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Good morning, ladies and gentlemen. I'm Kritika, moderator for the conference call. Welcome to Salzer Electronics Limited Q2 FY '23 Results Conference Call. We have with us today, Mr. Rajesh Doraiswamy, Joint Managing Director, Salzer Electronics. Mr. Murugesh, ACS, Salzer Electronics Limited. [Operator Instructions]
This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectation of the company. As on the date of this call, these statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Please note, this conference is recorded.
I would now like to hand over the floor to Mr. Rajesh Doraiswamy. Thank you, and over to you, sir.
Thank you very much. Good morning, everyone, and thank you all for joining us today to discuss the unaudited financial performance for the second quarter and half year ended 30th September 2022. Pleasure to speak to you again this quarter. I have with me Mr. Murugesh, Joint Company Secretary of our company; and [indiscernible] PR, our Investor Relations team. We have already shared our results update presentation, and I hope you all must have received it and gone through the same.
Before we discuss the financial performance of the second quarter and half year, I would like to share some key developments during the quarter and also the market scenario with you. Today, the world is witnessing historically high inflation with fears of recession already sitting in, in the Western world. Interest rates are rising across the world. U.S. dollar continues to strengthen and is a cost of concern for net importing countries. Along with this, there's geopolitical environment which is very, very unstable.
In such a volatile time, India has been on a sweet spot so far. We saw the U.S. Fed raising interest rates significantly, inflation numbers proving to be a surprise and Ukraine war is a disaster to the world economy. But despite all these factors, India has held on, and when most of the markets were down 20% to 30%, India clearly outperformed. Economically speaking, India has held on well, done well, and this has been reflected on the tax collection numbers. It's been good so far for us in India. However, as we all know, globally, financial markets are interlinked, and so it will be very wrong to say that if something negative happens in the U.S. or Europe, we will not get impacted at all from the financial markets perspective.
So having said that, if you will get into the key developments of -- and the financial performance of the company, coming to our company and its business and financial performance during the quarter, I'm very happy to say that our second quarter performance has been in line with our expectations. We have seen good growth coming in from the Industrial Switchgear business and also in building product businesses. We also witnessed substantially higher demand for many key products from both these businesses.
This growth came in primarily from high demand products like toroidal transformers, 3-phase transformers, land cables, sensors and MCBs, apart from our legacy product growth. We're also seeing strong demand especially for our 3-phase dry-type transformers, particularly from the sectors of renewables and machine tool industry, as this product is getting very well accepted in the market. Raw material prices also have begun to stabilize, and we are seeing the benefits of our price hikes in the form of better margins quarter-on-quarter. We also expect raw material consumption percentage will reduce further going forward in the coming quarters.
Our export markets have also recovered very well with significant demand coming in, while the impact of geopolitical tensions are certainly felt in certain geographies. So Q1 and Q2, our export market has done well. We are not very positive on our high-growth markets like U.S. and Europe in the near future, given the high inflation and high interest rates in those markets. However, we expect stable business for the next 2 quarters from these regions.
Coming to our quarterly financial performance. During the second quarter, our revenues increased by 26% year-on-year to INR 245 crores from INR 194.81 crores in the previous corresponding period. This growth was driven by higher demand for switchgear products as well as building product business. There has been a strong order inflow to our products like 3-phase dry-type transformers, toroidal transformers particularly in sectors of renewables and mission tools.
The EBITDA margins, excluding the other income, EBITDA was at INR 24.49 crores in Q2 FY '23 as against INR 18.41 crores in Q2 FY '22, which is a year-on-year growth of 33% on account of increased sales in switchgear business and also increased exports. The EBITDA margin for the quarter stood at 10%, a rise of 55 basis points year-on-year. Our EBITDA margin has improved sequentially by 158 basis points, result of our price increase in this quarter and also raw material price stabilization for various products.
