Astra Microwave Products Limited (532493) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Astra Microwave Products Limited Q4 and FY '22 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. S. G. Reddy, Managing Director. Thank you, and over to you, sir.

Thank you, and good afternoon, everybody. A warm welcome to all of you for the post results earnings call of our company. I am with my colleague, Mr. M.V. Reddy, Joint Managing Director; and SGA, our Investor [ Relations ] Advisers. The results and the investor presentation for Q4 and year-ended 2022 are uploaded on our company website and stock exchanges. I hope you had a chance to look at it. As you are aware, we are in this business of -- supplier for RF and material components and subsystems for the last 32 years, serving markets in the area of defense, space, telecom, meteorology and civilian applications. Over the years, our company has moved from components and subsystem to high value-added systems. The company was able to create a solid order book of close to INR 1,546 crores on back of our deep domain expertise. With our proven track record, we are very well placed to capture a bigger pie of the growing defense market, which is growing at a very fast pace on back of various government initiatives like IDDM and MAKE-II programs. Many of these programs are especially in the area for radars and electronic warfare systems where Astra has a good expertise. We believe that going forward, our revenue mix will be in favor of domestic market as compared to the previous years, where it is skewed in favor of exports, which is a high volume and the low margin business. Therefore, we believe that going forward, the profitability of the company is likely to improve in a significant way. As shared with you some -- in the last conference call, we are confident to book about INR 3,000 crores of the orders by the year 2025 and out of a market potential of about INR 14,500 crores up to year 2028. Our order book as of 31st March 2022, is at about INR 1,546 crores, which is executable in the next 12 to 13 months. And during the year, the company has booked about INR 760 crore orders with a INR 77 crore order coming in Q4. We see near opportunities in the area of anti-drone, EW systems, satellites, SDRs and electro-optics, which will add up to the order book and business potential of the company in the coming years. Coming to the specific financial performance of the company. For the year ended, we did about INR 735 crores of sales after adjusting the late delivery charges and other adjustments, which are pertaining to the accounting standards. This is as against INR 589 crores of business, what we did in the year '21, which shows a growth of about 25% year-on-year. EBITDA for the year stood at INR 87 crores as against INR 64 crores for the year -- for the previous year. The margin stands at about 11.8% as against [ 10.9% ] in previous year. EBITDA margin for exports is around 3%, as against domestic margins of about 23%. The company has reported a profit after tax of about INR 40 crores for the year as against INR 24 crores for the previous year. The Board of Directors have recommended a dividend of about INR 1.40, which is 70% for the year ended FY '22. In terms of the sales executed in terms of geographies, the domestic sales is INR 53 crores, and exports have contributed about 47%. Going forward, for the year 2023, we are confident to achieve about INR 850 crores of sales, with an expected EBITDA of INR 85 crores. This year, the composition is likely to be more in favor of domestic, which is likely to contribute about 65%, and that will still be coming from exports. This is all what I can share with you as of now. And I open this call for the question and answers now.

[Operator Instructions] The first question is from the line of Vivek Ganguly from Nine Rivers Capital.

So you'll have an order book of about INR 2,100-odd crores, and can you give the breakup between domestic and exports?

INR 2,000 is I think, consolidated.

No, the -- you mean the order book you referred to is the consolidated one?

Yes.

Our stand-alone is only about INR 1,500 crores.

INR 1,500 crores. Okay. And in that, how much would be -- so the remaining would be coming from your -- the Software Defined Radio JV? .

Yes.

Okay. So within the INR 1,500 crores, how would it be between domestic and exports?

Domestic is about INR 1,002 crores and rest were exports, around INR 540 crores.

Okay. Got it. And so the domestic and export, both of them are, on an average, executable over 12 to 14 months? Or there would be -- the time span would be different for both?

Yes. Out of this INR 1,500 crores, we are trying to execute about I think [ INR 220 crores ], and another INR 30 crores which are being booked in the first quarter, we are planning for execution. So out of this INR 1,500 crore backlog, we are executing around INR 820 crores.

Next year?

Yes. Currently year.

[Operator Instructions] The next question is from the line of Aarti Sharma from [ PCT ] Investments.

