On Day 2 of Kotak Chasing Growth – 2023 Conference, a host of companies including JSW Energy, Tata Elxsi, Cyient, Coforge and InterGlobe Aviation gave business updates, highlighting growth outlook and capex plans. The day, Kotak said, saw more than 3,000 interactions between 747 institutional investors and 113 members of the management teams of 56 companies, in addition to the seven speakers. Here are the key takeaways from the management of five companies:
JSW Energy
1) JSW Energy’s management highlighted that the company has received an letter of acceptance for a 500 MW battery energy storage project in January 2023, one of the largest such projects based in Rajasthan. The company plans to get it operational in 18 months. Management stated that it could offer this storage mechanism on lease, with an expected rental of Rs 11 lakh per month per MW, implying total annual revenues of Rs 650 crore. The company expects at least mid-teen IRR from the project. It highlighted that the project is on a BOT basis, and the land would be transferred back to SECI after 12 years.
2) Receivable days for JSW Energy dropped to 69 days from 75 days as of Q3FY22. However, the quantum of receivables increased to Rs 160 crore as of December 2022 from Rs 130 crore as of December 2021.
3) JSW Energy stated that 1.26 GW of wind projects won under SECI IX and X are currently under construction, while the Kutehr hydro project is running ahead of timelines, with 90 per cent tunnelling work completed against 84 per cent as of September quarter.
4) JSW Energy stated that the acquisition of renewable assets of Mytrah (1.7 GW) will likely be completed in Q4FY23 – this project has relatively higher receivable days against the company’s average of 69 days as of December 2022. The 700 MW Ind Bharath thermal project acquisition has been completed, with commissioning expected in two years’ time.
5) The management stated that it plans to increase its total generation capacity to 10 GW by FY2025 and to 20 GW by FY2030, against its current capacity of 4.8 GW. Most of the incremental investments would be in renewable sources of energy. Accordingly, it plans to have 80 per cent of its generation capacity from renewable sources by FY2030. JSW Energy is also exploring a green hydrogen project, but would wait for regulatory clarity here. It highlighted that any incremental capex over the next few years would not require equity dilution from the current levels. The JSW Energy management also stated that JSW energy has a strong balance sheet with a net debt-to-Ebitda at 2.3 times. The company has set a target of becoming carbon neutral by 2050.
Tata Elxsi
1) The Tata Elxsi management indicated that uncertainty on macroeconomic scenario has had implications on demand. It indicated delays in project ramp-ups and expects client spends to remain conservative over next couple of quarters. However, there are areas with secular tailwinds (conversion of ICE to EV, software defined vehicles within auto). The company is well-positioned on capabilities to drive growth over the medium term from these technology transitions.
2) Tata Elxsi has offerings across three verticals within EPD segment namely transportation, broadcast & communication and healthcare. Each of the verticals have identified sub-domains and capabilities to invest in. The sales organisation too is aligned by verticals. The management indicated optimism on opportunities within auto and indicated continued investments in the area both in enhancing capabilities and also building bench strength.
3) Most of the engagements are in the vertical are around developing connected vehicle, digital twins and autonomous, etc. Tata Elxsi is focused on creating IPs selectively and in areas that can be replicable across multiple engagements. Further, it is increasingly focusing on consultative engagements with clients in areas like battery management systems, which would provide an opportunity to engage with clients from early stages of electric vehicle powertrain development. In BMS, Tata Elxsi is partnering with chip design companies to build customised solutions for OEMs. In other areas like infotainment and connectivity, it is engaging with Tier-1 suppliers.
4) Europe remains a key market to drive growth in auto vertical followed by the US. To tap the opportunity in emerging markets, Tata Elxsi has developed platforms by partnering with Renesas, which would lower the cost of development of EV platforms for OEMs in emerging markets. Renesas platform is primarily targeted at 2W, 3W and LCVs.
5) ESOP plan is seen aiding in retention of key talent. Tata Elxsi indicated that interventions made on the supply side have partly aided in moderation of attrition from peak levels. Further, it has constituted OP plan with pay-out linked to achievement of business targets across a set of parameters. ESOPs would be vesting over a period of three years in 30:30:40 ratio. This would cover key roles across senior and middle management.
6) There is limited overlap of capabilities with Tata Technologies. Tata Technologies has greater play in mechanical engineering – electronics, PLM, etc. with limited overlap of capabilities. Management indicated that Tata Elxsi has been enhancing capabilities in electronics and software in the past few decades.
7) Offshoring is unlikely to revert to pre-Covid levels. The company derived 75 per cent of revenues from offshore delivery pre-Covid, which increased to 90 per cent of revenues by FY2022. While there has been some moderation lately, it is unlikely to revert to pre-Covid levels. Further, Tata Exlsi indicated that customers on convinced on ability to deliver remotely and insist on onsite presence only in instances where the work is required to be done on high-cost equipment present in customer premises.
Cyient
1) Cyient indicated that several measures have been undertaken to accelerate growth in the business, including diversification of revenue from aerospace to high-growth areas like mobility, connectivity, energy and
sustainability, service lines, geographies and sales teams, rewarding incremental growth. Cyient sees significant opportunity in modernising tech stack of industrial companies and building solutions and accelerators to leverage IT/OT play. It expects strong double-digit growth in aero, double-digit growth in other verticals excluding rail. It indicated stability with upward bias on revenue in rail.
