Samvardhana Motherson International Ltd
NSE:MOTHERSON
Earnings Call Analysis
Q2-2024 Analysis
Samvardhana Motherson International Ltd
Samvardhana Motherson, against a backdrop of global challenges, has achieved its highest ever quarterly revenues, reporting a remarkable surge with a 28% year-on-year growth to INR 23,500 crores. This financial feat was supported by a strong double-digit growth across all divisions, and notably, the addition of four acquisitions to the stream in this quarter. Further, the company boasts an impressive booked business, reaching an all-time high of USD 77.2 billion, up from USD 69 billion just six months prior.
The company's growth story features a bold expansion strategy, highlighted by a notable investment in 15 acquisitions since September 2022, which collectively bring in pro forma revenues of around USD 6.4 billion. While these acquisitions present a wealth of opportunities, they also come with significant financial commitments. Consequently, Samvardhana's net debt has swelled by INR 5,000 crores, largely due to acquisition payouts and heightened capital expenditures, which have increased to cater to burgeoning growth opportunities, particularly in the vibrant Indian market.
Maintaining a delicate balance, Samvardhana has seen its leverage ratio climb to 1.9x EBITDA, a temporary ascent within their policy limit of 2.5x, driven by strategic CapEx to secure future growth trajectories. The company reinforces its commitment to prudent financial management, assuring investors that these leverage levels are a transitory phase in pursuit of greater returns.
Samvardhana faces complex dynamics in its European operations, contending with macroeconomic hurdles, which have impacted its SMP business. The company is mitigating these challenges by remaining engine-agnostic and pursuing negotiations with customers to share the burden of inflated costs, ensuring the possibility of a stronger performance once stability returns.
In an environment of escalating wages, Samvardhana has preemptively factored in most wage increases, safeguarding its financial projections against sudden spikes across numerous geographies. The company has also embarked on a significant restructuring in Europe, taking substantial costs upfront to realign operations by merging facilities and streamlining processes to better meet market demands.
The company grapples with an unforeseen net monetary loss of INR 57 crores in Argentina due to the Central Bank's restrictions on foreign exchange payments, resulting in a significant ForEx loss. While the future impact remains uncertain pending new government policies, the company anticipates a diminished effect post-depreciation.
Despite the flurry of acquisitions, Samvardhana has achieved an organic growth of 18% at the revenue level, with an EBITDA margin holding at 8.4% for the organic business. The company remains focused on sustaining organic growth, alongside integrating new acquisitions and exploring synergies within its expanded footprint.
Looking ahead, Samvardhana is positioned well with a substantial order book that promises continuity of revenue streams. The company emphasizes the importance of the booked business as a more reliable trajectory indicator than quarterly earnings, drawing attention to its substantial aerospace segment which is expected to contribute $1.3 billion on its own.
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Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Results Conference Call of Samvardhana Motherson International Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. V C Sehgal. Thank you, and over to you, sir.
Thank you very much. Good evening, ladies and gentlemen. Thank you for joining the results conference call of Samvardhana. First of all, a very happy Diwali to all of you and your family. I am pleased to announce that the Board has approved the results for quarter 2. Motherson has delivered a consistent performance against the backdrop of global unfortunities. We have posted highest ever quarterly revenues. All the divisions have shown a good double-digit growth. Customer continues to trust Motherson with the highest ever booked business of USD 77.2 billion. . The environment is also offering us a lot of opportunities. We have announced 15 acquisitions since September 2022, and the team continues to explore more. There is definitely a work in progress quarter. And I have with me Vaaman, Pankaj, Kunal and Rajat to provide further business insights and clarify [indiscernible]. I hand it over to Vaaman.
Thanks, [indiscernible]. Good evening, everyone. So [indiscernible] saying, SAMIL has delivered the highest ever quarterly revenues of INR 23,500 crores, which is about 28% growth year-on-year. And with that, an absolute EBITDA of about INR 2,000 crores, which is 34% growth year-on-year. All the business divisions have performed well and were further supported by 4 acquisitions coming on stream in this quarter. These were SAS, [indiscernible], Saddles, and Rollon.
