Hitachi Energy India Limited (POWERINDIA) Earnings Call Transcript & Summary

[Audio Gap] [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. N. Venu, Managing Director, ABB Power Products and Systems India Limited. Thank you, and over to you, sir.

Thank you, Aman. Good afternoon, ladies and gentlemen. Thank you all for joining us today for this call. I hope you all are staying safe and taking care of yourselves and steadily adapting to the new norm. This festive time of the year, we are all looking forward to some news to reignite our collective optimism. Before I get into the nitty gritties, allow me to mention that the Q3 performance slide deck which I'm going to refer for my call, has already been uploaded on the stock exchange. And you can also refer that and those of you who are connecting phones, I will be calling the slide numbers for easier reference as we go through the presentation. We can all acknowledge, without a doubt, that this has been a very unusual, difficult year, one that none of us would have fathomed. It has not been easy for anyone. Business across the board, across the nations were affected. Companies in the capital goods segment were hit harder than some. Manufacturing stopped, supply chain, disrupted and exchange of goods halted or delayed. In this time, we also learned something about ourselves, our resilience and passion to persevere. At the start of the quarter, the global transaction between ABB and Hitachi have concluded. Hitachi ABB Power Grids came under Hitachi -- Hitachi's ownership. Through the quarter, we continue to build on our passion for innovation, ambitions and our people. We persevered, kept our focus and marched on these challenging times. I'm now referring Slide #3. Today, it gives me some comfort to say that we have calibrated to overcome the challenges. On this slide, you will see our investment in our people and their well-being. Our strategic business continuity measures, our continued customer engagement and adoption to the new norm have been -- have begun yielding results. After an uneasy second quarter, where off of the quarter, we did not work due to the strict lockdowns, the second half of the year is showing some return in business activity and demand, with revenue moving closer to pre-pandemic level. I'm now on the Slide #4. This would not have been possible without that united effort and due diligence of our crisis teams and country and locations and collective adherence to safety guidelines of our entire workforce. Various measures were put in place to engender a culture of awareness and action, leaving little to chance. Alongside mandated health, safety and environmental measures, we have been conducting staff training on self-protection essentials, arranging COVID-19 awareness sessions for employees and their families and even keeping our partners and customers up to date on due safety protocols through virtual forums. We have been cognizant as well as of the efforts of our frontline workers and COVID-19 warriors. We have recognized their service and sincerity, letting them know that we value them greatly and that they have our full support. Whilst all this, we have also continued upskilling our people and identifying top talent to join our company. Hiring continued even during the lockdown. We made efficient use of digital technology to onboard new joiners and ensure they were oriented properly with their new company. As I have often said, people are our top priority, and we see them as our pillars of strength. They have been and will always be an important part of our journey and growth story. I'm on the Slide 6, macroeconomic snapshot. Most of you know more than us. The pandemic meant that we are conducting business amid a rather challenging and unpredictable environment. The Indian economy has contracted a record 23.9% in the April and June quarters. It is likely to contract around 10% in the financial year 2021. Industrial production plummeted. Inflation, on the other hand, has already surpassed the RBI 6% policy limit, making further monetary policy easing a difficult call. Lower tax collection can also impede government spending. If I move to the next slide, the good news, however, is that the pandemic appears to be receding from the first half. It is not over yet. Cases have been steadily dropping for the past consecutive weeks now. We used to be in the range of 90,000 to 100,000 per day cases, which has now fallen to 45,000 to 50,000. Also key indicators such as manufacturing purchase, PMI index, fuel and power consumptions are retracing in an upward trajectory. Car sales are showing signs of recovery in the pre-festival season. There is even then a looming risk of second or third wave of COVID-19 infection as winter and festive season starts. We also seen similar kind of things in other countries. Much will depend on community efforts to remain cautious. That's why the short-term outlook remains uncertain across the board, even though these indicators are showing some of them are at pre-COVID level. So our view is cautiously optimistic on a sustained economic revival in India. If I move to the Slide #8, the order distribution. With this backdrop, as you can see, majority of our orders were for our state-of-the-art products and systems and services with a leaning towards the high-growth segment identified in our strategy. And in the second and third charts, you can see that the largest share of orders came from utilities and industry through direct sales. What we must note here is that decisions on over INR 190 crores worth of orders, where we are L1, have been delayed to the next quarter mostly due to the pandemic, as our customers could not complete the necessary paperwork and the necessary approvals. If I move to the next slide, Slide #9. In the current climate, Hitachi ABB Power Grids in India have been focusing on preserving business continuity. We have continued to strengthen our position to the best of our abilities, engage with customers and make efforts to recover lost production days. Our concerted efforts have helped us secure big projects win in India and also exports that you can see on this slide. A INR 100 crore order to strengthen mission-critical power infrastructure in HPCL Rajasthan Refinery's Barmer refinery, breakthrough transformer orders accumulating to INR 200 crores from Torrent Power & Megha Engineering, a INR 10 crore renewable energy monitoring, automation order from a leading power transmission company. On this slide number -- I'm on Slide #10. Strong relationships with our solid customer base and our world-class manufacturing capabilities ensured that exports orders remained firm led by orders from Asia, Australia and Africa. Among