Aeroflex Industries Limited (AEROFLEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aeroflex Industries Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Asad Daud, Managing Director, Aeroflex Industries Limited. Thank you, and over to you, sir. Thank you so much.

Good morning to everyone. I welcome you all to Aeroflex Industries Q1 FY '27 Earnings Call. Joining us today are members of our senior management team, along with representatives from Strategic Growth Advisors, our Investor Relations partner. I hope that you have had the opportunity to review our financial results and the investor presentation, which is available on the stock exchanges and also on the company's website. We are pleased to report our highest quarterly performance ever. Our consolidated revenue for Q1 FY '27 stood at INR 145.97 crores, which is an increase of 72.4% on a year-on-year basis, with growth coming in both from our core business as well as our emerging businesses. Our flexible hose business grew 41% on a Y-o-Y basis and the assemblies and other value-added products grew even at a faster pace. Revenue from SFN Skid assemblies reached INR 32.4 crores in this quarter, which is contributing to approximately 23% of the total revenue. The skid assemblies enable control circulation of the [indiscernible] across the entire cooling systems in the data centers, and it is engineered to meet the stringent requirements with regards to reliability, pressure management and also leak prevention. This marks a major step in our company's evolution from being just a flexible hose manufacturer to an integrated provider of advanced flow control and flow management solutions for mission-critical applications. As part of our capital expenditure plans, we have expanded the capacity of assemblies from 6,000 units to 9,000 units per annum. And we further -- and we have the plan to further increase it to 15,000 units per annum based on the requirements from the -- from our customer and also the deployment time lines given by them. We also continue to invest in automation, advanced building solutions and also precision manufacturing to help strengthen our product quality and reliability. On the flexible hoses vertical, we have planned to increase the production from 17.5 million meters per annum currently to 20 million meters per annum and it should be completed by Q3 of this financial year. Now talking about our financial performance for Q1. Our total income stood at INR 145.97 crores, which is an increase of 72.4% on a year-on-year basis. Our EBITDA stood at INR 33.5 crores, which is up by 116% on a year-on-year basis with margins expanding by 468 basis points as compared to the same quarter in last year to 23.04%. Our profit after tax stood at INR 18.79 crores, which is up 162% on a year-on-year basis. And our PAT margin currently stands at about very close to 13%, which is an improvement of 440 basis points from last year same quarter. Our cash profit grew by more than 100% to INR 26.64 crores with cash profit margin improving by 278 basis points to 18.25%, which reflects strong operating leverage and improved cash conversion and profitability across our business. Our exports grew by 43% on a year-on-year basis and the higher contribution from the domestic market in this quarter was primarily driven by the rapid scale-up and supply of the liquid cooling solutions, the skid assemblies of the liquid cooling solutions. Looking ahead, we are confident in the business model that we have in the products that we manufacture and the long-term momentum of our growth story, which is built on a strong core business of flexible hoses and assemblies and the fast-growing vertical of skid assemblies for data centers. This gives us an opportunity to scale rapidly along with seeing the growth coming in from the opportunity that the AI infrastructure provides. We remain firmly focused on scaling all our business verticals, including the liquid cooling business, expanding the capacity of skid assemblies and also for flexible hoses and hose assemblies, deepening our customer relationship across our customers, both in India and across the world, advancing new product development and also undertaking automation and digitalization initiatives. I would like to thank our employees, our customers, our suppliers, our business partners and all our shareholders for showing the continuous support and trust to the company. Thank you. And with that, I conclude my remarks, and we can now open the floor for questions.

[Operator Instructions] we have our first question from line of Shweta from iThought PMS.

Am I audible?

Yes, Shweta.

So my first question is, I saw there was a spurt in revenues from Europe in this quarter. So could you please explain like where that was specifically from which segment?

So we are seeing increased business coming in from both Europe and also in the U.S.A. market. From Europe, it's a mixture of the business growth coming in from various countries, which includes Italy, Spain, France and also the U.K. And we are seeing the business across Europe coming in not only from the tradition industries, but also we are supplying our flexible hoses to applications to data center applications in Europe as well.

Okay, sir. So we are exporting data center applications?

Yes. Exporting our hose assemblies, the flexible hose assemblies also for data center application in Europe.

We have our next question from the line of Karan Tule from [indiscernible] Mehta.

Am I audible?

Yes.

Congrats on a good set of numbers. My question skid assembly segment, so was this domestic [indiscernible] plan within product?

So in skid assemblies, right now, we are among the few players who are into this space who are supplying. In terms of competition, there is -- there are a few people who have just started to work on that, but it would be difficult to share the details of competitors because not much data is available in public with regards to that.

Okay. And what about international market [indiscernible] peers who are supplying in financial market?

So in international market, there are companies in the U.S., there are companies in Europe who are manufacturing of these assemblies, plus also our competitors such as Senior and Parker are also into this. They have also started with this business vertical. So these are our competitors internationally, plus there are local players in the international market who are supplying and serving their local industry like in the U.S. and in Europe.

