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

Ladies and gentlemen, good day, and welcome to the conference call to discuss Q4 FY '20 results of HPL Electric & Power Limited hosted by Elara Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harshit Kapadia of Elara Securities. Thank you, and over to you, sir.

Thanks, Ayesha. Good evening, everyone. On behalf of Elara Securities, we welcome you all for the Q4 FY '20 and 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 Gautam sir 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 our financial results for the fourth quarter and full year FY '20. At the outset, I hope all of you and your loved ones are healthy and safe. To give an update on our operations, in line with the government directive, we had closed all our factories, offices and marketing activities from 23rd March 2020 onwards as we did not fall under the essential services category. We restarted all our operations from mid-May onwards, following all safety measures directed by the government and are gradually ramping up. We have seen decent traction in our B2C business in June 2020 with Meter segment also witnessing some pickup in order execution and increased dispatches, although there was no activity from the utilities. While the nationwide lockdown was officially announced only from 23rd March, the disruption caused by COVID-19 at the ground level was felt effectively from the first week of March 2020 itself. On the meters side, the inspections came to a halt at the beginning of March. Furthermore, there was a shortage of few imported critical components in Feb and March due to the COVID disruption in China. Both these factors significantly impacted the dispatches and consequently, sales for the fourth quarter and the year as a whole. On the B2C side as well, the month of March 2020 was mostly a watch out as there was hardly any product sales in the last 15 days of March, which otherwise is a period where we see excellent traction. We lost around INR 120 crores of revenue. This is, of course, estimated in the fourth quarter due to the lockdown on account of COVID. Adjusted for the same, we would have reported revenues of approximately INR 330 crores in the fourth quarter and close to INR 1,100 crores for the full year FY '20. Ready inventory could not be built due to sudden lockdown. Similarly, the receivables were not realized at the year-end, resulting in higher borrowing and working capital cycle. However, even amidst all the gloom, there are some major positive takeaways. Firstly, during the lockdown, the importance of installing smart meters was reinforced as the discounts that had installed smart meters were able to build a higher proportion of their customers versus the discounts that had not. This is likely to drive faster adoption of smart meters among the discounts and SEBs going ahead. In fact, post the lockdown, in May 2020, HPL received smart meter orders worth INR 90 crores. We believe that this is just the tip of the iceberg as the replacement of 25 crore conventional meters by smart meters is likely to open up a cumulative opportunity size of INR 60,000 crores to INR 90,000 crores for prominent meter suppliers like HPL Electric. Secondly, the Lighting and Switchgears segments witnessed very good traction during the first 2 months of the fourth quarter. Had it been business as usual, in March 2020, we would have seen a revenue growth of minimum 15% to 20% in the Lighting and Switchgear segments. Moreover, despite COVID, both these segments reported robust sequential growth in the fourth quarter. Thirdly, our gross and EBITDA margins improved by 330 basis points and 120 basis points, respectively, in the fourth quarter on the back of efficient procurement of raw materials and rationalization of operating overheads. In Q2 FY '20, we took a strategic call to increase our product prices in Wire and Cable segments. Our recalibrated strategy is progressing well. Despite doing business for only 2 months in the fourth quarter, sales were more or less in line with the third quarter of FY '20. As the situation on the ground normalizes, we expect to see an improved performance in this segment as well. During the year, we launched and showcased many new and innovative products in sync with the latest technologies in meter, switchgears and lighting categories at major platforms like the Elecrama, which was held in Delhi in January and the MEE in Dubai, that was in March. So now to give you an outlook for the next year. HPL, like most other companies in India, have been adversely impacted by the lockdown and plant shutdown in the first quarter of FY '21 as well. However, we have taken many steps to readjust to this new reality. We have rationalized our operating expenses, including employee costs and other overheads. We have also bought down our marketing expenses significantly in Q1 FY '21. At present, we have a robust order book of INR 368 crores, which provides revenue visibility for the next 2 to 3 quarters. Smart meter orders of INR 90 crores will also help in improving our gross margin profile in the meter business. On the demand side, much will, of course, depend upon bringing the COVID-19 pandemic under control. But hopefully, this can be achieved in the next few months. Basis this assumption, we expect to see a demand recovery of our consumer products in the second half of the year driven by macroeconomic revival as the impact of lockdown recedes, further supported by the onset of the festive season and higher government spending. On the meter side, we will continue with the execution of our pending orders. Furthermore, we expect that the onetime liquidity injection of INR 90,000 crores into discounts announced by the government in May 2020 will help in supporting the demand for meters over the next 1 year and ensure timely payment of dues for equipment suppliers like HPL Electric. Looking beyond these near-term challenges, we expect to see robust demand for smart meters over the medium term and remaining fully geared up to capitalize on the enormous opportunity. On the B2C side as well, we expect to see healthy traction over the coming years, led by product development efforts, network expansion and effective branding initiatives. On that optimistic note, I would request the operator to open the floor for Q&A. Thank you.

