Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Premier Explosives Limited Q4 FY '20 Earnings Conference Call hosted by Stellar IR. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Hina Agarwal from Stellar IR. Thank you, and over to you.

Thank you. Good afternoon, everyone. I, on behalf of Stellar Investor Relations, welcome you all to Premier Explosives Limited Q4 and FY '20 Earnings Conference Call. We shall be sharing the key operating and financial highlights of the quarter and year ended March 31, 2020. We have with us today the senior management team of Premier Explosives Limited, Dr. A.N. Gupta, Chairman and Managing Director; Mr. T.V. Chowdary, Deputy Managing Director; and Mr. C. Subba Rao, CFO. 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. A.N. Gupta to share his initial remarks on the company's performance for the quarter. Over to you, sir.

Thank you. Firstly, I hope that everyone on the call and their families are safe. Also, on behalf of the entire team of PEL, we'd like to take this opportunity to thank all these people who are fighting the coronavirus at the forefront. This virus has affected so many lives in India and overseas, and we hope things will come back to normal soon. I'm honored to share with you that PEL recently received export license for SCOMET, items from Director General of Foreign Trade for export of propellant-filled rocket motors to Israel Aerospace Industries, Israel. SCOMET stands for Special Chemicals, Organisms, Materials, Equipment and Technologies and other items that are dual use, having both civilian application and military. We have successfully designed and developed the rocket motors against the trial orders received from ISI -- sorry, IAIA. We are hopeful to receive regular orders after successful dynamic test in due course for the time. This is first time the company is expecting a SCOMET item. And perhaps, this is the first time rocket motors of any kind being exported from India. Receipt of this SCOMET export license is another step -- stepping stone for PEL. Government of India has the initiative to become self-reliant through [indiscernible] our package has opened many opportunities for defense and commercial explosives sector. The impetus on making India to reduce huge defense import bills and the indigenization of import spares will enable the Indian defense manufacturers like us with buoyant opportunities going forward. Overall, imports of India's defense imports account for 70%, and the more ways to curb the imports and further to generate huge demand for domestic defense sector companies. Also, policy reforms such as increase in FDI from 49% to sub 74% and initiatives such as time-bound defense procurement progress and faster [ detours ] in making will gradually result in favorable market dynamics for Indian defense players going forward. Introduction of commercial mining in coal sector and enhancing private investments in the mineral sector is expected to add to opportunities for Premier Explosives. The government's boost on private sector participation in space activities through the various initiatives sows green shoots for PEL and its space segment. In the backdrop of tension between India and China at Galwan Valley, we expect boost in defense orders, though, it may be gradual. Currently, we are experiencing a structural change in the defense economy and PEL being an established player in the defense sector will be a beneficiary of the same. I would now request Mr. T.V. Chowdary to shed some light on the business performance of the company. Mr. Chowdary?

