Sansera Engineering Limited (SANSERA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Sansera Engineering Limited Q1 FY '27 Earnings Conference Call. Before we begin, a brief disclaimer. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. B. R. Preetham, Executive Director and Group CEO. Thank you, and over to you, sir.

Thank you. Good morning, and welcome, everyone. On this call, I'm joined by our CFO, Mr. Vikas Goel; CEO of ADS division and our newly appointed Executive Director, Mr. Hari Krishnan; CEO of our Automotive Division, Mr. Rahul Kale; and our Investor Relations advisers, SGA. The results and the presentations have been uploaded on the stock exchange and the company website. I hope everyone has had a chance to review them. We started FY '27 on a very strong note, delivering [ our ] highest ever quarterly revenue while maintaining healthy profitability. Our quarterly revenues crossed INR 10,000 million milestone, reaching INR 10,213 million, representing a year-on-year growth of 33%. EBITDA and PAT margins remained resilient at 19.2% and 8.6%, respectively. That said, amidst a challenging geopolitical environment with significant cost inflation, Sansera was able to maintain its profitability and deliver double-digit sales growth across segments. Let me take a minute to talk about the broader industry trends that impacted us. On the domestic auto side, our OEM customers across the board are talking about hyper growth, high vehicle volumes and continued consolidation of supply chain to better capitalize more capable suppliers. Our passenger vehicle exposure has historically been roughly balanced between domestic and exports markets. While exports saw some moderation in the last year and this year, we are seeing some traction in our international business getting back to a normal growth trajectory. A positive trend in the industry alongside the rising tide of outsourcing creates a strong foundation for sustained growth in our auto business on both domestic and export sides. Now looking into our segmental performance. The performance was broad-based across all the key segments. The nonauto segment delivered its highest ever quarterly sales of INR 1,998 million, registering an impressive 129.9% year-on-year growth. As a result, its contribution increased to 20.8% of our overall sales. Within the nonauto segment, our ADS business remained the primary growth driver, the revenue increasing by more than 3 times year-on-year and standing at INR 1,454 million. Moving to our Auto-Tech Agnostic and xEV business. The segment achieved its highest ever quarterly sales of INR 1,316 million, growing at 22.2% year-on-year, reflecting accelerated EV adoption, especially in 2-wheelers. Our Auto ICE segment also delivered a healthy 20.8% year-on-year growth on a high base and stood at INR 6,275 million. During the quarter, we recorded our highest ever quarterly performance across passenger vehicles, commercial vehicles and scooters. With this, we expect to end FY '27 with high teens top line growth with continuous focus on improving margin profile. Now I would like to give you some updates on our order book. Our customers for ADS segment, especially aerospace and SEM, which is semicon equipment manufacturers, have very tall outsourcing targets from India's perspective, which is reflective in our growing order book position. Our cumulative unexecuted lifetime order book for 5 years, especially for ADS business, stood at INR 44.4 billion as of quarter end. Further, we have received a few more orders in this segment in the current quarter, Q2, which have pushed our ADS order backlog to around INR 57.5 billion currently. These orders are executable in next 5 years. As explained to you previously, these orders are structurally different from our overall order book, which we give as peak annual revenues for the new business instead of total cumulative backlog. To avoid duplication, we have removed the value of ADS business from the standard order book numbers for the rest of the business. Therefore, as of June 2026, our peak annual revenue of our new business ex of ADS stood at INR 18.5 billion. We are gearing up to capture this immense opportunity ahead with our CapEx plans across different plants on both auto and ADS clients. Looking specifically on a few of the CapEx projects on the ADS slide first. Recently, we have inaugurated a surface treatment facility next to our ADS plant. We are in the process of obtaining NADCAP validation for this. Surface treatment is a defining capability that allows us to complete the production within the single facility. This is in line with Sansera's history of backward integration. So as we enter larger and more complex structural parts in this segment, having this process in-house will give us better speed, quality control and reduced external dependency. We are in the process of relocating our defense business to a dedicated facility separate from the rest of ADS to provide it with focused infrastructure and enhanced operational execution. This, we believe is going to be helpful in tapping very huge opportunities in the defense sector, both domestic as well as exports. Lastly, we are building a new 80,000 square foot hangar for the aero and SEM business. Lines will get installed and validation -- validated by our customers in this hangar in the coming quarters. Turning to our growth road map in the auto segment. At Pantnagar, which is our Plant 6 and our Manesar facility, Plant 4, we are setting up additional forging and machining capabilities, mainly for crankshafts for both 2-wheeler and passenger vehicle OEMs -- connecting rods for the passenger vehicle OEMs. At Bangalore Plant 2, we are augmenting machining capacity with a clear focus on Auto Tech-Agnostic and xEV components. This will be complemented by our Sansera-Nichidai joint venture, which deepens our presence in the cold and warm forged precision components. The project that I mentioned on both ADS and auto sites will come on stream beginning of Q3 FY '27 onwards, and we will get it completed within a year from now. The shift towards non-ICE is gaining strong momentum and is progressing well ahead as planned. With our CapEx investments coming on stream, we expect the contribution from these businesses to scale up meaningfully and become an increasingly important driver of our growth and mix. We believe this is the only beginning of a significant new growth leg for our business with the benefit of this transition becoming increasingly visible over the coming years. With this, I would like to hand over the call to our CFO, Mr. Vikas Goel.

