Schneider Electric Infrastructure Limited Q3 FY16 Earnings Conference Call

Transcription

1 Schneider Electric Infrastructure Limited Q3 FY16 Earnings Conference Call February 11, 2016 MANAGEMENT: Mr. Prakash K Chandraker, Managing Director Mr. Anurag Mantri, Chief Financial Officer Mr. Vineet Jain, Sr. Manager (Investor Relations) MODERATOR: Mr. Deepak Agrawala -Vice President, Industrials and Utilities Research, Elara Securities Page 1 of 12

2 Ladies and Gentlemen, Good day and Welcome to the Schneider Electric Infrastructure Limited Q3 FY16 Earnings Conference Call hosted by Elara Securities. As a remainder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touchtone phone. Please note, that this conference is being recorded. I now like to hand the conference over to Mr. Deepak Agrawala. Thank you and over to you, sir. Deepak Agrawala: Thanks, Lizann. Good afternoon, everyone. On behalf of Elara Securities, we welcome you all for the Q3 and Nine Months FY16 Conference Call for Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infrastructure Limited, Mr. Prakash Chandraker, the Managing Director; Mr. Anurag Mantri, Chief Financial Officer; and Mr. Vineet Jain, Investor Relations. We will begin the call with a brief overview by the management followed by a Q&A session. I will hand over the call now to Mr. Chandraker. Over to you, sir. Good afternoon, everybody I am Prakash Chandraker - Managing Director, Schneider Electric Infrastructure Limited. First of all, I would like to extend a very warm welcome and thanks for showing interest in our company by joining the concall. Looking at the third quarter of financial year , the market continues to be challenging. However, we have remained focus to build and execute our healthy backlog. In terms of business outlook, new policy reforms are yet to hit the ground to trigger the market momentum and to accelerate the growth in infrastructure side. The utility segment with push of IPDS in Deen Dayal Upadhyaya Scheme continues to have a positive outlook, facilitating implementation of smart energy solution for the distribution network. The renewable segment, over the last couple of quarters has shown upward trend. Schneider has been a key player in this segment and offers critical equipment for successful evacuation and integration to the grid. Now, I would like to take you through the presentation slide. This is slide number three where macro economic outlook I am sharing along with segment view what it means for Schneider Electric Infrastructure. So GDP inflation and interest rate is green, however, domestic demand looks to be red at this point of time which is indicated by the PMI and IIP indicators. Government spending in segment where we operate looks green which is basically a distribution grid, through IPDS scheme AMRUT, Solar, Smart City, Digitization and so on. Market still remain uncertain because of the China slow down, oil prices, policy delays, GST, so we are conscious about this. When we come to the segment view, the three segments which I would like to share with you first, the three which are red, Power Gen, MMM and Oil & Gas, we still see there are a lot of Page 2 of 12

