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Edited Transcript of MOTHERSUMI.NSE earnings conference call or presentation 11-Nov-19 11:00am GMT

Q2 2020 Motherson Sumi Systems Ltd Earnings Call

New Delhi Dec 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Motherson Sumi Systems Ltd earnings conference call or presentation Monday, November 11, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gaya Nanda Gauba

Motherson Sumi Systems Limited - CFO

* Laksh Vaaman Sehgal

Motherson Sumi Systems Limited - Non-Executive Director

* Pankaj K. Mital

Motherson Sumi Systems Limited - COO & Whole-Time Director

* Vivek Chaand Sehgal

Motherson Sumi Systems Limited - Chairman

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Conference Call Participants

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* Arvind Sharma

Citigroup Inc, Research Division - Associate

* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Dipan Anil Mehta

Elixir Capital Limited - Chairman of the Board

* Hitesh Goel

Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst

* Joseph George

IIFL Research - Assistant VP

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Kashyap Jhaveri

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Kumar Rakesh

BNP Paribas, Research Division - Analyst

* Mayur Parkeria

Wealth Managers Pty Limited - Head of PMS & Fund Manager

* Nishant Vass

ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Priya Ranjan

Antique Stockbroking Ltd., Research Division - Research Analyst

* Riken Gopani

Infina Finance Private Limited - VP

* Shyam Sundar Sriram

Sundaram Asset Management Company Ltd. - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q2 FY '20 Results Conference Call of Motherson Sumi Systems Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Vivek Chaand Sehgal. Thank you, and over to you, sir.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [2]

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Thank you. Ladies and gentlemen, welcome to the Q2 Results of Motherson Sumi Systems. Very briefly, the conditions globally are you are all aware, and I think all the team members of Motherson have worked very hard to bring in these particular results. The Board congratulated all the associates and the management. And I think what was very interesting was that it's the last year of our 5th -- 5-year plan. And all the teams are very focused on ROCE, on improvement, and the timing is such that they are able to do -- or deliver some very good results in that.

I know you have a lot of questions. So I hand it over back to you, with that, and warm welcome to all of you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [2]

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While the question queue comes in, I'll introduce the people who are in the call. We have Pankaj, we have Gauba, we have Vaaman and myself, this is for your information.

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Operator [3]

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The first question is from the line of Kumar Rakesh from BNP Paribas.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [4]

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Congratulations on good performance on the margin front. My first question was around your customer feedback, especially on the production plan going into December quarter. Have you heard anything from some of your major European clients that are they looking to cut down their production higher than usual in the December quarter? Any feedback in that regard?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [5]

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No. As of right now, we haven't seen any major change specifically for the quarter or anything like that. Everything is as per schedule. We have -- really haven't seen any customers coming back and saying that anything will be reduced or something like that. No, we haven't seen that.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [6]

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Great. My second question was around the greenfield and SMRC part of your business. That continues to report EBITDA losses of around 8%. By when do you see that to start turning profitable?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [7]

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Just to clarify, SMRC is a positive. So greenfield is a negative for winter, so partially that gets offset by the positive contribution coming from SMRC. Since we are giving a data to make like-to-like comparisons, so SMRC is also excluded from the existing plant sites. But to make the fact clear, SMRC is positive.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [8]

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Noted. So your greenfield plant, by when do you see -- expect that to start turning profitable?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [9]

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Well, there's still going to be some time for that. We are making a lot of efforts right now to make sure that we can secure the ramp-ups on the production. When we talk about the 2 main plants, which contribute to this, one is Kecskemet and one is in SMP Alabama. The Kecskemet plant is a little bit further ahead, so we do expect it to hit breakeven fairly soon, and then the focus will always be on improving the profitability. SMP Alabama is still in ramp-up mode. The last time we spoke, we were about 700 -- 600, 700 cars a day. That has now increased to more than 1,000 cars a day. So numbers are ramping up quite significantly over there, and there is still a little bit more to go in the next 2 quarters. And the focus will continue to be to make sure that we can deliver up to the customers' volumes and expectations. And following that, we will make a big effort towards improving the profitability and pushing it forward. So there's still a little bit time for that to happen. But at the current time, we're always focusing on making sure that we can revert the volumes.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [10]

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I think with so many plants, one plant in that kind of a thing, we always have had that particular situation. So I think the other plants are really supporting the startup plants and all that. So I think it's -- in that sense, it's very, very positive as you can see the results.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [11]

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Right. My final question was around the stand-alone business in India. With prices increasing for BS-VI, do you see a risk that customers can be downtrading during this time and hence the mix and value-add benefit, which we have historically seen, could come under some pressure, and also OEMs may push back into not moving into more premium products at least for a year's time? Are you looking at that mix risk in the next year or so?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [12]

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Not really. I mean the Euro 6 products are already into the market. And we see that not just Euro 6, but the market movement has been over a period of time for more features, and we have seen the trend as to how vehicles have moved up the value chain.

