Permanent Magnets Limited (504132) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Permanent Magnets Limited Q2 FY '25-'26 Earnings Conference Call hosted by TIL Advisors. [Operator Instructions]. I now hand the conference over to Mr. Sayam Pokharna from TIL Advisors. Thank you, and over to you, sir.

Thank you, Rutuja. Good afternoon, everyone. We appreciate you taking out the time to join us today on this call. The press release for quarter 2 has already been uploaded on the stock exchange and on the company's website. To take us through today's results, we have with us from the management team, Mr. Sharad Taparia, Managing Director; and Mr. Sukhmal Jain, Senior Vice President and Chief Financial Officer. We will begin with a brief overview of the quarter and the half year from Mr. Taparia, followed by a Q&A session. Please note that any forward-looking statements made during this call must be viewed in conjunction with the risks and uncertainties that we face. These risk factors have been outlined in our annual report. With that, I would now like to hand over the call to Mr. Taparia. Over to you, sir.

Thank you, Sayam. Good afternoon, everyone, and thank you for joining us today for Permanent Magnets Q2 and First Half FY '26 Earnings Conference Call. I will begin with a review of our performance for the past quarter and half year. Revenue from operations for Q2 stood at INR 49 crores, representing a decline of 12% year-on-year. Revenue from operations for the first half was INR 102.7 crores was reflecting a decline of 7% year-on-year. These declines are mainly due to lower exports, particularly to the U.S. and weaker domestic demand in the energy meter segments. EBITDA margin were less in Q2 largely because of the reduction in exports to U.S. This was a direct result from the recent changes in tariff policies, which created some uncertainty and led to one of our U.S. customers to defer the orders during this quarter. However, the situation has since improved, and there has been a resumption of business from this customer in the recent months. The domestic energy meter business also recorded lower demand from our customers, both year-on-year and sequentially primarily due to customer-specific factors that were outside of our control. Alloy segment saw higher volumes in Q2 compared to Q1. Now on the project execution front, both alloy and relay facilities are progressing as per our plan. The new furnace for alloy facility is expected to be installed by December, as we have previously communicated. The visibility for orders for incremental capacity for alloy in Q4 is already there, so it will be possible to immediately increase production once the new capacity comes online. The relay facility is scheduled to become operational in Q4, but commercial orders are likely to start in Q4 as customer approvals continue to take longer than anticipated. Some trial orders will likely be supplied in Q4 with commercial production ramping up thereafter. Now regarding Quantum Magnetics. Our joint venture agreement with Lorentic Pte Limited was executed in August. Since then, the first phase of our capital expenditure plan has started with equipment orders placed and some equipment is already on the way to the facility. Further project updates will be provided as progress continues. In the existing components business at Quantum Magnetics, the Chinese government has announced certain relaxations relating to rare earth supplies, at present, we are awaiting import approvals after which manufacturing operations for components will be resumed. Now looking ahead to the second half of the year, our main focus will remain on timely completion of key projects across alloys, relays and the joint venture. These initiatives are expected to support future growth, both in terms of expanded capacity and broader market participation. With these updates, I would now like to open the floor for questions. Thank you very much.

[Operator Instructions] The first question is from the line of [ Praneet ] an individual investor.

So I was wondering in terms of the JV that we are -- for magnetic assemblies and rare earth magnets, I was wondering what is the status of it? I understand we're making progress. But like what type of assemblies would be manufacturing? Could you give some idea on what could be the product in terms of assemblies and magnet themselves and the final industries?

JV is formed to manufacture rare earth permanent magnets. And the objective is to do it using India supply chain completely from India. World over, there are geopolitical issues related to -- mainly due to Chinese supplies and all customers want [indiscernible] and that is what our plan is. So going forward, we are -- that is the plan in phase-wise manner, we are going to implement that plan.

But in terms of sourcing, where you'll be getting the raw materials because rare earth primary mining and processing still remains with China. So locally, how has the progress been? And do you think you'll be able to start commercial production with local sources? Or would you need to start -- still supplement it with imports from China?

[indiscernible] largest rare earth metals. And so our plan is to source the material from India itself, already some discussions have happened with government of Indian and Indian rare earth even -- is the government, which is already doing the mining of rare earth metals, and our plan is to source from them. If the capacity falls short, then we will also import from other countries and that we are already discussing with them.

