Hitachi Energy India Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. We have a first question from the line of Apoorva Bahadur from Goldman Sachs. Please go ahead. 9/20

Sir, two questions. Firstly, on the margin bit. Just wanted to know what caused the other expenses to increase almost by Rs. 50 crores year-on-year? And also, then what's our full year EBITDA margin expectation for this year? And second question is on the capital expenditure, essentially the part of 6 billion CAPEX that the parent has sort of allocated to energy transition. So, any clarity on how much of that is expected to be spent in India and some road map?

Yes. Thank you, Apoorva. Maybe on the first one, I will ask our CFO to talk on that, but we don't give any guidance, forward-looking statement. What we have been talking about consistently is that we will enter double-digit EBITDA by end of FY '25. So, that's what we have been telling and we continue to do that. Maybe, Ajay, why don’t you take him through the other expenses.

Okay. So, thank you, Apoorva. So, as I mentioned that traditionally, our quarter 1, we see the revenues are low and the cost base are high. But specifically talking about the other expenses, I would like to comment, including FOREX. So, let me comment in this particular quarter we had a FOREX hedging impact compared with the previous quarter, the impact was around Rs. 20 crores, and largely for the new project that we have booked. Then the second item is basically we have higher IT charges. As we have discussed earlier, we have migrated to a new ERP, during the 1st Quarter of '24-'25. And right now, we are on a parallel IT infrastructure. So, basically, this is where we got this higher cost, but we really expect the same to be normalized by the year-end.

On overall full financial year basis, so we will be able to ramp up.

And the other element is basically on the higher overhead is on account of the royalty, which is, if you see royalty expenses in the current quarter is calculated based on the revenue numbers of the previous quarter as per the contractual terms. And that is how our previous quarter, as I told, was exceptional on the revenues. So, these are the three or four major items that has impacted other overheads.

And all these things will be within the range on an overall year if you take it for.

Correct.

So, on the second question, Apoorva is on the capital expenditure standpoint. Well, definitely, there will be, as I said, we would not like to tell at this point in time. We want to reserve it this for a later part of the year, for announcement. 10/20

Okay, sir. So, as of now, the capital expenditure is, what the regular run rate that we have Rs. 200 crores?

Rs. 100 crores per year.

Next question is from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Congratulations on great order inflows during this quarter, sir. So, my first question is on when you say that you will achieve double-digit margins by year-end, but you've already achieved it in 4th Quarter FY '24. So, what do you mean by achieving it by year-end?

When I said from entering double-digit means, we expect that in a sustainable manner. We will look at that. That's what we meant.

Is it right to assume that maybe at some point of time where the revenue cross is Rs. 2,000 crores on a quarterly basis, then we'll be able to deliver that kind of number, because at Rs. 1,300, Rs. 1,400, you'll barely be at EBITDA positive. This is what I sense given the cost structures, you have at 37% gross margins and other expenses of 20% to 23% and 9% of employee expenses. So, you'd barely make any EBITDA at run rate of Rs. 1,400 crores, Rs. 1,500 crores of revenue per quarter.

Yes, we don't want to make that kind of statements. It's up to you to calculate. But as I said, we don't give any forward-looking statement. Sometimes, in addition to what you're talking about, also mix will play a large part of the thing. So, the mix could also change quarter-to-quarter.

So, my second question is on the orders. So, last quarter, you said that you have bid for some HVDC project and some STATCOM projects. So, if you can update us anything has been opened, where we are right now in the HVDC orders of Power Grids. So, if you can give some color on that.

Yes. So, we have submitted our bid. At this point in time, since it's a closed bid, so we do not have any official information to share. All we can say is that we are engaging with the customers and providing all the necessary information sought by the customers on those particular tenders, both on STATCOM as well as an HVDC tender in that.

We are not L1 as of now in any of these projects, right?

There is not publicly opening of this, right, yes. 11/20

We have a next question from the line of Mohit Kumar from ICICI Securities. Please go ahead.

My first question is, a number of transmission orders in India got bid FY '24.

Can you come close to the mic, Mohit?

