Ladies and gentlemen, good day and welcome to Automotive Axles Limited Q1 FY26 Earnings Conference Call hosted by Batlivala & Karani Securities India Pvt. Ltd. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded, and I hand the conference over to Mr. Sailesh Raja from Batlivala & Karani Securities Pvt. Ltd. Thank you, and over to you, sir.
Thanks, Shubam. Good morning, and thanks to everyone who have logged into Automotive Axles' Q1 FY26 conference call. From the management side, we have with us Mr. Nagaraja Gargeshwari, President and Whole-Time Director, Automotive Axles; Mr. Ranganathan S., CFO, Automotive Axles; and Mr. Kishan Kumar, GM, Meritor India . I would now like to turn the call to Mr. Nagaraja for the opening remarks following the event. Sir, you may begin now.
Yep. Thank you, Sailesh. Good morning, everyone. Once again, welcome to this Automotive Axles Q1 FY26 Earnings Call. I have, again, with me Mr. Ranganathan, CFO, who will be able to take up any of your questions related to the finance. And then I also have my colleague, Kishan Kumar Udupi, President and Whole-Time Director, MHVSIL, who can bring in more information to the end markets. Despite the soft market, we are able to put up a very strong performance, and then we continue to improve our EBITDA and cash flow for the quarter. So with that, Ranganathan, could you please take us through the results and followed by the question and answer?
Sure. Thank you, Nagaraja, and very good morning to all of you. I am Ranganathan, CFO, Automotive Axles Limited. The revenue for the first, I just do a quick highlight of the financial performance. And overall, the revenue for this quarter is close to about INR 498 crores. If you do the overall revenue of the last year, more or less, the revenue is in the same level. And the revenue from operations was slightly lower, just 1% compared to last year, but if you take the overall total income, we are at the same level as last year. As far as the profitability is concerned, EBITDA for the quarter is about 11.7% as per the published results, and compared to last year, for the same quarter, it's 11.2%. So EBITDA level, we are able to improve 0.5%.
As far as the PAT is concerned, we are at 7.3% compared to 6.9% last year. We are still better than the 0.4%-0.5%. The highlight and overall strong working capital performance for the quarter, the cash has significantly improved. Good cash flow performance too for this quarter. Overall, the key contributory factors, as all of you know, that we have adopted the new business model as per the arrangements with Meritor. The first quarter, we are reporting under that. Overall, as Nagaraja said, the market is still, this quarter is going a little slow. Probably in terms of the initiatives towards the new product development and production, and improvement on the cost reduction and automation, it's all continuously on the same pace. This is definitely yielding slowly the improvement in the profitability perspective.
That's one of the things I just want to highlight. Overall, the profitability has improved compared to the last year. With this note, I'll probably end here, and we will continue with the question and answer. Thank you.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Viraj from SiMPL. Please go ahead.
Yeah. Hi. Thanks for the opportunity. A couple of questions. First, can you explain a little bit more in detail how the new model would work, both in terms of impact on top-line EBITDA? And also, how is the arrangement now with regards to the service fee, which we'll be paying to the private entity?
Yeah. So I take this question. By and large, the earlier model versus this model, more or less about 75% of the sales were referred to MHVSIL, which is also being consolidated currently with Automotive Axles and the customer. In terms of revenue, earlier also, we are operating with very strong operating transfer pricing as per the arm's length. The improvement on the revenue may not be very significant in terms of the top line. And it is less than the double digit in terms of the increase on the top line.
How many increase in top line is?
It is in the single digit. It may not be a significant improvement compared to the earlier transfer pricing, which is the direct sales to the end customer. And because it varies between the product mix, that's why I'm saying. Second is about, on the overall profitability as an arrangement, we have a very significant arm's length assessment towards the fee what we need to pay as Meritor continues to support Automotive Axles on the marketing, product development, and engineering support. So we have made an arrangement as per the arm's length. That's what's been arranged.
In terms of the overall profitability, your question is, we can see the effect for the full year because the first quarter, since we have the two factors I just want to bring to you, one is about the revenue recognition is one of the factors which will affect especially for the export this year, this quarter. And that will get normalized in the coming quarter. And definitely, all the efforts on the new product as well as on the cost improvement programs will continue to reach you. And you'll definitely find a marginal improvement. But since the arrangement is also to pay the fee for the support and marketing and engineering and product development.
Just a follow-up on this one because, sorry, it's not clear to me. First, if I look at the sales model earlier versus now, right, as you said, close to 80% of the sales were routed through Meritor HVS. And if you look at that entity, they typically have a gross margin of 10%. So there was a markup of 10% further on the sales purchase from us and sold to OE. Now, that piece is basically now sold by us to OE. So naturally, one would think that there will be at least a 10% or so kind of a bump up in our top line starting from Q1. And if I look at our key customers, be it Ashok Leyland and others, except but also the production largely being for the quarter being flat or marginally positive.
Starting Q1, the thinking we had, and I think in our earlier discussions also, you indicated the top line growth being faster irrespective of the market cycle. That has not really played out starting Q1.
No, I'm sorry, I mentioned these are two things about it. The 10%, I don't know where you reference this from.
So you said their own financials from RFC?
