Hind Rectifiers Limited (504036) Earnings Call Transcript
February 7, 2020
Earnings Call Speaker Segments
Ladies and gentlemen, good day, and welcome to the Q3 and 9 months FY '20 investors call of Hind Rectifiers Limited. Today we have with us from the management Mr. Suramya Nevatia, CEO of Hind Rectifiers Limited. [Operator Instructions] Please note that this conference is being recorded. I would now hand the conference over to Mr. Suramya Nevatia for opening remarks. Thank you, and over to you, sir.
Good afternoon, ladies and gentlemen, and welcome to our Q3 FY '20 conference -- investors call. I would like to start by just pointing out few of the highlights of this particular quarter and the 9 months up till now. Our sales for the third quarter has been INR 70 crores and profit after tax has been INR 3.69 crore and EBITDA is at INR 8.42 crore. That's for the third quarter stand-alone. And for the 9 months cumulative, up until now, we have done INR 221.73 crore of sales. Profit after tax is INR 16.41 crore and EBITDA is INR 31.61 crore. This is a very brief highlight of the performance of our company so far. And I am pleased to inform you all we released a press release just last week indicating our pending orders. We are at INR 335 crores of pending orders and to be executed more or less over a period of 18 months. And that's my opening remarks for now. And I will now take your questions.
[Operator Instructions] The first question is from the line of Dhaval Shah from Girik Capital.
Sir, just a couple of questions. First, the order book of INR 335 crores would translate into what sort of top line for FY '21?
Okay. So this is basically our pending orders as on date. We will -- we are expecting orders incoming as well in the fourth quarter and as we go along the year. We have put a target of maybe 25% or so for the next year for FY '21 for the top line.
Okay. In Q3, what sort of orders did we get, the incremental orders? Because I think in Q1, our order book was some INR 330 crores, and then we executed in Q2, Q3. So the absolute incremental orders received in Q3 would be how much?
In Q3, we have booked INR 109 crores of new orders for third quarter, INR 109 crores.
Okay. And sir, what sort of margins can we look at? And in Q2 -- and in the Q3, there were also some reduction in the margins. If you can just tell us, was there a change in the product mix, any delay in the order, any changes there?
Yes. Regarding the EBITDA margins, right, so the fee margins dropped a little bit because of product mix. We have something that we sell, which is transformers, which is high volume and low -- slightly lesser margins in that particular product. In the second quarter, the transformer sales were relatively much lesser compared to that of Q3. So which is why the EBITDA has been slightly affected. Also, the products for which we have done the backward integration, they were not at high dispatch in the third quarter. And so there was a little bit of an offset, and that's why the EBITDA margins declined slightly.
Okay. Sir, what sort of progress are we seeing on the Bombardier Transportation? Initially, what we have -- we are a [indiscernible] converter, we are diamond supplier for them. So what sort of visibility do we have from that coverage?
So with BT, we have more or less, it's like an exclusive rate contract. This diamond certification that you are talking about is not yet certified by the German Board. They have considered us for diamond certification, that is yet to be done from their head office. But that is just an added accreditation. That's not really something which is very important right now. But our relationship with them is going as well as earlier. We have all the orders that they are getting for their systems and all the converters for their systems, they're buying from us. So even for the next year, they have quoted a couple of tenders that they are very well positioned, and we are expecting good business from them in the next year as well.
Okay. And sir, just last 2 questions. So A, what sort of EBITDA guidance would you give for FY '21? And B, what is the debt as on today and how do you see that number changing over the next 1 year?
So debt as on today is INR 75 crores, that's the total debt.
Including working capital debt?
Yes. Including working capital. And for the next year, we will not be increasing the debt by too much. There are certain funds which are sanctioned by the bank or in process of being sanctioned, and that's about it. That's not a very significant amount. And for working capital, that's about it. And as far as EBITDA margin goes for next year, we hope to target, as a whole, upwards of 14% or 15% for the next year. That would be our target.
Okay. And sir, receivables -- sorry, yes, receivables, is there any issue from the railways? And yes, are you seeing any delay?