Is it better now?

Yes.

My question is number of transmission orders or let’s say TBCB orders would have added to players, but we haven't seen any significant order inflow from India in Q1. What is causing this delay?

Mr. Kumar, give me a moment please. We've lost the management connection. I will reconnect them. Mr. Kumar, we have the management team back on the call. You may go please ahead. Sorry about this.

Sorry about that.

Should I repeat my questions, sir?

Please do that.

Yes. Sir, my question was a number of transmission bids were awarded in FY '24, right? So, our expectation was that Q1 will see a much, much larger order inflow for the industry. Why is there is a delay in finalization of these orders? And do you think that going forward, these numbers will pick up, especially from India business significantly?

I think so. If you just look at in the last three to five months we had elections, maybe that's also one of the reasons maybe it slowed down. But there is bidding going on. As we speak, lots of bidding activities there. Yes, there has been a bit slow decision-making. I'm sure now with the new government, new ministries are in place, that should accelerate that.

My second question is on the railway side. Last year, I think railway has updated guidance for adding locomotives and adding train set, and we also see a lot of Scott 12/20 transformers opportunity coming up. In your opinion, and given what you see, are you seeing this activity much, much higher compared to last year in terms of pending activity?

Yes. I think we'll look at the whole of last year. There's a lot of activity in the first six months that there was a bit of slowdown, not exactly slowdown. But the second part of the year was a bit lull. But if you really look at now, I think we see a lot of traction on the fast-tracking of some of the bids.

Railway, are you seeing that?

Railways, I'm talking about the railways.

We have a next question from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.

Sir, globally, there has been a shortage of transmission distribution equipment. So, although we have indicated that, maybe over a medium period, maybe 25% to 30% of our sales come from the international market. But given the current situation, do you think we will play more role on the global side, on TD equipment?

Thank you for your question. It's a very important question. All we are saying is that we have seen a lot of demand in the domestic market, okay. Our first and primary aim is to serve the domestic market. So, we are expanding the factories. We are setting up the new factories. So, those things continue to grow on that. So, while doing so, we are also keeping enough provision in our factories, both existing as well as the new ones, to cater to the demand outside of India. And that's the reason we said our exports in the beginning was a 15% when we started our company. And we said it will, over a period of time, it will happen 25%. Now it's already in the range of 30%. And we will see in that 25%, 30% range, it will remain consistently, without taking any large orders like Marinus Link, even without that, we will be in the range of 25%, 30% in that. So, that's where we want to do because we have a huge domestic order, domestic demand, and that's where we will be concentrating on that, in addition to the export.

Sure. And sir, apart from transformers and switch gears, I mean some of the equipment like grid automation, reactors, STATCOMs, where we have edge over the competitors. So, do you think this part will become major going forward or substantial part of the business, maybe three four years down the line? 13/20

Yes. I think if you really look at the whole renewable, renewable needs a lot of new technologies powered through the semiconductor, etc. So, that semiconductor things like whether it is HVDC, STATCOMs or power quality. And those are the things, we'll definitely have a bigger edge in new power systems or in the new grid stability related things like that. And we have seen this coming in, not only here but globally, and we are one of the first movers to invest in those technologies and put up our factories. And the Chennai factory is one example. We are the first one, probably in the country, to set this up at that scale. From that factory, we have produced the very crucial parts, like what we call as HVDC valves for our Mumbai project, and then we have received now other major orders for another project. So, these are the things we believe that going forward, will have quite a big traction, whether it is renewable integration or cross interconnections between the nations. Those are the things that have a huge opportunity.

And sir, last question from mine. We have guided that we will achieve 10% margin in the medium term. But going by the demand scenario, both in domestic and globally, do you think there is substantial scope to improve our margins, I mean significantly higher than what we have been guided, not now, but maybe over three to five years down the line?

Again, I don't want to say anything, Mahesh. What I can say is that what we have committed. So, we want to come over there and probably then we will talk. You can make your own calculations. If the revenue is going up with the same cost structure, things like that, you can start making your own estimate. But all what we can say from the management standpoint, is that we said we will enter 10% EBITDA by end of FY '25.

