Suprajit Engineering Limited (532509) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Suprajit Engineering, hosted by Anand Rathi Share and Stock Brokers. [Operator Instructions] I now hand the conference over to Mr. Vijay Sarthy from Anand Rathi Share and Stock Brokers. Thank you, and over to you, sir.

Thanks, Pratuja. Good morning, all. And on behalf of Anand Rathi, I welcome you to the Q3 FY '21 earnings call of Suprajit Engineering. From the management side, we have Mr. Ajith Kumar, Founder and Chairman. We have Mohan, MD and Group CFO -- CEO; and Mr. Medappa, the CFO and Company. As always, we will have the results update and business updates of these business, and then we will follow it up with Q&A. Over to you, Mr. Ajith.

Yes. Thank you, Vijay, for organizing this call. Thank you, Anand Rathi for this call. Good morning to all of you. Welcome to our Q3 results con call. I'm sure all of you have seen the results and the business update that we have released. We did have an excellent quarter. I will sum up in the end. Before that, I will let our team to give some brief, starting with Mohan, our Managing Director and CEO. Mohan?

Yes. Thank you very much. Obviously, from the results, you see that we have had an extremely good quarter. In the last quarter call, I was telling that we had had the highest in the history of Suprajit, but I would say that we have broken that record already. So this Q3 was breaking the Q2 numbers. And as of now, definitely, I can say we have had a V-shaped recovery. I do hope it will not end up in W, and let's hope that we continue on the same path. Most -- all our divisions, whether it was Domestic Cable Division, Phoenix Lamp Division, SENA or exports cable, we did well. There was some small hiccups here and there. But overall, I would say, very confident about what's happened in the last quarter. As usual, I'll take you through each one of them. I'll start with SENA and Wescon. Our revenue, inventory and EBITDA trends are in the right direction, and we had I think had earliest of about that we had launched what is called as an operating catalyst to improve the situation there. I would say that it is paying out. The very good thing is that for 1 year, we have not seen there from the corporate headquarters. But our weekly operations call, our monthly business review, they all have set into a very beautiful rhythm. So we have been able to understand the business and run the business along with the local team of this firm out there. So it's been a very good one. We have been bidding for new business, pursuing new customers and also adding new products into our SENA portfolio like the gearbox for speeding cable. Having said all these things, I would say that we are not yet out of woods. The COVID factor still now hangs like the [indiscernible] sword. Mexico is still a red zone. Before, I would not very confidently say we are out there, but the trends are positive. Moving on to the export cable of SCU. We are still navigating through the Brexit issues. Of course, Brexit has happened. That has led to certain changes in structures out there in Britain. And along with that, we are also facing certain headwinds like the container shortages and port conditions in Europe. Having said that, none of our customers were affected. In fact, both the 2 big customers that we have there, Volkswagen Group and BMW have been appreciating the efforts by Suprajit Group. Moving on to Trifa and Luxlite. Our uphill journey here continues. There have been severe restrictions in Europe due to the COVID second wave, and this has forced many challenges out here. Coming over to the domestic front, I'll start with the Phoenix Lamps Division. Both the operations at Noida and Chennai are extremely loaded. We're very busy. And we have come to a level where we feel that we need to expand capacity. Therefore, we had presented to the Board, and we got an approval to go ahead with a capacity expansion for our HS1 H4 line. So we would be adding to the capacity. Phoenix brand is doing extremely well in all the regions. And in fact, it has started showing very good growth even in south, which was traditionally our weak spot. So overall, whether it is production from Chennai or from north in Noida has been pretty good. On our Domestic Cable Division front, the northern pocket experienced some farmers movement -- farmers agitation. And that affected in a small way for our plants in Pathredi and Manesar. Rest of the areas, there has been very good growth. There have been no issues, and we have been operating at around 80%, 90% of our capacity. And I think it's now again time to expand capacity. Therefore, we have taken a decision that we will be expanding capacity at our Narsapura plant, which is serving the interest of one of the marquee customer parts. Along with this, we -- we again see like in Phoenix Lamps Division. We again see in the Cable Division, the aftermarket is showing tremendous growth. So we felt that this does need a special attention. Therefore, we are in the process of putting up what we call as a centralized fulfillment center. Therefore, we cater to this market much more seriously. Apart from this, general comments are that the headwinds and commodity price increases are there. They have a tremendous adverse impact. There have been increased costs and uncertainties both in terms of inbound and outbound logistics crates, specifically international one. And that has been posing a big challenge. The electronic chip shortage incidentally has hit us also for our Wescon operations because one of the sensors that we use new chip, and that has caused a certain amount of backlog with some customers in U.S. However, I'm confident that as a team, we will face and resolve these issues and serve the market well. That's an update for me. Thank you.