Thank you, Preetham. Good morning, everyone. Let me now take you through our consolidated financial performance for the first quarter of FY '27. For Q1 FY '27, our consolidated performance reflected strong operating execution with revenue momentum translating into improved profitability and a stronger margin profile. Within ADS, reported revenue of INR 1,454 million includes product sales, scrap sales and tooling income. Prior period figures have been restated for a like-to-like comparison with details provided on Slide #7 of the investor presentation. Margin expansion was supported by operating leverage, disciplined cost absorption and a more favorable product mix, which together helped offset inflationary pressures during the quarter. Operating expenses increased in absolute terms as the revenue scaled and included a provision of INR 126 million for U.S. import duty tariff incurred in the previous year. These amounts remain recoverable as we speak and efforts are on to continue on the process of recovering them. However, a provision was made based on the recovery risk assessment, while we continue to pursue the recovery. EBITDA for the quarter stood at INR 1,961 million, reflecting strong year-on-year growth of 48%. Profitability also improved with EBITDA margin expanding by around 200 basis points to 19.2% compared with 17.2% in the same quarter previous year. The quarter included an exceptional charge of INR 169 million towards settlement of a litigation matter in the U.S. District Court. The matter was disclosed in our 2021 prospectus and the settlement was completed without any admission of liability. The EBITDA numbers that I spoke earlier is excluding these exceptional items. Other income stood at INR 134 million for the quarter, up around 15% year-on-year, primarily driven by higher ForEx gains during this period. Profit after tax at INR 874 million, up 39% year-on-year with PAT margins improving to 8.6%. Excluding the exceptional item mentioned before and adjusting for this post-tax impact of INR 127 million, PAT for the quarter was at INR 1,000 million. Our CapEx program will continue to be phased in line with customer validations, order visibility and expected utilization. We remain focused on ensuring that new investments meet our internal return threshold and support profitable and sustainable growth. From a balance sheet perspective, our focus remains on maintaining financial discipline with funding growth less CapEx. We continue to monitor working capital closely, particularly receivables and inventory to ensure that growth is supported by healthy cash conversion. Overall, we remain confident about the medium-term growth outlook, supported by a diversified order pipeline, new capacity coming on stream and continuing to focus on margin, working capital and capital efficiency. With this, we conclude our opening remarks and open the floor for Q&A.

[Operator Instructions] The first question is from the line of Siddhartha Bera from Nomura Group.

Congrats on a great set of numbers. Sir, first question is on the ADS side. I think in the presentation, it is mentioned that the order book is close to INR 45 billion, but you mentioned that it has gone up to INR 57 billion in the current quarter. So am I sort of reading it correctly? And if you can just talk about the incremental orders, is it from the existing customers or from any new customer if you have added? And now with this order book, where do you see this segment revenues in the next 3, 4 years? So that will be the first question.

