Q4 23/24

May 21, 2024

Summary

FY 2024 revenue rose 17%, while normalized EBITDA margin narrowed amid investment and one-time costs. Management expects FY 2025 growth to exceed industry levels, with recovery weighted to the second half and debt reduction lowering finance costs.

Ladies and gentlemen, good day and welcome to the AXISCADES Technologies Limited Q4 FY 2024 earnings conference call hosted by Centrum Broking. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sumeet Khaitan from Orient Capital. Thank you, and over to you, sir. Good evening, everyone, and welcome to Quarter 4 and FY 2024 earnings conference call of AXISCADES Technologies Limited. Today from the management, we have Mr. Arun Krishnamurthi, CEO and Managing Director, and Mr. Shashidhar S.K., Group CFO. They will take you through the results and business performance, after which we will proceed for 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, opinions, and expectations of the company as on date of this call. 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. With this, I now hand over the call to Mr. Arun Krishnamurthi for his opening remarks. Over to you, Arun, sir. Good evening, everybody. Welcome to the Q4 FY 2024 and our full year earnings call. I am accompanied by Sashi, who is our Group CFO. Mujahid, who is the CEO of Mistral, is at the moment on business travel in California, so it is 3:00 A.M. for him, so he will not be able to join on this call as he usually does with us. I trust you have reviewed our investor presentation, which we have revamped to provide you with the status and potential of each vertical that we serve, along with business and financial performance. The financial year 2024 was a momentous year for the company in which we successfully completed a qualified institutional placement, made two acquisitions, acquired new logos, strengthened our strategic relationship with several OEMs, had several deal wins, retired high-cost debt, and strengthened the balance sheet. I am pleased to report good performance in most of our verticals in FY 2024, except heavy engineering and PES, where we had macro challenges. The company completed the financial year with consolidated sales revenues of INR 952 crores, recording a growth of 17% over FY 2023, revenue of INR 814 crores. Our growth was much higher than the ER&D industry growth rate of 7.4% as per the NASSCOM report. Our constant dollar revenue growth was 14%. The revenue growth was driven by engineering services revenue, which grew by 21% from INR 576 crores in FY 2023 to INR 694 crores, led by aerospace, automotive, and energy. This growth came about despite degrowth and softness in heavy engineering and product engineering verticals, which I will elaborate going forward. The defense revenues grew by 8% from INR 238 crores to INR 258 crores, with production revenues in Mistral Solutions (Defence vertical) tipping from INR 39 crores in FY 2023 to INR 112 crores this year. The company recorded consolidated EBITDA of INR 150 crores in FY 2024 as against a normalized EBITDA of INR 124 crores in FY 2023, a growth of 5%. The EBITDA margin stood at 13.7% as against normalized EBITDA margin of 15.3% in FY 2023. As stated in our earlier earnings call, the company continues to make significant investments in building digital capabilities, which has short- to medium-term impact on EBITDA. The financial year also saw one-time costs and organization costs because of two acquisitions, as well as non-permitted expenses of equity raise event, which was charged to the P&L statement. The company hired senior leadership talent during the year and continued to retain experienced and billable resources in heavy engineering and product engineering services despite degrowth, as it expects normalcy to return to these verticals in the later part of FY 2025. The reduced EBITDA margins in FY 2024 should also be seen in the context of this. The company recorded a PAT of INR 33.4 crores as against a PAT loss of INR 4.8 crores in FY 2023. The normalized PAT after adjusting for exceptional charge in FY 2023 was INR 63.23 crores. With prepayments of borrowings from proceeds raised by QIP, the finance cost has significantly decreased in FY 2024, which has added to the PAT. The business performance for the fourth quarter, the company continues to record consistent year-on-year growth in its engineering services business. For Q4, engineering services business grew by 23% year-on-year to INR 182 crores from INR 149 crores in Q4 FY 2023. The sequential revenue growth from Q3 FY 2024 in engineering services was flat, mainly due to lower revenues from product engineering services and automotive. The defense business in Q4 FY 2024, at INR 73 crores, grew by 49% from the previous quarter, with defense production revenues accounting for INR 42 crores, doubling from INR 22 crores recorded in the previous quarter. The EBITDA was at INR 32 crores in Q4 FY 2024 as against INR 29 crores in Q3 FY 2024. Let me now delineate on some of the vertical-wise business performance and outlook for FY 2025. The aerospace vertical, constituting 30% of consolidated revenue, reflected robust growth of 27% over previous year, recording a revenue of INR 285 crores as against INR 225 crores in FY 2023. Our long-term relationship with aerospace OEMs continues to expand and will benefit from the enhancement in production run rate by OEMs, backed by large order backlog with the OEMs. As such, our recurring revenues from manufacturing support and in-service repairs will continue to show healthy growth in FY 2025. The company is bidding for several other programs for which we will be a preferred supplier given our legacy and proven competencies. The company has also initiated several digitization projects in the aerospace vertical, which will enhance productivity and margins. Our outlook for this vertical continues to be bullish for the foreseeable future. With the acquisition of Addsolution, the share of revenues from automotive constitutes 11% of our total revenue at INR 103 crores in FY 2024, as against 4% at INR 35 crores in FY 2023. The company added new capabilities in this vertical in HMI testing, automation, and EDI. The company added several new logos in FY 2025 and acquired a cybersecurity work package with an automotive OEM in the U.K., which designated us as a preferred supplier. With the current emphasis on software-defined vehicles, we are building a brand differentiator with Mistral's hardware and Addsolution automotive capabilities. We, however, see some signs of softness in some of our automotive clients due to challenges from Chinese OEMs on their EV portfolio. With the acquisition of Epcogen in December 2023, AXISCADES closed the financial year 2024 with revenues from energy vertical at INR 33 crores, constituting 3% of total revenue, as against INR 19 crores in FY 2023. With Epcogen, AXISCADES serves both domestic and overseas clients in the oil and gas, refineries, power, and green energy sectors with expertise in front-end engineering, pre-award proposal engineering, detailed engineering, construction and commissioning support with multidisciplinary capabilities covering the full spectrum of the energy sector. The company, considering the potential of this vertical, has positioned a business unit head in Dubai to enhance current relationships and build new relationships in the Middle East and seeks to open a marketing office in Dubai in FY 2025. AXISCADES projects healthy growth from energy verticals in FY 2025. As stated earlier, the growth of 21% in engineering services business has come about despite the degrowth in heavy engineering