Salzer Electronics

Stock Opportunities Not-so-Hidden Gems
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By now, Salzer Electronics is an already known stock to many of you. I found some interesting tidbits in its latest AR.

  1. Its main electrical products are


  2. As I highlighted, energy management solutions contributed 3% of the revenue in FY15. Mean, 283.3 * 0.03 = 8.5 Cr

  3. Later in the AR I read its new initiatives in Energy conservation and Energy metering through a dedicated vertical with an Order book of 106 Cr.

    So, does this mean Energy management vertical is going to be one of the significant revenue streams in the near future, going up from 8.5Cr to 106Cr ? Or, am I reading the AR wrong ? Please advice.


4. And, the management is projecting the company to be a 1000 Cr enterprise by 2020. Thats around 5x from now. your thoughts ?

Disc: Tracking for few months, not invested.

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My only concern being L&T being investor (and assume major customer as well as) and conflict about same.

In past 3 years, while sale grown at 10.6%, net profit has only decline by -3.49% (source screener data), and hence the concern. Having said that, TTM sales and net profit increased significantly.

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The uptick in sales and profits only started recently. AR shows pretty good customer list. Remember reading somewhere that none of the customers/countries are contributing more than 10% revenue.

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Salzer QIP info:

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/EC65927D_DF20_4975_9220_A53344797ADD_171027.pdf

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Dhiraj,

Yes, L&T is the biggest buyer … In FY 15 and FY 14 sale to L&T in Rs. 124 Cr and Rs. 120 Cr respectively. Good point is non- L&T sales grown in FY 2015.

I am unable to fathom the “Other Interest” expense they pay of Rs. 3.5 Cr. to Rs. 4 Cr. (appx) each year. If you take their total LT / ST loan outstanding vis-a-vis interest cost, it seems too high. And no clarification is given about this interest payment in the AR.

Overall, Copper Wire is a dull business which constitutes 40% of revenue. Other 50% from regular transformer and switchgear is also not very exciting.area … I guess they complement some product lines which L&T themselves don’t produce and given Salzer access to their 350 distributor network.

They talk about Rs. 1000 Cr revenue by 2020 and issued QIP at Rs. 235/- recently. But if the entire company can evolve to a value added grade product / service offering can only be known if they can walk the talk for at least next few quarters.

Their PPP based model with government for Energy Saver business in municipalities are a bane or boon can only be known once they complete a few successfully.

Also, their USA investment in IT & ITES company seems completely unrelated and I didn’t find the rationale given by them in AR is very sound.

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  • 62 cr raised via QIP, 26.4 lac shares issued at 235/- per share.

  • Promoter holding is 25.5% after QIP. (Down from 30%)

  • allotted 10 lac convertible share warrants to the Promoters @251/-, which should be convertible into equity shares within the period of 18 months from the date of allotment.

  • EBIDTA margins are at 12.5%. Will rise atleast 100 bps in future as per guidance.

At 300/-, it is at 34 p/e (ttm) . I dont know whether to go for it or not.

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Just Now: L&T has reduce its stake from 19.82% to 13.66%. Selling the shares since 28-07-15 to 04-08-15.
This is the reason the share is falling.

Is this a Alarming thing for the company ?

Senior please give your opinion on the L&T stake sell, please.

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It’s not a stake sale but dilution because of QIP which diluted all shareholders - nothing to be alarmed about.

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It is sale not dilution because of QIP. They have already informed about dilution to exchange last week. Today they informed about sale of 6% equity in open market.

Discl: Invested today…

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More actions in Salzer. L&T already sold 6% from its 26%. Is it selling the rest all now ?
Any idea who is the new BIG buyer ? Kedia already entered at 235/-

Disc: Invested today.

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L&T completely exited from salzer. It sold remaining 13% today in open market. That is the reason for huge spike in volume. Its current holding is nil. Dont know who bought from L&T.
Discl: Invested.

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Will there be any negative impact if land has exited? Backing of a big conglomerate is always a comfort factor. Just trying to validate my hypothesis.

