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

Ladies and gentlemen, good day, and welcome to Hitachi Energy India Limited Q1 FY '25 Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. N Venu, MD and CEO, Hitachi Energy India Limited. Thank you, and over to you, sir.

Thank you, Yasaswi. Good afternoon, everybody. Thank you for joining us for the Analyst Conference Call. And I hope all of you are fine and doing well. So yesterday, we announced our results for the first quarter of FY '24-'25. And over the next 20, 25 minutes, what we will take you through these results in detail. We have uploaded the slide deck in the BSE and NSE portal, and I will refer those numbers for easy of your understanding in case we are joining through phone. So with me in the room today, I have our CFO, Ajay Singh; General Counsel and Company Secretary, Mr. Poovanna Ammatanda; and our Head of Communications, Investor Relations Manashwi Banerjee. Throughout the last fiscal, our focus was on balancing operational complexity and efficiency, which has helped us in achieving a strong order intake, resulting in a record order backlog in the first quarter of FY '24-'25. As energy transition gathers space, investments in the power sector, especially in the renewable and grid connections continue to grow. And with the backdrop of Union Budget '24-'25 announced on Tuesday, in which energy security is a key priority. We expect more traction in terms of opportunities, in terms of opportunities in the coming quarters. So let me start my presentation and moving to Slide #3. So, as you know that safety is our license to operate -- safety, integrity and quality are our license to operate and are a fundamental part of our day-to-day operations. As we review the quarter, I want to start with the good news that Hitachi Energy has been accorded with the Prestigious International Safety Award from Royal Society for the Prevention accidents, Gold 2024 for our Mumbai HVDC project, which is under execution. Human capital is at the heart of all decisions and employee wellbeing is paramount to us. So this quarter, we have organized multiple awareness sessions, health camps, training sessions across our offices, facilities, project sites, for the welfare of our employees and workman. To mention a few, we had a session on tobacco cessation, pain management, mental health. In light of the extreme summer temperatures in this quarter, we also had multiple sessions to prepare employees for the heatwave across our offices, factories and project sites. At Hitachi Energy, safety, integrity and quality and change in our DNA, and we are committed towards implementing the same in all spheres of our work. Moving to the Slide #4, sustainability. At Hitachi Energy, our purpose is to advance a sustainable energy future for all, towards doing so, we have been building on our internal sustainability initiatives. So similarly, you have also seen that previously, we announced our Sustainability 2030 targets. As part of that, we want to be carbon neutral in our own operations by 2030. Across facilities, we have implemented projects to reduce emissions and managing water and waste. And these help us keep track of our greenhouse gas emissions, energy consumption, usage of freshwater and waste management, ultimately, what gets measured gets done. Some of our key actions from this quarter include replacing furnace oil and boiler with a biofuel boiler at our Mysore unit, to reduce fossil emissions and energy audits at Maneja. Furthermore, to conserve rainwater, several rain water recharge well are put to use and reduce freshwater usage, or STP treated water is used, watering part of the garden areas in our locations. Also at our Peenya facility, 15 water meters were installed to monitor water consumption and reduce wastage. In terms of waste management, we have stopped the regular use of single-use plastic bottles across all locations. We have also devised plant to reuse the waste and packaging material at our Doddaballapur and Peenya, respectively. These are a couple of examples, what's happening throughout our organization. As you can see the right side of the slide where, in addition to drive our KPIs -- financial KPIs, our leaders are also being monitors of these KPIs, in-house gas emissions, energy consumption, freshwater use and waste generated, as well as well waste disposal. These are the KPIs -- are being tracked, like how we track our financial KPIs. So moving to the Slide #5, I think on the left-hand side, probably you know a lot about it, but let me just go through that. The Indian growth story continues, as the country is on the right track for a $5 trillion economy in the coming years. According to government reports, India's GDP is estimated to grow by 8.2% and Indian industry IIP supported this trend growing 5.4% for this quarter, '24-'25. With an objective to further boost the renewable sector, the government in Union Budget for '24 allocated INR 90,100 crores to the Ministry of New and Renewable Energy against the revised estimate of INR 7,080 crores for the budget, '23-'24. In