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Kumar Rakesh, BNP Paribas, Research Division - Analyst [13]

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So my question was around India business. So you expect a similar trend to be in India, but the transition could take some hit on the mix. Is that understanding correct?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [14]

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I mean the ...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [15]

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The carmakers could, how are we going to get affected, we didn't get the connect. The carmakers could get affected. But I don't think we would get hit unless the numbers come falling down or something.

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Operator [16]

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(Operator Instructions) The next question is from the line of Priya Ranjan from Antique Stockbroking.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [17]

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So just continuity of the last question on the growth outlook across the segment plus how the ramp-up, et cetera, in Tuscaloosa is going to happen? And how soon we can achieve the profitability, given the -- I mean, can we achieve -- I mean, the breakeven level is like 1,000 car per day or is it going to be like 1,500 or 2,000 cars per day kind of scenario?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [18]

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Look, the Tuscaloosa has been a special case. There's very little availability of manpower. So really, the skilled manpower that we are getting is not up to the mark. And frankly, the unemployment level is practically zero [especially] in that region. So it's very difficult to get people. It's quite -- what we pictured, it is quite different to what the situation is. We've had to hire a lot more people than for the same job that we would be doing in a plant in Mexico or in Germany. So that quality mindset, being able to drive in the efficiencies, we still haven't been able to do that as per our expectation because the customer is still launching and the numbers are still going up. So in the short run, at least, like I said, we have added on a lot of people, so we have added on more cost to secure the customers' volumes. But moving closer towards March is when we will make a much bigger drive towards improving the profitability once all the launches and everything is completed. It has taken longer than we expected, but that is again due to the unavailability of the specialized manpower and skilled manpower, which is lacking in that region, and has caught us in an area where we would like to have efficiency drive once the launches are complete.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [19]

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But overall we are seeing an improvement. So we can't be telling you when we are going to hit breakeven or something. But I think every day, the improvement is there. The ability to train the people, make them understand what are the nuances of making such a premium product, all that particular thing is happening. And we are very proud of the people that are there in Alabama. They are doing a fantastic job. And I think it's just a matter of time. And it could have been last quarter, but now we have Christmas, and that's coming up, so it -- all these particular things play out a bit. But I think as Vaaman said, probably the next quarter would be a great time to talk to you about how all of the people at Alabama are doing a great job.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [20]

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And second question is on the overall order book at SMRPBV level. So I mean, we have seen quite flattish kind of net order book at -- for quite some time. So is it because of the market weakness? How do you see -- or how do you read about this?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [21]

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The order book is -- it's very high level. If you remember that the order book, we take the entire full order out as soon as an order starts. So the point that the order book showing is that there is still a very healthy level of virgin order book that has not started yet. If you see the sales are increasing in SMRPBV, we have 15% growth. So the growth is still intact and it continues to grow. So we don't see any issue with the order book level being [vacant]. It depends on the launches. If the launches are simultaneous launches, a big portion of that order book will come out because we extract the full 5-year period of that order book out of that number that we show you. So that depends on timing of when the orders are starting. This is just an indicator of how much virgin order book we still have to execute.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [22]

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Maybe the reference numbers you're talking about is more of a middle kind of scenario. I mean because there will be a scenario where there will be less ramp-up than what even OEM might have thought of, and then there's an optimistic kind of scenario. So these are the average out kind of order book you are...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [23]

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So definitely, I mean, we will keep you informed, god forbid, if such a thing happens. We have never seen it happening because new cars, actually the ramp-up is much higher and the quantities are higher. But I don't know why a car customer would be giving a new car and then reducing the number. It doesn't make sense what you're saying. But anyway, if god forbid, such a thing happens, we will guide you. Thank you.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [24]

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So I am talking more in terms of, say, if the product becomes acceptable or if it becomes say...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [25]

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We have to restrict your questions, sir. Give everybody a chance. Come back in the line, we'll answer your question, sir.

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Operator [26]

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(Operator Instructions) The next question is on the line of Mayur Parkeria from Wealth Managers India Private Limited.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [27]

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Am I audible? Hello?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [28]

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Yes, yes. Go ahead, go ahead.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [29]

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Sir -- so Vaaman, now that you have got fair -- I'll say a relatively fair visibility of how the plants are shaping up, the new plants, and the production schedule it is at. So while this is a financial question, where -- would you like to put some number on where we will see the debt levels in a year's time from now, given that the CapEx is behind and the cash flows -- there will be some fair visibility post the high cost, which is there. So what can be the debt levels, which we could see in a year's time?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [30]

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Look, as you spoke about that we've done -- majority of the CapEx requirement has already happened. So there are new -- no more new greenfields that we are currently assessing for that to come in. So all the greenfields in the production plants, as they are now coming up and the existing businesses continue to perform better, they will start to generate the free cash flow, which will significantly reduce the debt levels. But to give you an exact number may not be possible because there are always new opportunities and things that are coming. But if you already see it, we've reduced it significantly from the same year period a year ago.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [31]

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It was more than INR 2,500 crores, and we'll continue to do that.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [32]

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Right. What I was just looking at is, obviously, subject to the inorganic or any possibilities or opportunities, on a like-to-like basis, could we see a substantial fall in the next 12 months or will it be just a gradual situation? I mean can we see INR 2,000 crores kind of fall? Gauba, sir, is it possible?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [33]