these were INR 30 crores traction transformer orders for Perth Metro in Australia, a INR 34 crore power quality order from Dangote refinery in Nigeria. Expanding our income from service is part of our 2025 vision and a lever we continue to focus on this quarter as well. This quarter, we booked our largest ever high-voltage service order for extension and refurbishment of GIS substation for Sembcorp. Adapting to the new demand, we even launched a new product line of virtual instructor-led training. Moving to the Slide 11. Our ally in this unprecedented times has been a digital technology. We accelerated its use to engage with customers, with stakeholders, conduct webinars, hone employee skills and win big projects. In the July to September quarter, we energized the first phase of Raigarh-Pugalur 800 kV ultra high-voltage DC link that is capable of bringing power to 80 million people, conducted numerous remote factory acceptance test to strengthen infrastructure across industry, organized and participated in various high-quality virtual event, deep dived in technical section for decision makers as well as thought leadership positions. If I move to the next slide, Slide #13, financial summary. We did our best and more to simply adapt to the new norm and see it bore fruits. Despite the restricted business activity and mobility, orders in July and September quarter were up 57% quarter-on-quarter in INR 890 crores compared to the previous quarter. And here, you may recall about INR 200 crores, exactly INR 191 crores worth of orders were deferred by customers and are in the pipeline. As I said earlier, this was driven by multi-tranche customer engagement on product and service delivery strategy, along with accelerated use of digital technologies across operations. It facilitated major order wins from utilities, industries even amid tight economic conditions. As of September 30, 2020, our order backlog was INR 5,175 crores, which will provide visibility of future revenue. Our determined order conversion brought us 46.9% jump in revenue to INR 932 crores to near pandemic levels. Our cash-over-revenue approach, continuous quality improvement, initiatives for better customer experience, accelerated use of remote management solutions and strategic cost of action resulted in a significantly strong cash position. In the current market environment, such credible performance is worth underscoring for any company, but especially so for us, as we started our stand-alone operations, a year ago, with no cash reserves. Strong cash collection also helped in full repayment of all our borrowings by the closure of the quarter. I'm in the Slide #14. As you can see from here, operational EBITA, excluding exceptional items, in the third quarter was INR 68.1 crore, returning operational EBITA margin to pre-COVID range. Profit before tax before exceptional items was INR 69.3 crores. In line with our strong focus on good governance, Hitachi ABB Power Grids continuously reviews its contracts and receivables. In light of payment delays in a few cases and our analysis, a onetime provision aggregating to INR 60.48 crores was made in the quarter. This provision will reduce the potential burden on the business balance sheet in the medium term. Yet, it impacted profit after tax in the July-September quarter, which stood at INR 4.8 crores. Moving to the Slide #15. I also wanted to give an update on our recently concluded open offer. As you're all aware, the acquirers has made an open offer to the public shareholders under SEBI regulations, which concluded in the last quarter. And I'm happy to inform you that only 179 equity shares were tendered in the open offer. This seems to demonstrate a clear indication of investor confidence in our fundamentals, in our growth strategy and future growth by stakeholders and shareholders. Moving to the Slide #16. For us, COVID-19 was not a time to wait and watch. It was a time for introspection and analysis of our future opportunities. Our long-term growth drivers are intact. For a sustainable transition to clean energy, India needs to prepare for rapidly rising shares of wind and solar, cyber threats and extreme weather events. Investments in the grid and other key parts of electricity systems will also have to rise. At Hitachi ABB Power Grids, we launched products and solutions that can nurture the whole power ecosystem. You may be aware that in Q3, we introduced our key expert ecosystem. It's a complete suite of products, software, services and solutions that work together and have the capability to integrate with the new and existing digital equipment. It is designed to drive data-driven intelligence and decision-making in the operations, maintenance of transformers and Power Grids, allowing millions of dollars in savings through greater flexibility, efficiency and resilience in electric networks. Hitachi ABB Power Grids globally signed a definite agreement with the U.S.-based Pioneer Solutions LLC, a provider of industry-leading front to back-office commodities, energy trading and risk management solutions. This expansion will give the businesses the most comprehensive offering in the market. It will expand energy market operations, offering and empower energy market participants with a leading digital capabilities to navigate the evolving regulatory environment and renewable energy goals. Moving to the Slide 7 (sic) [ Slide 17 ]. Probably you have seen this slide in the previous quarter. To summarize, as many of you are aware, Hitachi ABB Power Grids serves utility, industry, infrastructure customers across the power value chain, products, software, systems and services. We collaborate with our customers' entire life cycle, as right from the planning stage and engineering phase to operation and maintenance space. Our strong footprint, scale, largest installed base and local capabilities give us the strength and expertise to power India's sustainable energy future. Moving to the Slide #18. Hitachi ABB Power Grids brings together the best of 2 highly respected companies. Hitachi's leading digital technologies merged with world-class Power Grid solutions will help us to actively support the global transformation and decarbonization of the energy system. The new ownership will facilitate growth opportunities in emerging areas such as mobility, smart cities, industry, energy storage and data centers. Synergies and complementing technology, expertise will bring us new market opportunities and enable us to deliver greater customer value, while harmonizing social, environmental and economic value. So that was a summary of our performance in July to September quarter. Now we can open the floor for your questions. Thank you for listening.

