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

Ladies and gentlemen, good day, and welcome to the Schneider Electric Limited Q4 FY '23 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. Mudit Kabra from Elara Securities Private Limited. Thank you, and over to you, sir.

Thank you, Lizanne. Good afternoon, everyone. On behalf of Elara Securities, we welcome you all for the Q3 FY '23 (sic) [ Q4 FY '23 ] and FY '23 conference call of Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infra, represented by Mr. Sanjay Sudhakaran, Managing Director; Mr. Mayank Holani, Chief Financial Officer; and Mr. Vineet Jain, Head, Investor Relations. We'll 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. Sudhakaran for his opening remarks. Over to you, sir.

Thank you, Mudit. Good afternoon, ladies and gentlemen. This is Sanjay Sudhakaran, here, your Managing Director and CEO for Schneider Electric Infrastructure Limited. As usual, I will get straight to the topic by talking about the economic outlook of the country. We'll go over to the Page 3, where we have outlined certain macro indicators. Clearly, the economy seems to be facing some headwinds in terms of growth projections, but this could be due to some base effect of last year and we coming fully out of the COVID impact and a year-on-year comparison. However, we do see some headwinds in terms of the global situation, the recession fears, I would say, more fears that are looming around and the reductions in spend by certain IT giants, et cetera, do pose some headwinds in terms of the projections for India on an overall basis. But what we feel is that this twin story of electrification and digitization along with decarbonization will stay strong. And as we can look through in the future outlook that we present on some of our key segments, we feel that these things would somehow be mitigated, and we should be in the range of -- we should -- we can expect a growth of around 6% to 7% of overall GDP in the calendar year 2023. The industrial production forecast does seem to be a little on the lower side. However, things are expected to improve as we go forward. So going on to Page #4, which is the segment trends, we see continued interest in the government to invest money on modernizing the grid. This is, of course, linked to the urbanization that is happening across India as well. We could see some moderation in terms of mineral mining and metals, which came off from a very strong year last year. However, the trends on the mobility sector seem to be very strong, again, driven by urbanization and the need for more urban transport, primarily airports and metros. And modernization of railways, which is the Vande Bharat platform, could see some very strong opportunities which are presented towards us in the market. The cloud & services segment, which is primarily the data center market, continues to be strong. We could see more investments coming on smaller data centers, which are the Edge data centers, along with the colocated large hyperscalers as well. The industry and building segment is also expected to pick up with vacancy rates dropping to a very large extent in all metros across India and rental rates firming up, we could see expansions coming in the building segment as well. So overall, I think despite all the headwinds that we see on the global economy side, we do see some good prospects on the Indian economy. Certain sectors might perform a little lower than the others, but the negative impacts would be canceled out with the positive impacts, which will be driven by the government's push and drive to drive infrastructure growth in India to keep ahead of the growth curve. Going on to Slide 4 and -- Slide 5 and beyond. I will use certain examples to articulate our conformance to our strategies which we spoke about previously. So here is one of the largest orders that we have won for smart RMUs, which -- from a DISCOM in the south of India, which is clearly a vindication of our strategy around -- being focused around our key accounts, digitization with a smart RMU and partnerization program which is leading to more and more transaction orders coming in and we enhancing our position in this segment with better and better cash flows. So this win clearly demonstrates our ability to execute on our strategy in these aspects. I will go on to Slide 6, which is a repeat customer from one of the cement majors trying to put up a greenfield project in an already existing site and this was primarily a completely digital order with connected equipment and SCADA and solutions, which will lead to further life cycle revenues, which is again us focused on our strategy to grow services and software. We go to Slide 7. We are committed to our key focus segments and transportation being one of them and primarily urban transportation. We have won a very large order for the mass rapid rail transit system in the north of India. We can expect this to be scalable with many more phases of this order coming in, in the future. Of course, we need to win these orders in a competitive manner, but given the reference installation that we can have in this -- with this customer, I think this would position us positively. On the cloud & services provider, another repeat order from a colo Giant in India. So again, a very strong pitch with data center customers with Edge control software like SCADA, necessary digital communication and a very strong powertrain in terms of both medium-voltage equipment and low-voltage equipment here. I'll go on to Slide #9, which again demonstrates our ability to percolate solutions with customers, which will give us life cycle revenues. So on the left-hand side, you see an example of a major cement giant, which has -- which is now on the EcoStruxure asset advisor platform with our protection feature inbuilt into it. This is, again, our solution, which is predictive in nature, along with the EcoStruxure Transformer Expert, which is again a transformer solution, which is predictive in nature, with leveraging our ETAP acquisition that we made globally, which will provide them with a digital twin. So these 3 solutions will provide the customer with a reduced downtime due to a solution that promotes proactive maintenance, reducing downtime and reducing failures. So this is going to be an example where a customer will real time see the benefits of these solutions. On the right-hand side, we are working with a major oil and gas public sector unit and retrofitting our old relays with the modern relays that we have launched in the market, which is the P3 and P5. This will again provide us with opportunities in the future for service retrofit and also new equipment which can go with this state-of-art release. So customer stickiness and -- over a long time and life cycle revenues, again, one of the strategies that we have articulated in our previous calls as well. So going on to Slide 10. Our basic philosophy behind digitization is to try and move towards 100% natively connected equipment. We impress upon customers the need for an Edge control software, which will connect all their equipment together and provide them with live monitoring. And finally, on a level -- layer 3, we provide them with diagnostic software connected to the cloud that can boost their productivity and reduce their downtime. So the pillar of digitization rests on we trying to serve the customers on layer 1, layer 2 and layer 3, which is articulated on the right-hand side in terms of what we call as connected products, Edge control and apps and analytics. We'll go to Slide 10 (sic) [ Slide 11 ] and this is how we are progressing on these initiatives. We have almost a 20% growth in terms of our Edge control layer and a 50% growth in terms of our software and digital services, as we call it. And you can see that we are trying to percolate into all our key segments here, whether it is power distribution, automobiles, metros, refineries and steel. So -- and being largely a key account business, we see strong repeatability happening. Once the customers adopt this technology and are comfortable with this technology, we see that they can be long-term attached with Schneider Electric for many years to come, providing us with life cycle revenues. Also, Slide 12, we spoke about -- a number of times about the fact that we are diversifying our portfolio into segments that we have not been strong before. Some of these are emerging segments, some of these are segments which have existed, but our portfolio remained largely on the power and grid side due to historic reasons, but you can see that the diversification is actually bearing fruit. The industrial and building segment is growing by 40%, which is almost 2x the rate at which the company is growing. And the cloud & services segment, which was very small in previous years, is now gaining contribution and contributing positively to our business, and it's growing at around 150% year-on-year. And with new -- more and more customer acquisitions in the space, we expect this business to be sizable in years to come. I'll go to Slide 13. Along with all this, we are making sure that your company is positioned very strongly in the minds of customers, as we call it, top of the mind recall. We have actively been involved with customers on the thought leadership side, collaborating along with customers to create forums that will create awareness around decarbonization, digitization and electrification, which are the pillars on which our strategy lies. So you can read for yourself. There are a number of events that we have participated. This is just a snapshot of what's happened in the previous quarter. But throughout the year, we have engagements with the top leaders in the industry as well as decision makers. So going on to Slide 14. You would have got a glimpse of our financials. And I would like to say that we stay committed to our strategy, which is accelerated partner growth, more digital services and diversification of our portfolio. And along with this, the financials will follow. And I would now request Mayank Holani, our CFO, to lead you all through the financials and give you a glimpse of what's behind it as well. Over to you, Mayank.

