MOTHERSON — 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

Moderator · Conference Operator

Ladies and gentlemen, good day.

And welcome to Samvardhana Motherson International

Questions and answers

Moderator · Conference Operator

We'll now begin the question-and-answer session.

The first question is from the line of Raghunandhan N.

L. from Nuvama Institutional Research.

Please go ahead.

Raghunandhan N.

L Congratulations, sir, on stellar numbers.

And thank you for sharing order book details for both, the upcoming and ongoing programs in presentation.

Sir, 3 questions.

Firstly, as you mentioned in the opening remarks, global 4-wheelers are seeing an improvement in supply situation.

And they are notably lower from the peak levels, which was seen in 2018-19.

How are you seeing the ramp up in the near term on the 4-wheeler side in the developed markets?

Secondly, energy costs have reduced, considering the current natural gas prices, which continue to correct, would you expect further margin benefits in coming quarters?

And just lastly, on the order book details for both, upcoming and ongoing programs, what would be the average duration in terms of number of years we should consider by looking at upcoming orders and ongoing orders?

Vivek Chaand Sehgal Thanks.

Kunal, would you take this thing?

And Vaaman, you can add up.

Kunal Malani Sure.

So Raghunandhan, I think on the 4-wheeler side, as you rightly pointed out and as Vaaman was mentioning, it is still around about 20% below pre-COVID levels in the developed world.

With whatever production schedules that we have, we continue to see a bit of a ramp-up happening still.

So we're not seeing any decline, etc, as yet.

In fact, on an aggregate level for the year, we still expect that the industry is likely to grow.

Now the growth pace is obviously going to get calibrated depending upon how the environment plays out.

But overall, the downside risks of this is much less than the potential upside is the way we see it.

On the energy price, while we have seen a sizable decline happen in this quarter and ongoing as well, we anticipate at least up till now that things are looking pretty static to where it was in the end of the previous quarter.

It, however, remains at least 3, 3.5x higher than pre- COVID level.

So we are not out of the woods.

And obviously, much of the geopolitical aspects will get played into it.

The good part, however, is our conversations, I mean, with the efforts that the team has done to work with the customers, we've been able to share some of the elevated cost structures with the customers.

And hence, that should aid well even if there is some amount of increased cost going forward.

But overall, we expect that hopefully, the energy prices are not going to shoot up again going forward.

On the duration of the order book side, the average duration is anywhere between 5 to 6 years.

So that's the time span over which we expect this INR5.7 lakh crores order book to get delivered.

Laksh Vaaman Sehgal Not much to add over there.

I think Kunal covered that it well.

I would just like to say, I think as a group, we've all come to -- we are thinking that these elevated cost structure are there to stay.

Really comparing them to pre-COVID levels is not the right comparison anymore.

We are living in a new normal.

Samvardhana Motherson International Limited May 26th, 2023

Sir, your audio is not coming clearly.

Kunal Malani I think Vaaman was trying to mention that the cost structures that are there on an elevated level is potentially the new normal, and we have to work around our own business around this area.

What has been hit effectively is the lower end of the market.

The premium and SUVs continue to do well.

And hence, our product mix is also aiding our growth.

So maybe that's the reason why we are not seeing as much of a downside risk as maybe some of the other players are.

Laksh Vaaman Sehgal Absolutely.

And also the order book being aligned towards the EV growth as well.

I think that's really going to help there, new models that are coming up.

Since we have a significant part of the new order book aligned to these EVs, we expect them to do well as well.

So we should do better than what is the average expectation in the market.

The next question is from the line of Pramod Amthe from Incred Capital.

Please go ahead.

Pramod Amthe First question is with regard to the vision systems.

If I were look to at your revenue momentum, it looks pretty impressive at 30% Q-o-Q versus your own presentation talking about the muted growth in the regions which you cater.

So what is this driving 30% growth on Q-o-Q?

Is it more new orders or the content per vehicle has gone up?

If you can give more colour to be helpful and the sustainability of this momentum.

Vivek Chaand Sehgal Rajat, you are there?

Rajat Jain Yes, I am here.

Thanks for the question.

So primarily, again, I think it comes down to the fact that we are working with OEMs on premium models and SUVs, and that's the trend that we are playing on.

And that's the segment which is still seeing good performance overall and growth.

So bulk of that is coming from there.

And also, as you would know, there is also a lot of contracts which have been renegotiated, and all the discussions been going on for some time.

So that also is helping to then reflect in the top line growth.

Pramod Amthe Okay.

And the second question is with regard to the debt, working capital and interest cost.

Even though it's impressive to see the net debt coming down by almost more 10%, the interest cost seems to be still elevated and usually moved up by 80%.

So is it more the cost going up itself is still a reflection and is it a more sustainable interest cost on a quarterly basis?

That's one.

Second is, you are planning to substantially reduce the working capital requirement.

So the reduction in net debt seems part of that?

And what the extent of journey are covered in working capital reduction as the supplies improve?

Or you feel there's more headroom available to cut your working capital?

Kunal Malani So I think on the interest cost side, yes, things have obviously moved up on the interest rate side as some of our fixed rate instruments are getting refinanced into the newer instruments, yet the interest cost is going to move up.

Samvardhana Motherson International Limited May 26th, 2023 Having said so, this quarter, there has been forex losses also that is embedded in the interest cost.

Some of the corresponding gains have come on the top line side.

So that's how it's been reported.

From the perspective of debt, we do expect the deleveraging to continue on the organic side of the business.

The working capital improvements are not out of the way completely.

