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

Good evening, everyone. On behalf of Elara Securities, we welcome you all for the Q1 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; along with him the new CFO, Mr. Manoj Dugar. We will begin the call with a brief overview by the management, followed by Q&A session. I'll now hand over the call to Gautam sir for his opening remarks. Over to you, sir.

Yes. Thank you, Harshit. Good evening, everyone, and thank you for joining us on this earning call of HPL Electric & Power to discuss the financial and operating performance for the first quarter of FY '22. At the outset, I hope all of you and your family and loved ones are healthy, safe and sound. To give you an update on our operations, post easing of second wave of COVID-19 in July 21, we are now witnessing healthy traction in Q2 FY '22 across all our segments and are confident of delivering robust performance going ahead. Strong pickup in meter dispatches and increase in demand in the consumer segment will augur well for the current financial year 2022. Our performance for the first quarter of FY '22 was heavily impacted by the lockdown and the COVID-19-led disruptions. Notwithstanding the lockdown and COVID-19 disruption, revenue, EBITDA and net profit in Q1 FY '22 would have been substantially higher. The company's revenue for the first quarter registered a growth of 34% year-on-year to INR 190 -- INR 129 crores as compared to the corresponding quarter last year, though on a lower base. EBITDA grew by 48% year-on-year to INR 9.8 crores during the quarter with an EBITDA margin of 7.6%. The cost reduction initiatives helped us to restrict the cash loss for the quarter below INR 6 crores despite facing this unprecedented disruption. During our segment-wise performance, the momentum gained in the metering business during Q4 FY '21 was halted by the second wave of COVID restrictions and lockdown, resulting in lower inspection and dispatches. The metering business registered a revenue of INR 49 crores in first quarter, thereby growing at 40% year-on-year as compared to Q1 FY '21. The inspection and inquiries have started gaining traction in the current quarter, and we believe this momentum to continue for the entire year. The consumer segment performance too remained muted during the first quarter due to the extended nationwide lockdown. However, the revenue on a year-on-year basis grew by 34% to INR 87 crores. As the economic conditions gradually improved post the easing of the lockdown, the consumer segment saw a decent uptick in Q2 FY '22. Now to give you an outlook for the rest of the financial year 2022. At present, we have a robust order book of INR 685 crores, which ensures strong revenue visibility for the year ahead. This is underpinned by the commencement of the execution of INR 372 crores order bagged for housing project in Andhra Pradesh for switchgear, wires and other related accessories. Additionally, the company has INR 100 crores plus smart meter orders, which is to be executed in the coming quarters. Furthermore, we are continuously evaluating and bidding for metering tenders floated or are in the pipeline and are quite optimistic in winning few orders in the near term. We expect to benefit from the huge unfolding of the smart meter opportunity with the central government earmarking INR 225 billion towards installation of INR 25 crore smart prepaid meters pan-India under the INR 3 lakh crore power distribution scheme. The central government's tabled Electricity Bill 2021 aims to de-license power distribution. This move is expected to bring a level playing field for the private entities, thereby empowering consumers to engage their preferred choice of service provider from multiple players. This competition will enable improvement in the distribution services, which is likely to benefit metering players, including HPL. We are aimed to tap the larger pie of the smart metering space as the industry is transforming from conventional meters to smart meters. We have a well-defined portfolio of electrical equipment catering to various market demand. The company is planning to enter in new products in the consumer segment. We are extremely positive on the long-term perspective of the consumer business, led by improving consumer sentiments due the rapid pace of nationwide vaccination drive, onset of festive season, continuous introduction of new products and new lineup for the festive season, improving business and economic activity backed by renewed government's focus towards the revival of the infrastructure sector. Our leverage and liquidity profile continues to remain comfortable, and we continue to maintain the low CapEx [ stance ] as we have desired capacity for the future growth. HPL is well prepared to surpass the short-term hurdles and looks forward to capitalize on the enormous potential that smart meter offers going ahead. On the consumer business front as well, we expect to see healthy traction over the coming months, led by a diverse product portfolio, trust on R&D, state-of-the-art technology, capacity and strong distribution base. On that positive 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 [ Harish Shah ] from HS Investments.