Thanks, Sanjay, and good evening, everyone. You can move on to the next slide, Slide 15. The orders for -- orders for the quarter grew at about 10.6%. These are just the OG, outside group, orders and not the within group orders. And the orders for full year have grown by 10.3%, taking it to about INR 15,376 million. We saw good momentum in orders in all segments and our backlog at the end of March '22 -- March '23 -- sorry, there is a typo here, grew by about 15%. Now moving on to next slide on sales. This quarter saw a growth of about 20.7% on sales, and we landed at about INR 410 crores versus INR 340 crores in the previous year same quarter, while sales for full year stood at about 16.1% at INR 17,772 million or INR 1,777 crores versus INR 1,530 crores in previous year. And this is once again the highest ever revenue in any financial year. So last year, we touched the highest number and, again, this year, we have crossed it. So we see good momentum in sales quarter after quarter. There will be slight ups and downs, but we are in the right direction and implementing our strategy as explained. Now moving on to the next slide, Slide 17. You see the P&L for the quarter. We saw a growth of 20% on sales, slightly higher other income. Our gross margin is 37.6%, which is an improvement of about 840 bps since last year. This is due to a couple of factors. One is -- one is being the raw material cost normalization, which has been moving normally up in the previous few quarters. And also, to some extent, the better mix of the portfolio, which has led to this higher gross margin. EBITDA, if you see, it's about 15.8% versus 5.9%, so a growth of about 990 bps. Profit before exceptional items at INR 54 million, 11.1% of sales, versus INR 27 million at 0.8% of sales. So that's a very good growth of about 1,030 bps. And exceptional items, this year slightly few small item, which is -- so you see a net profit after tax of about INR 448 million, which is 10.9% versus last year what we had about INR 7 lakhs profit for the quarter. Moving on to the next slide, Slide 18. You see the full year financial results. Sales, as I mentioned earlier about 16% higher, other income at a single level and the GM has improved to about 32.7% versus 30% in the previous year. And you see that last year, there was a dip in GM because of the raw material inflation and supply chain constraints. So we have bought back to the normal level and rather improved from the year before that as well. So now we are at the right level of GM in a way and recovered whatever dip or the decline we had seen in previous year. EBITDA at 10.1% versus 6.3% in previous year. And the profit before exceptional items of INR 108 crores, 6.1% versus 2% in previous year, so about 410 bps improvement. And exceptional items, if you will recall in the quarter 1 and 2, we had reported some profits due to the reclassification of interest component of loan and during the renewal of the loan and also the profit due to sale of some land at Naini. After that, net profit is about INR 123.6 crores versus INR 27.6 crores in previous year. And that's it from my side. We can now open for questions.

