Hitachi Energy India Limited (POWERINDIA) Q1 2023 Earnings Conference Call Transcript

Hitachi Energy India Ltd  (NSE : POWERINDIA) Q1 2023 Earnings Call dated Jul. 21.

Corporate Participants:

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Analysts:

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Apoorva Bahadur — Investec — Analyst

Amit Mahawar — Edelweiss Securities — Analyst

Ajay Singh — Chief Financial Officer

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Viraj Mithani — Jupiter Financial Services — Analyst

Vishal Biraia — Max Life Insurance Company Limited — Analyst

Kunal Sheth — B&K Securities Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Hitachi Energy Limited India Q1 FY’23 Analyst Conference Call. [Operator Instructions].

I now hand the conference over to Mr. N Venu, MD and CEO, Hitachi Energy India Limited. Thank you, and over to you, sir.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you. Good evening, everyone. Thank you for joining us for the call. I hope all is well at your end and you continue to take all necessary precautions to keep safe yourselves and your families and your colleagues. While the pandemic seems to have receded, recently, we reached 200 crore milestone of cumulative doses administered in the country. However, there are dangers still on the horizon. The economy is on the path of recovery to pre-pandemic levels. There is a healthy momentum, with demand and economic activity picking up and business confidence has started to improve the last time we spoke. However, multitude of factors continue to impact the growth numbers. We believe these are short-term challenges, which would flatten out in the long-term.

So, we have uploaded the presentation which I am going to use in the BSE and NSE. I am sure you have seen it. For ease of reference, I am going to use the slide numbers, so that we can just follow-up on that.

So moving to the Slide number 3. We started the quarter on an optimistic note, but were also cautioned by supply side constraints, such as increase in commodity prices, supply-chain constraints, freight and logistics costs, semiconductor crunch, all of which were anticipated by the combined. It has impacted economies and industries, affecting the entire ecosystem, including our profitability, as well as that of our customers and partners. In these challenging times, Hitachi Energy India scored a significant win, significant order win in the challenging markets. In this quarter, ended 30th June, we received orders for INR3054.6 crore. It is up by 309.7% year-on-year.

As a pioneering technology leader, we entered in the market with a long-standing partnership with the customers. Our value driven engagement with customers helped us driving some of the key orders wins this quarter. So order for 1,000 Megawatt HVDC link between Kudus to Mumbai reiterate customer constant in our technology expertise. The game-changing 1,000 Megawatt HVDC link will increase the supply of power to the city by almost 50%, paving the way for HVDC in the country to be the grid of the future. The order we have received from Adani for 1,000 Megawatt HVDC Infeed. And not only this, as you can see, we also received orders from the industries, and the rails and the datacenters.

Our long-term fundamentals appear solid. India continues to be a fast-growing market with a strong potential, and as the market leader, we continue our engagement with the customers to collectively come out of this uncertain market situation. As you can see, with this order, our order backlog end of 30th June is all time record high, INR6,777 crore.

Moving to the Slide number 4. Our work is underpinned by safety, integrity and quality and as we always say, these are basically our licenses to operate and it continues to resonate with our customers through our high service ethics. We have continued organizing regular training session for our employees, contract staff and partners, in some cases, even with the customers in order to stop the spread of COVID, reduce high risk hazards and any issues arising out of it. We conducted special session to spread awareness regarding risk management and Life saving rules, summer readiness on sites and so on to ensure our people and adapt to the new measures and bring safety and well-being into a sort of practice as a way of life in all of our workplaces, whether it is offices or factories or on the project sites.

Moving to the slide, next slide, Slide number 5. As an organization, we take a holistic approach in growth of the organization, our employees, our eco-system, our stakeholders and the community we serve across the country. We won milestone order as I talked to you previously, such as Mumbai Infeed HVDC, expanded export footprint by high voltage offerings and executed projects from various industrial and infrastructure segments. We contributed to policies in industry forums such as CII, IEEMA etc., and we continue to have dialogue with the Thoughts Industry Forum like Karnataka Energy Conference, Sweden-India dialogue on sustainability and also energy transition as a whole.

To further share our technology expertise, we inaugurated a Smart Electric Grid Lab in NIT Warangal, which is driving smart electric grid technology education, skill development and research activities. We also reinitiated Hitachi Energy Technology Conference, on ground, face-to-face events at some of our customer sites, in this case, recently in Lucknow and another healthy partnership is the CEA. Marking Environment Day, we conducted a sustainability drive at our manufacturing facility in Gujarat. This was an employee-led initiative and they planted over 1,300 saplings at our Vadodara premises recently.

