PGEL — earnings call

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Prepared remarks

– PG ELECTROPLAST LIMITED · MODERATOR:

MR. VIKAS GUPTA – MANAGING DIRECTOR OPERATIONS

MR. PRAMOD GUPTA – CHIEF FINANCIAL OFFICER

Moderator · Conference Operator

MR. DEEPAK AGARWAL – PHILLIPCAPITAL (INDIA) PRIVATE LIMITED PG Electroplast Limited August 05, 2023

Ladies and gentlemen, good day and welcome to the PG Electroplast Limited Q1 FY24 Earnings Conference Call hosted by PhilipCapital India Private Limited.

During this call, the company may make certain forward-looking statements based on the currently held beliefs of the management of the company, which are expressed in good faith and in the management's opinion are reasonable.

The forward-looking statements may involve risks, unknown risks, uncertainty and other factors which may cause the actual results, financial condition, performance or achievements of the company or industry to differ materially from those in forward-looking statements.

These forward-looking statements represent only the company's current intentions, beliefs, or expectations, and any forward-looking statement speaks only as of the date of this call on which it was made.

The company assumes no obligation to revise or update any forward-looking statements.

As a reminder, all participant lines will be in the listen-only mode.

There will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference, please signal an operator by pressing star and then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Deepak Agarwal from PhilipsCapital India Private Limited.

Thank you and over to you, sir.

Deepak Agarwal

Thank you.

Good morning, everyone.

On behalf of PhilipsCapital India Private Limited, I welcome you all to PG Electro Plus Limited Q1 FY24 Earnings Call.

Today we have with us management represented by Mr. Vishal Gupta, Managing Director, Finance, Mr. Vikas Gupta, Managing Director, Operations and Mr. Pramod Gupta, Chief Financial Officer.

Without taking much of time, I will hand over the floor to the management for their remarks, post which will open up for Q&A.

Thank you, and over to you, sir.

Thanks.

Vishal Gupta

Thank you, Deepak.

And thank you.

Good morning, everyone.

Thank you for spending your valuable time and joining this call today.

Hope all of you are doing well.

I'm joined on this call by Pramod Ji, our CFO, and Vikas Gupta, MD Operations.

Hopefully you have gone through the results presentation.

And the first quarter of FY24 has been actually another strong quarter for PG.

With good growth over last financial year numbers, despite headwinds of weather and lower commodity prices.

Sales grew around 26% and they have crossed INR676 crores, with product business leading the show with a 65% share in the revenue.

And EBITDA increased by 78% and stood at INR67 crores and net profits rose 106% with INR33.81 crores.

Product business crossed INR441 crores this quarter, with room AC business contributing INR383 crores, which is a 53% growth on a Y-o-Y basis.

The washing machine business was flattish, mainly because of lower commodity prices.

It was – we saw around 7% year-on-year decline in that.

Order book for product business remains robust, and the company is on track to scale the product business significantly in FY24. Our new product offerings in washing machines have received good response and companies continue its investments in new product platforms across different product categories.

The company is focusing its efforts towards developing platforms that help PG Electroplast Limited August 05, 2023 it maintain cost leadership while also strategically investing to achieve product leadership for specific models.

Company continues to see increased interest for business from new and existing clients and we remain very confident on the future growth prospects of the business.

For FY24, we are reiterating our guidance, which stands as our sales guidance will be minimum INR2,800 crores, which is a growth of 30% over FY23 numbers and operating profit guidance of at least INR210 crores, which is again around a growth of 28% over FY23 numbers.

The growth in product business, which includes washing machine, room air conditioners and air coolers is expected to be around 43% from INR1,341 crores to around INR1,920 crores in this financial year.

Capex guidance for FY24 is in range of INR170 crores to INR180 crores, and company is further expanding room AC capacities by setting up a backward integrated AC manufacturing plant in state of Rajasthan.

And we are also expanding our PCB assembly facilities for REC controllers in Supa, and we are setting up a similar facility in our Noida factory also.

Our company has also entered into a 50-50 joint venture with Jena India to manufacture LED televisions.

Now company has an access to Google OEM license and we will start manufacturing Google certified LED TVs and other products also in the future.

The JV company has already started setting up an integrated TV manufacturing facility in Uttar Pradesh and which we are very hopeful will be operational by the end of this financial year.

With this now I will hand over the call to my colleague, Pramodji, our CFO, to elaborate on the financials.