Thank you, Siddhartha. I'll start answering and probably Hari will take it forward. Yes, see, the normal course of business, we would not have mentioned this. But since this is one big order, and this is from semicon equipment manufacturer, and this is pertaining to a very significant -- this is also quite a significant milestone for us because this would propel us to almost close to $75 million worth of annual business from this customer. So we thought that it is appropriate to mention this order. So on a 5-year basis, this would approximately translate to about INR 1,250 crores. That is what we have said that from INR 44 billion, it is going up to INR 56 billion or INR 57 billion. So otherwise, on a normal course of business, we keep getting very strong momentum from both aerospace and SEM. So Hari can add. Hari?

Yes, Siddhartha. This is from our existing customer. It is from the semicon space. And as Preetham said, this is a win which happened post our normal cutoff date, which is 1st of July. This happened in the last couple of weeks. So we are very, very bullish. And the business with the customer, as Preetham said, with this will reach about $75 million or roundabouts the engagement with this customer alone. And we are working very actively for -- to address further RFQs on the table in the same space as well as the aerospace division. So right now, it is INR 5,700 crores executable by FY '31.

Got it, sir. And second question is on the export side. We also did see a very strong traction. I would assume that even outside the nonauto business, some of the ICE business also seems to be sort of picking up quite sharply. Can you sort of talk about some trends, both globally and domestically, on the ICE side? What is driving this growth? And how sustainable do you see the growth momentum to be in the next few years?

Yes. We saw a very healthy growth even in the off-road segment. We saw some good growth coming from passenger vehicle segment in exports. Everybody is aware of the fact that the domestic 2-wheeler industry and domestic passenger vehicle industry continues to surprise everyone. It is not only in quarter 1, we are seeing much stronger demand extending in quarter 2 as well. And we expect that since the festive season is distributed between quarter 2 and quarter 3, I think even the quarter 3 momentum, we see there is a strong demand. In fact, the demand is so strong that there is a lot of stress on the supply chain, both on raw material [indiscernible] part front. We see that there's a lot of capacity constraint and intervention from customers are helping us to get this material in time. But of course, when there is such huge demand coming from all the segments, there is a stress on supply chain and production. But I see a very strong demand visibility both in 2-wheeler and passenger vehicle for at least next 1, 1.5 quarters definitely. And on exports, there is a good traction, both on passenger vehicle as well as premium 2-wheelers, off-road vehicles. So we have also started -- commenced our deliveries into the energy segment to one of the key customers in North America. That should also start looking -- I mean, giving us sustained revenues from Q3. So overall, I see a very positive outlook going forward.

Yes. Just to add to what Preetham said, we have been talking last couple of years about a U.S. facility manufacturing, connecting rods, which was the requirement of our OEM customers there. And we also have been updating you that we are now waiting for certainty to come back into the system because of all the tariff confusion. While that status quo remains the same, we are seeing increased momentum from the customers to start sourcing more from Sansera, India without really waiting for us to start our operations in the U.S. We can see that trend as a stop-gap arrangement, and that is also contributing to increased exports in our prime premium product.

Understood, sir. Sir, last question to Vikas, sir. I mean, when you talk about this INR 129 million of impact, is it in the current EBITDA margins of 19.2% or have we already excluded it from the other cost? If you can just clarify that.

No, it is included there. It is considered as a cost.

The next question is from the line of Chandramouli Muthiah from Goldman Sachs.

First question is just around the order book again on ADS. You mentioned close to INR 57 billion as of quarter-to-date. So I just want to understand in terms of your CapEx planning and capacity expansion, you did mention that you are adding a surface treatment capacity nearby. There's a hangar also coming on stream over the next 12 to 18 months. And then you have in the past mentioned that you might look to do more greenfield there. So I just want to understand a sense of what sort of asset turns you typically need to keep in mind before investing for incremental semicon capacity and how that looks on aerospace as well? And does that have any implications for your sort of annual CapEx plans over the next couple of years?

