Ladies and gentlemen, good day and welcome to Sona Costar Q2FY27
Earnings Group Conference Call. Please note all participants lines are in the
listen only mode as of now. There will be an opportunity for you to ask
questions after the presentation concludes.
Please note that this call is being recorded. We request that you place your
lines on mute except when asking a question. Some of the statements by the
management team in today's conference call may be forward-looking in
nature, and we request you to refer to the disclaimer in the earnings
presentation for further details. The management will also not be taking any
specific customer-related questions or confirm or deny any customer names
or relationships due to confidentiality reasons. Please refrain from naming any
customer in your question.
Now I will hand over the floor to Mr. Kapil Singh, Deputy Head of Research
India and lead auto analyst at Nomura. Kapil, please go ahead. Thank you.
Kapil Singh:
Sorry, I think I was on mute. Yeah, good evening, everyone. To take us through
the Q2 results and to answer your questions, we have the entire management
team of Sona Comstar. Mr. Vivek Vikram Singh, MD and Group CEO; Mr.
Vikram Verma, Full-Time Director and CEO of Driveline Business; Mr. Sat
Mohan Gupta, CEO of Motor Business; Mr. Praveen Rao, Group CTO; Mr. Rohit
Nanda, Group CFO; Mr. Amit Mishra, Head Railway Business; Ankit Agarwal,
Investor Relations and Prateek Sachan, Head Strategy and M&A.
Sona Comstar – Q2 FY27 Earnings Call
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I will now hand over the call to Vivek for his opening remarks and the
presentation. Vivek, over to you, please.
Vivek Vikram Singh:
Thank you, Kapil and welcome, everyone. There are times when everything
comes together in perfect synchronicity, this was that quarter. Q2 was almost
a perfect quarter for us across all metrics- financial performance, new order
wins, technology and new products, cash flow generation, and our total
quality management.
We delivered our highest ever revenue, EBITDA and PAT. BEV revenue also
reached an all-time high, and for the first time, contributed more than half of
our automotive revenue. We commercialized 3 new products, the most we
have ever done in a single quarter. We also recorded our 3rd highest ever
order additions in a single quarter, with wins spanning across almost every
major product segment. Last quarter we had outlined, as you'd remember,
our ambition to grow 10x over 10 years under our Sona Comstar 2.0 vision. Q2
gives us much higher confidence in our ability to deliver on that ambition.
But as always, while talking to our shareholders, let me begin with the
challenges.
So let me start with addressing the margins upfront. Last quarter, I had spoken
about margins improving on cost passed through coming through from
customers. However, this quarter, the continued margin pressure has been
there, but it's mainly driven by change in product mix. Traction motor
demand has significantly exceeded even our own internal expectations. The
business has grown almost 50% quarter on quarter. That has obviously pulled
down the overall margin percentage a little bit.
Inflation was and still is the second factor. The war in West Asia continues to
cause pressures with further increases in steel, copper, and oil derivatives.
Freight rates have also risen sharply, they've nearly doubled from the previous
quarter's level. Strong growth and better operating leverage is what has
helped us absorb most of these pressures and continue to at least hold the
line on margins. Looking ahead, stronger traction motor demand is changing
our mix and broader inflation linked to West Asia remains uncertain. Both
these factors are largely beyond our control, which makes near-term
predictability a little difficult. However, it is mostly good news because
absolute EBITDA continues to improve at a very high clip.
So let me return to the positives and there is a lot of positives to talk about this
quarter. So let me start first with demand. Demand for EVs continues to
accelerate. Our EV business grew by almost unbelievable 129% year on year.
In India, strong demand for electric 2 and 3 wheelers was the biggest reason.
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This is what drove a very sharp increase in traction motor sales. Globally, the
shift towards EVs has supported the strong growth in our EV driveline revenues.
And suspension motor, which is our fastest growing product driven by its
success in China, is also in an EV customer. So we're seeing growth across
products, across markets, and across vehicle segments, and frankly it shows
the strength of the EV portfolio that we built.
Second, our business development efforts saw many meaningful wins in this
quarter. We secured our 3rd highest order wins by value and ended Q2 with
the 2nd highest order book in our history. These wins cover almost every major
product category like I mentioned, from differential assemblies and gears to
traction motors, controllers, starter motors, sensors, as well as railway products.
Third, we commercialized 3 new products, our highest ever number in a single
quarter. I mean, most companies would count themselves fortunate if they
have 3 new products in 3 years, for us this is a quarter. We've introduced a
helical limited slip differential, air springs for railways, and rear radar sensors
for two-wheelers, and Praveen will talk about these in more detail in his
section.
Fourth, cash. We delivered our highest ever free cash flow from operations.
In just 6 months of this year, we have generated more than 1.5 times the FCFO
we generated in the entire FY26.
And lastly, and absolutely not the least, I'm particularly proud that our
driveline division has won the 2026 Deming Prize for Total Quality
Management. Vikram, Balaji and his team have worked towards this for nine
long years and improved processes and systems manyfold along the way. So
take a bow Vikram, Balaji, wherever you are, and many, many
congratulations to all of you.