[Operator Instructions] The first question is from the line of Sujit Jain from ASK Investments.

A few details. In the contract where the INR 60 crores receivable for which you've taken a provision, what is the total amount of the contracts? What is the bank guarantee amount involved? What is the aging of the receivables? Is this the full provision? Then apart from this, what is the order pipeline that you expect in 2 to 3 years? The royalty post CY '20 to both ABB and Hitachi, you clarified last con call, 4% is the royalty for this year for ABB. Is it safe to understand that traction transformers is something that remains with us, traction motors and drives goes to ABB India Limited? And some balance sheet details in terms of receivable days, net working capital compared to H1, the cash and the cash flow from operation for 9 months. And just to have full numbers on Slide 8, you just have given pie charts.

Thank you. Thank you, Sujit. So you have multiple questions, so let me just answer as many as I can, as we can. So first of all, the question, the traction transformers. Okay, the entire transformer, including traction transformer, is part of our Power Grid portfolio, okay? So whatever was part of the Power Grid portfolio, which is basically the entire transformer portfolio, entire high-voltage portfolio, entire grid automation portfolio and entire grid integration, both HVDC and substations and then power quality is a part of our portfolio. And with respect to the provisions we have made, what we are talking about, we are basically talking about just the 2 contracts, okay? And in that, one is the EPC, another one is the other segment of the contract. So it was quite old. It was no more than 1 year old. And based on that, we have taken a decision. In one contract, we have provided fully and in another contract we have provided the majority of INR 18 Lac. And third question, probably, Ajay, you can take a couple of questions?

