Shilchar Technologies Limited (531201) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Shilchar Technologies Limited Q1 FY 2027 Earnings Conference Call hosted by TIL Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors. Thank you, and over to you, sir.

Thank you, Nirav. Welcome, everyone. Good afternoon, and thanks for taking out the time to join us today in the Q1 FY '27 earnings conference call of Shilchar Technologies Limited. The investor updates, including the investor presentation has already been uploaded on the stock exchange and on the company website. To take us through today's results, we have with us from the management team, Mr. Alay Shah, Managing Director; and Mr. Prajesh Purohit, Chief Financial Officer. We will start with a brief opening remarks on the quarterly performance by Mr. Alay Shah, followed by a Q&A session. I would like to remind you that anything and everything that is said on this call that represents 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, sir.

Thank you, Sayam, and good afternoon, everyone, and thank you for joining us today. Before we open the floor for questions, I would like to walk you through our performance for the first quarter of '27 and share some update on our operations and ongoing projects. [Technical Difficulty] reported revenue from operation of INR 134.60 crores (sic) [ INR 134.61 crores ]...

Sir, sorry to interrupt you. Your voice is breaking.

For Q1 FY '27, Shilchar Technologies reported revenue from operation of INR 134.60 crores (sic) [ INR 134.61 crores ] and EBITDA for the quarter stood at INR 29.23 crores (sic) [ INR 22.06 crores ]. The profit after tax stood at INR 20.86 crores. As you can see, the financial year '27 has commenced on a softer note. The quarter was shaped largely by the continuing effect of the crisis in West Asia, which affected our Middle East export directly and through a sudden increase of price for certain raw materials, which affected our domestic businesses. First, on the export front, the recovery has taken longer than we had originally expected at the time of our Q4 call, preliminary on account of a persistent increase in shipping costs to the first quarter. Container costs have risen between 3 to 5x for certain geographies as compared to levels before the crisis. This has materially increased the landed cost of our customers and has led to a slower pickup in export dispatches. The increase in shipping cost is not limited to the Middle East, and the cost to North America have also risen significantly on account of ongoing geopolitical uncertainty. I would like to emphasize that this is a cost and logistic issue and not a demand issue. And while most of our export terms are ex-works, there is a significant increase in the cost of procurement for our customers and hence, the deferment in orders. Underlying customer demand in both regions remaining -- remains firm, but customers are currently lifting the bare minimum volume they need. On the domestic front, passing on the sudden escalation in commodity price for existing order arising from the West Asia crisis has taken longer than anticipated. Negotiations with customers extended through much of the quarter, which resulted in slower dispatches in Q1. The situation was more severe in April and May and has eased off in recent months. The profitability margins for the quarter reflect both of these [Technical Difficulty] export mix and partial pass-through of higher raw material prices.

Sir, sorry to interrupt you. Again, we are losing your audio a bit. Can I ask you to repeat the last few lines?

Okay. On the domestic front, passing on the sudden escalation in commodity price for existing orders arising from the West Asia crisis has taken longer than anticipated. Negotiations with customer extended through much of the quarter, which resulted in slower dispatches in Q1. The situation was more severe in April and May and has eased off in recent months. Profitability margins for the quarter reflect both of these factors, a lower export mix and partial pass-through of higher raw material prices. Looking ahead, we expect overall business momentum to be notably better in Q2 compared to the Q1, while exports may continue to see some impact from elevated shipping costs if the situation in West Asia remains unchanged. We have better visibility on domestic side, which should support our top line. Our CapEx project, our Expansion Phase 3, which will add about 6,500 MVA capacity remains on track for commissioning in April '27. Civil foundation works have been completed. PEB erection and utility infrastructure work are progressing well and all equipment have been ordered. Our annual outlook remains unchanged for financial year '27, and we expect to operate our existing 7,500 MVA capacity at almost full utilization. And the new facility will drive the next leg of growth for financial year '28 onwards. We remain on track with our revenue ambition for the year, although the geographic mix may change if the situation in West Asia persists. Demand across our key domestic and export market remains strong, and our overall business outlook continues to be robust. Thanking you all, and we can now open the floor for questions.

[Operator Instructions] The first question is from the line of Vinil Shah from Dalal & Broacha.

Sir, I just wanted to know like...

Vinil, sorry to interrupt. Can you speak through the handset, please?

Sure. Yes. I just wanted to know that if the management could quantify the revenue loss for Q1 FY '27 due to the shipment delays? And also what is our revenue run rate for this year? Like we are well into this year. So we would like to revisit our guidance of -- if the management would like to revisit their guidance of INR 800 crores of revenue.

No, so like I explained at the beginning of my opening remarks [Technical Difficulty] achieve the projected [Technical Difficulty].

Sir, sorry to interrupt you. Your voice is breaking terribly. Let me reconnect your line. Participants please stay connected. Participants please stay connected while we rejoin the management back to the call. Sir, go ahead. You are reconnected.

Can you hear me now?

Yes, sir.

We are on [Technical Difficulty].

