Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of Premier Explosives Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Bhatt from Stellar IR. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. I, On behalf of Stellar Investor Relations, welcome you to Premier Explosives Limited Quarter 3 and 9 months FY '22 Earnings Conference Call. We shall be sharing the operating and financial highlights of the quarter and 9 months ended December 31, 2021. We have with us today the senior management team of Premier Explosives Limited, Mr. T.V. Chowdary, Managing Director; and Mr. Srihari Pakalapati, CFO. Before we begin, I would like to state some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. Documents relating to company's financial performance have already been e-mailed to you. Now I would like Mr. Chowdary to share his initial remarks on the company's performance for the quarter. Over to you, sir.

Yes. Thank you, Mr. Abhishek, and good afternoon, everyone. Thank you for joining the call. I wish you and your family the best of health. We'll begin the call with a key industry update, followed by an update on the company's operational performance during the quarter. To begin with, the government's impetus towards defense sector is promising. India's defense budget for the financial year '22/'23 stands at approximately INR 4 lakh crores after excluding the component of the defense pensions. It's primarily focused towards the upkeep and modernization of operational armed forces. The capital outlay towards the modernization of armed forces has been increased by 12.82% with an allocation of close to INR 150,000 crores. In addition to advanced growth of indigenous military manufacturing infrastructure, the government has put emphasis for self-reliance initiative, where 68% of the capital procurement to be earmarked for domestic industry, which is up from 58% in '21-'22. Indian defense R&D budget stood for 25%, which will encourage new skills further in the defense sector. Recently, the government announced a fresh list of 351 subsystems and components that will be restricted to be imported. By 2025, the government has set an ambitious goal of exporting aerospace and defense items and services worth over INR 35,000 crores. We believe the Government of India's measures towards reducing imports will bring opportunities for Indian manufacturers, reducing imports and exporting the products. Commenting on the test of missiles, India conducted 2 successful anti-ship missile tests BrahMos and Uran, which were launched from the Indian Navy guided-missile corvette in February 2022. In addition, India also successfully test fired a new user of the BrahMos supersonic cruise missile off the cost of Orissa in Balasore. Now coming to the company's performance. After numerous headwinds in recent past, we are now moving towards growth trajectory. On account of successful mass vaccination drive by Government of India, we have not witnessed a material impact of COVID-19 third wave during the quarter. We have generated healthy cash profit of INR [ 3.44 ] crores. With this, the company has generated the total cash profit of INR 13.07 crores during first 3 quarters in financial year '21/'22. This has enabled us towards improvement in working capital cycle. With strong order inflow going forward, we emphasis to generate better cash flow, which will be utilized towards strengthening our balance sheet. We are at the midst of ramp-up in the business activities. We envisage a strong order inflow in our high-value defense segment, which will drive the growth of the company. Now coming to our company's performance fiscal 2022 began on its sombrous 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 future. Let me update you on the status of a few key orders during the quarter. The dispatches for Chaffs and Flares as per our expectation. Update on MRSAM, the production is faring well, and we continue to supply rockets in quarter 3 financial year '22. For Astra, we have dispatched [indiscernible] during the quarter. And we are expecting to increase this quantity with availability of more pre-issued material from BDL. BrahMos, we have completed the technology transfer, and we are able to take up the casting of the full fledged motors. And the rocket motor order from Israel. As you are aware, we have 7 different orders for rocket motors from Israel. Out of which, We have already successfully executed 3 numbers, another 4 are in the process of completion. And we have also received another order for our warheads from Israel, which is also progressing well. And other than this, we are also interacting with different customers in various other countries for exports of rocket motors, which we are expecting them to certify in the year of '22 to '23. Now I'll 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 will present the financial results for the quarter ended December 31, 2021. The revenue from operations for Q3 FY 2022 stands at INR 506 million as compared to INR 488 million corresponding period last year. The EBITDA stands at INR 44 million compared to minus EBITDA of INR 37 million in previous year in the quarter. The EBITDA margin has gone up to 9% projection of improvement contribution from the defense segment. In Q3, in '21, '22, we reported a net profit of INR 6 million compared to a loss of INR 52 million previous year. Now coming to the order book. The company's current total balance order book stands at INR 4,011 million, out of which explosives business comprised of around INR 993 million, defense segment, [ INR 1,515 ] million and services that is operational and maintenance was INR 1,503 million. 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 Shivan MS from JHP Securities.

