Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Q1 FY '23 Earnings Conference Call of Salzer Electronics Limited. This conference call may contain certain 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'm now glad to hand the conference over to Mr. Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics Limited. Thank you, and over to you, sir.

Thank you very much. Good morning, everyone, and thank you all for joining us today to discuss the unaudited financial results of the first quarter ending 30th June, 2022. It's always a pleasure to speak to you and, once again, to meet you in this quarter, I'm very happy. I hope you all are safe and well. I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Joint Company Secretary of our company; and Bridge IR, our Investor Relations team. We have 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 of the first quarter, I would like to share some key developments during this quarter and the market scenario with you. On the market scenario, the war in Ukraine in all its dimensions is producing alarming and cascading effects to a world that is still recovering from COVID. Serious damages is being done to the global economy at large. The conflict and the associated uncertainties are weighing heavily on the confidence of business and consumers across the world. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing the demand and holding back production in various sectors. How the economy develops will crucially depend on how this conflict evolves on the impact of the current sanctions and on possible future measures. At the same time, economic activity is still being supported by the reopening of industries after the crisis. Inflation has increased significantly and looks like it will remain high over the coming months, mainly because of the sharp price in energy cost across the world. Inflation pressures have intensified across many sectors. Soaring food and fuel prices is affecting developing countries, which is a cause of great concern. Countries already under severe pressure due to the [ cost ] of pandemic are bound to see disruptions in trade, deficits widen and investments are going to contract. Additionally, significant increase in oil and gas prices can shift investments back into fossil-fuel-based energy generation which risks reversing the trend towards renewables at a time of acute climate crisis. Coming now to some of the key developments, business and financial performance of our company. I'm happy to say that the new fiscal year has begun on a strong note with Q1 FY '23 performance being in line with our expectations. We are witnessing high demand both for our switchgear business in domestic as well as export markets and for our Building Electrical Products division in the domestic market. We're also seeing strong demand particularly for our new product, 3-phase dry type transformers, particularly from renewable energy sector. We received new orders from various new customers from renewable power sector, which led to doubling of revenue of this product year-on-year. As far as the other new businesses, data cables is concerned, we have seen strong demand across customers, which helped in getting more orders for LAN cables. This business also is witnessing strong growth as expected in the current year. We recently received 2 patents, one for integrated cam operated rotary switches, which is a legacy product contributing substantially to top line and the bottom line, and another for motor protection circuit breaker. Such developments help protect our individual property and boost our R&D and product development efforts. On a year-on-year basis, higher raw material prices, higher freight costs and sales promotion costs have offset our price hikes and impacted margins to some extent. However, raw material prices have begun to stabilize, and we are seeing the benefits of our price hike in the form of better margins on a quarter-on-quarter basis. Export demand has been stable and positive for the quarter, and we expect that it will be stable in the near future. During the quarter, the exports have grown 33% year-on-year and 4% quarter-on-quarter. We hope the uncertainties due to the war doesn't affect the business much in the near future. During the past year, we also forayed into electric vehicles vertical in line with one of our growth strategies. However, in these 2 joint ventures that we have done, the product development is still underway, and we are still overcoming initial technical teething troubles. We expect that the product to be available for sales by end of this fiscal. Now moving on to our financials. During the first quarter, our revenues increased by 56.44% year-on-year to INR 233.06 crore from INR 148.98 crore in the previous corresponding period. Growth was on account of higher sales of all our 3 business divisions. EBITDA, excluding other income, was INR 19.62 crore in Q1 FY '23 as against INR 14.8 crore in Q1 FY '22, which is a year-on-year growth of 32.53% on account of higher sales volumes and increase in product prices. The standalone EBITDA margin for the quarter stood at 8.42%, which is a decline of 152 basis points year-on-year, mainly due to the higher raw material prices, vis-a-vis Q1 of previous year, coupled with higher freight and sales promotional costs. However, EBITDA margin has improved on a quarter-on-quarter basis by 277 basis points to 8.42% from 5.65% in the immediate preceding quarter. Standalone PAT was at INR 8.78 crore in Q1 FY '23 as against INR 3.81 crore in Q1 FY '22, which is a year-on-year growth of 130% and also a 129% growth quarter-on-quarter. PAT margin for the quarter stood at 3.77% as against 2.55% in Q1 FY '22. This is an increase of 122 basis points and a 209 basis point increase over Q4 FY '22. Moving on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 48.4% to the total revenues in this quarter. The Switchgear division's EBITDA margin stood at 10.87% in Q1 FY '23 as against 12.7% in Q1 FY '22, which is a decline of 180 basis points. However, it is higher by 5.6% on a quarter-on-quarter basis. The Wire & Cable division contributed 43.8% to our revenues in this quarter. This is an increase of 50% year-on-year in this division during this quarter. This division's EBITDA margin has been steady at 6.75% in Q1 FY '23 as against 8.5% in Q1 FY '22 and 6.6% in Q4 FY '22. The Building Electrical Products division has contributed 7.7% revenue in this quarter. At INR 17.92 crore for Q1 FY '23, this division has grown by 138% year-on-year and 8% quarter-on-quarter. The EBITDA margin for this division stood at 2.5%. On the export front, we are seeing steady growth, especially from Europe and the Asian countries. Exports to Americas also grew at 56% year-on-year in this quarter, while exports to Europe grew 73% year-on-year in this quarter. For this quarter, the export share of the revenue was at 21%. Growth in exports was 33% year-on-year and 4% quarter-on-quarter. On the balance sheet side, in this quarter, we have maintained the working capital debt at INR 235 crore, which is the same level as that of March 2022. We have been able to reduce the net working capital days to close to 142 days as compared to 166 days in March 2022. We have also reduced the inventory days from 104 days to 92 days in this quarter. We are continuing to work to reducing it further and our target to reach 80 days of inventory should be possible in this financial year. All our new businesses like 3-phase transformers, wire harness and data cables are witnessing high growth, coupled with all our legacy products, including the rotary switches, toroidal transformers and load break switches. The entire basket of switchgear products are seeing good demand across all customer sectors. Hence, going ahead, we expect to maintain our growth trajectory with our strong product offerings and brand position in the market. Though there are a lot of uncertainties and things that may happen, which is not under our control, we are optimistic about the overall business performance in this financial year. On behalf of the company, I once again thank all the stakeholders of Salzer Electronics for their continued support and faith in our company. I wish all of you good health. Thank you. This is all from our side. I'd like to take -- we can now take questions.

