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

We have Poovanna, who is our Head of Legal and the Company Secretary. And then Manashwi, who's head of our communication.

Yes, sir.

Good afternoon.

Can I start?

Sure.

So Venu sir, I think, first of all, I think the way you've given us guidance and insights on our quarterly con calls, I think a large part you've already covered. But maybe I have 4, 5 high-level questions. First, if we see Hitachi ABB in terms of presence in India, in terms of manufacturing landscape, the addressable opportunity pie, you can maybe correct me if I'm wrong. But the convention opportunity pie is around INR 15,000 crores plus/minus INR 4,000 crores, INR 5,000 crores. This has been where -- it has been hovering around. And roughly industry, which is private sector for you or nonutility is something around INR 10,000 crores to INR 15,000 crores. Transportation, in our understanding, is around INR 4,000 crores, INR 5,000 crores annually. Is this broadly where we are, correct? Or you would -- you have a different numbers in mind, sir?

Yes. So thanks, Amit. First of all, you know, our interaction would be based on our broad guiding whatever is publicly available information. So on this market segment, since we are not given publicly, so we will not be able to comment, but let me just give you a bit overview on that. It's -- the markets, what we cover, our markets are not only the T&D. The T&D is for sure is the one, but it starts from the generation, transmission, distribution, the consumption side. Our play which our portfolio basically goes right from the generation. For example, if you want to set up a solar plant, so that needs a lot of generation-related thing like a grid connection, like automation, like dry-type transformers for the solar plant. So that is a part of it. And then it comes to the transmission, then distribution, then consumption, also. For example, you want to go to the any particular industry, so there is also a step down, step up of equipment in that. So clearly, I would say that slightly bigger than the numbers what you're talking about it.

Got it. Fair point. And in terms of transportation segment, because if you see the breakup that you share, transportation holistically is also equally large industry. So in terms of our core offerings in transportation, how would you summarize that, sir?

Yes. So when it comes to transportation, so we have 2 aspects yet as of now. We are concentrating on the, especially on the rail, right? So where we have, one is that the cross-country electrification, which is the 1 major thing where we get a bulk of our share for the -- our traction transformers. And then we also have the metro cities. So the bulk of our metros is not only on the power side, but 9 out of 10 metros in India is powered through our SCADA system, so that's another opportunities there. And then we have the regional lines like Meerut and Delhi, those kind of lines, which is another growth area. And then we're also seeing now, which is -- we have also talked about, of course, in our analyst call is like high-speed rail corridors, which is coming like, for example, the Mumbai-Ahmedabad, which is now a stage where we expect the bids in the coming year. So those are complete -- our markets in the rail segments in that. But that's just so far. We said that we have this electrical vehicle charging equipment, which is also part of our transportation thing in that. For example, we have announced this last year, we tied up with Ashok Leyland, and we are running our pilot bus in IIT Madras where using our technology the bus gets charged -- boost up a charge in less than 20 seconds. So we see this as a big opportunity going forward in where the Government of India has ambitious target of converting on buses into electrical vehicles. That is the government side, but we also see a lot of private companies who run their buses also are looking at these kind of opportunities in that. So our charging infrastructure not only for the buses but also mass rapid transport systems, mass car pools, et cetera, and that. So here, we do both front and back end. When you say front end means, front end means you have the charger, so you can go and plug it. On the back end, you need the grid stability, grid connections and resilient stock point, assuming that 100 buses comes and then plug in. So how do we ensure that the grid stability is another thing. So the both front-end, back-end kind of things in that, which is also a big opportunity going forward.

Fair point. So Flash charger and Grid-eMotion is what you're talking about. Yes, in terms of -- if I take a 3- to 5-year time horizon, of course, time will tell how much we transition from conventional fuel to electric vehicle, but is my understanding correct that ABB -- Hitachi ABB is more focused on commercial vehicle and not passenger vehicle in this area, which is the domain of the ABB company?

