Please note that this conference is being recorded. I now hand the conference over to Mr. Sailesh Raja from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Yeah, thanks, Renu. Good afternoon, and thanks to everyone who have logged in into Automotive Axles' Q1 FY23 earnings conference call. Today, we have the senior management team of the company, Mr. Muthukumar N, our President and CEO of Meritor HVS India Limited, and Mr. Nagaraja, President and Whole Time Director, Automotive Axles, and Mr. Ranganathan, CFO, Automotive Axles Limited. So I would now like to turn the call to Mr. Muthukumar N, for the opening remarks, followed by Q&A. Sir, you may begin now.
Thank you, Sailesh, and good afternoon, ladies and gentlemen. Thanks for joining for this investor call on Automotive Axles. We really appreciate your time and your interest in taking time to join for this call. I have with me my colleague, Mr. Nagaraj, who is the President and Whole Time Director of Automotive Axles, and Mr. S. Ranganathan, the CFO. Last time during this investor call, most of your questions was revolved around Cummins acquiring Meritor, and we are very pleased to announce to you on third of this month, that was the day one of formal acquisition of Cummins acquired the Meritor, and the day has come.
I'm very happy to present you the feedback from the Cummins Executive Chairman: "The acquisition strengthen Cummins' industry-leading range of powertrain components and accelerates the development of electrified power solution." Mr. Tom Linebarger, the Cummins Executive Chairman, said, "Meritor is a market leader, and the addition of their complementary strengths will help us to address one of the most critical technological challenges of our age, the developing economically viable, zero-carbon solution for commercial and industrial applications." You can understand the excitement at the Cummins level. They are very supportive of this acquisition, which is going to bring lot of transformations and growth to the organization. Dr. Baba Kalyani, Chairman of Bharat Forge, says, "I want to welcome Cummins as our new partner in Automotive Axles and Meritor HVS.
Bharat Forge has a long relationship with Cummins as a supplier, and also the user of their engine in our special products, and we look forward to bigger relationship now as partners in this venture and also as a supplier. I wish the new venture all success. Unfortunately, I'm not able to personally be there so to make this announcement jointly with Ms. Anjali Pandey of Cummins, but look forward to this new relationship, which will benefit all of us. Ladies and gentlemen, on the fourth of this month, in the evening, the Cummins management team has come to Automotive Axles in Mysore. We had an employee town hall, which makes the communication to all the employees about this acquisition process is over.
With that, I think, we are excited about this, acquisition and this progress that's opening, happening, which will make, our, our company very, very strong in the days to come. I'm moving on to the next slide, please. Those of you who are attending for the first time, I'm just giving a snapshot of our sales. You know our sales of FY 19, 20, 21, 22. We are always going ahead of the market in terms of the revenue, in terms of the EBITDA. For those of you who are attending this meeting for the first time, we have four manufacturing locations, the mother plant being at Mysore. We have facility in Jamshedpur for supplying to, brakes and allied products for Tata Motors.
We have a facility in Chakan, which supplies for the brakes for Ashok Leyland at Chakan, and we have a facility in Pithampur. This company, we could be shared with Meritor, holds 35.5, Kalyani 35.5, and rest is in the public. We have more than 2,000 plus employees of white collars and blue collars across the organization. As you all know, our major customers are present in the commercial vehicle segment of medium and heavy commercial, and we are also present in specialty and defense OEM. As you all know, the products what we have is for the commercial vehicle, axle, brakes, and suspension systems. In terms of the independent axle supplier, we are number one in India, and we are number two in brakes.
The company continuously works with customers in terms of launching the product, penetrating into the share, which I'll leave it to Mr. Nagaraja to tell at a later point of time. Ladies and gentlemen, your company is also taking a Mission 2028 on our sustainability roadmap, which is showing in the next slide. We earlier talked about the six pillars of our governance system for sustainability, and the company has done an extensive progress in terms of achieving the net zero in the days to come. As a first step towards that, about more than 30 to 35% of our power consumption is coming from solar, and the organization is moving towards water positive, getting into more than 80% by solar, and also taking an aggressive target of reducing 50% of energy by doing a lot of conservation projects.
On top of this, the company is also bringing in, in terms of the gender equality, corporate governance, which will all be, we'll be communicating to you on this. One of the initiatives, the next slide I move in, is on bringing in circular economy to make sure that the Mother Earth is not done with the products. Right from the design stage, in the manufacturing stage, in distribution, in consumption and reuse, and in collection, we are working with the OEMs, we are working with suppliers to make sure that our product is 100% recyclable at the end, so that the waste is converted to wealth, and we are not dumping the Mother Earth with any of this material.
In the days to come, maybe we will continue to keep you updated on our sustainability focus and what's the progress that we are doing towards net zero or what we call as a Destination Zero.
... With that, ladies and gentlemen, I will hand over it to Mr. Nagaraja to talk about our customers, the products, and what we are doing, and then to Mr. Nagaraja on financial. Over to you, Mr. Nagaraja.
Yeah. Thank you, Muthu. Good afternoon, ladies and gentlemen. I'm Nagaraja Gargeshwari, President and Whole Time Director for Automotive Axles. So, just like what Muthu mentioned, Meritor has been always a very strong player in commercial vehicle segment or industry. And as you can look at it, you know, we address the diverse end markets and supply to most of the major customers, not only in India, but also in the Asia Pac. So whether it's a truck, a trailer, bus, or military, or aftermarket, we have a product line which I'll be showing you in a couple of slides later. We have a presence in starting from 5-ton vehicle, all the way up to 55-ton, you know, tractor.
