Q1 23/24

Aug 7, 2023

Summary

Q1 FY24 revenue rose 17% YoY and EBITDA 45%, with margin at 15.4%. Growth opportunities include defense production, aerospace, automotive and energy, while refinancing is expected to lower quarterly finance costs from Q2.

Ladies and gentlemen, good day and welcome to AXISCADES Technologies Limited Q1 FY 2024 Earnings Conference Call. 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 this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Shishir Gullahoti 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 the first quarter ended June 30, 2023. 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 our investors, we have with us our CEO and Managing Director, Mr. Arun Krishnamurthy, Mr. Mujahid Alam, CEO of Mistral, and our Group CFO, Mr. Shashidhar SK. They will take you through our results and business performance, after which we will proceed for question and answer session. Before we begin the conference call, I would like to mention that this conference call may contain some forward-looking statements about the company, which are based on the 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 now hand over the call to our CEO and MD, Mr. Arun Krishnamurthy. Over to you, Arun. Thank you, Shishir. Good evening, everybody. It's always nice to connect with you. I'm really glad to have Shashi, who's our CFO, joining me on the call, as well as Mujahid Alam, who's the CEO of Mistral. We call Mujahid as Muju. This is the first time he's joining our earnings call, and I'm sure you'll enjoy interacting with him. I'm pleased to report that FY 2024 has begun on the back of a strong performance in Q1, both in terms of revenue and profitability. During the quarter, we initiated new customer relationships, strengthened our business with our existing customers, closed a strategic acquisition, continued to build on our digital competencies, focused on strengthening our balance sheet, and also enhanced our board composition and governance standards. As you can see, it's been a really busy quarter for us. The company in Q1 FY 2024 posted consolidated revenue of INR 214 crores, which grew by 17% from INR 183 crores in Q1 of last year. In US dollar terms, we recorded a revenue of $26.2 million, growing by 11% from $23.6 million recorded in quarter one of last year. Our EBITDA grew by 45% year-on-year, from INR 23 crores in Q1 of FY 2023 to INR 33 crores in Q1 of this year. Our EBITDA margin improved by basis points for the same period from 12.4% to 15.4%. We continue to gain wallet share from existing clients in aerospace and defense. Our new verticals of automotive and energy are gaining traction in their share of total revenue, and the order pipeline across all verticals continues to remain robust, except for heavy engineering, where the current growth remains flat. I am also happy to inform you that we have signed definitive agreements with add-solution GmbH, Germany. This is a company that specializes in automotive solutions to global OEMs. It provides services in the areas of wiring systems, software testing, and automation. This acquisition will provide a strategic foothold to us in the automotive space with significant offshoring opportunities, besides getting us access to automotive contracts with marquee global automotive OEMs. This will also get us a foothold in Germany, which as you know, is one of the biggest automotive markets. The acquisitions of add-solution will further enhance our automotive capabilities. The acquisition is expected to close shortly, and we hope to consolidate revenues for this business from September 2023 onwards. I am also glad to report that our nascent verticals, automotive and energy segments, are scaling up well. Their combined share of revenue in Q1 FY 2023 was 8.4%, which grew from 5.4% in the same period of previous year. I am sorry, that is Q1 of FY 2024. Revenue from vertical doubled while the energy vertical grew by 25%. Going forward, automotive and energy will constitute significant portions of our revenue. Our aerospace business has continued its growth momentum and grew by 29% year-on-year. Revenue contribution from this vertical now stands at 30%. It is the highest in the last eight quarters. As mentioned in our previous earnings call, we have started executing the enlarged scope of business with our strategic customer, and we are witnessing good momentum in this sector. The heavy engineering business slightly declined during the quarter due to lower offtake and deferred client projects. We are exploring opportunities in digital and analytics in this sector and are hopeful that FY 2024 will be a growth year for the company in this vertical, considering the new initiatives we have launched in this segment. The products and solutions business representing our defense vertical grew by 20% over the previous year, recording revenues of INR 62 crores, contributing 29% of our total revenue. While the revenue from Mistral grew by 30% year-on-year, AXISCADES Aerospace and Technologies experienced a degrowth of 23% year-on-year, and this is due to delays in certain inspections and approvals, which we expect will happen subsequently. However, despite lower revenues, both Mistral and AXISCADES Aerospace recorded healthy profitability during the quarter. On the operations front, the company is currently implementing Project Resonance to realign the practices of the parent company and our subsidiaries as one AXISCADES in order to bring about a high-performance culture in the organization. We have also effected certain changes and redeployed our global senior leadership team to prepare us for the next level of growth in the age of company. We continue to make significant investments to build our digital capabilities, which is critical to de-risk our business and improve our margin profile, even though it may compromise our short-term margins. As already reported, the company is taking steps to strengthen its balance sheet and has just concluded the refinancing of the high-cost borrowing for Mistral acquisition, which will reduce our finance cost significantly. With respect to governance, we are privileged to report that Dr. S. Christopher has joined our board as Non-Executive Non-Independent Director. Dr. Christopher served as Secretary, Department of Defense, Ministry of Defence, Government of India, and as the Chairman of DRDO, Director of Center for Airborne Systems, Group Director at Electronics and Radar Development Establishment, which is LRDE, and is presently engaged as a professor of practice in the Department of Electrical Science at the Indian Institute of Technology Madras. He is also the recipient of many accolades and awards. The company stands to immensely gain from his experience and expertise in the technology and the defense space, and especially in the defense domain. To conclude, in FY 2024 and beyond, our focus