Our rules on business excluding the greenfields and the M&As that were done in the current 5-year plan has improved from 12.6% in FY '23 to now 16% in FY '24. As we speak, we have a solid booked business of more than USD 77 billion, which is up from USD 69 billion as reported in March 2023. All of this, we have been able to achieve in a challenging business environment, where wage inflation across key geographies, rising interest rates and geopolitical uncertainties continue to mount pressure. Thankfully, there is slight spike coming from energy and commodities stabilizing although these are at higher levels than peak over.
On the automotive production, developed markets were impacted by the annual summer shutdowns, disruption in supply chain core key European OEMs and labor strikes in North America. At a global level, production remained stable at [ $22 ] million, due to significant growth coming from emerging markets, specifically India. And now India and China comprise about 40% of global LV volumes.
With the ever-changing and unpredictable external factors in evolving industry dynamics, we have taken several measures and initiatives to remain agile and greet with the market. A few I would like to highlight. We continue to remain in constructive discussions with our customers as sharing of inflationary cost structures will remain a recurring feature in the short to medium term. At the customers we had of acquisitions, we have added 22 facilities in Europe and 7,000 associates with the recently closed M&A, given this footprint expansion, we have also announced a chase reconfiguration in a few countries in Europe. This is done to streamline our operations and improve efficiencies and deliver more synergies. . Current quarter results include a onetime cost provision of about INR 250 crores, which would enable us to be competitive on a sustainable basis and capture future growth from our reorganized footprint.
In emerging markets, specifically in India, there has been a spurt of growth opportunities for both auto and nonautomotive business. India is among the fastest-growing economies. And as you are already aware, most of the OEMs are now bringing new capacities to support this growth. We're also investing INR 1,500 crores of CapEx in India to set up 10 new greenfields. Few of them, which will come online this year and the remaining in the subsequent fiscal year. This includes capacity for both automotive and nonautomotive business. Therefore, we are revising our full year CapEx guidance to about INR 4,500 crores plus/minus 5%. This is done to support the growth that is coming out of emerging markets and CapEx outlays for the acquired assets, which were not part of the earlier guidance.
Our net debt has increased by INR 5,000 crores, but this is mainly driven by the payout for the acquisition of nearly INR 3,800 crores, which were closed during the quarter, and the higher CapEx that we are going to put in to capture these growth opportunities. Consequently, the leverage ratio has also increased to 1.9x EBITDA.
But please note, this is a temporary increase and well within our stated policy of 2.5x. As you can imagine, to capture these growth opportunities, we definitely do have to invest in CapEx.
I'm pleased to inform that we have announced 15 acquisitions in September 2022, which have a combined pro forma revenue of about USD 6.4 billion in gross revenues at about USD 2.6 billion in net revenue. . Integration of post transaction is progressing well and is completely on track. I would like to thank our customers for their continued support and trust and Motherson. And with this, I would like to conclude and open the floor to question and answers.
[Operator Instructions]. We have a first question from the line of Raghunandhan NL from Nuvama Institutional Equities.
Congratulations on the profitability growth and ROCE improvement, also wishing festive greetings to everyone. Sir, my first question on the stand-alone side, raw material cost as a percentage of sales is higher than the last 3 quarters, and even the employee cost is higher. What has led to this cost increase? Is there any one-off? And would you expect RM cost to sales to normalize ahead.
Hi, it's Kunal here. I don't know if you're referring to employee costs, employee cost is a function of the nature of the business that we are in. If you look at our percentage, employee cost has actually decreased on a quarter-on-quarter basis. It was 11.4% over the 3-month period, June '23, and it is 11% for the 3-month period, September '23. The absolute value would obviously go up . Because theres' more business that we have done. The top line has grown accordingly in that line. . If you're referring to the cost of material, it's a mix of businesses, as you know, in stand-alone that we do. And it's dependent on how the commodity prices are, et cetera, et cetera. In this particular quarter, we also had the business that we had acquired the [indiscernible] business, which has a metal component to it and then it varies depending upon how those commodity prices has played out.
At an aggregate level, I think the margins in the stand-alone business has actually improved, and that's showing you the operating leverage that we are in the existing business also showcasing in some way how the growth in India is playing out.
Just to understand and sum up, so this increase in the raw material cost would be mainly because of the DICD metal component effect? And would there be any increase in input prices as well in this quarter, which you think can normalize in the coming quarter?
