Syrma SGS Technology Limited (SYRMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '23 Earnings Conference Call of Syrma SGS Technology Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniruddha Joshi from ICICI Securities. Thank you, and over to you, sir.

Yes. Thanks, Mitchell. On behalf of ICICI Securities, we welcome you all to Q3 FY '23 Results Conference Call of Syrma SGS Limited. We have with us senior management, but before I hand over to the them just in one line, our view is positive on the company. The company has done extremely well in the second results, and we congratulate them for the excellent set of numbers. Now I hand over the call to Mr. Nikhil Gupta, Investor Relations, to take it forward. Thanks, and over to you, Mr. Nikhil.

Thank you, Aniruddha. A very good morning, everyone. A very warm welcome to Syrma SGS Q3 Fiscal '23 Earnings Call. We have with us today Mr. Sandeep Tandon, our Chairman; Mr. J.S. Gujral, our Managing Director; Mr. Jayesh Doshi, Director; and Mr. Bijay Agrawal, our Chief Financial Officer, to discuss the performance of the company during the first half -- first -- sorry, during the quarter 3 2023 followed by the detailed question and answers. During this call, certain statements that will be made are forward looking, which involve several risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements made herein are based on the information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, please do review the disclaimer statements in the earnings release and all the factors that can cause the difference. With this, I now hand over the call to Mr. Sandeep Tandon, our Chairman, for the opening remarks.

Thank you all for joining this call. Like expected, we have been quite -- we have quite strong growth in the last quarter -- over the last quarter-on-quarter as well as the preceding quarter. We continue to see demand from all our customers. Of course, there is some slowing on export, but that is more like a misbalance of numbers not coming through as soon as we were expecting. But that also should be starting to trigger very quickly. But because we are so well diversified across industries, we are able to keep our growth prospects the same despite certain turbulence in certain area that might hit. We are not used to doing quarter-on-quarter review. So everything looks good as far as -- our year looks -- still continues to be strong. The team has done a fabulous job in bringing up our new facility in Manesar 2 and in Chennai for the design and development. We continue to double down on our design and development capabilities where we've added new talent this last quarter coming from marquee companies that we're building out more ODM-type development with our current and new customers. We have had very strong audits done by marquee customers throughout our facilities. So we are expecting a new business to roll in over the next 6 to 9 months with those customers. Generally, a good quarter, hats off to the team. Supply chain issues have calmed down somewhat, but not fully there. And also, of course, we were predicting a Chinese New Year that comes of planning materials before that would have made some changes on our inventory levels, but on the negative -- but otherwise, very strong performance from the team and very proud of what we've achieved year-on-year and quarter-on-quarter over the last 3 months. I'll hand it off to Nikhil now.

Yes. Thank you. Now I hand over the call to Mr. Gujral, our Managing Director, for the opening commentary.

Good morning, ladies and gentlemen. It's a pleasure to host you on the Q3 earnings call of Syrma SGS Technology Limited. The third quarter has been an exciting and challenging one. Exciting because we continue to see robust growth in the domestic market and strong inbound inquiries from domestic and multinational customers, both for domestic and exports. Challenging because we faced short-term headwinds because of the recessionary conditions in Europe, which impacted our export. But the long-term story remains intact. The quarter gone by, we have seen a good performance on almost all parameters. And this is a testimony of the robust and resilient business model which our team has been able to craft out over the last years. We have seen growth across almost all segments, barring exports and a couple of industry verticals. The domestic business has done phenomenally well. As of 31st of December, we have an order book of INR 2,100 crores, which would be executed during FY -- during calendar '23, spilling over to '24. I'll just summarize the key financial parameters before I hand over to Bijay to run you through the detailed financial numbers. Our consolidated revenue for the quarter ended December '23 -- December '22, stood at INR 524 crores which is a 73% year-on-year rise, EBITDA by 53% to INR 60 crores and PBT by 51% to INR 45 crores. On 9-month basis, that was for the quarter -- last quarter. On a 9-month basis, our consolidated revenues grew on expected lines by 55% to INR 1,391 crores. EBITDA by 42% to INR 151 crores and PBT 34% to INR 111 crores. The growth is primarily led by our continuous efforts on design-led manufacturing and has broadly been across sectors, but led by auto and consumer. The growth in a few sectors like health care and exports has been muted and slow because of the recessionary conditions, inflation in Europe, but we are very confident on the long-term story and expect this to rebound in the coming quarter or 2 quarters. Our margins, consolidated PAT is of INR 34 crores, which is a 70% growth year-on-year. I now hand over you to Bijay Agrawal to run you -- to run through the detailed financial numbers of the quarter and the 9 months ended December '22.