So we continue to drive the innovation, continues to upgrade our our products, continue to come out with innovative solution to address both our customer and end user requirements. Next slide, please. As you can see here, you know, there may be a myth, you know, sometimes customers talk to us, you know, like, Meritor, you know, your products are a bit expensive. But, what the company's always been trying to do is, we are trying to bring down the total cost of ownership.
As Muthu mentioned during the last investor's call, this company has introduced more than five new products in the last 18 months, and no other—none of our competitors or anybody for that matter has been able to successfully introduce innovative product and also, you know, continue with the production. So, here is a prestigious award, Ashok Leyland Gold Award, passed on to the Meritor for improving the total cost of ownership. Next slide, please. Again, as I mentioned earlier, you know, we have a product range addressing 5-ton axle, all the way up to, you know, 55-ton tractor.
And then if you really look at, you know, the car, the product has been placed in such a way that we will be able to address every requirement of our customer. And so in the brake also, if you can look at it, you know, starting from 310 diameter brake and all the way up to 4-ton brake. And also we are pioneering when it comes to these brakes. Next slide, please. We've been able to achieve it because of our team. Meritor always believes in investing in employee engagement, developing our people because we think that the human capital is the most important to be successful in the business, and rightly so.
We not only invest in developing the, you know, hard skill, but also in the soft skill. As we speak, just today morning, Muthu inaugurated, you know, our leadership program here at Mysore for, some of the upcoming leaders, in our company. We not only focus on the training, but also we want to engage. You know, work-life balance, as you are all aware, is taking a very important role for every employee. So we continue to, you know, engage with our employees meaningfully, you know, celebrating the teams. And then, also we are driving the diversity. In fact, we are very proud to say that, in our company, nearly 10% of our employees are women.
We continue to invest in the not only gender diversity, but also we are investing heavily at the... We want to be an equitable employer for every possible, you know, person from every, you know, corner of the country with every type of experience. So we continue to invest there. And the last one is, not only we invest in employee engagement and development, but we also believe that it is very important for us to recognize the value that this team is bringing in and also share the, and reward them.
So as you can see here, you know, there are several critical, whether it is an IoT or whether it is a automation, you know, the team has been engaged in, and we celebrate the success as soon as we accomplish those goals. And Kaizen is one area where all our plants are fully engaged in. On an average, anywhere between 200-300 Kaizens are implemented at all levels, starting from a operator level and going all the way up to the manager level. So these are all the things. What we have been doing is going to help us to continue to meet your expectation, meet the industry's expectations, and make sure that, you know, we continue to grow and prosper.
With that, I will pass it on to our CFO, Ranganathan.
Again, a very good afternoon to all of you. Thanks, Muthu. Thanks, Nagaraj. A quick snapshot of the financial performance. Hope all of you might have already, you know, seen our financial results. For the Q1, we are, our total revenue is about INR 501 crore as compared to INR 256 crore the same time last year. Year-on-year growth is close about 96%. As far as the EBITDA is concerned, I know this quarter we did about 10.5% as compared to 6.5% last year. More or less about in terms of percentage, it's about 62% increase in the overall EBITDA, largely contributed by the volumes and also, good contribution on the middle performance.
As far as the PBIT is concerned, we are at 8.3% for the last quarter year end of June, and compared to 3% in the same quarter last financial year. So as I already mentioned is about the commodity is one of the key challenges we are facing it. And definitely, we are expecting the coming days, the commodity may get softened, and this amount of challenges may get reduced, and we have to wait and watch in the coming quarters. Obviously, our focus is continuously be on some of the strategic initiatives as part of M25 is about grow revenue, grow profitability. And definitely, there's a set of team who's continuously working on the to drive these strategies and improve the performance holistically.
So both digitization and application of Industry 4.0 is one of our core objective, and we have been working on this journey for the last one year, or one or two years, and that will continue in the future, too. Next slide, as the M25 strategy is concerned, as one of things is this will definitely grow as per the market. This year, the market expectation is about 370,000 vehicles plus, and definitely, we grow along the market. And always our internal, you know, strategy is to go beyond the market. I think Muthu and the entire team is more working very closely with customers in all initiatives of the growth revenue.
As far as the profitability initiatives are concerned, and then, and also the operational excellence are concerned, and bringing the overall value to the customers are concerned, we are on the track. The subsequent two slides are basically about, the key actions and the customer wins. Muthu will touch upon it. Muthu?
Thanks, Ranga. I'll go through that. Ladies and gentlemen, I think, the team did an excellent job. Nagaraj talked about post-COVID, one of the key initiatives that the team, the leadership team here drives with engagement of the people. And, we have been very, very successful in retaining our talents and taking them to the next level of performance. Thanks, Nagaraj, thanks, Ranga, for leading those initiatives in the plant to make sure that our people are valued. We've been saying that our efforts. Team, I think, we have done the very, very key initiatives like what Ranga said. We have a business growth strategy. We have a cost measures, and safety continues to be our focus area.
