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

Ladies and gentlemen, good day, and welcome to Schneider Electric Infrastructure Limited Q2 FY'22 Earnings Conference Call, hosted by Elara Securities India Private Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. [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.

Thank you, Zel. A very good evening to everyone. On behalf of Elara Securities, we welcome you all for the Q2 FY'22 and H1 FY'22 conference 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 Investor Relations. We will begin the call with a brief overview by the management, followed by via a Q&A session. I will now hand over the call to Sanjay sir for his opening remarks. Over to you, sir.

Thank you very much. Good afternoon, everybody. I'm Sanjay Sudhakaran, Managing Director of Schneider Electric Infrastructure Limited. I am pleased to connect with you to share and update the progress of our company. Today, we will present to you market outlook and company strategy. Let's go straight to the presentation. I would request all of you to go to Slide #3, as we begin with a snapshot of the economy. So I think things are positive on the side of the economy. But I would say that we need to have a look with cautious optimism. There is a certain amount of pent-up demand, which is coming up in the market, and there is a certain amount of demand that is coming up due to the reforms and policies being driven by the government. It's a combination of 2 that we can see right now here. So if all goes well, India could end up with GDP growth in excess of 9.5% for the financial year 2022. However, we must also highlight the fact that there are strong supply chain constraints, which the globe is facing today in terms of your ability to deliver on projects. So this can be a major constraint in the economic growth as well. So we'll take a cautious approach to these overall market indicators and forward-looking indicators that we see. But right now, we remain cautiously optimistic about the market growth. Let's go to the next slide, a brief overview on some of our large-end end customer segments. Some of the segments that are very critical to this business are Power & Grid, Transportation, heavy electrification of Minerals, Mining and Metals and Oil & Gas segment. On the Power & Grid side, we see continued interest by the Government of India to bring more and more reforms into the segment. So you have more digitization happening here. You have distribution level reforms, including privatization and you have a big shift towards renewables. All these are work in progress and consistent actions can be seen in the marketplace around these particular agendas. The Transportation sector is also seeing a good level of investment as we go forward, whether it's the development of metros across India, including the B and C class towns, modernization of railways and locomotives, et cetera, and also investments in airports. One of the segments that is showing very good promise is Steel and Cement. Of course, India has gone through a turbulent period with respect to these 2 segments. In the past, there has been a lot of consolidation that has happened. But I think finally, everything seems to be falling in place, and these segments are up for strong expansions as we go forward. The Oil & Gas segment, we'll see some transition happening as they work towards and yield the energy transition that we want to make it happen, including renewables. There's a strong focus of renewables in this area as well, as well as the setting up of petrochemicals facilities in the country. So these are the 4 major segments, which drive our growth for this particular organization, and we see good traction in all the 4 segments in terms of their outlook as well. We'll go to Slide #5, which are our strategic priorities. This is just to reiterate what we have been saying before, and we stay invested in these strategies and we stay aligned to these strategies, there's no major shift in what we are trying to do here. Of course, the idea is to get more and more digital. Digital gets you more services as the stickiness with the customer improves. We are partnerizing and transactionalizing our business more and more as they go forward with the addition of newer and better partners. We are accelerating on our key segments, which we spoke about a while ago, and we are also focusing our efforts towards bringing about change in terms of green technology SF6 free switchgears pitches in the country. We now go to Slide #6, just to give you a glimpse of how we are actually actioning this out quarter-after-quarter. So in the last quarter, we saw a good wins aligned to our strategy. We work with the state utility company to provide digitization in the end at the edge, providing them with technologies to connect their products and their services to our software. This brings in better visibility to the customer in terms of their assets and preventive maintenance at there in as well. So continued relationship with this customer for the last 2 years have -- we have been able to repeat our successes here and get a preferential win here as far as our business is concerned. We'll go to Slide #7, another digitization opportunity that we have been able to win this time with an advisory services, which is called the EcoStruxure Asset Advisor, which is a cloud-based advisory service, which the customer has signed up with us for around 5 years along with the CapEx. This will help the customer in moving their maintenance from a reactive basis into more of a proactive basis, thus impacting their uptime in a very big way. And this is one of the, I would say, part-breaking orders that we have received the first in the country. Moving forward, again, with services, I would say that here's a different application of the EcoStruxure Asset Advisor focused on a state government building where all the medium voltage and the low voltage assets have been connected to an asset advisor, again, to provide the customer with predictive maintenance, so that the critical uptime is maintained. So a similar software being used for 2 different applications and 2 different customer base. Going on to the next slide, which is Page #9. Here is where the -- our partner play comes into forte. Here is a win by one of our licensee partner for a solar power generation in Maharashtra, where they have supplied critical equipment within very demanding time lines of 8 weeks, and we managed to install and commission it along with our licensee partner. So this is again how we are participating using the licensing model within the solar field, which is more around the renewables. Going on to Slide #10, another strong win on the data center piece, which is, again, an exciting business that is going around in the market here in India as India transforms itself digitally. Working with the end user, which is a global customer for Schneider and working with the EPC in India, seamlessly, we managed to provide all the medium voltage equipment that is required for this customer to be able to set up a very large facility close to Mumbai. This project will repeat itself in different modules as time goes by. I move on to the next slide, which is Page #11. Staying close to our digital strategy, we are launching more and more products that are connected, factory connected so that they can be easily integrated in the field either to edge software or the cloud software. So we have the connected RMU, connected transformers and the air-insulated switchgear, which is now connected with easy packed. So now I pause here, and I request Mayank Holani, who is the CFO for Schneider Electric Infrastructure Limited to take us through the financial update. Over to you, Mayank.