Sir, the first question that I had was on the order book -- when we I see our order book excluding the services part, so in defense, it is very range bound. So it has been in between this INR 150 crores to INR 180 crores of order book. So why have you not seen any traction in terms of increasing orders, considering there is so much impetus and there are a lot of these Israeli orders, which were expected, number one. And even on the explosives part, it has kind of stagnated at this INR 100 crores level. So that's my first question.

Whatever orders in hand are only projected in the order book. There are -- the orders which are in the pipeline and which are about to be received and all those are not shown in that. As you are aware, defense -- orders getting converted into orders in the defense sector takes qualification and then time and all those. Now we have completed that part, even Israeli orders also -- the initial orders were trial orders what we have executed. Now we are expecting all of them to get converted into bulk orders. When the orders come, yes, definitely, the order book is going to swell. Where as right -- the present figures are exactly what are on hand and what we are executing. So I hope that we'll be able to announce probably better order book in near future.

Okay. sir, then what would be that the pipeline as in the bid book? And what would be the conversion rate, some color there so that we understand what could be the expected order book moving ahead?

I think, a lot of orders. I mean a lot of -- we experienced some good orders and all are in pipeline. At this moment, you cannot just say some figures. But things are in good shape. We'll inform and intimate to the stock exchanges and others [indiscernible] when it concerned. Probably, we are expecting some good bids in the near future.

Got it. Okay, sir. And sir, in terms of the utilization of our plants, so the Katepally plant currently would be at what utilization level?

Yes, Katepally plant has just started. Like I mentioned earlier, I repeat again, defense and aerospace industry, as soon as the plant is ready, it will not get into full-scale production. So right now, it is in the qualifications level. We have several orders in hand for Katepally. But all those orders will become continuous production once the first number is ordered -- produced and successfully tested. So now we are in that stage, one after one, because it's a new facility, again, if we have to go through the qualification process. So we are in that process. And then I think by next year, we will start producing almost to 60% capacity.

Got it. And sir, could you -- I think you mentioned the cash flows generated from operations. Could you just repeat that for the 9 months?

For the 9 months, the cash profit generated out of corporations is about INR 13.5 crores of this [indiscernible] 13 crores, which is only the cash profit that came into operations. I mean we can see a lot of comparability and flexibility in working capital management.

So what will be the CFO then, sir, the cash flow from operations after the working capital changes and the tax outgo, what would it be?

No. Actually, the -- I mean for the last 9 months, actually, the real technical cash outflow would not be there for the taxation because there were some carry forward and the Katepally has started and we were expecting a good amount of the depreciation from there. So basically the INR 13.5 crores is completely, I mean, converted into working capital.

So you're saying that the CFO is nil?

Sorry, I didn't get you.

No. The cash flow from operations as reported would be nil or would be INR 13.5 crores, I'm not understanding, sir.

No, just cash profit -- I mean the cash generated out of operations for the 9 months. That amount is reflected in the working capital. The operations have gone up from significantly -- so last year, we did about INR 150 crores. This year, we are expecting about INR 100, about 30% up from the revenue.

At the same time, the cash flow coming out of the INR 13.5 crores is being utilized for the working capital needs because now we are growing and more and more defense orders are coming. That is what he means. Isn't it?

Yes, sir.

The next question is from the line of Sanjay Awatramani from [indiscernible] Capital.

Sir, any CapEx plans? And what are the sustainable margins we can expect?

CapEx plan, yes, of course, there's some additional balancing equipment and all those are is there. It is always there. But other than that, one of the plants we have taken up is that increasing our capacity of shock tube detonator plant. There is going to be additional capacity. And in the current year, we are going to capitalize the bulk explosives plant, which is constructed in Godavarikhani. I think in the -- by the end of March or April, it will be capitalized. Now the plant is complete, and it is in the inspection process of the statutory bodies. So these are the 2 CapEx plans we have in the current and coming years together.

