Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Premier Explosives Limited Q3 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 Q3 and 9 Months FY '21 Earnings Conference Call. We shall be sharing the key operating and the financial highlights for the quarter and 9 months ended December 31, 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's discussion may be forward looking in nature and may involve risks and uncertainties. Documents relating to the company's performance have already been e-mailed to you. Now I invite Mr. Chowdary to share his initial remarks on the company's performance for the quarter. Over to you, sir.

Yes. Thank you all for joining the call. Current situation is turning positive with the rollout of COVID-19 vaccine. Union Budget 2021 is expected to accelerate the economic growth. The government continues to put impetus on making India self relevant -- reliant in defense area. In order to achieve self reliance in defense, the government plans to invest $130 billion on military modernization in the next 7 to 8 years. Under Atmanirbhar Bharat Abhiyan, domestic manufacturing of bigger and complex defense platforms has become a key focus area of the government. Over the last 1 year, the government has taken major steps like import embargo, the rollout of defense acquisition policy, new guidelines for offsets management, strategic partnership model and increasing foreign direct investment in defense, amongst others. Government aims to achieve a turnover of INR 1,75,000 crore, including export of INR 35,000 crore in aerospace and defense goods and services by the year 2024. Budget 2021 has stepped up the capital outlay by 19% year-on-year to INR 4.78 lakh crore for financial year '21/'22, which includes capital expenditure worth INR 1.35 lakh crore, highest ever increase in the capital outlay for defense in last 15 years. This will provide major push towards modernization of armed forces. The missile segment, over the years, the government has been working on various prestigious missile programs with an objective of indigenization in this space. In recent time, the government has test fired various missiles like ABHYAS, Prithvi-II, BrahMos, Shaurya, Rudram-I and Nag, amongst others, further strengthening its mark in global defense space. Recently, government has given approval for export of 156 defense equipment, which includes Akash, BrahMos, Tejas, Astra missiles with an aim to record the export of defense equipment worth INR 35,000 crores by 2025. It is expected that the union government would adopt similar methodologies that approved the Akash surface-to-air missile system while allowing export of arms and ammunitions that are manufactured under Atmanirbhar Bharat scheme. This is a landmark step taken by the government. PEL being the prominent player in this space to be benefited by this recent development. The recent step of single window clearance portal will be a milestone for ease of doing business in India's coal sector. The government is expected to invest around INR 4 trillion in India's coal sector, which creates visibility for commercial explosive segment. Along with this government focus on infrastructure boost in the union budget and swift recovery in countries manufacturing activities will boost this segment going forward. Now commenting on the business performance. With the progressive recovery of the overall business activities in the country, we witnessed improvement on our production activities in the quarter. But import restriction and increasing domestic prices of ammonium nitrate have impacted the production and profitability of the company during the quarter. Coming to the company's major developments. Exports of rocket motors is gaining traction. We are pleased to share we have an order for the supply of 82H rocket motor from Israel Aerospace Industries Limited, Israel. This is a new variant of rocket motor. And further IAI has enhanced the order value to more than double for EDRM rocket motor supply, which was at the level of USD 5.2 lakh, enhancement is to USD 13.8 lakh, which was [Audio Gap]. Also, we have an order in pipeline from another firm. The receipt of new order for export is the testimony of customers' continence in the technical competence of the company. Also during the quarter, we have received an order worth INR 341 million from the Ministry of Defence for the supply of 50 mm flares and 26 mm chaffs, which are the countermeasures, with the execution of -- with the execution period of 6 months. In regards to the EDRM rocket motors, total order value will be the -- of the project has been enhanced to USD 13.8 lakhs, which will help better performance going forward. Now I would like to update on the status of a few major projects. Our chaff and flare cartridges order execution is progressing well with the availability of imported raw materials. We expect to complete the delivery of order over the period of 2 years. About MRSAM, Astra, these are the missiles where the propellant is cast in FIM, free issue materials, and with the revival of the industry, now FIMs -- availability of FIMs has improved, and we are hoping a big contribution from these 2 in the coming years. And the other projects, BrahMos ToT transfer has been completed. Now again, we are waiting for the free issue materials to take up the production activity. And in the -- I want to share about the thermal insulation lining, which now has become a regular product from PEL. And our ammonium perchlorate project also has come on the track with the acceptance of ammonium perchlorate by DRDO. And our new plant at Katepally is commissioned and started producing in trial production, and RDX and HMX plant has started working. And we are booking orders for the current and the next year. With defense and coal mining sector at the cusp of transformation at Premier, we are all set to reap opportunities going forward. Now I request our CFO to share the financial performance.