Ladies and gentlemen, thank you for your patience. Sir, please go ahead.

Yes. Sorry for the -- I think there was some problem with the network. But like I said, once again, I'm repeating that for financial year '27, we are on track with whatever we have targeted in terms of the top line. And we don't anticipate any problem in achieving that.

And also, if you could quantify the revenue loss for this quarter due to the shipment delays?

I mean I would not like to put it as a revenue loss, but we could have done maybe around INR 30 crores, INR 35 crores worth of revenue if this crisis would not have taken place.

Okay. And sir, my second question is related to our margins. So could you comment on the price revision done in this quarter? And how much raw material cost increase have we been able to pass on to the customers? Because we see significant pressure on gross margins for the last 2 quarters.

So whatever orders we had during Q1, which were to be executed in Q4 and -- I mean, whatever orders which we had on hand for -- which were to be executed in Q4 and Q1, we could pass on probably, I would say, about 50% to 60% of the price rise to the customer. But whatever we are executing now is all at the current market price. So we don't expect any problem in achieving the EBITDA.

[Operator Instructions] Next question is from the line of Aadesh Gosalia from Spark Capital.

Yes. I hope I'm audible. So my first question was about the geographical split, if you can just [Technical Difficulty], after that how much was the revenue from exports. And going ahead, the visibility [Technical Difficulty].

Aadesh, sorry to interrupt you. We lost your audio in between.

So am I audible now?

Yes, keep it just as it is. Go ahead.

Yes. So I was asking about the geographic split in our revenue, like how much was from the domestic market and from the exports, firstly. And going ahead for the next FY '27 or let's say, for next 1 or 2 quarters, what is the visibility from order book perspective we have right now, regarding the geographic split, like how much is from the export markets and how much is from the domestic market? And if you can share the order book number also?

So we have an order book of almost very close to INR 500 crores as of today. This is over and above whatever we have already shipped out till yesterday. So very -- we have a very strong order book and a lot of new inquiries are on hand for which we are negotiating. So we expect more orders in coming days. Like I said in my opening remarks, the geographical mix may change depending on the present situation. So if the Middle East situation improves and the shipping cost comes down, I think we will be back to our normal export what we were doing earlier.

Okay. But as you said, the order book right now stands at around INR 500 crores. So if you can share that, what is the split of that order book between domestic and exports?

I would say it's almost like 30% export and 70% domestic as of now.

Okay. Okay. And as you are saying the geographic mix going ahead is going to shift. So what are the new markets that you are targeting? And how are you looking at it? Or whether now for the -- like as of now, we are only focusing on the domestic markets.

Yes. So I mean, overall, we export everywhere, North America, Middle East, somewhat in Africa also. But to compensate the problems, we are concentrating on the domestic market and getting more orders from the local customers.

[Operator Instructions] Next question is from the line of Jiten Parmar from Aurum Capital.

Yes. And first of all, I would like to acknowledge the management that post the change in fortunes in capital goods and transformers, the management has performed exceedingly well and really took advantage of the cycle. My question is specific to margins. This -- you have maintained the annual guidance for revenue. What about margins? Are we still looking at kind of the 30% margins -- EBITDA margins, which we have been doing historically or there will be some hit on that? And second is, if you can throw some more color on the expansion we are doing, and we are going into 220 kV also. So will that be lower-margin business or that we can expect to have the same margins there, too?

So like I said earlier, if situation becomes normal and if our export comes back online as per previous years, we are confident that we'll be able to maintain the same profitability what we have done in previous years. But in case if that does not happen and if we are more relied on the local market, then there will be a slight dip in that. So it depends going forward how the geopolitical situation take -- I mean, takes shape -- takes the shape. And for project -- new project, everything is on track. Construction is going on in full swing. All the machinery, everything, the orders have been placed. And we are all set to start the production from April '27. So we don't anticipate any delay. Matter of fact, we may complete the project slightly earlier than what we are -- we have projected. And initially being new in the market, our margins will be lower, mainly to create the references and to penetrate into the market. But going forward, again, we are going to have the same policy where we won't be able to -- we won't be doing any business with any state utility companies, and we will be concentrating more on the export market once we have enough reference within the domestic market. So initially, there will be a low profitability. But going forward, then again, we anticipate better margin.

Okay. So my final question. So we are moving slightly in higher class of transformers. And any future plans? I know this expansion is underway. Obviously, I think it will be through internal accruals. Any further plans for -- because we have a lot of land in Gavasad. Any thought has been given on what next we want to do after this expansion comes in place?

Yes. So we have purchased an additional about 4.5 acres of land next to our land, it's common wall. So we are planning for further expansion in that particular area. I would not like to say anything on the type of product or type of kV class or the capacity, but we are working on that. And definitely, once this expansion is completed or is near completion, we will be planning something additional.

[Operator Instructions] Next question is from the line of Aman Soni from Seven Alpha Investors. Aman, your voice is breaking. Can you speak a little louder, please?

Am I audible now?

Yes.

