Q2 24/25

Nov 13, 2024

Summary

Q2 revenue grew 5.1% YoY, led by aerospace and defense, while automotive weakness constrained margins. H2 is expected to outperform H1; defense expansion is a strategic ambition, while FY26 targets are being reassessed.

Ladies and gentlemen, good day and welcome to the Q2 and H1 FY 2025 earnings conference call for AXISCADES Technologies Limited, hosted by Centrum Broking. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Sangeeta Tripathi, Investor Relations Head from AXISCADES Technologies. Thank you, and over to you. Thank you, operator. Very good evening to everyone. I am delighted to welcome you all to AXISCADES Technologies earnings call to discuss on our Q2 FY 2025 and first half FY 2025 results and business performance. Today on the call, along with me, we have our senior leadership team with us, our CEO and Managing Director, Mr. Arun Krishnamurthi, and our Group CFO, Mr. Shashidhar S.K. Leadership team will take you through our results and business performance, post which we will proceed for the question and answer session. Before we begin the conference call, I would like to mention that this conference call may contain some forward-looking statements about the company, which are based on the beliefs, opinion, and expectations of the company as on the date of this call. The actual results may differ materially. These statements are not guaranteeing the future performance of the company and involve risks and uncertainties that are difficult to predict. I now hand over the call to our CEO and Managing Director, Mr. Arun Krishnamurthi, for his opening comments. Over to you, Arun. Thank you, Sangeeta. Good evening, everyone, and welcome to the Q2 earnings call. I am joined by Shashi, who is our Group CFO, and of course, Sangeeta, who introduced us, who is our Head for Investor Relations. I hope you had the opportunity to review our financial results and investor presentation, which has been uploaded to the stock exchange. As always, let me first dwell a bit on the ER&D industry and then walk through our performance so that that sets the context. The ER&D industry is experiencing a challenging phase, reflecting the recent subdued growth and conservative outlook from key players in the companies in India. These challenges stem from a mix of sector-specific slowdowns, economic uncertainties, and shifting market trends, which are collectively tempering short-term growth expectations. However, the medium-term and long-term growth outlook for the ER&D sector remains positive, largely due to the following factors. Number one, rising demand for digital transformation. Number two, the ER&D players moving up the value chain to offer specialized services. Number three, global pressure to develop sustainable and environmental-friendly solutions, and this is pushing companies to invest in ER&D for products like electric vehicles, energy-efficient systems, and renewable energy technologies. With an expected medium-term growth rate of about 7.5%, ER&D firms in India could benefit from sustained demand in digital and high-value segments, positioning them well to capitalize on recovery once economic conditions stabilize. Whether this challenging period and position market for future growth, ER&D companies may need to adopt a blend of cost optimization, sectoral diversification, and digital innovation to remain resilient and competitive. AXISCADES has demonstrated resilience and steady performance, largely due to our well-thought strategic actions over the past two years to diversify across industry segments and expand our customer base with a focus on digital and embedded capabilities. This diversification has allowed us to mitigate some of the broader ER&D industry challenges and has positioned us well for sustained growth. The company's focus on aerospace, defense, and energy sectors that now contribute about 65% of our total revenues and AXISCADES strategic diversification has enabled us to build a balanced portfolio, making it less vulnerable to the cyclical downturns in any single sector. With these segments continuing to show robust growth, we appear well-placed to maintain our positive momentum and sustain a strong outlook for the year, even as the broader industry faces headwinds. Coming to the quarterly performance for Q2, AXISCADES showcased a good financial performance with revenues reaching INR 264 crores, which was a 5.1% year-on-year increase and a very robust 18.4% quarter-on-quarter growth. This growth trajectory reflects the company's focused efforts to expand across core sectors and strengthen our market position, especially in a challenging landscape. Some of the key highlights for this quarter. The engineering services sector remained the primary growth driver, with revenue rising from INR 175 crores last quarter to INR 181 crores. This uptick showcases our ability to capitalize on core engineering services driven by demand across diversified sectors such as aerospace, energy, and industrial. The growth in engineering services was tempered by degrowth in automotive, which impacted some of our revenue and profitability. The defense vertical, which contributes approximately 32% of total revenue, recorded an impressive growth, sequential growth of 73% and a year-on-year increase of 13% to INR 84 crores. This strong performance is largely driven by robust revenues from defense production orders, signaling the company's effective alignment with defense demand and production priorities. The company's order intake in defense in Q2 FY 2025 was a robust INR 121 crores. Production revenues in H1 are at INR 78 crores as against INR 49 crores in the same period of last year. Our increased focus on defense has set the stage for sustainable growth in this high-stake sector. However, we have always mentioned that given the irregular nature of defense contracts influenced by, A, lengthy procurement cycles, B, governmental budgets, and C, geopolitical factors, performance in this vertical can fluctuate significantly between quarters. Thus, evaluating growth on a year-on-year basis provides a clearer picture of long-term trends in the defense sector. With a solid performance and outlook in aerospace and defense, along with a cautiously optimistic outlook on heavy engineering and automotive and semiconductor, we appear well-prepared to balance near-term challenges with medium-term growth potential. The company's strategic focus on defense, along with a diversified portfolio, positions us to navigate current industry dynamics by being ready to leverage recovery trends across sectors. For Q2 this year, the company recorded an EBITDA of INR 36 crores with an EBITDA margin of 12.4% compared to INR 36 crores and a 14.2% margin in the same period of the last year. This decline in EBITDA margin is attributed to the underperformance in the automotive business. The company's business in Germany is currently facing