Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Premier Explosives Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Ms. Hina Agarwal. Thank you, and over to you, ma'am.

Thank you. Good morning, everyone. I, on behalf of Stellar Investor Relations, welcome you all to Premier Explosives Limited Q3 and 9M FY '20 Earnings Conference Call. We shall be sharing the key operating and the financial highlights for the quarter and 9 months ended December 31, 2019. We have with us today the senior management team of Premier Explosives Limited, Dr. A.N. Gupta, Chairman and Managing Director; Mr. C. Subba Rao, CFO; and Mr. Y. Durga Prasad, Director of Operation. Before we begin, I would like to state some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Documents relating to the company's financial performance have already been e-mailed to you. Now I invite Dr. Gupta to share his initial remarks on the company's performance for this quarter. Over to you, sir.

Thank you for joining the call. The prevailing macroeconomic factors, the long rainfall and delayed defense orders led to the subdued performance during the quarter ended December '19. However, we are expecting pickup in pricing of detonators, volumes of exports and defense production, which should result in better performance of the company in the coming quarters. Government of India is contemplating the replacing of instantaneous detonators by shock tube detonators and ultimately with electronic detonators. This will act as a major disruption in the detonator market. PEL is ready with shock tube detonators. We have been marketing this for over a decade. And with electronic detonators, we can gain from positive trend...

Sorry to interrupt sir. Excuse me sir, this the operator. Sir, the audio from your line is sounding very soft. Can you speak a bit louder?

Okay. Is it okay now?

No, sir, it's still the same.

Now is it better?

Sir, a little better. Thank you.

You're welcome. Hello.

Yes, sir.

Is it better now?

Yes, sir, this is better. Please proceed. Thank you.

Should I repeat whatever I said earlier?

Yes, sir.

The prevailing macroeconomic factors, long rainfall and delayed defense orders led to subdued performance during the quarter ended December '19. However, we're expecting pickup in pricing of detonators, volume of exports and defense production, which should result in better performance of the company. Government of India is contemplating replacement of instantaneous detonators by shock tube detonators and ultimately with electronic detonators. This will act as a major disruption of the detonator market. PEL is ready with shock tube detonators we have been marketing over a decade, and electronic detonators, we can gain from the positive trend. The union budget and government's push for infrastructure development and revival of consumption in the economy will test overall scenario and affect the economic activities. Recent IMF projection of Indian GDP growth to 6% -- to 6.5% for 2021 indicates green shoots of pickup of economic activities during -- looking forward. Coming to defense explosives. During the quarter, the revenue saw a significant decline, mainly because the low order level compared to last year. As last year, we had order for Akash missile, which are completed. We have supplied more than 2,400 number of sustainer and booster range. But the government has released 4,000 worth of orders on BEL, but it has not translated into BEL to BDL and BDL to PEL. We are hoping that this will take place within this month. And we will be back into business of Akash missile. Having said that, the execution of orders in defense segment will pick up from next quarter and higher execution thereafter in the coming quarters. The major execution of chaff cartridges and flare cartridges order for -- order worth of more than INR 100 crores will commence from fourth quarter -- will commence from fourth quarter and will continue in next financial year. Recent order for RDX and HMX worth about USD 10.71 million, revised from earlier USD 9.63 million would be executed in 2021 from our coming up Katepally project. Defense being the strength of the country, the Government of India is proactive towards strengthening India defense sector. In the union budget 2020, Government of India increased allocation of defense sector by 4.63% to the tune of INR 3.18 lakh crores for 2019 and '20, which is 1.5% of India's GDP. The recent DefExpo 2020 is a step forward in the Prime Minister's target for $5 billion defense exports in the 5 years -- in the next 5 years. Regarding the sales, as mentioned in the last call, government has cleared the production of 6 squadrons of Akash air defense missile system worth about INR 5,000 crores. Bharat Electronics has signed the contract and it has not yet been transferred to BDL and BDL to PEL. In addition to this, the Astra and MRSAM missile, which are IP of Premier Explosives, are now in production stage, and we have already received the order for -- from BDL. Order for -- from ISRO for the strap-on motors is received and iron will be arriving, and production will start in probably next month. Update on Katepally project expansion, solid propellant plant has already been received and license from PESO for commercial production has been received. The trial production has already started and this will result into production for both ISRO as well as DRDL. RDX and HMX plants have also already received -- ready and we have received licenses from Excise Department of Government of Telangana and Pollution Control Board and awaiting license from Petroleum and Explosives Safety Organization. We will start the operation soon as the license are received, which are expected in a couple of days. Now I request CFO to share the financial performance.

