Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Premier Explosives Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Hina Agarwal from Stellar Investor Relations. 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 Q1 FY '21 Earnings Conference Call. We shall be sharing the key operating and financial highlights for the quarter ended June 30, 2020. We have with us today the senior management team of Premier Explosives Limited 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' discussion may be forward-looking in nature and may involve risks at and uncertainties. Documents relating to company's performance has been -- has already been e-mailed to you. Now I invite Mr. T.V. Chowdary to share his initial remarks on the company's performance for this quarter. Over to you, sir.

Good morning, and thank you for joining the call. As we are getting used to the new normal, we hope that everyone present on the call and their family succeeds in the current situation. Also on behalf of the entire team of Premier, we would like to take this opportunity to thank all those people who are fighting the coronavirus at the forefront. The recent policies from the commercial mining and space industries threw green shoots for PEL in both the business segments. In coal sector, with the aim to reduce import dependency of coal in ensuing years, government of India has a target of 1 billion tonnes of coal production by 2023/'24. To achieve the said target, PEL to invest INR 1.22 lakh crores on around 500 projects related to coal evacuation, infrastructure and evacuation amongst other things. Also, government boost on private sector participation in commercial mining space and space activities are likely to provide huge opportunities for growth going forward. The escalating geopolitical tensions can thrust demand for defense products with a view to further strengthen India' defense position and mitigate any such future contingencies. Now coming to the company's major development, I'm happy to share that PEL has recently received an order for development and supply of EDRM rocket motors for export. As you all are aware, we have successfully designed and developed 4 different rocket motors for export in the past. Now we have received this order for -- fifth variant of rocket motor, which is larger than the first 4. The receipt of another order for export is the testimony of customers' confidence in the technical competence of the company. The exogenous shock of pandemic impacted many companies during the first quarter as appraised during the last quarter' earnings call. Lockdown imposed to contain the spread of COVID-19 has impacted the production activities during the quarter. Our production activities were at halt from last week of March to third week of April 20 with the relaxation of the lockdown. We gradually started the production and currently operating at 30% to 40% of our capacity utilization. During the quarter, our production and delivery time lines were impacted majorly due to delay in import of raw material and delay in pre-dispatch inspection of supplies, which has resulted into subdued performance of the company. Further, it has impacted the working capital cycle of the company. We believe the overall economy is on the way to revival and our business operations will also return to normalcy soon. Now I would like to highlight key developments during the quarter in the defense segment. Let me first update you on the major order in the order book that is shaft cartridges and flare cartridges order. The order witnessed delay in execution on account of delay in imported raw material due to disrupted supply chains. We have received the raw material in the last week of June. We have started the execution of order and expect to complete deliveries over the period of 2020/'21 and '21/'22. Now coming to Akash missile propellant. The company has received a new order from supply of booster grains and sustainer grains. They have already started the execution of the order and expected delivery in the third quarter. Touching upon Astra missile, recently, Defence Acquisition Council has cleared the purchase of 248 indigenously developed Astra beyond visual ranger air-to-air missiles Indian Air Force. PEL is the sole supplier of propellant for the said missile, and we expect to receive the order in coming months. Brahmos Aerospace, a joint Russian-Indian developer to Brahmos supersonic cruise missile received approval by governments of Russia and India to export the missile to third countries. This opens up the huge opportunity, the completion of technology transfer of Brahmos propellant. PEL would be well placed to capitalize this opportunity. With government thrust on defense sector, we believe the ordering activity to thrive in near-term and PEL being an established player in defense sector is well placed to capitalize on this end. Now I request our CEO -- CFO, Mr. Subba Rao, to share the financial performance.

Good morning to everyone. Thank you, sir. The real presentation for the quarter has been uploaded on the stock exchanges and on the company's upside. I believe you all have gone through the same. Now I would present the financial results for the quarter briefly. As all of us are aware, the lockdown that was imposed to contain the spread of COVID-19 pandemic has adversely affected the company's operations and the financial results for the quarter ended June 30. Hence, the results for this quarter are not comparable with the corresponding quarter last year on a comparative basis. The total income for Q1 FY '21 stands at INR 230 million, lower execution and sales in both mining and the defense businesses could not absorb the cost fully and the company incurred a negative result of INR 25 million at the bottom line. Regarding the order book, the company's total order book now stands at INR 4,826 million. Out of which, explosives business comprises around INR 552 million; defense segment total INR 489 million, and the services that is operations and maintenance, INR 1,785 million. With this, we now open the floor for questions and answers. Thank you very much.