is to build a well-governed and sustainable company with consistent growth and profitability by relentlessly delivering world-class and cutting-edge engineering and technology solutions and products to our global clients. I now request Muju to give you an update on the Mistral business. Thank you, Arun. I am delighted to be part of this earnings call and report. Sir, sorry to interrupt you. You are sounding a little distant. Okay. I will come closer. You are too mute. Hi, I am audible now? Yes. Okay. Thank you, Arun. I am delighted to be part of this earning call and report for FY 2024 Q1 performance on Mistral Solutions. It has been approximately six months since Mistral became a wholly-owned subsidiary of AXISCADES, and we are pleased to state that we are perfectly aligned with the group's objectives. We are working together to be part of the growth story of AXISCADES. As you all know, Mistral is a cutting-edge technology design and system engineering company delivering technology solutions in product engineering space, aerospace, defense, and homeland security with marquee clients, including Ministry of Defence, DRDO, Defense PSUs. With a legacy of delivering technology solutions for its customers for more than 25 years, Mistral sees exciting opportunities in both PE and defense verticals in the coming years. We believe that Mistral and AXISCADES are perfectly positioned to leverage and synergize each other's capabilities to deliver quantum value to our customers, investors, and stakeholders. In FY 2023, Mistral recorded a strong revenue growth of 14%, with revenues reaching INR 235 crores. In Q1 of FY 2024, despite a weak quarter from product engineering services, we achieved a year-on-year growth of 30%, increasing from INR 56 crores to INR 72 crores. The defense business contributed INR 41 crores, while the PES business accounted for INR 31 crores. We are pleased to report an EBITDA of INR 14 crores in Q1 of FY 2024 compared to INR 7 crores the same period of the previous year. The EBITDA margin also saw significant improvement, reaching 19%, with an expansion of 750 points from the 12% recorded Q1 of FY 2023. We are happy to note that defense orders are becoming robust, with Mistral entering the production phase of earlier developed prototypes for various defense programs. Production orders offer higher margins compared to development orders. In Q1 of FY 2024, Mistral delivered approximately INR 15 crores of production orders, compared to INR 35 crores for the entire FY 2023. In products, we continue to add global logos with strong growth potential. The Indian government initiatives and policies supporting Make in India in the defense, electronics, and semiconductor space will open new opportunities for Mistral. Additionally, our proven track record in engineering design services for global OEMs gives us a competitive edge and advantage in the semiconductor space as several companies are increasing outsourcing engineering tasks. Furthermore, the collaboration with DRDO and private defense companies in the form of DCPP, that is, development cum production partners, have opened up new opportunities for Mistral in technology development and quick deployment. In summary, we are optimistic about the opportunities developing in both the verticals, and our integration with AXISCADES will bring about incremental growth in revenue and profitability for both entities in the coming years. Now I invite our Group CFO, Mr. Shashidhar SK, for an overview of the financial results. Thank you, Muju. Are you able to hear me, Ajiken? Yes, sir. We can hear you. Good evening to everyone. I once again welcome you all to this earnings call. In Q1 of FY 2024, we have continued our journey to improve revenue and profitability quarter-on-quarter. Client queue. We are in the midst of exciting developments in the industry, as well as in the company, in the ER&D, semiconductor, embedded technology, and defense segments. We are well-positioned to harness these opportunities and deliver growth and value to our customers, investors, and stakeholders. The company has been consistently expanding its footprint in the last several quarters, both in existing verticals and new verticals, such as automotive and energy, and adding strategic logos in each of these verticals. The company is making considerable investments in digitalizing revenues and automating costs in order to expand revenues and enhance profit margins. The company's inorganic growth strategy is aimed at augmenting competencies and capabilities and further enhance our global ambitions, which will fuel our future growth of AXISCADES as a group. As reported by Arun, the company has achieved INR 210 crores plus of consistent revenues in the previous three quarters and has increased the monthly revenue run rate by 22% as compared to Q1 of FY 2023. In Q1 of FY 2024, the company recorded consolidated revenue of INR 214 crores and grew year-on-year by 17%, while there was a marginal revenue de-growth of 4% sequentially due to softness in new engineering, PES, and lumpiness in the defense revenue. However, the company is currently having a healthy order book to deliver on the revenue objectives for FY 2024. The company's strategy to reduce customer concentration risk by diversifying into new verticals and developing strategic logos is bearing fruit. Business from other than top 10 customers grew by 39% year-on-year to INR 50 crores in Q1 of FY 2024 from INR 36 crores in Q1 of FY 2023. This is expected to gather pace in the coming periods. Coming to profitability, EBITDA, excluding other income for Q1 of FY 2024, is at INR 33 crores, up by 45% from Q1 of FY 2023, which was at INR 23 crores. The EBITDA also grew sequentially by 10% from the normalized EBITDA of INR 30 crores in Q4 FY 2023. If you remember the EBITDA of INR 44 crores, which was reported. Normalized EBITDA of INR 30 crores after removing the one-time net benefit of INR 13 crores of FY 2023. The consolidated EBITDA margin is at 15.4%, compared to 12.4% in Q1 of FY 2023, which has shown an improvement of 300 basis points year-on-year. EBITDA margins improved by 170 basis points sequentially against the normalized EBITDA margin of 13.7% in Q4 of FY 2023. EBITDA margins are maintained despite significant investments in human resource in yet-to-be margin-accretive digital teams and the recruitment for the new logos and new verticals which are yet to achieve critical mass. The consolidated PAT in Q1 of FY 2024 stands at INR 5.7 crores as compared to a PAT loss of INR 13.7 crores in Q1 of FY 2023 after taking the exceptional charge of INR 44 crores. The employee cost of Q1 of FY 2024 at INR 109 crores has gone up by INR 2.4 crores only, just about by 2% quarter-on-quarter against the normalized employee cost of INR 160 crores in Q4 of FY 2023. The reported employee cost of INR 85 crores should be adjusted for the