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L&T sold its remaining shares in bulk deal, below is the snapshot from BSE:

05 Aug 2015 ONEUPFINANCIALCONSULTANTS PLTD S 3000 305.77
05 Aug 2015 ONEUPFINANCIALCONSULTANTS PLTD P 94000 301.89
05 Aug 2015 JAYNEEL SECURITIES PRIVATE LIMITED S 73022 285.31
05 Aug 2015 JAYNEEL SECURITIES PRIVATE LIMITED P 73022 284.94
05 Aug 2015 LARSEN & TOUBRO LIMITED S 1847358 290.25
05 Aug 2015 ORANGE MAURITIUS INV. LTD S 75000 304.00
05 Aug 2015 ICG Q LIMITED S 150000 303.56
05 Aug 2015 MERRILL LYNCH CAPITAL MARKETS ESPANA SA SV S 274171 260.31
05 Aug 2015 VESPERA FUND LIMITED P 200000 299.99
05 Aug 2015 ELARA INDIA OPPORTUNITIES FUND LIMITED P 1100000 300.00
05 Aug 2015 MULTIPLEX CAPITAL LTD. S 106060 282.24
05 Aug 2015 MULTIPLEX CAPITAL LTD. P 106060 281.84

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Salzer Electronics declines on stake sale by L&T

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Rajesh Duraisamy, JMD & Satyanand, GM Finance took call.takeaways by Capital Mkt
Short to medium term target is to add some high margin products such as dry transformers. The company is currently working on two more products apart from already announced dry transformers. The company is looking for technology knowhow.Currently about 33% of revenue coming from L&T’s marketing of the company’s products. The company is supplier for Schneider Electric and GE. Both Schneider Electric and GE together contribute about 10% of the sales with former accounting for 7% and latter 3%. Expects combined contribution of both Schneider and GE to overall sales to improve to a level of 14% this fiscal. The company is also supplies to other major global electrical OEMs such as ABB but their contribution is not that big.
Capex on dry transformer projects is about Rs 22-25 crore; the company will invest at about MCB facility at about Rs 5-8 crore. Balance proceed funds will be used for reduction of WC management till next new project (for 2 products) comes up.The company looks at revenue of Rs 650 crore in FY18 and Rs 750 crore in FY19. While the existing businesses of the company expect to grow at about 25% per annum, the products will bring in incremental revenue. Expects a PAT margin of about 7.5% by FY19.Revenue contribution from new dry transformer plant will commence from Q1FY17 end. On commencement of commercial operation the new plant is expected to contribute about revenue of Rs 250 crore.Sharp 550% increase in revenue of Energy management business was largely on account of burnout of recent order for supply and installation of energy saver panels. At EBITDA level the contribution of EMS is Rs 3 crore for the quarter.The energy saver panels order is worth Rs 106 crore. The scope of the contract is to source and manufacture equipment and install it in 4 municipalities in TN. Payment terms – About 25% of the contract value will on supply and another 25% on installation. Balance will be 12.5% every year with interest of 8% on balance outstanding. As per the contract the project has to be complete installation in 12 months.
The contribution from this order to FY16 topline will be about Rs 43 crore. Contribution from next fiscal onwards will be only Rs 12.5 crore as it is spread over 4 years. Cost of development of product is approx Rs 48 crore with internally sourced products worth amount Rs 22 crore.The company has already completed 2 such projects for Coimbatore and Madurai, where the payment is equally distributed over 4 years unlike current projects. The company has got payments in 6 months. In TN order there were 3 competitors who include Asian electronics and Belgium company.Since this order is under IUDS scheme, there is no payment concern and normally the payment comes within 3-6 months.IR sales in Q1FY16 are about Rs 1.2 crore but expect revenue of Rs 8-12 crore from IR this fiscal.Promoter holding currently stands at 25.5% and after conversion of warrants the promoter holding will be about 29%.The company currently exports to more than 40 countries. Exports account for about 20% of revenue.
Dry type transformer market in India is worth about Rs 2000 crore and is currently catered by two MNC players. And the company will be the 3rd player.Dry type transformers target market is OE segment where the transformer will be used in a product such as higher capacity UPS in large data centre or Solar inverters in renewable projects. So the market addressed by existing transformer players such as CG, ABB, Alstom etc are different to that the dry type transformer market addressed by the company and its peers. Competitors in India are Namura and one more Italian company.Latching relay – opportunity is very huge but the market has to mature as it is getting used in smart energy meters. The company is negotiating with an overseas player for technology.

