Schneider Electric Infrastructure Limited analyst Q&A

Thank you sir. Our first question comes from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.

Great set of numbers, execution and order booking. Sir, I mean, very, very impressive order booking. I mean, we have booked around INR 900 crores of order this quarter. So how the order pipeline looks going forward? Is it as strong as what we have witnessed in this current quarter?

So Mahesh, thank you for the appreciation. And we are sitting at INR1,700 crores is the order book which we have currently, which has grown upwards of 50% Y-o-Y. And these orders, we also grew 60%, as you appreciated. We see going forward, these schemes which have been getting rolled out will boost the requirements because government is pursuing that there has to be a demand push coming and which we see that we will be able to maintain a healthy, I would say, order inta ke in coming times as well.

Okay. Sir, in presentation, you have mentioned that we have launched the GMSeT, a modular and the digital switchgear. So is this a unique product for data center?

It is a unique product, but not limited to data centers. It can apply wherever you need to distribute power at 33 kV in the most compact and highly digitalized way. So just to give you a brief about this, Mr. Mahesh. These are embedded with sensors, which are really state-of-the -art and can give you the entire health of the asset. Also those type of healths, which were conventionally in the past was never available. So I don't want to get into technicals, but this is something which is really out of the class.

I would not like to make a comment on it. People are trying to do something in their own ways. But from our side, this is very unique.

The next question comes from the line of Nisar from ValueQuest.

This is Anirudh from ValueQuest. Congratulations on a strong quarter. First question was to understand the gross margins this quarter. So there seems to be a contraction in our gross margin in this quarter. So how should we look at it? Is it due to -- what are the factors that led to it? And how should we look at the margin trajectory ahead?

Thanks, Anirudh, for questions. When you look at gross margin, yes, if you look at it in terms of the percentage there is dilution, but what we have the sales growth. It's coming largely the impact of the mix. So as you know that we have a multiple segment in terms of the transactional where we offer standard product. We have services, then we have the projects and equipment and IG. So it is just the margin dilution. What you see there the last 9 months versus this 9 months and quarter-to-quarter mix has only changed the margin mix in the gross margin. Nothing unusual, I will say, but that's only a mix impact.

Right. Sir, any impact of this commodity cost inflation that we are seeing on our margins going ahead? And how are the contracts structured in terms of price variation clauses, et cetera?

Commodity inflation is not impacted in this quarter largely, because generally, our projects' tenure to execute it's 3 to 6 months. So we had an RM already on hand and the process was in WIP stage. So that's why you don't see the much impact of commodity i n this quarter for sure. But yes, obviously, as different industry getting impacted, we also foresee such impact may come.

Okay. And how do we hedge against that, sir, going ahead? I mean, are we able to secure some back-to-back contracts for commodity? Or is that position open?

Yes. If you look at in the P&L in the last line, other comprehensive income, this includes the hedging unrealized gain of commodity. So yes, we do hedge not 100%, but we do hedge the commodity, some key component.

Understood, sir. Sir, final question was on the data center opportunity. How large a component in our order inflows now would data centers be contributing?

Data centers till date order has been roughly about 10-ish, and we are trying to see as to going forward how will this contribute more for your business.

The next question comes from the line of Parimal Mithani from Credential Investments.

Sir, just I wanted a clarification. In your opening remarks with reference to Slide number 4, you mentioned you are at an inflection point. Can you tell what you meant in terms of opportunity for us? And second question is, any time frame of coming to dividend distribution, sir, for the shareholders?

I can take the first question. My colleague will take the second question. See, why Mr. Parimal I said we are at an inflection point because today, we do things which are around energy and energy management. Now for us, the energy stays as electricity. And all this, what you see on the Slide 4 are the drivers of electricity demand. Coupled with it, as you generate more and more electricity, or energy, which is either from fossil or non-fossil, you're also going to witness very strongly the management of this energy, the multidirectional flow of this energy. And the manufacturing in India will boost the demand of capex equipment, which the company makes. So all in all, because there is a thrust coming in, which is getting witnessed and supported and reinforced by government policies, we see a pretty stable and strong future for the company. That's the reason why I said it is more of an inflection because e verything seems to be moving in almost the right direction.

Sir, can you quantify the addressable market size for us in terms of -- I know the budget figure is quite high, but what is the addressable market size for Schneider?

Very difficult to answer, sir, because these are all different basis the segments and basis -- many other variables which come in picture. But typically speaking, like, for example, if you pick up power generation, it is something else. If we speak about distribution, it's something else. You come to data centers, it really depends on where is the data center being put up, what are the voltage class, the distribution, the mirroring, the redundancy, mode of data centers and many things. So it will be highly correct of me if I get -- give you a ballpark number, which actually as a percentage of investment being done by the developer, saying this is the addressable market size. So it really is different for different segments.

Okay, sir. And the second question, can you answer?

Yes. Your question on dividend. Your company has a dividend policy. It's there in our website. And rest assured that the company is taking up the necessary step to take up to the Board of Directors considering all operational and strategical -- strategy. A nd then accordingly, we'll come up and we will let you know in coming time. So rest assured. And we know that these questions are coming from the last couple of times. So it's there in the policies, and we will work it on that.