one-time COVID grant in the AXISCADES team of an amount of INR 21 crores, which has been set off from the payroll in Q4 of FY 2023. As has been reported, the company has refinanced a hyperset of INR 210 crores in Q1 of FY 2024. On the finance cost of INR 30.1 crores, INR 6.7 crores pertain to cost incurred due to prepayment. In the interest savings of around INR 2 crores per quarter from refinancing, the finance cost should moderate to around INR 11-INR 12 crores per quarter from what is reported in Q1 of FY 2024 of INR 20 crores at current levels of borrowing. That will start kicking in from Q2 of FY 2024. The company has a strong balance sheet with net worth standing at INR 326 crores at a consolidated level with sufficient cash generation happening at consolidated levels to comfortably service our debt obligations and generate free cash flows. We are happy to report that CARE has upgraded the credit rating of the company to BBB+ stable from the earlier BBB. We are confident of further upgrades in the coming quarters. The company is also strengthening its governance process with a global controller taking charge to deliver on internal controls, risk, and corporate governance mandates for an entire group. To conclude, in the last several quarters, the company has been largely successful in setting up on the path of sustainable growth and profitability and strengthening the balance sheet, and we are confident of building on this momentum in FY 2024 and beyond. Thank you. I will now open the floor to questions. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask the question. Ladies and gentlemen, you may press star and one to ask the question. The first question is from the line of Jeevan Patwa from Sahasrar Capital. Please go ahead. Yeah. This question is for Muju, actually, for Mr. Mujahid Alam. If you can just give us some overview on the semiconductor business, how the semiconductor business is shaping up, and what are the future opportunities you see in the semiconductor business? That is first. Second question is on the defense side. Last year, we did INR 35 crore of production revenue. How much do you think we can do production revenue this year and the next year, FY 2024 and next year, FY 2025? Well, to answer your second question first. In terms of production revenues, the production revenues are in upstream. Q1, we have continuous growth in the next few quarters, and I expect this to continue growing in the next 1 year to 2 years. Any numbers you would want to share? I think we should avoid specific guidance in terms of numbers. But essentially what Muju is very clear about is that quarter on quarter, if you look at the Q1 of this year, the production revenues were INR 15 crore. The run rate with respect to this quarter on quarter will only increase is what perhaps is the guidance we can give. Perfect. I can assure you that it will be a continuous growth in production revenues moving forward. Perfect. On the semiconductor side? Semiconductor business, yes, we have seen little bit of slowdown in Q1. We hope that we will catch up by Q3 and Q4. Things are changing, and at the same time, with the initiative of promoting electronics manufacturing locally here and setting up a semiconductor. We see this opportunity for us will increase. Already have marquee clients in terms of TI, Analog Devices, NVIDIA, who we work with on semiconductor business. This is only grow moving forward. Okay, perfect. If I have you compare the capabilities, Mistral capability, defense capability, radar capability, I would say specifically Okay with Data Patterns. How do you put yourself with Data Patterns? Do you have the similar capabilities as Data Patterns? Because Well, see, if you look at Data Patterns and Mistral, in terms of capabilities, we are very much similar. The only thing which Data Patterns has, probably, has their own manufacturing facility, which we do not have. The reason behind this, we believe that today manufacturing is a commodity kind of item, and if we invest on a manufacturing facility, we will be sticking to the same facility without any upgrades, because the ROI is much longer. Here, if I have a choice, I can go and get it manufactured anywhere across the globe or within the country, with the best of facilities available at my disposal, while focused on building IPs and owning IPs at Mistral. Perfect. Thanks. That's it. Thanks a lot. Thanks, Arun. Thank you so much. Thank you. Next question is from the line of Inder Soni from One Junus Goldfab. Please go ahead. Hi, Arun. Congratulations on a great set of results. This is a big-picture question. In your previous jobs, you've done a great job of taking the existing logos and growing them into big businesses. If you think about your current company, you have some of the biggest clients in the world, both overseas and in India. But the revenue from each of these clients is still quite small compared to the capabilities. What are you doing? What processes are you putting in place so that over the next 1-5 years, you can really grow the revenues significantly? Hi, Inder. It's nice to speak to you again. Yeah, great question. I would say that, like you said, our focus is twofold. One is, of course, we have some very good marquee logos, and the attempt is for us to expand the revenue margins with these clients. What we're doing is that, if you look at the aerospace client that we work with and the heavy engineering client, our focus is to move beyond traditional mechanical engineering, which has been our bread and butter, and that's where most of our revenues come from currently. It is to move more into the digital and into the embedded space. As we speak, and this is something that we've been doing over the last two quarters since we completed the acquisition of Mistral, is that we've put in very aggressive plans to take our embedded capabilities, all the good stuff that we do in the defense business as well as in the PE business, to the aerospace and to the heavy engineering clients. We are doing this by setting up workshops with these clients. We are having senior leaders from Mistral traveling and meeting some of these AXISCADES customers. The good news is that we have a supplier code with these clients, so it's easy for us to cross-sell some of these capabilities and grow that. We are very optimistic that we will see good progress on that because we are seeing very good uptake from clients. As you know in the industry, the mind share is in digital. A lot of the revenues are being spent on embedded and digital. We believe that's the right strategy. Having said that, growing new clients in the new verticals of automotive and energy is a big focus as well, as well as growing semiconductor, which comes in through the Mistral acquisition. Again, in these areas, we are looking at how we can build in deep domain capabilities. We are building