Sharda Motors – Emission tailwinds or EV threat to exhaust systems?

My questions on Sharda concall and the answers:

Q1. Company mentions in presentation that TREM V may be delayed by 1 year
A. That’s company’s assumption, given TREM IV has been delayed from Apr to Oct 2022. May not get delayed as much, have to wait and see.
Q2. When will the company start seeing orders for TREM V given a launch date post Apr 24?
A. The company is already in talks with all major tractor manufacturers regarding design of TREM V products. Company expects to take market share equal to or more than its PV/LCV market share (Around 30%) in the tractors segment and so far traction with OEMs is in line with those ambitions. They expect 2 major suppliers including them to be active in TREM V orders with the 3rd CV incumbent not as active in the tractor segment
Q3. Management had earlier guided that Eberspaecher JV needed 50Cr Qtrly value added revenue run-rate to break even, but it has delivered 50Lakhs profit this Q on a value added turnover of 44Cr, have costs come down?
A. Costs have partially come down due to efficiencies but numbers are ball-park in the region of earlier guidance. Next few Qs should be profitable for JV given uptick in CV demand.
Q4. How many engine systems is Sharda supplying to for each of the 2 CV clients under the JV? What ball-park proportion is this number of the total engine programs run by these 2 clients?
A. Sharda is currently supplying to 1 engine program each under the JV. Not aware of total number of engine programs that are run by these clients (Surprising that he doesn’t know, may be did not want to disclose)
Q5. Given that the standalone business (PV + LCV) is capital light and capital doesn’t become a barrier for entry, what makes Sharda the only Indian company capable of fighting a 3-4 horse race in this segment with other competitors who are predominantly subsidiaries of foreign originated companies?
A. [passionate answer here given by Aashim Relan] There are several reasons for this:

1. Sharda entered the emissions space for BSIV/BSVI very early in the late 90s. That has given them a big competitive advantage in terms of developing their R&D capabilities.
2. R&D is the moat for them = 100+ engineers in R&D Centre in Chennai (10% of total employee base). Their technologies are now on par with global counterparts and hence they see exports as a large upcoming opportunity
3. Full backward integration with tube mills and stamping plants which gives them a cost advantage that can’t be replicated easily
   Any new entrant will take several years to build these capabilities as per Mr. Relan.
   Q6. Will the Kinetic JV supply to Kinetic’s 2W only or 3W also (Kinetic has a good market traction in 3W)? If yes, will Sharda-Kinetic JV replace existing BMS supplier for 3W? When is Kinetic expected to manufacture their first 2W batch?
   A. Yes, JV will supply to 2W/3W both. They may not replace the existing vendor but will share the business/focus on a share of incremental volumes (Hesitant answer here, I think he was being diplomatic. My expectation is they will try to replace the vendor once POC is done; Otherwise why make a JV for captive supply?). Kinetic EV 2W production schedule is still dynamic and he isn’t sure of timelines but tie-up news with China’s Aima in Jan was very positive news as per him. Expect trial supplies to start from Q3 FY23.

Apart from this, some general notes on the call:

1. They keep getting questioned on why they can’t divulge split of revenues into value added and pass-through. Their answer is that this is confidential information and they are yet to receive approval from 2-3 clients to divulge this. Once they get the approval they will stat disclosing the split.

2. They also keep getting questioned on why revenue numbers don’t align with volume/revenue growth numbers of CV/PV players YOY. For e.g. Growth rate of revenues for OEMs has been far higher than Sharda revenues YOY for the last few Qs. Their answer is that their sales numbers are linked to engine production numbers and not to vehicle sales numbers. There are a lot of stages between their supply and vehicle sales : Sharda supply to OEM, OEM maintains exhaust inventory → OEM manufactures engine and maintains engine inventory → Based on semi-con availability, OEM assembles cars and maintains car inventory → Car sales happen as per demand. As per Mr. Relan, this long supply chain makes 1:1 correlation of retail/wholesale OEM sales and Sharda sales difficult. I am not entirely convinced by this answer, maybe part of the reason is inventory stocking and de-stocking at OEM end. Management has repeatedly assured that they have not lost any market share and hope to grow faster than OEM growth rates this year as they have done for the last several years.

3. Exports and acquisitions – Still scanning for acquisitions and export opportunities, will update when there is a material development. For exports, they have received some RFPs/bid for some RPQs and expect developments in the future. For acquisitions they are looking at powertrain agnostic options (I don’t mind them taking a few Qs more but if they can nail the right acquisition in a powertrain agnostic space, that might increase their terminal value substantially)

4. Plans with 500Cr B/S cash – First priority is to deploy it in business i.e. acquisitions. If acquisitions don’t materialize, then will look at returning it back to shareholders via dividends (No timelines given)

5. Capex plans – Only incremental capex needed to capture future growth including CEV V and TREM V, capex expected to be in line with last few years’ trend.

My views:
PV/LCV segment : They have a large market share here, so unless they crack Maruti, explosive growth opportunities here will be limited, they will grow as per ex-Maruti industry growth. BS VI RDE will only provide incremental additional value added revenues.

MHCV : Growth opportunity is lucrative here. They are at 180Cr run-rate and can do max 400Cr without additional capex. Enrolled with one engine program each with 2 leading CVs, if they can get themselves enrolled in a few other programs or these engines scale up fast for the OEMs, growth here can be fast. Exports in Asia are another lucrative opportunity due to low cost base for Eberspaecher out of India.

CEV/Tractors : Can add a new market as large as existing PV/LCV market. This is the most exciting growth lever especially as Sharda is already supplying TREM V compliant systems to these players for their exports. So there is not much technical challenge to scale, the market seems to be there for the taking and Sharda’s inputs on trials etc. already having started is quite bullish. Can provide a great revenue and EBITDA spike FY24 onwards.

Exports: With the kind of technical capabilities they claim to have, there is not reason they can’t get a small foothold in exports either in the standalone business or in the JV (JV exports are more exciting to me as standalone exports are likely to be low value add)

Open questions for me:

1. Why can’t Sharda crack Maruti? Does Maruti have an in-house supply system?
2. Who are the 2 CV clients for the JV – are they TATA and AL or TATA And Mahindra? Which one of them has a subsidiary manufacturing exhaust systems (@T11 Maybe you can answer this)
3. How many engine systems do these 2 CV clients have and what will it take for the JV to increase their market share with these 2 players? Will it be a slow ramp up as the clients test out their supplies for a period of years and then allow them to apply for other engines or can they exploit the opening created by OBD II?
4. What is the expected kit value of BMS + cell assembly for 2W/3W (Can we get this info from other players in India/abroad)? How serious is Kinetic’s bid to become a major player in India EV 2W market? I have shared links above which mention big numbers like 500000 units per year ambition, but does the Kinetic Group have what it takes?

Disclosure : Invested.