Slide 5
Okay, now let me take you through our Q2 performance. Revenue grew 35%
year on year, while EBITDA net profit increased by 23% and 29% respectively.
The business has grown quite strongly and well, frankly, ahead of our own
expectations, so I want to thank the entire team for delivering this
performance.
Turning to BEVs. We continue to see electrification growth, with growth
accelerating to 129% year on year. For the first time, BEVs contribute more
than 50% of our automotive revenue. Even if you look at it sequentially, BEV
revenue has grown 40%. Even as US EV market, the deliveries have broadly
remained unchanged. This demonstrates that our EV business is becoming
more diversified and less dependent on any single customer or single
geography.
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On a personal note, our Ebitda this quarter was 356 crore. When I joined this
company, that was roughly our revenue for the whole year, to now generate
that much, ebitda in a single quarter is a meaningful milestone for me, and
also a reminder of how far we have come, even for people following our
public journey. When the IPO happened, I think this was roughly our annual
revenue that we now do in a quarter. For H1 as well, the numbers are strong.
Slide 6
We delivered strong growth across every single financial measure. Our
revenue, Ebitda & PAT grew by 43%, 34%, and 36% respectively. Our return
ratios have also improved, and we expect them to continue improving, and
Rohit will walk you through the details of this in his section.
Slide 7/8
Now we come to our strategic priorities. And there is one change I want to
highlight here. We are broadening our first priority from electrification to EPIC
mobility. For the sake of repetition, this stands for Electric, Personalised,
Intelligent and Connected solutions. As we have started winning orders in
robotics, physical AI and other intelligent and connected solutions, it is the
right time for our stated priority to reflect that broader opportunity and that
broader change.
Slide 9
So let's now look at it on a combined basis. Our EV business obviously has had
a very strong quarter. The first half BEV revenues have crossed the 10 billion
mark. This revenue share was, I think, 30% in H1 last year, and now it's 48% for
the first half. We also secured 4 new EPIC programs during the quarter, 3 in
BEVs and 1 in intelligent and connected solutions. So at the end of H1 FY27,
we have 75 EPIC programs across 37 customers. Of these, 44 are in
production and 31 are yet to start production.
Slide 10
Let me also touch upon some of the key order wins of this quarter in EPIC. First,
we won an order for our new helical limited slip differential. It's quite a
mouthful, but it's a far more improved product. It is for an existing EV
customer, and it helps us, be first, and it also gives us higher penetration in
another geography. It is easily among our most advanced and highest
valued driveline products for cars, and this win reflects a lot of effort from our
engineering team to deliver on this.
Second, we won an order for a rear radar sensor, this is for a two-wheeler
customer in India, and for us, this is a new customer. This is the first time we
are working with them. This expands our two-wheeler offering, of course. It
adds radar sensing to our traction motor and controller portfolio, so it opens
up a new market.
Third win is for an integrated motor controller. This is from an existing EV
customer, and we also see our ability to offer more integrated products.
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Fourth is additional traction motor volumes from an existing customer where
we have got a revised PO with increased volumes, which also shows our
ability to keep penetrating and increasing wallet share even with existing
customers.
Slide 11/12
Don't want to leave our old and ICE businesses behind. I know our new horses
are running fast, but our old horses continue to run at speed as well. So we
won 3 new notable ICE programs, I would say. First one, actually, the second
one is the entry into differential assembly for ICE passenger cars. So as you
know, we've been fairly successful in EV differential assemblies. With this one,
we are starting for ICE as well. This was an existing customer for differential
gears who have now converted into a differential assembly customer. The
initial order size might look small, but if you look at the TAM that it opens up
for us, it is a very large market for a product that we already make, and in the
EV segment, we are one of the world leaders.
There is also a starter motor program that is mentioned. This is for an existing
customer and several, several new differential gear programs across the
board in North America and India. So what I'd like to say is if you take all of
this together, these wins are improving not only the quality of our orderbook,
but also the breadth of our orderbook across powertrains, geographies,
customers, as well as product categories.
Slide 13
So if you look at the quarter as a whole, we won 36 billion worth of new
business, which is the 3rd highest quarter for order additions. And unlike those
previous times, it is not anchored or moved on just one very, very large order.
It is distributed across several wins. And thanks to that, we have closed Q2
with a net order book of 251 billion. As we continue to win new business in EVs
and albeit small, but the robotics and physical AI orderbook also continues
to be built. It's 4%, we are hoping in the decade to come, this becomes what
EV has been for the last decade for us.
Slide 14/15
Let me now close my section at least with the diversification piece. We
continue to see meaningful progress across all fronts. When we made the
strategic decision and I wrote in my annual report letter to shareholders
about our look east policy. Eastern markets contributed about 1/3 of our
revenue at that time. This quarter, if you look at that chart, they contribute
almost 2/3 of our total revenue. And it is quite encouraging to see how quickly
we have executed on that decision and pivoted so meaningfully in just 2
years.