[Operator Instructions] the first question is from the line of Amar Maurya from AlfAccurate Advisors Private Limited.

Congratulations for a stellar set of numbers and strong order book. So a couple of questions. Firstly, if you can give the order book -- closing order book -- what is the closing order book for the Q4?

So our backlog -- the OG order backlog at the end of March '23 is about INR 10,735 million. Last year, December '22, it was INR 817 crores or INR 8,179 million.

Okay. And secondly, sir, in terms of our revenue growth on a year-over-year basis, full year basis, what would be the growth in the transaction services and systems? If you can give the breakup of that?

The transaction obviously has gone higher about 40-odd percent. You are asking about orders or sales?

Both. Order book breakup of the transaction services and systems and also the sales, both, if you can give the breakup?

Order book -- you are asking the order booking breakup, right?

Yes, order booking breakup.

In order booking, the full year, the breakup is about 48% equipment, 10% projects, 27% transaction and 15% services.

And let's say, sir, this would be -- what would be the mix of, let's say, order book for the end of FY '22?

That was March '22, right?

Yes, March '22.

51% equipment, 14% project, 21% transaction and 14% services.

So basically -- so why, sir, basically this transaction -- I think, I believe transaction reduced, right? Transaction and services...

So last year, it was 21%. This year, it was 27%.

Okay. And services, you are saying 14%?

14% to 15%, services improved.

Okay. And sir, similarly, if you can give the breakup of revenue as per FY '23 transaction, services and systems?

So revenue is systems 69%, transaction 20% and services 11%. Previous year was 72% systems, 17% transactions and 11% services. Mainly the 3% change between systems to transaction.

Okay. And that led to the profitability improvement?

So there -- see, it's not as simple as that. That is one of the factors, but it's not as simple that, okay, [indiscernible] because there are multiple factors, right?

So sir, basically, now if you see the mix is moving more towards the high-margin business of transaction and services. And I believe the order inflow, which you are going to see in FY '24, that would also be more skewed towards the more connected products, services and transitions. So basically, under this slide, how do we see FY '24 profitability? Like do we see that -- I think, 10% EBITDA margin we closed this year. What should be the profitability we should look for FY' 24?

See, we don't give any guidance as such on the numbers.

But I'm just asking, structurally, should we see them inch up given the mix of the order book which you have and the kind of order inflow and pipeline which you are seeing?

Structurally, we should -- we our ambitious to continue improving on this side. We will continue improving the performance and the P&L quarter after -- year after -- year-on-year. There may be some movements between -- within quarters because it's a different project-linked business. So there may be mixed changes quarter -- within quarters or something. But on a long-term basis, year-on-year, we should continue to improve.

Okay. And secondly, sir, this revenue growth, you are guiding for 6% revenue growth, right? That is what you -- did I hear it correctly?