a partnership, ecosystem of partners so that we can penetrate and we can be more relevant to this client. The new business part of it and the new logos is something that's equally important. Like I've mentioned in the previous earning calls, we want to grow the number of strategic accounts because the growth should actually come from strategic accounts rather than from a whole slew of accounts. We want to be relevant to a set of accounts, a smaller set of accounts, which are strategic to us, and then we sort of grow from there. Great. Can you also talk about two areas? One, automotive with your new acquisition in Germany. Can you give us some more color on that? Then with Mistral, you had talked about how you are going to increase the amount of production. You might not do it yourself, but the amount of things being produced will grow. Maybe Muju can talk about it, maybe you can talk about it. So what does that pipeline look like over the next 1, 2 years for things that are going to move from some single piece design prototypes to larger scale production in Mistral. Yeah. Let me take them one by one. So as far as add-solution GmbH is concerned, they have really good capabilities in wiring harness as well as software testing, and these are areas which are growing very rapidly. They work with the world's largest ER&D automotive player. We see opportunities twofold. One is that the work that they do with this client, we are very confident that we can show some of this and they Thank you. Next question is from the line of Dhruv Shah from Ambika Fincap Consultants. Please go ahead. Yeah. Hi, this is Nishit Shah here. First of all, congratulations on a good set of numbers to the team. Hi, Arun. My question is on, can you give some color on key accounts that you would have added in the ER&D space and the number of clients that we have which are above $1 million, et cetera? Whatever you can share. Yeah. Hi, Nishit. Good to speak to you again. So we had, like I said, very good progress when it comes to our new verticals, both in automotive as well as in energy. Actually, we also had some good additions in PES. Unfortunately, pardon me, but I do not think I will be able to name some of these clients because of confidentiality reasons. But I can give you a profile of some of them. So in automotive, one of the clients we started work about 2 quarters back is a very large OEM based out of the U.K., who makes sport utility vehicles and off-roading vehicles. We also work with one of the largest American OEM players who have a presence in India, but also globally. In addition to that, we work with two Tier-1s. One of them is a Japanese Tier-1, again, multibillion-dollar company, more than $15 billion in revenues. We also have started work with another Tier-1, which is U.K.-based, and we are actually developing some algorithms in things like driver drowsiness systems, et cetera. So that is the kind of profiles that we have signed up in the automotive space. When it comes to energy, as you are aware, we work with one of the largest Tier-1 subsea surface providers. In addition to that, now we are casting a net into the Middle East, and we are looking at starting the relationships with, again, some Tier-1s and some providers who, I would say, provide their services to some of the largest oil and gas manufacturers in the world in the Middle East. So that is also looking very positive and going forward, we feel that we can do a good job on that. In terms of clients, Shashi, can I hand it over to you in terms of the profiles of clients, new clients over INR 1 million? Yeah. So basically, all of these clients, as I was earlier mentioning, even though they have not actually reached that INR 1 million mark, all of these are heading out to be strategic logos for us in the next 1-2 years' time. But one thing which I can tell you is the pace at which they are growing in terms of our revenue share, as earlier Arun explained and what I just now mentioned. The growth in terms of all these new clients that they base around 40% as compared to Q1 of FY 2023 and going forward quarter on quarter, which will continue to up too in terms of our incremental revenue. Yeah. Great. So Arun, my next question is on the capabilities. In the ER&D space as well as now the energy vertical, are we growing the capabilities? Are we hiring the industry specialist people? Can you give some color on that area? Yeah, absolutely. So actually, if you look at each vertical, and I can probably just give you a little bit of an extended answer. If you look at aerospace, for example, traditionally, we've been very strong in the mechanical engineering, structural engineering part. But our focus now is we're looking at digital, we are looking at avionics. And again, we do a lot of avionics in the defense space. So we're looking at how we can get avionics into the commercial space. So that's an area of focus for us. In addition to this, we are looking at manufacturing engineering. So we have now started some work which we traditionally used to do in heavy engineering, but now that has started in aerospace. So we're looking at avionics, we're looking at digital, and we're looking at manufacturing engineering, and we have built out capabilities. We are hiring people. In some cases, we are cross-leveraging capabilities from AXISCADES Aerospace as well as Mistral from the defense space. If you look at transportation, and here I would say automotive and heavy engineering is similar to an extent, but the focus for us is that since we are starting these as new verticals, we want to focus on the embedded and the software part. Because clearly, a lot of the mechanical engineering part is quite commoditized, and the rates are obviously also much better when it comes to digital and embedded. So we are very keen on developing in automotive, for example, AUTOSAR capabilities. We're looking at software testing, we're looking at HMI testing, we're looking at getting into the whole connectivity aspects of it. So these are the areas that we're looking at. We have also started some digital projects with our clients, both in the supply chain area as well as in inventory management. And again, because of the fact that both these industries have been exposed to some of the cyclical aspects of semiconductor chip shortage, et cetera. In addition to, of course, upgrading their vehicles with electronics, they're also looking at the entire ecosystem in terms of how they can digitize their supply chain, how they can make provision of these much more predictable. So there's a lot of investment going there. So we're looking at the sales management of it, the inventory management, and the supply chain, and we're looking at digital solutions for this. If you look at energy it's a very asset-heavy industry. So the focus that we have is, of course, we're looking at the mechanical aspects of