Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Salzer Electronics Limited Q2 and H1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on 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, Salzer Electronics Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone. Thank you all for joining our earnings call to discuss the business and financial performance for the second quarter and half year ended September 30, 2020. I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Assistant Company Secretary of our company; 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 we discuss the financial performance, I would like to share that the COVID-19-led disruption seems to be declining, and we have started to see recovery in the demand scenario from various sectors that we cater to. Our team has been working hard and are in constant engagement with our esteemed clients in understanding the changing situation at various levels. I would like to highlight the fact that the domestic markets have been slightly subdued and weak, and we have been working on increasing our share in export markets. I'm happy to share that during this quarter, we have achieved highest export for a particular quarter, along with highest EBITDA for a quarter and are hopeful that this trend continues in the coming quarters as well. Though the near-term market situation remains very uncertain, we are being optimistic in the medium-term based on indications from various OEMs and customers and most definitely optimistic about our profitable growth in the long term. We, at Salzer, are geared to cater to any demand arising from our customers and are equipped to grab the opportunity coming our way. Now coming on to our quarterly and half yearly financial and business performance. We will first look at the quarterly performance. During the second quarter, our revenues increased by 8.7% to INR 149.8 crore from INR 137.8 crore in the corresponding period, mainly on account of increase in sales of Wire Harness product under the Industrial Switchgear division and higher growth in Wires & Cables division. The EBITDA for the quarter stood at INR 18.8 crore as compared to INR 17.5 crores in the corresponding previous quarter, which is a year-on-year growth of 7.2%. This is the highest EBITDA for a quarter achieved by increase in revenue and reduction in expenses. Q2 FY '21 EBITDA margins stood at 12.52%. The profit after tax was at INR 6.6 crore in Q2 FY '21 as against INR 5.9 crores in the corresponding previous period, which is an increase of 10.9%. Now coming to the half year performance. As a result of the nationwide lockdown, the Q1 FY '21 business has been impacted, which has affected the revenues of half year, both EBITDA and PAT as well. Hence, the results are not directly comparable with the corresponding year. For H1 FY '21, our revenues stood at INR 245.5 crore, down by 18.2% year-on-year on account of impact in the Q1 FY '21 due to the lockdown. EBITDA for H1 FY '21 stood at INR 28.3 crore compared to INR 34.2 crore, a decline of 17%. H1 FY '21 EBITDA margin stood at 11.55% as against 11.4% in the corresponding period. Profit after tax for H1 FY '21 is at INR 7.3 crore as against INR 11.7 crore in the corresponding period. Now moving on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 46.6% to the total revenues in this quarter and 43.1% in H1 FY '21. Our newly launched Wire Harness business has shown a record sale during this quarter since it was introduced in the market. The Wire & Cable division contributed 47.1% of our revenues this quarter and 51% in H1 FY '21. Buildings Products division, this division has contributed 5.3% this quarter and 4.7% in H1 FY '21. This business is the only B2C business that we have. The real estate market has been on a slower side, and we are yet to see a pickup in demand that has impacted the overall industry. We hope that this changes in the coming quarters and will help us increase our contribution from this segment to our overall revenues. The fourth is the Energy Management division, contributing 1% revenue in this quarter and 1.2% in H1 FY '21. In this division, if we don't get any new projects, then this will be the last quarter to see revenues coming from this division as we have no existing running projects. Now moving to the balance sheet items. The net working capital debt level of the company has slightly reduced compared to corresponding quarter, from INR 164 crore to INR 160 crore. The long-term debt is at INR 18 crore. The net working capital days has remained stable or slightly reduced by 6 days to 155 days in spite of the pandemic and lockdown. I would also like to inform here that from 1st of September, Schneider Electric has fully taken control of L&T's electrical division. For us, there has been no change in our business model with L&T because of this change of ownership. The leadership team at Schneider and L&T both have categorically confirmed that Schneider is going to follow a 2-brand strategy. And hence, it will be business as usual at L&T. And so far, we are seeing that going on as usual. Given the current situation, which is extremely fluid and uncertain, it is highly difficult to predict and give targets for FY '21. However, our aim is to maintain our margins and focus on our working capital and remain competitive to optimize on the opportunities arising in the future. To sustain and be stable is our motto this year. Besides strengthening the revenue drivers, improving ROCE and working capital cycle also forms part of our core strategy. With a very competitive team in place, we are confident of achieving the milestones we have set. We are also constantly on the lookout for new opportunities for technical associations to strengthen and increase our product offerings. Overall, we remain committed to our set agenda of delivering consistent, profitable, volume-led growth. I thank all the stakeholders of Salzer Electronics for their continued support and faith in the company. This is all from our side for now. I would once again like to thank everyone of you for your time and attention. All of you, stay safe, and we can now take questions.

