Shilchar Technologies Limited (531201) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Shilchar Technologies Q2 and H1 FY '27 Earnings Conference Call hosted by Avendus Spark. [Operator Instructions] I now hand the conference over to Mr. Ravi Swaminathan from Avendus Spark. Thank you, and over to you, sir.

A warm welcome to everybody to the Q2 FY '27 earnings call of Shilchar Technologies. To take us through the results today, we have with us from the management, Mr. Alay Shah, Chairman and Managing Director; Mr. Aashay Shah, Executive Director; Mr. Aatman Shah, Executive Director; Mr. Prajesh Purohit, Chief Financial Officer; and Mr. Nilesh Pandya, GM Finance and Accounts. We will start with a brief opening remark of the business performance of the quarter from Mr. Alay Shah and then open the floor for Q&A. Thank you, and over to you, sir.

Good morning, everyone. Thank you for joining us today. Before we open the floor for questions, I would like to walk you through the performance for the second quarter of FY '27 and share some updates on our operation and ongoing CapEx. For Q2 FY '27, Shilchar Technologies reported revenue from operation of INR 192.61 crores, up 43% over Q1 FY '27 and up 12% over Q2 FY '26. EBITDA, excluding other income, stood at INR 40.06 crores with an EBITDA margin of 20.8%. Profit after tax for the quarter stood at INR 32.98 crores with a PAT margin of 16.5%. As you can see from the top line growth, business momentum picked up notably in Q2 after a slow start to the financial year in the Q1. As we discussed on our last call, Q1 performance was a result of continuing effect of the crisis in West Asia, which weighted on our exports. On the export front, conditions in the Middle East improved during the quarter, but they are yet to fully normalize. The higher shipping and logistic costs we highlighted in previous quarter have not eased much. At the same time, exports to North America have gained momentum following the resolution of the tariff-related challenges of earlier quarters. The pickup in North America export has helped offset part of the shortfall in dispatches to the Middle East. On the domestic front, demand has remained very strong throughout. On profitability, our EBITDA margin improved to 20.8% in Q2 from 16.4% in Q1. We expect conditions for export to improve further in the near future. This should translate directly into higher export share in our revenue mix and in turn, a further improvement in margin over the coming quarters. On the project front, expansion Phase 3, which will add 6,500 MVA of capacity is progressing as per plan, with commissioning expected in April '27. Civil foundation work, erection and utility infrastructure work are in progress and all major production equipment has been ordered. This will take our total capacity to 14,000 MVA and drive the next leg of growth from FY '28 onwards. As for the current year, we remain on track with our revenue target of FY '27 of INR 750 crores with a healthy orders in hand and delivery scheduled for the second half of the year. We continue to see robust order inquiries from both domestic and export clients. With that, I thank you all, and we can now open the floor for questions.

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

I hope I'm audible?

Yes, I can hear you.

I had a couple of questions. The first on the working capital pricing and the margin outlook that we have. So during H1, the net working capital has increased to around INR 200 crores, including the rise in the financial assets to around INR 29 crores and higher receivables. So if you can share some light on -- some color on how this has fared and what is -- how sustainable this is? And whether for the second half, we may see some improvement or whether this is going to continue? And on the raw material prices also that how they have fared? And in the Q1, we had said that the new orders are as per the market prices, but how much of that has been the pass-through has been happening well and how do we see the gross margins faring from here on? The margins came in at 29% gross margins came in at 29% for Q2. But do we see it going higher from here on? Or what's the outlook that we have? That's the first question.

So we don't face any problem or we don't see any alarming situation for working capital utilization. I mean we have said this in past that since we have a surplus fund, and we don't use any bank facility for working capital, we earn interest out of the customer, which established on us for the supply of transformers. So that is why it looks that on the paper that we are utilizing more working capital, but actually, we are earning interest on that. The RM prices have stabilized. Again, it is not as what it used to be. And I don't think that it will completely stabilize till all the Middle East crisis and other things gets concluded. But all the orders what we are getting now is as per the market price, as per the current raw material price. And going forward, like I said in my opening speech, that the margins will improve with the higher sales of domestic as well as export market.

Okay. And sir, you didn't -- what about the financial assets going up to INR 29 crores and the receivables have been higher. So any outlook on that? What are the financial assets that have increased and as well as the receivables going up in the first half?

So higher asset is basically because of the investment what we are doing for the new project. And like I said, once again, the receivable is not actually a receivable. So just to give you an example, we provide a 60 days credit through LC to one of our customers, but we established LC for 180 days with interest borne by them. So we just get the money only after 180 days, but with interest. I mean we can always encash the LC after 60 days, and that would reduce our receivables on paper. But after getting 180 days, it shows that receivables is pending, but it's a secure receivable, which we are earning interest on.

Okay. Okay. And sir, the second question on the revenue. The Q2 revenue has been one of the best that we have witnessed over the past many quarters. And -- but is this because in Q1, you had mentioned that around INR 30 crores, INR 35 crores revenue was deferred. So has that revenue come into Q2 and because of that, the number is -- has almost reached INR 190-odd crores. Is that the reason?