headwinds due to a downturn in automotive, which impacted our revenue and profitability. However, if you were to exclude this, the company's EBITDA margin improved to 13.5% for Q2 with an adjusted EBITDA of INR 35 crores. This improvement suggests that the company's other business segments, such as defense, aerospace, and energy, remain strong and continue to contribute positively to profitability, showcasing their resilience even amidst sector-specific challenges. The long-term story for automotive, however, is very strong, and we are confident that this vertical will return to its growth journey by early next year. Moreover, when adjusted for a one-time ESOP related write-back accounting to INR 12 crores in Q1 FY 2025, the adjusted operational EBITDA grew significantly by 75% sequentially from INR 19 crores in Q1 to INR 32 crores in Q2. The company reported a PAT of INR 12 crores, resulting in a PAT margin of 4.6% compared to a PAT of INR 11 crores and a margin of 4.4% in Q2 of last year. This year-on-year increase in both PAT and PAT margin indicates a positive trend in profitability despite the challenges faced by some of the sectors such as automotive. This improvement in PAT margin underscores the resilience of AXISCADES' business model. Further, as the company continues to optimize operations, focus on high-growth sectors and retire its debt obligations, it is likely to further strengthen its financial performance in the medium term. I will now dwell on the performance and outlook for each of our verticals. I'll start first with aerospace. In Q2 of this year, the aerospace vertical contributed 29% of our revenues, amounting to about INR 76 crores. This represents a 19% year-on-year growth driven by, number one, increased volume share. AXISCADES has successfully expanded our service footprint within our existing client base, capturing a larger share of the aerospace R&D and engineering spend. Number two, service output. Our company has scaled service offerings to meet rising client demands, positioning ourselves as a preferred partner for larger and more complex projects. Number three, digital automation. We have automated many of our processes, enhancing productivity and delivering added value to clients and improved efficiency. Number four, strengthening OEM partnerships. Long-standing relationships with major aerospace OEMs have proven to be a growth engine for us. These OEMs are increasing production rates in response to a large order backlog driven by high demand for aircraft, which positions us to benefit from ongoing and future projects. Now, the outlook for aerospace. We are optimistic about maintaining strong growth in this vertical. This is backed by the fact that the company has won a critical work package on aerostructures. The contract value is about $15 million, thereby solidifying our presence on the vertical. The current three-year work package is a renewal of existing work as well as additional areas of work in aerostructures. In terms of expanding digital manufacturing, as our clients increasingly adopt digital transformation strategies, our digital manufacturing services are expected to play a critical role in supporting the OEM's needs. Lastly, deeper and more strategic client relationships are paving the way for sustained growth and long-term projects. Given these trends, the outlook for the aerospace vertical remains bullish, with expectations of steady revenue growth supported by ongoing client demand and our robust capabilities in aerospace, R&D, and digital. I'll now talk about some highlights for the Mistral business. The Mistral business posted revenues of INR 98 crores in Q2, marking an increase from INR 94 crores recorded in the same period of the previous year. Sequentially, Mistral recorded a growth of 51%, of about INR 65 crores, which was in Q1 of this year. The revenue composition is as follows. First, semiconductor. Semiconductor contributed INR 30 crores, reflecting a sequential growth of 36% from INR 24 crores in Q1, indicating that growth is returning to this vertical as forecasted in our previous calls. The Indian government's Make in India initiatives, specifically aimed at bolstering semiconductor fabrication and manufacturing, provides a strategic tailwind for AXISCADES. With these supportive policies, the company is well-positioned to leverage new opportunities in local manufacturing and potentially serve as a partner in India's growing semiconductor ecosystem. Now talking of the defense business of Mistral, we generated INR 66 crores, reflecting a sequential growth of 60% from INR 41 crores of Q1 of this year. Production revenues almost doubled sequentially from INR 28 crores to INR 51 crores, constituting 84% of total defense production. Mistral's involvement in defense is increasingly moving from prototype and development stages to full-scale production, a critical factor for sustained growth and profitability. Mistral reported an EBITDA of INR 18 crores, achieving a blended EBITDA margin of 18.2%. The EBITDA margin from defense production was at 24% and semiconductor business was at 25%. However, the company continues to record negative margins in its prototype developments for defense to build the future order pipeline. With production revenues from defense and semiconductor ramping up, Mistral will continue to accelerate on EBITDA margins in the period to come. Now talking of the order book, as of September 30th of this year, Mistral's total order book stood at INR 450 crores, providing a robust pipeline of projects and indicating strong future revenue visibility. The order intake in defense just in Q2 of FY 2025 was INR 121 crores. The increase in Mistral's defense revenue, driven primarily by production activities, suggests a maturing defense pipeline with steady recurring revenue potential. As defense production orders continues to grow, Mistral is poised to benefit from the ongoing ramp-up of high-demand programs in the Indian defense sector. Additionally, the healthy EBITDA margin in Q2 of this year highlights the efficiency with which Mistral is managing both the semiconductor and the defense operations despite challenges in the broader ER&D industry. Overall, Mistral's performance in Q2 underpins AXISCADES' strategic direction in defense production. The transition towards production-led revenue, especially within the defense vertical, aligns with our growth objective and strengthens our position in both the Indian defense ecosystem and high-tech sector like semiconductors. Also, in order to strengthen and people our expertise in defense, we have appointed Dr. Sampath Ravinarayanan as a non-exec Director. Dr. Sampath Ravinarayanan's extensive four-decade career in the Indian aerospace and defense sectors equips him with a deep understanding of government policies, foreign partnerships, and private sector strategies. Dr. Sampath Ravinarayanan has served as the Chairman