Hitachi Energy India Ltd
NSE:POWERINDIA
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Hitachi Energy India Ltd
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Ladies and gentlemen, good day, and welcome to the Hitachi Energy India Limited Q3 FY '23 Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. N. Venu, MD and CEO. Thank you, and over to you, sir.
Thank you, Aman. Good evening, ladies and gentlemen, and thank you for joining us. I hope you're all keeping well. And we have published our results -- Q3 results on the stock exchange, and we also uploaded the presentation which we are going to use for this call. In the next 20, 25 minutes, together with our CFO, Ajay, we would like to take you through that. And thereafter, we would like to take your questions in that. With me in this room today, I have our CFO, Ajay Singh, and Company Secretary and Head of the legal, Poovanna and Manashwi, Head of Communications, they are here in that.
So I'm just referring to the slide numbers, which I have uploaded in the stock exchange as well as I'm also sharing with this presentation. Go to Slide #3. So in the quarter ending December 31, we received orders worth INR 1,221 crores, up 31.3% year-on-year. This was the second consecutive quarter of double-digit order growth led by some key wins. From transportation, infra, utilities and industry customers are understanding the urgency of the pace of change needed to reach net zero and carbon neutrality. So during the quarter, we bagged a large order of supplying 500MVA transformer and 110MVA reactors for a bulk power transmission in the interstate green corridor that could support renewable energy evacuation.
We also received multiple orders for air insulated substations for wind and solar energy projects across the country. We continue to support the Indian Railways with our traction transformer and other offerings. During the quarter, we supply transformers for the Vande Bharat initiative, Vande Bharat Trains. And I'm glad to share that included our first order for a V Connected transformers.
We continue gaining momentum in the data center and energy-intensive industries with customers taking reliable power management and energy solutions. Commodity price -- increase, coupled with semiconductor shortage and rising interest expenses are dis-bearing on our profitability during this quarter. We will talk more during that section.
Profit before tax was INR 13.4 crores and profit after tax stood at INR 4.6 crores at the close of the quarter. In the following presentations, we will take you through our journey for achieving a sustainable growth in a challenging market. As you can see also, despite the high growth of orders year-on-year 31%, we still have almost INR 385 crores orders there, where L1 got delayed. We could not complete the paperwork -- necessary paper work for us to book in the last quarter.
So moving to the Slide #4, sustainability through collaboration. By now, most of you are familiar with our 2030 sustainable ambition that is we want to be carbon neutral in our own operations by 2030. In pursuit of our targets, we achieved 100% fossil-free electricity consumption in our factories and offices in December 2021 itself. In the last few months, we extended rooftop solar electrification and off-grid solar power for our project site offices cutting down on polluting diesel consumption.
We also switched over to environment-friendly Piped Natural Gas as fuel replacing diesel for certain energy intensive processes in the -- in our factories, especially in the transform factories. We believe that green infrastructure plays a key role in the development to support the growing urban population. To this end, we conducted renewable impact studies for over 6 industry players along with the national load dispatch centers for regulating usage patterns across different geographies. Such initiatives provide further encouragement for industries to use green energy for their power generation needs.
Under our CSR strategy and initiatives, we provided electric vehicle infrastructure at NIT Warangal and conducted an urban afforestation drive in central parts of Gujarat as part of our CSR initiatives.
Moving to the next slide, Slide #5. Noteworthy steps across the spectrum. Hitachi Energy collaborates with customers, partners, policymakers, stakeholders, to enable a sustainable energy future and have been progressing towards this commitment. In the last 3 months, among the several orders won, we also secured orders for integration of over 1 gigawatt of solar generation capacity into the grid, and some key orders were digitalization on asset management. We also commissioned 7 substation projects encompassing AIS and GIS technologies, spanning utilities, industries and also involving in one project, a remote commissioning.
As the pace of industry and government events picked up, we return to our traditional areas such as Innorail. We were active contributors to policy discussion at forums such as Invest Karnataka and India-Sweden Green Transition Partnership for creating safer, green future. The policy-driven support for increasing the power generation capacity for renewable energy is expected to further complemented by the transmission system, enabling higher rates of renewable adoption by 2030 which is encouraging for our business in the long term.
Moving to the next slide, slide 6. The Indian economy, though not immune to the effects of global fluctuations and disruptions have been resilient in the phase of headwinds posed by the pandemic and the geopolitical events and war in Russia and Ukraine, et cetera. However, demand constrains on a major challenge and it is the current environment. Semiconductor chip shortages have further compounded these issues as supply and logistics take a hit, especially during a time when industrial activity is still low.
If you see generally discuss lead time for chips and electronics have been between the 6 to 12 months. However, we need to also be aware that deliveries are rarely guaranteed. But analysts anticipate some easing of shortage by the end of 2023 considering the workarounds for easing supply chain constraints would start moving in. Retail inflation of CPI-based inflation in India witnessed a decline with various containment strategies implemented by the Reserve Bank of India to dampen it down further. Despite Central Banks and governments effort, the impact of inflation remain to affect the commodity price.