Thank you, Mohan. Medappa, a quick update on numbers, please.

Good morning, everyone. We announced the quarterly and 9-month financial result for December 2020. The consol revenue for 9 months ended December 2020 was INR 1,128 crore against INR 1,174 crores of -- for the corresponding previous year. I'll go through this quarter-on-quarter comparison, since YTD numbers are that not exactly comparable due to the subdued performance in Q1 2020. The consol revenue for the quarter ended December 2020 was INR 507 crores against INR 412 crores for the corresponding previous quarter -- previous year, recording growth of 23%. The consol operation EBITDA was INR 86 crores for the quarter as against INR 50 crores for the corresponding quarter of previous year, with 72% growth. Q3 2020 was highest quarter in terms of revenue and profitability compared to previous quarters. At the stand-alone level, we have operating revenue of INR 366 crore for the quarter as against the INR 290 crore for the corresponding quarter of previous year, recording growth of a 26%. The stand-alone operations EBITDA was INR 72 crores for the quarter as against INR 48 crores for the corresponding quarter of previous year, with a growth of 50%. We're also happy to announce that at that the overall group debt level has reduced INR 312 crore from INR 380 crores for the previous year.

Thank you, Medappa. I will just do a quick brief before I let questions to come in. I think for the first time this quarter, we had crossed the INR 500 crore per quarter run rate. The result, as you have seen, has been strong. The one of the important decisions that the Board has taken is regarding the distribution. As you all know, we have been doing only dividend distribution in the past. And the past range of distribution has been between 20% to 30%. We have distributed in that range in the past 5, 6 years. However, the Board after deliberation has decided that we should increase the distribution to shareholders and that we should also consider buyback. It has been another way of rewarding the shareholders. So we didn't have it in the past. So we have decided going forward. We'll also consider a buyback once in whatever 2, 3 years. And that the overall distribution to shareholders, when you consider together the dividend as well as the buyback over a, let's say, a period of 2, 3 years would be now between 30% to 40%. So there's a major decision that has been taken by the Board. Accordingly, a buyback has been announced. The other point is that in the beginning of the year, we have said that we are putting a halt to the CapEx. The markets and the business have been robust in multiple segments and sectors. And that cap that we had put has been reopened. And as Mohan has suggested 2, 3 CapEx plans have been rolled out. In fact, some of them have been rolled out on a priority basis simply because of the demand situation, demands that change in our CapEx. We -- some of the strategies Mohan has touched upon. But again, let me summarize. The electronics parts, is a problem globally both in automotive and nonautomotive business, shipping and related issues, port congestion, costs have gone up, commodity prices has gone up. But our team has been done an excellent job of managing these difficult times despite the challenges of COVID, which still persists quite severely in the western world, particularly Europe, U.K. as well as North America. So with that, we are seeing that this current quarter will also be fairly decent, good, I would say. January had been pretty strong. We are seeing that the next few months February, March also will be reasonable level to end the year at a satisfactory note. With that, I will let the questions to come in, and I'll hand it back to moderator. Thank you.

Operator Instructions] The first question is from the line of Mukesh Saraf from Spark Capital.

