Q2 23/24

Nov 9, 2023

Summary

Q2 revenue hit a record ₹252 crore, up 30% YoY, with growth across aerospace, defense, automotive and energy. Margins faced investment and operating-cost pressure; management targets 18% EBITDA margin within two to three financial years.

Ladies and gentlemen, good day and welcome to the Q2 and H1 FY 2024 earnings conference call of AXISCADES Technologies Limited, hosted by Orient Capital. As a reminder, all participant lines will be in a 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, investor relations head from AXISCADES Technologies Limited. Thank you, and over to you, sir. Thank you, Carolyn. Good evening, everyone, and I am delighted to welcome you all to the earnings call for Q2 FY 2024 and H1 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 accessible in the BSE and NSE websites. To discuss our results, we have with us our CEO and Managing Director, Mr. Arun Krishnamurthi. Mr. Mujahid Alam, CEO of Mistral, and our Group CFO, Mr. Shashidhar S. A. They will take you through our results and business 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, opinions, and expectations of the company as on the date of this call. The actual results will differ materially. 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 MD, Mr. Arun Krishnamurthi. Over to you, Arun. Thank you, Shishir. Good evening, everybody. Firstly, I want to wish everybody a very happy Diwali. Welcome to our Q2 FY 2024 earnings call. Like Shishir said, I am accompanied by Shashi, who is our CFO, and by Muju, who is our CEO for Mistral Solutions. I am happy to address the forum today as I complete two years of leading AXISCADES. Time has just flown by. It actually seems like six months. It has been so busy. The transformative growth journey of the company in the last two years has been exhilarating and exciting, and as we explore and harness the opportunities ahead of us in our quest to position the company in the forefront of ER&D. Our Q2 business performance was characterized by onboarding of new customers, rejigging our senior management teams, strengthening our sales team, and consolidating our newly acquired automotive business, which is add solution in Germany. During the quarter, we also signed a definitive agreement to acquire 100% of Epcogen, which is a niche solutions provider in the energy sector. These acquisitions will enhance the capabilities of AXISCADES, provide access to new geographies and new strategic clients. We have also strengthened our governance standards with the onboarding of a global controller and Chief Risk Officer and enhanced the depth of our board leadership. As we close the second quarter and first half of the financial year, our growth momentum continues on the back of strong order book and delivery performance in all our major verticals and business units. Just in terms of our quarterly highlights, we are privileged to report that Mr. Abid Ali Neemuchwala has joined AXISCADES board as our Chairman and Non-Executive Director. In his distinguished career spanning over three decades in the technology industry, Abid has earned an enviable reputation for his expertise in aligning organizations, driving business results and consistently leading transformation initiatives. He began his journey with TCS in 1992. In 2015, he joined Wipro as CEO and Managing Director, and under his leadership, Wipro transformed the business into a digital business. I will also take a moment to thank our previous Chairman, Mr. David Bradley, for his outstanding contribution and support during his tenure in the company. In a significant milestone to expand our energy practice, the company has signed a definitive agreement to acquire 100% of Epcogen, which like I said, is a niche solutions provider focused on engineering, design, and solutions in the high potential energy space. Epcogen serves both conventional as well as renewable energy space, supply chain management, and construction. The company hopes to complete the acquisition by end of this month, which will provide a strong impetus to the company's growth, as well as provide access to Middle East and North American energy markets. During the quarter, for the third consecutive year, the company was awarded the Diamond Supplier Award by Bombardier for year 2022. This recognition is a testament to our commitment to excellence, innovation, and delivering to the highest standards of customer satisfaction. The company also signed a strategic partnership with Cantier, a Singapore-based powerhouse in Manufacturing Execution Systems or MES, with specialization in Industry 4.0 integration. By integrating Cantier's innovative MES 4.0 with our engineering and technology solutions, we are poised to transform the core of industrial manufacturing by enhancing workflows and creating manufacturing excellence with real-time insights and seamless digital integration. During this quarter, we completed the acquisition of add solution GmbH and have commenced consolidating the financial results of add solution GmbH from 1st of August this year. With this acquisition, the company has acquired niche automotive capabilities and vendor codes of large German OEMs and Tier 1s, which will fuel the company's expansion in the automotive sector. AXISCADES has a significant presence in the U.K., and in the month of October, we opened an engineering design center in Saltney, U.K. The newly established facility strength is in carefully selected strategic location, which is designed to serve the long-term requirements of the aerospace industry and various promising business opportunities in the region. In terms of financial highlights, the company in Q2 posted consolidated revenues of INR 252 crore, its highest ever quarterly revenue, growing by 30% from INR 194 crore in Q2 of last year. In USD terms, the company recorded revenues of $30.6 million, growing by 26% from $24.3 million recorded in Q2 of last year. In the first half of the year, the company recorded revenues of INR 465 crores, growing by 23% from INR 376 crores recorded in the same period of previous year. Similarly, in USD terms, the company recorded revenues of $56.8 million, growing by 19% from $47.9 million recorded in H1 of last year. The company recorded a consolidated EBITDA of INR 36 crores in Q2 FY 2024, and EBITDA margin of 14.28%. The consolidated EBITDA for H1 FY 2024 stands at INR 68.9 crores at an EBITDA margin of 14.81%. The company has been able to maintain its EBITDA with marginal decline in EBITDA margins despite annual increments. We also had a few plant closures with some of our major customers, and we have also added resources who will get billed in Q3. That's an investment that we made in Q2. 