Salzer Electronics Limited (SALZERELEC) Q2 FY23 Earnings Concall Transcript

Salzer Electronics Limited (NSE:SALZERELEC) Q2 FY23 Earnings Concall dated Aug. 10, 2022

Corporate Participants:

Rajesh Doraiswamy — Joint Managing Director

Analysts:

Vijay Sarda — DL Finance — Analyst

Zaki Nasser — — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Senthilkumar — Joindre Capital Services — Analyst

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Archit Singhal — Nearc Investments — Analyst

Panjul Agrawal — Green Portfolio — Analyst

Anuj Jain — Green Portfolio — Analyst

Neha Jain — Individual Investor — Analyst

Rohit — Progressive Shares — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and a very warm welcome to the Q1 FY ’23 Earnings Conference Call of Salzer Electronics Limited. This conference call may contain certain forward-looking statements about the Company, which are based on the beliefs, opinions and expectations of the Company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.

[Operator Instructions]. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions].

I’m now glad to hand the conference over to Mr. Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics Limited. Thank you, and over to you, sir.

Rajesh Doraiswamy — Joint Managing Director

Thank you very much. Good morning, everyone, and thank you all for joining us today to discuss the unaudited financial results of the first quarter ending 30th June, 2022. It’s always a pleasure to speak to you and, once again, to meet you in this quarter, I’m very happy. I hope you all are safe and well. I have with me Mr. Baskarasubramanian, Director, Corporate Affairs and Company Secretary; Mr. Murugesh, Joint Company Secretary of our Company; and Bridge IR, our Investor Relations team.

We have shared our results update presentation, and I hope you all must have received it and gone through the same. Before we discuss the financial performance of the first quarter, I would like to share some key developments during this quarter and the market scenario with you.

On the market scenario, the war in Ukraine in all its dimensions is producing alarming and cascading effects to a world that is still recovering from COVID. Serious damages is being done to the global economy at large. The conflict and the associated uncertainties are weighing heavily on the confidence of business and consumers across the world. Trade disruptions are leading to new shortages of materials and inputs. Surging energy and commodity prices are reducing the demand and holding back production at — in various sectors.

How the economy develops will crucially depend on how this conflict evolves on the impact of the current sanctions and on possible future measures. At the same time, economic activity is still being supported by the reopening of industries after the crisis.

Inflation has increased significantly and looks like it will remain high over the coming months, mainly because of the sharp price in energy cost across the world. Inflation pressures have intensified across many sectors. Soaring food and fuel prices is affecting developing countries, which is a cause of great concern. Countries already under severe pressure due to the cost of pandemic are bound to see disruptions in trade, deficits widen and investments are going to contract. Additionally, significant increase in oil and gas prices can shift investments back into fossil fuel-based energy generation which risks reversing the trend towards renewables at a time of acute climate crisis.

Coming now to some of the key developments, business and financial performance of our Company. I’m happy to say that the new fiscal year has begun on a strong note with Q1 FY ’23 performance being in line with our expectations. We are witnessing high demand both for our switchgear business in domestic as well as export markets and for our Building Electrical Products division in the domestic market.

We’re also seeing strong demand particularly for our new product, Three Phase Dry Type transformers, particularly from renewable energy sector. We received new orders from various new customers from renewable power sector, which led to doubling of revenue of this product year-on-year. As far as the other new businesses, data cables is concerned, we have seen strong demand across customers, which helped in getting more orders for LAN cables. This business also is witnessing strong growth as expected in the current year.

We recently received two patents, one for integrated cam operated rotary switches, which is a legacy product contributing substantially to top line and the bottom line, and another for motor protection circuit breaker. Such developments help protect our individual property and boost our R&D and product development efforts.

On a year-on-year basis, higher raw material prices, higher freight costs and sales promotion costs have offset our price hikes and impacted margins to some extent. However, raw material prices have begun to stabilize, and we are seeing the benefits of our price hike in the form of better margins on a quarter-on-quarter basis.

Export demand has been stable and positive for the quarter, and we expect that it will be stable in the near future. During the quarter, the exports have grown 33% year-on-year and 4% quarter-on-quarter. We hope the uncertainties due to the war doesn’t affect the business much in the near future.

During the past year, we also forayed into electric vehicles vertical in line with one of our growth strategies. However, in these two joint ventures that we have done, the product development is still underway, and we are still overcoming initial technical teething troubles. We expect that the product to be available for sales by end of this fiscal.

Now moving on to our financials. During the first quarter, our revenues increased by 56.44% year-on-year to INR233.06 crore from INR148.98 crore in the previous corresponding period. Growth was on account of higher sales of all our three business divisions.

EBITDA, excluding other income, was INR19.62 crore in Q1 FY ’23 as against INR14.8 crore in Q1 FY ’22, which is a year-on-year growth of 32.53% on account of higher sales volumes and increase in product prices. The standalone EBITDA margin for the quarter stood at 8.42%, which is a decline of 152 basis points year-on-year, mainly due to the higher raw material prices, vis-a-vis Q1 of previous year, coupled with higher freight and sales promotional costs.

However, EBITDA margin has improved on a quarter-on-quarter basis by 277 basis points to 8.42% from 5.65% in the immediate preceding quarter. Standalone PAT was at INR8.78 crore in Q1 FY ’23 as against INR3.81 crore in Q1 FY ’22, which is a year-on-year growth of 130% and also a 129% growth quarter-on-quarter. PAT margin for the quarter stood at 3.77% as against 2.55% in Q1 FY ’22. This is an increase of 122 basis points and a 209 basis point increase over Q4 FY ’22.