the transmission segment, now you can see that the Gujarat Energy Transmission Corporation plans to invest almost a INR 1 lakh crore for the development of transmission infrastructure in Gujarat, in the next 7 years. This is the -- like we have seen previously the inter-state transmission network. And now we are seeing more and more state transmission utilities are coming up to invest in the grids of the state. The Ministry of New and Renewable Energy has sanctioned and sanctioned the implementation of the strategic interventions of green hydrogen transition program, component to the team has been allocated a substantial budget of INR 13,050 crores. And have budgeted 2.5 lakh crore is earmarked for Indian rail modernization and network expansion, where our companies are well positioned in this sector. And INR 50,000 crores capital expenditures is expected over the next 3 years, also discount upgradation, modernization, RDSS Schemes will be attracting more investments and then that happens in that. Moving to the Slide #6. We are customer-centric and are committed to building trust, the long-term partnership. This quarter also we engaged with our customers, starting with our team meeting the high-profile delegation at Sri Lanka Ministry of Power, to reaffirm ties and discuss future areas for collaboration. Another highlight was a full day seminar at [indiscernible] Power Grid Corporation of Bangladesh on innovation solutions and control protection, substation automation, telecommunication systems, et cetera. On the occasion of our visit of our global CEOs, there is a power-packed thought leadership evening on the energy transition in Bangalore with the government delegators and industry leaders. Our flagship initiatives on digital energy and digital world was kickstarted in Hyderabad followed at the second event at Bellary, both events are enthusiastic participation from customers and partners. If I move to the Slide #7, as part of year-long celebrations of our 75 years in India, we initiated a new platform called TECtalks, which will allow our employees to direct access to top minds in Hitachi Energy to understand industry and technology trends. The first TECtalks webinar witnessed participation by almost close to 1,000 plus people. The [indiscernible] had development program is specifically designed for our high potential women leaders, and we closed this year cohort on an encouraging note. Other upskilling programs this quarter included a Value Persona Sales Workshop, that drives home the focus on customers and improving the overall experience as we embark on the energy transition. And in progression of the next generation of energy transition talent, we participate in a career phase organized by renowned institutes, to spot production and to showcase our organization ethos to prospective high. This quarter, we were at Lalor College, Chennai, where we received an overwhelming response. On World Environment Day, you see the last picture of this thing, we initiated a [indiscernible] tree planting campaigns, aiming to plant 75,000 saplings in 12 months, commemorating our 75 years of on India. And please just me to say that our efforts continue to receive industry accolades with senior leaders being comforted with the Prestige award for their contribution to shaping the energy transition. Move to Slide #8. As a pioneering technology leader, we are committed to the energy security of the country through various projects undertaken by us. During the quarter, we have commissioned several projects, and I will highlight a few of them. We commissioned a 400/33 kVA station, 350 kVA and 432-megawatt DC solar project in [indiscernible], the team was responsible for design, engineering, procurement, supply installation, testing and commissioning. Another solar project that we commissioned was 100 megawatts SECI solar project Banipura, whose scope and compasses, design, engineering, light testing election, the team also commissioned energizing the 220/33kV bay extension packages. For the MP Power Transmission package, two projects along with design, engineering, procurement, supply installation, our project team is also taking care of our construction, along with testing, commissioning for 04 nos. of 220kV, 132kV, 33kV substations. These are just couple of examples that the projects commissioned in this quarter. Moving to the next slide, Slide #9. The quarter ending June 30, 2024, received orders totaling INR 2,236.7 crores, where Renewable let the pack from studies across utilities and industries to grid integration projects, aligned with the several power quality projects. The quarter witnessed order growth 112% year-on-year, 33% to quarter-on-quarter. Revenue was INR 1,347 crores, up 27% year-on-year, but quarter-on-quarter, there is a decline of 21.9%. Gross profit before tax and profit after tax or year-on-year growth of almost threefold. But on a quarter-on-quarter basis, the profit, PBT and PAT has declined. The quarter closed with a record on a backlog of INR 8,539.5 crores, which is the highest, so far in our company.

