Hitachi Energy India Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. We will take the first question from the line of Umesh Raut from Nomura India. Please go ahead.

Hi, team and congrats for a very good set of results. My first question is pertaining to execution. So, I just want to understand how much of execution pertaining to Mumbai HVDC project is remaining now and roughly how much of total turnover was contributed by Mumbai HVDC project for the third quarter?

So, thank you, Umesh. As you know , we don't share revenue details on a project specific basis, and when it comes to the Mumbai HVDC, so we have just completed our pre-commissioning test. We and we have just completed the pre-commissioning test. So, in just another two to three weeks, we will commission the project.

Understood, sir. So, my question was largely because of our gross margin performance which was slightly lower on a quarter-on-quarter basis. From last quarter, it was down to now about closer to 39.5%. So, apart from say, probably increased contribution from Adani HVDC project, was there any particular other reason for this drop in gross margin on quarter-on-quarter basis?

So, actually, this gross margin fluctuation is basically on the product mix that we are operating. We have also earlier talked about that in some quarters depending upon the execution of the products, there could be slight changes left and right. So, that is only the outcome of the product mix that you are operating.

Understood. And second question is pertaining to recent inflationary pressure from commodity prices. So, how you are managing these pressures? What percentage of our current existing backlog is on the account of price pass on to the customer?

We talked about also this, Umesh previously. Most of our backlog has price escalation formulas built in. So, we have been also telling you from the beginning that it will not impact great to the large extent because more than I think 70% of our portfolio is having a price escalation. There will be small amount of portfolio where they need immediately within one or two months turnaround for their revenue. So, those things may not be there, but otherwise our portfolio is largely protected from price escalation.

Understood, sir. My last question is on the outlook for domestic market. How do you see in terms of FY '27 demand especially coming in for transformers especially in the domestic market? In terms of capacity which is kind of also coming into the market whether we will have same kind of pricing power in upcoming tenders? So, any insight about these things?

Yes, I think we can give a market trend. The market in my view is very strong. It is still stronger and both in terms of transmission and also in terms of electrification is going in a big way. Electrification of data center will come in huge amount in the same. So, the need for more power equipment, whether it is transformer, switchgear, etc., is definitely going to be there in that. So, we have been looking at the capacities coming in. Various companies have announced the capacity expansion. Considering the existing capacities plus capacities to come, we believe that still there is a gap to close on . So, this is the way the energy transition story in our view, purely in my view is a multi-year growth story. Thank you.

Thank you so much. All the very best.

Thank you.

Thank you. We will take our next question from the line of Harshit Patel from Equirus Securities. Please go ahead.

Thank you very much for the opportunity, sir. My first question is on our HVDC localization. I know you have highlighted in the past about we are making HVDC transformers, converter valves and doing the entire engineering of those projects in India. I want to understand whether we are increasing our HVDC localization further or we have already reached a stage wherein further value addition is not possible at the moment in India?

We won't say that further value addition has not come. We are continuously taking a lot of actions to further increase our value addition. So, we have been doing that. We are also executing the HVDC project in a Marinus link, for example, in Australia. So, all these things will help us to further localize the supply chains here.

Yes, please go ahead.

Thank you. Sir, could you please provide an update on the budgeted CAPEX for FY '26 and how much of that we have already incurred as well as if you can highlight your CAPEX plan for FY '27 and FY '28 that will be very helpful?

We have very clearly given in our QIP document how we wanted to utilize CAPEX. In this first year, we said we will do Rs. 700 plus crores and the next year will be an additional Rs. 700 plus crores. So, that what is the thing in that. So, there could be a movement of few hundred crores this way, that way, but otherwise we are on track very much.

Understood, sir. Thank you very much for answering my question. I will come back in the queue.

Thank you. We will take our next question from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Hi, Venu. Congratulations on a great quarter. So, my first question is on the CAPEX. If I see the utilization of the proceeds, we have only used Rs. 155 crores till now versus Rs. 700 crores which was envisage for FY '26. So, why is there a big disconnect between what the CAPEX incurred and what we have outlined in the document?

So, just now, I think we answered the same question. So, we have a slow start for sure, but we have a pipeline in place where in the coming quarters, it will pick up. So, because of the product cycle, our product demands, we cannot do a bulk CAPEX at one go, so we have to go in a sequential approach. So, we have a plan around that and we are hopeful that we will pick up. So, it might happen that right now, your utilization is the lower side, maybe the next quarter, the coming quarter there is a huge spike also. So, that is how the cycle will operate. But we are very much on to that and we are very closely monitoring the usage of that CAPEX.