Moving on to the breakup of revenues as per the business division. The Industrial Switchgear division contributed 48.4% to the total revenues in this quarter. The Switchgear division’s EBITDA margin stood at 10.87% in Q1 FY ’23 as against 12.7% in Q1 FY ’22, which is a decline of 180 basis points. However, it is higher by 5.6% on a quarter-on-quarter basis.

The Wire & Cable division contributed 43.8% to our revenues in this quarter. This is an increase of 50% year-on-year in this division during this quarter. This division’s EBITDA margin has been steady at 6.75% in Q1 FY ’23 as against 8.5% in Q1 FY ’22 and 6.6% in Q4 FY ’22. The Building Electrical Products division has contributed 7.7% revenue in this quarter. At INR17.92 crore for Q1 FY ’23, this division has grown by 138% year-on-year and 8% quarter-on-quarter. The EBITDA margin for this division stood at 2.5%.

On the export front, we are seeing steady growth, especially from Europe and the Asian countries. Exports to Americas also grew at 56% year-on-year in this quarter, while exports to Europe grew 73% year-on-year in this quarter. For this quarter, the export share of the revenue was at 21%. Growth in exports was 33% year-on-year and 4% quarter-on-quarter.

On the balance sheet side, in this quarter, we have maintained the working capital debt at INR235 crore, which is the same level as that of March 2022. We have been able to reduce the net working capital days to close to 142 days as compared to 166 days in March 2022. We have also reduced the inventory days from 104 days to 92 days in this quarter. We are continuing to work to reducing it further and our target to reach 80 days of inventory should be possible in this financial year.

All our new businesses like three-phase transformers, wire harness and data cables are witnessing high growth, coupled with all our legacy products, including the rotary switches, toroidal transformers and load break switches. The entire basket of switchgear products are seeing good demand across all customer sectors. Hence, going ahead, we expect to maintain our growth trajectory with our strong product offerings and brand position in the market.

Though there are a lot of uncertainties and things that may happen, which is not under our control, we are optimistic about the overall business performance in this financial year. On behalf of the Company, I once again thank all the stakeholders of Salzer Electronics for their continued support and faith in our Company. I wish all of you good health.

Thank you. This is all from our side. I’d like to take — we can now take questions.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Vijay Sarda [Phonetic] from DL Finance [Phonetic]. Please go ahead.

Vijay Sarda — DL Finance — Analyst

Yeah. Congratulation, Rajesh, for a good set of number. Rajesh, my questions are two-pronged. One is in terms of the growth, how you see the growth momentum going forward with these exports doing good and now overall industrial activity on the ground also improved. So how do you see the growth going forward for the next two years for the Company?

And second, coming to the margin, what we have seen is good amount of volatality on account of the wire division on account of increase in copper prices. So now the copper prices have corrected almost by 30%, 40% and what all current inventory hit and all that we have to take, we’ve already done that. So do we see again margin inching back to our previous high of around 10% to 12% band in next one or two years?

Rajesh Doraiswamy — Joint Managing Director

On the growth, at least for this year, we see strong demand definitely for the Indian market at least. I’m very optimistic on the Indian market for this year. We think that growth will continue, and we expect that similar performance in the next three quarters.

However, the export market, as of now, looks stable, but we don’t know how the markets will turn around, depending on the uncertainties that we are facing due to the inflation and the war and a lot of other things that may play out. So we will have to wait and see how the export markets will work.

But as of now, things look stable on the export front. But as a Company, I think we are confident to continue this similar performance in the rest of the quarter this year. Now the margins, yes, I think the margins have been a little volatile. Mainly in FY ’21-’22, we have faced severe input price fluctuations, materials going up to the extent of 100%, 80%, 50%. Though we have done price increases, we were not able to offset the entire thing in the financial year, and that is why we saw a drop in EBITDA percentages over the last three quarters.

However, we are seeing the trend is reversing right now because of two things. One, the input material prices also is stabilizing. Secondly, whatever price increase [Speech Overlap]. Yes, and that also is showing the impact. So I’m sure, I think from Q2, Q3 onwards, we will be inching back to 10% — above 10% EBITDA levels for sure in this financial year itself.

Vijay Sarda — DL Finance — Analyst

Okay. And last a question in terms of this EV thing that we are doing. Have we come up with some products on the charging solution and all that? Have you done some inroad or progress there in terms of that EV ecosystem?

Rajesh Doraiswamy — Joint Managing Director

Yes, initial products have been developed, assembled. We have tested the product. They’re all fine. But however, to continue to do mass production, I think we still need a lot of technical inputs, which we are working on it with our collaborator.

Vijay Sarda — DL Finance — Analyst

Okay. So currently, we are targeting to cater to this all charging station and all that or domestic — basically domestic markets — household markets for charging? Or we are looking at commercial…

Rajesh Doraiswamy — Joint Managing Director

Yeah. We’re targeting both. Both the domestic market, that will be the slow chargers.

Vijay Sarda — DL Finance — Analyst

Okay.

Rajesh Doraiswamy — Joint Managing Director

And for service providers like Tata Power and companies like that, we will be trying to target them for the…[Speech Overlap]

Vijay Sarda — DL Finance — Analyst

Fast charger?

Rajesh Doraiswamy — Joint Managing Director

Yeah.

Vijay Sarda — DL Finance — Analyst

Okay. Okay, Rajesh. Thanks a lot and all the very best for next quarter. Thank you, Rajesh. Yeah.

Operator

Thank you. The next question is from the line of Zaki Nasser from Investor [Phonetic]. Please go ahead.

Zaki Nasser — — Analyst

Can you hear me?

Rajesh Doraiswamy — Joint Managing Director

Yes, sir.