Sona Comstar – Q2 FY27 Earnings Call
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On the product side, we're seeing progress across our product portfolio. EV
Suspension Motors was our fastest growing business this quarter, and I think it's
already reached 7%. So if you look at railway brake system, suspension motors
already equal to that for the first half. Newer products continue to gain scale
and our established differential gear and differential assembly businesses also
continue to grow fairly strongly. So if you look at DA plus DG together, you'll
see that on a year to year basis, 37% increase has come in our old traditional
business as well.
And I think the biggest driver for this diversification has been new product
development. And If I were to put that into perspective, a way to look at it,
or the way at least I look at it, traction motors and suspension motors were
both developed through our in-house R&D completely organically in just the
last 4 years. And together, if you take them, they have an annualized revenue
run rate of 1400 crore. This is roughly equal to the revenue of the entire
company in FY21. So we built almost another company just through two new
products, and that's the power in engineering and the ability to continue to
make new products. And this compounding is what is central to not just Sona
Comstar 2.0, this is what led us from where we were to our first decade, and
we very strongly believe that this is what will lead us into the next decade as
well.
There is not much to talk about in the market segment. I think apart from the
obvious one that's staring at everyone, that the two-wheeler, three-wheeler
are now 14% of our revenue, beyond that, the split of 70, 30, 70 auto, 30 nonauto continues. And technology, again, I would like to re-stress that
technology is the reason we are able to deliver the financial results that we
do. And that is the bedrock of what we will continue to build. And with that
almost perfect segue into technology, let me hand over to our group Chief
Technology Officer, Praveen, for the tech update. So over to you, Praveen.
Praveen Chakrapani Rao: Slide 16/17
Thank you, Vivek. Welcome, everyone. I would like to take you through our
technology roadmap. As you all have noticed, we have commercialized 3
new products this quarter, helical limited slip differential for passenger cars
and SUVs, air springs for railways, and a rear radar sensor for two-wheelers.
The first product is helical limited slip differential. A limited slip differential or
what we call LSD improves vehicle traction by limiting excess speed
difference between the two driven wheels. Helical limited slip differential is a
type of LSD that uses parallel axis helical pinions interacting with the side
gears to generate internal axial and radial forces. This passive mechanism
delivers smooth, progressive torque transfer without a conventional clutch
pack or external actuation. LSDs are typically used in performance vehicles,
off-road SUVs, and 4x4s.
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The next product is air spring, air springs are used in most modern railway
coaches, including LHB coaches. These coaches use a two-state suspension
system. The primary suspension uses coil springs to filter high frequency track
vibrations, while the air spring forms the secondary suspension connecting
the bogie to the coach body. Airsprings enhance passenger comfort,
maintain a constant ride height, and isolate body movement. Together with
the dampers, which control oscillations, they provide a smoother and safer
ride at high speeds.
The 3rd product is a rear radar sensor for 2-wheelers. 2 wheelers are amongst
the most vulnerable vehicles on the road, making timely warnings critical to
rider safety. A rear radar sensor does precisely that, by warning the rider of a
potential rear end collision or a vehicle in a blind spot. It provides valuable
time to maneuver to a safer position. As a pioneer in automotive radar, we
recognized early the potential for applying this technology for two-wheelers.
Together with safety systems this product can make a meaningful
contribution to improving road safety. With this, I turn to our group CFO Rohit
to update us on the financials. Over to you, Rohit.
Rohit Nanda:
Slide 18/19
Thank you, Praveen. A very good day to you all. It's my pleasure to share our
2nd quarter and H1 results for FY27 with you. First, the quarter's results, our
revenue for the quarter grew by 35% year on year to ₹1,546 crore. Compared
to the previous highest revenue of 1310 crores, which was clogged in the last
quarter only, it was higher by 18%. The higher revenue was led by 129% growth
in our BEV revenue year on year, which now constitutes 51% of our
automotive product sales. Our EBITDA for the quarter grew by 23% to 356
crores. EBITDA margin was 23%, which was lower by 2.3% compared to the
same quarter last year. The margin was lower primarily on account of change
in the product mix and higher input prices. Which were partially offset by a
positive impact of the operating leverage. Profit after tax grew by 29% to 223
crores. PAT margin was 14.4%, which is lower by about 0.5% compared to last
year. We had a positive impact on the PAT margin from a lower depreciation
percentage, whereas the margin was pulled down by a lower EBITDA margin.
Moving on to the H1 results.
Slide 20
Our H1 revenue grew by 43% year on year to ₹2,857 crore. Our BEV revenue
grew by 119% to 1,042 crores and constituted 48% of our automotive product
sales. Our H1 EBITDA grew by 34% to 659 crores. EBITDA margin for the half
year was 23.1%, which is lower by about 1.5% compared to the same period
last year. The reasons were largely similar to what I just stated for the quarter,
so primarily changes in the product mix and higher input prices and a positive
impact of operating leverage which helped us offset part of this impact. Profit
after tax grew by 36% to 404 crores. PAT margin was 14.1%, which is lower by
about 0.5% compared to last year. We had a positive impact on the PAT
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margin from lower depreciation percentage, whereas it was pulled down by
a lower Ebitda margin and lower net finance income in the first half.