Moving to the Slide number 6. Last year we announced our 2030 carbon-neutral goals. We had set milestones defining our journey for operations in India, as well as around the world. We model our strategies to implement this, both ground up and top down, to make the urgency and pace of change required to reach a carbon-neutral future. In the last three months, we conducted energy assessment across our manufacturing locations. We have nominated location leads who will undergo BEE Certified Energy Manager course and started STECOs with location ownership and management wherein help and ensure cadence and continuity in our sustainability path. As you recall, we are the first among many companies to announce ESG committee at the Board level to see and monitor how as a company we are performing. As you also recall, our portfolio goes into mission critical technology and also, our portfolio enables our customers in energy transition and that is also the reason where we want to walk the talk and take ourselves, targets of carbon-neutral in our own organization.

Actually it is promising, integrating renewable energy by overcoming capacity issues and reducing waste, we continue to maintain 100% fossil-free electricity consumption at all our locations, factories. Furthermore, the insights from the assistance also helped us identify the potential to reduce close to 60% CO2 emission by end of this fiscal year. As a responsible organization, we keep proactively doing our bit towards a sustainable future, with the first one being our business responsibility and sustainability report and non-financial disclosure done for the financial year ’21 and ’22 period. And this is also amongst the many companies to set ourselves in the leadership position, we have come out with this report, which we have published as part of our annual report.

Moving to the next slide, Slide number 7. I think this you know more than me and more than us, but still, I would like to touch upon a couple of on this. We are, as you all know, we are living in a very dynamic market situation. It’s started with the COVID and then some this and then the war and then the commodity prices and the port lockdowns. There were many things in terms of the pandemic. We are still not out of the woods yet, but definitely the case load has decreased from where we are a year ago, but the concern remains on the COVID situation. There has been a groundswell improvements across indexes such as Index of Industrial Production and core industries. And yes, in this quarter, India’s power demand touched an all time high of 210 Gigawatts according to analysts’ report. Electricity demand in just a few months of this year is exceeding the demand anticipated for the year.

Analysts estimate India’s GDP in this fiscal year to be in the range of 7% to 8%. While India is known to be government-driven economy, we are not isolated by the global happenings in terms of the supply chain, geopolitical and macro factors. Inflation remained high above 6% against the global double-digit inflation and projected by RBI between 6.5% to 7% for financial year ’22- ’23, and our currency further depreciated against the dollar. Just this week we touched INR80 per dollar, all-time high, the lowest in the history. The shortage of semiconductors continue to worry that industries. So all, COVID-19, war, supply-chain, semiconductors and also the three times the lockdowns were there.

Moving to the next slide, Slide number 8, which is, just want to update you on the situation of a global semiconductors and what kind of mitigation actions we are taking as a company. So you all know, but just wanted to reiterate. There are multiple factors that play leading to the present semiconductors crunch that we are facing. For one, there is spiraling growth in the demand for semiconductors with the increasing digitalization and consumption of electronics and automotive. This coupled with the lagging impact of COVID disruptions and geopolitical tensions have reduced semiconductor supplies to trickle. But we are working through the problem by reassessing certain strategies that will help us steer through the turbulent times in the long run.

One of strategies is reducing our dependency on the chips by redesigning products. Basically what I mean by redesigning the products, we will be redesigning the product where the semiconductors products are easily available or available more. And increasing our focus on product lines that do not depend heavily on semiconductors. As we have a vast portfolio, where we would to concentrate on the portfolio where the dependency on the semiconductor is less. So we are collaborating with our global teams as a global company. We also leverage global supply chain with this. So, we will in sync with the global teams and business unit operation and supply chain teams on stock sharing, at material allocations, as and when the case may be. We are proactively stocking some of the fast-moving electronic items to provide temporary hedging from the skyrocketing product prices.

While the global semiconductor manufacturers and the global supply chain organizations are continuously working towards striking the balance of demand and supply, in our view, it will take some time to reach ideal scenario. Analysts are predicting that we are yet to hit the upper limit of the demand and thus, the material costs especially for the semiconductor might further rise in the near time, owing to ongoing inflationary pressures.