No, no. That's not right. That's what we have mentioned this earlier also. Sorry to intervene. Their financials is not only selling through AAL; they have their own aftermarket division, which they have a separate setup, which is nothing to do with Automotive Axles. Okay? So you can't compare the entire other entity or the entire margin consolidation goal they're bringing. That's a wrong assumption, and that may not be appropriate, I guess. So the sales what we are selling to OEs, and this is now it's been consolidated at AAL level. Okay? And whatever the MHVSIL has got their own initiative of aftermarket, which continues to be with other units. Automotive Axles has no role to play there. Secondly, I know you talked about it, the revenue. There will definitely be an upside on the revenue with the consolidation's concern.
But it may not be 10% for sure because that's not appropriate to consider. Point number two is about. I mentioned that during the first quarter, some of the revenues we have to follow as per the accounting standard Incoterms. And the revenue could not be recognized, especially on the exports. That will get normalized. That will show a little bit up on the top line. And again, when you look at it in a shareholder outlook, it's a holistic revenue what you see. It will also have an effect of the domestic market. And it's a combination of both. So if the domestic market comes to normality, and probably the support on the top line you'll definitely see a little bit much more as compared to what you're seeing today.
Okay. Second question on this one. Can you get more detailed perspective of how the service fee would work? It's an absolute fee which we'll be paying every quarter, or is it percentage of sales? And if it's percent of sales, then what is that fee structure now which we'll be having to pay to the private entity?
Yeah. That's what I'm saying. This is basically scientifically done with the assessment of two professionals to see what is the fee to be paid. And it has been assessed as per the arm's length, which has been determined. And it is a percentage of the revenue. It's a percentage on the revenue what we pay outside the sales outside our group entities. Means that most of the sales, what is the Indian OEs what we do, basically is what the fee is applicable. So on an overall basis, it's just basically an arm's length. And probably that's how the arrangement has been made now at this moment.
So, net effect of post this fee structure and post full consolidation of export, I'm assuming export, we would have not recognized any revenue this quarter. Correct me on that. So, post consolidation of that and post now the new fee structure, the net effect to Automotive Axles and the EBITDA, should we see a material margin improvement also? Assuming the market stays where it is.
No, there will be an improvement in the margin, which is actually may not be material. I don't know what is material, but there will be definitely an improvement. It's a marginal improvement, I'll put it this way, because we have to be true to the arm's length assessment. So there will be definitely an improvement. There will be an improvement in the top line. You'll see, if you look at the whole financial year, you'll see the overall effect, you'll see. Because there are a lot more combinations you need to look at it. The market is so fluctuating. This quarter, we are looking a little more softening on the market. I think this can explain that. So the point is that that effect will also come in. We can't stand alone pull out and say that it's difficult because when you do that.
So the point is that definitely there'll be per se, the consolidation will definitely give the margin improvement, no doubt about that. But to the extent, not the material, I don't know what the material means, but what I mean is there'll be definitely a margin improvement will be there.
Okay. Just two more questions and come back in queue. We have been working on filling the product gaps pertaining to the bus segment, and any update you can give whether that has been commercialized, either the 13.5-meter or the 15-meter or the nine-meter segments, which we were working on? Any update on these new product assumptions?
Yes, I can. Thank you for the question. So I'll start with the 13.5- and 15-meter. So these two are already supplying in proto batches and will be going into production soon, which is as per our plan. And coming to the other one, which is the one we have discussed in the past, the new development, the business discussions and commercials are going on with the customer. So we have finalized the specification and design. And we are hoping to close the commercials first in this quarter, which is the Q2 of this year. The other two, 13.5- and 15-meter coach, as I mentioned, the proto trials are going on, and we have received good feedback on that. There are some tweakings required as we expect after the trials, which also we are planning to complete in the Q2 and early Q3 of this year.
Okay. Last question. So you said service fee would primarily be on the domestic OE business and not on the export, which is done to group entities. Correct me. So in terms of export, how would one now look at the margin compared to the domestic piece? And a related question is, if you look at the private entity, I understand they also have after-market. But if I remove the sales which are supplied by us to them, and eventually they are supplying to OE, that 20% of sales in the margins we earn would imply the gross margin they will be earning on that 20% sales after-market would be in excess of 40%-50%, which is quite abnormal for an after-market business to be in. Hence the assumption, what I was alluding earlier.
I don't know. I have not reviewed their financials to see what margins they are making in terms of that. As far as the Automotive Axles is concerned, it's fairly consolidated. We have made an arm's length assessment. Based on the assessment, we fixed the fee purchase payable to them. If you're right, this is basically largely for the domestic OE supplies. For intercompany exports, this fee is not applicable. There'll be a marginal improvement in the margin per se for this consolidation. The effect of it, you can see holistically as a couple of quarters is good season. You can see the normalcy over there.
Okay. I'll come back in. Thank you.
Thank you. Before we take the next question, we would like to remind participants, you have a star and one to ask a question. The next question comes from the line of Arjun from Arjun Securities. Please go ahead.
