Merritronix Ltd : Know Your Promoter - Management interaction with Mr. Dovari Amarnath, MD

0:00 This is one of the PCBS uh Rohit. >> Yeah. >> Uh this is a single board uh computer. This particular board has about 2,600 components on it. >> Wow. Okay. >> Okay. Both bottom and one bad solder joint >> on this board can create a hell for us. >> At this point of time, we are the only company uh who have got an order from CERN. particle detection by CERN Geneva 2011 the last time by opportunity is gone if they want to reproduce the same design which is qualified where do they get the parts so that's where the obsolescence management come that part is obsolete I mean basically the the part cost used to be around $12 and we have an experience of selling the same part at a price of 65,000 rupees Hello everyone, welcome to the 36th episode of the know your promoter series at Sunday investing. We are currently in Hyderabad at the Metatronics facility with uh Mr. Amaraji the promoter of Meratronics uh whose IPO will be coming very soon. Uh thank you so much you know for hosting us and having us here. Uh really looking forward to this interaction. Yeah, thank you so much Rohit for having me on this on your podcast. Uh yeah, so Meritronics was incorporated in 1988 and uh it just coincided with my passing out 1993 that the commercial operations started >> right.

1:45 >> So I had a brief stint for with civil services which I was not very successful. So immediately I joined the company here and the initial uh five six years were bit of a struggle but soon uh I could cope up with the environment and you know uh we were then working on cable joint tickets which we used to supply to department of telecommunications then which eventually became BS and business with BSN. Okay.

2:23 >> Which continued until 2012. >> But then we was the advent of mobile phones. >> We started seeing a decline in the requirement uh demand for uh the landline networks which had a direct impact on the products that we were supplying to BSNL. So that's when uh uh there was a there was always an underlying uh uh feeling that the we had to get into electronics.

2:59 >> So I mean the name the company's name was also uh named after electronics. Okay. Of course Mary is comes from my mother's name Mary. Okay. So that's how it has been named Meritronics. >> Yeah. I mean the initiation was with a an idea that we'll be manufacturing maybe about 10,000 uh uh electronic voting machine PCB assemblies but then it changed completely to the opposite side where we had to deal with uh uh high mix low volume kind of requirement. Right.

3:35 >> So basically we we start making uh almost like we handle about uh 3 to five SKUs every day. Basically three to five different types of PCB assemblies >> we manufacture. Uh so that actually taught us a lot uh because the SMT lines are meant for volume production but we started using it for I mean slow volume kind of requirement >> and initial maybe until until 2008 it was sort of learning curve curve for us as well because the kind of uh the quality that customers expected since the customers themselves were new to this technology. And then uh >> at the far end there were principles who were expecting the quality on par with what they get from others uh mature markets like China or anywhere else. So uh to understand that >> that gap it took us almost like four to 5 years.

4:55 >> Okay. And then by I can say by 2009 we were like we reached those we at least were at the initial stages of this maturity and then since 2012 13 uh we because of our uh history abbences uh we even work with zylings we work with analog devices we work with uh microchip We are still working with microchip for making their uh uh test boards for uh the taped out uh chips.

5:35 >> Okay. >> So though we had big names on our customer list, the business was still small because uh the it was limited to those few engineering samples. The big step was uh with Honeywell where they started doing their uh uh protos protos which ran into from uh anywhere between 20 to 50 members including material I mean including the inputs >> until then it was more like job work uh kind of thing. So, so that was a uh one milestone that I can mention of where the uh the top line started increasing in electronics division. Until then it was uh the the earlier division which was uh getting uh big revenues.

6:38 Uh so uh then as the years passed as you know Hyderabad is not a I mean it didn't it doesn't have many production uh product uh making companies in volumes. So our revenues were pretty stable and then sometimes you know they used to dip next uh the consecutive year >> right.

7:11 >> So we always used to be on t hooks where how the market would uh be the coming year. Come 2019 when uh the covid uh broke out uh the the whole dynamics changed in the market uh because the customers were all of a sudden they faced a uh acute shortage of electronic components because most of the components were being produced in uh Asian China to an image >> and China is the place where the code actually got initiated.