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Sir, you have seen how the debt levels are being maintained. In spite of increasing the working capital, our debt levels have remained same, similar to March level. So -- and we exercise a high level of financial prudence as well as the cash flow is reduced in September this year for both stand-alone and consolidated. So I see no reason why the debt level could not come down, but to put an exact number may not be a right thing for us to guide you on the call.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [34]

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Okay, sir. Last -- second question from my side is, what can be the full year SMR/SMP sales growth look like, given that first quarter was a very high number, second quarter has marginally come down. Obviously, it's a good growth, but it has come down from the quarter. So where do we head by the end of Q4?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [35]

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So we have guided you in the annual report that we will be an $18 billion company. Now, sir, what more do you want me to guide you, sir? I have guided you that 5 years ago.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [36]

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No, no. Sir, I was talking more specific about FY '20, what could be the SMP growth look like by the end of the year because...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [37]

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Sir, as I said, we normally don't make any forward-looking statement or something like that. We've guided you when we came out with our 5-year plan that we will be an $18 billion group in Motherson Sumi Systems. That's the whole -- [looking] at 40% growth. Sir, now you want specific numbers, I can't give you that, sir. It depends upon what we are thinking, what's happening. There could be a lot of acquisition. Anything can happen, sir. So allow that to happen and just enjoy the show.

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Operator [38]

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The next question is from the line of Kapil Singh from Nomura.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [39]

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Vaaman, you mentioned that the production at Alabama plant is about 1,000 cars per day. May I know what is the peak potential over there? And also the manpower shortages which you are facing and related cost, how do you plan to address these over the next few quarters?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [40]

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So look, it's still to go up from here. I don't know if I am allowed to disclose the exact number. But definitely, there is still a good double-digit growth from here in the next quarter is what Daimler is envisaging. So that's something that we have to make sure that our lines are capable of delivering. In fact, on the tests that have been done on the lines, if the people are all working in sync, the lines are definitely capable to deliver those numbers as well. So we do not see any further investment required to deliver any of those numbers. In fact, we are well covered for the increases that Daimler may ask us as the volumes start to do well and as car picks up, so we are totally geared for that.

The manpower shortages is a concern. There are things that we're also doing working with the state, working with the government to improve, get more and more people there. We are lobbying as well to get support. And of course, in the short term also, we are trying to get support from outside to train and teach the new people that are coming in to make sure that they are ready to jump on the lines and work through the shift for the increased production. But again, that's a challenge that we are currently facing every day. We are confident that we will overcome it. We just need some time. It has taken a little bit longer, but the people of Alabama have shown a lot of hunger for growth and to be able to do this. So we do not see that it should be a problem in the long term. It's just taking a little bit more time, but we should be on top of it.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [41]

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One more question on the India business. I just wanted to check, in terms of content for diesel vehicles for commercial vehicles, SUVs, et cetera, is the BS-VI content going to be much higher than in case of gasoline vehicles? And related to that also, if you could comment on the fact that while car industry did see a drop, sharp drop, we did hear that festive sales have been very good and there is a significant correction in inventory. So are we expecting the production run rates to improve significantly in the second half?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [42]

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To answer your -- this is Pankaj here. To answer your first question, yes, the content in the BS-VI commercial vehicles is much higher than before. And also, because of the festive season, yes, the inventories have got adjusted and the production demand was much more. To say whether we see a much higher demand level in the next half year, I mean, it's everybody's wish and we all hope that the demand will continue to keep improving.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [43]

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Sir, could you indicate what kind of improvement in content is there for SUVs and commercial vehicles?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [44]

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Sir, it is from a model-to-model, so there is no one particular percentage number, which I can specify. But yes, I can very clearly say that it is a double-digit improvement in terms of the content.

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Operator [45]

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Mr. Singh, request you to join the question queue for any follow-up. We move to the next question. That is from the line of Kashyap Jhaveri from Emkay Global.

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Kashyap Jhaveri, Emkay Global Financial Services Ltd., Research Division - Research Analyst [46]

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Just one question. You mentioned that run rate at Alabama plant is up from 700 cars to 1,000 cars, but I (technical difficulty) increases, the SMRC seems to have declined by about 10% Q-on-Q from EUR 380 million to about EUR 351 million, so how do I reconcile this number?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [47]

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See, please also appreciate Europe also has the summer holidays. So you are comparing with the previous quarter immediately?

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Kashyap Jhaveri, Emkay Global Financial Services Ltd., Research Division - Research Analyst [48]

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Yes, sir.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [49]

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So the previous -- immediate quarter is not comparable because of the fact that Europe has a holiday. So the Hungary plant as well as SMRC, which has a large operations in Europe, could be lower than the previous quarter.

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Operator [50]

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Mr. Jhaveri, is the question answered?

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Kashyap Jhaveri, Emkay Global Financial Services Ltd., Research Division - Research Analyst [51]

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That's it from my side, sir.

