TD Power Systems Limited (533553) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the TD Power Systems Limited Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Devrishi Singh of CDR India. Thank you, and over to you, sir.

Thank you, Vikram. Good morning, and thank you for joining us on this call to discuss financial results of TD Power Systems Limited for the quarter and 9 months ended December 31, 2019. We have with us Mr. Nikhil Kumar, Managing Director; and Mrs. M. N. Varalakshmi, Chief Financial Officer from the management team on this call. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Documents relating to the company's financial performance have already been e-mailed to all of you earlier. I now invite Mr. Nikhil Kumar to provide key highlights of the company's performance for the 9 months ended December 31, 2019. Thank you, and over to you, sir.

Thank you. Good morning, everybody. Thank you for joining us today on our earnings call. I trust all of you would have received our results and investor presentations. Now I would like to discuss with you TDPS's financial performance for the 9 months ended 31st December, 2019. Stand-alone. Our total income on a stand-alone basis for 9 months is INR 346 crores, an increase of 22% versus INR 283 crores for the same period last year. Profit after tax for 9 months is INR 9.24 crores versus a loss of INR 4.5 crores for the same period previous year. The company has adopted the revised tax structure and has made tax provisions accordingly. Manufacturing revenues for 9 months is INR 328 crores versus INR 262 crores, an increase of 25%. Exports and deemed exports contributed 61% of manufacturing revenue. The total manufacturing order book including our Turkey operation and our railway business stands at INR 1,095 crores. The split up is INR 290 crores is the India manufacturing, INR 736 crores is the railway business and INR 69 crores is Turkey. Exports and deemed exports, including Turkey but excluding the railway business, is 74%. Order inflow. Our total order inflow for 9 months is as follows: including TDPS Turkey, which is now clubbed together -- in the future, we'll be clubbing our Turkey business as a manufacturing business -- our total order inflow is INR 419 crores for 9 months compared to INR 370 crores the previous year same period. Q3 order inflow for the current year is INR 186 crores versus INR 131 crores for Q3 versus Q3 of last year, this year versus last year. Project business for 9 months is INR 10 crores versus INR 13 crores the same period last year. Our order book for the projects business stands at INR 35 crores. On a consol basis, our total income is INR 375 crores versus INR 268 crores the same period last year, an increase of 40%. Profit after tax and other comprehensive income is INR 10.53 crores versus a loss of INR 12 crores last year. We continue to maintain a strong cash position of INR 152 crores. Now I'll come to the market situation and guidance. This year, we have seen strong order inflows in all segments of the business, from India as well as from exports. In particular, we've seen heavy order inflows from the gas engine business export and with steam turbine side domestic. We've seen the domestic market ordering in steel, wastage recoveries in cement primarily, distillery including ethanol business, and paper. And to a smaller extent, we've seen some business in sugar cogeneration. We think that the domestic market has bottomed out and signs of consistent recovery are clear and emerging. For us, the hydro business is flat at the moment in terms of order inflow, but there are some big orders in the export market and we are bidding strongly for them, and we hope -- and we are hopeful to secure a few of them. Our Turkey manufacturing business deserves special mention. We have almost EUR 10 million order inflow, and our factory in Turkey right now is running at full capacity. We have taken orders in geothermal, hydro and biomass. We hope to have consistent volumes in this market for '21, '22 since the inquiry and project business -- project -- sorry, the inquiry and order pipeline is very strong. We have secured breakthrough orders from a major U.S. engine based -- engine company into TDPS India. We have received an order for 3 machines, and we will then receive an order for 5 more machines, a total of 8 machines for different engine types. We will expect volumes to begin in '21, '22 for this since there's an 8-month qualification period after delivery of these machines. Delivery of prototypes is expected to be around May this year. Our traction line for railways is running at INR 8 crores per month starting from this month. Confirmation of volumes at this current run rate for 2021 has already been received from the customer, and they're going flat out. Let me move towards guidance. Manufacturing business, the outlook for this current year, '19/'20, is firm as per our earlier guidances of INR 480 crores to INR 490 crores. Q3 revenues, as noted, were in line with our guidance given in the previous earnings call. TDPS Turkey will end this year with sales of EUR 3.2 million, which is around INR 25 crores. So as a total, our manufacturing business has crossed INR 500 crores this year for the first time. We would like to put out our first guidance for FY 2021, the next financial year. Based on the current order book and visibility, we can -- we expect manufacturing revenue to be minimum INR 600 crores, up from INR 500 crores this year, including Turkey. All our subsidiaries will be profitable next year. We do not see any major changes in our fixed costs other than the historic trend line increases in employee-related expenses and operating expenses. Investments for the next 2 years will be mainly in the area of robotics and automation. We have already installed and commissioned the third robot into TDPS. We continuously keep adding automation and robotics to our production to keep our manufacturing at the cutting edge of technology. These investments, however, will be kept well under the depreciation numbers of TDPS. Projects business, top line is INR 34 crores. This business is decreasing, and we are initiating actions to downsize, and we will downsize our organization in line with the expected business. Subsidiaries, TDPS Turkey, TDPS Europe will make healthy profits this year. TDPS Japan and TDPS USA will make small losses. However, netting out those small losses, overall our subsidiaries will show profits and will contribute positively to the company results on a consol basis. This brings me to the end of my initial remarks. I will now be happy to address all the questions that you have. Thank you.

