KEC International Limited (KEC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the KEC International Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Vimal Kejriwal. Thank you, and over to you, Mr. Vimal Kejriwal.

Thank you. Good morning. I welcome you all to the Q1 earnings call of KEC. I hope that you and your family are safe and healthy. Let me start with a brief update on operations during this pandemic. I am pleased to inform you that all our manufacturing units are now operating at pre-COVID levels of production, and work has resumed at almost all our 220-plus project sites across businesses barring 1 or 2 due to localized lockdowns. With concerted efforts in the recent months, our labor strength at sites has increased substantially. We are now operating with over 80% of our workforce from the earlier level of 50% in the early stages of lockdown. Safeguarding the health and well-being of the direct and contractual employees has always been the foremost priority for us. We took several steps on this front at the manufacturing units and project sites such as deploying rapid action task force at emergency response plans, deploying COVID marshals across project sites for stricter compliance of SOPs, daily tracking of safety norms through a digital safety app Raksha, developed in-house, conducting thermal scanning of employees at regular intervals daily, providing PPEs to all workmen, developing isolation centers for new workers who are being inducted at the sites, regular sanitization of workplace, et cetera, among others. The company under the aegis of RPA foundation was prompt to lend support to help the migrant workers, daily wage earners and the lesser privileged communities, which were deeply impacted by the crisis. The company prepared and distributed over 75,000 food packets through its staff canteen at its plant location in Jaipur, Jabalpur and Nagpur. The company also donated protective gear to health care professionals and police personnel in addition to providing corona sample collection booths through administration in Nagpur, Jaipur and Aurangabad. I would now like to brief you about the company's performance during Q1 FY '21. The execution ramp-up across all project sites is reflected in the month-on-month increase in revenues across businesses. The month of April '20 was the most impacted due to the pandemic. However, revenues of May '20 and June '20 have been better marginally as compared to the corresponding months of last year. We have started deploying a number of mechanization, automation and digitalization initiatives across projects to improve productivity and quality of execution with reduced manpower availability. We have achieved revenues of INR 2,200 crores for the quarter vis-à-vis INR 2,400 crores in the Q1 last year. Despite the significant issues faced in the early part of Q1, we have been able to deliver an EBITDA margin of 8.8% for the quarter. The margins have been impacted largely on account of cost overruns caused by slowdown in the execution of EPC projects in Brazil due to localized restrictions owing to COVID-19 and also low capacity utilization during the initial stages of lockdown. We have been able to achieve PBT and PAT margins at 4.4% and 3.2%, respectively. Our YTD order inflows stand at INR 1,931 crores, including the recently released order inflow of INR 1,192 crores. The orders have been largely contributed by T&D business. Order intake shows a growth of 73% over YTD last year. We have a strong order book of INR 19,682 crores as on 30th June. Additionally, we have an L1 position of approximately INR 5,000 crores, majorly from our international T&D business. Now coming to the specific businesses, our core T&D business has witnessed a progressive ramp-up across all project sites in domestic as well as international locations. Most of the international projects are operating near pre-COVID level productivity, except in SAE Brazil, where the pandemic spread is quite widespread in some of the provinces where our projects are located. This has resulted in a slowdown in the execution of the 3 transmission line projects. Further, the steep depreciation of the Brazilian reals over the last year has also impacted the revenues post translation. We have also commenced work on a new EPC project in Brazil. During the quarter, revenues of SAARC were impacted due to localized lockdowns and closure of borders between India and Bangladesh, Nepal. As far as the Essel project is concerned, we understand that the lenders have already clinched a deal with another party and is awaiting final approval from CERC, which is expected very shortly. Despite the lockdown, our Railway business has been successful in maintaining revenues at the same level as the corresponding quarter. The business clocked revenues in excess of INR 500 crores for the quarter demonstrating a fast and consistent ramp-up across project sites over the last 3 months. I'm also happy to share that in line with our growth strategy, the Railway business in addition to its existing offerings of conventional OHE, composite and civil works has started bidding in new technologically enabled areas in metros, such as OHE, third rail, power supply, ballastless tracks, signaling and telecommunication, et cetera. Our Civil business has registered a robust growth in revenues backed by execution of the 3 metro projects. The business has also recently secured its second order from Kochi Metro. The robust order book of over INR 2,600 crores, along with the smooth ramp-up of the metro projects, reaffirm our confidence of this business being one of the key growth drivers for us going forward. We are very pleased with the physical progress secured in all our metro civil projects. The business continues to bid for opportunities in warehouses, defense, water pipelines, urban infra and select industrial and residential segments. Cable business has witnessed a muted quarter due to lower order intake and loss of production dispatches due to COVID-19. Post commercialization of 3 new products for railways last year, the business continues its strategic focus on development of new products. The business plans to commercialize additional products in FY '21 for railways as well as for exports in addition to augmenting capacities for railway contact and catenary conductors. We expect a good growth in revenues of the business through these products. The execution of the existing orders, both in the solar and smart infra, are on track. Additionally, we are L1 in a defense package in the smart infra business. Coming to the financial position. Our net debt as on 30th June 2020 stands at INR 2,388 crores, which is within our targeted average borrowing levels of INR 2,500 crores for the year. Our concerted efforts in bringing down the interest costs is reflected in the consistent improvement in the interest costs, both in absolute terms as well as percentage to sales. We have refinanced, repaid some of our high-cost debt and replaced them with lower-cost debt. Further, we continued to maintain a foreign currency borrowing mix of 60%. These steps have resulted in the interest cost coming down as a percentage of sales to 3% vis-à-vis 3.3% last year and a reduction of 17% in absolute terms. The tender -- overall tender pipeline continues to remain strong across most of the businesses. However, quite a few tenders, especially in the domestic market, have been postponed. It is only a matter of time that these tenders are bid out and awarded. In case of railways, the tenders, which were postponed in early Q1, have already been bid out, and we expect them to be awarded by Q2, Q3. In case of domestic T&D, the issue related to the restriction on neighboring countries by the government has been clarified and necessary amendments in the bidding processes have just been issued for the bids submitted earlier for the Green Energy Corridor Phase 2. These bids -- the revised bidding process is expected to conclude in Q3 now. We continue to see significant traction in tendering activities internationally, especially in Middle East and Africa. Our recently acquired transmission tower manufacturing facility in Dubai is expected to start commercial production towards the end of this quarter. We've already received approvals from some of the international clients, and the supplies are expected to commence in the near future. With the uptick in tendering activity across the MENA region, we are well placed to leverage this facility and reestablish the MENA region as a significant driver for growth. With the ramp-up in almost all the project sites across businesses and an order book plus L1 of over INR 24,500 crores, we are confident of delivering a good performance in the balance 3 quarters of this financial year. Thank you very much. I'm happy to take your questions now. Thank you.

