Harsha Engineers International Limited (HARSHA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '23 Conference Call for Analysts and Investors of Harsha Engineers International Limited. [Operator Instructions] I now hand the conference over to Mr. Vishal Rangwala, CEO and Whole-time Director of the company. Thank you, and over to you, sir.

Good afternoon, everyone. Thank you for joining Harsha Engineers International Quarter 3 FY '23 Earnings Call. I would like to walk us through results for Q3 first and talk a little bit about that and then maybe Maulik will talk a little bit more specific about numbers. So to begin with, we continue to see the respectable top line and bottom line in quarter 3 results despite very difficult market conditions across Europe due to energy prices. This has top line impact in our Romania plant as well as supplies going from India to Europe. Further in Q3, due to strong zero-COVID policy implementation in China, there was impact on China revenue as well. A couple of other factors, which had our top line impact was on material -- mechanism in place and commodity pricing, price reduction into steel and brass commodity prices in changes. So as well as our customers started doing a lot of year-end inventory control, resulting in overall softening of demand as well. So Q3 is definitely lower than our expectation. However, these are the significant factors which had an impact on them. While we have improved our EBITDA and PAT over last year and last quarter. We have continued to work on reducing cost and obviously, partial revenue reduction impact due to material price adjustment. So we're keeping our EBITDA margin quite strong in impact. Considering material price change in pass-through as well as European demand softening...

Sir, if you could just move the mic a little more closer to you as participants have just highlighted that they are not able to hear you very clearly, sir.

Sure. Okay, I hope you hear me better. So basically -- so we are seeing significant price changes because of material pass-through and significant European demand softening and overall, there is a whole softening of overall market being there. Current year, we are looking at flattish top line. However, in EBITDA terms -- in EBITDA and absolute terms will remain strong as well as we will grow it as a percentage this year. We are seeing some impact in the wind market, specifically in Europe, which is very weak and we has some impact on our growth in bronze bushings business as well. We are closely monitoring the -- how the situation is developing and providing or actually guiding on specific to how it's going to roll out over next 2 quarters, which is very difficult at this point, but we are extremely hopeful that we will -- quarter 4 also will really improve from here. While we talk about this, we are very bullish on medium- to long-term -- our focus there is for continued growth. The drivers for us remain the same. We continue to see new order wins reference to China+1 strategy deployment by our customers. We are increasing -- focus on increasing business share within cage. We are actually continuing to grow with our Japan origin customer base across it to as well as we are seeing a lot of good growth possibility in bronze bushing as well as camping products. Overall that we remain very optimistic and continuing on that path. And with that, I ask Maulik to talk about numbers.

Sure. Thank you, Vishal. Hello, everyone. Good afternoon. We have uploaded the financial numbers as well as the investor presentation on our website as well as paired with the exchanges. And sure, you would have got an opportunity to go through the thing. Let me quickly touch upon the major numbers. For the quarter ended December '22, for Engineering business at consolidated level, we have achieved a top line of INR 297 crores against the INR 318 crores in the previous quarter as well as INR 312 crores in the same quarter last year. We have some the growth of minus 7% and minus 5%, respectively, for that period. Against that, our profit after tax for Engineering business for the December quarter is reported at INR 2.1 crores versus previous quarter reported number of INR 27.7 crores with a growth of 16% and INR 19.9 crores reported number of previous year quarter 3 with a growth of 62%. On EBITDA front, at consolidated level for Engineering and Solar business, we have achieved EBITDA of 18.1% as per the defined definition and against for 16.22% in the previous quarter. With this brief on the financial numbers, I hand it over to operator to take over the Q&A.

[Operator Instructions] The first question is from the line of Harshit Patel from Equirus Securities.

Sir, my first question is on our overseas operations. So if you could indicate what was the revenue growth or decline was there in both our Romania as well as China operations on Y-o-Y and Q-o-Q basis? And how has been the performance on the margin front over there? And in your opinion, how long could it take us to get back to the historical levels of margins over there? That would be my first question.