Let me just try to answer this. This is Hari here, Chandramouli, in 3 buckets. One is CapEx. In this current situation we are in is a parallel activity. It is a continuous activity based on what you invest today with the lead time of machines being 7, 8, sometimes up to 9 months. So when you really cut off at a particular point and check on peak revenue potential versus assets invested for a particular program, the ADS asset turns are very comfortably between 2 to 2.25 in that margin. And secondly, as far as infrastructure is concerned, what we are speaking right now is a confirmed order book of INR 5,700 crores to be executed by FY '31. Not to say that is a number we target to really reach. Orders are being negotiated. Conversions are at an advanced stage. We expect a lot of conversions to happen in Q2 and Q3. So keeping in mind the projected business, in addition to the 80,000 square feet hangar, which Preetham spoke about, which is going to get commissioned in a month or 2 at the latest, we will start installing machines and commissioning and validating the lines with the customers' approval. And also the special process coming on stream in maximum a month or 2 because the approval process, as we are talking, certification process is underway. We are also working on a build-to-suit facility not far from our existing place, which we hope to conclude discussions in August and have that facility ready in about 10 months' time, and that would add a further 100,000 square foot to our manufacturing space. And the biggest advantage is, all this will be in a vicinity of 500 meters.

So just to sum up what Hari was saying, our existing facility with an extended hangar for aerospace and SEM should enable us to generate a revenue of between INR 1,400 crores to INR 1,500 crores worth of capacity. Then we are also shifting our defense to have more focused approach on defense. So this should enable us to, over the next 5 years, generate a capacity which -- I mean, create a capacity which can generate a revenue of about INR 500 crores. Then the new facility just Hari spoke about, which will add about 10,000 square foot would also be able to have a capacity which can generate another INR 1,500 crores. So overall, by FY '31, our base plan as per the current visibility is to create a facility which will -- through which we can generate a revenue of about INR 3,500 crores.

Got it. That's helpful. My second question is just around some of the comments that I think have been highlighted in the presentation that you had uploaded. So 1Q top line growth for the company is north of 30% Y-o-Y. And you have sort of made a comment that you're looking to do high teens top line growth in FY '27. If I just break it down sort of between ADS and the rest of the business, in FY '26, I think ADS was in the ballpark of 10% of total company revenue. And if that's possibly doubling in FY '27 based on, I think, the guidance ranges that you've mentioned, that in itself possibly adds 10% to overall company top line. So does that mean sort of the rest of the business, the non-ADS business, the remaining 90% of the business in FY '26 will contribute in the ballpark of 7% or 8% kind of top line? But I think you're doing ahead of that run rate year-to-date. So I just wanted to understand that dynamic a little better, if the high teens guidance for FY '27 on top line is more sort of a baseline or if you expect some sort of moderation in the back half?

No. Actually, this was a general -- at the beginning of the year when we did our business plan, this is what something that based on the projection from our customers, we thought that we will end up doing about mid to high teens, more towards high teens overall growth. But as you are very right, looking at the sustained momentum of the 2-wheeler and pass car industry, especially domestic sustaining and also looking quite strong for the coming quarter -- in the current quarter and also towards the festive season, which will be into the third quarter as well. I think, overall, if you see our non-ADS business, all other businesses put together, non-ADS business itself, we should be able to look at a mid-teen kind of growth easily. So that is something that we are working on. As the business is evolving and situation is looking at month-on-month looks more possible that we will be doing more of mid-teens to high teens kind of growth in our other businesses as well.

Got it. So just to clarify, so if 90% of the business can do mid-teens, that might be sort of a 12%, 13% contributor in F '27. And then the remaining 10% possibly doubles, that again is a 10% contributor. So it should be possible to do comfortably north of 20% if these trends sustain in '27?

I think if the business continues to grow the way that it is doing now, I think it is a good possibility that we should be looking at between high teens to 20% as an overall revenue. Yes.

The next question is from the line of Mukesh Saraf from Avendus Spark.

