HPL Electric & Power Limited (HPL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the HPL Electric & Power Private Limited Q3 FY '20 Earnings Conference Call hosted by Elara Securities (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. The discussion today may include some forward-looking statements and this must be reviewed or considered in conjunction with the risks associated with the industry in general and our business in the particular space. I now hand the conference over to Mr. Harshit Kapadia from Elara Securities. Thank you, and over to you, sir.

Thanks, Ayesha. Good afternoon, everyone. On behalf of Elara Securities, we welcome you all for the Q3 FY '20 and 9-month FY '20 conference call of HPL Electric & Power Limited. I take this opportunity to welcome the management of HPL Electric & Power represented by Mr. Gautam Seth, Joint Managing Director. We will begin the call with a brief overview by the management, followed by a Q&A session. I will now hand over the call to Mr. Seth for his opening remarks. Over to you, sir.

Thank you, Harshit. Good afternoon, everyone, and a very warm welcome to all of you present on the call to discuss HPL's financial results for the third quarter and 9 months of the financial year 2020. Our performance during the third quarter of FY '20 was marked by growth in the lighting and meters businesses along with improved overall profitability. High contribution from the metering business supported by cost optimization measures helped us in delivering higher EBITDA and net profit despite the decline in overall revenues. Notwithstanding the subdued performance of the switchgear business, which was impacted by the weak demand in real estate, government and infrastructure segments, all of our other 3 segments: meters, lighting and wires, performed fairly well considering the overall slowdown in the macro economy. Meter business reported modest growth in revenue and EBIT in Q3 FY '20. Performance in this segment would have been much better but for the delay in dispatches due to pending DIs from the utility. In a major positive boost for the sector, various state electricity boards have begun gearing themselves to replace conventional meters with prepaid smart meters. This is in line with the central government's initiative of installing 25 crore prepaid smart meters within the next 3 years. This renewed trust by the government is a major step in the right direction and can be a game changer for the industry, as it opens up a huge cumulative opportunity size of between INR 60,000 crores to INR 90,000 crores for prominent meter suppliers like HPL Electric. We expect to see the positive impact of this in the form of higher revenues and improved realization per meters in the next 3 to 5 years, starting from the second quarter of the next year onwards. Lighting segment continued to witness healthy growth momentum in Q3 FY '20, led by network expansion, offering a wide range of new products to consumers and effective branding initiatives. Given the prevailing headwinds impacting the sector, such a positive performance by this division validates the strength of our brand and the quality of the products in this category. We expect this robust performance to continue going forward. During the Q2 FY '20 earnings call, we highlighted about increasing the prices of our products in the wires and cables segment. I'm happy to state that despite lower revenues, our strategy to increase prices yielded in better realization in this segment. As the ramp-up happens, we expect the segment to deliver even better performance going ahead. We have been regularly launching new products to be more competitive and yield better realizations. Our R&D team has been continuously working on the new product development to address customer needs, and due to this successful efforts, we have been able to launch over 25 new products, mainly in the switchgears and also in metering and lighting categories, which were demonstrated during the Elecrama Exhibition held recently in Delhi. We believe that HPL is poised for its next leg of growth, led by the smart meter initiative and a healthy growth in B2C segment in the medium to long term. Out of the current order book of INR 370 crores, of which the meter business has an order book of over INR 300 crores, this healthy order book, along with the robust inquiry base of meter tenders, provides revenue visibility for the near term. In the B2C business, we aim to drive healthy growth through a combination of retailer network expansion, product innovation and effective branding strategy. Furthermore, the government's plan of spending over INR 100,000 crore on infrastructure and allied industries over the next 5 years, as announced in the recent budget, is expected to support demand for HPL's switchgears and other products. With this, I would now like to open the floor for Q&A.

[Operator Instructions] The first question is from the line of [ Ketan Mehta ] from [ Alliance Advisory ].

Sir, in your opening remarks, you mentioned about the smart meters, how the market is gaining pace. So just wanted to understand how the things are moving on the ground? And are there any orders -- were coming from the electricity boards?

