Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PG Electroplast Ltd (BOM:533581, Financial) achieved all-time high quarterly profits and sales in Q1 FY25.
- Operating revenue grew by 95% to INR1,320 crore, with the product business contributing 75%.
- EBITDA increased by 100% to INR134.5 crore, and net profits rose by 151% to INR85 crore.
- The company posted industry-leading growth in the product business, with room AC business growing by 130% YoY.
- Orderbook and visibility for the product business remain robust, with new product offerings in washing machines and room ACs being well received.
Negative Points
- EBITDA margins remained flat despite high top-line growth, attributed to fixed conversion prices and commodity costs.
- Gross margins fell from 19.9% in Q4 to 18.1% in Q1 FY25, due to lower contribution margins in the AC business.
- Employee costs and other expenses saw a sharp rise due to increased production and activity levels.
- The company faces challenges in renegotiating contracts mid-season, limiting margin improvement opportunities.
- Dependence on Chinese imports for key components remains a concern, though efforts are being made to increase domestic value addition.
Q & A Highlights
Q: Firstly, congratulations on good set of numbers. So while the top-line growth has been very healthy, EBITDA margins have been flat. Now a business like yours is such that one should see benefits of op leverage at such high top-line growth. Also given the fact that this was one of the best quarters in many years in terms of RAC, so I was wondering if not now, then when? And on a related note, while we understand that your customers may have exercised their bargaining power on back of high orders, but at such acute level shortages in the channel, were we as an RAC OEM player not in a position to dictate terms and therefore take some benefit in terms of margin growth? Or is this purely attributed to commodity costs rising? If so, then should we expect margins to improve in second quarter FY25? If you could just share your thoughts on these two.
A: First of all, I want to highlight that we have seen a margin improvement on a like-to-like basis. If you see the previous quarter, we had a INR15 crore income from PLI, which was not there in this quarter. So operating levels at operating margins in both, all the product businesses were better than the last quarter. However, because of the absence of PLI was not reflected. By the way, I just want to highlight here, once the prices are settled with a customer for conversion or a season, they don't change in the mid-season irrespective of the season being strong or weak. So it is not that we can actually renegotiate in the season, go back to the customers. We only get margin improvement because of the operating leverage, because in the same line, if we are able to utilize it better, we can have slightly better productivity and slightly lower cost. But this business does not allow you to renegotiate the contracts in between the seasons.
Q: Sir, in terms of RAC, can you throw some light as to what was the split between RAC component business growth in 1Q versus your RAC assembly? And in the future, what kind of margin growth can we see in our RAC portfolio on the back of RAC component share increases?
A: So RAC component is a very small business for us. The number that we talk about in the product business of INR882 crores, that's a purely fully built units, indoor, outdoor, or fully built CBUs that we supply to the customers. Now for us, the component business is very small in the whole scheme of things. For the quarter, maybe that is a part of the plastic components and others, and that will probably not be even INR25 crores, INR30 crores. There are some small business which we have started in the controller side of the components. Last quarter it had a very small number. INR13 crores is what we sold externally and it is a part of electronics business in the AC controller side.
Q: Sir, I just wanted to understand when we look at more deeper into the numbers, our gross margins have fallen down from 19.9% in the Q4, is currently 18.1%. When I even compare this with the Q1, it is sustaining at the same level. It is 18.1% in the Q1 in the last year and this year, the Q1 is also 18.1%. But in the middle of the year, I am seeing that our margins is slightly improving to 20.7%. So can I understand, are we contracting with the client? Are we talking about per unit give me this much price or is it something like that or are we on to the entire contract value basis or unit level basis?
A: So I just want to highlight here a few things. If you look at our product business, the AC business has lower contribution margins because the bought-out parts, especially the compressor, the controller chip set and even motors et cetera are being bought from the vendors directly. So that is why the gross contribution is lower. So whenever the proportion in a quarter is higher of an AC business, the gross contribution comes down. Yes, you are right. We do have per unit conversion price fixed, and bill of material is a pass through to the customer for the whole season. So that amount is initially agreed by the customer for different models and then that remains the same for the whole season. That is the conversion cost.
Q: What is the normal conversion cost for AC per unit level on EBITDA?
A: It actually varies, and we don't disclose that number. But it varies from model to model.
Q: And second thing, sir, in the current guidelines, we have told that it is INR216 crores on our bottom line. Is that also including the PAT of the JV that what we are doing, INR600 crore?
A: No, there is nothing included in that. That INR216 crores is only for the standalone entity.
Q: 216 crores is only for standalone. And on the JV side, what can be our PAT margins, if it is possible, you have worked out anything?
A: On a full year basis, that should be in the range of about 1.5% to 2%. That is what we are targeting internally. In the first quarter, we had a small loss. On a turnover of INR75 crores, we did a small loss of about INR1.9 crores because they were startup costs and also, initially, for the first two months, the production was just getting stabilized. From June onwards, the things have started picking up and now for this month and next month, our plans are very good. So this next quarter onward, we should see turnaround in the profitability in the JV also.
Q: And if I am allowed to understand if our PAT will be coming from this JV somewhere around INR6 crores to INR9 crores?
A: About INR6 crores is the right number, the share of our PAT and even if we assume 2% margin on the INR600 crores, that will be about INR12 crore of profit and then our share will be INR6 crores in that 50%.
Q: So then we are talking about INR216 crores plus INR6 crores, that is INR220 crores and this is inclusive of all the PLI scheme and everything.
A: Yes, it is inclusive of the PLI. Yes, it is inclusive.
Q: Couple of questions. Given that we are entering into the future of washing machines, how is the order book looking like?
A: Order book looks very strong, and we have guided that overall, our product business will see a growth of almost close to 59% and we are building in very strong growth
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