it. We're also looking at, especially with climate control, a lot of the large refineries need to build out carbon capture, sulfur capture plants, and there's a big investment going into that. And there's a lot of consumption, there's a lot of capital investment. So we're looking at that particular aspect of energy. In addition to that, because it's very asset-intensive, one is we are also looking at things like predictive maintenance strategies, because all these assets need to function. They need to be maintained. It needs to be done in an optimal way so that the budget is sort of managed. So that's where we are focusing as far as energy is concerned. And like I said, we're tying up some very good partners in the industry, but of course, we are also hiring strong. When it comes to PES and the semiconductor business, we have signed up some, I would say two logos, which are very market logos. One of them is a client who doesn't like to be named at all, but we have started some work with them, and we are very confident that they are investing a lot in India, and they are also looking at the wearable space in a significant way. Obviously, there is going to be a big semiconductor play out there. So that is one area. Then we are also looking at automotive. Like Muju says, there is a huge play for the PES business in automotive. I think there are two or three new logos that we signed this quarter itself. They are still small engagements, but we want to sort of have the convergence of automotive and PES so that we can grow that. So in summary, this is where we are sort of looking at, Nishit. Each vertical, we are looking at specific capabilities as well as hiring some senior leadership talent. As we progress the company, maybe get into FY 2025, et cetera, we will then look at reorganizing ourselves along BUs, where we can have a vertical strategy. We still feel that at the current level, it will be suboptimal because when you move into verticals, you need separate cost structures, you need separate functions, et cetera. But we believe that with the current growth rate that we have, we are well poised to maybe enter next financial year, look at a vertical-based structure, which will bring in much more focus and depth into each vertical that we want to grow. Great. Thank you for a very detailed explanation. Once again, a very smart acquisition, add-solution GmbH. Can you give some color on the number of clients that add-solution GmbH would be having without naming the clients? How is that going to help you in penetrating into the larger auto giants? Sure, Nishit. So if you look at add-solution GmbH, they have one big client, so I would say a substantial portion of their revenue is with that one big client. That is the reason we are interested, because there is certainty of revenue. So the thing with acquisitions is sometimes you can make a great acquisition on capability, but then if contracts run out, then you sort of have to scramble around for new business. So the good thing about add-solution GmbH is that they have a long-standing relationship with one big client, and they have contracts. So we have good revenue predictability for the next two financial years because the contracts run into that. Having said that, beyond this, they have supplier codes with 10 other big automotive as well as Tier-1 companies in Germany. The thing with automotive in Germany is that it's virtually impossible to get a new supplier code. The only way to get in is to make an acquisition. We are very confident that through this, and given the presence that AXISCADES Solutions has a legal presence, a supplier code, we will be able to put in a sales effort, build out capability, be more aggressive, and sort of grow the business with the other clients as well. Thank you. Sorry to interrupt you, Nishit. I'll request you to join the queue again for the follow-up question. A request to all the participants, please restrict to two questions per participant. If time permits, please come back in the question queue for a follow-up question. Next question is from the line of Arun from Shubhlaxmi Research. Please go ahead. Yeah. Am I audible? Yes, you are. Yeah. Thanks for the opportunity, sir, and congratulations for the good set of numbers. My question is with regard to the order pipeline, that earlier we faced the issues of the smaller orders and the duration of that was also not that much. If you can show some color on that order pipeline, the size, and the average duration, that will be quite helpful. Okay. I can probably give you some qualitative feel, Arun, in terms of our order pipeline. Obviously we have taken a certain target for the year, and like I said, in the past, we're looking at industry-leading growth. I would say as our annual business plan was concerned, we had factored in about 30% of new business. I'm glad to say that after Q1, the new business that we need to win in order to achieve our business plan is about 18%. I can just give you that. I don't want to get into too many specifics because obviously this is confidential information. But the focus for us is to look at project-based business. We are not very keen on staffing business. Unless staffing is an entry point into a strategic customer, then we'll start that way. But we are very keen on making sure that we get larger contracts, we have more project-based business because that is a sustainable level to grow. I think sitting at where we are, I would say that in order to achieve our business plan, we need to get about 18% of new business. Actually, as far as defense is concerned, I would say that most of the order pipeline is already in the bag. With defense, like we had talked in the past, again, there is some lumpiness because there is a lot of dependence on inspections happening on time, certifications happening on time. But as far as the pipeline and the order book is concerned, that is all there. We just have to make sure that the spillover doesn't happen and we have to sort of try and close it within a certain quarter. But the best way to measure our defense business is a year-on-year basis, and we are very confident that we have the right revenue profile for the year-on-year growth as far as defense is concerned. Okay. That is quite helpful, sir. My next question is that in your last concall, you mentioned that you are looking for a partner in Europe or North America to enhance the capabilities in the automotive segment. By the acquisition of add-solution GmbH, whether that purpose will be fulfilled or we will look for some more push in your. Yes. Arun, with add-solution GmbH, now we have a partner in Europe with strong capabilities. For the moment, we will not be looking at any more acquisitions in automotive. Okay. Thanks a lot, sir. That's it from my side. Thank you. Thank you. Thank you. Next question is from the line of Rajendra Shah from Fidelis