We understand that Q1 was a bit disrupted because of COVID-related things, but had the disruption has not been there, so can we replicate our Q1 performance -- Q4 performance? And was it [indiscernible] about the segment?

Yes, yes. Thank you, [ Harish ]. Had this disruption not been there, our initial target in Q1 was to replicate the Q4 performance. Now if you recall, the Q4 performance across all the segments was -- I would say pretty satisfying. And the sales as compared to the last 8 quarters was at the highest level. And we did see a good traction and dispatches to the utilities. So meter was roughly around INR 140 crores. But even otherwise, all the consumer products had seen a good high double-digit growth. Going forward, from that momentum, which picked up from Q2 and then Q3 and Q4, we finally saw some good business coming in. But when we were looking ahead, our initial plan internally was that looking at the strong momentum that we need to replicate the Q4 performance in Q1, which, of course, in the trade business sometimes becomes difficult because when one looks at the business cycle, so Q4 is normally the highest in Q1 is slightly weaker than that. But we were still looking at that. But unfortunately, we got hit by the lockdowns. So definitely, it's I would say, a one-off quarter where we saw the business fall down. But again, starting from July and then running into August, we are seeing the tractions coming back across all the lines, whether it is in the utility business as well as the consumer business.

Okay. A couple of follow-up questions on the same part. So how do you see the current inspection and the current dispatches traction? And like how is the traction in the utilities segment also. Can we -- so now can we expect these to improve from going ahead?

Yes, definitely because we see the -- in terms of inquiries, the inquiries are at a very good level, both for the conventional meters as well as the smart meters. And we have seen smart meter tenders coming out from a lot of state utilities as well as on the central government. So in terms of inquiry, which we have given, we would approximate that to be about more than INR 2,500 crores. That is at a pretty high level. There are a lot of tenders which are now getting into the finalization stage and HPL Electric is pretty well placed in many of them due -- we've asked a lot of the technical evaluations or in a couple of them, we are also [ L1 ]. So we do expect certain good business coming forward. Also, the order book is currently around INR 282 crores. So that is also -- I would say, at a decent level where we can expect a good revenue visibility at least in the next 4 to 5 months and also with certain -- with the dispatches and the inspections picking up from the utilities. So definitely, the July-August-September quarter is going to be a much better quarter. And then even going forward, we expect the same momentum to continue.

One last question, and I'll be back in the queue for the follow-up. Can you just guide us what would be the inspection and demand for the smart meters going ahead? I mean the order book?

Yes, I'll just say. Currently, if you look at our order book, I would say well over INR 100 crores is the smart meter component. But what is interesting is that if you look at the overall tenders, what are there and currently, what we have also participated, I can roughly estimate that the figure to be anywhere in excess of over INR 1,500 crores, but the tenders what we have participated in the smart meter segment. Now gradually, as you are aware, the technologies are changing and every utility, in fact, the way if you go to the news about 2 days back, the government has mandated every government department, the central government has mandated that that every government department has to use the prepaid smart meters. So there are -- so eventually, going forward, we will see a lot of shift in the usage pattern of how metering is done, we will see a lot of -- the absorption of smart meters is going to come in a big way. And so that is very encouraging for us. Apart from that, the government has provided INR 22,500 crores for smart meters. So even apart from what they are talking about those INR 25 crore meters coming in, so there are midterm targets, that has been set by the government on a quantity basis. The funding is also coming through. So overall, if you look at it and plus the INR 3 lakh crore, the package what they have given to the DISCOMs in that among the 3 major parts where the spending needs to happen to curtail the distribution losses, smart meter is one of the big components. So overall, the government's push on smart meters backed by the funds what they have put in, I think it's going to really help those smart meters come up in a big way. We are seeing single tenders by utilities going in excess of INR 200 crores to INR 400 crores. So in terms of overall business size, the meter industry is definitely seeing a very, very positive momentum. And only in the last 6 months, if you look at the way the tenders are coming out, that seems to be very positive. So over a period, like your question you asked me on the share of smart meter business, maybe it can be anywhere between 1/3 or even half of it. But as we go ahead, the -- it is about time that the smart meter component will become much larger and eventually the industry is going to change. Now there are 2 other things I would like to add. One, in lot of installations, especially in rural areas and others, the government will continue with the conventional metering. So even that is right now gaining a good traction. And for some time, at least in the near future, that will also continue, although the smart meters will really grew at a much faster pace. You must realize when the smart meters are -- the overall shift to smart meters is basically from a product-driven technology to a more of a solution driven. So the smart meter entails a complete, there is installation involved, there is integration with the software. So there are a lot of things which are add-on to that. And that also gives us a new dimension where a lot of revenue services, the new streams of revenue can be generated on the additional services going ahead. So it's going to be a shift in the way the revenues are going to come for -- in the metering segment. And also in terms of the margins where we would see a certain shift happening on a positive side, where a lot of additional services on maintenance and other things, which would keep accruing over the years. So that will also be a positive going forward here.