Sure. Sure, Venu. So I think one of the question was about the contract value. So I will say that the contract value would be hovering around, let's say, INR 440 crores, INR 450 crores. That is our total contract value on which that we are talking about. And then we have already covered the aging part. So that is already covered.

Basically, other questions mean he's talking about royalty and other things.

So royalty, come again because -- what is the exact question on the royalty?

So the question was in the last con call, it was clarified, 4% royalty to be paid for CY '20 to ABB. So it continues in CY '20. But beyond CY '20, what is the percentage of royalty paid -- to be paid to ABB and to Hitachi as well?

So the royalty will be hovering around 4% to 4.5%. That is what we see at the moment. So it will be within that range itself.

To ABB?

Yes. So we are talking about, yes, the group companies, yes.

Okay. And a quick clarification on this bank guarantee amount involved for these contracts, INR 450 crores?

Sorry, Sujit. We will not be in a position to give you that exactly the bank guarantee amounts and things. The whole idea is we -- as you know that Hitachi ABB Power Grids, we take a very conservative look and the moment we see any issues, so we will be in a position to take suitable action on our provisioning side, while our efforts to collect the money will continue.

But in case it is encashed, then the amount of recovery goes up to that extent, not just INR 60 crores, but the amount and the bank guarantees encashed. To that extent, your recoveries...

We don't do that kind of situation, Sujit. We don't expect that kind of situation.

If you can name the clients?

No, we will not be in a position to name the clients.

Sure. And the order pipeline?

We respect the customers' privacy on that. We do not name any contracts like that. Thank you.

[Operator Instructions] The next question is from the line of Renu Baid from IIFL.

Congratulations for a reasonable operating performance, though at the provision level, it does impact the growth. So my first question is just to understand now that you're sitting on almost INR 5,100 crores of order book. This seems to be pretty reasonable. And your comments did indicate that most of the COVID-related headwinds are behind. So incrementally, as you move towards fourth quarter and next calendar year, should a double-digit growth be now very much comfortable on the current visibility of book that we have? Or you perceive there could be any execution headwinds, both on domestic and export market front? That's my first question.

Yes. So thank you. Thank you, Renu, for your questions. After opening -- gradually opening after the lockdown, so today, we are now more than 95% of our pre-COVID level, okay? All our factories are working and all our project sites are working more than 90% of pre-COVID level. So while we also see from our customers with whom we have the existing contracts the need to pick up the material. So that's the reason we are reaching almost 95% of the level in that. So having said that, the COVID itself is big uncertain, right? Like we have seen in other countries, wave 2, wave 3s are coming. So we are hoping that we will be in a position to navigate. And assuming that the same situation, what we have seen in August and September to continue -- September and October to continue, then I think probably we can reach definitely a pre-pandemic level top line.

Sure. Sir, second question would be more in terms of -- you did highlight that there was a cash flow-driven execution strategy. But at the same time, we see interest costs have gone up sequentially as well. If you can help us understand that how has the balance sheet moved in terms of working capital and cash and debt on book? At the same time, on the order inflow side, are we now looking at the pipeline maturing, given many orders are lined up in the pipeline for the next 6 months? So if you can give some color on the order inflow pipeline as well along with the balance sheet detail there?

Sure. So I will do that. But before that, I'll let our CFO, Ajay, talk about the interest part -- interest costs.

Yes. Yes. So fine. So the interest cost basically in this quarter has gone up because we had a significant borrowings in the earlier quarter. And as already we have mentioned that we had a very good collections in this particular quarter, where we are now able to repay all our short-term loans. So it is basically the interest incremental cost is coming on account of the borrowings that we had in this quarter.

So at the end of the current quarter, sir, what is your net debt on book? Are we net cash or debt-free? How is it?

So at the end of this particular quarter, we are debt-free actually. We do not have any debt.

Yes. That's what I mentioned, Renu. At 30th of September, so we are a debt-free company. And once again, let me reiterate our cash-over-revenue approach is helping us to drive our receivables, which are pending with our customers to collect and become debt-free in that.

Sure. If you can just comment on pipeline, and that's the last question from my side.