All the people from the plant has not only been done vaccination of the two dose, but also been taken with their booster dose for all the people. Like what I presented earlier, the ESG strategy is on, and then the implementation is on progress. Even though the COVID levels have come down, the company continue to practice it on the COVID protocol to ensure that our plant is always safe. Having said that, our team has started receiving the customers for audit. Our team has started visiting suppliers, but following all the protocol. In terms of cost measures, cost reduction has been one of the key, and you all know that, we all talked about that the loss elimination continuously lying, the significant savings expected through end 2022 time frame.
The cost measures in terms of the rate of conversion or in material or manpower costs is always under our focus and keep going. In terms of the business growth strategy, like what Ranga said, the market is set to grow, and rest assured that your company will grow more than the market. We have completed the successful implementation of the LTA Agreement with two top customers. Nagaraja talked about the hard work done by our team in terms of the plant team, in by the engineering team and innovation team. As you all know, the Meritor has been focusing on three things: focus on customer, focus on innovation, and focus on people. With this, the company, we just changed the perception of the customer, saying that Meritor is, it's comparatively...
I'm not saying it's a cheap product, but the total cost of ownership of the product is much, much better, and that is what has come back as a gold award to us. The new business and opportunities are in the pipeline. We have done two long-term agreement, both with, Tata Motors for the brakes and Ashok Leyland for axles and brakes, expanding our current share. The improved operational performance and increase share of business with OEM is one of the key things that what Nagaraj is working. Our, quality PPM has done substantial improvement over the past, and a lot amount of improvement is happening. Our product development and launch of new products. Currently, we are working with OEM for the launch of product that is going to be done in 2023 and 2024 to make sure that we are ahead of the curve in competitive meeting.
The driving E-mobility business, we touched upon this earlier. We continue to work on E-mobility business, and we have become a preferred partner for Ashok Leyland for their E-mobility solution in medium and heavy commercial vehicle. Digitalization and implementation of Industry 4.0, Nagaraja touched upon this, and we are going as per the plan. The plant, which is more than 35-year-old plant, will become completely Industry 4.0 post our Mission 27, gear up for the capacity to cater the rising market demand. While we are very, very critical about the market, how we come, control the cost, we are also geared up for taking the market demand. With that, ladies and gentlemen, once again, thanks for all your support of the organization to grow, and I give it back to Sailesh for organizing question and discussion. Thank you very much.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. 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 Sagar Parekh from one of Financial Consultants. Please go ahead.
Yeah, good afternoon, everyone, and thanks for taking my question. I have few questions. So firstly, during the AGM, Mr. Kalyani, he spoke about new business, I mean, new segments that we are focusing on, and one of the segments that he touched upon was the construction equipment industry and off-highway industry. So if you can give some color on that in terms of what is the, like, the kind of market size of that industry currently, and, I know it's a very small part of our total business right now, but, if you can give some more qualitative or quantitative details in terms of what can it be for us in next 2-3 years, it will be really helpful.
Thank you for the question. The construction industry is, it's growing, like what chairman was saying, and, the board, and the chairman and board have set as a target that we should penetrate into this for our long-term, growth. We have created three products at this point in time, and we are working with two different, two customers who are, a larger customer than off-highway and construction, and, the initial trials are on. You know, this industry takes at least almost about one year for the product validation and introduction. So we are working on those products, for those customers, and, typically, we, whatever we are doing today, by 2025, we want to double. That is what our objective of working on this.
I'm sorry, I'm not able to give you the exact target, what we are looking at for from construction segment at this point in time, because we don't share, but we want to de-risk our dependency on commercial vehicle business by introducing this. The second segment, which you said, is defense, and today, you know that, for 100% of the requirement of Ashok Leyland Defense, we are supplying, and we will continue to get orders from the other customers. We are working with various other customers to see that how we can supply our axles. You know, we are supplying both tactical and strategic axles to the customers, and we are working on this.
Just on this defense part, just a clarification which I wanted was, this Bharat Forge has recently developed this Kalyani M4 armored vehicle. So, are we, like, supplying the axles for that vehicle?
We are supplying some components. Kalyani M4 is buying the components, and it is being assembled along with the vehicle, so we are supplying components.
Okay, so they have recently won this INR 200 crore order from the government, so the, which will be executed in FY 2023.
You know, just I wanted to clarify that because it's not the axle on which it is mounted, okay? It is like a tractor industry where it is mounted along with the assembly. So it goes with the subsystem. I should not have used the word component. It's a subsystem on which it is getting assembled, which we are supplying.
So we are supplying the subsystems for that, right?
Subsystems, yes.
Okay, so but that will be classified in the defense segment for us going forward. So,
Yeah.
This year, we can see some bit of that-
Very, very less.
-coming through.
Very, very less number, but I think as and when the business grows. See, our product is approved as a prototype, and you know, once it is approved as a prototype, we'll continue to move, so it comes in.
Right. And just one more question was on this successful implementation of LTA agreement, which was mentioned in the presentation. So what exactly is this? I heard you said that there was—I mean, we have for Tata Motors, we have this brakes, and for Ashok Leyland, axles and brakes. So could you just elaborate on this particular part?
