Sona BLW Precision Forgings Limited (SONACOMS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Sona Comstar Q2 FY '27 Earnings Group Conference Call. [Operator Instructions] Please note that this call is being recorded. [Operator Instructions] 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 questions. Now I will hand over to -- hand over the floor to Mr. Kapil Singh, Deputy Head of Research, India and Lead Auto Analyst at Nomura. Kapil, please go ahead.

Sorry, I think I was on mute. Yes. 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, Whole-Time Director and CEO, 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 Pratik Sachan, Head, Strategy and M&A. I will now hand over the call to Vivek for his opening remarks and the presentation. Vivek, over to you, please.

Thank you, Gail, and welcome, everyone. There are times when everything comes together in a 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 third highest ever order additions in a single quarter with wins spanning across almost every major product segment. Last quarter, we had outlined, as you would 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 pass-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 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 add to cost pressures with further increases in steel, copper and oil derivatives. Freight rates have also risen sharply. They've nearly doubled from 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 generated more than 1.5x the FFO we generated in the entire FY'26 and lastly, and absolutely not the least, I'm particularly proud that our Driveline division has won the 2026 demin price for total quality man. Vikram, Balaji and his team have worked towards this for 9 long years and improved processes and systems manyfold along the way. So take about Vikram Balaji, wherever you are and many, many congratulations to all of you. 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 on 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, revenue has grown 40% even as U.S. EV market, the deliveries have broadly remained unchanged. This -- this demonstrates that our EV business is becoming more diversified and less dependent on any single customer or single geography. On a personal note, our EBITDA this quarter was INR 356 crores. 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 we IPO-ed, I think this was roughly our annual revenue that we now do in a quarter. For H1, as well, the numbers are strong. We delivered strong growth across every single financial base. Revenue, EBITDA NPAT 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. Now we come to our strategic priorities, and there is one thing 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, personalized, 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 in that broader change. So let's now look at it on a combined basis. Our EV business obviously has had a very strong quarter. The first half web revenues have crossed the INR 10 billion mark. We -- 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 FY '27, we have 75 EPIC programs across 37 customers. Of these 44 are in production and 31 are yet to start production. 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 in 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 value 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 2-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 2-wheeler offering, of course, it adds Radar sensing to our traction motor and controller portfolio, so 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. Fourth, is additional traction motor volumes from an existing customer where we have got the revised PO with increased volumes which also shows our ability to keep penetrating an increase in wallet share even with existing customers. Don't want to leave our old and ICE business is behind. So I know our new houses are running fast, but our old losses 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 looks 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 in -- there is also a starter motor program that is not mentioned. This is for an existing customer and 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 order book, it is also the breadth of our order book across powertrains, geographies, customers as well as product categories. So if you look at the quarter as a whole, we got INR 36 billion worth of new business, which is the third highest quarter for order additions. And unlike those previous times, it is not anchored or move 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 INR 251 billion as we continue to win new business in EVs and albeit small, but the robotics and physical order book also continues to be -- we are hoping in the decade to come, this becomes what EV has been for the last decade for us. Let me now close my section at least with the diversification piece. We continue to see meaningful progress across all tracks -- when we make 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. On the product side, we are 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 motor is 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 [indiscernible], -- 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 developer. 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 INR 1,400 crores. This is roughly equal to the revenue of the entire company in [ FY '25 ] . So we built almost another company just through 2 new products. And that's the power in engineering of 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, the 2-wheeler, 3-wheeler is up 14% of our revenue. Beyond that, the split of [ 70, 30, 70 ] auto continues. And technology, again, I would like to restress 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 be. 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.