Yes, sir. Sir, in our FY '26 annual report, which was released on mid of July, highlighted a recovery from April onwards, and we were very positive in our words for Q1, which was already gone by then. While the recent quarter presentation indicates that the recovery in the export has taken longer than expected due to persistently higher shipping costs during Q1. Could management help to quantify the impact of West Asia crisis and elevated freight cost on export revenue in FY '27? And if it was like that, why we pictured it differently in annual report?

I'm sorry, I'm not able to understand your question properly. But all our export orders, 90% of them are based on ex-works. So the shipping cost is not on our account. And if it increases, we don't pay anything from our side or it does not reduce our margin. But at the same time, from a customer point of view, when they buy our product and if they have to pay higher shipping costs, it is costly to them. So they right now, and because of this war-like situation in Middle East, all the customers are going very cautiously. And whatever they need in absolute terms, only that much they are buying and they are not stocking anything. So of course, this has affected our business. And nobody expected that this Middle East crisis will go on for a very long period, but it has. So that has continued in the -- affecting our Q1. And we are hopeful that this ends soon and everything becomes normal.

Next question is from the line of Salil Desai from Marcellus Investment Managers.

Sir, a quick question on capacity utilization. So where are we on this current journey to full utilization right now? So what would have been, let's say, quarter 1 average utilization?

So like I said in my opening remarks, I mean, we are planning to utilize very close to 100% of our capacity for year '26-'27.

Right. So I was just asking if Q1, how far are you from 100%? Are you at 80%, 90%, 100% already?

No. In Q1, I think we did only around 60%, 65% of the capacity utilization.

Okay. And I just wanted to follow up on the question from the previous participant is that your annual report mentioned that things were normalizing, right, which was released in July, the annual report. But this quarter seems to have again been a little unexpected from a dispatches point of view. So what is the difference? I mean, what kind of changed what you're thinking would be the situation when you're writing the annual report versus what the reality turned out to be?

Actually, annual report was prepared somewhere in early June and then it went for the printing and was circulated in July. But in June, we felt that this Middle East crisis will get over soon. There were a few announcements by the concerned parties, concerned countries that the war is getting over and MOUs are being signed. So that was the reason we said that. But unfortunately, that did not happen.

Yes, I think all of us were taken by surprise with that.

Yes.

Next question is from the line of Abhi Jain from AJ Capital.

Am I audible?

Abhi Jain?

Yes. Am I audible?

Yes, go ahead.

So my question is that last time around, I had checked with you that we were not able to ship our products, et cetera, from Middle East to domestic market because there was a lot of demand in the domestic market. And you had said that the orders were already in the pipeline and they were already placed, and it's very difficult to do that within a quarter. But when we were starting in April, right, we already anticipated and we were -- everyone was seeing that this war is going on. So I just want to understand that why did we not proactively try to match that demand that was there domestically? And why did we still hover on, on getting orders from Middle East? Because I see that there are 2 fronts on which we have lost out in this quarter. One is definitely that our capacities have been underutilized. So that is A. And secondly, obviously, when we ship to domestic market, the margin takes a hit. But in our case, both have happened, right? Margins have also taken a hit and we are underutilized, and we were not able to ship to our potential. We were not able to utilize our capacity to the maximum in Q1. Can you help me understand that why is management not proactively ship the demand or ship the order base from Middle Eastern markets to domestic markets? Because if you look at your other competitors who are focused on domestic markets, they've been thriving. The Q1 numbers have been thriving. So just want to understand, we took a margin hit also and we also had a reduced offtake of our orders in this quarter.

Yes. So I mean, we were anticipating that from April onwards, the shipping will take place in the normal way. And actually, it started in a normal way in April. But then suddenly from end of April and from May, the shipping cost increased drastically and that halted our exports. And these are -- the transformer what we make are all custom-made transformers. So immediately, I mean, we took a proactive action and shifted our focus from export to domestic. But then it takes time to get the orders and then it takes time to execute. So that has already started, and we are seeing that in Q2 now. So I mean, it's not some off-the-shelf product where we ship the product, we get the order and immediately we dispatch. I mean these are all custom-made products. So it takes minimum lead time of about 10 to 12 weeks or even 16 weeks. But we did take a very prompt action in shifting the -- our focus from export to domestic.

Yes. No, that was the discussion last quarter also, seeing the things that were on the annual, I think it would have been better to maximize our capacity utilization. But anyways, all right, sir. Yes, all the best for the future.

[Operator Instructions] Next question is from the line of Aditya Dayal from Zeva Consultants.

I just have one question. This capacity that is going to come in April '27, will it take more time for the product prototyping or all those things are included so that the revenue will be visible from the new capacity after April '27?

So I have earlier mentioned that in my earlier call also that once the facility is ready for the production, we will start producing transformers we are doing right now. And then slowly, we will start -- not slowly, but aggressively, we'll start marketing the bigger size of the product. But of course, the audit by customer, the approval process, the type testing, all those takes time. So actually, the larger capacity transformer orders will come a little bit later, but production capacity will be utilized by producing the existing range of transformers.

Sir, any time frame like when the prototyping for the bigger will be done?