Thank you, and good morning, everyone. I'll just quickly take you through the brief financials as explained by our MD. And on a consolidated basis, our revenue grew by 73% year-on-year for this quarter to INR 524 crores. EBITDA for this quarter stood at INR 60 crores, a growth of 53% year-on-year and despite ongoing global issues. And also, we are able to control some of our cost in this particular EBITDA. That's where we have been able to show this growth. Coming to PBT, our PBT for this quarter is INR 45 crores with a 51% growth. And PAT for this quarter is INR 34 crores with a growth of 70%. This quarter, our gross material cost increased by 300 basis points to 73% as a factor of softening into our export health care business and also coupled with our growth -- significant growth in the consumer segment, specifically. Coming to treasury position as on December end, we are continuing with a total treasury balance of around INR 886 crores as on December, which includes some bit of short-term investments and mainly the surplus funds from IPO invested into FDs. Moving to debt and CapEx update. Debt for this quarter is approximately INR 326 crores, which includes INR 236 crores of working capital loan and around INR 90 crores of term loan. On that basis, my net debt position as on December end is INR 560 crores. Coming to CapEx, we had deployed around INR 35-odd crores of CapEx during this quarter and expecting to incur another INR 40 crores to INR 60 crores in Q4 of this financial year. Coming to our overall working capital position. My inventory day has increased to 121 days from 108 days last quarter and mainly on account of we were expecting a Chinese New Year in this initial January first 2 weeks, and that's where we were -- on a conservative basis, there were the higher inventories, which were carried on as on December end mainly. On receivables side, there is a saving of almost 2 days -- 12 days on a quarter-on-quarter basis. So my receivables have stood at 62 days as on December end. Same with trade payables at around 99 days as on December. And in totality, my net working capital days are 83 days. 3 days increase over the last quarter. So broadly, that's the financial summary. I now hand this over to Nikhil.

Thank you. Operator, back to you for the Q&A.

[Operator Instructions] The first question is from the line of Bhoomika Nair from DAM Capital.

Congratulations on a good revenue number this quarter. I see that consumer segment has done quite well. We've seen a very strong growth trajectory, both on Y-o-Y basis and Q-o-Q. So if you can talk about how sustainable is this number? What is the kind of clientele where you've added clients? Or is it a wallet share gain, et cetera? And also if you can talk about -- you did mention in your opening remarks that exports have seen a bit of softness. So what is export as a percentage of revenues? Are we seeing an improvement in the inquiry levels, et cetera? And then I'll take on more questions if there is time.

Okay. Now answering your last question first. The exports for the 9 months ended December stood at about 34%, which are lower than the corresponding figure of last year. And for the quarter, they stood at about 26%. So there was a significant headwind on the export front, but we are very confident that based on the input received from the customers and the inbound inquiries, the long-term export model remains intact and robust and we expect a rebound to happen in Q1 of '23, '24 in the export front also. Now as far as your question on the consumer growth business is concerned, this is primarily led by our entry into the fiber-to-home devices under the telecom PLI scheme and visibility, which we have received, makes us confident that this is a sustainable -- this will lead to a sustainable growth in this segment in the coming quarters. It's not a one-off growth, but a sustainable growth, and we have also added more technology partners in this segment, which will further broaden the base and derisk the segment from the vagaries of a particular technology partner going down or a customer going down. So we are broadening the base on this front.

Okay. And thereby, the margins have kind of reduced because of this new client...

Yes, consumer as an industry has a lower margins, but it has a positive spin off of a higher turnaround which results in a velocity of capital and sort of that working capital days comes down. So it is a trade-off, but as an industry, consumer is more price sensitive than industrial and export and health care.

Sure. If I may just squeeze in one question on, obviously, we have a decent order book. We're seeing good trajectory going ahead. But any new areas that we are entering new clients that we've backed in the last quarter or so if you can just talk about that, that would be really helpful.

The new areas which we discussed last year also, the growth would be led by the automotive, industrial and consumer. In automotive, the higher traction of growth will be in the EV segment. As we speak, we are very strong into the EV mobility. That is electronics which go into the vehicles. The new segment, which is opening up is charging infrastructure and energy storage infrastructure. Early days, but we are having good inquiries. We're talking to technology providers who can provide solutions for that. So that's one area which we expect that going down the third quarter of this year '23, the energy charging -- the EV charging infrastructure should see a traction which currently is at a very sort of slow momentum. The mobility is very high which is the electronics which go into the scooter. During the quarter, we have been approved by 3 or 4 marquee customers, international customers and we have come on to their global vendor list. These are into automotive, refrigeration and industrial.

[Operator Instructions] The next question is from the line of Nikunj Gala from Sundaram AMC.

My first question is with respect to your material margin, which you have mentioned in the Slide 11 of your presentation where consumer material margin has declined from 45% to 19%. So I understand quarter-on-quarter won't be a right thing, but what was this number from 9 month to 9 month? And any color you can give us like why is there such a sharp deterioration there?

You see the numbers on 9 months I'll ask Bijay and Nikhil to share with you separately. I don't have it right away with me. But the -- sort of the contraction in the margin is that the consumer earlier was predominantly ODM. So the ODM component always has a higher margin and with the [ plain plate ] print to build consumer kicking in, and that value, the percentage of ODMs to the total bucket of consumers has gone down and hence the contraction in the margin.

Okay. So what was the percentage of ODM earlier and now?

Bijay, if you can...

Okay sir. Yes. Currently, my -- for this quarter, ODM percentage is 11% and it was previously 26%. On account of change in this export business, which was an ODM business. So the moment that comes back again, it will be...

Okay, sure. And what kind of CapEx we have done in 9 months, and hence, the -- what is the gross book as of 9 months FY '23?

Bijay will answer that.

So we have done approximately INR 35 crores of CapEx during this last quarter, and this is split into multiple different facilities in our North facility and Southeast facility also.

The question was like till 9 months what is total we have done and like what is the gross book at the end of December '22?