Slide 21
Moving on to the cash flow slide. This has been a high cash yielding first half
for us as Vivek has already briefed you. We generated 594 crores of cash
from operations, which was 90% of our EBITDA for this period. This was
supported mainly by release of 44 crores from working capital, despite a very
high revenue growth in this period. Net of capex spend of about 148 crores.
We generated 446 crores of free cash flows, which was more than 50% higher
than what we generated in the last full financial year. Other key movements
in the cash flows included dividend payment of 112 crores. There were cash
inflows on account of additional borrowings of 224 crores, there was an inflow
on account of ESOPs exercised by employees, about 108 crores and finance
income of about 32 crores. Consequent to all these movements, as of end of
September we had cash and investments worth 1,966 crores. This brings us to
the last slide which is on the key ratios.
Slide 22
Now here, all these ratios except for VA to employee cost showed
improvements in the first half of the year. In case of VA to employee cost, the
ratio, there is a decline compared to previous period, mainly due to change
in the product mix in favor of assembly products. Our return ratios continue
to show improvement. Post absorption of QIP fundraised impact, the
incremental returns from businesses are now supporting this improvement
every quarter. Net debt to ebitda ratio continues to be in the negative
territory for obvious reasons. In terms of the turnover ratios, both these ratios
showed significant improvement in the first half due to a robust revenue
growth. In case of working capital turnover ratio, though, it was also
supported by release of working capital, despite a significant jump in
revenue. With this, we've come to the end of our earnings presentation, and
I'll now hand over the proceedings back to the Nomura team.
Moderator:
Thanks everyone. We will now open the floor for the Q&A session. If you wish
to raise a question, please 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 question via Q&A chat box addressing to all panelists.
Please be reminded to keep your questions to a maximum of 2 questions. If
you have more questions, please return to queue. Thank you.
We have a question from Arvind Sharma. Hello Arvind, please go ahead.
Arvind Sharma:
Hi, am I audible? Great, good evening, sir. Thank you so much for taking my
question. The question is on the suspension motors business, which has seen a
very strong growth, since Vivek said, you know, almost 7% of the revenue.
What is that key driver for this business to see such a strong growth in this
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quarter, and is it possible to shed some light on the order pipeline in specific
segment?
Vivek Vikram Singh:
Thanks, Arvind. The question is interesting. The problem is the answer is not
very linear. See, when a new product is launched in the world, and this is the
first of its kind fully active suspension system. It is very hard to predict the
trajectory. The first time it was launched by our end customer, and this is
public information, so I can share it was with Nio. Their first model that it was
launched on did not do so well, but that wasn't to do with this product it was
to do with that model did not do well because of pricing or what the
consumer opt. When they launched it in their new model, it has exceeded
everybody's expectations on how well that new model has done. So
eventually, regardless of how good we are, how good our OEM customers
are, eventually, the consumer decides what all of our fates are. And that is
the thing with initial, but now that we have seen the market appreciation, the
market adoption, this would be a typical S curve. The order book so far is
limited to that one customer across, now it will span across variants. There are
significant conversations going on with other OEMs and as those orders are
won we will obviously report them, but the future looks fairly bright. When
customers realize that adding a new technology product helps them sell
more vehicles, that's when you start doing well. So I know I can't give you
anything definite because I don't know anything definite in this. It looks bright,
how bright we don't know but it has the potential to be massive.
Arvind Sharma:
Got it, thanks, that’s very helpful. Anything that you can share on the Denso
tie-up or is it too immature to talk about it right now?
Vivek Vikram Singh:
I think for last quarter we shared the announcement of JV is now we have to
finalize and close those. So, JV 1 of course has it’s legal timeline so I think.
Rohit & Sat, who would like to take this up?
Rohit Nanda:
So we're targeting to close this JV 1 part of it which is carving out of the
business by end of December because of the year-end holidays there is a
possibility it may spill over to January but that's the kind of timeline we are
looking at. JV2 maybe i'll request Sat to sort of chip in what sort of timelines
can be communicated
Sat Mohan Gupta:
Sorry, I was on mute. JV2 has not yet formed up but we are targeting to close
and have it sometime in the 1st half of calendar year 2027.
Arvind Sharma:
Got it sir. Thank you so much for taking my question. That's all from my side sir.
Sona Comstar – Q2 FY27 Earnings Call
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Vivek Vikram Singh:
Just a clarification, the holidays are not for us. We don't really go on holiday
in the winter but our advisors and partners sometimes do, so that does make
us slower than we would like.
Moderator:
Next question is from Chandramoli Muthia.
Chandramauli Muthia: Hi, good evening and thank you for taking my questions. I have two
questions, the first question is on the competitive situation in Europe. We have
seen our legacy businesses grow and pick up in the first half of this year, after
a slightly easier competitive situation we've been facing there. I just want to
understand how that's shaping up?