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Operator [52]

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The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [53]

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Sir, approximately, what will be the current utilization levels at our Hungarian and Alabama plant, just ballpark?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [54]

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So there is -- again, utilization levels is not something that really restricts Motherson because we don't have -- for to increase the lines, we just have to increase the shift. But like I said, because of the current inefficiencies that we have, we are currently running the plant almost 6 days a week and having 1 day maintenance. But even as we move forward, I think as the efficiencies come, we will be able to do that in 5 days a week. So that's the current situation as of right now.

The Hungary plant is further up, so they are hitting their required level. They are hitting their peak levels as they are a little bit ahead in time and are going as per their numbers, so no issues there either.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [55]

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Right. Sir, so just a question linked to that, sir, in the last call, you've spoken about the rejection rates being higher in Alabama from -- has that -- as a metric, has it been coming down? Are you happy with the way the Alabama plant is shaping up?

And similar on the Hungary plant, also, despite being a fairly ramped-up situation, you did mention there's still some losses there at the EBITDA level. Can you comment about, is the -- are there any concerns on the rejection in the Hungary plant as well?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [56]

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Okay. So for the Alabama plant, definitely, there has been steady improvement that is happening. I always feel that we can do better, but that's there. But definitely, the things are improving day on day. We've also, like I said, added a whole number of people. And also to be able to supply this number, which has gone from 700 to 1000, we definitely have made some improvements. There's still a while to go. I would not like to convey the picture that we are completely out over there because we have more launches that are coming up and numbers that also we have to increase. But yes, we are -- we've added direct and indirect people. We've also got a new operating team that is over there. We've also hired ex -- people from Mercedes, through their support to our plants, that they can guide us because they have a lot of experience in Alabama. We've hired them also on our team to help us through this time. So we really have the best team there right now. We still need to hire more people as the launches are coming up. But yes, there is definitely a lot more improvement since we've spoken.

On the Hungary side, I think the management team over there is a lot more stable. They do not have the same issues that we have in Alabama. They're a little bit more mature as well. And availability of manpower is more than Alabama, for sure. But also, because of the investments, heavy investments of automotive in Hungary, it's also, again, difficult to find people over there. But the team there is quite mature. They are looking on efficiency improvements. And hopefully, also in the next couple of quarters, we should see them push forward as well and I can tell you that once we reach there in time. Currently, right now, the focus is to make sure, again, that we protect the customer, we can deliver to their volumes and continue to deliver the new programs that they're launching from this plant. And in the shorter term, then pushing forward towards these efficiency improvements.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [57]

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Right, sir. Sir, if I may squeeze one last question. On PKC, we are hearing the Europe truck market suddenly falling off since September, but we have continued to show very good performance on the PKC. Sir, are we gaining incremental market share there? Does it [have something aiding us] show a better revenue trajectory than the underlying market, if you can add some color on that, sir?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [58]

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We have been doing incremental improvements in our operational performance, so which is helping us to get to a better performance. And as you have seen that our revenues have also grown. So this includes all our regions; Europe, South America, North America as well as in the Asia Pacific, China region, and it also includes the Rolling Stock side. So we have seen also our operational performance improve in the Rolling Stock side by a very good way as they also imbibed good practices, which are there in the group and also on the China side as the businesses are maturing, and in each of the regions where the teams continue to perform very well and derive better results by eliminating the waste. So definitely, we are getting more trust from the customers and getting new orders, for which we are also expanding our facilities. So we are expanding our facilities in Serbia where we already have a plant and then we are doing a brownfield expansion there. As well as for the future, we are also setting up a new facility in Ras Al Khaimah to support the expanded new businesses, which will come in PKC.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [59]

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Right, sir. Sir, where are we getting up new plants for the future, sir? Sorry, I didn't get that.

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [60]

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We are expanding our plant in Serbia, and also setting up a new plant in Ras Al Khaimah, U.A.E.

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Operator [61]

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The next question is from the line of Suraj Chhed from IIFL.

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Joseph George, IIFL Research - Assistant VP [62]

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This is Joseph from IIFL. My question is in relation to Alabama plant. Just wanted to understand there's been a significant improvement in the rejection rates because that's one reason that was quoted in the past for the losses? And the reason why I'm asking is because if the rejection rates have held steady in the next 1 or 2 quarters when you ramp-up revenues as the customer ramps up, you might actually see higher absolute losses. So from that perspective, do you really think that the worst in terms of rejection rates and loss is behind us?

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Laksh Vaaman Sehgal, Motherson Sumi Systems Limited - Non-Executive Director [63]

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Look, we have had to also add a significant number of people, so that cost is also there. Again, there are improvements being made in every aspect of the business, but there is also offset, so more people that we have had to hire for this increased volume, that was not envisaged earlier. I do not think that the losses can be more because as we move forward, we are planning a lot of improvements, like I said, in driving those efficiencies and that's not envisaged. But to think that it will continue as is, is also not going to be possible because we would not be able to continue to run the plant in that state if it's at that volume and making those losses.