of the FICCI Defence Committee and was instrumental in winning several large contracts in the past for AXISCADES, including the Airbus Fuselage Development Center and the Mirage 2000 Mid-Life Extension Project with Thales International and MBDA in France. His contributions have earned him an honorary Doctor of Philosophy from the National Institute of Technology Kurukshetra in 2020. His knowledge and network of relationships across Indian government agencies, foreign OEMs, and the private sector will be invaluable as AXISCADES aims to expand our global footprint and enhance our technological capabilities in defense. His ability to navigate the intricacies of government policies, foster international collaborations, and drive private sector agility will significantly support our growth strategy. Now moving on to heavy engineering. The heavy engineering vertical recorded revenues of INR 37 crores with a 3% sequential growth over Q1. The contribution of heavy engineering was 14% of consolidated revenue as compared to 16% in FY 2024. The growth in this vertical, which serves mainly the infrastructure sector, is dependent on macroeconomic factors and CapEx spend. With the conclusion of the U.S. elections, we expect that infrastructure investments are expected to pick pace, favorably impacting this vertical. The company is focused on revamping the cost structure and optimizing operations in this vertical, which will improve our margins in upcoming quarters. We are working on several large use cases with AR/VR, leveraging Mistral capabilities, and our in-house digital talent targeting niche solutions with customers. I'll talk about automotive now. In Q2 of this year, AXISCADES' automotive revenues totaled INR 23 crores, representing a 14% year-on-year decline and a 6% sequential decline. The automotive sector is facing significant headwinds, especially in Europe, due to macroeconomic challenges and shifts in electric vehicle strategies by some OEMs, creating uncertainties in the market. We had to absorb costs to the tune of INR 6 crores in H1 to retain our capabilities and weather the storm. This has had an impact on our EBITDA for this period. Given the current slowdown in European markets, which are key to the global automotive industry, AXISCADES expects the automotive segment to face continued challenge for the next two quarters. The automotive sector has a relatively shorter product life of 5-7 years, with new variants of vehicle platforms being introduced continuously. Automotive companies need to keep introducing new vehicles, whether ICE, internal combustion engines, hybrid or electric for their business. As such, ER&D investment cycles cannot be kept in abeyance for too long, which will seriously impact new vehicle introductions which the OEMs cannot afford. The expertise we have is technology agnostic and hence will not be impacted due to volatility in any of our platforms of ICE, hybrid, and electric. The services being rendered by us, such as wiring harness, software testing, ADAS, infotainment, et cetera, is being consumed by all the above platforms. The slowdown experienced is only because of the general macro and automotive slowdown, which is expected to revive in 2025. Despite these macro challenges, AXISCADES has been chosen as a preferred supplier by a leading U.K. automotive OEM. This recognition is an important strategic win that strengthens AXISCADES' position in the automotive sector and provides a foothold to expand our client portfolio in this industry. We are prioritizing growth in digital embedded solutions along with hardware testing and validation, aligning our services with high-demand technology driven with automotive. Now I will talk about energy. In Q2 of FY 2025, our energy vertical contributed INR 12 crores, accounting for 4% of the company's total revenues. Although a smaller segment compared to others, the energy vertical plays a strategic role in AXISCADES' diversification efforts. The integration of Echogen has been a critical enabler for growth in the energy sector, expanding our capabilities in energy engineering and project management. Echogen's expertise enhances our foundation in this vertical, providing a broader service portfolio to meet the evolving needs of the energy industry. We have been selected as a preferred partner for two new projects in the U.K. with a renewable energy solutions provider and are expanding our customer base in India and the Middle East. The company has appointed a full-time business head in Dubai and is in the process of opening a marketing office in Dubai to expand our footprint in this major energy geography. With new deals in this segment, ongoing geographical diversification, and development of new capabilities in this vertical, we anticipate the growth momentum in this segment to continue. To conclude, the company's strategy of diversifying across verticals and customers has served well for the company in the face of macroeconomic challenges and softness in a couple of verticals. Our sales hunting efforts continue to be robust, and we have added about four new logos, which we hope to grow as we go through the customer journey. The company is confident and focused on overcoming these challenges and will continue to strengthen the business to achieve sustainable growth and profitability. We guide that the H2 will outperform H1, with our main growth drivers of aerospace and defense, which will be the key drivers for this performance, both in terms of revenue and profitability. I will now hand it over to Shashi to talk about the financials. Thank you, Arun. Good evening, everyone. It gives me great pleasure to interact with you and take you through our performance and outlook for the year. The overall performance for Q2 FY 2025 and H1 FY 2025 was resilient given the backdrop of macroeconomic challenges, customer-specific, and sector-specific issues as has been delineated by Arun. The consolidated revenue for Q2 FY 2025 was at INR 464 crores, increasing 18.4% sequentially and by 5.1% on the back of robust revenue from aerospace and defense verticals and both returning to cyclical levels. EBITDA improved to INR 33 crores, showcasing operational efficiency even amidst macroeconomic challenges. For a like-to-like comparison, if you adjust the 12.3 crores of ESOP write back which happened in Q1 FY 2025, which was kind of taken off from employee benefit expenses, which is a one-time adjustment, and then comparing the sequential performance, we feel that the EBITDA has grown in absolute terms by 75% quarter-on-quarter from 19 crores in Q1 FY 2025 to 33 crores in Q2 FY 2025, as we have shown in the investor presentation. The EBITDA margin for Q2 FY 2025 is at 4.4%, as against 13.9% recorded in Q1 FY 2025, mainly due to underperformance in the automotive vertical. Excluding the one-time capital gain from sale of property which happened in Q1 FY 2025, which was about 7 