Q3 23/24

Feb 15, 2024

Summary

9M revenue grew 18% and PAT returned to profit, while margin pressure reflected acquisitions, defense mix and digital investment. A successful QIP will reduce debt as aerospace, automotive and energy drive diversification.

Ladies and gentlemen, good day and welcome to the AXISCADES Technologies Limited Q3 and nine-month FY 2024 earnings conference call hosted by Orient Capital. 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Shishir Gahoi from AXISCADES Technologies Limited. Thank you, and over to you, sir. Thank you very much. Good evening, everyone, and I am delighted to welcome you all to this earnings call for Q3 FY 2024 and nine-month FY 2024. I hope you all had an opportunity to review our press release and the investor presentation, which are available under the investor section of our website, and the same are available in the BSE and NSE websites. To discuss our results, we have with us our CEO and Managing Director, Mr. Arun Krishnamoorthy; Mr. Mujahid Alam, CEO of Mistral; Mr. Krishna, Managing Director of our newly acquired company, Equigem; and our Group CFO, Mr. Sasidhar SK. They will take you through our results and reduce performance, after 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 belief, opinion, and expectation of the company as on 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 will now hand over the call to our CEO and Managing Director, Mr. Arun Krishnamoorthy. Over to you, Arun. Thank you, Shishir. Good evening, everyone. Welcome to our Q3 FY 2024 and the nine months FY 2024 earnings call. Let me begin by giving you an update on our recent capital raise event by way of qualified institutional placement, which for us was a very good success. The company raised an amount of INR 220 crores from marquee institutional investors, and the issue was oversubscribed eight times. We are delighted and enthused by the confidence shown by the investors in AXISCADES and its potential for future growth. The funding will go towards retiring the borrowings of the company and various other corporate initiatives which will enhance the company's growth and profitability. This is a quarter of our overseas customers, and in this context, the company continues to record consistent quarter-on-quarter and year-on-year growth in product engineering services business. For this quarter, the engineering services business grew by 3% quarter-on-quarter and 21% on year to INR 192 crores. For the nine months FY 2024, the engineering services business grew 20% from the previous year from INR 426 crores to INR 512 crores. The expansion in engineering services fueled a healthy growth in aerospace and our nascent verticals of automotive and energy. Our relationship with two aerospace OEMs continues to expand, and this vertical grew by 29% in the nine months period. We further solidified our position with a strategic aero customer by winning a large multi-million dollar deal, which will continue to give us business for the next five years. The areas of focus within this win include major repairs, structural repairs, and various customer service angles. 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. Despite Q3 having holidays, our aerospace customer prioritized workloads to meet their year-end targets, and this helped us have a very good quarter from them. Aided by an expansion of add Solution in Quarter 2, the automotive business constitutes about 11% of our total revenue as against 4% in the same period of last year, with revenues from automotive vertical growing by more than three times from INR 22 crores to INR 75 crores in the nine-month period. We continue to add new logos in this space and are well-positioned to leverage on the opportunities with the capabilities we have developed and acquired with a large addressable market in areas such as wiring harness, software testing, ADAS, and software-defined vehicles. As was announced in the previous earnings call, we completed the acquisition of Epcogen in December 2024 and started consolidating revenues from 1st December with a revenue of just INR 2 crores for the month of December. I am glad to welcome Krishna, who is the Managing Director of Epcogen. He joins this call for the first time, and he joins the AXISCADES family. We have onboarded quite a few marquee logos in the energy space with this acquisition. The current revenue share of 3% for energy vertical, we expect will significantly grow in the coming periods. The company is also finalizing a go-to-market strategy with the intent to open an office in the Middle East. The company forecasts aggressive growth on this front across oil and gas, renewables, and infrastructure design and development. As stated earlier, the growth of 20% in engineering services business has come about despite captivity in heavy engineering and semiconductor verticals, mainly in the U.S. region. Revenue from heavy engineering was INR 115 crores for the nine-month period and constituted 17% of revenues as against 22% in the same period of the previous year. The industry is impacted by low CapEx spend and is highly sensitive to macroeconomic factors and is pivoted towards more digitization, automation, and electrification. AXISCADES is graduating to offering these value-added services with its Intellum and Mistral capabilities. The company's objective in the coming year is to focus on improving margins in this vertical, moving away from its predominantly low-margin staffing model. With respect to the product engineering business of Mistral, while the services part of the semiconductor business is doing well, the production business is adversely impacted in the short term. This is due to overproduction and overstocking of semiconductor chips by global semiconductor major during the pandemic. The revenues from this vertical is INR 102 crores for the 9 months, constituting 15% of revenues. We expect that growth will return to this vertical for the second quarter of FY 2025, with flushing out of built-up inventories. As you would have observed from the investor presentation, the defense business, which constitutes 26% of our revenues, always reflects quarter-on-quarter variability, which is typical to the industry. This impacts both enterprise consolidated revenue and profitability. The performance of this vertical, as we have mentioned before, needs to be measured on a full year basis rather than quarter on quarter. As such, while defense revenues grew by 12% year-on-year from INR 164 crores to INR 185 crores, the revenues were lower in quarter 3 at INR 49 crores as against INR 74 crores in quarter 2. This is due to shifting of certain production orders in defense to quarter 4. Also, defense production revenues, which carries significantly higher margins, was lower in quarter 3 at INR 22 crores as against INR 32 crores in quarter 