[Operator Instructions] We take the first question from the line of Ravi Swaminathan from Spark Capital.

My first question is -- sir, with respect to the order pipeline in terms of both domestic and international markets and power T&D and also the Railway business, how it is currently vis-à-vis how it was last year? If you can give a broad overview. You had mentioned that some of the railway orders were postponed in Q1 and they are back. So just wanted to get a sense on the pipeline, magnitude of orders which are there in the pipeline.

So the Railway business has got, I'll say, a fairly long pipeline, okay? As of today, if I have to look at it in the next 1 month, I have to bid around INR 10,000 crores of orders -- tenders, sorry, apart from what we have already bid. Unfortunately, in Q1, most of the tenders got postponed, but a large part of them have already been bid. I think we have got almost 20, 25 tenders which have been bid and which are waiting for the opening of the results and award. So as far as railways are concerned, I think we are pretty happy with what is opening on the tender pipeline, okay? Awards are getting a bit delayed, but I think there's a huge pipeline, both in conventional railway as well as in metro-related railway projects like track laying, signaling, et cetera. Coming to T&D, on the international front, I think there is a large pipeline, especially in MENA, parts of Far East and also Bangladesh, okay? India T&D is a matter of concern as of today because all the Green Energy Corridor, which we had talked about last time, which we had already bid, we had bid almost having 40 projects in Q1, all of them will have to be rebid now post the government restrictions on neighboring countries, et cetera, because the Ministry of Power has just issued a clarification on how they will treat all that. Based on that, Power Grid has just come out with a clarification, I think, yesterday or today or day before on how all this have to be -- how the bids have to be restructured and what needs to be taken into account, et cetera. So our view is that the bids are right now due in this month itself, August. And post that, the TBCB bids will happen, so which is why I said that, hopefully, we should see some action in Q2. If not in Q2, then at least in Q3 we should see most of these tenders getting awarded post this clarification. SEBs are a little bit slow, I'd say, I think. There have been some tenders which have been bid out, a couple of them have been awarded, but not too much action. So India T&D is, I would say, a bit slow. Rest of all other places, I think we are pretty happy with the tender pipeline, okay?

Got it, sir. And with respect to the, say, payment scenario, et cetera, obviously, first couple of months post lockdown, it might have got impacted. Has it got restored to almost normalcy with respect to guys like SEBs, et cetera? I mean -- or are they still in delay mode? If you can give an idea.

So Ravi, we have not seen any delay on part of the government payments, okay? To me -- that is why when you look at my borrowing figures, et cetera. And in fact, my collection for this quarter has been higher than the last quarter in spite of a 9% de-growth in revenue. So we have got -- to me, we have got 0 complaints on the collection front. Initially, there were some hiccups on the private sector, but I think now we are very happy even with the way the private sector has chipped in, both on the civil side and also in our TBCB where we have won a couple of private clients. So I think we are overall very happy. Obviously, April, we -- initially, we had some hiccups because the clients had to get used to digital invoicing, digital payments, et cetera, where we had issued checks, physical papers. So it did take 1 or 2 weeks for people to get used to how to handle digital papers and invoices and acceptance -- material acceptance reports, et cetera. But now I think the process is completely streamlined, and I think we are pretty happy with what is happening on the collection front. Not only in India, but even globally also we have seen a lot of monies coming in, specifically from Middle East, including Saudi, Dubai and also some of African countries. So I think, overall, we are pretty happy with the cash flows, okay?