and the PES verticals, mainly in the U.S. region. The share of heavy engineering to total revenue declined from 21% at INR 170 crores in FY 2023 to 16% at INR 152 crores in FY 2024. The decline of 11% in this vertical is due to slowdown in the U.S. region with low CapEx deployment for heavy earthmoving equipment. The company's revenue from a major heavy engineering OEM is mainly from low-margin staff augmentation business, which is disproportionately exposed to any slowdown. Hence, we have embarked on a journey to structurally alter our quality of revenue in this vertical by acquiring new logos and graduating to new value-added services, especially in digital, plant automation, process automation, and autonomous solutions by leveraging internal and Mistral capabilities. While growth will be muted in this vertical in the first two quarters of FY 2025, we expect growth to return to this vertical in the second half of the financial year FY 2025. The product engineering business of Mistral, constituting 13% of total revenue, recorded a marginal decline of 2% to INR 125 crores in FY 2024 from INR 128 crores in FY 2023. While the services part of the PES business recorded stable growth of 6% at INR 59 crores in FY 2024 from INR 55 crores in FY 2023, there was a degrowth in the production part of the PES business, which decreased by 8% from INR 72 crores in FY 2023 to INR 67 crores in 2024. As stated in the earlier earnings calls, this is due to overproduction and overstocking of semiconductor chips by global semiconductor makers during the pandemic. We expect that growth will return to this vertical during the later part of FY 2025 with flushing out of built-up inventories. Mistral continues to focus on new product development and innovation in this vertical. FY 2024 was characterized by the release of autonomous aerial robotics controllers product for a drone kit and Edge AI Box in partnership with a semiconductor OEM. We also entered into new business deals with major automotive tier 1 and tier 2 clients. During the year, Mistral developed and tested a next-gen protein synthesizer. All these initiatives will result in deal wins for us in the coming quarters. As stated earlier, in FY 2024, the total revenue from defense business, which constitutes 20% of our total revenues, grew by 8% from INR 238 crores to INR 258 crores. In this, the defense business of Mistral grew by 37%, from INR 137 crores to INR 203 crores. Out of this, the production revenue grew by three times from INR 39 crores to INR 112 crores, and prototype revenues were at INR 92 crores. The overall growth in defense business was restricted to 8%, despite significant growth in Mistral defense, as a large order being executed by our subsidiary, ACAD, for the Man Portable Counter Drone System got deferred to FY 2025 due to delay in pre-delivery inspection. Despite the delay, ACAD delivered 24 numbers of this MPCDS to the Indian Army in the month of March 2024. On successful execution of 100 numbers, which is an existing contract, by Q2 FY 2025, there are significant opportunities for repeat business and additional orders for this proprietary and one-of-a-kind drone technology developed by ACAT. This system is first of its kind of anti-drone system that has been inducted into the armed forces and is currently being used. The system, being a small portable battery-cum-mains operated system, caters to multiple frequency spectrums including command and control and navigation, and can detect and jam a wide variety of drones completely made in India. It performs both electronic spectrum monitoring and electronic countermeasure functions up to 5 kilometers. It also covers certain special frequency spectrums not addressed by any other system in the market. The Indian Ministry of Defence and Defense Forces plans to acquire counter-UAV capabilities, including that of MPCDS, through multiple RFPs. The addressable opportunity in this area within India is about INR 3,000 crores for the next five years, not to speak of potential for exports. We are confident that the defense vertical will continue to grow on the back of strong order pipeline, which has been built up with design wins and prototype certifications over the last ten years. The company added to its pipeline in FY 2024 with design and prototype wins in several defense programs such as HISAR, which is a missile launching program, next generation ERP for combat aircraft, Intel-based SBC, which is single board computers, DE satellite terminal and design, direction finding for naval programs, et cetera. Mistral production order revenue will continue to grow at a robust pace in FY 2025. Now, coming to the digital initiatives. The company currently has a 75-plus member digital team with deep competencies in automation, AI, ML, and robotics, with complete digital project execution capabilities in an agile environment. The team is focused on internal process automation as well as offering digital capabilities as a service to both existing and new customers. The digital team has developed a machine vision-based quality inspection system for AOL validation of manufactured products. The team is working with various customers, both current and potential, to offer digital solutions for process and cost optimization. As stated earlier, that the digital investment was negative to EBITDA in FY 2024, the same is expected to be neutral to positive in FY 2025. As stated in my previous call, I am pleased to report that in the last 2 years we have made significant progress in implementing our three-pronged strategy of vertical diversification, customer diversification, and digital first. The business stands significantly de-risked with six business verticals, addition of several new strategic logos, new acquisitions, and our investments for a digital future. We continue to build our team for growth and have added more than 500 billable resources in the last 12 months, and our people resource stands at 3,000 plus across all the businesses. The outcome of this can be seen from revenue from new customers increasing by five times from INR 14 crores in FY 2023 to INR 69 crores in FY 2024, and contributing to 7% of revenue in FY 2024 versus 2% in FY 2023. We currently work directly with more than 10 OEMs across our different verticals. We have delivery centers in multiple global locations as part of our global delivery model. We have been able to attract and retain quality talent having deep engineering expertise. Our attrition has fallen from 21% in FY 2023 to 16% in FY 2024. There is substantial headroom for growth in each of these verticals we serve, and our aim is to expand the addressable market with our service offerings formed over two decades. Our confirmed order book across all entities stands at INR 749 crores as against INR 589 crores at the beginning of the year, an increase of 27%. While we do not provide specific guidance on revenue and margins, our directional guidance on each of the verticals has already been delineated. Overall, I strongly believe that we should be able to put up a better performance and better than industry growth rate in FY 2025, even though we believe the growth will be generally back-ended to Q3 and Q4 due to the unique nature of some of our verticals and our overbreadth presence in defense, which are lumpy in nature and cannot be calibrated across quarters. To conclude, the fundamentals of the business remain strong, and we enjoy excellent customer relations to take us forward on our growth journey. Some verticals will grow faster than the others, and to some extent, that will be determined by macroeconomic trends and