Salzer Electronics Limited (517059) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Salzer Electronics Limited Q4 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Deepika Murarka from Choice Equity Broking. Thank you, and over to you, Deepika.

Thank you, Nirav. Good morning, everyone. On behalf of Choice Equity Broking, welcome to the Q4 and FY '23 post results conference call of Salzer Electronics Limited. This conference call may contain certain forward-looking statements about the company, which are based on the beliefs, opinion and expectations of the company as of the date of this call. These statements are not guarantee of future performance and involve certain risks and uncertainties that are difficult to predict. I will now hand over the call to Ms. Savli Mangle to discuss the financial performance of the company. Over to you, ma'am.

Thank you, Deepika. Good morning, everyone, and thank you for joining us today to discuss the audited financial performance for the fourth quarter and year ended March 31, 2023. I have with me Mr. Rajesh Doraiswamy, Joint Managing Director; Mr. Murugesh, Joint Company Secretary; [indiscernible], GM Account; Mr. Sanjay, Assistant Company Secretary; and Mr. Raman, COO of Kaycee Industries. I shall take you through the stand-alone financial performance of the fourth quarter and the year ended. During the fourth quarter, our revenues increased by 29% year-on-year to INR 295 crores from INR 228 crores in the previous corresponding period. This growth was driven by higher demand for industrial switchgear, as well as wires and cable businesses. The EBITDA, excluding other income, was INR 23.3 crores in Q4 as against INR 12.9 crores in Q4 FY '22, a year-on-year growth of 81% on account of increased sales in the switchgear business. The EBITDA margin for the quarter stood at 7.9%, were a rise of 224 basis points year-on-year. This was mainly on account of increase in sales from higher-margin industrial switchgear products. The profit after tax was at INR 9 crores in Q4 FY '23 as against INR 3.8 crores in Q4 FY '22, year-on-year growth of 134%. Coming to our full year financial performance, in the year ended March 2023, net revenue was INR 1,013.1 crores as against INR 783.6 crores in FY '22, year-on-year growth of about 29%. This was driven by strong demand for almost all products on the back of better market conditions, both the India and global markets. The EBITDA, excluding other income, stood at about INR 91.1 crores in FY '23 as against INR 63.8 crores in FY '22, a year-on-year growth of 43%, mainly on account of higher sales in all product divisions. The EBITDA margin was at 9%, a year-on-year increase of 86 basis points. The profit after tax was INR 36.4 crores in FY '23 as against INR 22.5 crores in FY '22, a year-on-year growth of 62%. The PAT margin was at 3.6% in FY '23, as against 2.9% in FY '22, a year-on-year increase of 72 basis points. Moving to the breakup of revenue as per business division. The industrial switchgear business contributed to about 53.4% of the total revenues in this quarter and 54.3% during the year. The EBITDA margin for this business stood at 10.5% in Q4 and 11.7% in FY '23. One of our high-demand products, the 3 phase dry type transformers grew over to nearly 300% year-on-year in Q4 FY '23 and 180% in FY '23. The wire harness grew 52% year-on-year in Q4 FY '23 to INR 23.5 crores from INR 15.4 crores in Q4 FY '22 and 18% year-on-year in FY '23. The wires and cable division contributed nearly 41% to our revenues this quarter and 38% during the year. That is an increase of nearly 19% year-on-year in this division during the quarter and 15% year-on-year. The EBITDA margin in this division has been steady at 5.5% in Q4 and 6.5% for the full year. The Building Products division contributed nearly 6% in this quarter and 7% in the full year. The EBITDA margin in this business was 2.6% in Q4 and 2.7% in full year FY '23. On the export front, we continue to see steady growth, mainly due to higher sales in Americas, including South American countries like Brazil, Argentina and Chile. Exports to the Americas grew 55% year-on-year this quarter. For this quarter, the export share of the revenue was 27%. Growth in export was nearly 73% year-on-year and 18% quarter-on-quarter. For the full year, export was 26% of the revenue growing 42% year-on-year. I'm happy to share that the Board has recommended a final dividend at the rate of 22%, that's INR 2.2 per equity share at a face value of INR 10, this is subject to shareholders' approval. I would like to hand over now to Rajesh to take us through the business developments and the leadership. Thank you.