The next question is from the line of Renu Baid from IIFL.

Congratulation for the good performance. I have 3 questions. First, if you can help us just put through some numbers on how was the overall domestic and international T&D sales split across in the current quarter. Though the overall transmission sales itself declined by 7% to -- 8% to 9%, how was the split between domestic and international?

More or less, the split is even. It's not a very different number. I think domestic went down slightly higher than international, okay? I think -- I'm not exactly aware, but I think the domestic was around 10%, 11%, and international was 6%, 7%. So not very different.

Sure. Sir, second question would be on the order inflow side. On the previous question, you did give some input. Would it be possible for you to quantify at least the big bucket or pipeline in terms of orders coming in from the Railway segment, civil as well as T&D? And to add to that, railways, as we have seen already last month, railway had issued a circular...

[Operator Instructions]

Yes. Am I audible now?

Yes, better.

Yes. So the question is, if you can quantify the order inflow pipeline across key segments in value terms. And specifically on the Railway segment, recently, there was a circular which was moved internally across key zonal offices to put most of the project awards in abeyance on the railway, except for certain safety-related jobs. So what would be the impact of this in terms of project awards? So optically, the pipeline might look healthy, tendering activity might be on, but do you see the project awards from Indian Railways could take a setback or a significant pushdown?

So coming to your first question, very difficult to exactly quantify, but as far as I remember, the total bids which we have put in till now is roughly around -- overall business is around INR 25,000 crores, INR 30,000 crores, which are waiting opening or award, okay? And another INR 30,000 crores are bids which we have to put in, in the next 2 months, broad numbers across all our businesses. Coming specifically to railways, I have seen that circular. And post that circular, we have had discussions with all our large clients, which would include RVNL, core and all other zonal railways, et cetera. Their view is that notwithstanding what has been written in the circular, and if you also hear what the Railway Minister has been talking about, saying -- even yesterday, he said that instead of 2024, we will start the Delhi-Mumbai in 2023 and all that. The amount of push we are seeing on execution of railway projects and also on the awards is continuing in the similar manner as before. We have had specific discussions with the railway authorities, people who matter and people who are, let's say, awarding the projects, and all of them have said that there will be no impact. This project would -- this circular would basically impact many things, which are probably, let's say, beautification of stations, a lot of other things which are nice to have, but not necessary. So that is the feeling which we are getting. And also, clearly, what is also happening is that whatever bids we are doing and whatever bids are due, we are not seeing postponement of it. There are, at least, I'll say, 5 or 6 large bids for electrification, which are happening in the last -- next one month. There are at least, I think, 5 or 6 bids for composite and system projects. So clearly, we are not seeing any slackness in the tender pipeline, but I will still repeat that awards of projects have not been happening, okay? L1s, they are now -- they have now started opening tenders and negotiations or discussions have been starting on time lines, et cetera. But I do hope that from this month onwards, which is what we are talking with our team in August itself, that awards should start happening in railways. But to repeat, there is no slackness on the tender pipeline, okay?

Right. And sir, the last follow-up to this would be broadly for the current financial year, given the way scenario is domestically in India and international markets, what would be your likely guidance for order inflow for FY '20?

Honestly, very difficult to give today. Honestly, I will not be able to give any guidance -- cannot ask me but -- order intake or revenue because we'll have to still wait and see. As I said, railways, so much tendering is happening. Let's wait and see how the order awards and all that happen, okay? But as I said earlier -- in my earlier part of the speech, we have almost INR 24,000 crores of order book plus L1. So I think we are comfortable for at least the next 18 months, even if we don't get any orders. But I think considering the huge pipeline which we have, I'm very confident that ordering will start happening. But as of today, honestly, it will be very premature for us to talk about numbers.

The next question is from the line of Prithvi Raj from Unifi Capital.

My questions have been answered.

The next question is from the line of Varun Ginodia from AMBIT Capital.

Congratulations for a good set of results. My question is a follow-up on Green Energy Corridors. Given they are going to go for rebidding now, do you see any impact on your margins? Because the cost for solar modules and solar panels are going to increase for the generators, so that might impact your margins per se. So do you see any change in margin profile for Green Energy Corridor packages going forward?

So Varun, I have got nothing to do with the solar module price increase and all that. These are -- what we are bidding is for simple transmission lines, okay, and substations, which are being bid out as TBCB by REC, okay? So we have got nothing to do with -- in fact, the rebid is good for all of us in a way, although it has postponed the tender pipeline -- order intake because when we had quoted and these are all normally when we quote for TBCB, even in Power Grid, they are fixed price contracts, okay, unlike normal Power Grid contracts where there are -- there is a price escalation, et cetera. So since we had quoted and now it's almost, I think, 3 months when we quoted, the prices of all the metals and all have gone up significantly. So hopefully, the rebate will at least help us in maintaining margins, which would have been under pressure with the metal price hike, okay? Although we had -- yes, cost profile -- cost profile for the bids will change. I don't see how the solar market will impact these bids.

Okay. So you don't see any impact on energy corridor packages or on the margin profile for EPC business from higher prices for solar panels or modules.

