Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to Salzer Electronics Limited Q1 FY '21 Earnings Conference Call. Please note, this conference call may contain forward-looking statements about the company which are based on beliefs, opinion and expectation of the company as on date of this call. These statements are not 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 for the first quarter ended June 30, 2020. I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Assistant Company Secretary of our Company; Ms. Savli Mangle and Smit Shah from Bridge Investor Relations. We have already shared our results update presentation, and I hope you all must have received it and gone through the same. Before I go in to discuss our quarterly performance, I would like to spend some time on the past 3 months that has impacted the entire world. The COVID-19 pandemic has impacted the day-to-day life of everyone. This also caused disruption in the business environment, with lower demand in overall domestic economy. During the quarter, our manufacturing activities were temporarily shut down for a period of around 45 days. And we have restarted our factories from mid of May, partially. Since the start of our factories, we have been following all safety measures as per the guidelines given by the government. Though the near-term market situation is extremely fluid and uncertain, we are optimistic on the medium term based on indications of various OEMs and our customers. We do expect that this year to be sluggish, but we are get towards any form of recovery that takes place, and even a slight pickup in demand would benefit Salzer asymmetrically. Our Salzer-branded products is also gaining acceptance in export markets, with the rise in export members even during this time of crisis. During the quarter, our exports were at the tune of around 19% of our revenues. Majority of our exports are of the Industrial Switchgear products. Also, to add, we have approached our new clients and have started to see a fair bit of inquiries from various reputed players and are hopeful that we start supplying to them soon. We have also successfully commissioned the LAN cable plant and trial production started. We have submitted samples to customers for approval and for third-party testing. So far, we have seen good inquiries coming both local and export markets. We expect the revenues to come from end of second quarter this year. Now coming on to our quarterly financial and business performance. All of our financials for the current and past quarters have been restated as per Ind AS accounting guidelines. As a result of nationwide lockdown, the business has been impacted, which has affected the revenues, EBITDA and PAT for the quarter. During the quarter, our revenues declined by 41% to INR 95.7 crore from INR 162.1 crore in the corresponding period, mainly on account of the lockdown announced by the government to contain the spread of COVID-19 pandemic. The EBITDA for the quarter stood at [ INR 9.6 crore ] as compared to INR 16.7 crore in the corresponding previous quarter, which is a decline of 42.5%. Despite the decline in revenues, we have been able to maintain the EBITDA margin for the quarter at 10.02%. The profit after tax was at INR 0.7 crores in Q1 FY '21 as against INR 5.8 crores in the previous period, that is Q1 FY '20, which is a decline of 88%. Moving on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 37.5%. The Wire & Cable division contributed 57% of the revenues in this quarter. The Buildings Products segment, this is a business -- this is the only business that we do with B2C. The real estate market has been on a slower side, and we are here to see pickup in demand that has impacted the overall industry in this segment. 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 in this quarter has contributed 3.9% to the revenue. The fourth is Energy Management division, contributing 1.5% to the revenues in the quarter. Finally, I would like to add that with all the recent happenings in the country and across the world on account of COVID-19, the situation is extremely fluid and uncertain and challenging. And it is highly difficult to predict and give targets for FY '21, though, internally, we are maintaining that we will be performing as similar to FY '20 in all aspects. To sustain stably is our motto this year. 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 forms part of our core strategy. 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. Overall, we remain committed to our set agenda of delivering consistent, profitable volume-led growth. I thank all the stakeholders of Salzer Electronics Limited for their continued support and faith in the company. This is all from our side. I would once again like to thank everyone for your time and attention. We can now take questions.

[Operator Instructions] The first question is from the line of [ Lakhi Naskar ], an individual investor.

Congratulations on, I would say, a decent set of numbers in a tough environment. Sir, we would like to know the different sectors of your business, which you feel are seeing an uptick now as the lockdowns are slowly being lifted, agricultural versus industrial versus the construction sector, sir? And as you mentioned, you have an internal kind of a target to maybe touch the last year top line. What gives you that confidence, sir?