While India continues to be one of the fastest-growing economies, supported by domestic consumption, the potential conflicts taking place beyond our borders are causing significant economic repercussions worldwide impacting how businesses operations proceed. So as you can see from the slide, against this backdrop, among the sectors most relevant to our business, such as utilities, transport & infra, industries, metals, mining, hydrogen, there is a steady growth anticipated in the medium-to-long term.
Despite all these developments impacting in the short term, the horizon looks, in our view, bright with a drive towards energy transition, creating various opportunities for our company portfolio, whether it's the product systems, services and software for us.
Moving to the next slide, Slide #7, focus on future energy networks. I'm sure you would have seen this particular information coming out of the Ministry of Power. So here, energy projects are driving a new wave of growth across India. Among the several CapEx-focused initiatives, the government has prioritized the integration of transmission of 500-gigawatt plus renewable energy in order to bring clean energy to every household, and it is enabling the 2030 goal of achieving net zero with a comprehensive plan to strengthen the country's transmission system. This includes an estimate of INR 2.4 lakh crore to expand its Inter State Transmission System, ISTS, across 26 states and union territories, with an additional INR 2.16 lakh crore needed to develop 268 gigawatt onshore renewable energy capacity and INR 28,100 crores for 10 gigawatt offshore wind energy capacity.
Looking ahead towards 2030, when these projects are expected to come to full fruition, India is set to benefit from significant improvements in both its sustainability target and growing manufacturing muscle on the back of policies such as Inter State Transmission System, transmission plan and also the newly announced National Green Hydrogen policy commitment of close to INR 20,000 crores to boost manufacturing of green hydrogen production capacity of at least 5 million tons per annum and the research and development in this area, which is also announced as part of the budget now. Ultimately, transitioning into a low carbon economy, so it increased the penetration of renewables is opening a huge, in our view, potential opportunities for the country, which is encouraging for our business as well.
Moving to the Slide #8, growth in renewables and associated transmission corridors. During the quarter ended December 31, the order growth was driven by renewable and transmission, data center and industry. As you can see here, it's a broad-based growth cutting across all the segments, majority of the segments as we are also talking about in several calls now, high-growth segments, which is yielding a very good result for us.
Notably, we grab some remarkable orders in data center space, which grew more than 300% year-on-year during the quarter as we develop a relationship with some of the major players in the country and dealing with the data center markets. Steps towards ensuring data security and stability across all network with data localization regulations are supporting the data center operators to build and expand their footprint in the country. Additionally, India launched 5G technology to further strengthen our digital infrastructure and capabilities. Energy efficiency and reliable power management for power-hungry data centers remain a concern, and we are supporting our customers with industrial power and automation solutions.
Renewables and transmission continue to be very important for us. With an estimated demand of 500 gigawatt of -- in renewable sources by 2030, India is quickly transforming into one of the world's leading clean energy producers. As I highlighted before, during the quarter, we received cumulative orders for over 1 gigawatt of solar integration into the grid.
In order to achieve a carbon-neutral future, governments and industries are looking at decarbonizing through electrification across sectors. Along with these initiatives, Indian Railways has committed itself to target net zero emission by 2030. And as also committed to modernizing the railway network, the electrification projects such as 2 x 25 kV electrification of high-density corridors apart from the Indian railways looking ahead, 8 to 10 metro projects are planned to be awarded over the next 12 months for supporting economic growth with the sustainable mobility solution. Given our positioning in these sectors, we are confident to bring home some orders from these upcoming projects.
With all these integrated efforts underway in various sectors towards digitalization, electrification and adoption of renewable energy as well as renewable integration, we are looking at some positive growth on the horizon supporting clean energy systems for India and also the rest of the world in that.
Moving to the Slide #9. Growth drivers maintain momentum. We have been talking about the growth drivers of exports and service. Given the global supply chain constraints, India holds the key to supporting this network with local manufacturing, Make in India, et cetera. We have been sprucing up our manufacturing for meeting local and global needs. Our global feeder factories have been gaining ground around the world, helping us gradually expand our export markets.
Export is an essential part with our target to contribute around 1/4 of the total orders, the 11% year-on-year order growth for our products is a testament to that. Specifically, we have provided components of electric transformers for Chile's public utility, advanced industrial system for copper mines in Congo, substation equipment for Bhutan, as well as goods throughout the world including emerging markets such as Africa and Asia. So these are a couple of examples to showcase that how our export strategy is working very well in these parts of the world.
Last quarter, we augmented our manufacturing, and we continue to invest in people and technologies. Export has contributed to the growth of our engine with our product portfolio and customer service excellence.
