Hitachi Energy India Ltd

Thank you, Venu, and good afternoon, everyone. Hope everyone is doing well, and you are fine at your end.

Mitigation of the external supply chain challenges helped the profit recovery in this quarter. As the profit before tax is Rs. 152.2 crore, which is up by 350.5% quarter-on- quarter and 133.8% year-on-year, and the profit after tax is Rs. 113.7 crore, which is up by 395% approximately and 124% approximately quarter-on-quarter and year-on-year,

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respectively. If you see our operational EBITDA, we have reached Rs. 172.6 crore, which is 10.2% for quarter in the double digits as a result of the favorable revenue mix, operational excellence, which has given this bottom-line improvement. If you see the overall rise in operational EBITDA compared to the lastquarter, it is 113% and compared to year-on-year, it is 77%. Our order backlog is very robust at the moment, it is Rs. 7,229 crore and we have revenue visibility for approximately, let’s say, 20 months.

If I go to the next slide, we have been focusing a little bit more detail on the numbers. So, we have been discussing the ongoing macroeconomic issues over the past several quarters. As highlighted in the previous quarter, I would like to share an update on how the numbers were during these last three months.

Let me take a moment to walk through the specific slide with further detail. If you see the table, it gives a clear picture of our relentless pursuit for improving the bottom line and the progressive margin recovery. You can see the revenue improvement compared to year-on-year 27.2% in this quarter, Rs. 1,699.2 crore and this is due to the solid order execution. Further, if you see the overall details, the material cost is 67.4%, personnel expenses 8.3%, the other expenses are more or less consistent, depreciation is consistent, interest compared to the last quarter, it has come down and in this particular quarter, we have an exchange gain of Rs. 9.8 crore. With this, we are able to reach profit before tax of Rs. 152.2 crore and profit after tax of Rs. 113.7 crore.

So, these are the overall updates from the quarterly performance point of view. With this, I hand it back to Venu for the closing slide.

Thank you, Ajay. and if I move to the last slide before we open it up for Q&A. So, our priorities for the coming quarter and the year are the same as before, our three major buckets, market, business, and functions.

As we enter the new fiscal year, our focus and growth objectives for the year remain intact. Our efforts will continue towards maintaining leadership in the core segment with additional emphasis to augment our service and digital portfolio along with scaling up of export. Furthermore, it will nurture high growth segments. As you have seen, high growth in our view is renewables, transmission, HVDCs, data center, is Rail, etc., that cater to the evolving needs of the sector, harnessing new segments and markets. On the businesses side, the focus will be on accentuating our operational excellence to improve productivity and quality. We will continue to push for optimal efficiency to convert our order backlog to revenue, increase profit and more cash in hand which will result in margin accretion. This week, we have migrated to a new ERP system as SAP/4HANA,

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which is what we call in our internal REIWA. It is a single SAP installed for Entire Hitachi Energy Group. Post-stabilization it will help improve operational processes, provide improved visibility across our system, help with line items like inventories, networking capitals, etc. With our constant endeavor of advancing sustainable energy future for all, safety remains the core pillar of all our processes. Focused efforts will continue to strengthen our human capital capabilities through upscale and cross-scale talent for agile energy transition and for future growth.

With this, I would like to close my presentation and request the operator to open the channel for questions. Thank you.

Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask questions may press * & 1 on their touchtone phone. If you wish to remove yourself from the question que you may press * & 2. Participants are requested to use only handsets while asking a question. Also, ladies and gentlemen in order to ensure that the management will be able to address questions from all the participants in the conference, kindly limit your questions to two per participants. Should you have a follow up question please rejoin the que. We will wait for a moment while the question que assembles. The first question is from the line of Renu Baid from IIFL Securities.

Allow me, Venu, to take this question. Thank you, Renu, for this question. So, the gross margin, if you see, is largely what we see right now, it's mostly dependent on the product mix that we are going through. So, in the last few quarters, we have been going through some headwinds. Now that we have stabilized and we see an ease out on the headwinds, mostly depending upon the product mix, the gross margin should be fairly consistent.

Ok and aligned with this, have we started booking revenues for the Adani HVDC? If so, YTD in fiscal ‘24, what percentage of the contract has been executed?

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Yes, as you know, this contract is under execution. On the revenue side, I would say a very low percentage of revenues have come in.

Got it. Secondly, in terms of the broad mix, while you have mentioned exports services growing at about 43% for the quarter, how is the broad mix on an annualized basis as a percentage of revenues? And given that global supply chains are stretched, can we expect expansion in the export portfolio, fresh mandate for new markets far often?