Look, it's a variety of different businesses. There's metro, there's polymers, there's wires, there's [indiscernible]. So given the variety of mix, it's very difficult to predict how things will go into [indiscernible]. And much of this is really a [indiscernible] at least in India, a majority of it will have a partum element to it with some lead lag effects. So we don't really worry too much about it.
Got it, sir. So stand-alone, when we break it up, there is wiring harness, modules and polymers. When I look at the segmental reporting, these emerging businesses, how much of that number would be coming from the stand-alone ?
We'll come back to you, very difficult to really ...
Fair point. I will take it offline. Secondly, on SMP, profitability has reduced on a Q-o-Q basis. Would it be mainly due to lower volume and higher employee cost? Was there any one-offs?
So for SMP, as you know, the majority of the business is in Europe. So definitely, if you're looking at on quarter-over-quarter and not year-on-year, you will see differences because this quarter has a lot of the holidays in Europe in the shutdown, so it's not really the right reflection. You should look at it year-on-year.
Apart from that, of course, there are multiple challenges in the Europe region [indiscernible] happening on the macroeconomic front. Not only that, some of the customers are also not hitting the volumes that they wanted on the EV front. Luckily for us, we are engine-agnostic, where we might not be selling as much on the EV side, some of the platforms on the [indiscernible] getting extended.
So those kind of challenges are still there. You are seeing quite a bit of macroeconomic pressure still coming up, now the winter coming. A lot of things are still to play out over there.
But, like we mentioned in the report that we are talking to the customers and getting [indiscernible] them on support for capacity that were not filled up or for commodity prices fluctuations that are happening, they are ongoing. I think the good part is that the confidence is on us. They're giving us more and more acquisitions. We're taking on more assets there. So definitely in times to come, once it stabilizes, we'll show a better result, and we are working closely with the customers to take support where we are getting [indiscernible].
And the impact of wage increments, would that be already factored in numbers? Or is there any major increase expected in the coming quarter?
[indiscernible] you talking about in general? Are you talking more about ...
In general, Sir.
Yes. So most of the wage increases are already [indiscernible] have been factored in. There could be certain locations where there could be a certain event where the regulation changes or something like that, where we have to change in midyear, but most of them are already seeing the impact of that.
Lastly, on the loss of [indiscernible] position in Argentina, the net effect is INR 57 crores, right? And this should be one-off? Or is there any more impact expected in Q3. Excluding this, the interest cost is INR 360 crores. Would that be the fair number to work with for coming quarters?
You're right. Look, in Argentina, it's a special situation where Central Bank has disallowed ForEx payments for importing material and hence, you have liabilities sitting in dollars and euros, which are unable to remit and as the currency has devalued, it's created a large ForEx loss.
The impact of that, we have classified interest cost because there are corresponding cash that is there where we are earning interest. So this is the net monetary position, which is the income we are generating on the cash that we are sitting on versus the ForEx loss that we have incurred there, which is the [indiscernible] number given in August and September, there was a very steep depreciation in the [indiscernible] this regulation came into play.
Where things stand, I believe the new government is coming into play in November, the election will happen some time now. And by December, there will be greater clarity on how the monitor position they look like going ahead. So difficult to comment on it if it's one-off or not, but hopefully, after this depreciation the impact will be significantly less even if there is any . Secondly, on the interest costs, you're right on the [indiscernible] the number may be a little bit actually lower, because there would be other charges, et cetera, the upfront payment, et cetera, that is done for all the debt approaches right now for all the acquisitions. Those would have also brought it up the interest cost to some extent. I would say on a normalized basis, this would look more like INR 300 crores to INR 320 crores versus the INR 360 you are referring to.
Got that. This is very helpful. I'll fall back to the queue. .
We have our next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Few questions from my side. One is with respect to the [indiscernible] for organic growth of about 18% at [indiscernible] level -- any color which you can give on either organic EBITDA or organic EBITDA margin for the quarter to have like-to-like comparison? .
Sorry, could you repeat the question again, you're not very clear Jinesh.
In the presentation, you have called out for organic growth of 18% at revenue level. Similarly, can you talk about what would have been organic EBITDA or EBITDA margin for the quarter?
