Hitachi Energy India Limited (POWERINDIA) Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the analyst call for ABB Power Products and Systems India Limited Q2 results. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. N. Venu, Managing Director and CEO, ABB Power Products and Systems India Limited. Thank you, and over to you, sir.

Thank you, Steven. Good afternoon, and good evening, everybody. Thank you for joining us the calls today. I hope all is well at your end and you continue to take all necessary precautions to keep yourself and your families are safe. So India has suffered, as you all know, severe health care crisis during this COVID Wave 2, especially in this particular quarter. The country is still reporting a quite a number of cases as per the World Health Organization, which has also put a bind on our business growth. But it brings some solace that over the past weeks and past months so we have seen a decrease in overall cases. In what is the world's largest vaccination program, we also see a very progress more than 400 million vaccine doses have been administered already, which brings hope that we are heading in the right direction towards the recovery. For us, that is Hitachi ABB Power Grids, the health and safety of people has remained at the center stage. And we believe that this is the bedrock of our long-term growth vision. So we have already uploaded the presentation in BSE website, and I would be referring the things and some of you are seeing this. We are also sharing the presentation. So please, those who are not seeing my PPT, please refer the PPT, we've just now uploaded in the BSE web portal. Moving to the Slide #3. Safety is our license to operate and which is a nonnegotiable virtue in our organization. Offering support to essential services, we could not switch 100% to remote work. So ensured COVID-19 appropriate behavior across sites principle to limit the spread of infections. Inculcating safety values being fundamental to self-reliance. We continued the trend of safety, operating tools and refreshes to ensure a safe working environment within our premises and reported no serious injuries. Safety is also in build in our passion and pursuit of powering good. To that effect, we also continued to receive appreciation for our safety and service standards from leading industry players, customers; indicating we have been on the right track. Our efforts to be known as a climate conscious company continued too in this quarter. We kept on nurturing our environmentally responsible values. The values that percolate down to every one, every employee in our organization. This World Environment Day we took yet another opportunity to renew employee awareness on climate change and our role as a company as well as individuals in curbing it. Be it through trainings on ecosystem, restoration, our personal carbon footprint assessment and measures to reduce. I will now move to the next slide, Slide #4. Further, our focus was steady on managing the COVID-19 for employees, customers, partners and the community as a whole and on lending support to the country's relief measures. We were able to achieve more than 90% vaccination rate at our company level and facilitated more than 6,000 mass testing for our employees and partners in our locations. We are still conducting regular vaccination drives for the remainder of our teams and their families. We continue to provide the PPEs and making provisions for medical assistance and equipment, such as oxygen concentrator to support our workforce across the country, whether it is the factories or the project sites or offices. In the quarter ending June, we continue to work on war footing, mobilizing our resources pan-India to help our people whenever they needed us. We also funded hospitals and NGOs to ramp up their medical infrastructure for a higher patient intake. We quickly repurposed and reprioritized our CSR spend here to take on the urgent needed related projects. We facilitated makeshift care units through 100 extra beds, including those for intensive care and enabled supply of critical medical equipment in and around our facilities and our communities. We extended support to much needed innovations to relieve the economic burden of wasted vaccines and enable vaccine delivery to remote health care centers. For the safety of COVID-19 vaccines in South India, we have partnered with a not-for-profit organization called C-CAMP for funding research, development and deployment of portable refrigerated containers. Moving to the next slide, Slide 5. Within our premises to ensure healthy and safe work environment, we instituted a team of doctors, deploy new workflow protocols to ensure social distancing and reduced physical contact, redesigned some of our workspaces and added extra shift to space of the work. We conducted regular sensitization training sessions and workshops to keep an open communication channel for our employees and their families. On the delivery side, we strive to handle with the resilience, the pandemic-imposed