crores, the sequential tax grew by 26%, from 10 crores to 12 crores. In Q2 of FY 2025, the company has repaid a further amount of 52 crores from the QIP proceeds to retire long-term debt from Ind-AS. The company is in the process of refinancing an existing OCD of 67 crores with own funds of 16 crores and a lower cost borrowing of 50 crores. As a result of significant repayment of debt, the finance cost of Q2 FY 2025 stands reduced by 26% year-on-year to 8.6 crores. The finance cost for H1 of FY 2025 is lower by 48% at 16.64 crores as against 31.15 crores in the same period of the previous year. Our endeavor is to be a zero net debt company in the next two to three quarters. Coming to H1 of FY 2025, the revenue was at 488 crores, growing by 5% from 465 crores in H1 of FY 2024. H1 FY 2025 EBITDA was at 64 crores with an EBITDA margin of 13.1%, as compared to EBITDA of 69 crores with EBITDA margin of 14.8% in the same period of the previous year. The lower EBITDA in H1 is mainly on account of an EBITDA loss of 6 crores in the automotive vertical as what Arun just now stated. Excluding the automotive vertical, the EBITDA margin as at 14.9%, indicating that the margin strength in other verticals is quite strong. PAT for H1 2025 was at 29 crores as against 17 crores in the same period of the previous year. With majority of production revenues from defense is to be recorded in H2 and better revenue from other verticals, we expect that the profitability in H2 to be better than H1. The annualized EPS stands at 14, up to 14 as against 8.4 in FY 2024. The annualized ROCE is at 17%, as against 14% in FY 2024. The company continues to focus its efforts on improvement in gross margin, cost rationalization, and productivity improvement by optimizing less than 20% gross margin accounts, outsourcing of non-core functions, and removing the linearity between revenue and headcount, which will continue to improve profitability going forward. The company is also optimizing resources and staffing with an onsite-offshore ratio of 77/23 and fixed cost T&M ratio of 69/31. A consolidated net worth of 611 crores, combined with robust cash generation and cash reserves further highlights that the company's financial and operational stability The company's free. Another aspect is that the company's free float in stock and public shareholders have significantly improved by 68% since the beginning of the financial year, with public shareholders increasing from about 19,000 in April 2024 to more than 32,000 currently. In summary, the company is effectively driving growth and profitability across its core verticals despite macroeconomic challenges. The promising outlook for H2 FY 2025, coupled with initiatives to boost margins and optimize resources, positions the company well for sustainable growth in future. Thank you. We now open the floor for Q&A. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star, then one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star, then two. Participants are requested to use only handsets while asking a question. First question is from the line of Nirali Gopani from Unique PMS. Please go ahead. Yeah. Hi. Thanks for the opportunity. Nirali, your line is unmuted. Please go ahead. Yeah. Can you hear me now? Nirali, can you hear us? Hello. Yeah. Can you hear me now? As there is no response from the line of Nirali, we will move on to the next question. The next question is from the line of Saurabh Sadvani from Sara Capital. Please go ahead. Hello? Saurabh? Hello. Hi. Good evening. Am I audible? Saurabh, can you hear us? Yes. I can hear you. Next question is from the line of Kiran Dee from Tabletree. Please go ahead. Opportunity. The first question that I had was, in our investor presentation, we said 60% of our overall revenue from the company will come from the defense business in the next 12-18 months. I am a little surprised at this number in terms of positive surprise. Are we almost saying that we will get to INR 600 crore because we will do about INR 1,000-INR 1,200 crore. So INR 600 crore of defense business in FY 2026? If so, what is the breakup between production and development? Yeah. Kiran, let me just say that this is directionally the journey that we are setting ourselves for. This is a vision, because now we are very well placed to receive some large orders. We feel that defense for us will significantly grow. I think the goal that we have set ourselves is that the defense business will grow from 30% where it is now to about 60% of our revenues. I do not want to get into any specific numbers in terms of how the business size will be, et cetera. This is based on some of the insights that we have and also some of the programs that we are bidding for. Got it, sir. Sir, then, if you could just tell me, at least from a high-level perspective, we were expecting a large order from counter drone. The other competitors are saying there are no problems with supplying equipment to radars and so on and so forth. Is our order book going to significantly increase in H2 FY 2025 because of counter drone and everything else? I think it will be a combination. It will not be just counter drones, but as you know, our strengths are across radar, sonar, telemetry. We expect some of the large programs that come in, including some of the defense programs which are ongoing. Also, by working in partnership with other companies, we expect to boost our order book. I think counter drones will be a part of it, but it is not going to be a significant portion of this growth journey. But certainly, we have an early mover advantage because we have deployed counter drones operationally, which has not been done by any other company. We do see potential in that, but we also expect the other lab related programs for the DRDO and NPOL and BEL and HAL that to ramp up. Got it, sir. Sir, what kind of order can we expect from LCA Tejas and Su-30? Is Tejas engine delay going to impact the order inflow for us? Just wanted to check around Tejas and Sukhois. Not being very specific, but at least at a landscape level, if you could just tell us from a FY 2026 perspective. Yeah. I think as far as Tejas is concerned, we are already part of the program. We already deployed about 60 numbers. We developed a radar subsystem which goes into the Tejas. As the production of Tejas increases, our revenues from that sector will go up. As far as the Su-30 upgrade is concerned, as you know, there are existing large quantities. This is something that's already been designed. As this program kicks off, we expect the deployment and production of that to ramp up as well. Of course, I must say that this depends on things starting off in a timely fashion. When we say 12-18 months, there is a dependency on both some of these programs kicking off as well as the production partners of the government also producing things on time and getting their subsystems and vendors to deliver everything