7:59 >> So companies which used to procure components in with a lead time of about 2 to 3 months all of a sudden started seeing a lead time of uh 2 to 3 years. So that kept them uh I mean they had to see for solutions and then it's uh that's when we were able to offer our customers that we can support them with the components at a much lesser lead times because uh since we are supporting Honeywell others uh with uh material we established our supply supplier base in uh Asian countries apart from US and Europe. So once we delivered that's when the then uh the the DPSUs stationed in Hyderabad started believing that that they can outsource uh orders to MS partners incomplete right from uh it's like build to print right from procurement assembly testing >> right >> the other avenue that uh opened up at that point of time was the component supply itself.

9:28 >> Okay. Apart from uh the turnkey manufacturing, the component supply itself and two or three things happened simultaneously like the other one more channel that opened up was generally uh sourcing obsolete components is a difficult task. You need to get >> genuine parts. That's the trick. Genuine parts. And uh >> uh you know the customer is always suspicious that you know the parts might be since these are obsolete parts they might be counterfeit.

10:13 So we could uh deliver to the customers genuine parts. So the contemporary parts as well as oxid parts. >> The other surprising thing that happened was uh the customers were also open to the idea of a form fit function equivalent for the components which were obsolete. That opened up uh that was a that opened up for us >> a need to do some engineering around the contemporary parts which could be uh put into a shape shape and form such a way that they become forfeit function equivalent onto their board. they don't have to change the the design of the board for the sake of one single component. So these three three things happened almost simultaneously and then we started seeing uh a very good opportunity in obsolence management and for last one and a half years we have been working on that more focusly because the rest of the parts the component sourcing and component trading is uh it is it is basically buy and sell.

11:43 >> Right. Right. Right. And as far as uh turnkey uh build to print is like you know we source again we source process them sell. >> Understood. Understood. So as a part of this obsolesence management we were uh uh one of our customers has shared a list of 400 line items >> out of which uh we identified about 40 line items and of which four of them we have delivered samples to the customer for evaluation.

12:18 uh one of the part as we are speaking uh is in fact not one two of the parts as we are speaking are tested and qualified >> okay >> we should be getting uh a formal communication soon >> so obsolescence so since actually there are a few different things you covered which I want to touch upon uh since you're talking right now about this obsolescence piece uh can you just explain what exactly this is why is it important because I know it is a big part of what you And what do >> so obsolescence basically all the OEM semiconductor companies what see uh the mood law says that the density of uh uh semiconductors in terms of diodes or gates is going to double every year right so which means shrinking of component size which in turn means shrinking of the whole electronics >> right uh subsystem.

13:18 >> Okay. Uh so suppose say today a part is released in the market at uh with certain functionalities down the line in about 5 years the OEM doesn't stick I mean he wants to upgrade his product line which is smaller which has more functionality uh embedded into Right.

13:50 >> And then uh uh this way the uh this way I mean basically uh when they are offering more functionality the the demand the the market demand also changes >> and then for them they get an opportunity to you know increase the price level or whatever. So it is their their way of operating. >> Okay. So now what happens is after 5 years uh this part they start making it end of line uh equipment uh end of end of line device and then they give a time period of about 2 years or so for uh saying that this is the last time by by opportunity. In those two years all the all the operators in the market who are using those devices have to pick up the uh component from the market from the uh production.

14:48 >> Yeah. Now what happens is in defense especially the they are in on the other end for them typically the now in the last 2 three years the private defense companies have come in but if we go back beyond those 2 three years the defense research or engineering was focus uh was concentrated with uh government defense labs or DPSUs. M now by their own processes the typical design time for them is about let us say 2 to 3 years >> because they have to go through lot of qualifications >> right >> and then once the design is >> uh come to a level where the production uh I mean they have to do some uh samples >> production production yeah >> yeah that takes about typically another 6 months and then they have to do a P then they have to do flight field tests and flight tests in case of uh uh aerospace.

16:03 >> Yeah, >> this whole thing itself takes nothing less than uh 5 years and I can cite a anecdote. We started working with uh RCA lab uh on IR seeker uh infrared imaging ray seeker back in 2006. >> Okay. >> And in 2012 actually it was sheld.

