The Anup Engineering Limited (ANUP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of The Anup Engineering Limited. [Operator Instructions] Please note that this conference is being recorded. Before we proceed to the call, let me remind you that the discussion may contain certain forward-looking statements that may involve known and all unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risk that could cause actual results, performance or achievements to differ significantly from what has been expressed or implied in such forward-looking statements. Please note that the company have uploaded the results press release, investor presentation and also the outcome of the Board meeting on the website of stock exchanges and the website of the company. I now hand the conference over to Mr. Nilesh Hirapara. Thank you, and over to you, sir.

Good evening to everyone. This is Nilesh, the CFO at Anup, and we have our CEO, Reginaldo Dsouza on the call with us. We have clocked a revenue of INR 139.8 crores, an EBITDA of INR 31.4 crores in this quarter, which is 22.4% of revenue. Retail in clocking revenue of INR 265 crores and EBITDA of INR 59.4 crores in H1. PAT remains at INR 21.7 crores, that is 15.5% of revenue in Q2, whereas in H1, PAT is at INR 40.30 crores, which translates to 15.2% of revenue. It gives us immense pleasure to inform you that on H1 current year versus H1 last year, revenue from the operation has grown by 73%, EBITDA has almost doubled and PAT has increased by 122%. Our ROCE for the quarter is at 23.6%, whereas return on equity is at 18.9%. On the balance sheet front, net cash is INR 59.50 crores, which is net of debt of INR 45 crores. Working capital terms achieved during Q2 is 3.5x, mainly on account of reduction in the receivable and higher receipt of advance from the customers. With this update, I would like to hand over call to our CEO, Mr. Reginaldo Dsouza, to give you update on the operations and market before we open up our session for the question and answer.