2. However, when we compare the 9-month period, the production revenues in defense significantly increased by 3x, from INR 23 crores in 9 months of FY 2023 to INR 77 crores in the current period. We are very confident that this vertical will continue to grow on the back of strong order pipeline, which has been built on design wins and prototype certifications for the last 10 plus years. I am also pleased to report that in the last 2 years, we have made notable progress in implementing our three-pronged strategy of vertical diversification, customer diversification, and digital first. The business stands 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 9 months. Our people resource now stands at 3,000 plus people across all our businesses. The outcome of this can be seen from revenue from new customers increasing from INR 8 crores to INR 48 crores in the 9-month period and contributing to 7% of our company's revenues from 1% in the previous year. On the financial and business performance, the company recorded revenues of INR 670 crores, growing by 18% from INR 590 crores recorded in the same period in the previous year. In USD terms, the company recorded revenues of $85 million, growing by 15% from $74.1 million recorded in 9 months of last year. The consolidated EBITDA for 9 months FY 2024 stands at INR 98 crores at an EBITDA margin of 14.1%, compared to EBITDA margins of 15.8% in 9 months FY 2023. The company's PAT has seen a significant improvement. For 9 months, it stands at INR 24 crores against a loss of INR 21 crores in the previous year. The acquisition costs, entity costs of the two acquisitions, lower production revenues from defense in Q3, and continued investments in embedded and digital capabilities has resulted in short-term compression in margins. We are in the process of integrating our recent acquisitions and rationalizing common costs to make these acquisitions margin accretive. As stated in our earlier calls, we continue to make significant investments to build our digital capabilities, which is critical to de-risk our business and improve our margin profile, although it does compromise on our short-term margins. Our order book continues to be healthy at INR 706 crores or $85 million, accounting for more than seven months of revenue at hand rate. To conclude, we are confident and stand energized to deliver on the vast opportunity before us and thank all our stakeholders and especially our new investors for their support and trust. I now invite Miju to give a brief overview of Mistral. Hello, Miju? Sorry, I was on mute. Thank you, Arun. I am audible, right? Yes. You are. You are audible. Yes. Thank you so much, Arun. I am pleased to report the Q3 performance of Mistral Solutions. As you are all aware, Mistral is a cutting-edge technology design system engineering company, delivering technology solutions in product engineering, aerospace, defense, homeland security to marquee global clients, Ministry of Defence, DRDO, and Defense PSU for the last 27 years plus. Mistral is on the cusp of realizing the fruits of its order pipeline, which it has built in the defense vertical based on the design wins and certified prototypes, which it has built over the last 15 to 20 years. The radar, sonar, and telematics systems, which Mistral has built indigenously find expressions in the country's prestigious defense programs like the LCA Tejas Aircraft Program, 230 programs, Rohini program, and radars like Ashwini and Arudhra. As Arun explained, defense revenue by its very nature will have variability across quarters and hence should be compared on a full year basis. As such, while the third quarter defense revenue for Mistral stands at INR 41 crores or lower by 22% from INR 53 crores recorded in the Q2 of the same financial year, the defense revenue for the nine-month period of FY 2024 stands at INR 135 crores, which is 35% higher as compared to INR 100 crores recorded in the same period of the previous year. The defense production revenues stands at INR 71 crores in nine months of this year, which was more than three times the defense production revenues of INR 22 crores recorded in the same period of the last financial year. The semiconductor and product engineering business of Mistral is undergoing a short-term challenge due to overstocking by semiconductor majors, and is expected to regain growth by Q2 of next financial year. The semiconductor business of Mistral recorded a revenue of INR 102 crores in the nine-month period as against INR 99 crores in the same period of the previous year. The consolidated revenue for Mistral for the nine-month period is at INR 237 crores, growing by 20% from INR 198 crores recorded in the previous year. Mistral recorded an EBITDA of INR 42 crores at 18% margin in the current year as against the EBITDA of INR 32 crores at 16% margin recorded in the previous year. The Indian government is promoting Make in India in defense, electronics, and semiconductor industry through multiple initiatives and policies, which will open new opportunities for Mistral. We continue to develop state-of-the-art defense technologies in collaboration with DRDO and our internal R&D. Let me conclude by saying that Mistral's overall strategic direction remains sound. Our defense segment continues to demonstrate promise, buoyed by ongoing contracts and a robust pipeline of new opportunities. Now, I invite Mr. Krishna, Managing Director of Equigem, the newest member of AXISCADES group, to give an overview of the Equigem Energy business. Thank you. Thank you, Muju. Thank you, Arun. Yeah. Hope I'm audible. Yeah? Yes. Yeah. Okay. Good evening, everyone. Yeah, I'm from Epcogen. Of course, as I said, we at Epcogen are very much delighted to be a part of AXISCADES family, and we bring our competencies to grow the energy business of the group. Epcogen is an ISO-certified engineering services company established in the year 2020. It boasts a team of industry experts from various multinational corporations focused on energy space. Epcogen primarily operates out of Chennai with additional footprint in Bangalore and Hyderabad as well. The company serves both domestic and overseas clients in oil and gas, refineries, power, and green energy sectors. Its expertise spans from the front-end engineering onwards, then pre-award engineering, proposal engineering, detailed engineering, construction and commissioning support with multidisciplinary capabilities covering the whole spectrum of the energy sector. The energy sector is currently experiencing phenomenal growth with vast opportunities in the oil and gas sector expected to continue for at least next 5 to 7 years, post which likely focus shifting towards green energy. The team at Epcogen possesses the technical capabilities to meet the growing market demands in the energy sector. The company has been in a growth phase