So the improvements have to come, that's a big part of the focus of the management team to bring in those efficiencies, reduce those things. I am personally there in Alabama, spending 3 to 4 days every single week over there, I just came back day before yesterday, and I see marked improvement. But sometimes, to improve the situation, you actually have to increase the cost by bringing in additional people so that we can train the people while people are working rather than trying to train them on the line, on the job. So again, it's a question of a couple of quarters until the launches are really done, and then we will really push through the efficiencies, which is happening as we speak.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [64]

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And I think as a corporate governance of the company, we can't be sending people for on a holiday and then going over there and working and all that. So we have to follow the law 100%, and there is no compromise on that. So these are things, that as the first plant that we have set up in U.S., we are facing. And this will augur very well because in the future we will be that much more knowledgeable, so it's a learning experience. And I think the commitment is very clear. The plant chief, the company chief, and Vaaman himself spends about 2 to 3 days every week in U.S., in Alabama. So I think the focus of the company is very clearly on getting this plant getting profitable very, very quickly. So we are sure and really not worried about it, but we wanted to take the right steps, the right direction and follow the law.

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Operator [65]

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The next question is from the line of Dipan Mehta from Elixir Equities.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [66]

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Sir, my question is more on a macro nature, sir. Sir, it does appear that apart from the Alabama plants turning around, and of course, overall automobile, while industry improving its volumes, there's no major trigger for bottom line growth rate?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [67]

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Sir, there is also a thing called acquisition, the SMR that sometime people forget. We were paid to take over this acquisition, sir. And it was EUR 500 million, now it's about EUR 2 billion and has a plus 40% growth approximately. I don't know Gauba will guide you on that.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [68]

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Also, I think...

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [69]

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Sir, but that as analysts, sir we cannot -- as analysts and fund managers, we cannot -- it's an event-based thing. So whenever it happens, then it takes its own time to get actually come into the numbers and show growth. As PKC has shown, it took almost 2 years before we got a full return on it. So -- I mean that acquisition is in your DNA, I understand that. But on a present operation basis, apart from Alabama plant and, of course, the overall automobile industry, whenever that improves globally, there is no real trigger.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [70]

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Sir, Gauba this side. I think one of the things, which you should find in these results is the resilience, which the company or the group has shown in the challenging market conditions. So take a case of stand-alone results, there, the markets are down by 18%, the markets are down by much higher amount, but the stand-alone revenues are down by 18%, yet we have maintained a healthy EBITDA. You look at SMR, while the markets have been almost like constant in spite of giving the cost down, everything inflationary condition, the EBITDA levels are maintained. And more importantly, please look at the cash flows or the debt levels the company has. So in a challenging market like this, it is very important to conserve the resources. We have conserved the resources, reduced the cost, eliminated the waste and reduced the debt level, maintained a healthy cash level so that we are better prepared for the growth. Absolutely right, we are an OEM supplier, so we don't have -- other than the inorganic part to grow our revenues, we will supply exactly what the OEMs require. But how do we manage our cost, how do we run our operations is something very important and this, we think, differentiates us.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [71]

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One last question, sir. Any time line or guidance for turnaround of the Alabama plant, have you given the Q4 or next year? Any time line, has the management disclosed?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [72]

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So what we are thinking is that hopefully within this quarter should be fine. But listen, if something extraordinary happens, next quarter maybe probably. But you are asking for something which really I can't decide. I really don't know how the government of USA will work. There are so many moving parts, sir.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [73]

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No, sir, because we have EUR 350 million...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [74]

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So too much to expect that we can guide you exactly on when this is going to happen.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [75]

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Let me put it in another way. So I think from Slide #9 that at about $350 million of -- EUR 350 million of turnover, we are looking at EUR 22 million of loss. So at what point of turnover do you think that you can breakeven? I am looking at Slide #9 and doing the particular calculation, so EUR 1,400 million minus EUR 1,049 million and EUR 104 million minus EUR 82 million.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [76]

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Yes, sir, I think Mr. Vaaman already emphasized that turnover is one part because there is an improvement which is coming in Alabama. However, the improvement does not fully translate into the improvement on the bottom line because of various reasons, because of the ramp-up which is happening or the new launches which are happening. And we have also said that this is the one quarter, which should be the last or we should see the improvement in the next quarter. So surely, our job is to first come to the breakeven point and then start building on the profitability.

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Operator [77]

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The next question is from the line of Hitesh Goel from Kotak Securities.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [78]

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Sir, just wanted to get a sense on the revenue outlook from the new plants in the SMP business. So basically, we had once guided that these new plants can reach a peak revenue of EUR 1 billion. Now you're giving us numbers of SMC and these greenfield plants. So can you tell us what is the revenue of Tuscaloosa and Hungary plant and where -- what can we achieve in next 2 years?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [79]

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There is no change in the guidance. So our earlier guidance of EUR 1 billion from the new plants once fully ramped up stays.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [80]

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Yes. So sir, can you just break up this revenue of the new plants...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [81]

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No, sir. Sir, we can't, sir.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [82]

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Because it's very difficult to then project where we are right now and what could happen in the next 2 -- or you can give us some understanding on the capacity utilization on Tuscaloosa and Hungary and...

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [83]

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From next quarter, SMRC will be common in both the quarters, so you will have the [real this thing]. And last year numbers are also there in public domain on SMRC. So I think we give enough of the data for people to get a clear visibility of that.