Thank you, Savli. Good morning all of you. I think we have listened to the financials division wise from Savli. So the past financial year actually brought a lot of headwinds for the economy and the overall industry in the form of various macroeconomic factors like increased inflation, exchange rate fluctuations, even reduced demand from the European markets and also some of the Asian markets. Despite that, I think Salzer has crossed various important milestones during this period. And the most important one was that we have crossed the INR 1,000 crore revenue milestones by achieving INR 1,037 crore on revenues on a consolidated basis. This was possible only due to our advanced engineering capabilities backed by a strong in-house manufacturing and R&D team, product innovation, strong technical collaboration and long-standing customer relationship. So I'm once again very happy to share that our revenues for the year crossed INR 1,000 crore, which was one of the key targets we have set for ourselves a few years ago. We are proud of this accomplishment, which is a testament to the hard work and dedication of our team. I would also say that this is just one step in our overall growth story. As you all must have been aware, demand for the infrastructure has been growing well in the country in the last financial year. There's a growing demand for a lot of projects such as roads, bridges, buildings, government's focus on smart cities development is also expected to spur demand for a lot of electrical products of our portfolio. Even the private investments continue to happen in a big way in India, which is also increasing the demand for all our products. There's increasing demand for renewable energy sources such as solar, wind and hydropower, which has opened new growth opportunities and demand for switchgears, transformers, wires and cables. During the year, we have seen good growth in all divisions, mainly due to better market conditions in India and also abroad in specific markets. On the switchgear front, growth was driven by high-margin products like toroidal transformers, 3 phase transformers, wire harness, rotary cam switches and isolators. All these comprised approximately 65% of our Switchgear division sales. To cater to the continuous demand that's coming from the country, we have set up a new manufacturing facility strategically located at Hosur in Tamil Nadu. Speaking of our wires and cable division, there was a slowdown in the first 3 quarters due to high inflation and slowdown in the agri market segment, leading to lower volume sales in the first 3 quarters. However, in the fourth quarter, the sales started to pick up, and we see similar demand continuing into this year. Over the last 2 quarters to 3 quarters, we increased our sales price for various products. At the same time, the raw material prices also started to stabilize and reduce a little bit, which helped improve our EBITDA margins year-on-year. We also expect to reduce the raw material consumption in the coming quarters, which will further improve the realization of our price, which leads to better EBITDA margins in the coming quarter. On the export front, 26% of our revenue this year came from exports, mainly on account of higher sales in North America and also South America. Some of the new products that we developed for U.S.A. and Australia during COVID time has started to give revenues from March 2023 onwards. This year, we will see revenues from these new businesses coming. As far as our subsidiary, Kaycee Industries is concerned, the sales have been growing well, and EBITDA margins are also getting better. Kaycee's top line grew 42% to INR 42.3 crore from INR 29.8 crore last year. PAT grew 87% from INR 1.86 crore last year to INR 3.5 crore this year. At Salzer, we have continued to focus on improving our operational efficiency. We had an internal target of achieving 12% ROCE in FY '23, which we have achieved this year. We also improved our net debt to equity for FY '23 at [ 0.65% ]. I'm happy to share that the net cash flow from our business operation was positive at around INR 23 crores. Going to the next fiscal, we expect to grow at around 20% with our strong product offerings and brand position in the market. Based on the domestic and export outlook, we are cautiously optimistic about the overall business performance. As a part of our strategy, we will continue to not just focus on profitable growth, but also on capital efficiency, enduring to improve our working capital cycle and being a cash flow positive company continuously. I thank the entire team at Salzer Electronics for their untiring efforts and all our stakeholders for their continued support and faith in our company. This is all from our side for now. I would like to thank you all very much for your time and attention. We can now take questions.

[Operator Instructions] The first question is from the line of [ Rabindra Nath Nayak ] from Sunidhi Securities and Finance.

