Sona BLW Precision Forgings : Analysts/Institutional Investor Meet/Con. Call Updates

SONA BLW Precision Forgings Ltd. (Sona Comstar)

Adding a New Pillar of Growth - Call Transcript

January 09, 2023

The webcast recording and the presentation referred to in this transcript are available on the website of the Company and can be accessed through the following link:

https://sonacomstar.com/investor/investor-presentations

Moderator: Ladies and gentlemen, good day, and welcome to Sona Comstar's Conference Call. At this moment, all participants are in the listen-only mode.

1. question-and-answersession will be conducted after the presentation concludes. At that time, you may click on the video question button below the media player to ask your questions. Please note that this conference is being recorded. Some of the statements made by the management team in today's conference call may be forward-looking in nature, and we request you to refer to the disclaimer in the earnings presentation for further details. The management will not be taking any specific customer-related questions or confirm or deny any customer names or relationships due to confidentiality reasons. Please refrain from naming any customers in your questions.

I now hand the call over to Mr. Vivek Vikram Singh for his opening remarks and the presentation. Thank you, and over to you, sir.

Slide 3:

Vivek Vikram Singh: Thank you, Aman, and I hope everyone had a great New Year. On behalf of Sona Comstar, I'd like to welcome all of you to the addition of a third pillar in our growth story, one of sensors and software. Now, as the automotive world moves into the future, it is becoming what we call EPIC. In the last couple of years, all of you must have read or at least heard extensively about chips. Well, another term for chips is integrated circuits or IC. That is the same IC in NOVELIC. It is the same IC, which is in another form in our view of the future of mobility.

So we've coined this term EPIC to capture all the four big ships, which are electrification of the powertrain, personalization of the vehicle to match and

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suit driver preferences, the increasing intelligence of vehicles in the systems inside them. And lastly, the connectedness that makes all of this possible. So in the EPIC, IC also stands for intelligent and connected, and that is the IC in NOVELIC that it is novel, it is intelligent, it is connected.

In this, I'd say, brave new world that is coming, sensors and software will play an oversized role in the automotive. This realization has been there with us for a long while, but it really hit home when we were making our IMCM module, the Integrated Motor Controller Modules for the intelligent suspension. And we realize this is that just a single module in a vehicle requires 2 million lines of code, which is about 5x the software that goes into an average space shuttle.

And that's not a very surprising thing. An average modern car has around 100 million lines of code, whereas the more advanced ones can go up to 200 million, and a fully autonomous vehicle will have more than 500 million lines of code. With this context in mind, we have embarked upon the next phase in our long-term strategy.

Slide 4:

Once again, we have been listed for almost 18 months, and I want to reiterate our purpose as a company. Why we exist as a company is to be one of the world's most respected and valuable auto technology companies. This is important to keep in mind with why we do the things we do. There is a purpose. We are a company that's led by a purpose, and that is why it's important to keep in mind when you look at any decision that we take.

Our automotive industry, as all of you already know, has a technology megatrend called electrification. And we expect that by 2035, EV penetration would be over 80% at least. On that trend, we acted early. We started our journey on electrification in 2016. And that has allowed us to take a leadership position in the global driveline space as well as the Indian motor space.

Now today, a new technology is emerging, which is one of increasing autonomy and intelligence of vehicles and systems within these vehicles. And in the same Sona Comstar spirit of moving not where the wall is today, but where the wall will be in the future. We are taking a meaningful step in the

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direction of electrified autonomous vehicles or E-AV with the NOVELIC acquisition.

Slide 5:

Now building an autonomous vehicle, in simple terms, is a matter of replacing with machinery, the three things that humans need to drive - the hands and feet that operate the controls, the senses that perceive their surroundings and the brain that turns the data into decisions. Now the first bit is mostly mechanical and electrical.

The second one, the one of perception, is achieved through sensors, whether they be cameras, LiDAR or radar sensors. And the third, the intelligence to turn this input data into decisions, is software. Software plus and iteratively learning general intelligence or, in simpler terms, AI. This is what is driving autonomous.

What this does and what NOVELIC helps us is in adding the second and third set of capabilities of semiconductor chip design of radar sensors, software and ML/AI tools to add to what we already have in mechanical, electrical and electronic abilities. This would help us to start building the third business vertical of sensors and software.