Okay. So can you quantify these amounts?

About INR 10 crores.

Yes, about INR 10 crores altogether it will be. What is the next question?

Next question is sustainable margins.

Actually, we have experienced an average of about 11% EBITDA for the past 9 months, and we expect it to continue. But at the same time, we are experiencing some significant growth in the top line. So obviously, it will be contributed to do the downline.

Okay. So 11%, we are expecting to maintain and this can grow above 11%.

Yes. It was -- at least the overall average of 9 months was about 11%, and we expect it to continue.

Okay. Okay. Sir, this INR 10 crores CapEx which you have mentioned. So this is for both the plants. And this will be for only for FY '22, right?

Yes, yes, FY '22.

And can you give us some guidance for FY '23?

FY '23, it will be normal. Maybe for some sort of tooling and for the new orders and all, maybe INR 2 crores to INR 3 crores for FY '23.

There is 1 more there, which may happen in the year '23, which is that our land allotment at Sriharikota, near Sriharikota. You are all aware that AP government, we are waiting for the allotment of the land. If that gets allotted, maybe the infrastructure may start there.

Okay. Sir, any revenue guidance for FY '23?

From which case, sir?

For FY '23, overall revenue guidance, sir?

We are expecting about 20% to 25% growth, sir.

20% to 25% overall growth in revenue for FY '23, right?

Yes, sir.

Yes.

[Operator Instructions] The next question is from the line of Monica Arora from Share Giant.

I have a question. Do you think that we will be able to repay our debts?

No. Actually, to be frank, we have very little debt on our head. Actually, there is a term loan is only about INR 3 crores, which will be repaid in next 4 quarters. And there is some loan from the promoter, which is about INR 7 crores. This is very nominal, and there is no -- I mean we are not expecting any big [indiscernible]. I think that will be cleared.

Okay. Okay. And sir, what kind of cash flows do you see coming in, in the next, say, 2 to 3 years in FY '23, '24, like kind of cash flows?

Yes. The kind of depreciation, it is getting charged to the P&L is about INR 10 crores a year. Actually, that is -- you know that will be like additions to the real profit. So we are recording -- maybe this year, we are expecting about INR 17 crores, INR 18 crores cash flow profit. And it will be, I mean increased in coming next 2 years. It will be above the present level. So we cannot comment on the future this thing.

Okay. Okay. Okay. And sir, as an investor, what do you feel how we should look at the company? So I'm asking about 2 things, about the shorter perspective and also about the longer perspective, say, in the next 2 years, what's going to happen and in the next 5 years, what's going to happen?

Yes. Actually, ma'am, I'm pleased to inform everybody that yesterday, we completed 42 years of incorporation of Premier Explosives. And 42 years back, we started as a 100% Indian company with that, and after 42 years with slightly -- normally with the growth whether the companies or people will become a little sluggish. So you have seen that in the past 2 to 3 years. Now again, we are overcoming that as we are shedding over this. And then we look forward to a better growth and the better performance with so many new products added to the company. Otherwise, earlier, we were only industrial explosives company, which is really highly competitive as on date.

And how do you see the business outlook, sir, going forward?

Actually, the contribution from the defense will go up significantly from now, and we are expecting the 20% to 25% growth from the top line. And we are looking further some good things to happen from the new -- purpose with a new, I mean, location at Andhra Pradesh, which we are expecting the land allotment very soon. So we are expecting some good things to happen in coming days. And the Katepally facility, it is not just for the existing products, we have added a lot of new product manufacturing facilities, like these are coming into now production, land mines and high explosives and all those. All these -- they are expected to add a good top line and bottom line both. Now, exactly figure probably I'll not be able to share, yes, but yes.

The next question is from the line of Sunil Patel, an Individual Investor.

I just want to know the reduction in employee benefit expense quarter-on-quarter for last -- almost 3 quarters. Any specific reason sir?.

