Hitachi Energy India Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press * & 1 on your touchtone telephone. If you wish to withdraw yourself from the question que you may press * & 2. Participants are requested to use handsets while asking a question. We also request that you restrict your questions to 2 per participant. We will now wait for a moment while the question que assembles. The first question is from the line of Mohit Kumar from ICICI Securities. Please go ahead.

Yes. Good evening, sir. My first question is about order inflow. Order inflow is yet to see a healthy momentum. We were expecting that given the strong bidding activity for transmission projects in the last nine months, especially in the domestic market, my question is how has been the inquiry from bidders for the transmission equipment and can we expect a slightly higher order inflow as we enter calendar year 24?

Thank you, Mohit. As I talked about it in my opening comments, I think we have a very strong, robust pipeline across the sectors, across the segments where we are operating. For example, the transmission is the one segment where you talked about. As I said, there are a lot of tariff-based bidding projects out there, including some of the STATCOM projects. And there are HVDC projects that are under pipeline. There are also large 765kV projects. that are also coming up for bidding . I would say that there is a very robust pipeline in the coming quarters.

My second question is sir; have you completed the study and submitted the reports for Leh-Ladakh for technical feasibility to Power Grid? And can we expect this project to progress in the next fiscal or this calendar year?

So, again, this is a very interesting question. So, we have, as part of our agreement with our customers, to complete by 31st of March. So, we are on track. So, progressively, we have to submit various reports. We are already submitting a couple of reports in that. We are on track. We would be submitting our study report in line with that.

How has been your experience, sir? If you can give some color.

Which one?

How has been the experience? Do you think this is technically feasible and this can be done at a reasonable cost?

I think our customers will talk more on that. But from our standpoint, we do have technical solutions for that. And we have not completed all the studies yet. There are a couple of studies that we have done, but there are many more studies to be completed. And we still have a couple of weeks before we complete and conclude our study report in that. But we do believe that technical solutions are available.

Understood, sir. Thank you for the opportunity. Best of luck, sir. Thank you.

Thank you. The next question is from the line of Renu Baid from IIFL Securities. Please go ahead.

Good evening, sir. My first question is on the bullet train or the high-speed project. We were expecting finalization of few packages this last year end. L&T was announced bidder for more than INR 10,000 Crore of orders. So, what is now the opportunity size for us? Are we still in discussion with EPC contractors, partners? And what could be the timeline of receipt of such orders?

Thank you, Renu. I think the question, you all know that the electrical package has been finalized on the EPC. So, we have also submitted our bids to the EPCs, including the winning bidder. We are in touch with them, and we normally do not mention the size of the projects until we know we can quote it. I t depends upon the customer approach, what's the business model or how we are packaging. Those things will differ the size of the project. As we speak, we have made our submission.

Maybe one to two quarters is what we expect. One to two quarters.

Sir, secondly, if you look on the broad basis, given the way domestic market has bounced back with respect to high -voltage transmission equipment, clearly supplies are in short and it seems that prices in general have improved. So, by when do we expect those better margin orders will start reflecting in our execution and our numbers? So how far are we? Is it just a couple of quarters away or probably our timelines and lead cycle of orders are different from the ones which are getting finalized. Because while we have been consistent in the last couple of quarters on gross margins and cost structures, it still seems to be suboptimal when we compare it with the rest of the key large domestic players. So how far are we in terms of getting these better margin orders in our backlog? And also, any view in terms of -- because we also had a target to improve the operating margins to near double-digit level by next year. So, are we broadly on track or there could be some additional hiccups on the way?

Again, it's a very interesting question, Renu. And we have been very consistent with what we have been saying on this. And we do have -- I think our portfolio -- our order backlog is very robust. It's, again, broad-based and our exports and service - which is also part of our portfolio - will definitely add to the bottom line in that. So, while we talk, there are also a lot of challenges, geopolitical and also the transport logistics. As we are improving on our exports, it's also important that our logistics on the exports is also robust. And any kind of external factors do have a challenge over a period of time. And it's important that we need to navigate them. But having said that, if you really look at what we have been talking about, we said we have been sequentially improved and we continue to perform a sequential improvement. In the last three quarters, so operational EBITDA, you take from a 3% in quarter one and 5.8% and now we came to 6.3%. So sequentially, we are improving it, and we also have a clear strategy to bring the double-digit operational EBITDA by end of the financial year is what we said. So, again, look at our strategy. We said that in exports, when we start about -- we are looking at in the 20%-25% range and then we have stabilized 25%. And if you really look at the nine-month exports, we are already 30-plus percentage. So, the strategy has to fall in place and become a little more stable, and that's how we are doing it. And on the margins, will definitely flow in once we execute the order backlog, which includes the export, which includes the service, which includes other things.