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 compromises our short-term margins. All our verticals have shown double-digit growth year-on-year. The combined share of revenue of automotive and energy in Q2 is 13.1%, which grew from 6.6% in the same period of last year. Revenue from automotive vertical almost tripled while the energy vertical grew by 22%. Going forward, automotive and energy verticals will constitute significant portions of our revenue with synergies from add solution and Epcogen. Our aerospace business has continued its growth momentum and is growing continuously for the last 11 quarters and grew by 21.6% year-on-year. The growth is a result of our long-term contract with expanded scope with our strategic customer. We are leveraging our aerospace skills to support Mistral customers in various areas. The products and solutions business, representing a defense vertical, grew by 47% over the previous year, recording revenues of INR 23 crores, contributing 29% of our total revenue, of which revenues from Mistral Defense grew by 82% year-on-year. To conclude, while the current geopolitical and macroeconomic headwinds do pose a challenge for the industry as a whole, we are confident that our efforts of de-risking the business will stand us in good stead for the balance of the year and thereafter, and we will continue to report improved financial performance in the coming quarters. I thank you for your continued support and encouragement. I will now request Muju to give an update on the Mistral business. Thank you, Arun. Wishing you all a very happy Diwali. I'm delighted to report the FY 2024 Q2 performance of Mistral Solutions. Mistral is a cutting-edge technology design and system engineering company delivering technology solutions in product engineering, aerospace, defense, and homeland security to marquee global clients, Ministry of Defense, DRDO, and Defense PSUs for over 26 years. Mistral recorded revenue growth of 50% year-on-year in Q2 of FY 2024, up from INR 63 crores to INR 94 crores. We have growth both in our professional services engineering business and defense business. Of the INR 94 crores of revenue, INR 42 crores was from PS business and INR 52 crores from defense business. For H1 of FY 2024, Mistral recorded a revenue of INR 166 crores, growing by 41% from INR 118 crores recorded in the previous financial year. The defense order pipeline remains strong. Many of our earlier designed and developed prototype systems for various defense programs have been tested and qualified and now entered the production phase. In Q2 of FY 2024, our revenue from production was INR 33 crores as compared to INR 15 crores in Q1 of FY 2024. Our defense production will continue to have a very healthy growth in the coming years. We are one of the first companies to have designed a non-Chinese drone controller in partnership with Qualcomm, which is now mandated by many governments globally for drones. This model was showcased at the Commercial UAV Expo at Las Vegas in August of 2023, and we see high interest in this product. 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 through our internal R&D initiatives. In coming quarters, we continue to expect healthy revenue and profitability growth in both domestic and international markets. Mistral and AXISCADES are perfectly positioned to leverage and synergize each other's capabilities to deliver quantum value to our customers, investors, and stakeholders. Now, I invite our Group CFO, Mr. Shashidhar SK, for an overview of the financial results. Thank you, Muju. Good evening to everyone. As has been detailed by Arun and Muju, our business performance, both in terms of revenue and profitability, has shown robust growth in Q2 of FY 2024 and H1 of FY 2024, boosted by our foray into new verticals such as automotive and energy, apart from our traditional verticals of aerospace, heavy engineering, and defense. As reported by Arun, the company achieved consolidated revenue of INR 252 crores in Q2 of FY 2024, growing by 18% quarter-on-quarter and 30% year-on-year. Our constant dollar growth was at 17% and 27% quarter-on-quarter and year-on-year, respectively. At the revenue of INR 465 crores in H1 of FY 2024, AXISCADES grew by 23% year-on-year and at 19% at constant dollar. We have seen year-on-year double digit growth in all verticals except heavy engineering. The company is currently having robust order book to deliver on the revenue objectives for FY 2024. The company has started consolidating the revenue of add solution GmbH with effect from 1st of August. In the 2 months up to September, add solution GmbH contributed about $1.4 million or INR 12 crores to a consolidated revenue. Revenue share from new customers is growing at a rapid pace. Revenue from the top five new customers was at INR 26 crores in H1 of FY 2024 as compared to INR 4 crores in H1 FY 2023, growing by more than six times. Revenue from the top five existing customers grew at 22% from INR 233 crores to INR 284 crores during the same period. Revenue from new customers contributed to 5% of revenue in H1 FY 2024 as compared to 1% in the same period of previous year. While the company's EBITDA margin was marginally impacted during the quarter and half year due to increments, digital investments, resources on the bench and plant closing customer sites, the company is able to maintain the last 12 months EBITDA margin at 15.8%. The consolidated PAT in Q2 of FY 2024 stands at INR 11 crores. The employee cost in Q2 of FY 2024 at INR 123 crores has gone up by INR 15 crores quarter-on-quarter, mainly due to annual increment impact of INR six crores, new hiring including senior leadership hiring impacting INR 1.2 crores, and employee cost of add solution which we started consolidating from 1st of August which has impacted by about eight crores. The company's finance cost mostly due to debt funding of Mistral acquisition was at INR 31.75 crores as against INR 10.25 crores in the same period of previous year. As communicated in Q1 of FY 2024, the company estimates a finance cost of INR one crore per quarter from Q2 of FY 2024. This cost considers the beneficial impact of INR two crores per quarter with respect to refinancing of acquisition debt which was completed in Q1 of FY 2024. The board of directors at their meeting held on the 8th November approved raising of fresh equity to pay down the debt and for growth capital. The company will endeavor to close the capital raise during the course of the financial year FY 2024. To conclude, the company will continue to focus on growth and profitability from existing and new verticals and from existing and new customers and we are confident of a sustainable and de-risked future for the company. I conclude by wishing you all a happy and prosperous Diwali and thank each one of our stakeholders for being with us in this journey. We'll open the floor for questions. Hello? Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star then one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question comes from Srinath Krishnan, an individual investor. Please go ahead. Thank you. Congratulations to you on such a strong performance in a challenging environment. The first question is on Mistral. There are a lot of articles, reports which says that the semiconductor space is going through a slight challenging phase now, but despite that, Mistral has done really well during the quarter. I wanted to understand what is driving this growth in Mistral. How is the performance been in the product engineering space and also in the defense space? As it has been guided in the past, the production defense has considerably picked up. I think it is close to about INR 35 crore to INR 40 crore in the first half. What is again driving the production here and could it translate to higher margins in second half? Since you have mentioned that production fetches superior margins compared to the R&D phase. Srinath. We have a legacy of having built design wins for the last 25 years and these design wins which we have built, tested and qualified on field are getting into production phase today. The systems which we have done about 10 years back are getting into production. This is one something which will continuously give us revenue moving forward. At the same time, there are many initiatives with DRDO and stakeholders wherein a lot of things are being outsourced. This also will drive growth. This growth will be on the professional services of defense business which in turn will result in production revenue moving forward. Today's growth is primarily because of the existing defense contracts which we have done in the past and also we have signed up with about two global clients wherein we are doing some high-end system integration for them. These have resulted in higher revenues. Got it. What is the performance of the PS space there in the first half compared to last year, and also is the kind of the worst over that can you expect a pickup in second half? You are talking about professional services business? Yes, sir. Yes. The PS business has grown, when compared to the last financial year by You see, the company's PS business for the Q2 of the current financial year was at INR 41.59 crore, and it grew by 34% from INR 30.83 crore as what was recorded in the previous year. Yeah. For the next half of the year, we will see probably a marginal growth in PS business because there are certain things which have slowed down, especially in the production business. Our NRE business continues to be strong. The production business has slowed down because of overstocking of components, which people have done during 2022. We see this improvement happening probably the second half of next financial year. But our NRE business will continue to grow. Yes. If you could speak about the product space there, you had guided and that is also coming through in the first half, we have seen a strong growth in production. What is driving the production within specific projects? Or maybe if you could just give a brief idea of how that would help in metrics of the business. When I am talking production here, I am talking about pure play, non-defense production. So this is the production orders which we do for semiconductor companies, and we build evaluation modules and some of the boards which are shipped out in the market as a joint development between Mistral TI, Mistral Qualcomm, and like those. These have gone through a slowdown because of overstocking in the past. In the last financial year, because of shortage of components, there was a panic buying from everybody. So that resulted with higher revenues for us in the last financial year. And now the stocks are still available with the OEM. So this is the reason why there is a slowdown in production, and we foresee this correction to happen in the next two quarters. In terms of defense, the production will continue to grow because most of our design wins which we had in the past are getting to production phase. And you will see in the next two quarters our order book getting bigger and bigger. Great. Congratulations. Good luck. Thank you. Thanks a lot. Thank you so much, Mr. Nath. The next question comes from Jyoti Singh with Arihant Capital Markets Limited. Please go ahead. Thank you, sir. Congratulations on the good set of top-line numbers. Secondly, Arun, sir, congratulations completing two years in AXISCADES. My question is on the segment side, could you please provide more information about the performance of the HEV, which has been underperforming for several quarters, except other segment which are doing better? Thanks, Jyoti. Firstly, happy Diwali to you. I will request Shashi to just chip in specifically with regards to the heavy engineering sector. Basically, you are right there. All other verticals have grown substantially for the quarter as well as for the half year. But with respect to heavy engineering, there was a flattish growth for the quarter and a bit of marginal decline as in the first half of the year. The reason for the decline is basically the macroeconomic factors which impacted the heavy engineering industry, and it is yet to recover from that. What we are actually doing now is utilizing our digital capabilities, and we are deploying our digital engineering skills. We have already started taking projects with respect to digital analytics and manufacturing engineering, which we hope will kind of, I would say, scale up and will be able to kind of come to control in terms of the heavy engineering vertical in the coming year. I think just to add to that, just a qualitative commentary is that what we are also looking at is how we can leverage more of the Mistral capabilities in the embedded space to take to our heavy engineering customers, because we do see that there is a lot of opportunity there. The second thing is that now with the acquisition of add solution, we have strong automotive capability in the passenger segment and the commercial segment. Heavy engineering is pretty much the off-highway transportation sector. We will also be exploring synergies between what add solution does in Germany with some of their OEMs and Tier 1s to what we can do in heavy engineering. I think the overall picture is, of course, that we are fully committed to heavy engineering as a vertical for AXISCADES, and we are looking at multiple ways of stimulating growth, either through digital or through embedded or through capabilities that we have acquired inorganically. This is the plan that we have in place. Of course, the macroeconomic situation would possibly improve going forward, and that would also help us recover the segment. Okay. Thank you, sir. Additionally, I would like to inquire about the finance cost which was there in this quarter, associated with the Mistral acquisition. Are these costs expected to continue in the coming quarter? Yeah. If you look at it, last quarter, there was some one-time, I would say, prepayment charges and all of that which we had to incur. As a result of which you would see that in FY 2024, in the Q1 of FY 2024, our finance cost was INR 20 crore. It is already moderated to INR 11 crore because those one-time charges are not there. Going forward in the coming quarters, our finance cost will be around INR 11 crore-INR 12 crore, which in fact takes into consideration the cost saving as what we are having for the refinancing which we did for the NCDs which we have raised for the Mistral acquisition. Okay. Thank you, sir. After considering that all other segment and geography-wise, we are performing well. Could you guide regarding margin and top-line performance for the coming years and quarter, because earlier, we were not guiding about it. Yeah. Jyoti, we still do not guide for future performance, but all I can say is that if you look at our other verticals, we have spoken about Mistral in the previous question, both on production as well as the PS part, as well as defense. We spoke about heavy engineering. If you look at aerospace, that is continuing to be a very strong vertical for us. We continue to grow very strongly with our strategic clients. If anything, we are entering into more new areas. We continue to bid for new projects. So that will definitely be a strong growth area for us. Automotive, we expect will also be strong, both from