No. Revenue growth, I said 16%.

No, guidance for FY '24, I think, sir, -- MD sir alluded something 6%.

Sir, I did not say any revenue growth.

Okay. So revenue growth would be what? 12%, 15% revenue growth, we should assume?

As I said, we are not giving any numbers for the next year. You have seen last 2 years, so you can make out what we should do, but I am not giving any numbers.

The next question is from the line of Apoorva Bahadur from Goldman Sachs. The line for the current participant has dropped off. We'll move on to the next question, that is from the line of Dhavan Shah from AlfAccurate Advisors.

I have a question on the gross margins front. You already mentioned that some part of the benefit came because of the lower raw material cost as there were some changes in the product mix. So can you please share the difference that how much it came from the easing of the raw material front and how much it is because of the improvement in the mix? Because that is roughly 800 to 900 basis point improvement. And the raw material easing, do you foresee that this is sustainable? I mean in terms of the pricing scenario, how do you see? Do you have to pass on the benefit for FY '24? Or this benefit can be expected to continue for this fiscal as well?

See, we are into the ETO business where you do costing for each project individually based on the tender requirements and then you get an order, right? So it's not a fixed price -- list price kind of difference. Now on the -- another question on the mix and the raw material impact, mix also plays a big role. And that's where, if you see historically also, quarter-on-quarter, sometimes you see very big variances in the gross margin because if you have a few big orders or a few big projects of certain product, it can swing your GM. As far as the maintenance, obviously, the Q4 GM percentage is stand-alone, if you look at it, it's not the representative. If you say 36% GM is representative of our quarters to come, obviously, it is not, right? Because we have to look at the GM for the full year. And if you see the past from '20-'21 to '21-'22, we dropped the GM because that year, there were, again, raw material, a lot of unexpected movements were there on the upward side, and then you had supply chain challenges also. So now we -- this was more of a normalized year, much normal than that. So it's kind of a normal level. So obviously, 36% is not something which will continue.

Okay. But on a Y-o-Y basis also, if I look at, it's roughly 300 basis point improvement versus the last year. So can you share the breakup? I mean out of this 300 basis points, is that largely trend because of the lower raw material cost or is there any part of the changes in the product mix also?

We cannot -- we should not extrapolate everything because it's got a number of reasons associated with it. Sorry to interrupt, Mayank.

You're right, Sanjay.

The business change mix, there is more of transactionalization happening, there are more of better projects, as we call it, driven by digitization. So it's a configured-to-order business, right? So it's not always easy to measure that how much came from pricing, how much came from raw materials, et cetera.

It's a mix of a lot of factors, right?

And the last one is, in terms of the order backlog, like we are segregating the segments between -- total 5 segments are there. So is there any possibility like we can get the order book breakup in terms of these 5 segments? And -- because I think in -- on one slide, it is mentioned that the industry and the building order book is up by roughly 40 percentage Y-o-Y and the cloud services order backlog is also up by 150% Y-o-Y. So is there any mix can we get based on these 5 segments in terms of the order backlog and the GP margin for these 5 segment?

See, obviously, quarter-on-quarter, your backlog or order book mix will keep on varying. Different segments may have different growths in a particular quarter, but we cannot provide you backlog or order book as such by segment or by industry.

The next question is from the line of Viraj Mithani from Jupiter Financial.

Congratulations on the very good numbers. Sir, my question is that -- does this mean that we are shifting towards -- more and more towards the EcoStruxure platform and our vision has changed from being a product company to a full solution company or something?

No. I think, Viraj, good question. So software and -- which is primarily EcoStruxure, as you rightly mentioned, also pulls product sales. So there is no strategy to defocus on products. Products is always at the center. The way you pull products can be through a pure product play. It can be through digital products. It can be through Edge control software or it could be through apps and analytics. So primarily what software does is, it provides a very strong stickiness between the customer and the organization because it's not just the product features that matter, it's the overall experience that the customer gets that matters.

Okay. And sir, does it mean that over the period of time, we should see the improving margins because of the initiative we have taken in last 2 to 3 years, changing the -- going towards more software side, giving me more solutions? Is this fair to think?

So that is the intent, as we have already -- always articulated in all our strategy presentations that the idea is to move towards more of services and that too more of digital services. And more of recurring services, right? So that is what gives you a very healthy organization in terms of top line.

The next question is from the line of Alisha Mahawla from Envision Capital.