We will be. Meritor is a preferred partner for both Leyland in terms of axles and brakes, and in terms of Tata Motors with the brakes. In this agreement, which is running up to 2025, we'll continue to supply with an expanded business, which is going to assure the business for a longer time because of our new introduction of the products, and we have been consistently delivering the value to the customers. We have currently an agreement which is running up to 2025 to continue to supply axles and brakes with an enhanced share of business for both of them.
Okay, so this is just basically a continuation of the agreement that we are... Because we are already supplying these products to both of both the dealers.
The level what we have been supplying earlier and now, we'll be penetrating more into the market.
Oh, so we'll gain market share in both.
You are right. Absolutely, you are right.
Okay, fair enough. Fair enough. And just my last question with Cummins coming on board, would it probably make entry into Tata Motors' axle segment a little easier, since they have some business agreement, I mean, business arrangement with Tata Motors? Or-
I don't want to give any forward-looking statement, but, for your information, it is going to definitely make much better. They are present in off-highway segment. Their presence with the Tatas will definitely give an advantage. Maybe not the current product, because they are making by themselves, but for the new generation products, when it is going to come, whether it's going to be an electric axle, whether it is going to be a new generation axle, it is definitely going to give much more avenues and opportunity for us to work together and successfully. We are looking at this.
Great, sir. That's it from my side, and all the best.
Thank you very much.
Thank you. Before we take the next question, a reminder to all the participants that you may press star and 1 to ask a question. Next question comes from the line of Sunil Kothari from Unique PMS. Please go ahead.
Thanks for the opportunity, sir, and really good job in this very difficult commodity environment. Commendable performance. So my question is on the, with now Cummins coming in, and I understand it's very difficult just now to clarify the strategy. But would you talk about the possibilities of this so Automotive Axles becoming sourcing base for maybe some other countries, other plants, opportunity, possibilities? Because difference is already we talk during AGM and now also. So some talk on the possibilities of the Automotive Axles base as a outsourcing for military and Cummins now.
Thank you for the question, and thanks for your appreciation on our performance. We will continue to meet your expectations and exceed that. In terms of the opportunities, yes, see, the world is looking at India today. Earlier, there are a lot of other military sites. I'm talking about. Let me come back to Cummins little later. Let me talk about military. Military has been sourcing components from India and whatever the value addition, the military is also sourcing globally from China and the sources. And we've becoming really competitive and cheaper, they were looking at it. But you know that there is a substantial perception changes, not only in terms of the cost, but in terms of the reliability, ethics on business and all.
I think the world is looking at India, and India will definitely have more opportunities this year. It's up to us, and we are exploring continuously to see that how we can double the exports in the next five years, we can move on. So we have been, you know, we have already been proved out that we are a reliable supplier. We are, our quality levels are high. So your company will continue to work on to see that how, not as an axle put together, but systems and subsystems to be exported from India to the other countries of military. It will definitely go up. I'm sure that their, their procurement from other countries will come down, and they will look at India, not only from just cost of the product, but the total cost of ownership and reliability and ethics in doing the business.
So we will get some more opportunities. I think the team is working on, my four leaders are extensively working on to see that what are the other opportunities that's available, and we will continue to explore in detail.
Great, sir. And-
With Cummins coming in, yeah, you are asking, Cummins is basically doing an engine business and what type of synergy at this point in time. We do not know whether our capabilities for manufacturing in Mysore. I'm sure that the teams from Cummins is coming, they are going to evaluate, we are going to go there and find out, explore the opportunities. If there is any opportunities, obviously, we'll become a very preferred supplier, and then we will ensure that we grab those opportunities.
Great, sir. And sir, my second, this is what I, I think, question, but, as a shareholders, what we expect from you, the way you are reducing total owners-ownership cost, the way you innovating, the way you take awards from the customers. But these are not reflected in the margin, which normally, any MMC company which achieve, having a very high R&D, high development capabilities, very high innovation capabilities. So over a period, should we expect some respectable margin? Because this 10 to 11% is not that great margin. So that is our, in our opinion, would you like to comment on this?
Ranga, you want to comment on this, on EBITDA?
No, if you really look at it, as a commercial industry, what we serve and, the products, what we do, basically, largely all of you know about we are supplying largely brakes and axles, okay? And each margins are quite different. So, it's difficult to say that, you know, aspiration is good, definitely working towards it. But, you know, if you really look at it in the 2018-2019, we have done a phenomenal job as far as the bottom line is concerned. But the, if you're really looking at a percentage per se, what you're saying is true, but the value addition is not reflecting the percentage because of the base impact is largely creating on account of the commodities.
At least, if you remove the 2018 base and remove the base, the base impact coming in, at least you can count about 2 percentage points to what your performance 2-2.5 percentage to the base performance, what you're seeing today. But it's not truly reflecting in terms of the percentage because of the commodities, by and large. But nevertheless, having said that, major piece, which is probably not seeing it. So having said that, definitely our, if you really see the cost parameters, whether it is to the growth, what we have, both in terms of fixed cost and commission cost, extremely under condition, under the control, okay? And our metal cost performance, we have a dedicated M25 team, which is really working on...
We know that the inflation and the commodities is a pressing factor for us. We are, in spite of that, we are outperforming the challenges what we have only because of the, you know, the initiatives of our Mission 25, what we have. Your point is valid. We are working towards with the customer in terms of where it is possible, where we can maximize the prices with customers. But, you know, in automotive industry, it's not that easy to get a price increase from the customer, but we are working, working very hard. In terms of, you know, giving holistic solution, where we also can, we also can. Muthu and team done a phenomenal job. Hopefully, I know in the coming days, with the current arrangement, we can able to penetrate a little bit.
