Mold-Tek Technologies Limited (526263) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mold-Tek Technologies Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Taparia from Emkay Global Financial Services Limited.

Thank you, and over to you, sir. Good afternoon, everyone. I would like to welcome Mr. Lakshmana Rao, Chairman and Managing Director, and thank him for this opportunity. I shall now hand over the call to him for his opening remarks. Over to you, sir.

Thank you, Raj, Emkay for holding this call. Thank you all for participating in our Q1 performance review. I'm very glad to inform you that the company has come out with a stellar performance by increasing the revenues, improving the operational efficiencies and controlling the cost, thereby giving almost 4x jump over the Q4 profitability and 12x compared to the Q1 last year. And this is another very important point to note here is this is without Beryl really contributing anything to the bottom line. Maybe on the top line, there was some addition. But the process of integration has started because the design team has to be created in India. That is what we are doing in the last 6, 7 months. And now the design team is able to contribute -- started executing projects for Florida clients. And that will become positive from maybe Q3 onwards. Q2, Q3 will be time they will start contributing to the bottom line also. So I think the future is going to be bright for the company with more automation being used to enhance the productivity, thereby reducing the employee costs or increasing the per employee revenues. either ways, it is beneficial to the company. And another positive note is in MES, power and distribution due to the data centers happening all over the world, there's a lot of demand for power transmission distribution work. And there, we are getting -- we got into a contract with a #1 power distribution company in the U.S.A. and the team is being formed for them. About 10 people have already started working, and the team may grow up to 20, 30 people center for that company in the coming months. So in all areas, there is a significant increase in the demand for our services, and I hope the future will be much brighter. We can share more information through question and answers. Over to the operator, please.

[Operator Instructions] The first question is from the line of Kiran from Knightstone Capital Management LLP.

Congratulations on good set of numbers. What is -- I have 2 questions. What is the work on hand for MES?

MES work on hand is just like last year, it's about 0.15 million, whereas the civil work on hand is 4.4 million as against 2.7 million last year. So civil continues to have strong traction on demand.

Okay. And does the incremental annual revenue of $2 million for Beryl includes the 1 million purchase order from Hillsburg county?

Yes. That is where we anticipate going forward in the next 12 months, their run rate revenue rate will increase because of this mass purchase order they received from that county. And also, they are entering into Georgia now because earlier they had restricted themselves to only Florida. Now with our Atlanta office is being in Georgia, we have initiated the registration in Georgia also. So thereby, they will be able to get the inspection and permits work from Georgia also. So this is the second step we have taken. And the team creation here also has come to 8 members now. That team might grow -- has to grow up to another 15 to 20 people by at least October, November. And then most of the design work can be handled from India. Thereby, you can see the revenue improvement -- I mean, profitability improvement from Q3.

Can you hear me?

And what was the EBITDA for Beryl in Q1?

Beryl is just around breakeven now. So EBITDA margin, we have to -- for [indiscernible], I'll let you know later. We'll work out.

The next question is from the line of [indiscernible] from SJ Investments.

Congrats on great results. So I wanted to start with one of the remarks, you mentioned that we have reduced all our other expenses costs. As a result, we are able to grow our profitability. Could you give some insight into what cost did we reduce? And how many of them are sustainable?

Yes. As mentioned in the previous quarters, we have taken a call on MES division downsizing of the automobile. That is one of the major reasons for the reduction in employee costs and also other expenses, like the very expensive software costs and other costs have been now reduced in MES. So that is one of the reasons why the other expenses dropped. And there were some MTM losses last quarter. This quarter, there is no loss. So that is another reason for the reduction in the other expenses.

Understood, sir. And you also mentioned a large pipeline as a result of data center build-out. So do you -- are the orders already in place with other design firms? Or do we expect in the next 1 year to also get more orders in this space because there's a lot of CapEx that already has been done in the country. So I'm wondering how many more -- how much more CapEx is going to be there?

