Shilchar Technologies Limited (531201) Earnings Call Transcript & Summary

Welcome, everyone. Good evening, and thanks for joining this Q2 and H1 FY '25 Earnings Conference Call of Shilchar Technologies Limited. The investor updates have been uploaded on the stock exchange and on the company website. In case anyone does not have a copy, please free to write to us, and we will add you to our e-mail list. To take us through today's results, we have with us from the management team, Mr. Alay Shah, Managing Director; Mr. Atman Shar, Manager Operations; Mr. Prajesh Purohit, Chief Financial Officer. We will start with a brief opening remarks on the business performance of the quarter and half year from Alay Shah and then open the flow for Q&A session. I would like to remind you all that anything and everything that has heard on this call that we present any outlook for the future that can be construed as a forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties have been mentioned in our annual reports. Over to you, Alay, sir.

Thank you, sir. I appreciate you all joining us today, and I would like to take a moment to provide a brief update on performance for the quarter and half year for year '24, '25 as well as share some insight into our business outlook. Following my remarks, we'll open the floor for the questions. The demand scenario for transport industry remained buoyant across key market segments, India's power consumption is on the rise with a country gearing up to meet the surge demand through substantial capacity addition in both renewable and conventional energy sources. According to the recent commentary from CEA officials, peak electric demand in year '26 is projected to reach more than 270 gigawatts. And by 2035, it could soar to more than 500 gigawatts. This significant growth in power consumption is expected to drive considerable investment in the transmission sector as well, of which the transformers are very key beneficiary. Apart from domestic demand, even export demand is looking up. As I have alluded in my earlier remarks, there are significant investments being made in Western market, be it in the existing aging grid infrastructure or in line with global increase in power consumption. All of this comes down to a very well -- demand of transformer for us and at least for coming few years. Coming to the company updates. After fully utilizing our 4,000 MVA capacity last financial year, we have successfully commercialized an incremental 3,500 MVA capacity in August 2024. Taking our total installed capacity to 7,500 MVA. The result of this expansion are already becoming evident. We observed a notable increase in production during September contributing to both year-over-year and quarter-over-quarter growth in Q2. This higher top line has enabled us to achieve positive operating leverage while maintaining healthy gross margin, resulting in improved EBITDA margin and higher profitability in growth. The new capacity base will be available for utilization in H2 and we are fully prepared to maximize this potential as capacity utilization rates increase each quarter going forward. In line with our expanding operation, we are also onboarding and training a significant amount of new talent into the company to meet the requirements of our new set of operations. We are also streamlining production process at our new plant and effectively ramping up the production capacity. We remain committed to achieving our target of INR 550 crores during financial year '24, '25 and look forward to fully utilizing the incremental capacity in year '25, '26. This can result into a turnover of INR 750 crores to INR 800 crores. The demand outlook, we are witnessing indicating strong domestic and export inquiries at various applications, including our existing stronghold sectors. We plan to maintain a similar domestic to export revenue mix for the upcoming financial year as well. Overall, we are optimistic about the future and remain committed to achieving our growth objectives while maintaining operational excellence. Thank you all for your attention. Once again, thank you for joining this call. And I now invite you for any questions you may have.

[ Yash Gandhi ] you may please go ahead.

I can't hear you, Alay. Sorry, I think mic is on mute.

Yes, we can hear you. Please go ahead.

Yes. Congratulations again on a great set of numbers. So my question was basically, given the demand environment that you're seeing, my question is more about FY '27. Do you think that we should -- is there a risk of more capacity coming in, in the next 2 years? Or do you think in FY '27 as well, there's so much demand potential that we'll be -- still able to grow revenues by 40%, 45%?

Yes. So we are expecting a demand for coming next 4 to 5 years for sure. And once we utilize the full capacity in year '25, '26, we will have to increase the production capacity to meet this demand. And for that, we may take a call in coming December or January, whether to go for an expansion, further expansion and at what capacity. So we will be taking a call in next couple of months.