There was a slight slowdown in the payments from railways for the third quarter. And -- but now things have improved. In fact, very recently, railways has passed a circular informing all the vendors that they are working on a policy to cover with LC payment. So let's see if that works out that will significantly help us in the next year. [indiscernible]
Okay. Great sir. So right now, what is the receivable days?
It's now 90. It has become 90.
Okay. Have you saw a delay of another about 10, 15 days more in Q3?
No, it was 75 previously. I think it's become 90 or 95 now. I'm not exactly 100% sure, but I think it's about 90 days now.
Okay. And this will remain?
It will remain for the time being until the payment structure becomes more sorted at the railways end and -- but otherwise, it would be around 90 days.
The next question is from the line of Rohit Ohri from Progressive Share.
A couple of questions. First, you can -- can we -- on this order book of around INR 54.6 crore that you have received recently, can you just elaborate a bit on the time line, the customers? Is it domestic or is it international?
So this INR 54 crores, INR 55 crores of orders that we have received, most of it is from railways. There is one order, which is not very big in amount, but it is a big breakthrough for us, which was from South America. And that's the first time we've got an opportunity to get our -- get an entry into that continent. Apart from that, there is one new application for railways that we are now targeting, and we have received an order for that, which is about INR 19 crores worth out of this INR 55 crores, and that is going to be a big opportunity, but this is development. So again, the cycle is long. We have to first create the product and then do the type testing and the field trials. And we are targeting that we should be able to do it all by next 6 or 7 months. If we can do it, we expect good opportunity for this particular product in the next year. If somehow we get delayed, although, I don't see that happening because we already made good progress. If we do get delays, then we'll miss out on additional opportunity for the next year. But I don't think that's a big possibility. So INR 55 crores, most of it is railways, 80% of that is railways.
Okay. In the previous con calls, you used to mention that on an average, for a particular -- for a locomotive, you were trying to fetch around INR 3 crores or something, and for the Hind passenger coaches, you were looking at around INR 25 lacs or something. So is that guidance still existing? Or do you see that there have been a slight bit of price hike that you have taken in that?
No, the thing is the prices of the products don't -- will not necessarily increase. It's just that we can increase the offering to railways by adding more products. So I've mentioned, I think, in my previous 2 calls as well that we're looking at introducing traction motor into the field. And so that -- so what each locomotive needs 6 traction motors, and each motor costs roughly around INR 18 lac to INR 20 lac. So that's about INR 1.2 crores worth of products that we are adding to our basket in this quarter. So hopefully, next year, we'll get the benefits of that. So it's basically more technology you can develop and more products that you can create it will help you to elevate offering from your...
Okay. And this revenue that we've generated, AMC would be what percentage today?
Out of the INR 220 crores you're talking about?
Yes.
It would be maybe 7% or 8%, 7% or 8%.
Okay. Sir, you've been talking about this backward integration and then indigenously producing products and just in time along with the Theory of Constraints, which has helped you quite a lot is what we can see from the numbers. So can you just highlight a bit more on what exactly was the Theory of Constraints that you have spotted and that has led to this big exponential growth that we have seen so far?
So ToC is basically just a manufacturing or operational principle that helps us expedite and cut -- drastically reduce our production cycle time. There's a word called throughput, basically, the amount of time it takes you to finish a process. It helps us to curtail that. And ToC is implemented only at our Nashik plant. So over there, we are really able to turn things around in a fast manner. What would happen earlier is we have material coming in and it's lying idle. And then it goes to the process. And again, it's lying idle, then it goes to quality, again, it's lying idle. In ToC, there is no idle wastage of movement. So delays that happen now is either because of -- a vendor has not supplied the material on time or the customer has not come for inspection or if they have not lifted the goods. The wastage of time and delay at our end, that is drastically reduced. That helps us to curtail the entire working capital used as well.
So more or less, like Kaizen is what you're trying to talk about, right?
Kaizen is something different. Kaizen is more system-oriented. This is -- ToC is more practical in approach. That's the key difference.
Okay. I read quite a bit on the new products and -- because some notes which were talking about brake system that you were working on. So any breakthrough in that? And any orders that you have fetched so far?