My first question is regarding, in the past, you have mentioned that for opportunities like anti-drone systems, electro-optics, there may be a requirement to raise funds. Where are we on this?

No, this is still going on. Electro-optics, what we mentioned earlier is that we are in advanced stage of discussions with our JV partner. And there is a potential business opportunity for our JV company. That is what we have mentioned to you. The discussions are still going on. But as and when these things materializes and if there is a requirement to raise our funds, definitely, we'll do that.

Okay. That was helpful. My second question is, can you share some updates on Astra-Rafael JV in terms of order book and its performance in the year?

A total of -- Aelius revenues for this -- Astra, okay. Astra revenues for the year is about INR 25 crores. We have just started executing this Software Defined Radios, which was in pipeline for the last 2 years. I think a small portion of those things were shipped to Rafael Israel. Because of that, it was able to record about INR 25 crores of revenues for the year, with a negative profit of about INR 5 crores for the year.

And we are expecting a revenue of INR 200 crores in the next 15 to 16 months.

[Operator Instructions] Next question is from the line of Ankit Agarwal from Arc Capital.

Yes. So I have a couple of questions here. So first one, sir, on the geographic mix. So can you give some details with respect to margins on domestic and export sales?

Now you mean for the current year?

Yes, yes, current year.

Yes, that I had already mentioned, EBITDA margins for the exports is about 3%, and the domestic is about 23%.

Okay. And sir, as I understand, going forward, you're going to be targeting higher sales from domestic. But -- so do we see going into more higher-value products the export side other than, say, like build-to-print orders?

Yes. Actually, we are also discussing with various OEMs in U.S. and other territories. And was -- in fact one of the customer, we are in a very active pace of discussions to develop subsystems for one of their airborne radar. That is -- if it materializes, I think that would be a big order value. So that I think in maybe a couple of months, I think, after that only we'll come to know about the progress on that. Otherwise, yes, we have been discussing with a few companies built to spec also apart from build to print for [indiscernible].

Okay. And sir, continuing with the margins, we have seen that the raw material as a cost of percentage your sales have increased over the past 5, 6 years. So how do we see it panning out in the future? Like are we looking at an alternate supplier or something like that?

No. raw material -- the increase in raw material cost is largely because of the sales mix. As I mentioned earlier, exports is a low-margin, high-volume business, and that was a major contributor for the last 3 years. Because of that, the overall raw material cost is on higher side. Going forward, definitely, the raw material costs will be much lower compared to the overall sales of the company, simply because domestic sales are going to be higher compared to the export sales.

[Operator Instructions] The next question is from the line of Ketan Gandhi from Gandhi Securities.

Sir, if I'm not wrong, you have said next year guidance, around INR 850 crores of turnover and PBT of 85%. That is a growth of around 60%, 65% in the PBT. Am I right?

Yes, you're right.

Okay. And sir, any guidance on the order book can be received during this financial year?

Yes. Mr. M.V. Reddy will answer that.

Order book last year, that is FY '22. Do you want the order book for the current year?

Yes, order book guidance, yes.

Order book guidance, okay. So this year, we are targeting about INR 850 crores worth of orders inflow in this current year. In this, again, from radar segment, we have clear visibility to book orders worth of INR 475 crores, and from EW segment around INR 125 crores, and in communication and telemetry together around INR 150 crores. So to overall defense is close to around INR 740 crores. And then space is about INR 5 crores to INR 10 crores, not much. And meteorology, around INR 50 crores. It is all about the overall order book in the domestic sector. So close to around INR 795 crores we are planning to book. And whereas in exports around INR 55 crores, we have orders in pipeline.

[Operator Instructions] Next question is from the line of Abhijit Mitra from ICICI Securities.

Just to understand for the order book guidance that you see for the next 3 years, I mean, how much of that would be radars? And what are the near-term execution orders that you see in radars? And also within the defense capital acquisition budget of the country, how much would be dedicated towards radars, any broad idea? These are the 3 questions I have. And also some of the competitors have also started talking up for potential orders in the radar segment, especially coming from HAL. So I'm just trying to understand what this entire LCA platform, [indiscernible], Uttam AESA any other electronic warfare we are sort of a vendor -- a potential vendor to? Some thoughts on that would be great.

