Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Premier Explosives Limited Q2 FY '22 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 IR. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. I, on behalf of Stellar Investor Relations, welcome you on Premier Explosives Limited Q2 and H1 FY '22 earnings conference call. We shall be sharing the key operating and financial highlights for the quarter and half year ended September 30, 2021. We have with us today the senior management team of Premier Explosives Limited, Mr. T.V. Chowdary, Deputy Managing Director and Mr. Srihari Pakalapati, 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 emailed to you. Now I invite Mr. Chowdary to share his initial remarks on the company's performance for the quarter. Thank you, and over to you, sir.

Yes. Thank you, Ms. Hina. Good afternoon, everyone. Thank you all for joining the call. I wish you and your family the best of health and spirit over this festive season. We will begin the call with the key industry updates, followed by an update on the company's operational performance during the quarter. To begin with, we would like to congratulate DRDO on the successful test firing of the Akash Prime missile, the latest addition to the country's integrated guided missile development program and mega defense boost. The government has announced a series of reform measures and initiatives over the last couple of years aimed at transforming India into a hub of defense manufacturing, including increasing foreign direct investment in defense manufacturing, creating a separate budget for purchasing locally manufactured defense products and notifying the list of 209 items, subject to an import embargo. In keeping with its efforts to increase self-reliance in the defense sector through increased direct participation, the Ministry of Defense recently submitted a proposal to shorten the time required to acquire defense equipment to 2 years from the current average of 3.5 years, without involving research and development. This is to boost the private participation in the defense sector. Furthermore, DRDO, India's premier research organization, is adopting the GOCO model to open its doors for private players. DRDO will provide access to its network of 50 laboratories located across the country with assets worth more than INR 100,000 crores. Through this -- this further reflects the union government's commitment to expand the private sector and priming it to play a new role in India's defense capabilities enhancement. Premier Explosives, as a major player in the defense industry stands to benefit significantly from these initiatives. Now coming to our company's performance. Fiscal 2022 began on a somber note due to the disruption caused by the second wave of COVID-19. However, with an increased vaccination drive and a decrease in active COVID-19 cases, our execution returned to normalcy in the second quarter. Additionally, our dispatches have restored to normalcy as the number of COVID-19 cases continues to decline. We remain committed to sustaining the momentum and efficiency of our execution. With increased contribution from the defense segment, we expect operating margins to continue to expand in the future. Let me update you on the status of a few significant orders. Our chaff and flare execution is proceeding as expected. The dispatches that were delayed in the first quarter of the fiscal year due to the second wave of COVID-19 have been restored, and we expect to complete the orders within 2 years' time period. On MRSAM, the production is faring well, and it continues to supply 20 to 24 rockets per month. For Astra, the production has started in the month of July. And BDL has indicated that the required quantity of hardware, which are to be given as FIMs, are ready, and we are expecting a good contribution from this. Recently, Indian Air Force have signed a contracts worth INR 499 crores with Bharat Dynamics Limited for procurement of Akash missiles. This provides the visibility of higher order inflow of Akash missiles in the near future. Brahmos, we have completed the absorption of technology transfer in terms of propellants. Now we are waiting for FIMs to be issued for proceeding with the casting of full-scale motors. In addition to that, the other orders which were in pipeline with DRDO ASL labs were received by us and the production activity has started in the Katepally unit for these large diameter rocket motors. Rocket motors from Israel. From the orders received from Israel, we have executed 3 orders, and among the 3, one of the motors we have received an inquiry for the production order. In addition to that, another 4 orders are in pipeline and their -- no, orders are in execution, another 4 orders are in execution and one also is going on, and we expect to complete these orders as per the schedule. I request our CFO to share the financials.