Moving to the next slide, that is Slide number 9. If you look at the breakup of the order, demand in this quarter was driven by demand from across the segment, including transmission, industry, rail, metro and power quality. While the HVDC order accounted for the large chunk in the existing order, but without the HVDC order also all growth is very robust across the segments. We saw a very robust growth of orders, 100% growth compared to last quarter, same year and this also explains the sharp rise in the number of orders have been towards direct sales. A considerable portion of the orders, pertaining to renewable energy aligned with the center and state’s priorities for capacitors and reactors based on power quality solutions. Some of the large scale orders are client based, data centers and industries, such as a couple of orders for the traction from Indian Railways and private equipment manufacturers. All in all, this quarter has been one of the biggest quarter in terms of the order inflows for our company and orders came from transmission sector, industry and Railways, metro and infrastructure.

Moving to the next slide, Slide number 10. As you recall, one of our key enabler for the growth and bottom line has been Service and eExports. Let me talk on the Service and Exports. Exports were roughly…we have been talking about 20% to 25% was our target corridor. Last year we have already reached in the mid-point of the target corridor and I’m happy that in this quarter as well, export was roughly 23% of total Hitachi Energy India revenue this quarter from market like Uganda, Saudi Arabia and Azerbaijan, etc. We are in the midst of, as I told you, mid-term target 20% to 25%, growth in orders and revenue from exports market and we have comfortably stayed in this corridor for the last four quarters now. And this is also important for us, as the ongoing global supply chain constraints and the geopolitical issues are compelling global customers to look at alternative supply chain routes and partners. In our view, India has the potential to make its mark as a resilient partner offering high quality products to different markets globally.

I’m moving some Exports to Service. Our Service portfolio continues to deliver 10% growth year-over-year. We see the scope to increase the markets and we adding a new customer names to our portfolio with the service order as we have a huge installed base. Our focus is to penetrate into our installed base and add more customers in that. So, we have added new customers like PSTCL, Vardhman, ST Telemedia as part of our service offerings to these customers. And then the small steps of leveraging synergies with Hitachi Groups, we booked the first order for the Modular Switchgear Monitoring from Hitachi Japan and for services, the group company GIS is here as well. So these are a couple of examples which just shows that how our service offerings are going in line with our strategy and also going together with our new owner, that is Hitachi India, leveraging the synergy to offer our portfolio to them.

Moving to the next slide, Slide 11. Financial performance. Our long-term strategy put in place to combat the global headwinds will take us through the uncertain market conditions. Even against the ongoing tribulations, we have delivered sustained performance. The company booked orders for INR3,054.6 crore, which is up 309% year-on-year, and as I told you, without HVDC also, our orders were up high double-digit year-on-year growth. Revenue rose 24.4% year-on-year, reaching INR991.3 crore for the quarter ended June 30, 2022, supported by world-class project management, execution. The Company commissioned several substations, switchyard projects for utilities, industries, datacenters and infrastructure sectors.

In the quarter, Profit Before Tax was INR2.1 crore and Profit After Tax was INR1.3 crore, while operational EBITDA stood at INR35.7 crore. The quarter witnessed rising cost of commodity and supply chain bottlenecks, creating a loss on margins. Various measures are being adapted to reduce the impact, with a special focus on semiconductor supply. On the order backlog, we have a healthy pipeline that provides several quarters of revenue visibility. During the quarter, we received the large HVDC order that has further strengthened our order book, which stands at all-time high of INR6,777 crore. This helps us plan for the future and prepare accordingly as a company.

Moving to my last slide, Slide number 12, priorities for the financial year ’22-’23. COVID still remains a matter of concern and we are determined to ensure that we continue supporting the healthcare infrastructure for our employees and their families and our community. We continue to recover, tried and tested three strong strategies, that is protecting our people, preserving business continuity and preparing for the new norm. We will focus on the high growth segments in addition to our traditional segment. As we have talking about, high-growth segments where we have a very good value proposition to offer to our customers, is yielding very good results. We continue to focus on that. Building a sustainable operation to guide us through the short-term supply side challenges. We strive to capture the large share of the market with our world-class portfolio, developing business competencies and new business models for unique partnerships.

