Ladies and gentlemen, good day, and welcome to Schneider Electric Infrastructure Limited Q2 FY 2022 earnings conference call hosted by Elara Securities (India) Private Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal for an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Harshit Kapadia from Elara Securities. Thank you, and over to you.
Thank you, Zach. Very good evening to everyone. On behalf of Elara Securities, we welcome you all for the Q2 FY 2022 and H1 FY 2022 conference call of Schneider Electric Infrastructure Limited. I take this opportunity to welcome the management of Schneider Electric Infrastructure, represented by Mr. Sanjay Sudhakaran, Managing Director, Mr. Mayank Holani, Chief Financial Officer, and Mr. Vineet Jain, Head Investor Relations. We will begin the call with a brief overview by the management followed by way of Q&A session. I will now hand over the call to Sanjay, sir for his opening remarks. Over to you, sir.
Thank you very much. Good afternoon, everybody. I'm Sanjay Sudhakaran, Managing Director of Schneider Electric Infrastructure Limited. I'm pleased to connect with you to share and update the progress of our company. Today, we will present to you market outlook and company strategy. Let's go straight to the presentation. I will request all of you to go to slide number three as we begin with a snapshot of the economy. I think things are positive on the side of the economy, but I would say that we need to have a look with cautious optimism. There is a certain amount of pent-up demand which is coming up in the market, and there is a certain amount of demand that is coming up due to the reforms and policies being driven by the government. It's a combination of two that we can see right now here.
If all goes well, India could end up with GDP growth in excess of 9.5% for the financial year 2022. However, we must also highlight the fact that there are strong supply chain constraints which the globe is facing today in terms of your ability to deliver on projects. This can be a major constraint in the economic growth as well. We take a cautious approach to these overall market indicators and forward-looking indicators that we see. Right now, we remain cautiously optimistic about the market growth. Let's go to the next slide. A brief overview on some of our large end customer segments. Some of the segments that are very critical to this business are power and grid, transportation, heavy electrification of minerals, mining and metals, and oil and gas segment.
On the power and grid side, we see continued interest by the Government of India to bring more and more reforms into this segment, so you have more digitization happening here. You have distribution level reforms, including privatization, and you have a big shift towards renewables. All these are work in progress and consistent actions can be seen in the marketplace around these particular agendas. The transportation sector is also seeing a good level of investment as we go forward, whether it's the development of metros across India, including the B and C class towns, modernization of railways and locomotives, et cetera, and also investments in airports. One of the segments that is showing very good promise is steel and cement. Of course, India has gone through a turbulent period with respect to these two segments in the past.
There has been lot of consolidation that has happened, but I think finally everything seems to be falling in place, and these segments are up for strong expansion as we go forward. The oil and gas segment, we see some transition happening as they work towards an aided energy transition that we want to make it happen, including renewables. There's a strong focus on renewables in this area as well, as well as the setting up of petrochemicals facilities in the country. These are the four major segments which drive our growth for this particular organization, and we see good traction in all the four segments in terms of their outlook as well. We'll go to slide number five, which are our strategic priorities.
This is just to reiterate what we have been saying before, and we stay invested in these strategies, and we stay aligned to these strategies. There's no major shift in what we are trying to do here. Of course, the idea is to get more and more digital. Digital gets you more services as the stickiness with the customer improves. We are partnerizing and transactionalizing our business more and more as days go forward with the addition of newer and better partners. We are accelerating on our key segments, which we spoke about a while ago, and we are also focusing our efforts towards bringing about change in terms of green technology and SF6-free switchgears in the country. We now go to slide number six, just to give you a glimpse of how we are actually actioning this out quarter after quarter.
In the last quarter, we saw good wins aligned to our strategy. We worked with a state utility company to provide digitization at the end, at the edge, providing them with technologies to connect their products and their services to our software. This brings in better visibility to the customer in terms of their assets and preventive maintenance at their end as well. Continued relationship with this customer for the last two years have we been able to repeat our successes here and get a preferential win here as far as our business is concerned.