But, to be very, very specific to now your question, I think you have posted the same question in your AGM also. You know, definitely drive towards the percentage what you are expecting is our aim also. But Automotive Axles standalone, getting to the 17 to 18%, maybe next one or two years, it's very challenging. But nevertheless, you will definitely see a significant improvement to the current performance what we have. Nevertheless, as the equation changes, the business proportion changes, the share of the various vertical changes, and more and more exports are coming in in future, are commenced and coming in, definitely it is quite possible. And our aspiration is always to reach out the best out of us.
We take your inputs and expectations in our mind, but definitely, if there is any possibility that we can able to significantly improve, we grab each and every opportunity, sir.
Great, sir.
Wish you good luck.
Thank you, Ranga. Sir, thank you, Ranga, but Sir, normally you know that we don't tell exact percentage of share, segment-wise profitability, but I'm very little curious when you said that the decent profit. Can you just tell me what is the magic number, what you are looking at?
No, there's no magic number. But, sir, between 15 to 20% EBITDA margin is across the company, which is having a very good technical capability, which is not just doing some some very basic value addition. Having so much innovation, those are the companies. That is what I, we would like to-
Understood. I'm sure that we understood your point, like what Ranga said, we will continue to do that. But let me tell you, I wanted to really emphasize our focus. Our focus is on customers, our focus is on innovation, our focus is on people with us. We strongly believe that if we are going to achieve this, we will be giving a sustainable growth and take it forward. Like what Ranga said, there will be 100 good reason for in terms of percentage, we could not grow because of the base impact. There's a huge increase in the commodity prices that has happened, but your company will continue to work on this, and we will move towards your expectations.
Thank you, sir. Wish you good luck. Great job.
Thank you very much. Thanks for your support.
Thank you, Sunil.
Thank you. Thank you.
Thank you. Before we take the next question, a reminder to all the participants that you may press Star and 1 to ask a question. Next question comes from the line of Radha. Please go ahead.
Hello, am I audible?
Yes, sir. Go ahead.
Thank you so much for the opportunity, and congratulations on very good set of numbers. Sir, my first question was that, so you mentioned in your opening comments that, it is an endeavor for the company to grow ahead of the industry. So in relation to that, incremental to see the industry growth, I believe that there are, four key drivers for the, growth, in the company, which is, share of business increase with customers, entry into new markets, new products like Slipper-type suspension, and also exports. So, could you give me, some kind of, guidance as to what is the expected revenue opportunity in these incremental revenue drivers?
Thank you, Radha, for the question, but unfortunately, you know, we don't share the segment-wise revenue, but I can just give you some more information on what you are asking. In fact, during my discussions, we said by 2027-2028, we want to double our exports, as I indicated. Also, thanks for asking this question on slipper-type suspension. Last time I said that while we introduced this product, we could not run it. Now we restarted the supplies to Ashok Leyland in a smaller numbers now. So we believe that by 2024-2025, this itself will become a very, very profitable business for us, and we'll be able to penetrate a good amount of vehicles that are Ashok Leyland with slipper suspension, because they believe that this is adding a lot of value to them.
So we'll continue to work with this and then enhance this business. But if you, for your specific questions, on what will be the revenue potential when we go, we don't give the forward statement, but this is the same question that is asked in the AGM also, where our chairman said, "We cannot give a number, but yes, your calculations are right, and we'll be hitting the magic number this year.
Okay. Okay, sir. So the next question was that, in exports, other than Volvo, Thailand, is there any addition of new customers in the overseas markets?
At this point of time, you know, the Volvo, Thailand, is one which we are working outside the Meritor umbrella. But you also have to keep it in mind that globally, on every region, we have a team available of Meritor, and they are supplying to the customer. So we will be focusing on exporting a subsystem, because there's a huge penalty for shipping the axles out of India, because of the logistics cost disadvantage. So while we will be exploring the option, our main approach is exporting towards our Meritor plants and systems and subsystems, where we'll be competitive, and where we have an accessible team for doing the servicing job.
... Also, sir, could we talk a bit about the off-road vehicle business opportunity, like what is our market share, and who are the key OEMs that we are supplying to?
Currently, as I said, it's very, very less to compare to the market, and we'll be around not even 2 to 3% of the market. But, having said that, as I told you, we are with 2 OEMs, and we are developing the product. We had an extensive market survey to find out what type of issues that they are having in that segment, and we are taking 2 products and working with 2 customers to get into this product. You know, with we getting into the off-highway segment and construction segment, it's a lot of product development is there because it's not a volume game, and it is more of a variety that we need to come in, and lot amount of engineering time and development time is needed.
We will be working closely, but steady. This is the direction. I think as chairman said, the focus on defense and construction equipment is a challenge that they have given to us, and we will continue to work on that market to expand.
Okay, sir. Coming a bit on the financial side, so on a QoQ basis, there has been a revenue decline of INR 50 crore. However, I can see that the other expenses have increased by INR 1 crore-INR 2 crore. So, could you give me a reason for this?
