SONACOMS — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to Sona Comstar Q4 &

We will now open the floor for the Q&A session.

If you wish to raise a question, you can use the raise hand function located at the bottom right of the webex page.

We will unmute your line and prompt you to speak or you may submit your questions via the Q&A chat box.

A gentle reminder to keep your questions to a maximum of two questions.

If you have more questions, please return to the queue.

Thank you.

Kapil Singh

By the time, I will just ask a couple of questions.

So firstly, we've shown a slight variation from what you had given earlier in the roadmap for the motor business, and we've won some other new orders as well.

Where do you see the largest potential when you do crystal ball gazing over next 4-5 years for yourself from where you are today?

Which segment do you think will grow the largest?

Vivek Vikram Singh

Right, so growth has two connotations.

I mean if you have a low base, growth as a percentage will be very high.

For motors that is always going to be because, traction motor business just 1.5%, right?

So that's what Rs.

30-35 crore or something of revenue, that's nothing.

So, we will grow very-very fast in that in the next three or four years because it's just begun.

Driveline, let's say we have got Rs.

450-460 crore or perhaps 470 this year.

That as a percentage may not grow much but it will significantly ramp up because of two reasons: one, - vehicle electrification itself as the trend gets us there, right; if you have 1/8 of the market, If it goes from 4% to 50%, you benefit from that anyway.

Second, if you've noticed, this is why I called it the single biggest achievement of this quarter.

We started from being a differential gear Company, then we became a differential assembly Company, then we say differential assembly plus final reduction gear.

But you know that in the whole transmission there are a bunch of other reduction gears and other things.

With the Spool Gear addition, we have basically said that now we can make EV transmission gear.

So, we have literally opened-up the whole addressable market of differentials.

The reduction market or transmission market is perhaps larger than that.

So yeah, that field now can just suddenly accelerate because every architecture needs reduction plus differential, and we got it covered.

So yes, it is exciting times.

Kapil Singh

So, I take it that the driveline business in terms of revenues will have a lot of growth and maximum addition.

Vivek Vikram Singh

Yeah, I mean, look, we don't give future guidance.

So, I won't give numbers plus it is the surest way to disappoint people, right that you over promise and then you don't end up delivering.

But we have given over the last seven years about, you know, 35-36% growth on an average.

I don't see any reason, non-macroeconomic reasons, there I’ll caveat, I can't prevent Sona Comstar – Q4 FY22 Earnings Call wars, non-macro-economic reasons for that to not continue in the near future.

Kapil Singh

Sure, so let me ask on that topic as well, because a lot of investors want to know.

There was a lot of chip shortages which affected us during the last quarter.

How are things progressing from a ramp up perspective now?

Vivek Vikram Singh

So I think the first time Kapil you had only asked me, first time we did this was in August right, last year, I had said 18 months and that time I think when we said 18 months people were shocked that why is this person so pessimistic.

So let me just put a caveat.

We're not pessimistic or optimistic.

A company's management’s role is to transparently, truthfully clearly tell you what we know to be true.

The decisions on investment etc. are the investors.

The decision to analyze is of the analysts, but don't read too much into the psychological bearing of the statement.

It isn't.

It is the truth as we see it.

We thought it was 18 months, I think with all that has happened in the last quarter, maybe we add 3-6 months, but it stays where it was.

The semiconductor chip problem was not an easy problem to solve, right, It is a multi-industry, multi-capacity problem, where the supply demand mismatch is not shortening because the demand is also continuing to increase.

Now there is a chance that given all the central bank's actions in the next few months, demand might cool a little and the demand supply gap can narrow.

But still, I don't see that happening - at least 12 months, we've still got ahead of us, to weather this.

Moderator · Conference Operator

The next question is from the line of Nitin Arora of Axis Mutual Fund.

Nitin Arora

My first question is, you know on, just a question which Kapil was asking.

So would you say the revenue growth would be doable, order book is strong.

This is in context I am asking is, because what we read in global reports is that war is still on, this is something beyond guess and the war is still on for more than last three months, four months.

Do you see a scenario of, you know, further panic in the production of the chip shortage which can impact you know most probably after Q1, Q2. So,you know, where is this confidence coming for this revenue growth.

Vivek Vikram Singh

Okay, Nitin, I will try to answer the line is not very clear.

So, I will paraphrase.

One you're saying will the chip shortage get worse because of what is happening in Europe with the war situation, the answer to that is not really, it is where it is.