Sir, another question is on the order backlog. We have almost 30,000 shares of the order backlog and if I estimate or remove the HVDC parts, our base order will be somewhere around Rs. 10,000-Rs. 11,000 crores and now the Adani HVDC order is over. So, in the coming quarters before the HVDC starts getting executed from FY '27, so there could be a slowdown in execution in the coming quarters at least for two-three quarters now?

No. I think we told also it is not that HVDC will slow down because HVDC, for example, we are already working on the existing two projects, manufacturing is going on and also various other simulations are going on. So, those are the projects we recognize the revenue based on the POC. So, revenues all will keep coming in that. We don't see any slowdown in our revenue growth.

One question on the other expenses. So, we have been seeing reduction in other expenses despite increase in the turnover. So, just wanted to understand is there any impact as we reduce any royalties. So, how is that other expenses have been going down for the next two-three quarters?

So, we have been discussing earlier also that our other expenses normally hovers in the range of let us say 15%-19%, . So, depending upon the revenue growth and also the operational efficiency that we have been focusing, so there we are able to get the leverage out of that and this operational efficiency we are talking about some of the expenses, also on the group expenses, there we are working and that is how the outcome is there. So, it will be in that corridor. If you ask me ballpark number, it will be in that corridor only.

But has this ABB sharing of IT expenses is now totally, are we migrated to our own IT system because earlier we were paying them some royalty for that so is it because of that we are seeing some reduction?

That we have closed this chapter a year before. So, right now, we are totally operating on a standalone basis. We are not relying on the ABB so very much it is our Hitachi Energy Operating System and we are working on SAP4 HANA. So, we are on our own.

Thank you.

Thank you. The next question is from the line of Sumit Kishore from Axis Capital. Please go ahead.

Good evening, and my compliments on a very strong set of numbers. My first question is a couple of large HVDC LCC projects are there in the pipeline, which could mature over the next 12-18 months. Could you speak about them and capacity wise how are you geared to address the opportunity and if you could spell out what opportunity these two projects present roughly in terms of size as well? That is my first question?

Thank you, Sumit for your question. I think as you know there are quite a lot of HVDC pipeline, but one of them has definitely come for bidding for our customers that is TBCB customers in the Barmer project which is a 6000 megawatt LCC project. As you said, in fact, in the last concall also, I have been saying consistently that we have been creating the capacities in anticipation of all that. So, we do not have any limitation on taking any particular order, but every order we look into based on the risk reward profile and also our exposure etc., any particular customer. Those like any other organization look into that. So, we do those kind of things, but on the capacity standpoint, we do have a capacity. We will be bidding these projects.

Just to follow up on this. Is it fair to say that the size of the HVDC opportunity addressable by you would be roughly 50% of the project cost?

We don't know, Sumit to tell you differently depending upon how the line size and other things it will be different in that, but it is definitely sizeable.

If you could speak about the share of exports and services in your nine-month inflows and backlog and the outlook for the next one -two years for exports and services?

We said exports will be in the range of around 25% is what we set our target, but now we have reached almost close to in any way bidding 29%-30% range. And we also said our main thing would be to address the domestic market and that is the reason we are expanding, we are creating the new facilities because we have a clear visibility of the domestic market where it is going to go. So, at the same time, our exports are also growing, but exports are not at the cost of the domestic market.

Thank you.

Thank you. We will take our next question from the line of Bhalchandra Vasant Shinde from Motilal Oswal. Please go ahead.

Hi, sir. If you can provide some insights on recent budget also, there has been potentially given for seven high speed rail and on the export opportunity also, again one point to address is currency has depreciated, so we will be more competitive advantage wise, also on the better manufacturing cost. So, don't you think that relatively export opportunity should increase for us further?

Thank you, Bala, for this question. I think on the budget, I think in addition to what you talked about, there are many other positive things out there, but if I only stick to the seven corridors of high speed rail, it is definitely a big opportunity for Hitachi Energy, and I'm not sure what kind of funding, etc. If it happens to be a Japanese funding then we are going to be in a much more sweet spot on that, but leave alone the funding. I think this is the opportunity, in fact, again considering this opportunity. We already started expanding our traction transformer facility. So, we are expanding our traction transformer(facility) and lot of other equipment which go into that are also being expanded. Yesterday, we did our ground breaking ceremony for high voltage product facility in Savli in Gujarat. So, this also lot of this equipment will go, not only into the transmission but also into this high speed rails, etc., . So, you are absolutely right, export right now because of the currency we can definitely take advantage of it, but we are building a solid and sustainable strategy. So, we don't want to create a strategy around a temporary phenomenon. If it remains like that, probably we will definitely do that but on a short-term basis, yes, we are reaching out to some of our global companies wherever they need, so they can procure from us it will be competitiveness for us. Those things we do it, but as I said we are looking at our company at a longer term, longer strategy and basis which we are working on things. And as you have seen our margins evolution over the last five years in only one direction improvement.

