Salzer Electronics Q2FY18 Concall Summaries

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 Q2FY18 Financial Performance

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  • Financials restated as per Indian Accounting standard, Ind-AS
  • The net revenues from operations were at 101 Crores
  • A year-on-year growth of 9% witnessed as compared to Q2 FY’17
  • A net growth in revenues demonstrated
  • Growth mainly driven by higher demand in Wire and Cable business and Industrial Switchgear business
  • 29% year-on-year growth in exports due to the increased exports to UK and USA
  • The EBITDA grew by 8% to Rs.13 Crores as compared to Rs.12 Crores in the corresponding previous quarter
  • Sequentially, growth of 23% witnessed for EBITDA
  • The EBITDA margins improved by over 270 basis points to 12.8% on a quarter-on-quarter basis
  • These were the best margins over the past four quarters
  • Further improvement trend for margins was expected to continue
  • Better product mix and increased exports was the main reasons for increase in EBITDA margins
  • The profit after tax grew by 8% to Rs. 6 Crores in Q2FY2018 as against 5 Crores in the corresponding previous quarter
  • Sequentially, the PAT increased by 43%
  • The PAT margins for the quarter were flat at 5.8%
  • Sequentially PAT margins improved by over 190-basis points
  • Exports contributed 23% of the total revenue in the quarter
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H1FY2018 Financial Performance

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  • Net revenues from the operations were at 205 Crores in the first half of FY2018
  • A year-on-year growth of 13% seen as compared to H1 FY2017
  • Growth was driven by Industrial Switchgear and Wire and Cable business
  • EBITDA for H1FY2018 remained flat at Rs.23 Crores
  • The PAT increased by 2% to Rs.10 Crores in H1FY2018
  • Exports contributed to 18% of total revenues
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GST Implementation

  • GST regime was implemented in July
  • Slight teething problems to start witnessed though the overall long-term prospects remain extremely positive for the organized players like Salzer
  • Salzer was insulated to a large extent on account of its product offerings to a wide variety of industries, quality consistency and its recheck across geographies

About Salzer Electronic

  • Incorporated in 1985
  • Collaborated with the German Salzer, the manufacturer CAM operated rotary switches
  • Evolved from a single product company to a complete customized electrical solutions provider
  • Technical associations with the reputed companies across the world
  • Deals in high quality products of international standards
  • Associated with Larson & Toubro from 1993, Plitron from Canada in 1995 and with Trafomodern model from Austria in 2016
  • Focused on getting into niche and of great value technologies
  • Has a preferred vendor status with global giants like GE and Schneider
  • All the products are international certified
  • Operate under electrical and electronics segment
  • Classifies business into four different divisions-
    • Industrial Switchgear Division
    • Copper, Wires and Cable Division
    • Buildings Segment Division
    • Energy Management Division

External Environment and Impact

  • Country witnessed drastic and disruptive changes in economic terms
  • Government put forth its vision of make in India recognizable
  • Numerous economic reforms were implemented
  • A lot of teething problems in implementation of these reforms were witnessed by Salzer
  • Despite the numerous headwinds in the economy, Salzer continued to invest in businesses
  • The need to be future ready as soon as the business conditions revive is foremost priority
  • Salzer is very optimistic about the future prospects

Industrial Switchgear Division

  • Contributed 50% to the total revenues in Q2FY18 and 43% for H1FY18
  • With the GST regime in place and overall positive economic scenario early signs of revival in Switchgear business being witnessed
  • Received very good enquiries from large OEMs like BHEL, Schneider and GE, etc., for Switchgear products
  • Due to high standards of quality, demand expected to significantly improve further
  • New products like the Dry Type Transformers and Wire Harnesses witnessed a significant growth in Q2FY18

Wire and Cable Division

  • Second largest contributor to the revenues in Q2FY18
  • Focused at brand labeling for major brands like L&T
  • Started branding for companies like Crompton Greaves Consumer Products, Texmo, EFAB and a few other brands
  • In the previous two years, focused on giving value added products to customers
  • Came out with specialized products like elevator cables, solar cables, highly flexible hoist cables and other similar cables
  • This segment contributed 46% of the total revenues of the company in Q2 FY2018 and 51% for the H1FY18

Building Products Division

  • The only B2C business of Salzer
  • The contribution of the total revenue remains small
  • Increase in the contribution in the next two to three years to around 10% levelsis expected
  • Got annual rate contracts with major builders like Sobha Developers, Purvankara, Reddy Structures and Kumar Builders
  • The Building Product Division contributed around 4% of the revenues for Q2FY18 and H1FY18

