Q2 24/25

Dec 11, 2024

Summary

Consolidated Q2 revenue rose 4.7% YoY and EBITDA 18%, while H1 EBITDA declined 8%. FY25 guidance targets 18%-20% revenue growth on a gross basis and INR 130 crore EBITDA, with H2 improvement expected from BTS, EMS and subsidiary growth.

Ladies and gentlemen, good day and welcome to Centum Electronics' Q2 FY 2025 conference call hosted by JM Financial. I would like to mention a cautionary statement. Some of the statements made in today's conference call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management beliefs, as well as assumptions made by, and information currently available to the management. Audiences are cautioned not to place undue reliance on these forward-looking statements in making their investment decisions. As a reminder, 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 star then zero on your touchtone telephone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Nikhil Kandoi. Thank you, and over to you, sir. Thank you, Riddhi. Good afternoon, everyone. On behalf of JM Financial Institutional Securities, I welcome you all to Centum Electronics Limited Q2 FY 2025 earnings conference call. Today, we have with us senior management represented by Mr. Nikhil Mallavarapu, Executive Director, Mr. K. S. Desikan, Chief Financial Officer. Without taking much of the time, I will hand over the floor to the management for their opening remarks. Post which we can open the floor for Q&A. Thank you, and over to you, Nikhil, sir. Thank you. Thank you, and good afternoon, everyone, and welcome to our earnings con call to discuss the performance of the second quarter and first half of the financial year 2025. Let me first mention a special thanks to our host today at JM Financial. Now let me start by briefing you on the key performance highlights for the quarter and the year under review. After which our CFO, Mr. Desikan, will take you through the financial highlights. In the second quarter, consolidated revenue for operations has increased by around 5% year-on-year. In Q2, like Q1, the revenue of a certain contract is being accounted on a net basis. The gross value of such contract was amounting to INR 15 crores in Q2 FY 2025 and INR 39 crores for the first half of FY 2025. Adjusting to the gross value, the revenue for Q2 FY 2025 grew by 11% year-on-year and 10% for H1 FY 2025. Performance in the second half of FY 2025 is expected to improve significantly, driven by an increase in our build-to-spec deliveries to defense and space customers and an enhanced performance in the EMS and subsidiary as well. This will boost our overall margins. However, this is projected to recover in the second half as BTS deliveries increase, supporting a stronger margin profile. Next, on the order book front, it has increased to INR 1,772 crores as on 30th September 2024, with new contract wins from domestic BTS customers for defense in place. The pipeline continues to remain strong for both BTS and EMS customers. In other updates, Centum also received a platinum award from the Society of Energy Engineers and Managers, recognizing our outstanding efforts in the sustainability and energy conservation front. Now I'd like to hand over the call to our CFO, Mr. Desikan, to brief you on the financials. Thank you, Nikhil, and once again, a warm welcome to all of you. At a consolidated level for the second quarter, the revenue from operations were about INR 260 crores, which increased year-on-year by 4.7%. The EBITDA for the quarter was INR 20 crores, which increased by 18% year-on-year, and with EBITDA margins reported at 7.81%, while we had a minor net loss of INR 30 lakhs for the quarter. This has come down substantially from around INR 5 crores loss in the corresponding period in the previous year and around INR 4 crores loss in the previous quarter. For the first half, at a consolidated level, the revenue from operations were INR 505 crores, representing a growth of 2% year-on-year. The EBITDA for this period was INR 36 crores, which declined actually 8% year-on-year, with the EBITDA margins reported at 7.08%. The net loss for the period was around INR 4 crores. At a standalone level for the second quarter, the revenue from operations for the quarter was about INR 167 crores, which grew by 4.2% year-on-year. The EBITDA for the quarter was about INR 31 crores, which was down by 2.8% year-on-year, with the EBITDA margins reported at 12.3%. The net profit for the quarter was INR 10 crores, which was flat year-on-year. For the first half, at a standalone level, the revenue from operations for the period was about INR 300 crores, which grew by 4% year-on-year. The EBITDA for the period was about INR 33 crores, which was down by 14% year-on-year, with EBITDA margins reported 11.11%. The net profit for the quarter was INR 14 crores, which was down by around 16% year-on-year. With that, we can open the floor for the Q&A session. Thank you. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ankit Babel from Subhkam Ventures. Please go ahead. Yeah. Good evening, sir, and congrats for a good performance in the subsidiary. We have seen some margin improvement over there. My first question is, you mentioned in your opening remark as well as in the presentation that your performance would improve significantly in the second half. Can you just quantify it? What kind of revenue growth you are looking at in the second half and what kind of margins you are looking at at operating level? Yes, sure. Thanks, Ankit, for the question. We have been saying that on a full year basis, we are targeting to have something in the range of 18%-20% growth on a consolidated revenue basis. This is accounting for the gross, accounting for the subsidiary contract I talked about. We continue to maintain that target that we are driving towards. Similarly, on a EBITDA level, we are targeting to have between 10%-11% EBITDA for the full year. With that, you should have a rough idea for what the performance for the second half should look like, which is clearly driven by the higher quantum of deliveries going for the BTS customers and also the higher level of revenue coming from the EMS and the subsidiary business. Sir, since there is a confusion regarding this order on the gross basis and net basis, just for my understanding, is it fair to assume that in the second half, your EBITDA would be somewhere around INR 100 crores plus at consolidated level? Yes. For the full year basis, we are targeting something in the range of about INR 130 crores EBITDA. INR 130 crores? Yes. This is excluding other income, right? Yes. Okay. Got it. Yeah. Okay. So full year would be around INR 160 crores-INR 165 crores is what you are targeting? No. No. Full year would be INR 130 crores of EBITDA is what Nikhil said. So it will be in the range of between 10%-11% EBITDA is what he said. Okay. Also just to caution you that when he said 18% on the revenue growth, that is taking into account for that customer, it is a gross accounting basis. Yes. But if it is continuing for net accounting basis, maybe another 5% or so you may have to reduce. It will be about 14%-15%. Okay. Your employee cost has reduced YOY. I understand in the last quarter you had taken some VRS schemes and all those things. Going forward, what kind of quarterly run rate we should assume here? I mean, this INR 85 crores will continue, or it will go up or down in sync with the revenue? It may not go up significantly. It may be in the range of INR 88 crores to INR 90 crores per quarter. Because in the subsidiary also, the utilization levels and the revenue will grow. So in absolute terms, it will be about INR 90 crores, I would say, for the two quarters. Okay. How much of this employee cost there is fixed in nature and how much is variable? Nothing much is variable. Because these are all employees on rolls. Employees on? Employees on our rolls. We don't have contract employees. Uh-huh. So going forward also, we should assume just a normal single-digit growth in your employee cost in the, say, next two years? Yeah. There will be the inflationary elements, definitely. But at the same time, for the revenue growth, we may have to add some people, but it's not very significant. Okay. My last question is on the market. How is the industry performing? You did mention that your order pipeline is very strong and you see good visibility. But if you can throw some more light on the industry side, how are the orders panning out? Which segment of the industry is doing good, aerospace, defense or any other? Just a broad economic outlook from your side. Sure. First of all, I think we mentioned earlier that the order booking for the domestic defense and space business would be good this year. I am happy to say that I think we are progressing down those lines. The last quarter we announced a substantial order for a space program again. We continue to see a few more significant opportunities coming in for the rest of the year. These are broadly in the domain of land systems and military radars, basically. This is on the defense side for the domestic part of the business. In addition to this, even on the EMS side, our pipeline remains strong. One from the existing customers, again, for, defense is quite strong. We have seen the order intake increase from our export customers as a result of the global geopolitical situation today. Apart from that, we have also seen some new customers that we have just added into our portfolio in the last quarter, which will grow substantially in the next 1-2 years. These are broadly in the industrial equipment side. Different types of applications in that, but again, very clearly illustrating China plus one. One customer following clearly China plus one, and another one which we are hopeful of closing in this quarter or in this year, which will be a Make in India story, basically. Both of these opportunities are strong in driving the pipeline for us. Great. Satish, sorry for just one small question on this fundraising, sir. What is the motive behind raising funds? Is it for any inorganic opportunities or this is for the organic growth, for working capital or any other big CapEx you are