[Audio Gap] for a decent set of numbers. So my question is regarding this how the capital allocation, we have done rightly around INR 23 crores of operating cash flow this year. And also we have actually gone through a preferential issue, which will yield around INR 47 crores of money to the company. And going ahead also, you are expecting 20% growth on our business and also going for capital efficiency. While the capital allocation policy -- how we are going to spend this money in the next 1 year or 2 years' time? So please share some perspective on that?

Sir, thank you very much. I think the point is that we will be doing some capital expenditure because we have set up a new facility in Hosur, which will take up around INR 14 crores, INR 15 crores of investment for further growth. And I think going forward, we also have the joint venture for electric vehicle charging stations coming up. Hopefully, that will require some investments. I think we have not really allocated how much we are going to put in, but we expect that the electric vehicle charging station, JV will take at least INR 12 crores to INR 15 crores in the next couple of years. So this is what we will be allocating and the rest will be utilized for the working capital in the company.

Okay. Okay. Sir, can you please provide a product-wise breakup of the Switchgear business, because a lot of things are completely jumbled together in one segment. If you can give at least 2 to 3 products category, which will contribute into the business, in the Switchgear business, that would be helpful?

I think I mentioned in the call that our top selling products, 65% of our sales comes from the toroidal transformers, 3 phase transformers, rotary switches, wire harness and isolators.

Okay. Okay.

These are the top selling switchgear products for us.

Okay. Okay. And sir, when we can expect that the complete integration of Kaycee, even though we acquired 100% shareholding in our business, when we can expect on that?

So we are only at 74% shareholder at Kaycee. And as far as the operations are concerned, we are fully integrated. The company has worked together and are achieving the efficiency by utilizing each other's strengths. And that is why we see a tremendous improvement in PAT margins at Kaycee Industries.

So can we expect 100% holding in Kaycee in the near future or will we continue in the similar structure for quite some time?

At 100% holding, then we have to delist. No, we are -- there is no plan for that as of now.

Okay. Okay. And sir, in the product category, industrial switchgear, wires and cable, building segments, if you can give a breakup of -- appropriate margin breakup of -- EBITDA margin breakup of all these 3 categories, that would be helpful, sir, for FY '23?

Yes. I think the EBITDA percentage for industrial switchgear for this year is at around 11.7%, Wire and Cable is at 7%, and the Building segment is at 3%.

[Operator Instructions] Next question is from the line of Senthilkumar from Joindre Capital.

Firstly, congrats for the good set of numbers. In the opening commentary, you have highlighted that you have developed new products for North and South America. Can you elaborate what is the product, and what is the revenue we can expect for FY '24?

Sir, I think this year, we have grown close to 30%, which is actually a strong growth, I would say. Going forward, we are projecting around 20% growth for -- on the top line. And on the bottom line, we should be growing at around 25%.

Okay. No, actually, my question is about the new product development in North and South America. Now I'm asking on what is the incremental revenue we can expect from that particular...

Okay, about the new products?

Yes. Yes.

Okay. These products are -- so I mean the potential for these products are quite high. But we expect -- I think in the first year, we will be seeing a revenue of close to USD 1 million to USD 2 million in U.S.

Okay.

But the potential, we expect that in the next 5 years, we should be able to clock around [ $20 million, $25 million ] sales only in these products from the North American market.

Okay. Okay. So what is the product, sir? Is it switchgear or...

They are contactors for various applications in U.S. Contactors.

Okay, okay, contactors. Okay, sir. And my second question, in the earlier con call, you said like for EV conversion kit, we are developing a prototype, where are we, sir, what is the update on that?

I'm afraid that I don't have any new update because as I mentioned in the last call, I think we are going slow on that conversion kit project because we are not seeing much potential -- sales revenue potential or profit potential in that product and technology. So we are actually going slow, though we are doing some research and prototyping, but I don't have an update that to be -- that needs to be given right now.

Okay, sir, what about this charger unit, sir, EV charger?

Chargers in the final stage, I think it's under testing. So we should be launching the chargers mostly in the second quarter of this year for sale.

[Operator Instructions] The next question is from the line of [ Gaurav Sachdeva ] from [ Further ] Investments.

So my question is regarding the EBITDA margins. In comparison to Q3, despite of our revenues have increased in both the segments, but the EBITDA has dropped more than 200 basis points. What is the reason, sir?