Thank you. Thank you for your encouragement. So if we look at our business, I think, as we have divided this into 4 divisions for ease of understanding: the Industrial Switchgears, the Wire & Cable and the Building Management at the top 3; and then the Energy Management. Energy Management, I think, is quite stable because it's a government business. And we are getting the maintenance revenues. So that is not changing now. The Building segment is fully dependent on the real estate, which is not seeing any uptick as of now. I think it will -- in my opinion, I think it will take at least another 3 to 6 months before real estate segment, the construction segment really picks up as of now. On the Industrial Switchgear, there are 2 types of businesses: one is to the export market, one is to the domestic. In the export market, we are seeing normal stabilization already in July, August. In the domestic market, the OEM segment is doing well because most of the OEMs started working. But the dealer segment is still struggling because of the lockdown and the restriction of movement of material and people. So most of the dealer segments are still only partially open. We are only seeing between 30% and 40% operation or sales levels in the dealer segment. So it's a kind of a mix, if you ask me, that's happening right now. On the Wire & Cable, our -- predominantly, our sale comes from the agri segment. Almost 70% of our Wire & Cable sale comes from the agri segment. In the first quarter, the agri segment has done well. And that is the reason that we have done almost INR 55 crores in Wire & Cable, which is only a 10% reduction sequentially. So that means we have almost done full normal sales in 2 months. That's because there is a very good uptick in the agri segment. So I don't know whether this will continue going forward in Q2, Q3 because agri segment is always a seasonal business, monsoon-dependent seasonal business. So maybe half of Q2, we will have this demand, then it will drop, but it will again pick up in Q3 and Q4. So this is the situation now. But overall, the confidence for us that we will reach last year's sale comes from the forecasts that our OEMs are giving to us, and whatever additional share of business that we are taking from our OEMs right now. So this is the information that we have right now, based on which we are trying to project that we will reach FY '20 sales figures and profitability. I hope I have answered...

Mr. Rajesh, one more small thing. What do you see being the state of your smaller competitors? I mean there's...

It's a very tough call to make, but this is definitely a very challenging period. If the companies are not very agile, not very proactive, the companies are not flexible enough to adapt, then I think we are going to see a lot of, what we call, consolidation in this -- the entire business world, even in -- and particularly India. It's not easy for -- we can't really pick out small or big companies, but any company that is not quick to adapt are going to be suffering.

[Operator Instructions] The next question is from the line of Shubham Goyal from Green Portfolio Private Limited.

I have a couple of questions with you. One is like, do you have any opportunities like world is moving towards China-plus world? So do you see any opportunities from their side?

Yes, definitely. I think we had a question on this in the last quarter itself. And I did mention, definitely, this is going to give a lot of opportunities because of the anti-China sentiment that is prevailing across the world. And for us, specifically, even before this COVID, we had some inquiries that is coming from China, or people coming out of China, that's because of the trade war between U.S. and China. We have started working with companies like Eaton and a couple of other companies, which I'll not be able to name right now because it's in a very preliminary stage. There are definitely opportunities that are coming because of the Chinese factor.

Okay. So like government has banned products like smart meter that were earlier imported from China. So do you making any such products or are you planning to making such products in the future?

No. We are not making smart meters, but definitely, we are making certain electrical products, particularly, I would call, 1 product that we are directly competing with the Chinese imports here in India is the relays. We do make some relays for electronic items, where I think the Chinese imports are quite cheap. And that is now -- their rate of duty is going up and the prices will go up right now. There is definitely an opportunity to grow that particular product sale in India. And apart from that, I think, not directly, but indirectly, I think we will definitely benefit because a lot of electrical equipments, large equipments, large switchboards used to be imported into India for various things. They are getting banned. So that will automatically translate into local business for many, many companies like us.

Okay. I have only 1 more question. Like do you receive like queries for the new business segment in the recent quarter 1? So like, any other queries that you were not getting before?

Yes. So I think we have got a lot of new inquiries from Australia. I think that Australia is 1 country that we have seen quite a lot of inquiries coming in. That is mainly because of the Chinese factor. So out of which I think we might be able to get into the market with a few products in the next couple of quarters.

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

Sir, do you see there is a lot of opportunity coming out from telecom sector, and as India is also committed to have a local products in there. So on that side, how we are looking at, is there any opportunity we look at and any cash performance?