Zaki Nasser — — Analyst

Yes, Mr. Rajesh, congrats. Good morning, sir. Congrats on a wonderful set of numbers. I mean, I think Salzer has found its feet at last. Sir, as you already shared that these kind of healthy numbers will continue for the rest of the year. And sir, you are doing some — as I understand, you are doing some high-tech electrical stuff. But still, sir, our wire division contributes close to 50% — I think 47%, 48%. Sir, do you see any time in the future, next three years down the line, whereby your other products will be a larger portion of the whole cake in Salzer?

Rajesh Doraiswamy — Joint Managing Director

Look, I think if we really go back a couple of years, we will see that the Wire and Cable division was contributing more than 50% — 50%, 52%, 53% certain quarter, it was also at 55%. So we have seen that the other business that is the Industrial Switchgear business has grown substantially over the last, I would say, couple of years. And today, the Switchgear business is close to around 50% contribution and Wire and Cable is at around 43%.

So going forward, I feel that the Switchgear division will grow faster than the Wire and Cable division, and we will continue to see a 50:40 ratio because our Building segment business also is growing significantly compared to what it was a couple of years ago where it was contributing 4% to 5%, whereas now it is close to around 7% to 8% contribution.

So we expect that 50% from the Switchgear, 10% from the Building Electricals and 40% from copper. I think that is going to be the share going forward, at least for the next couple of years.

Zaki Nasser — — Analyst

But would you classify your wire harnesses in the Wire division or your Building Products division, sir?

Rajesh Doraiswamy — Joint Managing Director

No. Wire harnesses in the Building — the Switchgear division.

Zaki Nasser — — Analyst

It would be in the Switchgear division?

Rajesh Doraiswamy — Joint Managing Director

Yeah.

Zaki Nasser — — Analyst

Okay. So going forward, you would see 40-10-50 kind of stuff?

Rajesh Doraiswamy — Joint Managing Director

Correct.

Zaki Nasser — — Analyst

But this would be a long-term thing? Or would you want to reduce your Wire division to 30%, 35% and take up the Building Products division kind of stuff, sir? Because that adds great value to…[Speech Overlap]

Rajesh Doraiswamy — Joint Managing Director

We’re not purposly reducing the Wire business — Wire and Cable business. But we see that the Switchgear business is growing at a faster pace. So that gives that more revenue share in the overall pie.

Zaki Nasser — — Analyst

Okay. Fantastic, sir, and best of luck for the finance — And I hope — I think with the commentary, it looks as if you will cross the magic figure of INR1,000 crores this year. Thank you sir.

Rajesh Doraiswamy — Joint Managing Director

Hopefully, with all your good wishes.

Zaki Nasser — — Analyst

Thank you, Mr. Rajesh.

Operator

Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital — Analyst

Yeah. Thank you very much sir for the opportunity. Sir, I just wanted to understand, now you did mention that our input prices have got stabilized and even the price hikes have been done, right? So that’s the reason we are looking forward for EBITDA margin inching back to maybe around 10% in next one to two quarters, right?

Rajesh Doraiswamy — Joint Managing Director

Yeah.

Deepak Poddar — Sapphire Capital — Analyst

But I just wanted to understand in terms of potential, I mean, in terms of business that we are into, so what’s the potential, maybe not this year, but in terms of EBITDA margin potential, can our business have 11%, 12% kind of a EBITDA margin? Is that something that with the higher scale or the growth that we are seeing, our business has that potential to reach? Or what would be that potential be?

Rajesh Doraiswamy — Joint Managing Director

Again, I’ll say that if we go back a couple of years, just pre-COVID our Switchgear — Industrial Switchgear EBITDA margin was close to around 15%. The Wire and Cable was between 7% and 8%. That’s the margin that we were looking at, whereas it has — both have dropped down to around 11% and 7% as of now. So we still have a potential to increase at least 3 percentage on the EBITDA levels going forward, if not this year, I think definitely next financial year.

Deepak Poddar — Sapphire Capital — Analyst

3% EBITDA margin improvement may be FY ’24, right? And the base we are taking is the current quarter’s EBITDA margin at 8.5%.

Rajesh Doraiswamy — Joint Managing Director

Correct. I’m saying that we will be back to around 11.0%, 11.5% EBITDA margin.

Deepak Poddar — Sapphire Capital — Analyst

11.0%, 11.5% EBITDA. Fair enough.

Rajesh Doraiswamy — Joint Managing Director

Yeah. That is what we were making pre-COVID. I think because of the disruptions, I think we have dropped down, and I’m sure that we will get back to that level.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. I understood. Yeah. That’s it from my side sir. All the very best. Thank you.

Rajesh Doraiswamy — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Senthilkumar from Joindre Capital Services. Please go ahead.

Senthilkumar — Joindre Capital Services — Analyst

Good morning, sir. Thanks for the opportunity. I just want to understand the debtor days for domestic and export businesses. Now how we fared against the last two quarter on Q-o-Q basis as well as YOY basis?

Rajesh Doraiswamy — Joint Managing Director

Can you repeat the question, please?

Senthilkumar — Joindre Capital Services — Analyst

Debtor days for export and domestic businesses, sir.

Rajesh Doraiswamy — Joint Managing Director

You want the break up?

Senthilkumar — Joindre Capital Services — Analyst

Yeah.

Rajesh Doraiswamy — Joint Managing Director

Okay. This quarter, I mentioned that we are at 21% exports. So it’s close to INR49 crores of exports we have done in this quarter.

Senthilkumar — Joindre Capital Services — Analyst

No. I’m asking debtor days for the domestic business as well as export business.

Rajesh Doraiswamy — Joint Managing Director

I couldn’t understand. Can the moderator repeat the question?