My first question is regarding the margins that at the lighting divisions. We've seen that it's come out to about 11.5% from close to 15% last quarter. If you could just give us some sense on some of the restructuring activities that we have planned out there. And I think last year, overall, we have spent about INR 20 crores on restructuring efforts in SENA and these lightings. So what kind of benefits we are yet to see from there? Or have you seen some of the effects? And also, if you could just outline what could be the broad revenue mix there between Phoenix, Domestic, Osram, Trifa and Luxlite?

I thought you mixed some of the points in the question, but let me try to answer. I think you are talking about the margins at the Phoenix Lamps Division. For the quarter, the margin has come from at about a 10% to -- compared to last year to 11%. You must realize that we had Phoenix Chennai division, which was only acquired in the last October. So the YTD number is not really correct way of doing it because last year, in the beginning, we didn't have the Chennai division. For this year, we have. So Q3, number would be a more correct way of looking at it as possibly how we do look, I think, in terms of how the numbers are. The restructuring cost, I didn't understand which INR 20 crores you were talking about. You were talking about the restructuring in SENA or restructuring in Phoenix?

So more on the Phoenix side of it. We have done some restructuring with respect to Trifa specifically.

Yes. Yes.

I just want to ask if we have started reaping the benefits out of these?

Yes. Yes. Okay. I got it. Now, that's restructuring. I don't think it has that kind of a cost. There are some people change and some cost of letting go of some people and relocating 2 warehouse [indiscernible] in the larger things. I don't have the number at hand, but it is not that much. But anyway, having said that, the challenge in Phoenix as far as the Trifa and Luxlite is concerned in the current scenario in Europe. The idea just to bring the whole focus back the old strategy or the strategy with which we started was the Trifa and Luxlite will be our vehicle for global business outside of India. Then we realized that the cost structure of Trifa and Luxlite as a separate warehouse, as a separate Managing Directors did not justify because it was a competitive business. So that's the reason the decision was to shrink the operations in Europe into a single warehouse, 1 Managing Director, 1 group of people working, and that we will directly do exports from India and take the support of Luxlite to do the international business whereas no activity of handling, packing, reshipping will happen out of Europe. Now that is a totally different new strategy. That has been what we rolled out last year. And all these strategies take time. We're all looking at long term, not quarter-on-quarter numbers. So from a long-term thing, as you might have noticed in our business update, we also mentioned the direct export for the quarter has actually doubled. Although the base effect is small, but it has doubled. So there is a much -- there's a good traction. So that strategy of regrouping is working. So that's all I can say.

Right. Right. Understood. Any mix you can give between Trifa, Luxlite business and say the Phoenix, Osram business, sir, the domestic Osram.

Phoenix, I mean, Osram is buying as for a contract, right, I'm unable to divulge the data. But all I can say is that we are now today working -- every one of our plant is working on full scale. I mean there has been a lot of talk about LED. I'm sure people will again ask the question in this also. But we have no capacity. Today after buying Chennai plant of Osram, we are running out of capacity. We are running at a full run rate today. And we are adding capacity additionally by putting up another line, most likely in the Noida plant. To add another 6 million or 7 million, 8 million lamps capacity. So that shows the strength of our ability to manufacture very efficiently, cost efficiently and at the quality that global customers want. And that's why we are still continuing to do strong business with Osram. And then now we're starting to do business with Luminex, which is earlier Philips as well and starting to export directly. So I think all lendings are firing actually.

All right. Great, sir. And just my second question is more a strategy question. I mean you've always mentioned that we are looking at inorganic opportunities, trying to expand our product lines maybe in the related products as well. Where are we there, especially in the light of us now, you think to distribute more to the shareholders? So do we connect the two and say that probably there is -- there are not any immediate opportunities on inorganic expansion?

I think if you go through our business update soon after the buyback, we talked about inorganic opportunities and that we are actively pursuing. So I think that answers your question. I'm unable to say specifically. When we say actively, we do mean actively. And I think the opportunities will be there. I've always said that in the global auto component business, there's one too many players. And the consolidation will happen, and it is happening. Thanks to COVID, there are multiple opportunities. We are seeing, which is most appropriate for us. And it wouldn't have anything to do with our distribution policy. The distribution policy, which was -- which is a more futuristic in terms of how we want to distribute money to our shareholders. It was nearly 20% to 30%. Now we are talking about 30% to 40%. So it doesn't mean we still have a cash pile in our balance sheet. We'll continue to generate cash. And if you are distributing, let's say, whatever, 30% or odd, what happens to the rest. I mean still there is money getting generated. So I think we have enough cash flows to manage the acquisitions that we may plan to do on the future.