[Operator Instructions] [Operator Instructions] The first question is from the line of Dixit Doshi from Whitestone.

So firstly, we have a INR 483 crore order book. Can you just explain the time line or execution in terms of all 3 different segments of explosives difference in services?

Yes. Out of the total order book, like we discussed even in the previous call, the major part that is the INR 180 crores kind of thing is at the SHAR operations and maintenance, which is their tenure say, from now, if we say it is like 9 years kind of time. Rest of all the orders are executable in the next 18 to 24 months.

Okay. Sir, now that our NPCC, our explosives division, the order book left is only INR 55 crores. And looking at the quarterly run rate, I think this will be get executed within this year only. So are we seeing any new tenders in explosives? And are we planning to get any orders in near future? Or we'll be focusing only on defense going forward?

No, we are currently working on explosives also. And the Singareni tender is in the process going on. And we are also working on several export inquiries and orders. We are also executing the export orders. So we expect it to improve further.

Okay. So we are expecting some orders during this year. If you can just quantify, if possible.

Singareni market is still being negotiated and it is expected to be around INR 44 crores flat.

Okay. Sir, can you give the breakup in terms of product-wise in INR 250 crore of defense order book?

Yes. In that, approximately INR 70 crores would be for the share for remaining one. INR 74 INR or so is the RDX and HMX. And there are orders for Akash, both sustainer grain as well as booster grain, and MRSAM is there, LRSAM is there. So those are the other things were INR 4 crores, INR 5 crores, INR 10 crores kind of individual amounts are there. Still there are pyrogenic nature. All these accounts of the balance.

It's a big long list of orders. I don't think it's possible to quantify each.

Okay. Now sir, looking at the exports. So if I see in, it's good to see that we are -- we got the fifth order from Israel Aerospace, but still, these are small orders, like INR 5, INR 10 crores. So if you can explain the size. So obviously, they must be currently testing our capability, but if you can explain the size of opportunity. Let's say, in 2, 3 years' time, how much we can get from the Israel Aerospace? How big is the opportunity?

It's like -- as on that, the volume appears to be small. Our size appears to be small. But this is entry into it, like last time, Astra, we -- initially, we developed. And then today, we are the sole suppliers. Like that, this also, once we have proven that we have developed and all those. Now these are expected to be converted into bulk product charters. So we -- in coming 1 or 2 years' time.

So can this become like a INR 50, INR 100 crore of yearly orders? Let's say, not next year also. Let's say, to the previous time, can we become INR 50 to INR 100 crore of regular orders every year?

Yes, we can expect to go about to INR 50 crores, at least. That is what is -- our indications.

Okay. And in terms inn export, we have also received orders for RDX and HMX from some client from Turkey. So apart from Israel Aerospace, what more we are targeting in terms of products and country?

As you are already aware, we are producing ammonium perchlorate, which is an important raw material in the propellant. So we are trying to market that. And apart from that, many products we are working are import substitutions in defense line, part of making India and all those ammunition, mines and bombs and others. Now our Katepally Plant, I'm happy to announce that we received on the licenses for all the products to be produced. That is -- so now our trial production for RDX and HMX is completed. We are expecting a regular production clearance license from PESO. And the plant already started producing, Katepally.

Okay. And sir, in last 3, 4 years, we have always heard that there is a huge opportunity in Indian defense sector. But a lot of times, we have seen that the orders actually get delayed. But paying could not be the case with the extra exports. So let's say, given our size and whatever products we have, can we expect that, let's say, in 3 years' time or 4 years' time, the export itself can become a INR 100 crore-size in our book?

Difficult to confirm. But yes, we can always look forward. Like the export license is another thing, which is [ commit ] export license, which is important. Because in India, first time we are exporting rocket motors. So we -- now we got the license for export. Like that, we have to get for other products and all those. It's a little bit stringent process. So it may not happen the way we expect immediately, and all those. Even exports also can take time.

Okay. And recently, Bharat Dynamics have received order for MRSAM, and they are eyeing a strong order book in the next 6 months to 1-year time from Akash, trying some other missile. If you can elaborate our opportunity size and also, in which of the products we are the sole supplier.