Operator

Senthil, actually your voice is breaking when you speak.

Senthilkumar — Joindre Capital Services — Analyst

Is it clear now?

Rajesh Doraiswamy — Joint Managing Director

Yeah. You can repeat the question, let me see.

Senthilkumar — Joindre Capital Services — Analyst

I just want to know what is the receivable days for debt — domestic business and export business.

Rajesh Doraiswamy — Joint Managing Director

Recievable days? Okay. Okay. Our average receivable day as of today is around 85 days. I don’t have a breakup between export and local, but I’m sure that this will be very similar for both exports as well as domestic. Exports may be less than 70 days and domestic may be more than 90 days. On an average, we are at around 85 days receivables today.

Senthilkumar — Joindre Capital Services — Analyst

So what may be the same for the March 2023, sir, FY ’23 — at the end of FY ’23?

Rajesh Doraiswamy — Joint Managing Director

I think the receivable days will continue to remain between 80 and 90 days.

Senthilkumar — Joindre Capital Services — Analyst

Okay, okay sir. And another question, what is the net debt as on June 2022, sir?

Rajesh Doraiswamy — Joint Managing Director

Sorry, June 2022?

Senthilkumar — Joindre Capital Services — Analyst

Net debt.

Rajesh Doraiswamy — Joint Managing Director

Net debt? Last year?

Senthilkumar — Joindre Capital Services — Analyst

Yeah, end of, Q1 FY ’23.

Rajesh Doraiswamy — Joint Managing Director

End of this financial year?

Senthilkumar — Joindre Capital Services — Analyst

Yes, yes, this quarter — end of this quarter, June 2022.

Rajesh Doraiswamy — Joint Managing Director

As of now, I said we are at around INR235 crores of working capital debt. My opinion, I think we will either maintain this or it will go up by another INR10 crores at the max.

Senthilkumar — Joindre Capital Services — Analyst

Okay, by FY ’23 end, right?

Rajesh Doraiswamy — Joint Managing Director

Yeah.

Senthilkumar — Joindre Capital Services — Analyst

Okay, thanks sir. Thanks. That’s it from this side.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Akshay Kothari from Envision Capital. Please go ahead.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Yeah. Thanks for the opportunity. Sir, just wanted to understand that industrial automation segment is gaining a huge traction. So are we planning to do something on those lines?

Rajesh Doraiswamy — Joint Managing Director

Yes, I think the products that we make under the Industrial Switchgear segment, we produce more than 15 different products. They get consumed in the automation field to some extent. So we are there already, and we continue to develop new verticals, new products to the requirements of the OEMs and customers. So we are capturing the industrial growth of the country.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

So our customers would be like ABB?

Rajesh Doraiswamy — Joint Managing Director

Yes.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And sir, on the…[Speech Overlap]

Rajesh Doraiswamy — Joint Managing Director

ABB, L&T Automation, Siemens, Honeywell.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. So the — just wanted to understand, so we are not planning to do some forward integration on those lines because that would be a higher margin business as such or the competition is…[Speech Overlap]

Rajesh Doraiswamy — Joint Managing Director

No, we are not really looking at that right now.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And in Wires and Cables and Switchgears, mainly our customers would be B2B, right?

Rajesh Doraiswamy — Joint Managing Director

Wires and Cables, it’s mostly B2B right now, yes.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And Switchgears also B2B.

Rajesh Doraiswamy — Joint Managing Director

Switchgears is also B2B, yes. Only the Building Electrical Products is B2C.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And sir, on the debt, your plans to reduce debt, or how do you see going forward, whether the debt will increase due to working capital requirements? And any guidance on that part?

Rajesh Doraiswamy — Joint Managing Director

As I just mentioned, I think we are at around INR235 crore debt in March, and we continue to maintain that. And hopefully, this full year, we’ll be at this level. If the growth is going to be much higher, then maybe this can go up by around INR10 crores in my expectation. But it will overall remain at this level.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. Okay. Thanks a lot and all the best.

Rajesh Doraiswamy — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Archit Singhal from Nearc Investments. Please go ahead.

Archit Singhal — Nearc Investments — Analyst

Yeah. Hi, thanks for taking my question. So I have three questions, sir. Firstly, if you can mention what is the capacity utilization currently? And what will be the capex required to further enhance the size of the business beyond FY ’23?

Rajesh Doraiswamy — Joint Managing Director

I think we are not planning any major capex for capacity expansion as of now. I think with the current capacity, we’ll be able to go for FY — until FY ’24. So that means that we expect that we will be able to go up to INR1,200 crores, INR1,300 crores of sales with the current capacity and with some balancing and maintenance capex. So we don’t plan any major capex in these two years, yeah.

Archit Singhal — Nearc Investments — Analyst

Okay. And anything on the outlook for FY ’24? I don’t want any numbers here, basically, I’m just trying to understand whether FY ’23 saw some pent-up demand which can slow down in FY ’24 or FY ’24 also looks good enough?

Rajesh Doraiswamy — Joint Managing Director

We expected that from — I think that we are seeing some good growth demand coming in from Q3 — Q2 last year onwards. So we thought it’s because of pent-up demand and it might subside. But as of now, it looks — the demand is quite strong and stable, at least in the domestic market. We expect that this growth momentum will continue for FY ’24 also.

Archit Singhal — Nearc Investments — Analyst

Understood. And sir, last thing from my side. So you did mention about the working capital aspect in your initial comments. I missed that. So if you can repeat what is the working capital days target for FY ’23? And how are you planning to improve the net working capital for the Company?