We go to slide number seven, another digitization opportunity that we have been able to win, this time with an advisory services, which is called the EcoStruxure Asset Advisor, which is a cloud-based advisory service, which the customer has signed up with us for around five years along with the CapEx. This will help the customer in moving their maintenance from a reactive basis into more of a proactive basis, thus impacting their uptime in a very big way. This is one of the, you know, I would say, path-breaking orders that we have received, the first in the country.
Moving forward, again with services, I would say that here's a different application of the EcoStruxure Asset Advisor focused on a state government building, where all the medium voltage and the low voltage assets have been connected to an Asset Advisor, again, to provide the customer with predictive maintenance so that the critical uptime is maintained. A similar software being used for two different applications and two different customer base. Going on to the next slide, which is page number nine. Here is where our partner play comes into play. Here is a win by one of our licensing partners for a solar power generation in Maharashtra, where we have supplied critical equipment within very demanding timelines of eight weeks, and we managed to install and commission it along with our licensing partner.
This is again how we are participating using the licensing model within the solar field, which is more around the renewables. Going on to slide number 10, another strong win on the data center piece, which is, again, an exciting business that is growing around in the market here in India as India transforms itself digitally. Working with the end user, which is a global customer for Schneider, and working with the EPC in India seamlessly, we managed to provide all the medium voltage equipment that is required for this customer to be able to set up a very large facility close to Mumbai. This project will repeat itself in different modules as time goes by. I go on to the next slide, which is page number 11.
Staying close to our digital strategy, we are launching more and more products that are connected, factory connected, so that they can be easily integrated in the field, either to edge software or the cloud software. We have the connected RMU, connected transformers, and the air insulated switchgear, which is now connected with EasyPact. Now I pause here, and I request Mayank Holani, who is the CFO for Schneider Electric Infrastructure Limited, to take us through the financial update. Over to you, Mayank.
Thanks. Thanks, Sanjay. Good afternoon all the participants. Please move to slide number 13. The market is now looking committed and recovering. Our OI, order intake, in the quarter stood at about INR 3,087 million, which is up by about 51% over last year same quarter. If you see from over last three quarters, there has been a consistent you know movement in the order bookings, and it has been on positive side. We have also done well in execution. However, this quarter number looks negative versus previous year due to the base effect. Last year, what had happened is, due to the lockdown starting from mid of March, a lot of sales SG&A had accumulated in Q1, and the sales got executed in Q2.
Showing a drop in sales in this quarter. If we remove that effect, the trend is positive. We have good order momentum, and execution will also is picking up. If you see the in terms of half year, we are at about 2% order growth, sales growth versus your previous year. We continue to be cautious in order booking in terms of cash security and maintaining the margins. Next slide, please, 14 . Here, overall P&L is aligned with our strategy. We are focused on cash and margins, and we will continue this journey. This quarter and the last, actually, about the last couple of quarters have been impacted badly by the raw material inflation.
We have tried to manage it, you know, to the best possible way. You see the results in the numbers where the margin is maintained or even improved, even in a situation where there has been so much inflation on the raw material side. Employee costs are looking high, and this is more due to the employee costs coming to the more of a normal level in this quarter, in this year, actually. While last year, there was a lot of savings due to some tactical actions. This quarter, employee costs is especially there because of the VSS cost which is there, which has not been there last year as a tactical action. That's it. I will close here and leave the floor open for Q&A. Thank you.
Thank you very much, sir. Ladies and gentlemen, 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 handset while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star and one at this time. The first question is from the line of Manish Goel from Enam Holdings. Please go ahead.
Yeah. Thank you so much for the opportunity. I have few questions. Just looking at the results, what we see is that the closing inventory seems to be quite high. It has increased quarter-over-quarter. Is it that we were unable to dispatch certain finished goods, or what was its reason? What was the reason behind it, and was it one of the reason for probably seeing a decline in the revenues? How do we see that going forward?