Part of it is that and part of it new orders market situation has improved. And going forward, like I said that we are on the road to achieve our original target of INR 750 crores sales for the entire year, meaning that we will be able to -- we will be doing more than INR 225 crores, INR 230 crores every quarter going forward.

Aadesh, you may please rejoin the queue for more questions. [Operator Instructions] We will take the next question from the line of Jiten Parmar from Aurum Edge.

Can you hear me please?

Yes, I can hear you.

Alayji, my question is basically on the EBITDA margin from last year. Though sequentially, it is up from last year, it is down significantly by 10%. Now I understand that there could be cost pressures and due to higher freight or something. So if you can quantify how much is the higher freight affected us in a percentage terms of EBITDA, that would be great. And do you see that being passed on in the future? Or we will have -- can we get back to like the 30% margins?

So I think I have earlier also mentioned that once we grow, once we have the new capacity add margin to maintain this percentage cannot be ensured. But what we are doing is we are -- in net terms, we will be doing more profit. So with 30% EBITDA, if we have done INR 200 crores, maybe the EBITDA margin will come down, but our EBITDA in value terms will be maybe INR 225 crores, INR 250 crores. So that is what we are targeting going forward.

Yes. So the question regarding the impact of freight as a percentage of EBITDA, if you have any color on that?

I mean, of course, we would like to maintain the same higher EBITDA, but the market situation, the world political situation, a lot of things are dependent. If you look at our present margin, that is also comparatively quite higher than our peer group companies, and we will be mining -- we will be one of the higher EBITDA margin company.

Okay. Sir, my second question is, basically, with so much of capacity coming in, okay, across the board, all players are in capacity significantly, consumers are like, for example, also come out with their own transformer company and all that. And so do you see competitive pressure in the future, which can affect the margins, how such large capacity will be absorbed? Is the demand still intact? And how long of a way you see of the demand?

Yes, you are right that everybody is increasing the capacity. But at the same time, the demand and if certain government data, our power consumption will be doubled in next 3 to 4 years. The AI investment and the data center will require a lot of power. The renewable government is targeting more and more gigawatts every year. So this all will create a demand for not only transformer, but all the power equipment. And with increased in capacity also, my personal feeling is that everybody will have enough orders to.

Okay. That's all. Just if you can answer on like do you face any challenges on the margins because of this?

Sorry, can you repeat the question, please?

Do you anticipate any margin pressure because of this expanded capacities?

Not for at least another couple of years. I don't think because there is enough demand. After 2 or 3 years, I'm not sure. But like I said, the power consumption is very high. The power demand is going to grow, and I think that will drive the demand of all the electrical products.

Next question is from the line of Prathmesh Sawant from Abacus Investment Managers.

Am I audible? Hello?

Yes, you are audible.

Just 2 questions from my answer. First, can we have any data on the total MVA sold by us across the 2 core transformer categories that we have?

Sorry, can you repeat the question, please?

Just wanted to understand what is our -- based on our total existing capacity, what is the total MVA sold or the units of transformers sold across the 2 major categories of the transformer that we have.

So I mean, I can tell you that we are right now utilizing almost 80% to 90% of our capacity, installed capacity. And total MVA in our case, it is very difficult because, I mean, we can give you that data later on. But it varies from the product mix to products mix. So if we are making more higher MVA transformer, the MVA will be on a higher side. If we are making more smaller transformer, the MVA will be lower. But the total sales will remain same. So you can -- I mean I can tell you very confidently that right now, last quarter, we have utilized almost 80% of our installed capacity. And going forward in Q3, Q4, I think it will be almost 100%.

Okay. Okay. So is it a case for us like the other transformer players, the higher MVA that they sold typically the margin for them increase. So is that the case similar for us because we tend to have the highest margins across the other transformer players. But the average product MVA like we are doing 132 KV for 50 or 100 MVA. So that is relatively a smaller MVA product, but still we are doing highest margin. I understand exports may be one of the reasons. But no, what are other factors that are giving us such superior margin compared to the peers?

There are a lot of factors. One is that it's not -- I mean, for transformer industry, it is not correct to compare MVA with the profitability, because there are a lot of different products of different prices, a lot of different KV class and everything else their own working, but we have higher EBITDA margin because for a few reasons. One is that we are into export business. Secondly that we run our company very efficiently, and productivity is at the highest level in our company. So all these factors are involved in having the higher margin.

Okay. But typically, with the higher KV class, you don't...

Please rejoin the queue for follow-up. Next question is from the line of Ravi Swaminathan from Avendus Spark.

My question is with respect to the U.S. market. Can you talk about how the demand scenario is there from the U.S., what is the kind of lead times -- lead time that is there for transformer delivery? How will this apply locally? How is the overall demand scenario panning out across all KVA classes?

Yes. So I mean, demand from U.S.A. is quite good right now. In between our supply to U.S.A. went down mainly because of the 50% tariff imposed on Indian product, but that has been withdrawn in February. So after that, we have started getting orders steadily, and that orders have now increased. The demand over there is also very good. Our customers are projecting more and more demand for coming year also. And we will be part of that because we have a good product, good relationship with our customers and good quality of our product. We are into very specific KV class. So I cannot share or I cannot give you information on higher KV class. But as per my knowledge, I think higher KV class has a lead time of almost like 1 year, 1.5 years.