And the final customers will be the automobile industry, right?

Final customer, there are multiple applications. Automotive is one of the big applications, electronics, consumer electronics, mobile phones, these are the windmill energy and motors, there are many applications like that. So we are targeting all of these applications.

Got it. When do you expect to -- I understand if this is going in a phase wise manner, but when could you see commercial production to start at least the pilot phase in the next few quarters? Or how long would -- what is the tentative time line?

See, the pilot phase has had -- the first phase sales had already started for assembly. Our first phase was to [indiscernible] started last year, then due to the restrictions imposed, it stopped from this financial year. Our next phase is to start with block cutting -- from blocking cutting onwards to magnet production that is expected to go live by next year. So by, let's say, financial year '26, '27, it will start, somewhere let's say around [indiscernible] it will start.

Understood. So the INR 5 crores of orders that we completed during FY '24 was with assemblies. Is that right?

Yes, only assemblies, yes.

Okay. What assemblies were these like in terms of, let's say which industry will this get into?

Consumer electronics, mobile phone application.

And for these assemblies, we still imported all the components from abroad, right?

Yes, yes.

Got it. And in terms of the rest of our business, how do we see it -- because the smart meters and all the industries have faced their own sector difficulty during the year with execution delays and all of that. But how do you expect it to pick up at this point of time? Because I understand the contribution has been changing. But in terms of our technology upgradation to stay relevant and those kind of things, what you are doing at this point of time? How is it progressing in finding different industries for, let's say, our application with our capabilities?

Sorry. So your question, can you again repeat what specific...

Right now, I understand we have capabilities. We already started approaching new customers. So with this capabilities, are you approaching other industries and what industries are those?

Yes. We are -- so for the energy meter industry, we are going towards manufacturing of relays, which includes the shunts and CTs in that whole assembly. So that is like a forward integration to us. So we are -- with that, we are approaching multiple companies, multiple new customers. And for the other businesses, we are already looking out at newer customers that is going on.

But I understand that we wanted to forward integrate in terms of, let's say, for meters for a long time, and we have not able to be delivered. Like what have been the limiting factor so far?

We were in the shunts business, and we have -- this is a recent development that we decided to go into relays business. So that we have taken the step already. Shunts business by itself was very specific and customized for each customer they were using. And that got changed because customers started buying [Technical Difficulty] of relays, which included the shunt. So now we are forward integrating ourselves.

Have we completed the forward integration in terms of capability? Or is that in still process?

Yes, we have signed an agreement with U.K. company REL, and we are using their designs to manufacture the relay. So that plant is being set up now and trials are going on with the customers. Customers want to put some products in the field test. And also, we have to take some certifications. So all that work is going on right now.

So in terms of...

Sorry to interrupt you, Praneet. May I request you to please rejoin the queue. We have participants waiting for their turn. [Operator Instructions] The next question is from the line of Ankit Gupta from Bamboo Capital.

Sir, on -- with both the relay as well as alloy CapEx getting completed in this year as well as first phase of CapEx getting completed in Quantum Magnetics in the coming few quarters. How should we look at the growth of the company in FY '27? So if you can elaborate on that, how should we see a step jump in revenues and profitability in FY '27 in both stand-alone for this Quantum?

Yes. I'm quite optimistic on the growth prospects for '27. But that depends on how much order booking we are able to do for alloy business particularly. That seems to be well on the way because we are currently running at 100% capacity. And now we are increasing the capacity, that capacity also, we see visibility, good visibility. Customer is already engaging with us. So my expectation is a good level of growth in FY '27.

Sure. On the relay side, how do you see growth?

On the relay side, we are still in the testing phase. So by March '26, we should have some more visibility on which customers. But here, the customers are generally testing pilot, they test smaller lots first, they put it in the field, and they get the result, then they again take a bigger lots, they put it in the field. So it goes like that. So I think the real commercial larger volume sales can happen from middle of next financial year. Till that time, some sales will happen. Our judgment last year -- actually, our judgment was that we should be already started selling, but customers are slower to take the product.

Okay. Is it because of the Chinese pricing where majority of the imports come from?

No. Pricing is not the issue. The establishing -- customers are giving a warranty of 10 years to utilities, and they are demanding the same from us, so they want to do elaborate testing on the product. So we are going through that phase now.