The EBITDA margins for the quarter for the organic business, is that what you're asking for?
Yes, yes, yes. .
So that I think it is 8.4% or if I remember. The number is there. I think it's INR 180 crores is what we need to reduce from the INR 2,000 crores. So that's the [indiscernible] number for the organic piece [indiscernible] getting the math right.
Got it. This is helpful. Secondly, we have also called out for restructuring in Europe. So if the last part of costs already reflecting in second quarter? Or we expect some more provisioning coming in coming quarters? And what exactly are we doing there?
Yes. [indiscernible], that is the majority we're taking it upfront. It is -- as you know, we've added 22 facilities and 7,000 people obviously, a lot of those facilities that we have taken over are not running at full capacity as we deal some travel facilities that the customer has to take a [indiscernible] we are merging some of the facilities, really [indiscernible] in that context. So we are really beating with the market because we are growing significantly in that region. So that will again require some reorganization with all we have already put into play this all part of the acquisition when we took that over. So we are taking them all upfront. So majority is already there.
As I said in the beginning that this is a work in progress quarter. So a lot of the acquisitions, I can't give immediately magic this thing bullet which will solve the problem. But give us 3 months and watch what happens next quarter .
And lastly, we have talked about the [indiscernible] business going up to [indiscernible] at the consol level and [indiscernible] also shared the number. Would it be possible to share the net order book number of [indiscernible] which needs to share the average for [indiscernible] close to EUR 20 billion, 19.7% [indiscernible] for September '23?
Jinesh [indiscernible] to the booked business construct. I think the book business gives you a better reference point to see how the trajectory is versus the revenue stream that you are seeing on a quarterly or [indiscernible]. So request if we'll look at the book business [indiscernible].
Okay. So in that context, the Delta and book business over a period of time is the gross addition, right? That is a simple way to look at it?
You think is gross revenue. . Look, the book business moved from [indiscernible], which is only automotive, right? . On the nonautomotive side, at least on the aerospace side, you would see we've highlighted the fact that after [indiscernible] industries will be $1.3 billion on the aerospace side as well.
Right. So the $77 billion is the gross revenue, right . Not the net revenues as we report in P&L.
No, this is in relation to the economic revenue that is there [indiscernible] closer to the net revenue comes stock rather than the gross revenue.
We have a next question from the line of Arvind Sharma from Citi.
Sir, the first question would be on the broader demand scenario that you are seeing in the SMRP BV business. On the organic part, pay to see demand going on from here, both for industry as well as for SMRP BV. That will be the first question.
Look, you're seeing a lot of new launches that are coming up in the [indiscernible] and I guess in the global general, I mean, SMRP BV is not a global enterprise. So it's probably more helpful if we talk about the different [indiscernible] we talked about the immense traction that we're seeing in the developing economies [indiscernible] lot of stuff that's happening in India. So the demand is holding very, very strong there.
Internationally as well, like I said, there are some challenges in EV with some of those models. Customers have spoken about that. Whenever that happens, if the customer comes back and even more facelifts and new model launches to capture the customer back. And I think our strategy of 3CX10, no customer, no continue component is trading really well for us because we're not exposed to EV and that engine is really agnostic. So we are seeing growth, even though there could be pockets where demand could be a little bit weaker. Motherson continues to grow because of our diverse [indiscernible].
Sure. And sorry, just 1 clarification, I think somebody asked it previously as well. This INR 250 crores of onetime cost provision, is it reflected in the 2Q P&L anywhere?
Yes, it's coming as part of the exceptional items.
That's -- so this entire INR 250 crores is in the second quarter 1?
That's right.
We have our next question from the line of Siddhartha Bera from Nomura.
Sir, first question is on this acquisition. So what we understand is in the past this company used to do about like 11.5% margins. I understand we are in the process of restructuring. So any color how much improvement can we do potentially, say, in a year when we are done with this entire restructuring process and the business is making normal [indiscernible] .
Sir, which acquisition you're talking about . We've done 15 since September '22.
This is the SAS, which has come for 2 months in the quarter.
Right. So SAS is a running business and it is a profitable business, it is very different than some of the other acquisitions that we have done. So some of the reorganizations that are more towards the other acquisitions, which were not performing well and which we need to restructure, but SAS is looking more towards growth, we've actually added the CapEx in there for growth. There's not much restructuring or one-offs that are happening over there. There could be a small exception. But in general, we are seeing that as a growth business.