Ladies and gentlemen, we've lost the management connection, please stay connected while we rejoin them. Ladies and gentlemen, we have the management team back on call. Sir, please go ahead, please.

Sorry, the line got disconnected. I was just talking about our various orders. And the quarter closed with a record order backlog of INR 8,539.4 crores, which is the highest since inception of our company. Some key orders received in the quarter includes a large HVDC project order from Marinus Link in Australia. This is -- as you recall, we have set up our new greenfield factory in Chennai. And we have seen this demand coming up, not only in India, but also in other parts of our region, and we were early on to set up this factory in that. In addition to the Marinus Link, two transmitter projects, one through tariff-based completed bidding 6x500 MVA ICT, 400kV SR in Gujarat for Adani, and other one is 400/220kV (sic) [400/200 kV] digital substations, CRP SAS retrofitting of existing substation, Kanpur. One renewable project for Renew power in Fatehgarh, and another noteworthy export order from Canada for 800 kV CT for a Hydro-Québec customer in that. We remain the focus towards increasing operational efficiencies, while expanding our portfolio in the high-growth markets and continue to grow as in the market. Moving to the Slide #10, which give -- to provide some more color on the orders received this quarter. This quarter, transmission segment emerges as a high-growth segment, with year-on-year growth of 566% (sic)[567%] followed by variable, which is up by 500%. Industries also saw year-on-year growth 35%, whereas in Q1 we saw a year-on-year decline of 77% in data center segment, and it remains high growth segment in the medium term, with the rapid growth of data center electrification of railways and growing metro network sector of the country. We'll push these segments in the near future in that. On the right-hand side, of the slide, you can see order mix. Projects took the leading segment. No, products yes, for the -- products continue to be 57%, and the projects is 39%. And on the sector side, utilities and direct end users are clearer, as a very higher for the sectors and the channels, respectively, that. Moving to the Slide 11 is the value creator, service and export, as you have been seeing consistently. We are talking about increase in the exports and also on the service and offering both service and digital. The climate challenge is, we always say it's a huge challenge. It's the bigger than one company, one team and one individual and our continuous effort is to enable many pathways to energy transitions across geographies and segments. Exports contributed 27% to the total order book, not including the large HVDC export order we received from Marinus, because that's a large one. If you have that, the whole thing will be skewed, so we always take out this large projects in our thing. So we continue to trend in -- of our upper band of our stated targets of the exports. Orders for transformers, power quality technologies and other key products were booked from the markets like Europe, Middle East, Australia and neighboring countries in South Asia, apart from the Marinus Link order from Hitachi Energy Australia, we received orders from Hitachi Energy Canada, Portugal, Greece and Iraq for the multiple projects for our portfolio. Some of the key service orders for this quarter comprised of renewable studies from the private utilities, renewable generation companies, industrial houses, EPCs, emergency remote support to key data centers, et cetera. And now I'd like to move to the Slide #12, and then I'll hand over to our CFO, Ajay to take us through the financials.