The next question comes from the line of Sanjay from Goldstone Capital.

Congratulations on a very nice quarter, very successful quarter. Going forward, could you share what sort of capex we have planned for the next -- for the remainder of this financial year and the next financial year?

Yes. So as per, I think, SEBI, whenever we take a capex budget, anyway, it will get announced publicly. I think last time what we have announced somewhere in mid of last year, 2025. And updates are there in the balance sheet in September. And accordingly, we'll have the update status also in the March. So defin itely, if anything gets approved internally, you will come to know through the announcement.

Okay. So this quarter being the strongest quarter seasonally, going forward, are we to see some sort of smoothening out of the seasonality now in the business now that there is quite a bit of diversification across different applications, different end users?

So I wish I could have answered you this with certainty, but we are hopeful. We are hopeful for the infusion, which is being done by the private sector and also by the government sector in terms of really infusing and putting up capital. So we are hopeful that it will become more stable, slightly more predictable than what it was. But then when I say this, I say this, the situation which we see today and as all of us will appreciate that, because of the geopolitical situations things do -- things may go slightly off track, but then what we are trying to do is how do we mitigate and of course correct ourselves in case that those things happen.

Yes, one would imagine, because the strong order inflow that you've got would give you quite a bit of visibility now going forward for the next year or 2 and how this is going to be spread over the quarters and thereby get a little more evenly spread?

No, we could secure certain high-value orders, a few of them, and that's the reason why you see a 60% growth in the quarter or INR 900 crores in number. It really depends now the way these manufacturing requirements are going to be coming up and being seen by us. We are trying to - - the company is trying to see as to how can we really stitch together a solution and adopt a solution approach so that we can maximize in order. So there's actually -- and that's the reason why I said we are hopeful th at perhaps we will be able to see a stable growth in times to come in terms of orders.

Okay. My second question is on item in the other expenses. Basically, do we have Scope 2 leverage, the fixed element of warranty expenses and management support expenses because these are fairly significant items? Going forward, are we going to see some operating leverage around these expenditures to -- so basically see them go down as a percentage?

See, warranty expense, it's not a fixed component. Warranty expense depends on the volume and the value. And yes, territory allocations and other costs, which are there, obviously, we'll see the leverage for sure.

The next question comes from the line of Viraj Mithani from Jupiter Financial.

Viraj ji, of course, we have this. We are one of the pioneers who established this technology in the country, and we continue to have this and it's going strong. And this is -- just to clarify, this has got multiple usage, not limited to data centers. It is primarily a solution, which is where you are killing speed and you don't want to get into a civil construction of a substation where you box it up in a steel enclosure and put everything and thereby making it mobile at times. And this is seen by lot many people, including Power and Grid. Data centers, of course, they have this at times, because success in data centers in India is how quickly can one make an infrastructure for hosting data. So it does use -- what it also use, just to elaborate, is something which is not an E -House, but is a skid. And a skid is where you put everything on a platform, make it one composite structure. You install it as one composite structure and it actually gives you a plug- and-play advantage. So there are many things which are evolving, and let me assure you that we are on top of all of them.

Okay. So what is the scope? Can you give some market numbers on the E -House? Or is it possible?

There is a very thin line. I will not be able to give you some numbers, but there's something which goes as E -House and a power substation or a compact substation. These are usually a mirror term, which is used. And the E -House or CSS or PSS market, if I m ay say, my sense is about INR1,400 crores in the country. And we directly or through our partners are at a rightful share in this.

Okay. And sir, when you -- in your slide, you referred to the word digital, does it -- are you referring to EcoStruxure?

Yes, of course. So EcoStruxure stays as the core, the basic fundamental. And if you -- thank you for reminding us of EcoStruxure. If you remember, there's something which we call as connected and there's something which we call edge and there's something which we call as analytics. And the connected is the one which is the digitalization and sensorization. Because you provide these sensors, which give input to a simulator or an accumulator, which therefore, is topped by a layer of software, which give you far more insights into anything which you would like to seek. So yes, digital is the basic backbone of EcoStruxure.

And how is the revenue share you are...

I'm sorry to interrupt you. Viraj, I would request you to rejoin the queue. The next que stion comes from the line of Piyush from Batlivala & Karani Capital.

Congratulations on a very great set of numbers. I wanted to understand, currently, what is the percentage of exports that we have? And will any of these free trade agreements that have been signed, in particular, the EU FTA have any benefit to us?

Just to add to what -- sorry, just what Mr. Omkar said, these are very positive movements, which we are trying to do with free trade agreements with EU, which we all saw. We are still trying to see as to what additional business will it translate for us because it is not yet out in great details as to what will it facilitate. But overall, there is a positivity between India and European nations.

Okay. And my second question is, do you have any kind of guidance that you can give for Q4 generally being the strongest quarter? Is that something that we can continue to think of in this FY as well?

I cannot be telling you any numbers, but we -- be rest assured that your company is trying to do the best we can under the given confines of operations which we have.