Hi sir, my name is Gaurav Agrawal from Nine One Capital. Sir, your assumption, the previous participant, he said that most of the revenue at Meritor is coming from Automotive. I also did some work, and sorry to say, his assumption holds right because if you see direct purchase in that entity for the last five years, right, and you feed in your related party as percentage of that, it comes to 100%. So 100% of the RM is basically equal to whatever you supply to them as related party, and also, they have only what fixed assets of 10 crore, other expenses, operating expenses of 2.5% of sales. So you can choose to be ignorant about it or handle it honestly, what you are going to do in this arrangement.
So what's your question?
The question is that 10% gross margin which Meritor is making, now that entire sale has to be routed via you, will we see any benefit at the EBITDA level or will we see the zero benefit? And in some of the other.
No, no. I'm putting very aggressive statements. See, what I'm saying is that I very clearly mentioned there'll be a marginal improvement on the EBITDA. Okay? So the final.
I'm not able to understand that unless you see that service fee and R&D fees, all of that put together is around INR 200 crore. If you believe that, then it's okay. If there is a reason to believe that they should get INR 200 crore for providing these kind of services, then I totally agree. There should be not a marginal difference to the EBITDA. But if that service fee is, let's say, even INR 100 crore, then we should get INR 100 crore kind of a benefit to our team there. So that's what I'm trying to understand.
That's what I said. This arrangement is done on arm's length. So there'll be an improvement because of the model change. There'll be an improvement in the EBITDA margin. Okay? I can't say a number at this moment of time. We are also going through this. The point number two is about the assumption.
So the arrangement was supposed to happen from Q1, right, from 1st April 2025, right? And it is four months into the financial year. So still the arrangement is being decided upon, we'll get to know later part of the year or when will it be?
No, no. You see, as an investor, you see the effect of the we need to season out. I mentioned it. The first quarter, we have the revenue recognition point, which is as we change the model. That will get seasoned out in three to four months' time depending on the Incoterms what we agreed. And definitely, as a standalone, if we look at it under a new model, this new order will have a benefit to the P&L. But the previous person also mentioned it will be a material. I said material is a relative term. I mentioned very clearly that.
It's not a relative term. We are done. INR 100 crore of gross margin, it's very material, right?
Just for us.
Just, I think.
Yeah.
One thing. I think we need to.
200 crore.
I think we are at INR 200 crore profit pool. Even if INR 50 crore comes to our account, right, so it is 2.5% of your revenue or as percentage of your EBITDA, it is like 25%-30%. Last year, INR 220 crore EBITDA you made, if you add INR 50 crore, it's like 25% addition to your EBITDA, so it can be quite material and the profit pool is large enough, right, and the other entity, they have only INR 10 crore of fixed assets, so I don't understand with INR 10 crore of fixed assets, what kind of manufacturing are they doing?
Just slow down a second. I think Ranga already mentioned they not only have this business, and they also have an after-market business. Okay? So I think we don't have the complete details of what their margin is. [crosstalk]
If you want to have calculated everything, you can give me your email. I'll send you everything. I think it's fairly easy to conclude that most of the.
Yeah. What we have included. What we have concluded is with our visibility, like what Ranga has mentioned, there is going to be an improvement. At this point of time, because the soft market and the product mix and everything, it may not be visible. Over the whole year or six months, you will have a very clear visibility of what improvements we are going to see. It will be marginal. It will not be big, but you are going to see it more on the numbers rather than on the percentage, you are going to see it on the numbers. That's what we think.
Okay. Next question, please.
Thank you. The next question comes from the line of Radha. Please go ahead.
Hello, sir. Thank you for the opportunity. So my question was in buses. So with the 13.5-meter and 15-meter buses, as you mentioned, that you'll be supplying from Q2 and Q3 onwards. So currently, who is supplying to Ashok Leyland? And what is the expected share of business gain with these customers that you expect from the bus segment in the next two years?
Okay. I can take that question, Radha. So first of all, I did not say Ashok Leyland. I said customer. But anyways, let's keep it that way. So both these are new launches for the customer. So currently, there is no one supplying it. It's a new platform that is coming up. And like I mentioned, we did some tweaking to one of the products so that it is suitable for the application. The volumes are pretty low as it is a launch program, and it may not impact our overall share of business significantly with this customer. And over a period of time, the customer has an aggressive launch plan, but that has to be realized only after the market acceptance of the product. But overall, it looks like a big growing market, and the customer has the right strategy, and we are present 100% with them.
So I can leave it there.
So then in the other bus model of the existing customers, who was the current supplier?
The other one is our competition. You can guess. One of them is the competition there.
Okay. So secondly, is there an opportunity to make axles for the bus segment for other customers also other than Ashok Leyland?
In the coach, probably the chances are few because the other customers, for example, Volvo, if you see, they're already using our axles, which are imported directly through them. And then it's a very niche segment. Not many OEMs are present. No other OEMs are present. Coming to the smaller one, yes, there are opportunities, but I think our focus is right now to get the product out, and then we will pursue with other OEMs.
So for Tata and VECV, do they have in-house manufacturing for the buses and also for the e-buses also?
They have in-house capability, but this product range, the 13.5-meter and 15-meter, that's a niche segment. As I mentioned, that's something apart from Volvo, nobody is present today. And everybody has tried in the past, but it's a very different market. So I will leave it there.
Okay. So on the export market, other than non-Meritor, we have added only Volvo as a customer in large-sized units. So what are the initiatives that you are taking to add more customers there?