so that they can system integrate. We do see good potential going forward. But there is a dependency, like always, on some of these partners. Got it, sir. Sir, last question from my side. Sir, homeland security, we were expecting INR 40 crore-INR 50 crore worth of orders. Did we get the order? In FY 2026, can that move up to INR 100 crore, just from a visibility perspective? Yeah, some of the trials are on as far as homeland security is concerned. We are working with various agencies, both at the state level and federal level. We have also started some works in that path. I don't want to comment on the number, but this is not growing as fast as the other defense business, which is coming from the labs and from the production partners. This is also an important part of what we are addressing. Got it. Okay, sure. I'll join back in the queue. Thank you. The next question is from the line of Nirali Gopani from Unique PMS. Please go ahead. Yeah. Hi. Thanks for the opportunity. My first question is on the defense production side. If I look at the revenues Nirali, we are unable to hear you. Can you hear me now? Hello? Can you hear me now? Nirali, can you speak up? Yeah. Can you hear me? We move on to the next question. The next question is from the line of Saurabh Sadvani from Sara Capital. Please go ahead. Hello? Hello? Is there any technical issue at your side? Because two people have not been able to Sir, we were able to take the question. Saurabh, can you hear us? Yes, I can hear you. Can you hear me? Participants are requested to hold while we check on this. Please hold. It is a request to participants to continue hold to check if there are any issues at our end. Please hold. We move on to the next question of Deepak Poddar from Sapphire Capital. Please go ahead. Yeah. Am I audible, sir? Yes, you are audible. Yeah. Sir, I just wanted to understand on the defense side, how is margin different in the defense side as compared to your other segment? As compared to engineering? As compared to other segment, I mean aerospace or energy or the heavy engineering or automotive. Yeah. How better or how worse is that? Yeah. So essentially, the defense revenues consist of two parts. One is the production revenue, which results out of the order pipeline as what has been built, which has also been shown in Indra's presentation. There, because of the fact that the engineering efforts in terms of development of prototypes are not there, and we have an exclusivity with respect to the specific part number, the margins are high. Like for example, in the current half year, the defense production for Mistral was INR 78.05 crores, on which we made an EBITDA margin of 24.3%. But then we also had revenues from prototype development, which is for future order pipeline, where we had revenues of around INR 29 crores. Where we actually lost about INR 5.25 crores in EBITDA, which was, I would say, negative 17.8%. The prototype development is a process of adding to our order pipeline, which we cannot stop. While we can technically say that the huge order pipeline as what we have built of around 3,000, 4,000 crores, we can actually, I would say, kind of sweat it out by having this kind of disproportionate margin. We need to continue to build the prototype for future order pipeline. And when the production revenue kicks in, it is at this band of 22%, 24% plus kind of EBITDA margin. So that includes the loss from the prototype development, this 22. No, it does not. If you have to net it off in the defense production, as I said, the total EBITDA from the production revenues were at INR 18.97 crores, and the prototype EBITDA was minus INR 5.25 crores, which essentially means that we had a blended EBITDA of around 13 odd crores on a defense revenue of around INR 106 crores. So that effectively is around 12% kind of an EBITDA margin, right? Right. Because I presume your prototype development costs will keep on continuing, right? I mean, that is an ongoing thing for you to kind of garner more orders from the customers. So ideally a 12% kind of an EBITDA margin as a whole for the defense sector would be a right range or right number to kind of look at? No. What happens is that as we see, the production revenues are increasing year on year. This year we will clock somewhere close to INR 170 crores. The production revenues, the prototype revenues are fixed at about INR 100 crores. The difference is going to be that as the production revenues ramp up, that will far outstrip the prototyping revenue. Therefore, the margin should go up because the weightage of production will be higher. Just to give specificity in terms of numbers, if you look at FY 2023, the defense prototypes was INR 109 crores and the defense production revenue of INR 38.77 crores, we had a 30% EBITDA there. When you come to FY 2024, the defense production revenues was INR 112 crores. In this half year, the defense production revenues are INR 78 crores. As Arun said, the pace at which the production revenues are going is at a much faster pace than the prototype. As a result of it, the blended EBITDA will continue to improve. Understood. Fair enough. Understood. I got it. Will it be fair to say when we say over the next one to one and a half years, we expect our defense revenue to form about 60%, so it will be margin accretive for the entire company? Yes. Okay. I think earlier what we have said, also in light of the headwinds that we are facing in couple of sectors, especially in the automotive sector, how do we see the guidance that we have given earlier in terms of INR 1,600 crores revenue and INR 160 crores to INR 180 crores kind of a PAT level for FY 2026? Do you want to revise any of those outlooks? Yeah, I think so. That is something that we will come back with, but definitely, the automotive headwinds have surprised us this year and surprised the industry. When I say surprised us, it is not just us as a company. That is something which is not factored in because when we did these numbers, automotive looked like it was the fastest growing vertical. I think it has now significantly braked. It will be a few quarters before this comes by. We will need to sort of relook at this and come back. I do not have specific numbers at the moment, but it will certainly delay this to some extent. Absolutely. Fair. What about this year? We were targeting about INR 160 crores, INR 170 crores kind of EBITDA, right, at a company level. Given the first half performance, and you did mention second half would be superior to first half, how do we see this outlook? Yeah. As you were saying, the quantum of defense production revenues in H2 is going to be significantly more than what was there in H1, and that will add to the proportionate EBITDA from that level will be much higher. At the same time, what we expect is the automotive EBITDA, which was a negative INR 6 crores in the first half, will start getting to be positive