with commendable revenue growth year-on-year. Currently, Epcogen has over 100 resources on board, with additional support being taken from the partner companies as and when needed. The company has clear visibility of the future growth of the business. I now invite our group CFO, Mr. Sasi, for a brief overview on the financials part. Thank you. Mr. Krishna, before Sasi comes, can I just request you to do a brief introduction of yourself because it's the first time you're on the call? Okay. Thank you, Arun. I think I will continue a brief explanation about myself. I have been in the oil and gas industry for the last 40 years. The majority of the time I spent with Petrofac International, Sharjah, actually. Then, of course, I graduated from MIT, Chennai, and most of the time I spent in the overseas areas like Petrofac, Sharjah. Then through that, I was actually deputed to different locations in the world. Like Russia, I was there for quite some time. Oman, we were there. Qatar. We have a very good connectivity in the Middle East region. Then, of course, I was asked to start India operations for Petrofac during the year 2006. From there, starting from zero, we grew to a considerable number of 2,700 resources, and all the resources highly billable, 100% revenue. I think that was the most successful part of the career, and also as an engineering center, most successful operation from India, from Chennai, especially. That is for the Petrofac business, actually. We are more focused on detailed engineering services for EPC projects. Most of them are upstream oil and gas facilities. Also, we are into petrochemicals under different sectors. Now, recently, we are getting into the hydrogen projects, plus the green energy projects. Recently, we have been partnering with another company who are dealing with the cryogenic service, cryogenic storage systems, where that will end up in the regeneration of power via cryogenic services. These are the different sectors. Our experience, practical temperature ranges ranging as low as -67 degrees Celsius to a larger temperature, higher temperature of about 600 degrees Celsius. That means your cryo services, regular oil and gas operations, and then getting into the high-temperature services also. That is the spectrum of experience and expertise what we have with our team members. I think that is the brief. Thank you. Thanks, Krishna. Yeah. Thank you. Thank you, Krishna. Good evening, everyone. As explained by Arun and Mujahid Alam, as well as Krishna, you now all have a clear idea of how the business has performed in the last quarter and 9 months of the current financial year. I wish to place on record our sincere appreciation to all the new institutional investors who are on our cap table now for their trust and confidence in the company. The overwhelming success of the QIP motivates us to work even bigger for our continued success of the organization. Also, the next process of capital raise of INR 204 crores. Out of INR 220 crores, which we raised, INR 158 crores is meant for repayment of borrowings, which will significantly reduce the finance cost from about INR 49 crores in FY 2024 to less than INR 20 crores in FY 2025. The balance of money is meant for other corporate initiatives for growth and expansion of the company. With the fresh capital raised, the capital is now well represented by market institutional investors holding about 8.3% of the company. After having successfully concluded the acquisition of add Solution in Q2 and Epcogen in Q3, our focus now is to make our acquisitions margin accretive by synergizing the offerings, cross-selling capabilities, and rationalizing costs and resources. In the last few quarters, the company has also strengthened its corporate governance and sustainability initiatives in the areas of internal control, contracts management, and enterprise risk management. As we close the third quarter of the 9 months of FY 2024 of the financial year, our growth momentum continues on the back of strong order book and delivery performance, with scope for continuous improvement in margins in all our major verticals and business units. As stated by Arun, our business is significantly de-risked over the last 2 years in terms of vertical and customer diversification and our digital investments. Our focus going forward is to accelerate on our twin objectives of growth and profitability. Thank you, and 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 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, wait for the moment while the question queue assembles. The first question is from the line of Jyoti Singh from Arihant Capital. Please go ahead. Yeah, thank you for the opportunity, and it was a very good presentation from the management side. Sir, my question is on the defense side that we de-grow in this quarter. So if you can update on the order book execution side in the business along with the order pipeline for the upcoming quarter. Yes. See, typically in the defense business, the business is cyclic because the value of the orders are typically large, and the execution is over a period of 12 to 18 months for every order which we receive. That's why you see a spike quarter-on-quarter. So defense business, as Arun has said in the call earlier, actually we looked at on an annual basis. So the revenues were lower when compared to Q2, but in terms of the engagement which we are doing in the orders which are in the pipeline, the execution which is happening is extremely large. To just give you a clarification on this, in the last quarter, which is the Q3 quarter, we have recorded a new business of INR 153 crores, and the pipeline moving forward looks very positive. Okay. Thank you, sir. And sir, another question on the geography side, except U.S., we are underperforming most of them. So if you can highlight on that. Arun, you're taking this call? Yes, I can take that call. I think in Europe, clearly, we have grown because of the aerospace vertical, which is coming very strongly. For us, the U.S.A. vertical is predominantly in heavy engineering and PES, the semiconductor business. That I also mentioned in my commentary is where we are experiencing some macroeconomic headwinds, and that's the reason that region has de-grown. APAC for us is all defense, and Nityish has talked about defense. I think that's the reason that's coverage. Canada, for us, it's a very small part of our business. It's just 4%. Over the nine months, we've had good growth, and this business actually continues to be good. Given that it's a very small portion of our overall revenues, even a small swing here and there sort of shows in the figure. The commentary from me is that the business from our Canadian customers are stable, and it's not really a cause for concern. Thank you, sir. Sir, what are recovery that we are seeing and we are expecting, and