Yes. So, if you take the last year, the entire year, FY23, our export orders, for example, orders have touched close to 30%, slightly below 30%. So, we expect that exports as a percentage of our total orders or total revenues going forward will be in the range bound between 25% to 50%.

And any scope with respect to expansion of export portfolio in terms of product offerings as well as the market?

So, we are looking at it actually, because we also see a very strong demand in the domestic market. So, our main purpose is also to serve the domestic market, right? While serving the domestic market, we're also very open to looking at opportunities outside of it.

Thank you. The next question is from the line of Parikshit Kandpal from HDFC Securities.

Hi, Venu. Congratulations on a great quarter, sir. And I think you have achieved your double-digit margin guidance in this quarter, one year ahead. I remember you mentioning that FY25 and you'll be touching that. So, my first question is again on the EBITDA margins. So, in this quarter, we have seen the volume going up, the revenues have improved significantly and large part of the savings in other operating expenses passing on to the margins. So, just wanted to understand the nature of savings and other expenses, they have not grown in line with the business volumes. So, is it the sustainable level, the current levels of other expenses and now the worst is behind us, and we'll be able to maintain these double-digit margins?

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So, let me just give you an overview of that, then maybe ask Ajay to talk about it a little bit more on the expense standpoint. Well, yes, we have entered the double-digit margin in this quarter even though our guidance is far away from this particular quarter. But if you really look at an annualized basis because our business is what we call as a late and long cycle business, right? Even though we like to compare a quarter-on-quarter but depending upon our lumpy revenues, the whole thing can be started in that. So, we always look at it in a medium term to long term view which is fairly one-year comparison.

So, if you really look at the whole of last year, our EBITDA margin came to 6.7%. So, basically, we have improved 100 basis points on a year-to-year basis on that. So, this is where we are telling that directionally, we are looking at improving where we are, where we were rather. So, same, our endeavor from now onwards also looks at the same way to improve directionally to move the EBITDA margin at a higher level and a fairly mid-term basis in that. So, that’s what in our endeavor and we are looking at all to ensure that we do that. Maybe Ajay, just talk about a little bit on the expenses side.

So, on the expenses side just to give you a broader perspective, if you see our cost structure generally, so we have a personnel expense hovering around between 9% to 10% and other expenses including depreciation and interest, it will be hovering around, let’s say, 22%. So, this is the structure. We feel that we’ll be moving in this direction as we progress in the coming quarters. So, I see these are the areas where we see the expenses will be there. Overall, we’ll be remaining within this basket.

Ok sure sir. Sir, my second question is on the long cycle orders now. So, we have won high speed rail package, I think last time we had mentioned that. We are talking with the EPC player who has won the entire Rs.10,000 crore project. So, that was one thing. And the secondly on the HVDC orders. So, if you can give some more sense on how’s the order pipeline looking at on both these segments over the next one year. So, how do you see the ordering panning out?

The order pipeline is very robust. I would say, right now as you all know, that HVDC tenders have come for bidding and the STATCOM tenders have come for bidding. So, we are submitting our bids to the probable customers, and we are working on that. So, on that, I think we have seen a very strong and on top of that, we also see a very strong pipeline of our export projects as well. So, export projects, as we are saying, we are also looking at some of our other products that we use to export. Also, we are seeing a traction of projects very strongly in the markets where we are acting now.

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Ok, sure sir. Thank you.

Thank you. The next question is from the line of Apoorva Bahadur from Goldman Sachs.

Hi sir, thank you for the opportunity. Sir, you mentioned STATCOM opportunity of almost Rs. 1.1 trillion. I wanted to check if this is an incremental to the Rs. 2.4 trillion NEP opportunity or is it a part of this? This is very much part of it.

Ok understood. Secondly, sir, I think globally the parent has announced a CAPEX of almost a $1.5 billion for transformer manufacturing capacity addition. Would be great if you can give some color of how much of this will be deployed in India?

So, thank you for your question, Apoorva. So, as you know that we have been continuing to expand in India since last, I would say, three years, much ahead of the curve. I would say we have expanded our HVDC factory, our global technology services and also we have added new RIT bushing factory, STATCOM, power quality factory in Bangalore.

So, all these things were part of our strategy and fully supported by the global organization. And the transformers also, as we speak, we have already done a couple of expansions in the last two -three years and then we are also looking at very actively now.