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Operator [84]

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Sir, is the question answered, Mr. Goel?

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [85]

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Thank you.

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Operator [86]

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We will move to the next question that is from the line of Jay Mehta from Edelweiss Financial.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [87]

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This is Chirag here. Sir, my first question is with respect to CapEx, can you indicate how much we are looking to spend this year? And also, any ballpark number for next year, had it been [freezed], finalized?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [88]

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Sir, for the CapEx, we had given guidance for INR 2,000 crores initially, taking the exchange rate wherever they are and doing acquisitions without that. And we have a cash flow statement also published. And you can see that as compared to the last year, CapEx is lower. So we will stay with the same guidance as of now.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [89]

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And how do we look at next year because some part of your CapEx program would be running out? So what kind of reduction can we expect, assuming there are no other business opportunities that come across?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [90]

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So that assumption would be under question because we don't want to make the decision, okay? So we will come out with the guidance somewhere with the March results and we will also have a next 5-year plan coming up, so that's the way to look for that.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [91]

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Unless, Chirag-ji, you are thinking that we should not guide the market on the 5-year plan because four 5-year plans we have met already, this is the 5th one that we will try to meet. So you don't want the 6th 5-year plan to be there, is it?

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [92]

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No. We definitely want, and we also would like and say that you achieve those guidances as you have been in the past.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [93]

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Thank you so much. Thank you so much.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [94]

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Sir, second question is, on this additional order book that you have announced, EUR 3.8 billion, is it possible to give some color on that? How much of that would be coming from U.S.? Why I'm asking this question is, we have been putting in a lot of effort to diversify and penetrate U.S. as a geography, so what kind of success we are seeing over there, if you can help us understand?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [95]

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Again, on an overall basis, I can guide you on 3CX15, none of our customers is more than 15%. I think we had also given customer wise breakdown in some of the presentations as of now. Geographically also, we are getting quite widespread. U.S. is now second largest country contributing to the overall pie; Germany continues to be the highest. But the order book visibility, then it will happen, which year they are launching, so we'll get into data points which will be to volume. But in terms of guidance, I think we are right on the track.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [96]

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And is it right that in this new order win, PKC order wins are also there? Or is it possible to broadly [detail]?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [97]

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I draw your attention to the Slide #5, which states order book status at SMRPBV level.

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Operator [98]

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The next question is from the line of Riken Gopani from Infina Finance.

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Riken Gopani, Infina Finance Private Limited - VP [99]

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I just wanted to understand how is the...

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Operator [100]

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Mr. Gopani, can you be a bit loud, sir?

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Riken Gopani, Infina Finance Private Limited - VP [101]

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Sure. Am I audible now?

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Operator [102]

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Yes.

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Riken Gopani, Infina Finance Private Limited - VP [103]

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Sir, I just had one question with regards to the working capital situation at SMRPBV, if you could throw some color in terms of how are we seeing the situation? And how do you see the whole year situation pan out?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [104]

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I think overall, the working capital has improved at the consul level. And I think tomorrow, SMRPBV, we will also upload their interim financial statement and their results, so you can have a detailed working capital breakdown into SMRPBV at that point of time.

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Riken Gopani, Infina Finance Private Limited - VP [105]

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Okay. Sure, I'll have a look at the numbers. If you could maybe just give a flavor in terms of how are you seeing the -- is it getting extended? Or are you seeing over the full year things should remain fairly stable on the working capital situation? Your qualitative comments would be helpful.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [106]

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I mean qualitatively, you can see that the working capital -- there is a significant improvement in the working capital, both at much of a consolidated level and at the stand-alone level. Consolidated SMRPBV constitutes almost like 45% or so of the overall and a bit higher on the working capital side. So the improvement, which you are seeing should be more forthcoming as the new launches are completed. But I would like that we give specific questions on that once we have SMRP data in front of me, and I don't have that numbers in front of me as of now.

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Operator [107]

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The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [108]

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Sir, 2 questions I have. One, the ramp-up is there at the new plants in terms of cars per day, which you mentioned. But SMP revenues Q-o-Q have declined, so one comment there I wanted to know. And second, we were trying to figure out from Daimler's presentation, the GLC, GLS and GLE numbers are about whatever 38,000 for the quarter, which is quarter 3 calendar for them. If I try to break it up in cars per day, it's about 500 cars. So just wanted to know at these plants of yours, which is Tuscaloosa, do we make other than these GLC, GLS and GLE?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [109]

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Sir, are you sure your numbers are correct?

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [110]

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Yes, I tried to...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [111]

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No, no, no, because are you counting CKDs because they are assembling these cars in other places. So are you sure these numbers are correct?

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [112]

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So I have 3 quarters data. I am hoping whatever way I could collect, so it is not...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [113]

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No, sir. That, you can't do. I would love to meet one company, which can give you the carmakers' numbers in exact numbers, sir. Sir, this is misleading because they are also making the old version. So which version are you talking about? So there are a lot of things over there, sir. I mean if you ask a question like this, it's almost like misleading, sir. My revenue at SMP is up 20%, sir. Why do you think it's up 20%, sir?

