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

Ladies and gentlemen, good day, and welcome to the Schneider Electric Infrastructure Q1 FY '22 Earnings Conference Call hosted by Elara Securities 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 Private Limited. Thank you, and over to you, sir.

Thank you, Bilal. A very good evening to everyone. On behalf of Elara Securities, we welcome you all to the Q1 FY '22 earnings call of Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infrastructure represented by Mr. Sanjay Sudhakaran, Managing Director; Mr. Mayank Holani, Chief Financial Officer; and Mr. Vineet Jain, Head of [indiscernible]. We will begin the call with a brief overview by the management followed by a Q&A session. I'll now hand over the call to Sanjay Sudhakaran for his opening remarks. Over to you, sir.

Thank you very much, and good evening to all of you. It's a pleasure to be with you this evening. And my name is Sanjay Sudhakaran. I'm the Managing Director for Schneider Electric Infrastructure Limited. And it's a pleasure for me to take you through some of the highlights of our organization, how the quarter has been and what we feel of the economy going forward. If it's okay with all of you, I would like to go straight to Page #3 of the presentation, which is a quick snapshot of the economic highlights of India during this period. As you can see that we came out of a very difficult financial year, a year that was unprecedented, and we had never imagined a year to be so dramatic in terms of the pandemic and the implications that it had on the economies, lockdowns and all of it. We were expecting all of that to be behind us, and we were expecting that there could be a good amount of pent-up demand in the economy, which would come back to us favorably as we go into the year. Some of them partially materialized. However, it was also kind of dampened a little bit by the second wave of COVID, which began to hit as quarter that went by, and some regional lockdowns and implications and I think probably the severity of the health crisis was even much larger than the first year. However, I think the economy is more resilient. Demand is coming back, and we are hoping that the impact of this lockdown will be minimal, and we will be able to recover as we go forward into the quarters in this year. So that's the brief outlook that I have on the economy. I'll go to the next slide, which is Page #4, and give you a snapshot on how our end markets -- we see our end markets. As you all know that we have 4 critical segments, Power and Grid, Transportation, Minerals, Mining and Metals and Oil and Gas. These are the segments that we term as electro-intensive and has the more -- has the most runway for our products and services here. Power and Grid continues to be resilient, I would say, there are a number of reforms that are being announced here. There is a big trust on renewables. India is one of the few countries that are well on track to execute on the Paris Agreement. Our plans are having almost 450 gigawatts of renewable energy installed by 2030 seems to be something which the government is totally committed to. There is privatization happening. There is a big trust to cut losses in transmission and distribution, introduction of smart metering and digitization projects to enable that. So all these are very good lead indicators. Though the sector was a little bit plagued due to the COVID wave, the second COVID wave and the projects were slowed down, you had certain situations where the government spending on health care had to be increased, and that sort of saw less funds being diverted into this particular segment, and you had kind of sluggishness in the progress of the projects. But I think this is all coming back because we have a very clear backbone that the country is dependent upon. On the Transportation side, there are a number of projects that have been announced in terms of urban transportation, bullet train, high-speed trains and corridors, et cetera. All these are expected to close. These projects are expected to close in terms of orders for us in the quarters going forward. So we see a good traction on this segment as well. Minerals, Mining and Metals, we were kind of having a feeling that this could be -- the results could be next year. However, we see a good amount of CapEx in this particular segment. We have -- cement capacity is being ramped up. Steel capacity is being ramped up, a number of sustainability-driven initiatives in this particular sector in line with the sustainability goals of the corporations being introduced, and that sort of kind of has picked up the demand here. We see good orders here, and we see good orders going forward as well. Oil and Gas as a sector remains cyclic and the demand is not expected to pick up in a big way during this year. Demand will remain muted and there will be a shift towards renewables as we go forward. In addition to this, I think the building segment is -- the demand will remain muted because there is not much trust on return to offices. So there will be a kind of a slowdown in the buildings market. However, there are certain sectors within the buildings market like hospitals and data centers, which are expected to give us good returns, and we are continuously invested on these segments as well. So I'll now go on to Page #5, that is just to articulate once again our strategy and our commitment to our long-term strategy, which is to lead by software, which is more digital, concentrate on more services and recurring revenues, increase our coverage across India through our licensee partner models, accelerate our resilient segments and introduce greener products into the market, which is our contribution to the sustainability journey of the country. So these are our key strategic priorities. And quarter after quarter, we ensure that we will remain committed to these particular initiatives. Going to Slide #6, just to bring about a flavor of how we are going ahead on and executing our strategy. Leading with software. I spoke about it as one of our key strategic priorities. We continue to stay invested here. Here is an example of an atomic R&D center in Vizag that we have just completed. It uses our EcoStruxure for grid platform, which is the EPAS platform to be able to provide instant fast load shedding to the customers. We work very intricately with the customer connecting all their medium voltage products and providing them with the relevant software interface to be able to take informed decisions. I go on to Page #7. Here, again, we'd like to highlight the connected product story. We have sold almost 99 AIS insulated panels to a customer in the Power and Grid segment, which is primarily a connected product with temperature and humidity sensors and numerical relays, another example of how we are taking our digitization journey forward. I'll go on to the next slide, which is Slide #8, our commitment to more services. Here is an example of how we are serving a leading government hospital chain by providing them with remote diagnostics on the electrical powertrain, 24/7 monitoring and predictive maintenance so that they are able to take -- again, take informed decisions well in advance and bring down the pressure on their infrastructure as far as people intensity of maintenance goes. This also leads to lower operating cost and make sure that the hospital invests in areas where they are supposed to invest, which is patient health care and experience rather than in maintenance. Going forward to our story on increased coverage and our licensing partner program, here is an example of how our partner in Kolkata turned around a hospital for the government within 8 days -- 8 weeks, I'm sorry, to be able to meet with the pandemic pressure that it created on the health care infrastructure. So having more partners, empowered partners, licensee partner products, which are licensed by Schneider to them helps them in making sure that we serve our customers with agility and speed. And we intend to ramp this program even further going forward. I'll go to Slide #10. Here we talk about our connected product story. So in the quarter that went by, we launched 3 more connected products, which is a connected FBX, connected Transformers and you also launched the Easy Pact PIX Rof, which is another connected product. So I think we continue our journey towards digitization as far as new product launches are concerned as well. With this, I end the update on the strategy, and I will request Mayank Holani, CFO for Schneider Electric Infrastructure Limited, to take us through the financials of the organization. Thank you.

