Schneider Electric Infrastructure Limited (SCHNEIDER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Schneider Electric Infrastructure Limited Q3 FY '20 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Renu Baid from IIFL Securities. Over to you, ma'am.

Yes. Thank you. Good afternoon, everyone. On behalf of IIFL, I would like to welcome you to Schneider Electric's 3Q FY '20 Earnings Call. Today, we have with us from the management Mr. Bruno Dercle, Managing Director; Mr. Arnab Roy, CFO; and Mr. Vineet Jain, Head of Investor Relations. I would request Bruno to start with his presentation, give us a brief about the market environment and the quarter gone by. Thereafter, we'll start the session with the Q&A. Thank you. And over to you, Bruno.

Thank you, Renu. Good afternoon, everybody. I'm Bruno Dercle, I'm Managing Director of Schneider Electric Infrastructure Limited. I'm pleased to connect with you to share an update on the progress of our company. Today, I will start with a few slides on our market outlook and -- first of all with the -- some indicator -- or macroeconomic indicator, that you can see on the first slide. So we had a tough 2019 summer period. And quarter 1 and quarter 2 of the fiscal year were a year of election first with the -- and a year of transition -- a quarter of transition in rest of the world, during which we could see some -- an economic slowdown on the overall economy. We think that we have touched the bottom right now, and we touched the bottom somewhere in September, October. And we start to see some strong sign of recovery in terms of investment, CapEx announcement. And not only the overall Indian GDP growth rate showing sign of recovery but also -- a rebound, sorry, but also the composite index, which is a Schneider Electric sector-specific index computed by our economic department, is also showing a strong rebound now for 2020 compared with 2019. So we expect 2020 to be better. We could start to see in the quarter 3 some strong sign in this -- of rebound after a difficult midyear in quarter 1 and quarter 2 fiscal year. We proceed with caution because in this environment, we are still expecting the rebound to transform into a pipeline of opportunity. So we proceed with caution but with optimism. We have -- I can share also with you a certain number of indicators. I would like to stress on the one at the bottom left, which are adapted to our sector and segment of activity. You know that we have a very strong part of our activities in the mining/metals domain, in the electricity -- electric company segment, in the manufacturing and industrial segment. So the top -- no, sorry, the bottom left indicators are very sensitive for us and very critical. And we see that in the month of November, the last figure that we have published, we see that we start to go back to the positive evolution for the manufacturing and for -- but we are still negative for the electricity consumption, which is quite an important indicator for us as a medium-voltage and low-voltage switchgear manufacturer. So I will -- I just want to stress on that, we probably touched the bottom somewhere in September, and now we have a growth trend on the -- globally in macroeconomic figures. I would like to share with you a very, very emblematic project that we are proud to have won in last quarter, which is for HPCL Mumbai refinery. It is not a greenfield project, it is a brownfield project. It's -- we take advantage of the modernization of the -- and the investment program of HPCL Mumbai, which is an existing refinery, to propose a full EcoStruxure solution to answer the need of retrofit and the modernization of the refinery. EcoStruxure for us is our flagship in terms of offer on types of interconnected and digitized offer. You can see on the right side the overall architecture of EcoStruxure with some connected product at the bottom. So in this case, most of the products are already existing in the -- launched in the existing refinery of HPCL. We connect them to a control and a monitoring system, what we call the edge control, with the different systems to collect the data from the connected products at the bottom layer and doing the control and monitoring functions at this level, so which is the local control at the refinery level. And then the third layer that you can see on the right side of the screen, which is the application and analytics with some asset performance management system and a maintenance resource center. So quite interesting analytics and software designed for the -- not only the operation and control, which is on the edge control layer, but the improvement of the operation and the improvement of the maintenance and life cycle of the whole refinery, thanks to the analytics and the functions, which are at this layer of EcoStruxure using data coming from the field, most of them already existing in HPCL system. But with the addition of the edge control and the analytics layers, a lot of improvement can be done by HPCL on its operation of the refinery. So I will not go into all the detail. It's quite an interesting technical reference that has been won by your company in November, early December last year, and which is supposed to be commissioned in September, October of -- at the end of -- before the end of this year, in 2020. So quite an interesting reference on what will be commissioned, knowing especially that HPCL has a big program of investment in its existing refinery for the -- its future development. So this is the overall architecture of the project itself. And you can see the different product from -- coming from different parts of the organization of Schneider Electric. Not everything comes from SEIL. Part of it also comes from Aviva, which is a sister company of Schneider Electric Group with the aim of having a sharp improvement on the operation of the refinery by HPCL. So in the past 3 months, to summarize, we observed a general economic slowdown with some rebound at the end of the quarter. It has slightly affected our order intake. You will see the figure later on. The good thing is that the services and energy automation orders have confirmed their rebound in Q3 that after [ 3 years ] early stage of rebound in Q2. But in Q3, it has been confirmed. And medium-voltage switchgear orders were also still dynamic. We -- you remember that we had some flood event in Baroda in our plant -- in our main plant in end of July 2019, which has affected our Q2 sales level. We could catch up in Q3. Both very healthy quarterly -- level of sales in this quarter but also catching up the delay that we experienced with the flooding in Q2, so we can be quite happy with the sales level of Q3. We observed -- as a consequence of the general economic slowdown, we observed some tension on our customer cash situation. It has some impact on the finance cost that you will -- we will share this with you later on. But we still collected more cash than [ was in our sales ], which is quite a good performance in our daily operations and cash management. We have done further progress on our license program and core component program -- partner program in the past 3 months. We launched 1 new offer of a license for PIX medium voltage, PIX MV. We launched it in December. We have signed 2 licenses with this new offer already, which are not yet operational, but transfer of knowledge is starting. We have validated 2 additional FBX RMU license case. Again, it would take a certain number of months to be -- to have them operational, but we have bagged 2 partners and signed the contract agreement with 2 additional partners for RMU FBX, which was an offer that we launched in the previous quarter. And we have 2 of our partners on which we -- with which we signed license agreement for packaged substation, what we call PSS. Two of our license contract came into -- have been done -- came into force [ in reality ] -- with the prototype being validated in December. So that's quite an important program for us, a core component and license program because of the change of mix that we -- and the different application of our plant and selling efforts, thanks to our partner network. This will pay off in the coming quarters. With this being said, I will now give the floor to Arnab to update on the financials.