As you know, our strategy is to the grow high in the market. As we are taking a several leading initiatives, and that is helping us to grow higher than the market continuously for last several quarters. We just strengthened our leadership position to grow, continue to grow faster in the market, with a single focus on cash over revenue. We believe this is a possible with emphasis on growing the high growth segments, namely rail, transmission, renewables, datacenter, HVDC, 7Power Quality and automation. We will continue leveraging our growth through digital solutions, traditional service offerings and portfolio, and exports leveraging our local presence. As you know, today, we are manufacturing more than 80% of our globally manufactured portfolio, we manufacture locally here. We would like to leverage this local manufacturing not only for the domestic market, but also the export markets. We have and we’ll continue to invest in the planet, people, peace and partnerships, with our commitment to making our operations carbon-neutral and sustainable. That’s the reason we have launched our carbon-neutral strategy 2030 and we have also announced all the teams. The teams and the locations are working towards ensuring that we will meet our targets of carbon-neutral in our own operations by 2030.

We believe diversity and collaboration equates to innovation and therefore is the most peaceful and inclusive society for a sustainable development. Last year, in the whole of last year, we have added 30% more female employees in our company and this is our commitment that diversity 360 will definitely bring diversity and collaboration and is a great innovation for that. We have been working towards building the more structured network and profitable company over period.

Thank you. Ladies and gentlemen, I would now like to open the channel for your questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions]

The first question is from the line of Renjith Sivaram from Mahindra Mutual Fund. Please go ahead.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Yeah. Hi, sir. Congrats on the order win

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you, Renjith.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Yeah, if I can…if we can just throw some more light, like how much was the difference between us and the L2?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

So, thank you, Renjith. As you know, this is a tender where we have committed and it is not like in PTCL, it is not opened publicly. So we’ve not have any privy to the information of L2 and other things. So what we believe is that now we…when we have submitted our tender, so we are both technically and commercially competitive.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Okay. So it’s more of a negotiated tender or what?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

No. It is not a negotiated. It is like ICB, International Competitive Bid, where we submit our bid and then they have announced that we are the successful bidder.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Okay. And sir, how much is the value of this Adani order, because I think you haven’t mentioned that?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah. So as of now, we have, as part of a request from our customers that we don’t share the exact value as the bid details were not open publicly. So you can expect that the HVDC projects are very large projects and runs into several years.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

So what’s the timeline for this? When will it commence and when do when it will end?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

The project commencement has started and we have to complete in 38 months.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

28 months from this August 1st of this month?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yes. 38 months. We just booked at the last quarter, so 38 months from June.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

From June. Okay. Okay. Sure. And sir, just if I can ask, why the margins were a bit lower this quarter? Is it only to do with commodity prices or you feel the competitiveness has been higher or it is something to do with the product mix?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

I think, Renjith, I think there are multiple reasons in this quarter, that it was the quarter has gone, which is basically, I would put it in three to four buckets. One is that the revenue of product mix. The second one, as I talked about semiconductor shortages, because as you know, we use lot of semiconductors in grid automation and also in HVDC product lines. And the third one is supply chain disruptions leading to increase in freight and logistics costs, and also sometimes non-availability etc. And the third one is…the fourth one is exchange and commodity price fluctuations. So these are the primary four reasons due to which the margins got lower.

Operator

Thank you. The next question is from the line of Apoorva Bahadur from Investec. Please go ahead.

Apoorva Bahadur — Investec — Analyst

Okay. Yeah. Hi, sir. Thank you for the opportunity. Sir, I believe the next large order that the industry will have its eye on is Power Grid’s Leh Transmission. So, any update on that? By when can we expect the ordering? What would be the size and also do we intend to participate in the storage element of that order as well?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah. Thank you. Thank you for your question, Apoorva and yes, Leh-Kaithal is a very key project and as you know, HVDC, Hitachi Energy is pioneering in this technology more than 50% of our installed base, including the new projects around the world, including India, runs through our technology. So we are very keen. We have been working with our customers on this and we believe that the tender would come shortly. We are not in a position to tell exactly that. We don’t have any information but we know that is the next HVDC project being awarded.

As you recall, in sometimes back, we are saying, so much of renewables coming in, so much of energy transition. Our forecast has been that, every year one HV tender, HVDC tender will come up for bidding in this country for at least next three to four years. So we have the data. We are doing a lot of localization of our equipment. So, for this part, for further information for HVDC Mumbai projects, almost 80% of that particular project, will be manufactured in India local.

Apoorva Bahadur — Investec — Analyst

Okay. Great. Sir, on the storage component for the Leh project as well. So, we have a technology tie-up for it?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

We do the storage as the battery energy storage. We do that, but I do know that right now, the plan for our customers in this year, in our view is that they will go with the HVDC first and later they will come to the storage. So, but in any case, we have the technology.

