Salzer Electronics Limited (517059) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Salzer Electronics Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohit Ohri from Progressive Shares. Thank you, and over to you, sir.

Thank you, Darwin. Good evening, everyone. On behalf of Progressive Shares, I welcome you all to the Q4 FY '24 Post-Earnings Conference Call of Salzer Electronics Limited. Please note that this conference may contain forward-looking statements, which are based on the beliefs, opinions and expectations of the company as of the date of this call. These statements are not guarantee of future performance and may involve risks and uncertainties that are very difficult to predict. I now invite Ms. Savli Mangle for the opening remarks to be followed by question-and-answer session. Over to you, ma'am.

Thank you, Rohit. Good evening, everyone, and thank you for joining us today to discuss the audited financial performance for the fourth quarter and full year ended March 31, 2024. I have with me Mr. Rajesh Doraiswamy, Joint Managing Director; Mr. P. Sivakumar, Assistant Vice President, Marketing; Mr. P. Bellary, Assisted Vice President and Business Development; Mr. R. Menaka, General Manager, Accounts; Mr. K.M. Murugesh, Company Sectary; Mr. Jitendra Vakharia, Director, Kaycee Industries; and Mr. Raman, COO, Kaycee Industries. I shall take you through the consolidated financial performance for the fourth quarter and full year ended March 31, 2024. During the fourth quarter, our revenues increased to INR 326.6 crores from INR 302.7 crores in the previous corresponding period. This growth is driven by the businesses in Wires & Cables and Industrial Switchgear. On the export front, our share of revenue was [ 27 ]%, demonstrating a year-on-year growth of nearly 18%. The EBITDA, excluding other income, which received INR 33 crores in Q4 of FY '24 as against INR [ 24.7 ] crores in Q4. FY '23, year-on-year growth of 34%, mainly on account of higher volumes and higher contribution of the Industrial Switchgear business. The EBITDA margin for the quarter stood at 10.13%, year-on-year improvement of 198 basis points. The profit after tax was INR 13.3 crores in Q4 FY '24 as against INR 9.9 crore in Q4 FY '23, a year-on-year growth of 35%. That margin for the quarter stood at 4.08%, year-on-year improvement of 83 basis points. Coming to our full year financial performance. For the full year FY '24, the net revenue was INR 1,166 crores as against INR 1,037 crores in FY '23, year-on-year growth of 12.5%, driven by the businesses of Industrial Switchgear and Wires & Cables. The export share of revenue during the year was nearly 25%. The EBITDA excluding other income stood at INR 117 crores in FY '24 as against INR 95.9 crores in FY '23, a year-on-year increase of 22%, mainly on account of reduced raw material prices. The EBITDA margin was up 10%, a year-on-year improvement of 78 basis points. Profit after tax was INR 47.1 crores in FY '24 as against INR 39.6 crores in FY '23, Y-o-Y growth of nearly 19%, as the margin stood at 4% in FY '24, a Y-o-Y improvement of 22 basis points. Moving on to the breakup of the revenue as per our business divisions, coming to the Industrial Switchgear division contributed to 53.7% of the total revenue for the quarter and nearly 55% in FY '24. This business grew 8% year-on-year in the quarter and 13% year-on-year in the full year FY '24. EBITDA margin for this business was 13.3% in Q4 and 12.6% in FY '24, which is an improvement of 100 basis points over the last full year. Coming to the high-value products in this division, 3-phase [ Dry Type ] Transformer product with 4% year-on-year in Q4 and 43% in FY '24. And the Wire Harness product grew 28% year-on-year and 44% for the full year. Wires & Cables business contributed to nearly 40.5% of revenues in the quarter, and 39.5% in FY '24. This was nearly 7% year-on-year growth in this business during the quarter and 15% in FY '24. The EBITDA margin for this business stood at 6.3% in Q4 and 6.9% in FY '24. The Building Products division contributed 5.8% of our revenues in the quarter and nearly 6% in the full year. This business is the only B2C business that we have, wherein we sell many electrical products, the building sector. Due to high sales outstanding, we are slowing down space with a specific distributor. We're also doing some reorganization of teams and channels that we expect will improve the growth trend in the coming quarters and help increase our contribution from this segment. Thank you, and I'd like to now hand it over to Rajesh Doraiswamy to take us through the business development and the way ahead. Over to you, Rajesh.