Yes, hello. A very good evening and a good day to all, and warm greetings from team Anup. We are glad to be part of this call to present our quarter 2 results and overall performance. I must say the team at Anup has executed the plan very well so far into this year to ensure we post a good performance in Q2 and H1. So my sincere thanks to all our dedicated and committed team members, our partners, our suppliers and all our shareholders for standing by us and trusting the brand Anup. So let me take you all through the performance into Q2 and H1. So on the revenue front for H1, as mentioned by Nilesh, we have posted a 73% growth to clock a revenue of INR 255 crores INR with a decent EBITDA of 22.4% at INR 59.4 crores INR, which is almost double of last year during the same period. Also, as mentioned by Nilesh, all the other parameters on working capital, cash flow and financial ratios have been very encouraging in quarter 2 and H1. On the industry that we served in Q2, oil and gas and petrochemicals still holds a dominant position at 82% of our revenue. Fertilizers came in second at 17%, which also includes our business for hydrogen projects. On the product portfolio side, heat exchangers still maintains the dominant position at 76%; and reactors, vessels and columns at about 21%. Now as I mentioned earlier, also in last call, this will see a change as we move ahead in time as our Kheda plant starts dispatching equipment because strategically, Kheda will be manufacturing all vessels, reactors and columns. So obviously, we see this percentage mix changing and vessels and reactors taking a little higher percentage as we grow and move in time. Exports, which is another strategic focus for us, at the level of H1, it stood at 15% of our total revenue. And as guided earlier, we should touch an export revenue of approximately 30% in this financial year. This is based on the order booking in hand and our dispatched plan for into quarter 3 and quarter 4. So we should be comfortably at about 30% exports of the revenue for the year. On the order booking side, I must say we had a very good run. At the end of Q2, we had a total of approximately INR 355 crores towards the new orders booked in this financial year, which translates into a pending order book of INR 630 crores as on H1. Carrying on with this momentum, this month, I must say, has been an outstanding month for us, that is the month of October. We booked about INR 243 crores worth of new orders this month, INR 243 crores. This is historic and the highest ever that we've booked in a month. So as we speak now, we have clocked approximately INR 598 crores worth of new order booking in this financial year so far. And interestingly, 55% of them for exports. So this is another important factor of this new order booking. And also, I must say a good portion of it is booked for hydrogen projects. So this signifies our presence on the journey towards the energy transition and our hydrogen economy across our global projects. So this new order intake means a pending order book of INR 873 crores as on date. This is the best we ever had. So INR 8-7-3 crores as on date as we speak. So considering our plan for this financial year and if you put the numbers together, as of today, we would have approximately about INR 590 crores, INR 5-9-0 crores of orders to be executed in the next financial year FY '25. And we are still counting as we have some good prospects in the coming months. This means well for us and perfectly in line with our growth plan of 25% to 30% in the coming year. On our new manufacturing facility at Kheda, I'm happy to state that we have dispatched our first equipment from the plant in Q2 as planned and on time. So it was a large piece of equipment being about 200 metric tonnes for an export order for a customer in Jordan. So Kheda now with this moves full steam executing orders for the coming quarters. And I'm also happy to say that good part is that we have over INR 100 crores order fully booked for the Kheda plant. So that means well for this new facility, which we commissioned and inaugurated in the month of June. I'm also happy to announce that we have expedited the decision on adding capacity at Kheda. We have decided to extend one partial bay, which was built in Phase 1. So we are going to complete that bay. So if you remember, we have built 1.5 bays, manufacturing bays, of the total 7 bays that we had planned at the macro level. So that 1.5 bays, we are going to now complete the 1/2 portion and complete 2 full manufacturing bays. The plan is to make this operational in early Q1 of FY '25. So by March, April is where we are going to complete the construction phase and start and commission this extension of the existing 1/2 bay. This means we will have 2 full manufacturing bays as against 1.5 for the next year. So for this, we need an investment of approximately INR 15 crores, and we have a plan to complete it within the next 5 to max of 6 months. We are also making some good moves on sustainability initiatives. We have started on the project of rooftop solar at our Odhav plant. With the commissioning of this plant, about 50% of our power utilized will be from renewable source. This will be a good move, and we will continue on this journey of getting our power utilized from renewable sources. Also, at Kheda, since we have a large land at Kheda, we have started our forestation project at Kheda in the open land available to create a green belt in our quest to offset our carbon footprint and contribute towards our sustainability initiatives. So all in all, to conclude, we had a very fruitful first half of the year, and the momentum created with a good order book position, means well for achieving the growth plan of 25% to 30% for this year, that is FY '24, and also sets the stage for a similar growth in the next financial year, that is FY '25. Having said this, we are also aware and cautious of the current geopolitical uncertainties, elevated oil prices and also volatile economic outlooks in various parts of the world. But I'm confident that with a good business visibility into the next year on account of a strong order book and order pipeline already on hand and at the strength of a strong execution team at Anup and with the support of our reliable partners and suppliers, we will be able to deliver on plan. So with this, I end my remarks and comments on the performance of Q1 and H1, and we would be happy to open up the session for Q&A.

Thank you so much, sir. [Operator Instructions] The first question is from the line of Abhishek... So the first question we have is from the line of [ Abhishek Agrawal ] from [ Naredi Investments ].

Congrats on the good set of numbers. Sir, I have 2 questions. First question, what is the reason for lower the cost of employees and other expense in Q2 compared to Q1 FY '24?

So in -- as we speak in the Q1 call, there were certain variable incentive portion of last year, which were taken as a provision in the last quarter. And from this year, we have made a policy wherein the variables they're likely to be paid at the end of the year, which will be provided in each of this fourth quarter. So that one-time hit which we took last year, that is the reason why employee cost was higher. And the main reason for the reduction in other expenses is the royalties. In the last quarter, there were certain [ exits ] which were subject to the royalty, whereas in this quarter, the expenses which are subject to royalty is very minimum. That is the reason why there is a reduction in the other expense in this quarter. Nonetheless, we would like to tell you that the royalty which we are supposed to pay on the product is already built in the cost. So it doesn't impact our profit beyond the point.

So for the yearly basis, what will be the other expense?

Just a moment. Can you repeat your question?

So the yearly basis, what should be the other -- total other expense in FY '24?

This would be in the line of Q2 only.