We do have orders for brake system, and we have -- our prototype is 98%, 99% ready. We have already given the -- our plant has been cleared by railways for manufacturing of the brake system. We are now just awaiting the design clearance from them and then we will start the type classes.
Any time line that you have of project...
Actually in this, the ball is not really in our court, it's in railway's court. So we cannot do anything.
Okay. Sir, you already spoke about the technology front. So as far as I understand, the labor is something that -- the labor cost is something which hits our P&L. So are you looking moving towards the technology front or somehow trying to reduce the manual labor?
Not really. I mean I have not really thought on these lines. It's not a big concern for us today, I don't think this is...
Okay. Can you -- in the previous con calls, you mentioned about certain projects that we're looking at in Russia, U.K., Austria, U.K., U.S. and Turkey, which are big 2. So any further developments that you see in terms of the international orders that you have received, apart from the one which you've already mentioned some time ago?
Yes. So we have -- Turkey is one market. It's now regularly -- there are 2 or 3 big companies in Turkey, who are the EPC guys who do the pollution control work over there. And most of them are -- most of the times, they're buying from us, any projects that are going on in Turkey. Austria, we've already done the prototype. The field trials are going very successfully. And we, hopefully, expect some big business from them. The USA guys have actually given us the South America option. And so they're not buying it themselves from U.S., but they've actually referred to their company in South America, who are doing business with us now. And U.K. is going strong. In fact, we have continuous orders from U.K., and we started supplying.
So the total revenue that you booked, domestic would be what percent? And what would be the international orders?
International will be absolutely, I mean, it's not even comparable to what we do domestically because, as I said, first of all, industrial is only 10% of our total revenue. And out of that, exports is probably 10% of that. So it's actually really less. The only thing is that we get good exposure. We get good margins. And in the future, once we have these customers with us, we can expect some business. But we have to still lay the foundation. It's too early to have a very big international footprint as of date.
Okay. I understand that. Going forward, we're working on these control panels. And how many of these orders are still there with us or have you executed or some pending orders?
You want to know for control panel specifically?
Yes.
We have executed through December 2019, more than INR 73 crores or so, more or less.
Okay. And any repeat orders that you see in these...
Yes, continuously. I mean these are continuous in nature. We have a big demand for these in the first quarter now for the next year. For the fourth quarter is -- we do have some scheduled dispatches, but not as -- not to that extent.
Mr. Rohit, may we request that you return to the question queue for follow-up questions.
Yes, I'll do that.
The next question is from the line of [ Suraj Navandhar ] from Prithvi Finmart.
Sir, I wanted to know, is there any spillover effect in this quarter? Because our cost of raw material as a percentage of sales has gone up to 84%, 85%. So is there any order that which we have manufactured but have not dispatched or not booked the revenue or something of that sort?
No, it's not really that. The RMC has gone up because of the product mix. That is the major concern that we have. And because the transformer that we supply, right, there's really not much engineering, which is left you can do in that. And since it's a market-dictated price, it's what the situation is. The only way to offset that is to have products with a higher contribution, which, unfortunately, in the third quarter, we did not have.
So going forward, like where do you see margins stabilizing? Or can this happen, again, depending on the customer requirement? Or do we have any control over that?
It's not a matter of control, it's basically about maintaining uniformity or maintaining balance in the production and dispatches. What happens is, if the panels are being supplied at a faster rate, then the standards for transformers increase and panels decrease. If the transformers have been supplied at a faster rate, then the tenders for panels are available more. So it all depends on the railways and how they are taking their material inward. Many a times, they have a shortage of certain items. So you get an opportunity to supply more of that, if they have a shortage. So in the third quarter, they had a shortage of transformers and because of external reasons, what's happening in the market, so they really forced the vendors to supply transformers at a higher rate -- higher supply rate, not the price.
Got it. Sir, in the -- in our pending order book, what is the mix of the industrials and the railways? Are -- is there any -- are we increasing our revenue share from industrials? Or is it still at the same level, 85%, 90% from the railways and 10% from the...
