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Subros Ltd
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Ladies and gentlemen, good day, and welcome to the Subros Limited Q1 FY '24 Post Results Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Thank you, Lisan. On behalf of B&K Securities, welcome to Subros Limited 1Q FY '24 post results conference call. From Subros Limited management, we have with us today, Mr. Pramod Kumar Duggal, Chief Executive Officer; Mr. Hemant Kumar Agarwal, Chief Financial Officer and Vice President, Finance; Mr. Sukhbinder Gill, AVP Finance. I'll now hand over the call to Mr. Pramod Kumar Duggal for the opening remarks to be followed by question-and-answer session. Over to you, sir.
Thank you, Jayaraj. Good evening, ladies and gentlemen. A warm welcome to you for Subros' investor call for quarter 1 FY '23-'24. Quarter 1 of FY '24 has been a very mixed realization for us. This quarter, sales are less than the plan because a few OEMs continue to face the electronic component shortage, particularly in the models witnessing high demand. The company has clocked up sales of INR 694 crores. There is a 13% growth in Automotive segment, whereas in overall revenue, there is a 2% de-growth, mainly contributed by Home AC segment, where sales are muted because of climatic conditions. There's a positive trend of profitability improvement, though there is a small improvement. In addition to that, a significant development in the industry, I need to update the recent government initiative with an announcement of mandatory truck cabin for N2 and N3 vehicle categories to be air conditioned. The feature of air conditioning of truck cabin is necessary for providing comfortable working condition for the truck driver, thereby improving their efficiency and addressing the problem of driver fatigue. This notification was originally notified in 2017 with the date of implementation of January 2018, wherein air conditioning for N2 and 3 category was made mandatory. However, due to OEM representation, it was diluted to blower or air conditioning as optional. Now we welcome government's initiative to revise this notification. At the current situation, since this applied to N2, N3 categories of the trucks. So the estimated volume of this category will be approximately 4 lakh trucks. So estimated market size would be around INR 400 crores to INR 450 crores. Since Subros was preparing for this implementation since 2018. So our product range is almost ready, and our engagement with all major OEMs is already there. Few customers have already started air con fitments in truck as optional market. So far, it is successful because gradually, this percentage has increased from 4% to almost now 11% to 12%. So this would be incremental business opportunity for the company, and we'll update the progress in the subsequent quarter.Coming back to the results for quarter 1 '23-'24. We have shared with this results with the stock exchange and also posted on our website. Let me elaborate these results one by one. First I'll update about the industry relevant for our business. In this quarter, the passenger vehicle industry has shown a growth of 7% on a production basis as compared to the corresponding quarter of the last year, whereas Subros' PV segment, thermal product closed in quarter 1 is 9% in comparison with the corresponding quarter of the last year. So our performance is slightly better than the industry performance, mainly because of the model mix.Commercial Vehicle Bus is also improving because of the tourism sector and public sector revival, basic equipment ratio in buses has also improved. Our industry has shown a total growth of 46% on production basis in comparison with the corresponding quarter of the last year. Our growth in this segment is around 11% as compared to the last year.For the commercial vehicle N2, N3 category. The industry has shown a negative growth of 4% in quarter 1 as compared to the corresponding quarter of the last year. And we also followed the similar trends as compared to the last year.In Home AC space, we have muted our effort for Home AC products, business expansion just because of very high impact of the commodities, which was not compensated by our OEMs. So we were going slow on Home AC order booking. And unfortunately, this year, the climate condition is also not favorable to this industry. And most of the OEMs are ended up with huge stocks in their warehouses. So during the quarter, total turnover realized from Home AC [indiscernible] is just INR 2.2 crores, and we'll be watchful for the softening of commodity prices before we aggressively pursue this business again.As I mentioned, revenue