Rajesh Doraiswamy — Joint Managing Director

I think I mentioned that we have reduced our inventory days from around 110 days in FY ’22 to 90 days, which is a reduction of around almost 15 — close to 15 days of reduction. On the trade receivables also, I think from 95 days to 83 days, 85 days we have reduced. So on a net-net basis, from 166 days, we have reduced to around 145 days today. So we expect that this 145 days over the end of the year can go down to around 130 days, 135 days on a net basis. That means we are planning to reduce our inventory days further from 92 days to close to around 85 days, 80 days.

Archit Singhal — Nearc Investments — Analyst

Understood. Understood. Thank you so much. That’s it from my end, sir.

Operator

Thank you. [Operator Instructions]. The next question is from the line of Panjul Agrawal from Green Portfolio. Please go ahead.

Panjul Agrawal — Green Portfolio — Analyst

Good morning sir. Sir, first of all, I wanted an update on the EV segment. Like we were supposed to start building the order book from August. So have we started yet?

Rajesh Doraiswamy — Joint Managing Director

No, ma’am. I think there is a delay of, I would say, at least a year because we started this last year, August, and we planned to launch these products this August. But unfortunately, due to a lot of technical teething troubles that we are facing in absorbing the technology, developing the technology in India, project is being delayed. And hence as I said in my call, we expect that the products will be ready for sale by end of this fiscal.

Panjul Agrawal — Green Portfolio — Analyst

Okay. So, sir, this is the situation for both fast charges and conversion kits?

Rajesh Doraiswamy — Joint Managing Director

Yes, ma’am.

Panjul Agrawal — Green Portfolio — Analyst

And sir, with conversion kits, I wanted to ask that what kind of customers are we targeting? Are we targeting OEMs or are we targeting private fleet owners?

Rajesh Doraiswamy — Joint Managing Director

We are targeting the consumers and the private fleet owners. We are not targeting the OEMs on the conversion.

Panjul Agrawal — Green Portfolio — Analyst

Oh, so like for every individual vehicle, we will be providing the conversion kit?

Rajesh Doraiswamy — Joint Managing Director

Yes. We’re only doing conversion thing for autorickshaws, passenger and the utility autorickshaws.

Panjul Agrawal — Green Portfolio — Analyst

Okay. Okay. All right, sir. Sir, one more question. I just wanted to ask that how will our traditional business help in our EV segment? Like what would be our moat for that?

Rajesh Doraiswamy — Joint Managing Director

The traditional — I think basically the engineering setup that we have is the base to manufacture the kits. And also some of the products that we make, like the wire harnesses, the transformers are used in the conversion kits.

Panjul Agrawal — Green Portfolio — Analyst

Okay. Alright, sir. Thank you.

Operator

Thank you. The next question is from the line of Senthilkumar from Joindre Capital Services. Please go ahead.

Senthilkumar — Joindre Capital Services — Analyst

Thanks for the opportunity again. Sir, I just want to know how much capital invested as on June 2022 for the new business, sir — EV business, as you said, you are yet to start the commercial production.

Rajesh Doraiswamy — Joint Managing Director

Our — from Investment from Salzer will be less than INR50 lakhs for both the joint ventures put together as of now.

Senthilkumar — Joindre Capital Services — Analyst

Okay. Now how much do you expect to spend in upcoming quarters at least for FY ’23 for this particular FY — EV business?

Rajesh Doraiswamy — Joint Managing Director

We will be spending close to INR1 crore in each of the joint venture. That’s what we expect. So the majority of the investment, I think, will start flowing in post this fiscal, once the product is ready for sale.

Senthilkumar — Joindre Capital Services — Analyst

Okay. INR1 crore for each business?

Rajesh Doraiswamy — Joint Managing Director

Yeah.

Senthilkumar — Joindre Capital Services — Analyst

Okay, okay, okay. For FY ’23?

Rajesh Doraiswamy — Joint Managing Director

Yes.

Senthilkumar — Joindre Capital Services — Analyst

Thank you sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Anuj Jain from Green Portfolio. Please go ahead.

Anuj Jain — Green Portfolio — Analyst

Hello there. Regarding the EV business and [Technical Issues] in the past quarter, you said that you are facing some technical…[Technical Issues]

Rajesh Doraiswamy — Joint Managing Director

I can’t hear you properly. Can you speak from the handset, please?

Anuj Jain — Green Portfolio — Analyst

Okay, sir, am I audible now? I will get back in queue.

Rajesh Doraiswamy — Joint Managing Director

Can’t hear you again, clearly.

Operator

So in the meanwhile, Anuj comes back in queue, we’ll move on to the next question from the line of Neha Jain, an individual investor. Please go ahead, Neha.

Neha Jain — Individual Investor — Analyst

Good afternoon sir and congratulations on the good set of numbers. I have a couple of questions. So firstly, what is like our R&D budget for this fiscal year? And do we have any new products in pipeline?

Rajesh Doraiswamy — Joint Managing Director

The new products itself, we don’t have any major new products like what we did wire harness or three-phase transformers. We don’t have anything like that. But there are a lot of additions to the existing product lines that we are doing, like what — that we got the patents now for rotary switch and motor protection circuit breakers. So there are a lot of new lines we are adding into existing verticals. So that’s what we are doing right now. And our R&D budget has always been at around INR7 crores, INR8 crores, INR9 crores a year, so which continues to be at that level.

Neha Jain — Individual Investor — Analyst

Okay. And sir, which of our products require most of the sales promotion or marketing? And what kind of budget do we give for that?

Rajesh Doraiswamy — Joint Managing Director

Sorry, say that again?

Neha Jain — Individual Investor — Analyst

Which of our products require more of marketing and sales promotion? And what is the budget for those?