Yes. So if you see, the government has been actively talking about now the smart meters for a couple of months now with this new initiative of installing 25 crore prepaid smart meters in the next 3 years. And this has been reiterated many times now by the government in various forums. At the ground level, we -- because -- I'll just take you back to about 3, 4 years back when the government was very keen on the smart meters, but we found that in terms of the preparedness to come out with the smart meters and install them, there was definitely a gap, which we founded initially in the earlier time. Now when you see the renewed effort, which has come up a couple of months back, I would say a lot of effort has been made by the government. There have been a lot of multiple interactions. The standards are in place. The BIS marks are there. And even with ESL, which was earlier driving the complete smart meters, you see the first tender, second, third tender, what came out. They were not successful, and they didn't achieve the purpose what the government was talking about. And that was primarily because of certain terms, conditions, which were not conducive -- or that's what we felt were not conducive in the long term. And that's why we also refrained from participating in certain of those tenders. Now when we see in terms of the specifications, in terms of the prequalifications what are there, so the next tender, what has -- what is there with EESL and also the state-level tenders, which are coming out by various utilities, I would say the preparedness and the approach is much better. So going forward and in line with what the government is talking about, we -- as HPL Electric, we see a huge potential in the smart meters. And just to give you a sense on certain numbers that the government themselves are projecting this to be an opportunity in the next 3 years of even going beyond INR 60,000 crores, and if you take with related services, what will come along with that and other things, this can even go much ahead. Now maybe this -- maybe the 3-year could be very ambitious and this 3 years could extend to even maybe 4, 5 or a little beyond that. Still, despite that, even certain delay is happening, the meter industry is set to grow, probably even develop the way we look at it. So the size of what the government is talking about and what we have seen is enormous. We definitely can -- we see the industry is set to grow. Coming on the ground level, there are now -- like we are sitting on lot of inquiries, but a lot of future inquiries what are coming out are now all on the smart meters. There is a lot of talk in the utility as well that everyone is talking about that the next -- either the next tender or the future requirements are all going to be on the smart meters. So at the ground level, definitely, the preparedness is there. And that's why in my opening remarks also, I said that we would expect the smart meter in terms of revenues, that would start -- that should start rather hitting us on the second quarter, where we see the sales from the smart meters to really come out in a bigger way. And -- but I would say, as HPL, in terms of the technology, in terms of our preparedness, capacity or whatever -- in whichever way you look at it, we are pretty well prepared to look into that. I would believe there are a couple of serious players. In between, we had a lot of Chinese companies came in through the EESL. There was a lot of disruption, which seemed that, that disruption may come, but eventually, the business did not take off. And rightly so, we kept away from certain tenders also because we felt in the long-term interest of the company, that will not be viable for us to go in. But now as we go ahead, we see a good environment to -- when we approach this business to participate. And so we are quite hopeful going forward.

So sounds good. Taking this question forward on the meter segments, what is our realization in the conventional meters segment?

So there are -- I can't -- I don't think I can give you a single figure, but typically, because there are -- within these meters, like we are, even to the utilities, we supply a lot of single phase, 3-phase, trivector meter. There are already certain smart meters or even smarter meters, prepaid meters going to various utilities. And then as a company, at least about 10% to 15% of our meter revenue also goes into the trade where we are catering to the requirements of various contractors, which are dealing in typically the infra segment and then on the retail side where the sub-meter requirements come up. Apart from the utility metering or the utility metering, we are also into panel meters solutions, where again we have the single parameter and the multifunction meters. So a meter could range from about INR 600, INR 700 and could -- a single meter even goes up to even INR 10,000, INR 15,000. Broadly, we -- but sometimes, just as a benchmark, if we have to do, we have been taking as INR 900 or INR 1,000. But when we are looking at smart meters, definitely, that is set to go up in a much bigger way. So a unit value. Although when we see volumes, the -- maybe the pricing may change or come down definitely. But the unit parameter, what we would have for the smart meters would definitely be much higher.

So talking about that, what can the company expect in terms of realization in smart meters going forward?

No, it's difficult to say because these are competitive bidding. And only what I was emphasizing is that the overall environment for the competitive bidding is expected to be much more mature because in the initial tender, what we had -- we had certain public sector undertakings also coming in who had no meter experience. And even if you look back in last 3 to 4 years, we have not seen them even supply a single piece. So now going forward with the new prequalifications in place, we would expect a much more mature competition, although it's going to be very competitive, no doubt, because the volumes are very large. But definitely, maybe it could range at INR 2,500, INR 3,000, INR 3,500, depending again on the various specifications, which the various utilities choose to tender out. So it would eventually depending -- it would depend upon the final specifications. But definitely, it will be much higher than what the conventional meters are right now. And since the per unit is higher, so a lot of cost which go based on the numbers or based on volumes rather than on the values. So they get -- there, we stand to gain from either an overhead absorption or a lot of fixed cost, which come in based on the numbers.

Okay. Yes. Sir, last couple of questions. What is our current capacity utilization?

I would say current capacity is anywhere between -- I think in the last -- if you see in the second quarter, we were probably around maybe 65%, 70% or a little higher, I would say. In the last quarter, again, maybe around just about 70%. But as we go forward, we -- at -- in interim times, we have been even going above that. But right now, we definitely have a lot of room to grow within the same segment here or within the same infrastructure.