[Operator Instructions] The first question is from the line of Ritwik Bhattacharjee from Khambatta Securities.

So my question is in the wake of the current situation, what is your outlook on the net working capital cycle improvement, which is a key target for you? So how do you look at improving the net working capital cycle through this year -- this financial year and the next year? And what steps you're taking towards that?

I exactly mentioned this in my speech. I think in spite of the pandemic, actually, we were expecting this to go a little higher. But fortunately, because of our contacts and because of the variety of customers that we have, we have been able to maintain it stably at around 155 days. We used to be at around 160. It has come down to around 155, but our target is to go to around 120 days. So that's the target that we have been having for the last 1 year. But unfortunately, we were not able to get there. But because our sales is spread across various sectors, various type of customers and exports, all this combination, actually, I'm confident that we will be quite stable going forward or it will slightly come down. There is no risk of this going up because of the pandemic.

Right. Right. Sir, could you just touch upon what steps you are taking towards maintaining the working capital cycle and in improving it going forward? The key steps that you are taking towards that, if you can just elaborate that would be great.

There are 2 main things that we are doing. One is to try and reduce the inventory. I think, currently, the inventory days is around 90 days. I think our target is to go to around 70 or below. That's the target we're looking at. So that is one area we are working on. And on the trade receivables. Trade receivables, again, is at around 89 days, which is quite normal, I would say, for our kind of a business. But in spite of that, we are trying to see whether we can still bring this down to around 75 to 80 days. So we are working on with all customers and our export customers as well as domestic customers to see where we can bring this down to the 75, 80 level. On the trade payables side, I think we have been quite stable at around 45 days. I don't think we will be able to improve on this beyond this. So 45 to 50 days is the stability there. So if we can bring down the inventory, I think our overall targets will be achieved.

Right, sir. And related to the question, sir, any sense on any working capital loan leverage going forward?

Currently, as I mentioned, I think our working capital debt is at around INR 160 crores, and we have been remaining at this level for the last, I would say, 5, 6 quarters. I think we will continue to remain at this level for at least this financial year.

[Operator Instructions] The next question is from the line of Ronak Jhaveri from Khambatta Securities Limited.

Sir, can you throw some light on the CapEx cycle, for couple -- the next couple of years?

Thank you, sir. I think this year, we are not doing any major CapEx except for the maintenance CapEx. So overall CapEx for the current year will not be more than INR 7 crores to INR 8 crores at the max. So there is no major CapEx. So whatever CapEx we had to do, we have done last year. That was for the installation or setting up of the LAN cable, data cable facility. And going forward, I think whatever plans we had for this year, we have just pushed it to see how stable -- how the stability returns to the market. Once that happens, then we will see what to invest, in which products to invest, where to invest in FY '22. So for FY '21, I think our CapEx cycle is limited to our maintenance.

Right. Sir, you just said that you completed 1 CapEx cycle last year. What was the total size of that CapEx? And how was it funded, sir?

Total CapEx cycle is around INR 21 crores, and it was funded by around INR 17 crores of term debt and the rest internally funded.

And that INR 17 crore, the term debt is at what rate, sir?

It's around 8.75%.

Okay. So around INR 17 crore is through that. So INR 4 crore, INR 5 crore is internal accrual, right sir?

Yes. Yes.

And that was for which plant, sir?

For unit -- our cable plant.

Coimbatore Wire & Cable?

Wire & Cable, right.

Okay. Okay, sir. Sir, second question, sir, if you can throw some light on the total export, what you're expecting? I understand, currently, Europe is slowing down due to the extended lockdown, but some rough idea of coming year and a year later?

Fortunately, for us, I think, Europe has done extremely well in this particular quarter. I think we have done the highest ever export in a quarter for Europe. Our exports to Europe stands close to around INR 11 crores this quarter. And we expect that this will continue for Q3 also because we already have orders for Q3 from Europe as well as North and South American markets. So that -- these 2 markets are growing for us year-on-year. I think Europe has grown 30% for this quarter, and North America has grown by around 15% in this quarter. So we see that the European market and the North and South American being stable for us going forward. Though there has been a lockdown in U.K., there has been lockdown in Europe, but businesses have been working. So most of the businesses are still open, and they have been working. The manufacturing activities have been going on -- are going on still.

Sir, any possibility of any bad debt from the -- due to this lockdown or maybe a payment coming with a delayed kind of...

Definitely not from our export customers. But whatever we had doubts on the collection, I think a portion of it will be -- have already written it down in last March. I'm sorry, I don't remember the figure, but we have already written it off in March '20, whatever doubts we had. But whatever outstanding that we have now is all good and collectible. We don't expect any major, major bad debts coming because of the pandemic. Most of our customers have reopened, started business and they -- most of them are back to pre-COVID levels, except for the local distributors in India in certain states.