how is the discussion with the clients on the Europe side? Yeah, I think for us, the 3 verticals which have done well, aerospace, automotive, and energy. I think both aerospace and automotive for us, the exposure is predominantly in Europe. There we have good conversations going, and I think the traction with customers is good. Of course, the acquisition of add Solution also is in Germany, which is in the European region. Clearly with aerospace, I think we are in a very good position. Like I said, we also won a large multi-million dollar deal in Q3, which will get us into a new area and will give us a new revenue stream for the next 5 years. Of course, this also backs the fact that the aerospace business is coming back in a big way. Given that we do both product design and some work which is linked to production volumes, the recovery of the sector itself will give us a lot of tailwinds, and we see that going well. As far as automotive is concerned, we are focusing on, like I said, software testing, the ADAS and the software-defined vehicle. This is an area which is in great demand. We are, of course, new to this vertical. I mean, we are 2 years old, but I think, like I said, we have grown our exposure from 4% to about 11% in this vertical. We are betting on these technology trends, and this is where we will be sort of hiring more people and investing, and we hope to grow in this area. Our focus won't be so much mechanical, but it will be in the newer areas. Energy for us will open up the Middle East. Like Krishna said, a lot of the business that we do is with oil and gas companies, but also with renewables companies and with cryogenic battery storage companies, which is actually in Europe. We expect that the energy business for us will be predominantly a Middle East play, because we are seeing some large contracts, typically which is in the build-out of large plants for carbon capture and sulfur capture, large gas storage plants. We see that Middle East for us will start becoming significant. Towards the end, we are looking at opening an office in Dubai, which we will do this quarter. We will start with a small sales office, and then we will grow it depending on the way the business goes. For this, for us, the U.S. is twofold, the recovery. On the semiconductor side, of course, service is going well, so that is good. We are impacted by the production scenario in semiconductor, which is an industry trend, and most companies who are into production in semiconductor are impacted by this. This we expect will take another 3-6 months, but as the inventory gets flushed out, we will see some more demand coming back in. For us, heavy engineering is still work in progress. This is something where for us, it is predominantly a staffing business, and the contribution of heavy engineering as it was last year to this year has gone down. But we are now refocusing ourselves, and we want to focus on the quality of the business. Rather than looking at top-line growth, we would rather look at doing business in the embedded, electrical, and digital side for heavy engineering, which might shrink the top line a bit, but which will be more profitable business. It will also bring us closer to customers because this is where their mind share is. These are the actions that we are working on. Of course, defense, Amit, you talked about. Defense is not a recovery. It is just a quarter-on-quarter fluctuation. We expect that going forward, we will see, again, very good numbers from defense. Thank you so much, sir. I will terminate here. Thanks, Jyoti. Thank you. A reminder to all participants, you may press star and one to ask questions. The next question is from the line of Dilaj from Aspen Investment. Please go ahead. Yeah. Can you all hear me? Yes. Thanks for the opportunity. My first question was with regards to the product engineering services due to silicon downturn. Could you delve a little deeper into Actually, Dilaj, sorry. Your voice seems to have deteriorated a bit. There is a bit of an echo. Sure. Just a bit. Yeah. Is it better now? Yes, much better. Yeah. Thanks for the opportunity. With regards to the product engineering services, I wanted to understand one thing. Could you delve a little deeper into the genesis of the volatile revenue here, first of all, and secondly, what sort of is the contract with the end customer? Are they short-term, long-term? Is the volume fixed, or how does it work in this? Could you talk a little about it? Well, I will take this question. See, in product engineering business, we primarily work with semiconductor companies wherein we involve ourselves much earlier in the program before the silicon is taken to the market. So during COVID period, there were a lot of work stoppages which happened. And these stocks are still available with my semiconductor company, who is my primary customer. And we expect these volumes to kick in again from Q2 of next year. So basically, what we do here is, while our NRE business is on upward trend, the products which we build are the products which we built for a particular target segment of the clientele, given to us by the OEMs, like I said, Texas Instruments to us. So as long as they have stocks with them, our business will not increase. So products when we talk about, there are two sectors over there. One is products which we build as mediums which are given to multiple clients and NRE. Our NRE business is continuously growing. So product is the offshoot of the NRE business which we do, which is typically on a stagnant growth kind of thing. That is not our regular mainstay in business. NRE is our mainstay, which is growing. Okay. What would be the spread across or what would be the proportion between NRE and production? Sorry, there is some echo in the voice over there. Yeah. What is the split between NRE and the production business? In the professional services business, the NRE business will be typically in the range of about 70%, and production will be 30%. Okay. Could you talk a little about the sort of the agreements or revenue? What is the revenue model here? See, basically, the revenue model is we get a standing PO, which is typically given out at the end of the financial year, which is typically end of their financial year, which will be sometime in the December, January timeframe, and it is a blanket open PO. The PO typically will be for a larger contract value, and then the engagement can happen for multiple divisions of this particular company, which in this case, I am talking about Texas Instruments. Okay. So there is no value ascribed per se to the PO. Is that so? Well, I can tell you a value of last year, but I will not be able to tell you what we are discussing right now as engagement. Last year, open PO was close to $22 million as open PO. Dilaj, one other point to add here is that the purchase