So where can we expect the company to end up FY '21 in terms of capacity utilization? As you mentioned, we have long room to grow going through.

I would say because next year is -- if I look at past many years, next year is going to be a very interesting one because -- or rather, if you go back almost 2 decades, every 5 years, there has been certain changes in technology. And when a new technology comes in, definitely, certain things are changing. When we look at next year, it's going to be very interesting in terms that we will find smart meters actually getting established and getting supplied and implemented. So maybe in the interim period, when you look at when there is a shift in demand from the regular conventional electronic meters to the smart meters, so we may see certain erratic volumes of business because when people are shifting, and we saw this in 2016. When the government was very keen to shift to the smart meters, but since there were a lot of gaps and the proper homework was not done, it disrupted the volumes to a large extent. And that year, we witnessed almost the industry going down by 30%. And eventually, instead of those smart meters coming in, there was a resumption of the conventional electronic meters coming in. This year, I find that maybe as we see the Q4 and the first quarter, although we are still having over INR 300 crores of orders and lot of inquiries, which is very active right now in the market, but still, there may be some disruption in terms of volume. But thereafter, looking at Q2 and then going beyond that, I would say, the way the volumes are being talked about, we should be hitting definitely 100% capacity and then probably looking to up that based on the existing infrastructure, wherein the -- we can look at working on 3 shifts. A lot of -- even having certain noncritical parts of manufacturing being outsourced. So a lot of things, I would say, in the second half would be required in case we have to meet the enormous volumes as demanded by the government. So we are just hopeful on that. But as we get more clarity on going forward on how the tenders are coming and how they are -- the speed at which they are getting finalized, that would change the entire momentum.

[Operator Instructions] The next question is from the line of Viral Shah from Prabhudas Lilladher.

Hello? Am I audible? Hello?

Yes, you're audible.

Sir, what has been -- why has been our inventory days going up over so many years? So what is the status on that? Can you give some outlook on that? Hello?

Yes. Am I audible here?

Hello?

Yes, sir. Yes, sir.

Yes. Can you hear me?

Yes, sir. We can hear you.

Yes, I can hear you, I can hear you.

Yes. So if you see on a short term, our inventories have been a little high. And even last time, we have been talking that we need to take certain specific steps. On the trade business, definitely, there have been certain steps taken. And going forward, we will see the inventories coming down. On the utility on a very short term, there has been certain postponement of lift up from the certain utilities and that has impacted us, but that I would believe is a little short term. Nevertheless, the stocks are on a higher side. When you see going back on to a couple of years, if you see the stocks have pretty much remained high because earlier in -- if you go back couple of years back, we were not having the CNF model, and we were operating more on an off-line system. But now with our CNFs in place, the -- and with our range really expanding because even now, if you see, as in the last 6 months, a lot of new products have been launched by us. We have recently demonstrated them in Elecrama. And the range is going up because, definitely, to fight the slowdown, we need to have certain extra ammunitions in place, and that's what we feel that by launching new products, especially in lighting, in other things. So that has again contributed to the inventories going up. And meter on a specific thing where the inventories need to be large, where even of late, if you see even the process of getting the inspections and getting the delivery instructions, we have been continuously almost since, I think, in the last 3 quarters, at least 2 of them, we have found a lot of delays happening recently. So these are certain things. But yes, we are aware of it, and we also believe that as a company, we need to come into a much lower inventory to match that. If you see the net working capital without the cash in bank, that is more or less still maintained, but still because our debtors also have been -- at least on the trade side, have come down. But yes, there is definitely a scope for improvement. And I think as a company, we are looking into that.

Fair enough, sir. Sir, in terms of switchgear, what do you think of the outlook for the segment going forward?