No, I'm talking about power distribution for the data centers is happening across U.S.A. So there will be huge investments on power poles, laying of lines, distribution transformers and substations. So where we are the expertise for the last 7, 8 years, we have a team of about 50, 60 people. We are doubling that team now in the last couple of months. We are aggressively shifting some of our automobile people into poles and towers design, also substation design. So all these changes are going to contribute in the coming quarters. Already some changes have been done in the last 2 quarters. And some more teams are being added for a couple of big distribution companies in U.S.A.

Understood, sir. And could you also give -- you mentioned that Beryl is expanding to other counties. So could you explain synergies? I think they have U.S. offices also, right? So how are they exactly helping with Beryl -- are we mixing the offices together and employees together? How is it working there?

No, Beryl has limited its operations to only Florida all these years. They've never gone beyond Florida. Now we introduced them in Georgia, in Atlanta City, and they have already introduced and getting their name listed as an approved engineering service provider for the county. So that will start giving them work because any citizen anywhere in that particular county or state can approach Beryl for various works they require for the residential buildings, exures or permits, insurance claims. Anything to do with their residences, they can make use of Beryl also one of the listed entity. So it is listed only in Florida. Now it is recently getting listed in Georgia. So one more state work also can start coming in. Probably it will start as a trickle now, but we will pick up speed by end of this year. So their number of contracts they received now can double from one state, they can get from other states. So these benefits will accrue in the coming quarters, maybe from the Q3, Q4 onwards.

Got it, sir. And what kind of growth do we expect from these other states because you might have some attention and that's how you're building the team, right? So what kind of...

We are assuming that till Q2, it may break even in Q2, where may break even in Q2. And from Q3 and Q4 onwards, the numbers should be positive quarter-on-quarter. So hopefully, if not this year, next financial year, Beryl will be in a position to add at least $0.5 million to $0.75 million to the bottom line.

Got it, sir. And in terms of onboarding more professional engineers, how -- where are we at today? Because we had plans of expanding the number of people we have in PEs, right? So where are we?

Yes. We have only a couple of PEs as of now on our board who are U.S. certified PEs. And we are now in talks to acquire another structural engine company with mainly PEs on board because Beryl is more into residential permitting and development work. It is not much into design. So a good design company can make this total team well integrated because today, Mold-Tek is very strong in detailing and the connection design. is very strong in government permits and residential work, but not in design. So we are now talking to a design firm, which has both structural steel and residential background with about 7, 8 PEs. And if the deal gets through, this combination can be really what makes us a complete civil engineering service provider.

Understood. What is the size of to probably be acquiring, sir, in terms of revenue and the cost price?

Yes, we are discussing with them. Today, it may be too early to give the details, please.

Got it, sir. But have you seen any inflation in the prices because with the CapEx side, they also must be getting more work. Did you -- are you noticing any people asking for higher premiums than they used to in the last few months?

You mean asking for higher

Yes...

Not really. It is similar. There's not much change in the valuations. Got it, sir.

And one more question regarding MES, like just to understand the trajectory and what happened over the last few years. Because in your website, you mentioned that in 2022 or 2023, we finally reached profitability in MES, the mechanical division. So till then, were we accruing any losses in this division till 2023?

Yes, last -- in the last couple of years, MES has been bleeding, especially last financial year, MES work was is very low. It's almost INR 7 crores, INR 8 crores overall yearly loss in MES last year because we are holding the people and software, hoping that the EV market will revive. But there seems to be no real turnaround for EV market as of today. So instead of keeping those people idle, we are shifting some of them into poles and towers design, substation design and some people we let go. So the expensive software for automobile, those costs have come down and some of the expensive resources who are only suitable for automobile design -- I mean, EV robotic design, they have been let go. So these are the drains it was happening last 2 years, especially last year, the workflow in EV section was very low. So starting this year, we have started with a thin small team. We want to continue in EV because once it comes back maybe after 2, 3 years, we should not be lagging in knowledge. So we have kept a team of 50, 60 people who are relatively busy now. But the team was 125, 130 people a year ago. So at that time, they were mostly idling. So that some people were shifted to electrical poles and towers and some people were let go. So now the team is 50 and reasonably occupied.