Thank you, sir. So 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 have gone through the same. Now I would present the financial results for the quarter ended December 31, 2020. Total income for the third quarter stands at INR 48.8 crores as compared to INR 28.9 crores corresponding period last year. There has been a loss of INR 6.9 crores on account of sharp increase in key raw material prices. Other reasons are, during the quarter, which have made a provision of INR 2.85 crores for wage revision and powder factor recoveries of INR 2.76 crores. Now coming to the order book, the company's total order book now stands at INR 508 crores, out of which explosive business comprises around INR 106 crores, defense segment INR 233 crores and services, that is operations and maintenance services, INR 168 crores. With this, we now open the floor for questions and answers. Thank you very much.

[Operator Instructions] The first question is from the line of Bhagyesh Kagalkar from HDFC Mutual Fund.

Congratulations on a great set of numbers. I had a couple of queries over here, sir. If you see the order book that you have given in your PPT of INR 5,078 million, and you have given the breakup also, defense, services and explosives. So what is the execution time frame for this order book? And the question number two is that regarding the margins, what will be the trajectory because we are becoming a defense-oriented company because if you go by the annual report, there's been a huge number of approvals and ToTs. So can you guide us what will be the margin, this thing? And third is Katepally, what is the utilization now? So how much revenue we can do in 2, 3 years' time on full functioning of Katepally? Yes. Hello?

Yes. I will answer the order book question, and then Mr. Chowdary will take the other points. Order book, like you have mentioned, out of INR 508 crores, INR 168 crores of operations and maintenance services, that is a long-term kind of order book that will be balance of about 8 years is there still at the SHAR that is ISRO. That is for that one. The second part is chaffs, out of INR 70 crores or so as of now, it will take part of the supplies to this year within the fourth quarter and a complete year of 2021, '22 and maybe until July or so of the '22/'23 also. I guess rest of the projects or orders should be completed within the time frame of 18 months' kind of time.

Yes. The second one, I think you asked about the margins. The margins from defense business is good, definitely much better than the mining business, and -- except the service area. Services are one area where we do more and the margins are not as big as the supplies made. But still, they're still contributing, and then we want to continue in that area. And exactly about the percentages and all those, we don't want to...

Okay. But overall, the trajectory will be positive over the next couple of years in margins?

Yes, because the areas where -- if you see the shift, the company -- there is a shift in the turnover from the commercial explosives to defense explosives, that shift will definitely improve further margins.

Okay. Okay. Okay. And the Katepally plant, what will be the utilization now?

Katepally plant has started. The propellant plant, which is for the large rocket motors, has started functioning. We have the ISRO order already in hand. And along with that, there are several orders from DRDO, ASL are in pipeline for large rocket motors. And also HMX/RDX plant, high explosives plant has started functioning. And we are also assembling the rockets and missiles at Katepally plant for export also. For Israeli orders we are assembling the missiles from there. So it has already started. Next year, it will come into complete operations.

[Operator Instructions] The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Yes. Sir, firstly, you mentioned a couple of one-offs in this result. If you can just repeat that? I think there was INR 2.85 crore of wage revision. And anything else?

INR 2.76 crores of powder factor deductions.

Sorry?

We call it as powder factor deductions, which is done by Singareni Collieries. That is the...

See, the -- when explosives are supplied for mining activity, the performance of explosives is assessed by powder factor. And based on the powder factor, the valuation is done, explosives. So this is where in the valuation, what we invoice and what finally evaluated, there will be -- whatever difference is there, this is that difference.

Okay. So this is also one-off. So around INR 5 crores, INR 5.5 crores is one-off expenses?

Yes.

Okay. Secondly, sir, in our Q2 con call, you were mentioning that we will still try to do INR 200 crore top line in FY '21, and we are still at INR 118 crore after 9 months. So how do you see Q4 and FY '22?

As you are aware, the first 3 quarters they are really -- we were under stress to perform because of the deliveries and all those getting delayed due to various reasons, that import of raw materials and various clearances and inspections, people not traveling and all those. Now third quarter and the fourth quarter, the momentum has started. So we are hoping that the backlogs -- part of the backlogs, we can push through in this quarter. That's why we are still hopeful of somewhere -- reaching somewhere closer to it.

So we are still hopeful of reaching close to at least INR 200 crores.

Yes, INR 200 crores, okay, I mean we mentioned at that time. But the major exceptions that happened later is about the availability of ammonium nitrate, especially for our new content, which we got from Singareni Collieries. So actually, that has dented our calculations with a little substantial amount.

Okay. Okay. And out of this INR 233 crore of defense order book, how much is less than 1 year orders? Because I understand there are few orders which we have to execute within 6 months. So within 1 -- let's say, by end of FY '22, over next 5 quarters, how much we can execute out of this?