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

First of all, wishing all of -- all in the HPL Electric family, hope they are safe given the pandemic.

Yes.

To begin with, sir, the first question I would ask, what are the current utilization levels for our factory and in terms of issues which you had mentioned that there were some supply-side issues and labor issues and has that been resolved? And if so, and what is the percentage, sir, of the issues getting resolved from supply side and labor side? And what will be the current utilization level be?

Yes. Yes, thank you. So yes, in terms of our opening up after the lockdown, we, in fact, got our permissions to open up with almost a 30% capacity around the mid of May because most of our plants are in Haryana or in Himachal. So there are specific permissions required. So we got them. But by the time the actual operation started, by the time we got the sanitizations done and everything, it was almost by end of May. But nevertheless, if you see in June, our capacity utilizations are anywhere between 30% to 45% or 50%. But because it depends on the unit. In lighting, in wires and in switchgears, I would say it is on the upper side, around 45% or 50%. In -- when you look at the meters because meter plant happens to be in Gurgaon. And that is an area where there is also much more labor shortage because being more in the semi-urban area, the labor shortage was much more over there. Right now, if you see almost on a week-to-week, there is an improvement in terms of our capacity utilizations although overall, because even the markets were mainly closed in -- during the month of May and then as the opening up started, roughly, I would say, about 40% to 45% to 50% is what even the markets opened up. So our utilizations were like that. In terms of the supply chain, more or less, I would say, they were almost in line with our kind of opening up because most of our suppliers are either in the -- mostly are in the North. Some, of course, are in international territories and certain part in the West, more and more towards Pune and other sides. So since we have -- most of our supplies are also from multiple vendors, so we were able to get started in most of our products within June itself. In terms of shortages, because it happened that when the -- when China was under the lockdown, we were open and by the time as we got into a lockdown, they opened up. So there were certain extra or I would say, mismatch between for the components to arrive. So although these are -- most of the components are also from international companies, but they also have their factories and the manufacturing operations in China, and that's where they ship it from. So there have been certain shortages, which we have experienced right from Feb and March onwards due to certain critical components in the meters, although the bulk of inventories have been there. But yes, nevertheless, we did see certain shortages coming over there. But in other part of the business, when you look at the consumer business, whether it's switchgear, lighting and other things, more or less, since most of the vendors are in India, we have been able to align up the supply chain accordingly.

Fair enough, sir. That was very helpful. And secondly, when you look back, there was a recent announcement made by government and there was a ban on Chinese equipment and imports from China. What kind of opportunity do we see could arise for Indian manufacturers, one? And secondly, what is the percentage of our exposure to Chinese imports directly and indirectly?