Sure, Harshit. Maulik here. For Harsha China, our quarterly numbers have been decreased by minus 14% versus Q2, while it has grown by 17% on the year quarter 3. On Harsha China only, our EBITDA has remained good for the last quarter. We have achieved an EBITDA percentage of 15.6% in Harsha China on the top line of INR 27.9 crores. On Harsha Romania, our top line has remained at INR 60.3 crores with a de-growth of minus 6% over last quarter and minus 28% over last year quarter 3. Our EBITDA remained flattish -- remain breakeven view in this quarter versus positive EBITDA of INR 60 lakhs in the last quarter. And Harshit, I'll address on the -- our overseas subsidiary, I think we are seeing continued improvement on the margin side and EBITDA side. And we did have a difficult situation. We do have a difficult situation last quarter in Europe and as well as in China. And part of this volume recovery happens, we're quite confident that we will be positive margins, positive bottom lines, we will achieve in next few quarters and we grow from there. So that's idea.

My second question is on our bronze bushing business. As you have mentioned in your press release as well as you also told us that there is a bit of a slowdown because exports from India are suffering, the exports to Europe. So where would be in terms of our growth trajectory in that business? So will we be able to achieve our FY '24 guidance, at least, I believe FY '23 could be a little bit of a problem? But are we on track to do that INR 100 crore kind of sales next year?

Harshit, right now, exactly to define that becomes challenging that overall order win remains with us. How that market recovers, how fast that market recovers remains a question. So what we are hearing from our customers and overall wind market, the second half of calendar year '23, will be much better for wind. So as and when -- how that revival happens will be dependent on that. But in terms of opportunity and in terms of potential of the business, we are near that number of INR 100 crores and that how -- whether we are able to successfully do INR 100 crores will depend partially on the market situation.

Our next question is from the line of Amit Anwani from Prabhudas Lilladher.

My first question is on now as you already highlighted, we have taken some slowdown for exports and bronze bushing also uptake has been lower and maybe that will continue for 1, 2 quarters. So now the kind of guidance which we are providing earlier on the top line growth and obviously, the margin improvement, we used to talk about India margins at least improving significantly and much higher contribution from bronze bushing over next 2 years. So are we still remain firmed up on this? Or any change of stance that has happened?

If -- am I hearing Amit, your question correctly that what is the growth guidance for '23,'24 that we are looking at?

Yes, sir, FY '24, '25, any changes because now we are seeing bronze bushing also seeing lower offtake and we targeted that this will be also as major contributor.

So just as Vishal explained in his initial comment, this is Sanjay here. As Vishal explained to what is happening this year, we're definitely looking flattish in terms of the value. Having said that, there is definitely a volume growth, though not again, in our case, strictly quantifiable, but anywhere between 7% to 8% or maybe even a little higher volume growth even [indiscernible] even this years. Next year -- now what is happening, when all the growth drivers are intact, but next year, we believe that we will wait at least for this quarter, the Q4 of the current fiscal year to go because we want to actually quantify that what could be the growth guidance for '23, '24. Having said that, our target of a consistent medium- to long-term opportunity-wise the CAGR growth of 10% to 15% -- around 15% is what we are targeting, and we are very confident that this will happen. But for '23, '24, we want to wait for one more quarter and then give sort of an indication. Given the fact that we are facing a lot of uncertainties and it's not exactly possible to quantity at this point in time. So let's wait for Q4. Having said that, that doesn't dilute the opportunity of the growth story in any way. That is just medium to short-term problems that we are currently facing. But I think it will be only fair to say that let's wait for one more quarter, and we'll be able to then give you a little more exact indication about '23, '24.

Sure. So sir, is it our customers are seeing lesser offtake? Or is it the overall wind market?