Kishan?
Sorry, can you repeat the last part?
Yes, sir. So in the export market, other than non-Meritor, we have added only Volvo as a customer in large-sized units. So what are the initiatives that you are taking to add more customers?
Okay. So like you said, the first part is right. We always supply to our own entities elsewhere. And we don't typically do a direct sale because the application, the business model, and the legal requirements are very different in the regions. Volvo or currently UD, that is a different case because that is a division that is sitting in India. And the discussions and the techno-commercial closes here. It's only a supply that goes to the other plant outside India. But everywhere else, we have our own presence. And like I said, the application, techno-commercial terms, legal requirements, that's all handled by the regional teams. And that's why we supply to our own entities, and they interface with the end customer. And also, there is a lot of value add that happens at the region.
So we only supply the sub-components, but the value add, final value add specific to the region happens at those locations. And that's been the strategy, and I don't see that changing in any near future.
Okay. So in previous few calls, you had mentioned that you were in discussion with a few OEMs to add them as your customers in the export market. So what is the update on that?
So you're talking about deemed export. So let's say if one of the customers is in India, they want to do an export, we always have the right to approach them, and that's our right. That's our business. So it is a deemed export. That is possible. But going to the location where the.
Direct export, sir? Not indirect.
Direct export is only through to the sites of Cummins or the entities of Cummins, not directly to the end customer.
Okay. Two seconds. I'll come back in a few.
Thank you.
Thank you. The next question comes from the line of Purva Jhaveri from One Up Financial. Please go ahead.
Hello.
Yes, sir.
Hi. Good morning, sir. I just wanted to add a few questions, sir. Firstly, sir, on the overall outlook for FY2026, will the demand, do you see the demand softening or do you see fewer shafts here?
Kishan, can you take it?
Yes. So let me step back. So what we are seeing, okay. Let me start with the overall industry, what's going on. So typically, if you go back 10 years or 12 years, the historical cyclicality of the industry, we see that after, let's say, two stable years with good volumes, we see a dip. And usually, the dip is pretty severe. We have seen 15%-20% dip. But last three years, if you see, the market is hovering around 400, pretty stable. And we are not seeing a steep dip even this year, even though we have projected 4% lower than the last year overall production. That's still a very strong market for us. But what we do see is a couple of things which may be only temporary.
In Q1, due to this AC cabin change, most OEMs have built on their inventory, I think, in surplus of what they usually plan for, so that is going to impact us in Q2, and then the second one is monsoon. Typically, we see that when there is a good monsoon, the freight movement is low, and this year looks like it's above average monsoon, and also, it started a little bit early in the country, so both these will probably the Q2 will be much lower than what we initially anticipated, but we do think that Q3, Q4, that's where we see start seeing the other programs that the government is doing. For example, the industrial activities are very low, even though there are so many infra projects and programs launched, but those will start kicking in after the monsoon.
Hopefully, Q3 and Q4, we will see the market coming back, and we are very optimistic that it will be at that 400 or plus minus 3-4% level.
Okay, sir. Thank you. And sir, another question to CFO, sir. Sir, I wanted to ask about the other expenses which came in around 75 crores. So you must have classified the fees paid to Meritor in these other expenses. So can you just quantify how much fees have you paid to Meritor?
At this moment, I don't have the detail with me, but it is grouped under the other expenses at this moment. And so.
So sir, going forward, we can expect other expenses to be in the range of 15%-15.5%?
May not be. I don't think so.
So can you just.
Yeah. Probably, yes. It depends on, again, the product needs again, I think. So yeah, it will be around 12%-13%.
All right. So from Q2 onwards or for the whole year to 12%-13%?
Yeah. You need to see. See, the first quarter, we have just moved it to the new model. Okay? So we may have to have a little bit of this thing settled down next couple of quarters. Maybe Q3 onwards, you can see a reasonable normalcy in the overall financials.
Okay. So incremental revenue from the direct sales by us will be below 10%, right? The growth in the sales?
Yeah.
All right. Thank you, sir.
Because, see, for example, I don't know. There are a lot of calculations going outside. Much more informed information with them are going. At the point is that our transfer pricing for the financial year last year also is well-made, and no compromise on the transfer pricing is concerned. It's at arm's length, and it's been certified by the people. So this model is basically in response to the shareholders' decision. And probably a lot of expectations, all of you have. We completely respect that. But we also need to be when we adopt a model, the change of 44 years, we have to gradually adopt into the new system. The expectations are fine. We respect that. But we may have to take the business in a gradual way because there are some values which other entities are creating. We need to respect.
We need to have an arm's length model being a listed entity. We need to align. The compliance is a very critical aspect for automotive axles. So we have gone ahead with the right process in terms of setting this. It's probably the intention is very straightforward, and we want to be very honest with the shareholders. I just wanted to place it across the board.
And sir, can I just squeeze in one question, sir?
Yes.
So sir, you've seen gross margin improvement in this quarter. So what would be the reason behind? Would it be product mix?