We are there some parts of the business has been able to do, but I think there is still a long journey to go.

And as we go through this year and as more normalization happens through the year, I think we should be able to continuously deliver our -- I mean reduce our working capital going forward.

The next question is from the line of Amyn from JP Morgan.

Please go ahead.

Amyn Pirani Yes.

One clarification and one question.

Firstly, you mentioned that the cost pass-through discussions with the OEMs for FY '23 are already done.

So does it mean that the impact of that is already being seen in the P&L?

Or will you get these recoveries in the coming quarters?

Vivek Chaand Sehgal Vaaman, you take this, and then Kunal will follow.

Laksh Vaaman Sehgal Sure.

Yes.

So FY '23, those ones have already been taken and been approved.

Of course, because we are in a place where energy prices are moving around significantly and there's no visibility of how these things will play out other than what actually happens, these will be negotiated as we -- as we go down this year.

So whatever was there for last year is already there and has been already reflecting in the numbers, and the discussion continues for how these pan out for the rest of this year.

And these will be discussed at the end of the year.

Amyn Pirani Okay.

That's helpful.

Secondly, on the investments and deleveraging, you mentioned that next year's capex is going to be higher, plus you will also have payouts for some of the acquisitions which were already announced in the last few quarters and which will be fully done in the next few quarters.

So in that context, how should we think about the deleveraging cycle continuing next year?

Kunal Malani I'll take that.

Look, Amyn, I think you're going to view it from 2 different legs.

On the organic side, the business will hopefully be doing better and better going ahead.

And that implies that the profit generation, together with working capital reduction should be able to aid spending whatever that we have on the capex side, plus to also use some of the internal approvals for M&A.

Then there is a whole host of M&As that we have anyway announced for which the payouts will happen in the ensuing year, and there is a large pipeline of M&As as well.

So with what we have announced so far, I think we should still be within the 2x net debt-to-EBITDA levels.

That's the way at least we see with the announced transactions.

The next question is from the line of Binay Singh from Morgan Stanley.

Please go ahead.

Samvardhana Motherson International Limited May 26th, 2023 Binay Singh I hope this is better.

My question was on the order book slide.

How do we tie this up, like could you share a little bit more about how you have done, the execution number, is it for the financial year?

I assume that you are talking about.

Secondly, like earlier, you used to disclose order book of around INR18 billion or so in SMRP BV that was outstanding order book that was for September.

How has that number moved?

So I'm just trying to sort of connect the order book numbers that you were disclosing earlier with what is there on this slide.

Kunal Malani Okay.

I think, first of all, this is not the order book number.

This is the booked business.

The booked business will combine both the orders which are not in production, which is what we call the order book as well as the business which is in production.

And hence, this is what is going to get executed from this financial year, all the way over the next 5 to 6 financial years.

If you look at the SMRP BV presentation, that would have the order book of both, the ones which is entity one, the ones which is the amount which is not under production, which is about 21-odd billion and the ones which are under production, which is around about 18-odd billion.

That gives you a little bit of understanding of what the new orders versus existing orders is.

Binay Singh That is clear.

I'll check that out.

And secondly, when we talk about next 5 to 7 year execution cycle and what will be sort of a replacement orders versus new orders just to sort of see what exactly will be the incremental revenue from current base?

Any rough numbers on that?

Kunal Malani Back of the envelope calculation, we were to do your 70 billion over 5 to 6 years would anyway imply slightly more than 12-odd billion of revenues.

Next question is from the line of Veda Bhardwaj, an Individual Investor.

Please go ahead.

Veda Bhardwaj Can you give me an idea about the capex investment that you have highlighted about -- of about INR3,000 crores, if I am not wrong.

On what specific areas it will be invested and what will be the duration of this CAPEX?

Vivek Chaand Sehgal Vaaman, you and Kunal can take this.

Laksh Vaaman Sehgal Sure.

As you mentioned, this capex is going to go towards both, automotive and nonautomotive business.

We're also expanding the facilities.

We talked about 7 of them, 6 of them will be in India.

And 3 of those will be in the automotive and 3 in nonautomotive side as we go towards our 2025 target and the diversification.

These are the capexs that are related to orders that we have won, that we had to execute for the customers' new launches and the new programs that we are getting.

As you can tell from the past calls, we've also talked about our expansion of doing acquisitions in Aerospace, how the order book has doubled over there.

We are building new facilities in that as well.

Samvardhana Motherson International Limited May 26th, 2023 So as you can see is an overall growth capex that we are putting into place, and this should reflect, of course, higher growth in our top line as we move forward and these orders get executed at the time.

Kunal, you want to add anything?

Kunal Malani The only additional piece, unlike maybe some of our peers said, we do own our land and building.

So our capex numbers include the investments we'll be doing on land and building side as well.

As there are no further questions, I now hand the conference over to Mr. V.

C.

Sehgal for closing comments.

Vivek Chaand Sehgal Thank you, ladies and gentlemen.

We are all really excited.

Even though the conditions all over the world are a little bit on the tougher side, but we believe we are in the right position.

And we are really amply funded and all that.

So we are very excited with the future, and -- as it is happening and opening up in front of us.

The Board actually congratulated all the people in the company, almost 150,000 of them, thanked them that a great job was done under weight of circumstances.

I wish you all a good weekend, and thank you all very much.

Thank you.

Thank you very much.

On behalf of Samvardhana Motherson International Limited, that concludes this conference.

Thank you for joining us.

You may now disconnect your lines.

Thank you.

Safe Harbour

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