16:36 >> Okay. after all the qualifications it was sheld and again it got revived about uh in 201 >> 17. >> So uh the the the time span that we are seeing is about two decades. >> Correct. >> So in this time the the main tiger shark processor the the processor that they they were using >> became obsolete in 2011. M >> fortunately the labs purchased the uh the whatever quantity the the OEM offered and kept it in stock thinking that they'll be getting an order >> right >> so this is the time these are the timelines that uh the research projects happen in defense labs >> so now okay now 2011 the last time by opportunity is gone now where do they get if they want to reproduce the same design which is qualified >> where do they get the parts >> so that's where the obsolescence management comes actually the obsolescence management comes at the time of design itself >> the the the the design document will have that >> the the these parts are becoming obsolete or you know some document will be there which says that okay in so many years uh uh this will be done probably they have to get ready with the new design or uh they have to find an alternative replacement for that processor. So we uh meatronics what it is doing is that well whether the designer could take that step or not >> we are able to solve their problem by one sourcing the genuine parts >> these are from gray market >> uh two identifying uh functional equivalent and making it into a form fit equally.

18:36 >> Got it. >> So that's what we are doing in the process. Very recently what we could do is uh we could uh indigenously manufacture two of the Cypress parts. What we did was we could identify D bands >> uh across the world and then the package into which the D gets assembled. Both of them we could import them and get them assembled in India and then offered the part to the customer >> not with OEM uh marketing but with our own market.

19:10 >> Understood. And is this like a higher margin business for you relative to the >> Yeah, it uh it is because uh uh it is a higher margin business because uh one thing is not many of the >> operators in the market can do this. uh thing is they know of the requirement but the time they do not dedicate so much time onto it because they for them most of the distributors for them it is like revenues the uh they have to keep generating revenues >> right >> and if they have to work uh on one single product for five or 6 months to uh uh to make a to offer a solution and for which they are not even sure whether they will get an order or not.

20:08 >> They are not ready to put in efforts. So that's where we are coming in. >> Correct. >> And the customers uh uh they are ready to pay whatever >> we ask provided the provided the solution is good. I mean it is working. >> Got it. Got it. Got it. >> So we have seen margins uh really uh exorbitant margins like sometimes even 100%.

20:42 >> Understood. >> But on average I see that uh 30% is >> 30% >> is good to quote. >> Nice. Understood. So sir if we come to your core turnkey uh method which is maybe the bread and butter of what you do. Can you just show you know what kind of products you make? Just help people understand and you know visualize the products that you guys make. >> Yeah. >> And what the process manufacturing process is like.

21:08 >> So um this is one of the PCBs uh Rohit. >> Yeah. >> Uh this is a single board uh computer. Uh uh on this as you see these are the this is a risk processor. M >> this is a FPJ Xylink FPG. So this particular board has about 2,000 uh 600 components on it. >> Wow. Okay. >> Okay. Both bottom and and one bad shoulder joint >> on this board can >> uh make this bad uh I mean create a hell for us. I mean we when we are testing the board doesn't work. So the the what we have learned from 2002 to 200 8 is that you know every single joint is important and we could uh grow to a level where uh we are able to give 98% yield on this electronics assembly.

22:20 >> Okay. So basically the first time pass is 98%. >> Okay. So only 2% gets rejected 98% pass on the first. >> Yeah. >> Understood. Understood sir. And what is the typical process by which this is manufactured? What are the facilities you have here to help manufacture you know such a product? >> Yeah. So basically the the facilities that we have here uh as a any normal SMT line consists is right from uh loader PCB loader to PCB unloader. Uh uh we have a stencil printing uh solder based printing machine. We have pick and place machines.

23:00 >> Mhm. >> And uh we have a Panasonic uh line, >> right? >> And then a REM reflow over >> and then we have automated optical inspection systems. We also have X-ray inspection systems. >> We also have uh flying probe tester. >> Okay. >> Uh these are the equipment that we have. we have and uh what we plan to do next is to >> augment the facility to a industry 4.2 facility with another completely of fresh line.

23:36 >> Okay. So that'll be a second SMT line. >> Yeah, that will be a second line. >> Okay, got it. So apart from the SMT line, you also do through hole. >> Yeah, exactly. So without through hole components uh uh the board none of the elect very few electronics assemblies get completed because like the you see the peripherals here the connectors or the RF connectors uh like these uh connectors earning connectors right highdensity connectors >> these will uh probably basically the uh the throughold devices is largely have high uh higher current carrying capacity.