Manish, this is one of the reasons, and there are, you know, couple of reasons for this inventory increase. One is the sites. Some of the sites were impacted by the flooding which has happened in this quarter in many states. That has resulted into the site readiness has been impacted, and we could not dispatch. The customers could not pick up those materials. On the latter side, but there were a few cases also where, you know, we remain focused on our security of our money or of recovering the cash. Due to the customer security also, because we have withheld the sales instead of, you know, dispatching and then seeing the risk on the recovery.
This will get recovered in this quarter, next quarter.
Are you seeing that inventory which got built up has been dispatched almost now? It's almost 45 days past that quarter. Have you seen that happening?
Mostly, yes.
What could be the number, if you can share that, which probably could not get dispatched in the Q2, in terms of revenue booking?
Could be, would be around INR 30 crore.
Okay. Mayank, you mentioned that there was certain ESOP cost in the employee cost because the employee cost seems to have gone up significantly to INR 59 crores. What was that ESOP cost, and is it recurring or if you can please.
Manish, this ESOP is what we call; it's called a worldwide employee share options plan, and this used to run every year till 2019. Last year, due to the COVID impact, as a tactical action, this was withheld in addition to other cost-saving measures. As per the accounting rules, this cost is booked in the quarter whenever it is given, you know; it has to be booked in that quarter. That cost impact is in this quarter only. It will not be recurring in subsequent quarter.
What could be that one-time amount, Mayank, which would have got debited?
About $80 million. INR 8 crore.
On a normal quarter basis, if you see the employee cost would be in the range of INR 50-INR 51.
Manish, for this ESOP, that's a contribution towards. It's a combination of employee and employer contribution.
Yeah.
The employer contribution is approximately INR 1 lakh per employee.
Okay.
Yeah. It's multiplied by the number of employee who has opted for it. How it vary from year to year, it's formula of the number of employees opting for it and.
Okay. I'll just ask one more question and get back to the queue. Just, you did mention that the momentum seems to be picking up in the economy. How do we probably see going forward in terms of order inflows and do we see this momentum what we have continuing in terms of I think 50% growth what we see order inflow is on a low base, but going forward, how do we see, sir?
Overall, I think we should have a double-digit growth in orders, through the year. We are-
Also, sir, would like to congratulate on the excellent margin management as far as gross margins are concerned. In such a tough time, we have managed to control that. Do we see that we should be able to keep the gross margins in control, and then with growth in revenues, we should be able to see the operating leverage benefit?
I think on the gross margin side, I think it's going to be an uphill battle, and it's too hard to predict which way it will go because of the volatility in the commodity situation that you see, not just in India, but globally. It's going to be a battle that we are fighting day in and day out. We're doing our best.
Sure.
To protect our contracts going forward, wherever possible, with variable pricing, with, defined timelines, et cetera. We have done a lot of work even on the backlog in going back to customers and telling them about the difficulties which are there and being able, many of the customers have supported as well. I think it's going to be an uphill battle, and it's going to be a battle that has to be fought every day. It's hard to put a number to it by saying that, "Yes, we will be at this, percentage," or things like that.
Great. Thank you so much, and get back in.
Thank you.
Next question is from the line of Harshit Kapadia from Elara Securities. Please go ahead.
Hi. Thanks for giving me the opportunity. Just, sir, in initial remarks you have mentioned, you know, regarding four segments which you have highlighted that you are seeing good traction. Within these four segments, just wanted to understand, where do you see, you know, most traction for Schneider Electric? Are there any product gaps within these four segments which you are looking to, you know, reduce it over the next couple of months?
If you look at the ability of Schneider to serve these four segments, I would say that they are more or less the same. Okay. I don't see any major product gaps in our portfolio to be able to serve these segments.
Sir, within these four segments, where do you see the most traction, sir?