sector-specific seasonalities. I now invite Sashi, our CFO, to provide a review of the financial performance. Thank you. Thank you, Arun, and good evening to everyone. As explained by Arun, the company had an impactful closure in FY 2024, with revenue growing at 17% despite a challenging macroeconomic environment and de-growth in heavy engineering and product engineering services. After having successfully concluded the acquisition of Addsolution in Q2 and Epcogen in Q3, we are now focused on making our acquisitions margin accretive by synergizing the offerings, cross-selling capabilities, and rationalizing costs and resources. The company recorded a consolidated EBITDA of INR 130 crores in FY 2024 on sales revenue of INR 952 crores as against normalized EBITDA of INR 124 crores in FY 2023, a growth of 5% over previous year. The EBITDA margin stood at 13.7% as against normalized EBITDA margin of 15.3% in FY 2023. As you would remember, in FY 2023, the company had reported an EBITDA of INR 137 crores on a revenue of INR 813 crores, which included one-time net benefit of INR 13 crores in COVID grant in its U.S. entity. The company's EBITDA in FY 2024 came at a lower margin of 160 basis points. This was on account of our investment in the digital team, the bench being maintained for heavy engineering and product engineering services despite de-growth, where we expect growth to return in FY 2025, which together accounted for about 100 basis points. The shift of MPCDS program to FY 2025, which was planned in Q4 of FY 2024, which Arun spoke about, shifted about 50 basis points to FY 2025. The company took a one-time charge of INR 3.17 crores in the recalibration of the Mistral entity, Aero Electronics, accounting for about 30 basis points. The one-time organizational cost on acquisition expenses pertaining to qualified institutional placement and hiring of non-billable senior leadership hire accounted for another 50 basis points. All of this aggregating to about 230 basis points. The employee benefit expenses of INR 499.8 crores, a 39% increase over the previous year, takes into account the headcount of around 200, which have been added from the two acquisitions, namely Addsolution and Epcogen, which added a payroll cost of INR 38 crores. Net new billable resources who have been hired are 500 in number, as well as the spend which we did on the digital resources of INR 7.5 crores, which is currently a non-billable digital team and our senior leadership hire during the year. The company's finance cost came higher by INR 20.48 crores at INR 56.37 crores in FY 2024 as compared to INR 35.9 crores in FY 2023. This was because of the full year impact of interest cost for funding of Mistral acquisition, prepayment charges and unwinding costs pertaining to the refinancing of this debt. The company's PAT in FY 2024 was INR 33.41 crores as against PAT loss of INR 4.8 crores in FY 2023. Out of the net proceeds from the capital raise of INR 203.47 crores, out of the INR 220 crores from the size of the QIP, INR 158.45 crores is meant for repayment of the borrowings and balance INR 45.02 crores is for general corporate purposes. From the QIP proceeds, the company has since retired INR 120 crores in long-term debt to investors and bank borrowings and will retire a further minimum amount of INR 50 crores in September of 2024. With this, on an average basis, the finance cost in FY 2025 will reduce by about 50%. The net borrowings include working capital and optionally convertible debentures as on 31st March 2024 is INR 84.52 crores as against INR 214.37 crores as on the same date of the previous year, a reduction of 60%. The company has a healthy balance sheet with shareholders' equity standing at INR 592.82 crores as against INR 343.86 crores in the previous year. The cash, bank, and liquid investments on the balance sheet amounted to INR 182 crores. To conclude, our focus in FY 2025 will be to build a sustainable business and further strengthen growth and profitability. We'll now open the floor to questions. Thank you very much. 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 question queue, you may press star and two. Participants are requested to use handsets while asking the question. Ladies and gentlemen, we will wait for the moment while the question queue assembles. The first question is from the line of Jyoti Singh from Orient Capital Markets. Please go ahead. Yes. Thank you. I am audible. Sorry, ma'am, your voice is breaking. Yes. For the opportunity. Sir, my question is on the revenue mix side. If I see on the geography side and if I see on the there is a huge variance compared to last quarter to this quarter. We have an increase in certain segments and we have a decrease in certain segments. Can you explain on that? Will it be going to be consistent from here onward or will be doing decrease or increase in every segment? Hi, Jyoti. This is Arun here. Is your question about the segment or the geography? Hello? Yeah. Can you hear me? Is the question on the verticals or is it on geography? Because on the verticals, like I said, we have seen very good growth from aerospace, and that will continue for us. We are seeing growth from automotive, and we are seeing growth from energy. And of course, the defense business, which is all India-based business, that is also something that will significantly grow. These are the verticals that we see consistent growth. Thank you, sir. I will come in the queue, I think for network issue it says. Thank you. Thank you. The next question is from the line of Prakash Chiranje from Lucky Investment Managers. Please go ahead. Yes. Hello. Thanks for the opportunity. Am I audible? Yes, you are. Yes, sir. My question is that the total cost of goods sold that we have in our P&L, that pertains to the product revenue of the defense and the semiconductor business, right? You are right. The material consumption is what you see there, is only from the semiconductor and the defense vertical. Yes. Yes, sir. For FY 2024, if I see the total product revenue for these two verticals, it is about INR 180 crores, and the cost of goods sold is also about INR 185 crores. Currently, are we negative on the breakeven level at the gross margin level for these two verticals in the product segment? With respect to the material cost, the denominator as to the revenue is. Just a minute, let me take the Yes, sir. You are saying that I should take the denominator as the total revenue for this vertical? Not only the product revenue that has been mentioned in the presentation. The total revenue, if you look at the semiconductor revenues of Yes Mistral production revenue. The total number which has to be taken as a denominator is INR 383 crores, which essentially is about 50% of these material costs. Okay. You are saying we make 50% gross margin on the semiconductor business. Combined with the design and the product revenue. Yeah, correct. Okay. Would the margins be similar on the defense side as well? In defense, there are two parts to it. One is the production revenues, which are the regular runs in terms of what Arun described, which has tripled from about INR 39 crores to INR 112 crores. There, the EBITDA margins are around 29%. The other part of INR 90 crores as what we did for prototypes, essentially is a negative margin because the objective at that point in time is to get into the order pipeline. As a result of which, we have skipped bidding from various competition and we ensure that we bid appropriately to ensure that we are in the order pipeline. Yeah, I think the structure is, Arun here, just to clarify, the life cycle of the defense win is