Salzer Electronics Limited (517059) Earnings Call Transcript

Good day, ladies and gentlemen, and a very warm welcome to the Q1 FY '22 Earnings Conference Call of Salzer Electronics Limited. Please note, this conference call may contain certain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I'm now glad to hand the conference over to Mr. Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you all for joining our earnings call to discuss the unaudited financial performance for the first quarter ended June 30, 2021. I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Assistant Company Secretary; Savli Mangle and Rahul Trivedi from Bridge Investor Relations. We have already shared our results update presentation, and I hope you all must have received it and gone through the same. Before we discuss the financial performance of the first quarter, I would like to share some of the recent developments and market scenarios with you. As we are all aware, the second wave of COVID-19 pandemic continues to adversely impact our lives and industries. And the onset of the third wave is threatening to start, and there's a lot of uncertainties. A fairly large part of the first quarter was spent in lockdown to curb the virus and prevent it's spread, even as the vaccination drive continued throughout the nation. Consequently, operations gradually resumed to full capacity as restrictions were eased in a staggered manner. However, as we have demonstrated during the previous year, even in such trying times, Salzer has been resilient and registered a good performance. On a more positive note, I'm very excited to share that we have recently forayed into electric vehicles vertical, in line with one of our growth strategies of adding new products and entering into new and promising business verticals. In July 2021, we entered into 2 joint ventures, one with an Austrian company, Kostad, and another with an Indo-Australian start-up, E-March LLP. Through our joint venture with Kostad, we will be manufacturing DC fast chargers for electric vehicles and related equipment and software. Kostad in Austria is a specialist in DC charging stations and equipment, and its a renowned brand across Europe. With their technical knowhow, we will be manufacturing EV chargers for India and Southeast Asian markets. Through our other joint venture with E-March LLP, we will be manufacturing electric conversion kits for auto rickshas, buses and also cars. We foresee a definite shift in automotive industry towards EVs, especially in the public transport. Stringent emission norms and government support for EVs are going to boost the sector in the coming years. With these ventures, we are positioning ourselves to be a step ahead in the market as the demand picks up. Speaking of our current product portfolio, the domestic dealer and retail market continues to recover slowly from the COVID impact, which reflects in our Switchgear and Building segment business, where sales are picking up pace. We are optimistic that the demand for these products will continue to gain momentum in the coming quarters. The Switchgear division has seen a strong order booking, which has helped us achieve higher volumes during this quarter. Prices of raw materials such as copper, plastic, steel and many other commodities have continued to rise through this quarter. We have been able to pass on this price increase in some of our product lines. However, the margins have been impacted to some extent due to the lag in passing on the price increase. Our export markets are recovering well with significant demand coming in as the impacts of -- impact of the pandemic subsides slowly in the global markets. Export revenues have grown in this quarter. As the industry reopens fully, our growing export market will complement the domestic market to help us grow faster, giving an upbeat view for the next quarter. The near-term market situation is still a little uncertain due to the onset of the third wave of pandemic and potential lockdowns in any part of India. But based on the demand we are witnessing and indications from various customers, we are optimistic for the medium term, and definitely optimistic about profitable growth in the long term. The company is well positioned to cater to any demand from our customers and poised to take up new opportunities. Now we will come to our quarterly financial and business performance. During the first quarter, our revenues increased by 55.71% year-on-year to INR 148.98 crores from INR 95.68 crores in the previous corresponding period, mainly since the last year's first quarter was severely impacted by nationwide lockdown. Moreover, strong order booking in this quarter for Switchgear products also supported the growth. The EBITDA for the quarter stood at INR 14.8 crores as compared to INR 9.59 crores in the corresponding previous period, which is a year-on-year growth of 54%. Q1 FY '22 EBITDA margin stood at 9.95%, which is a decline of 9 basis points compared to last year. The profit after tax was at INR 3.95 crores in Q1 FY '22 as against INR 0.69 crores in the corresponding previous period, Q1 FY '21. Moving on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 49.34% to the total revenues in this quarter. Our Wire Harness product has been growing ever since it was introduced in the market, mainly driven by newly acquired business from existing OEMs. Wire Harness business alone grew 106% year-on-year in Q1 FY '22. The Industrial Switchgear division's EBITDA margin stood at 12.7% in Q1 FY '22. The Wire & Cable division contributed 45.62% of our revenues in this quarter. It is a 24% year-on-year revenue growth in this division during the quarter. This division's EBITDA margin stood at 8.56%. The Building Product division has contributed 5% in this quarter. This business is only B2C business that we have. Consumer sentiment in the real estate market was relatively muted until now. Slowly, we are seeing signs of recovery from this quarter. We expect the trend to improve in the coming quarters, which will help us increase our contribution from this segment. The fourth is the Energy Management division. During the quarter, we have not received any new order from the government as there were no tenders issued during this period. We are hopeful that in coming quarters, we'll be able to bag some new projects under this station. On the export front, except initial fluctuations during -- due to the lockdown, we were seeing -- we are seeing steady growth, especially from the U.S. and European markets. Exports to the Americas grew 41% year-on-year in this quarter. Exports to Europe grew 175% year-on-year in this quarter. For this quarter, the export share of revenue was at 24%. We are seeing strong demand coming in from U.S., Asia and Europe as well from the domestic OEMs also. We should help -- which should help us recover post the second wave of COVID. While the situation does remain slightly fluid and uncertain, especially in the domestic market, we expect things to be under control from this quarter onwards. Our aim is to maintain and improve margins and ROCE and focus on our working capital cycle and remain competitive to capitalize on the opportunities arising in the future. Our joint ventures in the EV space reflect this vision to innovate and diversify our product portfolio and also stay ahead of the market trends. I thank all the stakeholders of Salzer Electronics Limited for their continued support and faith in the company, and wish all of you good health. This is all from our side for now. I would, once again, like to thank everyone for your time and attention. We can now take questions.