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if company is doing exceedingly well then what is the logic behind decrease in promoter stake and for which reason larsen & toubro exit from startgeic stake holding pl give some light on it

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Co was repr by Rajesh Duraiswamy, JMD & Shankaran, Director.Takeaways of the call by Capital Mkt
Industrial Switchgear can do a business of Rs 200 crore in FY16. Wire and cables expects to grow 15-16% in volume but due to the fluctuation in copper price, the sales in value terms moderate to about 5-6% for current fiscal.Sales through L&T business was up by 4%yoy in H1FY16. L&T business contributed about Rs 26 crore in Q2FY16 as against Rs 24 crore in Q2FY15 and Rs 26.9 crore in Q1FY16. The Sneider and GE business grew 27-28% and 17-18 % respectively.
GE got 1000 locomotives supply order from IR over next 10 years. Similarly Alstom got 800 locomotive orders from IR. Since Salzer is the preferred supplier for other products the company is hope full of bagging order for supply of 3 type transformers as well. The company hopes to get Rs 80-90 crore of revenue for 3 type dry transformer in next 3 years and Rs 20-25 crore in first year of operations i.e. FY17.Capex for transformer is Rs 22-23 crore and the operation of transformer capacity will commence in Q1FY17. Capex for capacitor is Rs 15 crore which will be spread over Q4FY16 and Q1FY17.
The company is talking to a Capacitor company and this business will contribute about Rs 8-10 crore in FY17.All three new products/New businesses will bring incremental revenue of Rs 200-250 crore to topline by FY19.Switchgear business on an average gives an EBITDA margin of 15-16%. Copper business margin will be 9%. Building products typically gives a margin of 11%. EMS gave about 18% EBITDA in Q2FY16.Inventory is currently around 2.5 months and expects this to drop to 2 months in H2FY16.EM business: Of the annual revenue of Rs 43 crore revenue for this year, the company has already booked 25 crore so far. Of the balance Rs 18 crore, majority of that will be booked in Q3FY16.Market for 3 type dry transformer in the country is approx about Rs 2000 crore. About 3 competitors operate in India including Tamura from Japan, Graphomiz , an Italian Company and one Chinese player.Copper wires and cable accounted for 33% of STO in Q2FY16 with sales de-grew by 13%qoq. The decline in sales on qoq basis is largely due to fall in copper price as volume grew by 20%qoq.Sales of EM in Q2FY16 decline 15qoq. Since this is order book driven business the company has made installation to the tune of Rs 20 crore in Q2FY16 but could book only Rs 7 crore as audit did not happen. However balance amount of Rs 13 crore will be booked in next 2 quarter.The company is in line for Rs 400 crore of revenue for FY16.For H1FY16 the industrial switchgear business accounts for 49% of sales with a growth of 26%yoy, the building products accounted for 4% with a fall of 9%yoy; copper business accounted 34% of sales with a growth of 6%yoy and Energy Management accounted 13% with sales grew by 800%yoy.Exports more than 50 countries including European countries

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CONFERENCE CALL - from Capital Markets

Salzer Electronics

Sales can grow 25% in FY 2017 with 50 basis points improvement in OPM

Salzer Electronics held its conference call on 12th Feb 2016 to discuss its results for the quarter ended December 2015.
Rajesh Doraiswamy, Jt. Managing Director of the company addressed the call:

Highlights of the call:

During December 2015 quarter sales grew 30% to Rs 90.20 crore.

PAT grew 57% to Rs 3.4 crore.

Exports accounted for 29% of sales.

Industrial switchgear business accounted for 48% of sales and it grew 10%. This is in line with the company’s strategy of focusing on profitable and high growth products.

Building products business accounted for 5% of sales during the quarter and it fell 25%.

Copper business accounted for 36% of sales during the quarter and it grew 41%.

Energy management business accounted for 11% of sales during the quarter and it grew 789%.

EBITDA grew 24% to Rs 10.1 crore.

EBITDA margins stood at 11.2% down 53 basis points largely on account of product mix, higher contribution from copper business and one time consultation charges and Rs 60 lakh test fees charged during the quarter for new product developed for transformers General Electric. Testing happens for any new product that is developed in third party lab.