orders are backed by master service agreement of particular duration, which will be followed by purchase orders. Okay. Thanks for that. Could you talk a little about the sudden pickup in the other expenses and the people cost? They have gone disproportionately with regards to the revenue. Are we investing somewhere, or what is the logic behind it? See, essentially, if you see, the payroll cost has gone up. One of the prime reasons, of course, the add Solution, the entire quarter cost has come into the financials in this quarter. As you would remember, last quarter in Q2, the payroll numbers or the expense numbers for add Solution was only for a period of 2 months. Whereas in this case, in this quarter, it is for the entire quarter. On top of it, we have had, I would say, headcount addition as well as the, I would say, the acquisition cost as what we have kind of, I would say, charged into the P&L. That is the reason why these 2 particular expenses have gone up. Okay. Both of them will be a sticky cost, is what you're trying to tell me. This will- That is also included in most of it. Okay. And one last question. If I remember, there was one of your subsidiaries where under defense, it has the maintenance work. What would be the revenue, or where is it sitting right now? I will tell you the subsidiary name, which was the AXISCADES Aerospace and Technologies Private Limited. That is right. AXISCADES Aerospace and Technologies is also in the defense business, as you rightly mentioned. It is 100% owned by AXISCADES. The revenue, as typical as what experience in Mistral, the revenues for AXISCADES Aerospace for this nine months is around INR 50 crores as where we stand today. Okay. Thanks a lot, and best of luck. Thank you. Participants who wish to ask questions may press star and one. The next question is from the line of Amish Kanani from JM Financial Services. Please go ahead. Yeah. Hi, sir. I would like to understand the low EBIT margin that is being posted in the technology services solution where the growth is decent, but the margins are lower. I think the previous participant, you addressed partly. But if you can explain us, because we had aspiration to take that division's margins to much higher level. If you can give us the sense whether this quarter is an aberration and how should we look at it? Yeah. The engineering services EBITDA margin is sitting at about 14% now. And essentially what we would want to put on the table is the kind of investments as what we are making in the digital space, which is kind of taking away about 2% of the EBITDA. So close to about 50 people are engaged with the digital investments, which is not margin accretive at the moment. And our objective here is to take it. And also the fact that, as Arun was mentioning earlier, the business which we do with Caterpillar is something which is not margin accretive for us at the moment because it's all staffing business. And these are the two areas where the digital investments as what we're making will start giving us revenues and internal cost savings. Plus also the fact that where we are moving away from the staffing solutions because of Caterpillar will enhance the margins of the engineering services business going forward. The acquisition that you spoke in the previous question. Correct. Okay. Sir, is it possible to call out the one-time expense of the acquisition-related cost, maybe some legal or bankers cost, which might sit in, which may not be repetitive? Because my EBIT margin, if I take out that technology services solution, it is coming nearer at 12 versus last year this time around. The total acquisition cost in terms of due diligence cost, the legal cost, and all the costs which are related to acquisition is about INR 3 crores. Which may not repeat, right? Correct. The employee cost will obviously repeat, and that will increase the margin as and when we get the sales and operating leverage kicks in, but this portion at least will not repeat. Correct. Okay. The context was last year, this time around, in quite a few quarters, we had actually posted EBIT margins more in the range of 16%-18%, and as high as 20%. I was wondering whether- Yeah. The big shift which has happened, we took a conscious decision to start investing in the digital space, which we are very conscious that in the short term at least, it's not going to be accretive to the margins. But we have started getting, I would say, production orders and the kind of businesses what we do with our overseas engineering customers. We are selling our digital competencies and also the digital competencies are being used for internal automation. All of this is going to result in margin accretive, I would say, position going forward. Amish, I think just to add a couple of points. Yes, sir. I think one is that if you look at it traditionally, the company has been, for the longest time, in aerospace, heavy engineering, and defense. As part of diversification, we wanted to grow automotive and energy for the reasons that, as we all know, automotive offers a world of opportunity. The number of customers in automotive is far more than aerospace. For example, if I had to add strategic new logos, it is very difficult in aerospace, but it is possible in automotive and so also in energy. I think what we have been doing very consciously is that we wanted to increase our footprint in these two verticals rapidly. What we did last year was we grew automotive organically. We were able to do that in a year to grow to about 4% of our continuous revenues. We decided, and we saw that with our customers, that often to play in this space, you need to have some scale. To build that up quickly, I think acquisition is the only way. With the acquisition of add Solution, that brings us to about, I think, 11% to 14% of our revenues are now automotive. That comes with some short-term margin pain. I think strategically, I think these kind of investments in both automotive and energy will pay off in the long run. I think as we go into next year, next financial year, we are very consciously going to be looking at how we look at margins. If you look at it, our balance sheet is now much better, especially with the QIP, almost out of INR 220, some INR 155 crores goes towards writing off debt. If you look at our PAT, if you look at the cash position that we have, it will be much, much good, much, much better. This was the first goal, which was to improve the balance sheet, improve our PAT. We will work on margins. Margins typically take a little bit longer because when you go into a new vertical, new customers, it is competitive, and you do bid at lower rates. It is only when the account becomes mature, like we have in the aerospace, that you are able to offer more services and be more, I would say, margin-accretive. I think this is a journey that we are on, and