So, I am not able to tell you the exact details because we are firming up at this point in time, and maybe in a couple of months or a couple of quarters from now, I think we will be in a position to do that. Exactly what kind of scale, everything.

Sure sir, understood. Last question, sir, again on the manufacturing capacity, not just transformers, otherwise as well. I believe we are at 70% utilization with the type of pipeline that you see in hand. Do you think our manufacturing capacity is adequate or will we have to ramp it up significantly?

As I said, we have been continuously ramping up ahead of the curve, right, adding a new product line, bringing the new technology, localizing the technology. So, that's the reason. For example, our power quality factory, in Bangalore was a greenfield factory where we ramped up the capacity from 10,000 MVAR to 20,000 MVAR. From 20,000 MVAR we are now looking at taking up to 30,000 MVAR. So, it’s a continuous process and some of our product lines are much higher than the 70% utilization what you’ve talked about. Some of the product lines, we do have some room where we can still take

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the things back. So, on an overall basis, I would say we have quite a good utilization across the factories. We have 19 manufacturing factories just for you to know that we have a fairly good amount of utilization at this point in time.

Understood sir. So, we'll probably have to incur more CAPEX in expanding those if the demand persists. Yes.

Thank you. The next question is from the line of Mahesh Bendre from LIC Mutual Funds.

Thank you so much for the opportunities. Sir, in the presentation, you mentioned that the total investment required for the transmission of renewable is around Rs. 2,44,000 crores. And in the morning, one of the media interviews mentioned that the addressable market opportunity for us is around 40%. So, Rs. 1 lakh crore is the opportunity for us over the next three years. Is it the right way to look at it?

So, what I had said in the media, let me repeat. So, this Rs. 2.44 lakh crore is the government plan to reach 500 gigawatts of transmission. This is the one example I've given. This is the ISTS or part of the ISTS, if you want to reach the target of 2030, so this is the investment, right? And to reach the 2030 target, I've also said that the government or whoever it is needs to complete the ordering in the next two to three years, right? And that's what I was coming from. So, in the next two to three years, we see at least 40% of this market is our addressable market. The question is whether all ordering will happen in the next two-three years, even some of them will spill over to fourth year, is what we need to wait and see in that. But our view is that if we really want to reach the target of 500 gigawatts of transmission network ready by 2030, then the ordering has to happen.

So, if this Rs. 1 lakh crore ordering has to happen over the next three- four years, I think there are only two-three players probably will be addressing this opportunity. I mean, we, along with Siemens and maybe GE T&D. So, is it fair to assume that 40% of the market share could belong to us?

No. I think here we are crossing each other. What I was telling you, Mahesh, is that the two- three players or whatever we are talking only for some of the critical things like

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HVDC or so on and so on. But this Rs. 1 lakh crore is also for transformer, it's also for the GIS, it's also for the substation, right? So, it is a wider network, our addressable market, our portfolio, like a substation automation, those entire portfolios. So, there are many players, more than three players.

Sir, last question from my end. Sir, data center has shown very significant growth. So, how much contribution in this quarter from the data center?

No, we don't give the numbers segment-wise. I think in our view, as I said, it's a high single digit and we are remaining in the high single digit, we are growing in that. As I said, the data center is one of our key high growth segments. We have been working on this with the data center developers and we have the technology, and we also know how to support exactly how this kind of data centers require energy-efficient systems. And that's where we are very fortunate to be successful in that.

Thank you. The next question is from the line of Mohit Kumar from ICICI Securities Limited. Please go ahead.

Thanks for the opportunity and congratulations for a very good quarter. My first question is on these clarifications. The Slide #6 mentions that more than 30 STATCOM devices with a total budget of Rs. 1.1 lakh crore for reactive circuits by 2027. The number looks slightly off. I think 30 STATCOM, 1 STATCOM should be around Rs. 3 billion to Rs. 4 billion rupees. Isn't that, right? Am I missing something?

I think that's what is coming to us, right? When you say STATCOMs, we are talking about the whole STATCOM project there. So, the project includes not only the STATCOM devices, but also includes the end-to-end connections, etc., et cetera.

That's a pretty large number, it's Rs. 1.1 lakh crore. Is that right?

We will cross-check that. We will cross-check and then maybe come back to you on that.

Sir, my second question is on the Scott transformer opportunity. I think recently we supplied one of the Scott transformers with one of the EPC companies for the Western Railway Line. Is it fair to say that this can be a significantly large opportunity in the medium term?