Industrial will continue to be at 85%, 90% because the rate at which railways is growing, the industrial sector for our products is not -- it's growing at a standard rate of maybe 10% to 15% year-on-year. And as far as the pending orders is concerned, here it will mostly be railways because railways give us an order for long-term execution, for 12 months or 18 months, whereas industrials, once we get an order, we have to execute it within 3 months to 4 months, depending on what kind of order it is.
Based on your pending order book, can you give us a margin percentage range where -- considering your mix of order book that you have right now for next 12 to 18 months? What kind of EBITDA margins you'll be able to do in next 1 year?
I would like to target upwards of 14% and 15%, anything close to that or above for the next year, that's...
So it is safe to assume that now you have an order book which is of the high margin? So from next 12 months, we can expect 14% to 15% of EBITDA margins at least?
Sir, that is what we're going to try. See, actually, what happens is the EBITDA also gets affected with our new products that we are launching. So when we have to take orders, when we launch a new product, right, we have to be very aggressive, we have to be L1 in the tender, no matter what. So we quote aggressively to take those orders. And then once we get enough orders and we supply them, then we get the credential to become an approved source. So this is a continued...
But that percentage of orders, the amount of orders that you'll get for the first time will be really less, if I'm not wrong. Please correct me, if I'm wrong.
Not really. Because as I just mentioned previously, we got an order for INR 18 crores out of that INR 55 crores, which is of a new product altogether. And there, the prices are quite competitive. So it's very subjective on -- for product to product. So there is -- even brake system for that matter, we have orders of about INR 4 crores or so, which we quoted quite aggressively. Even that margins are very -- we've quoted very aggressively to get those orders. And that happens for most of the new products that we launch, including the motors, including this new application, including this battery charger and the brake system. So when you have the whole product, basket of new products, it does tend to have some impact. Just we don't want to reduce the EBITDA does not mean we don't quote aggressively because that's the only way we can get entry into the market.
And just one last question. Any new products successfully launched in this quarter?
We have launched the battery charger, which was like the biggest -- which was a big hit. And we have already supplied more than 350 of these battery chargers and then received orders for more than, I think, 700 numbers already and many more in pipeline.
[Operator Instructions] The next question is from the line of Milind Karmarkar from Dalal & Broacha.
Looking at the plan of railways to go 100% electric in the next few years. How do you see the growth for next 3 to 5 years after considering that you have been putting a lot of effort in product development?
So this electrification is actually probably the best thing that will happen to us because what we do is entirely all electric products. If railways were making diesel loco, our opportunity will be much lesser because we don't make anything for diesel loco except some rectifiers. So the fact that they are doing and targeting more and more electrification is a good thing. And the fact that they have made statements that they intend to make 650 locomotives for the next couple of years and also trying to bring it up to 750 is very reassuring for us that there is visibility for the next couple of years. And even in the passenger coach front, the LHB coaches, as they call it, which they're making. There was a conference where the Railway Minister made a statement that they want 100,000 in next 10 years, it comes to basically 10,000 a year, that's very, very ambitious but they are doing close to 4,500 now. And you'll see in the next 2 or 3 years, they do reach that goal of making 8,000 to 10,000 every year. If that happens, then that's really good.
Fair enough. So what kind of growth -- if assuming that, they do manufacture 650 locomotives and maybe, say, 5,000, 7,000, 8,000 passenger coaches every year, what kind of growth do you see in your business? Because railways does constitute a significant portion of your overall sales.
Significant growth will come when we have our new products, which are approved. Because as I said before, we have transformers, where we are 4 competitors now. And we are already -- railways are already making 650 locomotives. So 650 locomotives means 650 transformers. So that means, more or less, roughly, each competitor gets 125 to 150. It is not evenly distributed that way, somebody may get 200, somebody may get 100. That's what the ratio is. So if we really want to increase our revenue and our work with railways, we have to add more products like, for example, traction motor. Today, we are practically nonexistent. And if we do enter there, it really brings substantial revenue because there are only 3 or 4 other players. Same goes for other converters and other -- like brake system and other products. That's how we are going to increase our contribution with the railways.