Sure. And lastly, if I can, what could be the status of the Mumbai HVDC? You did mention valves getting manufactured at Chennai plant. So, in terms of execution timelines of this backlog, how should we look at end of this fiscal and next fiscal specifically?

Yes. So as part of our contract with our customers, we should complete anywhere between March 25 to June 25. I think we are on track both on the execution on the ground and as well as on the manufacturing of those various components, not only in India, but also in other places. So, we are very much on track on that.

Got it. Sure. Thanks much and all the best.

Thank you.

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

Hi, Venu. Congratulations on a decent quarter. So, my question is again on margins. So, we had done 6.3% of operating EBITDA margins this quarter. So, we have a journey of 10%, I think towards the end of FY'25. So, every quarter, do we expect some improvement to bridge that gap of almost 400 basis points, at least to start with at least 10% by FY '25 end?

Yes, as we just now spoke, Parikshit, so that is our endeavor. Our endeavor is to make sequential improvement while navigating the various challenges at the same time.

Okay. Second question is on other expenses. So, when I compare with your other peer, I mean, who is almost half your size, and I see your other expenses, gross margins largely in line, but your other expenses are substantially higher. So, is there any component there? I mean, earlier we had this IT support from A BB India, so where we were incurring expenses. So, has that come down? Are we now on our own IT network? So, what could be the component that can be used to help improve our margins?

Maybe Ajay, our CFO, would add to this, Parikshit.

Thank you, Parikshit, for this question. If you see our other expenses, you can see the current year results. We are consistent compared to the earlier quarter. So, if you see YoY, our other expenses were 21.7%, now we are hovering around 19.4%. Having said that, on the IT cost, yes, the IT cost, currently we are not yet totally out of the ABB support. We are still running at T SA, and we are expecting that we will be out of this support mostly by the mid-next year. But even if you are out of this support, we will have our own infrastructure where the cost will come. But overall, if I see the mix, I don't see any additional cost other than this that is popping up in the quarter. So definitely going forward, as the external impacts come down, we will be improving on the margins as such.

Okay, so just the last question, I f I may sir. So, this margin improvement, will it come from better pricing? Do we still have some under -absorptions of inflation on the pricing side? Because on one side, we are talking about very, very strong opportunity on the demand side. Other players are talking about under-investment in capacity. So, it definitely builds a scenario for increasing prices. So, have you already taken some price hikes over the last six months? If you can give some color on the improvement in margin tax streams, which will be the factors which will be driving this?

Our margin improvement , Parikshit, is basically a factor of our improving our revenue accretion, and because we have a strong backlog and that will get into the revenue accretion over a period of time. And then we also said our two levers which are service and exports, will contribute. As export revenue kicks in, and also service revenue kick s in, then that also will do that. And in addition to that, as you know that we have invested heavily in the last 2-3 years and set up new green factories, and those factories are also filling up now. One example is this, the Chennai power system and HVDC factory, where we started now producing valves on that. We also now filled with orders from other projects . So those things, we are able to leverage on those assets, and that also will add both revenue accretion as well as the margin accretion.

What about the price hike, sir? Any color on the price hikes have you taken in the last six months?

You should understand that India is a very competitive market, and we are getting a price increase, but also you should understand that the commodity prices also are equally increasing. So we are, whatever the increase is coming, basically for that. Then, yes, we are also looking at quality orders. So, we have initiated pricing excellence as a strategy to look at, you know, bring the more quality orders as part of the portfolio, and that should also help us to realize those things.

Thank you. The next question is from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.

Hi, sir. Thank you so much for the opportunity. Sir, previous two quarters, we were mentioning about the chip shortages that was actually limiting your production and delivery. So, has that problem been solved or is there still some issue on that?

Thank you, Mahesh. I think there, I would say that it has become better now. W e are able to predict and upfront order those components. So, we are partly, I would say that we have mitigated and then, but with a better forecasting things and upfront ordering, so we are able to manage at this point in time.

And sir, if I look at last five to six quarters, apart from the HVDC orders, our order inflow has been almost constant for every quarter. I mean, when we look at the peers or other players in the industry, there is a growth, significant growth we are witnessing on ordering inflow side, but our side is remaining almost stagnant. So, what could be the reason for this, sir?