No, Raja, you need to probably look at it in terms of revenue. I think overall, if you really see the industry, auto component industry, the Q1, more likely that in MHCV industry, so people are slowing. You can see a general trend in terms of the decline, and it's not Automotive Axles per se. But nevertheless, with the whatever the reduction of 10% quarter-on-quarter what you could see, we did our best in terms of the margins. In terms of the cost point, what you are trying to mention is, I think the cost is not a proper proposition, and definitely, and you—I request you to look at it holistically for the year. You will definitely see that the cost is well within control.
So, there's no exception as far as the numbers are concerned.
Okay. So, also, currently, what kind of utilizations are we operating at now? And, if we assuming that we reach 100% utilization, now, what could be our operating margins, like, what, what could be the operating margins of the company at a 100% utilization?
Well, well, I mentioned earlier also, the margins are probably, you know, it varies from the brakes products and the axle products differently, okay? So we don't give you the, the, what is the, percentage on the segment-wise, but definitely is quite, different. So obviously, that product mix do play a role. Okay, point number one. Point number two, our utilization is not 100% at this moment of time. So definitely, you know, if you really look at it, in 2018, the market was grown in 70,000 or 80,000 AC level. Today, the market is just working towards about towards the 350 or 360 this financial year.
So obviously, the market is running at close to about 70% level. So, at this moment of time, as the market is running at about 60 or 65 metric, I'm able to see that. So utilization is going in line with that. So obviously, as the market volume grows, our capacity utilization definitely will come substantially improve. Obviously, then the leverage benefit will definitely come into this.
So you mentioned that the product mix will change, and so the utilization, the margins cannot be stated. But assuming the current product mix, so if we assume the current product mix-
Quite a bit of possibility of the utilization goes up, you definitely see better leverage benefits as much will come, no doubt about that. Keeping the operating margin remains. There are various elements to it. The one is about the commodity, the price stability in the market, and definitely, that remain constant. I'm telling that, you know, the current product mix, and we were able to perform both 80% and 90% of the capacity what we have. Definitely, there's a good amount of improvement in the profitability can be seen. So, we have to wait for the market to improve on it.
Okay. So, with respect to the CapEx plans, considering that the company is generating a lot of cash now, what could be the CapEx plans and other capital allocation plans for this year and maybe the next two years?
Nagaraja can answer it, but broadly, I'll give you a perspective to you in terms of, in terms of capacity, the maximum, you know, investment we already made, you know, one or two years before. So in terms of capacity, we may not substantially invest, point number one. Point number two, we do invest in terms of, you know, streamlining the processes, productivity improvement, automation, and digitization areas. Industry 4.0 is one of our main, you know, objective, which we have been driving operational excellence in the manufacturing for the last two, three years. And definitely, in those lines, there will be definitely investment. It may not be very substantial, but definitely there might, there will be an investment there.
Okay, sir,
Also, on top of this, one minute please, Raja. On top of this, we'll also be spending capital on the new technology, and new processes that we are working with. We have to continually upgrade the process. Even though we may have capacity, we'll be creating a new processes, which is going to substantially improve the reliability, and so-
... we will be working on those for the capital expenditure.
Okay. So just, you mentioned previously that you will still continue to take price hikes from Ashok Leyland and other customers. So on the basis of that, I just wanted to know that on what basis do we take price hikes with customers? Like, is it on a monthly or quarterly basis? When the sale price is in an increasing scenario, so how frequently do we change the negotiation terms? How frequently do we change the negotiation terms with the customers?
Okay, I want Sailesh to note down. We are getting into the conversation, and there are lot more people are waiting, so due respect to you, but I will just answer this. I don't remember I have ever said that we just go and take price increase from the customers, because no OEM today, at this point in time, is willing to give a price increase. And they have said with the availability of excess capacity in the market, they say, "Either you supply, go down on your cost or get lost." I think that's the message that comes from OEM. So if life were-- life would have been so easy to go and get, give a check and then get it, we would be very, very happy, but this is not happening today in the industry.
However, we have a business agreement with them, and we will try to see that what level of commodity increases that is happening, to that level, we are working with them. See, to be more honest, let me also let us also tell the economics in the organization. It's very, very easy to go and increase the prices to the customer, and so we'll not supply. But if my customer is not willing to give it to the end customer, who is looking for reduction in the cost, we will lose the share of business, and we will have all the businesses only on paper, and not reality. So we work very closely with the customer to make the customers competitive and also expand our margins.
I think this is the philosophy that which we are working, and we will continue to work on this, which is what is helping us to grow in the business. But the commodity, like whatever you are asking, whenever the commodity price is going up or something, we will have a discussion between steel mill, between customers, and we'll try to agree on it.
Okay. Thank you so much, sir, for the detailed answers, and all the best.
Thank you. Thank you very much.
Thank you. Before we take the next question, a reminder to all the participants that you may press star and one to ask a question. Next question comes from the line of Shashank Kanodia from ICICI Securities. Please go ahead.
Yeah, good afternoon, sir. So in the presentation, you have largely lowered the production guidance for M&HCV sales domestically. If I remember correctly, last conference was something like 380,000 odd units. This time it's 372,000 odd units. So any specific concerns that you witness from any of the clients?
Sorry, I think your line was not audible. Can you repeat the question little clearer?
Sir, I think that in your presentations, you have largely lowered the M&HCV volume guidance for the industry. So in the last presentation, it was talking of 30,000 odd units, and this time it mentioned that 372,000 odd units.