On the service side, orders were steady year-on-year as our life cycle service partnerships continue to gain traction from providing first factory repair for traction transformers to making successful GCBs overhauling, et cetera, replacing third-party SCADA & Controls to rendering life cycle services orders for grid automation from heavy industry and utility customers. We have effectively provided comprehensive services in various segments. All this will help us contribute to the bottom line as well as build a strong market position for us going forward in that.
So with this, I hand over the next 2 slides to take us through the -- our financial performance to Ajay Singh, the CFO, and I've changed also to Slide #10, Ajay, over to you.
Thank you, Venu, and good evening to all our participants. So if you see Slide #10, if you see during the quarter, the company booked orders worth INR 1,222 crores, up 31.3% in comparison to the same quarter last year. The revenues were INR 1,041 crores. The profit before tax in the quarter stood at INR 13.4 crores and profit after tax was INR 4.6 crores.
Operational EBITDA stood INR 29.9 crore in this quarter. We continue to face chips and electronic shortages, commodity and spread price increases and ForEx volatility. However, with a consistent order growth, the order backlog stood to INR 7,231 crores, providing us a visibility of roughly 20 months of revenue.
If you come to the next slide, Slide 11, then here you see, this year, while we were emerging out of the pandemic after close to 2 years, we were confronted with the myriad of interlinked challenges. And as I quote the UN Chief from speech on the world economic forum that the world is in a very sorry state. So over the last few quarters, we have been talking about the consistent challenges on the macroeconomic situation and let me take you -- run through this particular slide a little bit in detail.
If you see in the particular slide -- that chart, you see the margins are fairly consistent. The material cost quarter-on-quarter is hovering around at 62%, 63% revenue mark. And the personnel cost also, I will say, is more or less steady. But if you see the chart that is a bridge -- Y-on-Y bridge on the right-hand side, it provides a true story of credible performance in a very, I would say, a highly volatile market.
Chips and electronics were leading factors impacting our profitability. And despite our reported late times 6 to 12 months of delivery of chips and electronics, deliveries remained uncertain, and we took tough decisions on price versus faster deliveries. Further to this, the commodity price, the ForEx and the interest expenses basically pulled us in this particular quarter as far as the bottom line is concerned. With a strong cash focus, we are making strategic investments in high-growth segments which we expect to help us strengthen our bottom line and cement our market positioning in the long run.
So with this, I hand over to Venu for the closing slide.
Thank you, Ajay. And moving to the Slide #12. Priorities for purpose-driven growth in financial year '23. The world economy is facing, as Ajay was talking about, tumultuous time navigating through the current chips and electronic trends and lockdown disruption poses a difficulty. However, exports and services can still provide a good growth opportunities in addition to the domestic market. We see a good opportunity in the horizon in our high-growth segments that remains central when it comes to sustainable energy recovery from the impact of market disruption.
We have been working on a strategy to adjust the imminent commodity price increases by making sure their supply chains are flexible and adaptable enough to handle changes quickly. Additionally, we continue to remain cash focused with the aim of building our people and capacities for a greater future successes. And we'd like to close this presentation and open for questions. However, before we start the Q&A, I would like to take a few minutes. I'm on the slide -- on the next slide, Slide #13.
You remember last quarter, we were talking about hosting a physical analyst meet in our -- one of the largest world-class manufacturing facility, Baroda, on March 3, 2023 between 10 a.m. to 3 p.m. And this location is home to our transformers and high voltage factories as well as our world-class customer experience center energy, technology experience center and training center. So along with our management team, I saw our global CTO also, he's joining this, and we will soon open for registration for you to plan your visit. We look forward to hosting you and meeting you all in-person. And I would now like to open the channel for questions. Thank you.
[Operator Instructions] First question is from the line of Renu Baid from IIFL Securities.
Yes. Am I audible?
Yes.
Sure. I have a couple of questions. Starting first, if you look at -- as we have clearly elaborated the impact of almost 500 basis points on operating margins.
Can you speak close to the mic, Renu, because you are breaking in?
Okay. Am I better now?
Yes, now it's better.
So my question was, if you see in the presentation, a purely highlighted 500 basis points...
Not better, because that's breaking in.
One second, let me try again. Is this better now?
Yes, this is better.
So you have highlighted 500 basis points impact on the EBITDA margin coming in from commodities, semiconductor fix shortages and logistics cost impact. So broadly, now if you look at the remaining backlog that we have of INR 7,000 crores plus, what could be the share of those loss-making or low-margin fixed-price projects, which may continue in the fourth quarter or in the first quarter of the next year, which carry lower margins? And by when do you expect the impact of these chip shortages to receive in your operating performance? So basically, when are we expecting operating margins to be back in 8% to 10% EBITDA levels?