Yes. Thank you, sir. Good afternoon. I would start saying financial year '20 has been a year of challenges, like lower demand and weak macroeconomic conditions, prolonged rains, increasing competitive intensity in commercial explosives business, delayed defense orders and furthermore, COVID-19 impact in the last fortnight of March 2020. This has led to subdued performance in financial year 2019/'20. However, the execution of defense orders started picking up in the last quarter of FY '20, but got impacted on account of unprecedented outgrowth of COVID-19. We expect the higher execution in defense orders with the improvement in the current environment. To throw some light on the positive developments, which PEL has experienced in its defense segment, the major order in our order book is for countermeasures that is chaff cartridges, flare cartridges and the Air Target Imitator worth more than INR 100 crores. Execution has started during the last quarter. And only because of that [ PDIs ], it is waiting for the visit of inspecting agencies to clear it for dispatch. And this will continue. This will continue in financial year '21 and also '22. Now coming to other missiles and the propellant being supplied. To start with Akash missile, which really significantly contributed to our previous years. Last year's -- the quantities were less from BDL. But now again, we have received new orders for both booster grains and sustainer grains, which are expected to be delivered fully in the current financial year. And in addition to this, 2 other missiles for which Premier has developed the propellants and waiting for the orders, that is Astra and LRSAM and MRSAM, both are now being productionized by BDL and the supply orders have already started flowing in. Third area where we are hoping a good improvement in our performance and then good orders is the supplies to Israel, like Chairman explained about the receiving SCOMET license, now we have another 3 orders in queue. The first order we got SCOMET and we are supplying. Now we have another 3 orders, which we again submitted for SCOMET, and we are hoping this will be easy. Since the first one is cleared, now it becomes easy for -- we'll be saving time in getting export licenses and already development of these products is completed. Once we get the SCOMET license, the export of these also will start, which will definitely boost our image and also our future orders -- export orders for markets of this size. And I would update on Katepally project. Despite of all the problems we had, heavy rains and then delays due to COVID and all those, the statutory authorities not being able to initiate inspect. After all those things also, we have overcome all those. And finally, now propellant plant has become operational and it started working. And now where we are in the execution process of ISRO order. We are also in the process of technology transfer for PJ-10, that is Brahmos propellant. And also, the new rocket that is [indiscernible] propellant, so both these products, we want to make at Katepally. The process has already started. And the second one from Katepally is RDX and HMX plants, for which we have received ISO license and also narcotics license for the raw materials. The plant is just starting in this week. I'm hoping that by the end of -- by the middle of this month, we'll be ready with the trial batches and then -- of the material for inspection and testing. Lastly, as the world economies face the exogenous shock of COVID-19 pandemic, its impact is being felt on our defense supply schedules. Due to ongoing lockdown, our supplies are awaited for predispatch inspection and few of our supplies are delayed in tandem with delayed import of raw materials. Currently, all our plants have been operational, observing maximum precautions, but at lower utilization levels and the working hours limited to only daylight hours. As many industries say, financial year '21 is a year of survival, and we are doing our best. Yes. Now I request our CFO to share the financial performance. Thank you.

Thank you, sir. Good afternoon, 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. Now I would present the financial results for the quarter and the year ended 31st of March 2020. Total income for FY '20 stands at INR 1,579 million, lower sales in both mining and defense areas could not absorb the cost fully and the company incurred a loss of INR 145 million. The similar figures for the quarter -- Q4 '19/'20 stands at INR 343 million at top line and INR 74 million at the bottom line. Order book update. The company's total order book as of 31st March 2020 stands at INR 4,838 million, comprising explosive business at around INR 762 million; defense business, INR 2,380 million; and services, INR 1,696 million. With this, now we open the floor for questions and answers. Thank you.

We'll now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Anurag Patil from Roha Asset Managers.

So my first question, if you can share any outlook on the mining and infra sector. And specifically, any benefit we are expecting from the commercial mining segment going forward?

Mining and infrastructure industry right now is in a bad shape. It is not -- one is, as such, it was doing badly, the fact that COVID has really affected it badly with all the migrant labor moving away. So that is definitely affecting us, both that is mining, quarrying and the -- only the whole India and then Singareni Collieries. Coal mining sector, to some extent, it is running as an essential industry, but all others are suffering badly.

Yes. About your question of the government initiatives for the coal sector or mining sector, yes, these are just the policy announcements have been made. In the long run that will help. Yesterday, also we were discussing coal mining, say, Coal India is doing the almost 90% of the coal mining today. But if the private players come, the rules of procurement of exposures may be completely different from what it is happening now, which will be better for organized players like Premier Explosives in the long run.

Okay. And second question, so in terms of ISRO launch pipeline, are you seeing any impact in terms of deferment or postponement in the near term?

No. But presently, whatever launches are taking place, they are taking place with the product being produced in their facilities. So -- and our involvement in this is our service contracts, which we are doing at ISRO. But the future, where we are making ourselves and all those future, that we have to wait and see coming 2 years will decide finally what happens.

Okay. And one last question, sir. This Katepally plant, after all the approvals are in place, how much revenue you can expect at the maximum utilization?

So you're asking about the execution of the project?

Yes, sir. Post completion of this plant, what is the maximum revenue potential from this plant?

Maximum. Yes, about INR 100 crores, it can contribute at the maximum.