The most traction currently that we see taking off on the ground. See, there are two things. One is a potential which is based on certain announcements that have been made or certain reforms that are expected to happen. Some of those initiatives could take time to take off the ground, so you wouldn't be able to really predict in which financial year it would really take off, this one or the next one. Definitely based on the investments and the decisions that have been taken in the past, I would say that cement, and metals and transportation, that is metros and high speed rails and things like that, I think those things are getting off the ground pretty fast.
Fair enough, sir. You also highlighted, you know, there were some supply chain issues, where you were not able to deliver your projects. Do you foresee anything in Q3 as well, which you could highlight, this will be a much smoother quarter from that?
You see, it's quite a volatile situation when it comes to commodities, both in terms of pricing and in terms of availability. For example, you can see from our strategy that we are trying to push more and more stuff onto the digital side, connected products, et cetera. There is a huge volatility as you would have seen in the market from some adjacent industries as well that there is pressure on electronics. There's a huge pressure on electronics and chips. We have a supply chain which is pretty robust, globally controlled through a 24 by 7 control tower. Actions are in full swing to mitigate all possible risks, not only from a revenue perspective, but also from a customer satisfaction perspective.
We're taking all those actions, but there is a possibility of misses led by shortages not only in terms of the components, but also in terms of availability of freight and shipping lines, et cetera.
Fair enough, sir. Within the order inflow which we have announced for Q2, you said INR 310 million, would you be able to share, you know, which are the sectors where you've seen the highest growth?
I think we have seen the highest growth in terms of transportation, metals and also data centers.
Just to understand more on data center, how large is this opportunity for Schneider Electric, sir? We are only in the medium voltage category in data center. If you can highlight anything, any number on that would be helpful.
This company participates only in terms of medium voltage in data centers and automation around medium voltage. Overall, as a group, we participate in many areas which includes the low voltage, which includes UPS, which includes building automation products, a host of other things. It's a pretty large and attractive segment for Schneider on our own, and this category is expected to grow double-digit for the next two to three years.
Okay. That's all right, sir. I'll join back in.
The next question is from the line of Nikunj Doshi from Bajaj Capital. Please go ahead.
Hello.
Mr. Nikunj Doshi, you may go ahead with your question.
Hello, this is Nikunj Doshi here. Yeah, sorry.
Yeah.
Just one clarification. In annual report, we mentioned about export opportunity and related party, so one special resolution which we had passed. What is expected from those export opportunities and what kind of order book we are looking there?
The key export opportunities are more we keep doing on mainly the RMU and the transformers. When it comes, I think the special resolution which you are referring is more for the purchases which was there.
Okay.
We expect that to pick up in, you know, next term. Because that's a long lead time, our product. That was for GIS, and we expect it to come up in, you know, next couple of years. So it's a product which takes at least eight months lead time from ordering to delivery.
Okay. This was a related party purchase, for purchases we had passed that resolution. We are not looking at export opportunity as such.
I think you must be referring to the resolution which was issued couple of months back.
No, because I think there was a mention that you got some INR 25 crore export order and further you may expect further export orders, and that's why perhaps the resolution was required.
No, that was for import.
Okay.
If I recall correctly, I'm not saying. It's the form for import purpose.
In terms of the profitability, when do you see the company returning to profits? Because I think our net worth is also eroded, so any plans for rights issue or funding for company equity, or any plans to raise resources on that side?
When you see last year, we had almost reached a break-even level.
Mm-hmm.
Right? With improvement in revenue, we hope to improve it further in this year.
Okay.
Once the revenues come back to normal, we should be good.
You mentioned that order book is expected to grow in double digits. Double digit can range from 10 to 99. Can you be slightly more specific on what kind of order book growth we are looking at?
I think this year, if you see the H1, we are at about more than 30% for the growth on order book, about 32% to be precise on outstanding order. For full year basis, we expect to be at least around 20% or more.
Okay. Okay.
For H1 we are at 32%.
Whatever new orders we are bidding for, is the raw material pass-through consideration or still we have to bid based on the fixed price contracts only?
