Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the FY '23 Earnings Premier Explosives Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vishal Mehta. Thank you, and over to you, sir.

Yes. Thank you. Good afternoon, everyone. I, on behalf of Stellar Investor Relations, welcome you all to Premier Explosives Limited Q1 FY '23 Earnings Conference Call. We shall be sharing the key operating and financial highlights for the quarter ended June 30, 2022. We have with us today the senior management team of Premier Explosives Limited; Mr. T.V. Chowdary, Managing Director; and Mr. Srihari Pakalapati, Chief Financial Officer. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Documents relating to the company's financial performance have already been e-mailed to you. Now I invite Mr. Chowdary to share his initial remarks on the company's performance for the quarter.

Thank you, Mr. Vishal, and good afternoon, everybody, and thank you for joining the call. We'll begin the call with key industry updates, followed by an update on the company's operational performance during the quarter. Like we have been mentioning and like you may also be aware of, the opportunity in the defense sector is huge. The government of India has an ambitious defense production target of USD 25 billion by 2025, including USD 5 billion from exports by 2025. Towards defense, the government's impetus towards defense sector continues to be promising with India's defense budget for the financial year '22/'23 at INR 5.52 lakh crores. A key component of this is the major push on procurement of weapons and military platforms from domestic producers. Key defense manufacturing players are focusing on supply chain management. And key defense manufacturing companies are currently also focusing on designing and developing various indigenous [indiscernible] and accession products to boost domestic manufacturing capability and -- aligned with the vision of our [indiscernible] and reducing the country's reliance on imports while promoting the same quality -- the same high-quality equipment needed by our [ forces ]. This focus on becoming [ self-reliant ] becomes even more important as we see the overall geopolitical scenario impacting procurement. To reiterate the numbers, 85,000 crores has been allocated towards domestic capital procurement with 310 defense items reserved for domestic manufacturing. 25% of this, 21,000 crores, has been allocated for procurement through private industry, MSMEs and the start-ups. And Premier being in a unique position of providing energetic materials is associating with all the companies, which are working in building the platforms and other capital equipment. And we look forward for a better and improved future in the coming years. And coming specifically to recent updates on missiles. Now as we have mentioned earlier, the missiles which were under development by DRDO, that is LRSAM, MRSAM, Astra, NGRAM, QRSAM, all these have come for productionization and we are glad to inform you that Premier is the qualified vendor for the propellant casting of all these enlisted missiles. Now coming to industrial explosives segment. Like we mentioned on the last call, too, things continued to improve in terms of raw material prices. Raw material price have skyrocketed up to almost 200% in the last 1 year, which was very difficult to survey when we maintain the supplies as per the commitment. But now things are changing and the prices are stabilizing, and also the supply for the whole sector, pricing of the supplies to whole sector policy and all those have changed. And that has brought [ retail ] relief to the industry. And coming to our company's performance, we continued to go on our growth track. During the quarter, we have generated healthy cash profit of INR 4.1 crores, which are execution run rate improving. And given the nature of our cost structure, the operating leverage of our business will help us to generate better cash flow, which will be utilized towards strengthening our balance sheet. The change in business mix with the increasing contribution of different segments will augur well for our overall margin. Further, with the pandemic-related disruptions hopefully firmly behind us, we have experienced strong momentum in our aggregation. And let me take you through the new orders with you during the quarter. We signed an agreement with overseas entity for USD 13.13 million, which will be delivered within time frame of 18 months of contract date. Back orders from Singareni Collieries Company Limited was [ INR 105 crores ] for supplying of different types of explosives and other accessories. Signed deals with MoD army for delivering of [ NHN ] for a total worth of INR 45 crores. Received order from MoD for manufacturing of 1,500 MTV flares was INR 58 crores. These are some of our notable orders. We are extremely pleased to report that our current outstanding order book as of June 30, 2022, stood at approximately INR 446 crores -- INR 646 crores. It translates into 3.25x of our financial year '22 revenues. The [ factors ] for chaff and flare were as per our expectations. The other areas where the new missile [indiscernible] production of [indiscernible] we have already reached a stage of completing our ToT before entering into commercial bidding. Apart from this, supply towards MRSAM and Astra are progressing and these are dependent on the FIM to be received from customers. And customers have informed at the FIM status has improved, and they'll be able to supply us for distribution to us, and we can meet the schedule. And further quantities, which are going to be delivered in the financial year are expected to be 250 numbers of MRSAM and 150 numbers of Astra as per our vendor deal. They will be able to provide the FIM for this quantity. And as we are dependent on FIM only, the moment the FIMs are available, we will be able to execute the same quantities and supplies in the current year. Now I request our CFO to share the financial performance.