Yes. In terms of our -- I'll answer the second one first and then come back to the other one. In case -- in terms of our exposure to the finished goods coming from China, that is very less. It's practically nil. So since we have our own manufacturing units and we have a very well backward integration, so all the finished products, almost -- I would say, almost 95% of the products are all manufactured in-house by us. Still, in terms of certain components, so when you look at the electronics, which go into metering and into LED lighting, most of the electronics are being imported. So whether it is from China, Taiwan or Vietnam or wherever. So India as a country is dependent upon electronics, on plastics, whether they are any kind of plastics, industrial plastics which are used. So for these products, we are dependent upon imports and also from China -- mainly from China. So in terms of -- but in terms of finished goods, we are not dependent at all on China. When we look at the kind of -- what opportunity this brings to, I would say, it brings to a very large opportunity. And that is one reason where a company like us has been heavily invested into manufacturing, in fact, very well backward integrated. And going forward, we will see a lot of benefit coming to companies like us who are totally making it in India. And specifically, like in switchgears, our dependence on China is very less similar for lighting other than certain components. But going forward, I see a lot of inquiries coming from lot of global sourcing people, lot of countries who will be looking at Make in India products or looking at alternative destinations other than China. So looking at second source. And I would say, India can play a very important role in that. Even in wires or cables, our dependence on China is nil. In meters, a lot of components, as I said earlier, are coming in from there. Mainly it's all types of electronics components or plastics. But over a period of time, I think just shutting down anything like this would -- of course, may harm the supply chain in the short term. But over the period, it is easily possible for a country like India to cope up with that and become truly self-sufficient in terms of this. So I think the government is already taking a lot of action on this because there are active discussions going on in lighting industry as well as metering and especially on the electronics side. So I think over the -- going forward, definitely, I see India to be much more self-sufficient, but also more than that, because that is just to cover up the supply chain from a back end, the bigger opportunity will come in when companies like us can supply our internationally approved or marked products to global countries. So right now, although our exports are less, but we have seen a positive traction in the last couple of months and we are already exporting to 42 countries. But over the -- during this lockdown also and even after, a lot of inquiries are coming today from countries where we assume or we feel that people are today looking at alternate source. And definitely, HPL Electric will see a big opportunity going forward in this.

Okay. Sir, last question, if I may. In terms of order book and visibility going forward, which are the sectors where you feel the orders then can come in, in terms of awarding pipeline is very strong, our tenders are getting converted? And both domestically and geographically, if you could segment-wise give the opportunity, that would be great?