Thank you, Venu, and good afternoon, everyone, and I hope all of you are doing well at your end. So if you see in this particular slide, our focus and proactive approach has helped us to maintain the order growth momentum, carried from the last fiscal year. During the quarter, in which the company booked orders was INR 2436.7 crores, up by 73.2% quarter-on-quarter, and 112% roughly year-on-year. Revenue was INR 1,327.3 crores, which is also 27% year-on-year, up. And then also, if you compare with the previous quarter, there was a decline of 21.9% quarter-on-quarter, because of the cyclical pattern and which has impacted and further impacted by the revenue mix with the traditional product buyers. Profit before tax for the quarter was INR 15.1 crores and profit after tax was INR 10.4 crores, both up around as MD explained, it's roughly 3 times year-on-year, whereas operational EBITDA and operational EBITDA for the quarter stood at INR 39.6 crores and INR 61.5 crores, respectively. And on the percentage terms, operational EBITDA was 3% and EBITDA, 4.6%. Our order backlog stood at more than INR 8,500 crores. If I go back to the next slide, where I would like to share a little bit more details on how the movement happened in the particular quarter. So if you see our revenues INR 1,327 crores, obviously, previous quarter was exceptional quarter. But if I compare with Y-on-Y, INR 1,043 crores revenue was there. So there is growth of roughly 27%. Material cost for the quarter was around 62.8%, and our personnel expenses was around 9.2%. So historically, if you see Q1, there is a slow start for us, where we see a lower revenue and higher costs. And our other expenses, if you see, is hovering around 23.6% and then normally, in the first quarter, it is around 23% to 24%. And towards the end of the year, we see that we are able to achieve 20% to 21% for the year. Further, in the current quarter, if you see, there is an exchange ForEx hedging impact at INR 9.4 crores, and depreciation interests are more or less aligned with the previous quarter. So this is how we are able to close this particular quarter, 10.4% pack, which is better compared to Y-on-Y on the lower base. With this, I hand over to Venu.

Thank you, Ajay. Moving to the last slide, Slide 15 -- sorry, Slide #15, yes. So our priorities for the coming quarters and the financial year, we remain -- financial year '25, we remain committed to our 2030 strategy of maintaining leadership in core segments, shifting our core center of gravity towards service, export and digital and harness high-growth segments. On the business front, consolidated efforts will be made to leverage the large order backlog for the revenue accretion and also profitability accretion. We'll have to drive productivity with an emphasis on operational excellence in all spheres of work, to achieve sustained double-digit margins going forward. With the safety being entrance in our DNA, we will continue to approach every day as a day 1, in terms of implementing safety work culture, in all of our locations, whether it is the factory, offices, project sites. Furthermore, we continue to invest towards increasing our existing capabilities for sustainable future growth, be it for people through our cross-skilling or in terms of strengthening our footprint or expanding, all towards a seamless energy transition back. So with this, I would like to close my presentation and open the channel for your questions.

[Operator Instructions] We have a first question from the line of Apoorva Bahadur from Goldman Sachs.

Sir, two questions. Firstly, on the margin bit. Just wanted to know what caused the other expenses to increase almost by INR 50 crores, year-on-year? And also then what's our full year EBITDA margin expectation for this year? And second question is on the capital expenditure, essentially the part of 6 billion CapEx that the parent has sort of allocated to energy transition. So any clarity on how much of that is expected to be spent in India and some road map?

Yes. thank you, Apoorva. Maybe on the first one, I'll ask our CFO to talk on that, but we don't give you any full year guidance, forward-looking statement. What we have been talking about consistently is that we will enter double-digit EBITDA by end of FY '25. So that's what we have been telling and we continue to do that. Maybe, Ajay, wanted to -- take him through the other expenses.

Okay. So thank you, Apoorva. So as I mentioned that our -- traditionally, our quarter 1, we see the revenues are low and the cost base are high. But specifically talking about the other expenses, I would like to comment, including ForEx. So let me comment in this particular quarter. We had a ForEx hedging impact compared with the previous quarter, the impact was around INR 20 crores, and largely for the new project that we have booked. Then the second item is basically we have a higher IT charges. As we have discussed earlier, we have migrated to a new ERP, during the first quarter of '24-'25. And right now, we are on a parallel IT infrastructure. So basically, this is where we got this higher cost, but we really expect the same to be normalized by the year-end. Our overall full financial year basis, so we will -- they will -- and the other element is basically on the higher overhead is on account of the royalty, which is, if you see royalty expenses in the current quarter is calculated based on the revenue numbers of the previous quarter as per the contractual terms. And that is how our previous quarter, as I told, was extensional on the revenues. So that is what -- these are the three or four major items that is impacted other overheads.

And all these things will be within the range on an overall year if you take it for, correct. So on the second question, Apoorva is on the capital expenditure standpoint. Well, definitely, there will be, we -- as I said, we would not like to tell at this point in time. We want to reserve it this for a later quarter of the year, for announcement.