No. I think there is a clear distinction between what our other company do it. So we -- our concentration is for -- not only for commercial vehicle, but also passenger vehicle, but we will not do a small like household charger. Suppose somebody buys a car, you also need a charger, right? Which will take whole -- entire -- complete -- whole night to get charged. That kind of charges, we don't do it. Our charging system is a flash charging. It can be used for like, for example, many cars in airports kind of things and many depots, those kind of things, which is faster, more economical and fast charging, things like that.

Got it. So more institutional segment? Okay.

Yes. More institutional segment.

Fair point. And typically, on data centers, you discussed a lot, sir. But roughly, if I see data center in the next 4, 5 years, whatever the government policy mandate indicates, the opportunity basket for ABB, specifically in terms of area, what is the area that we will cover here? Because we can't do the entire data center that's -- if I roughly assume 1,200 to 1,400 megawatts of overall data center coming in the next 2, 3 years, at maybe INR 30 crores, INR 35 crores each. That will basically be a big number, but in terms of ABB's -- ABB Hitachi's opportunity basket, which area will be focused here?

Yes. We've said -- let me just give 1 slide if you want I can share with you to just give you what kind of play we do it in the data center. Look, can you see my slide?

Yes, sir. It's visible.

You can see the data center. This is our play Hitachi ABB power grid, high-voltage substations, and every hyperscale data center needs in a high voltage in every part of the state that has a gas insulated switchgear, engineered packages, grid connection studies. And there needs a lot of grid connection studies because the data centers do have a lot of harmony by virtue of semiconductors, so that is also our portfolio, digital substation and dry-type transformers is also thing. Then the next part is electrification. Wherever, depending upon the customer, looking at an electrification, so we do the complete power distribution, back-up power, data center automation, battery storage and power quality for consulting and cyber security, which is also extremely important in that. So considering this portfolio, Amit, I think data center, we're talking about INR 30 crore to INR 40 crore CapEx per megawatt. Our play is around depending upon the customer, depending on the specification in the range of 25% to 30%.

Fair point. I think that explains very well. So typically, this is what we spoke about the opportunity basket. Now in each of these segments, sir, just qualitatively speaking, can I say that in the core T&D equipment market, right, which as per various experts, various industry participants, hovers around -- it used to be INR 20,000 crores, INR 25,000 crores, it's come down to maybe INR 12,000 crores, INR 15,000 crores. But without going into numbers, specifically, what would be our rank right now in market share across 4, 5 key product lines in this?

No. When we're looking at the overall basis, we believe that we are by far at least #1 in terms of the value in our market segment where we are doing. It's not one-to-one comparison, so there will be somebody who will have this portfolio and don't have that, but I am just looking at that part.

Right. Fair point. And typically, if I take a 4-, 5-year landscape on the new areas, which is data center, EV space, et cetera, and renewable, what kind of positioning are you targeting? Say, from the next 4, 5 years perspective, can we say we will target the top 3 position? And can it be like 10%, 20% of your current -- of your revenues in the next 5 years in these only new segments?

Yes. So if you really look at -- let me just take a step back and make you to recollect one of our strategies slide we have shown in the analyst calls. We did look at our strategy 2025, what we are talking about is more of digitalized product, system services is going to be part of our going forward in that. Why it is coming because with so much of renewable penetration taking place and the grid is becoming more complex. So for the grid planners, whether the utilities or industries or even transport infrastructure, they need to have more transparency of their systems in that. So that necessitates adding a more digital layer on top of the conventional core technology in that. So that, we have seen quite a lot of things happening. As we speak, we are doing several pilots across the industries, across the utilities and various things in that. So that is, for sure, is going -- data center is 1 example that so much of digitalization with -- once you have the entire portfolio or entire -- their equipment is digitalized are at least at appropriate level, then it needs to add a lot of remote care, remote maintenance, those kind of things is extremely important in that. So we see basically, one, is that our high-growth segments, what we call like data centers, like renewable, like power quality, like HVDC. And in addition to that, digital and service and exports are going to be the major growth drivers going forward.