Yes. You know that we have given a VRS in our major -- and there's a reduction of manpower. And apart from that, presently, we have -- our operations have gone up in Katepally and all those. Like earlier, we were sharing with you, we have redeployed mostly our people from other facilities and then Katepally facility we have added with the people without increasing the burden. So this has definitely brought down the cost of manpower and the employee welfare costs plus 1 of the operations at Jagdalpur, which was running on service contract. That contract was over by July and then now -- after July month, that expenditure has come down.

The next question is from the line of Raghav Rathi, an individual Investor.

The first question that I have, sir, is around the presentation, the investor presentation that has been released, whereas for the next 5-year plan, we are looking to become a full missile integrating agency in way of one-stop solution. Just wanted to understand what is the progress there? What is the road map on that particular front where we move transition from just being a propellant supplier to an integrator?

Yes, Mr. Rathi. Thanks for the question. If you look at us 3, 4 years back, we are a propellent manufacturing company, like you rightly said. But today, now we are not just a propellent manufacturing company. We are rocket motor manufacturing company. The all rocket motors what we exported to Israel are not propellants, full rocket motor manufactured and assembled by us. And also now in various DRDO projects, now we are participating as a rocket motor manufacturer. And from rocket motor to go into missile is the next step where the missile comes, it is the warhead, our payload and the electronics guidance system, all will come. So that is our next plan. We already have the required licenses and facilities all are in place. So we are working with different organizations whose specialization is in electronics and communication systems in the missiles and all those. So a lot of MoUs are there. And we are expecting a good growth in this area, this line.

Got it, sir. Just a follow-up question around the new CapEx spending that's happening across multiple platforms by the Indian Army, both in terms of the artillery as well as in terms of the missile defense system. What is the potential that you're seeing there? Because I'm not sure if you are a part of the Rudram development project. But then there are a lot of new missile systems that the Air Force and the Indian Army is test firing. Are we a part of any of those very big programs, just like we were a part of the Astra program?

Yes, yes. We -- like you are aware of Astra program and LRSAM and MRSAM. We are very much there, and now they are getting productionized and bulk supplies are going to BDL and all those. Apart from that, we are there -- we are only propellant manufacturers and suppliers to all the new missile systems of the DRDL, that is QRSAM, NGARM various other programs, we are supplying the special low smoke propellants for that. Plus the few technology transfer for new missiles with BrahMos. Now BrahMos is going to be a big business. And then we are very much there in BrahMos. So apart from these 2 and the new strategic systems, which are developed by DRDO, where the big -- large rocket motors are there. Now we are already very well established in manufacturing 4 different types of -- different Agni variants and other programs, which I don't want to name them here. So we are already there in those areas. And our facility, new Katepally facility is going to provide us all the required equipment and all those. Then the export orders what we are -- development orders since we completed, we are expecting them to get some -- converted into production orders in the coming year. That is '22, '23.

Got it, sir. Got it, sir. Sir, just if I could squeeze 1 more question. Have you seen instances where we have lost out business to competitors, especially in the missile propellant or the missile rocket motor manufacturing space. Because what we understand is Solar is also a very big player in this area, and I just wanted to understand the competitive dynamics here.

I don't know how that kind of feeling has come that -- we have lost. This is -- I don't know why. We are very much there in the front. We are not in the last or anything. Yes. Yes. commercial explosives, yes, I agree, Solar is a large player because of the large volume of capacities they have built in and all those, yes, they are doing. And whereas we are not trying to grow so much in that area. Our concentration is more in defense. And definitely, we have not lost to anybody, we are in the forefront.

Got it. Got it. Sir, any movement on the BMCS or artillery front because that's been in the pipeline for quite some time now, and we haven't seen any movement at least from the government side.

The government has not yet to -- the RFPs and all those other RFQs are not yet converted in any way into. They're still at that stage.

The next question is from the line of Renuka Jadhav, an individual investor.

So I have a couple of questions. The first question is on the working capital days. What is the working capital days for this quarter?

For the working capital for the -- I mean it varies depends on the segment. But in commercial explosives it is hardly about 30 days. But in defense, it is coming to about 140 days in the defense segment.

30 days, right? 30 days and...