[Operator Instructions] The first question is from the line of [ Vijay Sarda from VL Finance ].

Congratulation, Rajesh, for good set of number. Rajesh, my questions are 2-pronged. One is in terms of the growth, how you see the growth momentum going forward with these exports doing good and now overall industrial activity on the ground also improved. So how do you see the growth going forward for the next 2 years for the company? And second, coming to the margin, what we have seen is good amount of royalty on account of the wire division on account of increase in copper prices. So now the copper prices have corrected almost by 30%, 40% and what all current inventory hit and all that we have to take, we've already done that. So do we see again margin inching back to our previous high of around 10% to 12% band in next 1 or 2 years?

On the growth, at least for this year, we see strong demand definitely for the Indian market at least. I'm very optimistic on the Indian market for this year. We think that growth will continue, and we expect that similar performance in the next 3 quarters. However, the export market, as of now, looks stable, but we don't know how the markets will turn around, depending on the uncertainties that we are facing due to the inflation and the war and a lot of other things that may play out. So we will have to wait and see how the export markets will work. But as of now, things look stable on the export front. But as a company, I think we are confident to continue this similar performance in the rest of the quarter this year. But the margins, yes, I think the margins have been a little volatile. Mainly in FY '21-'22, we have faced severe input price fluctuations, materials going up to the extent of 100%, 80%, 50%. Though we have done price increases, we were not able to offset the entire thing in the financial year, and that is why we saw a drop in EBITDA percentages over the last 3 quarters. However, we are seeing the trend is reversing right now because of 2 things. One, the input material prices also is stabilizing. Second, [Technical Difficulty] -- yes, and that also is showing the impact. So I'm sure, I think from Q2, Q3 onwards, we will be inching back to 10% -- [ about ] 10% EBITDA levels for sure in this financial year itself.

Okay. And last 2 question in terms of the EV thing that we are doing. Have we come up with some products on the charging solution and all that? Have you done some inroad or progress there in terms of that EV ecosystem?

Yes, initial products have been developed, assembled. We have tested the product. They're all fine. But however, to continue to do mass production, I think we still need a lot of technical inputs, which we are working on it with our collaborator.

Okay. So currently, we are targeting to cater to this all charging station and all that or domestic -- basically domestic markets -- household markets for charging? Or we are looking at commercial...

Targeting both, both the domestic market, that will be the slow chargers, but for these providers like Tata Power and companies like that, we will be trying to target them for the...

House charger.

Yes.

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

Can you hear me?

Yes, sir.

Mr. Rajesh, congrats on a wonderful set of numbers. I mean I think Salzer has found its feet at last. Sir, as you already said that these kind of healthy numbers will continue for the rest of the year, and sir, you are doing some -- as I understand, you are doing some high-tech electrical stuff. But still, sir, our wire division contributes close to 50% -- I think 47%, 48%. So do you see any time in the future, next 3 years down the line, whereby your other products will be a larger portion of the whole cake in Salzer?