that when we win an order- Yes we work on the R&D and the design part, and usually that part is where we make some investments. That's of course, because we are in competitive bidding, we have to go low on price. So typically, the margins in that phase are low, and that's what we refer to as prototypes. If you look at this year, other than the INR 100 crores which is production, the rest of it is prototypes. But then once it moves into certification and production, that's where we have the part number. When we move the production, the margins are much higher. It is anywhere in that 25%-30% EBITDA region. So the INR 100 crore of production revenues comes at extremely high margins. But the prototype revenues come at a lower margin because like I said, for two reasons. One is we need to invest in R&D, and secondly, it's also competitive bidding. Okay. The production is, you said 29% EBITDA margin? Yeah. Essentially for FY 2024, the production revenues was INR 112 crores, on which we made an EBITDA of INR 33.18 crores, which is about 30%. Okay. At the same time, the prototype revenues was INR 91.62 crores, on which we lost INR 3.37 crores, as what I told you, because at that point in time, the objective was different. Essentially, the blended, I would say, EBITDA for the defense vertical of Mistral was INR 30 crores at 15%, against the INR 203 crores total revenue. Yeah. The prototype business is important for us because this is the pipeline that we build. This is the future production order that we have. We consciously make an effort to make sure that we win orders where there is a high production potential. Depending on the amount of prototypes, there is investment that we need to make. All right, sir. I have one more question. If you can tell us the figure for the finance cost for FY 2025. Yeah. The total finance cost for FY 2025 from the financial statements as what you see is INR 55.73 crores. That essentially involved the long-term debt which we raised for the purpose of acquisition of Mistral, which was a total amount of INR 210 crores. Of which now with the QIP proceeds, we have returned INR 105 crores or repaid INR 105 crores, and we will be repaying a minimum of another INR 50-60 crores in September. With this retirement of debt in FY 2025, we expect that this INR 56 crores of finance cost as what is there on the P&L will reduce by at least 50%. Okay. All right, sir. Those are my questions. Thank you very much. Thank you. Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead. Am I audible, sir? Yes, you are. Thank you very much, sir, for this opportunity. Just first up, I just wanted to understand. In the previous call as well, I think we had an objective, maybe what, by FY 2026, I guess, or 2026, PAT objective of INR 180 crores. Now, given this issue in the semiconductor sector as well as underperformance in heavy engineering, how does that outlook stand as we speak now? Yeah. We are still gunning for that. What we had said is that by, this is from FY 2023 to FY 2026, we would like to double our revenues and we try to triple our PAT. We were $100 million, if I talk in dollars, we were $100 million in FY 2023, so we are aiming for $200 million in FY 2026 and tripling of PAT. Like I said in my opening remarks in heavy engineering, we are looking at structurally changing our business from some of the low margin mechanical engineering work we do, to do more work in the embedded and the digital side. That's the journey that we are on. We have seen some success in the previous quarter and this quarter. It's been incremental increases. That is something that we will work on. We will expect that heavy engineering, the main client will improve, but also that we will be able to work with some other clients in the heavy engineering space. That's how we expect to see that improve. Of course, the other one which was a drag was the production of PES. We're hoping that the inventory stocking issue will sort of ease itself out by maybe H2 of this year. If that happens, then again, production revenues in PES, light defense are very high margin. That will also then come back and contribute to the revenue base. Obviously these are some of the macro trends, and of course, heavy engineering is also impacted by the U.S. election year, but we hope to see some recovery happening during the year. Okay. Effectively, when you said double revenue and triple PAT, FY 2023, we are basically from INR 820 crores, we are looking at INR 1,600 crores plus kind of a top line. PAT, I think adjusted PAT, you had exceptional item of INR 68 crores that year, right? That is right. Adjusted for that, your PAT would be close to about INR 50 crores. So INR 150 crores. That is what we have said. We are aiming for anywhere between INR 160 crores to INR 180 crores of PAT by FY 2026. By FY 2026, right? That is right. Okay. How will we achieve that? In terms of margins, if I have to see currently, we are at about 12.5%-13% kind of a margin level. If you have to achieve that FY 2026 kind of a bottom line, your EBITDA margin has to improve to around 18%+, right? Do you think that this is something that is achievable for us once this segment that you spoke about can come back, actually? Yeah. Yeah. Deepak, a couple of things. One is that, the doubling of revenues also includes an inorganic component too, I think I just wanted to mention that. Okay. For this year and next year, we will also look at some acquisitions so that there will be some revenue contribution from there. Secondly, I think on the EBITDA, you are right. I think we are definitely looking. This year we want to focus on profitability. We have structured our team. We have put in some measures. We have appointed a chief delivery officer, and we have changed the organization structure. We will look at getting to about 15, or anywhere in the range of 15%-15.5% of EBITDA- this year. Then we will look at also enhancing, like I said, our production revenues from both defense and PES, which will happen later part of this year to next year. We are hoping that the ramp-up of that quality of revenue or production will also give us a disproportionate benefit on EBITDA into FY 2026. That's the plan that we have. Just to add to that, the entire digital team as what we have built, one of their main focus areas is to remove the linearity between revenue and HR resources. What they do is they automate the repetitive processes, and their objective is to remove at least about 30% of the such labor, if I can call it that, involved in that. These automation processes and what is done in terms of the fixed cost projects will also add to the EBITDA margin. Okay. I got it. That's very clear. Just a final clarification. You mentioned this year you are expecting a growth that is better than FY 2024 growth that we have seen, and that growth will largely be back-ended to second half, right? Your first half will be flattish because of the oversupply in semiconductor and even the heavy engineering that you expect to have some improvement maybe in 6 months, yeah. Yeah. We are expecting obviously to grow better than industry. The industry growth rate is 14%-15%, we expect to grow better than that. In certain verticals, yes, the growth will be back-ended, specifically, when it comes to PES, for example. Correct. What I was trying to understand, if FY 2024 we have grown by about 16%, and ideally if we like to grow higher than that, maybe 17%, 18% or 20%, my second half growth on a year-over-year basis would be higher than my first half growth, right? Mm-hmm. That's correct. Yes. That's correct. Okay. Fair enough. I think that's it from my side, sir. All