Yeah.
Why would that be the decline? Any concerns that you witness on the group front?
We have downgraded it by about 8,000 axles when compared to last 8,000 vehicles, right?
Yeah.
Basically, what happens is the additional order that is supposed to come from buses is not coming, and the government is not releasing. So with the latest discussion with the customers, we have downgraded from 380 to 372 based on our discussion with customers.
Okay. But still, the industry should grow healthy 20 to 25% this year, right?
See, still the market is going to go up from 300,000 to 372,000. See, these are all based on... See, we are giving an update to you every quarter, and so whatever the best information available, we are trying to give it to you. Maybe in one quarter, the system can change, if the sentiment change. But you also take it that globally what's happening with the inflation that's going up, the interest is going up. People wanted to control the cash, and there is also a few information about the recession that's going to come hit globally by next year. So this is also a little bit of sentiment of the people, from the fleet operators to see whether we are going to really buy.
While we are very, very optimistic that 372 will continue, it can go up, this could be every reason that if the end customer is not willing to pay and he want to control cash, it may come down. You know, there's one more increase of interest rate has happened couple of days before, which is very good for controlling inflation in terms of macroeconomic, but it will have a short-term impact on with the sales.
Right. Right. Second, sir, on the CapEx part, you know, obviously, we will spend not only on capacity expansion, but for the process improvement and all the structures. Is it around that like to go at some INR 30-35 crore per year? Is what it's increasing?
Yes, of course. Ranga, can you confirm that number or we... Come again, sorry.
Sir, for the productivity improvement, process improvement and efficiency measures, so what kind of CapEx spend can we expect your end? So INR 35 crore per year is what we should be working with?
Yeah, it's the last year, the overall investment is more or less in the same level, sir.
Right. Right. Sir, lastly, you know, taking a point from the previous participant, so the sequential decline in revenues to the tune of 10%, the other expenses in absolute terms should not have gone up, right? So we can understand employee costs, maybe we could have a revised wage bill or something, but other expenses in absolute terms should not have really been sequenced.
No, no, we can't say that. We are the—see, there are various things involved in the overall aspect of it. So there are a lot of people engagement activities we are doing, a lot of training and development we are doing.
... So the various initiatives, we are consciously ensuring that, you know, we have the internally, the people and the process upgradation. And also I said the process level upgradation is also we are spending money in terms of the automations in the ERP and the systems around it. So it's okay that there is a slight variation in quarter-on-quarter, but the whole overall, if you really look at it, the every increase, the overall and the fixed costs and other expenses remain same. There's no, there's no material change to it. So but if you really look at it, there are some variations that is really a planned one towards the employees or towards automations, process automations.
Right, understood. Sir, one last thing. So, sir, are you going for an open offer, given that there is change in promoter? So, just want to understand that why there hasn't been any open offer from you, from the Cummins end?
Your voice is breaking. Now I hear you.
Sir, I'm saying that for a change in promoter group, there should have been an open offer, right? So are you exempt for this corporate action or something, because 37.5% is different threshold to require open offer.
No, no, we are Cummins will take note of it, and definitely they will come out with any actions around it in the near future framing. So they are evaluating it. Obviously, they just about our support is what we met each other, and definitely they might be working on it. Have some patience, definitely they'll come back with their return, because we also probably await their response, because they just initiated, so at least they are evaluating it, maybe they'll come back with the right action.
Thanks, sir. Sure.
Rest assured that the company will take all the statutory and regulatory procedures, and we will adhere to them.
Sure, sir. Thank you so much.
Thank you. Before we take the next question, a reminder to all the participants: press star one to ask a question. Next question comes from the line of Aditya Welekar from Axis Cap, Axis Securities. Please go ahead.
Thank you, for the opportunity, sir. So just want to understand a little, little more clarity, with little more clarity, what will be our key, margin drivers going forward? So is it- will it be, product mix or cost control or price hikes? So or will it be a combination of all three? Because now the steel prices have come down, so, I, I guess, the commodity costs are a pass-through for the company. So that's, that's not, that's not the point here. But what will be the key drivers which will drive our margins going forward?
See, go ahead, Kendar. No, just to respond, it, it's actually a combination of all. I know you can isolate one piece of it. You know, our generally our M25 strategic initiatives, really, so grow revenue is always one of the key initiatives. We try to grow revenues and more profitable means we want to bring it. That's always our aspiration and, and, and we work towards it. In terms of, you know, getting the margin improvement, you know, we, we look forward very sustainable and long-term solutions to the internal processes around it. So obviously, year on year, we take targets on, on those things, whether it's the manufacturing process or the support process improvements. We certainly bring more automation and improve the productivity.
Definitely, the driving the cost down is a consistent basis. Also, you know, we are working a lot of initiatives, including the solar power in terms of initiatives towards the conversion cost initiative. So all these things will definitely play a kind of an improvement in the cost structure for sure. If you ask me, you know, we can't say that it's a combo of everything, not and similar to that. Definitely, when we say that improve the top line and improve the bottom line, the bottom line improvement it comes through operational excellence, mainly towards automation.