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Yes. In the medium term, I agree with you that because on the Railway's standpoint, they are having a huge target to completely electrify the remaining things, and this is quite a big opportunity in our view.

And, sir, how is the competitive intensity of Scott transformer opportunity as of now? We don't want to name them. No, name, sir, broadly.

There are at least two or three players. So, the key is to do the type test. So, we are the first one to complete the entire type test successfully. So, there are, I think, one or two either in the process or they're completed in that. So, my view is that there will be at least three or four competitors going forward.

And, sir, last one, the HVDC. I think, of course, the bids are happening right now, so to speak. Is it fair to say that we have tied up with EPC, EPC companies and we are bidding it as one package? Is that right? The data question, do you have the appetite to take three or four projects at the same time?

Yes. So, our view is that we will be giving our offers very transparently, openly to all the customers, whoever is bidding for it, and then from there we will take it forward. At this point in time, we have not tied up with anybody and that's also not our strategy because we always have a multi-channel strategy and we will continue to give our offers very transparently, openly to all the customers, whoever is bidding for it.

And do you have the appetite to take two or three? Yes.

Thank you sir. The next question is from the line of Manish Dhariwal from Fiducia Capital Advisors Pvt. Ltd. Please go ahead.

Thank you so much for this opportunity and my compliments to the team for grappling with the tight and the tough situation for more than a couple of quarters, I would say, and finally like, seeing the destination of higher margins and better numbers. So, I basically want to understand that one problem that we were facing continuously was about the supply chain problems and semiconductors. Now, is this semiconductor issue clearly behind us?

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I would say so. Of course, on global or geopolitical conflicts, we can't say that everything is done deal or something like that, right? At this point in time, as we say, as we look, the semiconductor supply chain has eased out. So, we are able to get the chips and those kinds of parts. But we are able to project well at the end of the curve and then able to get it in there.

We’ll move to the next question, and the question is from the line of Khadija Mantri from Capri Global. Please go ahead.

Thank you, sir, for the opportunity. So, my question is regarding the Slide #11, wherein we have given the growth industry-wise. So, it is with respect to the company, or it is the whole industry has grown in this quarter?

No, this is for our company. The transmission, for example, that is for our company, what are the orders in that particular segment.

So, this is with respect to the order intake?

Yes, it is with respect to the order intake.

And, sir, in data centers, can you please elaborate what will be our offerings in terms of products and services? And how do you see this market growing? I understand that you said a high single digit, but in terms of for the overall industry, what could be the growth for the next three to four years?

So, the data center, as we told, our offerings are, because we do a lot of studies on the data center, on the power standpoint, and then the high voltage, and also the dry type transformers, and the grid connection, stability of the whole network grids, networks mean on the power side. So, that's what is our thing in that. Roughly, if you really look at the data center CAPEX, in a range anywhere between 10% to 15%, depending upon the size of the thing, whether the hyperscale is higher, and medium scale is lower. So, hyperscale is anywhere between upwards of 15% of the CAPEX is our addressable market.

Thank you. The next question is from the line of Shivani from PL. Please go ahead.

Sir, firstly, congratulations on a good set of numbers. So, what is the current capacity for transformer manufacturing in terms of MVA in Vadodara, as well as Saudi plant?

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Thank you very much, Shivani, for your question. So, normally, we are not giving that information yet. And so, I would say that we have built up over a period of time, more than two decades or so, expanding our factories. So, we're not only having a Baroda, but our factories are also in Sangli, Halol, and Mysore. They're all related with the transformer. Some, they will do the insulation kits, and some, they'll do the bushings, and some, they'll do the dry type of transformer. So, it's like that, we have built up the factories, and there are several factories within the transformer family, like a large power transformer, medium power transformer, like SPTs, and then dry traction, like that. So, there are various things are there. Putting a number does not look good. So, normally, we have not been giving, but all I can say that we are by far one of the biggest manufac- turers in terms of the capacity, in terms of the MBI, in terms of the supplies, et cetera., in the country. All put together.

Thank you. The next question is from the line of Tina from Motilal Oswal Financial Services. Please go ahead.

Congrats for a very good set of numbers for the current quarter. Sir, my question is related to the reduction in other expenses, which we have seen in the current quarter.

And so, I wanted to check, is there any further scope of reduction in other expenses from the current level, maybe in terms of any kind of reduction that can go to the parent side, or maybe any kind of cost-saving initiatives that you would have taken? So, how do we see this going forward?