planning? So, yeah. Actually, as Nikhil was saying, we are seeing a stronger growth over the next couple of years. We already have on our balance sheet a debt of about INR 130 crores also on standalone and another INR 40 crores also in the subsidiary. The question is to fund the growth, there is going to be an increase in the working capital. We also need to incur the CapEx, augmenting the line, the capacities and all of that stuff. Predominantly it will be for the increase in working capital and also the CapEx that we need to incur to ensure that growth happens. Since we already have a debt on our balance sheet, we thought it would be better to look at the opportunity of raising it through equity, and that is what we are looking at. So you are expecting more than 20% growth in the coming years? So revenue growth. Yeah. I think the point on Keith is, even if you look today for the current year and the past years, if you look at a standalone basis, our growth rate has been much more than 20%. We have been growing at 25% plus. That is what we are targeting for going forward as well. Some of these CapEx investments and so on, which Keshav was mentioning, is also for the future, for us to be able to invest in creating first technologies and products, again, in segments like defense and space, as well as some facilities to be able to absorb these kind of large opportunities and projects. That is the objective behind us being prepared to be able to take on some of these growth opportunities. The question of 25% or 20%, see, when we said 20% for the next couple of years, that includes the subsidiary where our focus is more on fixing the issue and making it profitable so the top line may not grow like 20% plus. That has to be compensated by a higher growth in the standalone company. That is what Nikhil was mentioning. Even in the last couple of years, standalone is at a higher growth. Mm-hmm. Okay. Thank you so much, sir, and all the best. Thank you. Thank you very much. Participants, to ask a question, you may press star and one on your touchtone telephone. Participants, to ask a question, you may press star and one on your touchtone telephone. Sir, could you let me know in the chat if this was- The next question is from the line of Rohit Dawar, who is an individual investor. Please go ahead. Hi, Nikhil. Just wanted to ask you, regarding all these new fab plants which are coming up in India. How would that help the whole ecosystem in the raw material and all that? Help us or did not help us. I just want to know your view on that. Thanks. I am sorry. There was a bit of noise on that. Could you just say that again? Yeah. With the new fab plants which are expected to come in India from different companies like Vedanta, Tata, so many companies are now coming and putting up their fab plant. Basically, how would that impact us as in the cost of the material which we, I think we are invoking that. Would it help us over there or something? That is what I wanted to know about. No, I think in the short term, we don't expect to see much impact from these actions in the short term because establishing these capacities and acquiring customers, all of that is a long gestation kind of project. With that, we're not really seeing any short-term impact. The obvious hope for the longer term is that we have a much more well-established product ecosystem here in India itself that will enable us to attract more customers, globally speaking, and perhaps also have maybe some better price. But we're not counting on any better pricing as a result of some of these announcements. Okay. Maybe too early right now. Okay. Thanks a lot. Thank you. Thank you. Thank you. Thank you very much. The next question is from the line of Chirag Kachadia from Ashika Institutional Equities. Please go ahead. Hi. I have one question with respect to this fundraise. This INR 250 crores fundraise, what incremental revenue in absolute term it can give us? Your question is in incremental? Yeah, I mean at what turnover we are targeting on the base of INR 250 crores this fundraise? Okay. So, no, it is again, up to INR 250 crores is what we said. Maybe we are evaluating the number. It may be even slightly lower to start with, number one. Number two, this is not immediate. It is for the next two years at least. Already we have a debt. The options are, yeah, we can go ahead and take a debt. But considering the debt equity and the leverage and the growth options, we thought it is appropriate to go for the equity. To answer your question, it is for the next two years. To maintain this growth, which we are aiming of 15%-20%, we are raising to support that trajectory. Is that understanding correct? That is right. Yes. One more question. Why we paying dividend? I mean, rather, we are a growing company, we can use it for our internal financing and all. That one, because you see, on the dividend question, there are many opinions, to tell you frankly. We want to be a consistent dividend-paying company as well, considering the investor expectations. One of our stated dividend policy is about 