Thanks, Sanjay. So Slide #12 So the market continues to be uncertain, and we all can need to adapt with the new market. Q1 of the current year was impacted by COVID-19 lockdowns during April, May and even in some places in June. Few customer sites were closed and from many other customers and the EPC contractors over certain liquidity [indiscernible] also. And we continue to be cautious on other booking and especially in terms of securing our cash and margin, maintaining the right level of margin. For outside group order intake for this quarter stood at around 2,900 million or 290 crores which is up by about 16% over same period last quarter last year. So -- and considering the current bucket, we see it a reasonably good growth in orders. Now moving on to sales. We have seen a strong comeback in execution and which is they are more impacted due to the lockdowns because of the site issues and the restrictions on mobility. Still, we had a growth of about 38.6% versus last year's same quarter. And this mainly comes, where obviously due to a low base impact of last year because that was major mainly impacted in previous year. So that is still we have a growth of 38.6% on the sales cut. And it has come primarily from systems and projects. So moving on to next slide on P&L. Overall, the performance in terms of our profitability is aligned with our strategy. We have focused strong margins and cash, and we will continue this churn. The quarter was better in terms of raw material price movement and impact on commodity, mainly the commodities which are used in our products like copper, steel have been impacted by the inflation. And their prices have increased significantly. We continue to monitor it closely and [indiscernible] approach with all our customers and trying to mitigate those exposures. So we are working on getting the price amendment wherever we are required and possible. And still, with this, our EBITDA margin improved by about 3.9 points and it's at almost at our breakeven level. And [indiscernible] in terms of perspective. We should get the margin level at the same level as previous year. And the full year or the quarter 1 -- quarter 4 of previous year, this close to that level or slightly better. So we are in the right action. I close here, and we'll leave the floor open for questions and answers. Thank you.

[Operator Instructions] We have the first question from the line of Anuj Jain from Globe Capital Markets.

Actually, I wanted to know your view on this smart meeting kind of thing, how it's going to push on this particular thing. And pardon me because I joined the call a little late. If you already have given some light on the same [indiscernible] so what is your view on this smart meter thing? And how big is this opportunity and how we are ready to grab this particular opportunity?