Okay, sir. So usually, sir, when do these people give you orders, is it usually the erection phase of the plant? Or is that time to time after erection also, you guys get orders in terms of design? Because just trying to understand the life cycle of design while you are doing this mechanical division. Could you explain that?

In mechanical, see, what now currently, majority of our mechanical work is coming from poles and towers and substations. Right when they start laying off the line, they decide the route, then they start using our services until the lines are laid. If it is a substation, right, they give the substation locations and then we design the structural frames, structural dimensions and detailed drawings to them. So the process will go on from the beginning of the project execution till the end, we'll be working with them. The initial contract will be after the design is completed. Generally, some part of the design, they let Indian teams do. The basic design is generally done based on site conditions. Hence, the design team in America will be doing this base design. Then detailed design and detailing will be done from India.

Got it. American team is also, but our team based in the U.S. It's not someone else subcontractor.

No, not really our team. We don't have team in mechanical design there. We have a team in structural side. We don't have a team in mechanical design. Today, mechanical design or even structural design base design is not done by us. That is why we are still looking for a structural designing company acquisition. Once we make that acquisition, then the team in U.S. itself will be able to take right from the general contractor, the work rather than taking the work from the correctors and fabricators. Today, our main clients are still correctors and fabricators. The real general contractor is where we have to target. There, we require structural designing capabilities. We have the capabilities, but we need a bigger team in U.S., which can bring the general contractors into the picture. And then that work can be outsourced from India. So that benefit is yet to accrue, but our next step will be in that direction, next acquisition.

Sorry to interrupt you, Mr. [indiscernible]. I would request you to rejoin the queue for a follow-up question. The next question is from the line of Dhruv Bajaj from Growth Ventures.

Sir, firstly, we did mention in our previous call regarding this master service agreement wherein we would be working with this power plant player. So has that execution started from this particular quarter? Or will that start coming from?

We had some master service arrangement with a client in U.S.A. for next 2, 3 years. Yes, that is where we started. We started with the team of 10 people now. 5 people are already being built from July. And from August, September 10 and by October, November, 20 people will be working. That is the outcome of that agreement.

Okay. And sir, how big can this be that be on an annualized basis, considering this was the very first quarter.

At this stage, for the next 12 months, that is starting, let's say, from August, it can be $1 million per annum activity with a very good margins. And with them taking us into other lines of activity, it can even go in the coming years. Currently, you can factor about $1 million from this contract.

Fair enough, sir. And sir, like you did mention like because of this data center implementation, there is a lot of requirement of this power transmission and power generation projects. So that we are working already on the U.S. I think this particular order was on that. But incrementally, what type of demand scenario are you seeing on that side? Because based on our understanding, the bottleneck is used on that side. So that should give you multiyear visibility.

The opportunity is big. I wouldn't say it is a $100 million opportunity. It can be together -- altogether, it can be almost $8 million to $10 million opportunity for our part of the business. But finding people and training people in that line is becoming challenging. We have just now started a team for this new client and created the content, created the videos so that our engineers can be trained in the American way of electrical design, so the electrical line distribution design. So that work that will initiate us to ramp up a little faster in the future. So -- but I wouldn't call this line as a $100 million opportunity. It will still be $5 million to $10 million per annum opportunity, but with a good profit margin

Fair enough, -- and sir, in this particular quarter, we surprised, I think everyone in terms of the margins that we clocked in of 19%, whereas we guided, I think, in the previous call that we will be achieving somewhere around 15%. So I was just trying to understand, I do understand there was a very decent restructuring expenses, which ultimately led to higher margins. But is there some sort of seasonality in what we are considering Q1 is generally one of our better quarters -- or is there some product and service mix change which is leading to such higher margins versus what we guided? So if you can help us understand sustainability...