Yes, we have a potential of close to around INR 600 crores. Out of that, we are expecting to book around INR 475 crores from the radar segment, as I mentioned earlier. And in electronic warfare is about INR 125 crores. So as far as the projects are concerned, we -- as we have been informing you that we have been developing [indiscernible] radar, which is almost is getting ready, within another couple of weeks probably we'll be delivering it to DRDO. And we are expecting the production orders for that AESA Uttam radar [indiscernible] maybe from FY '23 onwards -- FY '24 onwards. And other radars, like we have been working for synthetic-aperture radar and also we are working for digital active phased array radar, and we are working for the long-range radar. And these are all subsystems what we have been working with the DRDO. Apart from that, as we have mentioned earlier, we've been working on the [indiscernible] system. One is on the coastal surveillance radar, which we got ToT, basic technology from DRDO. We've been working on that to meet the end user requirements that has both domestic as well as export potential. And also, we are working on the ground penetration radar. Again, this is also a basic ToT, we got it from DRDO. Then attractively, we have [indiscernible] started developing on bird detection radar. This is again to meet that defense acquisition projects what you had mentioned earlier. So we are working on that. And then in counter-drone system. In that, we have taken up the radar development. The basic design we have taken from DRDO, but we are optimizing the design of the total radar in order to meet the end user requirement within a very competitive price. Then we are also working on the instrumentation radar, like [ PATN ] that is for telemetry radar and then also the multifunction AESA radar, which we -- [ PATN ] is almost is -- that has been completed. Now [indiscernible] test is going on. Whereas multifunction AESA radar is almost nearing completion stage. So these are the few radars, which I have mentioned, both of systems as well as systems we are creating in taking up development. Another side on the [indiscernible], we have been working for various programs like Aelius [indiscernible], what we have taken up development, which we are hopeful to complete the prototype development in the current year. And we are likely to book production orders from FY '25 onwards. Similarly, the other projects we have taken up which are under development, like one is the [indiscernible] proximity sensor. This is for advanced version of [indiscernible] program, which we are working with the DRDO. And also another project called the Course Correction Fuze. This we got it under the technology demonstration [ fund ]. This is also our most advanced stage of development. And as far as electronic warfare is concerned, we are expecting a good number of orders this year, especially the naval EW programs like NAYAN and SHAKTI from BEL, Hyderabad. And then also, we are into various Navy and Army EW systems development programs. We have been working with DRDO to develop the systems. And these are all the major products what we have been asked. Apart from that, the doppler weather radar, which we have already executed for India meteorology department, initial contract of 10 numbers. Recently, we got one more radar from DRDO. And also we participated a few more [indiscernible] in the meteorology department. Yes, I think I answered your question.

No, sir, just to understand the INR 3,000 crores to INR 4,000 crores of potential order inflow for the next 3 to 4 years, how much of that is radar? I didn't get it, sorry. How much of that would be radars?

In that INR 3,000 crores, I think it's close to about INR 2,000 crores is from radar segment.

Okay. And that majority would be this radars for the anti-drone system. Is it?

All subsystems and systems put together, I'm talking about.

Okay, okay, okay. Got it. Got it. And just to understand the customer-wise mix because many of the competitors have started giving those mix. So in terms of, say, DRDO, HAL, BEL, how would you break it up for this year for the domestic component that you have achieved? And how do you see -- what are the key customers that you see coming up in that list on FY '23?

In FY '23, the production orders, what we are trying to book is from DRDO for the AWC radar systems. And then Atulya. Of course, this is from BEL, Bangalore and they will be there in subsystem [indiscernible] to go for some few numbers from DRDO. And then flight control, radar is about [indiscernible] as I already mentioned. Then the [indiscernible] program where we are participating for the development program. So these are the few radars which we are into DRDO as well as production orders from BEL.

[Operator Instructions] The next question is from the line of Akshay Kothari from Envision Capital Services.

Sir, I just wanted to know that regarding orders from DRDO, what does the process exactly follow like designing or development? How much of it is done by us and how much of it is done by DRDO or outsourced? And are these developments being done indigenously or how does it go?

Basically, you're talking about subsystems or for the system.