Against those projects, we have spent almost INR 180 crores as of now. And in the upcoming quarter, we are expecting to incur another INR 40 crores to INR 60 crores.

And what is the gross book now?

Gross book currently is approximately INR 600 crores.

Okay, INR 600 crores Okay. And any guidance for FY '24 CapEx, if you can?

For FY '24, we are estimating we should incur somewhere between INR 200 crores to INR 250 crores of CapEx.

Okay. And currently, like, a 9-month basis, what was our utilization levels?

So we have started 2 facilities. One is in Manesar, Gurgaon and another one in Chennai. So the first facility which was initially started, that is going at a very decent utilization of around 50% plus. And the second one I've just recently commissioned that the utilization levels have to be seen on a run rate basis going forward.

Okay. So this INR 600 crore is still at like a gross book which you mentioned, like still a large chunk is still underutilized, right?

There is a lot of room for utilizing the CapEx cycle, which we have done. And it typically takes 3 to 6 months for the asset to come to its optimum utilization. So you're right when you say that the capital investment done so far, is yet to reach its optimum utilization stage.

Okay. When we say optimum, it's like 80% to 90%?

75%, 80%, 85%. Typically, we say 80%, 85% is optimal utilization.

Okay. And then in that case, sir, like the INR 200 crores, INR 250 crores, we are spending in -- we will be spending in '24. Then -- like is there that CapEx is any customer backed or is this the anticipation with which we are working with that CapEx guidance?

Technically, the CapEx, which we do is split into 2. One is the fundamental basic infrastructure, which is a land, building and putting up a facility. And the second is topping that infrastructure with the production equipment. While the first one is done once we find that the existing space or if existing facility cannot accommodate more lines. The second expenditure is invariably incurred once the current assets reach 80%, 85% of utilization and then we stuck the more -- stuff in more lines which are dedicated to expected business inquiries from the customers. It's not done without any visibility of business.

Okay. Sure, sir. And sir, last question, like since we have so many verticals, Import, export, the nature of the contact with the customers varies very differently and hence, the asset turns on the incremental CapEx, which we put becomes very difficult to guess. So as a very thumb rule, what is the structural ROC with which you initially put the CapEx.

See, we tried to get a ROCE of 25% -- 25% overall ROCE. But to say that I'll do this business at start, it could give with this policy. ROCE is very difficult to predict. So on a long term, we plan and we budget and we endeavor to get 25% ROCE from the overall business.

Sure, sir. And like in that, if you can help me, like just breaking down that number in terms of turns and the working capital requirement that would be helpful, sir.

That varies significantly from project to project and new business -- just like the new business which we have recently added, that is giving us a better turn versus my overall average asset turn currently for this quarter is about 5.6x. That is something which varies. But yes, what we expect going forward, the new business which we'll be adding that should give us an asset turn somewhere between 6 to 8x.

The next question is from the line of Pravin Sahay from Prabhudas Lilladher.

The first question is related to your order book. So can you give some detail on the industry-wise or domestic and export mix in your INR 2,100 crores of order book.

See, out of the INR 2,100 crores order book, what we have is the one which is executable within 12 months is about INR 1,800 crores, and the spillover is about INR 300 crores. And on the...

If we talk about export also here, export order book currently stood at around somewhere between 35% to 40%, and the balance is domestic order book that's it. Industry-wise also maybe about 40% is like a consumer sector order book and maybe about 20% plus is what the current order book is there from the auto sector. And then again, around 15%, 16% is like current order book is there from industrial and about 7%, 8% from LTI sector.

Okay. Okay. Great. Second question is related to what you had mentioned about the design-led manufacturing driven growth. So can you explain that?

In the EMS industry, there's 1 build-to-print, which is a vanilla EMS. The second one is where design component is involved. And we have always been a design-led manufacturing company. And going forward, we would be strengthening this design team to a bigger extent so that we can take benefit of the emerging technologies and the emerging business opportunities. So at talent level, senior level, we are strengthening the team. It will be a quarter or so when the full team is in place, and the results should kick in thereafter. So it is a deeper involvement, engagement with the customers, with the semiconductor industry to design products, meeting the futuristic demand of the customer across verticals.

Okay. That's helpful. So what's our target for the ODM contribution in the coming years?

We would strive that the ODM contribution should be a healthy 25%, 30% plus -- 25% plus on the increased top line with the domestic automotive demand and other demand going up 25% of the increased turnover, the resultant turnover, we will -- we are striving and endeavoring and budgeting to have it from the ODM business.

And especially in the consumer segment, you have largely the ODMs?

No. We have ODM, but the ODM in consumer as a percentage of the total consumer sale would be less. Bulk of it is build-to-print, which is the design and product is of the technology provider.

The next question is from the line of Dhaval Shah from Girik Capital.

Great set of numbers and good visibility in terms of margins. Sir, a couple of questions. First thing, the cash balance on the book of INR 800-odd crores. Next year, we'll be using around INR 250 crores from that plus cash flow already generating. How are we going to utilize this money, if you can give some understanding of that? Second question is, given we also have a plan which is under PLI. How will this PLI benefits come to us from where -- from which quarter or which year will it start coming in the P&L? And last question will be, what is the ROCE for the 9 months and third quarter?

