Salzer Electronics

Q2FY24 Concall Notes:

General Notes:

• Overall market was a bit slow as OEM pushed back the orders.
• Some of the high margin products such as rotary switches, isolators, cable ducts declined in sales due to which EBITDA margins didn’t grow as expected.
• HVAC segment may grow to be $20 million in next 2 years
• Inventory has gone up due to which ST borrowing have gone up as well.
Management claims that they have tech capabilities required to manufacture various electrical, electromechical, and electronic components, and that’s the reason that all the MNCs have come and stuck with them for years.

EV chargers:

• Charger is undergoing testing at ARAI in Pune to get the BIS certifications. Expecting launch in Q4FY24.
• Believe that this EV charger mfg business has potential to be game changer
• EV chargers will be used for public charging (B2B, B2G) not B2C as these are expensive products.
• Can earn 16-20% EBITDA margins here after these chargers evolves.
• Can produce 70-100 chargers a month as of now
• Currently, there are no ready-made customers for the charges in domestic market. Company is looking at creating a charging network themselves one year down the line.
• For exports, JV collaborator will see the chargers and Salzer will build these chargers for them
• There will be many playes in India in this segment, however, there will only be 2-3 players in fast charger category

Exports:
• Expect sales in Europe and USA to increase over the coming quarters due to recently developed new products for HVAC such as contactors, disconnect switches and whips.
• Exports have grown well this qtr (28% vs 25% last year). Export market is growing well because of new products addition. Export margins are a little bit bette, but currently not great due to additional costs incurred due to various reasons. It should stabilize from Q3/Q4.
• Subsidiary Kaycee sales have been growing consistently and EBITDA margins improving consistently. Expect Kaycee to do same in coming quarters.

Cap Utilization: Overall Hosur plants – Overall 70%, New plant 30-40%

China Dumping: Don’t see threats from China dumping because of BIS certifications, mandatory stds, and competent Indian players who supply to int’l companies

Pricing Power: Salzer passes on prices for wires and cables, but not for industrial switchgears as they have annual rate contracts. They do it for this segments only on annual basis.

Growth Forecast and Margins Guidance
• Growing at slower rate. Q3 might not be much different that Q2 as they are still seeing slowness. Hoping Q4 would be better
• May not achieve 20-25% kind of growth this FY, can lock-in 18-20% kind of growth.
• Management expects this to be a temporary blip rather than structural slowdown. This will turn around once things are stabilized internationally as well as domestically (election, inflation etc.)
• EBITDA margins for Industrial Switchgear – 11.5%, Wire and cables – 7%

ROCE Improvement:
• Still committed to get 18% ROCE mark and is a constant work in progress.
• Biggest challenge is bringing the inventories down.
(still I don’t see any concrete steps, no clear direction on how they will reach there)

Disc: Invested