[Operator Instructions] Next question is from the line of [ Vinod Sabnis ] from Sabnis Investments.

I hope everybody is safe from COVID. I just have 2 questions. So the first one is, how are -- can you just give some guidance on the sustainable EBITDA margin? Because I believe this quarter was again an aberration. So the numbers for this quarter may not be extrapolated for the full year. So as like -- as for the current business scenario, what is the visibility you have on the EBITDA front?

Yes. Thank you. On a sustainable basis, the EBITDA margin would be anywhere between 12% to 13%. Of course, this looks at the way traditionally the business has been going. But when we look at certain opportunities in the smart meters, that could have an incremental effect on the smart meter EBIT margins on the overall way meter margins. And if that were to happen, the way things are in the couple of coming quarters, then we would definitely see the overall EBITDA of the company go well beyond 13% as well.

Okay. That's good to know. So just to add here, are we -- do we have any export agreements or contracts currently which may also be a bit high-margin business?

No, in exports, we are selling currently to about 42 countries, although our base is small. But if you look at our export broadly from last 2 years, we have started seeing a good growth coming in. You have to realize that when one approaches any international market, there is a lot of preparation that needs to happen. In terms of doing local testing there, even complying with the individual country standards and to make even certain adjustments on the products because of the local requirements. And that's is same for India, that anybody coming into India typically needs a BIS, it needs certain preparation. So we have been -- we have spent a lot of time in the past couple of years doing the preparations to enter a lot of countries. And thanks to our R&D and the technology what our products have. And overall, with the IEC standards, we are able to comply with that. So coming back to your question, we are supplying into a lot of distribution markets across Africa, across Middle East, Southeast Asia, primarily. And so we have been seeing certain good tractions over the last quarters. So last year, we have seen almost 70% growth, again, on a lower base. This year also, we see an equivalent amount of growth. So even our first quarter has been like this, the pending orders have been good. So they are typically not long-term contracts. These are orders which our teams are fetching for different products from various dealers and customers across the globe. So that's how it works. So our focus is on that. We are not doing any government or utility business in the overseas and it is basically focused on the private trade market, which I believe would be good. So exports have a, I would say, a fairly steady margin. The working capital requirements are much lower. The payments are secured and much better. So there are definitely certain advantages. And this also gives us a way to fill up our capacity in the market. So on a medium or a long-term basis, we see exports to be really growing. And overall, I think the momentum has picked up, which we see it going across this year and the next year despite the COVID disruptions.

Sir, next question is on the balance sheet aspect. So if you could just give us the current debt level on our books because we've been guiding, I believe, for the last few quarters that we are trying to reduce our debt and interest cost, which can give [indiscernible] line -- that if you could provide some more details on that?

Yes, our current net borrowing is around INR 499 crores. So although this still remains at a little higher level only. But if you look at the year-on-year basis, so there has been a reduction of almost INR 18 crores. And in fact, if you look at in the last year, almost 3 quarter ending, there have been a reduction from that level. So some movement, but overall, yes, we are aware, and we do expect the business to come back in the second quarter with this, although I don't see the debt going down on an immediate basis on an absolute number, but at least the business is expected to grow from here on with the same amount of debt. And maybe looking at more on the consumer products and the consumer business, where, of course, we have been successfully able to bring down the debtor days and do certain things. So we do have certain targets where we should be able to bring it down further, maybe streamline the operations in a better way and which could result in the debt coming down.

Next question is from the line of [indiscernible] from Sequent Investments.