the very best to you. Thank you so much. Thank you. Thank you. The next question is from the line of Amish Kanani from JM Financial Services. Please go ahead. Yeah. Hi, congrats sir, on a relatively good set of numbers. Sir, in terms of defense, good ramp-up that we have seen on the production side where the margins are high from INR 38 crore to INR 112 crore. We have mentioned that executable production orders for the coming year could be INR 272 crore. So one clarification, sir. Thanks for this, that it gives us some clarity on the trajectory. The question is, sir, is it one year or it could be 12-18 months, should we take it? Is the first question. In that context, sir, we were looking at, sometime back we were talking about some design win orders, with some quantum. This new opportunity on the drone side that we are talking about with addressable market opportunity of INR 3,000 crore, is it an addition to the all design win orders that we have had all this while or it's part of that? So that's the Yeah. Amish, thanks a lot. The drone potential of INR 3,000 crore over five years is in addition to the production revenues that we are talking about. The production revenues this year was about INR 100 crore. We expect that to get close to about INR 200 crore next year. It might be slightly less than INR 200 crore, but it will be in that region. Sure. We are working on quite a few prototypes as we speak in FY 2024, which also will sort of contribute to some of the revenues. So the anti-drone revenues is in addition to the production revenues, the potential revenues. Okay. This drone, where we are talking about 40 and plus probably 60 and stuff like that, it is all Army? We understand drone will go beyond the Army and defense as well. Any thoughts there or it is as of now only Army? Yeah. The current order that we have is for 100 units of the anti-drone system, out of which 40 has been delivered. All this is for the Army, and they will be deployed there in the borders of the Himalayas as well as Rajasthan. We are in the process of completing the balance 60, which would happen, like I said, by Q2 of FY 2024. The other pipeline of orders that we see in anti-drone also we are seeing at the moment from the Army. But like you said, this will be across the board. It will be from Air Force, it will be from Army, it will be from Navy, it will be from the Home Guards security service as well. We see that overall, INR 3,000 crore potential to be widespread across. Of course, I must mention that we are only focused on defense. When it comes to drones, we are not really looking at commercial or logistics or agricultural drones. Everything I talk about in this is mainly related to the defense use cases of drones. Sure. Okay. Last question on the aerospace side. We had one of our anchor clients where we had good wins and we have got a good growth in that aerospace division as well. Any thoughts in terms of growth being led by the key client, or we are diversifying the client base there? Sorry, I missed the last part. Can you repeat? Is this loaded in favor of one key client, anchor client that we have, or it is diversifying across many multiple clients, smaller clients which could ramp up? Is it dependent on the key anchor client, or how are we diversifying that part? Yeah. If you look at the aerospace vertical, unlike, say, automotive or any other vertical, there is a small set of OEMs. As you are aware, there is Airbus, there is Boeing, there is Bombardier, and to a smaller extent, Embraer. Typically, when we work with an OEM, a lot of it comes from the OEM which is doing well. At the moment, obviously, Airbus is doing extremely well. We have a long relationship with them, a good track record. We also do a lot of work with Bombardier in Canada. We expect a lot of the growth in the aerospace vertical specifically to come from the commercial aerospace side, from one particular OEM, which has had a lot of success in terms of selling a lot of aircraft and has a lot of deliveries which will go right up to 2030. It will be based on one client. What we are also trying to do in aerospace is to look at going beyond OEMs into tier ones, et cetera. We have signed a small order in the U.S. with a company where we do engineering for their interiors, the cabin interiors which go into the aircraft, like seats and galleys and trolleys and stuff like that. But I would say a lot of the demand in aerospace for us is really dictated by one big client. Sure, sir. That helps. And all the best. Thank you. Thank you. A reminder to all participants, you may press star and one to ask question. The next question is from the line of Faisal Zubair Hawa from H.G. Hawa & Company. Please go ahead. My question is about the defense offset. Do we have any kind of more defense offset that we may have tie-ups for and which could yield us a very big business in coming years? Second question is, with regards to your estimate for FY 2026 of INR 1,600 crore revenue, does it include our defense business or is this purely the software services business? Third is, while our attrition at the workforce level has come down, our attrition at top level, like CEO and CFO, has always been a point of concern for investors. What kind of systems are we putting in place so that we are agnostic to the leader who is at the helm of affairs? Secondly, sir, with regards to Mistral, how do we want to now incentivize so as to, we can retain the old team at Mistral, because this is also very IP-related business which has been built up over the years. With any kind of incentivizing the team could cause some kind of problems to us in the future. Yeah. So Faisal, thanks a lot for all your questions. I'll try and remember all of them and answer it in the same order. I think firstly, your question was on defense offsets. What we're seeing is that the offset business is actually declining in India. It's not just for us, but across the board. The reason being that offset was meant so that there could be a technology transfer which could happen to India. Otherwise, there was a penalty, in very simple terms. Now, what most foreign companies have been doing is that they're pricing in the penalty into their contracts. Therefore, they don't do the transfer of technology. When we talk of defense, predominantly it's the Make in India, it's the Atmanirbhar programs which is the big driver for us. Everything that we talk about in terms of production, in terms of prototyping, et cetera, across the whole electronic warfare area, most of it, I would say almost all of it, is electronic warfare. Of course, we have a small part of the business which we do for some French multinationals through our subsidiary in AXISCADES, and that is the manufacture of test benches for a couple of clients. That will continue. That was sort of more legacy. We do not see much offset business going forward in defense. We see more of the Make in India initiatives, which is a huge driver for growth. That is point number one. The second question you had about the 1,600 crores, does that include defense? Yes, definitely it includes defense. In fact, defense is one of the big drivers, which is part of that because given the differentiators that we have and the relationship that we have, we expect to grow defense and that will be a big contributor to the revenue ambitions and the EBITDA ambitions that we have. So definitely it is part of it. Third question of yours, existing on workforce, on CEO and CFO. We have been around here for now 2 and a half years. You are right, I think in the past there has been concerns, there has been a fair amount of attrition, et