[ Abhi Jain ], you may please go ahead next.

So am I audible?

Yes, go ahead, please.

So just a hygiene question. Any plans on getting the share listed on NSE as well? It's just currently listed on the BSE, right?

Yes, we are seriously thinking on this and also. Of course, a decision has not been taken, but we will be, again, taking decisions maybe next quarter.

Sir, just a follow-up question, and this is basically on the business demand that you're seeing. Just wanted to segregate in terms of the demand that you're seeing for FY '25 and '26. Could you break the demand in terms of whether it's consistent across your exports and domestic or whether you're seeing a higher demand in domestic? And what sort of players or what sort of customers -- are these repeat orders, repeat customers? Or are you seeing newer customers enter into the market? Because I just wanted to understand what are the dynamics of the market, this ever evolving market with huge demand that is going in. I just want to understand how sustainable this is?

So we are mainly catering the renewable energy sector. And because of this government push for more and more production of electricity by way of renewable energy, we are expecting huge demand in coming few years. And that is the only sector which we are serving. The demand in local market is going to increase quite a bit. And even in export market, as I said in my opening remarks that those exporter demand is also increasing quite a bit. But if you are -- I mean, talking to me on this sort of demand growth, I'm bullish on the domestic market.

We'll take the next question from [ Naman Parmar ]

Congratulations on a good side of a numbers. So first question is on my macro side. So how has been the lead time over the export market? You have seen in previously the lead time has been increased from 1 year to 2 years. Now currently, you are seeing the similar type of lead time or what has been in the macro or export model?

No. So our biggest strength is our quality, our service, our brand value and our lead time. And our lead time to our customer has not increased much. So that is the main advantage which we have with customer finds it attractive when they prefer us over our competitors.

No, industry-wide also, there is no increase in the lead time. It has remained at a similar level or it has decreased?

It has not decreased for sure, but it has increased slightly. It's nothing major. I would say, like instead of 12 weeks now, it has become 14 weeks, 13 or 14 weeks, something like that.

Okay. And secondly, how much contribution would be of the IDT or renewable transformer in the overall revenue, around 80%, 90%?

I would say almost 60%.

Okay. And lastly on -- how has been the CRGO supplier? There has been an [ issue ] on that side in procuring the CRGO lamination and [ pour on ].

So there are some issues going on with CRGO imports, which is related to the BIS approval. But material is available, and we are not facing any problem in sourcing this material.

Okay. So if you see -- if you backward integrate more on the radiator tanks or all that in the in-house only. So don't you think you can also increase margin from here also? Even the quarter 2, you have shown a good set of margin. But do you think that more [ backward integration ] you can do?

We can always do backward integration, but it depends on the kind of model which we want to adopt. I think for now, we would like to concentrate on producing transformers rather than anything else. So we don't have any plan at present for any backward integration.

We'll take the next question from Mr. [ Jain Preshado ] [Technical Difficulties] We'll go ahead to from Mr. [ Vivek Gautam ]

Hello, Vivek Gautam this side. Am I audible?

Yes, we can hear you. Please go ahead.

Sir, I wanted to know -- to raise some questions on the sustainability of the growth and that expected opportunity size and total addressable market, sir.

So like I said, I mean, there is a lot of demand right now. Like I said, there is a lot of demand of transformers -- can you hear us, Vivek? [Technical Difficulties]

We'll take the next question from Mr. [ Jain Preshado ] Please go ahead. [Technical Difficulties] We'll take the next question from Mr. [ Arjun Agarwal ] Please go ahead. [Technical Difficulties]

Congratulations on a good set of results. Sir, I just -- I have got a couple of questions. The first question is, sir, can you just give a bit of light on what is our -- means what is our kind of share if you can give any data in renewable projects like -- and what kind of MVA we envisage for like per year, like if it be installed -- if India installed 30 gigawatt of solar annually. So what kind of MVA do we envisage as a TAM for renewable in India?