Sir, I joined a little late. What is the order backlog number as on 31st March?

It's INR 10,735 million.

And this will be executable over what period?

See, typically, some orders may even be going to next year. Some orders would be going to next year, some would be in this year. So typically, we -- our backlog is about 7 to 8 months of sales. And based on product, it ranges. Some products may be deliverable in 3 to 4 months' cycle, some may have 6 to 8 months' cycle.

On an average, 6 to 8 months is the kind of number, if my execution is right? Okay. And at the start of the call, we mentioned that we are only expecting the GDP growth rate of 6%, 7%. So do we have the aspiration of x percent of GDP growth is what we target or we believe is achievable for our kind of business?

Sorry, can you repeat?

We mentioned that we're expecting the GDP growth rate at 6% to 7% for the current financial year. Just wanted to know that as our business, can we assume like a 1.5x kind of GDP growth rate for our business?

It's difficult to comment. It's like giving a forward statement which, as I said earlier, we don't give.

Okay. Sure. And just sort of something the earlier participant was asking. The gross margins for the year were at almost 33%. This is not sustainable. Is that what we were mentioning earlier?

No. I said gross margin for the year is -- gets averaged out. But for the quarter, it's something exception, right? So if you say 36% is sustainable in the next quarter after quarter and you have seen in the past also quarter-on-quarter gross margins can vary based on a lot of factors. But obviously, full year gross margin, definitely, it's sustainable and we need to maintain that or even improve.

And going forward, this number can improve incrementally, keeping in mind that our order book mix is also changing towards -- is tilting towards transaction, services, et cetera?

See, in principle, there is no way other than improving the -- growing sales and improving the margin, right? It is not that you can continue to maintain the same. It's a gradual process. You have to improve the profitability and no one can stop it.

The next question is from the line of Apoorva Bahadur from Goldman Sachs.

Sir, I wanted to know your thoughts on the RDSS scheme. What's the update over there? Are we seeing any pickup in the ordering? And what could be the opportunity size for Schneider over here?

So I wouldn't want to put a number on the opportunity size because of numerous reasons. But the money, I would say, the investments are trickling in. Obviously, the government had challenges in terms of coming out of COVID. The huge spend on the health infrastructure that happened during that period, et cetera, slowed down the intent of RDSS as a thing -- and there are regulatory approvals, which are also required for each of the investments. So there's a bit of lag in what I call as intent and action, but you -- we do see those investments coming in gradually.

Sir, by when can we expect this ordering to pick up over here really? This year or next year?

I think it should pick up towards the later half of this year. But then my guess is as good as yours.

Sure, sir. Understood. Sir, secondly, if you can please share the export revenue for the year '23?

Just give me a second.

And also, where do we see it over the long term? Is there any percentage we are targeting for exports?

See, FY '23, the export sales is INR 1,985 million. Last year, it was INR 2,397 million. So there was a slight drop in the export sales for the year.

What would cause this?

See, again, as I mentioned earlier, it's a project business. So sometimes -- last year, it was -- there was a jump on upside because of a couple of big projects which we had, so it keeps some on moving sometimes like that.

Okay. And are we targeting a specific share over here of the overall revenue? Say, x percentage we would like to be exports?

Yes, we -- see, we are expecting a good increase in the export business from definitely -- I mean one is the normal business as usual from the current operations, but also from the new factory which is coming up in Kolkata, that will lead to a good export additional business from FY '24-'25 once that is operational. So that factory will lead to a lot of exports.

How much would that be, if you can share the number?

I mean I will not put a number right now because that factory will, obviously, lead -- cater to both the domestic demand as well as export as well. A big part will be exports. And that will start coming from '24-'25 financial year and just restrict myself to that right now.

Okay, sir. Sir, also, if you can share the intergroup sales number for the year? And also, the order flow?

See, intergroup sales for the financial year '23 was about 19%. And the orders -- intergroup was about -- in terms of value, it was about INR 380 crores, INR 3,798 million, in FY '23.

The next question is from the line of Raj Rishi, a private investor.

Can you just repeat the export number which you just mentioned?

The export number is INR 1,985 million for this financial year.

Okay. And in 2 to 3 years, what do you think the export possibility is as a percentage of sales?

It has to grow as per the overall business growth and that is the minimum. And then additional big volume will come from Kolkata new plant. [indiscernible] the work in progress for construction of that plant.