Centum Electronics Limited (517544) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm [ Celsia ], moderator for the conference call. Welcome to Centum Electronics Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note this conference is recorded. I would now like to hand over the floor to Mr. Gulshan Singh from Sunidhi Securities. Thank you, and over to you, sir.

Yes. Thank you, ma'am. Good afternoon, and very warm welcome to everyone. On behalf of Sunidhi Securities, I welcome you all to Centum Electronics Limited Q2 H1 FY '26 Earnings Conference Call. Today, we have with us the management represented by Mr. Nikhil Mallavarapu, Joint Managing Director; and Mr. Sundararajan Parthasarathy, Chief Financial Officer. We thank Centum Electronics for giving us the opportunity to host the call. And we [ will ] now like to hand over the floor to the management for their opening remarks, post which we will open the floor for Q&A. Thanks, and over to you, Nikhil, sir.

Thank you, Mr. Gulshan, and good evening, everyone. Welcome to our earnings conference call for the second quarter and the first half of the financial year 2026. Let me first thank our host of today's earnings call at Sunidhi Securities. Let me now take you through the operational performance of our company for the period under review, followed by which our CFO, Mr. Sundararajan Parthasarathy, will brief you on the financial performance for the period under review. During the second quarter of financial year 2026, we recorded a robust stand-alone revenue growth of 18% year-on-year, supported by strong execution in our build-to-spec business for domestic defense and space customers. Operational efficiency and improved revenue mix contributed to EBITDA margin expansion in the quarter as well. These gains were primarily driven by the high quality of our build-to-spec revenue mix. At the consolidated level, EBITDA margins were, however, impacted by subsidiary losses. Our international operations continued to face headwinds in the first half of 2026 with weak macroeconomic conditions and intense competition in the ER&D market in France, and this has led to subdued demand and pricing pressures. We are progressing on the planned divestment of our Canada operations, and we are in the process of also evaluating the long-term strategic direction of our European business in alignment with our longer term value creation objectives. On the balance sheet front, we continued to invest in CapEx and to enhance capacity to build inventory in preparation for the strong order execution expected in H2 of FY '26. We continue to see strong order book momentum, supported by healthy growth in the EMS business from new customers. And also on the domestic BTS order pipeline, we continue to see a healthy pipeline, remains robust and is expected to be a key driver for sustained growth in the coming quarters. Further, during the period, we strengthened our strategic partnerships. We've received notable recognitions. We signed MoUs with GRSE for collaboration on navigation systems for the Indian Navy, and with BEL to advance indigenous defense electronics across electronic warfare, radar and military communication systems. We also delivered nearly 400 critical modules for ISRO's recent CMS-03 GSAT-7R program, underscoring our execution capabilities in space programs. Our BTS unit also received NABL accreditation, which is further enhancing our credibility in the defense contracts. Recently, the company was also recognized by CII as an energy-efficient unit for Excellence in Energy Management for 2025. Now I would request Mr. Sundararajan to give you more details on the financial performance.

Thank you, Mr. Nikhil, and good afternoon, everyone. Let me brief you on the financial highlights for the second quarter and first half of financial year ending 2026. At the stand-alone level for the quarter under review, our revenue from operations increased by around 18% year-on-year to INR 206 crores. EBITDA stood at approximately INR 25 crores, registering a 36% year-on-year growth with EBITDA margins improving by 154 basis points to 11.97%. PAT came in at about INR 13 crores, reflecting a strong 97% year-on-year increase. In the first half of financial year 2026, revenue from operations grew by 24% year-on-year to INR 391 crores. EBITDA for the period was about INR 50 crores, marking a 68% year-on-year rise and EBITDA margins also expanded by 338 basis points to 12.88%. PAT for the first half stood at INR 29 crores, delivering a robust 182% year-on-year growth. Now coming to the consolidated financial performance for the quarter under review. Our revenue from operations increased by about 12% year-on-year to INR 291 crores and EBITDA stood at approximately INR 18 crores, which declined by 12% year-on-year with EBITDA margins also declining by 165 basis points to 6.16%. Profit after tax was reported at INR 4 crores as against a loss of INR 30 lakh for the same period last year. For the first half of the financial year 2026, our consolidated revenue from operations grew by 12% year-on-year to INR 564 crores. EBITDA for the period was around INR 41 crores, marking a 14% year-on-year rise and EBITDA margins improved by 14 basis points to [ 7.22% ]. Consolidated profit after tax for the first half stood at about INR 9 crores as against a loss of INR 4 crores in the corresponding period last year. As of 30th September, 2025, our borrowings stood at about INR 108 crores. That was about 12% increase on a net basis after accounting for INR 16 crores of discounted letters of credit. We maintained healthy cash balances of INR 136 crores, which includes about INR 76 crores from the QIB proceeds. And we also reduced some subsidiary borrowings by INR 13 crores through waivers and cancellations during the quarter. With this, I now open the floor for question-and-answer session. Thank you.