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [114]

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No, no, no, sir. I was looking from Q...

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [115]

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No, no, no, sir. Come on, now you answer my question, no, sir. Because recently 840 million, and now we've gone to 1.1 billion -- 1.011 billion, that's 20% up. How did the numbers go up, sir?

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [116]

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Sir, my first question was from Q-o-Q side, from Q-o-Q perspective, not from Y-o-Y. So is there anything, which I am missing? That was the first question actually. And second I was trying to figure out from Daimler's numbers, so that's how I asked you, sir.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [117]

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Sir, on, quarter-on-quarter, I answered in relation to the other question, that both the quarters are not comparable because what happens is in the July to September quarter, there are summer holidays in Europe. A good part of the business of SMP as well as SMRC is originating from Europe, so there will be an impact of summer holidays, which are about 1 month, 1.5 months nearly, there it's always there. So the right comparison is year-on-year rather than on quarter-on-quarter.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [118]

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Perfect, sir. Perfect, sir. And sir, on that second question, at our plant, do we make GLC, GLS, GLE, or do we make some other models also?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [119]

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Sir, we can't tell you what all we make. We are just telling you what we are doing just so that it helps you to understand. I can't be disclosing the carmakers' numbers and models and things like that, sir.

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Operator [120]

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The next question is from the line of Mayur Parkeria from Wealth Managers India Private Limited.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [121]

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Just wanted to understand the SMRC run rate, which you had given historically remains the same, right?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [122]

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Almost (inaudible) similarly.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [123]

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So 240, 250, right?

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [124]

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I don't have that exact number, but this period is a summer month so to take an average of [entire] may not be advisable to...

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [125]

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Okay, okay, fine. And sir, secondly, on just -- you mentioned that the PKC growth has also been driven by the Rolling Stock, so are we -- and the China growth. So just subpart to this is, is the growth excluding the Bombardier or -- is also growing or is it because of that which has grown in this quarter? And secondly, does the China improvement also have SMR growth?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [126]

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Sir, what I explained to you was in relation to the improvement in terms of profitability of PKC that there has been an all-round improvement and in that sense I explained that even Rolling Stock has improved and the Chinese joint ventures have also on a consolidated basis improved. So that was my point. And definitely, you are right that whatever numbers we report, it will also include the acquired entity, which has -- whatever has been consolidated in the company.

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Mayur Parkeria, Wealth Managers Pty Limited - Head of PMS & Fund Manager [127]

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Yes. But excluding that would -- organically, there would have been growth in the top line?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [128]

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In PKC overall? Yes.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [129]

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And to come back to your question on SMR and PKC, both the companies are addressing different market segments in China. While the SMR business largely comes from the passenger car market and also please note that SMR has a joint venture, which is 50-50, which is not consolidated on the top line line-by-line into SMRPBV, whereas PKC is more catering to that commercial vehicle side.

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Operator [130]

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Next question is from the line of Nishant Vaas from ICICI Securities.

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Nishant Vass, ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst [131]

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Sir, first question is on PKC, now we've had the, obviously, had the company for a few years and we have seen a significant cost improvement that you're also showcasing on the margin. So am I reading too much, this seems to be moving in very surprising fashion because when we acquired the company, it was at around 7% EBITDA; it's now hitting close to 12%. Is this a gap right now from the business perspective, or you're seeing more cost levers that we can unravel in the next couple of years first on PKC?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [132]

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Sir, our job is to continuously keep improving, and that's what we do.

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Nishant Vass, ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst [133]

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From a more end market perspective because, we all, investors have this concern that PKC is at the, from an end use perspective, in CVs, but do you think that the variable costs or the breakevens have come down to the level where you can manage the cost in a much better manner than this company did in the past and the variability that margins would be much lower?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [134]

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Sir, we never guide on the margins as such. So our drive since the acquisition of PKC has been on return on capital employed. And as you know that in return on capital employed, nearly everything gets captured whether it's better inventory management, it's removal of wastages of all kinds and that's what has driven the company from a 7% ROCE to now nearly 28%, 29% ROCE in the company. So with that drive, everybody in the company, the management and the associates on the shop floor, they have imbibed good practices, which is resulting in this improvement.

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Nishant Vass, ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst [135]

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Sir, if I could squeeze one question. Obviously, we've had a long question queue for the greenfield, but just looking at your organic numbers, ex of SMRC greenfield, there seems to be a good cost control and improvement. Could you highlight some of those things that you have done over the last year for SMP organic business, where you're seeing this margin improvement, what has led to that?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [136]

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So it's not something specific for the quarter. Of course, some of the erstwhile greenfields are getting more mature. We are also making sure that the management has continually focused on delivering improvement. A lot of the CapExes that have been done and a lot of the new plants that have been commissioned in the past are also moving towards peak volumes. So a lot of things are happening. There is no single aspect. As you can imagine, it's so diversified within geographies, within product lines, within customers, which programs we are on, which variants are being pulled by the customers. Well, there are a lot of things that are really going on. Our focus is to make sure that each team, each unit is stand-alone profitable and is improving the profitability as it keeps going and winning business. And there are also places where -- businesses we will not go after because if they're not giving us the required returns, we will not go after them. So it's a mixture of all those things. That's exactly what my father was saying that the Board congratulated the team on the performance with the market conditions as it is to still show improvements in such conditions, and we continue to drive more quarter-on-quarter as we go along.