Yes, yes. Actually, Q1 was -- last Q1 was not so good. Actually, we INR 78 lakhs profit and a very low EBITDA. So that way, there is nothing called seasonality. The real seasonality comes in, in terms of workflow. You always -- like in packaging, we talk about EBITDA per kg. But here in technologies, what I would look at is what is the work on hand at the end of the quarter. Today, it is $4.5 million in civil as against $3.7 million last year. So we are confident that the next quarter also is going to be good. The work on hand is a very important measure for us because if the project flow is coming down, even if you have the team, like in EV case, that's what happened. EV, we have created a big team of 150, 130 people, but the workflow used to be $100,000, $50,000 per month. So -- and the accumulated work at any given time was less than $0.25 million. So that is not a good indicator. Here, in civil now, we have $4.5 million work on hand as on today. That's a good indicator for me to see the next quarter also with a positive optimism. And one more thing that adds to my optimism is Beryl, which has not contributed in this quarter, rather it's small losses, would definitely become breakeven next -- in this Q2. And from Q3, it will start contributing because our design team will be ready.

Makes sense. Sir, ex Beryl, is it fair to say that we earlier guided for some INR 250 crores kind of run rate for FY '27. And given the volumes of order that we are receiving at the moment, is it fair thing that we will definitely achieve on that we already achieved in this particular..

Yes, INR crores is possible. INR 240 crores, INR 250 crores is possible because we have done around INR 61 crores now. And I think this trend in the Q2 also gives me confidence similar level of achievement is possible going forward.

And sir, on the margin front, do we want to revise our guidance from the earlier 15% level? Or will we stand with that level and hopefully over deliver? What's your take on that front?

I think the trend the way it's going on, EBITDA margins can even reach at least 20%, if not 23% what we achieved in the current quarter. So last year, it was around 16% EBITDA. So it should at least cross 2023 level -- sorry, last year, it was 1%... So it should reach at least 20% plus in the...

Sir, historically, we have always done, I think, 20%, 25% kind of EBITDA run rate. But due to our in certain segments, we were earlier having all the issues. But now directionally speaking, sir, how confident are you about this business? Because like even in your voice, we could see a lot of optimism versus the previous quarter's con call. So what are you seeing on ground that gives you so much confidence in the business?

Yes, 2 things. One is the workflow is increasing. The projects are taking off more and more in civil. And second thing is Beryl is going to start contributing from next quarter, at least Q2, Q3 onwards. It will certainly start positive contribution. And the third thing is our power and transmission line business is increasing with a strong leader giving us that MSA and work started for them. So this will be a very good referral point for us to showcase our abilities in U.S. for the other clients also. So with all this, it gives me confidence and our new productivity drive through automation is improving the output per person. So without increasing our employee cost that -- I mean, proportionately, with a less increase in the employee cost, revenue growth can be better, higher. So that is what gives me confidence on the overall performance.

Sir, just one last question from my end. Sir, we did mention in one of our previous calls that in Beryl, I think the promoters are also supposed to subscribe some warrants in the business. But due to fall in the share price, they couldn't. So any incremental increase is planned on that trend from there?

See, it was part of the understanding MOU at the time of the acquisition within a time frame of 6 months. So the 6 months' time lapsed in April. At that time, the 6 months average price was coming much higher than the current market price. It is normal for any human being to think why should I buy a 30% higher price when the share price is INR 130, he was offered at INR 165, I think, according to the 6 months average. So he didn't show interest and we didn't press upon it. So everybody has to make their own investment decisions. So we can't push to their own money. They cannot. And there won't be any increment al exclusion on there.

I was just trying to get that one because the 6 months period has already lapsed as you are saying...