I don't think it's getting worse or better.

The factors that are affecting it are beyond that situation.

Second, I think it's important to differentiate when I'm asked or when we are asked about industrial or macroeconomic issues like chip shortage, we are answering to that question, how much it will affect us is a different matter.

We don't look at the world only through a lens which is focused on Sona Comstar.

It is on the chip shortage issue, so I answered that.

That's why I think in the initial bit I did mention that regardless of all the known problems, right, the war in Ukraine, the material cost, the lockdowns in China because of Covid, the freight problem.

Despite knowing all this, we expect FY23 to still have fairly Sona Comstar – Q4 FY22 Earnings Call strong revenue growth for us as a Company.

As an industry, I doubt, I doubt there'll be strong growth in sales.

So, Nitin, basically everything is new programs-only led growth.

We have assumed that things will stay as bad as they are.

No industry tide to help us.

We are on our own, whatever we make is whatever we will eat.

So, it is all new programs and new customers that is all that we are looking at.

Nitin Arora

Taking further what you said on margins….

Vivek Vikram Singh

Nitin, I really can’t hear.

Kapil could you..

Kapil Singh

I think he is asking if you see further pressure on margins because of the commodity cost inflation.

Vivek Vikram Singh

Yeah, so, we are where we are in the last quarter.

If anything, further happens, I'm not going to try and guess because it hasn't happened.

With what we have, we can sustain, I mean if you look at it, despite all of this right, we still did 26% for the year.

So, we can't promise on every quarter but if you take the whole year, the effects of operating leverage also get realized, forex up and down also gets neutralized to some extent.

So yeah, I mean if you look at the full year, I can say that with far more confidence, but quarter to quarter there can be more variation.

Nitin Arora

Was there a Forex gain in this quarter?

Vivek Vikram Singh

Very little, compared to last year it was much lower.

Rohit, would you like to take that?

I don't remember, but it was little.

Rohit Nanda

Yeah, it was Rs.

2 crores for the current quarter.

Moderator · Conference Operator

The next question is from the line of Gunjan Prithyani from BofA.

Gunjan Prithyani

Hi, thanks team for taking my questions.

Just to follow up on the order book.

I'm not sure Vivek, I think my voice is echoing, is it okay for you all?

Vivek Vikram Singh

Perfectly clear.

Gunjan Prithyani

My question is on the order book because if I look at the order book, you know, versus last quarter, of course the EV book is kind of stable whereas the non-EV book has seen a pretty significant jump.

So, I'm just trying to understand where is this coming from?

Is this the plug-in hybrid?

The wins that you spoke about?

Maybe just give us a little bit color on, you know the sequential change in the order book that we have seen and follow up to this spool gear which you mentioned, when does it commercialize, and you know what does it do to the content value?

Those two questions.

Vivek Vikram Singh

Sure.

So Pratik, you can take us to the order book.

So, the plug-in hybrid.

So, the order book EV part contains all plug-in vehicles.

So, as you can see in the note, I don't know if the note covers that.

It is BEV + plug-in hybrid.

So those are in this actually.

In the non-EV side, we have some new order in the passenger vehicle space, I think, I did mention that we have added a Sona Comstar – Q4 FY22 Earnings Call new, actually we've added two new large automakers, they are in the top 10 automakers of the world.

So, for the traditional differential gear business.

So that has added that.

Does that answer your question?

Gunjan Prithyani

So I'm just trying to understand why was the EV order books stable.

I mean if I look at the, it was 116 billion last quarter and then it's kind of marginally come down this quarter and you know you spoke about all these wins.

So, I mean intuitively it would have gone up.

Vivek Vikram Singh

Sorry, net order book, which is why.

So, I'll go back into the concept.

We have also consumed orders in this quarter, right and most of that has come from the EV only.

So, if you look at our non-EV revenue, it has declined only our EV revenue increased.

So, there are some programs that hit maturity.

So, you take them out of the order book, go back one slide, Pratik, just the program slide.

So, if you look at last quarter, there were 7 EV programs that were in serial production.

Now there are 9.

So, two of those programs, the value has gone from order book.

Now they are only in serial.

Gunjan Prithyani

Okay, got it.

Plug in is there in EVs and non-EV is more the traditional.

I got it.

Vivek Vikram Singh

Second part of your question was Spool Gear.

So look, I think I have answered this before.

The traditional, Pratik, can you go to the 1 to 2 motor architecture Mr. Deshmukh’s slide.