Thank you, Savli. Wish you all a very warm welcome to Salzer Electronics Limited Earnings Conference Call for the Fourth Quarter and Full Year ended 31st March 2024. Thank you all very much for taking time today to join us. We have shared our results update presentation and media release. I hope you all must have received it and gone through the same. I would like to share some recent developments and outlook for the future. To start with on the market outlook, as we're well into the fiscal year 2024/'25, is imperative to gain insight into the anticipated trajectory of the global market in sectors where we are dealing. With a cautiously optimistic view, the market is poised to undergo moderate growth driven with several key factors. Despite the challenges posed by various geopolitical tensions and economic slowdown in the key markets, particularly in U.S. and Europe, we remain cautiously optimistic about the future growth opportunities for Salzer Electronics. Our unwavering focus on both revenues and margin expansion positions us well to navigate these challenges and capitalize on emerging trends in the global market. We are witnessing a mega shift towards green energy on a global scale, which is posting significant investments in renewable energy projects across the world. This persists a compelling opportunity for Salzer to leverage our expertise and offerings in the renewable energy sector, driving growth and innovation in this space. Moreover, the market outlook for Salzer remains positive, fueled by growing demand in India and ongoing investments in infrastructure and digitalization in the country. With our expansion plans underway, including the exploration of new markets like Australia, New Zealand and the Middle East, we are poised to capitalize on these opportunities and further strengthen our market presence. As we continue to expand our product portfolio and explore new avenues for growth, we are confident in our ability to achieve our strategic objectives and deliver value to our stakeholders. On the business, some of the key developments in the last financial year. Over the year, Salzer Electronics has demonstrated remarkable progress across various sets of business operations. Notably, the company has secured a patent for heavy-duty energy-efficient automatic changeover. This product -- this highlights Salzer's dedication to intellectual property advancements and enhancing its product portfolio with proprietary technology. Now moving on to our subsidiaries. Salzer Kostad EV chargers is one of our subsidiaries, where we manufacture EV chargers. In the previous calls, we had informed that the chargers are being tested at ARAI for certification. In this process, we have encountered a small setback. Out of the total of 14 different tests that the chargers had to undergo at ARAI, we have passed 13 tests. However, in the 1 last test, which is the communication test, the chargers have failed. The reason for this is the chargers developed for European markets by our collaborator are as per the [ PIN ] communication standards. Whereas in India, it is as per ISO communication standard, which is mandatory related to a software. Hence, we, along with our partners, are working on this issue to solve it. Hence, we expect some delay in getting approval from ARAI. More detailed updates on this will be shared with you in the coming quarters. On our other subsidiary, Kaycee Industries Limited, Kaycee has shown consistent growth in sales performance, reflecting effective management and operational execution. As far as our subsidy Kaycee Industries Limited is concern, the sales have been growing consistently and EBITDA margins are also improving. During this year, Kaycee's revenue was at INR 48.81 crore as against INR 41.7 crores last year, which is year-on-year growth of 17%. EBITDA grew 42% year-on-year to INR 6.78 crores. PAT grew 28% year-on-year to INR 4.49 crores in FY '24. PAT margins stood at 9.1%. This is an increase of close to 100 basis points from last year. Financially, the company has demanded robust performance with revenue and profitability showing significant growth in Q4 at the last full year as compared to the last year. This was mainly driven by strong performance in segments like Industrial Switchgear and Wires & Cables. Our new initiatives, the 3-phase transformers and the Wire Harness business are growing well, and we expect this growth will continue. Export markets have also been instrumental in revenue generation. Salzer is actively pursuing expansion initiatives in regions such as Australia, New Zealand and the Middle East, while anticipating continued growth in Industrial Switchgear business. This year, we have achieved noteworthy milestone in product development. Most notably, we successfully developed smart meters and the smart meter facility has received BIS certification for our [ newest ] smart energy meter. The cutting-edge smart meter factory is also backward integrated with Salzer's existing Coimbatore factories, which have been manufacturing crucial electrical components for smart meters. As informed earlier, the trial production is underway at present, and we are in various customers for long-term tiers. We recognize that the market has slightly slowed down and that there are more issues ahead. Nonetheless, we are in a strong position, thanks to our wide product range. We anticipate stability throughout these trying times because to our long-term relationship with various large cities. I thank the entire team at Salzer Electronics Limited for their untiring efforts and all of our stakeholders for your continued support and faith in the company. This is all from our side for now. I would like to thank you all very much for your time and attention. Now we can take questions.

[Operator Instructions] We have the first question from the line of [ Rajesh Mangal Agarwal ], an individual investor.

Please throw some light on the smart metering facility, whether this is B2C for household or [indiscernible].