from operation is around INR 694 crores in this quarter as against the corresponding quarter of INR 708 crores; overall 2% negative growth here. Our share of business in passenger vehicle air conditioning market is retained 40% and share of business in truck market has improved by 1%, now 43% as against 42% last year. And Bus AC segment also, we retained the share of business at 20%.Now I'll talk about the operational performance. Profitability has improved a bit as compared to the corresponding quarter. There are continued challenges in the supply chain due to the global increase in demand, which has started experiencing in the last 2 years. Commodity prices and logistic cost escalation and foreign exchange escalations has impacted on the margins in previous few quarters, though the trends have started softening and which has started reflecting in our financials also.The company has realized EBITDA of INR 48.8 crores in quarter 1 as against EBITDA of INR 45.35 crores in corresponding quarter. So if we compare EBITDA with the corresponding quarter of the last year, it has improved by 3%. And if we compare as against the previous quarter, quarter 4 of '22-'23, it is lower by 14%, mainly because of onetime other income book in quarter 4 of FY '22-'23.Profits before tax in quarter 1 '23-'24 is INR 19.78 crores, which is 2.86% of the net sales, and this has improved by 14% as compared to the corresponding quarter. Profit after tax in quarter 1 FY '23-'24 is INR 13.46 crores. Which is 1.95% of the net sales, and this has also improved by 18% as compared to the corresponding quarter. So overall summary, revenue of INR 693 crores, EBITDA of INR 48.8 crores, PBT of INR 19.78 crores and PAT of INR 13.46 crores earned during the quarter 1 FY '23-'24.Now update on the business side. As I mentioned, quarter 1 FY '24 performance has started improving and registered overall growth in EBITDA, PBT and PAT, even though there is a slightly drop in the sales, our efforts are consistent to grow in double digits during the year. And still, our plans are aligned to that. We continue our effort in terms of improving the margins through the localization and cost efficiency improvement, and we'll try to recover this very quickly.Localization focus to derisk capital from the global cost pressure. I've been updating the forum for last few quarters. It has started improving. Now 16% of our total revenue is the import content, and we have a target to bring it below 10% in next 2 to 3 years' time. There is a significant success in new business from our customers, business lineup for up to 2025 is almost completed, and this will ensure our sustainable growth in future. Thermal business in alternative fuel is our priority, and we have secured business of almost 15% of our turnover business coming from either hybrid or battery electric vehicle or CNG.A few new launches where we are part of supplies, Mahindra new tractor with the collaboration with Mitsubishi and M-Star tractor for the U.S. market. SOP of M-Star has already started. The trial run for Mitsubishi tractor also started now, which will be in SOP in subsequent months. We have also started SOP for Maruti Jimny and Fronx from our Manesar and Gujarat plant, and we see a very good response of these launches, which will help in growth journey for Subros.Product for EV thermal space for the upcoming model of Maruti is also under development with the support of Denso. And we also secured a major hose and pipe business of Mahindra and Mahindra future EV platform is our fourth platform for which we got the business, which has a value of approximately INR 90 crores per year, but it will be a gradual ramp up every year starting from 2024, next year. So for that SOP preparedness is also being done from our Pune plant.Thank you very much. And now we are ready to take questions.
[Operator Instructions] The first question is from the line of Aashin Modi from Equirus.
Sir, my first question is regarding this truck AC thing. So you have told that this will be a INR 400 crores sort of an opportunity industry size. Could you please tell us, given the current mix, what is the industry size right now? And is there a scope of market share expansion if the industry shifts towards truck ACs? And also if you could help us understand the margin difference between blowers and ACs. That would be my first question.
So you have 3 questions. One is what is the incremental market? Second is how this mix is going to be? And third, how the margins are comparable to the exist, correct?
End market. So do we have a scope of market share increasing? So we have around 45-odd percent in market share in trucks right now?