challenges, lockdowns, supply chain disruptions, mobility restrictions and demonstrated a credible performance. Some of our factories and project site had to be fully or partially closed during the second wave for weeks, in line with the local government guidelines. We also noticed that our customers face similar hurdles, resulting in delayed decisions and slower pickup from our factories. Moving to the Slide 6. We continue to deliver credible performance year-on-year. Orders were up more than 30% year-on-year and revenues more than 25%. Demand was driven predominantly by rail, data center and utilities helping us strengthen our position in future high-growth segments, which we have been talking about since last few quarters. However, in this quarter, close to INR 100 crores worth of orders where we're L1 were deferred by customers due to the pandemic. Closure of shop floors, project sites and disruption of logistics, affected production, project execution as well as service activity resulted in the revenue loss to the extent of INR 200 crores and earnings out of that. Yet, we were able to double our net profits in the same year. As you can also see, this is also half early results, as you can see, comparison between half yearly to half yearly as we have almost all KPIs improved compared to the last. Moving to the next Slide #7. We booked a multiple transformer orders from power transmission, rail and infrastructure companies and delivered our power quality digital solutions and service to utilities and data center customers. Our portfolio will facilitate power system stability, protection and efficiency. Our focus on the digital solutions remained very strong through power system studies. We consulted customers on deploying clean energy in line with the grid code while advancing India's mission to achieve 450 gigawatt of renewable penetration by 2030. Our portfolio of progress continued to reach offshore, and we booked our first 400 kV GIS order in South America this quarter. Moving to the Slide 8. We steadily solidified our efforts to build back better, be it through demonstrating efficient remote commissioning and upgrade of mission-critical power assets such as we did in Bhutan and also our Rihand Dadri HVDC transmission link or by making our operations more sustainable through smaller environmental footprint and an inclusive and talented workforce. Under our diversity-focused hiring, as you know, we have launched a diversity 360 strategy. And we strive to hire aspiring and exceptional women and develop our culture of diversity and inclusion. Our quest to tackle the underrepresentation of women in engineering across industry and build future talent today was strong and clear as ever. Besides, we engage the key industry discussions, including in the ministerial thematic forums of the UN high-level dialogue on Energy 2021. We spoke on accelerating citizen-centric energy transition to achieve the 2030 sustainable development agenda in the power industry in of our vision and ideas. Moving to the Slide 9. You may be remembering, we announced our carbon-neutral targets for 2030 in this quarter. And these targets are based on a 3-dimensional approach to decarbonization encompassing our operations, our products and our contribution to society and environment. Central to this machine is our UN Sustainable Development Goal, goals 7 of providing clean and affordable energy to all. We aim to transition to fossil-free electricity by March 2022 in our own operations across the country, reducing our emissions and over the course of decade decreased waste generation by off and freshwater use by quarter. We also target a 50% reduction in CO2 emissions along the value chain. We will electrify our operations, our transport fleet and implement energy management standards to ensure we walk the talk on the climate action market development. Our plan is to be carbon neutral in our own operations in this country by 2030. Moving to the next slide, Slide 11. I think you all know better than me. But just to give you a perspective from our side. The second wave of COVID-19 caused a significant setback delaying economy recovery a fair bit. The manic spread of the virus and the health care crisis affected our supply chain as well as our expectation, we had at the start of the year of achieving normalcy in the immediate future. We saw business activity slipping month-on-month and industrial production remaining muted due to the curbs and disruptions triggered by the pandemic. There was hardly any respite in inflation, and we saw price of oil and other commodities soaring. Yet, we remain cautiously optimistic of opportunities ahead in sectors, we track that renewable mission, rail and data centers. The government, the Reserve Bank of India and even the IMF are optimistic about India reaching double-digit growth in the financial year 2022, even though there is a downward revision in that. In the sectors where we operate, where India's oil consumption growing nearly 18% in the first week of July to over 30 billion units compared