I don't think our orders are stagnant. If you really look at our orders on a quarter -on- quarter, we are having a very good growth. And on top of that, if you really look at, nine months put together and if you take the last HVDC project out and then you look at the nine months cumulative. So, we have a very strong growth. So, look at our numbers on a cumulative basis. And then I think we have a, we have a strong growth, even if we remove the HVDC project, because the HVDC project is there in the last year, which is not comparable for the same reason.

No, I was mentioning about the export orders that we are getting very high traction. So, if you strip them aside, so domestic side, we are still given the position we are into and capex that is coming up. So that seems to be low on that side?

Yes, I'm not sure from where, what the number you're looking at it, even if we remove the exports also on the domestic demand, we still have a growth removing HVDC project. Mahesh.

Sure. Thank you, sir.

And in the base orders, there's a 16% growth, YoY.

Sure. Thank you, sir. Thank you.

Thank you. The next question is from the line of Umesh Raut from Nomura, India. Please go ahead.

Thank you, sir, for the opportunity.

Yes, sure. So, the first question is more of on the export side. So, when you are seeing strong demand on the export from various markets, I just wanted to know how much of these orders are coming in from parent entities and how much beyond parent entities?

You're talking about the exports?

Yes, exports with Hitachi Group and exports with non-Hitachi Group?

Yes, it's a ballpark in the range of, anywhere between 50% to 60% coming from our internal companies and the rest are coming from, direct exports.

Okay. And, sir, now this new proposal, which is under consideration.

Again, just as a comment, here we've got to understand, for example, internal means we supply a GIS in a Europe, for example, okay, we supply GIS. So, since we do not have any, sales offices there, the GIS will be booked by the local Hitachi Energy office, for example, the one which we booked, and that will be, given as an order there. So that's also we consider as an internal order, even though we stand as a full-fledged thing.

When you say these two segments means all the export orders, whether it is internal or external, it's arm's length only.

Got it, sir. And, sir, regarding this proposal, which is under consideration, regarding RPT transactions, now going up to about INR700 crore for full year '24. So how much of that has been booked in first nine months FY24?

Yes, maybe Poovanna, you'd like to add to that, Poovanna?

Yes, sure, Umesh. Thanks for that. As of December, we've had invoice-level transactions of 68%.

Yes, that is close to 68% has been booked.

Sir, second question is more of on your comment from the presentation, where you are referring that private capex or demand from industry side is also kind of looking up. But if I look at order inflow for third quarter, this is more of down, especially from the industry side. So where exactly you are seeing uptake in terms of industries and where exactly there is still downturn, which is kind of visible in the market?

When I talked about industrial capex is reviving, is basically I'm talking about the broad base. In one quarter, we may have a large order booked in that, so which is not comparable. But we see a lot of traction on the industrial segment, coming from expansions, service standpoint, digital, and more. They are also decarbonizing of the industries. So, these are the ones what I'm talking about in our thing, whether you talk about the steel, cement, industries, and data center. Anyway, we have a huge growth in that. So those are the things I'm talking about, Umesh.

Sir, last bit is more of clarification. So again, referring to slide number nine, where contribution from EPC channel has significantly gone up. So, was it fair to assume that this will add further pressure on profitability side, assuming that EPC channel would have relatively lower margins than the direct end user?

When we talk about the EPC, we have a strategy that we will not be able to sell everything to direct end users. So, we need these channels. And that's how we have been doing it. Whether EPCs, OEMs, distributors are part and parcel of our go-to-market strategy. And having said that, just because our EPCs have gone up, not that we compromise our quality of the order. We have a clear strategy on those things, and then we are maintaining it . And as I said previously, we started the pricing excellence. T he whole idea of the pricing excellence is to look at what is the value add. We look at it, whether we are selling to EPCs, we are selling to direct end customers. We do not see any of those compromise taking place or any kind of dilution of our margins, just because we sell it to different channels.

Got it, sir. Thank you so much. And all the best.

Thank you.

Thank you. The next question is from the line of Priyank Chheda from Vallum Capital. Please go ahead.

Thanks for the opportunity. Sir I would request you to give us more insights on the levers to the margin expansion which you spoke. First lever is service and exports. If you can help us with the data on how much is the service and exports revenue as on date. The second lever was revenue recognition picking up. So, if you can help us with what would be the revenue recognition that you are looking towards FY25. Would Mumbai HVDC project revenue recognition itself lead to a strong operating leverage? And the third lever that you clearly mentioned was utilizations. So, what is the current utilization level and what is the kind of a level that you are looking towards in the coming years? Thank you.