Thank you, Bruno. So we will start with the orders and sales just continuing from where Bruno left. We had a challenging quarter in terms of the overall economy. That is very clear. But in that context, if you see, the order number is slightly lower compared to the corresponding quarter last year. We had some deferments of some large orders which we are expecting to get this quarter. But it is a fact that the economy and in terms of the pipeline, there has been some challenges on the order side, which we are catching up. But from a full year perspective, if you see, we are almost at a flat performance with respect to the corresponding 9 months' period. Within the 9 months or 3 months' period, we have some good orders, one of them Bruno highlighted, but there are some good orders from EPCs, from end users, from partners all around. So I move on to the next slide now, which is on sales. Healthy performance on the sales. We had a double-digit growth quarter-on-quarter, thanks to a very strong order pipeline which was there with us, which we told you in the last call as well, as well as some catch-up which happened from the previous quarter to this quarter because we could not produce everything due to the flood. So a combination of these 2 effects led to a very strong quarter of INR 480 crores -- quarter, and you'll see the effect of this in the P&L when I go to the next page. For the 9 months' period, also, we had a very strong revenue performance. We had a 5% growth. Overall, all the segments, the equipment business, services business, transactional -- everybody has progressed well. So a good revenue quarter and a good revenue 9 months. Let's move to the P&L with this. So when I come to the P&L, you see the effect of this strong top line in the bottom line. We also had a very good improvement on the gross margin. Thanks to the -- a big revenue quarter, the factory was fully loaded, so we could get full leverage of the cost. So that's one of the contributing factor for the margin. The mix was what we wanted. So combination of full factory as well as a desired mix led us to the 3.5% improvement in gross margin, which is what we have been telling you in the past few quarters, and you could see a translation of that in the financial in this. So it is not by default. It is by design, is what I would say. Stable quarter from an employee cost perspective. So if you have to read it, whatever annual inflation we had, we were able to mitigate it through the restructuring which we have been telling you in the past quarters. So again, you can see a translation of that in the numbers. Other expenses on the face of the P&L, you see slightly higher. But last year, we had 2 factors within the other expenses. There was a [ mandatory ] recovery of about [ 80 MINR ] there, and there were some ForEx gain of about [ 40 MINR ]. So if you magnify these 2 factors, other expenses are also in a similar level. And this quarter, we had a more normal year. So with all of this, we had a double-digit EBITDA for the quarter. And with the depreciation being more or less stable, we reported a INR 30 crore profit for the quarter. So overall, a very strong quarter. And you can see the effect of this also when I go in that next page in the 9 months' period. So let me go to the next page, which is the 9 months' period. You can see here, I have already spoken about the revenue, so a 5% revenue growth. Directionally, the gross margin is at a similar level because if you remember, in the earlier 2 quarters, we were lower in the transaction business. So this quarter has revived it a lot, and we are at a flat position from a gross margin perspective for the 9 months' period. Every other item in the P&L is more or less in the same trend. And because of the INR 30 crores quarter at a 9 -- for a 9 months' level, we are only at a INR 3.8 crores negative EBITDA. And we are working for next quarter to see how we can catch up on this one. Otherwise, overall, I would say a good 9 months and good 3 months, and we will talk more when we are in the question-and-answer sessions. One important aspect I want to touch before we finish it and open it up. So last quarter, we had reported to you that the net worth had become negative. So the first message in this slide, when you see the balance sheet is from a negative net worth, we have come back to a positive net worth of about INR 30 crores, thanks to the profit for this quarter. As well as there is a INR 17 crore classification impact in this because some of the short-term loans, which we had, we had to -- we classified it as long term. And as a result, there is an accounting impact, which has flown into this. The other concern we had in last quarter was on the current asset versus current liability. And as you can see, we have caught up on that. The current asset and current liability is in the same level now. So recovery on the net worth, current asset and current liability ratio fixed is the message I would like to give you on the balance sheet. And with this, I will take a pause and open it up for questions.