Okay. On the cash and ROCE, I think Bijay will come back to you immediately, no. I'll take your questions till then on the PLI. On the PLI, we are -- already we sort of achieved the threshold CapEx and turnover limits. So we are eligible for the PLI. And as for the guidelines, we have to file the application after the close of the year. So the PLI application will be filed after 31st of March 2023. Now when we get the PLI, we get it in Q1 of '23, '24, Q2 of '23, '24 it's dependent on the government. But going by the past trends, I think, in the first half year or maybe at worst by Q3 of '23, '24. The PLI which accrues to us for the year ended March '23 should be with us.

Okay. And broadly, what is the amount?

Let's see, there are still 2 months remaining, but I think it should be -- we are eligible for 5% or 6% of the PLI in telecom. And I think we should be crossing the double digits on the PLI.

Now coming to CapEx thing against a total CapEx of around INR 800 crores, what we are estimating we should be able to use around INR 300 crores in next 1 year towards CapEx and some CapEx related funding can be used thereafter. And about INR 100 crores to INR 150 crores we can use towards working capital. And balance is what we have kept as the general corporate purpose, which we can use as and when depending upon the business requirements. So that's where we are. Coming to our ROCE thing, ROCE for this quarter. If we deduct the overall surplus unutilized funds of IPO and also the goodwill on the balance sheet, my -- ROCE for this quarter is 22.4%. And for 9 months, it will be approximately 21.7%.

The next question is from the line of Chirag Lodaya from Valuequest.

Sir, my first question was just wanted to understand, is there any seasonality between the quarters for us.

See, because we are spread across various verticals, on overall top line numbers we would not be impacted. But within the industries, there is a seasonality and there could be impact on the discretionary spend based on the recession of the inflationary conditions as we are facing in export. But because of the broad base of the verticals which we service in, the depression or a decline in 1 vertical is offset by growth in the other vertical for the top line. But the variation within verticals does have an impact on the earnings and the profit.

Right. No. But what I'm trying to understand is, generally, Q4 is much larger compared to other quarters in this kind of business. So do you also have that kind of scheme or more or less are all quarters are equal?

So -- you see, if we were to sort of split the 9 months gone by, Quarter 1, we had a run rate of about INR 128 crores or INR 129 crores per month. Q2, it went up to INR 148 crores, INR 149 crores. Q3, it is INR 169, INR 158 crores or INR 169 crores. So we expect that it should be around that -- sort of sustaining that thing. But since we are not dependent on too much of government orders, the skewing towards the fourth quarter is invariably when you are dependent too much on the government orders and grants are lapsing, so you tend to ship out bill out in the last quarter. Since we are not significantly present directly in the government sector sales, we don't see this queuing happening because of the quarter. The growth would happen because of the long-term growth. So quarter-on-quarter I'm growing, it will be based on that. Quarter-on-quarter, I'll keep growing.

Right. Right. Right. And sir, coming to next year, looking at the current order book, we feel that order growth rates might not be that encouraging. So just wanted to get sense what kind of growth we are expecting next year?

See, we expect to grow in line with the industry. And industry is expected to grow at a very strong level. So to say that the orders don't justify the growth, I think we all -- we have INR 2,100 crores of orders and the financial year is yet to begin, it's still almost like 50 days away. So we are very confident that the growth momentum and trajectory will be maintained in the coming years.

Right. And on profitability, sir, the current quarter, our profitability was a bit muted. It is to do with mix change, which we have seen in the overall numbers. So going ahead also our mix is more or less be same like what we have seen in Q3. So is it fair to assume our margins would be in the range of 10, 10, 10.5 percentage kind of range?

Let me put it this way that the Q3 gone by has seen headwinds in exports and health care. We expect a rebound of it to happen in the Q1 of FY '23, '24. So, obviously, when the rebound happens, of which we are very confident, the margins would see an uptick coupled with optimum utilization of my investments and the operating benefits setting it, I think all these 2, 3 factors will sort of add to the margins of the company.

Right. Sir, what would be our top 10 client concentration.

Top 10 client concentration would be about, I think...

It's approximately -- currently 46%.

46% or 50%.

The next question is from the line of Sandeep Abhange from Anand Rathi Shares and Stock Brokers.

I had a question related to the consumer segment. In consumer segment apart from fiber-to-the-home what are the other categories which are performing, like, we have also [indiscernible]. So other variable categories also coming overall and we are seeing quite a good shift from China to India, the overall manufacturing facility. So that's -- I wanted some color on the consumer revenue.

The consumer business broadly is led by the fiber-to-the-home telecom, the variables, as you rightly said, control for water purification. These are the ODM businesses, control for the energy-saving devices, the brushless DC motors. We have got big traction and a large order from our leading company in the country for our own design products. So these 3, 4 categories in the consumer segment would lead the growth.

Okay. Okay. And, like, I wanted some color on the Healthcare segment, like as you said, that it will come back in the next quarter. So in health care, overall, what is the breakup like domestic and exports and are you facing any difficulties from China, like as you are aware that China has started to recover and they have started dumping medical devices products in India. So what is the overall scenario in health care? Are you facing any difficulties like what are the exact difficulties? Can you put some details on that?