Thanks, Sanjay, and good afternoon to all the participants. So please move to Slide #13. The market is now looking committed and recovering and our order OG intake in the quarter stood at about INR 3,087 million, which is up by about 51% over last year same quarter. And if you see from over the last 3 quarters, there has been a consistent movement in the order booking and tends to be on positive side. So we have also done well in execution. However, this quarter number looks negative versus previous year due to the base effect. And last year, what has happened is due to the lockdown starting from mid of March, the lot of sales FG had accumulated in Q1 and the sales got executed in Q2. So which is showing a drop in sales in this quarter. But if we remove that effect, the trend is positive, we have good order momentum and execution will also is picking up. If you see the -- in terms of half year, we are at about 2% order growth -- sales growth versus previous year. And we continue to be cautious in order booking in terms of cash security and maintaining the margins. Next to Slide 14. So here, overall, P&L is aligned with our strategy. We are focused on cash and margins and we will continue this journey, there -- this quarter and the last -- actually, there's about -- the last 2 couple of quarters have been impacted slightly by the raw material inflation. And but we have tried to manage it to the best possible way. And you see the results in the numbers where the margin is maintained or even improved even in a situation where there has been so much inflation on the raw material side. Employee costs are looking high, and this was more due to the employee costs coming to the more of a normal level in this quarter in this year, actually, while last year, there was a lot of savings due to some technical actions. And this quarter, employee costs specifically there because of the ESOP cost, which is there, which has not been there last year as a technical action. That's it. I will close here and leave the floor open for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Manish Goyal from Enam Holdings.

Yes. I have a few questions. Just looking at the results, what we see is that the closing inventory seems to be quite high. It has increased quarter-on-quarter. So is it that we were unable to dispatch certain finished goods? Or what was the reason? Or what was the reason behind it? And was it one of the reasons for probably seeing a de-growth in the revenues, and how do we see that going forward?

So Manish, there is -- yes, this is one of the reason. And there are a couple of reasons for the inventory increase. One is the site -- some of the sites were impacted by the flooding, which has happened in this quarter in many states. So that has resulted into the site readiness has been impacted and we could not expect the customers could not pick up those metals. And there are -- also on the lesser side, but there were a few cases also where we remain focused on our security of our money or of recovering the cash and due to the customer liquidity also because we have -- we've held the sales instead of dispatching and then seeing the risk on the recovery. But this will get recovered in this quarter -- next quarter.

So, are you seeing that inventory which got built up has been dispatched almost now, it's almost 45 days past that quarter. So have you seen that happening?

Mostly. Yes.

And what could be the number if you can share that -- which probably could not got dispatch in the Q2 in terms of revenue booking --?

It would be around INR 40 crores.

Okay. Okay. And, Mayank, you mentioned that there was certain ESOP cost in the employee cost because the employee cost seems to have gone up significantly to INR 59 crores. So what was that ESOP cost, and is it recurring or if you can please --?

So Manish, this ESOP is what -- it's called a worldwide employee share options plan. And this used to them every year till '19. Last year, due to the COVID impact, the technical action, this was held in addition to other cost saving leases. And after the accounting rules, this cost is booked -- the quarter whenever it is given tends to be booked in that quarter. So that cost impact is in this quarter only. It will not be recurring in subsequent quarter.