Next question is from the line of Prathmesh Salunkhe from PL Capital. Please go ahead.

So, looking at the demand for the transformers in the country, just wanted to know what would be the market share of Hitachi Energy in terms of power transformers, especially about 220kVs, since that is the big boom right now?

Prathmesh, thank you for your question. So, we normally don't give our market shares by product lines, et cetera, in that. But having said that, we are one of the largest producers of this large medium power transformers in this country, and also globally. And all I can say is that we have a very decent market share in our area of operation. 14/20

Sir installed manufacturing capacity for transformers are reaching somewhere around 500 GVA by the end of '26. What do you think Hitachi Energy will stand in that sense, I mean in that sector?

We have recently announced globally, this is for global, it's not for India, I just wanted to clarify. So, on the CAPEX, globally, we announced that $1.5 billion will be invested globally. Again, I'm stressing on that, so that you understand very clearly, further increasing the CAPEX of the transformers alone, okay? So, that clearly shows that being one of the leading largest capacities globally available. So, we are investing in that. So, in India, also, we have been investing in the last three, four years, right? We have invested in the capacity expansion of our power transformers. We have expanded our dry bushing factories, new greenfield factory we announced. All those things, we continue to expand it. And we have done that in the last 3, 4 years. We never stopped investing even during COVID time also.

We have our next question from the line of Jonas Bhutta from Birla Mutual Fund. Please go ahead.

Just two quick questions. Firstly, if you can update us, what percent of the Mumbai HVDC project is complete as of now, as of this quarter?

Yes. We are in the range of around 30% - 40% completed.

And as this quarter has seen an increase in the share of projects versus products in our order mix. If you can just remind us of what is the typical differential in gross margins between a product order and a project order. And as India or BCL sort of starts awarding the HVDC projects over the next one, two years, given that these will be project heavy, just wanted to understand from that angle, how gross margins would be there?

Jonas, thank you for your question. We normally don't give margin by product line or projects taking that.

So, even a rough differential sir, would help.

Yes. Again, always margin is a function of risk and reward, right? The more the risk, the more reward, and if you are able to manage the risk, then you have better rewards. And the products are sometimes very simple products. Without any risk, we do not have that 15/20 much of a thing in that. So, it's a varying thing. It's not a straightforward answer I can give it to you in that. Again, when you talk about the project, you've to understand a couple of things, very important things. Like, for example, previously, the project when we used to do a couple of years back, that we used to do the project in a complete EPC manner, that is engineering, procurement, commissioning, civil everything. Today, we don't do that. Our project team is only confined around our products, okay? We do engineering of our products. We ensure that the products have been supplied to that, and then we install and the commission. That's what we call as a project defined. So, unlike EPC, where the risk profile is huge, and there's a lot of unknown elements out there, how long it will take. Those things and all we don't know. The one which we have received, the Marinus Link, we call as a project, but it is more of a design engineering supply and commissioning of valves and some other associated products for that.

Next question is from the line of Amit Mahawar from UBS. Please go ahead.

I have two quick questions, sir. First is on the next two large HVDC projects, can you briefly share the status? And what is the competence of Hitachi there?

Sorry, the competition of?

I'm saying on the next two HVDC large projects that are expected in the next 12 to 18 months. What is the broad status on both, because both are very different projects, very large ones. And broadly, what's our capacity or framework there, in terms of the financial and operating capabilities that we have?

Which 2 projects are you talking about, Amit?

I'm talking about HVDC project.

First of all, thank you, Amit. As you know, there are two projects of HVDC, which are, I would say, three projects. So, the one is 6,000-megawatt project, which is in the final stage of bidding. That's the one. And we hope that, that should get concluded in the next quarter or two quarters. And then thereafter, there's another of similar size for 6,000 megawatt Khavda project, okay? That's also another project, which has come for a bidding, and then we expect that bidding to be completed in the next two quarters or so. And then there's a third project, which is also Khavda, which is a VSC project, which is a 2,000-megawatt project. Recently we got notified about the project, but it will take time, maybe by end of this financial year, it will come up for bidding. 16/20

Just to clarify, Hitachi is technically qualified for all the three? Or is there any different technology in any of the 3, where we cannot participate, sir?