Both. Systems, subsystems, both.

See, basically, DRDO closed its tender with the specifications of the subsystem. And of course, we are in completing with -- competition with other players in this area. So we have to grow our technical competency in that particular product during the TSE. And once we get qualified and if we are commercially competent, like we are successful, and we get this order. This is the process what DRDO is following it up for the subsystems. System also, like they have been evaluating companies and they're identifying companies who has this potential to develop these particular products, and floating these tenders in a limited basis. Then thereafter, the user is commercially like to get this [indiscernible] and distribute to 1 or 2. It all depends upon the various RF requirements.

Okay. Okay. And designing is done by us only? Or are we outsourcing it?

Yes. As far as subsystem is concerned, all the design and development will be carried out at the -- by us only. We only -- we get specifications from DRDO.

Okay. Okay. I see. And sir, correct me if I'm wrong, I think you mentioned that our order execution cycle is around 12 to 13 months. Is that right?

Yes. Actually, it was around 8 to 10 months. But now due to the crisis of the components and other issues, it is likely now gone beyond 10 months. I think it is roughly around 12 months.

Okay. So we have an order book of INR 1,546 crores, the stand-alone one. So our next year revenue guidance should be around the order book only, because 12 months would be the order execution cycle, right?

Yes. Whatever orders we book for the current year, I think most of them will come for execution in the next year. Some of them at least.

Okay. So you have guided a revenue of around INR 850 crores. So that isn't tied up, so where am I getting -- going wrong?

So we have an order book of about INR 1,546 crores out of that, and potential order book of about INR 850 crores for the year. That will make up close to about INR 2,300 crores out of across the company. Out of that, we will be executing about INR 850 crores by the end of the financial year, which leaves a carryover [indiscernible] of INR 1,600 crores that is [indiscernible].

Okay. Okay. I understand that. And lastly, on the working capital cycle. So -- how are we planning to reduce this working capital cycle? And I understand that going forward, we would be doing more of diagnostic business, so I think our working capital cycle would be elongated on that. So your views on that front?

See, there's no other option like whatever way you can minimize that working capital cycle, so I think we have to do that. A major portion of that goes in procurement of the raw material. The realization is not an issue because as long as our final product is meeting the specifications, we should be able to get in about 90 days' time. So realization is not an issue, but we have to invest in sourcing the material, storing them for the duration of the project. That is where the maximum fund requirement is going to come in.

Okay. And how much percentage of the project cost do we get as an advance from our customers?

It's a development order -- if it's a development order, we get about 20%.

from 15% to 25%.

15% to 25% we get from the DRDO labs. Generally, for the products and orders, there is no advance. I'm talking about the domestic business.

Okay. And sir, could you give the breakup for the revenue mix as a percentage of development order and production revenue?

The development revenue may be about around 15% to 20% in any year.

[Operator Instructions] The next question is from the line of Bhavik Shah from MK Ventures.

So sir, we saw like a margin hit in this quarter. So was it on account of the raw material pressure we are witnessing?

No. See, in this quarter, again, exports is a significant one, where the value addition is very less. And also a couple of huge contracts from [indiscernible] and then one of the Israeli customers got closed in the current quarter. So there were some adjustments to be carried out in terms of the bill of material because all these contracts carry a bill of material guarantee from either side. If there is an increase on bill of material, it will be compensated. If there is a saving in bill of material, then I have to repay to my customer. So because of that adjustment, the export revenue -- export profitability got a hit in the quarter. So that is the reason why the revenues -- the overall profitability is low in Q4.

So basically, we pass on the raw material inflation cost, if there is any, right?

Yes, yes. In fact, in some contracts, we got it. In some contracts, we have to pay them. Unfortunately, this quarter, the net adjustment was in their favor.

Okay. So like what percentage of our order book will have this RM inflation being passed on?

This raw material, I mean, guarantee is there only for export orders, not for the domestic ones.

Okay. So in domestic orders, you need to take the hit, right?

Yes, yes, we have to. There is no guarantee for it.

Are we facing some RM pressure in Q1, like...

Can you repeat the last question? I didn't get you.

Are we facing any steep increases in raw material inflation during the first quarter of '23?