Sure, sure. And sir, on the Quantum side, if you can indicate how FY '27 is looking like because the first phase would be over. So with some orders in hand, how should we look at Quantum next year?

If you're looking -- right now with this relaxation coming in place, we feel that it is looking good, and we should be able to implement our strategy by March '26, we should be able to implement and start our production for the first 2 products that we are already doing. And then we will take steps to -- already we are engaging with other customers. So it will be starting up by March '26, it will start up and then [indiscernible] depends on the engagements after that. So I can't say today, but -- before that. And so once [indiscernible] everybody is looking for a proof of concept and this plant is set up in India, even government of India is keenly -- is keen on Indian producers to do this. They are announcing some incentives for that. So all that is going to happen between now and March 2026.

And we do have some orders in hand for the first phase of expansion for utilizing the first phase of expansion, right?

Yes, yes, that we already have, but we are not able to supply due to the restrictions. Now that restrictions are relaxed, but the actual notification is yet to come. So we are still waiting.

And how should we look at the margins at our overall company level with alloys and relay scale up happening next year. So when the EV scaled up, we had a very good EBITDA margins of 20% -- we had crossed 20% also in certain quarters. So with now -- with EV not doing well, but alloy and relay scaling up, on an EBITDA level, how should we look at the margins for the company from FY '27 onwards?

EV business, particularly export is a little variable. So for example, in this year, first quarter, we saw a little bit of more sales on that front, so our margins improved. So that may go up predominantly as per the demand of the customer. I am expecting a better sale in alloy business. And so overall, I feel that margins should -- EBITDA margin should be similar to last year levels only.

So that 17%, 18% is what we should expect with alloy scaling up?

Yes, 16% to 18%, something like that, we may expect.

The next question is from the line of Sanjay Kumar from iThought PMS.

First question on alloys, the new capacity is fully booked or only partially booked? When can you book it fully, the 750 tonne annual capacity that we'll have in alloys' post furnace?

It is partially booked. We have booked -- I mean booked -- when we say booked, it is a visibility given by the customer. They send the purchase orders generally 1 month to 2 months in advance only. They don't send the full year purchase order in advance because it also depends on the material prices, but they give a visibility to us based on that, we can say that it is about -- it is partially booked, and we are already engaging with about 4 or 5 customers. So we are working with them. Visibility is very...

What is the application of these 4, 5 customers? Are these repeat orders or are the onetime orders?

Yes, mostly repeat orders. They are in multiple applications. One is oil and gas, other is for powder metallurgy parts, so there are multiple applications.

Okay. Anything related to aerospace?

Some aerospace, defense-related volume also, but that is a smaller volume. Some of that is also there.

So what revenue can we expect from alloys in FY '27?

That depends on how much actual offtake customer will take, but we may be in the range of maybe INR 40 crores to maybe INR 70 crores -- INR 40 crores to INR 70 crores maybe something like that is my expectation today.

And it can increase also?

Yes, it can increase also, yes. We are trying to pitch to many other customers in India as well as exports.

Okay. Okay. Second, on relays, how many customers have we submitted or working for valuation? Where are the approvals taking such a long time?

We have given samples to about 3, 4 companies till now. We are yet to take the certification, the official certification from laboratory. So we are doing that work in parallel. And the customers are testing these relays on the field. First they test in inside their plant, then they will take some pilot lots and then they will test those pilot lots. So we are at that stage now.

So it's only a matter of time? Or is there a chance that will not be approved?

It is a matter of time. We have to tweak sometimes if they want, they are already -- we are the second supplier. We are not the first supplier. So they are already buying this product. And now when they change or they introduce one more supplier, then our product, first of all, should meet the specification in the standard and it should be equal to their existing supplier quality also. So they compare both together. Currently, all products are imported.

So by first supplier, you mean imported Chinese imports.

Yes, most of them are imported.

Okay, okay. And in relays, what will be the FY '27 revenue potential?

That depends on how much a customer, how fast because our earlier, our expectation was that we will start selling in this financial year only, that was not right. Customer took a longer time. So next year, I would like to be conservative. I'm a little cautious that we don't know how much they were doing, but my expectation is maybe INR 20 crores to -- somewhere between INR 20 crores to INR 50 crores possibility is there. Again, depending on how fast and how quickly pilot lots go, how fast their testing process is. They do endurance testing, end of life testing. I mean, they do a lot of long-term testing to check because the meter has to perform in the field for more than 10 years, so they do accelerated testing. Many things they do. It can be more also depending -- I mean, how the -- how fast the product is about how fast, because there are some customers who are buying more than INR 100 crores each.