3 challenges in these three segment, land reform still not through. Ecosystem in terms of conventional power generation, steel is not fully addressed and hence you do not see many of those PPP generation which use to be there. MMM segment which is basically mines, minerals and metals, we still see a big challenge after Yuan devaluation there had been cheap steel import to India. So we do not see big investment coming up in short-term in MMM segment. Oil & Gas there is a global impact due to the fall in crude oil price. However, we do see some of the investment happening in R&M which is renovation and modernization and there are some new opportunity should be coming through investment in refineries. However, these three segment we do not seen short-term too much of movement. Other segment like Utility, Renewable, Transmission, Transport, which is again our business as usual we do see the investments coming up. New segment where we have entered last year and we are trying to penetrate more are the water, CIB is basically commercial in the steel building, data center so these are the areas where we are penetrated. We do see good opportunities here and this is where we are trying to compensate for the market which are not having positive trend. We hope utility and renewable will continue to grow like what it was last two quarters - three quarters though renewable has been cyclical, we normally see somewhere in the quarter beginning June most of the tender happen and it comes for finalization in somewhere quarter beginning October, so we do not see much change in terms of the cycle what it was so but this will be positive. Transmission there government is investing in North Eastern region and green corridor for the renewable, we see this will continue to remain green. Transport that is Lucknow, Navi Mumbai, Nagpur, so we see in Tier II cities more and more metro coming up and we are strongly placed with our smart solutions to address this segment. So this is how we see the segment in short-term but medium-term to long-term I think the segment which is red MMM or Oil & Gas or Power Gen should also come back. Slide number four is just to take you through the UDAY Scheme which was launched few months back Union Cabinet has approved this scheme Ujwal DISCOM Assurance Yojana for turnaround of these financial distressed DISCOMs, 15 states have formally committed to join this scheme and four have already signed the MoU. The scheme is really complementary to IPDS Scheme what we already had which will help utilities to reduce their cost of power, it will also help to improve the operational efficiency, this should help to reduce interest cost of DISCOM because end of the day government wants to make power more affordable, it will also in four financial discipline because all these schemes come with some kind of rider clause where they need to apply some of those improvement scheme to make sure the benefit of UDAY Scheme is actually is seen by end users end of the day. Page 3 of 12

4 The next one is more of detailing of that so, if you see we have gone deeper in terms of how Schneider Electric can help the utility in terms of their mission so, if you see the bar the right side extreme right is basically AT&C losses which is Aggregate Technical & Commercial losses all India average is 32%, collection if you see all India is 97% and billing efficiency is 71%. So there are a lot of opportunity if you see in terms of improving the Aggregate Technical & Commercial losses including making the grid more reliable and efficient and this is what we are trying to show here in left side diagram, how the solutions on demand side management and smart solution can help the utility to really improve their operational performance and we have various offerings like right side if you see advance distribution management system, non-technical loss solution, in fact this is the product which we had launched in Elecrama on 13th of February at Bangalore. So this is also very unique because so far only focus was on technical losses and most of the solutions were basically towards that, we are going to launch this non-technical loss solution which will help utility to identify those leakages and find out how this can address, this can help them to address those issues. We are also offering solution which is basically helping customer to do analytics on their smart metering or automatic meter infrastructure. Schneider Electric is also very strong with many of those IoT-related applications on top of the basic scalar systems. So these are the places where we are connecting with the end users with the customers to really help them support them to improve the distribution utility. Next slide, slide number six, so we do see the opportunities in various segment and market through the scheme of IPDS, UDAY in utilities so, we are mostly trying to operate where the funding is secure and we are trying to secure the order where subsequent to order booking we are able to do the sales also. So this is where we are very-very careful when we are take the new orders. So we are trying to basically balance our growth and profitability, we are not just trying to grow because there are many tenders and opportunities where the order intake growth is possible but if credit is not secured then we are not taking those orders. Smart City industrial corridors are other areas. In fact we are well placed to offer many of the solution and we did secure some of the projects which is in smaller scale level which has been decided to make cities more smarter is the full fledge Smart City, tender has not yet come because 20 cities has been short listed very recently that will be coming up may be I do not know two quarters to three quarters down the line because they are still working on that but I will say in some of those cities where there are own funding there has some of the requirement and we are successful in terms of securing some of those opportunities. Industrial corridors are other areas DMIC and all that. A new segment which I shared in previous slide CIB this Commercial and Industrial Buildings, data centers, health care, we will be very focused on these areas and we are trying to penetrate with our secured automation solution, renewable focus in terms of integrating those renewable. Leveraging stall base that is another area where there are segment not growing, we are offering new solutions for managing their install base and making it much more efficient to reduce the O&M cost, so this is the Page 4 of 12