Kunal, do you want to add something there?
Yes. So if you're referring to the margins of SAS, please bear in mind, it's 2 months, August, September, August is where the summer shutdowns have been. So this is not necessarily reflective of [indiscernible] capability for where to put it. We do anticipate things to improve as in quarter 3, quarter 4 when the production levels are much more normal.
And from a restructuring perspective, as Vaaman was mentioning, right now, we see a lot of synergies lots of areas where it can grow. And the business is structured that on a more variable cost structure versus some of our other businesses. So if we see some of the places which are unviable at least in SAS, it's a lot more easier and flexible to move the production centers around. So it's relatively a more flexible [indiscernible].
It's important that you understand the real synergy of Motherson SAS because whatever Motherson is assembling right now, Motherson currently produces. So the synergy benefits are tremendous and we hope to pay them out in coming quarters. It's just been 2 months. These will give us some time, but we believe it's a very exciting opportunity and really transforms us to a Tier 0.5 and gives us a lot more ability to grow on the assembly side as well.
Understood.
In just 2 months, we've already transferring 1 from SMP to [indiscernible]. .
Your voice is not very clear. Can you come closer to the microphone, please?
Yes. So already, you saw that there are some movement of business from our SMP or polymer business into Motherson SAS. So we're already starting to push through the synergies and like I said, please give us some quarters and a lot of that will play out down the line.
That's good. So the second question . The CapEx number of [ INR 45 billion ] now, shall we assume that this will be the normalized CapEx going ahead? And does this [indiscernible] the CapEx for the new acquisitions also which we have done ?
Yes. So that's the exact reason, Siddhartha we are the revised CapEx. We had highlighted [ 3,000 ]plus/minus 10% earlier now , rising to [ 45,000 ], which includes a portion of the CapEx for new acquired assets that have been simulated in this quarter. Also, it includes the 11 [indiscernible] that is being set up in emerging market, 10 of them in India, 1 of them in China. [indiscernible] to you in March '24, which was part of the 3,000 that we had talked about. There are 4 new ones that have been -- for which we have got the orders now and hence [indiscernible] under the execution stage for which the additional CapEx required. . So the 4,500 really carries a lot of growth CapEx into it, given how the Indian environment, given how we are seeing a lot of traction on the nonautomotive side of the business as well. And hence, I would not say it's a normalized maintenance CapEx [indiscernible]. That number will probably be half old or so of this number.
That's it from me. I'll come back [indiscernible]
We have our next question from the line of Pramod Amthe from Incred Capital.
Is there a scope to get this increased CapEx split across divisions? Or you work [indiscernible], if you are to across your 4 verticals so that we can get some .[indiscernible]
Yes, I'm on hand. No, what I was asking was the [indiscernible] CapEx, which you guys have called out. Is there a scope to give it by division wise, so that we can -- that can help us to build the revenue profile or growth profile going forward?
I don't have the detail right now. Maybe we can add some of those details going forward. But I think as I mentioned, you should consider half of it is, give or take, the [indiscernible] all the beginning in the respective places.
The new one, we can give you more color as we go ahead. We don't have it right now.
Sure. And the second question is with regard to the broader industry related trend for wage costs. The type of negative surprises, some of the auto OEMs faced in U.S. Do you see that falling through for the -- some of the Tier 1 and Tier 2 suppliers also as increased wage cost when you renegotiate? Or second, considering your global operations and inflation being pretty high in many of the countries, you expect some repercussions of the same in many other clients.
So look, as far as we are concerned, we have already closed this year's increases. And we are doing it year-on-year. So we don't have a pile up of 3 years and then putting together as 1 contract, which might be there in [indiscernible] environments.
So for us, I think it's a regular [indiscernible] national pressure from the last year and this year as well. So more or less, we are already to date on 1 such increases. Now how does that affect all other companies, really, we can't comment .
We can guide -- we don't do.
[Operator Instructions]. We have a question from the line of Joseph George from IIFL.