So I think it is both. We are seeing less uptake from our customers because they are already cautious about the recession as well as the overall market is softened. Having said that, specifically, we see that in Europe that is significantly impacted. Other regions is -- we don't see a very significant impact, but it could come in. So that's why there is a lot of uncertainty because -- linked to that.

Sure, sir. And on the increasing customer wallet share, we talked about Japanese customers, where -- that's where we are focusing on and obviously, the outsourcing of large cages. So are we going progressively there? Is there any development there? Any contribution, anything which has happened?

Yes. I mean, in general, we are moving in that right direction. We are winning a lot of business with Japan, our region customer base across the group. The growth, 30% to 35%-plus growth we have seen for that customer base.

In the current fiscal?

Correct. Current year for the 9 months so far, right. And beyond that even large size cages, we're winning lot of orders. Part of it is now start testing and outsourcing. We don't have a specific large order to be shared that this significant has happened. But it is a very incremental journey. And we are continuing to see traction of both those fronts.

[indiscernible].

Sure. My last question on anything on railways. We saw there has been a good focus in budget also on railway side. Any company-specific benefit which you are looking in coming years on the railway side?

So we have -- railway, we are seeing significant growth, specifically to one product, we have just developed which is going into the railway. Another product which we have -- actually our customers were importing and now we have become the substitute for that import where in that situation, we are ramping that up, that product. So we have seen significant growth within the railway or rather we will continue to see this year, calendar year '23. So I'm very hopeful, but again, those numbers are in range of 20%, 30% plus overall based on what projections we have seen if we are able to fully realize that import substitution. So very hopeful, very aggressively are looking like that way now.

We take our next question from the line of Pradyumna Choudhary from JM Financial.

So you've done very well in terms of EBITDA growth, absolute EBITDA growth on the Engineering consolidated side. So I just wanted to understand the reason for the same.

Yes. So I think the one important thing that I mentioned earlier that because we have a material pass-through mechanism, we -- and as Sanjay mentioned, that we think that we still grew significant -- I mean, respectively, in spite of the headwinds we are facing. So basically, Our EBITDA absolute margin remain intact in spite of, if you look at quarter 3, a little bit soft. So that is basically leading to that EBITDA growth.

Major contributors in India. India has reported a decent, very decent EBITDA.

Yeah. So just to add on those 2 points, which Vishal has said about the pass-through plus we also have a good amount of action rate well in place in our EBITDA, which we have already realized, and it is there in our investor presentation.

Sorry, I can't hear the second reason. One is pass-through, what's the second reason?

Second, Maulik said that we have a good decent realized exchange rate also booked in the current quarter. What is actually realized by us.

Okay. And so one thing that [indiscernible] our revenue on a Y-o-Y basis, I'm talking about Q3, our revenue actually has declined by 7 -- I think, by around 7%, whereas the COGS has -- cost of goods sold has declined by 17%. So is there any chance that not all of the price decrease of material has been passed on to the customer?

Yes. So Pradyumna, we have disclosed that our price have to has a lag, which is 3 to 4 months net depend on customer to customer. And that may always give either a benefit to the company or a hit to the company for a quarter figure and that has been reflected by.

So having said that, this is always a constant process. And there is a little bit of lag, it goes on. So exact mathematics is very difficult to say. But that does not mean that automatically [ coupon ] margins will be further subdued. It also means that there would be no orders that we will get better margins. Some orders, we will have a little pass-through effect. On an average, at India level at 20% around that EBITDA we are maintaining. And we have explained hopefully, China EBITDA will further improve his Q4. Romania, we are keeping our fingers cross, very honestly, we don't know. But let's assume Romania remains more or less in the territory of 0% or a very marginal 1% or 2%. That would mean that Q4, I should see more or less a similar operating and net margins happening, which will mean that as compared to last year, there is a very decent margin growth this year, notwithstanding the fact that at the top line level, we are flat. This is sum and substance of the current year as we see.

Understood. And in terms of Y-o-Y in Q3, what is the volume growth?

Again, I'll be really honest, we have a brass, we have a steel, but its unroll would be maybe around 7% to 8%.