Look, I think if we really go back a couple of years, we will see that the Wire and Cable division was contributing more than 50% -- 50%, 52%, 53% certain quarter, it was also at 55%. So we have seen that the other business that is the Industrial Switchgear business has grown substantially over the last, I would say, couple of years. And today, the Switchgear business is close to around 50% contribution and Wire and Cable is at around 43%. So going forward, I feel that the Switchgear division will grow faster than the Wire and Cable division, and we will continue to see a 50-40 ratio because our Building segment business also is growing significantly compared to what it was a couple of years ago where it was contributing 4% to 5%, whereas now it is close to around 7% to 8% contribution. So we expect that 50% from the Switchgear, 10% from the Building Electricals and 40% from copper. I think that is going to be the share going forward, at least for the next couple of years.

But would you classify your wire harnesses in the Wire division or your Building Products division, sir?

The wire harnesses in the Building -- the Switchgear division.

It would be in the Switchgear division.

Yes.

Okay. So going forward, you would see 40-10-50 kind of stuff.

Correct.

But this would be a long-term thing? Or would you want to reduce your Wire division to 30%, 35% and take up the Building Products division kind of stuff, sir? Because that adds great value to...

Firstly, reducing the Wire and Cable business. But we see that the Switchgear business is growing at a faster pace. So that gives more revenue share in the overall pie.

Okay. Fantastic, sir, and best of luck for the [ financial year ]. And I hope -- I think with the commentary, it looks as if you will cross the magic figure of INR 1,000 crores this year.

Hopefully, with all your good wishes.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand, now you did mention that our input prices have got stabilized and even the price hikes have been done, right? So that's the reason we are looking forward for EBITDA margin inching back to maybe around 10% in next 1 to 2 quarters, right?

Yes.

But I just wanted to understand in terms of potential, I mean, in terms of business that we are into, so what's the potential, maybe not this year, but in terms of EBITDA margin potential, can our business have 11%, 12% kind of EBITDA margin? Is that something that with the higher scale or the growth that we are seeing, our business has that potential to reach? Or what would be that potential be?

Again, I'll say that if we go back a couple of years, just pre-COVID our Switchgear -- Industrial Switchgear EBITDA margin was close to around 15%. The Wire and Cable was between 7% and 8%. That's the margin that we were looking at, whereas it has -- both have dropped down to around 11% and 7% as of now. So we still have a potential to increase at least 3 percentage on the EBITDA levels going forward, if not this year, I think definitely next financial year.

3% EBITDA margin improvement may be FY '24, right? And the base we are taking is the current quarter's EBITDA margin at 8.5%.

Yes. I'm saying that we will be back to around 11%, 11.5% EBITDA margin.

11%, 11.5% EBITDA. Fair enough.

That is what we were making pre-COVID. I think because of the disruptions, I think we have dropped down, and I'm sure that we will get back to that level.

The next question is from the line of Senthilkumar from Joindre Capital Services.

I just want to understand the data days for domestic and export businesses. Now how we start against the last [ few ] quarter on [indiscernible] business?

Can you repeat the question, please?

Data days for export and domestic businesses.

You want the break up?

Yes.

Okay. This quarter, I mentioned that we are at 21% exports, so it's close to INR 49 crores of exports we have done in this quarter.

No. I'm asking data days for the domestic business as well as export business.

I couldn't understand. Can the moderator repeat the question?

Senthil, actually your voice is breaking when you speak.

Is it clear now?

You can repeat the question, let me see.

I just want to know what is the receivable days for data, domestic business and export business.

Okay. Okay. Our average receivable day as of today is around 85 days. I don't have a breakup between export and local, but I'm sure that this will be very similar for both exports as well as domestic. Exports may be less than 70 days and domestic may be more than 90 days. On an average, we are at around 85 days receivables today.

So what may be the same for the March 2023, sir, FY '23 -- at the end of FY '23?

I think the receivable days will continue to remain between 80 and 90 days.

Okay, okay. And another question, what is the net debt as on June 2022, sir?

Sorry, June 2022?

Net debt.

Net debt?

Yes. End of, say, Q1 FY '23.

End of this financial year?

Yes, yes, this quarter -- end of this quarter, June 2022.

As of now, I said we are at around INR 235 crores of working capital debt. My opinion, I think we will either maintain this or it will go up by another INR 10 crores at the max.

Okay, by FY '23 end, right?

Yes.

