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

Ladies and gentlemen, good day, and welcome to HPL Electric & Power Limited Q1 FY '21 results conference call hosted by Elara Securities Private Limited. [Operator Instructions] I now hand the conference over to Mr. Harshit Kapadia from Elara Securities. Thank you, and over to you, sir.

Thank you, Neerav. Good evening, everyone. On behalf of Elara Securities, we welcome you all to the Q1 FY '21 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; and Mr. V.R. Gupta. We will begin the call with a brief overview by the management, followed by a Q&A session. I'll 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 first quarter. At the outset, I hope all of you and your loved ones are healthy and safe. To give you an update on our operations, we resumed our operations from the 3rd week of May onwards, but following all the safety measures as directed by the government. Efforts are underway to get our operations back on track at the earliest. Our first quarter performance, like most other capital goods and the consumer durable companies in India, was heavily impacted by the prolonged country-wide lockdown and the ongoing COVID-19-led disruption. Due to these factors, the company essentially, this business for only a little more than a month in the first quarter, and this hurts our top line as well as our overall performance. Discussing our segment-wise performance, metering operations were disrupted as inspections continue to be halted in the first quarter, for the availability of semiskilled manpower being a stumbling block resulted in low production. A combination of these factors led to a sharp drop in the dispatches and consequently, sales for the quarter. The consumer segment fared relatively better. However, it's too had to bear the brunt of the pandemic. Intermittent localized knockdowns in many areas of operations, further accentuated the negative impact. As the economic conditions gradually improve post the lifting of the lockdown, our consumer segment saw a decent uptick in June 2020, led by the rebound in the lighting and cables category. In fact, our lighting and cable sales in June 2020 were higher on a year-on-year basis. Furthermore, meter dispatches have also resumed from June 2020 onwards, although at a gradual pace. We readjusted ourselves well to the new reality by moving towards a leaner cost structure. We rationalized our employee costs and other operating overheads. Advertising spends were also consciously restricted. However, as the business scenario improves, advertising spends will gradually revert to normalized levels. The cost reduction initiatives help us to restrict the cash loss for the quarter at only INR 8.7 crores despite facing this unprecedented disruption. Our leverage and liquidity profile continues to remain comfortable. We have successfully cleared the interest and debt installment obligations that were due during the first quarter. Now to give you an outlook for the rest of the year. At present, we have a robust order book of INR 327 crores, boosted by the receipt of smart meter orders worth INR 90 crores in May 2020. This ensures us revenue visibility for the near term. Further, in our consumer segment, we have taken significant strides towards reaching the pre-COVID levels in July and August, and unless there are any further lockdowns. We expect this momentum to continue, led by the opening up of the economy with the announcement of Unlock 4 guidelines, further supported by the onset of the festival season and higher government spending. Meter dispatches were also picking up in the second half -- are also expected to pick up in the second half of the year as we begin executing and billing for the smart meter orders worth INR 90 crores from October onwards. A silver lining amidst this entire COVID-19-led disruption is that the significance for faster adoption of the smart meters has been reinforced as the discounts that have installed them witnessed significantly better billing efficiency during the lockdown. So it is no longer a point of debate. As both the SEBs and private discounts gear up towards replacing a substantial quantum of regular electronic meters with smart meters going forward. This should drive a robust demand for smart meters as the conditions normalize. Hence, looking beyond the near-term challenges, we are excited with the opportunities that the future holds. HPL Electric as a company remains fully geared up, both in terms of the product technology and capacity to capitalize on the enormous potential that smart meters will offer going ahead. On the consumer business front as well, we expect to see healthy traction over the coming months, led by product development efforts, network expansion and effective branding initiatives. On that positive note, I would request the operator to open the floor for Q&A. Thank you.

[Operator Instructions] First question is from the line of Praveen Sahay from Edelweiss Financial Service.

Sir, I have a few queries. One, as you had mentioned that you did a little more than a month of our business last quarter, first quarter, and you have delivered of INR 96 crores of sales. So is that your business has backed to the -- almost the normal level on the month-on-month basis now?

Yes, when you look at the business resuming back, when we look at the consumer business, which is mainly the switchgears or rather it's a B2C business, which consists of the switchgears, lighting and wire and cable, we are seeing the traction almost back to the normal levels. And this, I'm talking about currently at the Q2 level. The metering is taking a little more time because the way the response from the utilities have been. While we opened out in -- within May and in June, due to the lockdowns in many areas, either the inspections could not happen or even the general conduct of business by the utilities has been very slow. So in that part of business, we still, I would say, we have not reached the normal level. But otherwise, on a month-to-month basis, starting from June and then moving up to August, we are seeing an improvement in a major part of the businesses.