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

Congratulations on good set of numbers. I have a couple of questions. The first that being in line with Kaycee Industries. So what kind of synergy are we seeing with Kaycee Industries? And has there been any tangible benefit in terms of revenue?

Actually, Kaycee Industries, as I have been saying is -- was our direct competitor for rotary switchers, one of our products. And we are seeing a lot of synergies in that particular product between Kaycee and Salzer. We are -- on the manufacturing side, we are -- you're seeing a lot of cost savings for Kaycee. And on the market front, I think we have avoided direct competition in a lot of areas. So that is one thing. But unfortunately, as soon as we took over Kaycee in 2019, we only had 4, 5 months before the lockdown came. And I think the market has been very uncertain after that. And Maharashtra has been directly been very badly impacted during -- due to the pandemic. So we are still not fully seeing the results of the synergies and the cost cutting, both in Kaycee as well as Salzer. But I'm sure that the acquisition of Kaycee is going to help both Salzer and Kaycee in that particular product to improve margins.

Okay. So, sir, in terms of what you said, do we have any specific targets or market share that we want to acquire?

No. I think there is no targets of a market share. But with the Kaycee brand in our fold, I think we are in a much stronger position in the market to compete with low-cost brands, I would say, which we were not able to do when we were doing with only Salzer brand. So with Kaycee brand in our portfolio, I think we are in a much stronger position to compete in a market where we were not able to compete otherwise.

Okay. Sure. Sir, next few questions are in regards to what you said in your speech earlier about the JV and EV market. So could you please elaborate a little on these announcements about entry into the EV market? Like what are the reasons that we enter into these new segments, what kind of returns can be expected? And is there any timeframe to that?

We have always been wanting to get into EV market. I think we have announced these plans even a couple of years before that we wanted to manufacture EV chargers, and we did them, the slow chargers. However, I think we foresaw that DC fast chargers are going to be the future whenever the EV market starts picking pace. So for this, we were looking for partners who can come with good technology to make DC fast chargers and that's how we identified this company, Kostad, and we got into them -- joint ventured with them to manufacture DC fast charging. So that's one business that we are looking at. And the timeframe, I think it's very difficult for us to give a timeline and the growth projections as of now because we see that EV market itself is picking pace for 2-wheelers only now. So for 4-wheelers and other vehicles, I think it's at least another 2 years before the market really starts picking pace. So that's when we will start seeing revenues for charges. In the meanwhile, we are working with various government agencies, including EESL, DSL and various state governments to see how we can work with them to create an EV infrastructure using chargers. On the other joint venture, which I think is a very innovative one, to make electric conversions kits mainly for auto rickshaws and also for buses and for trucks. This, I think, is a new market that we are seeing. Not many people in India are doing, though there are some local manufacturers in various parts of the country are manufacturing this. There's no company that is making this in a major way. So we see this can be a good breakthrough in converting existing auto rickshas and buses to electric. So here again, I think difficult for us to give a projection as of today, where we are still doing some analysis on trials and research on how this can pick pace and what will be the volumes that we'll be able to achieve. So maybe a couple of quarters down the line, we will be able to give you a projection and timeline for these two businesses.