I think in the Switchgear business, it's because of the product mix. What happened was I think we had tremendously higher sales coming in Q4 in wire harness and 3 phase transformers, which has actually pulled the EBITDA margins by close to 200 basis points. That's one. On the Wire and Cable, again, I would say it's a mix of product and various sectoral sales that has happened. But this is only a quarterly change. Overall, I think we are seeing a 200 basis point improvement year-on-year, and we will continue to see at least 100 basis point improvement over the next financial year in all segments.

But in your last -- yes. In your last con call somewhere you told that maybe we can have 11% EBITDA on overall basis?

Yes. We are getting there. As you see that we have improved 1% compared to last year. We will definitely get to around 10%, 10.5% next year, and we'll reach 11% -- blended 11% in the next few -- 5 quarters, 6 quarters.

Next question is from the line of Deepak Poddar from Sapphire Capital.

Am I audible?

Yes, sir, you can. Yes.

Yes. Sir, I just wanted to understand, I mean, in terms of the previous question on the margin front, I think what has changed? Because I mean, earlier, we were targeting 11% EBITDA margin FY '24. So is there anything that has changed in terms of our -- the raw material scenario or the pricing scenario, which kind of has pushed back our target to maybe, what, 1.5 years now we are targeting right as compared to...

Nothing major has changed. As we all know that FY '21, FY '22 was a very, very tough year for all the businesses due to this post-COVID scenario, where raw material prices increased tremendously over the year and fluctuating widely. So overall, if you see our Switchgear business's EBITDA margins dropped drastically. I think we used to be at around 13%, 14% EBITDA margin levels in our switchgear products, which considerably dropped to around 9% -- 9.5% in FY '22 because of the raw material price fluctuations. So which we gradually started improving in FY '23, and we are at around 11.7% as of today. The one thing that has changed is, I think the raw material price has stabilized, and we have got our price increase from our customers. I think that has happened. But also during the course of the year, we have seen a slight change in our product mix, which is giving the revenues to Switchgear business. So the more the transformers that sell, then I think the blended margin inside the Switchgear business will be slightly down compared to what we will sell more of the contactors or switches and terminal blocks and things like that. So there is a slight change in the EBITDA margin within the Switchgear businesses. There are certain products like rotary cam switches or isolators or cable ducts that can give us 17% EBITDA or 16% EBITDA. And there are also certain products like wire harness or 3 phase transformers or toroidal transformers, for example, which will give us 11% or 12% EBITDA. And also, sometimes we sell into certain sectors where we are new, where we have to get the business. So then the price we have to be competitive and the EBITDA margins in those sectoral sales also can be a little down. So that is the reason that we have not gone to 12%, 12.5% EBITDA margin, but we are at around 11.7% this year. And overall, we couldn't get to 10%, but we are at around 9%. But I'm sure that we are seeing a jump in the absolute numbers. I would say, year-on-year, there's an 80% jump on the absolute EBITDA number from INR 63 crores to INR 92 crores. And we will see -- we will continue to see similar growth going forward, and we will improve the EBITDA margin percentage also going forward, because I see a lot of stabilization in the raw material prices, and we will definitely improve on the switchgear EBITDA margins by around at least 1% in the year that's coming, the next year.

Okay, understood. But in terms of switchgear segment, so currently, about 65% of your switchgear revenue cater -- is catered by high-margin product in this division?

Actually, all the switchgear products, I would consider it as high margin, but within that high margin, there are differences. There are certain 11%, 11.5%, there are certain 15%. So this combination is what is bringing a 12% EBITDA margin to us right now.

Okay. Okay. I understood. Fair enough. And in terms of your outlook that you have shared, now in terms of -- even if I take 10%, 10.5% EBITDA margin next year, so your bottom line should grow much faster than 25% that you are kind of given as a guidance as such. Is that -- because even if you take 10%, it should grow much faster than 25% bottom line?

Yes, I think it will grow -- it will have a similar growth, I would say. We will see at least a 35% EBITDA absolute number growth for 35%, 40%.

Correct.