[Operator Instructions] The first question is from the line of Nimish Shah from Fortune Financial Services.

Congratulations on a good set of results. I wanted to know what is the growth outlook for the next year, 1.5 years. That's all.

Nimish, we don't give a specific outlook, but Bruno gave you the GDP trend you could see. And we don't expect to lose market share, is what I can tell you.

Okay. And anything specific in terms of the product lines that are seeing far higher growth than your core product lines?

I think most of the products, we are on a stable situation. And that is the reason you could see the translation in this quarter. So we don't expect any particular product line to degrow. We expect a steady performance and -- with the result mix which we have been telling you.

Okay. And any order books figures or something that you have?

Yes, for sure. So if you look at the overall backlog, what we have on 31st of December is about INR 744 crores. The corresponding number for September was INR 784 crores. And the composition of this INR 744 crores is 69% is systems, transactional is 17% and services is about 14%.

Okay. Okay. So no degrowth in any of these 3 lines of businesses you see?

No.

No degrowth.

Okay. So systems, transactional and services, right?

That's right.

The next question is from the line of [ Vivek Agarwal from Shivsagar Investments ].

I just want to know what is the difference, like you have 2 or 3 unlisted subsidiaries of Schneider [ being here ]. So what is the difference in product line? And what is the scope of scalability in this business, the listed one and the nonlisted one, how is it different?

So yes, it's true that we have a certain number of legal entity, resulting a part of it from our history. Schneider Electric has grown by acquisition. And as a consequence, we innovated from a certain number of legal entities. But mainly, we can consider that we have a legal entity for medium voltage switchgear and energy automation, which is the CIN, very focused on a few segments that I have linked in, there's the transportation segment, the mining, metals segment, the electric company segments where the bulk of the order and -- goes -- or come from. There is another legal entity for low voltage, either equipment or product, low voltage, which is [ SCIPL ] which isn't -- not listed. And there is a set of other legal entity for process automation, which also is a result of a former acquisition, were more designed for software and solution for industrial process and in the oil and gas segments, especially.

What is the normal margins we can expect from your -- the listed company? Like is it a 10% margin business? Or what is the ideal OPM margins that we can expect on revenue?

So you can see the reflection of a normal quarter, which is this quarter. And we don't give out a margin outlook again. And then -- so you will have to kind of...

What is the industry standard, like what is the industry benchmark -- what we'd look at for...