Okay, sir. So do we require a additional CapEx in the company? Are we planning to invest any CapEx as of now?

No. As of now, all the investments that we will be doing will be through internal generation, no additional debt we are going to take. And the CapEx, I think we have announced the total investment in both these -- we just put together coming to around 14 plus to -- INR 317 crores is what we are estimating as of today.

Okay, sir. And will this existing capacity be used in this, or do we need to add any?

This is completely new capacities that we have to have because it's completely new products. We can use some of our facilities and some of the infrastructure that we have, but this will be a new product and a new setup has to be made.

Okay. So do we have anything in mind for that? Are we looking at something as of now already?

Something as of now in the sense? I didn't get that.

In terms of, sir, manufacture -- like capacities or...

Yes. Yes, I think that is where the investment is going into and that's what we are going to set up.

Okay. Sure, sir. So are there like key customers for these products under the EV business? Have you already identified the key new customers?

Yes. Yes. For both businesses, we have identified a few customers, and we have already started doing trials.

Okay. And so will we be -- are we competing with some existing players already? Do we have...

Yes. On the EV chargers, we have competitors. We have companies like ABB, Delta, even Siemens is racing to chargers. And we also see companies like ASF making chargers for 2-wheelers. So we have competition in that space.

The next question is from the line of Kiran Naik from Mody Fincap.

Any plans of inorganic growth?

We always look for opportunities, but there's nothing in the agenda right now.

Okay. And you have taken the advantage of the PLI scheme of government?

No. Our products are not covered under the PLI scheme. I think the new ventures will be covered, so we will be taking advantage of that for the new product -- project -- EV products.

And what is our market share in the products we're dealing to?

It's very difficult to give a market size for the products because we have 15 different products. I think each product is having different market price. So it's very difficult for us to give a total market size for all the products.

But still, can we predict a 5%, 10% share we have, or more than that?

I think a couple of products we already have close to 20%, 25%. And rotary switch, we must be having 35% with the acquisition of Kaycee on the market share. And all the rest of the products, I think we should be between 5% and 7%.

[Operator Instructions] The next question is from the line of Aniket Redkar, an individual investor.

Congratulations on the good set of numbers. Yes sir, I have a couple of questions.

Go ahead, sir. Go ahead, please.

Yes. Yes. So there is a rise in revenue in quarter by 55.7% Y-o-Y. So which factor contributing is the most for rise in revenue?

I think we should accept that the last year first quarter was a washout quarter. So we did -- it was a locked down quarter. So we had minimal revenue. So that's one reason that you're seeing a very high growth. But even otherwise, I think this quarter also had a 1-month lockdown across various parts of the country and which also affected the revenues. Otherwise, we could have done much, much better in this quarter. Secondly, I think, as you said, the Industrial Switchgear business has contributed very well this quarter. Overall, I think we did around INR 74 crores in Q1 for Industrial Switchgear business, which is -- even on a normal basis, it is 15% growth. That is the business that is growing well now this quarter.

Okay. Okay. Okay. So next question, sir, Switchgear and Building segment, if you can see, is double in revenue during this quarter. So which factor driving the growth?

I think the general market has improved across the globe. Our exports have grown. We've got 24% share of exports, which is 4% higher than the normal exports that we have. So that's also one of the reason why Switchgear business is growing at a faster pace, and also domestic OEMs business picked up very well. The demand is very robust.

Okay. Okay. Regarding the same question related to the Building division. As you mentioned, real estate is showing a sign of recovery. So what do you envisage for the building division in this and next quarter? Are we categorically there?