Okay. Okay. And maybe I'll move to my next question, sir, from opportunity basket to challenges in the domestic market that some of the players -- all the top players are facing including ABB Hitachi. If you see in the last 7, 8 years, the overcapacity in T&D is still looming large, and that is 1 reason why the pricing has come off, reflecting in all the players return. Do you think we are now, in the next 2, 3 years, moving to a different kind of market vis-a-vis 760 kV lumpy orders, large bunching up of HVDC GIS. Do you think we are moving towards the medium voltage cycle with higher automation? How will it change the T&D landscape in the next 3 years for all the top 4, 5 players?

Yes. No. In my view, our view, at least, with going -- with so much of renewable penetration taking place. For example, as you know, Government of India's target is 450 gigawatt of renewable penetration by 2030. To achieve that, you need to do at least 4 to 5x what we have been doing it now, right? So that's a scale. So even assuming you take a factor of it, but the scale is still a bigger scale, right? And that needs not that suppose someone can set up a 100-megawatt plant and then you need some voltage, but the grid needs to be more strengthened because when the grid can carry so much of renewable, it has to be a flexible resilience to taking care of these kind of uncertainties of when the wind blows or when the sun shines, and that needs a more robust grid. So that's the reason, in the last analyst call, we were also saying that based on that, our assessment is that we're going to have 1 large HVDC project coming into the market per year for the next 3 to 4 years' time. So why does the HVDC needs? Because HVDC will strengthen the grid and enable the penetration of the renewable much more faster, much more agility in that. So in our view, I think, we'll continue to have on the large-scale HVDC projects and then 765 kV because the end of the day, the transmission remains the same, but high voltage levels in that.

Yes. Right. Sir, in terms of your competence, now if I compare the cost sheet of Hitachi ABB vis-a-vis, say, Siemens or other players, especially a lot of -- a couple of Indian players like CG Power. We have some line items where we are still fairly high on cost structure. And here, I just want to bring in this question that -- and we've seen you tried to work around -- the entire team is working around the cost structure. But how do you think you will be able to be competitive in a lot of time on additional basis considering that the cost structure for Hitachi ABB is still relatively high? Do you think the -- yes. So I think some color there, sir.

I will definitely do that, but can you give a little more color on where exactly -- other than the IT, where exactly you'll see the...

So if I see the royalty payments, right? So in last year, the royalty payment that we had, you did clarify on call that eventually that can -- that should come down. But my point is, if you actually see the gross margin profile of our company and what is the EBITDA margin translation. Broadly, it is almost less than half of what it was in this kind of business, say 5 years ago. Now I understand that the market has changed, but at least something which is in our control, which is our -- reworking of our cost structure, when we localize from, say, the parent company. I'm sure a lot of localization is coming underway, especially for a lot of new technologies. So what kind of -- do you think double-digit profitability in 2, 3 years' time for Hitachi ABB is an ambitious target? Or that's a realistic one, sir?

Yes. So let me just clarify on that, then I come back to you on this. As you know that we are in the transition phase. And then we are -- even though part of the Hitachi's ownership, but we are continuing to operate as a stand-alone global company. And then that's where we are building up our processes, our systems in line with that. Take, for example, IT, we are building up the new ERP system, and that's where the thing. While we are in the transition phase, so we continue to leverage some of the services from the ABB until the new systems will kick in. So those overlaps will be there. And then whatever we are investing the system, so we'll have more cost there. And all those things are also a long-term benefit for the organization to bring the more efficiencies, bring the most synergies cost -- inputting cost synergies, et cetera, in that. And when we talk to the EBITDA margin, EBITDA, that's what EBITDA, I'm talking about is, Ajay, you can add. We have been also continuously saying that we are now a single -- high single-digit, if you really take out high single-digit EBITDA margin, but we have a clear plan to bring it to the double-digit EBITDA margins in the near term.