In commercial explosive segment, it is 30 days.

Okay. Okay. And also, sir, you have mentioned that you see strong order inflow. So can you throw some light on that?

Order inflow.

Like I have mentioned to you already, the new products, we are already into countermeasures. Countermeasures, whatever earlier orders we executed and some orders are in pipeline. Already if you go and see in the defense orders and all those, you will see those tenders and all those -- of course, the orders are not issued, but we are very much there in all those. Then another segment where we are now qualified and ready to supply and waiting for orders to come very soon is that mines, different types of mines, which are -- these are bulk production activities where the numbers will be more in lakhs, unlike missiles and other systems where it will be in 100s. And the high explosives plant, that is HMX and RDX. Our plants are ready, but because of this COVID and then travel of people and all those restricted, the exports have not started. Right now, we are using it for domestic market and then self-consumption. Once the exports pick up, then that area also, we are expecting in India. So these are the new areas. And like I mentioned about the export of rockets in defense that also will give us a big push.

Okay, sir. Okay. That was helpful. And I have another question, like what kind of opportunity do you see on the Israel deal with India?

We find a good opportunity there because they have found a good partner in supplying to them the propellent and rocket motor because of our association with Israeli companies in development of LRSAM and MRSAM projects. And with the completion of this earlier 3 orders, which we completed development order, we have generated much more confidence in them. And after that, we started getting more. Like I mentioned to you, we have right now other than those 3, we have another 4 orders and also now they have placed for warhead which we are executing. So with this, more and more requirements are going to come and then bulk quantities will come now.

The next question is from the line of Shivan MS from JHP Securities.

Sir, you spoke about a lot of new products which we are going to be entering into. So sir, in terms of margins, how do these products come out to be as -- from the legacy products, if you could give some idea?

So this margin is usually we never tried to answer that question because there is also competition and all of you know very well. But yes, these products...

Sir, broadly, no numbers, but from a very broad perspective, if you could give an understanding.

Sir, it is very difficult to share any margin details at the moment, sir. So definitely, it will be much better than existing.

Because of the niche market of defense products and all those, yes, we definitely have better margins than industrial explosives, where market is really highly competitive. And as we are shifting from the commercial -- industrial explosives company to defense, you are seeing the transformation of the company is helping us in getting the better profits. I think that much only I can answer to that.

[Operator Instructions] The next question is from the line of Sanjay Awatramani from [indiscernible] Capital.

I just wanted to know, I mean, I've seen that in the presentation, you have mentioned that you're supplying for Bharat Electronics and Bharat Dynamics and various PSUs. So how the structure is working for you? Can you tell me, I mean, how we are working with DRDO? Or how this is in place?

Can you please repeat the question?

The functioning of the company, Premier Explosives and how this is going ahead with the PSUs, how are the orders going on with ISRO or DRDO. How are we moving ahead -- I mean the structure -- I just wanted to know the structure how we get the tenders and how we go ahead with this?

Yes. With our association where we have already executed successfully many products and many orders, our reputation with -- interactions and reputation with the DRDO and ISRO and defense PSUs, like BDL are excellent. Anything related to high energy or anything comes, they remember only Premier for that. That's the relationship we have, and then that is the thing we developed with them. what else I can say other than this.

Okay. Okay. So if I would say that when we participate in this tenders, I mean there would be other competing new companies as well in the private and public space as well. So what are the order winning chances for us, sir, if you can give us some highlight on that.

For many products, we are the single source, single vendor single source. So there -- that is one point. Second area, for many products, there are only 2 vendors or maximum 3 vendors, mostly. So these are all done by L1 and L2 basis. That is normally L1 gets 60%, L2 gets 40% like that and all those. So we have fairly good chance in winning that tenders.

Okay. So this will be in detonators, right, if I'm not wrong.

Yes.

Okay. Okay. This answers my question.

The next question is from the line of Raghav Rathi, an individual investor.

