Yeah. Hi. Thanks, team, for taking my questions. Congratulations for the closure of this deal. Good to see the business diversification continue. I have two questions. Firstly, on this acquisition. I just wanted to hear a little bit more from you, you know, in terms of what happens to the management team. Is it the entire team coming along when you're buying this business? And more from your perspective, you know, what is the, I have heard that businesses that you pursue typically should have a right to win, right? So I'm just trying to understand when you look at this business. What is the biggest right to win here? And what does the competitive landscape sort of look like? positioning, I know they are the leader, but how are the business dynamics? is it about the product? Is it about cost? What is the edge that, this business has?
Sona BLW Precision Forgings Limited analyst Q&A
Thanks, Gunjan. I am very happy to get a non -EV question! Frankly, management is very, very important to us. That's one of the first things . The first question we ask ourselves is, see buying things, looking at financial metrics, we are not traders; we are a permanent group. It's easy, you can
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buy something. It may look good on finances. How will you run it? And then how will you grow it to become an institution on its own? You would need capable people. We don't believe we are some superhumans who can come into any business and, you know, make it great. We rely on people who have capability and drive and have had some constraints, maybe it is constraints on capital, maybe it's constraints on focus. Like in this case, it is a great company that is part of, for that company, it is not a core business and hence, it may not have got the attention that if it got, it might prosper more. That's the thing. All the management team of the current railway equipment division of EKL is coming along and we would like to add more to the t eam, but everybody will be coming along. The second part, the right to win , I think that question usually you know that line, I said that maybe before - ‘pratyaksh ko pramaan ki avashyakta nahi hoti’. It means what is primal does not usually need evidence. If you have been the largest market share in any product category for decades, you would usually have something. But if you've been a market leader in a product category for some time, along with h igher margins, kind of like the last point, there will 100% be some reason for that. It is a three-player market. So, Gunjan, brakes is a very critical thing. So, there are big global companies, one big European company, one big American company and this one Indian company; three of them compete. The product validation process is super strict, and the entry barriers are very high. So, these three compete amongst each other. Sometimes cost, sometimes technology, depends on which generation of product you're in. Like in automotive, because if it's a product that's been seen for 20 years, then you have to be much better at process quality cost. If it's a product that is new then technology and how much better you make it for the customer that comes in also, cost will always run. There is no, I don't think there is a single customer purchase decision in any category of any product where the price is no value, maybe apart from Giffen goods that we studied in economics. Everything else does have that thing. Did I miss any part or no?
I think this is useful. I mean, the message that I get is still a very concentrated market, and it's basically just the validation from the government agencies, which is relationship over a period of time also matters a lot. OK, the second question that I had was on the order book. Now, we continue to sort of see the ramp-up in the programs coming through on the full ramp- up line; typically, you've had these 29 -28 programs which have won but not really translating into revenue. So, I just wanted to hear again from you, given that the entire set-up in autos with the slowdown is that, should we continue to still sort of work with the assumption that this book will translate into revenue three years out? Does that still, sort of h old true? Or should there be some change to the timelines there?
See, there isn't much that gives me any ground to change my view ; there is, there are two programs that are delayed: one, a European program that's delayed by a year, and there is one Indian EV Two -Wheeler program that's
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already been delayed for six months. Apart from those two, I don't have any instances to say one way or the other and that, frankly, also could happen. I don't know if it's a powertrain link. Model launches getting delayed happens. It is more a factor of , I would say, overall economic situation or customer readiness levels. I don't know which one it is.
But fair to say 231 billion or 230 billion over a span of 3 to 4 years should translate into revenues. You don't see a major risk?
So, I can tell you this : I don't think there is a single program there, and Pratik, you do confirm, started later than 2020, like at least the start of the session, fully ramped up or not, I don't know. I think there are some in there which are beginning FY27 calendar at 28 I doubt I would, you know.
Yeah, yeah. So that's completely right. Most of the programs will start by FY27.
Correct, because Gunjan as you know, 24 months and beyond that is really, it will be exceptionally unusual.
Thank you. We go to the second investor, Prat eek Sen. Your line is unmute, please go ahead with your two questions.
Thank you for the opportunity. Sir, can you help me understand the domestic EV traction motors and controllers market? And how is this market evolving? And what's our market share?