Just a couple of questions. One is when you look at our debt level at the end of September and I think of how it will move the next 6 months, please guide on the pluses and minus that will come through in the next 6 months, maybe more acquisitions or payment [indiscernible] acquisitions, working capital moving up and down, et cetera. Just some guidance there would be helpful.
Let's put it this way, we can't really guide on acquisitions, difficult to predict when it will happen. But needless to say, there is a strong pipeline. There is a lot of ...
Can I just interrupt you there, sorry. So when I said acquisitions as referring to payments for the acquisitions that have been announced and yet to be made for that 1 and whether you expect some reversal of the working capital et cetera, going along to the second half of the year?
Yes. So organically, if you're referring to I think we should continue our deleveraging path organically. Even after considering the INR 4,500 crores of CapEx guidance that we have spoken about, I think working capital, it would have been presentation earlier in March, we had highlighted on about INR 2,000 crores of additional inventory. That number is down to INR 1,500 crores. So directionally, things seem to be improving.
As we synergize with some of the acquired assets we do expect quarter 3, quarter 4 to play out better. That's how traditionally, our business has been [indiscernible] have typically been better than quarter 1 and quarter 2. So with that construct, we do expect some amount of [indiscernible] happen. Vaaman, you want to add?
Yes. Look, I just want to reiterate that this is a really, really exciting time for us here at Motherson. We have patiently waited for the last 4 years waiting for this moment really in a sense where the customer is asking us to go and take up all these acquisitions. And interest rates were extremely low, and a lot of deals were happening. We were patiently waiting and deleveraging. So we have come down significantly because we knew that we have to grow at -- when the time will come, there will be opportunity for us to really do large acquisitions and increase our footprint in the customer portfolio, and that's what exactly is playing out. So it's not that we are looking at these numbers and saying the numbers have gone up significantly. This has been planned for us.
We deleveraged from our levels because we anticipated that the growth -- there will be a window of growth. And if you can understand, we are literally the last man standing in that sense, where the customers are saying, please look at some of these acquisitions and support, and we have the headroom to be able to do it. This was an event, which is really setting us up for the future. A lot of growth will come in. As you can see, we're putting a lot of investments for these acquisitions and the growth opportunities would play out in the coming quarters. I mean, 15 acquisitions in 12 months, that is a pace that we really haven't seen before. And like I said, we [indiscernible] and we are prepared for it.
Sure. The second question that I had was in relation to CapEx. So you have upgraded the CapEx number to INR 4,500 crores for this year. But this wouldn't include CapEx that you would incur for some of the acquisitions, which are yet to be completed there because there are some due to get completed, I think in 4Q or so, which will add another [indiscernible] or so in terms of revenue. So would it be right to assume that FY '25, we should look at a CapEx number, which would be higher than what some of those acquisitions will happen towards the end of FY '24?
Joseph, I think Vaaman highlighted 10 new greenfield [indiscernible] which we are setting up for which we are spending INR 1,500 crores. That's nothing to do with any of the acquired assets. So I don't think this is normal CapEx levels that our business will be carrying going forward. These are growth CapEx more specifically in India, we have given the trajectory of what's happening in India. If you see every OEM has announced expansions. And as [indiscernible] we don't need to be ready to be able to cater to these expansion happening in India.
Plus on the nonautomotive side, there is a great amount of traction to set up facilities in India and showcase our strength in there. So that's the organic part.
You're right to the extent that the assets which we haven't closed, the CapEx is associated with that is not embedded in this number. And as they close, we will have better color and we can come back to [indiscernible] with whatever changes that needs to be done around this.
But for the current set of business for the current quarter, we do anticipate this INR 4,500 crores this year should be more than sufficient.
[Operator Instructions]. As there are no more questions, I would now like to hand over the call to Mr. V C Sehgal for closing comments. Over to you, sir.
Thank you all very much. I would again request you to understand that this is a work in progress quarter. We are always seeing that traditionally, the second quarter is always where the holidays come in, in Europe. And then coupled with the UAW strike in U.S., it's sort of that [indiscernible] particular this thing. But I believe that the quarter was phenomenal, and the results, the teams worked very hard to deliver this super results that are there in front of us.
Thank you very much and wish you all a very, very happy Diwali [indiscernible]. Thank you. Bye-bye.
Thank you, sir. On behalf of Samvardhana Motherson International Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.