So what could be the onetime amount Mayank, which would have gone debited?

INR 50 million. INR 8 crores. So on a normal quarter basis, if you see the employee cost would be in the range of INR 50 million, INR 51 million.

Manish, for this ESOP, that's a contribution towards -- it's a combination of employee and employee contribution and the employer contribution is approximately INR 1 lakh per employee. So it's -- yes, it's multi-driver number of employees was opted for it. So how it varies from year-to-year. It's a formula of a number of employees opting for it and…

Okay. And I'll just ask one more question and get back to the queue. Just, sir, you did mention that the momentum seems to be picking up in the economy. So how do we probably see going forward in terms of order inflows? And do we see this momentum what we have continuing in terms of -- I think 50% growth, what we see order employees on a low base, but going forward, how do we see, sir?

Overall, I think we should have a double-digit growth in orders through the year.

Okay. And also on the -- sir, I would like to congratulate on the excellent margin management as far as gross margins are concerned in such a tough time we have managed to control that. So do we see that we should be able to keep the gross margins being controlled and then with growth in revenues, we should be able to see the operating leverage benefit?

So I think on the gross margin side, I think it's going to be an uphill battle, and it's too hard to predict, which way it will go because of the volatility in the commodity situation that you see not just in India but globally. So it's going to be a battle that we are fighting day in and day out. We are doing our best to protect our contracts going forward, wherever possible with variable pricing with defined time lines, et cetera. We have done a lot of work even on the backlog and going back to customers and telling them about the difficulties, which are there and being able -- many of the customers are supported as well. So I think it's going to be an uphill battle, and it's going to be a battle that has to be fought every day. It's hard to put a number to it by saying that, yes, we will be at this percentage of things like that.

[Operator Instructions] Next question is from the line of Harshit Kapadia from Elara Securities.

So sir, in your initial remarks, you have mentioned regarding 4 segments, which you had highlighted where we are seeing traction. So can you just say, sir, which segments -- just to understand where do you see the most traction for Schneider Electric? And are there any product gaps within the 4 segments which you have highlighted, which you are looking to remove maybe over the next one year?

So if you look at the ability of Schneider to serve these 4 segments, I would say that they are more or less the same. Okay. And I don't see any major product gaps in our portfolio to be able to serve these segments.

And sir, within the 4 segments, where do you see the most traction?

The most traction currently that we see taking off on the ground, See, there are 2 things. One is a potential, which is based on certain announcements that have been made or certain reforms that are expected to happen. Some of those initiatives could take time to take off the ground, so you wouldn't be able to really predict in which financial year it would really take off this one or the next one. But definitely, based on the investments and the decisions that have been taken in the past, I would say that cement and metals and transportation that is metros and high-speed rails and things like that. I think those things are getting off the ground pretty fast.

Fair enough, sir. And you also highlighted there was some stock license issues where you are not able to deliver your product. So do you foresee anything in Q3 as well, which you could highlight or this will be more of a quarter from where…

You see, it's quite a volatile situation when it comes to commodities, both in terms of pricing and in terms of availability. So for example, you can see from our strategy that we are trying to push more and more stuff on to the digital side, connected products, et cetera. There is a huge volatility, as you would have seen in the market from some adjacent industries as well that there is pressure on electronics, there's a huge pressure on electronics and chips. So we have a supply chain, which is pretty robust, globally controlled through a 24/7 control tower. Actions are in full swing to mitigate all possible risks not only from a revenue perspective, but also from a customer satisfaction perspective. So we're taking all those actions, but there is a possibility of misses led by shortages and shortages not only in terms of the components, but also in terms of availability of freight and shipping lines, et cetera.

And, sir, within the order inflow which we have for Q2, you shared INR 310 crores, would you be able to share which are the sectors we are seeing as the highest growth?

I think we have seen the highest growth in terms of transportation, metals and also data centers.

And just to understand more on data center, how large is this opportunity for Schneider Electric, sir? We're only in the medium voltage category in data centers through, if you can relate anything -- any number on that would be helpful.

This company participates only in terms of medium voltage in data centers and the automation around medium voltage. But overall, as a group, we participate in many areas, which includes a low voltage, which includes UPS, which includes building automation products, a host of other things. So it's a pretty large and attractive segment for Schneider on a whole. And this category is expected to grow double digit for the next 2 to 3 years.

[Operator Instructions] The next question is from the line of Nikunj Dani from Bay Capital.

