Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Salzer Electronics Limited Q3 and 9 months 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 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 Financing Director, Salzer Electronics Limited. Thank you, and over to you.

Thank you. Good morning, everyone, and thank you all for joining our earnings call to discuss the business and financial performance for the third quarter and 9 months ending December 31, 2020. Today, I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Assistant Company Secretary; Savli Mangle and Rahul Trivedi from Bridge Investor Relations. We 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 in the last quarter and 9 months, I would like to share a few developments and market scenario with you. The domestic dealers and retail market for switchgears is still struggling to pick up. And the scale is on the lower side in this segment compared to the pre-COVID levels. We are hopeful that in the new financial year, the momentum for demand will pick up. Despite this, we have been able to almost match the last year's Q3 performance in the Industrial Switchgear division, which gives us a steady view that we will achieve our set target for this division for the full year. However, the Wires & Cables division has seen a strong demand, which has helped us achieve higher volumes. During this quarter, we saw prices of all raw materials, such as copper, plastics, PVC, [indiscernible], everything increased. We have been able to pass on this price hike in some of our product lines since November. Our export market is perfectly saving temporary headwinds from local lockdowns in major parts of Europe and North America. As the industry gradually reopens fully, our growing export market will complement the domestic market to help us grow at a much faster. This gives an update view for the next financial year. So the near-term market situation is still uncertain. We're optimistic in the medium term there's some indicators for various OEMs and customers and definitely optimistic of our profitable growth in the long term. Now coming to our quarterly and 9 monthly financial and business performance. We first look at the quarterly performance. During the third quarter, our revenues increased by 26% to INR 170.44 crore from INR 134.71 crore in the previous 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 17.28 crore compared to INR 16.71 crore in the corresponding previous period, which is a year-on-year growth of 3.45% on account of higher sales and lower employee and other expenses, which had caused the rise in raw material prices. The Q3 FY '21 EBITDA margins stood at 10.14%. The PAT was at INR 6.41 crores in Q3 FY '21, up against INR 5.51 crore in the corresponding previous period Q3 FY '20, which is an increase of 16.38%. Now coming to a 9 monthly performance. As a result of nationwide lockdown, the Q1 of FY '21, the business was impacted, which affected the revenues, EBITDA impact for the 9 months period. Hence, the results are not directly comparable with the previous corresponding level. For 9 months FY '21, revenues stood at INR 415.93 crore, down by only 4.3% year-on-year as against a negative sale of 18%, which we saw until H2. EBITDA for 9 months FY '21 stood at INR 45.63 crore compared to INR 50.89 crore in 9 months last year, which is a decline of 10.3%, which, again, is an improvement compared to 17% decline until H2. 9 months FY '21 EBITDA margins stood at 10.97% as against 11.7% in the previous corresponding period. The main reason for the decline in EBITDA margin is because of higher sales contribution coming from Wire & Cable division. Profit after tax for 9 months FY '21 was at INR 13.69 crore as against INR 17.25 crore in the previous period. Now moving on to the breakup of revenues as per business division. Industrial Switchgear division contributed 38.8% of the total revenues in third quarter and 41.33% for 9 months FY '21. Our recently launched wire harness product has shown strong sales during the quarter since it was introduced in the market. While sales from the existing customers of wire harness grew 15%, majority of the growth, around 73%, in sales of wire harness came from addition of new customers and new products [indiscernible] new customers. Wire harness business alone clocked a revenue of INR 23 crores for 9 months FY '21. We expect a very good fourth quarter for this division. This division's EBITDA, I mean the EBITDA for Industrial Switchgear division, stood at 14.7% in Q3 and 15.5% for 9 months FY '21. The Wire & Cable division contributed 55.86% of our revenues this quarter and 53% in 9 months FY '21. There has been an overall increase in demand across all sectors for the Wire & Cables. Price increase, coupled with growth in volumes, led to a 72% year-on-year revenue growth in this division during the quarter. Wire & Cable division's EBITDA margin stood at 7.96% in Q3 and 8.33% for 9 months '21. The Building Products division has contributed 5.32% this quarter and 4.98% for 9 months FY '21. This is a business -- only B2C business that we have. The real estate market is still muted to some extent, and we are here to see major pickup in demand that would impact the overall industry. The real estate sector started to look up in Q4, and we expect the trend to improve in the coming quarters. The fourth is the Energy Management division, which has contributed 0.7% to the revenue in 9 months FY '21. During the quarter, we have not received any new orders from the government as there are no tenders issued during this period, and we've also completed all the existing projects. We are hopeful that in the coming quarters, we will be able to buy some new projects once the government starts to issue new tenders. On the export front, barring temporary fluctuations due to lockdown, we have seen steady growth, especially from the U.S. and the European markets, both of which grew at 51% and 18%, respectively, year-on-year in this quarter. Business in the Middle East and Africa are not yet entirely operational due to pandemic, and hence, demand is set to pick up. For the quarter, export share was at 18% and for 9 months is at 20%. Given the current situation, which is very fluid and uncertain in domestic as well as foreign markets, difficult to predict any targets for FY '21. Our aim is to maintain our margins and focus on working capital cycle and remain competitive to capitalize on any opportunities that arise in the future. On long term, with the recent budget being a bit positive for the infra industry, we expect the CapEx cycle to start and create demand for all of our products across various industry sectors. Also, besides strengthening the revenue drivers, improving ROCE and working capital cycle also forms part of our core strategy. 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 our 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 Ronak Jhaveri from Khambatta Securities.