the client roster that we have within AXISCADES, but also through add solution. We have a strong pipeline in place and we can do much more. So that will be a good growth driver for us. Same thing with energy. Again, we are very bullish about energy because we are seeing that in the next few years, both on the fossil fuels as well as the renewable space, there is going to be a lot of investment. There will be a lot of construction, both on the refinery side in oil and gas, as well as on carbon capture and sulfur capture and tail gas capture. With the acquisition that we hope to complete of Epcogen, they have very strong product engineering, EPC kind of skills. For us also, we don't do much in the Middle East. So we are very excited that a lot of clients that will come in with Epcogen are Middle East clients, and obviously that's the hotbed of the energy sector. So we see energy also to be a strong growth driver for us. I think all in all, overall, we are seeing strong growth segment going through. We don't guide for top line as well as margins, but of course, like I said, we expect a good growth. So please do watch us every quarter as we talk through the earnings call. Okay. Thank you, sir, and happy Diwali to all. Next question comes from Inder Soni with RCG. Please go ahead. Yeah. Hi. Happy Diwali, and congratulations on a very strong set of growth numbers. Question about add solution GmbH. You talked about automotive, it's difficult to get into customers unless you have an existing relationship. But through this acquisition, it looks like you have some of the best OEMs, right? I'm looking at the chart from the company that says they have Mercedes-Benz, BMW, Volkswagen, Alstom, many big companies. I am not asking specifically about any of these big companies, but if you are already in one of these companies, does that give you the opportunity to grow in other areas within this company? How does that help? I am trying to understand. Are you a certified vendor because of this acquisition in all these companies? Because there is a list of about 20 big companies on their chart. Yeah, Inder, thanks a lot for your question. Happy Diwali to you as well. Yes, you are absolutely right. With add solution GmbH, the reason that we acquired add solution GmbH is that if you look at the German automotive ecosystem, they have a very stable vendor ecosystem, and it is really difficult to break in. The approach that we have taken is to acquire a company who already has a supplier code. Actually, this is something some of our peers have done as well. So now with this, we have supplier codes in, obviously, the brands you mentioned. Volkswagen is a big name, that is a big customer for us. We have vendor codes with Mercedes-Benz, BMW. We have vendor codes with Tier 1s like Aptiv, LEONI, Bosch, Sumitomo. So we feel that now we can firstly offer the offshore services that add solution GmbH had not been able to offer to these customers. Because one of the reasons why add solution GmbH wanted to come together with us is because they see a lot of growth potential, but they did not have the financial muscle, so to speak, to fuel the growth. Secondly, a lot of customers were asking them about what offshore capabilities they had, and that is something that they lacked. So now both of these are aspects that we can talk about. And of course, what we will be doing is that we also have embedded capabilities, which comes to Mistral. Excuse me. So we have software testing, we have wiring harness capabilities which come in from add solution GmbH. We have mechanical engineering capabilities which comes in from AXISCADES. We have embedded capabilities coming in from Mistral, and we have digital capabilities which come in from AXISCADES. So I would say, Inder, that now we are in a position to really harness the supplier code that we have, go into new areas, do bigger projects, and really look at how we can run campaigns to leverage some of the other suppliers where we have not had a big base so far. So we are very optimistic about this, and we feel that for a company like ours, this is the right strategy going forward. Because the other option would have been to sort of hire sales folks, organically look at hunting new logos, and like I said, with the German ecosystem, it is virtually impossible to get in. But from a time perspective, that would be a 1-year, 1.5-year kind of exercise. But here very quickly, we have strategic clients who get added to us. So now in addition to our two big strategic clients, we have a third big automotive German European strategic client. Then, of course, we have the ability now to do much more from account mining and a new capability perspective. Great. And your upcoming acquisition in the energy space, can you talk a little bit more about that? So what kind of work do they do, and what job? Is it mainly Middle East? Can you give us some more color? Yeah, absolutely. So these guys are also in the engineering space, so they work on the EPC part of energy. So if you look at AXISCADES capabilities, we have clients both on the renewable space as well as in the fossil fuel, oil and gas space. Epcogen does a lot of work on the oil and gas as well as renewables, again. So for example, we are working on liquid nitrogen batteries. We are looking at hydrogen batteries where they do some work. They are also working with some large oil majors as well as suppliers to oil majors, where they look at construction activities. And if you follow the whole energy space, there is a lot of construction happening, a lot of carbon capture and sulfur. So when you have an oil field, you build out refineries, but you also build out carbon capture, sulfur capture plants so that you can cater to the environmental considerations. So the whole project management, the whole capability, the whole design, inventory management, product management, that is the kind of skills that these guys have. And these are typically long cycle projects. So once a project starts, it usually lasts for 12 months to 18 months because that is the time it takes to stand up something of this scale. And we are very excited about it because we feel that at least for the next 10 to 15 years, this will be a very vibrant space. Of course, there is a move towards electrification and all of that. But we do feel that, especially with what is happening in the Middle East, there will be energy security issues. We saw with Ukraine that there were energy security issues in Europe. We feel that the energy agenda is going to be very prominent for most countries and most companies, and therefore this will attain a lot of prominence. That is why we want to have a foothold quickly and look at how we go to space. Great. Your employee costs have gone up because you said you have hired some senior people in advance of demand. Can you talk a little bit about that? Because I think that was one of the biggest increases in costs. Yeah. I think, like we have been saying, we obviously need to augment the team, so we are looking at augmenting the team from sales, which we started doing in the past. We are augmenting the team with senior delivery people. Now we are looking also at upskilling our corporate resources. We have hired a chief risk officer, we hired a controller, we hired a new CHRO, a new chief human resources head. These are