost front, the measures we have taken are significant in terms of how much of reduction we have been able to get in fixed cost as well as in our personnel cost.
My estimate is about 30% of this reduction we can carry through for the rest of the year as well, because a lot of the personnel and other admin costs, etc., in a sense are also variable so I would put the number at roughly 30% Ronak.
For Minda Corporation Limited · Research Analyst
Most importantly this is the time, knowing for each business how we reduce the breakeven point is an important area.
Ronak Sarda
Laxman we used to have significant contribution from commercial vehicles as well and last two years have been very challenging, was product supply to commercial vehicles more Minda Corporation Limited August 14, 2020 profitable and/or is recovery in commercial vehicles, if it happens from H2, will that be a significant contributor to profitability?
R. Laxman
I would like to let Mr. Neeraj Mahajan talk about the commercial vehicle pickup.
Only thing is, Yes, in terms of my share last year’s commercial vehicles were 30% in the same quarter and this year it is significantly reduced so the answer is, Yes.
Though the profitability in terms of EBITDA margin has been similar if you look at last year’s presentation on business vertical one and two, largely similar; however, the bulk was being offered by commercial vehicles, so yes any recovery in commercial vehicles will help us quickly absorb our fixed cost, that is on the costing side.
Over to Mr. Neeraj Mahajan on his outlook for the commercial vehicle segment.
Neeraj Mahajan
Thank you very much.
Ronak to me well we have been very closely interacting with all leading commercial vehicle manufacturers because almost 100% of them are our customers.
Market outlook as of now I would say is gloomy as far as commercial is concerned, so if recovery, if at all, for example the recovery it is expected they are not even speaking about it for this year so I think everybody is expecting about 30% to 40% drop on the annualized basis, so I would not give very optimistic opinion or picture about commercial vehicle at this point of time, while as Mr. Minda also mentioned there are some green shoots in segments like two wheeler I think the most exciting segment right now is tractor we are not able to meet their demand due to social distancing right now, they are going 2.5 to 3 times their volume requirements compared to 2017-2018, but commercial vehicle I am afraid after last year dropped off about almost a high double digit we are still expecting further drop this year as overall market going forward for commercial.
Ronak Sarda
Thanks, Neeraj and final question on the KTSM business any update there, has a large part of the liquidation done and/or any update, have the payments happened from our side?
R. Laxman
Yes, we have that part is now behind us and of course now it is a process and that process will take time; however, the obligations that we had in terms of what we had to complete by June yes we have done what we mentioned.
Ronak Sarda
Okay, thank you and all the best.
Moderator · Conference Operator
Thank you.
The next question is from the line of Chetan Gindodia from AlfAccurate Advisors.
Please go ahead.
Chetan Gindodia
Sir can you explain me how the order book works you have given the lifetime value of orders of this year is Rs.4,250 Crores and last year fourth quarter was Rs.7,350 Crores so our order book has declined this year and is this the value of new order that we will be executing in one year is this the annual value or how should a lifetime value order should be looked at, is it two years, three years what is the timeframe for it?
Minda Corporation Limited August 14, 2020
Neeraj Mahajan
Thank you very much gentleman for your question.
Lifetime order is typically considered between four to five years depending upon the program life of the project, which is confirmed by the customer and first year is typically the limited number of months based on the start of production SOP date and the balance month left in the financial year that is how we normally calculate on to this, so this is how the methodology is adapted.
Chetan Gindodia
The order book has declined from last year so how should we read this number?
Neeraj Mahajan
This is not revenue, this is the new orders which are received during this quarter, so this is nothing to do with our past revenue at this point of time.
Chetan Gindodia
In the two wheeler wiring harness business and also the CV wiring harness business we were supposed to have a big addition in our kit size and the value of our sales was expected to go up, so can you give the breakup of how much was the increase in two-wheeler wiring harness in this quarter and also in CV?
R. Laxman
I will come back to you with specific numbers; however, there are two points here, one is yes the two wheeler wiring harness kit value we had said will more than double, that thesis continues and it was expected to actually show a quantum result as we go forward in the future quarters.