Sir, I just wanted your perspective on the expectations for our export scenario from the northern part of America and Europe, please.

Thank you. Overall, I think the export situation remains good for us. I think we have grown in overall exports. For example, I think this quarter, our total exports actually stood at close to INR 30 crores, INR 30 crores actually, INR 30.8 crores, which is actually growing at a good rate. Particularly, you see the U.S., as you said, North American market. In Q3, year-on-year, we have grown there around 50%. 9 months, the North American exports have grown by around 40%. They are showing a very healthy trend of growth mainly because of new demand and new customers that we have added there. And apart from North and South America, I think we are also seeing good growth coming in from Europe.

Okay. Sir, one more question. Sir, can you throw some light on the future expectations from the Energy Management division?

That's a very tough question to call -- question to answer because we are not seeing any light right now for the division because we haven't seen any tenders opening up. But we are hopeful that going forward, there might be some orders that will be coming, which we will be able to [ back ]. But right now, we are not seeing any orders coming in the next 2 quarter at least.

Okay. Sir, and little tricky question, sir. Sir, what was the specific reason for Industrial Switchgear segment which reduced year-on-year in the last quarter?

I think the year-on-year [ addition ] is just 1.5%, not much, so we see that stable compared to what it was. As I mentioned in my speech, the local dealer at the electrical dealer market is still struggling to some extent, not really doing very well. Though OEMs are -- have been doing very well in India, the dealer market or the distribution market is still struggling. That means till the small industries or micro small industries have not fully opened and picked up in [indiscernible] on operations. So they start doing it when additional demand will come from that segment, which will actually increase the sales. So that area, I think, our sales are down compared to last year of pre-COVID levels. So that's one of the reason that it is down year-on-year.

Okay, sir. Sir, and the last question. In the last quarter, we have seen most of the commodity prices either too volatile or have been increasing unexpectedly. So was there any major impact on the raw materials what you are using currently?

I would say our margins there were definitely impacted by at least 1% because of price increase. We are not really worried of the commodity price increases, particularly on copper, because we do [indiscernible] on a monthly basis. So that is not impacting any of the margins. But all the rest of the products, like all plastics, steel, hardware, I think everything has increased in -- starting, I would say, even September, October. And it's been quite fluctuating. And on materials, the increase also has been quite substantial for which we have actually increased our product prices to the extent between 5% and 8%. And we hope that the input cost prices are stabilizing at these levels are going down from here, which will actually help us improve our margins going forward.

Sir, and the last question, sir, what is your outlook on the overall working capital cycle? So last -- in the last discussion, you said that you were working towards reducing the overall cycle. So where are we as of now, sir?