Yes. In the 6 months, they are just a small negative for the 8 months, what they concluded, some $5,000, $6,000 loss in the 8 months, which is not a big deal. And you can expect that -- while the integration is taking place between the Indian and American company, there will be some people who leave the company and that skill set has to be created. So that challenges have been now overcome, and the team is slowly gathering pace and the communication between Indian team and their American counterparts is pretty good. We just lost 2 out of the 38 people when we acquired. But those 2 both belong to design, unfortunately. So that is what has given a little setback to them. But these 6 people team in design, what we created now are catching up with the domain knowledge. So now I think going forward, our support to Beryl in design will be strong enough to -- for them to go aggressively in the market.

I request you to rejoin the queue for a -- the next question is from the line of Kaustav Bubna from Kamana Holding.

So in your press release, you have in the growth opportunities in the Civil and Structural division business, you said rising investment in data centers, right? So I want to understand right now, what are we -- right now, I don't think the company is doing much in data centers in the Civil and Structural division. Is there any plans over the next 1, 2 years to enter the space and how in the Civil and structural division? That's the first question.

No, we're already doing -- done a couple of data center structural work in the last 1, 1.5 years. And now with that background and showcasing that, our team is aggressively marketing for more and more data center structural work. We have already done a couple of them.

So with this new acquisition that you're talking about, which you're planning to do now or to add design capabilities, will that -- will your value proposition and offerings improve for data centers?

Not only for data centers, any project, any commercial or residential building, when one company is giving both structural design, detailing, connection design and the whole thing, including permits and all, obviously, you can charge not hourly rates, you can charge as a percentage of the project cost. which we can't do when you are doing in bits and pieces. So once we have a structural designing company in hand, which is an American company representing by American PEs and then we talk the fee at the cost of the project. Let's say, the cost of the project is $100 million. Probably we can charge 3 % to 5% for the entire structural design, connection design, drafting, maybe architectural will be left over. So probably together, structural and architectural, the general fees are 3% to 5%. So at least 2% to 3% can be charged as a project cost on the project cost, which we can do only if you have a strong design team representing the whole company.

Fair enough. And you had said earlier on the power side of the business, where substation pools, et cetera, designing we are doing, the opportunity size is 5 million to 10 million. So is that opportunity size the sector opportunity size or the opportunity?

No, no, the sector company. No, no, no. Sector is much more than $200 million, $300 million.

What we can deliver in that is what I'm saying $10 million. So the sector is more than 0.5 billion maybe.

So you can... More than $0.5 billion, but majority of the main design is done in America. So substation part design and detailing is what outsourced. So out $0.5 billion or even $1 billion, maybe $100 million may go out of Africa for substation design and detailing. In that, I'm hoping $5 million to $10 million for Mold-Tek.

So sir, let's say, we are -- if you're hoping for $10 million, let's say, where are we right now? What's the revenues right now from that business?

I mean... Right now, probably we are around 1.2 -- how much is our centers. This is 1.5 million and this is about $500 million. So about 2 million now. So you're saying it can become 5x in about 3 years? Yes, it can at least 3 to 4, 5x in the next 2, 3 years. And you're saying this is a high-margin business. Is high margin.

Okay. Sir, best of luck. I hope you continue to give this good performance with higher margins, and I hope the performance isn't volatile like it used to be. Best of luck for the future.

The next question is from the line of Manish from Swastik Investments.

Congratulations on the very good set of numbers, sir. Sir, I had a question. One, will you increase employees in your design team in U.S. since you've said they've expanded to one more state or county, which is Georgia.

There is no need. The design team is being created in India. One or 2 people there is good enough to take care. One PE is going from India to settle down in Florida from October onwards, maybe October, November once he get his L1 visa. So that will be enough with the current another 3 member -- 4-member design team available in Beryl. They will be able to do the front ending. And the back-end team, what I said now, 6 to 8 people here will be ramped up to 15, 20 people as the growth comes in. So there will not be any much addition of American staff in this domain.