See, on the health care front, it's a predominantly export-led business. So very little component in domestic. And what we supply is a solution to the customer. So it's not a commodity, which we are supplying. It's -- at the end of the day, it results into a commodity, but backed by an engineering solution, which is going to the customer. Now this is facing a bit of sort of a slowdown because of inflation, recessionary conditions and reduction in the discretionary spend of the customers. This health care products what we supply the solutions which we give are most life savings that it is mandatory for the consumer to spend. These are discretionary spends. And hence, we are seeing the sort of slowing down of the business in the Western world because of recession. We really don't see too much of -- competition would always be there. But we're being threatened by competition from China or their dumping because it's not a sort of what you call, sugar analyzer or [indiscernible] , pulsometer and all those things. These are solutions which we have provided to the customer -- customized solution.

The next question is from the line of [ Varun Mohanraj ] from [indiscernible] Capital.

So in the previous call, we mentioned that we are looking at inorganic expansion and forward expansion into box build assemblies. So can you throw some color on it, like, what is our existing business in this box build assembly section? And also, when we move forward with inorganic or the organic train to box build assemblies, will our margins go higher, probably like our peers, which are in the mid-teens for the EBITDA.

See, as far as the inorganic thing is concerned, it's a work in progress currently, and we have nothing concrete to share with the industry in the market. We are evaluating continuously and as and when something would materialize, we would come back to you. The current box bill as a percentage of my total sales is hovering at about 14%, 15%. Once we go into a box bill depending upon the industry segment, which we go into. It does have a positive ramp-off on the margins, but much would depend on the industry vertical where we go in. Because, for example, if it is appliances, it's not a significant, where it is a very sort of -- very less in raises in margins. We are not planning to go into them. But would -- the margin profile would depend upon the industry vertical where the box bill is supplied.

Okay. So can our existing ODM as well as the PCB business integrated into the box build? Or will it be a separate kind of business?

It is the same facility fungibility line. And typically, what happens is, a, we could get a box build right from day 1. And, b, is we start off with PCBA and then gradually migrate up the value chain to end up supplying a box build product. And that's been what we've been doing for the last N number of years that when we enter a customer, it could be a bit above PCBA. But if that PCBA was to go into a final box build and not part form of a big machine or equipment, then we sort of go up the value chain to supply the box build product.

Ma'am, can I just...

Sure, sir. Please proceed, sir.

This is on the question which the follow-up answer. In the inorganic, as you had asked -- yes, we are looking at inorganic things as Mr. Gujral said, and it's a little early. But whatever inorganic we'll do, it will definitely increase the margins. That's how we are targeting inorganic. And in terms of the order book on the earlier question, which was asked -- if you see earlier, the order book was about INR 1,700 crores, which is now INR 2,100 crores. So not only the actual order to conversion is happening at a faster pace. Also, the order book keeps on increasing. So it's -- you cannot look at -- in isolation, the order books that INR 2,100 crores will not get us into the kind of growth which we are looking at.

The next question is from the line of Nishant Sharma from Nuvama Wealth Management.

Congratulations for good set of numbers, sir. Two questions from my side. One question is related to margin on the ODM and OEM business. What -- if you can throw some light, like, what would be the differential margin between ODM and OEM, that would be great. And second question would be around the status of the PLI. So if I'm not wrong, we have 2 PLI, one is in the telecom segment, where we have scaled it up very well. And other is on the white goods space. If you can throw some status, some guidelines on what would be the threshold in terms of CapEx and in terms of revenue and incentive percentage, that would be helpful.

Okay. For the PLI part, I'll take the second question first. As I already confirmed that we have crossed a threshold limit for CapEx and turnovers in the telecom PLI, and we are well on our budgeted figure numbers, which we had planned at the start of the year and once we have shipped with the government. On the air conditioning or white goods PLI, unfortunately, we have not started off the CapEx cycle. The CapEx cycle is 10 years per year, INR 50 crores over a period of 5 years and resultant turnover, I think, 5x CapEx is the turnover which you have to do. We are supplying air conditioning control board to some companies, but the quantities are not large. Our old design boards have been supplied to a couple of customers, and they are still under validation. The investment cycle for this PLI would kick in only when the ODM boards get approved, that as of date, however, if we were to get a quantum jump in the air conditioning business, on build-to-print, which means the design of a customer or a technology provider, then the CapEx cycle would be set in, but as of date, it is on sort of a slow trajectory. Now on the first question, which you said, the delta between ODM and EMS, well, it is superior in ODM. And what superior number it is, but again, depends upon the vertical which we supply to...

I understood, sir. So basically, I was looking at that because are the consumer segment, which is a low margin would be scaling up much faster and would have a share of like 50% the consumer segment. So will there be any scope of like 100 to 150 basis point kind of a jump in the EBITDA margin going forward? Is that a possibility? So I was just looking at from that perspective. And on the PLI side, just to reconfirm, for air conditioning, it's INR 50 crore over the period of 10 years.

So INR 50 crores over a period of 5 years. CapEx, INR 10 crores per year. And telecom, it is INR 20 crores per year.

Approximately.

Approximately. The threshold limit is INR 20 crores, you could spend more. In telecom the threshold limit is INR 10 crores.

So for this year, we have spent INR 20 crores on the telecom side. And we are on that same trajectory going forward also?

Yes. Yes. Yes, please. And business will form 50% of our turnover that I think that is not correct. We don't see consumer forming 50% of our turnover.

So current order book, 40% is consumer, right? The INR 2,100 crores breakup which you have mentioned?