Probably this quarter is concerned overall basis is basically just a couple of things. Probably Nagaraja can add value. One is about the new product which we have introduced called 18TG, which is probably the volumes have slightly picked up this quarter. This was one of the reasons that the mix definitely has a benefit. And secondly, we also have the other side. The flip side of the mix is about export revenue is not really nice. But very important point is about very consistently for several years, we have a very focused approach as far as the cost improvement programs are concerned. And all of you know, the last one and a half years, we have very seriously considering automating our manufacturing lines. We have recently certified last year certified by TPM, and we are adopting Industry 4.0 for all the value streams one by one.
Automotive actually is investing. Though the market is slow, we are investing on this automation, improve the productivity, and we want to be up and ready for the upside of the market one in terms of the capacity and efficiency, so that is also happening, so all these programs of cost reduction and automation is paying up this year, and you can be evident, you will see the coming quarters too.
All right. Thank you. All the best.
Thank you.
Thank you. A reminder to all participants, if you wish to ask a question, you may press star and one. The next question comes from the line of Viraj from SiMPL. Please go ahead.
Hello?
Yes, you are audible.
Yeah. Hi. Just a few more questions. Just wanted to understand why what are the reasons behind not consolidating us not able to consolidate exports in Q1? And were there any expenses incurred pertaining to the same payment in Q1?
No exports have been made from Automotive Axle. Only these Incoterms for all these exports are different. So based on the Incoterms, we are not able to recognize the revenue in the books. And as we meet the Incoterms, the revenue will be recognized from this quarter onwards. That is, Q2 onwards, the revenue will be recognized as per the revenue recognition policy.
There is expenses? Sorry. Sorry, I'm not able to understand. So.
It is only the timing. It is just the timing because it depends on whether you are having a CIF, you have exports, or landed, depending upon what agreement is there with the customer, the revenue recognition is done. So it is just the timing. And like what Ranga mentioned, going forward from the Q2 onwards, it will get normalized.
And the expenses, have we recognized pertaining to the same, or that has still yet to be?
No. When the revenue is not recognized, automatically, the COGS relevant to the export is also not being recognized. So it goes hand in hand.
Okay. Second question is, in terms of export, what is that you are hearing from your key group entities across the globe? So I think for this year, we were also looking at a sizable CapEx to modernize the Mysore plant. So any color you can give in terms of what is that you are hearing from key market in terms of export? And any update on the CapEx?
I will take the first portion of it, and Kishan, you can add. As you can see, in North America, with all these tariff discussions going on, the end markets are very, very low. We have always been very competitive when it comes to certain specific models which we manufacture only in India, which are required in the rest of the world. At the same time, when they have peak demands, we can act as a layered capacity. The investment we are doing is not only for the export, but also for the domestic, as Kishan mentioned. The end market is changing. New products are coming. There is a lot of requirement in terms of product performance. Obviously, along with that, this will also drive our productivity improvement and reduction in our operational cost.
So this is when we started investing, we thought that the end market, especially in North America and Europe, is going to hold. Unfortunately, it is not the case. So we are expecting there will be a potential increase in our export to these regions in the next couple of years.
Given the way the tariff rates are playing out, how does that place us with all these other entities they independently sourcing from in the competitiveness?
Yeah. That is some strategy. Obviously, we need to be competitive when compared to the landed cost or in-house cost. Obviously, we also look at the same thing. We don't know if these tariffs are temporary or they are permanent. I'm sure that coming on their side, they are also working on the strategy in terms of they have a manufacturing centers here in India, Asia Pac, Europe, and everywhere. So I think they probably are also working on that. And then we work on our strategy and see where our strategy is going to sync with them. But again, at this point of time, it is too early to comment on this.
Okay. Just two more questions. So you said that the fee which we'll be paying is purely on domestic. So would it be right to think that whatever exports we will now be making directly to group entities, that will carry a much higher margin structure than what we have been historically earning?
Theoretically, yes. The agreement is that the fees are payable only for the sales that is done outside Cummins businesses. So essentially, any exports to Cummins entities will not carry any of these fees.
Okay. So traditionally, we've maintained that assuming a market is stable or margin will be growing, given the kind of cost initiatives we have been taking, as an entity, we can easily or comfortably earn somewhere around, say, 12.5%-13.5% operating margin. So given the fee structure is not applicable on exports, would it be right to think that we can have even possibly unmitting margins on exports?
Yes. Theoretically, yes.
Okay. Last question. See, I understand there's a lot of volatility in the market in terms of demand and product mix and other calculations. But if I take 2025 as a base, right, for you, and on that base, if you take into factor the new model we have, there will be some working we would have done in terms of the absolute increase in EBITDA we would see, assuming 2025 as a base. So I'm coming from a vendor side. We would also probably get some perspective of how much of that value addition is now coming to the listed entity as against what it was flowing through the private entity. So can you give some more perspective on this?
Ranga, you want to take that?
As I mentioned before, at this moment, I can't be able to quantify and tell you the amount. Sorry for it. But you'll definitely see a marginal improvement of that benefit will be coming through. And it is not appropriate for me. We have not looked at it, whether how much the other entity is making money. The approach most of the investors having is quite genuine. We respect, as I mentioned, that. But that's not the way we can structure the arm's-length transaction between the two entities. And the value addition of the other entity is quite significant. The survival of Automotive Axles basically depends on that engineering value addition. So the engineering is the brain behind this product. So obviously.