from Q4 of this year. As a result of which, the guidance as what we gave perhaps may be impacted in totality by about maybe INR 5 crores, INR 6 crores. But we are on the path of seeing how we can recover that. What we are saying, 5-6 crores kind of EBITDA impact on maybe 160-170 crores EBITDA that we had given earlier, right? Correct. Okay. Fair enough. I think that would be it from my side. All the very best to you. Thank you. Thank you. Thank you. The next question is from the line of Nirali Gopani from Unique PMS. Please go ahead. Yeah. Hi. Thank you for the opportunity. Arun, if I look at our numbers, India geography has been doing very well. Is this largely defense driven or any other segment is also contributing to this growth? Nirali, it's mainly defense driven. Okay. In your commentary, you mentioned the prospects of each of the segments. Is it fair to assume that this is the bottom and we should look at upward trends in almost all the segments because this quarter has been fairly good for all the segments. Is it safe to assume that? I would say automotive, there is still some uncertainty. It is a little bit hard to predict because we really depend on our clients giving us some clarity in terms of spend. I think automotive, we'll have to wait and watch. Aerospace, like I said, I think is looking to be good. Energy is also looking good. Semiconductor, we are starting to see, as we had mentioned in the previous calls, there was a production slowdown which had impacted the overall sector. But that, we are slowly starting to see that come back. So that should be positive. Heavy engineering, like you saw, we have sort of had some incremental growth from Q1 to Q2. I would say heavy engineering, like I've mentioned in the past, is not a very high growth sector, but we should see marginal growth there. I think other than automotive, we should see the other sectors being positive. I think the crucial factor for us here is how long the automotive pain will continue because that is diluting to some extent our top line and EBITDA growth, and it is sort of negating some of the growth and positive momentum we are seeing from the other verticals. Right. So in your assumption, automotive should stabilize here and not grow, or a decline is also possible? I think it should be. Yeah. Essentially, if you look at it, the automotive vertical, the total revenues were at INR 103 crores in FY 2024. If you look at the first half of the current financial year, we are at INR 48 crores. What perhaps would happen is it could be flat-ish for the entire year. In terms of what we recorded last year, which was INR 103 crores, could be the same, only that the EBITDA will be, from this structural vertical, will be negative because of the, I would say, the loss which we're taking from our European venture. Right. Perfect. In your presentation, when you say that the defense revenue will go up to 60% from the current 30%, if I assume the other segments to be stagnant, still you grow at mid-teen number for the full year. So next year should be pretty good, right? We can see a high-teens revenue for the company at the company level because if you do the numbers, that is what it comes to. Yeah. I think just one of what I would say that this is not a guidance that we are giving, this is an ambition that we have. I think the message that we want to give our investors is that going forward, we are pivoting more and more as a defense company because of obviously the market out that is there and our capabilities and the kind of programs that we see are coming in. I think it is really a messaging to investors that you will see defense growing faster. It is not a guidance in the sense that it is exactly going to be that number, but we are aiming to be there, and this is the sort of goal that we have set ourselves within the company, and this is based on a lot of fundamentals that we see. Perfect. Whenever we reach this number of, say, 60% of the revenue from defense, what kind of EBITDA margin should we look at? You see, as we stated, the EBITDA margins from production revenues are upwards of 20%. When the mix changes, pivoting more towards defense, obviously, the 13%-14% EBITDA margin as what we are seeing, will be significantly higher from the part of the total mix between engineering services and defense. But I would also say, Nirali, that a lot of orders could be new prototypes as well. There could be some prototyping revenue which comes in. There will be production which will ramp up as well. I think it really depends, as you know, it depends on the mix of how much production versus prototype that we have. We of course feel that the margin will go up significantly if the defense is 60% of the company's revenues. But I just want to say that it depends on the weightage of production to prototype. Perfect. That is it. Thank you. Thanks. Thank you. The next question is from the line of Saurabh Sadvani from Sara Capital. Please go ahead. Hello. Yes, Saurabh. Am I audible? Please go ahead. Yes, you are audible. Please go ahead. Hi. Good evening, everyone. One thing, recently, in the European region, there have been some import tariffs announced in the automotive sector. Have they in any way positively affected the decisions or the discussions going on for the demand? I think that will be a positive, because that has still not been enforced. What is happening in Europe is that the Chinese OEMs are coming and flooding the market with vehicles which are superior to the quality of some of the German and European OEMs, and that is at half the price. The governments are considering tariffs on these Chinese imports. It is still in progress. It has not been fully enforced, but when that happens, it will be positive because it will mean that the European OEMs will obviously be able to regain some market share and the Chinese cars won't be as cheap as they are, which should be positive for our business. This is something, and these are complex trade and governmental affairs, so it is hard to comment on when it will happen. But if that happens, it will definitely be a positive for us. Okay. Shashi, can you give us a historic profitability in the automotive segment, like add-solution GmbH when it was merged, what was the profitability in FY 2024? You see, the automotive vertical at an EBITDA level has always been in the range of around 9%-10% EBITDA margin. Of course, this year it has been negative because of this asset issues in Europe. Okay. On the attrition, it has spiked to 17%. What is the outlook on that? Yeah. I think there's a couple of things. I would say one is that this is voluntary plus involuntary attrition. Like I mentioned in my opening comments, we are looking at how we can optimize, use digital, and do productivity-enhancing measures. We are looking at trying to reduce our headcount to keep pace with the increased revenue growth. One is that it's voluntary plus