For the nine months sales grew 27% to Rs 262.30 crore.

PAT grew 52% to Rs 13.10 crore.

Exports accounted for 26% of sales.

Net worth stood at Rs 195 crore against Rs 107 crore as on March 2015.

Total debt stood at Rs 105 crore against Rs 937 crore as on March 2015 mainly due to increase in short term borrowings.

For the nine months Energy management business accounted for 12% of sales and it grew 368%.

During the nine months the company had technical alliance with Trafomodern. Trafomodern, an Austrian company-one of leading manufacturers of transformers in Europe.

The company will start production in first or second quarter FY 2017 from this tie up.

Salzer will use Trafomodern’s technology and design to manufacture Dry Type, Air Cooled Transformers, Chokes and Inductors in India.

The company also did successful capital raising through QIP whish saw well diversified representation and demand. 55% was allocated to FIIs and 45% to domestic mutual funds. Proceeds will be used for new product development and growth plans of the company.

The company has 5 manufacturing units located in Tamil Nadu & Himachal Pradesh.

It has more than 15 products catering to Industrial / Building / Automobile segments.

The company owns distribution network in local and global markets and it exports to 50 countries.

The company is amongst few players in India, to offer total & customized electrical solutions.

In-house manufacturing facilities with process capabilities ensures better product development and customization,

The company is the largest manufacturer and market leader in CAM operated rotary switches

The company enjoys strong customer relationships across the world.

It is the preferred supplier to GE, Schneider and only approved supplier of Nuclear Power Corporation

The company is the largest supplier of rotary and load break switches to Indian Railways.

The company has wide distribution network for international and domestic markets.

L&T gives it access to over 350 dealers in India. This apart it has its own network for modular switches with 50 stockist in 4 southern & western states

The company also has direct network across 50 countries with 40 international distributors.

Net WC improved from 145 days to 133 days/ the management is looking to reduce this further to 110 days by end of FY 2016.

Increase in exports and new products and customization will be future growth strategy.

It plans margin improvement through increase sales of high margin products and increase in exports especially to the fast growing markets of US, Africa and Middle East.

Energy management business has huge growth potential.

The panel business that the company does has lower margins. Revenue from panel business jumped from Rs 1 crore per quarter to Rs 2 crore in Decmeber 2015 quarter.

During the quarter, Asia (excl India) accounted for 21% of sales. Europe, 3%, US, 3%, India, 71% and others, accounted for 2%.

For the nine months, India accounted for 75% of sales.

There was no major fluctuation in copper prices.

Venture into new project/ product development will also be its future growth strategy.

DC Load Break Switches presents a high potential as there are very few manufacturers in the world. The company’s switches are the best available in market. The company already exports good volume to Europe & US.

Debtors days stand at 94 days.

In Switch gear business the company expects to grow 25% for the full year 2016. Till nine months it has grown 30%.

The company will start in FY 2017 the capacitor project by investing Rs 12 crore. In FY 2017 itself it will generate sales of Rs 4 crore.

Capex for FY 2016 will be around 19 crore.

Long Term Borrowings stood at Rs 17 crore against Rs 18 in FY 2015.

Total sales from L&T distributors grew from 110 crore in FY 2015 to Rs 87 crore in nine months. L&T contribution has dropped from 40% to 33%. L&T business is growing but as a % to total sales it is falling.

GE and Schneider revenues grew from 2.2% in FY 2015 to 4.5% during the nine months.

OPM is expected to improve 50 basis points in FY 2017.

By 2020 the company plans to achieve sales of Rs 1000 crore. New products will drive growth. With new products the company hopes to grow 20% each year and double sales in 5 years. It hopes to add Rs 250 crore by way of contribution from new products.

Sales can grow 25% in FY 2017 with 50 basis points improvement in OPM.

Sales from TLT can contribute to Rs 6 crore in FY 2017 and this is going to be continuing business.