obviously senior positions, and we need to spread it out over quarters because we cannot call it one shot. We have a plan in place, and we have sort of put it into our budget in terms of how we want to go ahead with it. That is point number one. Point number two is that, we are also, like I said, seeing strong growth from aerospace, from automotive, et cetera. There are some big projects where we need to do a ramp up. Our focus now is, given the pyramid mix that we want to achieve, we are looking at hiring a lot of people who are either fresh from college or who are in the zero to 5 to 7 year experience. With those kind of people, we need to put them through a 6-month training, and then they are in a position to get billable. We have had to prepare for some ramp-up activity which will happen in Q3. We have to absorb those costs in Q2, which we feel are the right things to do. I think one of the things we want to do is obviously balance the profitability with the growth aspect. Because we also want to make sure that as we grow, we keep investing in keeping an eye on the future in terms of how the growth should come. I think for us, getting that wallet share quickly is important. That is why we are looking at adding the manpower, both from a senior as well as from a delivery and a technical perspective. Yeah. Another area of your cost that went up was the materials at Mistral. That means that you are now moving more into the manufacturing phase, right? Can you talk a little bit about this? You talked last quarter somewhere you said you first do the design and then you get into manufacturing. How big are some of these projects? How long do they last? Just give us some color. I am not looking for it being confidential, but just at a high level, what does the manufacturing for Mistral mean? You see, I can give you a couple of examples here. Some of my radar programs. We are starting a radar production program. Probably by the third quarter end, we will start the production program. The billing will happen probably Q4 or Q1 of next financial year. This is a project which will go on for approximately 2 years, with delivery staggered over a window of every 3, 4 months, we roll out one number of radar for the customer. Similarly, if you look at our light combat aircraft program, we have design wins wherein the production cycle, it already started. We are producing boards for them. But this production cycle will happen for next 10 years plus. So different cycles- Wow. So up to 10 years, you are saying. What we will be designing today will never be changed. The same product will go in year on year, as long as the aircraft is produced. As you know, there are 120 aircraft which are being produced now, and also there is an order for 100 more to be produced in the short term. The order is yet to come from the government, but government has already promised HAL that order is coming. These production cycles will go for 10 years plus with the same design and the same product which we have today. Which means that we do not have to invest on manpower, we do not have to invest on a new design. Whatever we have today will be produced again and again. Obviously your margins will be taken care of. Great. And last question from my side. In heavy engineering, we have talked about digitizing and hiring people for that. What do we mean by that? Can you give us some color on what you mean by digitizing in heavy engineering? Yes. Inder, if you look at where heavy engineering is moving, one is that obviously like everything else in transportation, there is a move towards electrification. That obviously brings in new component designs and new ways of building the construction equipment. That is point number 1. Point number 2 is if you look at heavy engineering, concepts like autonomous driving are already present. If you look at, say, large mines in Australia, or if you look at chemical plants, you would have a lot of these machines that are running autonomously, and they run for 24 by 7. They run round the clock. And there is a lot of digital solutions by which they are monitored. There are digital twins in case there is a breakdown, if you need to fix a problem, et cetera. And also, the fleet upkeep is something which is very important. Inventory management, remote management of these machines in these kind of mines, as well as digital twins to sort of optimize them as well as bring them back in case of any breakdowns, in case of any enhancements. That is where we feel that digital will play a big role. And if you look at heavy engineering, unlike automotive, you do not really design the machine keeping a passenger in mind. It is designed keeping in mind how long this equipment can work, how hardy it is, and how much you can stretch the asset. The kind of digital use cases that you have in this industry are completely different from automotive, where automotive is more customer-centric and passenger-centric. Whereas here it is more maintenance-centric, more about optimizing inventory, more about upkeep of the fleet, and more about maintenance schedules. Great, thank you. That is all from my side. Thanks. Ladies and gentlemen, please limit yourself to two questions per time. The next question comes from Pankaj Shah with Canara Wealth. Please go ahead. Yeah. Hi, sir. Good afternoon. So, actually wanted to understand more on the defense order pipeline. So we used to tell that there was a two to three thousand crore order pipeline. So what is the situation currently? Have you participated with any big tenders? So how is the order book visibility looking there? As on date while we are talking today, the order pipeline in Mistral is currently outstanding at about 350 crore of unexecuted orders. And I am These are confirmed orders of INR 350 crore. INR 350 crore of orders in hand with Mistral. Okay. Which also includes a few orders from non-defense business also, but majorly from defense. We have already negotiated some couple of contracts with BEL and HAL for some of the production numbers which are due to us, and we expect these orders to come in in Q3. So those will be to the upwards tune of about INR 100 crore plus, of new orders which will come in, which are due to production. What are the tentative timelines for these orders? I am sorry. I think the delivery timeline. Delivery timeline will be spread over a window of 18-24 months. Okay. Sir, with regards to drones, I wanted to understand that there are already players who are supplying drones to the Indian Army and all. What are the chances of our R&D getting converted into confirmed orders? Along with that, have you received any fresh inflow of orders for our anti-drone systems? We have not received additional orders. At this point of time, I am talking about drones and not anti-drones right now. In terms of drones, yes, we are still in the R&D phase. We are doing some field trials. Last week we had some trials in some major locations up north. Okay. We are fixing the issues which were reported on field, and I expect this product to be available and ready for us by the end of the year. I think just to add on the drone, there is a follow-on order that we have been shortlisted for. It is quite a large order for about 200 systems of anti-drone. There is us and there is one other party who has been shortlisted. We are going through