So, it has been our fastest-growing product category, I think, for the last three years. But that is because the waste was incredibly small, and this industry was growing quite fast till the first shock came when the first duty withdrawal happened. if you remember May last year, then I think now again, we are where it's coming to a stable thing and all our growth comes from new programs starti ng. Actually, that's been true for most of the industries we operate. If you look at the underlying, Rohit does a good job each time each quarter he talks about that industry, un derlying growth was like 2% -3% whatever and our growth was this much, we have always grown faster than that because we grow on the order of new orders, basically means either wallet share with an existing customer or you get more customers that increase markets. That is how we have grown. Right now , I don't think the EV two-wheeler industry is growing very fast now at this stage. Market share is very complicated because what is the denominator, EV two- wheeler plus EV three-wheeler plus EV four-wheeler or just EV two-wheeler so that it varies. And also, by the way, the complication is that it also varies from month to month; if you notice the EV two -wheeler sales number, the fluctuations are quite wide and depending on which OEM is doing better or worse. Our market share also fluctuates a lot every month but, Sat maybe you can answer this. We can do the denominator. How many wou ld we be selling per month?
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Right now, we are selling around 20k per month.
Correct, So, on an average, Prateek, 20k per month. So, if you take and most of it is EV two -wheeler. So, if you take a two -wheeler market, I don't know exactly how many vehicles are for every month. But use that as the denominator because each one will have exactly one motor, none of them have two, you will get our market share or get close to it. Did that help Prateek?
Yes, sir. That's very helpful. Thank you.
We go to the next investor with a question. Rosen Lewis, your line is unmute. Please go ahead with your two questions.
With regards to your recent purchase of EKL ’s RED, right? So, I just wanted to understand, what is the kind of revenue that you anticipate it adding on to the overall the company's performance in the upcoming years. And secondly, what are the kind of competitors that you anticipate to be competing with alongside EKL in the braking system and the other businesses that EKL is involved in? That's all.
So, I will let Rohit or Amit Mishra to answer this. Also, in tribute to their role in this transaction. These two gentlemen led and closed the entire transaction. I did very light lifting. So, I'll let these two answer the question.
Amit, are you taking this one? Ok. So, I think the last year revenue from this business was about 900 odd crores and their EBITDA margin is about 18%. So, that's where this business is currently.
So, is it EBIT or EBITDA?
Yeah, sorry EBIT. And that's what they report. So correct. So that's where they are. That's the size of the business correctly.
We don't give future guidance for our business, neither will we give it for this business after acquiring it. So, we can only give historical numbers.
Is there a follow-up question on this?
Hey, Kapil, would you like to go ahead Kapil?
I just wanted to check if there is any follow -up question on this, or can I take questions from here?
Yeah, I just wanted to understand the flavo ur on the competition alongside EKL for the railway business in the business that EKL is involved in . Any competition that is involved against which you all would be working towards?
I think I did mention there are two other big competitors. One is the large US origin brake maker, and one is a large European brake maker. You know, we
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don't take names of other companies in our presentation. But it is a very clear market. In that case, the brake category that is. There are other products in which there are competitors, but that's on the slide. And second, listen, just to help and maybe w e can go to that slide. Pratik, can you take us to the financials slide, which would be no. 6 or 7 of the acquisition part and why we don’t want to guide it? So, if you look at it, this is a very, very high growth rate, right? Because this is the FY21 of 479 crores with this and now 950. Every year it won't be like this, there will be some years which will be not so fast. Like this year, there has been an election year. So it will not be the fastest. That's FY25 mig ht have been most likely be flat. But by the time we get in, which will be by the time we'll take some time to close also. The fact that we don't know exactly when? Only then does the journey begin for us to grow. The past? And what growth has been in the past is not necessarily a great guide for the future, but it does indicate that if investments into the railway sector, investments into building new tracks and new locomotives continue, the growth rate can be expected to be fairly high, how much that will be like I said, we don't guide because of the very simple reason. I don't think any of us, all of us exult in trying to find certainty in a world which is inherently uncertain in the future that is inherently unknown. There is no way for us to know nine m onths later whenever the railway budget comes, what exactly will we respond to? So instead of trying to do that, we focus on trying to do what is in our control, trying to do the right things, trying to develop new products, win new contracts, win new businesses, work on cost, work on R&D and we will continue to do that as we have for the last 3.5 years that we've been public, you've been seeing us. That's exactly what we will do with this business. That's exactly what we do with business. We will continue to do those things in that nature, guessing what will happen and trying to predict that and then share it with the world. I don't think that is something we have done, or we'll do.
I’ll take a couple of questions from the chat box. So these questions are from Ayush. The first question is if the team can explain large with respect to addition of orders through our order book also, are we seeing any delays in execution of others, especially concerning European geography?