My first question is what is the maximum revenue capacity that we can achieve with the existing capacity like for the coming 2 years. And I believe that we are not incurring any major CapEx. So are you -- you're also planning to add new products in the lighting segment. So could you quantify the amount spent on that?

Yes. Thank you, [indiscernible]. If you -- broadly, the CapEx has been done, including for the smart meters. So in terms of the capacity for us in terms of revenue, we can easily look at business of easily about maybe INR 1,500 crores plus in the next 2 to 3 years with the same amount of CapEx. So only the maintenance CapEx, mainly in the tools would keep continuing because these are more perishable items in an industrial manufacturing. But roughly, we do see a good upside on the sales front with the existing CapEx. Now coming to the lighting, if you look at the past 3 to 4 quarters, we have been continuously launching a lot of new products, mainly in the consumer segment. We also -- even during this first quarter, where the overall business was low and the lockdowns were there. Our teams have put in a lot of efforts to come out with newer products. So that is something what we will continue to do even in the next quarter. Right now, looking at the festive season and a lot of new products are coming out, which will give us an incremental sale. Now it may be a little difficult to define the exact revenue, what can come through this. But that's a -- because looking at the consumer pattern, looking at the way the lifestyles are, a lot of new products are coming, certain old products are getting phased out as well, which are being replaced. Yes, the one thing for sure that with these new products, we do expect a lot of incremental revenue, probably down the line, sometimes we would be able to quantify this in a better manner. Now this is on the consumer side. Now lighting, as you are aware, we are focused on a complete 360-degree of products and the consumer segment. So currently, we are just almost finishing up with the smart lighting, Smart City lighting for the Jalandhar city. So that has been, again, a very good order. Again, we have used the latest technologies there in terms of communication of the sweet lights and the thing. We are already well placed to get another 1 or 2 more orders on Smart City lighting. So that is, again, a lot of new products because each time, the earlier Smart City, what we did in Bhopal was sometimes maybe 3 years before. So the technologies are changing, our R&D is working to adopt those technologies. But the past reference is becoming a good parameter for us to get into future businesses. And now with 2 smart cities done and with us expecting 2 more orders. I think overall, the new products which are coming out will really help us here. And so there is a lot of focus not only on the lighting even on other products, but as the question pertains to lighting, we are well prepared and coming out with a lot of new products, especially for the festive season to gain the sales momentum for this.

So could you also share a broader picture of HPL's vision and strategies for the next 2, 3 years?

Yes. Our -- if you look at our business opportunities, the way I look at it, we are sitting on 2 very strong opportunities. One is the smart meter, the other is the consumer business. And I think with the kind of efforts and investments, what have already -- which HPL has already done, including building up the relevant manpower for each of the businesses, I think we are very well poised for that. So in terms of the strategy, what you are asking, I would say the strategy is very clear that we grow into -- in each of these segments in a big way. I think the overall opportunity in the market would be very supporting if you look at it in the next 3 to 5 years in each of that. Also, our strategy is that we need to do this -- the complete business in a more efficient manner. So we are looking to improve our balance sheet ratios, be it the EBITDA margin or even looking at reducing our interest cost or the debts on the book. So there are multiple targets what we have put in. Our teams have been further strengthened in the head office in the company. And so definitely, the targets are pretty clear. As a vision, we are always looking at newer technologies. So in terms of metering, lighting or the electrical fast-moving products, we are looking to be a single-stop shop for all the requirements, be it residential, industrial, even government infrastructure. So all the various segments, we should be able to cover in that. And we have been very well backward integrated. If you look at HPL Electric's profile, we have -- each of the things what we do, starting from our design development up to the component manufacturing, in a very well backward integrated and up to the final testing and then the sales, we have been having that focus. So even the newer products, what we are looking at, to come in HPL, would definitely have that kind of a focus. So we not be into manufacturing, but at least in terms of the design development and maintaining our edge because of the technology and the consistency and quality. So overall, when this is mixed up, we do see a great future with the products what we have and the segment what we are currently into.

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

Sir, basically, a couple of questions. One, in terms of working capital on each segment, could you highlight what is the situation currently and how things are changing with the lockdown and restrictions easing? Hello.

Yes, we can hear you. Please go ahead.

On the working cap -- I hope you got the question I was asking?