How long do you expect the legacy business to continue to grow at this
healthy clip before possibly entering more modest mature growth rates on
that part of the business similar to what it has been historically?
The second question is just on robotics. You have mentioned that Sona might
have aspirations to make actuators, India as a market historically maybe has
not had as much of legacy in making actuators. So I just want to understand
what are some of the internal milestones that we have in mind before we can
make robotics-ready actuators? Thank you.
Vivek Vikram Singh:
Sure, Chandramoli and it's good you asked me this. I will try to say this without
sounding immodest. India does not have the history of people doing 9% type
world market shares in any product. So many products that you pick of ours
will have a high large world market share. That you can say for any single
product. You could say we shouldn't even be successful at motors.
No Indian company has had that market share, even if we take a nascent
product like Traction
Motors and you actually do the market share ex-China and you'll find that it's
about 9-10% of the world even in traction motors this company from India.
So just the fact that it hasn't happened does not have any bearing on what
could happen. And technology and engineering are not determined by
where you are from or who you know, they are truly democratic and if you're
good you will. There is also no legacy of someone making a new product that
goes into a vehicle and then it does exceedingly well in China from India. So
we have faith in ourselves we will continue to believe in ourselves and
continue to believe in our engineering and we will try. More often than not
we have succeeded but that we will leave to god to determine and faith to
determine.
The first question is interesting, in Europe we are gaining more business and
we’re seeing a lot more traction as a lot of European OEMs want to have an
alternative supply chain to China and that would be good for India overall
but very good for Indian companies who can meet global quality standards
and have their own IP and design capabilities.
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Coming to how fast we can continue to grow legacy business, I would say
for a fairly long time, I mean in differential gears as we are barely about 9%
of the world, in differential assemblies now that we make ICE & hybrid
differential assemblies also, we should take it as a total we are barely 3% of
the world, I think it's many, many years before we say oh we are running out
of room to grow. I don't think we are there, that we have to start thinking that
we are so big that we will start plateauing in growth, that's a very long time.
Chandramauli Muthia: Got it, that’s helpful. Thank you very much and all the best!
Moderator:
Next question from Gunjan Prithyani. Gunjan please go ahead.
Gunjan Prithyani:
Hi, thanks for taking my question. First question is on the traction motor
business, I mean pretty huge growth in this quarter, I think it is far ahead of
where the industry growth has been, I am just trying to understand you know
how do I think about this business in terms of the scale up. Is it the larger wallet
share that we are getting with the existing customers, maybe a little bit colour
on three wheeler business adding in more meaningfully now that you could
share more insights on how big that business is and was there any new
program which commissioned in this quarter, a little bit color of this quarter
and how do I think because there's clearly a significant change in output in
terms of the revenue acceleration that we've seen with the traction motor
business.
And the second question is on the differential assemblies business again, after
many quarters meaningful improvement in the differential assembly business
as well. And you mentioned that NA North America's market has been
stagnant in terms of overall EV numbers, so if you can give some color on
what led to this? Is it new program or is it geography mix change? Some
thoughts on that.
Certainly, so while I'll invite Sat to answer the details of why the motor business
has grown because I don't want to steal his thunder. But Gunjan how to think
about it is very optimistically and very positively, that’s the answer for that. Sat
can give details on what has happened this quarter
Vivek Vikram Singh:
Sat Mohan Gupta:
so Gunjan, I mean for motor business it's both. I mean there is an increase in
the wallet share as well as our existing OEM business has grown compared to
the previous quarters, so it's contributed by both.
Second is that I mean we have got good traction on the 3 wheeler business
in addition to the 2-wheeler business and ya, going forward it’s looking pretty
good because we will be launching few more products in this quarter and
but overall, it's a combination of market growth as well as the wallet growth.
Gunjan Prithyani:
Any color on the 3 wheeler? Like how significant is it of the overall traction
motor business now? I think that was pretty small so far, we just knew it was
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supposed to see a new program addition, so of the number can be
quantified how big it is?
Sat Mohan Gupta:
May not be the numbers but yes as I said that we are launching another
product in this current quarter so that will further increase our share in EV
business.
Vivek Vikram Singh:
And Gunjan, not fair to keep as a sub segment, you know how many sub
segments will we continue to keep tracking then, it is meaningful as you know
if you look at the programs we have won and the customers we've won, our
market share is substantial in three-wheeler in electric. So as those programs
start ramping up, they should kick in.
Second to your point that why is it higher than industry growth?
You see any time when there are difficulties for good reasons or bad reasons,
bad reasons like the magnets problem was there, because of our technical
capability we were able to circumvent that and go to light rare earth and
scale up faster and gain more. Even in very high demand
situations when people are struggling with supply chain, a lot of people can't
ramp up their production that fast. We have the capability and the capacity
available to do that with agility.
So whenever OEMs are challenged, whenever it's not business as usual in fact
those times are best time for us to gain wallet share, so that is in a nutshell why
this has happened.