One last point on the exports. Can I continue?

Yes, go ahead.

Yes, one last point on exports. Sir, as per our global analyst meet and takeaways, there also our capacities are tied up till FY '30, FY '32 and we are adding capacities in India and other regions also. How is the scenario according to you on the global scale for us in that perspective that on the demand supply gap?

On the global scale, globally also it is a same situation. But globally, if they are adding the capacities, in fact based on the frame agreements etc., in that. So, it is quite tight and quite challenging in those things. And whatever the capacities we have added, in fact the need is to further addition is what we feel. So, those things are getting evolved as you see the demand. See, there are lot of things are evolving. We very much understand that is not a traditional power systems. Traditional power system, we know the load growth, etc., . That AI data centers, the demand is so huge and the need at yesterday’s basis. That is the urgency of building up those kind of infrastructure. And that needs not only the equipment, but AI-ready data centers and variation in the load from 100 MW to 250 MW in seconds, not even minutes, seconds. So, you have to have the power systems flexible enough to manage that kind of load center, right. So, it is not only the equipment, your whole system needs to be geared up, and that is what is happening in North America, that is what we see in Europe, etc. And we are very confident personally, that we see that mirroring in India as well.

Got it. Thank you very much.

Thank you.

Thank you. The next question is from the line of Amit Anwani from PL Capital. Please go ahead.

Hi. So, thank you for the opportunity. Again on data center, you did highlight it about the strong prospects. So, I just wanted to understand in terms of addressable market you have in that space. And since, as you highlighted, North America, is our export having data center orders already? What is the proportion? Has that increased? So, is export also will be driven by data center orders globally? Just a color on that?

Yes. I think, as I said, our exports, we are creating, again, capacities, etc., for domestic market, but we are flexible enough to address those exports in the data centers and also in industries, etc., in the nearby, our region, Southeast Asia, and other aspects of that. So, to answer your question, yes, data centers is also one of the things we are looking at. We have already received part of the orders from the data centers as exports. And we are also bidding for some other exports for data centers.

So, what is the addressable market there?

No, I think we will not be bidding everything together from here. So, we will be complementing with our global organization, wherever they are bidding it. So, of course, if there is a requirement for a couple of hundred transformers. They will also source a couple of transformers from our side . So, we are not able to estimate exactly what is the addressable market in those areas.

And sir, what is the contribution from data center currently?

No. Contribution from the data center and overall our order is still a single digit, high single digit.

And this we are expecting to grow much faster, probably?

Yes.

Thank you, sir. Thank you so much.

Thank you.

Thank you. We will take our next question from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Sir, just one question on this news, if you can help us understand regarding the Chinese thing which has been going on in the transformer side, say your views on that?

Thank you, Parikshit. I think we have also read the news and we have not seen any government clarification or official message on that. But what we heard during our interactions that they don't allow any imports from neighboring countries, border countries. So, if they may, in case if they have any manufacturing facility here, they may allow. But for us, it is not about which competition is that. As long as the level playing field is there, we do not have any issue with that. So, we don't see that as a major threat. So due to that we are not holding any of our expansion projects or things like that. We are very confident that as long as the level playing field is there, so we can beat the competition.

And second question is around the HVDC order. So, I understand that you have a level of localization in India and then there will be imports from the parent entity. So, when you calculate royalty, so how does it work? So, does the imports are excluded from that or the entire revenue is, the royalties will be applicable on the entire revenue? So, how does it work on the accounting side?

So, basically, royalty generally is calculated based on the overall revenue. But if there is any inter-company thing, that generally gets excluded.

Royalty is paid as a technology, not as a localization of import. Royalty is because we are getting the technology and the technology we are allowed to localize. For that you need to pay the royalty. And once you localize it, it is not that it will be there for every time they get an update, there will be some addition to that technology. So, those things continue to do that. So, royalty is absolutely required, for example, because we are paying the royalty, that is why our SF6- free technology which is available in the world, so we are able to bring it here and sell it to our customers in India, to PGCL and everything in that. So, that is a big advantage.