to a year ago. It returned to a pre-pandemic level, mainly due to easing of lockdown curbs and delayed monsoon, which partly means we have opportunities in the pipeline and partly that we have our work cut out. Moving to the Slide 12. I think been seeing this slide for the last couple of quarters. So COVID-19 headwinds notwithstanding, we remained the partner or choice for our products, services and softwares. We saw a high interest from utilities, transport and infrastructure segment, which was secured through direct sales as well as through our EPC channels. We continue to make headway in our key focus area as part of our Vision 2025 in the renewable integration, power quality, data centers, et cetera, the growth is trending in the right direction. We enabled renewable power utilization for key industry players, increased electrification of industries and transport, quality power for data centers and played a part in bringing Indian railways closer to its carbon neutral ambition. Slide 13, which is also a very important slide. We have been also talking about our strategic imperative both service and export over several quarters. And we all know that despite difficult market conditions, we continue make in India, not only for India but also for the world, leveraging our wide installed base and expertise. Customers trust remained rock solid as we saw service and export orders exceeding our corridor of 15% to 20% in order mix. Wherein service orders rose by 50% year-on-year and exports added in more than 30% to the order book in this quarter. So we were chosen for cybersecurity, which is also a very critical growth driver in the days to come of critical power infrastructure by leading utility or power asset automation solution by a major steel maker and for substation charging for a hydro project. Export demand for our products, systems and services came in from Africa, Latin America, South America, South Asia, Europe and many other regions. Moving to the Slide 14. It seemed that the start of 2021 that earlier brought upon by the pandemic could be getting over. Then the second wave hit us and hit us so rapidly and so intensely with a surge in infections in April, business confidence deteriorated with the big demand conditions and the reintroduction of lockdowns and priority of all organizations across the country remain to taking care of the people. However, our 3-pronged strategy put in place at the peak of the pandemic, which is protecting our people, preserving business continuity and preparing for the new norm, continue to support us in walking the tightrope during these challenging times. Even though manufacturing activity posed a challenge across the brand, across the board, we covered a good distance over last one year with a credible and sustainable performance. As of 30th June, 2021. Our order backlog stood at INR 4,770 crores, which will unlock revenue streams in the coming months. Our operational EBITA stood at INR 46 crores in the second quarter, with EBITDA margin of 5.8%. On an half year basis, the EBIT margin of 6.7% versus last 6 months, 4.2%. We continue to remain debt free, and we also maintained a AAA stable rating from the rating agency in that. Moving to my last slide. As I often say, we've invested in India for the long term, and we have been manufacturing here in more than 6 decades. While we aim to introduce new products to capture a bigger share of the market, our goal is to localize our portfolio to build indigenous capabilities. We will continue to make in India for India and for the rest of the world. Our key focus will be protecting our people and along with them, build our capabilities in high-growth segments such as rail, data center, transmission, renewable HVDC. We will focus on these segments and accelerate growth through services, digital solutions, and exports, leveraging our strong local footprint. We have a comprehensive portfolio of future ready and state of the products, softwares, services and systems to cater not only our traditional segments, but also many of the emerging segments. Commitment to lowering the carbon footprint of our operations, product localization, digitalization of the grid will be part of our yardstick to measure our success going forward. Nothing is complete without our people. Hence, we will relentlessly work toward their safety, their growth and their upscaling. We will also strive for building diversity as part of our strategy Diversity 360 in our various functions, businesses and balance the mix of competencies across the businesses, not only to take care of the ongoing segments but also on the evolving new segments as we are entering into the a big way into energy transition. In this energy transition, we see ourselves playing a leading role through our digital and energy platforms. We aim to be the partner of choice by our customers, for the industry to advance and sustainable energy future. With that, thank you once again for taking your busy time and also attending to this. I'll now request the operator to open for Q&A.