They are 2 different people. One is a person who is putting up the solar plant, which would be bid out and bring, let's say, people like ReNew or Azure or whoever it is, okay? And this part is what is being run by the transmission service provider, which would be a Power Grid or an Adani or a Sterlite or whoever it may be, okay? They are 2 different set of people, that cost lines are very, very different, okay?

Okay. No, my point was the higher cost at the generator level won't flow down to the bottom of the ecosystem back. You don't see that happening, right? Because for them, the cost per putting up a plant is going to go up if there are duties being imposed.

Varun, it may impact the solar EPC cost, not the transmission EPC cost, okay?

Okay. Got it, sir. And the second question, sir, your net debt is steady quarter-on-quarter. Is there some amount of this which is being paid from receivables during 4Q? So if you adjust for that, net debt could have been higher on a like-to-like basis. So is there any of that sort playing out in 1Q, wherein some payments from 4Q you got in 1Q and because of that net debt is steady despite higher working capital in 1Q?

Rajeev, do you want to answer this?

Vimal, I don't think that anything of that sort has happened, rather, in fact, something from the Q4 has really -- we have got collection in the Q1, whatever was the pending this thing. So that has helped us to maintain our working capital, and there is a very focused attention on the working capital and collection from the customer. And that is really helping us to maintain our net debt. And also, there is a constant, let's say, focus on reducing the cost of borrowing. So that is helping us reduce the interest cost for the company.

The next question is from the line of Renjith Sivaram from ICICI Securities.

Sir, congrats on good set of numbers given the overall challenges. Sir, if we look at the new course of action, the mode of anti-China, which is building up, so we also have some tie-ups with Chinese players for EPC contracts. So what risk do you see in terms of such agreements? Will you have to revisit those things? So would that impact our future prospects?

So Renjith, we do have some tie-ups with Chinese, okay, not significant. But our understanding with all our clients has been that on all the existing contracts, which are already in place, there should not be any impact, okay? Coming to the future part of it, there would be some realignment. As I said, the Power Grid and all have reissued tenders. So even if we had tie-ups with Chinese, et cetera, for some of the projects, those projects -- those tie-ups will now have to be revisited. Any case, India T&D right now is not looking very great. There could be some marginal tie-up -- impact, but let me also clarify that our tie-ups have basically been on the substation front with some of the GIS suppliers, but we have also been tying up with other people, including into Korea and Japan and all that. So it's a question of realigning priorities, which will happen with all the players because apart from the 3 large OEM manufacturers who have the technology and who are also bidding for the GIS contracts in India, all others were basically Chinese, Koreans and Japanese. So since there will be a fresh bidding, whenever we have a Chinese tie-up, and I think we did have with 1 or 2 tenders, we will realign them with other people. So I don't foresee a significant impact, that could be 1 or 2 tenders here and there, but nothing major, nothing to worry about as such.

Okay. And sir, was there any impact of ForEx in the quarter in terms of ForEx gains or losses?

Rajeev, you want to answer this?

Yes. The ForEx gain during the quarter was not really significant. It was about INR 10 crore, INR 12 crores during the quarter only.

Okay. And sir, just on the execution front, was there any good amount of projects that's there in the threshold limit and that has moved the threshold back helped us to show a better-than-expected execution? Or do you see that it's an overall good performance?

No. I think it's an overall good performance. So it is not some specific projects. But I think, as I said earlier, we are pretty happy with our metro -- civil metro execution, which is moving very fast. Those are large projects and revenues are pretty good from them. Also, international is doing very well, okay, both in UAE as well as in Far East has picked up. So I think we are -- overall, I think it has been -- generally, everywhere it has been good. So I'll not pick up specific projects. No.

The next question is from the line of Swarnim Maheshwari from Edelweiss Securities.

Two sort of questions. First is, you did mention about deploying various mechanization and digitalization initiatives to improve the productivity. I mean if you can just throw some light over here what exactly are you trying to do? And some sort of a cost-benefit analysis over here, are you trying to reduce our workforce? How is that going to pan out? What are we exactly trying to do? That's the first question.

Swarnim, very difficult to give a number today, okay? So mechanization and automation, et cetera, we had been pushing for a long time. We had been successful to an extent. But generally, there has been a lot of resistance at the field level, et cetera, [Foreign Language]. But now that when we had a scenario where the workforce went down from 30,000 to 15,000, most of the people then realized that we will have to do mechanization. So in a way, it was sort of a god-sent opportunity, so unfortunate, where we were able to push through a lot of mechanization effort and also which was acceptable with the client. See, the problem what I have seen in many cases is that if I want to use a ready-mix concrete, I've seen railway clients coming back and saying, [Foreign Language], I want to check at the site. So there was also a lot of resistance, not only from our side, but also from the client side on many items of mechanization, et cetera, which because of this COVID situation with a lot of manpower going down and logistic challenges and all that, we suddenly found that both our site people as well as the client were becoming very happy with whatever could give them more output. So mechanization is happening at the project site. We are also pushing a lot of automation and digitalization at the factories, et cetera. How do we -- and also, specifically on the safety side, like, we are putting some apps whereby social distancing can be measured. If you're not wearing PPEs, you can get measured. We are putting in some robotic warnings on tracks, et cetera. So if a train is coming, there's a robotic warning, et cetera, so that the people can move away from the tracks. A lot of work is happening on that. On the Railway side, on the foundation, et cetera, even on the overhead wiring, a lot of mechanization is taking place. Other thing what we have to keep in mind is, most of the metro railway civil projects give you an advance for CapEx, interest-free advance. So some of our capital expenditure we are going to finance through an interest-free loan for 2 to 3 years by these people. And that will also help us in meeting our targets. Numbers and savings is very difficult, but I think our target is that we do try to improve productivity at least by 20%. That's the target which we are looking at.