24:21 >> Okay. Okay. >> SMD connectors are more at a signal level or you know uh low lower voltages. >> Got it. >> So without TM through hole devices uh an electronics assembly will never be completed. I mean >> is it is it a fair understanding that the through hole also helps in adding more uh like more reliability or or high it it the the the PCBs can withstand higher stress higher uh you know heat higher you know is is that also one of the advantages. See normally uh through hole devices these days uh see anywhere the component ratings are uh uh beyond uh 5 volts I mean under 5 volts mostly the the the devices are uh surface mount mount devices >> right >> uh the upper threshold is about 12 volts >> okay >> anything beyond uh 12 volts largely about 80% of the time there will be uh through hole devices like say we are talking about transformers we're talking about >> uh toids right uh inductors or connectors >> these are the ones which will be largely through hole devices >> understood >> and see the since the the pins go through a hole and get soldered on the other side >> uh they not easy to get plugged out. Not like any surface mode devices.

26:04 >> So that would be important I think when you're looking at defense applications uh applications. >> Yeah, you're you are right in one way. But uh but SMGs are able to withstand the environmental uh test requirements uh as specified by uh you know uh defense lab defense establishment. uh basically the components themselves are uh graded in such a way I mean like you know mil grade I mean >> when the components are graded uh uh normally it is more on the uh temperature range >> understood >> okay so the extreme temperatures normally a commercial grade probably would uh would be rated anywhere between uh -25° to uh plus 60° something like that uh no uh defense for military requirements it will be somewhere minus - 55° to >> as high as 155° so >> understood understood so the component themselves >> yeah so yeah so there are different parts like one is milgrade parts there are radiation hardened parts >> for space requirements got it >> so uh it's like that so so what is the capacity that you guys operate in today.

27:31 What is your capacity utilization and and the IPO funds? Is that being used to uh increase your capacity or is it for other reasons? >> Uh the present utilization uh of the line is around 60%. >> 60%. Sure. >> Yeah. and the I the funds which we are seeking from uh IPO uh is to set up a world class uh manufacturing facility. Yeah, I mean basically you know we intend to reach out to uh customers based out of uh US or Europe or uh overseas >> right you know and when these customers are used to the manufacturing facilities set up in China predominantly and they have an experience of working with them for maybe three decades >> right >> there are huge capac capacity is set up there and the facilities are also in line with their expectations which is not the case in India. I mean we are starting now. So if we want to reach out to such customers, we have to meet we have to uh meet their expectations in terms of the >> uh the facility requirements and we want to be a showcase company at least in Hyderabad. I'm not sure uh to my knowledge there is no industry 4.2 to uh compliant client >> right >> that's my aspiration >> understood so I'll ask one last question on the products that you make like so where do these what are the final application that some of these products I mean you have a range of products and who are the end clients typical end clients work with >> so basically uh this particular uh assembly is it's a single uh single board computer uh this is uh used in radar >> in radar radar. So basically >> uh once the digital signal the signals come and then they process the signals using digital signal process >> signal processing cards. Then the input is given to this card.

29:59 >> Uh this will uh process the data and then uh given uh give an output to the user. So this is for radar and like uh uh we do uh uh we do these boards. This is a uh AFC this is for a project called AFCS. >> Okay. >> Uh this is for automatic flight control system.

30:29 >> Okay. >> Right. And then we have uh uh uh what's it we have made we have manufactured PCBs for this is a signal processing board. >> So from this board the data is given to the sign uh single board computer that I was referring to you earlier right. Uh so uh then we have made this is a uh side lo >> uh this is a PCB for the same customer.

31:10 >> So you see here right this is a airflow sensor. >> Okay. And if you see bit closely the marking here is provided for a part that was actually intended to be placed I mean required to be placed in the >> right >> code but that particular part became obsolete >> and we wor with the OEM and then use their present part to make it uh adapted it to the the earlier requirement.

31:47 >> Got it? >> And this particular order we got it on proprietary basis because we were able to offer this solution and no other no one else could do it. >> So I had seen some parts upstairs where you guys are working with uh I think CN CERN. >> Yeah. >> Uh for some particle detection. >> Yeah. So uh what's this is a RVIC board radar video interface uh board we are doing for the same customer.