Yes. About INR 150 crores kind of thing is possible with 18 months kind of period. 12 months or the 9 months, it is difficult to say. But normally, it is an 18-month kind of period, INR 150 crores kind of turnover should be possible.

Okay. And sir, are there any big tenders where we have participated or we are going to participate in the next few months?

We have already participated in several tenders, which are under -- in pipeline and some we negotiated, some negotiation is going on. But many of them are on the limited tender basis. So we are hopeful now.

Hopeful?

Yes.

Yes, big tenders are there, that is like 2 years back or so what we have done, which were canceled. And the now the date of -- was extended till March. So we may be doing that in March that is BMCS and ammunition project.

[Operator Instructions] The next question is the line of Abhishek Ghosh from DSP Mutual Fund.

Sir, just a couple of questions. One, we just wanted to understand how is the competitive intensity scenario for the nondefense part of the business, both in terms of Singareni and coal this thing and also in the overall housing and other segments? If you can help us understand that?

Yes. It's highly competitive. It's highly competitive. There are more than 40 players in the industrial explosives business.

But has it improved? Or has it improved a little on back of ammonium nitrate not being available in -- and this supply chain disruption, are you seeing that benefit? A lot of the smaller players are kind of having issues. Are you seeing that at the marketplace?

The availability of ammonium nitrate is still -- it has not improved at all to that extent. We are hoping that maybe end of this month, some imports may come. Otherwise, there is no improvement in that area.

So some of the smaller players may not be able to procure ammonium nitrate. Is that a possibility?

Yes.

Okay. Okay. And sir, in terms of the defense outlook, how are you seeing in terms of more from a 2- to 3-year perspective in terms of the overall -- see, because the challenge with defense is, one is the order, second is the execution. So there usually is a gap. So how are you looking at that prospects of the overall defense perspective?

Execution. See, we have already executed several orders, which you are aware. And in those areas, we do not have any doubt in that. But the only issue is where the government has to issue FIMs, which have to come from other agencies. There, sometimes the delays take place. Like this year also, current year also, that is one of the major factors. The overall industry was in a bad shape. And the manufacturers of other components like hardware, which are coming as FIM, yes, those delays affected us. So there is a possibility of such delays affecting our overall expectations. But in general, otherwise, we don't see any other -- any problem in executing the orders.

And sir, just 1 last question from my side. Are you seeing some of the smaller regional players...

Sorry to interrupt you, Mr. Ghosh. We are not able to hear you clearly, sir.

Is it better now?

Yes, sir.

Okay. Sir, in terms of the regional players because there's supply chain disruption, are you seeing people shutting down or in balance sheet trouble because profitability for the industrial sector has come down? Are you seeing some of the players kind of going out of the system? Is that something that you see?

You are asking specific to explosive industry or?

Yes. Yes. Yes.

Shutting down means, yes, if there are people, small players and all those where the raw material problem is there or did not get that, yes, temporarily, they are shutting down. They are closing down the plant, but we can't say that they have gone out of business.

So they can come back moment the supply chain kind of restores?

Yes. Yes.

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

Sir, my first question is, government is giving a lot of emphasis on exports of missiles and all. So can you throw some light what -- does it open opportunities for our company for export of missile?

Yes. You are very much aware about our company bagging the export order first time in history from Israel.

Yes.

Yes. And first time, we also got the export permissions from the government, DGFT and other areas. So this is an indication of, yes, support coming from government. We have to utilize the opportunities, and then we have to prove to the expectations.

So have we got permission to supply to the Turkey of RDX and HMX orders?

No, not yet.

Not yet. Okay. And sir, space program wise, there is a lot of talk of privatization. So we are getting -- we were to supply strap-on motors to the ISRO which were to be used in the space flight. So have we supplied those motors now?

Yes, we started the activity, but because of the -- again, for everything, it comes back to pandemic only. The ISRO people, there was a ban on travel of ISRO scientists. So they were not traveling and whatever activity was going through, only video conferencing, or sending all the way samples from here to there and there -- so because of those reasons, overall, there are delays. But still, there is a lot of progress. The first rocket motor, we are hoping that this end of -- month end, we will start casting.

[Operator Instructions] The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Yes. Sir, first question is regarding this ammonium nitrate. So obviously, the lesser inputs have impacted the supplies to Singareni. But going forward, do you see -- is it -- because when we bagged this order due to the competition in the tender, we already had got this order at very low margin. So do you see that this tender execution will be almost like not profitable?

We are trying to see that at least our -- we keep floating by requesting Singareni to reconsider this, to treat this as a force majeure condition. We are trying.