Management. Yes. Good evening, Arun Ji. As you grow rapidly, what issues or factors or parameters do you track to make sure that this doesn't make things go out of whack or off track? I mean, just how do you manage your risk if something goes wrong? Yeah, Rajendra, thanks a lot for your question. I would say that one is, of course, the macroeconomic situation. We are still not completely back to normal. I would say there is still some unpredictability. Certainly when it comes to our PE business. What has happened with the semiconductor industry is that with COVID, there's a huge shortage of chips and kits. Soon after that, a lot of people overstock. Some of the production softness we are seeing is because they're waiting for that inventory to run out. I think that is certainly something we need to keep an eye on. Secondly, on heavy engineering as well, now we are starting to see the demand coming back in. I would say one risk for us is obviously to keep an eye on macroeconomic factors as some of the verticals that we are placed in. For example, aerospace now is extremely robust. But 3 years back, I would have said that was a big risk for us, especially going through COVID. So one is that. The second I would say is that availability of talent is always something that is important for us. We are a services company, and of course, the defense part, because a lot of it now will be production-based. Our reliance on resources and people will be little bit less as compared to when we're in the R&D phase. But when it comes to the rest of the verticals, all the non-defense commercial verticals, availability of people and the ability to ramp them up quickly, I think that is another aspect that we keep an eye on. Now, I won't say it's a risk in the sense that I think things have got better. It was a very tight situation 6 months back. It is still not completely eased out, but I would say it's better now than it was some time back. The third aspect I would say is, for a lot of our clients, availability of materials and supply chain is a concern. In certain cases, like for example, aerospace, there's a lot of dependence on certain raw materials and rare earths coming from Russia, from Ukraine, and obviously the crisis out there has implications of that. Similarly, when it comes to energy, especially in Europe, they went through a period where there was a bit of energy crisis, but now it looks like the situation wasn't as bad as what it could have been. Some of the inventory, some of the supply chain aspect is something that we need to keep an eye on, and that could be a potential risk. Again, when we talk of softness in peers, it is typically a supply chain kind of issue. Again, when it comes to defense as well, we are very dependent on components and we are dependent on our suppliers. So to be able to stock our inventory in time to make sure that we don't have obsolescence, that is the other risk that we need to keep an eye on. So these are the three or four things that we constantly monitor. Thank you. Thank you. Thank you. Next question is from the line of Nirali Gopani from Unique PMS. Please go ahead. Yeah. Hi, sir. Thank you for the opportunity. Sir, my first question is- Nirali, your voice is not coming clear. Can you please speak through the handset? Is it better now? Yes. Sir, my first question is from the presentation on slide 10, where under aerospace, we mentioned about synergies between AXISCADES and Mistral and the progress on supporting Indian defense project on mechanical side. If you could please highlight on this point. Yeah, I am just opening the slide. Just give me a second. Yes. Yeah. This is basically, we have a lot of capabilities in aerospace. Clearly through AXISCADES, we have been working with a large OEM for the last 14 years, so we understand structural engineering to a large extent. Of course, through both Mistral and actually even through AXISCADES Aerospace, there is a lot of work we do on avionics, test benches, et cetera. We are looking at how we can synergize both of these. There is obviously a lot of defense opportunities that we want to address, both in India as well as overseas. We are bringing together the structural aspect in some cases. In Indian defense, we do not work on the structures aspect, so we are looking at how we can leverage the AXISCADES capabilities. In other cases, like I mentioned, when it comes to global OEMs, we are looking at leveraging Mistral's avionics and radar capabilities to take it to commercial. That is really the synergy that we are looking at, how we can take capabilities from each organization into the other and into customers. Right. You also briefly touched about the new business wins. I just wanted to confirm that you had planned to onboard four strategic accounts in FY 2024, two in automotive, one in energy, and one in oil and gas. Have you started working on that direction or you have already onboarded them? What do you mean by these strategic accounts? Is it the size of the business that they have to offer, or if you can just share some thoughts? Yeah. No, Nirali, definitely strategic accounts for us is dependent on the size of the business. For the size of a company, we would say that, when we start a new account which is strategic, getting to about $3 million annual revenue would classify that to be strategic. As we speak, we have two automotive clients, and we have one energy client, and these are accounts that we won in FY 2023. It's about three quarters now. All of them are progressing well. I would say headcount-wise, the largest would be somewhere in the 75 to 80 headcount region. The smallest one is about 20, 25. We are well on track of growing this to be strategic, and we hope to get them to that $3 million mark as much as possible. Yeah. Lastly, we had a strategic alliance with Mangal Industries. Any update on that part? Yeah. The objective of tying up with Mangal Industries was that they have very good manufacturing capabilities. We have seen that obviously there's a lot of manufacturing, definitely in aerospace, heavy engineering, et cetera, that's coming to India. Given the fact that we have relationships with these customers and OEMs, this was our way of trying to get a foothold in the manufacturing space where we could possibly look at some manufacturing coming to India, where we could program manage it, where we could do the engineering aspect of it. That's the objective of the relationship. As we speak, we are obviously socializing this with our clients, and the attempt is to try and see how we can get some of this to India. Having said that, these are long cycle things. It's easier to get services, but getting manufacturing of a component or a part to India takes much longer. But, we are in a phase where we are sort of talking about these capabilities and trying to build out a couple of pilot customers and sort of