Thank you, sir. Good afternoon, everyone. The result presentation for the quarter has been uploaded on the stock exchange and other company's website. I believe you all may have gone through the same. Now I would present the financial results for the quarter ended June 30, 2022. The revenue from operations for Q1 FY '23 stands at INR 51.8 crores as compared to INR 32.8 crores in the corresponding period last year. Our operating profit for Q1 '23 stands at INR 5.81 crores as compared to INR 5.98 crores in the corresponding period last year. In Q1 '23, we reported a net profit of [ INR 1.26 crores to INR 1.27 crores ] in the previous year. Now coming back to order book. The company's current total order book stands at INR 646 crores, out of which explosive business comprised of INR 140 crores. The higher-margin defense segment is at INR 365 crores, which is around 56% of our total order book. And the service segment is around INR 141 crores. This order book referenced a strong growth over the previous period and is the highest ever level. We are confident that with our continued execution run rate, our forthcoming quarters will continue the growth trajectory. 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 Swechha Jain from ANS Wealth.

Am I audible?

Yes.

So my first question is, like you said, we have an order book of INR 350 crores in the defense category. So I just want to know how much of this will be executed in FY '23? And also our EBITDA margins have improved, but they are still around 11%. So do you think there is scope for further improving these margins? And then my -- another question was that we were executing the orders from a drag, right, which was mainly development and design. And they were expecting this to get converted into mass production orders. So by when this is possible and for which products and what could be the size? Also, what kind of new order inflow in defense we are expecting this year? And also in the explosives division, demand for INR 42 crore order book that will be executed over how much time period, sir?

First question, the total order of defense book is INR 356 crores. Most of these will be executed in the next 18 months. So we are expecting about 50% to 55% in the current year itself. First question. Second question, in the commercial explosives, so we have the order book of 140 crores out of which INR 105 crores came from Singareni, which is to be executable in the next 24 months. So we started from the May. So I think it will be executed about 50 crores current year and balance will be next year. So the margins, as you have mentioned, I think there is some improvement. So we are expecting further improvements in the coming quarters.

Okay, okay. Any guidance?

[indiscernible] depleted last year because of the high raw material costs. Now the raw material costs have stabilized and have come down. Now we are expecting a better margin from industrial explosives, in turn, overall margins. Yes, the question about the Israeli design and development order, we are happy to inform you that 4 others we have executed, design and development orders, and 2 of them are already converted into production orders. And the third one is in the process, which is not included in the order book, but maybe soon we are hoping that they will be added.

So total, there are 7, is it?

Yes. Now it is 8.

Now it is 8. So you said 4 are executed, 2 are converted. And then another 2, sir?

And the 2, one is in the pipeline. Fourth one -- fifth one we are expecting it -- I think we'll announce in due course the order.

Okay, okay, okay. Sir, in defense, what kind of order inflow we are expecting this year?

You mean domestic?

Yes, sir.

Yes. The first quarter already -- like I have -- just to inform others, which are already received. And further to that, yes, we have participated in various other things, which include some new areas like mines and new -- the warheads and other new missile systems we have participated. And at this stage, I don't know, I'll not be able to specifically give you a figure. But yes, we are expecting the good inflow.

[Operator Instructions] The next question is from the line of Abhishek Poddar from HDFC Mutual Funds.