5 asset management solution I will say which helps customer to improve the reliability and availability of their infrastructure and will also help them in terms of reducing their O&M cost. So this is where, I finish the slide presentation and wanted to just keep you informed that we are in forefront of offering and implementing new innovative solutions, something like containerized solution, e-house, new type of transformer which is more user friendly, more green, which has called nature ester oil field transformers, self-healing grid many of the new concept in unmanned substation so all this solution will go a long way actually in building smart grid and then eventually helping the city to become more smarter in future and that is what government is also trying to push. So now, I would request Anurag my colleague to take you through our financial slides. Thanks, Prakash and good afternoon to everybody. Let us move to slide number eight. As Prakash was pointing out that the market continues to remain challenging and as such there is no major change in this quarter as compared to the previous quarter in terms of the macroeconomic environment. Funding issues for the large project is still need to be addressed but however we at Schneider Electric continue to be selective in taking the order in terms of our exposure to the credit as well as from the secured payment term as well as on the margin. Our order intake for the quarter stood at INR3.3 billion which is down by 4% year-on-year mainly due to focus on the profitability. In quarter three, we have seen the improvement across sales, EBITDA and net income. We registered the EBITDA of INR276 million versus 2% up year-on-year basis and net income of at INR97 million, which is 2% on year-on-year basis. Let us move to next slide, slide nine, showing Y-T-D nine months results to better understand the P&L. although there is no much change at the ground level however, with our strong execution and continuous focus on seamless manufacturing planning, customer s engagement for inspects, instruction clearance all these have helped us to achieve the sales of INR11,028 million which is a 12% growth over last year. Gross profit has increased by 4% as compared to the previous year. PAT has increased by 6% as compared to the previous year in the nine month period. Next slide will help us to understand the overall structure of the P&L in a better way. So if we see in all the cost line across employee expenses, other expenses well as the material cost, we continue to maintain a strict control and savings on all the three lines and that has helped us to achieve in terms of the right EBITDA and PAT margin progressing towards the right direction. Here I would like to highlight one thing that our PAT has impacted by MTM FOREX movement due to the volatile currency. If we remove the FOREX losses of around 9 crores, we are positive at PAT level that shows that we are rightly focused on balancing the growth and the profitability. Page 5 of 12

6 As Prakash was mentioning, UDAY is the new scheme announced by the government to improve the health of the DISCOMs which is another positive move to revive distribution sector which should eventually help us as a good business potential for SEIL in future. Accordingly, we continue to gear up for building customized offering, localization, introducing latest technologies, smart solutions, aligning with the local demand and requirements. I will now close here and leave the floor open for the moderator to start the Q&A session. Over to you, Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question is from the line of Renu Baid from IIFL. Please go ahead. Renu Baid: Sir, a couple of questions, good to see relative pick-up. Overall if we see our orders have been relatively weak, so you did not share with the outlook with respect the broad macro trends but what is your sense with respect to pricing in the market and the selective areas at which Schneider is looking for order flows and growth? And accordingly what is the view that we will be able to grow reasonably next year on volume terms and remain profitable? So as I was sharing market is still very challenging so, I will say the pricing is again very subjective because where there are smart offering required pricing level is at the right level but where there are conventional requirement for electrical equipment the pricing levels are really challenging so, it is quite mix today because market has still not come so that advantage while you see in terms of the order yes, relatively it is lower compared to may be the last quarter but however, if you see in terms of our focus area which we shared with you is on high profitable segments and where the credit is actually secured so we are trying to mix our growth areas we are not trying to grow everywhere because order growth is possible but then there are credit challenges and this is where we are not trying to grow. So we are trying to be really selective in terms of our segment and I also shared there are three more segment which we are penetrating which is data center which is in the 4G or e-commerce. Reliance 4G data center we created a very good reference last year and now we are engaged with many more such data center with the banking e-commerce and those areas then institutional building and industrial building wherever it is coming up, it was not a big market now also it is not big but we find it smaller market, niche market, but smart solutions are something like they want to make the campus smart, digitize and this where we have advantage to offer those kind of smart solutions, we are doing a few of IITs which was never a focus area for Schneider Electric. Water segment again was not again a focus area but we are trying to offer the water management system so, these are the areas where we becoming selective and where the price level is at the right level. Renu Baid: Okay. Sir, today some of these orders or these smarter products and our backlog approximately what percentage of the proportion do they comprise are they like 20%-30% or still larger. So I will say this penetrated let us say few quarters back and we are accelerating growth in that may be today if I see in terms of percentage it may be 10%-12% but we see having entered and Page 6 of 12