We are definitely -- we have been going towards becoming more efficient on that front. But as we all mentioned, unfortunately, this year has been a tough year because of Q1 washouts and Q2 -- still Q2 and Q3 are still struggling in certain divisions. So we are actually maintaining same working capital cycle like last year, hopefully getting better in Q4. But we are seeing a better trend in our areas, particularly on the inventory side.

[Operator Instructions] The next question is from the line of Sudhir Bheda from Right Time Consultancy Services.

Congratulations on remarkable set of numbers under the circumstances. Sir, my question, first, are we done with the drop in the margin or the same kind of margin, lower margin will come [indiscernible]? That is the number one question. And the second question, so in view of [indiscernible] from the -- actually mainly government and overall manufacturing sector is looking up, so are we expecting a good growth in industrial sector for the next year? That is the second. And what is the outlook for the next year? What kind of growth do we [ initiate ] for the FY '22?

First, coming to the margin front. I'm sure we are talking about the drop in EBITDA margins.

Yes.

I think the main -- there are a couple of reasons I think I would say for sort of a drop in EBITDA margins in Q3 to 10.14%. So the main reason is the Wire & Cable division has contributed almost 56% of our revenues as against the normal share of around 47%, 48%. I think Wire & Cable division has actually grown, as I told, kind of 70% year-on-year in this quarter. So on an EBITDA level, Wire & Cable is contributing around 8%, whereas the Industrial Switchgear is contributing around 15%. So naturally, the blended EBITDA margins are down because of that, one. Second reason, I think -- as I said, we also have 1 percentage point EBITDA down on the Industrial Switchgear also. However, we would have done a 15.7% or 16% EBITDA margin. So that drop is because of the input price fluctuations, which we have already offset by increasing our price since November, December. So definitely, Q4, we will see again back to 15%, 15.5% EBITDA level in Industrial Switchgear and 8% in Wire & Cable division. So looking at that way, I think we are steady in the margin levels, though the blended margin looks down because of higher contribution from Wire & Cable division. That said, coming to your question of the infra push from the budget, yes, definitely, that is a bit possible for the entire industry, manufacturing industry. And we expect the demand to pick up quite strongly in the country, and this will definitely increase. Sir, we are trying to maintain at least last year's business, which is itself is a big target for us, having done INR 416 crores. We have to achieve INR 565 crores to get to last year's, which is around INR 160 crores -- INR 155 crores, INR 160 crores that we have to do. But we are hopeful that we will achieve last year's business this year on the top line. For next year, my guidance will be around INR 670 crores on the top line, which is 15% to 18% growth on a nominal level. If things are good, we can do between 18% and 20%.

And such a slightly longer-term outlook. When we can reach INR 1,000 crores mark? Just to have -- into some number.

FY '24, '25. I think that's the year that we should look at that figure, sir. FY '24, if we grow at the rate that we are planning to.

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

Congratulations on the decent set of numbers for the third quarter. Sir, you have in your presentation and just now indicated that it will be possible to pass last year's top line at least. So do you think on the full year, March '21, that there will be pressure on the bottom line level, sir? And my number two question is, sir, the cost of inputs, like you indicated, plastic, copper, what would be the reason for increasing? It's more of a demand kind of price increase or a supply constraint kind of price increase or a cable inflationary price increase? Because you consumed a lot of these imports, sir.

I think first question is the margin -- the bottom line, we might be close to last year. So I don't think we will be able to pass last year's margin performing rupees. On revenues, yes, I think we will be very close for last year's revenues. Second is the increasing imports. I mean, it is an international phenomena. I suspect that this is because of the severe lockdown that happened across the world. I think India was quick to come back to operation. But I think many other countries really didn't come back to operation for a long time. So that has actually drained out all the materials wherever it is in the pipeline, in the supply chain. So maybe there is -- they're taking time to really come back and fill those supply chains. So that's definitely one of the reasons that the sudden shortage of material and demand. So maybe the increases will start stabilizing and start going down, hopefully from Q1 of next year. That's my expectation.

Okay, sir. And sir, within [indiscernible] rural demand, what kind of rural demand are you seeing there? Is it more of agricultural base or more of rural, industrial and housing base?