Sorry, so that's 20% -- I mean, the target that we're looking at, which is 20% on the subcontracting cost, is it?

It is not only on subcontracting costs, it could be also other things, like, what it would also do is fast track projects. If I have to do a foundation, manually, it may take me 3 days. If I do it through an excavator or a Bobcat, it may be done in 1 day. So these costs will also, ultimately, translate into faster execution also. It's not just labor costs, it would also be a lot of other related overhead and other costs also.

Yes. So it will actually result into speedier execution?

Absolutely, absolutely.

Right. Sir, the second question is on SAE. So you did mention that there are still mass labor constraints over there in Brazil. So how is the situation over there? Like, in India and other parts of the geographies, we have seen some execution ramp-up already starting to be in place from July onwards. But how is the situation over there in SAE?

So execution is happening. We have got, as I said, 3 old projects, which were under execution, and a fourth new project has just started, okay? So execution is improving. In fact, one of them we should be completing in the next 2 months. But the problem what is happening there is we are running into contractual cost overruns, et cetera, because, unfortunately, Brazil has not declared sort of a national force majeure like what India and many other countries have done. So because of it, the developers are not getting a time extension and because of it, we have to fight with them on giving time extensions and cost overruns, et cetera. Unfortunately, the Brazil government has sort of closed their eyes and said, no, there's no problem, so no contracts shall be touched because of that. So because of that, whatever costs we incurred during this quarter on account of COVID and the extra costs have all been put into the quarter. We have made claims with the clients and all that. As and when the claims come, they'll start getting reflected in the books. But because contractually, there's a problem in that country, we have booked all the costs.

Sir, will it be a fair assessment that 160 bps of decline in margins for the quarter, of course, some part of it is because of the negative uplift, but the other reason would be because of this these overruns which happened -- contractual cost overruns which happened in SAE?

I'll say you're largely right. A large part of the contractual decline would be on account of SAE. And so whatever else happened in India and all that with whatever cost savings we talked about and productivity improvement, a large part of the India margins have been recovered. Yes.

The next question is from the line of Parikshit Kandpal from HDFC Securities.

Sir, just on the civil space, so we have almost INR 2,600 crores, INR 2,700 crores of order book. So you highlighted some of the opportunities in metro segment and residential buildings. So besides that, this being a very highly scalable opportunity in the segment side, so what are the other segments you are looking to ramp up to basically counterbalance some of the segments where the ordering is not so encouraging?

So Parikshit, what we have -- if you look at the recent announcements which we had, one is we got our first order in the warehousing space. So clearly, with COVID and all that, we are clearly seeing that the logistics area is one area where a lot of ordering would happen. The second piece we are very clearly seeing is defense/civil. So we are focusing on defense/civil. That's the second piece. On residential, we are looking at some very select clients, okay? So that is the third piece. Fourth is on the metro rail/civil, like we just got one Kochi Metro order, extension of what we were doing. We have bid for some of the other projects. So I think those are the areas where we are looking. And sorry, last one is water pipelines. There are large projects now coming for water system improvement, basically pipelines from the source of the water till outside the city tanks, et cetera. So those are large projects which are coming up in Orissa, Gujarat, Rajasthan, MP. So those are the other areas which we are looking at in civil.

But can this order book double -- is there any internal target of doubling this or, say, increasing it to 30% of the shares in the next 2 years, 3 years? Because this is one segment which can really have a very huge scalability from the Indian context?

I completely agree with you. We had a bad last year. This year, we should have at least 300% to 400% increase in the revenue for civil as compared to last year. Order book, we are already at INR 2,600 crores. So that's almost, I'll say, 17%, 18% of our -- I'd say, 14% of the order book. Clearly, we are looking at civil order book going up. But I think today, the problem what I'm seeing is that the industrial order intakes have slowed down. And residential, we -- although we are bidding for very select ones, we are very careful. So the large pieces would come from your metro/civil, the pipelines. And also, there are very large projects coming up in oil and gas now, so if you look at the HURL refinery and the other pieces. So I think one area where we've just started bidding is oil and gas, and we are seeing large amounts of monies being spent by the public sector refineries as well as the gas companies, et cetera, on the oil and gas infrastructure. That's going to be a large area going forward for us.