No. Again, it depends on the overall sales that we are likely to execute. We have projected to do about INR 175 crores of sales in Q1. Out of that, exports are going to be close to about INR 50 crores to INR 60 crores. So it all depends on the product. I don't have the exact breakup for the Q1.

[indiscernible]

Yes, exports are going to be about INR 82 crores out of INR 175 crores. Therefore, probably the overall raw material costs will be higher in Q1, which is likely to get reduced gradually as we move forward.

Okay, Okay. And then in JV, so we have witnessed a loss of about INR 5 crores. So in FY '23, we're executing around INR 200 crores there. So will there still be a loss or will that JV turn profitable?

JV is likely to turn profitable at the end of 2023 financial year. There will be a small profit at the end of the year. But '23, '24 it should be -- reasonably good profits will be there in our JV.

Okay. And sir, in the same way, we have invested INR 30 crores for SDR, right?

Yes.

So are we going to see any revenues from there? Or is this just like the previous orders which we are going to fulfill?

[indiscernible]

SDR is in the development stage for Army -- Indian Army, which we have participated. That revenue will come only after once we are successful in this tender.

Today is about [indiscernible], but our joint venture is executing the order which date back almost 4 years back.

Okay. Okay. Right. And sir, like are we facing any challenges in execution of the order book? Because we have a strong order book of around INR 1,550 crores, but we have guided for around INR 850 crores, and our general execution period is 12 to 18 months. So are we facing any executional challenges? Do you like [indiscernible]?

Actually in this cycle time for the customer requirement a few contracts were there for around [ 2 to 4 months ]. So based on the milestones schedules, we have taken the orders for the execution. So for the current year, we are expecting around INR 850 crores. And of course, there is a scope to increase a little, but it all depends on the component availability. As I mentioned, like we have an issue of available semiconductors. They are taking almost 8 to 10 months, which is -- with that, I think we are trying to restrict to this sales, otherwise slight scope in increasing revenue for this year.

And sir my last question is like on the anti-drone system where we had invested around INR 15 crores. So is there any update on that?

No, anti-drone, we have not invested anything now. We are working on that.

Okay, so like we are in the development phase. Like...

Yes. In the development phase, yes.

The next question is from the line of Santanu Chatterjee from Mount Intra Finance.

My question is, sir, as we are trying to transform for -- from a subsystem player to a system player, I want to know, sir, how much order book we have brought from the whole system platform?

The whole stem platform, as we mentioned, we booked some orders for the instrumentation radar, which is close to about, I would say, INR 150 crores.

Okay. Out of INR 1,500 crores...

Yes, INR 150 crores is about the entire systems.

Okay. Okay. And sir, as you have already mentioned just a few minutes back, when I'm looking after your -- this quarter result, your top line is not moving up. Is there any execution issue? As you have mentioned, the semiconductor could be one of the reasons. Is there any other issue for which the execution is not up to the mark, sir? I'm talking about the year-on-year basis.

Actually, as I said, a few contracts which we have bagged need to be executed from FY '24 onwards. So that is leaving apart the long-duration contracts. The other contracts, the production contracts, most of them are like we are trying to execute. Only a few contracts, we are doubtful because of lead time of the components. In fact, sales contract which we bagged it, in that the lead term of components is more than 20 months. So because of that, we had to shift the entire contract to the next financial year. The major issue is the long lead time of components which are being faced as a global crisis that's going on. And hopefully, like this will improve, I think maybe, as I said, there we have a little scope to improve on these figures, what we have indicated now.

Okay. And sir, as you have presented in your presentation, we have got 4 different business verticals: defense, public, space, meteorological and exports. So can you have -- can you give us the margin profile of different business verticals?

See defense and space, the domestic margin's around 40%. That is sales minus material costs. Meteorology will be around -- is around 30% to 35%. Yes, that's it. Whereas the exports, the gross margins are around 8%.

The next question is from the line of Jitesh Patel from SS Securities.

I have a couple of questions. My first one is there is a significant increase in your other expense as compared to last year. Are there any one-off in this? Or -- and what kind of a margin do you expect in the future?