involuntary. I think the second is that we were hiring at a much faster rate in the previous quarters, which was tempering of the attrition percentage to some extent. That, again, we have tried to use more automation and more digital. We have really put a, I would say, tight freeze on the hiring. All this is to make sure that we keep our costs in check and improve it going forward. Okay. Thank you so much. Thank you. The next question is from the line of Aman Vij from Astute Investment Management. Please go ahead. Yeah. Good afternoon, sir. My first question is first of congratulations on recent performance. The first question is, when you talk about this 60% kind of revenue coming from defense in next 1.5 years. Sir, correct me if I'm wrong, we were expecting the Sukhoi and the Tejas, these are the big programs for us, to come in FY 2027 and 2028. Is this the prototyping for this which is coming in FY 2026 or is this something totally new? Because I don't believe you were that bullish previously. What has changed in the last one quarter for you to be that bullish in the next one, two years itself? Yeah. The prototyping is actually ongoing for both of these programs. We expect production to. In fact, we already started delivering some kits, so production will start ramping up, I would say, from next year onwards. The prototyping is already in progress. Now, the only thing is that, of course, like I said, we are dependent on the pace at which the production happens because when you look at the Tejas, there are many suppliers who are involved. We are one of the suppliers. The pace at which the integration happens and the complete product goes out is also an influencing factor on how fast we can produce. We are sort of ready with our components and our kits. But it also depends on the customer having the ability to pull it from us. Sure. This bullishness is coming mostly from LCA Tejas and Sukhoi upgrade program, or is it totally new program which is coming into production earlier than we thought, or what is happening? Sorry, just repeat that question. I was saying, this bullishness over next one and a half years, defense becoming 60% of our overall revenue, is it coming mostly from LCA Tejas and Sukhoi upgrade program, or is there any new program which is becoming bigger than we thought? I am still not sure about that part. Yeah. No, no, we are looking at other programs as well. Sukhoi and Tejas is something which is already on our radar. We are looking at other programs also to come in and contribute towards that ambition that we have. Okay. Sir, we heard from HAL call that Dornier orders are coming up. We heard from other players call. There are a couple of drone programs that is coming up for us, including Ashwini and VELE for other players. Is this one of the major reasons for the growth in next year? What kind of order book closing in FY 2025 do we expect in defense? H1, I think there were good addition in defense, but in terms of order inflow for H2, what kind of expectation do you have? Yeah. As far as Dornier is concerned, this is a program we are already delivering, so that is definitely giving us some positive momentum. 10 sets have already been delivered, so we are part of that. Yes, absolutely, that is one reason why we are optimistic. As far as Q2 is concerned, as we saw, we had 121 crores worth of order booking that is done. I think we look to be developing orders at a similar pace going forward for this year. I think for next year, we do not really give you guidance, but we will sort of, as we do the next earnings call, we will probably give you some more detail. Okay. Just one last part before I move to other segments. There was a lot of delay expected in Tejas engine because of GE and all those things. That is not impacting us? You see, typically, our supply of the subsystems in terms of radar, comes at least one year before the actual, I would say, production of LCA happens because they have to have the subsystem in place to integrate with the larger system. That essentially means that you would not be so much impacted by the engine delays from GE or anybody else. Sure. And sir, any rough pickup you Excuse me, Mr. Vij, we would request you to please come back in the queue as other participants are waiting to ask their questions. Sure. I will come back. The next question is from the line of Sameer Dosani from ICICI Prudential AMC. Please go ahead. Am I audible? Yes. Yeah, on heavy engineering segment, what to expect from this segment from here on? I think, if you can give some color on what is the optimization target which has been achieved till now, and where can we go in terms of margins in this segment? You see, what we have been talking about in the previous earnings call, while the heavy engineering vertical contributes anywhere between 16%-20% of our total revenue, which is quite substantial. Like for example, in FY 2024, our revenues from HE was INR 152 crores, whereas the margins were hardly there because in fact, just I would say, while the gross margins were positive at an EBITDA level, it was kind of negative, almost negative by about 1% or 2%. So if you had just removed heavy engineering from the scheme of things, our EBITDA margins would have been better by about 150-200 basis points. So what we have done this year is to look at each of the work packages and the work which we are doing for Caterpillar in each of the delivery centers as what we have. Especially with respect to the Chennai ODC from where we service the Caterpillar business in Chennai, where we do a work called fixed cost drawing, which was quite negative from the point of view of margins. We have optimized the work breakdown structure, and we have removed quite some people from that particular vertical and same set of people, lesser number of people are delivering the same quantum of work. We also have bid with Caterpillar for a much higher price in terms of these FTDs, as a result of which, we are confident that by the end of this year, we will have a positive margin to report from this particular vertical. Okay. Currently, we are not making margins. Are we making losses in this vertical? No. I can repeat. We are not making losses. It is a low margin account, but we are not making losses. These margins can optimize to what levels, you think? See, right now, Samir, it is in the single digit range. I think it will go to low double digits. I think beyond that Okay. That is why I have been sort of guiding that. No, that is fair. I just wanted to get some idea. That is fair. Second is on semiconductor business, can you give some color, like what kind of outlook that you are seeing? Defense, whether H2 is heavier for semiconductor? That is one. Any other qualitative feedback on what progress we have made on adding logos and how do we think production revenues can ramp up here in this vertical? Yeah. So with respect to the semiconductor vertical