__Excerpts of theconference call held on 27 Jan 2014,by Capital Mkt & was addressed by Mr. Vir Advani, President-Electro Mechanical Projects Group and Mr. B.Thiagarajan President Air Conditioning and Refrigeration Products.
- Order Book as of end of Dec 2013 was up 7% YoY and flat QoQ to Rs.1737 crore. As of end of Dec 2012 the order book stood at Rs.1628 crores and as of end of Sept 2013 the order book stood at Rs.1744 crores.
- Within the total order book, low or Zero margin business stood at Rs.350 crore as of end of Sept 2013; however company has not achieved material success in reducing it and now stands at close to Rs.275-300 crores as of end of Dec 2013.
- Some of the major order wins in quarter ended Dec 2013 are Apollo Hospital, Navi Mumbai, GIFT City, Gujarat, Tech Mahindra, and Hyderabad, Police Head quarters, Delhi.
- Total Debt as of end of Dec 2013 stands increased by Rs.16 crore compared to Rs.471 crore as of end of Dec 2012.
- 9% Salary hikes were given to staff in the month of July 2013; however management level people have reduced from 185 to 115 as of end of Dec 2013.
Electro Mechanical Projects and Packaged Air conditioning Systems (EMPS)
- Electro Mechanical Projects (EMPS) and Packaged Airconditioning Systems (PAS) segment revenue (64% of the total), declined 12% compared to the corresponding previous quarter due to lower billing volume. While segment PBIT registered a decline of 21%, mainly due to slower execution of projects as well as correction in the estimates of project revenues and costs based on revised quantity estimates.
- Many projects under this segment are facing completion delays and company has maintained JIT (Just in Time) policy to avoid building inventory and save costs.
- Legacy projects (with low or Zero margin) are being cleaned up and company plans to begin FY15 with a clean order book.
- 5% growth seen in Ducted AC business
- For FY15, EMPS segment revenue growth is expected to be flat and margins are expected at 6.5% if legacy order book is cleaned up by end of quarter ended Mar 2013.
Cooling Products
- Cooling Products Segment revenue remained flat primarily due to higher priced product line as new energy efficiency requirements BEE (Bureau of Energy Efficiency) have become effective from Jan 2014. Prices were increased by approx 5% for the new energy efficiency complaint products. However segment PBIT grew 21% compared to the corresponding previous quarter due to better market penetration, revision in selling prices as well as a higher mix of in-house manufactured products.
- Commercial refrigeration and Cold Storage business remains good due to demand from industries such as Pharma, Food Processing and Ice Cream.
- Q3 is usually a lean period for Cooling Products segment due to winter
- Company has exhausted all stocks that were as per previous energy efficiency levels
- Target 8 to 8.5% segment margins for FY14. For FY14 the company expects Room AC segment volume growth to be 10-15%.
- Capital Employed decreased due to lower inventory and lower receivables
- System Integration business showed increased enquiries but no conversion
- Import content is overall 70%. Proactive price hikes has protected the company against Rupee Depreciation and also a 10% reduction in import content has been achieved due to increased indigenization.
- In 2-3 years Window AC will go away from the market, and in Jan 2016, only Window AC energy efficiency norms will be revised, as Split AC energy efficiency norms in India are already the highest in the world.
Professional Electronics and Industrial Systems
- Professional Electronics and Industrial Systems segment revenues declined 11%, while segment PBIT registered a decrease of 10% due to the unfavorable business climate and impact of rupee depreciation.
- As per company management, this segment also should not be analyzed on a quarterly basis and should be seen from a long-term perspective
Outlook
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The dull business environment continues to dampen capital investment decisions as well as commercial construction, resulting in adverse impact on the profitability of the Company.
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New enquiries are coming up but conversion remains poor
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Passing off rising cost of materials to show good margins but absorbing cost escalation in orders that the company is winding up.
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Other Income for the quarter ended Dec 2013 largely due to provision write-back; Within Other income Rs.8.8 crores forex loss for the quarter ended Dec 2013 and Rs.19.70 crores forex loss for the nine-month period ended Dec 2013. Forex costs are high as company hedges around 70-75% of its net forex exposure.
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From an Industry perspective Room AC business may see a 15% value growth and 10% volume growth
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Taxation will continue to be MAT till FY15; beginning FY16 the taxation may return to normal levels
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Company focused on reducing working capital and thus planning to reduce receivables, but that will be offset by an increase in Capex in the products business
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FY15-16 target market will be the Metro Rail infrastructure across various cities of India and High Rise (more than 65 floors) buildings in Mumbai and NOIDA. Also Farm Equipment and Light Industrial businesses have seen some increased Capex and will be targeted by the company.
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VRF (Variable Refrigerant Flow) Air Conditioning business seeing traction and domestic market size currently stands at Rs.800-900 crore. Currently 12 players in VRF market and Blue Star has 10% market share. VRF in Room AC industry are also called as Inverter ACs.