Sorry to interrupt. I think nowhere, either me or any of those other investors are questioning the IP or the value add the private entity is bringing to the table. I think the idea that you need to pay is fully justifiable. What I think me and others are just trying to get more clarity is how much, as per the new arrangement, how much of the value addition will now be coming to the listed entity. And if you go back, say, in October or November, the whole reason why shareholders may be rejected the proposal is because there was not a clarity of how much value addition will be flowing to the listed entity.
So while we appreciate that you have corrected this structure and it's now flowing only to the listed entity, there's still some degree of ambiguity of whether the value addition will at all be coming to the listed entity or not. And I think we have Mr. Kishan also on the call, who is representing Meritor HVS. So I think some more clarity as long-term investors and co-owners, we would also appreciate having to have because we also want to be part of this new ownership under Cummins. So-
Yeah. We appreciate you bringing it up. I think we owe you an answer. As we clearly mentioned, if you compare base to base, there is an improvement. There is an improvement you are going to see in terms of margin, also in terms of absolute numbers. The challenge for us is putting it up because of the various product mix and then the mix between the exports and domestic sales, which is changing so drastically quarter on quarter. We are not able to put out an absolute number. That's why we are asking you to have patience. In just the first quarter, and probably by Q3, we will have a very clear visibility of what those margin improvements that we are going to see because of the new arrangement.
This is one last question for Mr. Kishan. See, Meritor HVS, as Mr. Nagaraja had also talked about, other than the sales through which they traditionally have been sourcing from Automotive Axles, they have roughly somewhere around INR 300- INR 400 crores of sales outside. Now, in the past, we have talked about aftermarket also being a sizable growth driver in our ambition to double sales in the listed entity. So can you just give some perspective of what this INR 300- INR 350 crores of sales, what does this pertain, and what role Automotive Axles will play in the aftermarket play in India?
Just one request to the management, maybe not immediately, but maybe you can just put it out in a press release, laying out a scenario that if we were to assume 2025 operations as a base, and with the COVID, obviously, mix changes and markets are dynamic, what kind of change one would see as per the new model? I think this will go in alleviating a lot of concerns of minority investors. Over to you, Mr. Kishan.
My respects to all of you, the investor colleagues for Automotive Axles. Let's restrict the question with only with respect to Automotive Axles because going beyond, it's not very appropriate. It's not compliant. It's also my opinion. So it's not just purely. Let's restrict the Automotive Axles performance as far as colleagues are concerned. I appreciate your understanding.
Yeah. Just to tell about Automotive Axles, any of the product that we sell into the domestic OEs or that we manufacture it here, all those parts for MHVSIL will be sourced from AAL only. So that means they cannot buy it from anybody else. They are buying it from Automotive Axles. So whatever they sell in the aftermarket, it will be Automotive Axles' product. But other than that, they also sell other makes. And other than axles and brakes, they sell so many other parts. So I think we'll leave it at that place.
Okay. Thank you.
Thank you. The next question comes from the line of Samarth from Janak Merchant Securities. Please go ahead.
Sir, am I audible?
Yes.
Sir, so American Axle, which got taken over by Bharat Forge, who is where Kalyani Group is also a partner in our own company. So they have been also trying to, when it was American Axle, they were also trying to get in Ashok Leyland. So do you see any pricing pressure in the axle category going forward or already is it visible because of which we have to take price decrease?
No. I don't think so because, in fact, we also supply some brakes to American Axle for another OE through the American Axle. So essentially, what we see is the American Axle, and as we continue to be competitors, we continue to compete for the share of business. That has been happening for the last several years, if I'm right, at least for the last 10 years. I think it will continue to happen. And then we are very confident in terms of the product that we are developing, in terms of the manufacturing capability and capacity what we are having. So we hope, and then we continue to put the effort in winning as much as share of business with the customer as possible. So whatever the recent transaction has happened, it is not going to change the way Automotive Axles is going to operate or pursue potential businesses.
Just add to.
So we haven't seen any pricing pressure.
No, no, no. See, I just add to Nagar . See, in automotive industry, as far as the OEs concerned, we consistently face the pricing pressure, okay, in terms of the value additions and passing on. It continues to be there, not just with us with respect to any Tier one or Tier two suppliers are concerned. That continues. What Nagar is trying to say is not that American Axle presence is not invaluable. They are always pre-existing before us also, before this acquisition also. So I don't think that won't add anything special at this moment. The business goes normal. There will be continuous pressure from the OEs as far as the price reductions are concerned. That is, we'll manage it. We have been managing for several years. We'll continue to manage it. We have specific programs with the OEs where we have an arrangement to share some benefits.
There are some internal value additions that will definitely accrue to us, so that arrangement will continue in the future also.
Sir, I have two questions from my side. One is the heavy axles that we have for the 50- and 55-ton vehicle. So from what we understand is Tata Motors captively doesn't have these products. So can you win more business with Tata Motors for the very heavy axle category?
Let me just try to answer Kishan. You can add to that. Now, we continuously explore opportunities with the OEs. There are new OEs other than to whom we are already supplying. They have approached us inquiring about certain, not just this particular product, the potential other products that we have developed. So continuously, we are looking at the opportunity. If the business makes sense, if it works out, why not? Yes, we would like to supply to Tata, not just Tata, any other OEMs as well.