The profit after tax, at INR 8.96 crores in Q2 FY '23 as against INR 7.46 crores in Q2 FY '22. It is a year-on-year growth of 20%. PAT would have been higher, but for the higher deferred tax in this quarter.
Coming to our half yearly performance. In the 6 months ended September 2022, net revenue in H1 FY '23 is at INR 478 crores, as against INR 343.78 crores in H1 FY '22, which is a year-on-year growth of 39%. The EBITDA stood at INR 44.1 crores in H1 FY '23 as against INR 33.21 crore in H1 FY '22, which is again a year-on-year growth of 32.78%.
The EBITDA margin at 9.23%, which is a year-on-year decrease of 43 basis points. This decline was on account of increase in raw material costs in Q1 of FY '23. The profit after tax stood at INR 17.74 crores in H1 FY '23, as against INR 11.41 crores in the last year. The PAT margin at 3.71% in H1 FY '23 is a year-on-year increase of 39 basis points, as against 3.32% last year.
Going on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 57.6% to the total revenues in this quarter and 53.1% during 6 months. EBITDA margin for this business division stood at 12.5% in Q2 and 11.8% in H1 FY '23. Quarter-on-quarter, the EBITDA margin improved, 160 basis points from 10.9% in Q1 to 12.5% in Q2 as expected.
Our Wire Harness business alone grew 4% year-on-year. Wire Harness business should have grown more significantly; however, shortage of electronic components and chips for our customers has disrupted the growth in this particular business segment.
The Wire & Cable division contributed 34.15% to our revenues this quarter and 38.87% during the half year. It is an 8.9% year-on-year growth in this division during the quarter. Wire & Cable division is seeing slower growth due to the market conditions since majority of our sales come from the agri market segment. Due to unseasonal and also good rains across the country, sales of various agri market cables have been slow. This division's EBITDA margin stood at 7.71% in Q2 FY '23, an increase of 100 basis points quarter-on-quarter.
The Building Products division has contributed 8.25% in this quarter and 7.98% in 6 months. This business is the only B2C business that we have, wherein we are selling many electrical products for the building sector. We expect the growth trend to improve in the coming quarters for this division, which will help us increase our contribution from this segment. The division's EBITDA margins also have slowly started to become positive at 2.7% in H1 FY '23 as against 0.15% a year ago.
On exports front, we are seeing steady growth especially from the Europe, U.S.A. and the Middle East-Africa markets. Exports to the Americas grew 22% year-on-year in this quarter, while exports to Europe grew 25% year-on-year in this quarter. For this quarter, the export share of revenue was at 25.5%, growth in exports was 18% year-on-year and 28% quarter-on-quarter. For this half year, export share of revenue was at 23.15% and growth was 24% year-on-year for the half year.
Coming to the other recent developments and update on past developments. As we all know that we have started 2 new joint ventures in the electric vehicle segment, we are seeing some traction in the EV charging space. Our collaborator's technical team was staying here to help us build the Indian chargers. We expect the fully Indian-built DC fast chargers for the Indian market to be ready for testing and approval and for sale by March 2023.
As far as our other joint venture for conversion kits are concerned, there are still initial technical teething troubles, and we are working on that. And hopefully, by end of next quarter, we will have more updates on that.
As far as our subsidiary, Kaycee Industries Limited is concerned, the business has improved significantly since our takeover. The sale has been growing well with healthy margins of 11.2% EBITDA and 8% up at PAT levels. We expect Kaycee also to grow at 30% to 35% level in the coming quarters.
As we recently announced, we are raising capital through issue of preferential warrants to promoters at an issue price of INR 278.5 as per the SEBI norms. By this issue, the promoter stake will go up to 38% from the current 32% level. The capital thus raised over the period of 18 months from now will be used for further capital investments and working capital purpose. Our aspiration to reach a consolidated revenue of INR 1,000 crores and achieving the INR 40 crore PAT in FY '23 is still on track, and we are working very hard to achieve this target.