[Operator Instructions] We have first question from the line of Smriti (sic) [ Kirti ] Jain from Sundaram Mutual Fund.

Sir, Kirti here, sir. Congratulations for very positive outlook, I would say, and good order flow, I would say, for the quarter sir, very good order flow. And third consecutive quarter we have seen a very good order flow, sir. So sir, just, first, I will start with, sir, currently your manufacturing -- you -- as per our computation it's INR 490 crores, right, sir?

Yes, I said INR 480 crores to INR 490 crores for the India, and EUR 3.2 million, which is around INR 25 crores, for Turkey.

Right, sir. What you have done YTD sir? As per our computation, we eliminate intercompany and calculate the -- what is our number you have done YTD as per we have done?

So YTD for India is INR 328 crores in manufacturing and Turkey is -- one second -- I think EUR 1.5 million you can take Turkey.

Okay. So we have done INR 340 crores, and we are expecting kind of INR 150 crores, INR 160 crores kind of manufacturing in the fourth quarter?

INR 155 crores to INR 160 crores in -- for Q4 and around INR 11 crores from Turkey.

So 4Q would be like a similar on a Y-o-Y basis? Like, last year, 4Q was a very strong year. So such kind of lumpiness can be there, broadly? Because last year, we did a [indiscernible].

No. We've seen that Q2 and Q4 is where we have maximum sales, and that's because of half year ending, many of our customers are also -- have year ending in September. So there is definitely a pull from the market in Q2 and Q4. Q1 and Q3 tend to be depressed quarters for us. But what we do is we manufacture consistently throughout the year and then the peak of sales takes place.

Okay. Sir, in terms of next year, sir, order flow also looks healthy, sir, at this point from the key customer for Q4 and Q1. Any -- like the order flows also directionally looks healthy, sir?

Yes.

Order flow momentum?

They've had a very good January already. Exceeded our expectations, to be honest with you, and we are seeing same kind of situation continuing into February and March.

Okay. Okay, sir. Sir, in terms of margin, generally, like what is the PBT margin we would be targeting, sir? Because now as per Ind AS, the -- some of the forex gains because of our hedging policy comes below the line, what would be the PBT margin you would be targeting?

Yes, I have not put out that number as yet, Kirti, because...

With this year, sir -- you generally review the guidance now, sir.

Yes. So this year -- so you can take our gross contribution to be somewhere in the region of 30% to 31%, okay? And then you can do the calculation based on that.

[Operator Instructions] We have next question from the line of Dhwanil Desai from Turtle Capital.

Congratulations for the very good set of numbers. Sir, 3 questions from my side. First question is, sir, this year on consol basis for this quarter, our gross margins have slightly dipped and the copper prices have been going down continuously. So how -- I mean as probably you guided for 30%, 31% kind of a gross margin, sir, that is considering the drop in copper prices? Or I mean copper remains hedged from our side?

So copper has dipped recently because of this coronavirus problem and the scare, and it's like maybe just to a couple of weeks old. It's not going to impact. So we have booked a lot of copper recently when the prices have dipped in the past few weeks, have booked a big chunk of copper, which will start affecting the numbers. Once the copper comes into our production system, which could be somewhere around April, May, and then the sales would take place a couple of months later. So it's not going to have any immediate effect on the bottom line.

Okay. But this 30%, 31% number that you are estimating is irrespective of this drop in copper prices, right? Is that fair to assume?

Yes, that's fair to -- it's fair to say that, yes.

Okay. Okay. My second question is, sir, on the Turkey. I think you mentioned that probably this year we'll close with EUR 3.2 million kind of a number. And so I think our turbine manufacturer from India in the recent call was talking about challenges in the Turkey market. So do we see anything like that on the ground for us for our product in that sense?

See, we have a manufacturing unit in Turkey. So we are not only looking at the steam turbine business in Turkey. In fact, the Turkish market is actually pretty small for steam turbines. It's a large market for geothermal, which is mainly driven by what's called a organic Rankine cycle turbine, it's not a steam turbine. It's a different kind of turbine. And it's a big market for hydro. To a smaller extent, there's a market for biomass, which is the steam turbine business. So our -- and you can say about 80% plus of our orders in Turkey have come from geothermal and from hydro. And this is -- both these segments are heavily promoted by the government of Turkey because there's a lot of investment coming into this because it's a renewable. And we have taken all -- practically all the business in both these segments because we have a local manufacturing plant. And delivering local generators gives the power plant owner an additional feed-in tariff, which makes it very attractive for him.