[Operator Instructions] The first question is from the line of Renu Baid from IIFL Securities.

I hope I'm audible and clear.

Yes.

Sir, I've 3 questions. My first question is to understand that post the second wave, have we seen some signs of delayed execution from key customers and projects. And will that impact the execution momentum on the order backlog that we have today currently? Any thoughts on this side?

Okay. So why not to go ahead with all the 3 questions.

Sure. So the first question is related to the execution momentum on the backlog and any project delays that you are witnessing. The second question is while you mentioned and commented about strong growth in services and exports or order inflows. Can you also share how was the performance in terms of revenues for the first half? And broadly, how are we placed in terms of this segment from a revenue business perspective? And the last question is the key focus markets that you've highlighted, data centers, rail and metro, how should one look in terms of the likely growth of segments in your business portfolio? So probably from a 3- to 4-year perspective, in your view, how large can segments be, given that data centers are expecting almost $8 billion, $10 billion of CapEx rail metro, you would be favorably placed with a lot of funded projects, giga-funded projects and like. So these would be the 3 questions.

Okay. Thank you, Renu. Let me just start from answering from your first question. So on the post-second wave, we have not seen any major delays. The delay was only during the wave 2 period that is the last quarter. But now I see more and more customers are trying to catch up. And in fact, we have even seen some of the customers accelerating the execution on that. So by and large, we have not seen any major delays due to the post second wave across that's what I think in that. So that's the one. And the second question is on the service and revenue. I think while we have been -- if you recall, we have been also telling you that in our exports right now is in the range of 15% to 20%, which is a higher brand of 20% range. And our plan is to take from 15% to 20% to 20% to 25% over a period of time. And then our revenues are also trending in the same brand right now. Same in the case, the [Indiscernible] we said 10% to 12%, but our plan is to take to 10% to 15%. And we're also seeing the same direction on the revenues part of the that. And to answer your third question, I think likely growth of our high-growth segments, especially on rail, data center and renewable and also HVDC. I think we do see that these are quite a big growth element in the energy transition, and they're going to take up a very bigger pie of our future order backlog. We're not in a position to comment exactly the thing. But it will definitely be going to be a major, major contributor for our orders in the 2- to 3- or 3- to 4-year period, what you're talking about.

So can it be more than 1/3 broadly in terms of mix, 30% to 40% given the size and scale of these segments?

Yes, 30% is definitely a minimum. We are looking at in excess of 30%.

Sure. And if I can add one more question. Would it be possible for you to share the outlook on the HVDC orders in pipeline, how are they placed and the broad time lines in terms of the likely award that we see?

Yes. So we -- basically, we are seeing 3 or 4 HVDC projects as we speak. And one of them, we are hoping that it will get finalized by end of this financial year. And there are 2 more large HVDC projects where our PGCIL and customers are looking at it. And definitely -- to give a long-term view, we see at least one major project per year. Because we see quite a lot of pipeline. And our view is that one major project per year is what we can factor in an award basis.

The next question is from the line of Yogesh Singhvi from SKY Investment. [Operator Instructions] As there is no reply from the current participant, we move to the next question from the line of Sujit Jain from ASK.

I hope I'm audible.

Yes, sir, you are.

Yes. Sir, a quick question on the -- if you can the global tie-up that we've done in Sweden with PowerCell, that is for fuel-based stationary power solutions. And I'm sure that has potential of even disrupting the standby backup power, which is provided by DG. It will be too early, but what is tie up and how we can leverage on that in India.

I think, Sujit, I think that's a very specific limited information, and we'll not be in a position to share anything, so this is basically like a kind of a pilot basis, we are doing it. And we have not reached a stage where we would like to commercialization of that particular thing in that.

Sure. And you spoke about digitalization and in the presentation, cybersecurity solutions as well. So -- and looking at the capabilities that Hitachi brings to the table through industrial IoT platform. What is the percentage of revenue that you've already started booking in terms of industrial IoT solutions in your key segment?

I think when we're talking about the cybersecurity, right now, our focus is -- so this is in the very nascent stage, right, the cybersecurity as a revenue stream, working with the customers and educating, and partnering with them. It's -- together, we've got to learn both our customers as well as ourselves in the longer in that. So right now, our focus is on doing the system studies of that, where are the loop holes, where are the plugs. And then we will give in a more of a consultancy standpoint. And then we start deploying the solutions of that. So what you're talking about IoT, IoT is not only for the cybersecurity, but we have now partnered with our parent organization Hitachi where Hitachi has very strong IoT platforms. So together with Lumada, we are offering our asset performance, APMs and enterprise software solution to our customers on IoT platform of Lumada of Hitachi. And we'll see that in a quite a big interest from many of the customers, starting from industrial customers and also quite a lot of renewable customers. So we can start taking a lot of things on a remote monitoring, remote measurements, et cetera, of many of these assets.