Thank you, sir. Good afternoon, everyone. The results presentation for the quarter has been uploaded on our stock – on the stock exchange and on the company's website. I believe you all may have gone through the same. Now I will present the financial results for the quarter ended September 30, 2021. The total income for Q2 financial year 2022 stands at INR 548 million as compared to INR 453 million corresponding period last year. The EBITDA stands at INR 69 million, with EBITDA margin of 13%, resultant of improving contribution from the defense segment. In Q2, we reported a net profit of INR 30 million. Now coming to the order book. The company's current total balance order book stands at INR 431 million, out of which commercial explosives business comprises around INR 114 million. The defense segment comprises of INR 163 million and services is about INR 154 million. With this, we now open the floor for questions and answers. Thank you very much.

[Operator Instructions] We have the first question from the line of Bhagyesh from HDFC Mutual Fund.

Sir, my question is, you have given the breakup of the order book in your PPT also right now that there is a commercial explosive order book. See, there is a view that in management of raw materials, everybody is having a tough time. So can you highlight what is your procurement strategy, say, procuring ammonium nitrate or anything else you can share? And what is the margin outlook in that segment?

Yes. Like you rightly said, the entire industry is suffering because of the raw material prices, particularly ammonium nitrate availability and prices for raw materials. So yes, we -- there are various actions taken by us to meet that. One is to depend on imports where the prices will be a little lower than the domestic prices. But to meet that requirement, we need to have larger storage capacity. And we have built a larger storage capacity at our Godavarikhani unit. With that, I think we should be able to easily import more quantity and meet the requirement. In addition to that, the domestic suppliers like GNFCL and RCF. So we are trying to procure more quantity from them and that too in terms of melt and other things and also trying to reduce the price by going for quantity discounts. So -- and third is technically looking at the product and then alternate raw materials and alternate things, as you are very much aware that we are R&D-based and then we -- when the real need comes, we come up with solutions. So we are working very hard on that to ensure that alternate solutions for the raw materials and alternate prices we can do that. And we are hopeful that we'll overcome this with that.

Okay. Now coming to Akash booster that we are doing, this is for the current generation of Akash missiles. Even in Pinaka, there is a next-generation Pinaka system coming with 75-kilometer range. That's the update. So for future programs also, this will help, that we are existing supplier to BDL plus DRDO. Am I right in my interpretation?

It is not clear. You mean to say that our -- continues to supplies to BDL?

Akash next generation is coming. And even the Pinaka next-generation missiles are coming with 75-kilometer range. So our continuity is assured or there is a competitive element over here also for the next generation of missiles, both Akash as well as Pinaka?

It will continue. Actually, okay, Akash, we are already going ahead. Akash is the going-on project. It is -- we are continuing to supply. Even today we are supplying to Akash project. Even though BDL is waiting for their IAF order, but they are releasing orders to us so that they remain in a prepared condition to deliver immediately. So that is going on. In addition to that, the new things which are coming are MRSAM, LRSAM and the NGRAM and Astra. So in all these missiles, we are positioned in an advantaged position to supply. So yes, definitely we'll play an important role in all these.

Sir, the Astra program you mentioned, Astra over the long run, this procurement will be very large from the forces, essentially IAF, obviously. Astra, we will be giving the motor. That's what the PPT mentions.

Beg your pardon?

Astra program, Astra missile, air-to-air missile, we will be giving the motor only and not the other stuff. For the propellant, you have mentioned, non-aluminized propellant. So these are the 2 things that we'll give?

Yes. Propellants and other initiators and all we are giving. We are with only that part. The hardware and all those, there are other vendors and then BDL is the integrating agency.

[Operator Instructions] The next question is from the line of Shivan Sarvaiya from JHP Securities.

A couple of questions. Sir, one is on the order book. So our defense order book, if I see, the trend has remained in the range of this INR 160 crores to INR 180 crores after removing the Turkey order. So just some color if you could give on the trend forward. And is there some slowdown or some consolidation there?

No, I don't think there is any slowdown. Rather, the order book is going on swelling. We are getting more and more orders. And there is -- you can see the increase also. So there is no slowdown, if at all any such impression has come.