I would say, we have not really done very well in the building division this quarter, though the sale has doubled compared to last quarter. That's mainly because last quarter was a bad quarter. Otherwise, we have not really performed very well in the Building segment division, but we expect that the market sentiments to improve going forward.

Are we chasing for the new clients as the sector reopens, I mean?

Yes. I think new clients, existing clients, both we are chasing. Even the existing clients offtake has reduced relatively. I think second quarter or third quarter onwards, this segment for us should do very well. Yes, we're aiming for at least 7% to 10% share of revenues from this division.

Okay, sir. Okay. So sir, raw material expense, if you can see as a percentage of sales, decreased slightly Y-o-Y, leading to improve the gross margin. Is it due to the successful passing on the price hike to the customer?

No, I think this slight fall is mainly because of the share of revenues. I think when we have a higher share of Industrial Switchgear revenues coming in, the raw material consumption percentage falls a little bit. But otherwise, the price increase is still not fully passed on. We are still seeing some impact, at least 1% to 1.5% impact on our margins because of the price rise, which I think will get offset over the next 2 quarters.

Okay. Okay. Sir, employee expenses also grew Y-o-Y by 52.7%. So is it just because of the low labor charges during this lockdown?

Which expense you say?

Employee expenses, sir.

Employee expense actually grew. It didn't grow, I think this is our normal expenses. But last year first quarter, we had lockdown. So the employee cost during that period was low. That is why you're seeing a growth, I mean, higher expenses this quarter. But otherwise, this is our normal expense.

Okay. Okay. So sir, Operating cost, also we can see there is an increase by 74.2% as well as percentage of revenue, leading to contraction in EBITDA margin?

Yes.

So what factors led to this increase? And what do these expenses comprise of?

Again, the comparison compared to the last year first quarter is not very correct because last year first quarter, it was a complete lockdown and we had very less fixed expenses. We actually had no expenses. But this year was a little different because it was a partial lockdown across different parts of the country. We were operating on a very partial -- partially. So we had to undergo a lot of fixed expenses, but at the same time, we are not able to see full revenues coming in. So that is why we see that other expenses as a percentage to the revenue gone up by 1 percentage point. So as I said, 1 percentage here and at least another 0.5% in raw materials, together 1.5% is the effect that we are seeing on the EBITDA.

Okay, okay. So sir, again, related to the Building division, I just want to know more about what would be your target share of revenues from the Building division. And what level of margins do we get in this business as a future point of view?

Ideally, we should get to INR 100 crores revenue target for this division. Maybe this year, we should -- we will be closing by between like, I would say, INR 50 crores as compared to last year's INR 35 crores. So hopefully, next year, we want to do INR 100 crores on this business, which has been our aim for, I would say, at least for the last 2 years. But unfortunately, we are not able to get to that level. So hopefully, I think this -- from this year onwards, it will be a turnaround.

Okay, okay. So sir, could you throw some light on the Energy Management business as a -- what is your future expectation from this division? Because as we can see, not much tender we are getting right now. But is there any opportunity you can see?

Not very much. I think I'm not very optimistic on this division as of today because it's a very -- what we call very fluid business. So it comes sometimes because there are also a lot of projects which we have already taken up through EESL is also stored because they are due to lack of funds from the government. So I'm not very optimistic on the energy management business as of now. And all our future projections are not including this division's revenues.

Okay, okay. Got it, got it. So sir, are you exploring any new companies...

Aniket, I'm sorry to interrupt. May we request you to come back in queue for follow-up questions? The next question is from the line of Chirag Patel, an individual investor.

Congratulations for the good set of numbers, sir.

Thank you.

I have a question. Like we incorporated several entities during this quarter, mainly focusing to EV side, I mean, electric vehicle side. So from where can we expect the production and all should start and come into stream?

We expect this production for these 2 ventures to start somewhere first quarter next year, March, April 2022, what we expect this production to start in revenues to come in.

Okay. And sir, like what product mainly be targeting like other than battery?

One is electric vehicle charging stations. The other one is electric conversion kits for autos and buses.

Okay. So like even ABB, as you mentioned, and Siemens also in this segment, right? So...