Okay. Just on the Green Energy Corridor, sir, you said that, that could be the -- this rebidding may also -- you will have to realign the supply chain of the solar module within India, large alliance with the domestic manufacturing. So your TBCB ordering would also be dependent on how quickly the generation companies get this supply chain in order. So do you think any chance though -- even if this ordering happens, say, in Q2 or Q3, do you think there is enough capacity in India which could basically help you in being -- for getting the TBCB ordering on time lines of 2Q and 3Q?

Parikshit, what is happening is that CERC and CEA have taken a very clear-cut call that irrespective of what happens on the solar side, we would like the lines to be ready. So if you look at these tenders, which have been issued, most of them have a completion time line of 12 to 13 months, okay? So I think there's a very clear-cut call within the government, saying, we need to have the transmission system, which is lines as well as substations ready irrespective of what is happening on the solar side or the capacity of modules or other things, et cetera, okay? So I'm very confident that once this tendering happens, the execution would happen pretty quickly.

Okay. Just lastly, on the cost reduction in this quarter. So what was -- what part of this is sustainable and what will come back, both on the fixed costs and the variable side?

To me, what is sustainable would be whatever we are doing on the labor productivity increase through the mechanization, et cetera. That is clearly a long-term one. Some part would be on the administrative and SG&A or whatever you want to call it because with the last 4.5, 5 months of work from home, we are also looking at seeing that a large part of the workforce, let's say, engineering team and other teams which can now operate from home, so a lot of travel costs, a lot of office accommodation costs and other costs related to that could probably become a long-term sustainable. Third sustainable cost reduction would be on the interest side, where we have taken very sharp targets and all, and that is happening very well. So I think these are 3 areas where we clearly see that cost reduction would be sustainable.

[Operator Instructions] The next question is from the line of Bhoomika Nair from IDFC Securities.

Congratulations for a good set of numbers in a challenging environment. Sir, just you spoke about civil, you spoke about the Green Energy Corridor. I just wanted to get some better color on the international order intake, where I think T&D ordering can be quite decent. Can you please just elaborate on that aspect?

So as far as international T&D is concerned, right now, we are seeing a good traction, first of all, and surprising to us is the Middle East, Saudi, Dubai, Abu Dhabi, Oman, 4 countries, where we are clearly seeing a lot of tenders, which have been bid or will be bid now. So that is one part of it. Africa -- as far in North Africa, we are seeing Morocco. Morocco is a new country where we have just been L1 in a couple of projects. So Morocco has come out with huge transmission and substation plants. And then West Africa. These are the 3 regions which we see. Fourth one coming closer home is on Bangladesh, where we are seeing a large number of tenders. Most of them are financed by Government of India, okay? So they are going ahead. And fifth one is Thailand, Malaysia and now Philippines. I think these are the areas where we are seeing quite a large traction in the -- either the tenders which we have quoted or a tender pipeline. In fact, I will say to an extent that the amount of L1 -- if you look at our L1, which we talked about, close to INR 5,000 crores, a large part of it is -- almost everything is from the international T&D market.

Got it, sir. So basically, sir, why -- I mean I understand in this challenging environment, we don't want to give a guidance in terms of the intake because you don't know about the finalization. Broadly, we're seeing decent intake trajectory in terms of international T&D, the domestic green energy-related orders or civil and railways. Would that be a fair assessment in a sense that will drive our order intake for the current year?

So you're right. I think the -- let me put it this way. The largest orders should come in from railways, then there would be international T&D, civil, then between SAARC and India. That would be the size. Even in SAE, we have got L1 for a long time. These are projects which are from Sterlite, which are not yet formally converted into orders, although we have LoAs and all that. So that could be another number. But size-wise, I think if you look at it, it should start that way, railways and international and civil, South Asia, et cetera.

Got it. Sir, here, if you can also throw some color on competition. Because with a few areas of ordering activity, are we seeing an increased level of competition? And how that potentially can impact both working capital and margin? And my last would also be, you spoke earlier about mechanization and automation. Does that only help in terms of faster execution? Or is there some long-term sustainable cost savings? And -- that can help.

So if you look at mechanization, there would definitely be long-term cost savings. No question about it. We are very clear on that, that it's not just faster execution, there would clearly be cost savings because it's also related to quality, it's related to time. Now with COVID-19 happening, the entire manner in which you keep labor, their housing, their protection, the health measures and all that, huge amount of cost saves would happen through mechanization. Very, very clear, sustainable cost savings will be there. I'm very clear on that part. Sorry, I lost your first 2 questions, what were they?

Sir, on competition.

Yes. Okay. Competition, I think, I'll say, on the initial part of civil and railways, we did see competition going up because of, I'll say, the slowdown in NHAI ordering. Now that NHAI has started giving orders or tendering and all that, many of the civil contractors who are primarily road contractors who have tried to move into railways, et cetera, I think that we are now seeing coming out, okay, going back to the roles rather than stepping into railways. As far as the other places are concerned, I think the impact of COVID has been pretty significant on many of the smaller players. So overall, I think we are not seeing any major increase in competition and correspondingly, no major impact on margins.

The next question is from the line of Ajinkya Bhat from Macquarie.