Approximately 35% to 40% is yes. So it will be that in that range only, total consumer business.35% to 40%.

The next question is from the line of Dhananjai Bagrodia from ASK Asset & Wealth Management.

First congratulations on a good set of numbers, but this is a question in relation to your previous answer. When you mentioned health care, for example, is more solution based. So just to understand more about this. Does it mean that there's some part of this business, which is revenue accretive regardless of any orders? Is it sticky? Or does it move in tandem with orders? How does this part work when is a solution based to a client?

See, when it is a health care business, which we are into is essentially a solution-based product which are supplying to a customer. And that customer is seeing a slowdown in demand because it goes only into the Western world. It's not for the developing countries or this part of the world. Because of the inflation -- uncertainty because of the Ukraine war, the energy crisis in the West, and inflation, which this generation of West, whether America or Western Europe has never seen in their a life of inflation rate of 7% to 10%. So the discretionary spend has taken a big hit, a big knock. And hence, the slowdown in the products which we supply to our customers, they are more not lifesaving, as I said earlier, they are more lifestyle and health care products which go into the thing. Hence, this is facing a headwind. And as I shared earlier, I think, by Q1 of next year, we expect a rebound to start kicking in and expect to attain over previous levels going forward.

Sir, I understand that and how does it work in terms of solution base? Does it move in tandem with the order place? Or is there some part of it which is sticky and you get revenue for that regardless of how much...

We have developed the solution if it has a life of 10 years or 5 years. So the product -- so it depends on the product life cycle. So once we have provided a solution, the orders will keep kicking in until a new product is developed. And once we are with the customer and if you have serviced the customer well and we have done that, over the last 4, 5, 6 years. So it's much natural that any new development of a product which comes in from the customer, we would have a head start, and we would be the preferred choice for the customer because we have serviced that customer very well over the last 4, 5, 6, 7, 10 years. So that would be adding to the portfolio of the products or the replacement of the existing product.

Okay. And sir, I know this one is a little tougher. But is there any part of a business which we couldn't consider, let's say, there's a global slowdown in all your segments, is there some part of business which you could stays sticky, which will you see minimum revenue regardless of how much turnaround, let's say happen, like, now, we say auto industrial is doing really well in consumer, but some automobile companies are saying that they are starting to see slowdown. Would there be any part of our business which we could see as sticky?

See the stickiness of the customers is evident that we have customers who have been with us for 30 years, 20 and 15 years and we are growing with our customers. The wallet share is growing with our customers. Now in the very unlikely situation of a global recession like 1930s, whether that is a macro level thing which will affect everyone, and it depends how much less we can be affected by. But to say that will not be affected by a global recession unlikely though, if it was to set in, I think would not be correct. But based on our broad profile of products and regions, geographies, we believe that we are well placed to face any such headwinds. The fact that despite exports in Europe and America slowing down, we have still been able to grow at 50-odd percent for the 9 months and 73% for quarter on is a testimony of the robust business model which we have in place.

And sir, lastly, on the last part -- last question on PCBA, what could help us leapfrog in terms of making PCBA much larger portion of our revenue and how are we going about that?

See PCBA still account for about, I think, 70% or 70-odd percent of core revenue.

Okay. So in terms of, let's say, us, what this consumer business -- PCBA for consumer -- different types of industries. In consumer, obviously, PCBA would be lower margin. But for that to -- is there any way that we could see that in terms of margin increase if we do anything more value add? Or is that a fixed across the board?

See we have our industrial -- we have our business model set in and fixed we will be concentrating on different industry verticals and we'll not be skewed towards a particular vertical, whether it is automotive, whether it is consumer. We'd like to have a healthy mix of all the verticals. Now if consumer -- if you are referring to, say, mobile phones, where that's a separate thing. And as of date, I'm not saying that it's a no-go forever or it is -- as of date, we have not at all sort of -- we're not evaluating going into that segment because there are good players in that line, and we don't see that we'll be able to give any value add. See unique selling -- unique proposition, which we offer to the customers will give them a value add. If I am also one of the manufacturers of a particular thing, then, well, that's not our DNA.

The next question is from the line of Smitesh Sheth from Raedan Securities.

Sir, just now in the opening remarks, you have mentioned there were audits conducted by some of the marquee customers. So which segment they are into and how much time does it take from audit to order finalization or a placement stage?

Okay. Now the segments where we have been audited by our IT, telecom, automotive, industrial. Industrial is again a broad spectrum. It could be renewable power. It could be refrigeration, it could be anything. So it is across the industry verticals. Typically, from the time when the audit is conducted and should the business materialize it is a cycle of 12 to 18 months for volume production to kick in. So whatever audits have been done in Q3 of FY '22, '23, that is up to December, the business of this would come only towards the end of '23 or financial year, '24, '25. So whatever audits were done in '22, the business has started kicking in now. So this is an ongoing process. When the new customers come in, it takes 12 to 18 months for volume production to start.

The next question is from the line of [ Suraj ] Navandar from Sampada Investments.

So I joined the call a bit late, so the question might be repetitive. But I see that exports revenue has fallen to 26% of our revenue from operations. So do you expect it to stay at lower levels? Or do you expect to bounce it back to...

Sorry, what you said exports?

Exports revenue has fallen to 26%...