Sir, regarding this defense order book, trying to understand what could be the order prospects for the next year, 2 to 3 years? If you can give some more details that what is the market size of the products that you're getting in India? And what percentage of that you would be hoping to get? And how should this order book move? We have seen a very strong move in the order book in the last 1 year or so. So should we expect certain -- the same growth path ahead also? Some understanding there, sir.

Yes, yes. Based on our activities, present activities, and then the orders and RFPs -- RFIs and RFPs, we expect them to move in the same order coming at least 2, 3 years also within the same -- growth within the same area.

Right. So if I look at the order book growth, it's more than like 50% from the last year. So any understanding, the same 50% growth would be maintained or any absolute number that you want to have?

It will be maintained, it will be maintained.

Okay. So sir, by that logic, your order book could reach about 1,000 crores next year. So that's something, which is achievable? Or how are you thinking of that, sir?

It is achievable because we have geared up all our facilities and systems for that. So the past 2 or 3 years, we are working and building. One after one, they are coming in maturation. And we are hoping to improve further because of [indiscernible] for India and the negative list where the imports are going to be stopped and then totally it will be shifted to domestic manufacturer.

Right. And what will be our share of negative list items in terms of purchases by MoD?

Right now, I don't have in front of me the list, but there are -- I think as on that, we have 6 items, which we are producing or in the process of that in development and which fall under that negative list.

Okay. Understood. And sir, second question is regarding the margins. If I look at the volatility in margins, operating margins were 18% in 1Q '22, came down to single digits and again we had. So how should we think about it on a steady-state basis? And if you could also give some color on the margins for 3 different segments, for defense, explosives and services.

First, I will talk about services. Service expenses, the margins will keep on depleting because it's a long-term service contract of 10 years, even though there is a price escalation plus the increase in expenses towards salaries and wages of people where we keep on increasing. So as we reach the end of 10 years, there will be depletion in the margins there. But coming to the defense sector, of course, you know that which is a high-margin area because of the nature of the business involved and the criticality and accuracies we need to follow, we expect better margins there. So these already we are experiencing. The third area, which is really -- which was giving us uncertainty and then problems [ currently in ] commercial explosives where the raw material prices were fluctuating. And in fact, not fluctuating, last year they have shot up like anything. It went up by 200%. But now the matter was taken up with the government with the manufacturers' consultation and the government also. I think whatever actions were taken by the government, but the prices have come under control because most of the manufacturers are public sector, the raw material suppliers. So they have come, and then we are hoping that this will be maintained because it's also very important for explosive industry to survey for the better outlay or output from the coal industry. So definitely, the interest of the nation is involved in it. And we hope that this will continue, what now is achieved. So with this hope, we are expecting better margins in the coming year compared to even better than that. And also, you have seen that. Now we are shifting, our business share of defense is increasing and the commercial is -- commercial will further increase. And automatically, proportionately the margins should go up.

Right. Understood. Sir, any guidance you want to give on the steady-state margins for all businesses combined or separately, either way?

I can be a little conservative only, I can be. But at least we should achieve a mark of 20%, which is a good figure for the industry.

20% at EBITDA level, sir?

Yes.

And sir, last question on the execution capability. Given we could see a 50% growth in revenues next year -- this year, sorry, do we have the capacity? And if you can talk about the CapEx plan also?

Yes. The CapEx, you know that last year and before last year, we have taken up the investment in Katepally plant, which we will build for defense production. So most of it is invested. But still, there will be further balancing equipment and other things as we keep on getting the orders and then some serial production line equipment we have to build, not only for this, for the export market. Like I was mentioning about now converting into bulk production from design and development stage. That expenditure is there, and we are already incurring. We are on that job already. And about our other capabilities, particularly human resources. This is required, yes. Definitely, the qualified people. Our recruitment has gone. We are already in the process of recruitment and we have recruited. It is going on further as the order book is building that what is going on. But definitely, it's an area which we have to really work and see that the quality of work and manpower improves. And production level manpower, you know one of the products which we produce -- the industry is producing, electric detonators. Electric detonators is being phased out by government of India. So I think the manpower level, which is going to be -- which is being used for electric detonator manufacturing upgrade, next year diverting to our activities of defense and other areas, which are coming up. So the numbers, I think we have enough numbers as on date. We'll be shifting from this operation to that operation. In fact, it would be good, then we know commercial explosives during the rainy season like this earlier, if you see the earlier reports, the turnover and the margins will be low in the rainy season and middle 2 quarters. But now that will not be there. There will be a consistent output for all these figures. I think we'll be prepared for that.

