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

Ladies and gentlemen, good day, and welcome to the Schneider Electric Infrastructure Limited Q4 FY '20 Earnings Conference Call hosted by Elara Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harshit Kapadia from Elara Securities. Thank you, and over to you, sir.

Thank you, Nirav. Good afternoon, everyone. On behalf of Elara Securities, we welcome you all for the Q4 FY '20 and FY '20 Conference Call of Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infrastructure, presented by Mr. Bruno Dercle, Managing Director; Mr. Arnab Roy, Chief Financial Officer; and Mr. Vineet Jain, Head of Investor Relations. We will begin the call with a brief overview by the management followed by the Q&A session. I will now hand over the call to Mr. Dercle for his opening remarks. Over to you, sir.

Thank you, sir. So good afternoon, everybody. I'm Bruno Dercle, Managing Director of SEIL. I'm pleased to connect with you to share and update the progress of our company. Today, I will present some slides on the market outlook and also, of course, the COVID-19 impact on our company. So let's go to the presentation. I will start with Slide #4. So Vineet you will present the slide and I will [indiscernible] So we have been hit by the impact of the COVID-19 crisis starting from February. First of all -- on our global supply chain. Our global supply chain started to be disrupted from February when our imports started to be disrupted. In fact, mainly first from China; and second, from European plants. And so then it has pushed, as a consequence, a lot of our sales to the end of the quarter to the month of March. And then we were impacted again in the month of March by the restriction on transportation and movement within the country of India. So you will see later on the consequence on our performance of this first disruption of the global supply chain, and second, the internal movement within India that prevented our customers to come to the factory and do the factory acceptance test. I will stress later on the importance for us of the factory acceptance test when our customers take, in fact, our goods or declare them good for shipment. As a consequence, right now, we continue seeing impact of the lockdown. Most of our end-user projects are delayed by an estimated 3 months. And the best of case, we have 3 weeks of delay of our customer, of our end user project. In the worst case, we can go up to 5 months of announced delay, 5 to 6 months of delay for some infrastructure projects. But you can consider that we have an estimated 3 months on average of project of our end-user being delayed. It can be the plant, the station -- the power station of the plant. It can be the metro in metro station, in the RIL infrastructure project. It can be all the end user usage of our medium voltage product. Still today, we have major customer sites under lockdown, which is also a cause for delay of our sales. It continues. It has not been concluded in -- with the ease of lockdown that occurred in May and early June. The good thing is that we see a very strong improvement on the vendor and supplier front. They are still ramping up post lockdown. They face issues of manpower, workers, workforce, but the situation is largely improving. We have seen this all along the month of May first and then confirmed into the month of June. And we continue to see bottlenecks a little bit everywhere in the supply chain, in the ports, in the airfreight, in the truck, in driver and different supplies. And also typically, the Nepal border was closed until 1 day or 2. So this type of bottleneck continued to happen in quarter 2. And started in February of quarter 1 and quarter 1 calendar, quarter 4 fiscal year. The good thing is that we start to see a good ramping up of our vendor and suppliers in India. We have good flow of order intake. The order intake is showing very good resilience and it is thanks to our positioning in some segments that has shown very good resilience and competitivity of our product as well. So the order intake during all along the COVID-19 crisis remained quite good. The -- and also, we see -- we observed a change in the customer behavior. Today, it is not unusual to do virtual factory acceptance test. When it was the exception until February or March, it is becoming the norm. Our customer pushed by the necessity that they usually do not travel within the country. They entertain to do virtual factory acceptance test, entertain to do virtual negotiations. We were ready for that. Your company was ready for that. We have already invested into high-resolution video and cameras and tools in order to do virtual FAT in our plants. It has been a very good use during the months of April and May. And it is somehow a new normal. We will -- very probably, some of our customers will never come back to the old ways of doing factory acceptance test by traveling to the plant and spending 2 or 3 days over there. It was -- the new normal will become a virtual way to operate. So that is a good thing also to see customer behavior changing and that will allow us to rebound in the coming few weeks and months. And we have started to observe it in the past 2 months. We can go to the next slide. So during this period -- during this troubled period, we had very clearly defined our priorities through this crisis. So our first priority was to take care of our health and that our health team -- the health of our team. We had to communicate. Everybody was sent home in the end of March and everybody was somehow isolated. So we had to reconnect all our communities. So we had weekly communication, very clearly defined country guidance. We also adapted the workload, the work force to our workload at some stage. So taking care of our health, taking care of our teams, ensuring that no one feels insecure and alone working from home. Knowing that all our office workers were already equipped with mobile connection meaning that all our back office operation has not been disturbed by the lockdown, means all the front-office, sorry, has not been disturbed by the lockdown. Only the back office in the plant, of course, was disturbed during the March and April lockdown. Second step was to take care of our customers. I mentioned already some examples of operations to virtualize, in fact, our interaction with our customers moving to the digital, spending a lot of time on the back office part, the tendering activity, ensuring as much as possible what we could deliver from the finished goods. So this was -- and also answering to the priorities of some customers. I will give an example at the conclusion later on of getting a hospital example of a very strong reaction, a very fast reaction from the company to ensure it delivers. We have to take care of our company because the disruption of the business during the month of March was very important, and nobody was -- most of the big customers were delaying their payments. We had cash to manage. We had to discipline our cost also because the COVID-19 generated some extra cost on our supply chain. So we had to manage that as well. We have also to take some action related to the underabsorption that were generated by the lack of volume and the delayed sales in our plants. And we used a lot of the months of April to protect -- to prepare for the post crisis, to prepare for the rebound, which we are currently putting in place. What does it mean concretely to take some measures to protect our workers, to protect our people in the plant. So here, you -- I just selected a few pictures out of many that shows the before and the after in our factory in Baroda. So you can see on the left side, what it -- how was one shop floor for a given line of manufacturing in before the COVID-19 measures and after on the right side, you see the type of thing that we have done in the late March, early April in order to prepare the reopening of the plant in safe condition. We need to ensure the social distancing in our plant just like we ensure the social distancing in