Thank you. Good morning, everyone. The result presentation for the quarter has been uploaded on the stock exchanges' and on the company's website. I believe you all may have gone through the same. During the quarter ended December 31, 2019, the total revenue is INR 29.14 crores and PBT is negative INR 8.94 crore. On a 9-month basis, top line is INR 123.57 crores and a negative profit of INR 7.08 crores. Order book update. As of today, we have total orders worth INR 478 crores, out of which explosives business comprises of INR 82 crore, defense products INR 232 crores and services INR 164 crores. With this, we now open the floor for questions and answers. Thank you.

[Operator Instructions] The first question is from the line of N K Arora, an individual investor.

Sir, we had received a big order from Turkey. So when are the exports likely to begin exactly?

The order from Turkey will be executed as soon as RDX and HMX permission for our Katepally Plant is received in next 2, 3 days or 1 week maximum. After that, we will apply for permission for export, that is, it will go through the process for import export code, and we can start the production -- and we can start the export.

Secondly, sir, is there any effect of epidemic in China on our company?

Sorry?

China epidemic, is it affecting our company?

Coronavirus, coronavirus.

No, that will not affect the dispatch of RDX and HMX because the coronavirus in China has got nothing to do with this. And I don't think they export much of explosives of this nature.

In the Small Satellite Launch Vehicle, we have received the order for solid propellant. So in the Small Satellite Launch Vehicle, do you have liquid propellant also?

Small satellite vehicle. ISRO small satellite vehicle project.

Small satellite project, I don't think ISRO has been able to finalize that because we are very much in line with in -- to start the SSLV. In fact, we had a number of meetings with ISRO people on this, and we are waiting for them to finalize.

Okay, sir. And in the Akash missiles, we are getting order for propellant, but can we...

Sorry to interrupt, Mr. Arora. Sir, your voice is breaking up.

Okay. I'll just come back in the queue again.

The next question is from the line of [ Monica Arora from Man Finance ].

Sir, I wanted to ask that if we see your results during the quarter, your top line has registered a huge decline in revenue, whereas the operating profit has also declined. So sir, what is the reason for the same? And when do you see the things to normalize?

See, there has been 2 reasons, particularly one which is very, very prominent is -- that we completed the order for Akash missile. And the new orders were cleared by the government, and it has been placed on Bharat Electronics, that is still to be finalized on BDL and BDL has to then give it to Premier Explosives. Second reason has been because the monsoon, which normally is ending by September, it continued up to October and November, particularly in this area, that is, Rajasthan, Gujarat and Telangana, particularly. And that has affected the sale of detonators.

Okay. So sir, what is the scope for margin expansion once all these things normalize?

See, as I have told earlier, there is a change in the government policy that instantaneous detonators are being replaced with shock tube detonators. In fact, yesterday, there was a meeting in Delhi and earlier, there had been some meetings in various places in country. And they have decided that 25% reduction would be started with this year, 25% reduction in the next year and 50% thereafter. And ultimately, they want instantaneous detonators, which are used by the terrorists for blowing up caravans of CRPF or Army and other things. That will be completely replaced and would be with electronic detonators, [ it's a different thing ]. So what will happen is that the possibility of terrorists using that detonator for this particular purpose would be stopped.

Okay. So sir, then if I...

This will act as a total disruption of -- instantaneous detonator. This will be replaced by shock tube detonator. We make that for more than 10 years, and electronic detonator for which we are prepared.

Okay. So sir, when can we expect the company to generate free cash flows?

The company next -- only 1 month or so, we will be exporting the first consignment of the propellants to Israel and we'll be sending our first counter-measures to the Government of India, MoD. Because counter-measures -- this orders are received in bulk and we have -- you have to completely make that, put into 1 consignment, which is tested and approved by the government and by the MoD people and then we can dispatch it. So that could be about INR 11 crores itself.

Okay.

Yes. The date has been given as the middle of March.

[Operator Instructions] The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

First, I want to understand that when you will start this our Katepally facility, sir?

We are waiting for the license or clearance from the chief controller of explosives, that is in charge of PESO, that is Petroleum and Safety Organization, which is expected any time now. Anytime means it can come in today, it can come tomorrow, because there, all the questions have been answered and all that and we are waiting for it.

Okay, okay. Sir, just given that the prior year, you had highlighted the pricing erosion had happened in the Coal India explosives, sir, like what is the risk mitigation we are doing or the -- any other -- like, do we look -- envisage that through our trade channel route, we will be able to sell more and make up for it, sir?