Okay. Okay. And they're willing to replace those imports with our product if they find that this...

Yes, yes. They are willing to -- we are willing to, yes, yes.

Okay, okay. So this INR 20 crores to INR 50 crores FY '27, but your total capacity at peak or full utilization can be INR 100 crores, right, the...

Yes. First, we are setting up 5 million, then we will go to 10 million and 10 million will be INR 100 crores level. But first, we are setting of 5 million, which will be established by March '26, between March and April. And then looking at the customer demand, we will scale it up.

So 5 million per month you're saying?

No, per year.

Per year. Okay. So 5 million will give you INR 50 crores revenue.

Yes, Yes.

Okay. Okay. And third on Quantum Magnetics. For the assembly business that we were doing, which has been passed, can you not source raw material or the blocks from, say, Japan or U.S. any other country?

So we were importing the magnets directly. Right now, we do not have the black block cutting facility. That is the Phase 2, which is going to happen in March. So right now, we were importing the magnets and that was restricted. That we are unable to import from other countries because all the other producers in the world are now full of demand due to this Chinese restriction.

Sorry to interrupt Mr. Kumar. May we request to please rejoin the queue. We have participants waiting for their turn. [Operator Instructions] The next question is from the line of [ Bhavesh Chouhan ], an individual investor.

Sir, in terms of margins, I have 2 questions actually regarding margins. One is what is sustainable margin in our industry? And also recently, as we have seen last few quarters, the EBITDA margin has come down around that 12% mark. So when do we see a recovery in that?

Yes, our business is comprising of multiple divisions, multiple products. So product segments being energy meter, automotive. And within automotive also, we have EV, we have relays and we have alloys. So margins are different for different products. So depending on which product we sell more, the overall margin depends on that. Our expectation, given the product mix that we see visibility for next year, it should be around between 15% to 18%, 16% to 18%, something like that, overall. That is the expectation today. As we go ahead, it may change depending on customer demand. Suppose, for example, we get more orders of EV business like the way we did for quarter 1, then we will have higher margins.

The next question is from the line of [ Dia ] from Sapphire Capital.

So can you provide a margin mix of how much for EVs, relays and alloys...

Sorry, I could not understand, can you repeat?

Can you provide how much margins does energy meter gets, how much you will get...

Alloy and relay. Margin levels are different within these businesses. Alloy business, margin depends on whether we are doing production out of virgin alloys, we are doing [indiscernible] or recycled materials. So those are different markets. And for energy meter business -- for relay business, I've already indicated that depending on the customization level, it can be from between stand to about 20% -- 10% to 25%, roughly, this is the levels depending on product to product. And for the EV-related or automotive-related businesses, again product to product different margins are there, ranging from 15% to about 40%, 50% in some cases depending on volume and complexity.

Right sir. And can you provide the current revenue mix that we have?

Current revenue mix is about 45% energy meter application, around 30% automotive and balance are other divisions. But last quarter, for example around 7% was alloy. So last quarter numbers I can give to you. Energy meter was 37%. Automotive was 22%, [indiscernible] about 9%, CT was about 10%, alloy [indiscernible] balance other applications.

All right. And can you quantify how much revenue growth we can see for FY '27. I know it depends on the kind of demand we get from our alloy business and also relay, but...

It could be between 20% to 30% is my expectation today, depending on the visibility that we have, it may become higher if we get more alloy orders or EV orders or relay orders or -- and this is my general judgment today.

And sir, this year, sir?

And this year, about 15% is our expectation, we will close growth.

Okay. So 15% for this year and 20% to 30% for FY '27?

Yes, yes.

The next question is from the line of Sanjay Kumar from iThought PMS.

Sir, on the Quantum magnetics, let's say, the import relaxation was received or we get our license, how much revenue can we do from assembly alone?

Our import relaxation is still not -- it is announced in the media, it is still not come officially to the suppliers. So once it comes, then we will again start business, and that turnover can be about -- only from the assembly business can be about INR 5 crores to INR 10 crores really, only from assembly business. And plus, we will add the block cutting once that starts, so that will be another addition to that turnover.