Yes. So thank you, Renu. I think we -- as you know, as a company policy, we don't give exactly our forward-looking statements in that. But all I can say is that when it comes to the -- if you really look at our bridge in the Slide #11, the bulk of that is almost INR 30 crores is basically on the chips and electronic shortage, right? Because we have a policy of recognizing the revenue only when the revenue happens. While a lot of our manufacturing has completed in these panels, but because of the some relays not there, so we are unable to dispatch those things and unable to revenue this. While the cost has come in already, we were not able to revenue those kind of things in there.
So when it comes -- and this particular thing, as you know, it's a global challenge for semiconductors, which is very focused to the energy sector, especially on that. Even though semiconductors for some other sectors has really improved, but in our things, we are taking a second phase. And we see improvement on those things, but it will be at least in a couple of quarters before it will come back to the normal level of what we used to see in that. So that's what is the thing in there.
And when it comes to the -- it's low margin, I won't call any low margin or high margin, it's always a mix. And we have -- once we have this revenued out then I'm sure we should be in a position to come back to where we are planning to.
And by when are we expecting the completion of execution of these -- of this unfavorable mix?
No, we don't have any unfavorable mix in our portfolio as such, okay? There are a couple of projects where we had -- we have taken the orders on a fixed-term basis, and those execution happened. And 1 or 2 projects remaining, I think the execution is ongoing on that. But bulk -- if you really look at our order backlog, bulk of our order backlog has variable contracts, et cetera, part of that.
Sure. Secondly, you did highlight quite a bit in terms of railway transportation orders coming through. And I think that has been a high-growth market for us. Now there are large Vande Bharat projects coming up for avoiding in the coming quarter. So from this segment of the market, how is Hitachi positioned to garner a reasonable share of their pie? And do you think the capacity expansion, which we had done for traction transformer or a similar portfolio would be for this domestic market opportunity and for exports as well or it's largely domestic centric?
So on the Railway, as we have been talking about is one of our growth segment, we have been continuously looking at opportunities and also looking at inside to expand our factories at which we have been continuously expanding our thing. Today, we have quite a major market share in local transformer, EMU transformers, all are in a dedicated freight corridor transformers, et cetera in that.
The Railways have announced a major tenders like a 9,000 horsepower tender, which and 12,000 horsepower and Vande Bharat trains, EMU trains. And we have quite a big offerings in that. So each project has a quite a large portion of our offerings going to that. So this is one aspect of that. And in addition to that, we also work very closely for all the metro projects -- and metro projects, both we do the track side solutions like a grid integration, et cetera, the wayside transformers and as well as SCADA systems. So there are very big opportunities are there. As railways have announced a large number of local trains, we are now also looking at further expanding our transformer capacity.
[Operator Instructions] The next question is from the line of Mahesh Bendre from LIC Mutual Fund.
Sir, I mean, what we have indicated is that there was a production loss because of the lack of availability of the chips and other parts. So what was actually a production loss that took place at sales level? If these things had not come, then what would have been an impact on the delivery side?
Yes. You can see that in our this thing. So we have a revenue loss up to the extent of INR 100 crores. So Ajay?
Yes, fine. Thank you for the question. So in this particular quarter, the impact basically on account of chip shortage is roughly across INR 100 crores, that is we got impacted. And because of what you see in the page, roughly INR 31 crores is the impact on the bottom line.
Bottom line.
So if you would have not had this probably there would be roughly in the range of 2% to 3% margin would be on the up side compared to what you are having right now.
At the PBT level.
Yes, PBT level.
Sure. And sir, second thing is that, I mean, the logistic cost is also -- you have mentioned one of the reasons why our profits have gone down. So what we have observed typically now is that most of the companies that are declaring the results, they're actually benefiting because of the logistic price has actually gone down on a year-on-year basis. So I'm just trying to find...
Yes. Here is what we are talking about is the logistics cost is basically, we are talking about the export logistics cost, especially as we have -- you see as part of our strategy, we have increased our exports over a period of time. The export freight cost has really gone up substantially in many parts. And some of the things we are time bound, we have to ship those things in a time-bound manner. So that's where is our logistics cost is coming. While you are true that domestic transportation cost is in the same level or slightly lower than the last year levels.
No. I mean on export side, we are hearing this from companies. They're benefiting and they're showing that the export cost is actually -- I mean, transporting the export -- international cargo has become cheaper compared to last year. So there is a drop of many companies are reporting in the logistic costs. So we are, I mean, exactly opposite to that.
Where we can't comment about others, but we have been also using -- our many of these logistics is our global contracts. So we have a very effective system. So we have -- yes.
One thing basically what you are telling is correct. So if you see a Y-on-Y basis, this is quite visible. But you are right, if I go quarter-on-quarter, probably, the impact has come down. But if you see from Y-on-Y, the bridge we're talking about is Y-on-Y, there's still -- what Venu was telling is -- talking to on those lines actually.
So this bridge, what you have seen in the Slide #11 is basically Y-on-Y.