Sir, my first question is regarding your working capital. Your presentation mentions 132 days of working capital versus March 2020 presentation mentioning 119 days. Is it predominantly because of manufacturing activity that progressed while project sites were still under lockdown during 1Q? And could you throw some light on that, whether this working capital can then come down in the coming quarters as you dispatch and supply and install all these manufactured structures at the project sites?

So Ajinkya, you're right. First part is completely right that this is because of the manufacturing impact. On the second part, what has happened is that the first month, we hardly had any production, any procurement or anything. So if you look at the breakup between debt and acceptances, acceptances went down significantly because our entire procurement went down, okay, which is the basic impact which you see on the net working capital, et cetera, because the creditors have come down, because the entire procurement activity has got postponed. So the impact is not because of receivables, but the impact is more on the payable side, where the overall payables came down because the level of activity has gone down, okay? And we are very clear that the numbers will come back to what we have been talking earlier.

Okay. Okay. And sir, second question is on the raw material costs, obviously, compared to 4Q FY '20 year operating expenses as a percentage of sales have come down from 72% in 4Q to about 69% in 1Q. So are you seeing any benefit on the raw material costs over there? Do you think that they will stay benign in the coming few quarters?

So last quarter had been benign. July onwards, the prices have started going up. The steel companies, which is basically large line raw material for us, have been trying to use all sorts of measures to try to push the prices up, whether it is import control or countervailing duties or whatever else, the antidumping duties, et cetera. Every month, they do try to push it up, then it again comes down because there's not much of demand. So we do see some attempt happening there. Maybe Q2 may see some marginal rise in prices also because of logistic issues. Cement is still -- cement companies are not working full. So logistically, supplies are becoming a bit of a problem. But to me, they are very, very marginal -- very marginal, okay? But Q1 was clearly benign, and Q2 will not be benign, but I don't see any significant impact on the pricing. No.

And sir, what would be your split of fixed price contracts versus variable price contracts where you can pass on all these material cost and labor cost changes?

I don't have it readily, but nowadays price variation clauses are being coming down. The major contracts are mainly from India and Bangladesh, okay? So I don't have a number, honestly. Maybe Abhishek can give it to you later on, but it'll not be very high. But that is in transmission. But if you look at all our metro projects, et cetera, most of the -- surprisingly, most of the civil and railway, sorry, I need to correct myself, most of the railway and civil contracts have a price variation clause, okay? So the non-T&D has a price variation. In T&D, the share of Power Grid and all is coming down, the price variation clause -- price variation percentage is low.

The next question is from the line of [ Aniket G ] (sic) [ Ankit Babel ] from Subhkam Ventures.

This is Ankit Babel from Subhkam. Sir, 2 questions. First one, what was your guidance on the interest cost, I missed, as a percentage of sales for this year?

We have not given any guidance as of now on any of the numbers. No.

Okay. But you feel that the current run rate of around INR 65 crores, INR 70 crores would continue for the next 3 quarters in the interest cost?

Rajeev, do you want to answer it?

So basically, it will depend on the ramp-up rate of the execution. So by and large, we are actually trying to control the overall net working capital deals as a whole. So that number will remain under check, but it is difficult to say that with the revenue going up, the interest cost will remain constant. Number will definitely come down compared to the last year, but it is difficult to give a guidance on this.

Okay. So in absolute terms, the interest cost is expected to come down on a Y-o-Y basis, but exact you wouldn't like to comment on that one.

Yes, absolutely. Yes.

Okay. Second question was, sir, you alluded a lot of things on cost savings, improving productivity, controlling interest cost, et cetera. So if we take a 2-, 3-year costs from here, is it fair to assume that your margins will improve, say, by another 100 to 200 basis points from your current levels of around 10.5%, 11%? I mean, ignoring the current margins, the historical margins have been in the range of 10.5%. So with all these things happening the way you are expecting, do you feel that structurally the margins of your company would shift towards, say, 11%, 12% kind of a range?

Ankit, very difficult to answer that question. I wish I could say yes straightaway to that answer. The problem what we can see is, right now we discussed about order intake, discussed about tender pipelines. So we'll have to wait and watch and see how the entire thing pans out. If the market keeps on growing, what you're saying is something which we will definitely target saying that with all our cost control and other things, the margin should go up. But let's say, for some reason, the tender pipeline does not materialize, orders don't come in, then the competition can go up. So at the moment, I think it's a little difficult. Maybe by Q3 end or something, by which time the order intake and the tender pipelines would be much more, let's say, firm than what they are today, we can talk about it. But yes, you're right, directionally, we are looking at how do we reduce the cost and all that. Other thing what I would like to point out is what Rajeev said is that we are trying to see that below the EBITDA line or so, how do we control costs. Our tax rates have improved. Tax compliance -- tax rate, if you look at, has come down by almost 1.5%, I think. We are also looking at interest cost also. So one part is how much of money you can make at EBITDA level? Second is that what are the costs below the EBITDA level which can be optimized? So we do hope that we can improve it, but I think we'll probably have a better talk at the end of Q3 on these numbers, okay?

Sir, just a follow-up. So suppose if you, I mean, succeed in reducing the costs, so will you keep it in the company or will you pass it on?