Sure, sir. Just maybe I'll move to the next question, which is leverage on Hitachi Lumada and export mandates the parent. So globally, Lumada is a very big business, one of the large businesses for the parent company, right? How much could one expect AB -- Hitachi ABB in India to leverage on this business in the next 2, 3 years? And more importantly, let me also connect this question. We are expanding GIS portfolio, right, in India, traction transformers and SV bushings. Now how much of this expansion will contribute to exports? We have around INR 6 billion roughly exports as per last year, which is 18% of revenues. So next 2, 3 years, what can we see in terms of export number? And what part of this expansion is basically geared towards exports, sir? And you can actually add on Lumada also. How do you plan to leverage?

So the Lumada is a very good synergy, and we are looking at the synergies between Hitachi and the power grids. And as you rightly said, Lumada is one of the very well-known IoT platform, where they have been globally very successful. And we are now offering some of our enterprise software solutions on the Lumada platform, for example, our asset performance management on a Lumada platform, Lumada, Asset Performance Management, we have redesigned, rebranded that and the Lumada APM and Lumada Workforce Management and Lumada Enterprise Software in that. So the whole idea is, again, Amit, to get you that, the energy transition is quite big. The scale at which it is happening, both in terms of the -- so much of the renewable penetration also the quantum and the time it's taking -- faster time it's taking to deploy, it needs systems which are able to take care of on a real-time basis, give a more visibility, flow of electrons are bidirectional with several feeding points, several take-up points. It makes the -- everyone needs to have a system where one is that you have more transparency. On top of that, how do you leverage the assets? Today, the cost of the ownership is coming in both CapEx and OpEx models are coming in. But how do we ensure that the failsafe models are being deployed across the industries in respect of that. So that's where our asset performance management, our enterprise software, that is boardroom to the -- field to the boardroom where the decision making will be much easier. Instead of knowing that when your asset will pay, you know when what action you need to take that. It's our -- take, for example, our APM, what we call our Asset Performance Management is just like in a health check, like how everybody go for annual health check, this is a health checkup. After knowing the health checkup, the next one is Enterprise Management, where the decision-making comes here in that. We see more and more customers are going towards this. And also looking at quite a big business going forward from our customers in the area of India and that. That's one on that. And exports, I think we have been consistently saying that our exports are in the range of 15% to 20%, but we want to take it to 20% to 25% in the near term, and many of our expansions are in line with that. Just give you a 1 example, last quarter, we got our first order for GIS from South America. So all those things are very much as part of our strategy.

Okay. Okay. And in terms of -- if I see the global CEO, what kind of mandate do you have from the global CEO? So particularly, this question is around the leadership scare in India. Is it more around the market capitalization? How much will it grow in line with the performance? Or it's more driven by a market share and profitability in the next 2, 3 years? I mean qualitatively, you can help us.

Yes. No, I'm sure. I'm also not only the CEO for India and South Asia, but I'm also the member of executive team from global organization. So we always have our strategy in mind in most of the markets. Our strategy is very clear. We want to grow in a profitable and sustainable. And we want to grow higher than the market. So we are taking several initiatives upfront. And we are also investing in various technologies to bring in here, localization and also upskilling our people in because the transition is quite big. It's important that our people also need to be upskilled and able to take care of those things. So since we are taking all that, we are -- continuously we are saying as per our strategy, one is that we grow profitable and sustainable and grow above the market.

Okay. Okay. And sir, in terms of -- if you see Hitachi's presence in India, it's more than USD 2 billion across 30-plus entities. So my question is more around, if you see most of the MNCs who have a large unlisted presence. Generally, stakeholders try to understand how much of the focus is there for the listed entity, how much is the parent focusing on the understanding. My question here is more around, how do you help us gain confidence or help investors gain confidence on the rigor that ABB Hitachi, the listed entity, will have to ensure -- you have some of the entities here in terms of MNC basket where the unlisted have grown more. Now that can be for various reasons, but maybe this question is more around how do you give -- impart confidence that the rigor and focus on addressable market, the profitability of the listed Indian entity as is going to be the top agenda for the parent company, sir?