The next question is from the line of Varun...
Hello? Can you hear me?
Yes, sir.
Now -- that Mahesh has listened to us, I'm not sure.
Sir, I want to ask something.
Yes. Sure, go ahead, Mahesh.
Sir, when do you think this situation will normalize now? I mean when chips available and the execution will pick up?
This was the same question, previous person also, Renu, was asking about it now. While all the actions are there to see that the situation improves, so we have taken several actions just to narrow it, not only talking to the existing manufacturers but also looking at an alternative suppliers. At the same time, we are also looking at slightly modifying the design of our products so that the existing available chips can do that.
It's not that all the chips are not available. There are -- if you look at -- give you an example, we need thousands of components to make one particular relay, which is a very heart of the power system, right? In that it goes hundreds of components chips requiring that. So we maybe getting 80%, 90% of that, but in the last 10%, 15%, we're having a problem. So that's the reason all the actions are there. We see definitely signs of improvement, okay? So earlier the lead time was 6 to 12 months and also not guarantee that those lead times that we are able to get those things. But today, the lead times are becoming a slightly better, I would say. And then we are having a direct contact with -- not only our suppliers, but also and chip manufacturers as well in that.
At the global level, we are taking all the actions to see that whatever we plan, and we are -- on top of that, we are placing advance orders at least 1 year ahead of the curve. So all these things, in our view, should help us to normalize in a couple of quarters -- a couple of quarters progressively.
The next question is from the line of Varun Basrur from Julius Baer.
Am I audible?
Yes, Varun.
Yes. So first thing is, has there been any penalty that's been imposed for short delivery or for short execution? I don't see anything in that PBT bridge on the Slide 11. And second thing if I see the cost...
If you're talking about the LDs?
Yes. Any penalty or any liquidated damage, anything that has been imposed in the current quarter?
No, not -- not -- any of the LDs are not there. As you know, we have been very proactive with our customers engaging with them, ensuring that they understand the situation. We are notifying them well in advance. So -- and we are very close to them to see that we find a workaround solution wherever customers are gently in commissioning something like that. So taking their existing installations to do that, all those actions are enabling us to be close to the customers and not to levy any penalties at this point in time, because this is a force majeure. This is a force majeure. It's not a delay of any organization or something like that. And customers do recognize. We have notified all the customers like that. This is a post majeure and they need to realize or recognize as per as the contracts or the condition -- conditions of the contract.
Okay. And second question is, if I see the cost -- the interest position, it has also increased whether it's year-on-year or quarter-on-quarter. I'm assuming that part of this is a higher inventory. Has there been any other increase in either working capital or debt? Can you say what is the net debt position?
Yes.
So the increase in the interest expense is primarily on this bank loans that we have taken during the particular quarter. So as you know, the interest rates now, it has increased right now, it's hovering around 7% purchase. So that is one of the major reason where we see there is an increase in the interest rate. Other than that, I think it's more or less streamline.
On the debt level?
On the debt level, if you see -- if you see currently, the debt level of our company has come down. So last quarter, we had closed at INR 315 crores. So now we are at INR 275 crores. So that way it has come down. But during the quarter because of the movement of the working capital requirement, that is what is basically there is an increase in the interest expense.
Sir, this INR 315 crore is net debt or it is gross debt?
INR 315 crore is basically the net -- if you talk about the net, it's INR 150 crore is the balance which you're talking about net debt, INR 150 crore is the net balance we are having, because we're having a balance of INR 150 crores and our debt is around INR 275 crores. So you can say the net is around -- hovering around INR 150 crore.
The next question is from the line of Parikshit Kandpal from HDFC Securities.
Congratulations on a decent quarter. So my first question is on the Railways segment. So besides beyond this traditional Railway segment, the new segment, which is coming up in 9,000 and 12,000 HP and the Vande Bharat. So how big a market it opens for us if you can quantify in terms of prospects there and what will be the products and services which you will be bringing in?
Yes.
I think if you -- we are talking about around 5 projects. Recently, the Indian railways have announced 8,000 horsepower, 12,000 horsepower, Vande Bharat, EMU train sets all put together, our accessible market is anywhere between INR 4,000 crores to INR 4,500 crores. And what we are supplying basically in this is we're talking about a local transformer, that's our major play in that.
So this is about -- sort of the INR 1 lakh crore of ordering, which is expected about INR 4,500 crores to INR 5, 000 crores will be our addressable market, right?
Yes. So I'm not sure about INR 1 lakh crore, I'm talking about the 5 projects, which basically includes 9,000 horsepower, 12,000 horsepower, EMU trains, et cetera. This does not include high speed. This does not -- what I told you does not include high-speed rail, does not include metro stations, does not include cross-country, those kind of projects in that.
And this will get finalized in the next 1 year, sir?
Yes. This is progressively, I think the OEMs are bidding for it, and it will get finalized in the next 1 year or so.