Okay. Okay, sir. And out of the defense orders, sir, what is the proportion of the Israeli order book?

Israeli order book right now proportion-wise, it will be within the defense.

Sir, it was INR 25 crores at the end of Q1 out of the total defense order book. So I just wanted to know that number for this quarter. The absolute number also is fine.

Yes. We have about INR 30 crores of orders on hand from Israel, which we plan to execute in the current year. And please mind it, these are all development orders, not the production orders. Once we complete the development, then like I mentioned in my earlier days that out of the first 3 supplies made, one has now come to production order and then we are working on that. And others are also in the line. And this INR 30 crores is only for the development stage. And once they get converted into production, then it will go into numbers -- much larger numbers, hundreds and thousands.

So sir, this order that got converted from the -- from a test order to the production order, sir, what is the quantum of the order? If you could give an idea what it would be when we get it?

Generally, where we are signing the order and all those after the development, there will be an indication, but there is no written confirmation which comes. It comes only once our product is cleared and the static test -- now in India, we are doing the static tests. They are going to Israel for dynamic tests, and then they release the order. So the orders -- the indication, like I mentioned, it is from hundreds to thousands. Exact figure item-wise we'll not be able to tell you.

And we expect these production orders to come in, in the second half of the year?

No, next financial year we can say. Second financial year, there are already orders in hand, development orders, which are, like I mentioned, around INR 30 crores worth.

Okay. No, sir, you spoke about this one order, which has gone into production. So that is what I was trying to decipher that is...

No, that's not gone into production. Now they have indicated. They have production quantities and all those. They have asked us to get ready for that because out of the 3 numbers supplied, 1 number they have test fired and found it all right and now they are talking about production. And other 2 -- probably in a month's time, the other 2 also will come around.

Okay. So these 3 orders you expect them to be starting to fulfill in FY '23?

Yes.

Okay. Got it. Got it. Okay, sir. And sir, in this quarter, we've seen a bit of a margin decline in terms of our GP margin also. Of course, a quarter-on-quarter view is not right. But are we -- any reason for this dip in the GP margin from the last quarter and the March quarter? Because those were in the range of 70-odd percent, and we've come down to 50%. So just wanted to understand the gap here.

This is mainly because of the product mix. Actually, the raw material consumptions are more in the product where we have done mostly in the planning – I mean, the previous quarter. It's probably because even in defense products, there are certain products where the raw material consumptions are more. So that's only because of the product mix. There's nothing else.

And the raw material prices, which are pretty high and they're increasing, are we able to pass it on? Or how does the raw material prices get passed on to our clients?

No, in case of industrial explosives, there is a price escalation clause, which takes care of increase in the raw material price. And in case of defense products, there is no such clause. And variation also, it is not so frequent that the prices will change so frequently. But yes, recently, we are finding a slight increase in the prices. So it is order to order. So next order when we quote we will consider that and the price will be on that basis.

Okay. Okay. So sir, we are confident of maintaining that 15% to 18%, 16%, 17% margin, right, on that EBITDA? That is what we've been doing in the last couple of quarters, not this one?

Yes, sir. If you see from the March quarter onwards, we are almost maintaining between 13% to 18%. Probably we hope that it will be continued.

Okay. Okay. And there are a couple of bookkeeping questions. One is that when I look at the cash flow statement of the first 6 months, it's negative as in there is a cash outflow instead of cash generation, considering we've got a positive EBITDA. So when I look into it, it's -- a lot of working capital has eaten away our cash flow. So sir, any reason for this buildup? And how do you look at it going forward?

Because the stocks in defense have gone up, the inventories have gone up. Like in previous quarters we have explained, we have become more and more of a defense manufacturing company where the turnaround of money is a little slower compared to the industrial explosives. So while that shift is taking place, naturally, the cash flow also changes. Because the product is produced and it takes delivery and inspections and all those, then only we get the payment, so that is the difference between the industrial explosives and defense.