We have a complete technology, both the technologies, we have invented this and globally. And locally, 50% of the installations around the world, they run through Hitachi Energy technology. So, that the technical competency-wise, we are fully competent and fully qualified to bid these projects, when they are available for bidding.

Very helpful. And second question is more on the sector, Venu, and a slightly longish one. If you look at last 20 years of transmission equipment market history in India, how do you think Indian companies, right, and I'm talking about the top four, five Indian companies, including the MNCs, who are operating out of India to serve the global market because China used to be a large exporter of transformers it gives for the world, right, at $5 billion, $6 billion peak number a decade ago, which is no more a number for them, because the Western countries are no more buying from China. So, whether it's Hitachi or the four, five other players. What are those four, five factors do you think which are in our favor, which makes India one of the large potential supplier of transformers it gives to the world? This is more a qualitative assessment from your side.

No, I understand that. But the ones which we announced project of Marinus Link, can give you one kind of sense for you, right? Now this factory, we set it up, okay? And this is the first time we did it. And we have seen this demand coming not only from India, but also from the rest of the region. And you see here and after resetting up of the facility, we are now even looking at what else we need to do, because the factory is already full now. So, those are the things can give you a little bit of sense, for you. And yes, India can play a major role in going forward, in making this as a manufacturing hub, and because we have the talent availability in the country, we have the required resources, and those things should help us in a medium term to long term.

We have a next question from the line of Apoorva Bahadur from Goldman Sachs. Please go ahead.

Sir, I just wanted the share of services and exports and revenue, if you can provide that?

Yes. So, on the exports, Apoorva, I think we have been consistent, saying that we got to 25% and now it is slightly trending upwards of 25%. So, this quarter, for example, if we 17/20 removed Marinus Link, we are 27%. If you add Marinus Link, then we are 60%. Sometimes, those things will get skewed with a large project. So, we will always take a measure of a baseload orders from the exports, so we will be in the range of 25% to 30%.

In the quarterly revenue as well, if you can provide a breakup?

Quarterly revenues will be slightly lower, I would say, but it will pick up in the same range in the next 2 to 3 quarters.

Okay, sir. In services?

Services, a high single digit at this point in time. So, this quarter was a bit low, actually. Again, we had a large project due to that. If you take the numbers as a percentage, it looks a bit low. But our strategy on the services is, if you take on a one full year basis, we are in the single digit, and we want to take it to the double digit.

Okay. Sir, my next question is on the pricing power in the domestic market.

What power?

The pricing power in the domestic market, as the global markets are so strong in this shortage of transmission equipment. Are you seeing any improvement in your pricing power?

No, I wouldn't say there's a dramatic improvement on the pricing power. But all I can say is that the T&Cs are becoming better, and then more and more projects are coming with the price variation clauses, those things are better, I would say in that.

We have our next question from the line of Vijay Bhatia from Max ROI. Please go ahead.

Congratulations on a great set of number as always. I just wanted to ask, sir, CNBC carried in a story today at around 3 o’clock that there will be a block deal or a stake sale from the parent, since they already hold 75% in the near future. Just wanted your comments or thoughts on it, sir.

Not that we are aware about of any of those block deals. All I can say is that the parent organization is very committed in the Indian market, and that's the reason we have been investing, and we continue to invest and expand our factories in that. So, we do not have 18/20 any information, if we come to know, so we will always notify and inform all the authorities, stock exchange, etc. We do not have any information.

We have a next question from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Just this question for Ajay. So, Ajay, you've spoken about that 1st Quarter ERP system went live, and parallelly you had an IT system running. So, for, when your full captive system is online, what kind of savings do you think can happen on other expenses? Because if I see last year annual report, you had incurred about Rs. 128 crores of information technology expenses for the year as a whole. So, how do you think this number will settle down?