I didn't quite understand the first part, but I can answer the second part. We have one; I actually did answer that there is one European EV -related new order whose SOP is delayed; apart from that, we have not seen any other delays outside India and one India EV 2-wheeler. I think I already answered that. The rest is a demand thing. Europe PV, India CV, US off highway - these three segments are seeing a fairly bad slowdown ; the good thing with diversified revenue streams like ours is th at even in this environment, we can do good things. Yes, there will be quarters where the headwinds would be so high that you can't win. But these are the three that , for now, I can say are the most of them; the rest are flat, mostly flat. But was that the question? I didn't get the lag order.
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I mean, I've just read from the chat box so I'm not really sure what is being asked here. Maybe Ayush you can raise your hand or reach out directly.
Correct. Write down again in the box. And what is the meaning? Because see, you get a purchase order from purchase order to SOP bill always take between 18 to 24 months. Sometimes , it's faster if it's a running product and you're replacing someone, but that's not always usual, especially if you're a going to spec or black box type of company like we design the product. So design process has a longer time or if it's a very new type of product, then sometimes it goes even beyond 24 months. That's the thing.
Ok. One more question was there from Ayush, the fairly new plant set up in Mexico. Can you talk about the capacity utilization of that plant? And how are the synergies which we are aiming to achieve in America market coming along since this acquisition?
Sorry, which acquisition?
I don't know, I think maybe this is just related to the plant in Mexico only
Ok. So, we have not acquired. So, capacity utilization, we have to put up the equipment first. Well, Vikram. When do we expect it to start production?
Q2 or Q3 of next year. So, October timeframe.
October 2025 and only a quarter after that would a capacity utilization number have any meaning.
And then one question is there from Mike. The EBITDA margin of the railway business you are acquiring is lower than the company average. So should we expect it to converge up to the current company average over time?
I’ll let Rohit answer that, but one we don't know the EBITDA margin because it's never been reported. But no, I doubt that I doubt it will converge up to the current company.
Sorry. Kapil, could you please repeat the question?
Yeah, sure. So the question is EBITDA margin of the railway business you're acquiring is lower than the company average. So should we expect it to converge up to the current company average over time?
I think this would be too premature, let's assume the current EBITDA margin continues for now. Ok. But having said that, the PAT margin would be largely lying with our current PAT level, so at a PAT level, it should have a similar margin.
So, I guess that's for the Escorts to answer and not for us to answer. I guess their board meeting is coming up shortly. If Narottam can reserve this question for that meeting.
But all jokes aside, I think it would be there in the schedule. So, I'm pretty sure they would have put up on the exchanges this decision themselves. When there are two listed companies involved communication would be there. But I would say, or you know th at Escorts Kubota Limited is owned majority by Kubota Japan, which is one of the largest farm equipment manufacturers in the world. For them, if you look at this railway equipment division as a percentage of the global revenue, not jus t as a part of Escorts Kubota Limited, even as a part of Escorts Kubota Limited, I don't know, it's like 13-14% of the revenue. But if you look at it in a global thing, it would be a very small part, maybe a percent, maybe less. It isn't their focus; it is something that is not aligned with the rest of their business. I think that's the reason. Anything more than that seriously also, not in a lighter way, I think you should address to Escorts Kubota Limited. We estimate it to be between 18 to 20% EBIT right now; let's just do last year. So that's 179 upon 950, right? So that's 18.8%. So yeah, 20-21% should be there. And those are the numbers Escort Kubota Limited has been reporting the railway division number as a segmental revenue, the revenue and EBIT and all of those numbers are there in the public disclosures every quarter part of the investor presentation. So, all of them can be easily found in the public domain.
OK. Vivek, I have actually one question for Mr. Deshmukh if he's there since it's the last time we are interacting with him, sir, on this public platform. So, I would like to know, in terms of you're leaving behind a legacy, right? So we just want to understand what, what do you think is the strength of Sona as far as the R&D process is concerned? the approach to R&D and what kind of processes have you built? So, that we or the company doesn't miss your presence as you move out.