But just being a little conservative, let's see how the first 2 quarter goes, and then we can have a real projection for next year because the markets are still, I would say, little fluid. People are a little conservative. Though the Indian market is growing well, but we don't know how the global headwinds is going to turn out in the next few months.

Correct. So any specific, I mean, concern that you have in terms of business or globally or anything that as a investor...

Globally, there is a financial risk that will -- that is -- that everybody thinks that is going to happen in the U.S., then if U.S. gets into a recession, then I think it will be a problem for the entire world market. Then we will see a short term, maybe a 2-quarter slowdown. If that doesn't happen, then I think we are good that we should be able to grow at the same level. Because even though we do a lot of business within India, I think those businesses are also dependent on various other foreign markets. There are a lot of private investments by the foreign company that is happening in India. There are a lot of others who export out from India. So which all may be affected.

Next question is from the line of Ankur Agrawal from RC Wealth Solutions.

[Foreign Language] CapEx plan [Foreign Language]?

CapEx plan, our regular maintenance CapEx we are doing. And as I said, we are having this Hosur plant investment, and the next CapEx will be for the EV chargers.

How much amount required for that CapEx?

Hosur, we have estimated at around INR 15 crores in this year. And the next year, for EV chargers, it will be close to around INR 15 crores again.

Okay. [Foreign Language]?

We are already doing business with railways. We are selling our switches and other -- various other switchgears and transformers to railways. And we are seeing constant business from railways, not great growth but constant business.

[Foreign Language]?

No, I didn't get your question because I'm not very good in Hindi. So if you can translate -- somebody can translate...

Next 3 years, 4 years, how much company will grow like how much top line and bottom line?

Sir, we expect to grow at around 20% for the next 2 years, at least, for sure.

Okay. And bottom line will be better than top line?

Yes. Yes.

Next question is from the line of Sanjay Kumar from ithought PMS.

First question is a very broad question on strategy, [ vision ] capital allocation. So you have toroidal transformers, wire harness, where you're putting up capacity, but you also have dry type transformer business, where peers like Voltamp, CG Power are putting up capacity, you have wires and cables, [ Kupper ] are putting up capacity, in fact Kupper is exporting a lot of cables to U.S., Australia. So without the scale in these segments, why you venture out? Is it because the base business growth is very slow or you want to move to other segments? So why is EV charging? Does it have any moat from the JV? And you were even looking at retrofitting or conversion kits for 3-wheelers. So I don't see lack of capability because we have you -- a license for many products in the U.S. So capability is not a constraint. Just that I don't see cognition and vision or long-term strategy. I may be completely wrong. So if you could explain your thinking and rationale? And I'm just trying to think it through in terms of management bandwidth will be diluted in terms of EV charging and the retrofitting or do we have any moats in EV charging? So any thoughts on these lines, sir?

Yes, got your point, got your question. I think our total long-term vision is to be a global electrical solutions provider. I think that's what we are looking at. So anything to do with electrical solutions, we want to be there and we want to be a first mover. So that was one of the reasons we got into electric charging because we thought that I think that EV is going to be a future in the next 10 years, 15 years, at least a 2-decade business from now before the technology can change or whatever happens. So we thought we have all the capabilities, we have all the components that will go into a charger and why not we make a charger. And luckily, we got a JV partner to manufacture that, and that is how we are into that. That is the reason that we are into that. Conversion kit, maybe you rightly said, maybe it's a little deviation from us, and -- but as we ventured into that, we understood that, that business is not giving us scale or giving us a great opportunity. So we are scaling back on that, which we've -- I've already said in the previous 2 calls that we are scaling back and going slow on that conversion kit. But charging, yes, we have a reason for that because we can use our components, and we have the technology, and we can see that the future business is there, it's the future technology is there. And we -- as an electrical company, we want to be in that space. That's the reason we're doing that. On the other product expansion, as you know that we started off as a rotary cam switch company, that's how the company started 3 decades ago. And there is a limitation for a rotary cam switch within India or globally because the market size is limited. So -- and then we -- reason that we ventured out and started making various other different products is that we wanted to grow on scale and also be with the customer connect with many products. And that's how almost all the top switchgear companies across the world have grown, including Schneider, including Siemens or Eaton or even the Indian company like Larsen & Toubro or Havells, for example. L&T is a switchgear company, but they have 25 products within that switchgear segment. So that's how this business happens in the market, the business trend is like that. We actually went a little more diversified, started making transformers, wire harness and also various other products that may or may not fall under the switchgear definition, but it sells to the same customer. The same customer uses this. Sometimes we get a customer for rotary cam switch because of transformers or vice versa. So that's the advantage of having the large product portfolio and trying to expand all the products. And as you asked rightly, how and which [Technical difficulty]. Hello? Am I audible?