Okay, sir. So as of now, the capital expenditure is, what the regular run rate that we have INR 200 crores?

INR 100 crores per year.

Next question is from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on a great order inflows during this quarter. Sir, my first question is on the -- when you say that you will achieve double-digit margins by year-end, but you've already achieved it in fourth quarter FY '24. So what do you mean by achieving it by year-end?

When I said from entering double-digit base, we expect that in a sustainable manner. We we will look at that. That's what we meant.

Is it right to assume that maybe a some point of time where the revenue cross is INR 2,000 crores on a quarterly basis, then we'll be able to deliver that kind of number, because at INR 1,300, INR 1,400, you'll barely be at EBITDA positive. This is what I sense given the cost structures, you have at 37% gross margins and other expenses of 20% to 23% and 9% of employee expenses. So you'd barely make any EBITDA to run rate of INR 1,400 crores, INR 1,500 crores of revenue per quarter.

We don't -- yes, we don't want to make that kind of statements. It's up to you to calculate. But as I said, we don't give any forward-looking statement. Sometimes, in addition to what you're talking about, there's also -- mix will play a large part of the thing. So the mix could also change quarter-to-quarter.

Okay. So my second question is on the orders. So last quarter, you said that you have bid for some HVDC project and some STATCOM projects. So if you can update us anything has been opened, anywhere we are right now and the HVDC orders of Power Grids. So if you can give some color on that.

Yes. So we have submitted our bid at this point in time, since it's a close base so we do not have any official information to share. All we can say is that we are engaging with the customers and providing all the necessary information sought by the customers on that particular tenders, both on STATCOM as well as an HVDC tender in that.

We are not L1 as of now in any of these projects, right?

We have not -- there is no publically opened of this, yes.

We have a next question from the line of Mohit Kumar from ICICI Securities.

My first question is, a number of transmission orders in India got within FY '24.

Can you come close to the mic, Mohit?

Is it better now?

Yes. Yes.

My question is number of transmission orders or if TBCB orders would have added to players, but we haven't seen any significant order inflow from India in Q1. Do you think -- what is causing this delay? And do you think that in the Q2 and Q3, as always...

Mr. Kumar, give me a moment please. We've lost the management connection. I'll reconnect them. Mr. Kumar, we have the management team back on the call. You may go please ahead. Sorry about this.

Sorry about the telephone line problems. I understand there are rains in the Western part of India.

No issue, sir. Should I repeat my questions, sir?

Please do that.

Yes. Sir, my question was the number of transmission bidding -- bids were awarded in FY '24, right? So our expectation was that Q1 will see a much, much larger order inflow for the industry. Why is there is a delay in finalization of these orders? And do you think that [indiscernible] going forward, these numbers will pick up, especially in the from India business significantly?

I think so. As you just look at in the last 3 to 5 -- when we start election, maybe that's also one of the reasons may be slowed down. But there is a bidding are going on. As we speak, lots of bidding activities there. Yes, there has been a bit [indiscernible] making, slow decision-making. I'm sure now with the new government, new ministries are in place, that should accelerate that.

My second question is on the railway side. Last year, I think railway has update guidance for adding locomotives and adding train [indiscernible], and we also see a lot of Scott transformers opportunity coming up. In your opinion, and given your -- given what you see, are you seeing this activity much, much higher compared to last year in terms of pending activity?

Yes. I think we'll look at the last -- whole of last year. There's a lot of activity in the first 6 months that there was a bit of slowdown and once they slow down. The second part of the year was a bit dull. But if you really look at now, I think we see a lot of traction on the cost-tracking of some of the bids.

Railway, railways are you seeing that?

Railways, railways. I'm talking about the railways.

We have a next question from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, globally, there has been a shortage of transmission distribution equipment. So although we have indicated that, maybe over a medium period maybe 25% to 30% of our sales come from the international market. But given the current situation, do you think we will play more role on the global side, on TD equipment?