Okay. Just one request before I just conclude. Would it be possible, like, of course, we are a price pass-through company, and we get seriously impacted by -- like our numbers get impacted by the commodity price fall or rise, right? So some sort of disclosure on -- I don't know how, but maybe something on the volume side in your presentation going forward so that we are able to better assess the business performance would be really helpful.

No, I appreciate your point, but let's understand our difficulties that we face. So we have 7,500 SKUs, and there are so many different parables and patterns. So that, for example, if I'm talking of brass, we have x volume, but during us much higher average realization, when I talk of steel, we have very small 20mm, 30mm, 40mm products, DGBB, et cetera, [indiscernible], where it's very high volume, but the average realization is very low. So I'll be very honest, we will still want you to look at us as a percentage EBITDA. It will be very misleading for me to say that is average realization per se because I don't want you to promise something which we can't deliver.

Absolutely the...

Our next question is from the line of [ Dhananjay Majhi ] from -- well, an individual investor.

If I'm audible?

Yes.

Yes. Sir, your casting products are low margin, which might be dragging your margin down. So how you would be offsetting? Is that only the product that is bronze bushing?

So no. So I think our casting business, we only do any Semi-Finished business in Europe and out of our Romania facility. Otherwise, our focus is on finished product business. And the bronze bushing is actually a finished product with a respectable margin. The casting business, which is relatively lower margin only in -- out our Romania facility.

And as we have rightly mentioned, being in Romania energy prices have hit us hardly last quarter in which we have seen 0% EBITDA for the 7 months.

Okay. So my next question is by any chance if the demand for sensor embedded bearing increases or are we having any capabilities of supplying those? Or let me modify the question in short, how are we molding ourselves towards Industry 4.0?

So see, there are 2 aspects of this. One, how we are working internally, we are actually aggressively implementing Industry 4.0 internally to really give us the benefit of optimization of cost efficiency as well as just in time and all that. So there is a significant in-house program, which we run, linking all our machines to our central system and how to create -- how we create the signal and all that, so that right maintenance, right attention within review. So that is how we do internally Industry 4.0. Having said that, our product per se when it goes to bearing, we -- our product has no impact, whether this bearing has a sensor built-in or not, we are agnostic to that. And even with this sensor built bearing the similar or the same cage goes in. This is being a highly precise product. So as such, that's how it is. However, to take advantage of this trend, we are within our -- we have a injection molding cages also, an injection-molding capability. We are working with some of our customers to supply additional products within bearing side. So that we can give that molding our plastic component which incorporate the sensor as an attachment to the bearing. So that's something as a small way we are working on. Beyond that, as I mentioned, that bearing cage, our main product remains same, irrespective of whether it's a sensor bearing or not.

Okay. And my third question is actually your plans vary -- taken issues due to energy prices in Europe, you mentioned here also. So you prior -- on the prior call, you have mentioned that there would be demand for some products. So have you generated any revenue or have you generated any order from that country?

Yes. So we -- what we mentioned is that we are working to grow our demand for finished products, which is cages out of our Romania facility. Currently, considering overall demand situation in Europe, that demand remains muted. However, we are continuing to work in our business order gestation realization cycles are long, where we have to actually -- when someone awards us the business, we go into product development. We validate those products and only after approval, we start series production. So there are some wins in pipeline. And we are also very hopeful that additional opportunities will come our way. We will grow that business, but I don't have any specific large order to talk about today.

Our next question is from the line of Shirom Kapur from Prabhudas Lilladher.

One question. So in EBITDA, I understand in your disclosures, it includes other income and other income has come significantly higher this quarter at about 1 -- about INR 13 crores versus only about INR 2.5 crores last quarter. So stripping out of other income, are we still going to see EBITDA margins rising significantly because I feel it's getting a little bit skewed based on our other income in fleet.