This, we are not aware of their action plan and all those. About Akash, what they got MRSAM. As far as we are concerned, MRSAM, as on date, we are the only propellant manufacturers and supplier, qualified propellant manufacturers and suppliers. So if Bharat Forge (sic) [ Dynamics ] or anybody is going to manufacture MRSAM, as far as we know that we have only supplier propylene, the only that is qualified. But we have no idea about their plans and all those. And Akash, yes, Akash, we are qualified, and we have already crossed more than 2,200 numbers of propylene grains. And anybody is going to make Akash, we'll be supplying them.

But any -- if you can quantify the -- how much order we can get in next 1.5 years' time from business side.

We have no idea about what others Bharat force, what and what.

Dynamics, yes. Bharat Dynamics.

And it's okay. You said Bharat Forge so I was wondering. Bharat Dynamics, yes, whatever. They are expecting another 500 numbers of our Akash missiles, but it's going to be more of MRSAM and Astra. And in both -- in case of both missiles, we are the sole suppliers of propellant as ante. So definitely, it's a very big opportunity. We are expecting to become a major turnover for the coming 2, 3 years.

But if they get, let's say, 500 pieces orders, so how much order book in terms of absolute orders will be then translate into us roughly?

See, the 500 missiles require 500 propellant grains. Yes. In that area, we are -- today, we are 3 players in that area. So it depends L1, L2.

How much could be the 1 propellant price, if you can?

I definitely -- we wouldn't want to disclose that because these are price sensitive.

Okay. I have some more questions I'll join back in.

The next question is from the line of [ Sadanand Shetty ] from [ True Equity Advisors ].

What is the status of mines and warheads from the Katepally project? Is it also being commissioned now?

Yes. We just got our license for manufacture of mines and bombs. And just, what, and mines also, we are assembling mines with ARD technology transfer. It is almost ready in our existing plant. Now finished product will come from Katepally plant.

When is that time line, sir?

The TOTs, they don't depend on us, and it is dependent [ ARD ]and HMRL because of this pandemic, there is no travel between Hyderabad and Pune. So because of that reason, they are getting a little delayed. Maybe it may take out 2 months. Now we propose to them, instead of traveling, whether we can have full documents, detailed document and then exchange our reports and all those. It is going on, that process. We hope that in 2 months, it will come through.

Sure. In your opening remarks, you talked about commercial mining opportunity. Can you please deconstruct and elaborate how is the incremental opportunity? You also mentioned huge opportunity by this big opportunity, commercial mining opening?

Yes, as imports are reduced and more and more areas of mines opening. And proportionately, that will increase the opportunities for mining explosives. And we, having our bulk explosives, plants, established and located strategically in different areas, so we have a better reach to different new mining areas which are going to open, so...

Okay. See, in the recent past, your operating margin has been a bit erratic. The business today reached the stage where we can say operating margin would be relatively stable. And we can actually forecast where it can be.

Margins.

Operating margins.

Yes. Actually, it depends upon the -- our company has some element as fixed expenditure. So the top line and the bottom line, and when the top line really grows, especially in the defense, that margin will be better. So we are working to get the -- get that to the normal margins like previous years.

Overall, the mining industry, the mining explosives, the margins are thin because of the competition. And if you look at it every year, the prices are reducing, not increasing. So margins are coming down. That is the reason we have looked forward for more and more defense by remaining in the business. We are not quitting the business, but we'll remain in the business. But we'll look for other business also. And we're being 40 years old company, Premier Explosives. Today, we are the oldest operating company in all the land. So yes, definitely, comparatively, our margin's certain, but we are working. We are working on those.

Mr. Shetty, do you have any more questions. Seems like we lost the connection for Mr. Shetty. [Operator Instructions] The next question is from the line of Hardik Jain from ISJ Securities Private Limited.

Sir, can you help me with the current debt number on the books?

Yes, debt is basically, as of March, it is INR 6.5 crores or about INR 7 crores. You know that moratorium is allowed by Rural Bank of India. So 2 quarters' moratorium has come -- I mean installments have come in. And then they were -- we have taken the moratorium opportunity, we didn't pay. But at the end of -- after end of the August, they were saying RBI is [ itemizing ] in the Supreme Court, what kind of moratorium and including interest on during the moratorium period. These are the questions that are being done. 2 installments have we already paid to HDFC Bank. But RBI, our Supreme Court -- and also, then they told they would reverse it.