32:22 >> Then we have this is for uh mission computer uh uh uh code NCDP project for one of the avionics customers. >> Understood. >> Yeah. Yeah. >> So can you share some of the clients like or is is that is that >> Yeah. So our clients predominantly are H BL BDL >> ECIL uh Honeywell ABB and uh CERN as you said CERN we are doing uh we are one of the at this point of time we are the only company uh who have got an order from CERN for uh PCB PCB assembly.

33:02 >> Right. Right. And these boards are uh used for particle detection by CERN Geneva. >> Nice. >> Uh so what happens is uh these are u very highspeed boards with uh uh uh like the signal speed I mean that uh is 12 picosconds. So if uh if there is any uh abrasion in the manufacturing process >> that the the Yeah.

33:42 >> Yeah. Yeah. Correct. Correct. Understood. Understood. It sounds like very specific niche niche. So I'll move on a little bit to the uh numbers now. Um perhaps you can just help people understand now what is your typical so FI26 is already already >> I would like also to uh >> ah sure yeah >> is this the one yeah >> yeah so uh this is a again a formfit function equivalent for a Texas part >> okay >> uh which is ptn04050 ah so basically the this particular part uh is is used in many of the missile programs >> and the specialty of the product that Texas made is that it is a milgrade part >> and it can deliver it can work uh it can deliver 6 W of power and it can give given a positive input it will it will give out negative uh voltage >> okay >> so that part is obsolete I And basically the the part cost used to be around $12 and we have an experience of selling the same part >> at uh at a price of 65,000 rupees.

35:05 >> Okay. >> Okay. >> Wow. >> So that's what that's what I meant by in this particular Yeah. Yeah. So uh what we did was I mean since I mean even in the obsolete market I mean if we are just buying the original part and selling the the quantities would be limited and the price actually gets getting pushed higher and higher. So what we did was we took a contemporary part. This is the present part. Okay.

35:32 >> And we did some engineering around it here. Uh added another uh uh small uh hardware here. >> And now it does exactly what used to. >> Understood. Understood. >> And this goes goes directly and sits into the so now we are doing a thermal uh testing on this part. >> Okay. Sir, if I'm not mistaken, uh about 10% of your business today is from this obsolescence engineering. Is there any plan to scale this up and become a bigger part?

36:03 >> No, we we aspire to increase bring it up to about uh 25 to 30% uh of our revenues. Uh >> okay. >> Uh in the next 2 three years. Okay. Understood sir. So let's move on a little bit to the numbers. Now I think FI26 is over. So what has the you know what is the scale of the business today? uh what are the typical you know EIDA and net margins and and what do you see you know just overall at a growth level how how do you see the next >> yeah so uh we have clocked 155.6 crores uh on the revenue side and at the PAT level we are about uh 9.5 9.6% 6% at this point of time.

36:49 >> And we see that uh in the revenues will keep growing at the same 25 to 30% uh annual uh >> rate and the profits after manage uh after tax we expect the same to grow around anywhere between uh 15 to 20% year on year. >> Okay. Yeah. So, uh if we are we are good enough to make all those 40 components that we were talking about indigenize them >> right >> uh it could get the pat itself could get uh anywhere between 15 to 17%.

37:37 >> 15%. So you see a large move from your pack current margin of 10%. Do you think that the pack margin itself can become close to 15%, if your obsolescence becomes a larger and >> understood sir and sir what is your typical working capital like how much working capital you require? >> Yeah Rohit. So um that's an interesting question. So basically in most of the uh defense projects what happens is uh especially on the power side right I mean the ruggediz ruggedized power supplies are required >> which have to withstand tangy kind of uh shocks >> right right and then vibrations >> and then also withstand temperatures as I told you earlier - 55 to as high as 155°.

38:31 >> At this point of time, there are not many manufacturers in India who are able to make such hardware components. So these are being at this point being I mean there are handful of uh manufacturers uh based I mean who are based out of the US and these parts comprise almost like 20% of the whole bomb cost and for these what happens is the lead time uh the the the payments have to be made in advance only after pay getting the payment they will start manufacturing the lead times are typically about four to 5 months from the date we pay them. And then uh if we get to uh a detailed level the typical bill of material will be having about 200 225 components or something 250 line items.