Slide 6:

Now why NOVELIC specifically? So we have five compelling reasons for this.

One, extremely, extremely few companies share our DNA of being high technology, high growth and very high profit. I mean, their 27% net profit margin is rare. And when we saw that NOVELIC has achieved all three of these without any external funding ever, metaphorically speaking, at least it was love at first sight.

Second, we've done a lot of research in the last six months to validate the hypothesis that radar sensors are the best technology to solve the in-cabin sensing problem. We'll speak more about this and why best, as I've said repeatedly, best is not just high performance. It is high performance and low cost and, importantly, with a zero invasion of passenger privacy.

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Third, which is very very important to us and very close to our hearts. And it is also a fact that most M&As fail mostly due to cultural integration issues. With NOVELIC, although, if you can see them on your screen, you will later, they may not look like us totally. But culturally, we are very very similar with shared middle-class values of integrity and frugality and respect for money. They are also committed to vitality and agility in innovation and engineering excellence.

Fourth, and this one is a slightly technical one that, this is one of the rare vertically integrated companies in this field with capabilities spanning the entire gamut from chip and sensor design to signal processing software; very rare to have the whole capability set at one place.

And last but not the least part of it. So we expect this deal to be EPS accretive from the first year itself while providing us the opportunity to grow this into another $100 million vertical in the next six to seven years.

Now we'll talk about each of these details in the next few slides.

Slide 7:

So first, the market. Because of increasing autonomy and intelligence in vehicles and vehicular systems, more-and-more perception is required. This perception is achieved through sensors, as you can see on your screen, whether they be camera, LiDAR or radar. And according to McKinsey, increasing adoption of ADAS and autonomous or semi-autonomous driving will propel this ADAS sensor market to $43 billion by 2030, which is a 3x jump in the next seven to eight years. Now today, most ADAS applications are sold by single sensor solutions.

However, as autonomy advances, this can only be achieved through a multisensory approach and sensor fusion, which means a combination of camera, radar or LiDAR and the ability to integrate it. Today, there are very few companies globally that have innovative single-sensor solutions, let alone having multi-sensor. So no one company actually today is working on all three types. NOVELIC is very proficient in radar technologies and can offer sensor fusion algorithms to its customers.

Slide 8:

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In addition to its technology prowess, NOVELIC is unique in its approach to high profitability and sustainable growth. It has been profitable every single year since its inception. It has grown revenues at a phenomenal 53% CAGR over the last 10 years. And all of this without ever raising any external equity capital. So there is a lot I admire in these three gentlemen that I may not have told them personally, but I'm telling that publicly that the journey they have taken is inspirational to us in many ways.

And this is so much like Sona in how we value money, technology and growth that - I mean, this is only our second acquisition in eight years. So it goes that we look very hard and we are very selective. But when we do find someone, it is someone very aligned with us. So together with NOVELIC, we are going to be one of the very few companies in the world to have a large and growing revenue share from the twin automotive megatrends of electrification and autonomy while achieving and maintaining a high growth and remarkable financial performance in terms of profit and return on capital. Now I'll hand over to our Group CTO, Mr. Deshmukh, to talk more about the technology and its application. Mr. Deshmukh, sir.

Slide: 9

Kiran Deshmukh: Thank you, Vivek. Good evening, ladies and gentlemen. Radar will play a significant role in ADAS world. Radars can detect distance and speed of the vehicles on the road, obstacles in the car's path, the position of the car relating to the road and other vehicles and the car's blind spots. Mainly ADAS functionality, such as adaptive cruise control, automatic emergency braking, lane-keeping assistance and autonomous driving, cannot be performed cost-effectively without ADAS.

Another critical application of radar technology is in-cabin sensing. Children and pets left behind in locked cars have resulted in thousands of deaths worldwide due to heat stroke. In new car models, government regulations and car Safety Assessment guidelines mandate Child Presence Detection or what is called CPD. Euro NCAP 2023 requires CPD for a 5-star rating. Major OEMs have joined hands and have announced that they will provide CPD on their own in the cars.

NOVELIC's radar technology detects life presence, child presence and seat occupancy through vital signs such as heart rate and respiration sensors. The

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