Okay. Okay. And second question, this announcement net profit margin you attained in Q2 and H1 FY '24 is sustainable and this kind of a 15% net profit margin will be maintained for next 2 to 3 years?

Yes.

[Operator Instructions] The next question is from the line of Abhineet Anand from 3 P Investment.

Yes. Just wanted to understand our -- the role in the hydrogen part that you were talking about that some of the orders that you've got in the international market is -- so what exactly are our roles in this hydrogen part?

Yes. So hydrogen, as we know, it broadly has 3 aspects. One is the generation side; one is storage; and transmission. When we speak about, say, for example, green hydrogen, on the generation side, we do not have any role per se right now because that's more on the electrolyzers and generation using green electrolysis process. Where we play a role is in storage and transmission of the hydrogen. So today, we are manufacturers of static process equipment. And those are the equipment that are used for storage and transmission of hydrogen. So broadly, even today with our capabilities and capacities in place, we are able to serve customers for hydrogen business, and we will continue to do so in the future. So broadly, a direct answer to your question is it's more about storage and transmission using static process equipment that we build. So it's not a different product portfolio for us. It falls in the existing product portfolio bucket.

And I mean, is it possible to state like, for example, over the next few years, how important can this segment be? Like clearly, although we are at x percent, which might be small because it is initial time, and over the next 3 to 5 years, can this become a significant opportunity for us?

Yes. Surely, it's already becoming a significant opportunity. So as I mentioned, the current order booking that we had, a substantial portion of it has come from hydrogen projects for exports, largely in places like Louisiana, U.S.A., and Canada. So we see a lot of hydrogen. But yes, of course, we don't see as many green hydrogen projects, but the blue hydrogen, which is probably the intermediary stage, 'til such time that the green hydrogen really picks up because I think on the green hydrogen side, the cost would be a major factor. Today, we see anywhere -- based on the information available, the cost is anywhere -- the price is anywhere between $6 to $7 per unit. And what it will make affordable and then a mass demand would be somewhere around $1.5 to $2. So that would take some years, but I'm sure intermediate 'til we reach that stage, blue hydrogen will be the path forward. And a substantial portion of it is coming from hydrogen projects for us today.

And any green shoots you have seen on this side in India, sir?

You mean to say on the hydrogen projects?

Yes, yes.

Yes. So there are a couple of projects which are being initiated. Of course, it's not at the same scale as we see abroad, but there are pilot projects which have been announced. And we see this taking and picking up in the near future. From our perspective, from the Anup perspective, we are ready. It's the same product portfolio. So it's just about getting the inquiries, quoting and winning the projects and executing.

[Operator Instructions] The next question is from the line of Bharat Gupta from Fair Value caps.

Congratulations for a good set of numbers. Sir, a couple of questions from my side. So when I look at the overall space in terms of the CapEx intensity, which lies in the domestic space, so definitely, there has been some sort of a slowdown if I look at the chemicals space in there. So how do you read? Because I believe INR 4,000-odd crores of bid comes on an annualized basis. So are we seeing that kind of like slowdown getting impacted to us in a way in the domestic space?

Yes. So on the domestic side, yes, on the refining and petrochemical side, we are not seeing the same drive as we saw last year because there are some projects which have been announced and yet to take share. But they are in the preliminary stage of getting along with the project. What we see is a lot of projects which are coming up on the petrochemical side and also in -- especially in PVC, polysilicon and PTA plant. So there are a lot of projects on the cards now. And as you remember me talking about why do we want to spread -- have the geographical spread to be focused on exports as well, this was a precise reason because we have seen this nature of CapEx is cyclical. Of course, we are in the best CapEx cycle right now and are stretched on too. But it is going to be significant in nature. And that is the reason the geographical spread is extremely important, so that it does not impact our business going forward. And that's where we have a good mix now of domestic and exports, and that would protect the growth going forward.

Right, sir. Sir, just on the export bid because I believe our strike rate in the domestic space is near about 30-odd percent. So how are we placed in terms of the export orders which we get? What would be a strike rate in that?