Understood. So sir, if you look at the turnover, which is about INR 200 crores in '22, there is a potential for it to grow significantly by 50% or 100% in 2 to 3 years' time. So our execution capability is sufficient for us to execute it.

Yes. In fact, we have much more capacity because you know that we have handled the service contracts that is the whole plant of Jagdalpur, DRDO plant has operated [indiscernible] and the Sriharikota plant is being operated [indiscernible]. These all contracts are given to us repeatedly based on our operational capability and execution capability only. Only difference is the plant is not owned by us, but the operations all are done by our people. And now we have this done from Jagdalpur service contract. So that trained workforce is available for us to execute and the facility we have built enough capacity to do that.

[Operator Instructions] Next question is from the line of [ Parful Sadat ] from [indiscernible] Capital.

Am I audible?

Yes, sir.

So this may be a little repetitive, but I just wanted to clarify. So to you being confident of order book touching INR 1,000 crores the next year, so is it fair to assume that the revenue would probably be doubling by financial year '24 at bare minimum or would it be even higher?

There is a probability so we can -- we are hoping to reach that.

Got it. Okay. And would it be possible to provide us with EBITDA margins for individual segments, sir, so defense, your explosives and services?

Our facilities are mostly combined facilities so it is different.

Next question is from the line of Akshay Kothari from Envision Capital.

Am I audible?

A little bit louder now.

Yes. So sir, I wanted to know what is the current capacity utilization?

Utilization of?

Current capacity utilization in explosives?

We have various plans and various products. The capacity utilization changes from plan to plan.

Okay. So to put it another way, what could be the peak revenue from the current capacities?

Now we are -- on an average, we can say we are at 60% level of utilization. But it's average, it's the average of the plant. But if we go plant to plant and we go to the industrial explosives, detonating fuse, DF, we are almost at 100% utilization. And detonator -- electric detonator and other areas, we are at 50% utilization. And commercial explosives, that is bulk explosives, we are at 50% utilization. And like that, it varies. Defense, we are at 40% utilization.

Okay. So we won't need any CapEx in the medium term to grow, right?

Yes. No, but see, the product to product, the defense products are different. They are -- from product to product, they vary. So depending on the [indiscernible] if we have to add, we need to add. For example, mainly, it comes from the testing equipment where it needs some special testing equipment, quality control and all those, the specific -- particular product, we have to go for it.

Okay, okay. Secondly, on the competitive intensity, sir, have you seen any competitive intensity rising in the bids which we are making?

Right now, we don't see as on it, we don't see. But we can never say that. There can be others who will try. But one advantage in this industry is gestation period or period for qualification is longer. So any new entrant has to go through the qualification cycle, which we have already passed through and then some. So that gives us a margin compared to them, we will be ahead of them to that extent. I think that is our advantage to us.

Okay. And I understand it would be difficult to tell this, but for what would be our major raw materials for the products, which we are supplying on -- major raw materials as per our order book.

Our major raw materials, ammonium perchlorate for missile products, propellants and all those; and ammonium nitrate for bulk explosives on select basis. These 2 are the major raw materials. Ammonium nitrate, we are totally dependent on the petrochemical industry and other fertilizer industry, which is now mainly under the government sector. And for ammonium perchlorate, we have our own manufacturing facility capacity and also we procure from external agencies for both. These 2 are the major raw materials for us.

Okay. And that ammonium nitrate is different from TAN or technical ammonium nitrate somehow?

Ammonium nitrate, industrial grade ammonium nitrate. Technical grade, there's-- we don't need technical grade. We need only industrial grade.

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

Am I audible, sir?

Yes, yes.