Pramod Gupta

Hello and good morning everyone.

I'm sure you have seen the financials and details already.

Just to touch upon them, we had a very solid quarter, first quarter in many aspects.

The net sales grew 26% despite a sharp drop in commodity price and headwind due to unseasonal rains.

Operating profit has grown at 84.3% to INR64.2 crores and net profit rose 106% to INR33.81 crores.

During first quarter, operating margin improved due to lower commodity prices and operating leverage.

More importantly, on balance sheet, we have decreased the debt by INR54 crores in the first three months of this year.

This was largely due to the good operating profit and also decrease in the working capital.

We are, as promised, we are on track to control our working capital in FY24. And this is a working capital optimization is one of the major focus areas for the company this year.

Our focus on improving working capital efficiency and overall capital efficiency has started bearing fruit now and as you can see on trailing 12-month basis companies RoCE has improved to 22.8% and RoE has improved to 24.9% on a TTM basis.

Net fixed asset turn for the consolidated entity today stands at almost 4.5x.

I want to highlight here that we want to deliver industry-leading growth with best-in-class return ratios in coming years, and with our new partnerships that we have formed, we aim to be a significant player in the consumer electronics industry as well.

With this, I'd like to open the floor for question and answers.

PG Electroplast Limited August 05, 2023

Sure, please go ahead. · Management

PG Electroplast Limited August 05, 2023

Koushik Mohan

Sir, my question is on any update on the TV business side sir, what we have in the last quarter that we have spoken about?

Moderator · Conference Operator

Thank you.

The next question is from the line of Pranay Roop Chatterjee from BCMPL.

Please go ahead.

Pranay Chatterjee

My first question is with regard to your AC volumes, vis-a-vis the secondary retail offtake from the months of May to July.

So, on a yoy basis, the reason I'm asking this is because your growth, your volumes were quite stronger than the end market, which actually declined in Q1, as we have been hearing in other calls so should we expect a strong impact on our volumes over the next couple of quarters so is that a logical assumption?

Pramod Gupta

Well not really one thing that you have to appreciate is that we are still small, our base numbers are still small.

Second thing is that we are a contract manufacturer and we work for several brands, so some of the brands which we work with have gained market share and they have done well and they have seen a decent growth.

Third thing which I want to highlight here is that, you know, there is a narrative in the market that probably industry has done pretty badly.

PG Electroplast Limited August 05, 2023 From whatever internal estimates we have, we think probably industry has not seen a very good growth as was envisaged probably in the month of February, March.

But for sure, in our opinion, the industry has not seen a decline.

There has been a lower growth probably because if you look at the industry closely, out of the top four players, three top players have seen very decent growth in the even in the month of April, May and June.

And one of them is a public listed company which has already posted its result, the other two have made public a statement which is LG and Daikin.

And we know several other brands and some of the other e-commerce players and modern retail players with private labels, have seen a growth in the industry during this period.

Nonetheless, we do know and we do understand that April and May were a slow month for the industry, but as per our understanding, June and July have been okay and industry has, in general, seen some reduction in the inventory levels.

Moderator · Conference Operator

Thank you.

The next question is from the line of Gnyan Thakar from Ashika Group.

Please go ahead.

Gnyan Thakar

Congratulations sir for a very good set of number.

Sir, I would like to get an update on PLI benefits.

When can we expect the PLI benefits will start flowing to the financials?

Pramod Gupta

So, what has happened is that we are eligible for the PLI benefits of the last year, but government has still not opened and finalized the formats and application for claiming that PLI.

Once they open the forms and open the website where we have to claim, lodge our claim, and once our claim is lodged properly and we get an acknowledgement that is the time when we will start accruing or we will start taking the PLI into the accounts.

So we are hoping that to happen probably sometimes in the quarter 3 or quarter 4 this year and that is the time we will be booking the PLI benefit.

We hope to get the PLI benefit probably in the fourth quarter but once the application is lodged and we get our confirmation that is the time we will start booking.

Gnyan Thakar

Sir, with respect to your investment in the JV company, how are we trying to fund the investment?

Will it be through debt or maybe you are trying to raise fund or internal accruals?

Pramod Gupta

It will be largely through the internal accruals.

Gnyan Thakar

Sir, can you just give a color like how much will be the investment?

Pramod Gupta

In the first phase, we hope to do about INR10 crores to INR15 crores of investment.

That will be largely going into the plant and machinery.

Land and building as I told you has been leased.