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Nishant Vass, ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst [137]

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Sir, a small suggestion, if I may. Considering the return on capital improvement that we are seeing and across other lines of businesses, when in year-end we are talking about the 5-year guidance, if it could be possible to kind of break down the return on capital for the organic piece of SMP as well as, obviously, the ones in greenfield, that would be really helpful to see that.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [138]

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Sir, it will also be very helpful to the customers, sir. Be careful -- what they are saying, it will be very helpful to you, but also helpful to the wrong people, sir.

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [139]

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Nishant, I think one other important aspect is that today, the entire group is standing behind the greenfield, which require support. So they want to make sure that they extend the support and ensure that the house, their house is doing better so that we can all contribute towards that target.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [140]

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Yes. I think a lot has been said, but I again want you to think about something. USA is special. USA has some peculiar very true to USA kind of challenges. And this being the first big plant of ours that we have set up over there, we are facing those problems, and we are facing it very bravely. We are not doing anything wrong. We are catching the bull by the horn, and we are trying to solve those particular issues. But I think one thing is very clear; if we have to grow future, the next 5-year plan or the ones after that, mastering USA is very, very important. So I think if you will allow me to say so, yes, we are learning USA by setting up of this plant, and we call it baptism by fire.

So yes, we've gone through so many of these things. If you remember in SMR, about 7, 8 years ago when we were doing the Hungarian plant, we've gone through Oldenburg, we've gone through so many plants all over the world, and everything has taught us a lot. So I am sure the lessons learned from Tuscaloosa, Alabama, is going to be something very, very crucial for our group's [this thing] because the kind of numbers that we have already started hitting and we will hit in the future, America cannot be ignored, and we have to be in USA. So we have learnt our lessons, we are learning more, and every second, we are learning more, and that I think augurs very well for the future of our group.

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Operator [141]

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The next question is from the line of Arvind Sharma from Citi.

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Arvind Sharma, Citigroup Inc, Research Division - Associate [142]

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Two questions, sir, first again on PKC, strong growth in terms of margin. Just wondering what is capacity utilization over there so that we can know exactly how far revenue growth can be? And my second question would be more of a data question on the stand-alone, that is [stay] in your business. Would it be possible to share the split between commercial vehicles and passenger vehicles in the Indian business in terms of revenue contribution?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [143]

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I'm sorry, we have not understood clearly the question on PKC.

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Arvind Sharma, Citigroup Inc, Research Division - Associate [144]

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PKC, sir, the question would be what is the current capacity utilization so that we can know how far can the revenue growth can go even from these levels.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [145]

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So in all our plants, this is something which I would like to tell everybody. We don't have anything like capacity. For example, if we -- see, we are not producing cement or something. Whatever we produce is exactly what the customer is asking us to produce. So if you really want to know capacity-wise, technically, if you hit 80% of the so-called capacity, in your imagination, I will have it. I will open the second plant because the customer can ask to improve immediately. So really, we don't work as the capacity because there is no plant that is churning out cement or something like that. It's basically based on what the customer is asking. But Pankaj, would you want to add on that?

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Pankaj K. Mital, Motherson Sumi Systems Limited - COO & Whole-Time Director [146]

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Exactly. I mean some places, as we already told you that we are expanding our plants to where we see that the future demand of the customer is going to be bigger as the new models are kicking in, which were not being produced earlier. So we are setting up new plants for there as well.

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Gaya Nanda Gauba, Motherson Sumi Systems Limited - CFO [147]

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On the second question, the domestic sale breakdown, we are currently not doing into that as of now.

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Arvind Sharma, Citigroup Inc, Research Division - Associate [148]

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So just on PKC, essentially we can go much further from this EUR 300 million kind of a level as well?

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [149]

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Watch this space.

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Operator [150]

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Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Vivek Chaand Sehgal for closing comments. Thank you, and over to you, sir.

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Vivek Chaand Sehgal, Motherson Sumi Systems Limited - Chairman [151]

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Well, thank you very much. I think what's important is to understand this is the final year of our 5-year plan. A lot of effort is being put in by the companies to improve our condition, bottom line, efficiencies, inventories, every single thing is being taken care on that. We are also working on our next 5-year plan, which we'd love to share with all of you somewhere around in May, April-May, something like that. We are vindicated when it came to a lot of the things that people said are going to change the face of automotive. We can see strong traction in the numbers of cars. I think even now people are still worried about the 18%, 20% drop. I keep telling them, please deep dive and see which cars are not selling, and then you will understand that actually the cars that are selling, the 80% that is selling is high-value cars. And that's something which is very, very encouraging for a company like Motherson.

Thank you very much, and have a great week ahead. Thank you.

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Operator [152]

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Thank you, sir. Ladies and gentlemen, on behalf of Motherson Sumi Systems Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.