offices and we ensure the social distancing in our private lives. So this is an example. You can go to the next one. Here, the work position, okay, the workers need to respect a certain distance. When it is not possible due to the type of work which is done, we have to implement barrier, a physical barrier in order to limit the possibility of cross contamination, and this is an example of what is happening. What has been implemented in Baroda plant. And if we go to the third one, here, it is a special case also when 2 workers need to work together, they know the choice and they have to work together in the same assembly position. Here, we equip them with PPE to protect them from each other while letting them work and execute their task. These are example of what does it mean social distancing in the factories. And again, I said, implemented in the month of April in order to be authorized to reopen and to prepare the rebound of the production and the manufacturing starting from end of April, early May. Many indicator on the global on the overall dashboard, I want to stress on 2 of them. One is the ForEx on the right side of the screen, you see the exchange of the euro and the dollar, and we are sensitive to the USD and Euro, especially. So you see that, as you know, this indicator but it means somehow some stress on one of our activity, where there is a component import. So it is important that we monitor very carefully this, the ForEx, which is escalating in the months of April and May. Second indicator that we are following particularly for our company is a manufacturing indicator and the electricity growth indicator on the left side of the screen. And you see on the left side of the screen that energy consumption, the electricity consumption was down by 22%, to almost 23% in April, showing the impact of the lockdown on some things on indicator which is extremely important for SEIL, reflecting, in fact, mainly the industry and consumption. So the electricity KPI indicator is absolutely important. The manufacturing indicator just the growth is also very important and they are not in a good shape at present, that is from April. We just recently got the data for May and June. Going to the electricity is going better in May at minus 15 approximately and minus 10 in June. So it is recovering from the dip of April, but it is not yet at the normal level, which would be plus a few percent of electricity consumption growth year-on-year. If I go to the next slide, this is the segment dynamics as we see them from Schneider Electric perspective. You see a few resilient segments that continue to pass orders at appropriate volume. So Food and Beverage, Hospitals, Electricity company. A lot of this segment and companies are very active on the market. C&SP is the cloud and service provider and data center. So these are dynamic segments for which we have the right offer. And then we have other segments like Oil & Gas and MMM mining metals which are more as flattish or downward trend. And mainly Buildings segment, which is heavily impacted, and it might be [indiscernible] impacted. These are the way we see them. The good positioning of our company is that we are not -- we are particularly well positioned electricity company. You know that it is sometimes a problem to be highly positioned on electric company because it is difficult to be paid. So our cash situation is always at risk when we work on this electricity company segment. But in terms of resilience of this segment, in the current context, it is a good thing to be heavily positioned on electric company because this segment is very resilient, and we -- our order intake since the beginning of this year has shown a very good resilience of this segment. Knowing the weakness for this segment, which is the difficulty -- the delay in payment and the difficulty to manage our cash. So electricity company is quite important for us. And we have to be careful about the evolution of the Oil & Gas and MMM Mining Metals, which are also very sizable in our activity. And we have to be careful about -- we monitor very carefully the investment plan of these -- of the major actors of these 2 segments. We can go to the next slide. It's -- I will go [Technical Difficulty] little bit complete and complex. I think you will have it in the communication pack in the slide deck. It shows our vision of the evolution of the electricity company segment from the traditional vision of transmission and generation. The generation segment for the past few years has been heavily modified by the renewable generation arriving. So the blue side of the screen on the left is what used to be a traditional electricity company market and what we observe. And we are positioning our offer more and more on the right side of the screen for the future growth is the green side on the right side of the screen. And with the prosumer, the localized production, localized generation and much more attention to efficiency and cost management with a smart component and connected offer and much more present now in the mind of the electricity company than before. Before it was major -- mainly a matter of how do I bring the power to the consumer to see development. Now it is much more at what cost and which efficiency do I bring the power to the consumer and how many prosumer will appear in my market. So this change in paradigm shift starts to be visible and that's why we have positioned several of our new offer on this path. Our key priority to serve the utility electricity company I think I have summarized them on this slide. It's more automation, digital -- more digital, moving up the digital value chain. We are developing offers for that. We have large market in the market some offers recently in that domain. More services. Increased transactionalization. We have now several licenses using the Schneider technology, Schneider Electric medium voltage technology which are now up and running and promoting our offer. So for us, it will be a transactional business, much more agile and flexible for the -- and which would remain Schneider Electric brand and Schneider Electric technology. We have worked on the market coverage. There are some portion of this market of electricity company which are still not yet well covered. We are working on that. And we also work on the synergies among our different divisions within Schneider Electric in order to maximize the basket and all that within our organization. This slide, you will have also on the slide deck. You see at the bottom part of this slide, the orange color is what is the traditional way to address the electricity company market, and preferably the typical MV/LV substation, typically SCADA DNS. All this, we have offered which are traditional offers for us. We are now launching the other boxes in terms of new growth area, which can be related to other offer and different go-to-market as well. A lot of it through partnering and licensing. So I will go faster because time is running out and I want to keep place for questions. I will conclude my presentation with an example of what has happened in the -- to support one of our customers, a prestigious customer AIIMS in Delhi -- in New Delhi. We had delivered -- 6 months ago that was already several months before the crisis, we had delivered some goods and some low-voltage panel to this hospital for development plan. Suddenly, with the crisis when it erupted in March, the customer asked us in emergency to commission and to -- despite the difficulties of move and transport at that time which was in the middle of the lockdown, but they asked us to support them and to commission within 24 hours and all these devices that have been supplied. So it was not manufacturing. It was a service and commissioning effort. It was done within the 24 hours. So our team was extremely active and it has been extremely well appreciated by AIIMS as a customer for the activity that our company has demonstrated on that example. So now I will ask Arnab to update on the financials indicator and performance.