No. I was asking, sir, if you can help me with the current debt number because debt must have increased during the year because of the…

Yes. That's what I'm saying. That is all the term loan, which is availed from the HDFC Bank. There is no other bank who has given us the term loan.

And with -- now -- so now since we have hardly any sales from explosives because we made -- part of the order book is now from defense, so I think the EBITDA margins only depends, as you said, will be much higher than what we get in explosives. So once this order gets -- start executing, you will see the margin percentage much higher than what we were doing earlier. Is that assumption right?

Yes, that is a correct interpretation. How much turnover and top line improves and observed in the future costs. So that is what all the efforts going on.

But now because this order book will be executed 2 years and then the services order book will be executed in [ 9 years ], but by -- when do you see we, again, going about INR 200 crores sales in next -- can we see that happening in the next 2 years?

We hope by next year itself, we should reach INR 200 crores. This year, okay, we are trying for that number still, but going by whatever happened last year, that is different. But next year, it should be possible.

Okay. So even this year, you think that we may find this kind of number?

Yes. We trade, yes.

Okay. Just a second. And sir, how is the payment? You mentioned once that payment is getting delayed from the government and the defense -- so we may execute the orders, but how do you see the payment situation from -- do we expect unusual delays from the government?

Yes, that is -- I mean while we are in the defense business. Okay, whatever, for the first, it may help to some extent. But overall, the terms of payment at defense, it will take longer, and we have to go with this scenario in the coming months or quarters also.

But then in that case, we'll actually need some working capital loan, also additional limits from the bank. Because that if that is the case, we'll have to try to do something.

Yes. If there is any requirement for additional funding, yes, we have approached the banks and get that. But we are trying to keep it at minimum possible that are then going and borrowing.

Right. Okay. And sir, the government has announced some negative list of [indiscernible] products. So do we get any benefit out of it? Do you think we make some products that can benefit out of it?

Yes. We have already gone through the list and identified the products where we are going to get the benefit. One of the important products which we're already doing is countermeasures. And then other rockets and missiles, where we have the strength, and then the bombs are there. Ammunition also, now with Katepally, we have started. So there are areas where we have the advantage and then -- which we have already written to the government.

Okay. So what products do you plan to make in Katepally regardless of that?

Katepally Plant is for listed rockets and missiles, mine, ammunition maybe medium caliber and large caliber and bombs. BMCS, Bi-Modular Charge Systems, and HMX/RDX warheads -- HMX/RDX [ all-switch ] and also compounded HMX/RDX products. So this is the full list of our -- fuses also. We have -- we proposed to make fuses is also in Katepally.

[Operator Instructions] The next question is from the line of Milan Shah from Urmil Research Consultancy.

Sir, VR and all that we are going to VR 78 worker at the Pedakonduru plant. And the payment is in next installment. So how much the strength of this plant? And what is the period to pay the worker?

You're talking about the VR scheme?

Yes, yes, yes.

Yes. In the month of July, VR scheme was introduced. And in 6 months' time, we have to make the VR amount payment.

Okay. And the strength of the plant worker? We are going to...

That is about 500, out of which 78 after for the VRS.

And we are going to pay next 6 months, right?

Correct.

Okay. And sir, we have a product of [ NHN ] based detonator, which -- that would be, here, provided to U.S. company, is there any opportunity to other country?

On that, no. If somebody approaches, yes, we can always transfer.

Is it a patented in USA or India, this product is? Because you're world #1 in this product, no?

No, we have not patented it.

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

Sir, my first question is, when is the production of RDX likely to start and get exported?

The trial -- first, we received permission for trial production from PESO. We just completed trial production. And we are approaching -- today, we are approaching PESO to give us the commercial production. So it will happen in a week or 10 days' time. Afterwards, we'll start.

Yes. Sir, secondly, there has been a large order for Pinaka rocket launcher from the government of India. So is there order for Pinaka rockets also?

No. Right now, there is no other for Pinaka rockets on us. Right now, Pinaka rockets are being produced by Ordnance Factory at [ RC ].

Okay, sir. Sir, thirdly, we were supposed to get a piece of land near SHAR, Department of [ Space ]. So what's the progress on that?