Rajesh Doraiswamy — Joint Managing Director

If you look at the sales promotion activities, the major sales promotion activity goes into the retail segment, that’s the B2C segment. That’s where we do a lot of sales promotion. But having said that, I think even the switchgear industries now require marketing promotion and things like that.

So overall, I think our total budget for sales promotion is close to — actually, we can — we have a budget of INR1.0 crores to INR1.5 crore a quarter for this. But we are at around — we are spending around INR1 crore a quarter right now.

Neha Jain — Individual Investor — Analyst

Okay. And sir, in your opinion, what is driving the demand for three-phase transformers? Like, is it like a onetime demand, sir or is it likely to sustain?

Rajesh Doraiswamy — Joint Managing Director

We expect this to sustain. As of now, the demand is coming from the renewable business, mainly the solar project, EPC contractors, both from domestic as well as foreign market. We expect that this will continue for at least this next two years.

Neha Jain — Individual Investor — Analyst

Okay. And are we planning to add new geographies in terms of exports?

Rajesh Doraiswamy — Joint Managing Director

We have already added a new geography, Australia and New Zealand in the last 1, 1.5 years. But we are yet to see significant revenue growth from this geography. Hopefully, this year will be a good year where we will add additional revenue from this geography. But otherwise, our existing areas itself, we are selling into more than 40 countries, and I think all the existing distributors itself is — there is growth — enough growth coming in. Hopefully, without any major disruption, I think this growth will continue in the export market.

Neha Jain — Individual Investor — Analyst

Okay. And sir, in terms of the two new JVs, by when do we see them contributing to our revenue?

Rajesh Doraiswamy — Joint Managing Director

I think FY ’24, we will see some contribution.

Neha Jain — Individual Investor — Analyst

Start of FY ’24?

Rajesh Doraiswamy — Joint Managing Director

Yes.

Neha Jain — Individual Investor — Analyst

Okay. And sir, my last question is in terms of other income that we see in our P&L this time, which was not there last year. So what is it comprised of?

Rajesh Doraiswamy — Joint Managing Director

I think the increase in other income is mainly because of the foreign currency fluctuations for this quarter. That’s the reason for the increase in the other higher income.

Neha Jain — Individual Investor — Analyst

Okay. Sure, sir. Thank you so much and good luck for future.

Rajesh Doraiswamy — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Panjul Agrawal from Green Portfolio. Please go ahead.

Panjul Agrawal — Green Portfolio — Analyst

Sir, actually, we are really concerned about this. Our joint venture partners are like the leaders in this field. And how come we are still facing technical issues in building the products and technology absorption? So are we serious for this business?

Rajesh Doraiswamy — Joint Managing Director

Okay. Actually, a good question. On the conversion kits, I’ll start with that, I think this is a very India-specific product. Though we have a partner, which is a startup from Austria, it’s an Indo-Austrian joint venture, but the product that they have developed is a very Indian-specific product. It’s a conversion kit for autorickshaws. We have already installed three autorickshaws, we have converted, it is running fine. There are no major issues on that. So on that front, the problem that we face right now is the cost of the conversion kit. We expected that to be between INR60,000, INR70,000. And with the price increases on across all materials, we thought it can end up between INR1 lakhs and INR1.2 lakhs, around that levels. But unfortunately, the cost for the design that we have done right now is going beyond — way beyond INR2.5 lakhs, which is not a salable product as of now. So we are trying to rework on the design and see how we can bring this cost down substantially. So that is where we are stuck as of now.

On the charging stations, it’s quite a complicated product than what we had expected originally because we are looking at charging a car in less than 30 minutes, 0% to 80% charge in less than 30 minutes is what we are expecting to do. So the product is actually much more complicated than what we had expected. So maybe we didn’t really look into the technical — technological issues before we started with SEBI though our partner is quite strong in what they are doing, I think when they’re coming to India, the ecosystem and the supply chain that we have in India for this product is still very, very nascent — at a very nascent stage.

So, we are forced to import quite a lot of materials for this, and we are facing a lot of teething troubles in identifying the sources and bringing in the supply chain. And if we do that — if we do what our collaborator is doing exactly, then the cost is not going to come down. Then there’s no point in manufacturing this in India, we’ll as well import it from Austria. So what we are trying to build an Indian-made charger with our own supply chain, and that’s where it is taking more time.

Hope I’ve answered it to your satisfaction.

Panjul Agrawal — Green Portfolio — Analyst

Yes, sir.

Operator

Thank you. The next question is from the line of Akshay Kothari from Envision Capital. Please go ahead.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Thanks for the opportunity again. Sir, this conversion kits which we are making, it’s for autorickshaws only, right?

Rajesh Doraiswamy — Joint Managing Director

Yes, correct.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

So if the cost is coming higher, so what could be the barrier that we are not going for the passenger vehicles? How come — what is the technical difference? Can we actually do that?

Rajesh Doraiswamy — Joint Managing Director

Passenger vehicles, in the sense, for the cars?

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Yes.

Rajesh Doraiswamy — Joint Managing Director

No, we have not really looked at doing a conversion kit for the cars as of now because we think that, that will be a very difficult market, both in terms of selling as well as in terms of regulations. So that’s why we are focusing mainly on the passenger autorickshaws and the goods transport autorickshaws. I think that’s going to be our first focus.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. Okay. And sir, on this three-phase dry transformer, can you — could you please explain the technical part of this product in sense of how is it different from other transformers, what is the market opportunity, and every renewable power plant — every renewable player, how — what are the benefits of using this product versus any other transformer?