39:30 >> So even if one single line item is shortage for some uh reason in the market >> the whole bomb is stuck >> gone. Yeah. So we are seeing a cycle time of about 6 to 9 months for our working capital uh cycle to being completed. >> Right? >> In some cases the orders the the customer themselves place an order for uh total project order for 5 years. M >> so which which is an acknowledgement that the working capital uh cycle time required is huge. I mean >> uh so it is >> uh I mean we fortunately or unfortunately we are we have we handle uh few of such projects and uh I think we are probably 6 to 9 months is the best case and we are able to achieve it.

40:29 >> Got it. Got it. So you mentioned one thing which I wanted to ask earlier actually which is just on your order book and your I think today you have about a 90 cr order book which is roughly about 8 7 8 months of revenue. Uh and what is that order book typically like? Is it generally you have 78 months of revenue as order book or is there a period where the order book expands and then you know where more orders come?

40:53 Would you typically have one year two years? Uh it is like this Rohit and so uh we u generally uh we have order book orders in place for about 6 to 8 months or so >> right >> uh we are I mean gen uh in general there could be an impression that uh looking at the the tire one defense companies who have orders for 10 years. Yeah, multi years like HL has got 62,000 course orders for next >> uh 10 years right has >> order books of similar line >> so they for them it is like uh the systems that they deliver right so when it percolates down to us >> uh I mean basically the see I mean let us be in their shoes and and start seeing how how we manage a project. Now we we have an order for 100 sets, >> right? So and then they get a delivery time for uh say 10 years.

42:07 >> Okay. >> So they they actually get an order say 10 systems a year or something. >> Right. Right. >> So basically for us it turns out that for for this year we ordered 10 sets to our suppliers. So basically that's the reason why we do not have exact mapping in terms of order book from the customer >> right >> but uh with HL who is our one one of our major customers uh we have their uh job work which we still continue to do and then we'll be continuing to do that we have orders at least for next 5 years uh but uh we do not mention that because uh >> they comprise a very small percentage of our revenues.

42:55 >> Sure. Sure. Understood. Understood. >> But then there is they are going through a transformation where they want to uh go for build to print. >> So then the to book is going to from especially HL it's going to uh balloon out. >> Understood. So one last question just on given you've been running this business for so long. What are the big risks you see like you know what are things that the keep you up at night or things that you feel you haven't fully like gotten around or you think could affect the business or that investors should be worried uh should be aware about.

43:34 >> See I mean uh for some reason I'm a very complicent guy. I I never saw uh risk because the businesses when handled well I mean without uh >> losing focus will never get into a risky situation. And I'll give you an example right uh our own example in 2012 what happened was uh the earlier uh I mean earlier uh business that the telecommunication cable joint it was a big revenue generator it was a it was almost in that particular year there was a >> another thing of a scam that happened in telecom sector case I think your batch right you passed out >> yeah So, so that hit us really bad. I mean the whole the that particularly year it was zero.

44:36 >> Uh >> uh and then we had just a revenue of 4 crores from our new division. >> Okay. >> We still booked profit. >> We were able to contain our costs. >> Uh we the c the business was coming in because we were able to deliver. So okay keeping this uh I mean this exception aside the risk that I see at this point of time is uh due to war or whatever reason the dollar is still going up. So if there were some orders which we for which we quoted earlier >> right >> when the earlier this the parodies sometimes concerns me but it has actually worked to our advantage in especially in CERN's order because when we quoted to them it was uh 82 and now it is >> 96 95 or something >> right >> so probably we are taking hits somewhere where unknowingly because We still continue to uh order parts.

45:46 >> Correct. >> Uh but uh we have an efficient uh purchasing team. So we are able we are able to still >> uh see a gross margins of around 20% on each >> project. Yeah. Got it sir. Got it sir. So is there any message you want to leave with the investors who will come on board? Um >> um yeah the only uh the only message uh that I would like to give our investors is that we are a company focused around customers and we believe that customers are biggest assets and we have uh a track record of retaining customers over over last two and a half decades and most of our customers are uh acquired by word of mouth and now we plan to uh be more aggressive and inorganic and uh uh given this uh I see that uh we will be doing a very great job uh uh with the money that is mobilized uh through IPO uh and we solicit your support for this thing.

47:07 >> Thanks. Thank thanks for that ammoni. Really appreciate you having us over. >> Uh wishing you the very best from the Sunday investing team. Hope you have a wonderful IPO and hope you're able to use the funds to the fullest extent. >> Thank you so much Rohit. Thank you.