the process on that and as we go through, we will obviously move towards winning it and executing it. Okay. My broader question was that we are spending our time and effort on R&D. But what are the chances that these R&D efforts get converted into order? Because drones is already a crowded market, if I am not wrong. What we are looking at is very specific applications. We are not looking at logistics drones or agriculture drones or those kind of use cases. For us, it is very specific when it comes to defense uses. From a drones perspective, we are looking at high altitude, heavy payload drones. That is exactly what the Indian Armed Forces need because of the kind of borders that we share with our neighbors, where there is a need for drones which can fly at high altitudes in thin air and which can also lift heavy payload. Those are the specific use cases that we are working on, and we actually have a prototype in place which we are in the process of testing and which we are showcasing to the Armed Forces. We are very focused on that, and we believe that especially with everything that is going around the world, with heightened need for defense supplies and R&D in defense, that is absolutely the best thing to do because we do not want to spread ourselves too thin. We are very sharply focused just on defense use cases. We firmly believe that if you look at the drone industry, the defense expenditure on drones will far outweigh any other commercial kind of expenditure that will happen on drones, because the commercial drones are more commodity drones, whereas the defense drones are more specialized, and they are custom-made, and they are suited for the terrain and for every country's specific purposes. That is our focus area, and we believe that that will, in the future, be a very strategic move for us. Okay. Perfect. Sir, last question from my side is, we have been reading that Airbus has been increasing its presence in India quite a bit. They recently planned to establish MRO facilities also. They have signed a few suppliers also. Do we see our scope of work increasing for Airbus in near time? Yes. If you look at what we do for Airbus, we work across a spectrum of activities. We work on aerostructures, fuselage, wing kind of design, which is like a horizontal service, which is done across multiple countries in Europe. We have started work on manufacturing engineering, which is supporting plants. With Airbus' footprint increase in India, as you know, they have a joint venture with Tata to manufacture the C295 military transport aircraft. In addition to that, with the large orders that Air India and IndiGo have landed with Airbus, they will be looking at MRO partnerships. The manufacturing, engineering, plant support kind of work that we do will be something which is very relevant to India, but also globally. Because really, if you look at the order book that Airbus has, it is very strong, and it is all across the world. The third aspect, of course, again, which is very relevant, is what we call repair, or which is customer service. Which is when an airline operator buys an Airbus plane, and if there is an issue with any kind of incident like a bird hit or corrosion or anything like that, there are SLAs on which Airbus has to sort of turn it around. That is where we are present. That is something we do around the clock, 24 hours, from India, Europe, Britain, and the U.S. As the number of aircraft in the skies increases, the more customer service initiatives will come through. I think we have a really nice spread, and there is a new area that we are working on as well, again, on customer services, which is related to the repair work that I mentioned. I think we are strongly poised, and I think given that Airbus is doing well, I think it has a good knock-on effect, and they are extremely happy with us as a supplier. I think we are certainly bearing the fruits of the investments we have made and the good delivery that we have done for them. Okay. Thank you so much. All the best. Thank you. Next question comes from Saurabh Sadhwani with Sahasrar Capital. Please go ahead. Hi, team. I wanted to understand the projects that add solution GmbH is doing. Specifically, what is the timeline of the products that add solution GmbH is working on? Are they the upgrades of the current versions, or are they the EVs that would come later in the decade? Yeah. add solution GmbH has capabilities broadly in two areas. One is the whole software testing area, and the second is wiring harness. If you look at it, they work across the passenger and commercial fleet for the large German OEM. These, as you know, are projects which are long-term projects, and especially software testing is a business which is growing. Because if you look at the software-defined vehicle, there's been more and more of a move towards software in the vehicle. Of course, the architecture of the vehicle is changing as well. Until now, most of the cars had many ECUs, and there used to be application stacks on top of that. With the software-defined vehicle, it's moving to more computing, which is based. There are a couple of computers in the car, and then most of the software and applications are loaded on that. What we do through add solution GmbH is testing of a lot of the infotainment and the vehicle cockpit systems. This is where a lot of innovation is happening because if you look at the passenger, they're looking at more connectivity, they're looking at more ADAS features, they're looking at richer options for streaming or entertainment or video. This is the kind of service that we provide. We are in the right spot in the growth area. Of course, wiring harness is something which is very critical because, again, with the move towards EV, the cabling and the architecture of how you do wiring harness, the high voltage engineering, you have needs for high-capacity chargers. That is exactly what add solution GmbH does. Both of those are areas which are exactly in the direction in which the client is investing. If you look at the client, they are moving towards electric vehicle platforms, and they're moving towards more connected and more ADAS feature-rich cars and software-defined vehicles. These are the two areas that we're present in. We actually don't do much of mechanical through add solution GmbH, but that's something that we will definitely not want to rule out because AXISCADES does a lot of mechanical engineering. Like I said in one of the previous questions, because we have supplier codes, we will definitely also look at expanding mechanical because that is our bread and butter. But our focus will be on the embedded and the digital and the software side as we go through. These products are going, like these projects and these clients are going to stay long-term, right? Yeah, absolutely. add solution GmbH has been in existence for 20 years, and they have very strong relationships with these clients. They have had projects running for the last 20 years. After the acquisition, I had an opportunity to visit some of these clients along with them, and the relations are super strong. We do expect that they will be not just stay, but we expect it to grow. The whole objective is actually to put our combined might together and grow. Like I said, one of the things is they are actually not able to service