[Operator Instructions] The next question is from the line of Patrik Kothari from Unique Asset Management.

My first, a broad question on the demand side for the past, maybe 5, 6 months, all of us have been pleasantly surprised with the orders that we have seen. So just your comments on what is this leading to and maybe also have a sustainability part of it?

Sorry, what was the last part?

On the sustainability part...

Sustainability part. okay.

Demand that you see.

Yes. I think initially, we felt that there was a pent-up demand. You are all shut down and there is demand coming back due to pent-up and how things will be post-Diwali festival season. We have been seeing a fairly decent, I would say, a continued business traction, although January retail registration show some kind of a dip. So it's still -- it looks good but still, there is some amount of concerns on the sidelines as to why, for example, January, registrations have been below previous years, both in car and 2-wheeler segments. So I think we'll all have to be a little more patient and wait and see. Having said that, we still have a good demand for February and outlook for March is good. Now I think the next 2 months will really tell whether there is a positive underlying economic sustenance. So I won't comment anything. It looks different, but I would say -- I won't go out of the way, whether it's great because the January figures were a bit of a damp.

And the reason we are able to outperform the industry as such because these hands are going out. We also commented on our aftermarket units. Our numbers are much ahead of the industry. So strong hand replacing weak hands.

I think it's the same point that I just now mentioned is the consolidation happening and the stronger hands become stronger. I think that was the story of this business. And in aftermarket case, I think our aftermarket channels as Mohan just mentioned, has been doing an excellent work. So again, the GST, the grey market players getting marginalized, our ability to reach out to the market in remote corners, that helps in the aftermarket. And obviously, the OEMS, the people want to have a supplier, great supplier, quality cost, delivery, development and further data and give the business to ship as long as we deliver it and that it keeps coming. I mean we just mentioned about setting up a plant or extending our plant in Narasapura, one of our marquee customers. It's just a question of we doing better than the competition, and we are gearing margin share and a commitment from the customers, we'll increase the capacity we want more from you. So yes, I think what you said is right.

Fair enough. And sir, my second question on the CapEx side, first, this urgent to cap CapEx that we have announced how much would we be outlaying for that? And I believe this is to take care of short term, the spurt that we have seen. But going forward, maybe for next year or year after that any major large expansion, anything on far level, would you like to comment?

See, I would say simply that this was something customers said, are you interested in more business. And of course, we always say yes. And that's what has happened in the cable side of the expansion. And on the halogen lamps, I think on one particular variety, the HS1 and H4, they are complementary to each other in a sense in from manufacturing. We have certain -- we are foreseeing some capacity shortage for the next peak season. So that's a little longer term, I think, lead time item. So both of them will be in place in the next, I would 6, 8, 9 months’ time, intime for the next peak season. So that's what we are currently working on. So it's actually for the next year take requirement, not for today's requirement, but we are putting it in. The total cost will be about INR 25 crores for these two. And having said that, there may be some minor margin on CapEx will require for next year, I think the year-end is coming, we typically prepare a CapEx. I think for the next quarter, we will come out if there is anything major. At the moment, I don't see anything major, but some CapEx will be there.

But given this additional CapEx, it's only marginal as compared to what capacity you already have in place and we [indiscernible].

Yes, I would say, balancing the capacity in certain plants to make sure that we need the new requirement of customers. Suppose if it happens in [indiscernible], one of our not Indian customers, we have got enough infrastructural capacity already in place. We'll be able to deal with it. Whereas in this particular plant, we only planned it for x capacity, which is what committed by the customer. Now we're doing it x plus 25%. So we had to add that extra space.

The next question is from the line of Abhishek Jain from Dolat Capital.