Okay. So as I mentioned, this overall industry would be around INR 400 crores to INR 450 crores by the time the SOP will starting. That is a full year of FY '25-'26. Right now, since the blower is mandatory and AC penetration is optional around 10%. So total market currently is around INR 100 crores, INR 135 crores. So there would be incremental market of INR 285 crores to INR 300 crores as this notification will get implemented. So the early mover advantage for us is that out of this 15% optional share, which is currently mainly dominated by Tata Motor or Ashok Leyland or Mahindra. So we have already product lined up and we are already supplying. So for these products, the conversion would be from 15% or 10% AC penetration to 100%. So that would be incremental revenue for us. Second is switching to other customers who were not -- right now only on a blower. So that engagement is also on, and we are trying to give them off-the-shelf product so that the implementation can be faster. On the market size, since we are already at 43%, we are intending to increase it to 50%-plus as this conversion will happen by January '25, mainly because of the product availability and the readiness, which is already planned a few years back. So we are confident that we'll be able to get up to that number. As compared to margins, so they are more or less comparable to passenger vehicle segment. So there is no much difference because products are more or less similar. Only the size and the capacities may change based on the engine or cabin capacity, but otherwise, they are comparable.
And sir, my second question is regarding the gross margin. So there's a significant improvement in our gross margin. So is the commodity price pass-through in the other price pass-through which we were talking about, are they more or less in? Or do we expect it to improve from here on as well?
So see, when the trends were on the upside, and we mentioned that since we are getting partial compensation or there is a lag or because of denominator or numerator remains the same, the margins were almost shrinking at that time. Now since the commodity and ForEx prices are softening. So that means the impact will be on the reverse side. Also, the effort of [indiscernible] improvement period of last 2 quarters where we successfully pursued this cost reduction has also contributed positively on that. So we see from here onwards, our strength should be improving on.
And sir, my last question is regarding the -- so we are building compressor for strong hybrids and EVs. So is there any development over there because it's a higher ASP product compared to a model?
So still, the visibility is online because it's a very large investment, and we are -- we have tried -- we have already engaged with the customer to finalize the specification because EV market in India it's still evolving. Still, the specification for vehicle segments are not very sure. That engagement with customers has already progressed, and we are trying to finalize the specification, which would be finally executed from 2026 onwards. So based on the final configuration, we'll decide the product launch strategy. Discussions with Denso and [ TIFO ] are on, and we are progressing well on that. So as and when we conclude officially on that, we will update the market.
[Operator Instructions] The next question is from the line of Abhishek from Dolat Capital.
Sir, if you can provide the revenue breakup in terms of the passenger vehicle AC, CV radiator and Home AC for the quarter 1 FY '24?
So overall breakup out of this broadly INR 693 crores is INR 490 crores is coming from -- sorry -- INR 543 crores is coming from a passenger vehicle Air con. Radiator ECM is around INR 100 crores and rest is from the other segments.
and how much revenue was from the commercial vehicle, especially what was the categorization in terms of the CV in trucks and buses.
So overall track buses etc would be around INR 30 crores.
Sir, as you mentioned that your market strategy and the market size would be around INR 4.5 billion. Is it for the OEMs only? Or what would be the aftermarket revenue if AC would be would be mandatory in the segment?
So aftermarket is excluded for that because there is no clarity right now for aftermarket retrofit implementation. So if OEMs will be supplying the mandatory AC-fitted cabins only or through cowl as a separate kit. Right now, aftermarket is not included in this projection.
So assuming your 50% market share, we can expect around incremental revenue of the INR 2.2 billion to INR 2.5 billion from FY '26. Is it right, sir?
So this would not be incremental because INR 450 crores would be the total market, if we take 50% to 5. And right now, also, we are doing around INR 50 crores to INR 60 crores as part of the blower supply. So I'll take incremental between INR 150 crores to INR 160 crores.
And what would be the margin of this particular business?
So similar to the PV. So it is comparable to the PV.
And is there any requirement for the CapEx from the -- for this business?
No. It will not be a substantial CapEx. Investment has already been done. Very small CapEx of INR 5 crores to INR 7 crores, INR 10 crores will be only for the tooling development, if required to execute the numbers.
And during this quarter, we have seen a very fast jump in employee and other expenses. Is there any one-offs in this quarter?
Which expenses you mentioned?
Employee and other expenses.
Hemant, can you update, please?
Can you repeat the question, please?
So in this quarter, employee and other expenses have seen fast jump. Is there any one-offs?