So we are already supplying to almost all the telecom companies. I think last year, we had a good business coming from Jio. This year, I think, we have tapped some business from Indus Towers, which is a subsidiary of Bharti Infratel. So I think that business is already -- we are getting. But we have to see what they have been importing from China. And if that they're going to stop coming to India, what is the additional business we will get? That is the area that we are now discussing with the customers. Otherwise, we are already getting this business from telecom industries.

So what we are supplying to telecoms, sir?

We supply all -- like, rotary switches, we supply to -- last year, we did rotary switches and terminal connectors to Jio, all the towers that they had built. And I think that's also, I think, an ongoing business, but it has slowed down now. I expect that second half of this year it will pick up again. And -- but I mean the Indus Towers is the same. It's all electrical equipment going into the best towers.

Okay. So you want opportunity on mobile manufacturings. They're like PCBs and all. Is there any opportunity there?

We have not exported anything into that area so far, sir.

The next question is from the line of [ Rohan Mehta ], an individual investor.

Just a couple of questions I had. If you could -- we see -- like you spoke about the exports, we see that they've been growing over the last few quarters. So if you could just shed some light on whether we can expect that same trend to continue in the near future as well, and if we have any such target in mind as to how much of our revenue would come from exports?

I think if you compare last year, last full year, I think we had close to INR 100 crores of revenue coming from exports. So that's kind of a INR 25 crore average per quarter. In spite of this lockdown, in this quarter, we were able to get around INR 19 crores of exports. So we expect this trend to continue and get better. And also our targets are also that we have to reach at least 25% to 27% of exports, I mean, of the total revenue from exports from the current 19%, 20%. I think, right now, the majority of the business for us comes from North-South America, part of Europe and Far East Asia. This is the mix that we have. We see that North and South America increasing, the trend continuing like that. And adding this new Australian business, our Asian business also will get better. So I think we are definitely confident that we will see growth in exports this year compared to last year.

Okay. Okay. So the -- like you mentioned, the inquiries from Australia, there, we can maybe expect to see something in -- within this financial year?

Yes. Definitely, yes. We expect that to now -- something to start coming in from Q3 onwards.

Okay. Okay. And just one more thing, sir. Last quarter, you had mentioned about a new customer that we were planning to approach. So is there any development on that front? Or if there's been any update on that?

I think I already mentioned Eaton is 1 American customer that we have been discussing, and it is true. And there are a couple of other U.S. customers. We are in the final stages of development of product for U.S. And I already mentioned this Australian customer. These are the customers that we are discussing, close to around 4 customers, all put together. We will see revenues starting from Q3 onwards.

[Operator Instructions] The next question is from the line of Anurag Patil from Roha Asset Managers.

Sir, our working capital situation, has it deteriorated? Or it is same as last quarter?

It is very similar to last quarter. I would say it's a little better than last quarter. We have been able to reduce both our inventory and receivables by around 5%, relatively, compared to the figure. However, on the number of days, it might look a little more because the top line has dropped. If we had done a normal top line, I think the working capital has become better.

So rest of the year, we can expect it at the same level?

Rest of the year, our target, I mean, my target is to improve from here, definitely, not deteriorate from here.

Okay. And sir, are you catering to railways also?

Railways, yes. We do cater to railways. [indiscernible] I think the outlook was actually good until end of March. Because of this pandemic, railways have postponed certain orders. But on outside, I think, they are still doing good. We definitely see business coming from railways or the preponement of all the orders from this once the lockdown or restrictions of movement of people gets over.

Okay. And in FY '20, what would have been the railway contribution, approximately?

We did around INR 18 crores, if I'm not wrong. I don't have the figures right now, but I mentioned this in my last call. But approximately, I think, we did around INR 18 crores.

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

I have 1 question. Yes. Like just 2 days back, the government invited 23 private companies for the private railway. So how are we looking at this development? And if this successfully happened, I mean, the private players build trains and privatization happen, then this is after -- it's also the same way we will cater to railway? Or is there any changes in going through this? Because private players, normally, the way they give contract of sort subcontracting work is today different than what government-controlled entities do.