[Operator Instructions] Next question is from the line of Keshav Garg from Counter Cyclical Investments.

Sir, I wanted to understand. Sir, in your presentation, you have mentioned that companies presently working at around 30% utilization. Sir, so with this, sir, first of all, sir, when do you see this ramping up? So what is the constraint in ramping up since you already have a strong order book and especially on the defense side? And sir, what follows up is that at what level will be breakeven, sir? Like are we breaking even at 30% or maybe 50% we'll break even? Yes, sir?

Yes. Order book is there, but like Mr. Chowdary has already mentioned, say, chaff is linked to the input of raw materials that could not be -- that should have then actually maybe in April or May, but that has come only, I think, yesterday or today, it will reach the factory that is a temporary numbers of chaff. So like this, this will be there. And a predispatch inspection, where the government officials have to sometimes travel from Delhi to Hyderabad, so those things will have arbitrarily execution so far. These are the factors which are hampering the order execution. Regarding breakeven, yes, 30% is, well, certainly very low to breakeven. We need to go to at least 60% to get to that breakeven level.

So COVID has impacted book 2 ways. One is that there are no internal sites. So people from Delhi are not able to come to Hyderabad for the reason of quarantine. When they go back from Hyderabad to Delhi, they have to, again, 14 days quarantine at Delhi. So they are scared of coming to -- coming out from Delhi to any place. Second is the dispatches from foreign countries, they are not coming because international flights, both for passengers as well as our goods, are not started as yet from India.

Sir, so basically, unless all these constraints ease up, traveling, et cetera, sir, so you see that, sir, our utilization -- so I mean, you'll find it hard to ramp up until these traveling restriction is up?

Yes. Absolutely, absolutely. In addition to that, even the attendance of employees and all those at factory, like I explained it, we are allowed to work with social distancing and only during the daylight hours. So that is putting a lot of restrictions under working utilization of the full plant.

In between, in the month of March, April, there were absolutely no operations at the factory.

Sir, so as things stand, sir, what's your feedback that you are getting back? When, in your best guess, you can -- I mean, all these constraints will ease up? Like you said, that import now is -- you are seeing it is moving. So overall, sir, I mean, tentatively, how many quarters do you think it will take for company to at least reach breakeven level?

See, already, the operation at the factory are normal now. The people -- most of the people are coming. We don't have any migrant labor. We are complying people from only next-door villages. But there is a restriction that only people at below 55 years can be employed. Further, there is also a restriction that not more than 3 kilometers on the factory, we should ask people to come. And there is a night curfew at Hyderabad.

The lifting of all these curfews and orders, our guess is as good as yours. The knowledge of when the flights will start, where the movement will improve in all those results, it's not specific to us.

In fact, we have done very good in the way that we have talked to Indian airports, and they have deployed people from the local branches of airports to come and inspect this thing because they require this material for their China forward.

Sir, and what is our fixed expense per month or per quarter? I mean tentatively approximately?

Beg your pardon?

Sir, how much is our fixed expense that we are incurring per month or per quarter?

Yes. Fixed expenditures will be mainly employee cost, which is around INR 4 crores to INR 5 crores per month, INR 4.5 crores.

The next question is from the line of Milan Shah from Urmil Research Consultancy.

Congratulations, sir, for your execution of SCOMET. And we are proud of the first company in India to supply sockets. But my understanding it is SCOMET's first order is started and 3 orders are maybe in execution or maybe we could -- how much is the potential of this order?

The current orders, what we have, I think we have already shared the values and all those.

No, he's asking about specifically exports.

Yes, I hear you. And as we declared, we have announced whenever we received orders, we have announced all those.

Yes, that was about 1 year ago or maybe a little earlier perhaps. We have -- and also the others from IAIA to the tune of about 10 crores.

And this is -- yes. And these are the -- like initially, they will develop a source. Now they have developed the source they have given us. We have developed. We have proven ourselves as a source of the product. Now as they keep on -- IAIA doesn't use all for themselves. They're exporting themselves. So on the market, our potential also will go up. We are expecting a good contribution from that.