Energy Management Division

  • Being order book driven business during Q2FY18, Salzer did not book any revenues
  • For the H1FY18 it was 1% of the total revenues of the company
  • Salzer expect to book revenues for the first year of the contract it took in Tamil Nadu
  • Contact is 12.5% of the total contract value of Rs.86 Crores
  • Focus remains to achieve profitable growth by adding newer, customized and value added nature products
  • Newer geographies, which can yield better margins were also explored
  • With a very competent team in place Salzer is confident of achieving the milestones

Strategy for Steady Progress

  • Board in its meeting on November 17, 2017 approved the proposal to acquire the entire business of Salzer Magnet Wires
  • Acquisition is as a going concern on a slump sale basis with appointed date as April 1, 2017
  • It is subject to necessary further consent from the shareholders of both companies and clearance from regulatory authorities

Salzer Magnet Wires

  • Founded in 2008 and was promoted as a separate company because there were other investors who wanted to invest and setup this business
  • Offers extensive range of enamel coated copper wires suitable for winding applications in transformers, motors, alternators, contactors, relay and auto-electricals.
  • Business witnessed a compounded annual growth of around 20% since its inception in 2008
  • Polyester coated wires for deep well pumps and fine enamel copper wires also manufactured
  • Absolutely no holding by Salzer Eelctronics. It is held by Salzer promoters
  • 50% is held by the Salzer promoters and the rest by other directors of Salzer and from some outside people
  • Cables and Wires made by Salzer electronics and enamel copper wires made by the Salzer Magnet Wires are very similar in nature.EBITDA level it is around 8.5% to 9%.• For current set of operations, being at 11% it is slightly better than Wires and Cable Division
  • The fine enamel wire for which the plant has been setup for manufacturing going to be better margin product
  • The selling price are significantly higher than the current selling products

Acquisition of Salzer Magnet Wires

  • Bringing a new business into Salzer Electronics without testing the waters wasn’t desired
  • Process of this acquisition will take two months
  • Some regulatory approvals and the shareholder approvals are expected to complete by end of December
  • The consolidated numbers should be there in FY2018
  •  Capital employed is around Rs.16 Crores.

Benefits of Acquisition

  • A lot of synergies can be seen in bringing that into Salzer Electronics today due to Wire and Cable Division and work with Larsen and Toubro
  • The synergies are mainly in sourcing of raw materials
  • Volumes are going to significantly increase due to acquisition for both
  • Rs.60 Crores will be added in sales volume for Salzer Electronics in FY2018
  • Result in incremental growth of 20% to 25% in the next five years
  • 3% is the PAT margins of the company and it is going to be EPS accretive
  •  Strengthening of the product portfolio will give opportunities for further improvement of market penetration of the products of Salzer Magnet Wires
  • It will enable to focus global markets over the next few years
  • Integration of the two companies’ business would provide leverage for better price negotiation with suppliers of copper on the volume growth basis
  • It will give price benefit of at least 1% to 2% in the raw material of both wires, cable and new company getting acquired
  • Acquisition would bring cost efficiency in manufacturing and provide scope for improvement in operational synergies of Wires and Cable Business
  • Products like three phased transformers and Toroidal Transformers would get more benefit in terms of better pricing and margin
  • The products of Salzer Magnet Wires will have better scope for innovation and application with support of Salzer electronics’ in-house R&D facility
  • Salzer Magnet Wires will also bring in completely new customer base to Salzer Electronics
  • It will provide opportunity to get new customers for our Salzer Electronics existing products

SMW Acquisition Cost To The Company

  • The cost to Salzer Electronics will be 10.3 lakh shares  on a fully converted basis
  • The shares are being issued at Rs.197, as per the SEBI rule for the pricing of the shares.
  • Approximately amounts to Rs.20 Crores
  • Company’s FY2017 turnover was Rs.60 Crores
  • For September 2017, it was around Rs.37 Crores
  • It is expected to be around Rs.70 Crores in FY2018

Focus Of The Company After Acquisition

  •  Approximately 15% of the production of this company will be used with 15% to 20% ason captive basis
  • The company has set up a fine wireenameling plant
  • The fine wire enameling has a very highmargin with limited Indian manufacturers and a very good market.
  • Salzer Electronic customer base will be able to consume a lot of this finewire fine enamel wires