And sir, I see a small increase in the bad debts in the cash flow statement. So any reason for the same? And from where have these bad debts emerged?

No, these have been coming from the -- I mean basically, we have written off some of the debts, I mean, book debts, which have been coming from, I mean, long period. So mostly came from the -- some came from the commercial explosives, some came from the defense also.

There are bad debts on the defense side also considering this is the government that we are supplying to. So I was a little surprised to see bad debts on those fronts.

No, no, it cannot be termed as bad debts, in fact. Actually, the thing is we have [ write off ] the bills previously wherein there were some issues. There are some issues related to LD, late delivery clauses. Some of the old orders, they got delayed because of this COVID and pandemic and all those. So in many cases, we could convince and they have understood and then they have extended the delivery period. But there are some issues where it was not done. So they refused to accept, then we had to write off some of that. These are like that, the bad debts. And some are there where the order was received in the old tax regime where the tax was different and the concessional rates were different. Now the present tax has changed, and now there is a compressional rate for DRDO supplies. So now they are insisting on only paying that tax rather than the old supply tax. So these things, these are the things which have given a little this.

[Operator Instructions] The next question is from the line of [ Mihir Desai ] from Desai Investments.

Sir, my question was regarding -- you had earlier mentioned that there is an opportunity coming in MRSAM and LRSAM and another few some missile programs. So can you please quantify the opportunity size of the sale?

Quantify in terms of numbers?

Yes, sir.

Number of missiles or...

Number of missiles or order size, basically, sir.

Yes. This information is there in the Internet, what Army is procuring or Air Force is -- and Navy is procuring. So I think probably you can get from those.

Okay. So -- and the terms of quantity, sir, can you quantify, opportunity size?

As I mentioned, they are there in that. What are in our hands and what is coming only we can do that. And we have almost...

You can't even give any ballpark number, sir?

Yes, it is like -- already 1,000 numbers order we had received and then we have executed part of it and then balance are going. That is MRSAM. And Astra, we already have an order in hand for 250 numbers, which we're waiting for FIMs to be issued. Like that what we have in our hand is there, but opportunity, it is better if you look into that, you will get better figures probably rather than we telling that.

Sure, sir. Understood. Sir, earlier, you had also mentioned regarding the rocket motor. So what would be the size of these 4 rocket motors that you had mentioned, sir?

For export?

Yes, sir.

What size means, in terms of?

In terms of numbers.

These are the tactical missile category. You understand tactical missile and strategic missile?

Sir, not that much, but...

Yes. Tactical missiles are those medium type or small type ones, which are carried by aircraft or fired from ground level and the surface-to-area, air-to-air, surface-to-surface, all those things. Strategic are the big ones, large diameter, the Agni class and all those. So what we are exporting are the tactical ones.

Understood, sir. And sir, also, I just wanted to know regarding our Katepally facility. So as it is fully operational now, what would be the utilizations that we are operating? If you can share, in September, what were the utilizations which we had operated.

We are -- see, it has just started. As you know, any project when it starts cannot be at 100% utilizations. Right now, I don't know how to [ tell ] in terms of the orders we have booked, orders are in hand, and we have started, and it is going on. And the percentage utilization, it is difficult to calculate in those terms for these plants, propellant plants, where we are doing the large diameter motor. See, unlike the other products, every month you turn out so many hundreds of numbers. Here in -- what we make in Katepally large-scale or large motor, which are strategic, they're produced one in a month, one in 3 months like that. So it's difficult to mention and indicate about that. So even the booking of the -- this also it varies. Once in 3 months, it will be like this and 3 months it will be like that. So up and downs will be there. We have to see at the end of the year how [ it has gone ].

So, sir, at the end of the year, what could be the average peak utilization that we can operate this facility at?