Yes. Yes. The export revenue has fallen to 26%. That's what I shared in the opening remarks. And we are very confident that it will rebound, kick back in Q1 of '23, '24 and then gain traction and momentum thereafter. And we expect that next year, we should be back to whatever percentage is, which is about 30%, 32% earlier. If everything goes as it is and if there are no surprises across the world, then the exports should rebound and will rebound.

Sir, currently, if you look at the rest of the world situation, it looks they're going into a recession in a slowdown. And India in all of that looks a very bright spot. So why don't we -- why are we not focusing more on India, do we get better margin for exports?

No, no, no. See again we are the growth -- that's what we said in the beginning, the growth in the current thing is only coming from the domestic demand. So it's not that we are looking at export versus India. It is export plus India. And we are geared up to cater to both the markets. So it's not that sacrificing growth in India. We are bullish, and we are very aggressive on achieving greater market share for the verticals, industry products, which we are in. So India would continue to be one of our prime focus area. I think it's a wrong perception. India is one of our prime, what we call focus area. But it's not domestic versus exports. It is domestic plus exports.

Right. Right. And sir, let's say, if at all increase -- the global markets doesn't rebound as we have expected. So we should be able to fulfill that void with Indian business, right?

Yes. Yes. You see, again, despite exports coming down, we have still achieved what we had set out at the beginning of the year. And based on the inquiries in the imports and the dialogue with the international customers, it's only a question of time, maybe 1 quarter, 2 quarters before the export traction gains momentum and comes back to its original form.

And sir, do we get any better margins in exports or is at the same level as domestic business?

You see exports has 2 advantages. One, it provides us a natural currency hedge because electronics we have all 60% of the cost of materials is imported. And second, yes, export does have a better margin.

Okay. And sir, how is the semiconductor issue right now? Do we have a very smooth -- how is the semiconductor issues right now? Do we have a really smooth supply?

Yes. The semiconductor components have eased now. But microcontrollers continue to be a challenge area because passive components at least because of wider manufacturing base whereas microcontrollers and the active components have a smaller manufacturing base. There would be a handful or 2 handful of companies making all those things. And bulk of the semicon is being done by Taiwan semiconductors and Samsung, they control about 85%, 87% of market share of semiconductors. So easing in the passive components, but challenges remain in the microcontroller and active components.

And sir, till when do you expect this to normalize? Or is it difficult to say?

It is difficult to say. It's very difficult to say. But with the way the passive components have eased, we believed last year that it would be easing out by maybe middle of this year. Maybe another 2 quarters from where it should ease out. But that only necessitates long-term planning. The growth has come despite the shortages.

Right. And sir, how is the freight cost behaving now?

It has slightly softened. It slightly softened. The container availability has also eased out a bit and the freight costs have also eased out a bit. They were not what they were middle of last year or third quarter of last year.

The next question is from the line of Saurabh Mehta from East Line Capital.

Yes. Sir, I would like to just understand the box build business better, like, what is our current revenue mix from the box build? And do we see it reach in the coming years? And also I want to understand our manufacturing capability in terms of box build, like, are we vertically integrated? Or do we plan to be given it's not our key strengths, so we want to depend on outsourcing for this -- and does it -- like in terms of box build versus a plain PCB, is there a big differential in terms of margins? Because what I see is our key competitors, they have a mix of over 30% box build and they make margins at 14%, 15% and -- so just would like to get your perspective on this.

Now box build as a percentage of our total sales is about 14% -- 14%, 15%. On the capabilities, we have full capabilities for the box build. When I say full capabilities, it may not be announced, but we have got long-term contracts, dedicated vendors for sheet metal and plastics which go in for a box build. Putting up a plastic molding line with the tool room is not a big deal, but the volumes have to justify the investment over there and the management bandwidth which it will take. But we have got dedicated vendors with whom we have been working for the last decade, 2 decades. And we have had no -- faced no issues that because of lack of in-house facility the business is suffering. Should that be the situation, we would evaluate and go in for the backward integration. But currently, since we are not facing any challenges because of that, we would continue to work out on this model. Now box build versus PCBA, the volume value goes up and slightly, the margins in absolute terms also go up.

Yes, yes. So basically, you're saying box build would definitely -- there will be better margins in that business, right?

Yes. It has a superior margin than vanilla PCB. It does have superior margins than a vanilla PCB because once we make a box build, then it doesn't go into the factory of the customer, it goes directly to the warehouse of the customer and to the ultimate consumer. So, obviously, what the customer is doing at his end, we are doing at our end. And if there's a differential cost strategy, it does result into a superior margin.

Got it. And sir, in terms of box build, what we do currently, like, [ 15%, 16% ] what are the kind of products are we doing? Are we doing more hiring products? Are we doing more consumer products.

We are primarily doing industrial products. We would be the power supplies, which are going in for data centers or what you see at the airports and all those things, the door openers. We do point-of-sale printers, which is again industrial or a consumer application. It's not the normal printer, which we install in the house. There are a bit more sophisticated fiscal printers, which are having a lot of software in it based on the VAS structure of the country where they are exported. So these are the 2 sets, which we currently do. One is the power supplies and one of the some controllers we do, which are box build and point-of-sale printers are box build.

Right. Right. And, sir, probably repeating my earlier question, but is there any reason why there should be such a big differential in terms of margins between us and competition given we are almost serving similar kind of customers, similar work, probably their box build is probably slightly higher -- but is there any reason for such a big gap in terms of the margin profile?