Apoorva Bahadur — Investec — Analyst

Fair enough, sir. Very useful. Sir, also….

Operator

Sorry to interrupt Mr. Bahadur. Sir, may we request that you return to the question queue Thank you. We’ll move onto the next question that is from the line of Amit Mahawar from Edelweiss. Please go ahead.

Amit Mahawar — Edelweiss Securities — Analyst

Hi. Congratulations for the large project win. Sir, I have…first question is basically on, in this quarter, how much in the ForEx we have and if you can comment on, also the royalty and technology fees, generally is it higher than the last year average as a percentage of sales or it’s basically…? So some color on that. And generally on profitability metrics because Q1 was a very sharp impact and this is despite your gross margins which are relatively stable. So it seems the overhead basically on multiple points is impacting the profitability. So if you can comment on the profitability and the details, sir?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you, Amit. I will ask our CFO, Ajay to answer your first part of it and then I’ll come back and comment on the processes.

Ajay Singh — Chief Financial Officer

Thank you. Thank you for the question. The first part, if I understand correctly was more on the profitability side and the royalty fee side. So let me first answer the royalty. So, first, let me take on the royalty fees. So royalty fees is, we are already around the 4%. So it is a same level. So, we do not see any increase compared to the earlier part, that is one. Coming to the ForEx, for this particular quarter, yes, we have been impacted by the exchange and commodity price fluctuation, and that is basically, if I will talk about roughly INR13 crores is total value that I can attribute to for this particular quarter.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah. So, just to add to our CFO, royalty fees is extremely important, because you know we are a global company. The whole energy landscape is changing so much and it needs to be, all of our portfolio need to be updated once and on top of that we need to bring a new portfolio there. So it’s extremely important that this is like our investment for getting the new technology, new products, new offerings, etc. in this changing landscape of the energy transmission. That is super important. And as I commented that we have basically the whole ecosystem is affected with supply chain constraints. The supply-chain constrains include some of the semiconductors, not semiconductor issues. If you take the semiconductor issues, now this is the world. Initially it is a world that prices were higher. Later on the delivery issues came out. Today, now it’s not availability. So from high prices, non-availability of not committing the deliveries to non-availability of semiconductors.

So I just…you have seen my slide also, how the global semiconductor industry is facing in that. So that is the reality. So far, we were able to manage all of our safety stocks. But once the safety stocks, we have exhausted those safety stocks and inflows were actually reducing. So we have had several actions in place to get this particular challenge being faced here. So while we are also engaged with CEOs, CHO levels of these companies at the global level. We are also working with our other companies who have sharing of those things and we are also redesigning some of our products, whereas the semiconductor… availability of semiconductor is easier.

So all these actions could not happen overnight. For sure, it will take some time and those are the actions at least from a company standpoint we are taking.

Amit Mahawar — Edelweiss Securities — Analyst

Thanks, Venu. The second and last question is on basically, do you think High-Speed Rail ordering now that EPC is largely going to be over in the next couple of months, one can assume that high-speed rail equipment ordering for you will happen in the next 12 to 14 months? And also on the upcoming tenders for Vande Bharat and other railway tenders, generally your assessment of the offerings, two, three large equipment specs that Hitachi will benefit from? Thank you.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

So we are talking about, we talked about HVDC. We booked the HVDC in the last quarter. So Similarly the high-speed rail which is funded by the Japanese government is definitely in our radar. It is our targeted opportunity and we have been working on that. And our estimate or it is our assessment is that the tendering will go by the first quarter of next year, the last quarter of this financial year. So that is very, very clearly in our radar and we are working, because we have a lot of our portfolio which is locally manufactured, can go into this particular segment. So, similarly, there are many other train projects for example, Train 8, Train 18 is one such project, Vande Mataram trains. All these things we are working very closely with the train, the manufacturers and we have a huge portfolio of this going into that, as and when it comes to that. We will inform you. But this is the most targeted segments for us as a company.

Amit Mahawar — Edelweiss Securities — Analyst

Okay. Thanks, Venu and good luck.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you.