So share jump is because if you see the lower sales, which is [ fortunate ] in terms of percentage. And second is the [ heavy ] in the wage revision for the beginning of the year.
So on a full year basis, what kind of the employee expenses growth can we assume, sir?
For the full year -- or the question was the full year?
For full year.
Yes, for the full year. The [indiscernible] will remain in the single 67 multiplied by 4, approximately INR 250 crores.
So run rate will be sustainable?
Abhishek, the point is that with normally employee expenses, there are 2 variable elements. One is as the sales growth will happen, there will be certain direct manpower, which will be directly proportionate to that. And second, between 8% to 9% is the annual incremental rate, which cannot be applied on average to the overall employee spend. So these are only variable factors, which will be applied subsequently.
And my last question is what would be the CapEx plan for FY '24 and '25, sir?
'25 or '23-'24.
Sorry, sir.
Which year you are referring to '23-'24 or '24-'25?
'24-'25, sir.
Subsequent year. So it would be -- other than if we go for a static investment for electric compression, -- minus that it would be in the range of INR 100 crores, INR 110 crores.
So is it because of the capacity additions for the Maruti plant?
So it would be for the capacity expansion relevant to that because Marti plant if we understand it will be gradually ramp up. So 240,000 multiplied by the number of lines in subsequent year will happen. So we'll also grow gradually into that expansion.
[Operator Instructions] The next question is from the line of [ Varun Arora ].
If you can give us your view on this revenue generation from the tractor segment, you have started to supply to U.S. and Japan market?
So this sector expansion, which we lined up with Mahindra and Mahindra for Mitsubishi collaboration project would be a full mature volume would be around INR 30 crores to INR 35 crores. And this U.S. market, which is M-Star would be another INR 10 crores to INR 12 crores. So this market as a matured number would be between INR 35 crores to INR 40 crores where we see our future growth in this.
Approximate INR 80 crores for the year, correct.
No, total INR 35 crores to INR 40 crores for both M-Star as well as K2.
And what in Q1, do we have received any sort of revenue from that and what you are expecting from the Q2 and from this quarter.
That is [indiscernible] has not yet started. It is still to start. So M-Star has started in the month of July only, K2 will be starting in the month of December. So right now, the numbers are very small. It is just INR 2 crores from the tractor segment, it will grow as these 2 major SOPs will start.
Sir, on CapEx plan, so now we see is looking to double its capacity by the --
Sorry to interrupt, Mr. Arora we are unable to hear you clearly.
So on the CapEx plan, if you can tell me about, on this Maruti. So Maruti is looking for double its capacity by the 2031. So what's your plan on that? Are you -- would you be able to do that CapEx, I mean, by that time. So if you can just give some colors on that?
Maruti has only indicated one partial plan to that, although they have already announced that they will be going up to 4 million of capacity right now between 2.2 million or 2.3 million to 4 million. Only the clarity, which is given to us is that Kharkhoda project which is in Haryana, so our effort right now is only for that expansion. Another extension, which is yet to be clarified is we are not planning for that so far. But for Kharkhoda, this expansion is spread into 4 years, which is a multiplier of 2.4 or so 1 line expansion every year. So we are aligning to this expansion road map. And accordingly, the incremental investment is also spread into gradual 2 to 3 years' time.
The next question is from the line of Abhishek from Dolat Capital.
So sir, earlier, your margin, which is used to be around 10% to 11%. Now it has come down to 6.8%. So what is your near- to medium-term target in the margin, given that in this quarter, we have seen a tough jump in the gross margin, but there was an impact because of the negative operating [ way ]. If we assume that passenger vehicle growth that would be strong going ahead, then what kind of the margin you would be able to make in the coming quarters?
So Abhishek, this EBITDA margin of 10% to 11%, where we were before COVID period, the -- our first attempt would be to regain that target. So whether it is short term within a year, 2 years, I'm not putting a time line to that, but yes, we need to recover back to double-digit first. That is our first approach to recover. And beyond that, it would be dependent upon how the segment growth will be. So right now, we see car segment growth is quite prominent, and we see growth potential in the next 3 years' time. Of course, there are disruption between EV, hybrid or IC, which one will grow at what pace. That's the only differentiator. But yes, to compensate that disruption, cut market would be an add-on thing for us. If we realize the target number of, as I mentioned before, of 50% share of business, definitely, it will give a much better growth, top line growth also as well as on the bottom line also.