In the Q1 why you are not able to significantly see the differences because the BS-VI to BS-IV mix if you put it roughly, it is still being only roughly about 50% because majority of the BS-IV still came in due to exports of the OEMs so that is one clear point and the second point is of course there have been ramp up challenges with respect to BS-VI at all the manufacturers ends and at our ends and therefore a more clear comparison or at least the visibility of that bulk up of kit value will be more clearly available in Q2 and Q3 going forward that is the quick response.
Chetan Gindodia
Okay and in terms of decline in gross margin that we have seen in this quarter compared to our last quarter so what has led to this?
R. Laxman
The absolute fall in the revenue significantly dented this, so it does not make it comparable at all.
Chetan Gindodia
Okay so going ahead we should be back to our 38%, 40% is what we should do?
R. Laxman
Yes, as we ramp up yes we should and our hope is that we will catch up faster than probably what was usually expected because like many other players we have also very aggressively worked on our fixed costs so if we were to reach the goal in X months earlier or X number of quarters earlier we hope to reach that goal faster now.
Minda Corporation Limited August 14, 2020
For Minda Corporation Limited · Research Analyst
We were not expecting that the recovery will be so faster than we are seeing in two wheeler and tractors.
So during the COVID time we were thinking that the second quarter will also be very much concerned, but the things are not like that.
Chetan Gindodia
Okay and the last question in terms of employee cost, we have seen a very sharp reduction so should we expect the employee cost in absolute number to remain at this level or will it be more of linked to the revenue and should be back to the Rs.
90, 120 Crores run rate from next quarter?
Essentially, our employee cost has declined to Rs.54 Crores from Rs.
96 Crores last quarter so is this employee cost reduction likely to again go back up with the rising revenue or is this a more sustainable reduction how should we read into this?
R. Laxman
Roughly 30% of it we expect it to be little sustainable, a very rough number, because our employee cost has a mix of variable and factory workers as well as staff cost, etc., so all the cost cutting measures we have taken on the personnel side we are expecting about 25%- 30% of this to remain sustainable.
Chetan Gindodia
Okay thank you sir.
Thank you for the details and all the best.
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhishek Jain from Dolat Capital.
Please go ahead
Abhishek Jain
Good evening Sir.
Thanks for taking my question.
Just wanted to understand what is the current status of insolvency process of Minda KTSN, has it completed?
R. Laxman
No, it is only started now and an insolvency administrator we believe has been appointed and it is a process that will take its own course and it is very, very established process that they will go through so it may take some time.
Abhishek Jain
So how much debt will reduce post completion of this process?
R. Laxman
The debt numbers have already been reduced because now our consolidated numbers are without the numbers of KTSN so today roughly our consolidated debt looks at about Rs.394 Crores.
Abhishek Jain
My second question on the debt part that your interest payment is around Rs.50 Crores annually, which is around 38% of your EBIT despite the sufficient cash in hand on the other hand you are earning only Rs.26 to Rs.38 Crores at interest income, so you are losing significant amount of interest every year, so just wanted to understand your thought process behind to keep the money for future acquisition and how this will be fruitful for the company’s profit?
Minda Corporation Limited August 14, 2020
R. Laxman
Two points that you highlighted, one is the negative carry that we call with respect to keeping the money at the lower interest rate and second is you are talking about the strategic intent in terms of to do with the money.
So the strategic intent I will request Mr. Minda to answer, but before that on the finance side I would like to like to say that of course we have kept the powder dry and there is a small cost to keep that and the incremental cost could be about 1% of the amount of total deposits I have, strategically it has worked out very well for me now because we have dry powder available in case the management and the leadership decides to take a call on synergistic acquisition opportunities and I would like Mr. Minda to comment.
For Minda Corporation Limited · Research Analyst
We have decided strategically to park this because we raised QIP and the vision of the QIP is support our future growth and we have decided not to use this one putting in the system and we are continuously working for using this QIP funds in an area where we really not doing any fast investment so that is why we have said that almost we also know that we are losing some minor percentage of interest, but we have decided that so that the more working capital, which we are using there will be a pressure with the businesses to be more efficient to take out the funds from the working capital that was the strategic call.