Yes, sir. Yes, sir.

You are audible.

Yes. So on how and which product you are going to expand, I think we -- as the opportunity comes, I think we are allocating capital and expanding capacity dynamically as the opportunity comes to us. I think last year was the year for 3 phase transformers because I think the growth in 3 phase transformers was close to 70%, 80% or 100% -- 250% actually year-on-year. So when the demand that came in, then we had to be dynamic and we had to expand the capacity and then we have to capture that market. So that was the reason that from INR 25 crores in FY '22, I think we were close to around INR 75 crores in FY '23 on that business. And it continues to -- I think the growth has slowed down, but it continues to grow at around 30%, 35% in this year. So that is how we manage the product portfolio within the segment. And on the scale about -- I think you mentioned 2 companies, Voltamp or CG, I think we are not in that space. I want to clarify our 3 phase transformers or dry type, indoor application transformers for low voltage, whereas Voltamp or CG makes oil-cooled or cast resin transformers for high voltage distribution transformers. We are not into that space.

Okay. I think Voltamp, 30% of their business is dry type. But anyways, just to...

Dry type high voltage. They are all 11 kV or 22 kV, those kind of transformers. We are only in 440 volt, less than 1,000 volt.

Yes, sir. So just 2 follow-ups there. So if dry type is growing so fast, any CapEx for wires and cables business or the dry type transformers? That's one. 2, what components in the EV charging, I mean, how much will we be making in-house and how much will be bought out in the EV charging product?

Around 30% of the value of EV charger will be in-house components.

Okay. Okay. And on the CapEx in dry type and wires and cables?

Yes. As I said, I think the wire and cable is a little different because we are not doing any major CapEx because we still have a capacity open in wire and cable. But dry type transformers, yes, we have done around INR 4 crores, INR 5 crores in this year on capacity expansion, and we will continue to do around INR 3 crores, INR 4 crores in the coming year for 3 phase dry type transformers. So not much, I think it is dynamic. As and when it requires, I think we will keep adding machineries for that.

And asset turn for dry type would be 6x, 7x?

It's right now at around 4x, 4.5x.

Okay. Okay, sir. Just last question, if I may. 5 years from now, what kind of product mix breakup are you looking at in the top line? Any rough figures?

The way that it goes looks like, I think we will be a 60-30-10 or -- that's how it is, 60% from the industrial switchgear business, 30% wire and cable, 10% from building electrical. That's how I'm looking at.

And EV charging will be part of?

EV charging will be a subsidiary. So that will be again, I think the business is still evolving. If it grows, I think it can give an equal amount of revenue.

[Operator Instructions] Next question is from the line of [ Manish Maheshwari ] from [ Manu ] Group.

Yes. Sir, you said you used to command a EBITDA margin of about 14-odd percent in your switchgear business, right, which eventually came down to 11% during COVID or...

It has actually come down to 9.5% last year.

Okay. So when do you expect margins to restore north of 14% or at least 14%?

That's what I said know, whether we will go back to 14%, I'm not sure because of the change in the product mix, because if you go back a few years, we didn't have transformers as a top selling product in the switchgear segment. We had all other products in the switchgear segment, which gave 15%, 14% EBITDA margin. When the volumes grew, I think we -- in my opinion, as from 11.5% right now, we may touch around 13% in next year -- FY '25, 13%, 13.5%.

FY '25 is an year after that, right, FY '24 and then FY '25?

Yes, FY -- I think we will see a 1%, 1.5% improvement year-on-year.

For the next year, you mean for FY '24?

FY '24, 1% to 1.5%.