Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Q3 and 9 months FY '20 Earnings Conference Call of Salzer Electronics Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as of date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you all for joining our earnings call from third quarter and 9 months ended December 2019. I have with me Mr. Baskarasubramanian, Director Corporate Affairs and Company Secretary; Mr. Murugesh, Assistant Company Secretary; Savli Mangle and Smit Shah from Bridge Investor Relations. We have already shared our results update presentation, and I hope you all most have received it and gone through the same. As you're all aware, the company started as a single product manufacturer, manufacturing CAM operated rotary switches in India. And over the years, we have evolved from a single product manufacturer to a company that offers total complete and customized electrical solutions to our customers. Though we are operating under the electrical electronic product group, for ease of our analysis, we have classified our businesses into 4 divisions, namely: Industrial Switchgear business, the Wire & Cable business, the Building Segment business and the Energy Management business. Now coming to the developments that happened during the 9 months of the financial year. As it has already been intimated to you all, I would again like to share that we have completed the acquisition of 74.8% of equity shares of Kaycee Industries Limited, which now becomes a subsidiary of Salzer Electronics Limited. And I've also appointed Mr. Raman as Vice President, Finance and Operations at Kaycee Industries Limited. Now coming onto our quarterly and 9 months' financial and business performance. Our financials for the current and past quarters have been restated as per IND AS accounting guidelines. During the quarter, our revenues declined by 6.1% to INR 134.7 crore from INR 143.5 crore in the corresponding period. This was mainly on account of lower contribution from Wire & Cable segment due to the slowdown in demand. In fact, the Wire & Cable division during the quarter declined by 19% year-on-year. Our revenue for 9 months ended December 31, 2019, and stood at INR 434.7 crore (sic) [ INR 434.6 crore ] compared to INR 404.7 crore in 9 months FY '19. That is a year-on-year growth of around 7.5%, mainly driven by exports and higher contribution from Industrial Switchgear business. During the quarter and 9 months, our exports contributed 20.7% and 16.7%, respectively, towards to our revenues, mainly driven by increase in demand for our products under the Industrial Switchgear segment. The EBITDA for the quarter stood at INR 16.7 crore as compared to INR 16.1 crore in the corresponding previous quarter, which is a growth of 3.8%. The EBITDA margin for the quarter was at 12.4%, which is an increase of 119 basis points over last year. This increase in EBITDA margin is backed by higher exports of Industrial Switchgear products. The EBITDA for 9 months FY '20 grew by 8.8% year-on-year to INR 50.9 crore from INR 46.8 crore last year, driven by increase in contributions from business of industrial Switchgear and Wire & Cable. The 9-month FY '20 EBITDA margin stood at 11.71%, which is an increase of 15 basis points as against 11.5% in 9 months FY '19 on account of change in product mix. The profit after tax was at INR 5.5 crore in Q3 FY '20 as against INR 5.4 crore in the corresponding previous period of Q3 FY '19, which is a growth of 2%. And for 9 months FY '20, PAT grew by 10.8% to INR 17.3 crore (sic) [ INR 17.2 crore ] compared to INR 15.6 crore (sic) [ INR 14.9 crore ] in 9-month FY '19. Now moving on to breakup of revenues as per the business division. The Industrial Switchgear division contributed 50% of the total revenues in this quarter and 44% in 9-month FY '20. This segment has grown by 6.7% year-on-year in Q3 FY '20, driven by increase in exports and demand across products, especially uptick in Three Phased Dry Typed Transformers. For the 9 months, the Industrial Switchgear division has grown by 14% year-on-year. The Wire & Cable division contributed 41% to our revenues this quarter, declining 19% year-on-year on this quarter, mainly on account of lower demand in the domestic market. This division contributed 47.3% in 9 months FY '20, with a growth of 5% year-on-year. Moving to the Building Products division. This business is the only B2C business that we have. During the 9 months of the financial year, the real estate market has been on the slower side. And we are yet to see pickup in demand that has impacted the overall industry. We hope that this changes in the coming quarters and will help us to increase our contribution from this segment to the overall revenues. This division has contributed 6.8% this quarter and 6.4% in 9 months. The fourth is the Energy Management division, contributing 2.2% revenue in this quarter and 2% in 9 months FY '20. This is an order book-driven business and revenues have been driven from annual maintenance contracts. This financial year so far has been a very challenging year due to the prolonged slump in the industrial activity in the country. For us, extended monsoon has affected the agri-cable business and the severe slowdown in demand in real estate sector has affected the Building segment business. In spite of the headwinds, we have grown in the Industrial Switchgear business due to our constant push in the market and our long-term relationship with various customers. We expect that our enhanced manufacturing capabilities and brand visibility among our customers will enable us to scale our business and customer connect. Besides strengthening the revenue drivers, improving ROCE and working capital cycle also form a part of our core strategy. We are also working on system and process management to grasp a better visibility of orders based on which we can plan our inventory levels. The collaborative efforts taken internally will lead us to improve efficiency, reduce working capital inventory levels. We expect with these initiatives our ROCE to improve from the current levels to around 18% within the next 3 years. With a very competent team in place, we are confident of achieving the milestones we have set for ourselves. We're also constantly on the lookout for new opportunities for technical associations to strengthen and increase our product offerings. This is all from our side for now. I would once again like to thank everyone for your time and attention. We can now take questions.