Thank you for the question. As I told you, right now, presently, we are running on it. Just now we have converted to the new system, S4/HANA. And for 1 or 2 quarters, we expect that there will be a parallel IT infrastructure that we need to do. So, compared to what we see right now on the percentage terms, we are definitely going to come lower at the end of the year.

But this will move to depreciation, right? If you have IT assets and I can understand you will be amortizing. It’s removed from other expenses to below EBITDA line, right?

The nature of the expense is not to be amortized, because it is expensed out as far as the project is concerned.

My second question is last time you spoke about the high-speed rail and we're engaging with a large EPC contractor who has won this Rs. 10,000 crores of orders. So, any update on that? So, what's the score, what could be potentially the size we could get from the opportunity within the Rs. 10,000 crore pieces for us? And also, on the Vande Bharat, because last time, I think, you talked about Rs. 4,000 crores opportunity lies on the Vande Bharat side. So, if you can update us on that.

You're talking about on the high-speed rail?

One was on high-speed rail that Rs. 10,000 crores, I think, which went to L&T. And then I think in the previous call, you mentioned about that opportunity for Hitachi to play on Vande Bharat was about Rs. 4,000 crores. So, if you can update anything? 19/20

Yes, those projects pursuits are still under discussion. So, we submitted our bids. So, when the bids are under submission, so we'd not like to discuss. Once it concludes, then we would like to tell you on that.

Vande Bharat opportunity, I mean you still hold on to the Rs. 4,000 crore number, I think you had spoken about.

I think so, yes. Based on the projections of the ministry, because we believe that's the available market for us. On the previous question, if I may clarify to Mr. Vijay about CNBC news piece, which you talked about us, we saw that, that basically has nothing to do with the Hitachi Energy. It's a different Hitachi group, where basically commercial HVAC pertaining to residential and lighting commercial. We do not have any details, but this is what we have seen on CNBC.

We have a next question from the line of Viraj Mithani from Jupiter Financial. Please go ahead.

My question is on; can you give some color on data center opportunity for us?

So, data center, as I said, the data center has quite a good growth potential for the sector as a whole. And we have been talking about for our portfolio, almost 15% to 20% of CAPEX dependent on the hyperscale data centers, etc. And so, the data center decision is not happening uniformly on a quarter-on-quarter, but we believe that it has a huge potential, and it can go and a more consistently ordering should take place on a quarter- on-quarter basis is that. But it has a huge potential. As you know that, there's a 900- megawatt worth of data center there. And in the short term, the expectation is that it is going to be doubled almost 1,500, 1,600 megawatts.

What would be our size of the opportunity in this, in terms of numbers, if you can quantify?

That's what I said. For every data center, our CAPEX is around 15% to 20%.

And sir, my next question is on other expenses, which has seen a jump on quarter-to- quarter. So, can you give some light on what are the components that have led to this rise?

Maybe Ajay, will you talk about? I think you already explained it, but once again you can explain it. 20/20

Thank you for the question. I think this question already I have talked about. But since you asked again, let me again. So, other expenses, including FOREX, I have talked. So, FOREX, we have done a hedging of our large projects. So, that is where compared to the last quarter, there is an impact. And then there we have higher IT charges. And again, as you must be aware, we have discussed earlier. We have migrated to a new ERP during the 1st Quarter of '24-'25. And right now, we are on a parallel IT infrastructure. And that is why, we see the caution there in this quarter, and we expect the same to be normalized by the year-end. And another important aspect that I talked about is on the overheads, is on the royalty, which is basically, if you see royalty expense in the current quarter is calculated based on the revenues, pertaining to the previous quarter, and that is just for the contractual terms. As you know that our last quarter was exceptional on the revenue side. So, that particular impact has come in this quarter. So, these are the major ones, as far as the other expenses are concerned.

I understand again the expenses would come back that will be again reimbursed right to our account. Is this a nominal entry? Is that correct to say?

Yes. I think it's a notional cost and that's not actual cost. You’re right.

Ladies and gentlemen, that was the last question for today. On behalf of Hitachi Energy India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.