[Operator Instructions] First question comes from Nishita Shanklesha from Sapphire Capital.

Sir, I just wanted to understand that on a consolidated level, our margins have dropped. So when are we going to see our subsidiary become EBITDA positive?

Thank you, Nishita. I think the point on the subsidiary is clearly a high priority topic we're all looking to address. I think, as I mentioned during the earlier discussion, we -- with regard to our Canada operations, we are quite confident that we will have a solution very shortly to be able to divest or close the business that we have there. That's been a contributor for an important part of the losses that we have as part of the subsidiary. So that we feel, in a fairly short duration, in a few months or a couple of months by the end of the quarter we should have a clear decision on this. With regard to our Europe operations as well, as I mentioned earlier, we are evaluating various options on this front. As I mentioned, the macro scenario today is not favorable to be able to have a good amount of growth, which is what is really needed to improve the margins. But we are taking various steps on that front, but also more strategic options are being evaluated. And at this stage, I'm not able to share more, but we expect that by the end of Q4 we should have a direction on which we have [indiscernible].

Okay. Understood. So once we have more clarity on the Canada and the Europe operations, we will be able to say more about when the subsidiary will be EBITDA positive, right?

Yes. Yes. The objective is that we clearly would like as much as possible to not have any losses from the subsidiary impacting our overall numbers in the next financial year. So we are working on various different actions to be able to address this in the next couple of quarters.

Okay. Understood. And if you would like to give any revenue guidance and margin guidance for FY '26 and FY '27, that would be great.

Yes. I think with regard to revenue, as you mentioned, the stand-alone numbers have been very strong. In light of what I've just mentioned, I would focus my comments on the stand-alone numbers. So the stand-alone numbers have been very strong. As we mentioned, we're close to 25% for the first half. Also, as usual, our second half numbers typically are higher. And based on this, we are targeting a 30% growth for the full financial year at the end of March. That's with regard to revenue growth on the stand-alone numbers. And with regard to EBITDA margin, again, with the higher sales that we are seeing in the second half, we expect by the end of the financial year on a full year basis, we should be in our range of between 13% to 15% at a stand-alone basis for EBITDA.

Next question comes from Nirmam Mehta from Unique PMS.

So on our BTS business, while we saw good growth, our order book has gone down slightly from last year. So can you just give an outlook for this business over the next 2, 3 years? What segments do you see the growth from? And what -- where do you see the [indiscernible]?

Yes. I think we are very confident with regard to what we have in the pipeline. I think the second half of the year here as well, we expect to see a very strong order booking. And there are several different programs that are in advanced stages of decision. So we expect between Q3 and Q4 that the order book on the domestic BTS side will definitely increase, and we should close at a very healthy pace by the end of this financial year. And with regard to more longer -- 2 to 3-year kind of horizon, as we've mentioned in the past, based on our pipeline of opportunities and what is our share and so on, we expect that over a 3-year period, including this year, we're targeting somewhere in the range of a little over INR 2,000 crores of order booking in this business. So, again, as I mentioned, we've got -- we continue to be confident on certain things, and we expect some of that to come in within second half of this year.

Okay. And similarly, can you also present our outlook for the EMS business? How do you see that for the next, say, 2, 3 years?

Yes. EMS also we've had -- we are expecting this year itself to have a very strong growth, again, just as we have had in the past couple of years. We've -- as I mentioned, certain new customer additions that we had are now in production as of this quarter, which will help to drive some of that growth. And there continue to be several other opportunities that are significant, which are in the pipeline, and we are in a good position to be able to win those. So with all of this, we are seeing also basically a healthy pipeline also on the EMS front. We will have, obviously, from year-to-year or quarter-to-quarter, some ups and downs in one business or the other, but targeting a 30% growth rate in the overall stand-alone.

Okay. And lastly, so you mentioned about the decision on the Canada business by the end of the month. So what are we trying there, [ sir ], transferring the business to the customer or what option are we deciding?

Yes. As I mentioned, there are a couple of options that remain open. One is -- and I'm not able to disclose exactly what will happen until it's finally done, but the first option is to -- is a discussion with a third-party who is interested in this, and we are in fairly advanced stage of discussions with them. But if that doesn't work through, then we may -- there is a backup solution also from the customer or we may also proceed with the court-assisted process for us to exit the business.

But you do expect a decision by -- in the next 1 or 2 months?

Yes, for sure.