On differential assemblies, all three of our large customers in that space in EV,
all three of them have picked up this quarter.You know last year so many bad
things were happening. I started with Q2, there are quarters where everything
comes together in a perfect synchronicity. Q1 last year was when all the bad
things in the world came together in a perfect negative synchronicity. And
life teaches you and humbles you that there are times when even things that
are very predictable and seem to be 100% certain can go away from you.
This is just reversion to mean, to be honest. Otherwise a lot of this should have
been there always. So it's growing.
I mean. It was not really normal what was happening at that time and we
were on the wrong side of any luck or fortune based decision at this time
which has corrected itself.Again second is always our performance if you are
a supplier who's reliable, who does high quality product and can support
customers through thick and thin, you over the medium to long term will
always win.
Gunjan Prithyani:
Alright, I'll join back the queue. Thank You so much!
Moderator:
Next question from Basudeb Banerjee.
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Basudeb Banerjee:
Hi team congrats and Vivek with 356 crore Ebitda per quarter hoping you
start delivering 356 crores non operating income per quarter down the line.
Just to understand with two quarters of 23% kind of margin and rising mix of
motor controller 2-3 wheeler business, rising orders from robotic segment,
railways moving up the curve. Leaving aside that commodity situation, from
a 2-3 year perspective how to look at the margin mix from your earlier
guidance of 23% to 25% range as we know motor controller business relatively
is a lighter margin business so any change from that perspective with the
changing mix?
Vivek Vikram Singh:
So first Basu, ‘apke muh mai ghee shakkar’ and second I don't think there is
any reason to change our range, I think 23-25 is fair. We are genuinely in
exceptional inflation at this point. I mean if you look around in the world
regardless of whether you are in manufacturing or not, just look around in
your daily life you'll realise how bad inflation really is. In my career, I've not
seen inflation like this. It can't continue at this level for too long without major
disruptions in other things.So I do not see any reason to change that range.
Rohit you can add, I mean we have done an exercise on how the next five
years will look like and we kind of have an idea on where margins stack up,
so Rohit can shed probably more light on this
Rohit Nanda:
So, hi Basu. I think for now like Vivek said, holding on to 23-25% range makes
sense because like we have already said there is a large part being played
by the product mix also so you know for us also we project numbers and like
Vivek said this quarter we've seen, let’s say, traction motor growth faster than
we had anticipated. Now, the way the product mix will eventually move will
also be a determining factor given that you know it's transparently known
that let's say one particular product line makes lesser margins so I think it is
going to be a mix of that. Material prices if they continue to be this high if
they are flattish I think we should be able to hold on to this margin because
eventually with the lag of material prices pass through to the customers the
only scenario where it deteriorates is if the material prices continue to inch
higher. That also seems improbable because beyond a point things start to
break down, so I would say let's say if the world is operating in a normal
fashion then we should probably around 23% I don't hold us to like every 10
or 20 bps, but I think that's probably the ballpark, the range we see at least
given how we see the product mix panning out.
Vivek Vikram Singh:
Basu, in short, unless oil goes to 150 when all bets are off, we think we will hold.
Basudeb Banerjee:
Understood. Second question, Rohit sir in the call in the beginning you said
cash and liquid investments at 1900 cr odd, so is that net or absolute?
Rohit Nanda:
That's gross Basu, net would be between 1400-1500 crores.
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Basudeb Banerjee:
So say 1400-1500 crore second half of this year another 400-500 crore of FCF
and by the year end 900 crore from DENSO so you will be sitting somewhere
around 2800 to 3000 crore net cash potentially. So, just to understand like
since IPO we have only seen Novelic as a M&A or some substantial kind of a
thing.
Rohit Nanda:
You are forgetting railways, Basu.
Basudeb Banerjee:
No no, in core business other than railways. So like aerospace is a segment
where everybody is looking at. So, how to understand the deployment of
such huge size?
Vivek Vikram Singh:
So Basu da, again very happy that what you say comes true but you're
forgetting that what we get from Denso we'll pay tax on. We will pay tax in
normal cause also we also have capex we also will have some working
capital and JV2 also has some you know amount that we will block for the
capex for that. We will have a substantial cash balance at the end of the
year and M&A is the right way to look at it. Just because everyone is doing it,
is not the reason we will do it. We will do it if it makes sense for the company.
As you know we are very selective about M&A We have only done three in
last decade. And for us it has to be and I'll again repeat the four filters that
we use to identify this.
(1) A product that we believe will continue to be in these devices, vehicles,
devices whatever it may be for at least the next 15 years.
(2) It should be something in which we can have some kind of market leadership
either today or in the future that we believe we can be amongst top 5-10 in
the world. World class is the only class we want to be part of.
(3) It should make financial sense for us that it should have healthy margins. It
should be margin accretive, return accretive and it should add value to us.
(4) it should be something that we believe is good for the world. And sometimes
the definition of good is on how we define what is our moral code, right.