Okay sir. Sir, any -- so we -- as an analyst, I would expect EBITDA to improve year-on-year. But if you can throw some light, where is the possibility of improving the overall margin as such?

If you look at our EBITDA margin, I think we have been between 10.5% and 11.5% for the last many quarters. And this quarter, I think we have achieved around 12.52% EBITDA margin, mainly because, I think, our EBITDA margin in the Switchgear divisions have improved to 17% and Wire & Cable also improved from around 8% to 9%. So that's a 1 percentage point up in the Wire & Cable division. So we expect that -- this to continue going forward. So hopefully, if we can maintain this 12% to 12.5% for the next couple of quarters and continue that. I think that's a 1 percentage point improvement compared to the previous years. So we hope that this will continue. And the reason for this higher EBITDA is mainly because of reduced expenses and also increased sale from the higher EBITDA margin products.

Okay. Sir, can you just give an example which higher products, what you have...

All our Industrial Switchgear division products give EBITDA between 14% and 18%. The average is -- so this year, the average has been -- this quarter, the average has been seen 17%. So if the sale of that continues to increase and if the share of -- share in the revenue of these products increase, then the blended EBITDA will also be higher.

Okay, sir. Sir, coming back to the same -- sir, just last question. Coming back to the net CapEx, which you did last year of around INR 20 crore, INR 21 crore, was that for a specific company? Because we have seen it in the past that if you have a -- it's a B2B business, and I understand that it's -- from some company, it is coming direct contract. So what is the portion of that INR 20 crore, let's say, you are initiating or rather starting the...

I understand your question. I think we went into manufacturing of data cables, mainly the Cat 6, Cat 7 cables. So this is actually a growing market. This also includes the CCTV cables. So this is a facility that where we can produce a variety of such cables. So the main reason that we went in to invest in this facility to set up this factory is that we had a definitive contract coming from Schneider. So they were interested to buy this from us, and we are working with them now to -- for product approval, so that they can start buying. That is for, I would say, 40% to 50% of the capacity. So the rest of the capacity, it will be Salzer branded, sold in the open market because the demand for this cable is quite high. And we hope that we will be able to sell the rest of the 50% capacity in the open market.

The next question is from the line of Sanjay Shah from KSA Shares & Securities.

Sir, you have done very good on export front and your view are that we should do much better in coming quarters. And you -- so what is the rationale of that? What are the rationale you see that -- up in the European and North American? And do we see that -- and which are the -- can you give us a product breakup of that export? What are the products where we have done good on that side?

Sir, I think that the North and South American markets, the demand is going up mainly because the -- some of the customers are trying to shift out from China. So that is the feeling that I have. So we see a slight demand going up from that area. Europe, I think Europe business for us has always been good. In between, it was subdued and it slowed down in the last year, 2, 3 quarters. But Europe business has always been good for us, and we see demand going up in Europe, mainly because of the lockdown happened and they're coming back to work. I wouldn't call a pent-up demand. But overall, I think their requirements have gone up. That is my feeling and understanding, talking to the customers. I think it may not increase 30% quarter-on-quarter, but I'm sure that it is going to be stable at this level is what is my opinion. Apart from these 2 areas, we are also seeing a lot of inquiries and demand coming from the Australia and New Zealand market because that is a country that is really looking forward to shift out of China. So I think that is also some business that we are confident that we will start getting from Q4 this year onwards. So based on these assumptions, I expect that the export market will definitely be doing good. On the products that we are selling in exports, I think all the exports that we do is from the Industrial Switchgear division. Under the Industrial Switchgear division, the major products that we export are toroidal transformers, rotary switches, isolators. These are the 3 major products that contribute almost 75% of our exports; and then the rest, 25%, various other products, wire harness, terminal blocks, relays and many other products.

Actually, this Australia and New Zealand are the new geography for us?

It is -- we had a client there, but we were not doing great business with them. So that is why we are not still showing that region as a separate region in our presentations. It is still combined with Asia. Once the business volume increases, I think we will separate it out. As of now, it is not very significant. So we can definitely call it as a new geography.

Sir, can you highlight upon your view on our B2C development, how successful we are and what opportunity you see on that side?

Well, I think, B2C, we could have done very well this year but for the pandemic. We were actually geared up with all the new products, everything set. But unfortunately, this pandemic came and slowed down everything. So we are actually back -- almost back, 90% -- 90% to 95% levels of the pre-COVID levels. I think this year, growing this segment is going to be very tough because the whole real estate market itself is still struggling. And if suppose we are going to be aggressive in this segment, I think we are going to face a lot of payment issues. That's what is my feeling, and that's what we -- the market also feels because the real estate market is a very dangerous market in terms of payment cycles. So we are planning to go slow this year, do what we are doing. Hopefully, achieve the same sale of last year or a little bit more than last year, but then doubling it for this segment is our goal for FY '22. And we are still operating, I would say, at the max in 6 states, including Maharashtra and the South.