So if I understand your question correctly, if you are comparing other income, please understand that this year, we have a portion of almost INR 5 crores which is the realized FX. When I say realized, that means whatever is the difference between the booking of the sale and the actual realization, it has been realized during the quarter. And therefore, it is in my pocket. So in my humble view, as an export-oriented company, the realized current gain is an independent part. So if, for example, there is a loss, that loss gets booked as other expense, and which is a part of the operating cost, that for my other income, which is realized should be a part of the operating income and not now non-operating income. So if you remove the realized gain or receive we consider that, then there is no decide difficulty in terms of comparison of the margins at the operating level. Yes, there is a treasury income in terms of interest, that is fine. Similarly, there are the mark-to-market currency. So when I translate my closing balances at the current currency level, there's a mark-to-market translation gain, which could be reversed or which could be maintained depending on how the currency fluctuates. So that is fine. I mean that is the part of your analysis, if you remove that is effective also. But I think if you consider the realized gain, we are okay. There should not see any problem.

Understood. And my next question is regarding -- we see a higher percentage of sales, your other expenses and employee benefit expenses have increased as a percentage of sales. So going forward, if your realizations continue to fall and that impacts your top line. So you continue to see this percentage grow or is there any one-off this quarter that caused your other expenses and employee benefits to increase versus last quarter?

So at control level, some inventory has grown up due to 13 [indiscernible] in Romania being a 6 month quarter. And otherwise, what we have observed is on account of the metal price reduction impacting the top line value getting down. So indirectly, it increase the percentage terms, when in absolute terms if you observe, it remains more or less constant on a -- or a regular increase year-over-year.

Okay. Got it. And last question is on your precision stamped components business. Do you have any updates on this? Any numbers you could share in terms of growth margins for this?

Yes. I think from -- I can share just a directional and what we are seeing in terms of specific numbers, it will be difficult to share. Directionally and on the ground, we are seeing significant growth specifically in this business. Again, we are starting from a relatively small base. But we are seeing this year about 25%-plus growth in general in that business. And with the order wins in the pipeline, I think we are very bullish and hopeful on that business in general. Overall margin point of view in general, very similar or slightly lower than our average margin for stand-alone basis. That's again what we can share. Specific numbers, we are not separating those out of overall.

Okay. Got it. And these components are primarily exported or are they sold in India? Because if there's softness in Europe, will this also get impacted?

Yes. No, we -- right now the majority of business is bound for India with some opportunity outside. But a major focus is India, that's where we have growth. So yes, I mean, right now, we are not seeing any impact related to Europe or anything in this business.

Our next question is from the line of Prolin Nandu from Goldfish Capital.

Vishal, a couple of questions from my side. The first one would be, even our domestic or engineering stand-alone business has 2 elements to it. One is what we supply within India and what we export out of India. How different are the margins for these 2 businesses for the domestic as well as the export part?

They are fairly similar. There are -- there could be obviously pockets and things and opportunities which could create a differential. Obviously, export business, if I look at historical trend, it gives us exchange rate-related benefit, which probably improved just because of that inherent advantage built into it. Beyond that, depends on the situation, the situation per se domestic or export would not necessarily have a different margin profile.

Sure, sir. And just on this exchange benefit part to it, right? In the past calls, you have mentioned that we -- if I'm not wrong, we hedge 50% to 60% of our currency exposure, so correct me if I'm wrong, this exchange gains that we are talking about would not have accrued had we hedged completely 100%. Is that understanding right? Back-to-back when we win orders if we would have hedged 100%, we wouldn't have let -- got any exchange benefit. Is that understanding correct?

So on the forward [indiscernible], it will be part of our realized gain, which are not settled in the terms of forward or options we've taken. It is part of our other comprehensive income, and it is not there in the other income. Whenever if we'll settled, it will for that.

No. But to answer your question directly, I think, yes, you're right.

Yes.

So sir, I mean, what is the cost benefit? Have we historically done that analysis that why do we want to take calls on exchange rate and why not hedge 100%?