[Operator Instructions] The next question is from the line of Akshay Kothari from Envision Capital.

Sir, just wanted to understand that industrial automation segment is gaining a huge traction. So are we planning to do something on those lines?

Yes, I think the products that we make under the Industrial Switchgear segment, we produce more than 15 different products. They get consumed in the automation field to some extent. So we are there already, and we continue to develop new verticals, new products to the requirements of the OEMs and customers. So we are capturing the industrial growth of the country.

So our customers would be like ABB?

Yes. ABB, L&T Automation, Siemens, Honeywell.

Okay. So just wanted to understand, so we are not planning to do some forward integration on those lines because that would be a higher margin business as such or the competition is...

No, we are not really looking at that right now.

Okay. And in Wires and Cables and Switchgears, mainly our customers would be B2B, right?

Wires and Cables, it's mostly B2B right now, yes.

Okay. And Switchgears also B2B.

Switchgears is also B2B, yes. Only the Building Electrical Products is B2C.

Okay. And sir, on the debt, you have plans to reduce debt? Or how do you see going forward, whether the debt will increase due to working capital requirements? And any guidance on that part?

As I just mentioned, I think we are at around INR 235 crore debt in March, and we continue to maintain that. And hopefully, this full year, we'll be at this level. If the growth is going to be much higher, then maybe this can go up by around INR 10 crores in my expectation. But it will overall remain at this level.

The next question is from the line of Archit Singhal from Nearc Investments.

So I have 3 questions, sir. Firstly, if you can mention what is the capacity utilization currently? And what will be the CapEx required to further enhance the size of the business beyond FY '23?

I think we are not planning any major CapEx for capacity expansion as of now. I think with the current capacity, we'll be able to go for FY -- until FY '24. So that means that we expect that we will be able to go up to INR 1,200 crores, INR 1,300 crores of sales with the current capacity and with some balancing and maintenance CapEx. So we don't plan any major CapEx in these 2 years, yes.

Okay. And anything on the outlook for FY '24? I don't want any numbers here, basically, I'm just trying to understand whether FY '23 saw some pent-up demand which can slow down in FY '24 or FY '24 also looks good enough?

We expected that from -- I think that we are seeing some good growth demand coming in from Q3 -- Q2 last year onwards. So we thought it's because of pent-up demand and it might subside. But as of now, it looks -- the demand is quite strong and stable, at least in the domestic market. We expect that this growth momentum will continue for FY '24 also.

Understood. And sir, last thing from my side. So you did mention about the working capital aspect in your initial comments. I missed that. So if you can repeat what is the working capital days target for FY '23? And how are you planning to improve the net working capital for the company?

I think I mentioned that we have reduced our inventory days from around 110 days in FY '22 to 90 days, which is a reduction of around almost 15 -- close to 15 days of reduction. On the trade receivables also, I think from 95 days to 80 days -- 83 days, 85 days we have reduced. So on a net-net basis, from 166 days, we have reduced to around 145 days today. So we expect that this 145 days over the end of the year can go down to around 130 days, 135 days on [ net ] basis. That means we are planning to reduce our inventory days further from 92 days to close to around 85 days, 80 days.

[Operator Instructions] The next question is from the line of Panjul Agrawal from Green Portfolio.

Sir, first of all, I wanted an update on the EV segment. Like we were supposed to start building the order book from August. So have we started yet?

No, ma'am. I think there is a delay of, I would say, at least a year because we started this last year, August, and we planned to launch these products this August. But unfortunately, due to a lot of technical teething troubles that we are facing in absorbing the technology, developing the technology in India, project is being delayed. And hence as I said in my call, we expect that the products will be ready for sale by end of this fiscal.

So, sir, this is the situation for both fast charges and conversion kits?

Yes, ma'am.

And sir, with conversion kits, I wanted to ask that what kind of customers are we targeting? Are we targeting OEMs or are we targeting private fleet owners?

We are targeting the consumers and the private fleet owners. We are not targeting the OEMs on the conversion.

So like for every individual vehicle, we will be providing the conversion kit?

Yes. We're only doing conversion thing for autorickshaws, passenger and the [indiscernible] autorickshaws.

Okay. Okay. All right, sir. Sir, one more question. I just wanted to ask that how will our traditional business help in our EV segment? Like what would be our moat for that?

The traditional -- I think basically the engineering setup that we have is the base to manufacture the kits. And also some of the products that we make, like the wire harnesses, the transformers are used in the conversion kits.

The next question is from the line of Senthilkumar from Joindre Capital Services.

I just want to know how much capital invested as on June 2022 for the new business, sir -- EV business, as you said, you are yet to start the commercial production.