Premier Explosives Limited (526247) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Premier Explosives Limited Q2 and H1 FY '23 Earnings 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.

Thank you. Good afternoon, everyone. I, on behalf of Stellar Investor Relations, welcome you all to Premier Explosives Limited Q2 and H1 FY '23 Earnings Conference Call. We shall be sharing the key operating and financial highlights for the quarter and half year-ended September 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 (sic) [ Pakalapati Srihari ], 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, Vishal. Good afternoon, everyone, and thank you for joining the call. We'll begin the call with a key industry update, followed by an update on the company's operational performance during the quarter. On the defense industry, like we have been mentioned and like you may also be aware, the Government of India has an ambitious defense production target of USD 25 billion by 2025. This includes USD 5 billion from exports by 2025. The government's goal for the India is to become a net exporter of defense equipment. The Government of India has made many changes in [ recent year ] that have had a positive impact, and it has risen to become one of the top 25 defense exporters in the world. India's defense exports reached INR 80 billion in the first half of this year and are anticipated to surpass the INR 130 billion mark from last year. By the end of 2030, the Government of India will be making defense equipment for itself as well as for the friendly countries, Make in India, Make for World, is the new motto for defense production department. In recent years, the government has taken several steps to increase self-reliance, including increasing foreign direct investment in defense manufacturing, establishing a separate budget for purchasing locally-manufactured [ military ] hardware and notifying lists of weapon, equipment and subsystems that cannot be imported. Recently, the Defence Minister has released a fresh statement stating that between December 2023 and December 2028, 780 components and subsystems will be subject to phased import ban. With the last -- with the latest indigenization push covering items used in fighter planes, trainer aircraft, helicopter, submarines and tanks, the recent list of import bans consists of import line replacement units, LRUs, subsystems, components. These contain 2,500 items, which are already indigenized, and 458 items, which will be indigenized within the given time line. Contracts going to domestic businesses have increased. Over 10,000 MSMEs have entered defense industry, and there has been growth in employment, R&D, start-ups and innovation. And coming to -- specifically to the recent updates for missiles, as I have informed all of you about our productionization of missiles developed by DRDO, that is LRSAM, MRSAM, Astra, NGRAM, QRSAM. The productionization efforts are going on. And now we have production the final integrator, BDL. And in addition to these domestic requirements, now, as we have informed you earlier, we have developed rocket motors for export purpose, and those are now accepted by the customer and they are getting converted. Some almost 4 of them were converted into production [indiscernible]. So this is going to keep us busy for the coming 3 years. Now coming to the industrial explosives segment. From the start of the current fiscal [indiscernible] has been improving on the raw material pricing price. The raw material prices, which have spread [indiscernible] up to almost 200% in the last 1 year is now stabilizing, and also this applies for the coal sector. Pricing of the supply to coal sector policy and all those have changed, and that has brought a little relief to the industry. In terms of demand outlook, India is rapidly industrializing, requires high power supplies and raw materials, which has increased the country's coal mining and coiling activities. This signifies that India's demand for industrial explosives is growing rapidly, particularly in the mining industry. There are products like coal, limestone, iron ore and stone aggregate from quarries were produced. There is a significant supply-demand gap, which needs to be narrowed down in near future. In financial year '23, '24, the Ministry of Coal forecasted domestic coal production will increase to 1.2 billion metric tons. In financial year '23, the demand for cement is predicted to increase by 7% to 8% to 382 million metric ton. Thus, there is a definitive opportunity to increase the use of industrial explosives in the mining and related industries. Now coming to our company's performance. We continue to move on our growth track. During the quarter, we have generated healthy cash profit of INR 5.94 crores, with our execution of -- with our 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 flows, which will be utilized towards strengthening our balance sheet. The changing business mix with the increasing contribution of defense segments [indiscernible] for our overall margins. On the order intake front, too, there has been good progress. Let me take you through the new orders -- order update issued during the quarter. The company has recently signed an MOU with Hindustan Aeronautics Limited in the field of manufacturing, [ assembly ] and testing, storage and transportation of explosives for bombs and missiles. Received new orders from Israel Aerospace Industries Limited for manufacturing and supply of warheads with total value of USD 537,500. That is around INR 4.3 crores and expect to be delivered by May 2023. Production and supply of booster rocket motors for a total value of USD 688,000, that is INR 5.5 crores and expected deliveries by March 2023. The company also received an advanced amount of USD 2.44 million, that is INR 19.4 crores towards the development of production lines and procurement of raw materials for the order received from the Overseas Entity for supply of rocket motors. Recently, our company has dispatched another PSOM-XL motor to SDSC-SHAR and has become the first privately owned enterprise, a non-ISRO unit, to have been successfully qualified for complete insulation lining and propellant processing of PSOM-XL motors to be used aboard a PSLV launch vehicle. Premier Explosives Limited has produced the first-ever PSOM-XL at a non-ISRO facility intended for flight use on PSLV-C5X. These are some of our notable updates from quarterly orders. We are extremely pleased to report that our current outstanding order book as on September 30, 2022 stood at approximately INR 601 crores, which translates into 3x of our financial '22 revenue. The [indiscernible] as per our expectations. And regarding other rocket motor feature in the development phase, that is Pralay and BrahMos. As we reported in the last quarter, we have already reached the completion of TOT state. And we are waiting for the FIMs to be issued by the customer to take it up to production levels. And we are expecting this to happen before the end of this financial year. And MRSAM, we've already received orders against the requirement of Army and Navy. Now the order for requirement of Indian Air Force is in pipeline, and we are hoping that, that will come to us before the end of this financial year. Total number of all these things are going to really give our Katepally and then Peddakandukur units both of them fully busy with supplies till the end of coming 2 financial years. Now I 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 would present the financial results for the quarter and half year ending September 30, 2022. The revenue from operations for Q2 FY '23 stands at INR 60.6 crores as compared to INR 55.1 crores in the corresponding period last year, with a 10% growth year-on-year. Our operating profit for Q2 FY '23 stands at INR 7.2 crores as of compared to INR 6.9 crores in the corresponding previous last year -- corresponding period last year. The operating margin for the...