Yes. The current year order book, as I mentioned, most of them are from the domestic sector, except INR 55 crores in exports. The result from the domestic sector, which has a reasonably good contribution of margin. In this, the breakup I think we have already given, but anyway I will repeat for this, about INR 475 crores from the radar, and INR 125 crores from the EW and about INR 150 crores from the communications.

And out of this INR 1,500 crores of this order book, can you provide a breakup of this?

Yes. This defense is about INR 754 crores. In that, radar is around INR 409 crores. And electronic warfare is about INR 143 crores. And telemetry and communications is about INR 200 crores. Then space, we have onboard as well as the ground application book put together around INR 200 crores. And meteorology around INR 42 crores. So overall domestic is around INR 1,002 crores and exports we have about INR 540 crores.

And additional INR 800 crores what you are going to apply, that would be in which segment primarily?

Yes, defense, that's what I said. Defense and that to in particularly radar.

The next question is from the line of Maria Varma from JR Securities.

I have 2 questions. Firstly, in the presentation, the company has mentioned that the business potential until 2028 is INR 14,500 crores. I just wanted to understand the basis of coming off to this quantum of business potential and the foresight for the next 6 years.

Yes. Actually, based on the opportunities, what we have seen in our domain, like especially in the radar area and also in the electronic warfare [indiscernible] segment, there's ample of opportunities for a company like us to grow in this domain. And whether they are for development contracts, which we have executed or going for production, like Army Akash and then [indiscernible] missile program. And as far as the radars is concerned, then it's like flight control radar, which is, of course, being executed by [indiscernible]. And then [indiscernible] radar. And then also the [indiscernible] which in fact has been already sanctioned. There we are there in the primary radar, most of the subsystem [indiscernible]. And in the EW segment, we have production orders from BEL, most of them are from Navy and Army EW projects. So in that, again, it's close to worth of about INR 1,500 crores to INR 2,000 crores worth of potential is there. And space, of course, we have taken only a [indiscernible] for next 4, 5 years based on the projections what we have received. It is worth for about INR 500 crores to INR 600 crores worth of products we are likely to book over 3 years. But the majority of order, basically, we are trying to get it from radar segment, which is close to about INR 10,000 crores. That in fact, includes the entire systems like [indiscernible] radar and counter drone systems. And other radars, which, in fact, MOD is planning to release RFPs, like body [indiscernible] radar, and like this the various programs are there.

Okay. Okay. And sir, you've given a guidance of INR 850 crores with a 10% margin. So this would mean good growth on revenue. Is that where we're seeing this growth coming from?

INR 850 crores, the projection is made out of the existing order book. And the growth in reporting margins is coming in because this year, the export -- the domestic is going to be the major one compared to the exports. And hence, there is an improvement in the gross margins for the company.

The next question is from the line of Ketan Gandhi from Gandhi Securities.

Sir, I'm looking at the presentation, Slide 22, where you've mentioned about that by doing extensive investments to strengthen our position as a system vendor, exploring the areas in the anti-drone on EW, satellite, SDRs and so. So I believe the company will be in requirement of the additional capital. Any plan to raise the capital by way of equity issue or some other means in the near future?

Yes. We have talks on those lines. But as of today, I don't have any formed plans to share with you. But going forward, yes, we are aware that we are in need of some capital resources. Those ideas have to be implemented.

So can you please mention the time line? I mean, if you don't mind, say, 1 year or 2 year or 6 months?

Probably in 1 year's time, we should -- we have to take a call on that and come out with some proposals.

The next question is from the line of Suraj Kumar, individual investor.

I want to know about the finance cost and consolidated profit and losses statement. Finance costs had reduced. What is the reason?

Finance cost is reduced because the company was able to rotate the funds better and utilization of the overdraft facility for day-to-day operations has come down compared to the previous year. So that is a reason why it has come down.

Okay. Sir, one more thing. Government has declared that the performance bank guarantee will not be required more for defense companies. What is your view on this business?

I think as of today, they have only reduced the percentage of the performance guarantee, what was submitted earlier. Earlier, they used to have for about 10%. Now that got reduced to around 3% or 5%. I don't think totally, it was taken out.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you, everybody, for joining the call. We wish to see you at the end of Q1. Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, on behalf of Astra Microwave Products Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.