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CONFERENCE CALL - from Capital Markets

Targets 18%-20% growth in sales (excluding the Energy Management business) in FY 2017

Salzer Electronics held its conference call to discuss its results for the period ended March 2016.
Rajesh Doraiswamy, Jt. Managing Director of the company addressed the call:

Highlights of the call:

  • Since Salzer’s incorporation in 1985 as a single product manufacturer it has now evolved to offer complete customized electrical solutions to customers. All products are internationally certified and it sells in over 40 countries

  • Though it operates under the electrical and electronics product group, for ease of analysis, it has classified businesses into four different segments viz., the industrial switchgear businesses, the copper business, the building segment business and the energy management business.

  • It has five manufacturing facilities, four located in Coimbatore and one in Himachal.

  • It also has in-house R&D labs in Coimbatore recognized by Government of India, Ministry of Science Technology.

  • The revenues from the operations stood at Rs 99 crore in March 2016 quarter as against Rs 78 crore, up 28%.

  • Switchgear business contributed 41% of the total revenues during the quarter and reported a y-o-y decline of 4% and on a sequential quarter the decline of 7%. This decline in revenues is mainly because of delay in getting new project businesses that it is working with various OEMs.

  • The building product segment, which is still a very small segment, contributed 4% of the total revenues and witnessed a year-on-year growth of 6% and a 3% growth on sequential quarter basis.

  • The copper business consisting of copper wires and cables was the largest contributor with 45% of the total revenues of the company during the quarter with a year-on-year growth of 39% and a quarter-on-quarter growth of 34% on account of increased volumes.

  • The Energy Management business, which is basically order book driven business, contributed 10% of the total revenues with a year-on-year growth of 488%. The very high percentage is because the last year the company did not have this full-fledged business.

  • EBITDA margins were at 10% as against 12% in the corresponding quarter last year. This decline of almost 2.5% is basically because of two reasons. The first one being the change in product mix wherein the wire and cable contributed to higher than the expected percentage to the revenue and also lower realization of energy saver income to the tune of approximately Rs 7 crore due to the incompletion of the third party audit. However, the company has incurred most of the expenses towards that.

  • For FY 2016 revenues stood at Rs 361 crore against Rs 283 crore, up 28% growth. Exports contributed 22% of the revenues in the full year with a growth of 18%.

  • The revenues have grown in line with its expectation especially from the profitable segments industrial switchgear business.

  • In FY 2016 industrial Switch Gear business contributed 47%, up 16%. The Building segment product business contributed to 4% to the total revenues with a year-on-year growth of 9%.

  • The Energy Management business contributed 12% to the total revenues with a y-o-y growth of 600%.

  • The copper business, consisting wire and cables contributed 37% to the total revenue with a yearly growth of 15%.

  • FY 2016 EBITDA was Rs.43 crore against Rs 36 crore, up 21%.

  • EBITDA margin was at 12% and remained flat compared to last year.

  • PAT was at Rs 17 crores against Rs 12 crore, up 42%.

  • Net worth stood at Rs 196 crore as against Rs 107 crore last year.

  • The total debt is at Rs 99 crore as against Rs 93 crore.

  • The net working capital decreased to 134 days from 151 days. The management is continuously working to bring this down to below 120 days level going forward.

  • As mentioned in the past, its plans going forward is to add more specialized products in the Industrial Switch Gear business segment and focus more on the profitable growth. In line with this, the company has added more products in its basket and have added more customized solutions to customers. It has increased exports. Currently it exports to more than 40 countries worldwide including the most advanced nation like US and Europe.

  • Salzer has signed a distinguished agreement with a company called IPD group limited in Australia. IPD is a leading distributor and a wholesaler in Australia for electrical products and they will be marketing Salzer branded electrical products for solar photovoltaic applications in Australia and New Zealand. This agreement opens in new large market for Salzer.

  • It has also entered into an agreement with a Croatian customer for distribution in Croatia.

  • CRISIL has revised rating outlook with A- positive from A- stable for long term and A2+ from CRISIL to A1 for short term.

  • The management is confident of a double digit growth in the range of 18% - 20% for FY 2017 on the revenues with higher contribution coming from Industrial Switch Gears business which is relatively higher business margin in portfolio and going forward its focus and concentration is going to be on this segment.

  • In FY 2017 the wire and cable is expected to continue to grow around 15% - 16% and the switchgear segments is expected to grow at 20% - 25%.

  • Energy Management is basically a project driven, tender-driven business. So as of now the management is not able to give guidance for the revenue growth from this. The company is working on various tenders but is not confident of giving a number on this. So its growth projections are excluding Energy Management business.