we are conscious that it does appear that it is going up and down. We believe that going into the next two to three years, this is the right thing to do. Yeah, sure, sir. And sir, coming to Mistral, I understand it is a volatile business on a quarterly basis. But if you can give us some sense of, one, whether if you can call out the fourth quarter, what is the bump up that might happen? If it is not possible, given the volatility, again, if you can give us some sense of how the trajectory looks like, say on a 12-month basis, for say next one year, that will be really helpful because we understand that it will be volatile on a quarterly basis. But some sense of growth will really be helpful or else giving us some order pipeline that we can share. That will be really helpful. Thanks. Mridu, you want to take that? I can give you just a high-level commentary. Mridu can fill in. Amish, we do not give out guidance, but for us, the defense business for Q4 is going to be much better. I do not want to speak in terms of percentage terms, but I will say that the production volumes that will happen in Q4 are going to be much, much more than Q3. It will be more like a Q2 situation that we had. So it will be a much better position for us, which will obviously help both top line and bottom line. But Mridu, do you want to add anything that you can share? You are on mute, Mridu. Thank you. Ladies and gentlemen, in order to ensure that management is able to address questions from all the participants in the conference, please limit your question to 2 questions per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Saurabh Sanswani from Sahasrar Capital. Please go ahead. Hello. I want one clarification that the new multimillion-dollar deal that you are saying is in the aerospace segment, right? Sorry. Yes. Sorry, Saurabh. Your voice is breaking. It's fine. I just request you to reconnect again, please. I am using the handset now. Is it better? Your voice is breaking, sir. Okay. Let me try again. Can you just reconnect again, sir, please? Yeah. Yeah. Thank you. The next question is from the line of Jalraj from Aspen Investment. Please go ahead. Thanks for the opportunity again. This is with regards to Mistral. You mentioned it prior in the previous answer, but something I too. Could you give some color to, maybe not quantitatively, but qualitatively that what was the exact reason for the fall, and how do you see it in the top line? How do you see it going forward? Has there been some supply chain issues or something else, per se, for this particular quarter? Yeah. I would not say it is a fall in revenue. The defense revenues are typically cyclic, so you should never look defense revenues on a quarter-on-quarter basis. Because one, as I said, the quantum of order value is extremely large typically. And then the delivery period is anything from about 16 months to 2 years to 3 years will be the window for delivering any product. So one, the order value is larger, and the deliveries are also longer. So there will always be a curve in terms of when the revenue gets recognized. That's why you'll see a drop in revenues on a quarter-on-quarter basis, or you'll see a spike in one quarter and then low in one more quarter. On a yearly basis, we are in a growth trajectory, and you'll see excellent growth in defense business from Mistral this financial year. Got it. Otherwise, from, let's say, medium to a longer term, the outlook-wise, there is no change per se, or it is medium to long-term perspectives are still the same? Could you talk a little about that? Could you give us a little color there? See, our order book is extremely healthy, and the pipeline also looks extremely healthy. So we will definitely see a growth year-on-year moving forward. So there is no ambiguity on that front. Mm-hmm. Got it. Last question, with regards to the AXISCADES Aerospace, what we talked about when you told me the 9 months revenue was ₹50 crores. So does this vertical also have a little seasonality? Because if I remember it correctly, FY 2023 revenue was ₹90 crores. I will check if this is on Airbus. No, if you talk about AXISCADES Aerospace & Technologies, yes, last year there were total revenues of INR 90 crores. This year, half year is INR 50 crores, but there is one major order as what is being executed for the Ministry of Defence, and we would see the revenue accretion happening in Q4. Okay. Thanks a lot. Bye. Thank you. A reminder to all participants, you may press star and one to ask question. The next question is from the line of Tushar from Coatue Management. Please go ahead. Yes. Good evening, sir. We were talking a lot about the testing that was taking place on the drone side, and several important testing results were supposed to be out by December. Do we have any updates on the drones? There was one Ghatak that came out in the Indian defense. Are we involved with that? No, we are not involved on that program. We are building a drone indigenously at Mistral, which is our own initiative in terms of R&D. We have finished some test trials, as we talked today. The trials have been conducted at Bangalore at the environmental conditions which Bangalore has today. The ultimate goal is to fly this drone in challenging environmental conditions, based on the terrain which we have against our borders. So that testing is yet to start. Whatever the learnings which we had from the testing, which we did locally here, we are incorporating that, and then we will start testing again shortly. We are on the right path at this point of time. Okay. I thought we were also into anti-drones industry too. Are we seeing any revenues coming from that section or the drones that are anti-drone sections? Yes, so we do have a large order in the anti-drone part. That project is currently undergoing inspection as we speak, and that will happen over the next 10 days. That is an ongoing project, and we expect, as we go closer to March, that one portion of it should get completed, and the next portion of it will get picked up next financial year. Thank you very much. Thank you. The next question is from the line of Amanisha, an individual investor. Please go ahead. Hello? Hello? The next question is from the line of Sameer Dosani from ICICI Prudential. Please go ahead. Thanks for the opportunity. I just wanted to confirm this Mistral pipeline. What is the kind of booking pipeline we will have right now? I think, if I am not wrong, last quarter, we were speaking about INR 350 crores. Can you confirm what is the kind of pipeline? Second, this quarterly variability can happen, but do we hope to recover all the revenues back in Q4? So your yearly target of around 30% growth or not, if that is the target. So that we can meet, if you can confirm that. Fine. On the yearly target, yes, we are on track. In terms of order book, we had a healthy