I can see for myself, honestly. We are in the business, and we are in the marketplace and we know what prices are available. So we standby the numbers which we have shared. I really cannot comment. I'm not competent to comment on the numbers of anyone else.

Right. Right, sir. But given in the call previously, you mentioned about increasing your capacity utilization and efficiency, we can also reach double digit like at least 12%, 13% kind of margin, say, in the coming years, right?

What we have been maintaining all through is that we'll be at double-digit -- lower double-digit margins on a sustained long-term basis. Short term, because of the CapEx cycle, which has been set in because of front loading of expenses to make the organization future ready, there could be certain sort of a depression in the margin, but we continue to believe that on a long-term sustained basis, we should be at lower double-digit margin.

Sir, last question from my side is on the clean energy space. Are we doing -- like are we under discussion already doing something on the hydrogen space, solar space for some U.S. clients? Like are we already under discussion or already doing something for them, doing some technical like more complicated box build products?

We are already supplying controllers to renewable energy companies. They're all export-oriented. As I shared in the -- my opening remarks, that electric charging infrastructure and energy storage. These are 2 upcoming cycles, sort of verticals which will -- we believe, will see a lot of traction going forward, maybe not 1 year from now, maybe 2 to 3 years from now, energy storage would be one of the biggest growth drivers in the sector. And we are currently evaluating and in discussion early days. We'll share some if some -- if we get some breakthrough. On energy part, energy conservation and energy efficiency would be another thing because of the green goals that the government of India has set in. And we are well placed in that with our own design on controllers for brushless DC motors for the fans and migrating it to other applications.

The next question is from the line of Chirag Lodaya from Valuequest.

Sir, just one clarification. You mentioned our order book is at around INR 2,100 crores and 35% of the order book would be export and around 65% would be domestic. Is that fair understanding?

Yes. Broadly, yes.

Yes. So sir, on this basis, if you see, domestic revenue, which we would have achieved, we are almost on that run rate. So how to look at the overall numbers. Basically, I'm just trying to understand what kind of growth we might achieve in domestic because domestic this year has been exceptionally well and current run rate is also pretty high.

We are very bullish on the growth of domestic business, fueled by sectors across verticals led by automotive and consumer and other. Long-term our objective and our target is to be in the 30%-plus range for exports going forward for a long-term sustained basis. Quarter-on-quarter, they could be same because you see, we don't play business quarter-on-quarter. We are more focused on building an organization, which is sustainable, scalable and profitable over the long run. So these are the 3 parameters which we work on. A sustained growth, scalable growth with profits. Short-term hiccups would be there. It's a business environment. So we are -- while we are cognizant of this fact, we are not too much worried on the quarter-on-quarter basis as long as our focus on the long-term building a model which can withstand the long-term vagaries of business cycle, that's our endeavor.

Also just to add this order book, which we are discussing, that is something to be fulfilled in the next few months, next quarter or majority part of it in a way. So it's not like in the next full year estimated volume, something like that. The majority part of it has to be fulfilled in early next few months and quarter.

So you mentioned that INR 1,800 crores is the order book, which has been executable over next 12 months, right? So on that basis...

That is depending upon the total orders of this thing, but again, that's just the outer deadline of few of the orders in that thing. A majority of those order book has to be fulfilled in the next 2 quarters also.

Just to add on, last quarter, we had an order book of INR 1,700 crores. Last quarter, we did about INR 500 and INR 524 crores. So if INR 1,700 crores minus INR 500 crores just for the sake of rounding of it, INR 1,200 crores, and INR 1,200 crores to INR 2,100 crores. So INR 900 crores is a fresh intake. So that, as Mr. Jayesh Doshi had stressed very correctly the final thing that despite a higher run rate of execution, my order book has increased by almost like 25%, INR 1,700 crores to 21% is almost like 21%, 20% to 25%. So we are very bullish on the entire thing.

Got it. Got it. Clear, sir. And on, sir, exports are we adding any new client, et cetera? Or this is existing clients will see rebound in growth?

Both -- exports are both new clients and existing clients. In existing clients, we could meet sort of expanding the portfolio of offerings for them.

Right. And just lastly, 9-month FY '22, if you can give us export share. So this 9 months is 34% versus what could be last year?

Last year, it was about 46%.

Ladies and gentlemen, that was the last question for today. I would now like to turn hand the conference over to Mr. J. S. Gujral, Managing Director, for closing comments.

Over to you, sir. Thank you. Thank you, ladies and gentlemen, for participating in this Q3 earnings call. I would just like to conclude that as management are focused on building -- I just said in my earlier comments a short while back, on building a sustainable, scalable, profitable organization which can withstand the vagaries of business cycles. Quarter-on-quarter is critical, but we are more focused on the long term. And we are building more capacities, building our management team that we have professionally one ethical company which serves not only the business stakeholders, but also the society so that all our skills are also focused on making the world a better place by energy conservation, green technologies and all those things. So we are bullish on the long-term sort of growth story not only of our company but also of the country. We believe we have now reached the threshold, the cusp where we can see accelerated growth in the quarters and years going forward. We would and there were to be the preferred EMS partner for anyone who wants to look at EMS as a service in India. Thank you very much.

Thank you sir. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.