Yes. We are sitting on an order book of INR 368 crores with INR 300 crores being from meters. So you must understand that all the meters have a longer lead time. So normally, you would have a bigger pendency there. But nevertheless, on the trade side, having a penalty of even INR 40 crores, INR 50 crores is good because normally we would have the order input -- order flow will be coming on a daily basis. So that truly does not reflect the future revenues. In terms of the inquiries what are there and meters are very healthy, almost more than 10 million meters are currently being evaluated into various -- by various tenders. And having an order book of almost INR 368 crores under the present circumstances seems to be fairly good, I would say. But you must realize that since the last 2, 3 months, we have seen a very low activity from meters -- from the utilities with respect to metering or from a general activity based on very low inspections happening, the tenders getting postponed just because every state is having a different rule for COVID, each one is in a different situation. So the progress on the tenders which was there just pre-COVID level, currently they -- I don't see them being decided at least in the next 1 to 2 months. There is also certain challenges, which a lot of companies are facing in submitting tenders, submitting the samples because physically one is not able to travel to many of the states. So there may be -- although our pending orders are good and the inquiry levels are high in meters, but for a period of 2, 3 months, we may see a low activity. But thereafter, let's say, as we are nearing September and then going beyond, we would see the situation reviving to a very good extent because the fundamentals are right. Also, when one looks at the meters, the -- whatever loss of revenue is there, the eventual loss of orders of that demand is not there. So it gets pushed back. Our order input remains. The inquiry still remain. Only thing, the demand will get pushed back. So net-net, we don't lose any business on the meters. On the other front, in lighting, because of the COVID situation, what we have seen in China and thereafter, in India, we see a big opportunity coming in for all of the branded players. One must realize that in terms of the breakup of organized and unorganized market, over 50% of the lighting industry was dominated by the unorganized players although the organized players are themselves very big. But still, even after so many years, the unorganized players were over 50%. And this is -- these are figures given by ELCOMA, which is the lighting association and body of the manufacturers in India. So after -- when we look at the way the market has gone, the -- right from January onwards, the imports of lighting coming in by casual traders who will get it from mainly China and who are selling it in the market very cheap, sometimes even these are substandard quality, LED products. So that has really gone down. And after the COVID, when we have seen a large gap and with smaller companies probably having little financial challenges and other things. So we believe that as we go -- as we are in the current situation and even as we go ahead, we will see a lot of market shift to the organized players. And that is where we hope to see a good demand coming up, although the overall demand because of the COVID may come down. But because of the internal shift from the unorganized to the organized, it would definitely give us a good way to grow. And you can see it even -- during our Q3 results, we did -- we have indicated that we expected very good sales in the Q4. And only in the 2 months, we were able to surpass our Q3 sales in a good way. So it would have been a very good quarter for us looking at year-on-year or even sequential basis. But overall, even when we get started, of course, the Q1 was a very limited period almost -- practically, we did almost a months sale in the 3 months. But going forward, even on the Q2 and other things, LED lighting is one segment where -- and which is mainly trade base, we see ourselves really growing pretty well. And the factor of the unorganized shifting to the organized will also partly contribute to the growth. So that is one thing where we see orders coming. Switchgear, the building segment has been slow. There's no secret about it. But when one looks at post-COVID, I see that segment, the project segment will take time to grow. But internally, the way we are pushing and since our market share is low, so we -- I think with our efforts, I'm sure I would be still more optimistic that we should be able to try and reach last year figures or try to maintain them. So overall, the first quarter, due to the lockdown, was not really great. But looking at the second quarter and then going beyond, from at least the second half, we see the orders coming up in a bigger way.

The next question is from the line of Praveen Sahay from Edelweiss.

Sir, one query related to your -- the figure you had quoted for revenue loss of INR 120-odd crore for the last quarter. So sir, how to assume these numbers? Like the way forward, is that some non-execution of some order you had not able to generate revenue or that expected to execute in this quarter or a coming quarter? Is that fair to assume some part of that?

Yes. If you'll see the -- even if you go back last 5, 10 years, March is normally the highest sales for any trade company. And typically, like the way most of the companies operate, which are trade-based or dealer-based, a lot of sale happens in the last 10, 15 days of March. The reason being that we have a lot of annual incentives of our trade and dealers, which are target-based, which expire on the 31st of March. So although March, the first 15 days was a little slow, which normally is like that, but towards the end, it really picks up. So whether we look at switchgears, lighting, wires, any trade products would have really picked up towards the end of the year or end of the month. And unfortunately, that didn't happen. Although the lockdown happened from 23rd, so right from almost 15th, 18th onwards when we saw even our office got down -- got locked down much before the national lockdown happened, we are situated in Noida. So the market started slowing down, there was any way the things happening. But this is pure estimation. It is our estimate based on what is the sales we could have done. When you look at our estimate also, we would have been slightly lower than our last year sales of INR 352 crores. We would have probably ended up somewhere around INR 330 crores. But still, this is our estimation based on the business we could have done from trade and then also had the inspections happened in March, this is normally something which -- because these were scheduled orders, they could have gone on had the inspections happened on time. So this is purely our estimate and this is what we believe is the revenue loss for the last quarter.

No. So the question, sir, is, is that INR 120 crore? And majorly, I can see that's in meter -- metering and wire and cable has given a larger degrowth. So is there some order which you had not able to book due to logistical challenge or some execution challenge due to lockdown? Is that any sort of a revenue? Is that -- first, because I can also see your B2B has shrink quite significantly in the fourth quarter as compared of the entire year. So that 50-50 almost and B2C, B2B is another 30%. So is that some order you had not booked or generated revenue because of some challenges, but it's -- you were able to do so in the first quarter or the coming quarters?