Okay. So thank you for asking this question. We did touch upon it briefly in terms of the Power and Grid sector, as I was doing my presentation. The key aspect here is the government is very, very keen on driving reforms in this particular sector of power distribution. So there is a very strong mandate to cut distribution losses, and of the first areas in cutting distribution losses is to have good measurement. And at the same time, the government is committed to providing consumers with good quality power and 24/7 uptime. So I think these are some of the thrust areas in the policy and reforms, which are leading to the smart metering growth. But smart making growth does not really come only with meters growth. It comes along with software growth as well because, at the end of the day, when you are installing such large number of meters at consumers -- with consumers, what you need is an interface that can not only measure what's going on but it can also give you diagnostics and tell you fault protection and things like that in advance so that you can take corrective actions. So software is going to be a very key aspect of this growth as well, and as you know, we are well poised in this area of software. We have done projects like smart cities of Naya Raipur, et cetera, with advanced metering softwares, which is called ADMS, which is the advanced distribution management systems. We have the know-how, we have the technology, and we feel that this provides us with a good runway as far as opportunities of projects as well as recurring revenues of annual maintenance contracts are concerned. Now putting a value to this opportunity is kind of difficult because this is going to be a multiyear deployment plan, and such things are not that easy to implement in a country of our size. So I think as these opportunities come up, we will be able to quantify them. There are a number of certain discussions with the DISCOMs and the specifications are being frozen. The RFPs are being created, but I think it's hard to put a number on to it right now.

Okay. Okay. Okay, sir. And any plans of raising any capital and cash operating capital in the future, if you would like to touch upon that?

Mayank, would you like to take that?

Yes. So see, this system, there is no plan from the next few quarters. So as soon as something comes up, we'll let you know.

[Operator Instructions] The next question is from the line of Viraj Mithani from Jupiter Finance.

Okay. I have a couple of questions. The first question is about the raw materials. And I see this number, how do we plan to mitigate the raw material inflationary pressure in coming and days to come? Should I continue all my questions and you answer it?

Your choice, we can take it one by one as well. So on the raw materials, what we'd like to highlight is that we have a very strong governance system, thanks to the processes of Schneider Electric globally. We have been kind of getting alerts well in advance, highlighting the raw material impact. And we have been taking proactive actions to price up in line with the RMI increase that we have been seeing on different commodities. So we have kind of -- on the future-looking contracts, we have managed to price this up and pass on these commodity increases to the market to the best of our ability. Now you can see that there is another impact of the commodity increases on the backlog. So on the backlog, we have been carefully studying all our contracts. Some of our contracts do have variable pricing clauses incorporated and then in line with the EMA, which exists in the country. And we are able to pass this on, but this is a small portion of the contracts. The second part is -- of the contracts which are expiring due to the contractual publications are expiring for orders in the backlog due to whatever delays in site and execution and things like that, here, we are going back to the customers and renegotiating our contracts or even canceling them from our backlog in case it is not viable. So we have been taking very strong actions as far as mitigating the commodity risk is concerned.

And just to add to this, what happens based on the [indiscernible] forecast, which we get from our global teams on a monthly basis, we keep providing our costing for the fresh tenders or codes, which we are doing, so that more of less is covered. Also, if you see, even with this kind of [indiscernible] the numbers you see, we don't go -- we need to go by the exact comparable to last year's quarter 1 comparison is not right because due to the lockdown and all the mix had changed. But if you look at this quarter's mix is more or less similar to the full year net or even the Jan to March quarter mix. And this material cost percentage has actually improved. It's better than the last year's full year material cost percentage and even better than the Jan to March quarter. So even in spite of all this commodity inflation, we have been able to improve the margin from there.

This employee benefit expenses because of the -- our program to -- because of [indiscernible], it has gone up?

So that we are still comes into the exceptional. So what happens is the employee cost last year in Q1, [indiscernible], we had tax rate and the lockdown time, there were certain technical actions taken for cost savings. So now those are coming back and then also there is some impact of the [ selling ] inflation, which has come and which the total takes it higher, much higher than the [ 11.2% ] increase which you see, which is the growth is partly [indiscernible] offset by the savings due to the structural changes which we did in last year. So the intent of whatever [indiscernible] one in the run cost, the savings are coming in this year.

And other expenses, I understand is exchange contracts and all which have gone down by INR 8, INR 9 crores?

No. So other expenses are -- there are multiple factors. So there are certain expenses which are linked to the volume like power and [indiscernible] which is [indiscernible] not maybe 100% proportion but partly linked due to the volume. And then there is ForEx in tech, where they cover like last year, there was almost no travel in Q1. So this still, there was nothing going on because the business was running to people were trading in urgency. So there is -- there are multiple factors in that.