The next question comes from the line of Gunal Bansal from NBG Investments.

And my question is to Mr. Udai Singh. We heard your opening remarks, which talks about a very strong footing of the company, and it is well supported by your financial numbers. So my question is, what are the challenges or concerns which you see, which makes you worried?

Mr. Bansal, thank you for asking this. Today, we -- if you really ask me, the top most priority of us is how do we have a profitable growth. Which means that we have to pick up the right strategic contracts. Two, as I think, and just a few minutes ago, there was another gentleman asking, how do we mitigate the risk of raw material impact, which we might see in times to come. And what at this point in time I want to say is that while there can be an impact, but the actions -- internal actions taken by us is how do we mitigate that impact to the least. So if you really ask me today, Mr. Bansal, we are trying to see as to in this geopolitical situation, in this absolutely volatile raw material scenario, in the growing demand, which is challenging capacities of manufacturer, number one, how do we pick the right contract? Number two, how do we execute it profitably, mitigating the risk and volatility of raw material which those contracts might offer.

The next question comes from the line of Pratik Dharmshi from Union Mutual Fund.

Many congratulations team for a splendid set of numbers. A couple of questions from my side. One is, which are the sectors which you are seeing good growth or positive tailwinds currently and from next couple of year point of view? And the second question is, we have a lot of our products in the distribution capex side as well. So what are you -- what's your understanding in terms of potential DISCOM -related opportunities going ahead for our products?

See, this RDSS scheme is a booster. And I can rattle out many views on segment -wise. But for us, what stays important is the Power and Grid, and you rightfully mentioned in terms of how do we maximize our presence in the distribution sector of Power and Grid. There are many states which are augmenting their infrastructure, modernizing their infrastructure, not only tangibly by putting up the capex equipment, which we can offer and supply. But parallelly, there is a lot of push which actually has been happening in terms of how do they modernize their localized and their national grid. Now just to give you some insight, even the Ministry of Power has been actually advocating extensive usage of AI and ML for making the grids more resilient and transparent. So we see this as a major booster. We see the mass rapid transport in the country is going up. We are talking about airports being made, the new ones. We are talking about metro networks being -- getting established, besides the 4 metros to our other cities. We know that data centers will see a spike, which will again fuel the power demand. So all in all, we -- if you ask me is there are many segments which are really clicking. And hopefully, if everything is going right as planned, it will give us a stable environment to operate in times to come.

Sure. And just a follow-up on that. Considering a lot of levers for growth for our company, there are scope for also operating leverage to kick into our business. So are you happy with the current margin band? Or over time, do you see there is opportunity to get better on the margin side as well?

As I said, sir, we are trying to do business profitably. So we are always in constant search for how -- which areas do we optimize the cost, which areas can we get better prices. So that's a continuous rigor which we have in the organization. So the levera ge of volume will certainly come because, as you know, it's there on our website, the capex, which we are infusing in all our 3 plants in terms of getting ready for the future. With those volumes, certainly, there will be some advantage and some leverage will come on the profitability.

The next question comes from the line of Sanjay Kohli from Goldstone Capital.

Sir, do we provide the breakup between our central government deals and the state government deals, the percentage? For instances Bihar -- South Bihar, South Patna DISCOM case study, which you've highlighted in the presentation. Is this -- I mean, it's a r elated question. Is this a recent relationship? And going forward, it would probably extend to a number of years? And how significant in particular, would -- I mean, if you can give some sense of some kind of number to this sort of thing and the division between the center and the state ? Some sort of elaboration of this sort of this case study, yes?

So Sanjay ji, I'll try to answer this, and I hope that I'll be able to clarify. I have not greatly understood the split which you are seeking between center and state. But if there's any distribution company, which is government run, seeks funding, they have 2 options. Option is it is done by the state. And as you rightly said, it is funded partially or fully by center. And there are 2 nodal agencies, which were REC and PFC who used to do that, which are getting merged by the way. Now that really doesn't matter to us as to who's the funding agency. Eventually, we need to have clear right of way. We need to have clarity in what we need to supply. We need to have clear support from the state coming in to implement our solutions and ha nd over. If that is there, to answer your question, we don't have the number of -- we don't track as to how much is state and central funded. Now two, you're asking about Bihar, that's something which we have actually commissioned to the last mile some time ago and recently. But what we are trying to showcase is that there are certain cities, which have ambitions to become smarter. And a very im portant piece of this is how do you make the basic necessities available 24/7. And there's just a showcase of that, which Patna has done, where if you -- I do not know whether you got a chance to visit Patna 25 years ago and what you see Patna now in terms of availability of power and the support which the DISCOM is able to give, whi ch has been getting possible because of the solution...

Yes, huge, huge difference, obviously, I mean?

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for the closing remarks.

Thank you so much. And I really would like to extend thanks and for the appreciation which you have given to the team here. Along with me, I have Mr. Mohit and Mr. Omkar, who has joined for this. And I wish you a great day and lots of health and wealth in coming times. Thank you so much. God bless you all.

Thank you, sir. Ladies and gentlemen, on behalf of Elara Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.