Thank you, Bruno, and good afternoon, everyone. Just to translate some of the comments which Bruno made in his initial part into numbers. So we had a resilient order quarter, as you can see from the numbers. So in spite of the sluggish March, we still managed a 5% growth in orders for the quarter. And overall, on an annual basis, we had a 1% growth on August. So the segments which we operate in contributed us to go and maintain order momentum. So if I move to the next slide on sales. As Bruno was again indicating earlier for us, the disruption started earlier than March. So disruption started depending on the product and depending on the supply chain, somewhere from February, somewhere from end January and you can see the impact of that in the results. So about 20% we had a revenue dip. So actually, the total COVID impact in terms of turnover was slightly higher than that because we were anticipating some growth, but we ended up with a 20% kind of a degrowth situation for the quarter. And due to that, overall, on an annual basis, we had a flattish year, which otherwise we would have had some amount of growth in the year. So that's the overall story. Moving on to the financials. Due to this revenue dip, overall it had effect on the entire financials. But stand-alone, if you see the elements of the financials like material cost or the employee cost or the other expenses, there was no abnormal items in this quarter. It was more or less in a trend. It was just the top line effect which led to that bottom line effect which you see in the results. So barring that, I think -- I mean, there was nothing abnormal to report in terms of expenses in that quarter. So -- but due to this lower top line of almost about -- I mean lockdown impact was about in the range of INR 75 crores to INR 80 crores. So with that kind of a top line impact, I mean the bottom line reflection is there in the quarter results. Moving on to the annual results from 3 months. So if you see on the annual results, again, as we said, we had a flattish result overall in the turnover. But then if you look into the other components of the financials, the material cost, thanks to the mix and thanks to the transactional, I mean, showing some effect, so the overall -- I mean, the material cost is showing a downward trend. Other incomes, if you recollect, last year, we had a significant collection from old bad debt. So this year was a more normal year. So we did not have that advantage. So that is the main delta which is coming between the FY '19 and FY '20 performance, if one has to compare on an annual basis. It is the old debt collection of almost, you can see the quantum there, almost around INR 30 crores that is impacting the results. Other than that, if you see the other perimeters, it's more or less in a controlled situation. So there is nothing abnormal per se to report in any of the other lines. It's just a lower top line effect, the missing other income of last year and which is leading to this number there. Possibly I will get one more question during the question sessions, but I would like to upfront cover it. So you will also recollect that in this financial year, we had that flood effect in Baroda. So we had to take a significant hit in this fiscal year. Now due to this lockdown and the insurance companies moving slow, both in India as well as France, we were not able to realize the insurance benefit of this. And as I had reported to you in the earlier quarters that we had a dip in to the tune of about INR 11 crores to INR 12 crores, which we are currently discussing with the insurance companies, which will only account when we get the cash. So clearly in mind, when you are looking at the results, there is that impact, which this current fiscal is hit and which will come in the coming quarters. So with that, I will pause here, and we'll open it for questions.