Fine Enamel Wire

  • Used in electrical, auto electrical, the products like contactors, relays, lot of coils, and auto relays
  • It is 100% copper enamel and copper polyester wire

Raw Material Expense

  •  Raw material prices have always remained at around 70% to 72%.
  • Two major product segments:
    • Wire and cable industry
    • Switchgear.
  • On the switchgear front, it is around 60%
  • On the wire and cable, it is around 85% to 86%
  • The rise in raw material price for the commodities like copper and steel, is completely passed on to customers
  • The rest of the raw material, have not witnessed any major price changes

Target For The Full Year And FY2019

  • The full year target to be between 11% and 12%
  • It also depends onthe product mix that in the next two quarters
  • A higher EBITDA margin can be expected if the revenue share of the switchgear business is goes higher,
  • With the increase in revenue share of the wires and cable, the EBITDA margin percentage will be be low even though the absolute numbers are higher
  • A four to six week order book position I worked upon

GST Rate Applicable

  • Was at 28% when it was implemented then reduced to 18%.

Future Path Ahead

  •  For the past four or even six quarters growth has been very small
  • The main reason is the struggling Indian market
  • Going forward, the Indian market is on the verge of the growth path
  • Industrial switchgear business is one that is poised to grow at a much faster pace than what it was in the past six quarters
  • Exports will pick up significantly to Europe and US, giving better margins
  • 95% of exports are switchgears business.

Three-Phase Transformer Activity Wiring Harness

  •  Three-phase Dry Type Transformer production started in January, 2017
  • Significant enquiries were seen from very good OEMs in India
  • In Q2FY2017 a business of around Rs.3 Crores
  • Business around Rs.15 Crores to Rs.18 Crores in FY2018 is expected for three phase dry type transformers
  • Companies like BHEL, companies like Toshiba, Mitsubishi, and UPS, companies like Schneider, ABB, and from Indian Railway made enquiries

Wire Harness

  •  Wire harness segment was started in the previous year
  • A good growth almost doubling of business is being seen
  • It is not for any automotive, wire harness is for industries
  • Not many organized players are present in this segment
  • Focus is on Wire Harness industry where the demand is quite good
  • Got business from almost all the elevator companies and various other industries are being looking at for wire harness.

Affordable housing

  • Government of India is planning to invest for affordable housing
  • It is going to be a game changer in the real estate market
  • Salzer has products for building like wires, switches, MCBs, and distribution boards
  • There will be enormous demand if the Government of India invests for the affordable housing
  • More focus is into the building

Trade Receivables

  • Rs.86 Crores business was done with Tamil Nadu Government for the street light energy efficiency project
  • As payment term in the contract 12.5% will be received every year
  • The non-current is the first 12.5% that has been built and the payment is expected
  • By March of FY2018, the payment is expected
  • The overall receivable levels is going to be around 90 days
  • That has been the industry norm in the segment
  • It has increased a little bit beyond 90 days, going forward its expected to remain at 90 days

Industrial Switchgear Business Demand

  • The biggest advantage being a supplier to a wide variety of industries starting from the core infrastructure industries to the renewables to the backup power industry to machine tools to medical equipment industry
  • The general industrial pickup in the country will give a boost
  • The power generation, transmission, and distribution across all three sectors is a significant factor for the product growth
  • Around 30% of the business goes into power segment
  • No new business, getting large amount of business for maintenance

10 Years Contract With GE Transportation

  • GE Transportation signed the contract with Government of India
  • A locomotive plant will be set up in Bihar for manufacturing 1000 locos over the next 10 years
  • Coming around 100 locos every year
  • A contract with GE made for supplying a very special customized contactor to the locomotives
  • The size of the business is not very significant
  • The size of the business is approximately around Rs.12 to Rs.15 Crores over the next 10 years
  • The biggest advantage is getting an opening into GE Locomotive, which is much larger business globally
  • Starting the business with Indian company with GE Locomotive, aim is to get the products to GE Locomotive in US where the size of the business isat least 10 times bigger
  •  Significant opportunities in transformers is also being explored
  • Samples for various other Salzer products have been submitted to GE Locomotives
  • Testing is being done by GE as that require a very long-term testing
  • After getting through the quality testing a business of around Rs.8, Rs.9 Crores with GE Locomotives is expected

German Tie Up With The Salzer German

  • Focus is to sell CAM operated rotary switches to Salzer Germany and to market it in Europe under their brand through their network
  • If that stabilizes over the next two or three quarters, new products will be added in the same network
  • GST implication on cable business
  • The reduction is definitely good for the industry overall and demand pickup is expected because of that