So, if you look at the 1st architecture, 1 or 2 motor architecture, this is going to be the dominant form for most vehicles, 90-95% of all electric vehicles in the next 5 to 10 years should go with this architecture.

The spool gear architecture is for a three-motor configuration which is required for high torque vehicles, which means either very high speed, or high weight or off-road.

Not too many of those expensive solutions, because we are putting 3.

Value content per vehicle is very high and I can’t give it away without giving the price, so I won’t go there.

But see the final drive differential assembly is there in the front axle, it is perhaps, so a single one, it is three times nearly, let’s put it that way, the spool gear version.

However, Gunjan the volume will be low, these are expensive vehicles.

This is more a capability thing, and this is why I was saying that, look at it more as a capability addition because this doesn’t have any differential.

What this says to you as an analyst is that we have been saying this is the total differential assembly market they have 12.5% market share but there is a market out there for reduction gears for transmission of the EV in which we had till now 0%.

Well now we enter this.

Right?

That’s the point.

So, the order is one, production will start next year.

Gunjan Prithyani

Okay, just one more if I can pitch in maybe Rohit.

Just a follow up on the margins.

Now, you know, can you just share some color on how typically the contracts for you know, aluminum, how quickly they can get re-priced because clearly there's still more pressure on the aluminum side.

So maybe some color on how should we be thinking about the margins?

Sona Comstar – Q4 FY22 Earnings Call

Rohit Nanda

So, aluminum and copper, most of the contracts for Motor business will be with a lag of 3 months.

Gunjan, could I explain?

Gunjan Prithyani

Okay, so the pressure, the surge that we have seen, we will see, we will see the, you know, the hit of that in quarter one as well on the motor business.

Rohit Nanda

Yes, but then previous quarter positive will also come in, right, because it is a one quarter price lag, so it will partially offset.

Because the prices are on an increasing trajectory right, so they must have increased in the quarter prior to that as well.

Vivek Vikram Singh

So, it is rolling settlement, Gunjan.

It keeps going up on that slope. every quarter the next quarter will be the settlement one.

But again, I don't think it could be that significant to be honest.

Steel is the one you should look at as an analyst because steel affects both divisions.

Gunjan Prithyani

All of that with a roll, with a lag of 3-4 months is passed through, right?

Or is there anything that is not a pass through, and you know, which will happen, which will adjust, which will take time to adjust?

Rohit Nanda

Motor business, steel input, that's a pass through only in a smaller percentage of customers.

Gunjan Prithyani

Okay, got it.

Thank you.

Moderator · Conference Operator

The next question is from the line of Hitesh Goel from CLSA.

Hitesh, Your line is now unmuted, please go ahead and ask your question.

Hitesh Goel

Thanks for giving me a chance to ask the question.

Vivek my question is, your largest customer in BEV has faced certain lockdowns in China because of Covid, right.

So, can you give us some updates on the production ramp up there?

Vivek Vikram Singh

As we have requested multiple times, we don't take customers specific questions.

Sorry.

Hitesh Goel

Okay.

Any view on the China lockdown situation about, you know, your orders from there.

Vivek Vikram Singh

Actually, it's not just that.

So, we took a big hit last quarter.

I think March was a bad month, completely wash out type month.

As you know, China is our fourth largest market, right.

But I think the problem is not just local, so we must all pray that the problem gets resolved not just as a humanitarian crisis, I do feel for people there who are locked up in their houses, but beyond that I think supply chains and trade is going to take a massive hit all over if it doesn't get resolved within May.

See we make controllers and for us because we are seeing it firsthand, a lot of the supply chain runs through there, right, semiconductor, the chip stuff.

Our customer supply chains, almost all of them, if you look at the automotive world, how many of their supply chains go through China and if China stays locked down for too long, it's going to have a massive ripple effect.

So that is, I would say a Sona Comstar – Q4 FY22 Earnings Call larger concern than one particular customer or one particular market, the impact of China being locked down on the global automotive analogy.

Hitesh Goel

And you know, yesterday actually Volkswagen also had alluded the same point that you're highlighting, but it was more of a European impact on the supply chain.

Is the US also getting impacted because of supply chains?

Vivek Vikram Singh

Which country, which car, if you take and say that it does not pass-through China?

Any vehicle, I doubt it.

So, it's a global problem, I think.

I didn't hear Mr. Diess’ thing, but he is perhaps coming at it from an European angle, but because we are in Europe and US both pretty fairly significantly.

It is everywhere.