And what is the contribution of sales from that?

Contribution of sale is around -- this half year, it is around 5%, sir. This quarter, it was 5.3%. Half year, it is around 5%.

Next year, we can go up to 10% from it?

Hopefully, if we double it, I think it will be 10%, yes.

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

Mr. Rajesh, congratulations on a strong set of numbers for the September quarter. I have 2 questions. You partly clarified that the strong sales were not pent-up demand. So do you think that the next 2 quarters can see these healthy numbers? I mean these are really healthy numbers in terms of the way your margins have panned out and the way the segment price revenue has panned out. And the India contributor, I think, 78% in the half year. So do you think the full year for India will remain at around 70% to 75%? Or do you plan to take it low for India? My next question is, sir, data cables, we invested INR 18 crores you said last year. What would be the turnover of this division on a full capacity basis, sir?

On a full capacity basis -- I'll answer the last first. On a full capacity basis, we will be able to do around INR 30 crores in LAN cable, INR 27 crores to INR 30 crores. But we need -- if we can add a few more balancing machine with a CapEx of around INR 1.5 crores to INR 2 crores, then actually, we can double the capacity to around INR 50 crores, INR 55 crores. So that is the capacity planning that we have done so far.

And when do you think -- in what time line do you think this will be possible in a reasonably decent market, sir?

Sir, if the contract with Schneider is through, if we start -- I expect that to get completed by Q4 of this year and start off. If that happens, I think -- within 3 quarters, I think we should be able to fill this capacity and then go for the additional expansion. Like I said, around additional INR 2 crore investment and then double this capacity. On the next quarter's sales revenues and margins that you were asking, I think I'm quite confident, definitely, Q3 and Q4 will be as good as Q2. We are not seeing a slowdown or any major hiccups in that so far. Though, as I said, I think, things are still uncertain because as the other investor said, Europe has gone for a lockdown. I don't think U.S. is going for a lockdown. But we don't know what happens to other Asian countries. And we don't know what will happen in India, is there a second wave or how this pandemic is going to turn out. So until there is a very stable situation on the pandemic, it is going to be highly uncertain to really predict. But things as of now -- standing as of now, I think we are very confident that we will be able to maintain what we have done in Q2.

That is fantastic, Mr. Rajesh. And last con call, you had mentioned that you have an internal target of at least meeting the last year's full top line. So I mean do you think it will be possible, I mean, since 1 more quarter has passed?

Yes, I think, last year, we were close to around INR 567 crores.

INR 585 crores, consolidated, I think, yes.

Yes, consolidated. So stand-alone, INR 567 crores. So we have to do another INR 320 crores. Hopefully, by end of Q3, I'll be able to give a confident figure. But I think our -- definitely, our target is to achieve that sale.

The next question is from the line of Vinod Ohri from Silverdale Capital.

I wanted you to elaborate more on the data cable business as such. What type of margin do you expect there? And what are the chances of expanding the capacity?

I'm quite confident on expanding the capacity because the requirements from various quarters that we are now receiving inquiries are quite good. So if we can convert all these inquiries into orders and start processing, I don't think that there is a problem for expansion. So we will definitely do the additional investment and expand the capacity so that we can reach the INR 50 crores sale in that. So I'm quite confident on that because the opportunity -- requirement is quite high, and there is still a lot of imports coming in with scale. That is first part. Second, on the margins. Right now, our Wire & Cable EBITDA margin is at around 9%. It was at 8%. I think we are improving to this 9%, maybe it is between 8% and 9%. On the data cable facility, I feel that it can be at least 2% to 3% more than the regular Wire & Cable. So it would be between, I would say, 10% to 12% on EBITDA.

INR 1,000 crore turnover company?

Sorry, sir?

When can we be a INR 1,000 crore turnover company?

Okay. So that -- actually, our target was to...

Assuming everything is normal.

Yes. Actually, our original target was to achieve this in FY '22. So we still have plans for achieving this in FY '22, hopefully, if everything goes well. But I think that is too optimistic, I would say, because we are still short of INR 400 crores to reach that. So we -- our plan is to see how we can get that INR 400 crores business in the next 2 years. So let's have a target of FY '23 to achieve that.

What type of CapEx you will need to achieve this INR 1,000 crores -- additional CapEx?

I am not seeing major requirement of CapEx. I think whatever CapEx required, we will be able to manage within internal funding. We don't see -- foresee major CapEx. In the next 2 years -- this year, we are not doing anything. So FY '22 and FY '23, if we can -- I expect that the CapEx will be between INR 15 crores to INR 20 crores each year.