2) The Cyient management indicated that typically technology refresh happens over a 15-20 year cycle in aero and 7-10 years in auto. Last technology refresh in aero was in 2007-08 and management sees new cycle to emerge in 2024-26 as manufacturers such as Airbus and Boeing undertake platform refresh programs. Cyient indicated that auto is undergoing multiple tech refresh cycles albeit of shorter duration, including electrification, autonomous and connected vehicles and software defined vehicles. The key underlying phase changes are lesser number of domain controllers and centralised architecture. Cyient hopes to leverage capabilities in aircraft electric systems in electric vehicles to drive revenue growth.
3) The key reason for clients to choose a vendor over another within ER&D is dependent upon the vendor’s ability to demonstrate domain-specific capabilities. Other reasons include customer centricity, access to senior management, governance process, mutual visits and being part of planning process, better execution and lower feeling of discontent. Cyient indicated that its CSAT remained flat YoY in 2022 but ranking improved significantly and the company was placed 2nd within Indian companies within the sector and higher than other ER&D peers.
4) Cyient indicated that the profitability of larger verticals is better than company average. However, investments in certain growth segments and onsite-centric acquisitions have impacted margins. It expects offshore revenue contribution to increase from 46 per cent in Q3.
Coforge
1) Coforge is bullish on Europe. The order book and deal wins are healthy. Clients in travel vertical continue to spend. Exposure to troubled hi-tech segment is nil. Coforge said it can meet consensus growth expectations for revenue growth in FY2024.
2)In BFS, the revenue split is 60/40 per cent with banking/capital markets clients. The exposure to capital markets is with buy-side (asset and wealth management) clients. The focus is on being best of breed in niche services and growing in adjacent services. In banking, Coforge has the capability to provide end-to-end services across core banking, front end and back end. Coforge has resence in 3 banks among global top 20 (1 in US and 2 in Europe). A large European bank ramped up well in the last 2-3 years. Coforge won a $100 million deal with a UK-centric Spanish bank a few years back. Fifth Third, which used to be 100 per cent BPO, is in top 10. Due to cross-sell, it is now 94 per cent BPO
and rest is digital/automation. Banking will lead growth within BFS. BFS will do better than other verticals.
3) Coforge can close a large deal in the vertical in next few quarters which will aid growth in FY2024. Coforge has decent exposure to manufacturing including E&U in the US; accounts for 5-6 per cent of revenue. Coforge is working on scaling up to $2 billion in revenue. Focus is on scaling up 4-5 accounts to $100 million. Coforge is focusing on mining and gaining share in 30-plus key customers. Coforge is growing new capabilities such as ERP where it has hired a senior leader.
4) Coforge said executable order book gives 70 per cent visibility to revenue. Risk of slippage is less than 7-8 per cent of revenue in a year tends to be net new business.
5) Coforge derives 3-4 per cent of revenue from India, which is legacy business and not a focus area.
6) Rationalisation of costs in mortgage will aid margins by 70-80 bps sequentially, Coforge said. Higher working days, better billability of trainees, lower impact of furloughs, lesser SG&A and better growth will aid margins by 200-plus bps in 4QFY23. Margins will improve in FY2024. Wage hikes will be 80 per cent of pre-Covid levels. Gross margin can improve by 100-150 basis points in the next 1-1.5 years.
7) Coforge has good presence in insurance. Coforge is strong in specialty insurance and won a $50 million deal in Q3FY23 with a large specialty insurance client in the US. Weakness in Duck Creek has bottomed out. Duck Creek exposure will account for 10-12 per cent of overall insurance portfolio. Insurance platform has been impacted by volume decline. Holistic improvement in insurance platform will take a few quarters, it said.
InterGlobe Aviation
1) InterGlobe Aviation said load factors in February are better than the average February month. This is telling as it is happening at meaningfully higher yields. Good prognosis of loads does provide baseline of fares, and thus is supportive of healthy yields sustaining. March, however, would be a weak month in terms of seasonality.
2) InterGlobe Aviation said the near term capacity constraints are in IndiGo‘s favour, an airline that
continues to add new fleet month after month. Also, with volumes reaching pre-Covid levels after three
years, there are tailwinds to growth for the sector. This will also work in IndiGo’s favour. Also,
consolidation happening in airline space is positive for pricing.
3) IndiGo had placed 180 aircraft order in 2011 and 250 aircraft order in 2014. It has 190 aircraft remaining to be received. Another 300 aircraft order was placed in 2019. So, in all about 500 aircraft is what Indigo expects to receive over time.
4) InterGlobe Aviation does not expect the maintenance cost per ASK to return to historical
pre-Covid levels in spite of CEOs becoming a small part of the overall fleet. Factors that have changed include changing lifecycle period and changing FX rates. On an overall cost structure, the effects of inflation are still to get fully reflected.
5) On being probed on whether Tata group of airlines using the pricing lever to gain relevance, Indigo had the arguments to make against this thesis – IndiGo started ordering 12 years ago versus Tatas ordering now; unlike Indigo’s single supplier narrow bodied fleet, Tata would go for a combination of narrow and wide-bodied fleet across the two suppliers (training and different kind of pilots requirements) and IndiGo has a lot more years of operating experience. IndiGo does not expect Tata group international aviation business cross-subsidising domestic or Tata group’s hotels business cross-subsidizing the airline business.
6) The international side of InterGlobe Aviation’s business is at pre-Covid levels of 23 per cent of capacity for IndiGo and has seen market share increase to 16 per cent levels. The endeavor is to increase the share of capacity to 30-35 per cent levels over the next few years. Bilaterals and airport slots make it difficult to chart out a specific growth strategy, however privatisation of Air India does make the slot allocation process more democratic. The company expects A321 XLRs to start coming by FY2026..
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