7 customer has seen in advantages and more customers are visiting to see those installations so we feel this will get accelerated. Renu Baid: Okay, right. So if you can just share with us how does the balance sheet at the end of the nine months looks especially on the debt and the working capital side of the business? So Renu, the debt at the nine months at December end was Rs.238 crores which was last year was Rs.254 crores and the cash in hand was around Rs.60 crores. Renu Baid: Okay. And overall receivables would have relatively improved because obviously this was a bulky quarter for us, so it would look Receivable has shown a good improvement we are as we shared earlier last year also with you that we continue to focus on our debtors days in a focused manner and right from that the order booking stays as Prakash was mentioning that we have always selective that has helped us to improve the debtors days so overall working capital is moving in the right direction. However, it is not that there is a large change as such because the volumes are also growing and December being a heavy quarter always there is a high working capital requirement. Thank you. The next question is from the line of Vinay Nambiyar from Premji Invest. Please go ahead. Premji Invest: Sir, you mentioned a FOREX loss of Rs.9 crores, that is a nine months number, is it? Yes, that is a nine-month net number as compared to what is reflecting here and this quarter actually if you see the quarterly results there is a FOREX gain of Rs.7.5 crores, if I make up only the quarterly number. So when I see the nine months number because last quarter there was a loss so that Rs.9 crores is the nine-month loss number. Premji Invest: And these are what on payables you have interim right? Yes. Thank you. The next question is from the line of Mr. Deepak Agrawala. Please go ahead. Deepak Agrawala: Sir, one question from my side, if you can elaborate how this Smart City progressing like you just touched upon that it might take two quarters - three quarters down the line for tenders to come into market. So can you give some kind of a roadmap like what opportunity size that you are looking at? So 20 cities are already short listed by the government in the criteria we very clear in terms of the expectation by the Central Government and which has been already retain by all these cities municipal corporation how they are going to go about it. So vision has been defined their funding has also been for the initial one which will come from Central Government, State Government is also clarifying, they are also suppose to basically finalize the skills what they Page 7 of 12

8 are going to go ahead. So that is what I think we are in process of hiring their consultant and submitting the bid. Now I think they are suppose to demonstrate every year there is progress and that is how they will be start getting every year those funds so they will be in hurry actually and they have very clearly defined what are the risk they see what will be the risk mitigation they will be doing so, these projects are quite well defined in terms of getting implemented in time bound matter but possibly the initial one may take time because SPV they have to clear and declare that and then they start running through that. So some time will take initially but I think this is a short-term project, it is not a very long-term because in five years different scheme has to be completed by them. Thank you. The next question is from the line of Sanjay Doshi from Reliance Capital Asset Management. Please go ahead. Sanjay Doshi: My first question is on the UDAY Scheme that we are referring I believe initial spending would be more on getting the basic infrastructure right while some of the offerings or more on improving efficiency, so can you just help us understand where are we in terms of any particular talks with any of these 15 states how are the SEB conversation progressing on that front? So I can just in terms of give you overview. So there are conversions of many of these schemes, so if you see there is Deen Dayal Upadhyaya, there is IPDS scheme, there is UDAY scheme. All these schemes are addressed to make the complete distribution robust up to consumer so, consumer right from the billing up to management of the distribution grid. So, IPDS was more focused let us say on all those hardware equipments and all that, Deen Dayal was more on the rural electrification and UDAY Scheme is improving their financial discipline through alignment with the state, cleaning their balance sheet so that they can borrow more money and start accelerating their progress towards making transformation. Today, in fact, I have seen today in newspaper where Chhattisgarh State Electricity Board is already asking for consumer indexing and GIS for most of their circles part of this UDAY Scheme so, wherever they have signed the MoU they have already progressing because it is coming with some kind of discipline when they are availing the scheme so though the scheme are already spilled out how to spend those money so, we do see the progress in utility so, I just shared with you one which is already in public domain. Sanjay Doshi: Right. And who are the other players in the space is there any competition is very sever in the space or it is limited to few players? Here I will say since these are the advance solution, the number of players are limited and is a technology which they want to use it for reducing AT&C losses. However, for the basic equipment which is basically base level hardware there are enough number of players but we are talking about more of high technology items where number of players are limited. Sanjay Doshi: Okay. And last one question is on the transport so your presentation mentions about metro opportunity. Is there anything on the traditional railway side that we are working on? Page 8 of 12