No. When we look at the -- if you see, we will talk on B2B and B2C separately. If you look at the B2C, the orders lost. Of course, the March is a time when the dealers stock up. So unfortunately, that didn't happen. So again, when the business revived towards the end of May, then June, the dealers are back and they're ordering, but maybe not with that trust what they would have done in the March end. So we can't say that we've lost the business or that orders are coming. But yes, because generally, even the dealers will be seeing, they'll be more cautious and they will see the demand coming back. As it comes back, that will happen. So that business, we would believe, is lost forever because -- but generally, as the market is opening, the dealers are back. We have already seen the traction happening from almost every state. When you look at the meters, those are specific orders, they could not go. So obviously, some part has gone on in the first quarter, but there are many states still where we are having our orders, where -- which have not even done inspections even until now. So of course, now there are talks on getting the inspection waivers so that we will -- so that we can supply them. So there has been generally a very low activity from the utility right from starting in March and then also extending almost to the end of the first quarter. The good thing is that I believe that the government has also given an exemption that there will be, I think, covering the lockdown period and a little beyond, that any delay happening on -- to supplies of any electrical or for that matter, any products to the government against tenders, no -- the LED charges for the net delivery charges will not be charged and that will be waived off. So although there is a delay in booking the revenue, the revenue is bound to happen because it's just something getting delayed and at no cost from us other than the holding cost of the inventories. So that is what it is.

Okay. Second question is, sir, as you had highlighted the meter and the light have a higher dependence on the import. With this China thing, is there any expectation for increase in the costing in these 2 components, these 2 segments?

Yes, on a short-term basis, there could be some increase because already in the LEDs there has been certain increase even that increase is getting passed on to the market also. So we have also increased most of them. But this is on two reasons, not specifically because of this anti-China type of a thing. Generally, the supply chain was disrupted. So has this -- so it is not because of the negative sentiment. It is more because of the months lost because 2 months China was closed and then almost 2 months we were closed. So due to the supply disruption, there has been certain mismatch of, let's say, components or certain gaps coming in the supply chain. So because of that, there has been some increase in cost and also with the dollar also increasing over that time. So that cost had been passed on to the market in the LED part. So that same applies because the electronics are all like that, that same applies on the metering side as well. So this is where we see the cost going up on a short-term basis. But then again, let's say, the question is again of a demand and supply as I think the supply side also picks up and everything starts moving back to the pre-COVID levels, again we will see the costs coming down until they specifically have some issue on the long term.

All right, sir. Sir, lastly, last question on the numbers that your other expenses have been down more than your sales. So what exactly in that component has been down for Q4 largely?

No. If you see throughout the -- this is the annual figure.

So that's for a quarter, I'm asking that the other expenses have been down by 57%. So what exactly down in that largely?

No, from the last -- if you see from the sequential quarter, they are down by about INR 5 crores because they were INR 26 crores in the earlier quarter and that has now come down to INR 21 crores. So if you see one thing, throughout the year we have been maintaining that. We have been reviewing our employee cost. We have been reviewing a lot of our fixed expenses. So there has been -- that's been a continuous thing. And overall, if you see on the year-end as well, of course, the sales drop came more on the last part, that is one thing. The other thing is, if you'll see, there is an impact of the Ind AS 116, which is on the lease where we find that certain expenses, almost INR 3.5 crores of expenses from other expenses, they get reduced there. And that goes on to the depreciation. So that's why you find certain increase in depreciation happening like that. So that is the first year when the Ind AS gets implemented. So there has been couple of things, which -- it's a combination of lot of things where we can, in case you are looking at details, I can ask the IR to have it shared with you.

Okay. All the best.

The next question is from the line of Rishith Shah from Dhanki Securities.

So basically, first thing is regarding, again, related to China. So basically, in the terms of smart meters, so what is the total -- I mean, bids that coming from China as a ballpark figure right now? And how much could it benefit us going forward?

No. You mean bid coming in various utilities or?