We have a next question from the line of from the line of Raman form Sequent Investments.

Can you hear me?

Yes.

Sir, I have a couple of questions. First on the flexible hose assembly part. I just want to understand 2 things. What is our current utilization of our current capacity in this segment? And once we are done with the capacity expansion of this flexible hoses, I think Q3 will be done, what will be the peak revenue potential from this segment?

Okay. So currently, we are operating at about 65% capacity utilization right now, 65% to 66% capacity utilization. Basically, at the peak utilization and assuming that 70% of the sales comes in from the assembly, we are looking at a top line of anywhere between INR 650 crores to INR 675 crores.

Okay. So you are basically saying we can do around INR 650 crores, INR 670 crores of revenue from hose including the assembly part, right?

Correct.

So I mean, sir, about 2 years back, you wanted -- you are more towards like the margins on the flexible assembly will improve and move towards 25%. So from this -- during the current quarter, what's our margin from this business itself? And are we on the road to achieve that 25% margin in this business?

Yes. So our idea is to achieve a 25% blended margin combined as a whole, which includes all our products, which includes the flexible hoses, the flexible hose assemblies, bellows and also the skid assemblies. So the target for the company overall is to achieve an EBITDA margin of 25% in the next few years, and we are right now on track to achieve that.

No, I'm just talking about the flexible hose assembly part. 2 years ago, your aim was to get 25% margin in the flexible hose. So I just want to understand where are we at?

So the margins in the flexible hose business depends on the products. So when we sell the flexible hose just in the hose form, margins range between 16% to 20%. And when we sell the assemblies, the margins range anywhere between 22% to 26% margins. Yes.

So can you give the blended split between how much are you selling as just a flexible hose part and how much are you selling as flexible hose skid assembly?

Split is already there, like I mentioned in the last -- in this quarter, approximately 66% of the business was through -- 63% of the business was selling of the fittings and assembly products and about 37% of the business was selling the flexible hose, so 63% and 37%, yes.

Okay. Understood, sir. So basically, on a blended basis, this is more towards 22%, 23% margin?

Slightly...

Higher contribution from, yes. Okay. Understood. And sir, my last question is, can you also give us the revenue from Hyd-Air and metals and metals bellows as well?

Yes. So the revenue from Hyd-Air in the last quarter was around INR 7 crores. And the revenue from the metal bellows was about INR 3 crores in this quarter, in Q1.

And what about the miniature metal bellows, which we were planning?

Miniature metal bellows is part of the metal bellows...

Okay.

Yes. And for metal bellows, we are seeing increased business also coming in. So we are expecting the next 2 quarters to be -- to see really an uptick in the sales for the bellows division.

And do you have any CapEx plan for Hyd-Air? You said you will share it in the next financial year.

Yes. We are in the discussion for the same. We would announce it as soon as it is finalized.

[Operator Instructions] We have our next question from the line of Shubhi Gupta from [indiscernible] Asset Managers.

So my question is that our average price for skid assembly has declined. So what is driving this? Is it coming from competition? So what is driving this price decrease?

Each skid assembly for every data center and for every floor of a data center has a different design. So based on the design of the skid assemblies, the value of the skid assemblies changes even in the same data center building, the value of the skid assembly might change based on floor to floor. So technically, it is -- the price has not declined because the value per skid assemblies depends on the design of the skid assembly. So if the skid assembly has less number of, for example, piping, the value will be definitely less. And if the skid assembly has a longer piping, the value will be higher. So it's more of a tailor-made product. Hence, it's not the right way to see the price per skid assembly because it varies vastly. It -- the supplied skids was INR 1 lakh also, we have supplied skids worth INR 5 lakh also. Obviously, the materials used for INR 1 lakh is much lesser as compared to what the piping used in INR 5 lakh.

Okay. So this will not impact our margins per se?

No, it does not impact our margins because the costing for every skid assembly depending on the design is done separately. So it's not like a standard off-the-shelf product.

Sir, my second question is that we are doing a lot of R&D. So any product which is close to commercialization also RD will this lead to some better market opportunities for us? Or will that impact on margins, any technological improvement?

So we are working on a lot of products in our assembly business and also in the liquid where we are developing certain products in collaboration with our customers. So definitely, these products are -- these products are there for -- so these products are basically will be urgently commercialized and used in our applications.

Sir, any time line on this or will this improve our efficiency cost or will lead to better margins?

It depends. Products depends at what stage they are in. So some are towards the end of completion, some have just started, some requires a lot more in terms of engineering, in terms of its end-use application. Some products might require special machine for us to make it. So it's difficult to give a specific time line as to what products will happen at what time. Some products stay in R&D for a long time, right, because sometimes it is difficult to meet the requirements of the customers. So that's part of R&D.

We have our next question from the line of Prem Luniya from Astute Investment Management.

So congratulations on the numbers. I had a few questions about if you can give us an update on the fire hose assembly for the data center.

Fire hose assembly?

Data center, which we were developing. Is there any update on that?