This is, if it resolves within, let's say the next three weeks, I think we all will be relatively unscathed, and we'll get through.

But if it doesn't then we have a problem.

Hitesh Goel

Good, great.

Thanks.

Moderator · Conference Operator

The next question is from the line of Jinesh Gandhi from Motilal Oswal.

Jinesh Gandhi

A couple of questions from my side.

First of all, congrats on a good performance.

Can you share some details on the geographic restrictions on the tie-ups with Enedym and C-Motive?

Is it only for India or this would be for other geographies as well?

Vivek Vikram Singh

Good question.

Mr Deshmukh?

V. Vikram Verma

I think Mr. Deshmukh is dropped for some reason.

I don't see him.

Vivek Vikram Singh

Okay, so I'l try to answer that.

So Enedym, no restrictions, the applications could be very far ranging.

This is not a traditional automotive type of product.

I don't know how much is known about electrostatic, but in our spirit of trying to reduce more and more from the motor to make it more efficient.

This has nothing actually; it's dielectric fluid and we are going back to Benjamin Franklin times.

Right now, it’s very low speed and high torque is what that motor can deliver.

So, for automotive it is not actually a right fit in its present shape because as you know, automotive, the wheels have to rotate at a fairly high speed so it’s high RPM.

What we will do is we are going to be investing in them as well.

We are going to together try and adapt this to automotive and mobility applications because if we can, I mean, can you imagine, Gunjan was just asking about copper and we are so worried about 3% - 4%, movement in copper.

If you can just eliminate all copper and all magnets you can have potentially, and I'm using my words carefully, I don't want it to be said as you know, talking too big, but it can be a potentially industry changing device.

V. Vikram Verma

Mr. Deshmukh is back.

Vivek Vikram Singh

Okay, good.

So it is a moon shot, but it's a global collaboration.

Enedym is far more near term in that sense that the motor exists.

The issues that switched reluctance motors had in delivering that kind of torque and power without a magnet.

There were problems around weight, there were Sona Comstar – Q4 FY22 Earnings Call problems around torque ripple.

Those have been sorted out by this Company.

Here, Mr. Deshmukh I think the question is about is there a geographic boundary to the Enedym partnership?

Mr. Deshmukh

Well, there are boundaries in the sense that the current agreement is for India specific, but it is not limited to India.

In case, there are specific markets and specific requirements from outside India, we can address that which would be on a case-to-case basis.

But essentially it will focus on India, and probably Southeast Asian markets.

Jinesh Gandhi

Got it.

And the C-Motive as Vivek indicated it's primarily there's no restriction on geography as such.

Mr Deshmukh

Like Vivek indicated, it is a moonshot and we hope that we are able to convert that into an automotive application, mobility application and if that happens, I think the entire world is there.

Jinesh Gandhi

Couple of other questions for Rohit.

One is with respect to Capex for FY23 what should we look at and secondly you talked about interest on income tax refunds, so is that part of other incomes?

How much will that be?

Rohit Nanda

Yeah.

So I'll answer in reverse.

So income tax refund interest is part of other income, about Rs.

16 crore for the full year, okay.

And coming to your Capex question, look what's happening is because of all these uncertainties in terms of deliveries etc. what we've experienced in the last 12-18 months is that machines which used to get delivered say earlier in 8 to 9 months are now probably taking double the time.

So, in that sense, you know, the time span over which the Capex is happening has kind of elongated.

So rather than, I would say, mentioning only of one year, we will probably look at a period of three years and given the current order book, I think we should be spending about Rs.

900 -1,000 crore between FY23-25.

Kapil Singh

I will read out a few questions we've got in the Q&A box.

So firstly, you have partnered with Enedym and C-Motive for SRM and Electrostatic Drive Motors.

Will these products compete with the same market and use case?

Also, will they cannibalize share from BLDC and PMSM motors.

And secondly, do you have customers for BSG product and integrated motor controller module?

Vivek Vikram Singh

Yeah, so IMSM is with a customer, we even gave the order value last quarter I believe.

So that is in our earnings presentation of last time.

BSG we still don't have a customer.

Otherwise, it would have been in the order book, we would have announced, and what was the first part of the question?

No, there is no cannibalization.

I think Mr. Deshmukh showed a very nice chart.

Every end use application has a different need.

Sub $1,000 electric two-wheeler for example, the need is how many lifetime miles can you deliver on that device upon the TCO of that device?

That's basically it.