grow it from there. Great. That's it from my side. Thank you. Thank you. Thank you. Requesting participants to restrict to two questions per participant. Next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead. Yeah. Thank you very much, sir, for the opportunity. Sir, just wanted to understand first on the interest cost. The refinancing that we have done this quarter, so any additional cost that has come in this quarter and what would be going forward interest cost? As I mentioned earlier, the total finance cost for the quarter is around INR 20 crores, of which around INR 7 crores is a one time, or I would say, the cost which you have to incur to prepare the borrowing from Unicred Capital, it was the earlier lender. Now, going forward, the per quarter interest cost or the finance cost will be moderating to around INR 11 crores-INR 12 crores per quarter. INR 11 crores-INR 12 crores of interest cost going forward, right? Correct. Understood. Fair enough. I understood. Secondly, on the margins front, you did mention that this product business, you expect it to grow at a much faster rate. Right? Even quarter-on-quarter we should grow. I presume that would attract a better margin as compared to the margins that we would be clocking at the company level, right? Yes. The defense business, when it gets into the production mode, carries a much higher margin as compared to the prototype which was cost. Correct. So what would be our aspirational margins that we may look at, let's say, next 1-2 years? On the defense, I would say, business, which gets into production, it could be upwards of, say, 20% in terms of the EBITDA margin. On an overall basis. You are talking about at an enterprise level? Company level, yeah. Yeah. We are at about 15.4% as you see. We are consistently maintaining that margin, and our objective and aspiration is to reach the industry best metric of around 18%-19% in the next couple of years. We need to bridge that gap between 15 and a half to about 18%-19%, and that is a journey which we are currently taking. Correct. At the company level, how fast are we looking to grow? The industry is growing very fast, right? We have maintained in the past that we would like to beat the industry. Because of your inorganic acquisition as well, Mistral coming in and then this add-solution GmbH. The trajectory of, let's say, 15%-20% revenue growth for us, can it go beyond 30%-35%? Can we have that kind of 3% because of the growth that we are seeing in the industry as well as your inorganic acquisitions that we have been doing? Any comment on that will be helpful, sir. Yeah. I'd like to comment on that. I think the industry average is anywhere in the 15%-18% range. Of course, some companies have given an outlook. I think all we would like to say that we'd definitely like to grow beyond that rate. I don't want to specifically comment. As you know, we don't give specific guidance on these numbers. Of course, the objective of making these acquisitions, and we call it a string-of-pearls strategy. We are not making acquisitions for the purpose of just for aggregating the top line. The reason is that we want to acquire specific capability, which we can then organically take to our customers. It is for us a long-term game. We believe that with these acquisitions, of course, there will be short-term benefits when you consolidate revenues into the enterprise. But longer term, these capabilities are bets that we place in the industry. These are specific areas we believe will grow faster than other areas. So that will then put us into more industry-leading positions. I do not want to comment on specific percentages, but we believe we are in the right direction with some of these capabilities that we are acquiring. Correct. Yep. I think that is very helpful, sir. I think that was all my query and all the very best. Thank you so much. Thank you. Thank you. Next question is from the line of Samyak Shah from the network of Capser. Please go ahead. Hello. Am I audible? Yes, we can hear you. Hi, sir. Thanks for the opportunity. My first question was on ER&D. I wanted to know what is the share of mechanical engineering embedded and digital within our ER&D portfolio and the margin profile for each. What I can tell you is that we do not want to give you a slice-by-slice breakup, but at a company level, about, I would say 30% of our revenues fall into the embedded and digital category and about 70% into mechanical. As we speak, of course, we are looking at how we can grow embedded and digital faster than mechanical going forward. Okay. Secondly, this quarter we saw 170 basis points expansion in our margin. What was the reason behind it, and can we sustainably maintain this level in the coming quarters? Yes. You see in Q1 of FY 2024, the kind of, I would say, margins and what we got from the defense business was much more, I would say, as compared to the engineering services business, which was around 12% to 12.5%. In terms of sustaining this margin, as Mujahid Alam said, we are getting into the production cycle in terms of defense, and the PES business with what Mistral has is at a much higher margin level. We are confident of sustaining this margin, and as I said, our journey is between 15% to 19%, 18% to 19% in the next couple of years, and that's what we are traversing with. Fine, sir. One last question. When do we expect heavy engineering revenues to pick up from here? We are putting in plans to sort of recover this in FY 2024 itself, so in this financial year. Yeah, that's our outlook. Any plan for QIP? Not at the moment, no. Okay. Thanks a lot. I will get back with you. Thank you. Thank you. Next follow-up question is from the line of Nishit Shah from Ambika Fincap Consultants. Please go ahead. Yeah, thanks for taking my question. My question is to Muju. We have a lot of defense orders. We have been working in various fields like in radars as well as in sonar. Can you give some color that these orders are spread over how many years, and what are the new areas that Mistral is working on, and what is the kind of potential that we are looking at? In terms of radar technology, if you look at any radar which is manufactured or which is in the development phase in the country today, have something of Mistral in it. So there are about seven or eight different radar programs running in the country. And every radar program has something of Mistral which has gone into it. Similarly, sonar programs are done by for the Indian Navy. Most sonar programs have our signal processing boards, signal processing systems. So we have a lot of electronics in every sonar product which is developed in India. In terms of new areas, yes, we have a lot of things in terms of electronics which are going into LCA and Su-30 upgrade program. These will see traction in about 2 years from now. 230 upgrades will happen. As you know, the LCA