You will be providing the support bid to the OEMs. You commit a support bid. Once they get the tender and then they'll call that directly, the OEMs will award it to you on a competitive basis?
No, we are -- as we speak, we are providing our offers to the OEMs because they need to take our offer as part of the design parameters.
Okay. Because recently, Siemens wins -- are we part of the Siemens win like Siemens got this 9,000 HP from -- have you given any support bid to that?
We don't comment on a specific project, but for all the OEMs, we have been actively in discussion.
Okay, great sir. My second question on this Kudos Mumbai corridor project. So any update on the executions where are we? I think last time you were in a design stage. So when do we see the revenue start kicking in, we can get some sense on that one?
As I told you, these are the large projects. Normally, the deliveries are in the range of 40 to 45 months. And the first 15 months or so, it will be used for the design and doing the studies, et cetera, power system studies and then a lot of approvals, engineering and simulations, et cetera, will take place. And then the construction will start now soon. And thereafter, we'll see that by end of -- middle of next financial year is what we start seeing the revenues kicking in.
[Operator Instructions] Next question is from the line of Venkatesh Subramanian from Logictree Investment Advisers.
So my question is about the next 3 to 5 years.
May I request to please use your handset, please?
Sure.
Sorry?
My question is in terms of the opportunities. If I go run through the presentation and when we look at what you emphasized in terms of 2030 vision of India renewable energy? Broadly, if I take a 5-year view on Hitachi Energy, what is it -- what is the kind of broad growth rate that we can look at some sort of a guidance? And how much of that would be service revenues as a percentage?
No. I lost you in between, Venkatesh. You're breaking it.
Yes, my question is I broadly understand the vision of where Hitachi Energy India is going over the next 10 years, sir. It's a decade long call. In which, if I split it into 5 years and 5 years, over the next 5 years, what kind of growth in terms of top line can we expect approximately over the next 5-year period? And what percentage of that would be service revenues, sir?
Yes. So I think, Venkatesh, very good question. So let me just put it instead of top line, let me just decode your questions in a twofold. One is at orders. So if you really look at our orders, what we are talking about, the market is growing at X percentage, we said we will grow higher than the market. So this has been our strategy. And if you really look at our 9 months cumulatively orders, and we have been at least more than 100%, more than 100%, we are growing on the orders and we are in a long cycle of converting orders into the revenue. So revenues will follow after some time, right, in that. So that's exactly working.
Our strategy on the securing the order pipeline is -- we want to grow first in the market. If the market is growing X, we want to grow higher than X. And that has been consistently, we are demonstrating for the last several quarters in that. So that's number one. So what are the other growth areas? So one you talked about the service, we also said exports. Export is 1/4 of our orders will come from the exports. So which is also orders are, we are able to demonstrate that almost in the range of 20% to 25% orders for each quarter, we are getting from the exports. And in the couple of quarters down, which is also reflecting our revenue mix on that.
And the third one is the service. We also said in one of the calls that service order potential what we have in the INR 2,000 crores in that. So we have -- right now, we have a high single digit as part of our service. So our plan is to take it to the double digit over a period of time. So this is now the broad growth strategy, which is a broad-based and taking care of both domestic market, international market and our huge installed base of services, which we would like to leverage in that.
Fine, sir. I understand. I think -- so is it fair to assume that if the size of opportunity is going to be fairly high over the next 5 to 10 years, our growth rate top line should broadly be in double digits somewhere?
Sorry, again, I missed you -- lost in between.
So I'm trying to just figure out that the market is growing at X percentage. So if you believe that the market is growing to grow in a double-digit growth rate over the next 5 to 10 years, we want to exceed that. That would be the right assumption, right?
Absolutely. You're absolutely right.
The next question is from the line of Mohit Kumar from DAM Capital.
Congratulations on a very good set of order inflow. So my first question is that the -- you spoke about making strategic investments. So what are the kind of investments you're making over the next 3 to 4 years to grow the business, in which products and which segment. And the Cap expenditure, if you can -- if you can put a number to that over the next -- or over the medium term?
Yes. I think we have been consistently saying that in our Hitachi Energy, India is one of the key market, not only for the market, but also using our existing manufacturing base to -- existing our manufacturing base to not only cater to the domestic market, but also the export market and the rest of the other things like that. So this is our -- this has been our consistent strategy and then we are also living up to the strategy.
If we really look at it in the last 3 years, including COVID year, we continue to expand. We built up a new factory for power quality in the greenfield factory in power quality in Bangalore. And we also set up a dry bushing factory in Baroda, and we expanded our feeder factories, and we continue to expand those kind of things. So today, more than 80% of our portfolio -- global portfolio we manufacture here locally.