cetera. But I think likely we have sort of spoken about this in the previous calls. Both me and Sashi are people who have stayed in companies for a long tenure. So from our perspective, definitely we do not switch a lot. Secondly, even from a company's perspective, there are financial incentives, there are stock options, which are all performance-based vesting. So those are incentives which are sort of meant to keep the key management remains. It is also not just for CEO, CFO, it is obviously across the board. But since you asked the question of CEO, CFO, I mentioned that. Lastly, on Mistral. We have again rolled out a stock incentive plan, which we are in the process of finalizing. Everything is almost done and dusted. We are very confident that we will be able to retain all the key talent, and in fact, we have also promoted some of the key leaders of Mistral to very key leadership roles across the group. For example, one of the co-founders is Rajeev Ramachandra. He now becomes the Chief Delivery Officer for the entire group, and he is instrumental in working along with me to drive some of the profitability and EBITDA improvement actions. Mujahid, Muju, who is the CEO of Mistral, we will look at how we can consolidate the defense business under him, and he will play an integral role both for the defense as well as for the PES business. So if anything, we are working extremely closely. I think that integration has gone very well. Of course, in addition to career progression opportunities, we are also looking at financial incentives and stock incentives to retain the talent out there. Is there any thinking within the company to de-merge Mistral and list it separately also? It is a pure IT business, and it does get confused by the stock market, with the software services business, which is much more commoditized. All I can say is that we do understand the point about there being two different entities, so we will look at how we can consolidate. I think anything beyond that, as you will understand, it is price-sensitive information, so I really cannot talk about it. We will definitely look at the clearer structures going forward. As to whether we monetize it or not, unfortunately, I do not think I will be able to comment on this today. Can you just elaborate on the role of Mr. Abidali Neemuchwala, on how he is really guiding us? He comes from a very large platform, and for him to even agree to become a Chairman of a company which is much more smaller is a big thing. I mean, what kind of goals that he is setting us and what kind of specific inputs that the company is utilizing at this point of time from him? Abhay is the Chairman of our company, and, as you know, he was the CEO of Wipro. My association with Abhay started when I was with Wipro as well, so we have worked together out there. I and the board, we had requested Abhay to come in and steer the company because, like you said, he has got a lot of achievements under his belt. He has run large businesses. He is based in the U.S. He knows how to scale businesses, both from a top-line perspective as well as a profitability perspective. We obviously benefit a lot from his advice. He is on board with us just for more than 5 months, and of course, he is relatively new as far as the other board members are concerned. But from our perspective, we are obviously looking at how we can leverage his guidance and how we can have the benefit of his advice and wisdom and experience. Thanks a lot. I really appreciate you answering my questions. Thank you. Thank you. The next question is from the line of Tilak from SN Investments. Please go ahead. Yeah. Am I audible? Yes, you are. Thanks for the opportunity. Could you help me reconcile one number? For the defense, you guys told me that INR 112 was the revenue for production, then INR 91.60 was for the design or the prototype. What explains the balance? This adds up to INR 203, so there is a difference of INR 55 crores. Yeah. That essentially is the revenue from our other subsidiary, which Arun was talking about, which manufactures the counter-drone system. Okay. The revenue for that comes out to be INR 55 crores for this year, yes, sounds right. Right. What was the revenue for the same last year? Last year it was INR 90 crores, and this year, the reason as to why there was a degrowth is essentially because of the fact that the entire anti-drone system, which was one of the main focus, I would say, revenue for this year got pushed. Okay. What sorts of margins do we make in that business? About 40%. Okay. That explains it. Thank you. My second question was with regards to the other ER&D business of ours. If I were to see the margins separately, the segmental margins as you mentioned, there has been a dip, if I were to compare the FY 2023 and the FY 2024 numbers. Could you help me understand what explains it and what we are doing to improve them both ways? Yeah. Yeah. Essentially, if you remember, during my call, as I explained to you, the cost of what we incurred for the Digital team, which contributed a substantial number, and also the one-time cost of what we incurred for the QIP as well as the acquisitions which we did, and also the revenue from the HED and the PES business or the de-growth with respect to that and the people who are working those verticals we retained. All of that, in terms of each metric, as of what I explained to you, that's what was the cost for a marginal de-growth in EBITDA, which we hope to clawback in FY 2025. Yeah. Jalaj, I'll just add on here. I would say that traditionally, this has been a part of the business for us which has been low margin. When we talk of improving a margin, say, going up to FY 2026, the defense margins will sort of approximately remain in the same region. The improvement that we will hope to bring in is in the engineering services business. This is the sort of transformation journey that we are undertaking. When I talk of a lot of profitability measures, optimization, delivery optimization, et cetera, a lot of it will be targeted towards the engineering services business, and that's where we will bring in some actionable items. Got it. So just maybe a little deep dive into it. So what gives us confidence, or is it more from a capability perspective that we need to improve, or it is more to got with the delivery per se, you feel like is where the or maybe both the short-term and the long-term perspective to it respond to that. Could you deep dive a little into that? Yeah, sure. I think there's a couple of things. So one is that in certain sectors we are present in, I would say, commoditized mechanical engineering work. I think I mentioned about heavy engineering, where the margins are not very high, and some of it also tends to be staff augmentation in nature. Number one, we are looking at how we can change structurally those businesses where we are in commoditized low margin areas into, say, moving into embedded or into more profitable areas. So that's point number one. Point number two is that we will look at how much we can automate and digitize a lot of our internal workflows. For example, in aerospace, we had some pretty good success because we had very good domain knowledge. So we've done some of that in FY 2024. But going forward, we will bring in AI and automation to a large degree so that we can sort of break the link or the linearity between revenue and headcount. That is the second thing that we'll be looking at. I think the third thing that we will look at is that traditionally, a lot of people in our various verticals have tended to stay in those verticals. Now, with our new delivery structure, with