Abhishek Jain
So, are you looking to make any repayment during FY2021 or FY2022, as the current situation capacity utilization is quite low and you are losing significant interest also and your EBIT is also quite low so just wanted to know on this?
R. Laxman
What is the first part are you looking at what you said repayment did you say?
Abhishek Jain
Repayment of debt?
R. Laxman
The repayment of debt is naturally occurring because of the tight cash management and thanks to input from you gentlemen we in fact had a very tight focus on working capital and because of that we have managed to generate funds to repay debt.
In fact during the COVID period of first quarter also we generated cash surplus so we are expecting debt to naturally go down by this, we do not expect such low EBITs to continue Q1 is not probably a right extrapolation for the rest of the year so that is where we stand and in fact today also as we speak our cash position should be roughly equivalent to the debt we have so if you look at it theoretically on a net debt basis we should be zero.
Abhishek Jain
Okay my last question is related with the two wheeler locking system, so I just wanted to know your share of business with different OEMs, have you won any new business or have there been any increase in content per vehicle post BS-VI implementation?
R. Laxman
Over to you Neeraj.
Minda Corporation Limited August 14, 2020
Neeraj Mahajan
Yes, in case of wiring harness there is a content increase, in case of share of business, I think we have segment-to-segment and even in that program-to-program differentiation so I think it is exhaustive thing if we talk about, we will have line items of about 100 plus maybe I can understand your question later and I can ask Biksah to especially provide you the information about specific segment you are looking for, but in general for a share of business if we talk about for two wheeler, we are in a strong commanding position when it comes to top three in case of wire harness I would say in most of the places depending upon program we are either holding about 70% to 80% of share of business in let us say leading maker one and two and three or at least 50% in most of the cases so it depends the product, which we are referring to here.
For Minda Corporation Limited · Research Analyst
And as I explained last year that we introduced the key account management to give the forecast on the specific customers where we can increase our per vehicle content and not only the per vehicle as a whole but the per vehicle model wise content, how we can increase as a group so that is how we are giving forecast so as we have mentioned there are a list of products, list of models how much we content we have in that model, and to how much extent we can increase it is all that is how we said.
Neeraj Mahajan
To give you comfort I can just share one input with you, if you see most of the two wheelers today are becoming from mechanical or mechatronic products are moving into connected and also in terms of keyless, the value addition in such cases from Minda Corporation is going to increase and that is going to increase the kit value for each vehicle what we supply and our main focus right now is to make sure which I have explained in one of the slides for let us DC-DC converter, keyless entry system for this and we are right now very deeply connected with some of the new startups with whom we are discussing for their requirements we have one of the startup, which is going to start its production in October month for their two wheeler EV in Netherlands so there we have got various products, which we have started to also discuss with various startups here and also the two wheeler, which is in advanced stage of EV entry into the country so I would say that kit value will surely increase going forward as electronic components and content is going to increase because that is where SMIT focus of development and also the return is going to happen.
Abhishek Jain
Okay Sir my last question is related to share of business with the Bajaj Auto, in two- wheeler locking system?
R. Laxman
I think specific clients, it will be a little unfair to probably discuss but Neeraj over to you in case you would like to add any comments?
Neeraj Mahajan
I think I can see some of the members of competition in the call so I would avoid such questions.
Minda Corporation Limited August 14, 2020
For Minda Corporation Limited · Research Analyst
Okay otherwise we are not losing any of these on the positive side, which was not any issue with us.
Abhishek Jain
Okay Sir.
Thank you.
Moderator · Conference Operator
Thank you.
The next question is from the line of Sachin Kasera from SVAN investments.
Please go ahead.
Sachin Kasera
Yes Sir just one question on this cost cutting, so if you can just quantify that of the total cost cutting you mentioned 30% is sustainable so if you could just quantify that on the employee front and secondly have you also taken some significant cost reduction in the other expenses and if you would quantify that also which is sustainable?
R. Laxman
Yes, sure Sachin thank you.
Sachin on this staff cost, I am talking about within the overall employee cost that staff cost also and within that in staff cost we have saving of about Rs.12 Crores in this quarter, that is the specific number that comes to mind and if you see the other variable expenses that has gone down by about Rs.33 Crores so out of which again about 30% of that is something, which we think is sustainable.