So the reason for that is that we want to be competitive here. We want to localize the products here, and we want to increase our skill sets not only for the domestic market but increase the market. So over the last 3 years on average -- in the last 3 years, we spent around close to INR 300 crores in the CapEx. And we believe that, that will continue there in the coming quarters. We are looking at expanding in our traction transformer facilities to cater to the new demand coming out of that. So those things will be as part of our strategies going forward. We continue to expand the new growth opportunities arising out of the transmission -- transmission system, [indiscernible] et cetera.
Second question on the Slide #6, you're talking about 40% increase in production. Is that pertaining to electronic supply?
Which one which slide you're talking about?
Slide #6, 40% increase in production, what does this signify?
Slide #6, semiconductor.
Semiconductor, right?
Yes.
Yes. Understood. The last question, sir. Do you see in terms...
On Slide #6, just want to clarify, the 2023 season more than 40% increase in the production of semiconductor, not our production. It is -- what we are talking about is the industry there of the semiconductor. So how we are going to come out of this is, we also got the feedback from the industry that they are also increasing the production of that particular areas.
Sir, last question, sir, of course, you spoke about Inter State Transmission CapEx going up to INR 2.4 trillion, do you see Intra State transmission picking up? And what are the kind of offerings we have in the segment? Is that offering different from the Inter State CapEx?
Yes. We have -- yes, absolutely. This is very important. And this is our core of it. Inter State transmission things includes HVDC, include FATs, includes STATCOMs and includes 765A transformer, include 765A transformers and reactors, 765AC transmission, all these things is part of our offerings over there.
For the Intra State CapEx? Intra State CapEx -- within the state CapEx, Intra State CapEx?
Within the state, as you know, some states are going up for the expansion of 400 kV substations 220 kV substations. So that is also a part of that. But like HVDC projects, what you are talking about, that is primarily for ISTS.
The next question is from the line of an Priyank Chheda from Vallum Capital.
My question is regarding the transmission project of Le Ladakh is at what stage and in case Hitachi goes for it, what can be the opportunity for the Hitachi? That's first question, sir.
Yes. So thank you, a very interesting question. In fact, I was expecting this question. As you have rightly said, this is a very important thing. And if you have gone through the recent budget announcement, so the budget has provided INR 8,300 crores grant for this particular project, okay? So this was actually the whole thing was waiting for this particular thing. And we believe that this will help us to accelerate this project for both HVDC and all of the things. So it's quite a big opportunities for us. And right now, we are working on this to look at in our various things, including manufacturing, those kind of things. It's quite a big project.
Sir, bids are out for this project?
Not Yet. Bids are -- basically, there's a consultancy bids have been asked for it, which we have submitted. But the main bids in our view, is that -- now that budget has given the grant. And after that, it will accelerate now.
So you mean that this project should be certified in the current year?
Coming year, coming year.
Coming year, yes. And sir, on overall HVDC order pipeline, if you can brief us on that? Because we had envisaged of winning at least 1 HVDC project every year, how do you see this faring up?
Yes. So absolutely. So we have been talking about previously that we really look at previously India used to have 1 HVDC project for every 5 or 6 years, and we set that we envisage 1 year per year, which is in line with our envisage in -- in line with our thought process is coming out. Now we see that 1 project is already awarded last year. And now in addition to the Leh Ladakh project, we also see a project of Khavda is coming up and then another project is also coming very clearly. So 3 projects, as we speak, is in a very active stage of -- coming for -- are about to come for a bidding.
Okay. Okay. And last question. On the last call, you had alluded about the royalties fees coming down from the current levels of, say, around 3.5%. If you can help us, what are -- where are we in that process and what can be the percentage royalty that we should be paying over the coming years?
I'm afraid, I don't think we have said that it will be coming down, but let me just give you an overview and then Ajay will talk about the percentage. As you know, the whole ecosystem of energy transition is really shaping in a very big way. So that's exactly the reason why we organized this Analyst Meet in our factory on 3rd of March, if it could take some time to attend it, then you'll understand how this is transforming in a big way. This needs a lot of investments in the technology standpoint. This needs a lot of investment in R&D, innovation, et cetera, to bring those technologies latest up-to-date in that.
It needs investment, and we believe that by being the royalty, we are accessible to this latest state-of-the-art technology to be able to support our customers in India. So over to you, Ajay, on the percentages.
Yes. On percentage side, currently, if you see our royalty expenses have been hovering between the range of 3.5% to 4%. But as we speak today, currently, we are at that level of 3.5%.
The next question is from the line of Anish Jobalia from Girik Capital.
Sir...
Anish, your voice is breaking, I request you to use the handset.
Yes. Am I audible now? Yes. Sir, so my question is, you mentioned about INR 100 crores of revenue...
Anish, you are not very clear. Please use the handset.
Is it better now?
Yes, go ahead.
So question is, sir we spoken about INR 100 crore of revenues which we are not to book in this quarter. But if I were to add that INR 100-odd crores, we have seen flat versus the last quarter which is Q2 FY '23 as well as fee of Q3 of FY '22. And what I'm understanding is that...