The outlook, in terms of -- this is -- if you see the B2B part on the switchgear, which is typically the government and infrastructure segment, of course, it goes in through the trade and through the dealers, but that is where in the last -- from the last year and now, we see a lot of drop in volumes there. And otherwise, on the trade side, if you see which typically goes into the redistribution, where we are supplying through our distributor and then going through the retailers and all, there the volumes are still intact. But in the last 2 years, the government came out with a lot of schemes and projects, especially the last mile connectivity, where they were giving -- the 4 crore households were electrified. So lot of our volumes on switchgear, especially the MCBs and the switches, they had gone into those segments. And -- but of late, right now, we are not seeing any demand coming in from last -- almost -- now it's almost, I would say, 9 months or beyond, right from when the elections happened, we have not seen any volumes resume. The recent announcement what the government has made on the INR 100,000 crore being invested into infrastructure, we believe that again certain schemes would come out. Because I think just last week, the government had formed a committee for, again, evaluating what the next level of distribution reform should be. So I would expect that in the coming months, we would again expect certain of those things to come. As a strategy, of course, our certain good volumes were coming from that, which is down, but we are not restricted only to that volume. So we are -- the way we have expanded lighting in a bigger way in terms of channel sales and dealer-retailer network. Similarly, now we are pushing the switchgear and switches into that. So going forward, we would see the growth in those volumes. But immediately, we don't find ourselves. Though sequentially, we have still been a little better, but even in the last call, we did say that we were -- in the Q3 also, the switchgear would be subdued. And I would say even going forward on a very short term for the next quarter, maybe we will not see some results. But from next year onwards, as we are diversifying our customer portfolio much more, we hope to be more derisked into the segment, so that we are able to cater to different segments. And once the government spending also picks up, although which will contribute maybe just 20%, 30% of our switchgear sales, but that also should see a good increase going forward.

Sir, in terms of distribution segment, when you look at what is the difference in terms of the margin when you look at versus government or infra players giving out contracts versus yours? So is that huge or it is at par?

No, the segments in distribution would definitely be a little better than the unit margins what we have in the government segment, although the volumes in government segments are much larger. Now these -- typically, if you see the switchgears, unlike meters, they don't -- they are not directly tendered by the government. So if there is a project, let's say, an IPDS or what we had earlier in Deendayal Upadhyaya Gram Jyoti Yojana. So those kind of projects are contracted to certain big private players who subcontract it and then the demand comes in from dealers. So although they're competitive because these are repeat buyers, they have better -- good knowledge about the competition and everything. But our -- because of our relationship and the kind of credentials what our products have, so we have -- we stand a good chance for that. So just to remind you, if you see what we had in the Deendayal Upadhyaya Gram Jyoti Yojana and the last mile connectivity, we were the only company in the country where all the 8 products required by that were -- could be supplied by us because each household had a single-phase meter, it has a double-pole MCB. There was an enclosure, a switch socket, there was an angular holder for a bulb and then an LED bulb and wires. So each of the product could be supplied by us. So these type of things -- but since -- because -- but the volumes were very high, the unit margins were little less. But our aim is definitely to reach out to various customers. And always, the product mix and the segment mix needs to be there. So something with a little higher margin. But overall, if you see the switchgear margins, although the volumes have been little low, have been around at 18%. And so I would say these are still good margins. But as the volumes pick up, even they can even go up to even 19%, 20%. So that's the -- overall, the segment has that potential and it's pretty steady to see based on either the commodities or other things. So there are not much disruptions happening in that segment here.

And lastly, on the liquidity front, in terms of working capital and payments from clients, how are you facing? And what is the situation out there? So if you could throw some light on that.

No. I assume you're talking on the B2C business, the trade business?

Yes, on the B2C business, yes.

Yes. The -- if you see the overall sentiment in the market or the liquidity position in the trade market, that has affected. I would say it's not really great. There is a certain amount of liquidity crisis happening in the trade market. Nevertheless, if you see since the past couple of years and quarter-wise, we have actually improved our debtor days in the trade. And we are roughly around 90 days if you look at it. The reasons have been that we came up with channel financing, then we put in a very strong internal discipline for collections, and there have been a lot of efforts since almost last 1.5, 2 years on that. So during this time, while we were improving our figures because if you go back about 3 years back, our trade debtors were, at one time, even at 120, 130 days. So we have definitely come to a better situation. But during this time, while we improved our figures, the market also went bad in terms of liquidity. But still despite that happening, our figures are still good. We -- had the market not changed from -- let's say, from an average market to a bad market, our figures would have been much better. So even as a choice -- or right now, when we are seeing sometimes -- actually, the demand is not a problem. There are a lot of demand coming in, but we are still supplying in the channel based on the payment terms and what we see as the expected recovery rather than take a short-term view of just hitting higher sales and then again spoiling our debtor days. So there, we are very conscious, and I think our process and systems are much in place. Going forward, for the next year, again, we have lined up a much more -- many more dealers to come into the channel financing, and we have been now been much more forceful with our channel that, that is something that needs to happen to bring in a better fiscal discipline. As we see the market pick up, which probably should happen somewhere next year depending on how the government policy is, because a lot of efforts they are making, but until we see the results. Once that happens, I think we can even bring down our debtor days in the trade market much, much better than what we have today.

Thank you. Viral, we would request you to please join the question queue for any follow-ups, as we have several participants waiting for their turn. The next question is from the line of Anurag Patil from Roha Asset Management (sic) [ Roha Asset Managers ].