our Chief Delivery Officer, we are looking at building out competencies, and we are looking at horizontal competencies which we can build so that there's more fungibility and mobility of people from one vertical to the other. That next time we have a requirement, say, in a new vertical, we don't have to go out to the market and hire, but rather we can pick an existing person, retrain them, and deploy them. The whole resource movement, fungibility, the utilization of people, that is the third lever that we will look at. These are three levers that we will broadly look at. Of course, there are a few other things, like we are looking very aggressively at tier 2 centers. We are sort of very close to finalizing one or two centers not in urban areas so that can reduce the cost of delivery. We are also very aggressively looking at increasing the bottom of the pyramid. Recruiting more interns, looking at how we can get diploma holders to do some of the lower end work rather than engineers, so that lowers the cost base. There is a few items that we are putting in which will sort of work towards this. Understood. One last question if I may squeeze in. For the semiconductor business per se, there is a drop in the production revenue, I understand, for FY 2024, maybe the overstocking thing is there. But the design part also it has been more of a flattish. Is it because of some client-specific issues or the client is also facing a headwind? Or there is some other thing you believe, like, because I do understand production can be a thing, but design, across AI and all stuff, there is a lot to do with the semiconductor layout or the motherboard designing there. Could you help me understand that, or are we building in more capability which is required? Are we on the lower end of the capabilities there in the value chain? What explains that, and what are we doing to fix it? Yeah, sure. I think if you leave out the production part, if you look at the design part of it, actually what we do is pretty high end. Actually, some of the problem lies in that. Because what we do is that we work on silicon validation boards with our OEMs. Basically, before a new chip is released, we work on building it up for the end customer, develop use cases, et cetera. Almost every 6 months to 1 year, as a new chip is developed, we sort of work with that. So it is almost at the cutting edge of technology. Now the challenge with that is in order to and of course, we are seeing some growth from FY 2023 to FY 2024. But I think the challenge out there is also to find the right kind of skills, because these are pretty specialized skills. For us, unlike in, say, aerospace or automotive, where we can go and recruit, say, 50 engineers, to get people who have very good embedded kind of capabilities is hard. Plus, the other factor which is happening is that we also have a lot of GCCs coming into the country, who are obviously setting up base, and they are mopping up a lot of the people. So we have some supply chain issues, I would say, in the semiconductor space. I would say the pipeline is pretty robust. We have very good relationships. But there, it is more a question of getting some of the high-end resources. Even if you are to train them, it takes longer. It is not like a 6-month or a 7-month training course. It's probably much longer than that. So those are some of the challenges that we have in order to build up that business at scale. But the good news is that the market opportunity is there. So we are looking at how we can improve on that front as well. Understood. Best of luck. Thanks for the update. Thank you. Thank you. A reminder to all participants, you may press star and one to ask question. The next question is from the line of Manju A. from JM Financial Services. Please go ahead. Hello, sir. Good evening. Just certain clarifications here. First on the Mistral part, the production revenues is clear, INR 112 crores for the year, versus INR 38 odd crores. The other part, the R&D and design revenues, the numbers, what is the nine-month number in this, and the full-year number you have talked about is close to INR 146 crores. So what was the nine-month revenue run rate here, sir? You are wanting to The full-year revenue from prototype is INR 91.62 crores. Okay. You want only the nine months? No, because nine months from whatever data I have, it suggests some INR 167 odd crores, and you're saying full year is only INR 91 odd crores. So I just wanted to clarify. No, the prototype is only INR 91 crores. The prototype is only INR 91 crores, and if you want the first three quarters, then of course, I can pull it out and let you know. But the actual prototype revenue is INR 91.62 crores. Okay. On this INR 91 odd crores, you said there is a loss of close to INR 3.5 odd crores for the full year. Correct? That's right. Okay. This INR 91 odd crores, the growth of this R&D and prototype revenue will be based on whatever newer projects that you're working on and things of that sort. It is sort of a lead indicator, isn't it, sir, for how the production revenues will build up over the next few years? You are right. Okay. The Mistral sales is combination of production revenues and the prototype revenues only, right? That's right. Okay. What was the Mistral- Production revenues and the prototype revenues and, of course, the PES revenues, which Arun Krishnamurthy was just talking about. What was the Mistral overall sales for the current quarter, sir, for Q4 2024, and the comparable number Q4 2023 as well as Q3 2024? Just give me a minute here. For the quarter, the just concluded quarter Q4, the total revenues of Mistral was INR 91 crores. The immediate previous quarter, which is Q3 of 2024, is INR 71 crores. And the immediate, I would say, previous year, which is Q4 of 2023, was INR 77 crores. Essentially, year-on-year, we have grown from INR 77 crores to INR 91 crores on a quarter-on-quarter basis, which is INR 71 crores to INR 91 crores. Understand. And the margins that we had indicated for the production revenues is somewhere in the range of 30% odd, right? Yeah. This year it is 30% on a production revenue of INR 112 crores. Okay, sir. The visibility of growth of the production revenues is it can double in the following year from INR 112 odd, it can be INR 200 plus odd crores in FY 2025 based on the visibility that you have currently. Right. Sure, sir. Thank you so much. The other part is on the Aero business. Aero business, there were certain commencement of execution that had happened in the previous quarter, Q3 2024, if I understood correctly, from orders which you had won, say, six months earlier. Expectation is the execution of these orders will continue to be better, is what the expectation was. Is it as per our expectation, sir? Is the delivery of the aerospace revenues in this quarter, is it up to the company's expectations, or you think that it could have been better? No, it is as per expectations. As you would have seen, the aerospace revenues have grown by 27%. Even with respect to a quarter-on-quarter growth, if you look at the aerospace revenues from INR 77 crores in Q3 of FY 2024, our aerospace revenues was at INR 80 crores. The same number for the last year, Q4 FY 2023 was INR 52 crores. We have been going at a healthy pace, including the new, I would say, the contract of what is being currently ramped up. Sure, sir. This is the ramped up execution mode, the revenues of 80 odd crores per quarter. This is a sustainable run rate is what you are suggesting for Aero. That is right. The $18 odd million wins, which we had highlighted in our presentation as well, part of it is