Yes. So I mean India targets almost 25 to 30 gigawatts every year. And practically, I think about 15 to 20 gigawatt is what gets installed every year. Now we have right now with the additional capacity at 7,500 megawatts of transformer, which is like 7.5 gigawatts. And out of that, almost 60% is for renewable energy. So that is what our contribution to the renewable energy sector.

Okay. And sir, regarding the capacity expansion. So what is the maximum capacity that we can -- that we are looking up to from the existing facility, means from the existing land parcel that we have that is available?

Yes. So I mean, in terms of MVA, we can have installed capacity of almost 25,000 to 30,000 MVA, if we utilize the complete land parcel what we already have right now.

Okay. Okay, sir. And my last question is, sir, in your product spec -- in your products in the presentation, I have gone through the products. And there was 132 kV hydro transformer. So the same transformer will be if it allows -- can be used into pumped hydro projects?

Yes, it can be used.

We'll take the next question from [indiscernible]

Sir, I just wanted to know like if you can provide the bifurcation like how many -- I will go into company details. How many transformers we sold in H1, like linear telecom and [ RFO ] standard line, high frequency [indiscernible] control. Is it possible to give that kind of bifurcation?

No, it would be extremely difficult because there are too many varieties, but we have basically 2 segments. One is the electronic and telecommunication transformer which includes all these high-frequency [indiscernible] linear transformers and so on. And another category is distribution and power transformer, which includes all renewable energy distribution substation transformers. So our electronic and telecommunication transformer division, it's a very small part of our total sales. It contributes less than 5%. So all this is coming from the oil pool distribution and power transformers.

And sir, what the export percentage in the revenue in H1? And if you could provide the geography-wise allocation like North America, Europe, Middle East, Africa? Just any insight on this?

So I think almost 45% of our sales came from export. And we are mainly exporting to North American countries like U.S., Canada and Middle East countries.

Okay. And would you like to provide some guidance for the next 5 years? Volume and top line guidance?

So I mean it's next year for -- like I said in the opening remarks, for year '25, '26. Once we fully utilize our production capacity, we can do a turnover of about INR 750 crores to INR 800 crores. But going forward from that point onwards, if we have to increase our sales, we'll have to put up new capacity. And for which we will be taking decisions in the next 2 months for the further expansion and at what capacity and what rating.

We'll take the next question from [ Vivek Gautam ] [Technical Difficulties] We'll take the next question from Mr. [ Yash Sinha ]

Congratulations on a great set of numbers. I had 2 questions. Broadly wanted to understand the split and margin profile between your domestic orders and your export others. And the second one was more of an industry question. Looking at your competitors, they operate at significantly lower EBITDA margins. So I just wanted to understand how you guys are able to do, say, north of 25% EBITDA margins consistently.

So of course, I mean I cannot share the exact numbers for profitability, but export sales have much more margin than the domestic sales. And the lower domestic margins are also improving because of the higher demand. While we make more profit compared to our competitors because we run a very efficient operation. We have low overheads. We do not have any finance cost. So these are some of the reasons why our profitability is on the higher side.

Understood. Just following up on this. In the last year, you guys took about 6 months to get the new CapEx up and running, right? You mentioned that about 2/3 of your land parcel is still available. If you notice that the demand is picking up, what would be the turnaround time in setting up, say, increased capacity on the remaining land?

So again, I mean, we will be taking a call in the next 2 months. But it all depends on what kind of capacity we are installing. But in our case, it is very fast. So if -- suppose that we decide on setting up a 5,000 MVA new capacity, we can -- up and running in less than 1 year.

We'll take the next question from [ Ashish Upganwal ]

Yes. Sir, there was a question earlier about the current demand is very good versus the supplies and supplies are catching up properly. So any insights on -- I mean, the supplies that are coming and what sort of demand environment that you see for the next 2, 3 years? Because these kind of margins I think on domestics are possible when the supply side is constrained. So your views on how this would go, it will be very helpful, actually.