You're Absolutely right. I think anything opening up to private will bring in efficiency, I'm sure. But on this particular area, I think it is too early for me to comment because we still don't know the tenders that government has called for is for what. I think I understand, if I'm not wrong, this is to run the right trains. I don't think it is for manufacturing of it. That's what I understand. But if that happens, then we have to see what kind of a business that can emerge from that kind of a contract that government is going to give to private players. So having said that, I would also like to mention here that we are already a supplier for the GE Transportation, which is a private player manufacturing the locomotives in India. We are already a supplier to Alstom and Bombardier in -- at a small level, but we are in touch with them for discussions for supplying our 3-phase transformers to the metro coaches that they are building here in India. So apart from this, so we are already into this. We definitely have a chance to get into other private players, if they get an opportunity to run or manufacture coaches or locomotives.

[Operator Instructions] The next question is from the line of [ Neha Jain ] from [ Cortica Wealth ].

Sir, I just have 1 question. Are we facing any issues or relating to the receivables lately?

Ma'am, go ahead again, receivables?

Are we facing any issues relating to receivables lately?

No, ma'am. Actually, we are not facing any issues. Actually, if you see our receivables have been quite stable, though, there has been a delay because of this pandemic, which we have to agree. It was at around INR 140 crores in FY '20, March. I think we are at around INR 135 crores right now. So we are not facing any issues as of now, but we do face some delays.

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

Sir, I just had a couple of more questions. The capacity that which we are -- that we were operating -- that we've been operating in the first quarter, has been similar to the previous couple of quarters, or has it increased?

No. I think the Q1, we started -- we actually reopened on 6th of May, but it was with 50% capacity. The whole of May was running at 50% strength, basically. So we are only producing 50% or less than that only we were producing. In June, I think we increased our strength to around 60%, 70%. So at the end of June, we became 100% operational. So even though we have now been operational, I don't think we are -- even though we're 100% -- 100% strength is coming to work, we are still not 100% efficient or utilization is full levels. In first quarter, it didn't happen. But July was better than June, and we see August is better than July. So it looks like Q2 can be a normal quarter is what we expect.

Okay. Okay. So sir, since we've [indiscernible], have we had any labor-related issues at all?

Luckily, no. We don't have any migrant labors. We had some issues because our local migrants are there. Tamil Nadu local migrants and others are there, who went to their natives and couldn't come. But that was a very small percentage, I would say, less than 10% of our total workforce. So we didn't face any labor shortage issue.

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

Sir, I have a couple of questions. My first question is that, last time, you had mentioned that you are searching new customers. So what is the status of that?

I already mentioned before to some other question that we are working with some new customers from Australia and the U.S. I think the Australia -- both the Australia and the U.S., I think, it is kind of some customized product that we have to do for them, not the same ready-made product that we can sell to them. And for Australia, also, we need some new certifications that we have to take. So we are into that process. And hopefully, by end of Q2 or middle of Q2, this quarter, we should be able to finish that and revenue should start coming from Q3 onwards.

Okay. Okay. Okay. Sir, my next question is about the -- any new product development?

Not this year, sir. Whatever we have been doing last year, we are continuing to do but not much. But we are slowing down on that R&D expenses this year.

Okay. Okay. And what is the debt level currently?

It is similar to last year. I can get that figure for you. So I can get the details. It's around INR 150 crores, sir. INR 150 crores.

Has it been the same as it was in the March? Or it has declined?

No. It's the same level, like March.

Okay. Okay. So sir, as we have seen, just because of the COVID-19 pandemic, they are impacting so much on our business front. So what kind of precaution we are taking as in terms of the -- I mean in the manufacturing facility, and how we are going to recover to come down to our same level?

I think, for us, on the manufacturing side or supply side, we have stabilized everything. Our supply chain is stabilized. Our manufacturing units are ready, geared up to produce. We are just waiting for the markets to open up. So when the exports market opened up, we started supplying domestic OEMs started opening up, we started supplying. So if the market starts opening up, we are ready to produce and supply. Precautions, I think we have incorporated all safety precautions inside the factory. We have got additional space. We have moved people around. So we are following all the required precautions. That said, so far, everything has been fine. We haven't seen any single COVID cases within the factory.

As there are no further questions, I now hand the conference over to Mr. Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics, for closing comments.

So thank you all once again for your attention and support. I wish you all stay safe. Look forward to talking to you again for the next quarter's call. Thank you.

Thank you. Ladies and gentlemen, on behalf of Salzer Electronics Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.