Sir, I agree with Nagaraja, but I also want to clarify our strategy with Tata. It's definitely we want to strengthen our relationship on brakes, right? That's where our current business holds. And then anything add-on, and I don't know where you're getting this data that Tata is looking for or may not have the right product. They already have a product which is in the market. And we always pitch our product when we launch it, but it's purely the gap they see in their product line in terms of whether it is cost, performance, reliability, durability, quality. That is what is the pull. Otherwise, it's purely an interaction with Tata on brakes alone today.
Sir, and on the brake side, so in brakes, like 30%-35% cost is a casting cost, and we don't do our own castings. So as we gain scale, do you have any plans of getting castings for captive purpose, or you can even export it out of India since you will be able to build a scale?
Right now, we are looking at multiple. We have been looking at potential opportunities to increase the value add within our manufacturing footprint. So I don't know whether it is going to be just casting or it is more automation and then increasing the capacity. So time and again, whenever there is an opportunity, we'll explore it. Casting is a totally different animal. If it makes sense, yes, we might look into this. But right now, our focus is looking at automating our current processes, bringing in new technology rather than adding some commodities which we can buy more economically and more efficiently from the current suppliers.
Thank you, sir. That's all from my side. Thank you.
Thank you.
Thank you. The next question comes from the line of Saket Kapoor from Kapoor & Co. Please go ahead. Mr. Kapoor, your line [crosstalk] .
Thank you for this opportunity. I'm audible, sir?
Yes, sir.
Hello. Yeah, yeah. Sir, firstly, I joined late. So firstly, if you could just give us some understanding how the current year is shaping up with the exit of the first quarter in terms of our deliverables that are scheduled going ahead in terms of the incremental tonnage that we may expect. And in the other expenses line item, we see that that line item is increasing disproportionate to the scale. So what any one of items that is included in the other expense line item of INR 75 crores for this quarter?
So, I just answered the second one, and [Ranganathan] here. So, I think we have explained it earlier. So, the technical fee, what we pay to MHVSIL under the new model, which has been coming under the other expenses. And as far as the market is concerned, Kishan can be able to answer it.
Yeah. So this year, specifically, a couple of things are happening. One is I explained earlier to the audience. Historical cyclicality has actually changed now. So we are having a constant volume around 400,000. This year, we do see a dip of around 4%, which is primarily coming from some of the inventories that have been built in addition to what OEMs typically plan. And the second one is, even though the volumes are around 400, the mix is changing. So one, in the truck segment, we are seeing higher heavy-duty engines coming into play, whether it is a 4x2 tractor-trailer where we already have a product launched, and then the tipper segment. So again, we have a product there. The other change which we are seeing consistently in the last three, four years is the bus volume in this entire product mix. That is changing. That is increased.
Typically, we see around 40,000 buses on an average last 10 years if I take an average of bus sales, but last three, four years, we see consistently 70,000, 80,000. This may be the deficit that's caused by the COVID, and then there was a continuous push to improve the overall bus from the state transport units as well, so overall, the market will still be 400. We do see this product mix mainly in the buses where we have already launched two products. One product is in the pipeline, and the heavy segment, what you mentioned, the tonnage carrying capacity in terms of tonnage carrying capacity of the vehicles, we have for 50-55-ton range, the axle already in production.
Sir, so that is alluding to our business volume and the margins going up, which is what the common subject should be, especially for the higher tonnages and the contribution also moving ahead?
Per axle realization in terms of pricing, yes. It is definitely more because there is more metal, more content, more technology. Yes.
Sir, for this other expense which you mentioned, for the, I think, the Meritor parts, so this is going to be directly proportional to the sales, or what should be then the number we should continue in going ahead? Just to understand what should be the percentage here.
No, the point is that the arrangement I mentioned earlier, the arrangement for the support of engineering and product development and the marketing, based on the arm's length, we have fixed a percentage. We have fixed a base, which is their percentage to the sales to the domestic OEs. So that will be payable to MHVSIL for the valuation what they are bringing in. So I mentioned it earlier. Just wait for a couple of quarters. Third quarter onwards, you can see a kind of the normal view about this transaction.
Sir, the last two lines, I completely missed. If you could just repeat the four quarters of what you were trying to say.
No, no. We want to see we want to have some holistic view. I said at least three quarters need to go through. So I just requested that you hold it till the third quarter and see it. Then if you still have any points, we can ask and discuss it.
Okay. No, if you could just elaborate the component for it, out of the INR 75 crore, how much is accessible to the commission part for the special expenses which we have paid for the technology and the sales promotion?
No, no. That's what I said. Hold it for a couple of quarters. At this moment of time, I said the percentage is based on the sales what we made to the domestic OEMs. Hold it, your question, for the next couple of quarters. My request is that.
Okay. But will our margin be protected, sir, when we are selling?
100%. 100% margin is protected. I mentioned earlier also, and Nagaraja has also reinstated that. This new arrangement, definitely, there will be a marginal improvement on the margins, and the market expectation is high. That's why we have given a very clear communication earlier part of the call that there will be a marginal improvement on the margin. As per the percentage model is concerned, see, the margin on a holistic way, when you look at it, there are various other elements too. One element is about the product mix. Other element is basically the market fluctuations, so definitely, we are doing our best to make sure that Automotive Axles margins are well protected. Under the new model per se, there will not be any deterioration in the margins. There will be a marginal improvement on the margins.