Firstly, I think one of the strengths of Sona Comstar has been R&D, it's a company built on technology, if you see the kind of financials that you're seeing purely because of the technology that it has and it owns. So this company doesn't depend on externa l help for technology. It is completely owned by itself and developed by itself. And this has happened over the last 25 years. So the processes for R&D, processes for developing new technology. And when we talk about R&D, it is not just about products but also about the processes. So both processes and products R&D go hand in hand, and the processes for developing the processes and processes for developing the products are extremely well defined, and the company follows TQM practices. As I think everybody knows, in TQM practices, you have a process. It is a process- driven approach. So everything is, it doesn't depend upon the individual; it depends on what systems you have in place. So already very strong systems are in place. And therefore, when I leave, I leave with the sense of satisfaction. And I have full confidence that the team
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under Vivek and Vikram and Sat and Darko will take this company to the next level.
The next one, we will go to Mukesh Saraf. Mukesh, your line is unmute. Please go ahead with your two questions.
My question is firstly on the acquisition, just trying to understand the, one of the key strengths, is it? So, my question is, is pricing one of the key strengths of the Escorts Kubota braking systems? The reason I'm asking is that this is obviously competing with large European giants who have products and technologies throughout the world. And when I look at the margins of , say, one of those companies, it is upwards of 35% in India. So , I'm just trying to understand if pricing is basically localizing some of those technologies here and being able to supply it at a lower price. Is that one of the key strengths here for this braking business?
So, Mukesh, the thing is that, based on our understanding of the market and their positioning, Vivek already mentioned that this is a market which is and especially if we look at brakes, which is their largest product. It's a market which has three players , and they have a large market share. So, it is both price and quality because eventually, all these orders, railway orders, are run through a tendering process. So , price cannot be the only criterion . And as you can imagine, brakes are a saf ety product. So this is, this is something on which railways or any company would not compromise just for cost reasons. So it has to be both, it has to be quality as well as cost.
In the general. I don't think there is any category anywhere in which you can be the largest market share by being cost alone. You have to be good and have a good cost. We've been in the auto business for long enough to do that. It is never price alone. You have to do two out of three, either best, cheapest or most convenient. You have to be at least two. If you are all three, you are god, but at least 2 out of 3.
Absolutely, Vivek. So the reason I asked this question is, are there cases where you have, you've probably seen in the past , that EKL’s braking business has kind of brought in new technology, maybe even ahead of the European competitors? So that's the reason I asked the question. So have you also been, have this, has this also been technology?
True. True, true. So, Mukesh, yes, the answer to that is yes, we can't talk too much about it. As you know, it is an announcement with an intent to acquire till it's closed. We don't actually own the asset, right? So there are some things we can’t disclose, but the answer to that is yes. However, there is a very, bizarre thing in railway, in the private space if you are first with the technology, actually, or first mover advantage that you get a lot of market and in railway actually becaus e they always have to have multiple suppliers for each product, you have to actually wait for others to also come up with the technology only then. So it's slightly different from our area. but , the short answer is, have they been able to do it in the past? Yes, and can we do it in
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the other product categories also ? The answer to that is also yes, and third, an unanswered part of your question is that when there are big global people. We love that and that is what we love doing. What do we do in differentials? We compete against big, big global companies. Motors, we compete against big global companies in lif e in general if you're an ambitious person who wants to achieve and create something of significance. Find people above you and compare yourself to people bigger and better. Do not just compare yourself to the lowest of the low and be happy and satisfied fighting for that. Let's compete with better people. That's what we've done in every single business that we do. That's what we intend to do in this one.
Got it, got it. Thank you for that. And secondly, my question on the fo rging business is if there is any colour you can provide on one aspect that I was looking at, which is your nonferrous forging. So, you have mentioned that now for the last few quarters as future products. So , are there any updates that you can provide anything at all on non -ferrous? And the reason I'm also asking this is obviously now with the new business of railways, how is the top management's focus going to be shared across these business lines? So, yeah, this question.
So, the first part is easy. I won't even bother, because if there was an update we would have shared, you know, when an update has to be, that we have won a purchase until then all updates are in a way meaningless to at least the shareholder community because we internally and I mean, you know, we track it on the entire technology readiness level. Each product from TRL1 to TRL7 is the progress that is all in -house. The TRL8 is when you get a customer order only then does the disclosure make sense. So when that happens, we will. Effort is relentless, result you know, sometimes even with best intention doesn't come. But when it does, of course, we will share. The second part which is top management bandwidth. I think I partially answered this question to Gunjan, which is why we like buying or acquiring businesses where there is already good management, we don't intend to do much. I mean, you look at our history, NOVELIC, you know, the entire team is there, right? I probably go there once every four or five months . Rohit spends some time with them, but mostly, we do it on phone calls. if it does require a very heavy involvement in us going and firefighting, we'd probably not do it. We hold management bandwidth and available time to be very sacred. In fact, we will even go to the extent of taking our most valuable, and we don't waste them lightly. So, we like getting businesses with great management teams and good leaders. I mean, look that business has gone from about 450 to 950 in 4 years. The guys are doing something right that this is a good team already. If it was a bad team, they wouldn't be able to grow it so fast and so well; they have added new products, they've introduced and are working on a new future pipeline. It's a good team.