Rural means for us, it is mostly agricultural. So the demand for us from rural is agri segment business in what has done quite well for our wire and cable solutions. [indiscernible]

The next question is from the line of [ Chirag Patel ] from [ Adina Shares ].

[indiscernible] [Technical Difficulty]

Not clear, I think. We are not able to hear you.

Sir, I just have a few questions. Like in domestic business, we don't have the performance. So I just want to know which states are leading in the domestic.

On the domestic, I think the majority of our business always comes from [ mark ]. That is, I will say, Delhi NCR region, then Mumbai, Mumbai surrounding Mumbai-Pune, Maharashtra, basically. And then it will be Bangalore in Karnataka area and then Tamil Nadu. So this is how the normal state contributions are. And then [indiscernible], Kolkata, Andhra Pradesh, Telangana, [indiscernible]. But I think that remained [indiscernible] did not change much. But what we don't see the demand coming from here is all the micro small industries. I think the demand from micro small industries are not there still. They are still struggling, in my opinion, whereas the medium to large industries are all operational and they're doing well. As I said, exports are also doing well for us. So if -- hopefully, I think this new year onwards, things will change, and we're already seeing some uptick in demand from certain dealer segment. The dealer segment is selling well, means that micro small industries are slowly coming back to operations.

Okay. And on, sir, the real estate side, we have seen a good traction and [ decision ] number from buyer side. What's your take on it? Are you able to see a bit of [indiscernible] business going forward? Or is it same on [indiscernible]?

We have not seen big demand until, I would say, late November, mid-December. So it looks like from January onwards, things are better, and then definitely, the budget has been given and proposed. So hopefully, things will change because we see that there's not many new projects coming up. We think there's a lot of inventory that is on demand and getting sold, but there are no -- new projects, we have not seen coming up in the current dates, particularly until December.

Okay. My third and last question. You mentioned in your presentation that the raw material prices impacted the margin and the price up [indiscernible] lag impact. Should I consider that from the coming quarters or this quarter the increased price of our products so we can compensate the cost increase at margin level?

We already increased our product prices in 1 11. But the real effect or real [indiscernible] would have happened from 1 12. So from December, we already increased the prices. We're just waiting and watching if the raw material prices continue to increase and we will do one other increase maybe by March. However, we will continue this.

Okay. So in what remaining impact will become [indiscernible] increased prices?

We have increased certain products 5%, I think 5%, 8% to 10%, depending on the -- how the input has affected that price of the product.

Okay. So -- okay, sir. So like -- just one more clarification on the question. Is it that -- is the recent turnover growth, what -- is led by this value increase?

Okay. That's actually a good question because if you see the Wire & Cable this quarter actually has grown by around 72%. So out of 72%, I think that is where the major impact of price increase has come, which is also a [indiscernible] growth for us. Out of the 72%, I would say, at least 30% to 35% is because of the price increase. The real volume growth will be around [indiscernible]. So the price impact would not have been much in industrial segment because we didn't do any price increase in the industrial segment except for the last 1 month, which is, I would say, very minor.

Okay. So after this significant [indiscernible], I guess, almost 50% of growth [indiscernible] price increase. Is there a softening of prices because of the higher [indiscernible]? [Technical Difficulty]

Sorry to interrupt you. Your audio is breaking such from your line.

[indiscernible] start breaking up. Yes. Go ahead.

Is the softening of prices of copper so that the sale also was soft?

Yes, I mean -- yes, it's possible, but moving apart the price increase growth, we see the volume growth that we have achieved, we did full 40%, which is quite good, and we still see a lot of demand for the Wire & Cable division in this quarter also. So we don't foresee a drop in sale because of softening of prices because the copper prices have already started softening. We went to the peak and it already started coming down slowly. But irrespective of the price, I think we are looking at volume growth.

The next question is from the line of [ Vira Sada ] from [indiscernible].