for the first half year, we have, I would say, recorded a revenue of INR 56 crores. With the Q2 numbers being much larger in terms of INR 32 crores as against INR 24 crores in Q1. As we have kind of projected in the previous earnings calls, the semiconductor revenues as such is coming back. In this year, we head towards the same number as what we recorded last year, which was around INR 125 crores. Of course, that has come at a much larger EBITDA margin. For the INR 55 crores, we recorded an EBITDA margin of around 22%, recording an EBITDA of around INR 11.2 crores on INR 55 crores of revenue. So it is a high margin business for us, and we are hoping towards the inventory build-up as what has happened with the OEMs have now fleshed out. We definitely feel that from Q3 onwards, even the production revenues will come back, and also along with the service revenues. Yeah, I think on the new logos part, the flavor I wanted to give is that, in the last four months, we have really intensified our hunting activities. We have hired a few new people. We have also engaged a lead generation engine, and we have some B2B tools. Just to give you an example, in the U.S. itself, we started with a list of about 140 clients with whom we did some prospecting. As we whittled it down, we got an interest of about 40 clients who are interested in actually starting work with us, out of which nine clients, we got it to an advanced stage and four new logos we generated. Just to give you a process, that's the funnel that we are working on. New business for us is a focus activity. And of course, you would have seen that Highview Power, we made a press announcement as well. This is a renewables company based out of U.K. We landed a large deal out here, a three-year engagement. They have big plans to increase their plants across the world. They start in the U.K. and Australia, but they will expand globally. In addition to what I talked about in our major aerospace OEM, where we won a $12 million deal. We are making good progress on hunting. I am hopeful that as we go along, the new logo addition will improve. And- Sorry, just one more thing that I think we mentioned to you is that we are working along with Zinnov, specifically on the automotive sector, to see how we can sort of create some deals, and we are working with them on strategy. That again, will start to bear fruit. But Ritu here, in semiconductor, similar to defense, should we think that the production piece is which will be stronger in H2, so higher margins for semiconductor as a vertical? The margins as far as the semiconductor, both of the service part and the production part is an average of around 22%-23%, and that will continue. Okay. Whether it's service or production revenue. Okay, got it. Lastly, on aerospace, with the new contract in, we should think a 20% year-over-year growth, this trajectory should continue for us, or we should accelerate or how should I think about it? It's a three-year contract, like I said, it's part renewal, part new programs. But with that contract, we also get to play in the U.S. region for that client, which we have not done to a large extent until now. So we are quite hopeful that that will grow. Aerospace for us will continue to grow. You must be aware that in Q2, the aerospace OEMs have a plant shutdown, so for 2-3 weeks. Correct Typically we had no work. This year even some of the aerospace companies are struggling with supply chain and engine issues. So this year has been difficult from that perspective for aerospace as well, but our business is still continuing the momentum. I am hopeful that those industry issues will go away, which will provide a further positive momentum to us. At least these shutdowns are behind us, right? In terms of production, in terms of plants. Yes, shutdowns are behind us. But I think you are aware that Air Force, for example, they had predicted they will produce 800 aircraft. They had reduced their guidance down to 774. Companies like us, our revenues are linked to the number of aircraft that are produced. So we had to sort of expand work in different areas to continue to grow momentum, which next year, if they are able to produce more aircraft, that will be another positive momentum for us. But what I remember is their monthly run rate- Sir, can I request you to come back in the queue? Sure. Thanks, Sujith. Good luck. We will now be taking the last question from Karthikeyan V.K from Suyash Advisors. Please go ahead. Yeah, hi, good afternoon. Just one clarification on the defense profitability that you spoke about. The last we spoke, there was nearly 29%-30% margins on the production side, and now you are talking about early 20s. I am just trying to understand if there is a change in the scope of work that you will be doing going ahead, as in there will be lesser amount of assemblies, or is it that something else has changed? Can you just throw some light on that? See, the production revenues in H1 for the defense production was around INR 78.05 crores, on which we made an EBITDA of 24.3%. You are right, in FY 2024, our production revenues was INR 111.5 crores, on which we made an EBITDA of 30%. The production EBITDA depends on the mix of the various programs which we execute. There are auto components, there are OEM business which we do. So it depends on the mixing of the various programs which we are executing. It is safe to say that the EBITDA will tend towards 20% to 25% plus, it can be better. In terms of the totality of a program which we will be executing, this is the safe guidance you can take. Fair. Thanks very much, and best wishes. Thank you. That was the last question for the day. I would like to hand the conference over to the management for closing comments. Yeah, thanks a lot for all the questions and all the interest. I think just to summarize, I would just like to say that aerospace and defense continues to be the industries in which we are most positive, and we have also obviously laid out an ambition as far as defense is concerned. As far as energy is considered, it is a small part of our business right now. Again, we are optimistic that will grow. Semiconductor is a big differentiator. I think that industry is growing rapidly. So we will see that also being positive for us. Automotive, of course, we are a bit in wait and watch mode. Personally, I am very bullish about automotive over a longer term, because that is where technology adoption happens the most, and they are the biggest R&D spenders as compared to other verticals. We will be strategically continue to place our bets in automotive and stay invested, and see how we can get new logos. Of course, when the downturn fades away, that will be really positive for us. Thank you so much again for the interest, and wish you all a good day. Thank you. On behalf of Centrum Broking and AXISCADES Technologies, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.