Capability is what we will look to acquire not capacity, not customer and
100% not because other people or everyone is doing it. I think the surest way
to destroy shareholder value is to follow the herd and say everybody's doing
it, I must also do it. You don't win that way you do not become leaders like
this. And last but not least we are happy to be patient. According to our
calculation, cash to ebitda ratio as long as it doesn't go above 1.5. we don't
have to rush into any decision. So we'll be patient whatever we do will very
deliberately and we would do what is best for every single shareholder of this
company.
Basudeb Banerjee:
Great to hear that, thanks
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Moderator:
Next question from Pramod Kumar. Pramod please go ahead.
Pramod Kumar:
Yeah thanks a lot everyone and congratulations on the excellent set of
numbers, and Vivek and team congratulations on the Deming award as well.
I think historically the companies which have got the award in India have
gone to do great stuff for their industry, so hope that journey starts for us. It is
already there. On that count, my question is about humanoid robo
opportunities sir. Because you've previously stated that you plan to target 60%
of the build of material in this industry and this is and I look at the kind of
statement coming from SpaceX Elon Musk on the kind of potential here. Just
trying to understand, if you can help us understand, what is the kind of R&D
spend we are doing here? What is the kind of timeline in terms of say product
validation status and what are the capital allocation plans for this dream of
yours to materialize? And, are you also positioning your existing global EV
driveline infrastructure to act as a supplier for such large projects with your
existing customers, if you can just share your broad thoughts there.
Vivek Vikram Singh:
Thank you Pramod for that very leading question. As you know, we do not
mention customers' names. Our aspiration of course is to be global suppliers
and you are right 60% of the BOM is something we have capabilities in. If you
take the BOM out and look at the software part also, there also we have
enough capability in the perceptions stack. So hardware as well as
perception we have capabilities in both and when we say robotics,
humanoid is one form factor, but one is right in front of you on the screen,
AMRs which actually by units maybe a much bigger opportunity set.
Intelligent industrial robot is another opportunity set and a Robotaxi, frankly,
is the deployment of physical AI.
It is far more complex frankly than, apart from the degrees of freedom in the
hand if you look at how fast a Robotaxi has to maneuver and what a varied
environment it has to maneuver it is quite complex. So all those are
application sets. I think we have the capabilities, we have orders, it's still small,
4% of a 250 billion order book is I would say small compared to our size, it will
grow. As percentage of R&D, I mean when we give ranges for EBITDA etc
those are considering all these facts. We are spending on R&D during this
time, actually considerable sums for our standards. And everything is inhouse. A lot of this R&D is just our time so the Novelic teams' time, our
driveline’s teams’ time, they are doing a full-time job which may be different
and also you know devoting a lot of their management bandwidth and time
to these technology developments. It will continue, the capex as you know
we had declared last quarter I think that 62 crore of capex is for this area.
That should cover it and I will invite you to Bharat Expo whenever that
happens, hopefully we'll show you some of these things and then you can
visualize much better what is it that we are talking about. Powerpoint is
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powerpoint at the end of the day. To see it, is to believe it. Bharat Expo is I
think in February, we should be able to demonstrate some of these things
including what is on your screen.
Pramod Kumar:
And Vivek one thing, at least if you were to look at the next 3-4 years, which
year do you expect to be the big inflection point for this business of yours
because the scale is humongous. So I'm just trying to understand which year
according to you, when it becomes a sizeable part of your business in terms
of order wins?
Vivek Vikram Singh:
It’s a hard question, Pramod to answer. I don't know is the real answer. EV if
you'd asked me in 2016 and I was much younger, I was just 36, so I was super
optimistic I said two years and what actually happened was 2016 2017 2018
2019 it didn’t really grow, it was 1% of our revenue even in 2019 and now it's
51%. The thing is when these curves start it's very hard to predict and now that
we have public listed and this is a recorded call, you know, you can always
hold me to it that that day you had said, which is why we don't want to stick
our neck out on this one. Whenever it does come, the curve will be very
steep. That is something I can guarantee. I just don't know when that point is.
The point, I think Kapil can weigh in, or he's shared a couple of reports with
me, I hope he can share with you guys as well. Although you guys compete
so I don't know if you will read his reports.
But with physical AI models becoming open-source with the cost of compute
going down by about a thousand times, the cost side is moving very, very fast
on all physical AI devices. What is not moving as fast is the simulation to reality
in deployment in real world environments. So one of the things we are doing
right now is that AMRs we have developed, we are deploying as we speak
on our factory floors to develop those use cases, get that real work training,
get that as a feedback, loop and improve the products. So, we don't know,
is the short answer, long answer I have already given but whenever it
happens it will be super steep.
Pramod Kumar:
Ok, final one on the railways. The growth outlook given that we are launching
new parts, new components and we have stepped up the R&D upwards
there. What is the growth outlook on this business for the couple of years?
Vivek Vikram Singh:
Since we are in Amit Mishra's home, in Faridabad, in his factory, let him answer
this one.