Yes. So demand, like I said, is increasing, and it will continue to increase as according to my estimate. And I think for the next 4, 5 years, we'll be having a very robust demand of this kind of customers. And this will continue to give us the good margin. Of course, everybody is expanding capacity. And I think once they come in the market with their exit -- I mean expansion, I think there will be some price pressure, but still, the demand will be on higher side. So I would say that going forward, there will be some pressure on the margin. But at the same time, it won't be that low that there will be a problem or there will be a substantial reduction in EBITDA or in the net profit.

Sir, how -- I mean when do you see this supply catching up? Any -- because you are in the industry, so you would now who is putting how much and there would be kind of a match between the supply demand. Is it like '26 or is it away from there also '27, '28, given the opportunity in the market overall?

I would say that from last quarter of year '25, '26, the new capacity will start coming into the market. That's what my estimate is yes.

Okay. And sir, on the export side, that's another thing which probably can hedge the overall pricing and margins. So since you are already exporting 50% of your turnover, so can you spell out for us how is that opportunity? Is it pretty near term? Or is it kind of a very substantial opportunity, which is a continuous one for us? Is it too big?

Yes. So export demand has also increased and it has continued to increase. There is a lot of demand in the export market as well. So I personally feel that it will also continue to grow.

Okay. So if there is a maybe an oversupply in the domestic market, exports is big enough to absorb that. Is it [ right ] to say that?

No. I think there is a lot of demand in domestic market. So you cannot say right now that there is oversupply.

No, not right now, sir. Maybe 2 years down the line when capacity is -- just keep flooding in domestic market. That what I [ meant to say ]

It's very difficult to say right now, very, very difficult to say.

Okay, okay. But for the next 12 to 18 months, the margins like 25% plus, you see that these can be maintained, probably?

Yes, we are quite confident on that.

We'll take the next question from Mr. [ Chintan Shah ]

Sir, 2 questions. So one is you explained on the supply side, but I just wanted to understand in terms of capacities that are coming in, is it majorly from the existing customers or existing players who are there in the industry? Or you see that there are new players are entering as well? And secondly, from a customer point of view also, if you can help us understand, I mean, how -- so to say inclined that they would be to just not stick to the current suppliers? Or they would be willing to go to some new suppliers as well. So if you can explain that.

So major production capacity increase is coming from the existing suppliers. And there are new entrants also, but transformer is a very important product for any power project. So customers always prefer to buy from the established existing supplier who has a very good track record. So they will always get a preference over the new entrant. I mean there is -- this is sort of like an entry barrier for the new supplier because without having a trial, without taking -- having a track record, nobody would trust for such an important product and for project. So of course, the existing suppliers will have a preference going forward.

Got it. Understood. And one of our large peers, I mean, who were not present in this renewable [ IDT ] transformers that we do. So they are adding a huge capacity which is coming, say, in December, I believe. Do you think that can change the industry scenario in terms of margins as well as the demand-supply imbalance?

I don't think so. I mean, because there is a lot of demand right now, I don't think there will be any impact on any orders or any margins, at least not for coming a couple of years.

Okay. Got it. Understood. And my last question from my side, I mean, did we ever consider to do a larger size of transformers, which are also required? Or we would stick to the current size of transformers that we do? And so if -- can you just explain, I mean, how easy or difficult it is to get into that segment?

So right now, we have no plan to make any bigger or higher rating of transformer. We would like to concentrate on the present product range what we have considering the demand. But going forward, then anything can happen. It all depends on the market scenario.

Okay. Got it. Understood. That's all from my side.

We'll take the next question from [ Akshay Shah ].

Sir, in the last AGM, we have mentioned that we have got -- we have received 1 order from Europe. So what is the opportunity size in that market?

So in the European market is also very good, especially for renewable energy projects. And we had never concentrated on European market. We were more focused on the North America and Middle East. Now we have started putting efforts in European market, and we have got a breakthrough recently. So I'm sure that's slowly that market will get developed, and we we'll continue to get more and more orders from that.