And typically, how much does a traction motor cost for the railways?
Close to INR 20 lacs.
INR 20 lacs. And what would be the current requirement of railways for traction motors?
3,600 annually.
And this is imported or locally manufactured?
Locally made. There is no import of traction motors.
And who does that?
BHEL.
Okay. But railways would be willing to give it to a private player instead of BHEL?
Yes, of course. I mean they cannot -- there is no restriction on that. They have to.
[Operator Instructions] The next question is from the line of Rohit Ohri from Progressive Share. Mr. Rohit, your line is in talk mode. Please go ahead.
Suramya, you just mentioned that one of the players for these traction motors would be BHEL. But BHEL was one of our customers as well. So don't you think that there could be a slight a bit of a conflict that may come in?
I'm sorry, I didn't get the question. What does that mean?
See, for these traction motors, as far as I remember along with railways from the industrials side, we had BHEL, who was a customer to us, right, as Hind Rectifiers?
Yes, yes. So that -- so BHEL is a huge entity. And we've been competing with them since many years. We are supplying to them since many years. And we are competing with ABB for many years. We are supplying to them, we're buying from them. It's really not -- it really doesn't matter.
It doesn't matter. Okay.
Even we are competing with many other people who we are supplying our other verticals and other devices, too. So it's fine.
Okay. Sir, do you think that the margins would be somewhere around, roughly ballpark would be like 13% to 15% EBITDA margin is something that we can work on?
Yes.
I think going forwards, if at all, with this INR 300 crore, which we intend to finish by the year-end and with margins approximately in this range. Do you think that we can end the year at profits with slightly double as to what we have done last year, which was somewhere around INR 11 crores or so?
By the end of the year, next year you mean or this year?
This year, this year.
This year. Last year, we had closed at INR 11.84 crores.
INR 11 crores.
And this year, we would be -- yes, a couple of that, yes.
Okay. That's a good news. One famous question that is always there on my mind is this BTR industries and the Bajaj family shares that they have, any updates on that? And anything or that you had worked with them or something of that sort?
No. I have no idea. I mean, we don't talk to these guys on a daily basis.
Okay. I was trying to gauge or understand what sort of valuations are they looking at. So probably, we can buy the shares from them and increase our shareholding. That is always there, in my mind, always.
But it's not in my mind right now.
Okay. These are high-value projects that you are working on executing them. Can you just elaborate a bit more on this? What percentage of the order book are these high-value projects that we are working on?
It's -- I would say, to define high-value is quite subjective. I mean what constitutes high value. So this new order we have received for this new application. I can't mention the name or the product right now. So that is going to be something which is very critical and very important for us next year. And we are working priority on this project right now. And so hopefully, we will be able to get some good results. And if we do, you will see that reflecting in the numbers.
That's good. In terms of the execution, do you see that -- is there any blip or it's all in a timely fashion that as per the clients expect, the orders have been executed as per their time lines?
Yes. I mean there is no issue in the execution or in the operations because railways wants the goods, we are making the goods, vendors are supplying everything on time. I think everything is working very smoothly. It only becomes a problem when it comes to timely payments.
Payments, okay. I understand that. That's good. With this dividend distribution policy, I understand that it is the decision of the Board. But do you expect that with these slight changes that came in the budget, the shareholders would be rewarded in a better way in this year? Or are you going to go by the same standards which we had last year?
Sir, last year was, of course, it was just like a statement that we made that, okay, we're back on track after a couple of -- and this year, we -- perhaps, and hopefully, we would do something better. And I guess, it's the Board, not me. So once we have a meeting regarding this, we'll let you know.
As there are no further questions, I would now like to hand the conference over to Mr. Suramya Nevatia for closing comments.
Thank you for joining us for the third quarter investors conference call. We do have good pending orders as on date, and we are working very hard to execute them. And hopefully, we will see a good jump in top line and bottom line both next year. And yes, we're looking forward to speaking to you all in 3 months from now. So thank you.
Ladies and gentlemen, thank you for joining us, and you may now disconnect your lines.
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