Congrats on a good set of numbers. Sir, as you mentioned in your earlier call that you have benefited from increasing content per vehicle. So just wanted to understand how much increase in content per vehicle in 2-wheeler and 4-wheeler cable space?

Okay. On the cable side, when CBS came, there was some increase in content, I think that's what you're talking about. So that has happened, and it's done and dusted. It's an old case, it's no longer -- it's all in the place. So is there any further increase in content? No, there isn't actually.

So how much growth in the pricing?

Pricing, there has a no change actually because we are now approaching customers for possible some price adjustments. But at the moment, it's similar old prices only.

Okay. Sir, despite the increase in the RM cost, your gross profit margin has improved. So is it because of the strong aftermarket or pause on the input cost impact to the customer.

I think we also negotiate hard with our suppliers also. And we also -- there is always a pushback from customer to us, and we also push back to our suppliers. So we will sort of match the customers, whatever, if you get some price to our suppliers. So some amount of impact on particularly, some of the big steel mills, they are not going to wait for my customer to give me a price increases. So some impact is there. But it has probably come at the tailwind of it. We also plan our material very well. In fact, we try to -- knowing the market trend, maybe we do some smart purchasing. So that effect has not been so evident in the third quarter. But it will be in the fourth quarter unless we have not been able to get some appropriate decent price adjustments from our customers. So we manage it. And also, the advantage for us is, again, it's the person strong getting stronger. The stronger player has got a better buying power, and that also helps with the kind of volume we give for our components or our materials. Nobody else is able to offer, and that no supplier wants to lose, there is some pricing power as well for us.

Sir, my last question on SENA division. In SENA division, margin has improved sharply. Is this because of the increasing export from India, from unit line or improvement in the product mix and currency benefit?

I think Mohan touched on that. There are both side to it. I think SENA, in terms of the operations out of North America as our ORS and Wichita plants have started performing better than they probably have done in the past in terms of operational ability to do better. And added to that, I think, slowly and steadily, the exports from India is happening. And that will continue to get traction and that will continue to add actually margins. When it's manufactured out of here, there certainly is a better margin. So I think, all of that is slowly starting to get the effect on the number side.

So how much contribution right now from the export from India to the SENA division? What is your plan to increase it?

I think you need to come off-line, maybe you can talk together late on. Don't have it immediately in my mind. But it is starting to increase.

The next question is from the line of [ Stephen Shankar ] from Trustline PMS.

Congrats on the good numbers, sir. First of all, I wanted to understand, how has been this top line performance for Phoenix Lamps, excluding Trifa and Luxlite. So we have been saying that capacity has been fully utilized. So how has been the performance of Phoenix Lamps?

Our Noida division itself had a decent -- for the quarter, decent double-digit growth, for sure. What the exact number you're taking come offline, talk to [indiscernible]. It is a double digit. Yes.

Okay. Okay. And also in terms of margin performance. So currently, I think the Trifa and Luxlite has been impacting some performance of Phoenix division. So over medium to long term, are we seeing strong improvement in Phoenix Lamps' margins?

I think the margins, we are at double digit, which is pretty good in auto component business. Yes, there is some drag. I think we have made it very open and transparently, that there is some drag from Phoenix coming from Luxlite and Trifa. That's largely also because of the current situation in Europe. There are -- the big shop markets are not open. People are very reluctant to go out and buy. So the aftermarket business in Europe, which is the forte of these 2 companies is challenged because of the current scenario. So once those things go away -- I mean it won't go very, very soon, as you all know, COVID will be there for a while. So I think we have to be patient on that. And with the direct exports catching some steam, we are pretty sure overall, the double-digit performance. We are quite hopeful that we will be able to maintain.

The next question is from the line of Chirag Shah from Edelweiss.

Just a few questions from my side as well. One, how do you look at currency from given our rising exports because from here on Y-o-Y currency would be either flattish or marginal negative. So how do we look at that [indiscernible] in the past we have as that [indiscernible]?