So, and after the fixed cost optimization is one of the points we always keep in mind, because that's where we've been very conscious about it. But definitely, if you ask me, yes, it's a combo of everything. And so, that's always the interview. We can't say that one singular thing which makes a difference. Answer is no, because everything is contributory, and you've got an impact in the overall profitability concern. So would you want to add something? I think, well said by you. I think, so the, it doesn't come, the profitability enhancement doesn't come from one simple thing. I think if you look at our Vision 25, which we did, we have to work on innovation to continuously improve the product.
It's not to pass on the money to the customer, but at least give a pro-customer a product at right value. Maybe lesser value for product, but expanding our margins, that the innovations will help us. In terms of the growing the revenue, whereby using our fixed cost and asset utilization, the manufacturing excellence in terms of creating a world-class manufacturing, continue to work on cost reduction, maybe even optimizing on our fixed cost, all these areas has to come. But one thing that we are always wary, is it's not the pass on the... The commodity increase and decrease may be a pass on, which is like a transaction error, but we work with customer on a transformation to see that how vehicle level the product can be innovated, so that the total cost of operation comes down.
That is what giving us an enhancing business, at the same time, enhancing margin. So we will continue to work on this. I think we'll work with the sourcing ideas. I think Nagaraja and team are working with excellent sourcing ideas to find out that how we can bring customers closer, how we can work on.
... various other avenues of the sourcing and to reduce the cost. So every aspect of our cost transaction, the team is working on to reduce the cost, increasing the margin, and thereby become more competitive and reliable to the customer.
Yeah, thank you for the elaborate answer, sir. One other point is, means, last in the last call, you touched based upon these EV products, and as we are- we were discussing on the product mix. So, these products like subsegments of tippers, defense, EV products, so these, these-- I guess, these are the high margin products. So, do we see any substantial improvement from these products in the near future or maybe in the medium term, so from EV perspective?
Okay. I think last time we presented you the latest study by, Big Four or big consulting firms like McKinsey or BCG or EY. They shown that in India, in 2032, only 15% of the electrification will happen in medium and heavy commercial. Having as an information on this, your company is continuously working to provide a solution to the customer, that if the market is going to come ahead, we should be prepared for it. Like whatever indicated, we have been a preferred partner for Ashok Leyland, for their axle. We've been working on various other, solutions on e-drivetrain solutions. I think our, acquisition of Cummins is going to give us much more leverage, so we'll work on this. Whether the market... When the market is going to come, it depends on so many situations. Whether your company is ready to launch the product?
Yes, we are ready, and we are ahead, and keeping ourselves ready so that whenever the market comes, we can grab the opportunity. I think that's our strategy at this point of time. We can't change the customer behavior or going to tell him to launch the product, but should he decide to launch, we have a solution.
Understood, sir. Thanks a lot. Thanks, and all the best.
Thank you. Next question is from the line of Nikhil Rungta from Nippon India Mutual Fund. Please go ahead.
Yeah, hi, sir. Thanks for this opportunity. Sir, just one question from my side. In the presentation, you have mentioned that you are looking Q2 to be slightly better than Q1. And, seasonality, if I have to take into picture, then Q3 is always better than Q2, and so Q4. So can I assume that on a QOQ basis, at least in the current financial year, we are seeing a better moment on a QOQ basis for the next two to three quarters?
See, the thing, why I think Ranga has made the statement in financial term, Q2 demand is estimated slightly higher. Most of the industry volumes have reduced their inventory in the end of quarter one.
Right.
So they dropped the production in April, May, June, and July and has been seeing it like... The inventory is saying that we believe, and also because of the monsoon, normally there's little less demand in June, July. We believe that this quarter is going to be a flat or slightly higher, and Q3 and Q4 is definitely going to be good because good amount of projects on infrastructure, good amount of projects, many, many projects, plenty of demand is available. So we believe that the demand has to come. The only difference there is the interest rate going up and also the, the predictions about global recession. Ultimately, at the end of the day, it's not only financial, it's the financial plus also a sentiment that is being, that has to work it out. So we are little optimistic at this point in time.
Should the market get into 370,000, that's going to be a slightly higher number, and it has to come. It will come. That's what— That's why Ranga has given that in his financials, that Q2 will be better. But for sure, Q3, Q4 should be better. And also, you know, the statement from Mr. Honorable Minister, Mr. Nitin Gadkari, that the FY 23, you may see, next year, you may see the vehicle scrapping policy into the practice. They are now declaring about voluntary. If that is going to come, it is going to take the market up.
Got it. Got it, sir. This is quite helpful. Thank you so much.
Thank you. As there are no further questions, we have reached the end of question and answer session. I would now like to hand the conference over to the management for closing comments.
Ladies and gentlemen, once again, thanks for the confidence that you have reposed on our organization. It's our organization, and we'll continue to work on meeting all the stakeholders' expectations and to win the confidence of our customers and continue to focus on innovation. Thank you for the confidence that you reposed on. We're looking forward to continuous support in our journey towards making this organization a world-class organization and serving all the stakeholders with a lot of satisfaction. Thank you very much once again. Thanks, Sailesh, for hosting this, you and B&K and the team. And thanks to my colleagues, Nagaraja and Ranga, for joining and taking time to explain to all of you. Once again, thanks to every one of you, and looking forward to see you soon. Thank you.
Thank you. Thanks, everyone.
Thank you.
Thank you.
On behalf of Batlivala and Karani Securities India Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.