Energy Management Business

  • Large project was done the previous year
  • An order from EESL company for Rs.20 Crores for Varanasi and Jharkhand was received in FY2018
  • Some portion has been built in the first two quarters
  • Could not do anything in Q3 as EESL actually postponed thedelivery schedules
  • The first-year revenue of the Tamil Nadu project, approximately around Rs.10.5 Crores has not been billed
  • Waiting some certifications to come in
  • After that in FY2018 first 12.5% of the Tamil Nadu project will be billed as well as some revenues for the EESL in the next two quarters
  • This was for Tirupur, Erode and Vellore, the three corporations.
  • Every year Rs.10.5 Crores is expected to be received
  • • The margins would be very, very high

Building Material Division

  • Q2FY2016 was extremely good for the building segment
  • That is why a little slowdown is felt in Fy2018,
  • Division on an annual basis is expected to clock around Rs.27 Crores, Rs.28 Crores compared to last year’s Rs.23 Crores
  • Definitely seeing a 20%, 25% growth in the segment
  • It has better gross margins, but less EBITDA as of now
  • Aim is to attain critical level of around Rs.35, Rs.40 Crores
  • After crossing a significant jump is expected in the EBITDA margins for this product in this segment.
  • The estimation for FY2018 is around 420 without the acquisition
  • With this acquisition 10% more or more than that is expected

Expected Financials

  • The company is expected to do in FY2018 turnover of approximately Rs.70 Crores
  • A margin of around 3% to 3.5%. on the PAT levels.
  • On the EBITDA level, it is going to be around 9%.
  • For FY2019 EBITDA margin is going to be between 11% and 12% depending on the product mix
  • If the switchgear segment witnesses higher growth, EBITDA margins can be a bit higher than 12% else between 11% and 12
  • 18% to 20% growth both in top and bottom line for FY2019 is excepted

Evaluation Of The Current Scenario

  • Major changes in the economy can’t be observed
  • The economy is still struggling to grow
  • That is the reason for very less demand for the products in India, in the industrial sector
  • The reasons for that is various reforms came in into shorter time
  • FY2019 will see significant pickup in demand resulting in growth of 20%
  • Growth will be much faster if the Indian economic changes.

Product Mix

  • More products are being added into industrial switchgear division
  • Wire Harness, Three Phase Dry Type transformers are the examples
  • That is going to be the more focused division
  • It gives 15% to 16% EBITDA
  • Good exports give EBITDA margins of around 16.5% in the switchgear business
  • The wire and cable division is growing at a much faster pace
  • The EBITDA margins are lower at around 8.5% or 8%
  • The absolute number will be much better if that grows
  • Focusing in the building segment business to sell wires under Salzer brand
  • Salzer has a good brand name as far as at least South Indian states are concerned
  • Started taking advantage of brand name
  • The same network of selling switches, MCBs and distribution boxes is being used to sell building segment wires

Plan for Getting CFO

  • Salzer has a very good team behind, though they are not facing the company outside
  • The team is excellent providing support in all aspects of the business
  • Mr. Rajesh Doraiswamy will be handling finance part

Growth Sustenance

  • No revenues for energy management were booked in Q2FY2018
  • Seen good growth and growth is expected to continue for next two quarters or even better
  • The Wire and Cable, year-on-year has grown 20%
  • Switchgear grew around 8%
  • Switchgear is expected to grow a little better and Wire and Cable will continue to grow at around20%
  • On energy management business, the demand is shifted to the not central government the EESL, Energy Efficiency Services Limited
  • The demand is picking up but EESL is finding difficult to deal with various corporations in various states
  • The future is going to be good for this division
  • With EESL stabilizing things will get better
  • No scope for this business in industrial market


  •  Will be touching around Rs.70 Crores for sure and may lie around Rs.80 Crores
  • Rs.39 Crores business has been done by half-year
  • 29% jump seen in second quarter exports as compared to the first quarter exports
  • The second quarter trend is expected to continue for the next two quarters
  • At least Rs.40 Crores to Rs.45 Crores will be done in the next half year

Dividend Payout

  • The Company has a dividend payout policy of around 15% to 20% of the PAT
  • It will be between 15% and 20% of the PAT in FY2018
  • No news for debt reduction but still looking at opportunities

Equity Dilution

  • Have ESOP running, and is getting issued right now