some requests because of the fact that they do not have the ability to invest in people. We will also be looking at whatever money is left on the table to sort of expand it. Yes, absolutely, these are strong relationships which will continue for the long term. Okay. Secondly on the material cost that has increased this quarter. This was related to Mistral going into some production contracts. The material cost is commensurate with the production orders which was executed by Mistral. If you look at it out of the ₹94 crores that was recorded as defense revenues for the half year, about 50% of that is material cost. So it is commensurate with the production orders that have been executed by Mistral. Okay. So these costs do not have, yeah, that is it. The next question comes from Nirali Gopani with Unique PMS. Please go ahead. Yeah. Hi, sir. Thank you for the opportunity. Most of my questions have been answered. Just a clarification on the fund raise. Due to the significant amounts, if you can just elaborate, what are we going to use this fund for, any further inorganic acquisitions or? Yeah. I think the first question you asked is the best kind of question I like to answer, where all the answers are being provided. But, yeah, just in terms of fund raise, as you know our board has approved that we can raise funds up to ₹500 crores. So the objective is twofold. One is that we will look at writing off debt that we have acquired because of some of the acquisitions. And the second part, of course, is for growth capital. We believe that the long-term story for the company is strong and we do need to invest, hire more people, invest in R&D, build our products. And actually in digital is where we're making a lot of investments. We're also looking at how we can develop our own IP so that our revenues can be accelerated and not just sequential based on client revenues. So these are the two broad areas in which we will deploy the money that we will get. Anything- Just, yeah, just to clarify, the ₹500 crores that what has been notified to the stock exchange is only an enabling, kind of a, I would say, a resolution, which has been passed with the board of directors. It is not to say that we'll be raising ₹500 crores. As Arun explained, our debt on the books is around ₹210 crores in terms of long term, as what we raised for Mistral acquisition. We are looking at raising anywhere between perhaps ₹150 to ₹200 crores and not really ₹500 crores. Okay, perfect. Just one last clarification. So when we say that the cost of material consumed is largely related to Mistral related production, as the production layer goes up, do we see this kind of, gross margins or we can see further improvement there? Yeah, just to answer that, broadly for us, if you look at a defense win, it comprises of two parts. One is the R&D part, where we come out with a product and then get it certified. The second part is the production part. The R&D part is where we make investments and our margins are low because we are really innovating and doing R&D there. But when it comes to production, because the part has been certified and because it will only be procured from Mistral, the margins are much higher. Also what happens is, because like Muju explained, some of these production orders can span over 10 years. What we also need to do is that we need to stack our stock products or components which could become obsolete, because it is possible that when we did the design, these were cutting-edge technology, but over the next 10 years, they could become obsolete and it is possible that the OEM or the manufacturer has stopped manufacturing them. So we make an assessment of that. So when we see the production over the next 5 to 10 years, we also do proactively stock some components which we believe could be obsolete so that we are in a position to sort of deliver that. So the material cost, as we see production revenues going up, you will also see material costs going up because that is when we procure the materials and that finally becomes a finished product. Just to give you a flavor on numbers, for the half year, the defense revenues was ₹94 crores, of which the production orders that what was executed by Mistral for the first half year was ₹48.65 crores, and they recorded an EBITDA of 31% on that. Okay. That is it from my side. Thank you. Thank you. Ladies and gentlemen, please, for all participants to get an opportunity to ask, limit yourself to two questions. The next question comes from Deepak Poddar with Sapphire Capital. Please go ahead. Hello. Am I audible, sir? Yes, you are. Yep. Thank you very much, sir, for the opportunity. Just a clarification, sir. There was some margin impact that I think you mentioned in second quarter, due to some digital investment or higher cost, I think somewhere. Can you quantify the impact? What is the impact there? You see, we have built a very significant digital team which we would like to call it as an investment. Today we have a 50-member digital team who is working on various projects. They also will be working on billable projects. But at the moment, this 50-member digital team costs us around a crore a month. So the quarterly impact of that is around INR 3 crores, which is straightaway a charge into the P&L, and we are not capitalizing it as intangibles. Oh, okay. Fair enough. This will continue, right? I mean, as we go forward? Yeah. But only that, it will not remain as a cost. It will kind of accrue to us in terms of, I would say, the automation projects that what we execute or the billable projects that what we take with our customer, it will not remain as a cost, but it will yield its own margin and it will become a profit center of its own. Okay. Can you throw some light on the, what's the margin aspirations we are looking at, going forward? Currently we are at about EBITDA margin of maybe close to 15%. Last quarter it was close to 16%. So in the near term and in the medium term, what sort of aspiration we are looking at in terms of margins? Yes. We had said that in the next three financial years, we want to get to the industry best of about 18%. This is a journey that we are on. Of course, for us, I think a big determination of margin is also the mix of R&D versus production that happens in a particular quarter. Just to answer your question, two years back, I think we were in the 12% range. We are now at the 15% range. In the next two to three financial years, we want to get to 18%. But like I said, it's a journey and we won't get there, just a flick of a switch, but it'll happen through some really incredible action. That is by FY 2026, right? That's what we are targeting. Yeah. 3 years from FY 2023 base. Mm-hmm. Yes. Fair enough. Given the traction we are seeing in all the segments we are in, I mean, aerospace, automotive, even the defense sector, I think all the space are seeing a lot of traction and even heavy engineering. I mean, the growth that we have been doing, if you have to see last 2, 3 years, we are growing in the range of maybe what, 20% plus CAGR kind of a growth. Is that something that, one, we would aspire as we go forward in terms of maintaining such kind of a growth? Some subjective comment would be helpful, yeah. Yeah, subjective comment. I do not want to comment on the exact percentage, but what we will definitely aspire to is to