So we are not spending any money on that.

Gnyan Thakar

And it will be funded through PGEL's holding company if cash will be going direct?

Pramod Gupta

PGL own funds will be used which is going to come to the profitability this year.

Gnyan Thakar

Yes sir if you just allow me two more questions are there.

Yes sir correct me if I'm wrong we have a TV business in the company right now, which is an assembly business, right?

Yes.

Will that business be shifted to this JV company or this TV business will be run independently?

Pramod Gupta

Vikas ji, can you take this question?

Vikas Gupta

Yes, so that the current TV business will be moving to a JV company.

So that's the plan.

So as we are targeting a much bigger volume of TV business going forward in a JV company, so that's how we'll be trying to focus and concentrate our resources there.

PG Electroplast Limited August 05, 2023

Gnyan Thakar

And sir, the guidance which you have given of INR2,800 crores, no. Okay, okay, I will get back to queue now.

Moderator · Conference Operator

Thank you.

The next question is from the line of Bhoomika Nair from DAM Capital.

Please go ahead.

Bhoomika Nair

Yes, sir.

Good morning, sir, and congratulations on a good set of numbers.

So just wanted to, you know, understand from this JV for the TV with, what is the status of client additions?

Where are you seeing traction?

And when do you think that the business will start off and we can start seeing the revenues etcetera coming through?

Pramod Gupta

Vikas Ji can you please take this one?

Vikas Gupta

Yes, so I'll take this question.

So basically, as Pramod Ji has already updated, we have already taken a building on a long-term lease basis in Greater Noida and we have already ordered the equipment plant and machinery.

So that machinery should start arriving into our facility by end of November or December.

And we should be starting our trial production by month of January, February.

So, we are already working on client addition.

So, as you know, we are already doing a TV business in our parent company.

So that will also get shifted to that JV company.

So there'll be a client coming from the existing parent company, and we are already in discussion with quite a few new clients and that should start ordering with us in next two, three months’ time.

Bhoomika Nair

So what will be our capacity, sir, out here to start with, and what do we expect in FY ‘25, since that will be the first year of proper operations what kind of volumes can we expect there and this would be all on ODM right for TV?

Vikas Gupta

So Bhoomika I would say like we are targeting this business to be a ODM business only but we will not be shying away from the OEM category also in case we are able to get an opportunity or doing a OEM business also, we'll do that also.

We are installing a capacity of almost around 1 to 1.2 million TVs per annum there.

And in the first full year, we are targeting a volume around 300K to 400K.

Bhoomika Nair

Okay, got it.

And you're, obviously, I mean, are we looking at any backward integration in terms of the PCBs or any other aspects of the business to drive a little better kind of margin profile?

Vikas Gupta

So we already have our SMT lines in a parent company, so we will be utilizing that to service our TV business in a JV company.

Going forward definitely we will look at the steps of backward integration where we might go for localization of molded parts and the sheet metal parts which goes into televisions.

Bhoomika Nair

Okay, got it.

So the other thing is in washing machines clearly because of the weak demand you know the first quarter was impacted.

Now how are we seeing the kind of scale up as one moves ahead in terms of demand trajectory etcetera?

And here if you could kind of just help break down how is you know the semi-automatic and the fully automatic kind of performed and the client additions within each of these segments, please?

PG Electroplast Limited August 05, 2023

Vikas Gupta

So Bhoomika, in case of washing machine, definitely the first quarter was not that robust or as we expected, but now the kind of clients that we have with us, and there were certain hiccups in the first quarter for starting the mass production of one of our clients that have already been sorted and we already started doing the mass production.

So the kind of forecast that we have from our clients, we are quite confident that we should be able to achieve a growth of almost around 35% to 40% in our washing machine category in this year also.

And regarding the breakup of semi-automatic and fully automatic, right now the fully automatic is still a very small part of our overall washing business.

That should be around 10% of the overall volume and the value.

Bhoomika Nair

Okay.

And when you're seeing the scale up from in the washing machine segment on the semi- automatic side, that is coming from like, in-house shifting to us or another EMS shifting to us or just because market is obviously not growing at this rate, or is it some import substitution or exactly what is driving this kind of shift to us and growth for us?

Vikas Gupta

So for us Bhoomika basically it is a mix of both the things like we have been able to add quite a few clients in our washing machine business and secondly we are also seeing a increased volunteer from existing clients as well.

Bhoomika Nair

Okay.