Thank you, Priyank. I think we did not give any details on a project level and also, we did not give any forward-looking information on that. What will be the revenue coming in this quarter? So, all I say that we have a strong order backlog. And that order backlog is getting converted into the revenue and that's where the revenue acquisition is coming in. So, on the levers about margin acquisition I have already talked about. I think I have nothing more to add to what I have already talked about in that. So, revenue accretion is the revenue growth is the function of what backlog we have and what is our existing book to bill orders. So that's what is what we are going to do that. And having said that, let me also give you a couple of data points for you to understand that in export we are talking about in the range of 25%, right? So, we see export revenue depending on the quarter ranging from 20% to 23% or 24% in that. And the service is high single digit, which is moving towards the double digit slowly entering the double digit. So, that's how the thing what we are looking at in the margin accretion standpoint.

In terms of your current utilization levels?

Yes. Current utilization level is depending upon which factory it's varying anywhere between 75% and upwards close to 90%, 85%- 90%. And some new factories, as you know, which have been inaugurated definitely has a low utilization ratio, but they are also filling up faster.

Perfect. And just a data keeping question that I have on the operating -- operational EBITDA, which Hitachi reports is at around INR 81 crore, while the actual reported EBITDA is at around INR 65 crore. So, what's the – INR 68 crore. So, what's the INR 13 crore difference with respect to it? It may be related to FX or some other expenses, which you can -- if you would like to call out.

Maybe our CFO, Ajay Singh, will add more.

Thank you for the question. And you're right. It is mainly on the FX part that delta is there.

So, we have reported a FX loss on the tune of INR 13 crore?

If you see our results, you can see that in this current quarter, we have reported a FX loss of INR 9.8 crore that is there.

Okay. So, if you can help us, what is the nature of this? Why do we -- why are we able to report the losses? Would it -- it's just an accounting entry which would get reversed in the coming quarters?

Yes, it is basically a restatement of this accounting entry. Yes, it's an accounting entry.

Got it. And just to, again, clarify, Mumbai HVDC project was not recognized in the current quarter, right? We would be starting it from Q4, which is in the coming quarter. And also, if you can help us, the STATCOM order that we had received in the last quarter, by when would -- what's the timeline for execution of that, the starting period and the end period?

Yes. Mumbai HVDC, the project has started. As the project gets started, the revenue also starts getting recognition based on the milestones being done, right, both at the project site and also some other things in that. But it is a slow start now. In the coming quarters, we see a lot of material, big items will be coming in. So that will have a much better, higher revenue from the HVDC Mumbai project. STATCOM, we are supposed to complete in 24 months, and we have already started. And the first two quarters will be a lot of engineering approvals, etcetera, design and engineering approvals. And thereafter, we see the project is starting is starting with a revenue.

All right. Thanks a lot for answering all the questions.

Thank you.

Thank you. The next question is from the line of Dhavan Shah from Alfaccurate Advisors. Please go ahead.

Thanks for the opportunity, sir. So, my question is on the order book breakup. So right now, the order backlog is roughly INR 7,500-odd-crore. And if we exclude this INR 2,000 crore HVDC. So, what would be the order book breakup between service, exports and then the other industries like the data center and the other emerging one? Can you share the breakup of that? And what would be the execution timing?

Roughly, you can take 25% of that is exports and close to 9% to 10% is service orders. And that's what is our ballpark figures.

We don't split that industry-wise utilities, industries, and data centers at this point in time. But we have not been giving that -- it's not that we don't split, we have not been giving figures so far.

Okay. And as you said that the value-added segment, like the exports and the service revenue would go up in the coming quarters, which would help you to improve the overall EBITDA margin. So, what kind of gross margins do we do? And right now, it is roughly 40% od d. So , what would be your endeavor by FY'25? And what can be the gross margin? Because in the earlier years, we did roughly 45%, 50% also. So, is this achievable? Like 45-odd-percent gross margins?

So, again, we will not talk about what's the gross margin. What we are talking about is what we are sticking to. We are sequentially improving on the bottom line, which includes our better order gross margins and also on the cost side and also various other measures. So, it's a combination of all that, we'll get into the 10% operational EBITDA by end of FY'25, assuming that all the headwinds normalize. So that's where -- that's what we are saying.

Sure, sir.

Ladies and gentlemen, we request you to please restrict your questions to two questions per participant. We have the next question from the line of Nikhil Abhyankar from ICICI Securities. Please go ahead.