Operator

Thank you. We will move to the next question that is from the line of Varun Basrur from Julius Baer Wealth Advisors. Please go ahead.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

Hello. Good evening, sir. I hope I’m audible?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yes. Yes. Please go ahead.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

Yeah, hi. So my question is just a continuation of what the previous participant asked. On the other expenses, was the ForEx impact INR30 crore?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

It is INR13 crore.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

INR13 crore. And if you can just sort of, if you could…are there any other unusual or one-off expenses which you can quantify in the current quarter?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

So I think I’ll just add to that. We don’t have any other one-off things. I talked you about basically four things, revenue of product mix, semiconductor shortage and supply chain disruptions which has also increased our fleet and logistic costs and finally the exchange commodity price fluctuations.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

Sure. Sure. And sir, regarding our order book, what percentage of our contracts allow us to pass through any cost escalations that we encounter? Hello?

Operator

[Technical Issues]

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Sorry, Mr. Varun. Please go ahead and ask. The line got disconnected.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

Yeah. Sure, sir. Sir, so, my question was, what percentage of our contracts allow us to pass through cost escalations? And one more question if I may is, how would our EBITDA margins look in this financial year?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah. So let me give you…let me answer the first one that over about 65 [Phonetic]% of our portfolio has escalations costs. But you need to understand that just because of the escalation clause, there is more formula that’s something that is there, that what we are facing right now is unprecedented. For example, we have frieght cost. Those kind of costs are not covered in that. It is unusually very high. For example overseas freight is huge. It is not in percentage of increase but it is in terms of x. So those kind of things are very, very difficult to quantify and do that.

So that’s the one and we will not be giving you any guidance on the EBITDA margin for the further quarter. What I can say is that, I can give a little bit color to you that we have been consistently saying that we have a clear strategy to grow as in the market. That growth you have already seen. We have a huge order backlog, INR6, 777 crore, with the fixed cost of our thing. When the revenue comes, then naturally at a margin accretion over a period of time. And then we also have a strategy on the exports. We have a strategy and our service offering, digital offering. All this would get us into a double-digit EBITDA margin by end of 2025 financial year. So last year, you see we are very close to 9% of EBITDA margin.

Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst

All right, sir. Thank you.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Sure.

Operator

Thank you. We’ll move onto the next question that is from the line of Manish Dhariwal from Fiducia Capital Advisors Private Limited. Please go ahead.

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Yeah. Very good afternoon and thank you so much for this opportunity. My compliments to the team for securing a very good traction on the order inflow.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you.

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Now, given the fact that we are living in turbulent times, higher orders also bring with them some risks, as we have seen this quarter’s profitability. So I request the management to give us a flavor of what kind of profitability metrics can be expected and what kind of escalation clauses that have been put, so that continuing volatility in the exchange rates, in the supply disruptions etc. do not cause further impact on the profitability?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Well, thank you, Manish. Appreciate very much. As you know is our strategy, not this quarter, but last several quarters, we have taken that action we not accept any projects with any escalation clause or any product, which does not have escalation clause, or any order which go into a long gestation period do not have an escalation clause. So with that, all the orders, whatever we are securing, we have a clearly the escalation clause is built in and and also, there are several post merger also we have kept I part of some of the orders. Semiconductors, not availability also in some contracts, we have brought in as part of the force majeure. which is there to protect our margin and our contract has that. So as a company, we have seen this coming in. It’s not that it’s a surprise but in the last quarter that impact is the surprise, but otherwise, we know these challenges and we will be give our…we are taking all the actions to take those challenges there.

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Right, sir. Right. Sir, also, what…if we…now some of the customers, they are like very highly leveraged and what kind of debtor cycle that we have on these contracts, meaning the payment terms that we have agreed on that? Meaning is it, are we taking any risk on that/

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

No. Sorry, it was not clear. Can you please repeat once again?

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Sir, the payment ability of the customers…

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah.

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

It’s is also to be, it’s also a risk. So given the fact that the leverage, the position of some of the customers is like very high, so how are our payment terms covering those kind of challenges that may happen?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Right, right. I think again, yeah, as you know, this is always a risk here and that’s the reason we also have a clear strategy that we also negotiate the payment terms, which is like for example, like a large orders, we have a good level of advance payments and the rest of the things, we’ve covered that confirmed that loss related to that. So we have been doing this and so far we are being practical. There could be some percentage of portfolio of orders that may have a direct setting, but by and large, most of our our orders come in with a clear and committed payment terms with that.

Manish Dhariwal — Fiducia Capital Advisors Private Limited — Analyst

Wonderful, sir. Sir, all the very best and thank you for this opportunity once again.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you.

Operator

Thank you. The next question is from the line of Viraj Mithani from Jupiter. Please go ahead.