Excuse me, participants, this is the operator. The management line is disconnected. Kindly be online while we reconnect them. [Technical Difficulty] We have the management line connected. You may proceed.

Yes. 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 and half year ended September 30, 2022. The revenue from operations for Q2 FY '23 stands at INR 60.6 crores as compared to INR 55.1 crores in the corresponding period last year with a 10% year-on-year growth. Our operating profit for Q2 FY '23 stands at INR 7.2 crores as compared to INR 6.9 crores. The operating margin for the quarter stands at 12%. In Q2 FY '23, we reported a net profit of INR 2.5 crores as compared to INR 2.6 crores in corresponding previous year. The revenue from the operations for half year ended FY '23 stands at INR 112 crores as compared to INR 88 crores in the corresponding period last year, which is translating into 28% year-on-year growth. Operating profit for half year ended FY '23 stands at INR 13 crores as compared to INR 12.9 crores in the corresponding period last year, which shows a flattish growth. The operating margin is up 12% in H1 FY '23. Net profit in H1 FY '23 stood at INR 3.8 crores compared to the profit of INR 3.8 crores. Now coming to the order book. The company's current total order book stands at INR 601 crores, out of which explosives business comprises around INR 132 crores. The higher margin defense segment is at INR 333 crores, which is around 55%, half our total order book. And the service segment, that is operations and maintenance, is around INR 137 crores. This order book represents a strong growth over the previous years. We are confident that with our continued execution on this, our forthcoming quarters will continue the growth trajectory that we have seen in the past few quarters. 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 Darshil Pandya from Finterest Capital.

I just wanted to get an idea about greenfield expansions you have done. So we have achieved this -- this is the license side Chief Controller Of Explosives.

Okay. Please go ahead, sir.

Yes. I'll rephrase it. So we have received this license from the Chief Controller Of Explosives. So when we expect this orders to start?

See, the new unit, Katepally unit, mainly the licenses are for assembled rocket motors, for which we already received orders, and we started supplies. We have licenses for explosives, that is RDX and HMX and their compounds. We have already started and producing. And we have a license for bombs and warheads, which we already started producing. We have license for producing mines, we have started producing. We have license for producing ammunition, ammunition part, which is under development with our [ DcPP ] mode at the [ ARD ]. Once that is complete, we will get into production mode. The point is utilization of the facility. We just started. So the utilization will be at a lower level. And we expect to go to at least 70% to 80% utilization by year ending 2024.

Okay. Fair enough. And sir, one of the questions, you said about the cement industry and the coal industry is going up in the good numbers. And also the defense, there's a good air about defense in the defense sector precisely performing well. So where do you see these numbers going up? And do you see any margin efficiency on this part?

Margin deficiency? Sorry, I did not -- margin efficiency or deficiency?

No, efficiency, sir.

Yes. We definitely see, as we explained and as I've mentioned in my thing, last year, there was a steep increase in the raw materials because of which the mining sector really we could not -- in fact, it has pulled us down. But now, that part is over now because of the demand supply gap. The Coal India and Singareni, they have revised the pricing policy. And with this now imports not having any restrictions. Now the total raw material costs are coming down, and then they are comparable with the selling prices. So that should bring the change.