Rajesh Doraiswamy — Joint Managing Director

There are different types of transformers basically available in the market. So what we see on the roads are all oil-cooled transformers or we call them as [Indecipherable] transformers, which are used for high-voltage applications. Whereas what we are doing is transformers for indoor applications where you need to step down or step up the voltage or sometimes use it as filters to avoid the harmonics. There are different applications for these kind of indoor transformers, where we cannot use oil cooling, which will cause a lot of maintenance because of the oil cooling. So the transformer design is such that it is naturally cooled by the air. And that’s why we call it as air cooled dry-type transformer.

So the major applications are renewables. Of course, every solar project needs to have transformers, starting from 100 kV going up to 1 megawatt size transformers. And every wind mills are having such transformers. Then we have different applications. We have locomotives like the train application, railway applications. We have UPS applications. So there are multiple — even machine tools use such type of transformers.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Other players might also be making it?

Rajesh Doraiswamy — Joint Managing Director

Yes. There are a few manufacturers in India who are making this.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And what is the market opportunity?

Rajesh Doraiswamy — Joint Managing Director

When we started the project in 2017, 2018, I think we estimated that the market size at that time can be close to around INR2,500-plus crores.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And what is our current revenue contribution from this?

Rajesh Doraiswamy — Joint Managing Director

This year, I think we will end up doing around INR50 crores in that.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And if you don’t mind, can you name the other players as well in this specific category?

Rajesh Doraiswamy — Joint Managing Director

I don’t have names in that, but they’re all mostly foreign players having shop in India.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. Okay. So none of the Indian players are actually interested in this.

Rajesh Doraiswamy — Joint Managing Director

Not in this type of transformers. There are one or two, but majority of them are foreign players.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. And every solar and every wind plant, which is coming up would need these type of transformers, right?

Rajesh Doraiswamy — Joint Managing Director

Yes, yes, yes.

Akshay Kothari — Envision Capital Services Private Limited — Analyst

Okay. Thanks a lot sir.

Operator

Thank you. The next question is from the line of Rohit from Progressive Shares. Please go ahead.

Rohit — Progressive Shares — Analyst

Hi, sir. Congrats on a good set of numbers. The demand seems to be coming back, and it is favoring the long-term investors like us.

Rajesh Doraiswamy — Joint Managing Director

Yes, I think so. Thank you very much for your support. Yes, it looks like the demand is coming back and will be sustainable. Hopefully, it will be sustainable, yes.

Rohit — Progressive Shares — Analyst

Surely sir. So you mentioned that there could be some 3% to 4% uptick in the EBITDA margin. So are you anticipating that it is the natural growth that was pre-pandemic, that is because of the comeback of the domestic market? Or how do you see the dealers and the retail market currently in the current situation in the domestic?

Rajesh Doraiswamy — Joint Managing Director

No. I think actually, it’s not because of the growth I’m saying that there will be an uptick in the EBITDA margin because that has been our normal EBITDA pre these disruptions. I think the whole pandemic disruption reducing the volumes and the price increase across the board has actually eaten away our margins. So, we are slowly coming back to that level. That’s what I said. So in the next four, five quarters, I think we should be back to that level is what I expect.

Rohit — Progressive Shares — Analyst

Okay. Sir, you did mention that you’re working on some… [Speech Overlap]

Rajesh Doraiswamy — Joint Managing Director

Growth will definitely help in that process. But in my opinion, I think that is our normal margin levels.

Rohit — Progressive Shares — Analyst

Okay. So you did mention that there are certain catalog products, if not the new products that you’re working on. So what sort of revenue can we expect? And when do you expect these to be rolled out?

Rajesh Doraiswamy — Joint Managing Director

As an internal target, we always see that the new products which we have developed in the past five years are always contributing between 20% and 25%. So that’s been a norm that we have been working on. So sometimes it’s at around 15%, sometimes it’s around 25% of the revenues. So on an overall basis, whatever new additions that we make will be contributing around 20% of our revenues.

Rohit — Progressive Shares — Analyst

Okay. In terms of value engineering and cost reduction, which were some of the initiatives taken during the pandemic, how are they panning out? And how are they helping in the current situation?

Rajesh Doraiswamy — Joint Managing Director

I think this is a constant continuous work that we have been doing over many years, and we will continue to do. I think value engineering, cost reduction, doing automation, reducing — I think improving the efficiency of the manufacturing, it’s a constant work. I think — we can’t really put a figure to it and say this much percentage that we have got because of that.

But having said that, if you see even after all the inflationary pressure that we have on a normal circumstances, let us leave what happened in FY ’21-’22, but on a normal level, whatever the inflation that we see in spite of the overhead increase, the salary increase, we still continue to maintain and improve the margin is because of the value engineering and cost reduction activities that we do internally.

Rohit — Progressive Shares — Analyst

Yes, so you definitely have done quite well in this stressful situation over the last two, three years. But do you think going forward in FY ’24, ’25, can we start inching towards 14%, 15% kind of an EBITDA margin, even though if it is a vision or an ambitious target to achieve?

Rajesh Doraiswamy — Joint Managing Director

That’s definitely the vision, at least what you call, on a net-net basis, 5% to 6% PAT is our target and vision. So hopefully, we will get there.

Rohit — Progressive Shares — Analyst

Okay. Sir, if we see on the industry level, and you also mentioned in your remarks that players like Schneider, L&T, Eaton, Siemens, ABB, Honeywell, or all of our customers, they are growing quite well. So with their growth, do you see that you have a visibility of orders for the next three quarters or four quarters, if you would like to share that?

Rajesh Doraiswamy — Joint Managing Director

Yes, I think the visibility for this year is quite good. That’s what I said, the demand from the domestic industries and OEMs for this financial year is quite good. We had only a doubt on the export market. How it will pan out in these three quarters, we are not very sure. But domestic market is quite strong, and we see that this growth momentum will continue in the domestic market in this year.