Viraj Mithani — Jupiter Financial Services — Analyst

Good evening, sir. Am I audible to you?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yes, Mr. Viraj. Go ahead.

Viraj Mithani — Jupiter Financial Services — Analyst

Sir, my question is, the continuation of the previous participant. So, listening to your comment, is it fair to say that we have clearly learned about in this quarter. So lot of things have been taken care of, going forward from here in terms of escalation clauses, commodity pricing?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Ajay, please take this.

Ajay Singh — Chief Financial Officer

Yeah. What I was telling you in regards is that certain thing, even though we have learnt for example, semiconductors, we have learnt. It’s not possible for us to overcome the challenge if the supplies are not coming in, right. So while we are taking lot of actions to redesign the things, that will take time. That will not happen overnight in that. So when we come to the semiconductors, you have also probably seen this. The best estimate is that, it will definitely improve, but to normalize it anywhere, it will go into the 2023 or so. It will improve from quarter-to-quarter, quarter-to-quarter, but to really to normalize the level where we used to see and that is not going to be before or at least in the year 2023. So…

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

I mean think I understand is the case, what we have done in installation clause, the escalation clauses have been built in that, for example, the copper, the GRV roll, oil in the transformer and steel used in that, but the escalation that comes to the freight costs, when it comes to our overseas because we do lot of exports now, as a strategy we have built in exports.

Viraj Mithani — Jupiter Financial Services — Analyst

Correct.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

So those things will take more to stabilize.

Viraj Mithani — Jupiter Financial Services — Analyst

Okay. Sir, my next question is the orders which you have received are margin accretive or we have been sacrificing some margins to penetrate the market? Like if you can give us some sense on that.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

As you know, and because of the HVDC, we are pioneering in the technology side. We have, we never take any order to sacrifice margins to get an order. We don’t want to book an order for the sake of booking an order. So what it is for us, as these projects, we always look at risk-reward portfolio. What is the risk and what is the reward it will give? And once it fits into our strategy, then only we’ll go for it. So that is our clear strategy, we have it and we adopt for every project, we look at it, including this.

Viraj Mithani — Jupiter Financial Services — Analyst

And sir, my last question is, we supply to the government utilities. So do we take into account the debtor cycle? Sometimes government of state did in particular take long time to pay. We take our precautions when we provide to them whatever service or products we provide to them?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

No. Viraj, can you please repeat if you don’t mind, because the line is not very good?

Viraj Mithani — Jupiter Financial Services — Analyst

We supply lot of utility companies, the power companies, which is probably the central government, state government. So when we supply to them or offer services to them, do we take care of the thing that the payment terms are very clear, so that our payments don’t get postponed, which is the case with the government?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Absolutely. Absolutely. We do not…if in government we see any risks, we don’t even go for that particular project at all. In some electricity boards, where we see a huge amount of delay, then we always take care that the decision is not bad. But most of our contracts which are with the central utilities like PGCL, or Indian Railways like CLW, DLW, there we see our payments are fairly accurate as per the payment schedule.

Viraj Mithani — Jupiter Financial Services — Analyst

Okay, sir. That’s it from my side, and all the best, sir.

Operator

Thank you. The next question is from the line of Vishal Biraia from Max Life Insurance. Please go ahead.

Vishal Biraia — Max Life Insurance Company Limited — Analyst

Thank you. So something on the export front. You were saying you had a target to increase it to 25% in a few years. So where are we on that track? Have we seen incremental traction because of the chaos that we are facing?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Vishal, your line is very feeble. Can you please speak a little louder?

Vishal Biraia — Max Life Insurance Company Limited — Analyst

Yeah. So, my question was pertaining to Europe, to exports mainly. Have we…we had set a target of 75% exports of revenue in a few years. So where are we on that? By when do you plan to achieve it?

And the other is, are we seeing any near-term traction on exports, because of the chaos that we’re seeing in Europe, because of the energy crisis and other aspects?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yeah, yeah. Yeah. I think when it comes to the exports, I think we said, we are ourselves set a mid-term target of between 20% to 25% and last year we were in the range of 23% of our revenue and our orders came from exports last year. Our orders came from exports last year. And this quarter also, I was telling you, that we reached the exports of 23%. So, we have two types of strategy export. One is the directly we export some of our products. We have a global fleet of factories. Some of the factories, we have a global factory like our circuit breaker and [Indecipherable] which is used everywhere around the world. And then second strategy is that we also have a global fleet of factories. They will sell the components to some of our factories. And the third one is the direct sales to customers like in Africa, or in Middle East and also South America, etc. And we have a very clear strategy to bring it to the 25% and we believe that we already reached the mid corridor of our thing, even though we kept three at target, but we continue to grow on the all of this.

