Ceinsys Tech Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Margin sustainability confirmed, not guided: Management called current EBITDA margins sustainable and not an aberration, but explicitly declined to give forward-looking numbers, leaving investors to judge from the order book and execution trajectory.
• Order book provides 18-24 month visibility: A capex-heavy order book of ~INR1,100-1,125 crores is executable over the next 18-24 months, with O&M portions extending to 5 years, anchoring the INR1,000 crores annual revenue aspiration.
• Fundraise deployed for dual-track growth: INR105 crores raised this quarter from a INR235 crores equity-and-warrants issue, earmarked for organic expansion and an active M&A pipeline with one term sheet expected by end-November 2024.
• Tax spike is a one-off dividend artifact: The elevated tax rate reflects ~INR4 crores of extra current tax on a higher-than-usual dividend from a JV; the dividend sits outside EBITDA so the spike is non-operational.
• What to watch next quarter: Whether the INR1,500-2,000 crores bid pipeline converts by fiscal year-end, the pace of subsidiary expense absorption, and any revenue split disclosure between government and private sectors.

Margin Quality & Sustainability

• Quarter-on-quarter EBITDA growth: Margins have been growing sequentially, driven by value-added project execution and operational efficiency improvements that allow handling of larger volumes.
• Subsidiary drag is deliberate investment: Consolidated EBITDA was slightly lower than standalone because subsidiaries invested ~INR6 crores in business development, expensed through the P&L. This focused spend may continue for 1-2 quarters.
• US subsidiary gap persists: The consolidated-to-standalone EBITDA gap will remain in the near-to-medium term because the US subsidiary, an investment vehicle, will show lower numbers until investments begin yielding results.
• Working capital trajectory: Consistent improvement in working capital reflects ongoing efforts to optimise operational efficiency, reduce costs, and enhance cash flow management.

Kamat: "Are these margins sustainable? My answer would be yes, but we are not going to put our neck on the block to say it will match exactly to every number. But these are the sustainable margins. This is not an aberration quarter, if that's the question."

Order Book & Pipeline

• Current order book: Stands at INR1,210 crores, with the capex portion (~INR1,100-1,125 crores) executable in 18-24 months and O&M portions spanning 1 to 5 years.
• Focused bid pipeline: An additional INR400-500 crores of high-winnability bids are in play, giving a total pipeline of INR1,500-2,000 crores that management is "working towards" converting by fiscal year-end, though this is aspirational rather than committed.
• Win-rate strategy shift: The company moved from a "buckshot" approach to "rifle shooting", bidding only where it has serious competency and credentials. Government contracts use QCBS (Quality and Cost Based Selection), so price is not the sole criterion, supporting a 90%+ win rate.
• Key recent wins: Two contracts from Maharashtra State Water and Sanitation Mission, an IoT-based project (INR206 crores) and a digital project monitoring system (INR60 crores), plus an extension of a third-party inspection project in Uttar Pradesh (INR196 crores).
• Technology solutions ramp: Certain orders in the technology solutions segment are expected to contribute substantially in the next 2-3 quarters based on the order book and execution plan.

Kamat: "We have stopped going after a buckshot approach by throwing 10 stones and see what hits. Instead of that, we have got into a mode of rifle shooting."

Segment Dynamics & Seasonality

• Segment reclassification: From 31st March 2024, the company moved from three segments to two. Geospatial now includes engineering services (automobile work from a subsidiary), while technology solutions covers in-house platforms and process solutions not dependent on geospatial. Both segments are expected to be equally strong going forward.
• Core competency thread: Despite appearances of spread across Metaverse, water pipelines, highways, and transport, the unifying competency remains "scanning and capturing of reality." All segments are use cases of that same capability. The company builds platforms for others to use, not virtual reality itself.
• Seasonality persists but softens: The company still derives the majority of revenue from geospatial and government-related business, so Q4 typically remains the strongest quarter. However, as diversification into other avenues succeeds, the extreme seasonal swings, such as Q4 doubling, are not expected to continue.
• Technology solutions contribution: This segment is expected to grow meaningfully, with certain orders contributing substantially in the next 2-3 quarters.
• Data center vertical: Team mobilisation has started with market research underway in Singapore and Bangalore. A detailed business plan will go to the board shortly. The company plans to design data centers for others, including liquid cooling, with no capex investment in running its own data center. It will take at least 1-2 years to become a reasonably big segment.

Kamat: "All what you said are the use cases of that competency. And that's why we are selecting those segments. So we are not moving away from our core competency. We are using our core competency for different use cases."

M&A & Capital Allocation

• US acquisition closed: Acquired a boutique geospatial company in Michigan in August 2024. The company has been in business 6-7 years, counts the top 3 US telecom tower companies as clients, and creates inventory by scanning towers. Its erstwhile CEO, John, has been hired and granted performance-linked ESOPs.
• Active M&A pipeline: In active discussion with three companies; one is likely to receive a non-binding term sheet before the end of November 2024.
• Fundraise completed: Raised INR105 crores during the quarter from a total INR235 crores equity-and-warrants issue. Funds are directed toward both organic and inorganic growth strategies.
• Subsidiary merger underway: Allygrow, a subsidiary, is being merged with the parent company, likely within one quarter or slightly more. The US subsidiary will remain a separate subsidiary.
• Geospatial non-Indian government revenue: Through the US acquisition, revenue from geospatial non-Indian government clients has started trickling in and will continue to increase.
• New hires: Beyond John, the company hired Rashi Mehta as finance VP in the US, also with performance-linked ESOPs. A new office was added in Singapore.

Kamat: "We are currently in active discussion with three companies, out of which one, we are at a stage probably we would be able to give them non-binding term sheets before the end of this month."

Tax & Accounting Items

• Tax rate spike explained: The company received a dividend of ~INR10.7 crores from its JV (70% holding). This dividend is not accounted as EBITDA and has no top-line impact, but is taxable, resulting in ~INR4 crores of extra current tax. The quarterly share of profit (~INR2.6 crores) is accounted on an accrual basis. Dividends are received annually, but this year's declared dividend was higher and fell in the July-September quarter.
• Escrow account treatment: An analyst flagged INR37.75 crores in margin money or escrow under investing activities. Management stated it is from customers and already part of the cash balance, but did not clarify why it appears in investing rather than operating activities.
• Segment comparability gap: When asked why geospatial and engineering services revenue showed near-flat figures (INR0.58 crores in Q2 FY24 vs INR0.53 crores in Q2 FY25), management explained the classification change but did not provide a directly comparable prior-period figure.

Guidance & Commitments

Key Metrics