Okay. You want me to answer the first question. Okay. Currently, yes. I mean, we have -- how do I say our net exposure to currency, up to 50% to 60%, we hedged always. That means there is a hedging position for 50% to 60% of our core exposure, net exposure. And for the balance, yes, how the U.S. dollar will perform over the period. Historically, rupee always depreciated against dollar, and there is currently a talk that -- I mean, I guess, there is a talk, but I don't know how far it will be so true that rupee will appreciate, not depreciate. If there's a major depreciation of dollar and execution of rupee, there will be an issue for a certain period of time. Let's assume from INR 73, it goes to INR 68 really has some impact on our dollar-denominated revenues. Yes. But that we also have a positive impact on our imports because you've got both are -- there is a fairly decent amount of imports as well. So the next impact, there will be some, but it may not be material for us. And whether euro will appreciate or depreciate, I don't know. I mean we have also had exposure there. So between the two, imports and exports and our hedge that we have, we are reasonably protected, but that is a problem of global trade. I mean you take certain bets. But what will also happen is that if [indiscernible] INR 73 goes to INR 68, our -- all our new contracts will be at the new rate. So there is always readjustment happening for all the new businesses. So for a period of time, there may be some challenges. But I think we'll all deal with it when it happens. So far, despite the dollar getting weaker, Indian rupees, the exchange rate of INR 73 is still very good for us. We're quite happy. If it is anywhere north of INR 70, we were quite fine.

So what are also referring to?

[indiscernible]

How do -- because our -- our international exports is likely to further go from here on over the next 2, 3 year? Structurally, currently how do you look at it? Are you -- is it an ever for you? Or how do you [indiscernible] currency and what was the to strengthen your core opportunity to it the impact of currency. So we are not relying on currency. We are efficiently [indiscernible]?

Yes, I don't think the currency is not kind of a lever or a main parameter, on which things work. I mean, if currencies in our favor it’s a bit of a icing on the cake. But if it isn't there, our hard-core revenues and hard-core margins will not change, I think.

Okay. This is very helpful. Now last question is there any downward revision from VW or BMW given this chip shortage issue as [indiscernible].

You're a little weak on my phone. Tell me again?

I hope I'm audible now. What I was trying to highlight is that your European customers, VW or BMW, is there downward revision of the business outlook from them since because of chip shortage or because of lockdown issues? And what is your -- what is the primary reason for downward revision?

No, there has been rescheduling of certain models and certain product lines and certain plants. From, let's say, few plants in Europe have been shut down for a week, but something else is running. But they've also given an outlook for us that in the next 3, 4 months' time. When things sort of get back to normal, they're actually going to catch up the lost business. That's what they say. So if let's say 2 weeks production has been disrupted, they're saying it's gone for good. They are saying they were going to catch up in the second half of the calendar year. This is what we are saying generally. So at this moment, there are some scheduled changes. And some reduction in schedules, not that, as far as Suprajit is concerned, it is not going to have a major effect because the overall traction is still good.

But this downward revision would be about 5%, 7%. I'm [indiscernible], I understand that once things normalize there would be stronger bounce back, but there will be 5%, 7% downward revision versus what we were expecting or could be larger one?

It is not beyond that for sure. Maybe a little less so. It's a week shutdown some plants and some 10 days change of production schedules and that kind of stuff.

The next question is from the line of [ Rashit Shah ] from [ Danke Securities ].

The first question regarding the CapEx plan again. So the savings revision, we are adding [indiscernible]. Can you just quantify what additional capacity that will happen or less?

On the halogen lamps, I think you're talking about 7 -- Mohan, will you answer that?

Yes, sure. We are adding 7 million capacity on the halogen bulb side, which is 1 [indiscernible].

And on the cable?

On the cable, It's more like I would say reorganizing, we talked about 300 million as our capacity, maybe it will add another 5 million here and there, but we will stick to the 300 million for the time being, although it's done more in a specific plant, whereas in overall schedule with the customer may not change.

Okay, understood. And in the opening remarks for the immediate, the centralized basically centralized [indiscernible] aftermarket. Can you just highlight what is the plan on and what is exactly?

Mohan, can you answer?