Okay. Understood. And this demand is coming from -- so data centers, renewable or which category from which the demand is coming from in terms of...

It's not that specific demand, but it's a mix of everything. I mean we cater to -- I mean, we cater the customer demand of transformer. It can be data center, it can be distribution network, it can be substation, it all depends.

Next question is from the line of H Shah from Quantum AMC.

Just 2 questions from my side. What's the export domestic mix for the quarter and half year and order book as on date?

So we have an order book of more than INR 550 crores going forward. So like I said earlier in my opening remarks that we are on track to achieve more than INR 750 crores of sales, which was projected in the beginning of the year. And the export domestic will be in ratio of around 60% to 40%, 60% domestic, 40% rest, which is likely to improve in fewer coming quarters.

Okay. And of the INR 500 crore order book, what is the export domestic mix?

Again, it is the same ratio, about 60-40.

Next question is from the line of Samad from Spark Capital PWM.

So most of the questions are already answered. So my question is on the order book. So -- sorry, on the utilization. The utilization as I heard correctly is going to reach 100% in the next 2 quarters. So -- yes, so is it correct that the production will reach 100% in the next 2 quarters?

Yes, that's right.

Okay, sir. And do we have the order book executable over the next 6 months?

Yes, yes. very much. Like I say, we have order in hand of almost INR 550 crores, and we are getting new orders also, and this first half, I think we have done about INR 330 crores in sales. So even if we do additional say, INR 500 crores, we'll reach to more than INR 800 crores. I mean we have started getting orders for even the Q1 of next year.

And sir, how is our export looking in terms of region wise? So has there any volume picked up in Europe specifically?

Sorry, can you repeat the question, please?

How is the volume in export market? Is it picking up in Europe, region and any other region?

We are exporting in Europe, but not much. We have started putting efforts in last 1 year, by participating in exhibition. So the results will come maybe in next year or next to next year. And besides that, we have some in Middle East and North America.

And so last question. So in the last quarter transcript, last quarter con call, you mentioned that for FY '27, you are aspiring for INR 800 crores revenue. Is that still intact?

Yes, this will be more than that.

Next question is from the line of Rakesh from iValuethought.

So one question I wanted to ask on the pricing power. Since we are seeing the raw material costs are going up, right? Is it something we can pass it on to the customers and how we can expand you say?

Can you repeat the question? I'm not able to hear you properly.

The question is on the pricing power. I think we -- there is a fluctuation in the raw material cost side. We saw that it has increased. Is it something when there is an increase in the raw material cost? Is it something we can pass it on to the customer? How is the pricing follow?

Yes. So I mean, based on the current market price of raw materials, we decided our cost of transformer then go to the customer. So all these new orders, what we are getting is based on the present raw material price, in the prevailing market.

So once we pass on this to the customer, I think we can reach our earlier EBITDA margin of something close to 30%, because we are passing on this one right, raw material costs. That is what -- it was affecting our margin, right? That is one of the reason. Is it something that we can pass it on to the customer so we can look at the margin...

No, so I think we had discussed this in the past that in the month of March, there was a sudden increase of all the raw material costs because of the Middle East conflict. That was a very unusual situation, and that does not happen in peculiar business. So during that period, whatever orders we had, we had to go back to our customer and ask for the price reason. But now things have stabilized and whatever present material cost is there based on that we do the costing and put to our customers.

Next question is from the line of Pankaj from Iris Capital.

I think you may have answered this question, but my apologies, my line got disconnected in between. So my rest all other questions were answered. The only question I have is what is the number guidance you have for FY '27 in terms of operating margins? I know Q2 we had 20-odd percent. So I also understand that you have said that it will improve, thanks to increasing exports. But what is the number you have in mind?

So like I said, the first quarter 2 has much better margin than quarter 1. And going forward with 100% capacity utilization and inflow of export order, the margins will improve in Q3 and Q4. But I cannot tell you any numbers. I mean, it's difficult for me to even guess.

Next question is from the line of Maitri from Sapphire Capital.

Am I audible?

Yes, I can hear you.

Just one question. Once we're entering the higher class transformer of 220 KV, have you received any approvals for the same? Do we have in some order book or some soft commitments and orders once we start a new line, we can start the production, just some clarity on that.

Yes. So we don't have any approval once this plant will function, only then we can apply for the approvals of 220 KV plus transformers. But I have said earlier that in the same plant, we start manufacturing the lower KV class transformer until we get the approval for higher KV class, and we start getting orders. But a lot of our customers to whom we supply the transformers right now, they also require 220 KV class transformers. And we have a commitment, verbal commitment from them that once the plant is ready, they will definitely support us with the orders.

Got it. And how long will it take us to get those approvals first 12, 18 months or maybe faster?

It will be an ever between 3 to 6 months.

Okay. That's great. And these are from the existing clients, the approval will be in the 3 to 6 months?

Correct. Yes.