Vishal Biraia — Max Life Insurance Company Limited — Analyst

Okay. Have you seen any near-term delta in exports or inquiries from Europe or from the feeder factories because of the chaos in Europe where the production has taken a hit?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Yes. Yes. There is. There is very…I don’t want to say chaos, but there is…we are going as per our strategy. We have a very clear strategy to bring some of the products to the local manufacturing, and that’s the reason we have been expanding. We have been also telling you that we have a clear capex to support the exports. We have inaugurated one factory last quarter and then we also have several factories lined up as part of that thing. We also…in one of our conference call, we have also told what are the factories we are investing and ex panding and coming out with a new greenfield projects.

Vishal Biraia — Max Life Insurance Company Limited — Analyst

Thank you very much.

Operator

Thank you. The next question is from the line of Kunal from B&K Securities. Please go ahead.

Kunal Sheth — B&K Securities Limited — Analyst

Yeah. Hi, sir. Thank you for the opportunity. Sir, I just wanted to quickly get your view on, so when I look at some of your end markets like datacenters, railways, renewables, they all are quite high growth markets. So I just wanted to get your view on what can be the medium-term or long-term growth number that one should work within each of these sectors, like utilities, industries, and transportation as you classified, is it right to assume that all of this are mid-teens kind of a growth sectors or would like hear your views on the same, sir?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

So, Kunal, thank you for your question. If you really look at Indian power sector, really going for a huge transformation, right. The growth in the energy or forward demand is phenomenal. We have already reached the 200 Gigawatt. It means lot of renewables is coming in and it needs a lot of technology support to the grid and the rest of industry associated with that. So our growth sector is definitely a transmission and the renewable, right. So this will be higher growth. Everything will grow but these are the growth, they have growth more than the normal market average. So actually, this is a transformation for example, HVDC is one example in that. Previously, one HVDC project come three to four years. Now we expect, at least every year one HVDC project or every one and half year, one HVDC project. So that is a kind of developments that are taking place, and that’s the reason we also localizing lot of equipment which we use to bring it from outside of, from our overseas company. So we are manufacturing everything in India. So that’s one aspect of it.

And second thing is, we see industrial capex, we are seeing industrial capex, lot of industrial capex, we have already announced it. Maybe due to the current, the macro situation, there could be some delay in decision making, but we are seeing our pipeline is very robust at this point. Our pipeline in terms of transmission, in terms of variable, in terms of the industry capex, whether it is the steel and cement and aluminum, we are really going for expansions and also, the data centers. So they are the high-growth segment. They are growing higher than the market average, and we have a clear strategy to grow above the market. And that’s the reason we have seen our orders in the last quarter that reflects…reflecting our strategy.

Kunal Sheth — B&K Securities Limited — Analyst

Sure sir. This was really helpful. Just a quick follow-up on that one, sir. You mentioned about localization. So, currently what would be the level of of localization across the company?

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

I would call… it depends again product to product. It is like that what we’re saying is that, globally, whatever we are manufacturing, if have manufacturing 100% of our portfolio, 80% of that, we are manufacturing locally.

Kunal Sheth — B&K Securities Limited — Analyst

Okay.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Everything is available locally in line with Make in India, bringing the new technology. Last quarter, we announced the opening of the new factory, which is a resin cast, resin integrated polymer pushing, which is the first time 400 KV that kind of questions what manufactured here. This is a very high technology intensive products which we got this year and we are manufacturing. But this is just a layer of it.

Kunal Sheth — B&K Securities Limited — Analyst

Sure, sir. Great, sir. Thank you so much and best of luck for the future.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraint, that was our last question. I now hand the conference over to Mr. N Venu for his closing comments.

Venu Nuguri — Venu Nuguri Managing Director and Chief Executive Officer, India and South Asia.

Thank you, ladies and gentlemen. Thank you for your time and listening to our call and appreciate very much. Lack of time, I think, we could not answer any more questions, but please reach out to us anytime. And we are happy to answer your question anytime. Meanwhile, please take care of yourselves, your families and your colleagues and just stay safe and stay strong. Thank you.

Operator

[Operator Closing Remarks]

Duration: ?? minutes