But the question, sir, is if the little more than a month, you are doing INR 96 crores and last year, if I see that the INR 250-odd crores to INR 248 crores of business EBIT for the entire quarter. So that time, you are a normal like on a month -- if you are done up for a month INR 96 crores, then that business is a normal.

You must realize that there were certain pending orders or materials, which were line post -- just retrieve the knockdown in March end. So that gave us, in some extent, certain head start. But I look -- when we look at the production, because we restarted -- we resumed operations somewhere in the 3rd week of May. So our factory is to time because a lot of part of Haryana and Himachal has been closed, including Gurgaon and Gurgaon was much more badly affected. So while the factories opened up, it did take much more time for us. And the figure probably will not reflect exactly the operations at the back end. But yes, there were certain stocks or orders, which were in the pipeline just before that. So that, of course, gave us an instant start to get started on sales.

Okay. And second, on the cost side, the employee expense is down by 56%, and that's quite, let's say, higher side. So how is that, like can you segregate like do you cut down the employees strength? Or is that some contractual worker so that your number is down significantly?

Yes. So during lockdown, when we were definitely hit by this -- the challenge of looking at the way business will come back, and we will anticipate that it will take some time for that to happen. So we took certain strong decisions internally. We had gone for certain salary cuts, starting with directors that all the directors took 30% salary cut. Then even the senior management and the -- down level employees anywhere ranging between 10% to 20%. So that is something which was done almost across the organization for all the staff. Since the manufacturings were not there, so pro rata, we did not have any workers or the contractual employees coming in. But even while -- even thereafter, while we started opening up, there has been review in each kind of department on the manpower. And so effectively, while we were in the lockdown and we had sufficient time to strategize and think, we have been looking at the employee cost and all the other expenses. To give you an example, well before we open, our senior people with the finance and all the directors, we have been reviewing each and every line item on the profit and loss for each expense. And we had worked out a way of how we can reduce them. And so therefore, if you see the results, they are definitely off the work, which did go in right from the long down time, even then moving forward as we opened up. So from that point of view, you will -- definitely, the drop is there. Even if you see the other expenses right from whether the advertising or even rents will be renegotiated out of our rents. We even got certain moratoriums on them during the lockdown and even some beyond that. So definitely an effort went into looking at each expense, and I think the results are front of you.

Yes. So I just wanted to figure out how much is in the structural in the nature that will continue that cost reduction, because 56% down in the employee and 63% down in other expenses, definitely, advertising and the rental has measure renegotiated on all, but how much is that is like we can see with the normalization of the business, some portion will continue the cost measure?

No, if you -- when we look at the other expenses, there are at least 3 major expenses, which are more variable. So when we -- there is power fuel, which constitutes a bigger portion, which is directly in proportion to the manufacturing. So as the manufacturing comes back, we will see that also come back. Traveling and conveyance has been at a very low one, but as we have seen the business come back, we don't see that travel expand generally in the company to come back. There are -- I think during the lockdown, a lot of new learning has come within the organization. And we definitely believe that although the bare necessity travel will happen, but still, we don't see these expenses in the near future to come back to the levels which they were there, although that will not hamper the business in any way. So the business will come back, but probably some of the expenses which were considered variable will probably be relook for some time. Advertising, as I said in my opening remarks, there, we have consciously restricted it maybe another 2 to 3 months, we would restrict, but maybe some level as the markets are opening, some small parts will come back. But as business normalizes, we will definitely be investing more in advertising. But probably, again, at least up to March, not to the level what we were doing earlier. Until fully, we can see ourselves back to normal, and we see a growth coming in. So these are on the -- when one looks at the Empire cost, there, we have, over the period, become much more conscious on -- we become much more conscious on the manpower. So there is a regular review, which is happening to see that what is the kind of manpower we need under the new way of working on the new scenario. So I think, of course, the manpower will go up based on the business. But again, I see that in the long term, we are trying to eventually make sure that it does not go back to those levels, and we are able to benefit from the new learning, what I can say -- what we have got through the lockdowns.

[Operator Instructions] Next participant is B&K Securities.

Hello?

Yes, one.