Strike rate, in a sense, do you mean quarter conversion rate?

Quarter conversion rate. Right.

So we are in the region of 15% to 20% average strike rate. And we wish to keep it at that. As I mentioned earlier, too, it is all a factor of the profitability that you on. You can improve your strike rate by taking orders at a lower margin, which is not the strategic intent that we have. So based on the experience and based on the inquiry bank on the table today and what we see in years down the line, we feel 15% to 20% conversion rate is a good strike rate for us to maintain growth as well as profitability.

So in a way, if I look like overall in terms of the margins, EBITDA pertains to that, and that will be comparable to the one which we enjoy in the domestic market?

Exports will be comparable. In a sense, when we book the orders, we don't see much of a difference in the margin profile, but yes, exports do benefit us from the perspective of better working capital because advances are much better as compared to domestic orders. And also more than often, we are conservative on the ForEx side. So when we actually dispatch and get our money, we tend to benefit out there. So like-to-like at the order booking stage, there would not be a substantial difference. But once they kick into execution, our export orders do help us as compared.

Right. And sir, when -- last time, when we are discussing, so probably we were thinking of adding new like titanium kind of a coating. So that gives you an edge in terms of your predicting the margin side. Because we are clearly about 20-odd percent. So in a way, going forward, do we think that because hydrogen would be one which will be contributing a major part of revenues going forward? So there, the margins will be remaining on a similar sort of a trend, and it will be more of a premiumized kind of a segment for us?

Yes. So as I mentioned, our strategic intent is as we grow to maintain a 20% plus kind of an EBITDA range, that's what our intent is. So it is all about making choices. And currently, also, the orders that we are booking in the hydrogen space and elsewhere, we are choosing products or we -- or in other words, we are going aggressive on products and orders where we get a better product mix in terms of higher metallurgy. So with the -- for the same kind of churn and execution on the shop floor, we tend to get a higher realization in terms of revenue and EBITDA. When I say EBITDA, it's an absolute EBITDA from executing projects with higher metallurgy. So we see that trend going, and that is clearly a differentiating factor for us going forward because arbitrage will not work for too long. So we have to differentiate ourselves and create our own USPs by having more fast-track records on executing critical projects. So we will be strategically going more deeper and more wider into the product segments.

Right, sir. And just a last one. What would be a time line for the execution of the current orders which we have received over the last 6 months? And we aspire to become a INR 1,000 crore top line company, so do we -- like, is that 25% kind of a CAGR growth is sustainable over the next 3 to 4 years?

Yes. So the answer to your first question, as we speak, all the orders that we have booked is within the realm of FY '25. So we've got deliveries until 17 to 18 months. So it falls exactly into the end of FY '25. So whatever order book that I mentioned, will all be executable by the end of FY '25. Sorry, what was the follow-up question on that?

Yes. Sir, just wanted to check, like in terms of our aspiration to be a INR 1,000 crores company in terms of the top line. So are we like -- do we see the momentum to remain on a positive side, we want to grow at 25% CAGR over the next 3 to 5 years?

Yes. So our growth guidance remains the same that we want to grow at a 25% to 30% growth rate. And as I mentioned on the order bookings this year, it has been quite encouraging. And we see this momentum going forward with the right choices made from our side.

All right. Sir, just the one question, particularly, just a follow-up on the export base. Given now the competitive intensity, so like what means a key mood out there in the export side? Is it just primarily on the cost side? Or is there something where we have the expertise in the product design? So what, according to you, has been the key mood and the key reason why we have been able to receive a good order from the export side?

Okay. So the primary requirement in export, of course, we're being supplying equipment, which are customized and high on technical nature. Getting qualified technically, of course, is the primary requirement. But assuming that we -- the competitors are all qualified and capable of getting the bids and quoting for it. Next, of course, price is a determining factor today because budget is a big, big constraint. But having said that, I think what we are seeing in export is also more on reliability and a good experience in terms of the way companies do business. So we have seen many repeat customers coming to us just because we had -- they had a very good experience working with us, especially on the way we execute projects on time, and of course, without saying quality is a high win for them. So largely on price, yes, that's a critical factor. But added to that, I think a good cost experience and reliability in terms of supplying equipment on time is a critical factor. Because as we said, our products would be a few crores, but the customers' projects would be $1 billion. So a lot depends on our timely delivery of equipment. And I think that's the USP that Anup has today.