So it would depend, Ankit, on what happens with competition, okay? If competition is also able to reduce it and if they start passing on in the tender, then I'll also have to pass it on because we are in the L1 business, okay? If the competition decides that we will not pass it on and we'll try to improve the margins, then the margins will go up for everyone, okay? If competition is not able to follow my numbers or follow my cost-cutting and they continue at a higher cost level, which I think is very difficult, ultimately, people see what others are doing and catch up, maybe with a lag. So it will depend upon how the industry behaves, okay? Initially, we are ahead of the curve in terms of cost-cutting, we could see probably some improvement in either margins or improvement in the order intake because I would be able to bid better. It's very difficult today to talk about whether margins will go up or the order intake will go up.

The next question is from the line of Amber Singhania from Asian Market Securities.

And congratulations on a good set of numbers in challenging environment. Sir, just one question from my side is, as you mentioned that there have been some cost issues on the ongoing product -- projects, which has impacted the margin this quarter, so are we done away with all those extra costs and going forward we can expect the normal margin coming in? Or those projects may further have some issues going forward, like, in Brazil and all you mentioned? How should we look at the coming margins?

Okay. So Amber, primarily we talked about Brazil. What I said in India also, we had the cost increases on some projects -- on many project sites, where the factories were shut down for a full 1 month, full month, okay? So we were paying salaries and all that. So -- but in India, we were, in a way, able to recover that through cost controls, client claims and whatever else you want to call it, okay? Brazil is still in a flux, so we'll have to wait and watch what happens. Going forward, there will continue to be some impact, but I don't see any significant impact unless there is a significant relapse of COVID. If you have a wave 2 or something and there is large lockdowns, large shutdowns, et cetera, then there is a different issue. If there is no large lockdowns and if we continue the way we are continuing and opening up and all that, then I don't see a major impact. There could be a marginal impact, obviously, in Q2, but I think going forward by the time we reach Q3 and Q4 and all that, we should be back to normal. As I said, it's all subject to what happens on the COVID front. But otherwise, I think the costs are now coming under control, yes?

[Operator Instructions] The next question is from the line of Bharat Sheth from Quest Investment.

Congratulations on a good set of numbers in a very challenging time. Sir, just I have one question. On the Indian T&D space, from a midterm point of view, structurally, earlier, thermal power were announcing and -- which used to take around 4, 5 years to come up and simultaneously T&D projects were announced and so -- which also can come up, I mean, match the line. Now thermal is going down substantially, whereas solar is increasing, where T&D may take -- solar plant can come up in 6 months, 9 months or 12 months to 15 months, whereas T&D because of ROA -- ROW issue or -- which takes some -- so how structurally the business alignment will change?

So Bharat bhai, what will happen is, if you look at the current projects, which Power Grid has bid out or REC -- let's look at the TBCB projects which REC has bid out, the Green Energy one which we're talking about, most of them have got 15 months for the developer to complete the project, okay? So clearly, what -- when the developer bids out the EPC also looks at which companies can complete the projects in 12 months and 10 months for us. So in a way, it is good for us saying that there are very few companies which will come back and stick their neck out and say [Foreign Language], which we could clearly see when we were taking up these projects. That's number one. Number two, what we are also now seeing that with this sort of tight time lines and all that, many of the bankers, especially in case of private projects, are coming into the picture and saying, we want you to give the award only to large companies who can complete the project, who have the working capital limits, et cetera. So recently, we have clearly seen in all the TBCB projects, only large contractors have got the award. That's the second part. The third part which we have seen is that both CERC and CEA now have been coming out saying that even if the solar projects are getting delayed, please go and build the lines first because of exactly what you said that the lines may get delayed, the solar may not get delayed, so which is the other thing which is happening that there is a lot of push from the government that even if there is some redundancy, please go ahead and build lines even if there's a delay in solar. So I think these are the 3 things which we are seeing. The fourth thing which will come out is what we talked about more mechanization, et cetera, to ensure faster buildup of lines, okay? And the fifth thing I'll say would be more happening on the design of transmission lines, which will become much more modular. See, existing tower [Foreign Language], existing module [Foreign Language] so that the lines can be built much faster. I can see the 4 or 5 structural changes which will happen in the transmission sector very clearly.

Okay, sir. And will there be any technological, I mean, within this transmission because solar, I mean, does not operate round the clock, I mean, like thermal operates. So additional, some, I mean, kind of a power voltage fluctuation and additional thing also may be required, I mean, or which can take...

Yes, Bharat bhai, there are -- there is a talk going on. There have been some -- if you look at the recent TBCB tenders in substations, in some of them, they have got some more technical upgradation of SVC, et cetera, where they are asking for a lot of things on voltage stabilizer, et cetera. But that's not on the transmission side, that's on the substation side. There are changes happening, yes.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for their closing comments. Over to you, Mr. Vimal Kejriwal.

Thank you, Janice, and thank you, everyone, for your continued interest in KEC. Thank you. Stay safe.

Thank you. On behalf of KEC International, that concludes this conference. Thank you all for joining. You may now disconnect your lines.