better industry growth rates, and we will continue to look at that kind of a growth. We also believe that we are in a phase where there are 2 ways you can look at top line growth and margin growth. I think the more customers you have, the bigger wallet share you have, the more strategic customers you have, the ability to improve margins is much better. Whereas on the converse, if one were to sort of focus on margin versus growth, then the wallet share and the growth sort of gets a little bit muted. Our approach has obviously been to balance both of them, but we also believe that if we can increase the number of strategic clients and therefore, grow the business, then once we acquire a new logo, then through account mining initiatives, we will be able to drive better productivity, better digital initiatives and improve the margin. So we are looking at top line leading the bottom line growth, purely because the more accounts we have, the more we can mine them and the better the margins can be. But to answer your question, we are looking at bettering industry growth rates. I will just leave it at that one. Please do follow us every quarter. It could be what range? I mean, industry growth rate, I mean, what is the industry growth rate currently? Industry growth rate is anywhere in the 15%-16% range. Fair enough. That is quite helpful. My final question is in terms of mix. How do we see the mix changing going forward in various sectors? Yeah. If you look at it, we have three areas that we want to focus on. One is the mechanical engineering, which comes from AXISCADES. The second is the embedded, which comes from Mistral. The third is digital, which we are organically growing through AXISCADES, Mistral, add solution, and hopefully Epcogen. As we look at the business going forward, there are two things we want to look at. One is we want to increase the longer term projects that we can work on. The second thing is we would like to see the mix of embedded and digital go up, purely because of the fact that there is a lot of money that is being spent on these two areas, but also a lot of the thought leadership and the innovation that is happening is really happening on embedded and digital, and not so much on the mechanical side. Our ambition is that whilst we grow, we want to increase the percentage contribution of embedded and digital. That is where we are investing, and these are areas which are very interesting and very exciting for our employees as well. The next question comes from Manju A. with JM Financial Services Limited. Please go ahead. Hi, good evening to the management team. Thank you for the opportunity. Sir, in the beginning of the call, I remember you talking about certain client closures that have happened in Q2 2024. Can you please elaborate on that? Client closures? No. Okay. Sorry. You meant plant closures. What has happened is that some of our strategic clients have had to shut their factories for an extended period in summer this year for a variety of reasons. Some of them had to do it because some of their suppliers were not able to come up with components, and those subsystems were needed to complete the product that they usually build. The second reason is that in some of our clients who are growing at a very rapid rate, they have to shut the plant so that they can upgrade these plants so that they are much more productive and they are smart factory compliant and Industry 4.0. That had a billing days impact for us. That is what I was indicating, that there are some plant closures which happened for more days than we anticipated in Q2. Okay. This is a usual phenomenon. I mean, it would have happened in the same time as last year as well. Generally, we hear about these plant shutdowns, et cetera, during the December quarter from rest of the IT companies. In your case, I think it has happened a quarter prior. Am I understanding right? Typically it is a seasonal thing. You have plant shutdowns in Europe, which happen both in the summer as well as during Christmas. What has happened this year has been an extended shutdown. We do anticipate plant shutdowns in Q2 as well as Q3 during the Christmas and New Year break, and Q2 during summer. But this year, like I said, because some of our customers are on expansion spree, they had to sort of shut those plants down to upgrade them, which will result in larger volumes and more productivity for us going forward. The good news is that a lot of the small revenue miss that we had in Q2 because of plant shutdowns will actually result in much more enhanced business as we go through the next quarters. Sure. Are we quantifying this phenomenon, sir? The revenue loss with respect to the shutdowns was about four crore for the quarter. Got it. Thank you so much. The other question is regarding the production production Sorry, we lost you. Hello? The next question comes from Tushar D. Bakai of Vassa Bavfa with Cornice. Please go ahead. Hi. Congratulations on the grand performance, at least on the revenue side. I understand the margins have gone down. Can you tell us what is the headcount as of today or this quarter for the company? I wanted to know that the dilution is, as I heard, that INR 150 crore-INR 200 crore, which I think would be around 25 lakh-30 lakh shares. That is around 7%-8% of dilution, right, on the equity we can anticipate. What will be the impact of that in the long run? I did hear a quote that we will still have the INR 11 crore-INR 12 crore financing charges. But if we raise the money and if we extinguish the debt, should we not see that INR 11 crore go to zero or much lower number? Yeah, you're right there. When I quoted the number of INR 11 crore-INR 12 crore, it did not factor any, I would say, debt repayment from the capital raise which we're anticipating to do. Once we pay the debt down, yes, there's going to be an impact on the EPS and proportionate, I would say, impact on the share prices, too. The INR 11 crore-INR 12 crore, which I said, is pre-raising of capital. Correct. Our employee strength, sir, the number of employees that we have today, just to have a comparative. Yeah. We are close to about 3,000, and in Q2 we added about- 51 net. Yeah. Close to about 51, and of course, add solution GmbH got integrated as well, so that is another 100 employees in Germany. So you can say we are in the 3,000 range. Okay. We are in 3,000 range. One more Thank you all very much. In the interest of time, that was the last question on today's call. I would now like to hand the conference over to the management for closing remarks. Over to you, sir. Yeah. Thank you very much, and thank you for all the questions. We value the support that you have given us. Like I said, we are very passionate about the future of the company. We believe we are in the right space. Some of the things that we talked about two years back about growing automotive and energy, you have seen that we have made acquisitions, that business is growing. We are seeing a strategy that we spoke about playing out nicely, and we are very optimistic about engineering going forward. We will obviously keep in touch with you with every earnings call that we have. Thanks a lot and wish everybody a very happy Diwali. Thank you very much. On behalf of AXISCADES Technologies Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line. Thank you