It depends on the, you know, the nature of tender and, you know, terms and conditions. In, as you know, in public sector tenders, you cannot change the terms and conditions. For now, you know, we are also covering the, you know, sufficient cushion or provisioning for any uptick in the raw material price, any inflation in the price. Again, that remains an estimate. You can do a best estimate only because if you keep too much of cushioning, then you will be. Your price will be too high than competitor. We have to strike a right balance.
Okay. Yeah. Thanks.
Thank you. Next question is from the line of SK Damani from SKD Consultants. Please go ahead.
Hello, am I audible, sir?
Yes, you are. Please go ahead.
Okay, sir. Sir, actually, I wanted to know from the management, sir. Thank you for the opportunity given. That, can we report trading turnover and manufacturing turnover separately? Thereby we come to know that how much is manufactured by the company in-house in their works and how much is procured and then sold. That will give us some idea as to is there any niche that the company has got in their own business in various verticals. Because the primary reason for asking to get this kind of detail is for the fact that the company has not been able to give some very good results. I mean, our profitability is not there in the business.
Can you kindly reply me please, sir?
We are reporting as per the Indian required standards, and the required data you have asked is already there in the annual reports as per the standards and the norms of the revenue. Annually this information is published in the annual report and you can track it.
Sir, what are the niche products that our company makes where there are no competition or all the products are subject to competition only?
We are living in a competitive world, so we cannot say that any product is there where there is no competition.
Because when this company was formed, sir, it was told that it's a leading electrical manufacturing company of the world. What we thought was that, you know, this company will have no problem, you know, generating profits from the day. It was, I think, separated from T&D company was there.
From there, this company was spin off. I mean, it's a story of before about seven, eight or 10 years. I mean, I may make some mistakes, but I think this was a spin off from L&T company was there. From there it was spin-off. Would you be kind enough to? Of course, I'm little late also in joining. I mean, can you kindly just highlight that when we are going to be becoming positive in all the quarters to come?
As I said earlier, you know, last year we were almost at the breakeven level. We hope to continue the same journey. I think this year we should be positive. I mean, once the, you know, sales are with sales improvement, we should end. You see the order book is positive and it's consistently over the last three quarters, we are seeing good momentum in orders. As it turns into conversion to revenue, we should see the improvement in numbers.
Last question from the government was a very big program of Smart City.
Sorry to interrupt.
Yes, okay.
Sorry to interrupt, but may we kindly request you to return to the queue for your follow-up question?
Okay.
Thank you very much.
Thank you.
Next question is on the line of Sonal Minhas from Prescient Capital. Please go ahead.
Hi there. Am I audible?
Yes, you are. Please go ahead.
Sure. Just had two questions. First one was around the financials for this year. If you could strip out one-off costs from the overheads, the employee costs and the expenses, that could just help us understand the recurring and the one-off elements. That's one. Secondly, just wanted to understand the contours of deal around the L&T product business takeover, if there's any update around that.
I'll update you on employee cost, and then we'll request Sanjay to update on L&T side. The employee cost for the quarter is INR 588 million and includes about INR 81 million of non-recurring costs related to the share options.
Okay.
You can take about INR 510 million-INR 515 million as a business as usual employee cost.
Got it, sir. Other expenses does not have any one-offs in that?
Other expenses are usual. You know, sometimes you have some, say, old debts recovery or something, provision they get, so it's as usual. Some of the other expenses are fixed nature, while there are some like freight which are variable and directly proportional to sales.
Good to understand that. Those are range bounds basically, so there are pluses and minuses around that. Got it.
On the L&T acquisition, I'd like to remind you that it's primarily, you know, acquisition that is led by the low voltage synergies. The medium voltage overlap is very small and, as things are progressing, we are working towards that, how do we leverage the synergies. Right now it's a bit premature to talk about it, and as I mentioned before, the overlap is very small.
Understand that. For us as minority shareholders, are there some controls which we should be aware of, or it's still premature for me to ask that question, to what would be eventually the shareholding of minority shareholders in this entity? Just want to understand that because I understand there's a third party and the funding board there too. Just seeking an update on the structure of the deal for minority shareholders.