Again, that's an outlook question, so we don't give an outlook. You can see a reflection of how we have done in the last 3 quarters. The transcripts are there with you, and we would expect you to form your own judgment.

And what is the scalability of the business like we are in now? What is the market size we see that like and is it a kind of export -- is there an export market for what we do?

We are have -- we are currently developing a part of our activity with exports, but it remains, for the time being, a limited part of our activity. We are massively catering to the Indian market, and we are currently developing the export market for mainly what we call the PIX roll on floor product, which is the medium voltage switchgear that we export to Africa, Asia and Middle East markets.

The next question is from the line of Manish Goyal from Enam Holdings.

Yes. Many congratulations on excellent set of numbers, sir. It's very heartening to see our profit at the [ bank ] level. Hope we maintain this. Just to carry forward from the recent last question on the export side, just which are the countries we are looking to export?

So we are looking at export on the medium voltage switchgear to Africa, Middle East and Asia -- Southeast Asia.

Okay. Okay. And what is the -- basically, if you can give us some sense as to what is the export revenue and how has it been growing, sir?

Okay. Today, Manish, the export revenue is relatively small. It is INR 500 crores, okay? But as when we are getting qualified on the products, and as Bruno said, we are in a direction of getting more and more of our products qualified for those countries.

Okay. Okay. Fine. And if you can give me the revenue breakup in terms of external sales and intergroup sales for the current quarter and competitive number as well, please.

Yes, sure. I will give it to you. So if you look at the current quarter, Manish, the overall intergroup is about 15%, and 85% was outside group sales, which are external customer sales, okay?

Sure. And also, if you can please give us the revenue breakup in terms of systems, transaction products and services?

Yes. So this, I'm giving you on a full scale of [ hundred ] without bifurcating on [ IG ]. So systems is 70%, transactions is 16% and services is 14%.

And competitive number for the quarter, December '18?

Competitive number was, systems was 71%, transactions was 17%, services was 12%.

Okay. So just trying to get a sense that -- so probably this quarter, we had a very good improvement in gross margins. And what I see from the numbers, what you shared now is that, ideally, your mix is not much different from what it was. So what has led to improvement in gross margins? And is it very particular project-specific where your margins are good or now we can probably look forward to a secular number going forward?

So we had -- first of all, we stabilized our activity at a high level, okay? So it allowed us to have a good utilization factor of our plant. So the growth of the volume in each and every one of our product lines has led to this -- has contributed to this good figure. But also, we have been engaging into a pricing up of our product, and we have a much better quality of the backlog and the margin on backlog than we used to have. So we have flushed most of the order that we have taken and that were in our backlog at a low margin in the previous quarter, and now we have a much better-quality backlog with much better margin on backlog.

Yes. Okay. Okay. And if you can also please share the order inflow breakup between the -- so the INR 343 crores order inflow number is pertaining to only external customer or it includes the IG also?

This is the external customers.

So please, can you share the IG number as well, please?

So IG is stable. IG is about roughly INR 110 crores, INR 115 crores. So that's the IG number overall.

INR 115 crores for the quarter?

Yes, roughly in that range.

Okay. And last question, if you can please breakup the order inflow in terms of systems, transaction and services, please.

It's a similar number, Manish, just a marginal percentage here and there, but similar to the sales one.

Okay. And you referred to that you had a ForEx write-back and a provision write-back in the previous quarter. So you -- ForEx was roughly INR 4.8 crores, you said. And what was the provision write-back number in other expense last quarter?

ForEx was about INR 4 crores, Manish, and provision write-back was about INR 8 crores.

INR 8 crores in the quarter. Okay. Okay.

So this quarter, we had a more normal performance, so there was no abnormals from that perspective.

So this quarter, we don't have much on the ForEx and write-backs, both at the material level as well as other expenses level?

Yes. Because you'll be remembering that I have been telling you that we have started hedging the contracts wherever we had to hedge. Now the effect of the hedging is getting reflected, so we are neither getting a gain or a loss.

Okay. Okay. And last question on the employee costs. Now do you think that this number of quarterly INR 54 crores, which is probably there for a similar number for last few quarters, will continue with this run rate?

Broadly, I think this is run rate with which will continue. I don't expect too much of a variation. There may be a quarter here and there [indiscernible] gets paid off, stuff like that. Other than that, I think it's a normal run rate.