Okay. Okay. Okay. Got it. So I mean our outlook on Turkey remains quite positive in that, right?

Yes. It's totally different. I mean our Turkey -- most of the Turkey is based on the renewable side of the Turkish market. And we have products for both geothermal and hydro, so...

Okay. Got it. Got it. Yes. And sir, last question is for the next year's guidance that you are talking about of around INR 600 crores. Now we will be seeing around INR 480 crores, INR 490 crores this year in manufacturing side. And we have the traction, whatever orders are starting next year ramping up at a run rate of INR 8 crore a month that we are talking about roughly INR 90 crores, INR 95 crore. So I mean given the strong order pipeline and the inquiry that you have, the rest of the business, are we expecting 10%, 15% kind of a growth? I mean are we being conservative in giving INR 600 crores number?

You're totally right. I mean, I am being conservative with INR 600 crores, I'm being extremely conservative with INR 600 crores, but you're totally right. I will upgrade the guidance next quarter.

Okay. Okay, got it, sir. And sir, lastly, so I mean, let's say, we grow our manufacturing division by around 20%. The costs on the employee side and other expenses side, do we -- shall we assume in line with inflationary cost? Is that the number that we should assume? Or should it be kind of linked with the increase in volume? How should we look at the -- those costs?

So I will say, look at the -- see, we have enough floor production capacity for this entire INR 600 crores. So we're not going to add any major fixed costs into our company. We have a historic trend line growth of employee-related expenses between 4% to 6%, and the other fixed costs are maybe growing -- we kind of kept them flat because we have been able to look at productivity improvements and things like that. So approximately, you can say 4% to 6% increase in the fixed costs overall, including employee-related expenses and factory cost. We -- that's the main goal of the management to keep it at that level, plus/minus 1%, 2% could take place, but we always try to keep it less than 6%.

[Operator Instructions] We have next question from the line of Rajat Setiya from Vrddhi Capital.

Sir, how much did we do in the railway side in this year?

INR 34 crores will be done this year.

And what is the expectation from the next year on the railway side?

Around INR 100 crores.

Around INR 100 crores. And in terms of the continuity of that order, there is no -- I mean, there were some news articles or rumors about the order continuity, I mean...

So there was one article that came out some time back. And there was a subsequent article which came maybe a couple of weeks later. So our customer has -- the locomotive has passed all the tests. And they are producing at full rate right now, they're producing 8 locomotives per month. So they are at full steam ahead and locomotive has performed really, really well.

All right. So basically, starting next year, we would be doing INR 100 crores every year from that order itself?

Correct. With potential for upside is also there. There are some discussions, but let's see. Right now, it is INR 100 crores.

Okay. All right. And in terms of gross margins, I'm sorry if I missed it, they were little down in this quarter. So what really happened?

We had a couple of -- I mean, we had a few orders which contributed to that dip. We had one large machine that we had on the 2 Pole, this larger machines, about 60-megawatt. We had one machine that we sold at a bad price and that -- this hurt the numbers little bit. But overall, the business is doing good.

Okay. All right. And sir, one final question. You mentioned that one Indian company, engine company has given some 8 orders machine -- 8 machines order to us. Sir, when will the delivery begin?

I didn't mention anything about any 8. I said this is a U.S.-based company, U.S.-based engine manufacturer. And that, as I said -- that would start from May, and then there'll be 8 months of testing.

We have next question from the line of Lalaram Singh from Vibrant Securities.

May I know the order inflow by domestic and exports, can you split that for this quarter?

Yes, INR 50 crores accounts to...

INR 50 crores domestic, right?

INR 147 crores has come from direct and deemed exports and including Turkey, and INR 38 crores from the domestic.

INR 38 crores from domestic? Okay. And do you see that domestic order inflow to be much better than this in the coming few quarters?

Yes. It's going to -- see, in the worst years that we had, like maybe 2 or 3 years ago, I don't remember exactly it was 2 or 3. We had -- total domestic was something like INR 95 crores. And now we are running around INR 40 crores a quarter. It's definitely improved.

Okay. I think in one of the -- in recent past, we've also done INR 50 crores and even INR 60 crores a quarter there. So -- but you're saying that INR 40 crores a quarter run rate is something which we can maintain and on that we can also foresee a growth.

I'm quite upbeat about that. I'm seeing a consistent order inflow and negotiations taking place, order flow -- order inflow taking place with both our major customers in the captive power plant business. And so it's -- there's no doubt that the captive power plant business is here to stay and every brownfield/greenfield investment taking place in this country is putting up a captive power plant. So this 10-megawatt to 50-megawatt business will continue in a big way in India.