Maybe Ajay, you wanted to take this question.

Thank you for this question. As I just spoke earlier on this. So, overall, if you see the reduction in other expenses, over the cost structure, more or less will remain in the same basket that I spoke about earlier. Again, I repeat, my personnel expenses will be in the range of 9% to 10%. And removing the personnel expenses, all the total expenses should be around 22% to 23%. That is what we see. So, some line items can come down, some items can go up, but overall, we'll be within this basket.

So, if I exclude the depreciation and incurred portion, if I keep that aside, if I look at purely the other expenses, which is part of your total expenses, can it come down on better absorption of your cost once the scale-up happens in, let's say, your Adani project, or maybe the other projects that you would have received during the current financial year?

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So, in this only comment will be seen wherever the expenses which are related to volume, that is where we can see some changes. Else, I think more or less we are consistent.

And is the execution of Adani project going to ramp up in the coming quarters? What is the timeline for completion of your portion in that? This will go to next year as well.

So, between FY25 and FY26, we can expect the portion to get completed?

Yes, as per the original schedule, it goes right up to FY25-26.

The last question from my side is regarding the HVDC project tendering, which is already going on for one or two projects. What percentage of this, let’s say for an individual project, what percentage of this can be the addressable market for Hitachi?

I think these are pretty large projects, so depending upon what kind of projects, weighting, etc. So, the value can be high anywhere in excess of Rs. 10,000 plus crores, depending upon what kind of business model, what kind of things, et cetera. So, those are the things.

So, we will not be able to tell exactly the thing, what business model. There are customers who have different, different ways and means of doing it. So, we need to also look at the exact weightings, etc., in that. So, it's different for different things. We are not able to exactly tell what the market for each project will be. The market will be varying hugely.

Sure sir. Thank you sir, that’s it from my side.

Thank you. The next question is from the line of Bhalchandra Vasant Shinde from Kotak Life. Please go ahead.

No, we will not be able to tell exactly what is Adani’s order. HVDC technology is a very niche technology. There are a lot of things we depend on vendors outside of India. But having said that, we said that we have done a lot of value addition here. We set up our own manufacturing factory for our valves. We have a complete manufacturing for the converter transformer. We have a complete manufacturing for the capacitors. So, that way our domestic component is quite high, in excess of more than 50%, 60% of that. So,

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if you add our engineering capabilities, which is very, very rare in that, our indigenously developed thing is far, far higher. That's what I was telling you.

And sir, in the exports market, it is said that there also HVDC opportunities are gaining traction and there again, the supply constraint is there, like in India, like only three players are there. There are also relatively fewer players. So, in our context, do we wait for the parent to get orders, or we can go for direct export orders?

No, you see, all this thing is not that we can do. The energy transition challenge is huge.

It needs a lot of collaboration, co-creation, working not only within company, within group, but also outside of the group, right? The challenge is so big. So, it's not possible for any single company to go and do that because we have to have a collaboration, working together in a coordinated manner. It needs to be done because in some places, understanding the customer's requirement will be better known by some other people who have been tracking that particular customer. So, it cannot be done just like that we go and do that because this is a highly technology intensive project. It needs a lot of prior working, understanding the system studies, understanding the behavior network before we do that. But having said that, we do see some opportunities for us to at least to supply some of the components in those areas where we built up the factories in India in that.

So, as and when those opportunities mature, we will let you know that. But at this point in time, for us, the export strategy is throughout the portfolio. So, we are actively looking at it in our three-prong strategy. That is the first one, we have a global feeder factory that some of the products we manufacture only in India and for everywhere.

The second one is that we have some allocated markets where we develop those markets together with the local sales and marketing teams over in that particular country and sell our products. And the third one is we have a feeder factory where we manufacture some of the components of the full products and those components will be sent to our factories around the world and so that they are able to use these components for complete production. So, this is how our strategy of the exports and with that, we said we have got to 25% and now it's going to be anywhere between 25% to 30%.

Thank you, sir. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. N. Venu for closing comments. Over to you, sir.

Thank you very much. And once again, a big thank you all of you for taking time from your busy schedule and attending to us and listening to us. And we're happy and due to the paucity of time, maybe we could not answer some of your questions, but please reach

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out to us if you need any more information you want to know from us. Thank you, and please take care and stay safe.

Thank you, members of the Management. Ladies and gentlemen, on behalf of Hitachi Energy India Limited, that concludes this conference. We thank you for joining us and you may now disconnect your lines. Thank you.