  • 18%-20% sales growth guidance for FY 2017 projections is excluding the Energy Management business. This is because this division will be starting straight away minus Rs.30 crore for FY 2017 because in FY 2016 it has realized revenue of Rs 42 crore from Energy Management business whereas for FY 2017 it will be realizing only Rs 10 crore to Rs.12 crore in that business. So this division will already have sales of Rs 30 crore less.

  • For FY 2017, it is looking at first year revenues from Australian company alone between Rs.7 crore and Rs.8 crore. The first shipment is about to go first week of June 2016. This order is for a very special solar photovoltaic switch. This order has margins of 14% - 16%.

  • The company is looking at OPM range of 12.5% - 13% for FY 2017.

  • For FY2017, the company is looking at capex of Rs.20 – 25 crore and for FY2018 it is going to be a normal maintenance capex between Rs.8 crore and Rs.9 crore.

  • All the capex growth plans will be in the Industrial Switchgear business segment only.

  • In the second half of FY 2017, the company will start realizing the revenues from its new project, the three phase Toroidal Transformers wherein it has signed a joint venture with Austrian company. That project will be on stream from second half of FY 2017. From this project the company expects a minimum of Rs.12 – 15 crore sales in six months of this year.

  • The industrial switchgear business did sales of Rs 170 crore approximately. Rotary switches and Toroidal transformers contributed Rs.37 crore each. Then the next biggest two products was cable duct and isolators. These four would have contributed approximately 75% of its total switchgear revenues.

  • Long-term debt is only Rs.17 crore which is for a period of five years. However, the management intends to repay it much quickly once it starts realizing the payment from the Energy saver business.

  • Receivables have increased y-o-y. Receivables should have been around Rs.86 crore to Rs.88 crore but it has gone to Rs.99 crore due to Energy Management business. There is Rs 11.5 or Rs.12 crore outstanding in that. So, once the company realizes that, it will have normal outstanding. The management expects this to happen in Q1 of FY 2017.

  • In quarter and FY 2016, other income includes foreign exchange gain of Rs 65 lakh (against Rs 12 lakh) which is one off.

  • Gross debt stands at Rs 99 crore.

  • The management is looking at sales of approximately Rs.750 crore in FY 2019. To achieve that it is trying to bring in new projects like it did with the Austrian company. The company is looking at the switchgear business segment growing and bringing in high margin products.

  • The promoters stake will rise back to 30% once the warrants are converted. The promoters will increase their stake further over the next three to four years.

  • For Railways the company is already supplying rotary switches and a couple of new products for this signaling division called the fuse change over and the track field battery changeovers. The total revenues that it gets from Railways are approximately Rs.6 – 7 crores including the supplies to RCF, ICF and all the workshops.

  • The company has been working with the RDSO on a very new technology for an unmanned Railway processing signaling, or warning for the unmanned Railway gates. The company has implemented the proto in a couple of places and RDSO has inspected and approved it. It is waiting for the next step wherein the 17 zones of Railway will order for more trial, which it has to implement. Six months from then the Railways will include this as a part of their normal tender process and the business should go on.

  • The management expects that there are 3500 unmanned railway crossings to be monitored and approximate potential business it is looking is Rs.600-700 crore, which it will be competing.

  • The company hopes to see some trial orders from all these 17 zones this year.

  • RDSO is very active in getting new technologies. They are very interested and things are moving a little faster under Railways Minister Suresh Prabhu. Normal approval period for RDSO is between three and five years but the company was able to get this project installed and tested within one, one-and-a-half years. So definitely there is a speed in decision making.

  • The management is very optimistic on Indian market, in general Indian Power, Indian capital goods market but unfortunately it has not really grown as expected. But the management feels that it is seeing the bottom of the curve and definitely there should growth from this point. So it is going to be a good growth story for the country across all sectors.

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Salzer Electronics Limited has informed the Exchange that the Board’s Sub committee at its meeting held on August 26, 2016 approved the allotment of 88000 Equity shares of Rs 10/- each with a premium of Rs 241.45 per share.

https://nseindia.com/corporate/IntimationtoSE88000_26082016115957_595.zip