Sachin Kasera
So broadly we have been able to reduce the cost around Rs.80 Crores to Rs.100 Crores a year, which is a sustainable number, is that better way to look around normal-to-normal basis?
R. Laxman
It may not be fair to estimate it for the whole year.
For Minda Corporation Limited · Research Analyst
But there are some areas of cost, which will definitely continue that is what I said it helped us to brought it down our breakeven points and that there are various heads where we have reduced the cost that will help us to continue.
Sachin Kasera
Okay, thanks.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen, we will take the last question from the line of Chirag Shah from Edelweiss Securities Limited.
Please go ahead.
Chirag Shah
First question is on Shark Finn Antenna are you the sole supplier or you are making an entrance to that product in that sense either Tier-II supplier, second is it for a single model on project basis or is it for multiple models and third is it a import substitution product or it is completely a new product that you have created, was this product already there in the system and you are now replacing it?
Neeraj Mahajan
So let me take the third question first, at least for the customer we have got introduction this is replacement of previous generation product that means the pole type antenna, so that is going to be let us say a replacement or a new generation product introduction.
Second the Minda Corporation Limited August 14, 2020 large customers do not introduce a single supplier so there are going to be at least two vendors supplying the same and third the product is going to be, today the business order is for one particular model but which is for let us say preferred situation it is going to be almost the largest volume program, but considering the historical situation we have noticed that these parts are common-ised to take advantage of the pricing in long term including tooling cost reinvestment being avoided so we are hopeful that we may have opportunity to introduce this part in other programs, but as of now to answer your question this is for a specific program, I hope I answered all your questions.
For Minda Corporation Limited · Research Analyst
This is import substitute, most of the customer input is new and this is going to be introduced in all the segment over a period in all the category of personal vehicle.
Chirag Shah
In the wiring harness segment, today who is your competitor?
Neeraj Mahajan
In the WH segment, this is by sector, we have multiple competitors, this is becoming a commodity space to be frank, so two wheeler is going to be another three dominant players including us, we have commercial vehicle, there are another two important competitors, we have tractor which is a lot of complication but very crude wire harness relatively so you have more competition there including next to the plant kind of wire harness those who are supplying to them for over the last 30, 40 years.
PV is the most, let us say, organized one including its technology, but I am pleased to say that in this BS-IV, BS-VI transition recognition of Minda Corporation as one of the most reliable wire harness supplier is there among two wheelers, among commercial vehicles equally and substantially, but I do not want to go specific to my competitor’s name in this case I am sure unless that is a very specific question which you would like me to address.
Chirag Shah
And for Shark Finn Antenna, this is for a particular OEM right and this technology it cannot be used for some other OEM, right?
Neeraj Mahajan
The product per se the patented design of external shape is going to be unique, but there are about four or five different varieties of feature application, which are going to be possibly offered in future if they would like us to expand more with the higher end technological product in their product range; however, the basic design of the product can be utilized with the specific model-related design requirement of particular customer so to answer the question - generic interior design unique for particular model, which requires to be developed, we have competency for both.
So this can be expanded to other customers easily this is what we believe as far as the product range is concerned without very significant investment other than volume expansion requirement of capex I think the technology can be horizontally deployed with other customers also.
Chirag Shah
Thank you very much.
Minda Corporation Limited August 14, 2020
Moderator · Conference Operator
Thank you.
Ladies and gentlemen due to time constraint we will take that as the last question.
I would now like to hand the conference over to the management for closing comments.
For Minda Corporation Limited · Research Analyst
This financial year 2021 will be a challenging year but we are confident that the worst is behind us.
I can assure you that Minda Corporation with its huge value proposition, research and development driven products, support from customer base and a strong balance sheet is well placed to navigate through these difficult times.
With this I thank everyone for joining on the call and please keep safe.
Thank you very much.
Moderator · Conference Operator
Thank you.
On behalf of Minda Corporation Limited and KR Choksey Research that concludes this conference.
Thank you for joining us and you may now disconnect your lines.
Notes
1.
This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings 2.
No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Minda Corporation Limited.