already reflecting in the revenues as well, no, sir, in this quarter as well as the previous quarter? Yeah. Manju, this is something that started from 1st of January. So it is reflected in Q4. Typically, in aerospace, some of these large orders, what happens is that we win a piece of work from an incumbent. Yeah. But usually there's a six-month transition because it's very specialized. So it's a little bit slow in the first six months plus. There are two reasons. One is, of course, we need to ramp up people, but secondly, the customer also wants to make sure that there's adequate transition and there's no falling between the lines. So typically, it starts accelerating after about six months of start. So it started on 1st of January, and we will definitely see this pick up as we go through the year. Sure. That is very helpful, sir. And just a couple of more things, if I'm permitted. On our consolidated P&L, the efforts that we had put in terms of improving the employee mix and the digital initiatives which we had taken and the leadership changes, so all those have reflected in the last few quarters' employee costs. So the current run rate of INR 135 crores on a quarterly basis, this should only see inflation-related movement over the next year. Is that a right assumption, sir, on the employee benefit expenses? Yeah, I think largely you're correct. I think most of the digital team we have now built up and they're starting to be productive and the business benefits and the return on investment is starting to happen. Of course, we will still look at a few leadership hires as we go in, definitely on the sales front. So that will come in, but it is not going to be huge in number, and I would say it won't be very material. But every year that we go in, because of the nature of the business or the geography that we go into, for example, now with energy, we are going into Middle East. We will need to make a few investments in leadership. And really, the way I look at it is that building a good team then delivers a good business. So, it will not be large scale like it was last year with the digital team, but definitely we'll be cherry-picking and doing some leadership hires as we go through this year. Understood. Is there some leverage possible from the other expenses line item, sir? I am not too sure what is the composition of this. Is this largely sales and marketing and admin related costs only there? Yeah, it is largely SG&A which is there in the other expenses. As what I told you, in FY 2024, we also took some one-time charges, which are also part of the other expenses, which essentially is that INR 3.17 crores, which was there for the recalibration of the Mistral entity by way of Aero Electronics. There was about INR 1.5 crores, which we incurred for the purpose of the due diligence for the acquisitions as well as the disallowed expenses or unallowed expenses with respect to the QIP and a few others. There are one-time charges there which will close about INR 5 crores, INR 6 crores, is not something which we will repeat in FY 2025. Sure. But the current Q4 run rate of close to INR 37 odd crores, is that a representative number, sir, from a full year perspective? Or you think those one-offs are part of this Q4 run rate as well? It is part of the Q4 run rate. The QIP expenses are part of the Q4 run rate, whereas the INR 3.17 crores, which I mentioned to you was actually with Q2. So essentially, I would say that close to about INR 2 crores is sitting in other expenses in Q4. Okay, got it. This is going to only grow at inflation linked, and it is not necessarily going to be linear as our revenue growth will happen. You are right. Sure, sir. Just one last point. INR 1,600 crores of top line you said will also have some inorganic composition to it. Any ballpark number you would like to share with us, sir, in terms of what is the organic and the inorganic composition that you are looking for on your aspirations of doubling the top line? I would say that if you look at $200 million, I am a little bit more comfortable in dollars, if you are okay to answer the question. Sure, sir. If you look at $200 million as a target that we are setting for ourselves in FY 2026, we will probably look at something like $30 million, somewhere in that range. I cannot give an exact number for inorganic, as you understand. But we will look at something like that to be the contribution of inorganic, about $30 million. But as you understand, this could change a little bit, but that is the ballpark. Sure, sir. This 272 crores of executable production order, over what time frame, you said, sir? You did mention about this. I could not get it clearly. That is why, sorry, I am repeating this. It would be generally in the range of 12 to 18 months. 12 to 18 months. The overall order book, can we assume that would also be the INR 750 odd crores, that will also be over the similar time frame? That is right. Essentially, if you look at the run rate as what we have, the order book as what we are talking about is something which is executable in FY 2025. Okay, great. Thank you very much, sir, and wish you all the best. Thank you. The next question is from the line of Godwin K, an individual investor. Please go ahead. Yes. Thank you for taking my question. My question pertains to the acquisition of the company, Epcogen. Can you throw some. Epcogen is into more verticals. If you can kindly help me understand, since we are in the process of streamlining your company into good systems and process. What made us to go and acquire this company during that process? First thing. Second thing, if you can kindly help me understand the renewable energy landscape business that this company is into and put some color on the future of this company, that will be fine. Thank you. Yeah. The rationale for acquiring this company is that firstly, like I said, we believe in a diversified vertical base because at some point or the other, there is one vertical or other which will always have some seasonality. I think having a diversified base helps. Of course, we don't want to spread ourselves too thin, so we are happy with the base that we have. But the rationale for acquiring Epcogen was we felt energy is a good business to be in, both from a renewable new energy perspective as well as from an oil and gas perspective, because oil and gas still has a lot going in it, at least for the next 10 to 20 years. In specific, if you're asking about, so what Epcogen has is the whole procurement, construction, engineering kind of skills, and this is applicable across large CapEx construction in oil and gas as well as renewables. For example, in renewables, we are working with a company which is a U.K.-based company, which makes cryogenic fuels. So we are constructing large storage plants for them, and the whole procurement and engineering design of that is done by us. But of course, we're doing a lot of work on the oil and gas side as well when it comes to construction of refineries, carbon capture, sulfur capture, and gas storage plants, et cetera. The rationale is that we want to have a presence in energy, and we believe that with that Middle East is also an interesting territory for us. Thank you, sir. That's from my end. Thank you very much. Thank you. As that was the last question for the day, I would now like to hand the conference over to the management for closing comments. Over to you, sir. We thank all the participants in this earnings call, and we also thank Orient Capital for organizing this call. Thank you very much. Thank you. On behalf of Centrum Broking, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.