20%-25% of the profits we distribute. That's the current dividend policy. I see your point, but we also see a strong growth opportunity coming. That is the reason why we had been paying the dividend. Any status on the MOU which we have signed with the Indra Sistemas, I think one and a half year back also? Yeah. On that, the status remains the same, Chirag, basically. We're still waiting on the budget allocations from the government to. Not budget allocations. I guess the RFP has already been submitted. It's the decision from the government to go ahead with the commercial bid opening, which is being delayed for various reasons on their side. So, we're still awaiting a final decision from the customer on that. Okay. Thank you. Thank you very much. The next question is from the line of Nirali Gopani from Unique PMS. Please go ahead. Yeah. Hi, thanks for the opportunity. Nikhil, if I work out this INR 130 crore EBITDA guidance that you are giving for this year, the second half you will do an EBITDA margin of course of 13%, if I am not wrong. You had guided that you will reach this 13%-15% in the next three to five years. You will be achieving this number way too early. Do you feel this number will be sustainable over the next few years, and you can grow it from there? A quick point on that is, as Nikhil earlier mentioned, the increase happened in the second half mainly because of the BTS business, which is actually seasonal and lumpy in nature. If you look at the first half of the BTS business, it was very poor. Now that will be compensated for in the second half. It is always better to look at a full year as a perspective, and that is the reason why we are saying in the next two, three years, we should be able to go to 14% or 15%. If it happens too soon, we are happy. Considering the lumpy nature, we cannot say that. Correct. Yeah, exactly. I think what Nitish mentioned clearly was with regard to this year itself, where we clearly have seasonality in lumpiness, the high-margin BTS business, which should be looked at more from a full year basis than just the second half. I think the second part in terms of us getting to that 13% to 15% level, a key factor in that will be obviously improving the subsidiaries' EBITDA margins up to that level, which will take that two-year timeframe that we have been mentioning. We remain consistent with what we have been saying, which is that this will be a stepwise improvement in margin over the next couple of years. Right. For FY 2025, I assume INR 1,200 crores of revenue on a consolidated basis, on a net basis for full year. What will be the percentage of BTS, roughly 29%-30%, which we have been doing? It will be again, not too far from where we have been at. Roughly about 25% or so would be BTS, and then maybe around 30% or so will be on engineering services. Then the rest of it, which is roughly around 45% odd, would be EMS. Okay. Perfect. That is it. Thank you. Thank you very much. Participants, to ask a question, you may press star and one on your touchtone telephone. Participants, to ask a question, you may press star and one on your touchtone telephone. The next question is from the line of Manoj Bengani from Bengani Capital. Please go ahead. You have shown in your presentation that you are a single-source supplier. In 80% cases, you are a single-source supplier. So aren't our margins very low considering we are single source supplier in 80% of the supplies you make? Margins are determined more by the model of engagement than the fact that we're single source. Obviously, it's always better in these situations than when you have a very tough competition. But when you look at our build-to-spec business, as I mentioned earlier, on average, on typical basis, you can get 18%-20% type of EBITDA levels. Whereas on the EMS side of the business, which is always a cost-plus model, the costs are transparent to the customer. As a result, your margins cannot be excessively high in that type of a business. It's a contract manufacturing business. So there, your typical 10%-12% kind of EBITDA levels are what would be considered as a good margin or healthy margin in a contract manufacturing business. So that's really where it comes in. Thanks for the answer. Single source was more a matter of choice by the customer, because like what Nitish said, EMS basically is a cost-plus model. So the customer has a choice to go to any of our competition as well. But the fact that they are staying with us in EMS shows that we deliver quality products consistently on time. So that's how we are able to retain them. Thank you, sir. Thank you very much. The next question is from the line of Chirag Kachadia from Ashika Institutional Equities. Please go ahead. From related area diversification, are we looking to enter into anything similar to OSAT or something in future? As of now, we have no plans to get into OSAT. I think we want to continue to develop already. We believe we already have a reasonably well-diversified portfolio, both in terms of engagement models and in terms of segments that we address. So we are not