Amit Mishra:
Hi Pramod. We don't share business-wise growth outlook, or we don't give
forward growth guidance but I can talk about growth levers, so we have a, I
think the product addition or new product introduction will be the main
growth driver over the next three years. We are working on new products
within brakes, couplers, suspension. This quarter we supplied air springs and it
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has just started and will ramp up. Within this year we have supplied first batch
of HVAC systems to customers, so that will also go up in the coming quarters.
Electric panels have started in a small way, that's also in the ramp up. So we
have multiple products which have started or gone into serial production and
we have orders. According to customer requirements, we will ramp it up over
the next few years. And we have enough in the product pipeline to support
our growth over the next five years. That's what I can share. It is more
dependent on whether we are successful to launch these products on time.
Vivek Vikram Singh:
Kapil Singh:
Pamod, in short we've already given our aspiration which actually does imply
a 25% CAGR. There are three stars we have Vikram, Sat & Amit, and
sometimes some will shine brighter than others and it'll be different quarters,
different businesses will have different growth rates, but overall as one
company I think we feel good that in the medium term we should be able to
stick to that CAGR.
I'll just take a couple of questions from the chat box. The first one is what is the
scenario with heavy rare earth metals? Will the company switch back to
heavy rare earth for performance motors?
Vivek Vikram Singh:
They're not available, it's a fairly hypothetical question i'd say because as you
know the restrictions on export of heavy rare earth materials from China
continue, so in that scenario it is not possible, if they were to be once again
abundantly available we would of course, try and use it wherever it is
imperative to use it. But again right now that question we haven't thought of
because they're not available and right now we don't see any signs that
those restrictions will be eased.
Kapil Singh:
Second question, on margins don't we have passthrough arrangements with
our clients that can incident margins?
Vivek Vikram Singh:
Yes, we do. Rohit you want to explain the numerator/denominator effect on
even if margins are passed through why percentages continue to drop?
Rohit Nanda:
Ya, so like we said before, there is a pass through mechanism with the
customers but there will be a lead lag effect essentially. The prices will go up
first and then with the lag, the prices get passed on to the customers. So one
is that impact; secondly even when the full pass-through happens because
numerator and denominator change by the same value, so, the delta to
both numerator and denominator is same, so arithmetically the percentage
margin tends to come down.
So, I think that's the point, whenever there is an inflationary trend in the
material prices these are the two impacts generally once the prices start to
go up immediately there is a margin impact because of the lagged effect
with which the pass-through happens and once the price is stabilized there is
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an impact because of the arithmetic and as and when prices start to come
down the reverse also is true, it comes into the reverse mechanism so the
margins will improve as and when the material prices start to come down. So
that's how it functions.
Vivek Vikram Singh:
Yeah just to illustrate on a very simple mathematical basis all things being
equal, if the price is 100, 75 is the material cost and 25 is margin. And let's say
75 increases to 80 and you pass it through, and you get it back. What it is, is
now you can still make 25 but you make 25 divided by 105 and hence your
margin as a percentage goes down. So that's what happens in these
inflationary situations.
Kapil Singh:
And the last question for the day is, Robotics & Physical AI, are there any plans
to deploy humanoid robots on Sonacom’s production floors for repetitive
tasks?
Vivek Vikram Singh:
We are evaluating. Let me be short about it, we are evaluating it and we are
evaluating where it makes business sense. It has to be seen with the lens of
when will the pay back reap? Like any machine you decide on, this is also
one. So this is a business decision as you would evaluate any machine. It's the
same way we'll evaluate an industrial robot and the same way you will
evaluate humanoids. But we are evaluating it. There may be areas where the
first area will be tasks that are unsafe or low acceptability to human beings
are the first task actually that would come, that if humans cannot do it is a
better thing for a machine to do it. Replacing humans just for the sake of it is
not really anybody's target in a country with a large population like India. That
should also not be your target. It has to make business sense and it has to be
a degree of return higher only then would we actually evaluate it.
Kapil Singh:
Okay, thank you team. That was the last question for the day. Vivek I will ask
the floor to you in case there are any closing remarks.
Vivek Vikram Singh:
Yeah, one is that you do not have any questions this quarter.
Kapil Singh:
My peers have asked a lot of interesting questions so in the interest of time,
otherwise you know.
Vivek Vikram Singh:
So thank you everyone for attending. As you can see, our financials were so
good and heavy that Rohit and Vikram are on one screen sharing the screen
to give those results.
And thank you so much for asking us good questions, please if you ever have
any specific and actionable feedback let us know we'd be happy to
incorporate it in our presentation, in our communication and what we do
with others. Thank You!
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Kapil Singh:
Thank you everyone and have a good day.
Moderator:
Thanks everyone, we will now conclude this call. If you have any follow up
questions, please feel free to email your Nomura sales representative or
corporate access team. You may now drop off the line.
Disclaimer: This is a transcription and may contain transcription errors. The transcript has
been edited for clarity. The Company takes no responsibility for such errors, although an
effort has been made to ensure a high level of accuracy.
Sona Comstar – Q2 FY27 Earnings Call
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