[Operator Instructions] The first question's from the line of Sanjay Shah from Alphaline Wealth Advisors.

Sir, can you highlight about the growth which we have achieved in Switchgear are from which vertical, that is which are the -- which products, which gave us such a nice jump in our Industrial Switchgear business? Was it transformer or anything else? And can you elaborate on our transformer business? How it's panning out?

I think Three Phased Transformer business is definitely panning out well. For 9 months, we have achieved a turnover of around INR 20 crore in Three Phased Transformers. And I think our Wire Harness business also is turning out to be extremely well. In 9 months, we have achieved a turnover of around INR 15 crore in that. So these 2 have contributed together around INR 35 crore out of the INR 195 crore that we have done in 9 months so far.

And what's the visibility, sir?

Sorry?

Visibility, future visibility.

I think these 2 businesses are growing at around now 50% year-on-year compared to last year. And we see a good visibility in Wire Harness, particularly with various customers, both in India as well as exports. And another reason for Industrial Switchgear business growth is, we have got some additional business in railways, which has contributed to this growth, and also exports. And exports in this quarter grew at around 20% year-on-year compared to last -- I think last 9 months, we are, in exports, we are up by around 16%. Particularly to, I would say, U.S.A.

U.S.A., okay.

And that is also one of the reasons that the EBITDA margins are a little better.

Right. So U.S.A., we are supplying to the -- our distribution channel or directly to the OEs?

U.S.A., majority of our business is through distribution. We also do some small business to OEMs. But I would say 90% is to distribution, our dealers in U.S.

Sir, value-wise, can you tell us how much we have done business with railways and how much with -- in exports?

The exports, I think overall, exports for 9 months, we have done around INR 75 crore. Railways exactly I will not be able to tell, but we have definitely grown around 40% in railways compared to last year. I can share the figures with you.

Yes. Sir, my second question was regarding the balance sheet. We have not disclosed December '19 balance sheet. So will it be possible for you to share some numbers on debt side? What is the total debt right now, short-term and long-term separately?

Yes. I think the long-term debt has increased by around INR 10 crore, mainly on account of the data cable project that we are implementing. Apart from that, there is no change in the long-term debt. So overall, long-term debt is around INR 15 crore right now. On the short term borrowing, it also has increased by around INR 10 crore. Currently, it's around INR 145 crore, INR 150 crore.

Right. INR 150 crore. So total around INR 165 crore to be -- basically about.

Correct, right.

Sir, just my last question, how do -- can you run up through the future, how do you see it panning out next year? We -- DCL as it is? How will be the next year?

Current year itself, we had estimated that we will reach a top line of around INR 630 crore this year. But unfortunately, I think the markets have been extremely challenging, and the industrial scenario has been too, too tight. There's been a demand slowdown across sectors, which has actually not allowed us to grow at that pace. But nevertheless, I think we will -- we are still hopeful of reaching INR 600 crore to INR 605 crore in the top line this year, which is still a growth of, I would say, around close to 10% to 12% -- 10%, I would say. Next year, I think, we hope the situation definitely has to change because it's been quite long that we have been in this kind of situation now. So we expect the industrial scenario to change the economy to pick up. If that happens, I think we are looking at close to around INR 720 crore, INR 730 crore next year.