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

Sir, the Defense Department have been given the cash equity of emergency purchase of INR 500 crores for each of the departments. Given the size, they would be buying up their ammunition requirements, given the size of the ticket prices. So are we getting any inquiry and business from this defense department from this emergency use cash, sir?

Sir, we are being contacted for various items, which we have already supplied and we have proven, we are being contacted.

Okay. Okay. Sir, how do we see the current year, given the 3 months of business has got disrupted and we're are cold? When we see the full year defense business and given the mining sector is also opening up, any niche orders or inquiries you have got for the mining sector also?

Mining sector has been opened only a few days back, and different sectors is also sort of getting inquiries now. It is your guess as well as ours.

It is not great. Jump in the mining sector with us also, where it is still going -- go P&L. We're right now executing the orders in our hand, and we'll have to see.

Because there are policy matters. It will have only a long-term visibility there, not immediately.

The next question is from the line of [ Anke Rora ], an individual investor.

Sir, my first question is that at the Katepally plant, we are ready to produce RDX and HMX, and we had an order from Turkey. So have we got the export license for the same?

No, not yet. No.

Sir, there were many order tenders for ammunition and Pinaka rockets and all. Any progress on that front?

So they remain at the same level because the dates now in many cases, the people participants requested for extension. The dates got extended, last days. So we can't say that anything -- any great improvement in it.

Sir, now that government has -- is opening up the space sector for private players to make and launch rockets. So how will that affect our company?

Yes. We are expecting a good -- we are going to be a significant player in that line. Because as on date, we are the only qualified propellant manufacturers who have already done propellant motors for ISRO. So definitely, yes, we are hoping a good contribution from that.

And sir, with the current defense policy change, there's an FDI of 75%. There's a negative list of items, and there's a budgetary allocation for domestic sourcing. So do we think that we'll get a lot of help from these policy changes?

Yes, definitely, they'll help us because any industry will get helped with all those new decisions, but they have to now get converted into figures and then orders.

[Operator Instructions] The next question is from the line of [ Rahul Singh ], an individual investor.

Yes sir. Sir, I have a question that is there any government procurement to advance our defense sector in our country from our company?

You mean the government procurement for defense, you are asking?

Yes, sir. Yes, sir.

Yes. Whatever Indian Air Force that is directly from the government, chaff and flare, our ATI which were mentioned. Other things have flow through, Bharat Dynamics Limited, DRDO, like that.

So any major order cancellations? You have said that there are many order postponement because of international trade issues, and that is because of COVID. Any major order cancellation, sir?

No. We have no cancellations at least until now.

Okay. Sir, how many tenders are recently there in the market? And how many of you are likely to subscribe them, book for it? Or any insights on that?

I think that's a very big question. I -- we will tell you about this big order then, big tender, which we participated 2 years ago for BMCS. Those things are not yet to open. We are still waiting for the government to do their part. We have extended the data also. We are waiting for the outcome. That is the biggest tender in defense area for the 30 mm and 40 mm also. Those are where we participated. Totally, there are 7 or 8 tenders. We participated in 2 tenders. One in BMCS, we have raised 30 mm and 40 mm ammunition. But still, we don't know their fate.

The next question is from the line of [ Lars Knight ], an individual investor.

I have a couple of questions. One is what is the potential? I'm just asking potential. I know there are too many tenders in there. But what is the potential of the Israel order as we go forward in terms of exports? And second is, you have an order book of INR 483 crores. What is going to be the execution cycle of this over the, say, next 2 years, in FY '21 and FY '22? If you can give us some reasonable idea about it, that will be great.

About the first question about the potential of Israeli orders, Israeli aerospace industries is one of the -- I mean, very well-known and then their products are very well accepted, that is rockets and missiles and all those. So now that they have identified us as a source of rocket motors, so definitely, there is a good potential. And it is -- before even we executed the first orders, we got 4 orders, which shows that the confidence level and what they are -- they're trying to depend on us.

Okay. How much did they bring you, sir? How much they should be doing right now in that segment in terms of value, if you have any idea?