Okay. Congratulations for excellent number. Only defense is going to slow in this quarter, but it's going to revive, I think so. My question is we have a tie-up between [indiscernible]

Sorry. We are not able to hear you clearly. Can you please repeat slowly.

We have a tie-up between [indiscernible] for a high-grade material. Is there any development in this regard?

Can you repeat, sir?

We have tie-up with [indiscernible] for a high-grade material, if there's any development in these results?

No. I think there's nothing significant to mention about the development.

Okay. And sir, what is the import contained in our raw material or we are going to purchase all [indiscernible].

No. We are importing at about 20% of the overall requirement as on today. It is not necessarily we have to import. The ammonium nitrate domestic sources are also available. So our dependence on imported raw materials is very, very limited.

Okay. And it is our raw material, as you say, correlated to [indiscernible] so effective if dollar coke price is increasing and our material price is also increasing...

To dollar, yes, there is some pricing. But most of our imports came through euro. I mean, it has come from euro. The euro has not appreciated so much.

That's fine. Sir, what is our total debt on this quarter end?

We have a term debt that is INR 12. crores, which will be repaid by December. There will be 0 term debt. And there is a working capital cash -- I mean working capital funds. I mean with regard to the fund limits, we have about INR 50 crores. Nonfund limits, we have at INR 145 crores, nonfunded.

Okay. Sir, are you planning for going to any research and development for any particular segment?

Development?

Research and development.

Yes. Well, we have really a lot of work we are doing. Many of the products are in-house we develop there. For example, the countermeasures, which is a major source of revenue today for us, it's completely developed in [indiscernible] in our R&D. And the R&D is continuing on that line further. Similarly, the areas -- you know that we are doing a lot of design and development of rocket motors for export. That's also part of our R&D work.

Sir what is the research expenditure ratio turnover regarding our...

R&D percentage?

Yes. Regarding sales over.

If we go by the R&D percentage, it will be very, very limited because we are in a hierarchy metal business [indiscernible] explosives. So even the R&D work on is developed -- done in the pilot scale level in the plant, on the production plant, because the production plants are built to all the safety norms for operations during the development stage. So exactly earmarking and then discerning what is the R&D is a bit difficult other than what we had...

Next question is from the line of [ Pravir ] from [ Ratnabali ].

Sir, I have a couple of questions. First of all, if I see the contribution of defense to the total revenue, last year, it was roughly 55%. So I want to know like this defense contribution, what would be the defense contribution for FY '23? And what is the target for you to bring it to? Is it like to take it to 70%? So this is my first question, then I'll come with the follow-up questions.

Sir, the defense contribution for last year was about 55% of the total turnover, which will be -- I mean, it will be increased current year. But the kind of the volumes increase, there you can see the substantial incremental [ depend ].

Okay, okay. Sir, in defense, can you please give us an idea about the -- each segment, like how much is the contribution from propellants, how much is from chaffs and ammunitions? Can you just break it down for us?

Product-wise, defense except is difficult to give.

Okay. So is it like propellants is the biggest contributor in defense?

So we have both, propellants and the countermeasures and there are pyro devices, pyrotechnic devices and all those are there. All our [indiscernible].

Okay. So in propellants, there are 2 kind of propellants, solid and liquid. I guess you have a very high market share in solid. So the kind of missiles are developed by India. So what would be the scope of opportunity for solid propellants and for liquid? And what is your take on it? How much can boil down to this -- to your company?

See, we are not into liquid propellants. We produce only solid propellants and composite propellants, it's not double [indiscernible]. And about the opportunity, see the defense missiles and systems and all if you look at the recent developments, all are with composite propellant, where Premier is the source for propellant. So that's the opportunity we have in front of. And liquids are used mainly in the stealth application and where liquid propellants cannot be loaded and kept waiting. They have to be loaded into the rocket before launching. In defense systems, you cannot wait and then launch when an enemy is trying to attack you. So all defenses are going to be composite propellants -- solid propellants.

Sir, is it like this cruise missiles perhaps more liquid propellants or am I wrong?