Rohit — Progressive Shares — Analyst

So sir, if the continuity is there and with around INR50-odd crores coming from KC and if we do the rough math, you will be inching closer to your target of INR1,000 crores by the end of the year. Is it fair to assume that?

Rajesh Doraiswamy — Joint Managing Director

Yes, sir. Yes, it is — I think that’s definitely we have in the agenda, and that’s one of our first targets that we want to achieve, yes.

Rohit — Progressive Shares — Analyst

Okay. Sir, few last questions are there. In terms of the new products that we were developing, and you did mention in some of the earlier con calls that you were working for some client in US and Australia, and we’ve taken some one-off expense for development of the product in Q4 FY ’22. So how far has that product development gone? And by when do we think that, that product can be launched for commercial uses?

Rajesh Doraiswamy — Joint Managing Director

There are like at least four or five products that we have developed for the Australian market and Australian customers. Out of which, I think a couple of them, we’ve already started realizing the revenues to some extent in this Q1. But the majority of them will start from Q2, expectedly.

Overall business, we expect from the business that we will be doing in Australia will be close to around $2 million and for US market also, we have developed certain new products, which are all the effects of the COVID and various reasons that customers want to come out of China and develop products here in India.

So, I think that is the reason that this product development has happened. And the US market business, I expect to start from second half of this financial year. And again, the potential for the product that we have developed for the US market, which is a contactor basically, that’s how we call them, will be close to around $4 million to $5 million in a full-fledged year, maybe not FY ’24, but FY ’25, yes, full potential of that, we will realize.

Rohit — Progressive Shares — Analyst

Okay. So coming back to the new products in the cable and CCTV or wire cables, what sort of orders do you have and what visibility do you have currently?

Rajesh Doraiswamy — Joint Managing Director

I think data cables, LAN cable business is showing good growth signs. I think our capacity as of now is around INR40 crores to INR50 crores in a year. I think we will definitely be close to around INR35 crores to INR40 crores in this year. And maybe we need to add some balancing equipments to take this capacity to around INR75 crore level. I’m sure next year — next full financial year, in data cables, we will be doing around INR70 crores.

Rohit — Progressive Shares — Analyst

Okay. Sir, the next set of questions are slightly futuristic or maybe a value addition. But do you see that — are there any opportunities for Salzer to play a role in aerospace, wires and cable segment?

Rajesh Doraiswamy — Joint Managing Director

We are always exploring possibilities in the defense and aerospace in such areas. We haven’t really got a good foothold in that area so far. But we are always discussing, looking at opportunities. We are discussing with customers, talking to them. I can’t see any — I can’t give you any visibility as of now to get revenues from that sector as of now.

Rohit — Progressive Shares — Analyst

Okay. But do we have the registration for that AS 9001? Are we registered for that?

Rajesh Doraiswamy — Joint Managing Director

No, not yet.

Rohit — Progressive Shares — Analyst

Okay. Okay. Because some of the products which come under Make in India and Atmanirbhar Bharat program, the fire resistant and flight-critical thermocouples, extension cables, these are the kind of products which are the requirement of the country and knowing that the more adjacent to the product lines that we have, we could play some role in UAV drones as well as ROV buyers. So that is why the question.

Rajesh Doraiswamy — Joint Managing Director

Definitely a good area to witness, and we’ll definitely focus more on that from — I think your inputs are good and we’ll definitely focus on that sector.

Rohit — Progressive Shares — Analyst

Okay, sir. Thank you for patiently listening and answering all the question. All the best. And, hopefully, you achieve your target by the end of the year. Thank you sir, thanks a lot.

Rajesh Doraiswamy — Joint Managing Director

Thank you. Thank you very much for your best wishes.

Operator

Thank you. The next question is from the line of Senthilkumar from Joindre Capital Services.Please go ahead.

Senthilkumar — Joindre Capital Services — Analyst

Thanks sir. Now I just want to understand, do we have any service kind of revenue opportunity for dry-type transformers, sir, like KMC [Indecipherable]

Rajesh Doraiswamy — Joint Managing Director

No. I think right now, I think none of our products have any AMC kind of revenues that will come in.

Senthilkumar — Joindre Capital Services — Analyst

So what will be the lifetime of these products, dry-type transformers? I just want to understand in terms of replacement demand.

Rajesh Doraiswamy — Joint Managing Director

Yes, transformer is basically a passive product. So it has like endless life if it is used properly. But on an average, I think it will all work for ten years minimum.

Senthilkumar — Joindre Capital Services — Analyst

Okay, okay. After ten years, it has to be replaced. So because you said… [Speech Overlap]

Rajesh Doraiswamy — Joint Managing Director

And people will normally replace between ten, 12 years.

Senthilkumar — Joindre Capital Services — Analyst

Okay. What about the lifetime of the oil-type transformers, sir?

Rajesh Doraiswamy — Joint Managing Director

I mean all transformers, I would say. I think all oil-type transformers, it will be a little less actually speaking. But mostly, the transformers have infinity life because there is no moving parts. So it will continue to work. So with proper maintenance, it will continue to work. Otherwise, even oil-cooled transformers also have to be normally be changed between ten and 12 years.

Senthilkumar — Joindre Capital Services — Analyst

Okay, thank you sir. That’s it from my side. Thank you.

Operator

Thank you. That was the last question in queue. I now hand the conference over to Mr. Rajesh Doraiswamy for closing comments.

Rajesh Doraiswamy — Joint Managing Director

So once again, I would like to thank you all for your interest and your support to the Company. Looking forward to talk to you again in the next quarter. Thank you very much. Until then, stay safe. Bye-bye.

Operator

[Operator Closing Remarks].