Right. Great. Okay. INR 720 crore means growth of around 20%.

18%. 18% to 20%.

18% to 20%, okay.

Yes. [indiscernible] Come back for any other questions.

The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, in terms of EMS businesses, sir, how is the ordering pipeline? And how we see the business for this year and next year?

On the EMS business. I think this year, for 9 months, we have got a revenue of around INR 8.8 crore, which is mainly the yearly maintenance that we're doing, and this will continue for 1 more year. Apart from this, on the pipeline, we haven't got any orders so far, but we have actually quoted for a tender, a couple of days back in Punjab, which is a INR 40 crore worth of tender. So we are expecting the results to come out in the coming week, and we will know what is the status of that. So that's the only tender that has come out in Punjab and we have quoted for that.

Sir, in terms of finance costs, we have been able to reduce sequentially finance costs. So any -- what is the key reason? Sir, it's rate reduction or it's aided by say, lower borrowings -- average borrowing, lower average borrowings?

Lower -- lower utilization of working capital.

Okay. Sir, then in terms of the other expenses, like, say, top line has still slightly come down sequentially, but other expenses have gone up INR 2 crore on a sequential -- INR 2.2 crore on a sequential basis. And on lower top line on a year-on-year basis, other expenses have increased 13 -- by 10% each, sir. Any particular reasons, sir?

Any particular reasons you're looking at year-on-year December to...

Year-on-year, December -- year-on-year December and also sequentially, both have gone up sir?

Actually, year-on-year, December, if you see -- okay. And I'm not looking at quarter-on-quarter, I'm looking at 9 monthly basis. 9 monthly basis, we are almost on the same levels like last year 9 months. I don't have the figure exactly for the quarter, which, if you give me...

On the 9 months basically is, you're right, sir. It's INR 38 crore, INR 38.7 crore, INR 39.4 crore.

INR 39.2 crore and INR 39.4 crore. Yes. On the quarter basis, I will -- I'll check and then come back to you on this one?

Sure, sure, yes. Sure. Given that the copper is coming off slightly, so can we express like at least for a quarter or 2, near term, the benefits in our Switchgear businesses, sir?

Yes, the copper price drop will definitely -- the benefits will accrue for the Switchgear business. On the Wire & Cable, it will get passed on because that is -- there is no effect on the copper price for us. It will be passed on, on a monthly basis to the customer. But for the Switchgear business, yes, I think we will definitely see an uptick in the margins.

[Operator Instructions] The next question's from the line of [ Chirag Patel ] from [ Adinath Shares ]

Hello, am I audible?

Yes, We can hear you, but I would request you to speak a bit louder?

Okay. I have a few questions. First of all, we tender for INR 74 crore for the acquisition of Kaycee Industries. So with respect to that, what are the plans for FY '21 for stand-alone Kaycee business and operation? So we can get benefit out from the penetration of this particular entity?

I think, a good question. We are actually seeing -- already seeing the benefits by way of acquisition of Kaycee. Kaycee's top line last year, FY '19 was INR 25 crore. FY '20, they're going to be flat at INR 25 crore. But there's definitely, we are seeing an uptick in the margins, improvement in the percentage -- margin percentage. For FY '21, we are seeing -- we are looking at INR 32 crore -- INR 30 crore to INR 32 crore of revenues on the top line and a 10% PAT.

INR 30 crore to INR 32 crore you are expecting?

Yes. INR 30 crore to INR 32 crore in top line. We're looking at a 10% -- 9% to 10% PAT levels. But apart from that, the benefits that you're already seeing is the increased railway business to Salzer. I think that I already mentioned to you because only Salzer and Kaycee are the 2 major competitors in railways. So we've already got a price increase with railways. And also, we are seeing better business to Salzer flowing in.