On behalf of the company, I thank all the shareholders, stakeholders, of Salzer Electronics for their continued support and faith in our company and wish all of you a very good health. This is all from us -- from our side as of now. I would like to thank, once again, everyone for your time and attention. We can now take questions.
[Operator Instructions] We're having a question from Neha Jain, an individual investor. Please go ahead.
Congratulations for a good set of numbers. I have a couple of questions regarding the capital raise that has been proposed. So I believe that it's happening through promoters and non-promoters as well. Sir, I wanted to understand how much is it that the promoter is going to infuse and what is going to be the non-promoter share?
Actually, the capital raise -- I'll answer this first before we go to the next question. The capital raise is only for the promoters. There is no non-promoters at this point of time. The main purpose of this capital raise was to won the capital for the company and the promoter stake to go up to 38%.
Okay. Sure, sir. Sir, my next question is regarding the Kaycee acquisition that we have done a couple of years back. So how is the acquisition turning up for the company? How is it profitable? How is it adding value to the company? And what are the types of the revenue and PAT that we expect from it in the next couple of years?
One second -- actually, Kaycee acquisition, we acquired the company in 2019, just a few months before the COVID hit us. So once the COVID hit us, then things actually didn't go very well for us. So then another 1 year went away. But as of now, the unit is growing very well. We see that Kaycee also has been growing at 30% year-on-year. When we took over, the annual revenues were around INR 23 crores. I think for this half year, we have done around INR 20 crores of revenues and an 8% PAT. So almost -- we have doubled since we have taken over. So the company has grown on its own.
Secondly, there have been a lot of synergies between Salzer Electronics and Kaycee on the manufacturing side and also on the market side. We were competitors. We have gained market share by working together in certain markets. And we have also got better pricing from the market. So the advantages of taking over Kaycee is being realized in the last 1 year and will continue to be realized.
So sir, is it possible to say that even in the next couple of years, the Y-o-Y growth of revenue, we can expect it to be around 25%, 30%?
Yes. For Kaycee?
Yes, for Kaycee.
Yes, yes, yes.
Okay. Sure, sir. And sir, what is the R&D expense in the budget for this year? And do we have new products in pipeline?
Actually, R&D is a continuous process. We constantly keep developing new products, new businesses. I don't have a figure what is the R&D expense for this full year, but I can answer you later on. I'll keep note of this question and send you information on what we have spent so far and what we are going to spend on the R&D. But it is a constant effort. We are continuously doing new products, developing existing products and also bringing in new products. That's the constant work that we're doing. There is nothing significant that is there for me to give an update as of now.
Okay, okay. Sure, sir. And sir, my last question is adding the patents. that we've already received in the last quarter. So are there any new patents that we have ongoing or pending?
No, I think we already received 2 patents. We have applied for 2 more, which is still pending. So hopefully, by another 2 quarters down the line, we will have some update on what is the status of the new patents that we have applied again.
[Operator Instructions] We're having a question from Naveen Bothra from Subh Labh Research.
Congratulations for steady set of performance continuing from the last 4, 5 quarters despite all these pandemic and geopolitical uncertainty.
Thank you.
My question is regarding on the side of Kaycee industry only. We acquired 2, 3 years ago and growing around 20%, 25% revenue from where we acquired. I've seen in [indiscernible] similar set of balance sheet, wherein Kaycee also our complete network is invested in the inventory and all these things -- receivables and all these things. So if you can share a little bit more about the Kaycee side, how we want to scale it up to INR 100 crore turnover company, and what will be the benefits going ahead for the Salzer's shareholders. And because the equity is quite low there, around INR 63 lakh...
Correct, INR 63 lakh only.
The price is also quite high. So any corporate restructuring or the shareholders of Salzer [indiscernible]? If you can share all these points going ahead for the next 2, 3 years, how the management thinks about it.