My question is specifically regarding the Chaffs and Flares because you haven't heard a lot from your end in the last 1, 1.5 years about that. I just wanted to understand 2 things. One is whether the Chaffs and Flares that we produce are compatible across all platforms? So whether it's the new Rafales, Apaches, Chinook or even sea-based platforms, that is first. And secondly, do you see any export potential? And what is the progress around that just around Chaffs and Flares?

Yes, there is a good export potential also. And the Chaffs and Flares, the platforms, you know there are 2. One is NATO and another is lots of treaties that is at Soviet Union and all those. So we -- nowadays, there is no that barrier drawn between these 2. So right now, we are manufacturing both, for these as well as those air crafts, that is one thing and...

In the export prospects.

Yes, export prospects, yes, like we are competing with our global competitors in international market also. Of course, we are here to get any order, but we started competing.

Right. Any progress that you see coming up in the next 6 months around this? Because what I understand is Chaffs and Flares are more of a commoditized product, and it's more of a cost play. And if you're competing against the more expensive foreign players, then I think we should have a good chance there. Correct me, if I'm wrong?

Yes, you're right. You're right. And many tenders, like I mentioned you, they are in the pipeline, and we are expecting them to come in the very near future, which are in -- which are across the RFP space, and they are under active placement of orders.

The next question is from the line of Aryan Varma, an individual investor.

Am I audible?

Yes, you are audible.

So my first question is, when can we expect revenue contributions from the Thorimba tech transfer, the ammunition one?

Sorry, it's about Thorimba you said something. Can you repeat the sentence?

Yes, I'm asking about when can we expect revenue contributions and the tech transfer?

Tech transfer -- technology transfer.

Revenue contribution, when will it start to contribute in the revenue?

General, you are saying, general technology transfer from anybody.

No, no, I'm asking about Thorimba tech transfer and when can we expect the revenue contribution?

See, the revenue contribution will come only when we win the tender. Winning the tender, it depends upon -- now it is at -- RFPs are all answered and submitted, it is a process, which may take 6 months to 1 year by MOD process that where they analyze technically and all those because that is a Make in India scheme. So yes. So it takes time.

So my second question is, this is a scenario-based question. So when you say in the earlier con calls that we'll move from INR 30 crores to hundreds and thousands, and while we move from development to production orders. So may the investors expect in some kind of exponential roles from the company when we move from development to production orders.

Development to production orders?

Yes. My query is like can we expect exponential growth in terms of the revenue because our revenue itself is sub-200. So if these orders...

Yes, you're right. In development, the numbers in 2-digit figures. But when we go for the production, it goes to 3 digits or 4 digits. Yes, definitely it will give an exponential growth.

So like we can expect this growth from FY '23 onwards?

Yes.

[Operator Instructions] The next question is from the line of [indiscernible], an Individual Investor.

For the comparative reasons for the December quarter in '20 and '21, it is okay. Okay, there is a growth. But when we compare the results of the September and December, there is much more reduction in the profit margin, what's the reason behind this actually?

Yes, sir, that is mainly because of the product mix, change in product mix. I mean, the change in product mix only make that difference. Otherwise, everything will be all right.

So there is tremendous reduction in the profit margin. Top line is decreased by INR [ 4 ] crores and margins were decreased nearly 1/4.

Actually, there was a reduction. There was a reduction. You are comparing with the September quarter, sir?

Definitely, September and December, 2Q. I'm not comparing the last year with this year. I'm comparing with the same year, actually.

Right, sir. No, no, when the September, the EBITDA was about 13%. And in December, it was about 9%. So the reduction [indiscernible] in EBITDA. Okay? So that mainly caused due to the changes in the -- I mean, change in product mix. There is -- even in the last quarter in September quarter, we have supplied -- build the products, which had good margin. And this quarter, it might be decreased.

When we are in a commodity business, then it will be equally distributed turnover and profit margins. But we are in a business where that it will be up and down surges in the supply, whenever the product is delivered, it goes up when the product is in the building stage when we are building the product, it shows less. So we have the different products and different segments, wherein the margins are not equal.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. T.V. Chowdary for closing comments.

If there are no questions, I thank the investors for their interest shown in the company and attending the meeting and putting the valuable questions which also definitely help us in future running the company. Thank you very much.