I think all -- thank you for your question. It's a very important question. All we are saying is that we have seen a lot of demand in the domestic market, okay? Our first and primary aim is to serve the domestic market. So we are expanding the factories. We are setting up the new factories. So those things are continue to grow on that. So while doing so, we are also keeping enough provision in our factories, both existing as well as the new ones, to cater to the demand outside of India. And that's the reason we said our exports in the beginning was a 15% when we started our company. And we said it will, over a period of time, it'll happen 25%. Now it's already in the range of 30%. And we will see in that 25%, 30% range, it will remain consistently, without taking any large orders like Marinus Link, even without that, we will be in the range of 25%, 30% that. So that's where we want to do, because we have a huge domestic order, domestic demand, and that's where we will be concentrating on that, in addition to the expense.

Sure. And sir, apart from transformers and switch gears, the -- some of the -- I mean some of the equipments like grid automation, reactors, STATCOMs, where we have a edge over the competitors. So do you think this part of -- this part will become a major -- going forward or substantial part of the business, maybe 3, 4 years down the time?

Yes. I think if you really look at the whole renewable, renewable needs a lot of new technologies powered through the semiconductor, et cetera. So that semiconductor things like whether it is HVDC, STATCOMs or power quality. And those are the things, we'll definitely have a bigger edge in a new power systems, or in the new grid stability related, thing like that. And we have seen this coming in, not only here but globally, and we are the one of the fine movers to invest in those technologies and put up our factories. And the China factory is one example. We are the first one, probably in the country, to set this up at that scale. And we have -- not only from that factory, we have produced the very crucial parts, like what we call as HVDC valves for our Mumbai project, and then we have received now other major orders for another project. So these are the things we believe that going forward, we'll have quite a tractions, whether it is renewable integration or cross interconnections between the nations. Those are the things have a huge opportunity.

Sure. And sir, last question from mine. We have guided that we will achieve 10% of margin in the medium term. But going by the demand scenario, both in domestic and globally, do you think there is substantial scope to improve our margins from 10% to -- I mean significantly higher than what we have been guided? Not now, but maybe over 3 to 5 years down the line?

Again, I don't want to say anything, Mahesh. What all I can say is that what we have committed. So we want to come over there and probably then we will talk. You can make your own calculations. If the revenue is going up with the same cost structure, things like that, you can start making your own estimate. But all what we can say from the management standpoint, is that we said we will enter 10% EBITDA by end of FY '25.

[Operator Instructions] Next question is from the line of Prathamesh from PL Capital.

So looking at the demand for the transformers in the country, just wanted to know what would be the market share of Hitachi Energy in terms of power transformers, especially about 220kVs, since that is the big boom right now?

Yes. No, I think Prathemesh, thank you for your question. So we normally don't give our market shares by product lines, et cetera, in that. But having said that, we are one of the largest producers of this, launched power medium power transformers in this country, and also globally. And we definitely -- all I can say is that we have a very decent market share in our area of operation.

Got it, sir. Sir, installed manufacturing capacity for transformers are reaching somewhere around 500 GVA by the end of '26. What do you think Hitachi Energy will stand in that sense? I mean in that [indiscernible]?

We have recently announced globally. This is for global. It's not for India. I just wanted to clarify. So on the CapEx, globally, we announced that in our $1.4 billion will be invested globally. Again, I'm stressing on that, so that you understand very clearly, further increasing the CapEx of the transformers alone, okay? So that clearly shows that being one of the leading largest capacity, globally available. So we are investing in that. So in India, also, we have been investing in the last 3, 4 years, right? We have invested in the capacity expansion of our power transformers. We have expanded our dry bushing factories, new greenfield factory we announced. All those things, we continue to expand it. And we have done that in the last 3, 4 years. We never stopped investing even during COVID time also.

We have our next question from the line of Jonas Bhutta from Birla Mutual Fund.

Just two quick questions. Firstly, if you can update us, what percent of the Mumbai HVDC project is complete as of now, as of this quarter?

Yes. We are in the range of around 30%, 40% completed.