[Operator Instructions] First question is from the line of [ H.R. Gala ] From [ Finvest Advisors ].

I think it was a very comprehensive presentation. Can you just help me with what is the pending order position as on April 1 which we are starting the year?

Okay. I'll answer that question. So the order backlog as on 1st of April is to the tune of about INR 892 crores.

Okay. And how is it broken up between different user segments, if you can help us?

Yes. So the systems piece out of it is around 69%, transactional is about 18% and services is about 13%.

Okay. And in terms of the users, like industry, electricals, railways, et cetera?

See, we don't -- I mean, get into that kind of a micro. But overall, if you see, as Bruno said, I mean, the resilient segment for us is the electrical utilities and transportation. So those are the resilient segments which is there.

In terms of backlog, we have 16-plus percent in electric utilities.

Hello, I didn't get you, sir.

In terms of backlog, we have approximately 16-plus percent in utilities in electrical.

In utilities. Okay. And sir, any orders are we getting in the newer areas, which you have highlighted in your slide in the black border?

A lot of it is in this part because whenever we sell a smart avenue, connected device, connected avenue, which is a medium voltage product, it is part of this new activity. It is the -- it helps the utility, it helps the electric company to reduce the -- to have a better efficiency of the network when it is connectable, when it is connected.

So do you expect any orders? Like what kind of pipeline do you have at present?

So we have a healthy pipeline as far as electrical utilities and those kind of segments are concerned. So it's a healthy pipeline. And I already gave you the backlog number. So you can see that it's quite decent. It's almost about 7, 8 months of sales.

Okay. Okay. So overall, sir, what is your sense for FY '21 in terms of revenue growth and margins, et cetera?

We will have to tick it as the quarter emerges. I mean we all know that the country was in a complete lockdown for the full month of April and part of May, and we are slowly bouncing back. And that also, there are 29 different answers depending on which state you are in. So it is moving in a direction. So we will have to first live this quarter and then -- of course, the expectation is that there will be a resilience and bounce back coming from the July onwards, but we will have to live with it, I mean this kind of situation.

Okay. Any major CapEx in this year?

No, no.