Thank you. On the pipeline, what we are seeing is that we are definitely seeing a robust pipeline compared to the previous year in the same quarter. But what is concerning here is the decision making. Okay, well, we know that there are a good amount of pipelines, especially on the transmission side and the central transmission side and also TBCB projects and the green energy corridors and the renewables. And on top of that, where some of our high-growth segments such as the metro, rail and also the power quality and also the digital capabilities are really coming up. The key is the decision-making. And we believe that with the relaxation of the economy, there will be enough time from the customers to get this finalized and get going in that. So all in all, I think we are continuously monitoring this and continuously engaging with our customers through our digital technologies, using digital technologies. And we are really getting ready as and when a customer gets decided -- wants to decide any particular segments of the orders.

So would it be possible for you to quantify the value of this order pipeline for the next 6 months, which could materialize a quarter earlier or later? But what would be the broad size of the pipeline?

No. Unfortunately, Renu, I may be disappointing you. But what I can definitely can give a little bit of color is, renewable is definitely a big portion of it, renewable and the metro and not metro, rail segment as a whole. The rail segment, which includes the traditional rail segment and the metro rail and also the corridors, which are being built by the team. So they are quite a big chunk of pipeline of this.

[Operator Instructions] We'll move to the next question. That is from the line of Nikunj Doshi from Bay Capital.

Just one question. Can you provide some granularity on the order book position that we have? So what percentage is exports? What's domestic orders? And what kind of industries or the segments are we getting these -- are these orders from?

Thank you, Mr. Doshi. I think we have been also maintaining our exports in the range of 15% to 20%, okay? And then we have a service 10% to 12%. And the orders -- rest of the orders are from utilities and industries. So we are, right now, our utilities are a big chunk, given the range of 60% or so. And the rest is in the industries. As you have seen this quarter, we have won a big industrial project from HPCL Barmer refinery. So INR 100 crores project we have won from industrial customers.

The next question is from the line of Abhishek Puri from Axis Capital.

Congrats for a decent set of results, sir.

Thank you, Abhishek.

Sir, just wanted to check, one, in terms of base orders, what will be the quantum in the current quarter? And second, in terms of growth that we have seen in these services and exports, I think that your base fleet or if you can also talk about Y-o-Y growth? And lastly, in terms of strategy for the India business, given that buyback has not been successful and how does the parent company look at this now? And in terms of, specifically, from an exports perspective, are we adding any new products or categories here, which can be used for making India as an export hub in future?

Okay. So before I answer other questions, so just want to -- our General Counsel, Poovanna, to answer on the open offer one? Poovanna, the need for the open offer and the hub.

Thanks, Abhishek, in terms of the open offer that was made, this was triggered by virtue of an indirect acquisition that was exercised by Hitachi. And this was a mandatory open offer that was made. So it doesn't mean that it was not successful. The very fact that only 179 equity shares were tendered by the public, that demonstrates our faith in the industry and the company. So it may not be correct to say that it did not succeed. Over to you, Venu.

My apologies, my question was in the sense it was not related a comment on how it started, the parent would have wanted in the core market. Parents would have wanted a largest chunk of this business. It has not been successful. So is there any change in strategy from the parent travel, whether to more products here and deals based on manufacturing.

Sorry, you are not audible. Can you come close to the mic, if you don't mind, Abhishek?

Sorry, Venu. So my question was related to not regarding the success of the buyback. It was more from a country, how the parent sees the country as an opportunity, given that [indiscernible].

[Operator Instructions]

Yes. But I got the essence of your question, Abhishek, in case if you are not able to talk. Let me just answer you from parent, our new parent, which is Hitachi, I think they see India as one of our key growth area, one of the key manufacturing base that they would like to leverage, not only from India, but also for rest of the countries. So I think we -- that's what I was just thinking that it's a key market and also leveraging our existing engineering footprint, existing manufacturing footprint, existing design capabilities for India and also rest of the world in that. So that is the one. And then your another question was on the export. Is that right? Can you please clarify on that a little more? Abhishek, are you able to hear me?