Any number that you can give what it has reached as a percentage of sales to begin with?

No, it is right now, it is too low. We are not in a position to give any percentage. It's -- we are making 5 layers, and we are doing some customers at various segment levels. So -- but we see that in the near future it's quite a big pickup of this particular complete digitalization, including IoTs of the whole energy networks.

Sure. And one last question in exports. Can you practically offer your solutions across geographies and markets or there are some restrictions in terms of which global entities. Sorry, in terms of, for example, this entity in India, which markets it can service and which markets it cannot service, et cetera.

Correct. We have a dual strategy. One thing is what you said right, in some of the product lines. So we have strategy that particular markets are being allocated and then we will be developing the markets because with the local sales organization of that particular country. So that's the one strategy. And then we also have other strategy where in some of our product lines are at global factories. So that means we will be selling throughout the things either through directly to our customers in like South America and other things, but also through our Hitachi ABB Power Grid sales organizations of those things. So it is a combination of both, Sujit.

[Operator Instructions] The next question is from the line of Yogesh Singhvi from SKY Investment.

Am I audible, sir?

Yes, yes.

Sir, I just have 2, 3 small questions. First is from what is the private and government order split, in your order book. I understand your primarily majority of order book is from the government side, like from PGCIL. But I just want to have a quick idea. What is the split between private and government orders, including export also. Private means, I mean, from private business like private industries like from data centers or some...

Yes. Thank you. I think -- thank you, Yogesh. Actually, if you really look at -- as you already said, the government and private, if you really take the split. We have a bulk of our order backlog falls under private. So around 60% is private and the rest of the things is part of the government. So most of the things like a data center like industries, which we have been announcing major wins of the last quarters. So that's where our private industries and private, we call it a one. And the government is pure government like PGCIL, like state utilities underlying and base part of the government. Even it is a public sector, but we call it as a part of -- not part of the government bucket as well but call as a private.

Okay. Okay. That's helpful, sir. And the second question will be, sir, like due to this pandemic situation, there might be some delay in exhibition and delivery of the products. So have there been any instances where customers have levied with us with liquidated damages. I hope in government contracts, it is there, early damages. And in private, I'm not so sure. So how that situation is emerging?

No. I actually answered. In fact, we had a major delay last year. And as huge disruptions and due to that some of the projects got delayed. But then there, the government and also many utilities have extended suitably for whatever the delay and we did not face any major delay liquidated damages on those contracts. I was just answering to your colleague just now that we don't foresee any major disruptions due to this wave 2. There are some disruptions, but there are good catch-up plans until unless, we hope, that is not going to be any major potential wave 3. And if that is not there, we hope that it will stabilize and then we come back to the normal in the -- if not in the next quarter, but next couple of quarters.

Okay. And if you permit, can I squeeze in another question, sir?

Sure, go ahead.

Yes. It is about our overlap with the ABB India. Because I see in their presentation also, they talk about data centers, railway electrification and metros as growth areas over in future. So is there any overlap between their product and other products or they play in some like LV or we are in MV or higher voltage segment or we both go as a go-to-market strategy we adopt in the marketplace.

Thank you. I think a very good question. I think first of all, there is absolutely no overlap between Hitachi ABB Power Grids and ABB, okay? So there is no overlap at all. And when it comes to data centers, as you know, we have the competency to build the data centers right from the gird integration and then also the studies and also the automation, et cetera, in that. So that's where we will be focusing. And in some cases, we will also go together with ABB, wherever it is required, but we are very clearly saying that our competency on the data center is the high-voltage substations, whether it be air or gas insulated substation, engineering package, grid connection studies, digital substation, dry-type transformer, and electrification is that the power distribution, backup power, data center automation, battery storage, power quality and consulting, cybersecurity. These are all part of our portfolio, and we have a fully -- there is no overlap.