looking at OSAT again as a new thing now. In fact, I would say our point there is more in terms of moving up the value chain rather than down the value chain. Right? So designing, developing full systems products is what part that we would like to pursue going forward. So that is the quick read on that. Okay. All good. Thank you. Thank you very much. The next question is from the line of Ankit Babel from Shubhkam Ventures. Please go ahead. Yes, just a couple of follow-ups. What would be your CapEx guidance for FY25 and FY26? Also tax rate, both at the consolidated level. CapEx, as I said, there will be an additional requirement than the normal operating CapEx that we used to have because of the growth. So for the next couple of years, it will be in the range of about INR 100 crores. On the tax rate, the standalone will stay at 25%, and in the subsidiary, we may not have tax at all because we are having a cumulative loss, which should be offset against the future profits. Sorry, sir, for this first clarification. This INR 100 crore CapEx is for two years combined or per year INR 100 crores? Two years. Two years. So around INR 50 crores per annum. Correct. Okay. Sir, as you mentioned that on standalone basis, your tax rate would be just 25% and at subsidiary you won't be paying. So on a combined basis, since your subsidiary would also be profitable, on a combined basis, are you saying that your tax rate will be less than 25%? Yes, that's right. Yes. Any number you can say, sir? Like 20%, 15%, any calculations you have done? It will be too early to say for next year. Okay. It will be definitely less than 25%, yeah. Okay. And sir, another question is it fair to assume that post raising of money via equity, should we consider that your current debt would be your peak debt and it will only come down because all your future financial requirements would be met by equity money only? That is right. Yes. Is there a scope for reduction in debt in the coming years? Yes, definitely we should be able to reduce it. But I would go with your first statement saying that the current level would be the peak and it will not go up. We should be able to bring it down. Okay. Just a confirmation. So your interest cost also will remain the same, what it is. Yes. That is right. Even at a 20% growth, your interest rates will remain at INR 35 crores-INR 40 crores levels on an annualized basis. Correct. No, one small caution there. What you see as finance cost is a combination of interest cost, plus there is a bank commission on the bank guarantees that we issue. If for the future contract, if there is an increase in the requirement for bank guarantee, we may have to give the bank guarantee. Nevertheless, it should be in the same range like what we indicated because interest rates will come down, and we should be able to maintain the same levels of cost. Okay. So maximum INR 40 crores. Yes. Okay. That's it, sir. Thank you so much. Thank you. Thank you very much. Participants who ask a question, you may press star and one on your touchtone telephone. The next question is from the line of Harsh Mehta from Perceptual Capital Advisers. Please go ahead. Hi, sir. Congratulations on the very good set of numbers. I just had one question. When will the subsidiary get profitable? Will it be by the next quarter or in FY 2026? Yes. We expect to have a positive contribution for the subsidiary in the next two quarters, Q3 and Q4. It is important to remember that even in the subsidiaries, it is a bit seasonal in nature. Q2 is always the slowest quarter over there because the number of working days are the least. Q4 also is the highest in the year also because of the number of working days being high. We do expect that, yeah. Is it okay to gauge that in the next two quarters, the profitability will be there, but at a very lower rate, and in FY 2025, the actual profitability will start to kick in, like in the numbers also? Right. Exactly. Okay. Thank you so much, sir. That is it from my side. Thank you very much. Participants who ask a question, you may press star and one on your touchtone telephone. Participants who wish to ask a question may press star and one on your touchtone telephone. As there are no further questions from the participants, I would now like to hand the conference over to the management for the closing comments. Thank you, and over to you, sir. Thank you all again for your interest in Centum and for attending our conference call this quarter. As we mentioned, just to summarize, we continue to be positive in terms of what we are seeing from a growth and profitability improvement standpoint. We stay consistent with what we have been mentioning for the last couple of quarters. The second half of the year will bring in a strong growth both on the top-line and the bottom-line front. From the order book perspective also, we continue to see a healthy pipeline of opportunities for us to work on. With that, let me conclude the call, and I look forward to seeing you all in the near future again. On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.