Good afternoon, sir. Thanks for the opportunity. Sir, there are multiple projects already announced under the RDSS scheme. So, what kind of pipeline do we have remaining going forward? And are we selling it directly to the discoms or are we going through the EPC players?

Again, these particular projects are a combination of various things, which includes the engineering, procurement and also SCADA and many other aspects of the digital infrastructure. And we would like to play in line with our strategy. We will focus on SCADA automation, DMS, EMS and more. We are working with the partners. We are working with some of the EPCs and some of the projects we have received orders from PGCIL and also other places, in some places wherever it is meeting our strategy. So, we are also bidding directly on that. It's a combination of various things. But we are very actively pursuing all these projects to position our portfolio there.

So, what can be the pipeline, say, in next 12 months?

Again, we don't quantify the pipeline for any of these segments, but the pipeline is very robust, Nikhil.

Thank you. The next question is from the line of Bhalchandra Vasant Shinde from Kotak Life. Please go ahead.

Good evening, sir. I would like to know on the longer -term perspective, like since we have started with the facility in HVDC, how the localization content versus our peers and cost advantage wise, how we have placed things like there are lined up HVDC orders. And do we see that competitive edge for us as compared to peers?

This is a very interesting question, as you know, HVDC. So, we are pioneering this technology, and we will be completing 70 years of this technology globally as an inventor of the pioneering technology by Hitachi Energy and our predecessors. Right, so as we speak, we have globally as well as in India, almost 50% of our existing installation HVDC links run through Hitachi Energy technology. So, we do have quite a robust end-to-end offering in India for example, we manufacture the converter transformer. We do the valves. We have the switchgear and we do also end-to-end engineering. That's also quite a big cost element in HVDC kind of projects. With that, I think we should be in a better position to offer our competitive solutions to our customers.

And ordering wise, as we mentioned that every year one HVDC order is expected. But this year we have not seen that kind of a, though tendering has happened, but still any end result we have not seen. Are we expecting anything in next six months or in this calendar year? Which orders we should expect to come in?

You probably know the Bhadla is already tendered, and which is due now on the 1st of February. And if there is no extension, the tender will be submitted as per the due date, right, which is already there in the REC website. So, you can also look at the schedule of ordering, etcetera. They have already published in their website.

Okay. Thanks, very much.

Thank you.

Sure, sir. Yes, the next question is from the line of Teena Virmani from Motilal Oswal Financial Services. Please go ahead.

Hi, sir. Thanks for taking my question. I just have one question regarding this INR 700 crore cost with the related parties. Just wanted to understand, is it possible to localize these products which you are right now thinking of procuring from the parent entity over a period of time? Or just wanted to understand whether this cost will remain in future too for the company or over a period of time we can think of manufacturing these?

Total put together is around INR 700 crore.

Yes, yes, exactly.

And whatever you are procuring from the entity, is it possible to localize those products or those products will continue to be procured from them only?

Some of the products we continue to procure. It's not that the localization we have been doing to the extent possible today. For example, almost 85% of what we produce globally, we do it locally here. So, we already reached a very, very substantial level of localization and local manufacturing in that. The bulk of this, what we are talking about is the sale, what we do there.

Okay, so this will not come in your path to achieve that double digit margin trajectory, which you have highlighted by end of FY25?

This is not a cost, as I said. This is basically we are selling our products from here to our Sweden factory and the bulk of that is our products we are selling to them. And some we are also receiving it because, for example, some of our HVDC, we have to get some components from there. So that is how it goes like that. So, it is for both sale and purchase. So, yes, sure. Ajay go ahead.

Let me give a clarification. So, this is just a regulatory requirement that we have to comply with. But this is a related party transactions with our entity Sweden, where the overall transition is going to hit the threshold. And threshold is 10% of our last year's revenue. And since it is crossing the threshold as a good governance, it is required that we have to take a prior approval from the minority shareholders. And that is why we are going ahead with this ballot paper, where we seek approval from the minority shareholders in order to be compliant with the related party regulations.

Thank you.

I hope I have clarified. Yes.

I would now like to hand the conference over to Mr. N. Venu for closing comments. Over to you, sir.

So, thank you very much, ladies and gentlemen, for attending to this conference call and asking very interesting questions. And as we navigate all the challenges and then continue to grow our strong pipeline, both the orders and also converting them into margin. And then finally, we are able to reach our goal on the margin. And we are advancing sustainable energy future for all of our customers. And this is a journey, and we would like to continue this journey together. And thank you very much once again, taking time from your busy schedule and attending the call. Please take care and stay safe. Thank you.

Thank you. On behalf of Hitachi Energy India Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.