[Operator Instructions] The next question is from the line of Manish Kayal from Nippon India.

Sir, revenue for Q4, what we were expecting for the...

Sir, sorry to interrupt you. Your voice is not audible. May I request you to repeat your question from the beginning, please?

Yes. Sure. So I have 2 questions. First is on the -- you mentioned that we were looking for a growth in Q4. So can you share the number, the difference between the internal budget and the actual revenue in Q4? And secondly, what are we -- I mean, any steps we have taken to reduce our expenses, I think which would be mainly on the overhead side. So any reduction that we can expect on the other expenses for this year on a sustainable basis? So these are the 2 questions from my side.

Okay. Thanks, Manish. Answer to your first question, I think I partly mentioned it. So if you see the delta between last year to this year, we are having about INR 66 crore lower top line. But as I said, due to COVID, we got impacted to the tune of about INR 77 crores, INR 78 crores. So otherwise, we would have INR 12 crores, INR 13 crores growth in the quarter without the COVID impact. So that's on your first question. On the second question, yes, there are a lot of things which we are -- is work in progress. A lot of actions have already been taken because when you are having this kind of revenue dip and the current quarter is also not helping, so we are very closely scrutinizing all aspects of cost and we are taking action in that direction. It's quite significant. Obviously, I mean, it will not be prudent for me to -- I mean give a complete number because a lot of actions are in working progress. But possibly, as we firm it up in somewhere in the next quarter, once we are able to announce the restructuring part, we will come back to you with a more defined number at that stage. But at this stage, bear in mind, there are a lot of work-in-progress actions going on.

Next question is from the line of Manish Goyal from Enam Holdings.

In the opening remarks, it was mentioned that due to rupee depreciation, there is some impact. So going forward, like how are we covered in terms of RR? Do we have a clause in our contracts to cover up the ForEx impact or how does it -- how do you see it going forward impacting our margins?

So I think this topic we have deliberated on our earlier calls as well. So if you see, we do our hedging. So we do -- I mean, as we say -- I mean, whatever we are reporting, most of it, we take a forward cover. So -- but forward cover comes also with limitations. So which is -- but most of it is covered. So we don't see a significant impact coming in terms of the results because of the moving of ForEx. Some contracts which are very long term, there, there are some provisions of ForEx adjustments or kind of an indexation. But most of it, I think in our nature of business, it is in the tune of between 6 months to a year, 1.5 years and the forward cover takes care of it.

Okay. Okay. Okay. And on the revenue mix side, like, I just wanted to get a sense of what was the contribution from Inter Group for the Q4 and for the full year?

Okay. Sure. So overall, I think I'll answer both the parts because I'm sure there'll be a question on the other mixes also. So if you see from a full year perspective first. So for FY '20, the overall systems business was around 74% and 22% was the IG content in the systems mix. So overall, that's the first answer. The 22% was IG content with an overall systems of about 74%. Transaction was about 15% and services was 11%. And the same math, if you have to do for the quarter, which is Q4, systems was about 78% with the IG component in that around 36%, services was 15% and -- sorry, transaction was 15% and services was 7%.

Okay. So how is it that service has been so much volatile?

It's mainly because of the shutdown in March. So if you see the -- practically, the country was almost on a lockdown in the month of March and that reflects on the service side. And due to the backlog, the systems and even the backlog burning is happening. So that is the reason for the quarter you see more systems happening.

Okay. Okay. And on your order inflow number, Arnab, does it -- that's the external order inflow number, right? So whatever turnover you do on a quarterly basis for IG, that would be the additional order inflow we should factor, right?

Yes, you're absolutely right. So when we report an order, we report to OG, our outside group, IG is on top of it.

Okay. Arnab, just for record purpose, if you can give us the IG number comparable for Q4 and last year as well, please?

Yes. For the full fiscal year, IG was approximately INR 300 crores. For the Q4, IG was about INR 80 crores.

It is previous year, you are saying, right?

I'm talking about this year which we closed.

Okay. No, I wanted a comparable number.

You wanted a comparable number? Okay. So the year before, the IG was about INR 430 crores for the full year. So -- and comparable quarter previous year was around INR 60 crores. So for the quarter, we had a growth, but for the full year, we are slightly lower.