order book in Q3, which stands at more than 150% growth rate. Moving forward, we are seeing a healthy order book for the next 12-month window also. Okay. I think last quarter was around INR 350 crores. We had some order pipeline of INR 350 crores. That pipeline number, how much it would have grown? We have added additional about INR 150 crores last quarter. Okay. That is new orders. Okay, sorry. New orders, yes. Second, to get some idea around aerospace. We have been doing phenomenally well in the aerospace vertical. If you can share that trajectory, like what, with the new order you have won, how should we think about this aerospace vertical for the next 2-3 year perspective? This is given that, I think both the aerospace majors have committed to increase their sourcing from India by 2 or 3, 5 years, I think. If you can just give some idea around how do we see this vertical performing in a 3-4 year period. That will be helpful. Thanks. Yeah, Sameer. I think we have spoken in the past. I think the growth that we experience in aerospace, we expect that to continue. Like you mentioned, typically, the orders that we get from our customer are either a 3-year order or a 5-year order. We have a very good amount of predictability in terms of what the workload will be over the longer term. The trend has been in the last few years, we have grown into new areas as well. I think case in point is, of course, the deal that we won in Q3. Even 6 months back, if you recollect, we won a deal in manufacturing engineering, which was a new area for us. For us, the way it works is typically that, like I said, it's a 3 to a 5-year deal. When we start off, the first 6 months is usually a little bit slow because the customer uses that as a transition between the old vendor to the new vendor. Everything that we win is at the cost of somebody else. Of course, there is some scope which happened because of good business and expansion in volumes on their side. In the case of this deal that we have done as well, this will now start to gather from first of January, but there will be a 6-month overlap between the existing vendor and us. Typically, what we forecast over 5 years, starts picking up from 2 years onward, so the second year onward. The thing with aerospace is that it's predictable business. Over a longer term, we see good growth momentum, but the ramp-up happens in a very planned way, just because of the fact that the airplane is essentially a 30-year life cycle. The way that they plan their activities and the way they plan their outsourcing is also done in a very methodical way. To answer your question, the growth that we are seeing, we will be sustaining the similar rate of growth over the next 2 to 3 years. Understood. The 6 months, the contract you won 6 months back, is that fully ramped up or it is yet to kick in in our numbers that way, in that sense? It is not fully ramped up. Again, a lot of this work was typically done by overseas players in the local geography. Now manufacturing engineering is a very, I would say, an area which is very close to the plant and the factory. The customer is having a big mindset shift to move more and more workloads to offshore. In fact, we are on a call with the. We had a strategic call with the supplier, and one of the things for them at the start of the financial year was to do more offshore. We have started the ramp-up, but I would say this will start picking up over this year. Over next financial year, we will see more of these volumes coming in. Okay. For product engineering services, you explained what is happening exactly, but should we think that Q3 is the bottom end and maybe gradually start to pick up in that sense sequentially from here? How should we think about this product engineering services segment? Sanjeev, you want to speak about it? Sorry, Arun, I missed that question. Yeah. I think in three years there is weakness in three years, but has it bottomed out? The bigger part of the weakness or the decline is already captured in the numbers in Q3. Should we think that at least the base is protected and we may grow from here? I still couldn't hear you properly. Please. Sanjeev, you can hear me? I can hear you but, Arun, the question, I had to make a Yes, the question that Sameer is asking is that on three years Yes. has the revenues bottomed out in Q3 or do we still see some softness going forward? So he just wanted some color on how the business is shaping up broadly. I think you are right on saying that the revenues have bottomed up in Q3. Going forward, we see a growth happening on the NRE side, but on the production portion of the business, the growth will only happen probably by the Q2 of next financial year. Okay. Production is a smaller part of the business, right? That's only 30%. Bigger part is NRE, if I'm not wrong. NRE is the bigger portion because that is where the manpower is involved and manpower to revenues is where our business is continuously growing. Whereas production is an offshoot of our NRE business which is currently in decline because of overstocking by our partners. Got it. That's helpful. But should we think that this vertical can also grow in line with other segments like aerospace or any other verticals for us? Should we think that should be where it can grow, at least the NRE part, if any? The NRE part, yes, definitely, it will continue to have a growth. I expect a growth of about 20% on a year-on-year basis. It could be a little bit more also. At this point on, this is the guideline. Arun, if you can just take us through what you've been getting. Obviously, market share in aerospace. What are those few competencies or those deciding factors by the clients that's keeping you above the competition? If you can speak about that will be helpful. Thanks. Yeah, sure. I think we are present in 2 or 3 different areas. One is in the product design part, where we are involved in design of certain parts of new products, new aircraft. The second part is what we call as concession management, which is related to production. Wherever there are defects, we do an engineering assessment. The third one is the repair work. The fourth, sorry, there are actually 4 areas. The fourth one is manufacturing engineering. If you look at product design, that is a stable business in the sense that at any given point, there's one product that is being developed. When one finishes, something else comes up. We did A380, then A320, now we're working on A350 for example. When it comes to the concessions management, that is linked to the volume of aircraft which roll out the production line, and that, as we know, is increasing significantly. There we are seeing volumes go up. The third is repair work, which is basically when a aircraft is sold to a customer and there's warranty. Again, the number of aircraft that are flying these days is