Okay. My next question is [indiscernible] other competitors like ABB, ABB Power. They have been very bullish on data centers, railways, cybersecurity and power distribution. So do we see some traction in this industry in India, can you give some color on that?

Yes, for sure. I think we -- I spoke about it in my opening remarks as well. If you see the data center industry in India, we can be extremely bullish about because of the fact that there's a twin effect here. One is the fact that there is an explosion of data primarily driven by work from home and all the digital gateways and digital ways of working and payments, et cetera, is concerned. The second is due to regulation, wherein the government has mandated that data for the country should rest within the country and should not rest on cloud as well. So you can see that there's a huge expansion in data center segment, and you will see the benefit of that coming into the Schneider Electric Infrastructure business also as we go along in these quarters.

Regarding railway infra, [indiscernible] we don't have any part in that? Am I correct in saying?

No, we have. We have. We have some good products like the locos, which are especially used in urban transportation, such as metros, et cetera, and high-speed trains. So I also spoke about this as one of the segments where we are poised very well for this year in terms of the projects and the pipeline, et cetera. We expect to do very well on the transportation side in terms of urban transportation, specifically, like metros and high-speed corridors and things like that.

And sir, about data centers, where do we fit in? Like what kind of offering comes into, if you can just give us some color on that.

Yes, sure. I think data centers pretty much electro-intensive. If you see the kind of data centers that are being built in India now, the scale is increasing day by day, and you can see more and more colo investments coming into the country. You would have read about the order coming in with a private equity firm with India. You have -- must have heard about companies like NTT, Yota and all expanding. We have certain market intelligence about Microsoft and other player is also setting up large data centers in India. And data center is also highly electro-intensive because they need to be powered. So you can see that you have this entire train of medium voltage products which will go into the data centers. In addition to that, you have a software play because data centers are highly sensitive to uptime. So you need a 24/7 operations, some redundant operations and things like that and have been controlled by software. So there is a software play in it, which we see as a very large opportunity and multi year of service revenue business, which comes along with software.

That will power a part of our medium voltage offering in [indiscernible]?

Yes. Yes, that will be the automation of the electrical network, both low voltage and medium voltage took together. We will automate the network and that will help the customer in terms of informed decisions and predictive maintenance, et cetera.

It's not ABB Power, for example? Is this [indiscernible] platform for electric vehicle charging. Do we have any sort of offering from a parent of -- in this company, are there -- has any play in this EV segment in future?

Our play on the EV segment in India would be around the electrification projects right now. We are currently -- we have not right now embarked upon the charging equipment as such, but we are actively pursuing opportunities on the electrification and automation space. You see we can -- what is going to happen due to this rapid increase in EV charging is that you are going to now have many charging stations which are in parking lots, which are on the highways, et cetera, which will use a mix of energy. They will use a mix of grid energy as well as renewable energy like solar. So we will be moving away from a centralized generation and transmission of power to a more distributed network. What this will do is it will add complexity to the grid. And after that becomes more complex, you will need more software like the ADMS software that I was talking about, to manage the grid. And this is a good example, opportunity for Schneider as it has made a number of acquisitions recently also in this space. We talk about EPAS and things like that, which have good software offerings, which will be available to our company to kind of promote in the market for our consumers as well.

And sir, just last 2 questions. What are the lower-hanging fruits in this sector, which you can see that Schneider would see benefit in the coming next 2 years in?

On EV charging?

No, EV data centers, railway electrification, solar power distribution by the government of India, there should be reforms by -- where do we see our traction in next coming 2 years, in terms of, say, low-hanging fruits. Others, I guess, a bit of a long medium-term growth. So where do you see the traction happening in say, next 2, 3 years, if I have to ask you?

See, like we spoke about, we see actually the traction in all areas. It is not just a single area, again, because we talked about reforms in the Power and Grid segment. We talked about the rapid investment in urban infrastructure on transportation. We spoke about data centers and the complexity that it brings along with software. We spoke about EV charging and the opportunities that it is. So I think the entire electrification story of India ties into the twin areas of electrification and digitization going forward, which represents a very good opportunity, I would say. It's hard to call out a particular sector to say that this is a low-hanging fruit. I think all of these we are well poised to take advantage of. Does that answer your question? Hello, am I done?

We will move on to the next question that is from the line of Manish Goyal from Enam Holdings.