And just lastly, if I may just squeeze in a question on the AC part of the business.

Now clearly, I mean, you know, we've done very well because we've scaled up a lot of in terms of the wallet share, etcetera.

Despite the industry being weak.

Where do you see this year kind of, there's a lot of talk that the festive season should be better off by some of the brands that they are looking at.

Are you seeing that traction and momentum in terms of your client conversations as well that they're expecting this kind of improvement and what kind of annual industry growth are you anticipating here?

Vikas Gupta

Vishal, will you answer this?

Vishal Gupta

See, the festive season typically is a low season.

So I don't think that it is going to change the needle much for AC.

So it is not going to change the needle a lot.

So our sense is that, you know, first six months of the season, which starts typically from February, March and not till now, has seen a very low single digit growth or probably flat for the industry as a whole.

And even if the industry does well in the second half, which will start sometime in January, February, March, which is the three months, four months, probably we will see very low single digit growth for the industry.

This is the first part.

I have no clue of, actually I'm not an expert on the industry, but we hope that industry should see a growth given the penetration and all those things which are there.

And more importantly now, even the new construction and new house construction is becoming good and a lot of launches are happening across the top cities.

ACs are purchased, so hopefully that should also add to the demand in the coming years and coming months.

Coming to our volumes, we think we should be able to do on a revenue basis at least 40% to 45% growth this year also in the AC business on a full year basis.

PG Electroplast Limited August 05, 2023

Bhoomika Nair

Okay.

Great.

I'll come back in the question queue.

Thank you so much and all the best.

Moderator · Conference Operator

Thank you.

The next question is from the line of Nikhil Agrawal from PhillipCapital India Private Limited.

Please go ahead.

Nikhil Agrawal

Hello, sir.

Sir, any plans on PCBA and semiconductor PLIs, IIT hardware PLIs?

Moderator · Conference Operator

Thank you.

The next question is from the line of Pulkit Singhal from Dalmus Capital Management.

Please go ahead.

Pulkit Singhal

Thank you for the opportunity and congrats on a good set of numbers.

Couple of questions.

One is on the working capital itself.

If you could help us understand what would be the individual receivable inventory and payable days, because I mean, we've had 55 days of receivable last year, and even FY ‘20 was similar.

Where do you see this heading?

And similarly, if you can help us understand for inventory and payday?

Moderator · Conference Operator

Thank you.

The next question is from the line of Koushik Mohan from Ashika Group.

Please go ahead.

Koushik Mohan

Sir, I got my answer.

Thanks for the opportunity.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sriram R, an individual investor.

Please go ahead.

Sriram R

Thank you for the opportunity.

I have three questions.

One is, can you give the revenue breakup for your product division for FY ’23 and Q1 and FY ‘24?

Moderator · Conference Operator

Thank you.

The next question is from the line of Mahesh Warje, an Individual Investor.

Please go ahead.

Yes.

Mahesh Warje

Hi, sir.

I was listening to a call of one of your competitors, and he mentioned that it is the component business in AC where the real profitability is and the whole unit profitability or that business perhaps doesn't have as much future.

So, could you comment on that?

PG Electroplast Limited August 05, 2023

Moderator · Conference Operator

Thank you.

The next question is from the line of Amber Sighani from Nippon Mutual Fund.

Please go ahead.

Amber Sighani

Hello, Yes, hi sir.

Thanks for taking my question.

Just two things from my side is one, you mentioned that you'll be applying for IT hardware PLI.

So, if you can just elaborate a bit on for which products you would be planning to use this PLI as such and what are our plans there?

Will it be a component or would it be a pure complete product per se like a laptop or tablet or anything as such, if you can give some color on that?

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question for today.

I now hand the conference over to the management for closing comments.

Over to you, sir.

Thank you.

On behalf of PhillipCapital (India) Private Limited that concludes this conference.

Thank you for joining us.

You may now disconnect your lines.

Questions and answers

Moderator · Conference Operator

Thank you very much.

The first question is from the line of Koushik Mohan from Ashika Group.

Please go ahead.

Koushik Mohan

Hi, sir.

Congratulations for the great set of numbers.

Sir, I have a basic question on the gross margins.

This time you have shown a very good set of gross margins and you have a great number of numbers.

Sir, I have a basic question on the gross margins.

This time you have shown a very good set of gross margins and you had a great number on the sales also.

I just wanted to understand is it this margins are sustainable on the gross level?