I missed the current year, current quarter number, sorry.

Current year, current quarter is INR 80 crores.

Okay, okay. And Arnab, the note also mentions about the incremental borrowing, the results to accounts. So now INR 100 crores the enabling resolution what we have taken. So what is our gross debt in the current year? And now net worth been turning negative, do you see challenges going forward in terms of bidding for the orders or things like that?

So first of all, we still manage to keep a slight positive network. So if you see from the March balance sheet, so it was not negative. It was marginal positive. On the gross debt, we had a gross debt of about INR 490 crores end of March. Because of COVID, we were fearing that the cash situation will get stressed in the next few months and that is the reason we took the contingency. But that doesn't mean that we are going to use up the entire things. Obviously, the endeavor is on keeping the cash momentum as much as possible. But definitely, we have taken a contingency in case situation worsens. So that INR 100 crores is more a contingency planning.

Okay. Okay. And out of this INR 490 crores, how much would be, say, from the parent and how much would be, say, from the other sources?

Bulk of it is from the parent, other sources are very nominal. I mean either Inter Group or something. So it's mostly Inter Group.

Sure. And I'll take the last question, I'll come back in the queue later. So just on the current situation, we did mention that we are seeing improvement in terms of order inflow which is quite good and the supply chain is getting back. So like as on June end, like just to get a sense that from a normalized perspective at what run rate we are back to? Like, are we at 50%, 60%? Or just broadly, like at what level are we in terms of our operating activities?

See, as we kind of discussed during the presentation, April was low. There was no activity happening. Towards the end of April, I mean, we started getting permissions to open the factory. May -- I mean, the ramp-up was going on. We were at about a 35%, 40% level in May. June, we are back to, I mean, close to about 85% to 90% level. So you can get a broad sense of how the quarter would have progressed with this. But definitely, I mean, now, I mean, in June, we have mostly come back to 85%, 90%, and we expect that momentum to continue.

So when we say 85% to 90% is in terms of both on production side as well as on the dispatches side?

Both, on both.

[Operator Instructions] Next question is from the line of Viraj from [indiscernible] Finance.

My question is, in the opening remarks, you mentioned a good order flow, in fact, that is from which sector that would be?

The good order flow, utility electricity company segment. Data center, but still representing a small percentage data center. But a good order flow in this quarter is on electricity company and data center. And regular flow of orders, not more than usual, but a regular flow in oil & gas and mining and metals, steel industry and cement, the quarter ending end of March.

Okay. And my second is now in terms of this global pandemic, how we see orders in terms of Inter Group from parent? And what support parent is giving us in this time? Any sense on that?

The support from the global -- the parent company, as Arnab mentioned, is mainly in ensuring our cash and avoiding us to pay high interest rate to -- on the market. This is the support that we obviously get. In terms of business, we received several, I will not say [indiscernible] but green light to quote and help and support our EPC, Indian EPC and contractors to go abroad. Because we have observed since the beginning of the year a very strong aggressivity or development of the activity of Indian EPCs to work in South America and in Africa -- Middle East, Africa, South America. And we decided cautiously with our group to support this Indian EPC in their exports. So we call it re-export towards these geographies with the Make In India strategy and competitive positioning.

Okay. Then what would be our Inter Group sales for this year would be more or less same or higher and any sense on that? I don't want number, I just want a sense on the Inter Group sales for the whole year. You're just -- a rough stance on that.

Yes. So there are some product lines where we are getting qualified as global sourcing. So I think Bruno touched upon it in the last quarter or the quarter before. So there is a -- the primary switch here, there is one particular product where we are going to export. So that will bring in some additional sales coming in from that. Other than that, I think -- we don't expect a kind of a lower number coming in because there is no indication. But that particular line where we are a source for Africa and some parts of that part of the world, we can expect some growth.

And Arnab, my one more question is since there is the global pandemic and lot of western countries are suffering, especially European countries, so would there be a cost-cutting on the parent side helping us to export some of -- like India or other countries to the parents in terms of maintaining their profitability there? Do you get any sense like that on this?

Not really because we haven't seen at least for Schneider, I mean that our -- any of the European plants has been very badly impacted. So we haven't seen it. I think everybody is more or less in the same situation.

Okay. And what is your capacity utilization as we speak today?