I can't answer in terms of average utilization or percentage utilization, in fact. Because this product to product it changes. I don't know how to calculate this utilization thing for propellant casting because one rocket motor may be 2,000 millimeters, one may be only 50 millimeters. They are all different and different requirements are there for such.

And sir, any further update on land allocation for setting up facility near Sriharikota?

Yes. It is going on. We received NOC from the local authority. And it is going on. Like last time I shared, the collector of Nellore District visited our existing facilities, and he went back and gave a press note saying that, yes, they are allotting the land. So after that, some NOC has come to us. So it's a long drawn process. They will be sending those documents to government and then cabinet decision and all those will be there. So the process may take another 6 months.

Sure. Sir, one question on DRDO front. You had mentioned that DRDO is now opening doors for private players. So do we see any opportunity from these? And if you can again quantify the kind of opportunity do you see from DRDO coming to our kitty?

It's not clear. Can you please repeat the question?

Sir, DRDO -- so what can be the opportunity which we can see from DRDO?

DRDO opportunities?

Yes, sir.

DRDO doesn't buy material, no? It is -- they develop it. After the development, then they go to the agencies like BDL for integration. That is where we get our full business. So DRDO opportunity, okay, in terms of participating in the development, like we have participated in the development of Astra and LRSAM and MRSAM. So now they got converted into production opportunity for BDL. So opportunity will come from the integrating agency. Only DRDO directly is integrating the big ones, strategic ones. And we already have 3 different orders with us from DRDO ASL. I think I don't want to discuss too much on the strategic.

Okay. Sir, my last question is on the bookkeeping front. Sir, what would be our working capital days for this quarter ended?

Actually, with regard to defense, it is coming at about 150 days. I mean it is almost similar to previous quarter also. With regard to the commercial explosives, it is hardly about 30 days.

Okay. And also, if you can share with us the fund-based and non-fund-based limit, sir?

So we had a working capital limit of fund base of about INR 50 crores. So nonfund, I mean, BG and LC limits, we have about INR 150 crores, which are not fully utilized, technically. Second, we have a term debt of about INR 4 crores from [indiscernible], which will be repaid in the next 6 quarters. So we – there is some MSME loans during the pandemic time, which is about INR 8 crores 37 lakhs, [ which were obtained ]. The repayment will be starting from next month.

[Operator Instructions] The next question is from the line of [ Saumya Mehta ] from [ Sanghvi Investments ].

I missed the earlier remarks. I just wanted to know, sir, last quarter, you had mentioned that we had bagged an export order for warhead. So I wanted to know what is the status of the order. Have we received any orders in this segment?

Yes. Yes. The order which I mentioned, now we are executing that. We are in the stage of execution.

Okay, sir. And sir, how is the order pipeline looking in this segment? Are we receiving more inquiries for domestic or export markets?

Can you please repeat? It's not clear.

Sorry. I'll just repeat. Sir, how is the order pipeline looking in this segment? Are we receiving more inquiries from domestic or export markets?

Yes, yes, both. We are receiving inquiries from domestic as well as export market for this segment.

Okay, sir. And lastly, how large this segment can become in the next 2 to 3 years?

Yes. It looks good because one thing is, warhead directly supplying. Second thing is, now all these new areas where we are entering, the mines, mines we are producing, now we are participating in mines. There also you require the warhead composition and high explosive compositions and all those. And ammunition, ammunition also what we have taken license, we are going to produce using them. So this segment has good potential for all those. We think that our 100% capacity utilization comes there, whatever we produce.

Sir, lastly, just one more question. What is the revenue target for the current fiscal?

Sorry?

What is the revenue target for the current fiscal?

We are expecting about 30% growth from last year, which is about INR 200 crores, INR 180 crores to INR 200 crores.

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

Yes. Thank you very much for participating in the session and then I hope that we have -- we could answer all the possible questions -- your questions and then satisfy you. Thank you very much.

Thank you very much. On behalf of Premier Explosives Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.