Yes, sir, smart meters is the meters that are used in every usual house and every small businesses, every factories, wherever the power means measured and monitored and billed the smart meters are used. They are consisting of different types of meters in the 3-phase for the application and then you have HT meters for the factory. So we are not...

Did you develop all the 3 meters, sir?

We are right now developed [indiscernible] and 3-phase. [ 3-user ], we have got the BIS certificate already, 3-phase, we will get the BIS certificate by end of June. The sales of these meters will be those customers who have already taken orders from the Discom.

Yes, yes, yes. So right now, what is the progress, sir?

The factory has been -- installation of the factory is almost 80% complete, and we are running trial production starting June. And we are in discussion with various customers and we are submitting samples to the customers. The customers are in the process of evaluating the product and integrating with their software, and we expect the commercial production to start as soon as possible.

Okay. Sir, second and last question is, what is the future guidelines for top line growth and EBITDA margin for FY '25?

Excluding the smart meters, we expect to grow anywhere between 18% and 23% in the coming year. Smart meter business sales will be over and above that.

Yes, both topline and EBITDA?

Yes.

No, no. Like top line, your EBITDA margin is around 10% to 11%. So what is the EBITDA margin for FY '25?

EBITDA margins have. Yes, excluding smart meters, EBITDA margins, we have improved by close to around 70 basis points this year compared to last year. So we expect this to go up by another 1 percentage point in the coming year.

So around 11%, do you think?

Yes. 10.5% to 11%, yes.

The next question is from the line of [ Balamurali Krishnan ] from Oman Investment Advisers.

My question is again on the smart meters. So we are going to supply to [ ISPs ] right [indiscernible] from discount. Are there any future plans to supply directly to discount like in some another I think the tender is yet to be awarded. So is there any scope for you to participate in the tender?

Good question, sir, thank you for bringing this up. We are -- right now, I think our focus is to manufacture meters and sell to [ same ] ISPs, those who have already taken orders from discount. It is understood the data that is available in the REC website that close to INR 15 crore meters have been tendered and orders have been taken by various [ same ] ISPs. So our major focus right now will be to get to this INR 15 crore meter orders and supply to the [ same ] ISPs. For your second question, I think, yes, I think we have also got the AM ISP license already from REC. So we are also able to participate in the upcoming tenders. We will keep our options open, and we will see if there is a possibility, if we are qualifying for the requirement, we will be participating in the tenders and taking orders directly from the discounts.

Yes. That's good to hear, sir. And secondly, on the [ stores ], so we are initially planning to manufacture 4 million smart meters. I think maybe if we start our commercial production from the June. So I think we were able to achieve this [indiscernible] capacity in 1 or 2 quarters, right, sir?

Yes, I think we are ready with the facility. As I said, 80% installation is complete. The balance 20% also will be completed in the next 1 month or so. We have already started trial production. We are just waiting for the first order to come in. To achieve 100% capacity utilization, I think that depends on the order inflow. We are doing all that we can in our capacity to bring in orders and fill the capacity.

And lastly, I'm just sort of asking are the [ base price ] of the smart meter would be from the INR 3,000, so we can expect like INR 1,000 crores revenue if we are at 100% capacity utilization on the year?

Yes, I think the pricing of the smart meter varies in [ there ] somewhere between 2,400 to 2,700, 2,800 for single phase and the 3-phase is a little higher. And you're right, I think our capacity is at 100% utilization for the manufacture of 40 lakh meters, we expect INR 1,000 crores revenue to come in from that business.

That's very good. Lastly, and any other new products, which are under trial that you want to start production like smart meters or EV chargers? So any other priorities in the pipeline, which could be realized in every next 6 months or 1 year or maybe 2 years?

There are various new products that we are working on. But there is nothing that is ready to launch and or anything that is significant to be informed. So we just keep doing a lot of new products, we keep expanding our existing product portfolio, but nothing new as of now, like smart meters.

The next question is from the line of [ Rajay ], an individual investor.

Am I audible? Perfect. So first of all, congratulations for the full numbers. I have 2 questions, again, on smart metering. So for FY '25, what is the revenue that you are expecting as a percentage of total revenue?

Yes. Thank you. Thank you for your appreciation. On the smart meter, as I just informed, I think, at full capacity, the revenue generation will be around INR 1,000 crores. However, to give a projection for FY '25 will be slightly difficult because we are still negotiating with various customers on the orders. So without a solid concrete backup from our customers, we'll not be able to give a projection. But my expectation is that I think at least 50% capacity utilization should be achieved. So I expect that we should be able to reach at least INR 400 crores to INR 500 crores revenue in the smart meter business, if everything goes well from now.