program is already in manufacturing stage. Yeah. On the drones, I thought we were working on it. Can you give some color on that? Yes, we are doing some drones. Right now, we are in field trials. I am expecting the field trials to be completed by the end of the year. Next year, we should have a product ready with us. Thank you. All the best. Thank you. Thank you. Next question is from the line of Rakesh Roy from Intex Securities. Please go ahead. Hello. Very inaudible. Hi. My question is regarding your defense vertical. With the appointment of Dr. S. Christopher as a Director, what is our outlook for the next few years, and do we plan on embedding add-solution GmbH to our defense vertical, and if so, how do we plan on going about with it? Let me take that question. As you know, Dr. Christopher is renowned in the field of defense. He is the ex-chairman of DRDO. We felt that given that defense is so strategic to us, and of course, the market is big and our capabilities are very differentiated, we're seeing a lot of interest from our customers and we see, like I said, production ramping up. We felt this was the right time to induct somebody on our board who could sort of guide us and give us more advice, who could give us suggestions on the defense business. This is just a reflection of the fact that for us, defense is so important that we wanted to bring in somebody from the board. As far as add-solution is concerned, that's at the moment a purely automotive play. At the moment at least, I don't foresee any synergy with defense. Having said that, famous last word, I don't want to say never say never again. If opportunities do arise, we will certainly look at it, but in the near future, I don't foresee add-solution having a play in the defense sector. All right. Thank you. Thank you. Next question is from the line of Saurabh Devani from Saral Capital. Please go ahead. Hello. Can you just tell us about the competitive landscape for the work that add-solution does? Yeah. So it's typically, if you look at global companies, it's companies like FEV, it's companies like Bertrandt. If you look at Indian companies, KPIT obviously has a play in that sector. I would think maybe even Tata Technologies has a play. So these are the kind of companies. So any engineering services company who has a presence in the automotive sector, who sort of does work on mechanical as well as embedded and software would be players who would compete. But having said that, I would again say, want to stress on the fact that add-solution has been working with this client for many years, like the way we have been working with our aerospace and heavy engineering clients. They have very solid relationships and they have carved a niche for themselves. They have very impressive labs in their offices in Wolfsburg, where parts of the automotive actually come in, and where a lot of the testing, the software testing, the HMI testing is done. I would think that what they do for some of those platforms is very unique. Given that it is very difficult, like you said, it is virtually impossible to get a supply for, it would be very difficult to get into those clients for other players, right? Yeah, absolutely. I think, because these German OEMs already have a rich ecosystem of partners, the only way for a new company to get in is through an alliance or through an acquisition. That has been our strategy throughout, and I think some other companies have done the same as well. Okay. Okay. Thank you. Thank you for that answer. Thank you. Next question is from the line of Rajendra Shah from Fidelis Management. Please go ahead. Yeah. Given the rapid growth that you are projecting, what would be the capital requirement and when would you need to raise capital? You see, at the moment, in terms of the debt which you are right, obviously have taken care of the acquisition as what transferred in 2023. But the company is generating, I would say, at an enterprise level, at a consolidated level, sufficient free cash flows, which will comfortably service this debt as well as leave money on the table in terms of the CapEx plan as we have. The CapEx is not really that significant and that large for us to look at capital raise only for that purpose. But definitely, capital raise will help in terms of reducing the debt burden and the interest burden. We can obviously feed back into the free cash flows. Would you consider raising money next year, next financial year? The plan is there. The plan is there in terms of, I would say, raising some amount of primary capital to reduce our debt. I would just put it this way that our focus has been on, one, is making sure the company is on the growth path, and secondly, that we are an efficient professional organization. So I think we have made good steps in that regard. So we want to get to a point, Rajendra, where we are sort of generating cash. We have a good pipeline, we have good growth prospects, and once we get there, and I think we are well on track, and I think this quarter has been great, and I think we are seeing a good outlook going forward as well. I think sometime in the mid to long term, we will definitely look at raising capital. But I think at the moment our focus is we don't want to get into too many things. We have to make sure that we optimize the organization, put it on a growth path, build a leadership team, get good marquee customers, and then take it to the next level. And do you think that the current price is too low a price to raise capital? I'm sorry. Say that again. Is the current share price too low a price to raise additional capital, given the future outlook for the company? I think that we leave it to you guys to decide. You guys are the investors. You are experts at it. But we certainly believe that with better performance, we can certainly improve the market capitalization of the company. Sure. Thank you so much. Thank you. Thank you. Next question is from the line of Mohammed Hassan from Fairdeal Investments. Please go ahead. Yeah. Hi. I just wanted to know what could be the possible tax rate for the financial year 2024. Can you just repeat the same? What could be the possible tax rate for the financial year 2024? Average would be around 35%. All entities are put together in terms of what we deal with. Okay. Thank you. Thank you. Ladies and gentlemen, that will be the last question for today. We now hand the conference over to Mr. Nachiket Kale for closing comments. Hi. Thanks everyone for connecting on the call today. I would also like to thank the management for sparing time and answering all the queries today. Orient Capital is the investor relations advisor to AXISCADES. For any queries, please feel free to reach out to us. Thanks everyone. Have a nice day. Thank you. Thank you. Thank you very much. On behalf of AXISCADES Technologies Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.