Centum Electronics Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Revenue surged 51% YoY, driven by EMS: Consolidated revenue jumped on broad-based growth, with standalone up 72% YoY and subsidiaries up 29% YoY, though the order book dipped slightly on BTS delays and shorter customer purchase horizons.
• Margins are on a stepwise climb: Consolidated 9-month EBITDA nearly 2.5x the prior year, and management laid out a clear path from near 10% this year to 12% next year, with subsidiary cost cuts and BTS operating leverage as the engines.
• China Plus One is a structural tailwind, not just a cycle: Customers now proactively seek Centum out, comparing its quality to Switzerland or the US, not China, while its engineering talent and proximity to clients' own India captive centers add a defensible edge.
• The order book softened, but for explainable reasons: BTS segment orders were delayed at the final approval stage and supply chain normalization let customers revert to shorter purchase orders; management expects imminent clearance.
• What to watch next quarter: Whether the delayed BTS orders actually clear, the pace of industrial demand recovery from customer overstock, and any concrete timeline for the electronic warfare and radar opportunities in the pipeline.

Revenue Growth & Segment Drivers

• EMS anchored the quarter: The majority of revenue growth this year came from the EMS segment, fueled by new customer wins in industrial, fuel cell, electrification, and e-mobility, all export-oriented businesses demanding world-class quality.
• Standalone outperformed: Standalone revenues rose 10% QoQ and 72% YoY, while subsidiary revenues grew 30% QoQ and 29% YoY, though subsidiary margin improvement remains the focus.
• Industrial segment added marquee names: A global OEM in grid automation for utility applications now uses Centum as a single-source supplier for key product lines, and a hydrogen fuel cell customer pursuing a China Plus One strategy chose Centum as a strategic partner.
• Share of wallet is expanding: The pipeline of opportunities from existing large customers is growing, and efforts to mine these relationships are starting to show results.
• Customer stickiness varies by model: EMS orders typically run 3 to 6 months but get renewed, while BTS engagements, after successful product development and implementation, convert into longer-duration letters of intent for mass production.

Nikhil Mallavarapu: "5 years ago or 10 years ago, the amount of effort that we had to put in to go and convince a customer to source electronics from India was significant... Whereas today, the customers are coming to us because they are driving them to find companies like us to source from."

China Plus One & Competitive Positioning

• Quality perception sits at the top tier: Centum is benchmarked not against Chinese competitors but against the quality standards of Switzerland, Europe, or the US, a positioning that supports premium export-oriented work.
• Cost competitiveness is split: On value-add, meaning labor-driven conversion cost, Centum is competitive; on bill of material, China retains an advantage due to scale and capacity, though localization and redesign engineering services help mitigate that gap.
• Engineering talent is the differentiator: The ability to bundle engineering services with EMS, for example, managing component obsolescence by redesigning products or upgrading performance, is a key factor for customers choosing Centum.
• Captive center proximity locks in relationships: Many global customers already operate their own engineering design centers in India, and physical proximity to those centers is a significant advantage when they select suppliers.
• Global competitors, not local ones: Centum competes with players like Plexus, Sanmina, Benchmark Electronics, Asteel Flash, and Venture Technologies, companies based in Europe or elsewhere in Asia, not primarily Indian peers.

Nikhil Mallavarapu: "we are compared not at the quality level of China but at the quality level of Switzerland or Europe basically or the US."

Order Book & Demand Dynamics

• Order book dipped slightly: The decline from September 2023 levels was driven by two factors: BTS segment orders stuck at the final approval stage, and a broader shift as supply chains normalize, letting customers revert to shorter-horizon purchase orders.
• BTS clearance is imminent: Management stated the delayed BTS orders are at the final stage and expected to clear imminently, which would restore that portion of the backlog.
• Industrial demand hit a temporary air pocket: Some industrial customers pulled back due to overstock, creating a slowdown that management expects to recover toward the end of the year.
• Engagement horizons differ by business: EMS runs on firm purchase orders with customer forecasts stretching 12 to 24 months, BTS is project- or PO-based over 2 to 2.5 years, and engineering services vary from fixed-price to recurring time-and-material models.
• Defense and aerospace pipelines are swelling: Existing customers are increasing spend due to ongoing conflicts in Ukraine and the Middle East, and Centum is seeing new demand from Middle Eastern geographies, though these opportunities will take time to convert into revenue.

Nikhil Mallavarapu: "But the information we have is that, it's at the final stage. We expect it to be cleared imminently."

Margin Trajectory & Cost Actions

• EBITDA nearly 2.5x over nine months: Consolidated EBITDA rose 67% against the previous quarter, and the 9-month figure is almost 2.5 times the prior year's comparable period.
• The margin path is explicitly stepwise: Management expects to exit this year close to 10% EBITDA, move into the 12% range next year, and then climb further from there, a cadence it reiterated when pressed on whether mid-teens margins were achievable by March 2025.
• Subsidiary cost cuts are a defined lever: A new CEO, in place for 1.5 years, has identified a cost reduction plan exceeding EUR 0.2 crore, and its implementation is expected to reflect in next year's numbers and deliver a positive contribution in the coming quarter.
• BTS operating leverage is the second engine: Improved contribution from the Build-To-Spec side is expected next year, providing further operating leverage on top of the subsidiary cost actions.
• Finance costs are contained: Management expects no significant increase in finance costs, with working capital levels maintained and debt to be brought down modestly.

Defense, Space & Strategic Opportunities

• Make in India is materializing in defense: In December, the Ministry of Defence announced a series of platform-related approvals, and Centum is engaged with several of those programs, competing in limited tenders alongside players like Astra Microwave and L&T.
• Electronic warfare, radar, and space are in the pipeline: Centum is actively pursuing opportunities across these domains, where significant potential exists, but the procurement timelines tied to government processes remain unpredictable.
• Airbus zero-emission aircraft work continues: An ongoing engineering services program with Airbus and an OEM is focused on future zero-emission aircraft, a long-horizon engagement.
• New geographies are opening: Beyond existing customers, Centum is seeing increased demand from the Middle East, driven by the broader defense spending upcycle.

Guidance & Commitments

Key Metrics