Okay, perfect. And my second question, that you have given a growth expectation of 18% to 23% for FY '25. I wanted to know about the breakup of each business segment. So can you give me an expectation of growth via Industrial Switchgear, copper business and building divisions, along with the EBITDA margin expectation?

I think EBITDA margin expectation, I already said that I think we will be increasing our EBITDA margin by at least 100 basis points from the current level of 9.75% to 10.75% to 11%. So that's our target for the coming year. On the growth, Industrial Switchgear business should be growing at around 22%, 23% this year. Copper Wire & Cable business should be growing between 18% and 20%. Our building segment, we are expecting that it will grow by around 40%.

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

And congratulations for the good set of numbers. Sir, just wanted to ask you about the smart meter. Over a period of, say, 3 years down the line, what percentage of market share which we are looking for that, considering the demand is there for around 25 crore of smart meters to be replaced over a period of years?

Very difficult question to answer because the market is -- actually, as you said, it's a very big market. We expect this -- the RDS scheme alone gives an opportunity of 25 crores, currently in the country. And then we have opportunities to export to the Middle East, the Far East as well as the applicant market. So there are markets outside of India. Even if we consider this 25 crore market, it's in my personal opinion, which is going to take at least for next 5 to 6, 7 years to complete the installation of this 25 crore meter. Right now, our capacity is 40 lakh meters. If we get the capacity filled up, as soon as possible. As soon as we get the current capacity filled up, we hope that we will expand this capacity or double it to for another 40 lakh meters there. So that is our idea. So considering all this, if we are able to secure orders and install the meters as expected, if the customers complete the installation as expected, I think we should be -- in the next 5 years, I think we should be able to sell at least 3 to 4 crore meters.

We have the next question from the line of Chirag Jain from Yogya Capital.

Sir, I have 2 questions. First, on the smart meters, we are seeing some [ current restriction ] on ground on the installation side. So how are you seeing that?

Say that again, I didn't get your question.

The -- on the ground, there are reports of people not allowing the power grid companies to install recently from Gujarat. People are not happy with the smart meters.

Yes. I think definitely, I think there will be resistance to change. People think that smart meters will charge them more and things like that. But I think the technology advancements cannot be stopped. I think it will move forward. The government is -- they want this project to happen. This will create a lot of positives for the Discoms going forward.

So hasn't the deployment been slowed?

Deployment is slow at this moment is not because of the resistance from the general public, but it's because of the issues that we -- because the MSPs have today, because of supply of meters, integrating the meters with software and ensuring that the service levels are at 99% plus. Because if the meter doesn't work, the Discom can't bill. So I think people are still testing and ensuring that things are working fine before they go at full speed for market implementation.

So don't you think there will be some delays in the installment before the actual size scale-up because there are issues in the installed meters and something like that?

I think you will -- we will definitely see a lot of shakeout in this field in the next 2 years. There will be a lot of new players coming in. There are a lot of old players getting out of this business. We do see a lot of -- definitely a lot of quality issues because communication of 15 crore meter or 20 crore meter over [ GPR ] or RF is not an easy job across India. So that needs a lot of bandwidth from the telecom industry, capability and bandwidth from the service providers or system integrators. We will definitely see a lot of shakeout. So I think in the next 1, 1.5 years, we will see a lot of consolidation and then things moving forward. That is why I said in my previous answer that it will be a 5- to 6-year project to complete this 25 crore meters.

Okay. Fair enough, understood. What are the expected margins currently do we have on mind for meter facility?

Meters, I think it's very difficult to say this now because we are still in the processing stage, and they are starting the [ tile ] production. But we expect that we will see -- this will be a very short on working capital there because of the demand that we see in the cost. So there won't be extra working capital in this. So considering that, we will see an EBITDA margin of close to 15% on this [ part ].

Okay. Secondly, on the EV charger side, the EV chargers technology hasn't moved up as we planned up to. So also the sales of the EV in the new cars is almost stabilizing or declining of to say. So how well -- how do you see that to tap that opportunity? And how are you working again on that? So can you give some guide on that?

Unfortunately for us, I think there has been a setback the development of our chargers in the [ present ]. But then I feel the short-term setback, which we overcome along with our partners, in the technology technical team that we have. On the business front, I think what you say is right. I think the EV business has -- I would say slowed down. The growth has slowed down or tapering a little bit. But I think it is temporary. Going forward, in my opinion, at least 20% of the vehicles will become EV. And that's what the world also is moving forward because that's what the U.S. and European markets are going. So I think India will be following the same trend. So before the actual business grows on the EV 4-wheeler front, we will be able with our chargers. And I expect that we will be able to capture significant market share in EV charger.