So what would be the closing margin for FY '24, given that your mix is improving because that revenue from the Home AC segment is going down and revenue from the passenger vehicle is going up. In that case, can you expect that margin will be around 9% or 9.5% in the coming quarter?
So Abhishek, it would be inappropriate for me to put some numbers, which are predicted or based on certain market risks. So I'll not be very explicit on exact numbers. But I can only assure you that this would be better than the last year. It would be gradually better than the quarters which we have already completed.
So gross margin, we have seen a very good improvement in this quarter. Will this be sustainable? And can you expect the further margin improvement in the gross margin front?
If there is no global disruption further and the economy is more sustainable. Yes, it is. If there are unforeseen disruptions, then there would be a slight risk on that.
And in this quarter, you also mentioned that you got the benefit of the better ForEx. So will it be sustainable in the coming quarter? And what was the benefit in the first quarter?
Hemant, can you take that, please?
Please for foreign currency, what's your question?
Sir, in the presentation, you mentioned that the margin was benefited from the ForEx movement in this quarter. So it was capable for you. So just wanted to understand what -- how much was the benefit and how much it will be sustainable?
So see, sustainability [Foreign Language] as you know, it is back to back reinvestment from the customer on the quarter line. So sometimes, quarter lag impact is posted compare quarter lag impact may be negative. It is totally driven by the currency movement. This is the existing factors. So if you see the quarter 4 impact in Q1, the quarter 4 for currency rates were high, now currency rate has come down. Again we were 61 in the quarter 4 now it is at 58, 59. So you will get an investment from the customer at [ RSA ] 61 and for SEBI 58, 59. If you talk about second quarter in neuter because it's a constant currency movement in the same quarter so your cost and the revenue is matching. It is very difficult -- so what is sustainable? Because it is sustainable, it may only impact with a quarter lag. Generally we will get -- it will get subdued.
Sir, in the radiator business, how much the growth in this quarter? And what is your revenue target for FY '24? And what would be the mix in terms of the passenger vehicle and tractor?
So in radiator business, last year, we did around INR 390 crores. In this quarter, we have done around INR 108 crores totally. So we are expecting that this year, we'll be closing around INR 450 crores to INR 460 crores on the [ ACN ]. There would be growth of almost double digits here. When we add the tractor, heat exchangers also, which will be in subsequent years, this number will be growing. And I think a mature business of radiator will be able to clock around INR 550 crores to INR 600 crores.
And in this quarter, basically, in Home AC, we have done only INR 22 crores. So last year, we had done around INR 85 crores. So we are able to cross the last year number or you will see the 40%, 50% degrowth in this year in the Home AC segment.
Just to correct you, Abhishek, this year, we have done just INR 2.2 crores of Home air con. Last year, business was on upside where there was a lot of pressure on the bottom line because of the commodity escalation, which was not compensated and we struggled on the margins last year. So deliberately, we have taken a call not to pursue this business more aggressively unless we get a back-to-back compensation from customers on all the escalation. So we are just waiting for this industry to soften -- there's no issue in demand side. It is up to us how and when we want to pursue this business aggressively. So of course, it will not be comparable to the last year. That is for sure. But we'll see how we are pursuing this.
So can we expect this, this year, Home AC would be most of because of this problem you are facing especially on the margin side. So -- and most probably that revenue would be around in the range of INR 10 crores to INR 12 crores only.
Yes, it would be around, I'd say, less than INR 20 crores, but we'll be watchful on that business development.
And my last question is on this -- how much gross and the net debt of the company at this point of time?
Net debt -- gross debt or net debt? Hemant?
So the long-term debt is very negligible, we had 100% by the next year, it is only INR 10 crores. The working capital limits definitely we are using the utilization of working capital is approximately INR 50 crores to INR 60 crores.