Each value, I won't be able to share. We have already shared earlier, the values.

At INR 10 crores, yes. But beyond that, you have not shared anything.

Yes. In terms of quantities, yes. Each one, there's a potential of 500 to 1,000 numbers like that.

Okay. Okay. So you can't give a value to that work?

Yes.

Okay. And what is the execution cycle of our current order book of INR 483 crores?

Yes. Out of INR 483, something like INR 170 crores are the order for the ISRO and for the general pool, what we call the DGMO order for the operations and maintenance. So that will be a long period one. Rest of the things, so yes, most probably, they should be done within the next 2 years.

Okay. That's how much, sir? Apart from these 2 orders you are saying the -- what would be the executable part of this INR 483 in the next 2 years?

INR 200 crores balance.

200 INR 200 crores over the next 2 years?

Yes.

[Operator Instructions] The next question is from the line of Anurag Patil from Roha Asset Managers.

Sir, I have only one last question. So are you expecting or currently facing any payment delays from different sectors?

Yes. [Audio Gap]

We are participating -- sir, basically, we are competing with the Ordnance Factory Board for all these projects?

Well, in some cases, we are competing with the Ordnance Factory Board. But in certain areas, we have our own systems.

Okay, sir. And also sir, a few years back, sir, you made a joint venture with the Kalyani Group, Bharat Forge Group. Sir, so any movement in that JV?

No.

Okay. And sir, are you looking at any other joint venture in any other area with some foreign partner or anybody?

Yes. Yes, we are looking for partners, particularly in the field of ammunition, where we do not have experience and only Ordnance Factory Board presently is supplying that.

Okay. Sir, so when can we hear about it? Sir, at what stage is this currently?

Well, anybody's guess. Present, there is no movement at all for people inside the country or outside the country. So until -- unless all these are lifted up and there is a free flow of people coming from within the country and outside the country to India, no further progress -- much progress cannot be sort of anticipated.

Okay, sir. And also sir, are ongoing infield project that we are working on, sir, are we fully funded for it? Or are we -- I mean, are we fully provided for it? Or are we facing any financial constraints?

No, no financial constraints at all.

And sir, how much CapEx is remaining to be done?

We have completed the CapEx.

Yes, we are spending at the Katepally project about INR 60 crores. Maybe May, June, maybe another INR 2 crores, INR 3 crores kind of thing may be remaining.

Okay. Okay. So basically, sir, no major CapEx is there upon now onwards?

Yes, there will be any -- other things can come at any time.

And sir, are we basically comfortable on the working capital side?

Yes, working capital cycle has become a little difficult, but we are trying to manage. But let us see how collections happen, how much we can postpone the payments to the creditors. So we are pulling like that.

And sir, have we taken a moratorium for the -- from the bank?

Yes. We have a small leveled off, say, INR 600 crores as of March term loan. Yes, we opted for the moratorium. That is, of course, until they are taken by initially, they told 2 months, then they told up to August or someday. They are going whatever the RDA is allowing, that we are taking.

Yes. Well, to answer one more about your greenfield projects concern, we have our project in AP, for which we are waiting for the land allotment from government of Andhra Pradesh. Once the land is allotted, then we will be investing there for the land development. The actual construction projects may start later. But for space requirements, we'll be starting our project operations there.

Sir, so what kind of CapEx it will entail over there?

No, right now, it is only the cost of land and development of the land for the coming year. After that, it depends upon the ISRO, like a lot of you are hearing the news and all those. So it depends on what kind of offsetting ISRO is planning to do, it depends on that. Because you see, we each are supposed building a rocket motor of one meter. They have requested a different kind of infrastructure, building a 2.5-meter rocket motor needs a different type of infrastructure. So depending on the [ surplus ], it will vary.

[Operator Instructions] As there are no further questions, I will now hand the conference over to the management for closing comments.

Yes. I thank all the participants in this investor call. We are trying our best to improve the company's performance despite all the odds we are facing now. Thank you very much.

Thank you.

Thank you.

Thank you very much. On behalf of Stellar Investor Relations, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.