Yes. ABB and Delta are the 2 companies currently making this type of charges here, the fast chargers.

Okay. So like Tata Power also, now that they are partnering to one OMC to set up EO at their existing petrol pumps, fuel pumps. So...

Tata Power doesn't manufacture charges, but they buy charges from either of these 2 companies, ABB or Delta.

Right. So from a strategic partnership point of view, which vendors we are looking to tie-up, similar to like Tata Power did?

We are looking at various options. I think the government is having a lot of plans to set up or develop the EV infra. So they have promoted a company called CESL, which is a subsidiary of EESL. So CESL is exclusively looking at EV business. So we are talking to them to get partnered with them, their tenders. And we're also talking to various other state governments, Tamil Nadu and Karnataka, to be specific, to see how we can implement EV charging infrastructure along with the state government's plans. Apart for this, we are looking at various other customer base. I think that's -- there's a lot of opportunities in charging stations. We can also -- we are also approaching Tata Power to see if we can have a business tie-up with them.

Okay. And sir, a follow-up to this question. Like 10, 12 years back also one boom has come for electric vehicles, particularly in two-wheeler side, okay? So -- but it has not gathered that much momentum and subsided well. So what is this time different story compared to the previous such momentum?

I think the only thing that is stopping people to buy an EV car or a two-wheeler is the range of the breakup. I think whatever vehicles we had earlier, I think the range was a problem. And then, also the mindset of that to get charged if vehicle stops in between. Unlike the fuel bikes or cars, you can see petrol pumps across and there's no fear of range. So when the fear of range is gone, I think this EV business will start picking up. And the vehicles that are coming today, both 2-wheelers as well as cars are of much quality and having much better range. So now, when we have the charging infrastructure set up across, I think the EV business will start taking place.

Okay. So for the charging stations, which you're talking about, like what normally it take time to fully charge the average battery, which any EV has...

A car, like, for example, Tata's electric car or Hyundai Kona, should get fully charged in less than 20 minutes, if we do it in the fast charger, which has a range of around 300 kilometers.

Okay. On lithium-ion battery, right?

Yes, on lithium-ion battery.

Okay. So how the future fuel station will be looked like? Because currently, we also see some time cars queue in petrol pump or fuel station in certain places, I mean, on crowd places. So how they will manage in future? Like because if it takes 20 minutes, right, then how the traffic can get controlled, and visualization for future fuel station I'm asking for?

I think it's too early to see how this will develop. But I can see that electric charging stations will be also a part of the infrastructure that -- along with the fuel stations. I won't say that the commission normal cars will just vanish and everything will be electric. I think electric will be also, along with the combustion vehicles will be running. And you will see a lot of charging stations across various places, across restaurants, across -- even in petrol pumps, you might be seeing charging stations in future. So I think it will -- it has to evolve in that manner. And going forward, this current 20 minutes may also come down. With the onset of technology, I think with more research getting into this, this timing also will start dropping.

Okay, sir. And other than this charging and the power conversion, are we looking into manufacture any other products or components for this EV industry going forward? Any new development?

Not immediately. No, nothing to announce as of today.

Okay. And what percentage of revenue we are expecting to come 3, 4 down the line from these 2 ventures?

I think we are projecting at least each -- both -- each business should do INR 50 crores to INR 100 crores. So electric conversion kit, we are targeting INR 50 crores in 3 years. And charging stations, I think we should target at least INR 100 crores in 3 years, if the business really starts picking up.

Okay. And what margin we expecting? I know it's at -- currently, it's...

I think it will be too early for us to commit anything on that front.

The next question is from the line of Zaki Naser, an Individual Investor.

I mean, congrats on a decent set of numbers for a difficult quarter. I think going back to Tamil Nadu was pretty bad. Sir, last year, we did around INR 630 crores on a consolidated basis. Considering that things are opening up and we have our infra in place for growth, do you think that we can have a 15% growth over that figure in the current year, sir, from the top line basis? That is question number one. Question number 2 is, Mr. Rajesh, these tie-ups, which you had with both these companies for the EV infra or EV chargers, do you think that Salzer as a core company will get some overflow of orders from these things like wire harnesses and stuff like that?