And as you see this raw material prices sustaining for next few quarters? Or what -- how do you see that?

Yes. Currently, it appears that they are going to sustain because the major Indian suppliers are public sector. So yes, so the government policy definitely also affects them. So we hope that this present trend, which has come after the experience of steep increase, will continue, which will yield better results.

Okay. And the very last question. The guidance on H2, sir, is it same? Or what do you expect for the next half?

We expect much better from now.

The next question is from the line of Abhishek Poddar from HDFC.

Sir, regarding the explosives, if you look at 1H '22 versus 1H '23, the revenues have gone up from INR 30 crores to INR 46 crores. Sir, if you could give us some understanding that how much of that is price-driven and how much is volume-driven?

Yes. No, actually, yes -- so one of the -- detonators division, yes, there has been some price hikes. But in other divisions, of course, the growth has come only from the -- with the volumes. We can say about 50% came from the price hikes and 50% came from the volumes hike broadly.

For the overall, including detonators, sir?

Yes, sir. Including detonators, it comes under the explosives division.

Right. And sir, like we have seen in terms of raw material, ammonium nitrate [ prices seeing ] a correction in last quarter. So how should we think about the revenues from here and margins from here for the explosive segment?

I don't know. Actually, there was -- actually, the prices have gone up by [ 200%, 250% ] over a period last 9 months before that. But now we just corrected hardly by 10%. And now again, it is coming back. But actually, what happened now because of the revised terms with the, I mean, Coal India and Singareni, we are able to absorb the prices basically.

In olden days, that is 1 year back, the pricing, that is the price escalation clause was being affected once in 3 months, which as I said -- yes, the price increases, which happened today, we were able to get the impact of that after 3 months. Whereas in this 3 months period, further increase has taken place. So now that pricing policy has been corrected and changed. And now the frequency of correction has increased. So at the same time, even the markets also stabilized and then prices have come down compared to that. So that's what really support us.

Okay. So now the lag impact passing on the prices will not be there? Or will there be a 1 quarter lag, sir?

No. It will be 1 month only, the lag.

Only 1 month. Sir, like on the converse, if the prices of ammonia nitrate fall further from here, would you benefit on the margin side? Is that the way to think?

With the new, I mean, price fixing -- with the Singareni and -- Singareni. So at least most of the thing will be -- I mean, whether it increases or decreases, most of the thing will be adjusted against the price. So -- but at the same time, we'll be left with -- I mean, whatever is the margin, which we have done at the time of the [ tender ].

Okay. So even if the price is correct, let's say, by 20% hypothetically, next month, only your prices will be adjusted. So then margin you will not be able to keep a higher margin.

Maybe at least 50% will be adjusted, at a minimum.

Okay. Okay. And sir, on the defense side, so there's an interesting slide where you've given the opportunities for Akash and MRSAM, Agni, BrahMos, and where you have also mentioned the [ PS ] contribution. Sir, if you can give us some understanding that, let's say, for Akash, there is a possibility of 2 regimens getting ordered. What will be our share in that? And who is the competition for us?

In Akash, we are providing the all [ energetic ] components in it, that is booster propellant, sustainer propellant and the initiators. So if you look at the supplies made up till now for Akash, whatever bulk supplies made, almost 75% of the requirement has been met with PEL supplies. Now in terms of finance and the money, I won't be able to say that how much percentage and all those. But the total volume of the [indiscernible] material, 75% of them are met from Premier's supplies only.

Okay. Sir, the reason I was asking, for example, for 1 Akash, the order value, which, let's say, Bharat Dynamics receives, could be INR 5,000 or INR 6,000 crores, how much percentage, sir, would be our share in that?

No, our percentage will be much lower than those cores are there, actually.

Yes. So like, would it be like INR 30 crores, INR 40 crores? Or how should we think? Some understanding if you can give, sir.

I don't know how to answer that question because...

Understood. Sir, not an issue. So sir, the other way to -- on Slide 21, you have 6 missiles mentioned there. What could be the opportunity size for us, sir, overall? And how should we think about the defense order book for the next 1, 2 years?

Exclusively for these missiles developed by DRDO, at least we expect some INR 100 crores of turnover coming from these missiles, all these put together.

And that will be annual, sir, or that's for the entire program?

Annual, annual.

Otherwise, financial year you can take.

Okay. Okay. And that currently is less than INR 100 crores, that's already there in the order book.

Yes.

Right. And sir, this defense order book of INR 330 crores, how do you see that moving in a year's time and 2 years' time?