9 We are engaged with Railway Ministry, we participated in their events also where we tried to make them aware how electricity in railway segment can be managed more efficiently because they also consume a lot of power which is today managed in very old fashion way, it is not yet I will say modernized in terms of management of electricity. But railway has its own process of approving different schemes so we are engaged in discussion with them to make their transformation of electrical management system also part of their modernization. So this is under discussion it may take some time but they are quite positive apart from metro. The railway will be also moving towards that. Thank you. The next question is a follow-up from the line of Vinay Nambiyar from Premji Invest. Please go ahead. In terms of indigenization efforts that we were taking where are we, are we complete 100% indigenization levels? Not sure. What was your localization? Yes, that is right. When we talk about the localization in fact almost our 80%-85% products are already localized we are manufacturing in our modern factories Baroda, Kolkata, Chennai some have solution which are global I will say the software which is required for asset management software which is coming through different acquisition Telvent or Invensys those are the software which we also take the licenses we do customization, application, based on our Indian customer requirement. So that we do import GIS also we import and some of the localization has been already done for that. Our local requirement is met which has already been localized. So from a product perspective are we 100% there or there is still. I said 85% of our product is local, 15% come still from global because some of the products are very high and where we do not have let us say critical volume which requires to be localized. Right. And in terms of you know the market opportunity when we talk about either the rail or Smart City, can you quantify what is the kind of size that we can address that is as a part of the listed entity? You know Smart City is such an opportunity where the size is big which they are talking about some 48,000 crores in five years but how much will be coming to the domain where we operate is something we are engaged in discussion because each city we will be defining in terms of where they want to invest, so they have a different infrastructure one is social infrastructure waste management, water management and all that then they have sustainability, in sustainability there will be economic infrastructure so economic infrastructure is very important for them to make it sustainable let us say 24x7 power supply is one of the mandate to make the city smarter, if you do not have rest of the facility, you just cannot guarantee. Now Page 9 of 12

10 Smart City the qualification criteria itself says that you need to make sure you give leveled 24x7 power supply. So I see there is a very high focus part of this initiative and there is where we see the opportunity. Now actual value will take some time because this is where the discussion has started now. Okay. And in terms of metro is there something that we can quantify to the opportunity that we address with the listed company? Metro I will say if you see all underground metro, we will have a market share very high almost something like 70% to 80% of GIS switchgear is supplied by Schneider Electric. So only thing is the metro in a year comes two so whenever this opportunity comes we have right technology actually what is required for metro in an area where we operate including we have traction automation, substation automation for metro applications. Sure. And in terms of our capacity is it adequate for us to get the turnover 2x to 3x from where are based on current investments or do we need to make further investment as we go by? Our factories are quite new and these have been designed to meet our requirement for next five years so we do not see a challenge for India market so it can be easily gone, it can go up to at least 1.5x. And we have enough space if there is small growth happens these factories are welldesigned to get multiplied so, we do not see challenge in terms of meeting those growth demand. Management: At least 1.5x of the growth, we do not need large CAPEXs and as we have spaces available and it has been designed in a way that with only certain minimal incremental CAPEXs we can further expand. Right. And sir, can you give sense of which were the order you have got in the quarter about the 300 odd crores that you received may be two or three examples of what orders were these? See customer names generally it is a commercial sensitivity we cannot say but large orders came from the utilities. So if you see in this quarter the most of the orders came from the utilities where we keep getting those orders so there are many public and private utilities as well as the industry customers so those are over. But mostly we are targeting on the fundedproject where we are talking about IPDS or those kind of the projects. So, would you say about 70%-75% would be utilities and the rest mix of industry and others? Management: Around 60% was utility not 75% Thank you. The next question is from the line of Deepak Agrawala. Please go ahead. Page 10 of 12