Yes. So I think here that when we're talking about the parent company, we talk about Hitachi ABB Power Grids. So just to be sure because -- we are definitely part of Hitachi's ownership, but we are a stand-alone global company, continue to be headquartered in Zurich, in Switzerland. So that is our parent organization. So it's -- as I told you, India is one of the key markets for the global organization. So they've been investing here, and they continue to invest here. And the whole idea is that the market in India is definitely -- is going to take a big -- what we can say that -- let me -- instead of putting qualitatively, let me just wrap up to the report recently released by IEA. And as part of the report, which they have released and is specific to India, International Energy Agency. And they're talking about with so many changes taking place, so much of penetration is taking place. To take care of that kind of penetration, India need to add a power system of a size equal to power system of Europe in addition to what we have now. So that is coming out from the third-party organization analysis and that. Even if you take a factor, we believe that it's a huge market. And this market is evolving into more digitalized, more analytical based, more IoT-based market. And we believe that we have a very pole position in this particular thing to offer our offerings to our customers in this changing market situation. It's not only selling a transformer. Selling a digital transformer is what we are going to look forward to that.

Okay. Sure. Sir, actually the reason I also asked this question is if you actually see the guidance that we've been issuing around on exports and if you see in a lot of products, this business has exclusivity on Indian plants, right? I'm sure globally, parent will look at the Indian factories for a lot of product as exclusive mandate or a very broad mandate. Then why, at least to me -- please correct me if I'm wrong, but at least to me, the guidance of export moving from 15%, 20% to maybe around 25%, 30% looks very conservative. So maybe can you highlight some areas where -- products where ABB -- Hitachi ABB India will be exclusive exporter? And globally, parent will leverage more on the Indian plant for those products because you mentioned about 4, 5 products in the annual report without mentioning them?

Yes. Some of the products, our export strategy is twofold. One is that some of products, we have a global fleet of factories, like, for example, 66 kV circuit breaker, just to tell you, the COMBIFLEX relays, just to give you another example. And these are our global factories. So we will be selling this through our sales organization of Hitachi ABB Power Grids around the world or sometimes directly to the customers, okay? That's one aspect of that. Then we're also selling other products on designated markets where we are developing those markets like some of the African markets, some of the South Asian markets, some of the Latin American markets, some of the Middle East markets, not all of them, but some of them in that. So that's 1 aspect of the strategy. The second strategy is that we're also producing a lot of feeder factory-based the components and then assemblies. And that will be also -- will be sold to our companies across the world. So that's also another revenue stream containers we will be getting in there. So that's our thing. So even though you may say that our exports are maybe not very high compared to 20%, 25%, but we are betting big on also on the domestic market, right? That's where the thing. We need to also -- we are here. And basically, we want to serve the domestic market and then take the export side part of that.

Fair point, sir. So basically, the next question is for HVDC. Now everybody has mentioned, all the 3, 4 top companies have mentioned around having 1 HVDC in the country. Point is in terms of Hitachi ABB's preparedness to garner the lion's share, maybe 2 out of 4 or 3 out of 4, time will tell, Siemens and ABB Hitachi are more important contenders, apart from some other companies. But what is the level of indigenization we have achieved till date? And we aspire to move towards to gain a competitive edge here? If you can just give us a qualitative aspect also that will help us.

I think we have been improving quite a lot. So it would take a few projects down the line, if our indigenous level is X, now we have, in the last project, we have improved at least by 30 to 35 percentage points on the indigenization. So the previous project, we are completely done locally here and the whole of our project management, engineering and including most of the manufacturing has been done by year. So that way, we are, if you take HVDC as an example, we are far ahead of our localization compared to anyone else in this market here.

Okay. Okay. Because the reason I asked this question is if I exclude HVDC for the next 2, 3 years, supposing we basically give you some reason that does not come to us, then there is a huge gap in Indian growth basket without HVDC. And hence, I want it to be sure.