Thank you very much. We shall move on to Nikhil, Nikhil your line is unmute, please go ahead with your question.
Congrats to the team on the acquisition. Just had one question on some of these new products that you've spoken about for the railway business. Can you just throw some light on them? And I also wanted to understand in terms of, would you have to go through the entire approval cycle for these new products or would it be like a shorter gestation period to that extent, a quicker kind of commercialization?
Nikhil, short, I don't know, shorter than it would be if we were complete outsiders, but you still have to go through the process. Actually, you know, we tried looking at this organically as well before obviously acquiring because that's the first thing we do anything acquisition related - do make vs buy, and say, can you make it? What you realize is the approval process if you want to go in as a non-empanelled is so long; it's like 5 to 6 years. So, if you're already empanelled and doing safety-critical products, the time is short, but it still will require the whole process and steps to be completed. So, it's relatively short.
Hi, Nikhil. Do you have any follow-up questions?
Yeah, thanks. Thanks for that . I just want to understand. So, for all the new products that you're kind of looking at HVAC and some of these other products that you kind of showed on the slide. The plan is to kind of do all the entire manufacturing in -house or kind of show some of these components and maybe become like a system supplier, or how are you looking at that?
That will depend from product to product , and frankly, it's likely early to be talking about future projects on the day of what, but it will depend again; these are obviously operational decisions, but let me just boil it down for you. This is by the way in our regular business, whenever you get the purchase order for something even before that you would have submitted your entire costing to the customer, et cetera, in doing that you would have alr eady developed and found a supplier, you would have already figured out what you will produce and at what process times, etcetera. So it is different for everything. And you take that decision, what is the best for the end customer? From both a cost and quality perspective. Of course, if there is something that is strategic and can increase value in the long term, for example, software, we give an update on ASPICE like this time at level-2. Why do we think software is so core that we keep most of it in-house and we have a dedicated team? And if you do find ASPICE level-2 means we are actually getting certified for automotive software. I mean, four years ago, we didn't even have automotive, we are now competing with those companies in that domain because we think it's critical. So like that , there will be parts, even in hardware, where we say it is too critical to outsource, and there will be things we will outsource. Forget parts ; sometimes, it's also processes for the same part; there are multiple processes; some you keep in -house, and some you
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will outsource. Depends. I know it depends, is the least helpful answer. It genuinely is the answer. It depends.
Thank you, Nikhil. Thank you so much. Thank you so much. We are now going down the list. Rohit Gupta, go ahead your lines are unmute. Please go ahead with your questions. Hi Rohit, are you able to speak up? Seems like he is having some challenges. We shall go on to the next investor, Nitij Mangal. He has dropped. Let's go back and try Rohit. Are you able to speak up? Perhaps you can type your question in the chat box? Yeah. Ok. We move on to the next investor, Pradeep Jain. Pradeep, your line is unmute. Please go ahead.
So, Vivek, I want to know about the CV traction motor factory. What is the status of that?
Thank you. So sorry, sorry, you have to repeat that.
Yeah, CV traction Motors. We are establishing the works now. CV, traction motors.
So we currently don't have any CV, traction motors. Oh bus motors? Sat, you can update on the bus traction motor.
Pradeep. We are on track, I mean as we have promised in the previous investor calls also. we are on target, and we are just in the first calendar year, the first quarter of the calendar year 26. We are going ahead with the plan, so it's on track right now.
Yeah. Ok. Thank you.
There are no further questions in the queue. I'll hand it back to the management in case there are any closing remarks.
Perfect, thank you Kapil. No, closing remarks. Yeah. Thank you, everyone for being here. Thank you for listening. Thank you for asking questions. Please ask us good questions. Makes us better. Keeps us on our toes. And wish everyone a great holiday season, Happy Diwali. See you next quarter. Bye.
Ladies and gentlemen, on behalf of Nomura, we thank you for joining this call and wishing you all a Happy Diwali as well. Deanna, we can close the call now.
Thank you very much. Thank you everyone for joining today's call. Have a good evening. You may drop the line now.
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