Thank you, Vivek. Welcome, everyone. Yes, I would like to take you through our technology road map. As you all have noticed, we have commercialized 3 new products this quarter elite differential for passenger cars and SUVs helping for rileways and a rare radar sensor for 2-wheelers. The first product is Helical limited-slip differential a limited slip differential or what we call LSD improves vehicle traction by limiting excess peers between the 2 driven vials. Helicalimited slip differential is a type of LS that uses parallel access helical opinions in trying with the side gas to generate internal axial and radial forces. This passive mechanism deliver smooth progressive to transfer without a conventional clutch pack or external actuation. LSTs are typically used in performance vehicles, off-road SUVs and four by fours. The next product is [indiscernible] . Airframes are used in most modern railway coaches, including LHB coaches. These coaches use a 2-stage suspension system, the primary suspension uses coil springs to filter high-frequency track vibrations. While the air spring forms the secondary suspension, connecting the bogey to the coach body Air Springs enhanced passenger comfort, maintain a constant rate height and isolate body movement together with the dampers which control oscillations. They provide smoother and safer ride at high speeds. The third product is a rare radar sensor for 2-wheelers. 2-wheelers are amongst the most vulnerable vehicles on the road, making timely warnings critical to rider safety. A rare radar sensor does pricely that by warning the rider of a potential rare and collisions or a vehicle in a blind spot. It provides valuable time to maneuver to a safe passion. As a pioneer in automotive radar, we recognized early the potential for applying this technology for 2-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.

Thank you, Pravin. A very good day to you all. It's my pleasure to share our second quarter and H1 results for FY '27 with you. First the quarter's results. Our revenue for the quarter grew by 35% year-on-year to INR 1,546 crores. Compared to the previous highest revenue of INR 1,310 crores, which was clocked 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 INR 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 [ INR 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. Our H1 revenue grew by 43% year-on-year to INR 2,857 crores. Our BEV revenue grew by 119% to INR 1,042 crores and constituted 48% of our automotive product sales. Our H1 EBITDA grew by 34% to INR 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 INR 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 margin from lower depreciation percentage, whereas it was pulled down by a lower EBITDA margin and lower net finance income in the first half. Moving on to the cash flow slide. This has been a high cash yielding first half year -- first half of the year for us, as Vivek has already briefed you. We generated INR 594 crores of cash from operations, which was 90% of our EBITDA for this period. This was supported mainly by a release of INR 44 crores from working capital despite a very high revenue growth in this period. Net of CapEx spend of about INR 148 crores, we generated INR 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 INR 112 crores. There for cash inflows on account of additional borrowings of INR 224 crores. There was an inflow on account of ESOPs exercised by employees, about INR 108 crores and finance income of about INR 32 crores. Consequent to all these movements, as of end of September, we had cash and investments worth INR 1,966 crores. This brings us to the last slide, which is on the key ratios. Now here, all these ratios, except for me to employee cost showed improvements in the first half of the year. In case of what 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 fund raise impact, the incremental returns from businesses are now supporting this improvement every quarter. Net debt-to-EBITDA ratio continues to be in a 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 a 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 Nomura team.

[Operator Instructions] We have a question from Arvind Sharma.

Hello. Am I audible.

Yes.

The question on the suspension motors business, which has seen a very strong growth since Vivek said almost 7% of the revenue. What is the key driver for this business to see such a strong growth in this quarter? And is it possible to shed some light on the order pipeline in the specific segment?

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 with Neo. The 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 of. When they lost it in the new model, it has exceeded everybody's expectations on how well that your model has that. So eventually, regardless of how good we are, how good our OEM customers are eventually the consumer, she decides what all of our fats are. And that is the thing with initial. But now that we have seen the market appreciation, the market adoption, this would be your typical S-curve -- the order book so far is limited to that one customer across now it will span across Berit. There are significant conversations going on with other OEMs. And as those orders are on, we will obviously report them, but the future looks fairly bright. This -- the 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 right, how bright we don't know, but it has the potential to be massive.

Got it, right. That's very helpful. Anything that you can shed more on the Denso tie-up? Or is it too premature to talk about it right now?

Yes. I think from last quarter, we said the announcement of JV is now we have to finalize and close those -- so JV 1, of course, is as legal time line. So I think Rohit who would want to take that?

So we are targeting to close this by at least the JV one 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 time line we are looking at. JV 2, maybe I'll request at to Sat of chip in what sort of time lines can we communicate.

JV 2, I mean, it's not yet formed up, but we are targeting to close and have it sometime in the first half of calendar year ' 27.

That's all from my side, sir.

Yes, just a clarification, the holidays are not for us. We don't really go on holiday in the winter, but our advisers and partners sometimes too, so that does make us lower than we would like.

Next question is from Chandramouli Muthiah.