[Operator Instructions] The next question comes from [ Sai Vijay ] from [ Kapso ] Securities.

My question is regarding the follow-up on the inventory that you mentioned in the opening remarks. So the past 6 months, inventory levels have increased by around 40%, 45%. So is this primarily due to execution of existing orders? Or can I be more optimistic and see it as a positive indication for expected order book growth?

So, yes, these are primarily for the existing orders in both BTS and EMS divisions. There are different programs that we are working on execution and this also support the statement that we made about how the revenue is likely to ramp up in the second half of this year. And this increase is kind of equally split also between the divisions. So you would see the liquidation coming in, in the next 6 months. And also -- this also explains that payables, that has also gone up and which will also get liquidated over time.

Just to clarify, all our inventory is bought against firm purchase orders or customer forecast given from -- by the customers. So we don't buy inventory in anticipation of something. It is really against firm purchase orders or customer forecast. So, just to reiterate what Mr. Sundar has just said, this is clearly in anticipation of the higher deliveries that we expect in the second half of this year.

Got it. Sir, and just -- I know you may not be able to give lot of details, but at least if you can just broadly speak regarding the opportunity size for Space-Based Surveillance-3 program?

Yes. It's -- we're obviously tracking various different opportunities on that front. I think from our perspective, we have seen somewhere in the range of about INR 1,000 crores of opportunities that is addressable. I'm not saying we'll be booking that entire INR 1,000 crores, but it is a significant program. And I'm sure that we will have orders that we will be booking even in the current financial year for this program.

[Operator Instructions] Next question comes Atul Panpatil from Sunidhi Securities.

Yes. Sir, I would like to understand how is our order pipeline for the European business? We were anticipating some good orders from the European customers. And -- so I would like to understand how is the-- what's the status over there? And we were also anticipating some margin improvements in the French subsidiary also. So if you could throw some light over it, it would be really helpful.

Sure, sure. Yes. So -- Sundar here, as I was mentioning, unfortunately, the uptick in demand has not happened in the way that we expected it to, with regard to our Europe subsidiary. Basically, there's 2 effects that we're seeing. One is, as I mentioned, most sectors are down. There's no major investments happening in the automotive side or in some of the other sectors as well, which is -- which has caused an impact to a lot of the players in the ER&D space. The second thing is, of course, even from a defense standpoint, which is an area that we have a good position in, a lot of the increased budgets and expenditure is happening in production contracts. whereas a lot of the new projects for design development have been delayed, which is really the area that we play in and when we talk about engineering services when [ any ] project design and so on that we do. So as a result of that, either programs that we were tracking have been delayed or pushed out. And on the other hand, due to general macro trend in other sectors, the intensity of competition, margin pressures have also increased in the sectors that we are in. So this is the challenge. We are continuing to monitor that and taking certain actions from first on the cost side to continue to look at where opportunities we have. But, as I mentioned earlier, we are taking a more holistic review of what strategically we can take action on with regard to the European subsidiary, considering especially the opportunities that we are seeing here in India. So, we're evaluating various options on that.

Yes. That's really helpful, sir. Sir, the second question is on the guidance and guidance which we had provided for FY '26, that we were anticipating somewhere in the range of 18% our top line growth and 12% to 13% our EBITDA margin. But we could see for H1 FY '26, we were able to achieve -- of course, due to the challenges in the European market, and, of course, that is the one factor. But the guidance which we had provided of around 18%, and we have achieved so far 11% to 12% top line growth. So how do we see H2 FY '26 will play out? And are we still maintaining this guidance for FY '26?

Yes. So, like we said, on the European side, of course, there is some softness. But on the domestic front, we definitely expect a good uptick on revenue for both Q3 and Q4, the number you've seen in line with the orders that we are likely to fulfill. So while, of course, it may not be as [indiscernible] as we stated as far as our European business is concerned, if we execute the orders that we have, that is a quite strong pipeline that we have in both BTS and EMS in India, we are likely to not miss that guidance that we gave in the past. So you will see some ramp-up coming on that.

Yes. Like I said, in light of what I was just mentioning, I would like to focus your attention on the stand-alone business, which is really a good story, where we continue to maintain the guidance, if not strengthen that to say, that we should at the stand-alone level, grow at 30% for the full year. The view on the subsidiary is we will have some degrowth over there. But like I said, we're taking certain actions on that front to look at more long-term opportunities. So the real focus for growth is on the stand-alone business. And on that front, we are quite confident we will hit the 30% number.

[Operator Instructions] Next question comes from [ S.V. Baya ], an Individual Investor.

Right. I've got 2 questions, please. First is on the domestic front, right, to achieve a growth of 30% for the year, right, we have to achieve a growth of 36% in the second half. So you are confident about that?