My first question will be on the quarter itself. Can you kind of give some sense on how the material cost has played and how your pricing pass-throughs have happened so far and what we can expect, say, in the next couple of quarters in terms of pricing, et cetera?

Yes. Vikas. So we have seen a material cost increase, not a very substantial increase. Primarily, it has happened in aluminum, a small portion of our total material consumption and also on some of the consumables where we've seen exceptionally high inflation, which has actually impacted us in the quarter. As far as steel inflation is concerned, we see limited inflation, and we are engaging with our customers for the pass-through, which is currently in process, not yet translated. And that's where we stand right now. We got some cushion with all of [indiscernible] to the ForEx movement. Some cushion or maybe short-term respite has come from that while we continue to engage with our customers for passing on material inflation, yet to materialize.

We have -- yes, as Vikas said that we continue to engage with our customers for getting compensation out of tool and higher labor costs, which has impacted especially our Northern plants. So I think this is work under progress, but nothing of that has come into the balance sheet or P&L yet in the first quarter.

Got it. Got it. So just in continuation with that, we've seen our gross margins expand in this 1Q vis-a-vis 4Q. So that's entirely a mix impact that means because we haven't got any pass-throughs anyways.

No, no. It's a mix plus the ForEx, both, because of the...

ForEx impact. Okay. Got it. And second question, again, on your ICE expansion itself. We had spoken about Pantnagar Plant 16 and then you're expanding Plant 6 there and now Manesar Plant 4. I mean, could you give some sense, is this because of OEMs expanding their capacity and you're getting commensurate kind of a wallet share there? Or are you kind of seeing an increase in market share and hence you're expanding these crankshaft machining facilities, et cetera? It would be interesting to see how ICE business itself could do for you in the next couple of years with the way you're expanding capacities.

Yes, I'll just answer then Rahul will take it forward. Basically, this is definitely a result of higher outsourcing opportunity in 2-wheeler OEMs who are looking at outsourcing crankshaft facilities. So that is something that we are focused on. And second thing is that because that is one of our -- we have been doing crankshaft assembly, both crankshafts, connecting rods right from forging. So it is some expertise that we have developed. But on passenger vehicle as well, we have got some very strong indications of capacity expansion. I'll just hand it over to Rahul, who will explain probably in a little more in detail on Pantnagar and Manesar.

On Pantnagar facility, as we informed earlier, we are expanding a special plant. A crankshaft facility, which is a fully automated facility, especially for 2-wheelers. This is mainly because of substantial increase in demand from a couple of customers, which are South-based 2-wheeler manufacturers. We also, like Preetham said, we have opportunities of OEM outsourcing, which is coming to us. But this is mainly dominated by crankshafts in North facilities. But like crankshafts are demanding for conrods also, which are being manufactured in Bangalore facilities. And of course, 4-wheeler Maruti volumes and all OEMs are pushing us for increasing demanding for these. I mean it's not only machining, we are expanding forging facility also in Pantnagar and all secondary operations, heat treatment. So all along in Auto ICE also, we are expanding both. Predominantly today in Northern plants, but as a consequence of crankshaft going up, connecting rods in Bangalore facilities. So Preetham mentioned in initial talk that we are building a new multistory kind of building in Plant 2 also. That is also a part of this expansion.

Got it. Got it. And just lastly, did you give an updated CapEx number for the company this year and with the expansion, maybe new order book, et cetera?

We have not. We have not. As I said, we are -- we gave an overall plan during last quarter for this year. But then we have not updated that number as of now. As we said, the new [ trends ] that we see, we continue to evaluate our CapEx plans.

The next question is from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, my questions have been answered.

The next question is from the line of Shashank Kanodia from ICICI Securities.

Congratulations for a superlative performance. Sir, on the top line front, given the fact we have an executable order book in previous time frame in non-ADS business and our ADS business doubling this year will be doubling over the next 2 years, will it be prudent to assume that we could be growing in excess of 20% of top line over FY '26 to '29?