Sir, I just would like to carry forward on the discount side. So like it's been a long wait. And do you think now that from the government side, in terms of cabinet approval and other things, most of the things are done and now the ball is in hand of [ SEVs ] or the implementation partners. How do you see -- when do you see that inflection point coming in and on ground implementation improving? Also, a related question is that I just want to get a sense that now I think we probably see a different mechanism where we will have players offering integrated solutions and like EESL coming in and then offering solutions on basically monthly rentals and things like that. So for you, who would be the ordering source? And just want to get a sense how do you see this evolving, sir?

Yes. So this market is going to evolve, right? Like you said, there will be people like ESL coming in. There will be some software majors who will be coming in because a lot of it would be very similar, what we call as an ERP implementation process. So that -- there would be large ticket software players entering this market on the end-to-end digitization. So -- all of these could be our customers, our partners, right? It's not that we are going to do all of this alone. We are going to do this in collaboration with people and -- the nature of our customers would change. The nature of our partners would change. Some of them would be our strategic partners, while some of them would be our customers. So I think there's a whole lot of mix that is possible here.

Okay. So there could be a possibility that we can be part of some consortium and probably look to offer the solutions?

Absolutely. Absolutely. That's how we are going about doing it as well. We stick to our core expertise, which is the software platforms. We understand the electrical network. We have the global R&D expertise and software and solution architects available with us. So we have experience of doing these projects elsewhere. So we are open to partner with anybody who has the scale to implement such a project in India. So I think the landscape will change in terms of the customers.

And have we started seeing any inquiries? Or do you expect that it will still take some time and?

No, no, we are seeing inquiries, and we are actively working on good prospects in this particular area.

Okay. Okay. And sir, like in your initial commentary, you mentioned that we expect demand to come back and hope to recover [ large crown ]. Like what is the -- like would like to get some sense as to what is the intensity of the momentum? Like are we really seeing very strong momentum building up and then we probably -- on a full year basis, we should start seeing double-digit growth for us?

So I wouldn't like to comment on -- I'd like to comment only on the end markets, okay? I wouldn't like to comment any forward-looking statements on our performance. I would like to say that the end markets are kind of mixed, as I mentioned. It also depends upon the health situation in India, the COVID crisis in India, how it pans out in the next few quarters. But we are seeing some very good demand coming back like we spoke about the MMM, Minerals, Mining and Metals industry coming back very strongly, the transportation sector coming back very strongly. And we also feel that with all these reforms and thrusts, I think the Power and Grid sector should also come back strongly. We spoke about good traction on the data center side and where the expansion goes on, irrespective of whatever happens on the crisis side and lockdowns, et cetera, because those projects keep getting executed because you can't stop the data -- work on the data. So I think all these should give us reasonable confidence that the things should pan out well in the next few quarters. However, the second COVID crisis has taught us that it's hard to have a crystal ball to try and understand what goes forward. So I think that's the cautious optimism that I would like to talk about.

Sure, sir. And I would like to have some bookkeeping questions if you like in terms of the breakup of order book, order inflow and revenue share, sir, as like always we share for the quarter?

Yes. So order book [indiscernible] it is about 12%, 16%. And just to move to your question on the momentum for even in January quarter, we had a growth of -- Jan to March quarter, we had a growth of about 12% on orders. And in the June quarter, growth of about 16% comes on a -- we see the normal base of previous years. So the order booking was not impacted in the previous year. And even last year, we had about 11% growth in orders. So definitely, we can see the order momentum till now has been there in the last 2 quarters because last year in September quarter and December quarter, we had seen orders coming down. So we hope that this momentum continues. So now on your breakup, our orders in this quarter, about 57% is equipment, 2% projects, 25% transaction and 13% -- 14% services.

Okay. And within order inflow, can you also give me what was IG part also?

Yes. IG orders in this quarter was 658 million while last year Q1, it was only 43 million.

Okay. Okay. Okay. And can you please share the order book? What is the order book and [indiscernible]

Order book to our backlog as of June end is about [ INR 17 to ] 3,170 million versus [ 707 million ] at the end of March.

And the breakup, sir?

Breakup is systems as of June end, system 70%, transaction 19%; [indiscernible] equipment, 43%; project, 17%; transaction 19% and services, 11%.

Okay. And the last piece on the revenue share IG as well as what is the IG and then the between systems and?

Yes. So revenue share of IG is 25%, right? And the equipment is 42%. 7% projects; 17% transactional and 9% services.

No, that does not add up. Can you please repeat systems and equipment is how much?

No, no, 25% IG. 42% equipment. 7% projects.

Okay. Okay. Got it. Got it. So IG is mostly systems only. So that is [indiscernible].