much higher. If you look at some of the orders that have been placed, it is likely to go up significantly over the next 5 years. Again, this is in our view, going to go up in terms of volumes. Last one is manufacturing engineering. Again, with the growth in the volumes, with customers coming from different parts of the world, they will look at, of course, enhancing the current plants that they have to improve throughput, make it smarter factories. But they will also consider setting up new plants in other parts of the world. This is where we see a lot of the growth coming in. I think the reason we are winning all this business is that in engineering and in aerospace, we have a good track record. The customer trusts suppliers who can deliver on time to the expectation that they have. We also invest ahead of time. When a new tender is going to come up, we start working on a couple of years before to sort of develop some POCs, prove our capabilities. That is what we do, and that is what has been the core of our success. I would also say one macro environment definitely also is that more and more work is coming to India, and at least with our largest customer, we are the largest Indian supplier. As the volume, as the pie of outsourcing in India increases, we will also be a beneficiary of that. That is encouraging to hear. Lastly, on this margin piece, if we can. So there is 3 crore one-off that clearly can translate for us, translate to margins next quarter. On a medium-term journey, can you share some trajectory around what should we think about the margins from here on? That will be helpful. I think we are definitely, and Sachin maybe you can add in here, we are definitely looking at how we can improve our margin. But I think this quarter, of course, the acquisition we talked about and the digital investment. So I see digital investment definitely to continue and the hiring also to continue. As we hire new people, there is a lag of hire to bill, typically 3 months to 6 months, depending on the qualification. So once we reach operating scale, I think we will be over this problem. Hopefully we will get there soon. But I think next year we will look at getting somewhere to the 15.5%-16% region. That is the aspiration that we have. We, of course, have to put a plan in place and do that, but that is what we are trying to do. Thank you. Our objective to go from here to achieve about 18% in the next three years. That's what we are on the journey as what our next rate. Sorry, how much? From where we are today, around 14.5%-15% is where we are, to about 18% in the next two to three years. Okay. Got it. Thanks for this, and all the best to the team. Thank you. Thank you. Ladies and gentlemen, please limit your questions to one question per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Harsh Jahavad from Avendus PMS. Please go ahead. For the opportunity. I just had one question. Given that there are a lot of macroeconomic issues, we are going through a certain transformation. At the same time, we have very good order book on defense side and aerospace side. In one of our presentations, we mentioned our target of achieving INR 180 crore PAT in FY 2026. Just want to understand whether you think it's achievable or will we see some deferment of the same? Yeah. That is what our, I would say, objective is in terms of where we would want to go. At the moment, that particular objective remains. Okay. Thank you, sir. Yeah. Thank you. The next question is from the line of Manju Jha from JM Financial Services. Please go ahead. Hello sir, good evening. This is Manju Bhashini. Sir, in the call, there was a mention about Mistral EBITDA at 42 odd crores and operating at 18% margins vis-à-vis 32 crores at 16% odd margin. Was this for the YTD time frame, sir? Can you please clarify on the same? YTD, yes. Okay. This 18% odd margin is despite the production revenues not as per our expectation. Is it fair to assume that the margins can get better as we see that revenues coming through in Q4 and the production mix as a percentage of Mistral revenues getting better? The production revenues will not see up-quarter even in Q4. But you are right in stating that as production revenues increases, our margin will get better. You see, there are two parts to it, Manju. One is the production revenues with respect to defense. As you would have seen, the production revenues with respect to defense has kind of tripled from the same period last year. The production revenues of defense yield us disproportionate margins, upwards of 25%. Then what Bhujju was referring to was the production revenues from the PES business. The blended EBITDA at this juncture for Mistral for the 9 months is 18%. As the production revenues goes up, even the blended EBITDA margins will also go up. Understood. Because earlier I remember partly the PES business also had some defense revenues embedded in it. But this quarter in the presentation I saw defense was replacing the products and solutions segment-wise. How are we supposed to read into this, sir? No, no. Products and solutions are nothing but the defense business. To bring in more clarity, we are now calling it as a defense business. As you know, about 40%-50% of the Mistral revenues are of defense and the balance of 40%-50% is PES. Okay. So for Mistral, it will be a combination of revenues from PES as well as defense. But defense per se is what you have classified, which is 21% contribution. That is how to read into it. Okay. Got it. Just one more clarification on this Aero segment. I know we have delved a lot into this. There was one strategic arrangement which we had entered into, and this was mentioned that was made $75 odd million over a couple of years. So what we have won in this quarter is in addition to what we had already announced earlier, correct? Is that the correct understanding? Yes, that's correct. It's a new area for us. Sure, sir. This quarter has just started the initial ramp-up. It's getting reflected in the P&L for Aero segment, and this can only get better as we see the ramp-ups from the orders won in Q3. Is that right, sir? Correct. That's right. Super. Thank you very much, and congratulations on an excellent fundraise. Thank you. Thank you. Thank you. As that was the last question, I would now like to hand the conference over to Ms. Akashi Modi from Orient Capital for closing comments. Thank you. Thank you everyone for connecting over call today. I would also like to thank the management for sparing time in answering all the questions. Orient Capital is investor relations advisory for AXISCADES. For any queries, please feel free to reach out to us. Thank you everyone. Have a nice day. Thank you so much. Good day. Thank you, everybody. Thank you. Bye. Thank you. On behalf of AXISCADES Technologies Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.