We are not able to hear you properly, Anish. No, I understand INR 200 crores. I didn't to understand you, what are you saying?
Yes. So can I -- am I audible now better?
Now it's better.
Okay. So my question is that you mentioned about INR 100 crores of revenues being lost in this quarter. But if I were to add that back to Q3 numbers, so we are still flat versus the last quarter, which is Q2 of FY '23 as well as Q3 FY '22. But my understanding and as I see from the numbers, like typically in H2, our execution is better than H1. So how should we think about what could be the other factors which have led to the revenue being much more benign than as compared to the order inflow growth that we have already seen in the last 9 months?
Yes. So I think Ajay will also add to this. As you can see there INR 100 crores, so we would have been INR 1,141 crores, which compared to the -- we are in the range of about 4%, 5% growth, okay? So -- but that's not the only one. There's also other constraint, et cetera. We have also a very robust in our revenue recognition policies, especially on our imported items, all those things have contributed a thing in that. So project specific, for example, in those kind of things. So all these things, in our view in that. But as you say, if you really take 9 months, 9 months to 9 months and then you can see our revenue, we have a growth of 13%, okay?
Yes, it is definitely not at the same level of order growth, but as I told you previously, so there is always a lag from our conversioning orders into the revenue. So that is a couple of quarters over there in that.
Okay. And my second question, sir, is that we have been continuously now seeing employee benefit expense of INR 100-odd crores. And then there is other expenses of INR 230-odd crores. So is it possible for you to define -- I mean, quantify how much of this saved INR 330 crores is fixed in nature. And how much would be variable? Like I'm not talking of the other charges which are subcontract and the cost of raw material because they are obviously variable. But within this, it will be great if you could quantify between the fixed and the variable expenses?
Here, basically, as you rightly told employees cost, mostly which is in fixed in nature that we can say. But other than that, I will say, royalty and the group charges that is more fixed in nature. Only a variable portion will be basically the freight and the power and fuel that is totally dependent on -- upon the -- basically the volume that we do and to some extent now that we have increased in the traveling and services on a third party is one that is basically there. And on top of it, the exchange rate fluctuations also is which is also variable, other than that, more or less, I think it is consistent.
Okay. Sir, if I can just squeeze in one last question. So I think we are looking to develop -- we pay some infrastructure fees, IT infrastructure fees to our each parent, which is EVP India So I think we are developing our own technology and reduce the dependence on EVP India for -- and not pay that particular IT fee. So where are we in the journey for that particular expenses actually trickling down to our profitability level?
So yes, let me take this question. So here on the IT part, yes, we are running a transformation project that is currently running, and we are working on the S/4HANA, we call it, upgradation of SAP system. So right now, we are in the mid of this journey. And for some of the IT services which we are taking from EVP, we are having this TSA, we call it a transactional services agreement which we think that it will continue until this year-end. So our target was to close this as early as possible, maybe in this particular year, only we are trying 2023 should be the year where we should come out of this, as we are progressively building our own infrastructure and we are quite ahead in that particular direction.
And maybe pay operator you take my last question.
The next question is from the line of Renu Baid from IIFL Securities.
Just wanted your perspective on developments on the penetration of the industrial automation solutions and -- that we were doing through Lumada platform. So any developments or numbers to share in terms of penetration with the existing installed base that we have in this segment of the business?
Yes. So Renu, thank you for the question. As you know, ever since we become part of the Hitachi, so we are looking at different synergies between Hitachi Energy and Hitachi, and you know that Hitachi has a [indiscernible] so I think a on the Lumada platforms, Lumada 1 leading IoT platforms. So we started offering our enterprise software solutions on Lumada platforms in that.
So we also have been talking about various -- we are doing a lot of pilots in the major industrial customers as we speak. And we are getting -- what we call couple of wins on every quarter, as I talked about in my highlights, you can see if some of them we bought it. But at this point of time, as we speak, our digital offerings are high single digit at this point in time, okay? So it is taken off even though it's a low base, but it's a single-digit offerings at that. But we see a lot of opportunities, a lot of synergies with the various customers, several pilots we are running with them for creating various opportunities in that.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. N. Venu for closing comments. Thank you, and over to you, sir.
Thank you, Aman. And ladies and gentlemen, thank you for your keen interest and taking your time from a busy schedule and attending this call and asking us questions. And as I told you that we are really looking forward to host you on 3rd of March in our state-of-the-art manufacturing facility to take you through -- primarily this call is to take you through how this power systems and various elements of the system are evolving it and how Hitachi Energy is getting ready in this big transition phase in that, especially on the technology standpoint in that. So with that, thank you, and take care, and have a nice weekend.
Thank you very much. Ladies and gentlemen, on behalf of Hitachi Energy India Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.