The next question is from the line of Nitin Gandhi from Inoquest Advisors Private Limited.

I just wish to understand the dynamics of adding bay. I would appreciate the decision to have 1/2 bay quickly, but how is it linked? What kind of volume or what kind of revenue, order book flow will force for addition of next bay? And how does it change cost-wise? And I have one follow-up question thereafter.

Yes, Nitin, thanks for the question. So if you have heard us even in the last call, I think we had a lot of interactions on when Phase 2 at Kheda after we came with Phase 1. So Phase 2 is 2 bays which we are going to add. So intermediate to that, since the order booking has been really good, the market dynamics are favoring us, what we felt is that the extension of the 1/2 bay gives us that added capacity. So to delay that case for a little bit depending on how the market moves. So considering the order input, a good visibility in terms of, as I mentioned, INR 100 crores plus for Kheda already and counting. We see a lot of inquiries for vessels and reactors on the table. So we foresee that Kheda's unique facilities are out of steam in terms of capacity. And we don't want to reach a position where we have the business opportunity and are not able to execute. And that's the reason we took a call and it's not much of an investment for us. It is just about INR 15 crores kind of an investment because we had already done 1/2 of the construction work in the first phase. Like all the piles for foundations were already erected. The floor was already ready. So it's just a question of covering the shade and having the final RCC flooring. So that's the reason we took the call. Number one, it will be quick, 5 to 6 months project. So you will be having the shed up and running now by March to April. And also the investment was not too heavy for us. So that gives us flexibility in terms of added capacity.

No, so I was just looking for to, say, the subsequent phase. Can we say that every INR 300 crore order book addition will seek additional bay and maybe the investment will be somewhere around INR 35 crores, INR 40 crores? So because we have the capacity for 7 bays. So I'm just trying to understand that logic.

Yes. So we have the overall masterplan of 7 bays. So as I said earlier, each bay, it would cost us anywhere between around INR 40 crores to INR 50 crores kind of an investment, and each bay can give us revenue, depending on the product mixes, around INR 150 crores. So as we move ahead in time -- and we need about 12 months for every bay to be constructed. So as we move, the right timing for us for Phase 2 with this extension would be in FY '25. So as we approach and get into FY '24, based on the order booking and the future forecast, we will take a call on Phase 2.

I have -- the other question is how do we see the -- what is our role you said 30% equipment for hydrogen plant. But what kind of revenue for some x capacity of hydrogen is possible for us based on the competition profile? Because that segment data is there, that blue hydrogen is getting added so much, so much. But what will be our revenue from each of hydrogen say 100-tonne plan or something like that, some indicator, if you can share that. How do we correlate our revenue with whatever blue hydrogen expansions are happening?

Yes. So of course, every hydrogen plant, depending on the license involved, will have a different kind of configuration. So we'll not be able to take the same numbers for all kind of configurations. But roughly, of course, these data points are not available. But based on our own experience, for a project of a particular size, roughly about 2.5% to 3% is the static equipment requirements, where we at Anup will be able to bid for. Now when I say this 2.5%, 3%, it is a product portfolio that Anup is interested in. Of course, there will be a lot of other projects on the lower segment -- or lower segments where we may not be interested and also on the much higher segments where we are yet not qualified, and we wish to get qualified in the future. So on an average basis, around 2%, 2.5% to 3% is a kind of traffic process equipment requirement based on the size of the project. Now for example, our project could be, say, for example, a $2 billion kind of an investment depending on the size that they build, we could have an opportunity of about 2.5% in static equipment. Of course, that is -- those are the inquiries that we can bid for, then depending on the win rate and how competitive we are, the order booking will be commensurate to that.