And so you are referring to greenfield CapEx also, or is this growth driven primarily by WHRS, which is being put in the existing plants?

So right now, it is more -- mainly brownfield, I would say, not so much greenfield. So it is -- wastage recovery, like I said, wastage recovery. Steel is also actually pretty strong. Distilleries, including the ethanol plants, and paper and to a smaller extent sugar cogeneration.

Got it. And in Turkey, you are saying that you're running at full capacity, so do we need to incur CapEx to increase the capacity to support the good demand?

No, we don't see the demand increasing dramatically from this level. We have a wait-and-see policy right now on further investments in Turkey.

Got it. Can you throw some light on environment in U.S. geography also?

So U.S., we have seen -- I mean, we had -- most of our development work has been done for the shale gas industry and for the mobile power units for the shale gas industry. And a lot of business that we got in the past 2 years is from -- was from that segment. But we have seen that in the past few months the -- especially with oil prices coming down, this business is again coming under stress. So we don't expect major ordering to take place in this business in the next year. However, having said that, there are other industrial power plants -- sorry, industrial sized units, 10, 20, 30 megawatts, which are required once again, basically the heat recovery systems or wherever steam is used as a part of a process for paper, for chemicals, food, those power plants are still coming up in the U.S., and we see a strong pipeline sufficient for us to have good growth in the U.S. compared to this year for next year. So -- but the shale gas industry, which I expected to be driving a lot of the growth, that is not going to happen next year.

We have next question from the line of [ Vivek Kumar ], individual investor.

My question is on the gas engine. So if you can -- because you have a -- and also steam on the Europe part. How is the demand from the customer now that he has -- that has changed, because this -- we read lot of articles that he is winning a lot of the orders. So can you throw light on steam and engine demand from our old customer and also steam Europe outlook?

Yes. So engine, as I said, gas engine, we've had an extremely good order inflow. We have -- we picked up -- we got big orders from Russia, and we got big orders from Australia. So really, really large volume ordering. So that's driving the growth for us on the gas engine business. Inside Europe, there's still steady demand and -- but the growth has really come from these 2 countries for us for this -- for the past few quarters and also will be for the next quarter because there are some more jobs under negotiation in these 2 countries.

Understood. What percentage of -- sorry, go ahead. Go ahead.

Yes, what percentage of business coming from gas?

No, no, what percentage of that customer are we catering to? Like the new owner, what percentage of his demand are we meeting? Like who can we, like...

So -- but the engine test that we are talking about, where we're supplying, you can say it's about 50%.

Okay, okay. Steam? Steam?

On the steam side, Europe is -- will be about flat for us next year compared to what it was this year. We have supplied good number of machines, larger-sized machines, 40- to 55-megawatt, and that we have a few more orders in the pipeline, and it'll remain flat. I don't see big growth taking place in this business in Europe next year.

We have added few gas engine clients, you told people you've added and you'll update on the guidance regarding those. Are you -- the U.S. engine maker is the same thing that you're talking about, your last quarter you told you added 2 engine clients.

I'm not mentioning the name, but it's based in the U.S. Yes.

So you have added another customer is what you said, so there's talks such thing going on? Like, what stage is it?

Last time I had said that we were expecting -- so we were expecting orders from this U.S.-based company. We got those orders now. So we are in -- very much into the qualification program for 8 engine types. And the other big European customer, that is not moving forward at the speed that we expected. Maybe it will happen next quarter, but -- we're pushing, but it's not happened as yet.

Okay. So given all this, our outlook for next year is INR 600 crore in manufacturing, right?

Yes, sir.

Yes. And then the rest will coming from...

Sir, I apologize. Would you like to come back in the queue? [Operator Instructions] We have next question from the line of Dhwanil Desai from Turtle Capital.

So one question. I think we have INR 150 crores cash and we did buy back last year, but I think recently, we gave a notification that we will consider interim dividend. So I mean are there any plans to utilize this cash through buyback? Or you think that the dividend has become a more attractive option? I mean, any view or thoughts on that?

So we can't buy back for a year since the last buyback, and still have some time for that. And we are -- we have discussed in the board meeting yesterday interim dividend. We will let the market know shortly.

We have next question from the line of [ Mayank Sheth ], independent investor.

Sir, one small suggestion I have; if after each conference call, we could forward a copy of the transcript in text form as a PDF file to the BSE and upload it in our company's website, that would be helpful for all the investors.

We will upload it to the company website.

Sure, sir. So coming back to my questions, we indicated that we plan to downsize the project business. I would like to know, would there be any onetime expenses to downsize it, like we had in EPC business?

No, no, no. It's just -- it's a small group of people, and we will not have any cost like we -- nothing close to that. It will just be gradual attrition of people and that's it.

And any pending warranty commitment in this business?