As of now, we are not looking at any corporate restructuring as of now for Kaycee industries. However, the main objective of taking over Kaycee was to remove one competition for one of our main business, which is also a cash cow for Salzer Electronics. Salzer Electronics first product was the CAM operated rotary switches, and we are the market leaders in that. And it is still 1 of the top selling -- top 4 selling products. So Kaycee industry was #2 in that market, and we thought getting that will enhance our market share and make the hold on the market much more. That is the reason that we took over this company.
And by doing that, I think we have seen a lot of synergies and we have seen Kaycee's margins improved significantly as well as Salzer's margin in the CAM operated rotary switches improved significantly. So having said that, I think going forward, we -- our idea is to make Kaycee definitely INR 100 crore company in the next 2 years at least, by adding products that Salzer is not manufacturing or not intending to manufacture. So we are trying to use Kaycee Industries to compete with other medium and low-cost manufacturers of various electrical products in the country. So that is the idea as of now for the next 2 to 3 years. Any corporate restructuring or not, I think we are not looking at right now.
[indiscernible] Kaycee, I would like to say -- on the Kaycee BSE page, if you go to Kaycee Industries site, it does not open. It opens some website and all these things, if you can take care of this thing...
In BSE India website?
Yes, BSE India website. We go to corporate information and there -- through that go to the website of Kaycee, it does not open.
Okay. I will look into that. Sure. Thanks for the information. Definitely look into that.
Next question comes from [ Zaki Nadal ], an individual Investor.
Congrats on a fantastic set of numbers. And as you said that this year, you would be crossing the INR 1,000 crores now. Sir, in your last con call, you had indicated that the next 2 years -- next 3 years, you are looking at a higher growth rate of around 25%. From here on, how do you propose that to happen, sir? That is my question number one.
Question number two is that going into the future, what is your outlook on the EV space? And how will it pan out for Salzer?
Thank you for the encouragement. What we see as of today is tremendous demand coming in from various sectors, both within India as well as outside India. So -- and also we hear a lot of positive signs from our OEMs. Though in the very short term, there may be a blip in the growth across the Western economies, I think India will still continue to do good, is what is my opinion. So I think that makes us think that the growth of 20%, 25% over the next 2 years is quite possible, one. Second, I think we are also adding new products, adding new customers for the last -- I would say, last 1, 2 years, and we are continuing to do that. So these things, I think, will all come into revenues in the next 2 or 3 quarters. So with -- adding all these products and customers to us will actually enhance our growth further. So even if we see a slight recession or a slowdown across economies, I think we will still continue to grow at a reasonable pace, is what is my take.
So having said that, on the EV front, I think when we started, we were very, very enthusiastic. It was almost a year ago. But unfortunately, I think things got delayed because of the highly complex nature of the product. So -- but we have overcome that. I think our collaborators were here to support and help us to get this done. So we are almost through with building and indigenously built DC fast chargers, which will bring the cost of the DC chargers down by at least 30% compared to what the European or American prices are today.
So having said that, I think we are very positive on the EV fast-charging space because we see a lot of noise happening on the 4-wheeler segment. Without a proper infrastructure, I don't think the EV market is going to grow. So I think it's going to happen side-by-side. Government is encouraging a lot of EV manufacturing. Charging is one of the good space for us to be in. So in my opinion, I think that alone over the next 5 years can be INR 1,000 crore game, in EV charging, both selling as well as service. I hope I answered your questions.
Yes. Your Wire Harness businesses, do you think we could Wire Harness for the EV space?
Wire Harness is a business -- as a business, I think we have been growing almost doubling the business year-on-year until last quarter. Unfortunately, I think this quarter, the growth has slowed down. The main reason is I think many of our customers are feeling -- still having the shortage of the electronic components and chips. So once that -- that is slowly getting sorted out. Once that gets sorted out, I think the Wire Harness business alone, even for the industrial market, it can be INR 100 crore, INR 150 crore market. And definitely, yes, you are right. I think the Wire Harness business for the 2-wheeler -- EV 2-wheelers and the charging infrastructure, all is going to be an additional business. And we are looking at that space. We are setting up separate lines for that, and we are getting ready for that.