Yes. Yes. So that product is already almost towards the end of completion, should be commercialized by the end of this quarter or latest by the start of next quarter.

Okay. But in terms of realization, can you quantify how big it can...

Difficult to give a number right now, but we have put in certain investments based on the projections or the estimation that we have received from our customers. So I think once it is commercialized and into production, I think probably at that time, we'll be able to give a better perspective on that. Right now, it will be difficult for me to comment on it in public forum until unless something is not yet commercialized.

Sure. But will it be for domestic use or...

No, International supply.

And also on this, the other products other than the SFN product, we had developed some 15-odd different products which we exhibited. Is there any update on any traction on that front?

15 products which are under development?

No, the 15 products which we showcased in the exhibition in April?

Yes, yes. So these were the products -- some of it we already had the orders from some of the customers in Europe. So we showcased those same products in the U.S. as well. We have already received the orders for the assemblies, which will be used in the data centers. For the skid assemblies, we are in talks with a few potential customers. It will be -- so once everything is finalized, we'll definitely let our shareholders know. Right now, it is still under discussion. And these things take some time because like I mentioned, the partner that we are working with in India, right, from the day we started the discussion with them to the date of the first transaction that we did with them took almost 10 to 11 months.

Sure. And just an update as you have shared that at the end of the year, 25% of the revenue will be contributed by HFM. But in this quarter, you have done already 22%, and you have not completely utilized the capacity. So do you want to reiterate the statement on that front?

Well, I think I would talk about this at the end of the year because like I mentioned, it is the plan for the end of the year. Quarter-on-quarter, things change. So -- but we work on a yearly basis. So that's why I think it's better that I answer it at the end of the year.

We have next question from the line of Tej Patel from [indiscernible] Invest.

Am I audible, sir?

Yes.

Congratulations on a good set of numbers. Sir, given recently there are a lot of announcements by the Gujarat policy coming in, there's a lot of traction of data centers in India. Just wanted to get your thoughts on are we contemplating based on our engagement with customers and their order pipeline to expand our capacity beyond 15,000. And if the thought is so, I mean, you already in talks with your existing customer to expand capacity beyond 15,000, right? So your thoughts on this once you, let's say, start the capacity to 15,000 by Q3, are we contemplating to, let's say, put in more CapEx beyond 15,000 as well based on your conversion with your current customer and overall thoughts?

The capacity increase that we have planned from 2,000 to 15,000 was based on the discussion that we had with our customers. And based on their projections at that time, we have built up the capacity to 9,000 now and to complete the 15,000 by the start of Q3. Now in terms of the further expansion and beyond 15,000 are under discussion, but it's too early for me to comment right now on this until something is finalized and then I shall share the same. But yes, demand is increasing. As we all know with the kind of data centers coming up, but obviously, it takes time for a data center to be built up and to be up and running. So we will definitely plan our capacity expansion after discussion with our customer. And the customer definitely share with us their orders in the pipeline that they have for the next few months and also the kind of business that we see coming in the foreseeable future. So we are in constant touch with our customer for this and probably -- our first target is to get the 15,000 skids commissioned and up and running and then to look at further expansion.

Understood. That was helpful, sir. And from the last con call, you said probably we will probably do some business internationally in the skids business and not the assembly, but in the skid business. Are we on track? I mean, how hopeful we are to get some order and execute in this financial year only?

Yes. So we are definitely on track. And in this financial year, we'll definitely have business coming in from international market.

So I mean, of course, you will be -- given you have to execute this year, you might already be engaging with the customer, right? So is it the same customer that we are dealing with within India? Or is it a complete different customer?

Not be able to comment on that. That's proprietary on that aspect.

Got it. No problem. In terms of quantum or let's say, in terms of quantity, if you could help us understand, is it significant to our current capacity or will it be a part of our existing plant 15,000 capacity or will be probably required to put up another CapEx for it?

See, in terms of the potential, right, you can just see the potential in the international market is multifold as compared to the India market, right? Just talking about Europe and U.S. themselves probably would have multiple times the potential as compared to the market in India, right? The design of their skid assemblies is slightly different than what we have in India. So we are developing -- in talks with them to develop the skid assemblies that is required by them. I think once we get some final I'll be able to share more details on that.

Got it. Not a problem, not a problem. And sir, the assemblies, which earlier participant was asking that for the same customer is probably our largest customer in U.S., right?

Yes, for that customer.

Got it. And sir, if you could probably help us understand with some indication on margins on the skid business this quarter, is it possible to give a range, if not an exact number, what margins are we making on their business right now?

See, the margins on the skid business is on a blended -- on the same level as the margins on an average for the entire company as a whole. So I think we'll only be able to share that much detail because I will not be able to share the exact margin details on public forum.

We have our next question from the line of Deepak Poddar from Sapphire Capital.

Sir, am I audible, sir?

Yes.

Just wanted to understand now this skid -- this capacity expansion from 9,000 to 15,000, right? So what is the CapEx involved there?