Congrats on good set of numbers. Rajesh, just 2 broader questions. One, you are talking about the 2024, '25 INR 1,000 crores kind of benchmark for us. So if you can just run through how this will be done because currently, we have been -- back in last year, we were around 30%, 35% of switchgear and then cable. So now cable is taking a prominent share from here on and will be slightly lesser margin since we are doing work for OEM. So over a period of time, once we get to the INR 1,000 crores trajectory, how our other businesses will ship because as I am getting a feel that cable business is substantially good. Other businesses are also picking up. But other businesses have a better margin profile than the cable. So this quarter, if I look at the cable and switchgear business, it has come down to 38%, which is [ 2 45 ]. So how is this growth -- I'm not looking at 1 quarter to quarter perspective, but if we get to INR 1,000 crores, what is the mix likely to be? And what's the margin? Because -- do we see all this [ leverage ] of all these higher turnoffs should come down to the bottom line and we should see a better margin profile away ahead?

Yes, I think that's a good question, sir. The different segment-wise share on a quarter-on-quarter basis, it will keep going up and down because I think the wire -- certain wire and cable that we're selling, the wires and cable are seasonal, the demand is seasonal. Having said that, if you look at on an annual basis, I think it is always between 40% and 45%, both segments. So that's how [indiscernible] going. And we expect that the trend will continue as -- I would say, the worst-case scenario can be 50%, 40%. Wire & Cable is 50%, Industrial Switchgear is 40% on the worst-case scenario. And the other -- another 8% to 10% coming from the Building segment and other products. Best-case scenario will be 45%, 45% and 10%.

Okay. Secondly, currently, if you look at this cable business, the margin is slightly lower. But now once we are getting into some kind of [indiscernible] and all that, then the margin will improve. So overall margin trajectory from here on, say, 100 and 200 basis point increase. You have to reach INR 2,000 crores. I'm not putting you a particular quarter or 2, but over the next 2, 3 years, definitely, we are headed for a margin expansion?

Yes, for sure. I think on an annual basis, we are already seeing slight improvement from around 7%, 7.5%. It actually touched 9% in Q2, and we -- this quarter has been down. But on an annual basis, I definitely see improvement, at least this year, 50 to 60 basis points come [indiscernible]. Last year, [indiscernible], on an annual basis, for Wire & Cable this year, we should see at least 8.6%, 8.7% on a full year basis for Wire & Cable. And next year, definitely 100 basis points from their improvement we are seeing because -- mainly because of addition of other set of products. [indiscernible] in our own brand directly to the market.

Wow, that is good. Okay. Sir, just 2 more questions. One, to reach the INR 1,000 crores [indiscernible], do you need to -- how much CapEx we need to be over next 2, 3 years? And then the second last question, this export, currently, we are around 12% to 15% export. So now with new client addition and big clients, what we added in last 3 to 6 months, do we feel we will be able to get a better traction in export going forward?

Okay. First on the export front. Actually, FY '20, we're at 17% export. Yes, FY '20. And 9 months, we are already at 20%. We definitely expect that this 20% will continue to remain for at least next few quarters before we see an uptick on the export percentage. With all the new customers that we have added, the revenues, I think, will start coming in only from Q1 FY '21.

So the trajectory on the export side will improve in next 2, 3 years and we can get to 20%, 25%.

Definitely. Yes, we see strong demand coming from North, South America, Europe and also Australia and Netherlands. So that will definitely help improve our overall exports, one.

Lastly on the CapEx.

Yes. We are not seeing major CapEx being done this year as well as for next year, FY '22 also. We will only continue to do our maintenance CapEx, which will be less than INR 10 crores or around INR 10 crores. '23, there might be some additional Capex, but we are still not seeing anything major like what we have done a couple of years before.

The next question is from the line of Sanjay Shah from ESK Securities.

It's Sanjay Shah from KSA Securities. Rajesh, you were citing a good growth for next year, maybe a [indiscernible] of around 15% to 20%.

Yes.

And you even cited that we may have that contribution from Cable division may slightly go down [indiscernible] share within the other product from 60% to maybe 55%, 57%. And you even -- we all are of the view that probably the prices may top out at this level of may go down. If I'm correct, I would like to understand from you what is the -- what shows you optimism of growing 20%? Which are the products, which are the verticals where we see this growth?