So next year, in the second half, once this smart metering volumes kick in, what kind of margins we can expect?

Yes. Yes. When -- currently, let's say, we are around 15% to 16% on that, so I think it would settle. But definitely, we can go back -- earlier -- if you've seen the earlier days, our margin on the metering were even much higher, even at 18%, 20%. So it's -- right now, it would be a little guess from my side, if I have to just put in. But broadly, the moment -- the most -- the smart meters when they come in, we do expect the margins to really go up, yes. So I cannot probably give a figure, whether it would be 18%, 20% or even going beyond that. But definitely, it is something which would go up. Now we need to see that as the couple of -- because the way the new tenders have come out now, this is, I would say, a second phase of tendering because the first phase didn't actually go the way the government wanted. So I would say the moment 2 or 3 tenders are out and we see 1 or 2 quarters of the implementation happening, definitely, I think we would be able -- we would be better placed to give a more specific guidance. But broadly, looking at the way the business is, the way the technology is much more higher-end, and with competition being a little restricted, definitely, the margins would set to go up. And it's not just maybe 1%, it could move up in a little different manner.

Okay, sir. And can you tell me the current total debt as of now?

Yes, on a net basis, the bank borrowing is INR 496 crores. Yes, just to add on that, yes, our debt-to-equity ratio has been maintained currently at 0.76, which is almost in line with what we had in March.

[Operator Instructions] The next question is from the line of Praveen Sahay from Edelweiss.

The first on the -- your order book. You had mentioned about the lighting have order book of nearly INR 57-odd crore. So can you give some details from where and what -- details of this order book like...

Yes. This is -- out of this INR 57 crores, roughly, I would say, about maybe INR 10 crores to INR 15 crores is purely from the trade. So this is a project order. There are 2 project orders more or less in this, which are again of LED lighting and which -- a large part of this would get executed in this quarter and something spilling over for the next quarter to the Q1. In terms of our revenue, if you see, based on last 2 years, the majority sale has been through the trade itself. So we have been refraining from doing business in EESL. And so even these orders are more from the private players, not from EESL. And -- but there has been a lot of -- so certain demands or certain push what we got from customers. So that's how we find the order book of lighting currently at INR 57 crores.

So basically, these are related to some projects, but you are going to supply with the trade with this -- for this project?

Yes, there they were, I would say, more institutional, yes.

Okay. But you are going to supply directly or through trade, you are going to put...

Yes, so just to -- I get what you're saying. They are not pure government orders. So they are more on the private side, yes, on the private market.

Okay. And the next query on your slide you had given, that the 56% is a B2B and 44% is a B2C. So if 56% is your meter and also, you have some projects related to lighting and all. So do you treat those project as a B2C or a B2B, like lighting projects?

No. Look, no, they are -- normally, when we look at that lighting, we would be treating it as a B2C. Because, typically, they are going into either private customers because apart from just a trade, we also do supply to certain industries. So they may be very well-known industries like, it could be Reliance or Adani or even some of these private players. And so some of them -- so typically, whatever is purely utility and EESL. Like if you see in our presentation, what we have given, we have clearly mentioned that the utility and the EESL are the orders which we treat as B2B and the balance being in the trade. But, of course, we take the entire metering as B2B. Even in the meters, almost 15% goes in through trade. But in the presentation, what I just observed, it is all taken as B2B. As we go forward, we are seeing that the B2C part, in the -- even in a near term, short term should pick up now. That is somewhere we -- where we -- the efforts have been there. And we see that to be picking up.

Okay. Lastly, sir, for the 9 month, definitely, in the last question, you had given like once the smart meter order will come and the margin will improve with that. But in the last 9 month, I can see there is some deterioration in the metering margin. So what's the major reason for that?

So it's -- if you see -- no, if you see the 9 months, the meter margin last year in 9 months was 14.5%.

My mistake...

And now it is 15.1%, so it has gone up. I think you're...

Yes, yes.

You're referring the wrong figure. So -- but just on the last quarter, it has been up to 16%, but we expect this to even go further up. Even in the conventional side, whatever is happening currently, that should improve. And once the smart meters kick in, that has a good chance to go up, I would say, either substantially or that way. So that has a chance to go up. Yes.

[Operator Instructions] The next question is from the line of Dhruv Muchhal from HDFC Mutual Fund.

Sir, is it possible to split the working capital days between the utility and the nonutility sector?

Yes, surely. Yes. So if you -- just a moment here. Yes. So considering GST, we are -- debtor days for utility are at 159 days and nonutility is 95. And on an average, that comes to 131 days.