11 Deepak Agrawala: See I have a couple of questions. First, can you comment on like slightly more from a two years to three years perspective, how do you see the company growth in terms of where do you see your revenue profile moving and which kind of products do you think would contribution almost over 75%-80% of the top-line? So Deepak as Prakash brief that the focus is actually on our thing is that to not draw on the conventional product and to move more towards the smart-end and technology-end project. Now obviously these type of product require the front type of engagement and more as a push sell to the customer and making them understand so, it takes longer time in terms of penetrate the market but our vision is that actually to move towards more smart-end solution, grow services business so, as you consistently see we are actually growing almost 25% year-on-year basis in our service business so that is the focus area. Conventional is not going to be a driver for us in fact we remain very, very selective in terms of wherever the margins are challenging or the credit side is a challenge. So the focus is not actually just to grow top-line from each and every order and if we see down the line two years I think depending on these how these schemes move especially Smart Cities and UDAY and IPDS, we should be seeing ourselves placed in these direction where the services continue to grow at least 25% year-on-year basis and the smart products and solution also continue to grow at least at 20% growth. Deepak Agrawala: Okay. So specifically in IPDS like they are talking of about 1000 substation at distribution level and that is based on GIS so because earlier we had seen GIS both from the transmission company side and not so much on the distribution side, so is this kind of a thing that you are looking? Yes, you are right so, what is happening is all the new distribution substations are coming in the city where the space is a big constraint, so when you see the total cost of ownership with the GIS which is very compact utilities are finding it more useful to go for GIS technology, second it is maintenance free where their O&M cost also considerably comes down and most of these are already smart. So it can be easily connected with SCADA. they have a lot of advantage and we are finding more and more customer going for those kind of applications. Thank you. The next question is from the line of Parimal Mithani from Credential Investment. Please go ahead. Parimal Mithani: I just wanted to know one is the order book for the first nine months, and secondly what is the contribution of services currently in the current year versus the last year as of nine months? Services contributes to now 10% of the business as compare to 8% last year and in terms of order backlog which is the right indicator to monitor which we have currently eight months to ten months of the order in the backlog. Parimal Mithani: Eight months to ten months and what is the order book size as of 31 st December for these nine months? Page 11 of 12

12 It is around Rs.1,100 crores. Thank you. Ladies and gentlemen, that was the last question, I would now like to hand the conference over to Mr. Deepak Agrawala for his closing comments. Deepak Agrawala: Yeah, we thank Mr. Kumar and his team for giving an opportunity to host this call. We also thank all the participants for joining this call. Sir, if you like to offer any closing comments before we close? Yeah, so I would like to just once again mention the market remains challenging; however, in medium-term to long-term we see considering the initiative as a government of smart city digitization and all that should be a positive. We also are closely watching on ground development once these policies are getting announced. We are also waiting for the budget upcoming what kind of announcement comes which would bring more changes at ground level so, this is where we will remain focus. I once again, thank everybody for their valuable time to understand our company and have a very nice evening. Thank you very much. Thank you, everybody. Thank you. Ladies and gentlemen, on behalf of Elara Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Page 12 of 12