Hello, this is Nikunj Doshi here, yes. Just one clarification. In annual report, we'd mentioned about the export opportunity and related party on special resolution, which we had passed. So what is expected from those export opportunities and what kind of order book we are looking there?

See, export opportunities are more -- we keep doing on maybe the new and transformer and when it comes -- I think the special resolution, which you are referring is for the purchases, which was there. And we expect that to pick up in next because that's a long lead time product, that was for GIS, and we expect it to come up in the next couple of years. So it's a product which takes at least 8 months lead time from ordering to delivery.

Okay. So this was a related party purchase -- for purchase yet for the group. We're not looking at export opportunity as such.

I think you must be referring to the resolution, which was issued a couple of months that…

No, because I think there was a mention that you've got some INR 25 crore export order and further -- you may expect further export orders, and that's why perhaps the resolution was required.

That was for import. I think if I recall, correct me -- correctly, it's for import.

Okay. And in terms of the profitability, when do you see company returning to profit? Because I think our network is also eroded and so any plan for rights issue or funding or pumping in equity or any plans to raise resources on that side?

See, if we -- you see last year, we had almost reached the breakeven level. And with improvement in revenue, we hope to improve it further this year. So the revenues come back to normal, we should be…

And you mentioned that order book is expected to grow in double digits. So double digit can range from 10 to 99. So can you be slightly more specific on what kind of order book growth you are looking at?

I think this year, if you see the H1, we are at about more than 30% of the growth on order book, about 32% to be precise on outside order. But for a full year basis, we expect to be at least around 20% or more. And for H1, we are at 32%.

And whatever new orders we are bidding for, is the raw material pass-through consideration or still we have to bid based on the fixed price contract on it?

It depends on the nature of tender and terms and conditions. So as you know, in public sector tenders, you cannot change the terms and conditions. But now we are also covering the sufficient cushion of provisioning for any uptick in the raw material price, any inflation in the price. But again, that remains an estimate, you can do a best estimate only because if you keep too much of provisioning, then you will be -- your price will be too high than competitor. So we have to strike the right balance.

Next question is from the line of SK Damani from SKD Consulting.

Hello, am I audible, sir?

Yes, you are. Please go ahead.

Sir, actually, I wanted to know from the management, sir. Can we report trading turnover and manufacturing turnover separately. So thereby, we come to know that how much is manufactured by the company in-house in their work and how much is procured and then sold. So that will give us some idea. So is there any niche that the company has got in their own business in various verticals because the primary reason for asking to get this kind of details for the fact that the company has not been able to give some very good results. I mean, our profitability is not there in the business. So can you kind reply me, please, sir?

We are reporting as per the Indian required standards and required data you have asked already there in the annual report as per the standards and then north of the revenue. So annually, this information is published in annual report and you can track it.

And sir, what are the niche products that our company make where there are no competition or all the products are subject to competition only?

We are living in a competitive world, so we cannot say that I think production where there is no competition.

Because when this company were formed, sir, it was told that it's a leading electrical manufacturing company of the world. So what we thought was that this company will have no problem of generating profits from the day, because I think I have made separated from C and B company was there. And from there this company was spring off. I mean, it's a story of before about 7, 8 or 10 years. So, I mean, I may make some mistakes. But I think this was a spring off from a T&D company were there -- from there it was spring off. So would you be kind enough to -- of course, I'm a little late also in joining. So I mean, can you kindly just highlight that when we are going to be becoming positive in all the quarters to come?

As I said earlier, last year, we were at almost at the breakeven level. We hope to continue the same level. We should -- I think this year, we should be positive. Actually, once the sales are at -- with sales improvement, we should end. You see the order book is positive, and it's consistently over the last 3 quarters, we are seeing good momentum in orders as it turns into, converse into revenue, we should see the improvement in numbers.

And last question, sir. The government have…

Mr. Damani, sorry to interrupt. But may we please request you to return to the queue for a follow-up question. Next question is from the line of Sonal Minhas from Prescient Capital.

Hi, am I audible?

Yes, you are. Please go ahead.

Sure. Just had 2 questions. First one was around the financials for this year. If you could strip out one-off cost from the overhead, the employee costs and the expenses, that could just help us understand the recurring in the one-off elements. That's one. And second, just wanted to understand the contours of deal around the L&T product business takeover, if there's any update around that?

I'll update you on employee question, then we'll request Sanjay to update on L&T side. So that employee cost for the quarter is INR 588 million. And in this, there is INR 81 million of non-recurring costs related to the share options. So you can take about INR 510 million, INR 515 million as a business, as usual employee cost.