Sir, just wanted to clarify whether this entire HVDC order, Royalty will be paid on that or import content will be excluded. Just a clarification I need?

We will not give you exactly like that, Parikshit. But there will be some calculation, methodology, etc., what is excluded, what is not excluded in that. But it will be at least some percentage on a ballpark, on overall thing ..

Sure, sir. Thank you.

Thank you. We will take our next question from the line of Mohan Krishnaswami, an Individual Investor. Please go ahead.

Yes. Thank you for taking my question. Sir, on the data center, we have been reading reports stating that there will be an element of HVDC content in those orders because the power requirement and the speed of transmission is very different and very high. So, do you think that is correct? And do we have the capability to do that in Hitachi Energy India?

Well, I think, as I said, the data centers are evolving. What kind of data center being built in the US is completely different from the data center being built here. So, that is what I said, that 90% of the AI-ready data centers are located in those two countries. And I am sure those data centers once start coming up here, so we will also look at it. Yes, absolutely, today the data centers are having a big challenge in managing, getting not only the reliable, affordable and clean power, but also ensuring that managing the flexibility of that. So, there are the data centers we are looking at connecting directly to HVDC through any other renewable source. So, from a competency standpoint, we do have those things in Hitachi Energy in India to do those kinds of things as and when it is required and wherever it is required.

Sure. And secondly, sir, the recent EU deal, whenever it gets finally signed, being a European company as well, do you think that can have some impact on our export strategy in the years ahead?

Yes. So, that is what I said. Definitely, we will look at using our factories in India to the benefit of our own companies in Europe because of this tariff expense. So, that there will be some tweaking we will do, or at least we really look into it, how this will pan out and what are the products we supply from here to Europe. Those are the things.

Thanks a lot, sir. Thank you.

Thank you. We will take our next question from the line of Shirom Kapur from Jefferies. Please go ahead.

Hi, thanks for the opportunity. I just want to understand a bit more on the export strategy. Is there any thoughts on the parent allocating greater markets to the Indian entity, given you the global shortages? Is there scope for the Indian entity to serve more export requirements of the parent?

Thank you, Shirom. I think our export strategy is very robust, and we have been building over a period of time. And we have a three-pronged strategy. The first one is that we do have certain global feeder factories, and those products we only manufacture here and we sell all over the world. And then we have some allocated markets and these allocated markets being reviewed to add a little bit more wherever it makes sense for us. And then we develop these allocated markets just like any other market together with the local sales organization of that particular country. And then we start amalgamating our factories and start selling those things. So, this is accelerating as we speak and we are getting more and more markets to do that. And the third one is we do have a feeder factories where we manufacture the components for the bigger product. And this component we sell it to our own factories around the world. And the combination of these three, what we are saying, it will be 25%-30% of our revenues going forward. Excluding, of course, you need to take out the big HVDC project, then it will be 25%-30%.

Understood, sir. Thank you so much. All the best.

Thank you. We will take our next question from the line of Subhadip Mitra from Nuvama. Please go ahead. Subhadip Mitra: Good evening, and thank you for the opportunity. Just wanted to get a clarification on one point. I am trying to connect two things. First, you have mentioned in the past that starting 4Q of FY '26, you are firmly going to be entering double-digit margins. I think we have already done that two quarters early. Margins are already quite strong. At the same time, we are seeing the Adani HVDC project, which has gotten delayed for some time, now entering into the commissioning stage. Is there a chance that we could see some delay related penalty or LD related hits that could come in 4Q? Or are you confident of maintaining these levels of margins and only improving from there on?

We don't have any delay in the HVDC on account of us or LD or anything like that. So, that is very clear, and we don't see that as a challenge. As I said, we have been building on a long-term basis and you have seen in the last, not three quarters, but several quarters, what we are saying and what we are doing it. And very consistently, we are making the margins up. Subhadip Mitra: Perfect, sir. Thank you so much. That clarifies my question.

Thank you.

Operator, if you don't have any questions, we almost came to the last minute.

Over to you, sir, for the closing comments.

Once again, thank you very much for your participation and your engagement. If you need any further information, please do reach out to us. We are happy to engage with you and provide any additional information, etc... We are in such an era of sustainable energy future. We are super excited about the opportunities arising, not only out of our traditional segment, but also the new segments. And I am sure, like us, you are also super excited about what we are doing. Thank you for joining and looking forward to seeing you or meeting you or talking to you. Thank you very much. Have a great day.

Thank you, sir. Thank you. On behalf of Hitachi Energy India Limited, I would like to conclude this conference. Thank you for joining us. You may now disconnect your lines.