Vivek Chaand Sehgal, chairman, Motherson Sumi Systems says, ''We are going to move more towards the quality of the top line, which means improvement on the bottom line. Our target for this five year plan, we will definitely come very close to 40% ROCE. Everything is moving in that direction.''
Following are the excerpts from the recently concluded conference call following their second quarter results:
Could you brief us about the financial performance of Motherson Sumi Systems for this quarter?
The revenues have grown 153% with the growth after tax by about 467%. Without SMP, last year also we have grown over 24%. The domestic volumes and the sales outside India have also grown very healthily and SMR again performance is very strong and in fact their growth is about 17% in Euro terms and 25% in Rupee terms. EBITDA has also improved by almost 88% and right from day one I think it has always been EPS accretive. SMP, we are quite enthused by the results. Please kindly remember that almost about 18 to 20 days are lost in August just because of the holidays in Europe. They have also delivered a cash positive result from July to September quarter.
I think the standalone business has done phenomenally well in spite of the conditions of one of our largest customers in India. They have grown 44% on exports and domestic sales also has grown by about 17% in spite of all the difficulties that everybody else is facing. What is also very interesting is that our debt has been managed virtually similar to the March 2012 results that we had announced.
Could you throw some color on the sales growth in SMR? And when do we expect the material scale up of the new orders that we have received in the last one or two years?
The SMR's performance, in the last quarter we had announced some new orders, and we have been receiving orders for the last three years, and Hungary plant is doing much better. The Hungary Plant II itself just in Q2 has done about 28 million already. So that is very healthy.
Our Brazil plant has also started small sales, but they have started, so that is good. Good growth has come from USA, has come from Korea, China, as you know Hyundai is doing very well, and we supply maximum to Hyundai all over the world. Also, generally we have been a bit hit by the results in India because of Maruti's closure, but other than that, I think by and large everywhere else things are going okay.
What do you see as the sales growth improvement for SMP? What is your sense over the next one or two years, how does that look?
I think we are continuously picking up a lot of orders. Last quarter, we had already announced EUR 1.3 billion worth of lifetime orders. We have already quoted for almost about 4.5 to 5 billion. So I think one can easily imagine that SMP would grow at a steady, I am not taking into account new growing markets, but would steadily grow at about 15% to 20%, 25%, depends upon the year.
With SMR Hungary second unit now ramping up. When can we really see SMR kind of performing at its peak? Is it March quarter or June quarter; is there something with which we can think of?
This is again depending upon the car maker. So we are there in a long-term thing. We are not a quarter-on-quarter company. I think we have given you a clear guidance that in 2014-15 we will go towards ROCE of 40%. So, as car models ramp up and things happen, the new plants are coming up, we are now setting up in new plant in Langfang in China, with the new plant coming in Yancheng, there is a Beijing plant coming up. There are plants coming up in China. So a lot of things are happening and it is good, as long as you see positive growth in the top line and you see a healthy growth coming in the bottom-line we are okay with it, we do not look for deadlines as to March or December or June, really cannot guide you on that.
Can you just throw some light again on the European market and the China market especially how are they moving in the luxury car segment?
It is all very specific to the car makers. Our car makers have not yet given us sort of a red flag or something like that. So we are just moving as per what they are saying. Definitely, there are certain car makers in the world which are a bit on the lower side, some French car makers, Italian, something like that. There are some issues which I think they will overcome within the next 3- 6 months and they will be back. So Europe for us, definitely a bit on the weaker side because the overall numbers of France and Italy, but generally on the German car side it is going quite okay. In China, it is doing very well. There are no issues at all. I think you should always keep one particular figure in mind. The 6.5- 7 billion people in the world and there are just 85 million cars that are produced in the world every year. So, you can see the equation.
As you say there was no near-term opportunities and may not go for QIP. But, are you still looking out something if comes in maybe next one year time you see some opportunities…?
Definitely, we are looking at three acquisitions and if they are worthwhile and we do get a good fit, we will look at it. We are always in the acquisition mode.
Would you able to comment a little bit on how you expect to get synergies from within the group for equity?
We are definitely looking at that, but one must keep in mind. We cannot do that immediately, just off the shelf, because you would then put some companies into chapter XI, there could be a lot of bad press and things like that, so what we are doing is, wherever there is a bankruptcy in the supply side, we are picking up all the tools and we are picking up whatever the product is, and bringing it into Motherson fold and supplying it to SMP, so that their lines are running without any concern.
We have a lot of facilities in Europe, we also have facilities in India, and in Sharjah, and all these places, so we decide, we know what is the size of the mould, where the machines are, where the capacity is available, we shift it over there, and keep supplying to SMP. However, what is important is that the new orders that we are quoting for, the RFQs that are there, we are putting in a lot of efforts to put in and give an option of our existing companies supplying for that particular thing. So, I think the real phenomenal benefits will start somewhere around a year and a half, two years, two and half years, depending upon when that model is going to be produced.
If we adjust the Forex margins comes to 3.7%, which is a good uptick if we compare on a YoY basis from 2.2%. How one should look at SMP margins going ahead at least say from next four to six quarters. It still would be in restructuring mode?
What we are doing is correcting the problems that are there in every unit. I explained this a bit time ago, but I will explain it again. Every unit is looked at in Motherson. We don't look at companies, we look at every unit, because that is where the money and profitability is increased and improved. Now, we did have some hot spots, we will improve some of them. There are still two hot spots, which are balanced. They will also come under control hopefully by March. Now the thing is that, these particular things are being, there is more cohesive things coming. The whole group is now thinking together.
We are correcting the man power, we are correcting wherever there is an anomaly on capacity or as I said if a new paint shop is required, then we are looking at the new paint shop, we are doing all those corrections, so definitely the idea is to bring to healthy high EBIT level very soon and I think at the next four to eight quarters, you will see that definitely, we will be looking at double digit EBIT.
You have the things you have generated good amount of operating cash flow, it has been used here for payment of interest and Capex, so free cash generation and net debt reduction, when can we expect those things to turn out internally. How are you looking at that particular point?
We are focussing on one thing and that is free cash and we will continue to focus on that. We are very comfortable with our loans. We are very comfortable with the interests and everything and all that I told you most of the interest is sub-5%, so I really don't understand, why we should be giving out what our strategy is, but definitely if we get an opportunity, we would like to take on more this thing. The target for the group is 10 billion by 2014 and 2015. Our target for MSSL for 2014-15 was 5 billion. If you extrapolate the two quarters that we have done, we are already almost crossing 5 billion in this year itself. In the third year, we are going to achieve our top line target.
We are going to move more towards the quality of the top line, which means improvement on the bottom line. Our target for this five year plan, we will definitely come very close to 40% ROCE. Everything is moving in that direction and I think it is too difficult for us to keep telling that now we are thinking this, now we are thinking that because there are so many options, so we will look at these options as they come.
Motherson Sumi Systems Limited (Q,N,C,F)*