And from B&K Securities. I just want to understand this smart meter sales, who are all the buying from us currently and another response going forward, you are expecting? I'm talking about a…

I understand. Yes. So the majority of smart meters is handled by -- currently by the Central Utility, which is WESL although there are many states which are also evaluating the same. Currently, if you see the way the trend is going in the industry, a lot of focus is shifting to the smart meters. And even during the lockdown, even post lockdown, the government has been very clear and has been reemphasizing that their focus going forward will be on the smart meters. And so we are seeing -- there are a couple of tenders which are there, in fact, certain very large tenders which are there currently under evaluation. So in a way, the way we -- the industry were shifting to the smart meters. So we are also seeing that shift from here going forward. And looking at the way because a lot of things have changed due to the pandemic. Smart meters is one thing which we don't find it to be changing. And in fact, the government is much more committed. So even if you look at our own order book, like we have an order book of about INR 288 crores currently on a net of GST basis for the metering. And more than 1/3 of them, more than 1/3 is the smart meters. So eventually, the technology is changing. It is based on the way we anticipated the market to change. So that's the way it is also changing. We are fully geared up with the technology and with our infrastructure to exploit the change. So that is happening. A lot of states also have been looking at it. I cannot name the states because a couple of tenders are out, a couple of evaluations are going on. But yes, in the future, maybe as we see around maybe in the next 2, 3, 5 years, this is the technology, what will come in. Government is earlier in February also reiterated that we are looking at INR 25 crores of meters coming in maybe in the 3 years or 5 years. And I think that's a huge and enormous amount of metering that will come in, in the market. And the government is fully committed. In fact, in the last budget, they had even kept out funds for the smart metering. So definitely, we see a big future for this.

Sir, what is the pricing differential between electronic meter and smart meter?

No, it depends on the specification. So it's very difficult to put a ballpark figure. But it, again, depends because the specifications are changing and their regular meters can be a single day or a 3-phase meter. But roughly, it's maybe about 2.5x. If I could just mention a figure, but I would be wrong to just give a single figure, but it depends again on the specifications. So a smart meter has multiple features, it can -- fully loaded, one can have a different pricing as compared to a normal smart meter. But generally, yes, they are -- because these also involved apart from the meter, there is a software, there is a communication module, which go along with that. So overall, the cost definitely goes up.

Just my final question, now what will be your business mix going forward which is smart meter versus a vertical as a company...

You are talking about metering with other verticals or smart meters within the metering.

No, smart meter versus other verticals, business verticals? I'm talking about metering versus other?

I think in the near future, if you look at it, maybe meters could be maybe around 40%, 45%. But generally, our business ratio in the last 1 to 2 years has been nearly 50:50. We are seeing a good pickup in demand for the consumer products. Our focus on switchgear, on lighting has also been very strong. So maybe for some time, maybe in the next 1 to 2 quarters or even more. Maybe it could be metering could be maybe about 45% or something, 40%, 45%. But generally, the smart meter kicks in, in a different way and the volumes go very high. With also the consumer business going up. So maybe we could again have some kind of a 50-50 type of a ratio.

The next participant is Nandish Shah from MoneyControl Research.

My first question is regarding the, let's say, smart meters. You said in your opening remarks that the billing will start from October regarding smart meters. Can you give us some sense regarding the kind of gross margins or EBIT margins, which we can see in these orders?

Yes. In the smart meters, we anticipate the gross margins to be a little better than the normal metering products. But one as to realize that currently, if you look at the metering industry, there are 2 aspects that we have been facing in the last 3 to 4 months and even post the lockdown, one has been on the skill labor because that has especially affected our Gurgaon unit because once a lockdown happened and there was a big migration of labor. So that was one, I would say, an important factor that was there. The other thing and more important is that currently, the components -- most of the electronic components are imported, and they are not made in India. So as a country for any metering or any electronic products, we are dependent upon components coming from outside. So until now, if you see in the last couple of months since January, when China ran into COVID and then subsequently, there has been certain disruptions in the supply chain. So maybe certain costs could go up on a short-term basis until alternate sources always seamless supply chain can be worked out. Of course, as of now, the products are coming from outside. There is no doubt in that, but there are delays. There are certain procedural issues, which could be coming in. So they may impact the cost. But generally, if you see as a normal single phase or a 3-phase electronic meter and when we compare to a smart meter the margins -- the gross margins are much higher. So metering is typically at around 15%, 16%. I can say, at least the other ones are at a much better level.

Okay. Sir, my question is so bearing this FY '21, which is seeing a lot of a headwind in terms of COVID. When can we see the growth rates of about 20% or 30%, which you have seen earlier?