I think nothing has changed on that landscape, I would say. I think nothing has changed from the landscape of the minority shareholding pattern or anything of that sort.
Okay. Two questions on that. Just to follow up, we would continue to remain at the same shareholding as minority shareholders. Secondly, there are no plans to delist this entity. I'm just asking specific questions if there are any updates.
We cannot talk about the future. Right now there are no developments on that up to date, but we cannot talk about the future because that's something that we do not want to speculate on.
Understand that. Okay, got it. Thank you.
Thank you. Next question is a follow-up from the line of Manish Goel from Enam Holdings. Please go ahead.
Yeah. Thank you. Thanks a lot. We would like to know what is the current order book and the breakup of that, if you can please share.
Mayank, will you be taking that?
Yes, sir. Sorry, I was on mute . Our order backlog as of September end is about INR 845 crores.
Okay.
Of that about 70%, 69% is systems, 19% transactional and 12% services.
Right, Mayank. If you can please share the revenue breakup as well between IG and external, and also give me the revenue share in systems and product, please.
Revenue for this quarter was 70% system, 19% transaction and 11% services. From system about 18% is IG.
18%?
Yes.
Also in order inflow, can you give me the IG and the breakup?
IG orders for the quarter stand at about INR 43.5 crores.
Okay.
OG orders, as I mentioned earlier, about INR 3,087 million.
Okay. I also wanted order inflow breakup.
Order inflow breakup is about, from OG side, INR 54 crore. 54 and 12. 66% of customer.
Okay.
66% custom. 19% transaction, 15% services.
No, that doesn't add up. One sec. Yeah. Okay. Got it. Okay.
It's 15%, 19%, 14%.
Okay. Just on our strategy to increase revenue shares from transactional products as well as services, somehow we are hovering between around 30% between transactional products and services. It's probably we are not seeing that number going up.
Manish, what has happened is, due to the-- during last one and half, this transactional strategy also depends a lot on the progress on our, you know, the, what we call licensee partner and the contractor channel deployment, which require a lot of, approvals and, validation of the partners from the end users, and which happen to be largely the government utilities and departments. That activity has got, you know, delayed, due to the last one year or so because of the COVID. People can't travel and go sit with the departments and get that approved. That has now started picking up from last couple or last quarter or so. Because that is the time taking.
Once you are approved, your partner make it approved from any utility or department, then it will be a quick, you know, improvement in the numbers from that model. That's where the transactional model will flow.
Okay. Thank you so much.
Thank you.
Thank you. Next question is from Nikunj Doshi from Bay Capital. Please go ahead.
I just re-read that related party resolution. I got the annual report in front of me now. The members may note that the company has undertaken transaction for supply of GIS product with one of sister concern. It says that the GIS product and the booked orders were INR 22 million-INR 70 million during the three months. Its order amounting to at least INR 2,500 million. So is it import or export we are talking of?
It's import of the component, which is largely the supply chain, which is right now being followed in India because of the lack of-
You mentioned that company has undertaken transaction for supply of GIS to a project.
We will import it from Germany.
Understood.
Supply to our customer-
From sister concern to you.
Yes.
Okay. I read it as export. Sorry. Okay.
That's why it becomes related party transaction.
Yeah. Yeah, but is that statement gives the impression that you are exporting and not importing?
I see. Okay.
Does that answer your question, Nikunj?
Yeah. Thanks. Thank you very much.
As there are no further questions, I now hand the conference over to Harshit Kapadia for closing remarks. Over to you.
Thanks. We would like to thank the management of Schneider Electric Infrastructure for giving us an opportunity to host this call. We would also like to thank all investors and analysts for joining today's call. Any closing remarks, Sanjay sir, that you want to highlight, sir?
I'd like to thank everyone for taking time out to talk to us and to understand the progress that this company has made. I wish all of you a very good evening. Thank you.
Thank you very much, members of management. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes today's conference call. Thank you all for joining us and you may now disconnect your lines.