Okay. So I mean, looking at your optimism and the way things are going, so next year, could we expect on a conservative basis a INR 1,200 crore kind of top line?
Yes, sir. Yes.
Next question comes from [ Ribhu Dixit ], an individual investor.
Mr. Rajesh. First of all, congratulations on a brilliant set of numbers here. I have a question on your export. I heard you in your initial remarks, wherein you said there are headwinds specifically from Western countries, Europe and North America. And as I see right now, our export is almost 14% of the total revenue mix in North America and Europe altogether. So what kind of impact do you see in the coming quarters in this export side? And then how do you wish to compensate this? Do we have enough demand in India to cater to whatever we will lose in exports to Americas and Europe?
So I think, yes, you're right. I think we're having a 12% to 13% of our export comes from North America and Europe. Europe is still the biggest market for us. I wouldn't -- I'm not saying that this business will go as a negative growth. I think in my opinion, as we speak to our customers, we see there will not be a growth because we have been growing year-on-year at 15%, 20% in these markets.
I think that growth may slow down. I don't think that the business itself will go down. If you look at the numbers, I think for half year, North America and Europe put together, we have done close to around INR 60 crores of business. And I don't see big -- the same growth, like 20%, 25% growth coming in Q3, Q4. It's just an expectation. We still don't know whether the recession really hit or things will smoothen out and go as it is. Nobody knows that. But the whole market expects a recession, so we have to be ready for that. So that's what I'm saying.
All right. So I have a second question. And as I see our mix of Industrial Switchgear, Wire & Cable and Building segment is around 57%, 34% and 8%, respectively. So what is our target as in how do we want to spread this out, say, in the next 2 years? I'm sure we will definitely grow in all 3 segments, but what kind of mix are we looking at eventually?
Actually, each division, we want to grow. There is no doubt about that. Each division, we want to grow at the fastest pace. I'll be happy if it continues to grow at 30%, as we have grown this quarter year-on-year. But it may not be possible, but we still continue to grow at 20%, 25% in each businesses.
How the division or how the share has to be, I think we would like to have at least a 55% share coming in from the Industrial Switchgear business and the 30%, 35% from the Wire & Cable business and the rest for the Building segment. That's how we would like the share to be. But we don't know how the businesses will grow going forward.
All right. Once again, congratulations on a good set of number. .
Thank you.
Next question comes from Tushar Pendharkar from Ventura Securities Limited.
Maybe state government and our central government is replacing low KV lines with the high KV lines and setting up new transformation facilities, high MVA transformation facilities so that will be a very large opportunity in the next few years. So what could be the switchgear size for such MVA stations, if you can throw some light on this?
Sir, I think all the upgradation -- the grid upgradation has been going on for now several years. I think we have already taken part in that. We have got a lot of businesses because of this. It will be very difficult for me to give you a figure on how this grid upgradation will percolate into numbers for us. But any modification, any changes in the generation transmission distribution will definitely percolate into business to us because that -- our parts doesn't go directly into the grid, but it goes into the substations, generating stations and other power stations. So that's how the business gets converted. So I will not be able to give you a number as such, but then it all gets converted into businesses. And we have seen that earlier also when there was a lot of grid modernization that happened.
Okay. And sir, my next question is on what is the share of our switchgear business in the industrial part and in the power sector part?
Our share of revenue from power sector has considerably reduced compared to what it was earlier. So our dependency today on power sector is close to between 25% and 30%, our business on the power sector, yes. The rest will be on different sectors -- different industries, different sectors.
[Operator Instructions] We are having a follow-up question from Neha Jain, and individual investor.
Sir, as for the EV, what are the type of EBITDA margins that we expect from EV business?
Maybe a little too early for that, but I can tell you it's definitely not less than 18%, 20% EBITDA levels for the charging space, at least, PV chargers.
Okay. And so the whole business together, what are the EBITDA margins that we expect? And does it stay stable? Or we expect it to grow further?