In -- as I said earlier also, if you see the nonutility business, I would say we will -- maybe starting somewhat in the next quarter and looking at the next 1 year, definitely, we do find a double-digit growth coming in. And with -- even up to going up to Q4. So at least the nonmetering business, we definitely find a good outlook right now. Going forward, there are issues in the market. Still a lot of markets are closed or have a risk of having a relockdown happening. So those fears or those risks will always remain as we go forward. There are a couple of reasons one needs to understand this. When one looks at lighting, since January, since we had China and subsequently with a lot of negative sentiment also being there to use their products in the public or with the general consumer. One has to realize that a lot of portion of the lighting industry, almost 45% to 50% has been unorganized sector. Now we are seeing that kind of -- that sector really shrink. So that provides a big opportunity for the branded lighting players to grow. Similar circumstances, probably with a lesser intensity is relevant in even the switchgears or other things. So generally, what we are seeing there is going to be a big shift now to the branded players. The unorganized sector has really gone down the imports or the casual imports, I would say, of cheap products coming in has really gone down. So even if the overall market does not grow, within the market, the market share is shifting to the branded players. So that gives us the confidence that we will see a growth almost coming in from the second quarter going forward. So lighting is one part. Same thing in switchgears. Of course, the builder market is down. There are certain other segments which are not really -- which have not come back or rather the project segment is not likely to pick up. But there are still a lot of areas where we see that our company due to probably our internal focus and other things, that we should be able to manage growth. And I would see that, at least on the nonmetering part to start from the next quarter itself and then moving forward, meters, we see the business to come back quite strongly from the second half. The inquiries are very strong. If one looks at the inquiry bank, it is almost going up to INR 2,500 crores. A lot of tenders are in the pipeline. Unfortunately, even from May onwards till now, the decisions of finalization of orders are not happening, even the basic activity, what the utilities are doing are somehow getting postponed, even certain orders which were confirmed have got rescheduled. So there is a, I would say, a temporary gap, what has happened in the metering. But overall, the market otherwise is strong, it is -- even if there is a postponement, the demand doesn't extinguish, it just gets postponed. And with limited players there who are in a way, exploiting the business. I would say that in the second half, we can definitely see a much stronger comeback. So maybe in the third or the fourth quarter, the growth will definitely come back to be in a strong double-digit growth even in retails. So overall, I think by Q3, Q4, as a company, we definitely see ourselves coming back in a big way.

Sir, my next question is related to the working capital cycle, which we are witnessing currently. You can throw some light on those, especially in terms of receivables?

Hello. Yes, working capital will not be comparable with these figures, Nandish INR 95 crores or so. But as far our debtors and inventories are concerned, debtors are down by INR 20 crores by quarter-on-quarter and INR 35 crore by Y-o-Y. And similarly, inventory is also down by INR 8 crores quarter-on-quarter and INR 4 crores by this Y-o-Y. And similarly, the interest, we had to pay more. Interest are down by INR 40 crores Q-on-Q, whereas it is INR 58 crores Y-o-Y. The reason of drastic down in the prices were that we were supposed to pay the this overdue crisis led to be paid. Some other crises were also regarding to get uninterrupted supply of from them, which is this COVID sector. And only as far that has gone up by INR 14 crores Q-O-Q on a net basis and on gross basis, it went up to INR 17 crores.

[Operator Instructions] Next question is from Santosh from Ashika Stock Broking.

Sir, 2 questions I had. First, at what are plants coming across the segment. One. And second thing, you just mentioned that the gross margins of the metering segment tend to be high. But when I look at the EBIT margin profile, it is the switchgears technique, which has the highest margins, right? So if the revenue mix would be seen more driven by metering segment, is there a possibility that the overall EBIT margins or EBITDA margins could be under pressure going forward?

Yes. High-margin from metering and switchgears is more or less same. There's hardly may be sometimes 1% lower or sometimes 1% less between that 2.

But when I look at the presentation, for the last 2 years, during 2019 and '20, it is a 300 to 400 bps close to almost differences both the segments. That's the reason I ask this question, sir.

so sometimes it depends on metering the product mix matters a lot. When the smart meter has come in, would be coming with the smart meter, the margins will go up. And it will match that with our margin in my opinion.

Yes, my earlier answer to the question was with regard to the margins of smart meter versus the regular electronic meters. But yes, what Mr. Gupta is saying, generally, the higher margins are from switchgear and from the meters. And -- but typically, they have almost a similar margin structure whereas sometimes depends on the product mix, especially meter has a much more variable margin depending on the product mix. So yes, as we are seeing forward, we -- so the overall margin will depend also on the product mix. But we are definitely seeing certain good volumes come back, at least on the consumer side. So maybe that can help out and there's a margin improvement. But yes, switchgear has typically the highest margin and then followed by the meters and others, which is almost similar. Coming to your first question, our meter right now, as a capacity utilization, if you see in the first quarter, it was very low, but typically, right now, we are probably around 60%, 65% on the metering side. The other ones are a little better, maybe around 75% or so. It, of course, depends on various factories. But generally, those are the levels, which we can say is or overall, if I have to put a single figure for the company, we are around maybe 70% of the overall levels.

And just for clarification, this numbers, I would put it for the month of August?