So getting into more granular sense of the testing team. So what are you doing now to how we have failed in the Indian conditions to considering the previous failure? So what changes do we have in mind or we have done in the last quarter?

I wouldn't consider this is a failure because we have completed all the tests. The charger is charging the cars, is working very well. One of the thing is that there are different technologies to communicate with different standards of testing for the communication protocol. So there ISO standards. There is development of different standards for the U.S. market. So the [ build ] standards are working fine, but the ISO standards are not working properly. Because the standard that the chargers were developed is for Europe, unfortunately, is not complementing the Indian [ tests ]. So now we are trying to change the software and we cooperate in new communication standard also. It is just a change in software that we have to develop. If there's nothing -- no change to the hardware.

Okay. So it can withstand the 50 degrees centigrade or temperatures which are...

[ Quality tests ] are completed.

Okay. Fair enough. So we have started work on that?

Yes, yes. We have already started to work on that, and I think we complete the software through the internal testing and then go back to ARAI for recertification.

So when do we expect something on that?

It's difficult to give a timeline for that for right now. I think in the next 1 month or so we will be having a clear picture on when this gets completed.

The next question is from the line of Amit Agicha from HG HAWA & Company.

My question was regarding the CapEx plan for the FY '25.

I -- current CapEx. Anyway, yes, I think there's no major CapEx because we have done our smart meter CapEx almost 70% this year. So the balance will be done next year. Other than this, there is no major CapEx, and we will be doing the maintenance CapEx of approximately INR 17 crores to INR 20 crores.

Okay. And as the company has informed that the capacity of the smart meters is right now 40 lakh meters. And the [ company ] is able to double capacity to 80 lakh meters. So will it CapEx be required for the '26 or '27 FY?

I think and from then, we are filling this under capacity and how the commitments from our customers are coming in -- so it can happen in FY '26 or FY '27.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Am I audible, sir? Sir, I just wanted to understand this commercial production, when we are expecting it to start, the smart meter?

As I said, I think the trial production is underway. Commercial production, we are ready once the orders come in. So we should be, in my opinion, I assess that I think by June, July, we should be getting some orders and starting the commercial production.

By June. And what is the total CapEx for this plant of 40 lakh unit?

For 40 lakh units, when the entire plant is installed and completed our total CapEx will be closer around INR 40 crores.

Total CapEx is around INR 40 crores.

Yes.

Okay. And you mentioned that the -- if everything goes well, we will be able to reach [ approximately ] INR 500 crores revenue from smart meter here. Which year we are referring to from this INR 400 crores, INR 500 crores?

[indiscernible] as I'm referring to the [indiscernible].

[indiscernible] [ 15% ] that we are guiding for this meter business.

First year might be a little lower because we're just starting. And I'm also very -- not very sure that we will be able to [indiscernible]. So it depends on the [ order book ], it depends on the [indiscernible]. But I'm optimistic, if we are able to do this first year, and the EBITDA margin is not 15%, I think definitely, it will be between 12% and 15% for the first year.

12% to 15%, right? And if not INR 400 crore, INR 500 crore maybe INR 200 crores, INR 300 crores is what we might target, right?

I think that's very optimistic, yes.

Understood. And just one last final thing. I think you mentioned next 5 years, you plan to sell about 3 crores meter, right? So that effectively means a revenue potential of INR 7,500 crores over the next 5 years, right?

Yes.

Okay. So what is the risk we see in that? I mean what can happen if -- I mean, what is the risk to it, the outlook that we are sharing here?

Actually, the risk is if the meters installed already doesn't work properly, if the communication doesn't happen and if the entire installation by the customers -- by our customers doesn't happen properly, then the whole team might slow down. So if it not -- doesn't happen in 5 years, I think it can happen in 6 or 7 years. But it will definitely happen because the government is committed to do this, to go ahead with this project. And they have awarded tenders, so it will definitely happen, but it might take a couple of more years to complete that.

Understood. But I think the tendering is for 15 crores meter, right? That has been...

Yes, but other 10 crores will start now, once the elections are over, the results are out. I think when the model code of conduct is completed, then the tenders for the rest, 10 crores will start.

Understood. And we are developing 3-phase and single-phase smart meter, right?

Correct.