Yes. Many of the IPs are technology transfers, which have taken, which are intangible. Now they are all getting converted into products and orders and supplies. So this should -- we expect a real good boost because one more area, which I've mentioned in my earlier question's answer, that is mines, which we started already producing, we qualified and the production has started now. And main production will come from the second half of the current year. And also it will go to next year. Similarly, the countermeasures, which are -- again, Premier is the sole supplier from the country. That [indiscernible] results we are expecting a big jump in that requirement for emergency procurement and various other things. So by putting all this together, yes, it looks quite bright.

Right. And sir, just the last question. From the MOU with HAL, what could be the revenue stream from that, sir?

Yes. That -- this is the beginning. We have signed an MOU to cooperate with them and then work together because as you know what is HAL's strength. And our strength is providing them the energetic components and materials for all those things. So it's just beginning. It's too early to premature to [indiscernible].

[Operator Instructions] The next question is from the line of Nachiket Gandhi from Gandhi Securities.

With a strong -- such a strong order book, sir, how -- if you can give a time line on whether we are capable enough and when can we reach revenues of INR 500 crores, INR 600 crores annually with EBITDA improving from 15% to -- around 15% to 18% and through which projects, if you can just brief about the time line going forward?

Our estimated time for achieving this is by year 2025, we expect to reach INR 500 crores turnover.

Okay. And sir, through which projects? If you can [ weight ] the projects...

The contribution mainly comes from the exports and mines and warheads and countermeasures.

Okay. Sir, about the Pinaka Mark II, we have been hearing names of L&T and Tata, but where are we on that because -- report also said production under TOT, Pinaka Mark I, II. Mark I, yes. But where are we placed on Mark II?

In Pinaka, we are only in the propellent casting, not in the entire rocket motor fabrication. So we are qualified, and we have -- ToTs are completed long back with [ HMRL ] for Pinaka standard, that is Mark I, and also Pinaka Mark 2. Now it is a question of the other bigger players who are taking the entire program. Pinaka launches, launching and all those. Now we have to tie up with them. So various MOUs and ties are going on with different organizations. This also can be -- Pinaka also can be one of them.

Okay. No, sir. But where are we currently on that?

We are not directly into Pinaka supplies to MoD because we are not making the hardware and all those. We can be only the sub-vendor to the -- and supplies.

The next question is from the line of Prabir Adhikary from Ratnabali.

I have 2, 3 questions. So like in, recently, we have done some MOU with HAL. And sir I want to know like, do we have any plans for missile integration? We, so far, are a component supplier to BDL. So do we have any plans in future?

Yes, we have. We already have the license for integration rocket motor as well as for missile integration. So what coming here is because total missile integration involves a lot of communications and [indiscernible] and various other electronic components and onboard computer system, [ CCaaS ]. So that part, our facility, we can take up the integration, but that input has to come from the expertise of the other partner. So we already have multiple MOUs signed with all the big partners who are doing it. And we have -- we are ready and we have plans for doing that for others.

Sir, why I am asking this question because there is a company called Economic Explosives Limited, it's a 100% subsidy of solar, which is also in a similar line of business like you. They have already submitted their proposals for Pinaka MBRL, extended version as well as the other missiles similar to BrahMos and a lot of other things. They are also in 2 [ chaffs ] payload also. So as they are similar line of business like you and they have -- they are doing these kind of activities, so where are we now? This is the #1 question. Second is, how do we see EEL as a competitor going forward?

See, in the missile integration area, I don't think we are competing with EEL because they have different plans. They want to make the full missile and supply to the MoD, probably, from what we hear from the news, that is what it's understood. But we have -- in our case, our strength is to handle the energetic materials, high explosives handling and integration and assembly. So we want to stick to our core strength and participate along with other participants who have the strength in electronics and communications and hardware, other areas. And then together, we want to participate. That is our strategy. And then yes, we have -- it's not one partner, we have multiple partners already in that line.

Okay. So my next question is related to space, where ISRO is providing assistance to private companies so that they can also make launch vehicles. And we are one of the supplier of strap-on models to these launch vehicles. So we have association with companies like Skyroot Aerospace, Pixxel, AgniKul, who are on the verge of making launch vehicles.

Yes. See, these are 2 different things. One is the new start-ups, they are coming up with their own proposals and designs. Yes, we are working already with them. Apart from that, the second one is the PSOM-XL, the PSLV itself is going to be privatized, where we have successfully supplied and qualified as a vendor for strap-on motors. There also, we have participated with multiple participants in the tender as a partner with them because we are the only qualified vendor up till now who have supplied and then successfully proven the PSOM. So we already have tied up with them, and it is in the process of finalizing. So I think it is better to announce when it is through rather than at this stage.