Got it, sir. And other expenses does not have any one-offs in that?

Other expenses are usual, sometimes you have some, say, old debts recovery or something provision like it, so it's as usual. And some of the other expenses are fixed nature, while there are some like rate which are variable and directly proportional to sales.

Sir, I understand that. Those are ranges I think. So there are pluses and minuses about that.

On the L&T acquisition, I'd like to remind you that it's primarily acquisition that is led by the low-voltage synergies. The medium-voltage overlap is very small. And as things are progressing, we are working towards that, how do we leverage the synergies. Right now, it's a bit premature to talk about it. And as I mentioned before, the overlap is very small.

I understand that. Sir, for us, as minority shareholders, are there some controls, which we should be aware of or is it still premature for me to ask that question. So what would be eventually the shareholding of minority shareholders in this entity? Just want to understand that because there is -- I understand the third party is -- are there too. So just seeking an update on the structuring of the deal for minority shareholders.

I think nothing has changed on that landscape, I would say. And I think nothing has changed from the landscape of the minority shareholding pattern or anything of that sort.

Okay. So 2 questions on that. Just a follow-up. We would continue to remain the same shareholding as minority shareholders. And secondly, there are no plans to delist this entity. Can I just ask these specific questions, if there is anything?

I cannot talk about the future. Right now, there are no developments on that up till date, but we cannot talk about the future because that's something that we do not want to speak later.

Next question is a follow-up from the line of Manish Goyal from Enam Holdings.

I would like to know what is the current order book and the breakup of that, if you can please share?

Mayank, will you be taking that?

Yes. So our order backlog as of September end is about INR 845 crores and that's about 70% -- 69% of systems, 19% transactional and 12% solutions.

Right, Mayank. If you can please share the revenue breakup as well between IG and external and also give me the revenue share in systems and products, please?

So revenue for this quarter was 70% systems, 19% transaction and 11% services. And from system about 18% of IG.

18%?

Yes.

And also in order inflow, can you give me the IG and the breakup?

IG orders for the quarter stand at about INR 22 crores, INR 215 million.

Okay.

And IG orders were mentioned earlier about INR 3,087 million.

Okay. I also wanted order inflow breakup?

Okay. So order inflow breakup is about from OG side, 54 -- 66% of systems, 19% transactions, 15% services.

That doesn't add up one, sir? Yes. Okay. Got it.

66%, 19%, 15%.

Okay. So just on our strategy to increase revenue share from transactional products as well as services, some how we are hovering between around 30% between transactional products and services. And so it's probably -- we are not seeing that number going up.

So, Manish, what has happened is due to the -- during last one-and-a-half, this transactional strategy also depends a lot on the progress on our licensee partner and the contractor channel deployment, which required a lot of approvals and validation of the partners from the end users and which happen to be largely the government utilities and department. So that activity has got delayed due to the last 1 year or so because of the COVID, people can't travel and go sit with the departments and get approved. So that has now started picking up from last quarter or 2. Because that is not time taking, once you are approved, your partner makes it approved from any utility or departments, then it will be a quick improvement in the numbers from that model. And that's where the transactional model will slow.

Next question is from Nikunj Doshi from Bay Capital.

Yes. I just remind that related party resolution, I got the annual report in front of me now. The members may note that the company has undertaken transaction for supply of GIS product with one of sister concern. And it says that the GIS products end of booked orders were INR 270 million during the 3 months. And it's order amounting to at least INR 2,500 million. So is it import or export we are talking of?

It's import. It's import of the component, which is largely the supply chain, which is right now being followed in India because the lack of…

It has mentioned that company has undertaken transaction for supply of GIS to products.

See, we will -- we imported from Germany and then supply to our end customers in India.

Future concern to you?

Yes.

Okay. I read it as the export. Sorry. Okay.

That's why it becomes a related party transaction, right.

Yes. But the statement gives under -- impression that you are exporting and not importing.

I see. Okay.

As there are no further questions, I now hand the conference over to Harshit Kapadia for closing remarks. Over to you.

Thanks. We would like to thank the management of Schneider Electric Infrastructure for giving us an opportunity to host this call. We would also like to thank all investors and analysts for joining for this call. Any closing remarks, Sanjay sir, that you want to highlight, sir?

I'd like to thank everyone for taking time out to talk to us and to understand the progress that this company has made. I wish all of you a very good evening. Thank you.

Thank you very much, members of management. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.