Okay. And the last point is, for this quarter, how are the programs for the deliverable scheduled if we compare it with first quarter or with last year? What are the current sentiment? And this carry part of the story that I joined late, so what would be the impact on us, if any, on the same if these two points you can explain?
Could you repeat that question, please?
Sir, firstly, how are the quarter two deliverables currently ongoing with respect to the programs which we have from the OEM, the current entering quarter? And how are these comparable with the first quarter or the last year's similar quarter? I just wanted to understand the business sentiment. And secondly, the impact of tariffs, if any, I think so, from the U.S. part, how are we prepared for the same?
Yeah.
[crosstalk] No, no. I'll take the first part. So this quarter, compared to last year's quarter, it's about 5% down. And there are many reasons, like we were discussing in the past, the AC cabin changeover. That has actually created a lot of additional inventory to OEMs. So we are seeing that impact coming into this quarter, which will subside going forward. And then the monsoon is also playing a role, which is typical. We see that from Q2 onwards. This year, the only thing is the impact is slightly longer than what it was earlier because of the early monsoon and also higher than above-average monsoon. Coming to the tariff, I think every day morning, we wake up with something new. I think anybody's guess right now, 50%, that's just impossible for anybody to navigate. I'll put it that way.
What percentage of our business is directly affected because of these tariffs to our U.S. counterparts?
Our export to North America is pretty small, so it's not a big concern for us. And also, as you know, North America market is already 50% down. And they have capacity, like Nagar was telling earlier, only where we are 100% present, only that is where we may see this impact. But otherwise, it's insignificant right now.
Okay. And two small points I wanted to firstly, sir, about the CapEx. How much are we going to spend for the CapEx, especially for capacity augmentation and further product introduction? And secondly, on our path to double our revenue, I think with the five-year program which was augmented last year, how well are we progressing, and what milestones are we expected to reach this year and next year? If you could just elaborate these two points.
Yeah. So I'll take that. Right now, the board has already approved about INR 120 crores that we are spending on the CapEx, including our capacity, capability, and then equipment replacement, and also automation. So all those projects put together. What we see is I can split it into, let's say, phase one and then phase I-A. The phase one, we will be completing it by the end of this financial year. We're going to start seeing those benefits improvements coming in during the later part of the first quarter of FY2027. Coming to the phase I-A, we should be able to complete those upgrades and investment and commission all the equipments by December 2026. That's the third quarter of 2027. Essentially, what I call is the first initial investment will be completed in the next 18 months or so.
In the meantime, we are already developing on working to meet our FY2030 goals. What are the other additional investments that we need to do, including our product strategy, including our manufacturing strategy? We are working on that so that we should be able to kind of finalize by the end of this year and go to the board to seek their guidance and approval.
Okay. So INR 120 is what we spend this year. This is what we are also doing.
This year and next year put together, mainly on the specific capacity enhancement, capacity and capability enhancement projects.
Okay. And the other management is CapEx.
Yeah. And for the product introduction, sir, you mentioned that new products launch would be there for the second half?
Yeah. Towards the end of the second half, we are kind of looking at this point of time. We are kind of fine-tuning the product specification to meet the ever-changing customer applications and demands. So we'll be having a proper prototype ready by the end of this year. And then we need to see when the actual start-up production happens with the OEs.
Okay. And sir, taking all these factors into account and the business modeling which we have done, does the quarter one business environment give us an understanding that we will have a better year in terms of higher tonnages and thereby improvement in margins and profitability for the year as a whole, or we need to wait for another quarter to get that understanding clear? How are we seeing the landscape for us for this financial year?
I would say that we need to wait for at least another quarter to clear all the confusions with the tariffs and everything, and then also, we need to see, like Kishan was mentioning, how the post-monsoon scenario is going to develop. We think that it will be slightly flat or slightly lower compared to last year, but unless something goes drastically wrong, we should be putting in a good performance.
Okay, sir. Thank you for all the elaborate answers, sir, and all the best to the team.
Thank you.
Thank you, sir.
Thank you.
Yeah. Can we close the call? Because already we exceeded the time.
Ladies and gentlemen, that was the last question for the day. I now hand the conference over to Mr. Sailesh Raja for closing comments. Thank you. Over to you, sir.
Sir, would you like to make any closing comments about Nagaraja, sir?
Again, thank you very much for calling into this earnings call. Really appreciate it. I know that there are a lot of questions out there with regards to the new models that we have put in there. What I would like to assure every investor is that the Automotive Axles interests have been always taken care of. That is the highest priority, and at the same time, we also want to ensure that we kind of respect the legal requirements, like arm's length, deal with the related party and everything. We have a very strong legal team. We take their advice before we make any of these decisions. Whatever the investment we are doing, it is going to really help us to improve our position, improve our share of business, at the end of the day, improve our profitability and net worth of our company.
So please continue to have our confidence in us. We will continue to do our best to meet your expectations. Thank you.
Thank you. On behalf of Batlivala and Karani Securities India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line. Thank you.