See, what we have done in Coal India. When the prices are falling, that we have withdrawn our quotation for supply to Coal India Limited. And that is being replaced by order from private customers; that is, other customers in the same area at much higher prices. So we hope that the turnover may be lower. But the profitability will be better. Where the prices of Coal India had gone to INR 22,000 per tonne, we have got an order for INR 38,000 per tonne, but low volume. But overall, there would be a profitability which is -- which will be more than INR 4 crores.

Okay. Like sir -- like what revenues do you expect, sir, in the current year, full year or next year from both the segments? Any rough idea you can give, sir?

Yes. This year, we should be doing around INR 170 crores. Say, INR 122 crores is there till December. Another INR 50 crores, we're expecting in the fourth quarter. So 2021, yes, let us actually calculate based on the order on hand and then the expected date of commencement, certainly, it will be better than this year. Only the point would be, subject to Coal India, like our MD was saying, top line may be falling down, but we'll hope the profitability will be better.

Okay. Sir, like at least FY '19 numbers, we should reach in FY '21. Sir, like INR 240 crores business we had done in FY '19. We would be able to reach at least that much in FY '21 given that our defense order is healthy -- order backlog is healthy?

Yes. We are expecting that in '21, we would be exceeding what we did in last year.

Okay. With better margin, sir?

Certainly.

Because defense mix will be higher and also like the orders -- order taken have been selective?

Yes. Defense plus service and all that would be better than the previous -- previous year. And we would achieve better results. But every year, the disadvantage of the tough quarter, whatever we said now is to be taken with a pinch of salt.

Sir, how big are these like -- say this private order opportunity, sir, like as compared to, suppose say, if Coal India opportunities ex, private would be like 1/3 of it or 1/4 of this which we had highlighted, private would be how big, sir, [ suppose ] in compensating...

It's about 1/3, but that is very confidential, and we would not like to give the details of that.

Okay. No, no, I don't want the detail, but like in terms of the revenues, like we are doing -- we are having a loss of business, sir, but -- so will we be able to make up in revenue, the defense revenue next year -- I mean, sorry, in the explosives revenue next year?

Yes, certainly. This disruption, nothing can be said about it. It has just started yesterday. So this disruption in instantaneous detonators is going to totally change over the complete industry. And what will happen, only next quarter figures will tell me.

Okay.

We were expecting this for almost like 1 or 2 months, but you can't be sure until the government takes a decision. The decision was certainly expected in this line and we were fully prepared to, say, take the change.

Okay. Sir, then any other new product which will come, which can add significant business, sir, in the next 1 or 2 years?

Well, we have developed what's called spectral flares. So the counter-measures department would be further sort of reinforced. We'll have flares, chaffs and spectral flares. But the inquiry for spectral flares is around -- that again has come in last 2 days and all that. And that requires what is called airworthiness certificate, which will take about 12 to 8 months. But the inquiry which has come, that is asking for dispatch of material after 1 year. And we are the only people who are making the higher flares as well as spectral flares, and we hope that this would be a good business.

Sir, in terms of service orders, which you have, any other new service order we are looking to take or any opportunity coming our way in the services business?

See, the main 2 parts, ISRO as well as DRDL. So we have ISRO order for next 10 years. And DRDL is sort of send inquiry to us, we hope that we'll be qualified for that. As well as ISRO Trivandrum, they're also looking for services, but until and unless the order is placed on us, we can't say. That will make it to your inquiry.

Okay. So ISRO Trivandrum is under inquiry pipeline, that is the thing, right sir?

Exactly.

Okay. Sir, defense exports, like government is giving emphasis and all, sir, any movement we are seeing, sir, in terms of defense explosives being taken by foreign countries or to match their -- the local sourcing requirement, sir, are the defense -- are they buying into this industry, sir?

Certainly, and as I have already told you, that we have got the order for propellant from one of the European countries and also for RDX and HMX from Turkey. These are all exports only, no?

Correct, sir. But because of this, sir, with regard to -- like under the contract, they have to buy, sir, like offset...

You're saying offset?

Offset class, sir. I missed it, I was -- under offset class, are they buying, sir, like for S-400 missiles or RAFAEL? Are they -- say the -- anything they are buying products -- for those products, sir?

See, RAFAEL is, still the ink is green. It is still not very dry and as 24 -- again has same thing, the imports have not yet started. So we are certainly looking for offset requirement under both the orders.

Okay. Sir, in terms of order flow next year, what is the target we have in our mind, given the various opportunities you would have envisaged, like without any specific, what would be our target, sir, in terms of order flow? Like what would be for explosives, what would be for the defense, sir, in terms of order flow for FY '20?