So total would be around INR 70 crores.
Yes, total INR 70 crores. So the long-term debt will get repaid by end of next year, and working capital will continue.
The next question is from the line of [ Neil Doshi ].
2 questions from my end. So firstly, can you please share some color on the products that we are manufacturing for the EVs and hybrids in the PV segment? And also in your opinion which products are higher margin products and where we see the major growth coming from?
Mr. Doshi your voice is a bit heavy. Can you be slightly away from the mike, please?
So my first question was on if you can share some color on the products that you're manufacturing for the EVs and hybrids in the PV segment? And also in your opinion, which products are higher-margin products and where do you see the major growth coming? My first question.
Okay. So for the EV, as I have been mentioning before, for thermal products, there is not much change other than certain routine and certain electronic parts which are getting introduced. So EV, we are -- EV or hybrid, we are supplying HVAC. We are supplying radiator. We are supplying condenser, hose and pipe, compression since it is used electric right now, we are not there because this product profile is not with us as of now, but that's what I mentioned that we are working to localize this compression going forward. In terms of margin, they are not very significantly different. But yes, since these are new technologies for certain new technologies, there are slightly higher realization from the customer, mainly because of the amortization and the investments. So going forward, this will also neutralize because there are a lot of pressure on the OEM to reduce the price difference between IC to PV or hybrid.
And my second question was on the localization. So we have recently been focusing a lot on localizing our products to reduce the global dependency. So again, here, you could share some details on what kind of cost savings we could -- we can accrue on manufacturing the products domestically?
So for last 5 years, we started the journey localization portion and we were around 30% of the total revenue was import and now it is remaining 16%. So we have seen there is a substantial value add when we localize in India, of course, one, there is a duty impact, which is neutralized here. Second, cost of manufacturing in India is slightly better as compared to Japan, Europe. So now going forward, we have a target to reduce our import content by another 6%. Of course, there would be certain investment initially, but there will be on long term, there will be a benefit coming into us. So I can say, around 8% to 10% is the line benefit of through localization.
The next question is from the line of Annamalai Jayaraj.
I have only one question. Sir, any update on this railways?
So yes, railways today and tomorrow, the approvals are finally going on. So we are expecting this approval will be completed by this month only within the month of August. Based on that, now the product readiness is almost concluded. There are a few tenders which are in pipeline, which will be rolled out in the month of September, October, which are very large tenders. And if we are successful in taking these tenders. Of course, we will have a very good start in railway business to aggressively pursue.
But earlier, we had some target of INR 100 crores, INR 150 crores in railways. Is there any --
I'm not changing my expectation. Of course, now since product performance is very good. We expect these numbers to be realized. Only the [indiscernible] so as the government will increase now that there is already effort from the government side for improvement, aesthetic improvement and renovation of all old coaches and also this Vande Bharat pilot also is very aggressively launched. So we see these numbers happening in the short and long term.
If we get this order, the execution will start from current year or next year, sir?
So it will start from maybe February onwards, gradual, but next year will be the full impact because I think the tender duration would be around 15 months or so.
And other than now railways any other -- I mean, non-other was -- we have been saying a few other things but anything working out, sir.
At this stage, no, because first, we need to stabilize whatever we have because a lot of disruptions, a lot of capacity expansion and a lot of new technology expectations from the OEMs. So first, we need to fulfill these all expectations before we start pursuing to other ventures.
Ladies and gentlemen, that is the last question. I now hand the conference over to the management for your closing comments.
So as summary, what I'd say is that there is some positive trends coming in now. Market is showing a very positive sentiment, recoveries are expected very soon. FY '23-'24 is looking very promising. We are still maintaining that we'll do double-digit growth in this year. Margin side, also, there is some positive trends now appearing. Quarter 2 definitely is very aggressive, and we see better growth as compared to quarter 1. So this is the only comment I have at this stage.
Thank you members of the management team. Ladies and gentlemen, on behalf of Batlivala & Karani Securities India Private Limited that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.