Yes. So on the net working capital basis, if you look at on a Y-o-Y basis, there has been a reduction of about 30 days. On a quarter-on-quarter basis, the net working capital has come down by 17 days. So overall, we have seen certain -- there's definitely an improvement in the data position on a year-on-year basis, also on a quarter-on-quarter basis. So certain improvements have been there, though although this quarter -- the first quarter is not a very indicative, it's not the best reference you can take out on this because of the low sales due to the lockdowns. But overall, if you look at the March and then, let's say, the end of second quarter, we again should be back on a much better sales and also on a better net working capital.

Okay. Fair enough, sir. Sir, secondly, in terms of segment, you did highlight around the opportunity, could you give some more highlight on the management bandwidth and strategy is what we are building in to build a team to achieve the goals which we have set forth maybe 3 years or 5 years down the line going forward? That's my second question.

Yes. If you look at these 2 businesses, like if you look at the metering business and the consumer business, so we have -- ultimately there, we have very senior professionals across all functions whether it is R&D, sales, manufacturing, even the support functions on IT, HR, everything. So there is -- I think, as a company, we do have very senior people across all the functions. And in terms of these 2 businesses, more specifically, the skill sets are very different. So the manpower, what we have from -- on the metering side are normally all either from big metering companies or even people who have been working with us with special focus on meters. Even if you look at the other products, the consumer products, if you look at the wire and cable industry, like people, what we have or lighting and switchgear, they are again very different skill sets in terms of sales and the manufacturing. So each of the manpower, what we have, senior people, are all from the relevant industries. So in terms of management bandwidth, I would say, on an operational level, the teams are very well set. In fact, in the last 2 years, we have reviewed the teams even on the -- especially on the consumer side, we have seen and we have seen the results post the first log down where a good double-digit growth has been coming quarter-on-quarter. So even going forward, I would say the targets what we have for the next 2 to 3 years where we can look at, at least the sales of 1,400, 1,500 [indiscernible] happening. I think the teams are pretty well set on that. We do have a lot of younger people who have joined the teams, lot of professionals who have joined in. And we are continuously looking at opportunities and reviewing our own strengths and resources for that.

So that's really helpful, sir. And finally, sir, I missed a number on the cash balance. Can you provide the cash balance for the quarter and the debt level?

The cash balance is INR 72 crores. And the net borrowing is INR 499.

And sir, last question from my end. In terms of -- so when you look at the steep rise in commodity prices, so do we have any legacy orders which are fixed price pending in the order book? And what will be that quantum be? That is my last question.

So normally, if you look at other than the meters, the orders are normally taken on a month-to-month basis with a visibility of normally 3 to 4 weeks. So I would say, if you look at our price increases, if we were to go from mid-2020, the wire and cables are seen maybe almost 7 to 10x the prices would have gone up based on the movement of copper. So again, whatever prices are -- the orders are coming, typically, they are passed on to the consumer, maybe with a lag of 30 days. Similarly, we have had 2 increases in the switchgear business. So I would say most of the costs, which have been there, have been fairly covered up. Lighting has seen a very different because normally, we have seen more on the metals than other things, but other than the plastic, which is not so much used in that. But still, we have seen 2 increases happen in the LED prices also. So I do not see any major lag in that. In meters, yes, certain parts have gone up or something. But overall, some things like the newer tenders, which we put in, in the second half of 2020, there was definitely an indication of the prices going up. So some things we have to build in more on anticipation as well. And -- but this is it. So I don't see any major impact in margins based on the prices going up because whatever increases have been happening, they have been continuously being passed on, yes.

Next question is from the line of [ Kamal Jeet ], an individual investor.

I have a couple of questions. One question is what is the plant utilization during the quarter and July month?

Sorry, you asked for the first quarter?

Yes. Yes, quarter 1.

I would say -- as I said earlier, the first quarter is not an indicative of the normal working. So probably it could be at 30%, 40% utilization because you must realize that although the markets were closed for almost half of April and then almost entire May, the factories were still functioning to some extent. So knowing that we didn't want to -- other than filling up the shortages or some very urgent orders, normal manufacturing was not happening because there was a shortage of labor, even the supply chain had broken down in many of the factories. So the capacity was pretty at a lower level. So roughly, it can be somewhere around 30% to 40%.

And in July month, it is improved or it is still...