Yes. From the perspective of 2021 financial year, like we have already discussed, the order for chaff on hand, about INR 100 crores. And the INR 76 crores is the RDX and HMX. These are the 2 major orders that we will be supplying. What would be in the pipeline are Akash, Astra and MRSAM. Astra and MRSAM is, okay, already received small quantities, but we are expecting them to be big, similarly Akash.

Okay. Akash you are mentioning is the add Akash right?

Yes, yes, yes.

Okay, okay. Sir, like cumulatively, these 3 names you told us, Akash, Astra, and MRSAM, put together, what would be the order flow, sir, next year, we are expecting?

It is difficult to say now because it will all depend upon the -- how fast they induct and all that. We can give you the -- give the figures, but it would be off the head.

Okay, okay, okay. Sir, like in the next -- and a little longer term, sir, like over next 2 years, like, sir, what is the revenue target we have, sir, at the company level? Anything we have planned, sir, broadly, sir, what is...

Let us not put any number for the time being because of whatever the -- this quarterly thing. Like our MD has always told, it will be taken with some pinch of salt. It is better to keep silent on that thing and let us come back to normal level and then talk about it.

The next question is from the line of Dhruvin Upadhyay from Sushil Finance.

Sir, first question of mine is, what is our strategy to stop our erratic sales growth? Because we can see that in some quarters our sales grew by around 30%. And this quarter, we have degrown by 30%. So how do you solve this problem? Or how are you planning to solve this problem, sir?

Yes. Whatever we have already explained, what is going to happen in the fourth quarter or the next financial year, these are all based on the orders on hand. We [ plan on ], say, irregular kind of number. In the commercial, it is based on the monsoons and other economic developments like mining and infra, that is one. Yes, that maybe relatively, it should be some kind of a smooth graph, but what has disrupted the Coal India order, which was -- we didn't want to take the order because if we have supplied in October to December, our loss would have been much more than what we have seen today. So that is where we were affected by the -- in the commercial line. In the defense, I mean we have to all agree that it is based on the order execution, it is like a project. Say, Akash we got -- we have supplied 2,400 over a period of 3 years kind of time. So there will be a gap in between before receiving another order. So this is very difficult to say why it is down and why it is more in 1 quarter because this is a natural phenomenon of the -- of our business, and there will be a U or V kind of graph will be there.

Okay. Sir, correct me if I'm wrong. Our commercial explosives business has always been kind of a bread and butter business, whereas the defense business has always been the alpha-generating segment for us. So is there any strategy that we have over the next 2, 3 years, where since you have mentioned, we'll be focusing on private players more, is there any target or strategy or an idea where you would like to normalize the segment first? Because I believe in the previous quarter, you had mentioned you have lesser focus in the commercial explosive business and more importance is being given to the defense business.

See, the commercial business is becoming very competitive and the prices are not stable. And you can see that Coal India, while we had to withdraw from the bidding, the other people have continued to do that. And now they are in trouble because the prices are lower than the raw material prices, and they're trying to put water into it -- into the explosive. So the letter which was issued by Coal India that this particular vessel which we're supposed to carry on and at this stage is carrying water, this vessel which is supposed to carry some lubricant is carrying water and all that. And a big inquiry is going on. We hope that this will not -- this will be taken very seriously and already WCL has coal, they're not taking enough explosive, because the prices are very low. One of our representatives has gone to Nagpur to say that, "Okay, if you give us the prices which are -- the earlier prices, then we are ready to supply you 40 tonnes per day." Like that, one after another, all the subsidiaries are going to come back. And say, "That's okay, fine, we'll take it, take the orders on risk purchase." That means, they will pay us whatever we want, but that will be deducted from the people who accepted the lower prices and are not supplying. So we hope that next 2, 3 months are going to be a little difficult. But soon, we are not going to sort of lose the business. We will get the business at our price.

Okay. And sir, there have been mentions by the government, they will be privatizing a couple of coal blocks and -- a number of coal blocks since Coal India is not able to meet its annual targets. What kind of opportunity do we see over here?

There is a lot of opportunity, but let there be some clarity, and then we can tell you. We are very upbeat about the privatization of coal mines and also people who want quality rather than the price. You see, we have got an order from Singrauli where the prices are INR 22,000 and INR 38,000. That itself says volumes about that there are some customers who want quality, they want to have a good blast rather than having a bad blast and then spending money to clear it up.

Right, right. And sir, relating to the fire that occurred in the Pedakonduru facility. Is there any loss or additional costs that we'll be incurring this quarter?

This quarter, next quarter is expected to be a good quarter. Normally, the fourth quarter is usually the best quarter. Apart from that, we are expecting good export as well as the defense supply.