I have 2 questions. 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 more easy competitive situation we've been facing there. I just want to understand how that's shaping up, how long we expect the legacy business to continue to grow at this healthy clip before possibly enter more modest mature growth rates on that part of the business, similar to what it's been historically. And the second question is just on robotics. You have mentioned that solar might have aspirations to make actuators. India as a market historically maybe has not had as much of a 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 robotic steady activities?

Sure. And it's good you ask me this, I will try to say this without sounding immortal. India does not have the history of people doing 9% type world market shares in any product. So any product that you pick up of us will have a high large world market share. that you can say for any single product. You can 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're from or who you know they are truly democratic. And if you're good, you will. There is also no legacy of some of making a new product that goes into a vehicle and then it does exceeding well in China from India. So we have faith in ourselves, we will continue to believe in ourselves and continue to believe in our engine, and we will try. More often than not, we have succeeded, but that we will leave to God to determine and fake to determing. The first question is interesting. Europe, we are winning more business, and we're seeing a lot more traction as a lot of European OEMs who 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. Coming to how fast we can continue to grow legacy business I would say for a fairly long time, differential deals, we are barely about 9% of the world. In differential assemblies, now that we make ICE and 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 run out of room to grow. It's -- 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, okay.

Next question from Juan with an Gunjan Prithyani, please go ahead.

First question is on the traction motor business. I mean it is huge growth in this quarter. I think this is far ahead of where the industry growth has been. I'm just trying to understand how do I think about this business in terms of the scale up? Is it the larger wallet share that we're getting with the existing customer? Maybe a little bit color on 3-wheeler business, adding in more meaningfully now if you can share more insights on how big that business is -- and was there any new program which commissioned in this quarter? A little bit color on this quarter and how do I think? Because there's clearly a significant change in outlook in terms of the revenue acceleration that we've seen with the traction motor business? And the second question is on the differential assembly business. Again, after many quarters, meaningful improvement in the differential assembly business as well. And you mentioned that North America as a market has been stagnant in terms of the overall EV number. So if you can give some color on what led to this? Is it new program? Is it geo-mix change or 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 a thunder. But could that how to think about it is very optimistically and very positive. That's the answer for that. Sat give details on what has happened this quarter.

So Gunjan, I mean for motor business, it's both. I mean there is an increase in the valid 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. Yes. And going forward, it's looking pretty good because we will be launching a few more products in this quarter. And -- but overall, -- it's a combination of market growth as well as the valid growth.

And any color on the 3 dealers? Like how significant is it of the overall traction motor business now? I think that was pretty small so far. We just -- it was -- it was supposed to see a new program in addition. So the number can be qualified how big it is?

May not be the numbers, but yes, I mean, as I said that we are launching another product in this current quarter, so that will further increase our share the EV business.

And would it not fair to keep a subsegment or how many subsegments will we continue to keep tracking there? It is meaningful. As you know, if we look at the programs we have won and the customers we have on our market share is substantial in 3-wheelers in electric. So as those programs are ramping up, they should kick in. Second, to your point that -- why is it higher than industry you see any time when there are -- there is a difficulty for good reasons or bad reasons, bad reasons like the magnets problem was there. because of our technical capability, we were able to circum that go to light red earth and scale up faster than 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 the best time for us to gain wallet. So That's, in a nutshell, why this has happened. On differential assemblies. All 3 of our large customers in that space in EV, all 3 of them have picked up this quarter. Last quarter or last year, so many bad things were happening. So it started with Q2. There are quarters where everything comes together in numeric in Cross City -- in Q1 last year was when all the bad things in the world came together in a perfect negative citron. And let 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 this is just resurgent to mean to be honest. Otherwise, a lot of this should have been there always. So it's growing.

As this momentum should contact same?

Yes. I mean it was not really normal what was happening at that time. And we were on the wrong side of any luck of fortune based decision at that time, which has corrected itself. Again, second is always our performance. If you are a supplier who is reliable, who does a high-quality product, and can support customers through thick and thin. You, over the medium to long term, you will always be.

Next question from Basudeb Banerjee.

And Vivek with INR 356 crores EBITDA per quarter, hoping you start delivering INR 356 crores nonoperating income per quarter down the line. Just to understand, with 2 quarters of 23% kind of margin and a rising mix of motor controller to 3-wheeler business, rising orders from robotic segment, railways moving up the curve. Leaving aside the 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 change in mix?