Above $1,000 price range, the electric scooter also has to deliver higher Sona Comstar – Q4 FY22 Earnings Call acceleration, higher torque and a host of other features, aesthetic elements also place a value.

The powertrain has to cater to that end application.

See in the end all of us in the automotive industry, whether we are suppliers or the OEMs, are solving the problem of the end consumer.

The end consumer for an electric three-wheeler, L5 type of vehicle has a different requirement i.e. lifetime miles into lifetime kilograms hauled upon the total lifetime cost.

That is what you're trying to maximize, not zero to hundred in two seconds or three seconds because I mean, unless you're an auto driver in Chennai, you're not trying to set speed records right.

It is a different need, you need a different kind of end product.

For that different product what we try to do is try to select the best technology for that product.

Cannibalization etc. is I think more a very FMCG word in which you have 60% market share and at the same price point you have two things etc. This is a nascent market growing so fast where we already don't have a 100% market, then those questions are meaningless.

Right now, the objective is to try to give our customers the best fit product for that end application and within a category also there will be multiple engines.

So, let's say an electric LCV, as you know today, earlier in the day one was launched, we believe that math of kilometers upon lifetime cost of those set kilometers, the electric LCV and L5 cargo carriage already is economically more beneficial to be electric and the whole market should commit.

In that time the objective is not this that we know how to make the BLDC, PMSM motors.

Let's try to make as many variants and try to give it to our customers.

It is not selling by push, this is a business you sell by pull which is you develop the best end technology product and if you build it and you build it well, customers will come to you and that is what we are trying to do.

We will fill this map - each space would have its own best fit product according to us.

It's our opinion.

We may be wrong.

But what we feel is the best thing we will provide for others.

That's what our attempt and if you're good enough, all the things like market share, revenue, all of that will follow.

That's the result that's not the process.

Moderator · Conference Operator

The next question is from the line of Ronak Mehta from JM Financials.

Ronak Mehta

Thanks for the opportunity.

My question on the traction motor part of the business.

Firstly, can you give some highlights on how the industry production was for the domestic market in the last 12 months, where are we in terms of market share.

How do you see the competitive intensity because volumes are inching up pretty sharply and how do you see the ecosystem development in the next 2-3 years?

Vivek Vikram Singh

So actually it's a very good question and I know some of you have to go for another call, excuse that but do tune into, Gunjan is hosting us at the BoFA EV thing, and I will talk about this subject at length.

I think there is a supply constraint on that and I think, you know the answer.

There is a big supply constraint, the demand is phenomenal for the e- two wheeler e-three wheeler and I think the e-four wheeler LCV segment.

Any device for any Sona Comstar – Q4 FY22 Earnings Call vehicle which has a high asset utilization is easier to justify economically because the opex is so much lower than ICE.

I think this market will just explode and there is enough.

On our market share I think we do about 10,000 motors.

So you know it should be easy to estimate.

So we're doing 10,000 right now per month, so it should be easy to estimate market share.

Ronak Mehta

But what could be the overall domestic production in that segment and how much is import here?

Any color on the industry side?

Vivek Vikram Singh

So how much is import, in the electric two-wheeler?

Ronak Mehta

Yeah, two-wheeler, three-wheeler.

How do you see the market?

Vivek Vikram Singh

Look I think FAME too will get more rigorous, they will start checking value addition and localization at tier two level also and more and more will move local.

I think the day of showing value addition in India by importing something, you know, repacking it and giving it to customers, I think those days are numbered.

Ronak Mehta

Sure

Vivek Vikram Singh

It is a high boost for local, Ronak.

And I think at the community there are a lot of people who stand to benefit even on powertrain as well as balance of parts.

Ronak Mehta

Perfect thank you.

Thanks a lot.

Kapil Singh

Hi everyone, due to time constraints we would have to keep that as the last question.

Vivek I will hand over to you for any closing comments.

Vivek Vikram Singh

No thanks, Kapil.

I mean, look, I know you guys have to go, but I'm here.

Please do let us know if you have any other questions.

Thank you to all of you for attending the first year of our reporting results as a listed Company.

So I'm sure we have much more to learn and further improve.

We'll try.

Should you have any further questions, feedback, please feel free to reach out to us or CDR India.

Thank you and best of luck and hopefully we show even better results in the next quarter.

So thank you.

Kapil Singh

On behalf of Nomura, thank you to all of you for taking out the time and I look forward to the same kind of success for another year as well.

All the best.

Thank you.

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