You're talking about our existing business?
Yes, existing business over the next couple of years.
Yes. I think in my opinion, I think it has to grow further because we have seen a dip in EBITDA margins over the last few quarters and the last year and only we started going up in Q1, and Q2 has gone up again. So I'm definitely expecting this EBITDA margins to go up further by at least 1 percentage point in the next 1 or 2 quarters.
Okay. And sir, what are the products that require majority marketing of the business? And what amount of -- or what is the budget for marketing?
Actually, we have multiple channels of sales and marketing because our products are different. We have different segments. As you have seen, we have Industrial Switchgear division and we have a Wire & Cable division and we have a Building segment. So each product is sold in different channels and different teams work on it. If you ask me a marketing budget, I think we definitely spend on sales promotion, sales activities, at least 3% to 4% on our revenues on that.
We don't have a big marketing ad campaign because it doesn't require -- our product doesn't require that, and we are still not there. But we do a lot of targeted focus marketing. We exhibit in various industrial fairs, technical fairs. We conduct seminars for customers. We do a lot of focused marketing on that.
Sir, any specific division which requires a push effect in the market?
Yes. I think as of now, our Building Electrical division requires a lot of push in the market. The other 2 actually does a lot of pull, but Building Electrical requires a lot of push because that's a new market for us. And we are doing that.
Okay. And sir, what is the sustainable ROCE that we are targeting?
Our target internally is to reach at least 18% ROCE. We are working towards that. Definitely, it will continue to improve.
Okay. And sir, my last question is regarding working capital. So is our working capital in line with the industry? Or do we need to improve? And how are we planning to do that?
Actually, if you look at the working capital over the last few quarters, I think we have considerably improved compared to what we were in March. We were a net working capital of around 145 days. We have reduced that now to around 125 -- 127 days in Q2 or H1 FY '23. Ideally speaking, I think we can go down by another 20, 25 days. Hopefully, by end of this year, I think we will get there. And that's when I think we will see a very significant improvement in our ROCE also.
And sir, and that will be sustainable, right?
Yes.
Next question comes from Senthilkumar Natarajan from Joindre Capital Services.
Am I audible, sir?
Yes, sir.
So the fund you are rising now, will any part goes into the repayment of debts?
If we are not going to spend it on capital, further capital investment and there's no requirement for working capital, then I think definitely, it will go in for [ additional ] debt.
So any set of numbers? How much we expect to spend for this new joint venture? .
The new joint venture, I think it's still evolving. As of now, we targeted around INR 7 crores for both JVs together -- put together. But then that might change as we start getting the business. So we will have to wait and see how that evolves. But as of now, it is INR 7 crores from both JVs put together.
And my last question is what kind of technical issues we are facing in the conversion kits? Actually now -- we expect now this will be getting in this quarter itself, but it's getting delayed. What is the kind of technical issue we facing in that segment?
Actually, we are trying to make a conversion kit for auto rickshaw. That's our plan and that is how we went in. We had the technology. We converted autos -- a few autos and it's running. But the point is when we entered the market, we saw that auto rickshaws in the market are not standardized. Every auto, every model is different in dimensions. They have different technology, different transmission. Every auto is different. So there are numerous models. Even if you take Bajaj, for example, the largest selling auto, Bajaj has -- Bajaj one model has different mixes. Bajaj Maxima 2012 is different, 2015 is different, 2018 is different and 2023 is different. So when we build one kit, which we want to build one kit common for all models, it is becoming difficult. So we had to -- we are looking at what we can do to standardize our kit to fit all these models. I think that is where we are getting stuck.
[Operator Instructions] There are no further questions. Now I hand over the floor to Mr. Rajesh for closing comments. .
Thank you very much, madam. Once again, I would like to thank every one of you for your interest and faith in the company. Looking forward to talk to you again in the next 3 months. Thank you very much.
Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using [indiscernible] conference call service. You may disconnect your lines now. Thank you, and have a pleasant day.