And sir, to an earlier participant, you replied that we are expecting turnover of around INR 720 crore this year, which is about 18% top line growth in FY '21, particularly. [indiscernible] sir. Yes?

Yes.

So I am just -- I just want to know in this INR 720 crore guidance, are we including this INR 30 crore to INR 32 crore top line of Kaycee Industries, which we had...

Yes. No, no, no. All the figures that I have been mentioning so far in my presentation is stand alone.

Mr. Patel, may I request you to speak on the handset mode? Sir, your audio is not very clear from your end. If you are on speaker, I request you to speak on the handset mode.

Yes, yes, no issues. Sir, I wanted to know that the consolidated EBITDA margin is what we're expecting for...

Sorry, say that again.

And my second question is on consolidation level, what EBITDA margin we are expecting from Salzer as well as Kaycee together?

On Salzer, I think we will end up between 11.75% and 12% EBITDA margin for the full year. Kaycee, I don't have the figures right now, but I think it will be on similar lines. Maybe 11%, not the 12% but 11%.

Okay. This is for FY '20, right?

FY '21 -- '20 and '21.

[Operator Instructions] The next question is from the line of [ Trisha Sarang, ] an individual investor.

Yes. Sir, you've mentioned that our Wires & Cables business has declined by 19% in this quarter if you compare year-on-year basis and you said is due to season demand.

Yes.

Yes, so do we see this continuing in the future? Or like, can you elaborate on that?

Actually, our -- the Wire & Cable business that we do are majorly contributed from the agri segment, unlike the other Wire & Cable majors. We do very less of real estate building wires and industrial wires. So majority of our business is agri segment. So the reason for the decline in this quarter is because of the extended monsoon. Normally, the agri season picks up during October, November and goes until June. So that's the peak season. You always see, historically, we have done extremely well in Q3, Q4 and Q1. That's the 3 quarters that we do extremely well, and Q2's always down. But unfortunately, because of the extended monsoon, this Q3 also has not done well, and we are seeing the same situation even in Jan. Hopefully, I think from Feb onwards -- Feb until June, things should change and get better. We expect that to happen.

Okay. Sir, my next question is, what is the contribution of Salzer branded Wires & Cables?

I think, I'll say, 65% to 70% is still white labeled to various parties, including L&T. So at 30% we are -- we will be to Salzer direct business out of the INR 205 crore that we have done.

Okay. Okay. Sir, so my last question is, our exports have increased during this quarter, which you said is due to the supplies to U.S. So -- and you said that the -- it is mostly to a -- 90% is to our dealers, yes?

Yes.

So any plans of expansion in that area? And if you can share the top customers.

I think U.S. is turning out to be a potential market for us, mainly because of the trade tensions that U.S. had with China. We have seen quite a lot of new inquiries, which we are working on. We're also working with a couple of large OEMS, which I won't be able to mention the names right now until we come to a conclusion with them. But we see a lot of potential with U.S. coming -- in the coming years. As of now, the increase in business is to -- directly to our existing dealers, with whom we have been working for several years. I think that is the business increase that we have seen as of now, but going forward, we see a lot of potential in supplying many other products from our product portfolio into U.S.

[Operator Instructions] The next question is from the line of Kirthi Jain from Sundaram Mutual Fund.

Sir, next year, can we expect the tax rate to be [ at 25 ] sir -- [ 25 percentage ]?

Which one, sir?

Tax rate, sir, tax rate. Tax rate currently, it's at 30% range, tax rate, sir.

Yes, I think we did work out to see with our chartered accountants which rate to adopt, whether to go for 25% tax rate or continue with the existing tax rate and avail the exemptions. So we found it advantage to continue with the existing tax rate and avail the exemptions because our effective tax rate after the exemptions is coming to around 24% today. Whereas if we go for the new tax rate, we -- it is 25-plus cess and other things, it comes to around 28.5%. And we will not be able to avail any exemptions. But we plan to continue with this, although, on the books, it will be 33% tax because of the deferred tax.

But on the effective cash flow basis, we'll be paying 24% real tax.

It's 22 plus cess, sir, actually -- I mean, I take it.

No, I think it's 25 plus cess?

All put together, it's 25.12, sir.