I can only answer to the current years, which I said that we will be very close to high teens to 20%, considering our growth, which will be about 75%, 80% in ADS. And we are doing -- there is a momentum on this. We expect that the customer engagement, what we have and their indications for capacity, because we have been engaged with most of the large OEMs to talk about, because since Sansera is a fully integrated facility and any expansion, especially in auto, any expansion on our forging and heat treatment and all such facilities will take anywhere between 18 to 24 months. So we need to have a kind of 2-year view on -- from the customers if we have to expand meaningfully. So we are engaged, and we are putting our plans in place. Really it's too early for me to say whether for the next 2, 3 years, we will do 20% plus. But then we expect that there is this strong momentum to continue.

But sir, on the base order book, our execution time line remains that we're going to achieve this order book in the next 3 years as a peak revenue, right? So that understanding remains unchanged?

Yes. That understanding remains unchanged.

Okay. Second, sir, on the margins front, adjusting for the provision that we have done for this quarter, the adjusted margin is 20.4%. And our endeavor has been to attain a 20% mark. So now how do we see the margin trajectory given the increasing share of ADS as a segment? So is 22%, 25% a new benchmark that we will be targeting internally? Or is it a 20% range is something that we are comfortable with?

No, I think it is -- this quarter could be slightly more elevated because we have had almost 40% revenue coming from international revenue. And we have had very strong mix advantage, currency advantage and all that. But otherwise, we have maintained in the beginning of our year that last year, our overall margin was 18.1%, and we would be more happier that if we are able to inch towards 19%. While the first quarter has been very strong, we would like to -- I don't want to give some number which is going to be -- while we are very aspirational, we are working towards achieving our 20-20-20 targets. But then I would still maintain that whatever I have given guidance in the beginning of the year, we would like to achieve it, slightly maybe overachieve it.

I would just like to add this. Our endeavor is to sustain this margin level and focus on growth while we sustain the margin. So that's the philosophy that we are working with.

Sir, will it be possible for you to share what is the differential margins that we earn for ADS? As in base business is earning 17%, 18% margin, what could ADS as a segment be earning?

No. See, our exports business and ADS business definitely come with a higher margin profile compared to our domestic business. While I -- last time also, during our commentary, we said that we are targeting or we are operating between 25% to 30% EBITDA margins in both these sectors. I would say that as we improve our capacity utilization, the numbers would be more towards higher north of high 20s. I don't want to put a figure into it, but then definitely, this would be between 25% and 30% margins.

[Operator Instructions] The next question is from the line of Suraj Malu from Catamaran.

Sir, I have 2 questions. First is in the motorcycle segment, if we see the revenue growth is in the range of 7% to 10% year-on-year for the last 3 quarters, whereas the industry volume for motorcycles has been 17%, 18%. So can you help reconcile these numbers? Like have we lost wallet share with any of the customers? Or how has it been? And the second question is on the passenger vehicle segment. Are we still maintaining our same wallet share with Maruti or that has reduced?

No, we have not lost any wallet share with any of the customers increase. We have been increasing it both with TVS as well as with Yamaha and Suzuki. So I don't see any reason why. While you compare the industry on numbers, our representation is on revenue. There could be some gap between that. But otherwise, we have been doing well and we have grown well. Exactly -- I'll have to check what is our motorcycle numbers. But then we have not lost anything. In fact, we have gained the market share. Second thing is in terms of Maruti, we have been -- I mean, we have been gaining market share. In fact, the projections also -- from our -- they remain one of our top customers. In terms of our engagement, even for the next couple of years, we see a very strong momentum from them. From the components that we are supplying to them, almost 75% of volumes are supplied by us to them. Yes. In our -- this thing that our motorcycle business probably has grown by about 12.5%. That's what is our numbers, but it could be -- I mean, we could reconcile. We can have an offline chat and...

The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

Congrats on the result and the new order wins in the ADS segment, sir. Just firstly, sir, just on the defense side, what will be our approach towards this opportunity? And how much CapEx we plan to put for this new plant? How will be the time line for this plant? And generally, sir, on the -- what kind of a business opportunity we see, whether it's forging, machining? It will be more like a Tier 1 or Tier 2 player. If you can give some more sense on this opportunity, sir.