Ladies and gentlemen, good day and welcome to Aeroflex Industries Limited Q3 FY 2026 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 the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this call is being recorded. I will now hand the conference over to Mr. Asad Daud, Managing Director, for opening remarks. Thank you. And over to you, sir.
Thank you so much. Good morning, everyone. I welcome you all to Aeroflex Industries Limited Q3 FY 2026 earnings call. Joining us today are members of our senior management team, along with representatives from Strategic Growth Advisors, who are our investor relation partner. I hope that you have had the opportunity to review our financial results and the investor presentation, which is available on the stock exchange and also on the company's website. I am pleased to report that in the last quarter, which is Q3 FY 2026, it was another strong quarter for us, which was marked by our highest-ever quarterly revenue, our highest-ever EBITDA and PAT. This performance was driven by our continued focus on value-added products and our expansion into new and high-growth applications, which includes products for data centers and AI infrastructure.
Despite the tariff-related headwinds, our quarterly export business grew 30% on a year-over-year basis, which reflects a strong customer stickiness and our execution capabilities. Overall, we delivered an EBITDA margin of 23.5%, which reflects the scalability of our business and also the benefits from an improved product mix. We added 1 million meters of hose capacity in this month, which takes our total installed capacity to 17.5 million meters per annum. The balance 2.5 million meters will be commissioned in a phased manner and is expected to be completed by Q2 of the next financial year. During the quarter, we achieved several important operational and strategic milestones. A key strategic highlight for the quarter was our entry into the high-performance liquid cooling solutions for data centers.
We completed the first commercial dispatch of the advanced flow control components and skid assemblies for the liquid cooling application. To support the rising demand that we are witnessing, we are expanding our skid assembly capacity to 15,000 units per annum, and the same is expected to be completed by June 2026. This expansion is fully aligned with the growing opportunities that we see in the global data center and the AI infrastructure space. To strengthen our skid assembly operations, we are also setting up a new plant at Chakan in Pune. This facility will act as a supportive unit to augment the production capacity at our existing plants. Also, we continue to strengthen the production of our assemblies section and during the quarter, we added six new assembly stations, thereby increasing the total number of assembly stations to 46.
As part of our ongoing focus towards efficient capital allocation and based on the updated market assessment and the phased demand visibility, also on optimization of our internal resources and capital, we have decided to rationalize the capital expenditure for the miniature metal bellows project from the earlier planned outlay of INR 23 crores- INR 10.5 crores. Accordingly, the proposed installed capacity for this particular project would be revised from 240,000 pieces per annum to about 60,000 pieces per annum. This would be sufficient to meet the near-term demand for the miniature metal bellows, while it also allows us to scale up in a phased manner as the volume increases. The lower upfront investment also helps us to reduce the project gestation risk and also enables faster payback.
The balance funds will be utilized towards other ongoing expansion projects where we feel we have the demand visibility and also our execution timelines would become stronger. The ongoing investments in the process automation, which includes both robotic and automated welding stations and an annealing plant, are progressing as planned and with a targeted completion by the end of this calendar year. These initiatives are aimed at improving the throughput and also enhancing consistency and helping us to penetrate into mission-critical business segments. Our subsidiary HydAir generated revenues of INR 8.5 crores in this quarter as compared to approximately INR 2.9 crores in the same quarter in the previous year. We expect HydAir's contribution to continue scaling over the next few quarters. Now to talk about our financial performance.
In Q3, our total income stood at INR 121 crores, which is a growth of 21% on a year-over-year basis. Our EBITDA stood at INR 28.5 crores, which is 28% growth on a year-over-year basis, and our EBITDA margin stood at 23.6%. Our PAT stood at INR 16.5 crores, which grew at 8% on a year-over-year basis, with a PAT margin of 13.5%. Our cash PAT increased to INR 22.75 crores, which reflects a strong cash generation and operating performance. For the nine months, our total income stood at INR 317 crores. Our EBITDA was INR 70.5 crores, with a margin of 22.2%. Our PAT stood at almost INR 38 crores, with a margin of approximately 12%. On a nine-month basis, our contribution of the value-added products, which includes the assemblies, fittings, bellows, and skid assemblies now contribute 54% of our total sales.
The outlook for the remaining quarter of this financial year is very good. We are supported by a healthy order book, strong customer relationships, and increasing penetration in global data center and AI infrastructure market. With a strong cash-generative business model, with our deep engineering capabilities, and a high focus on value-added solutions and products, we are poised to sustain our growth momentum and deliver long-term share value to our shareholders. Thank you everyone for joining today's earning call, and we will now open the floor up for questions. Thanks a lot.
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 questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is on the line of Raman KV from Sequent Investments. Please proceed.
Hello, sir. Can you hear me?
Yes, I can hear you.
Congratulations on a good set of numbers. I have a few questions. My first question is with respect to the liquid cooling skid system. As we have an exclusive agreement with a U.S.-based company, I think. I just want to understand two things. Are we going to pay some royalty to use their, how do I say, royalty to them, or is it like a revenue share model between the both of the company? And on the unit economics, if you can explain the unit economics of this liquid cooling skid system. That would be helpful.
In this, there is no royalty that we pay to them. It is the normal buyer-seller transaction. Although we have signed an agreement with them for exclusivity for the next five years. This is just for the India market. It does not include the overseas market. That is the answer to your first two questions. With regards to your second question, in terms of the unit economics, we receive the orders from them, and then we accordingly manufacture the products and then supply to them. That is how the entire business model works.
I just want to understand. Now I think you have around the capacity with respect to this is 2,000 cases, and you are expanding it to 15,000 cases.
Assemblies, yeah.
Yeah, assemblies, yeah. And the CapEx for this was around INR 100 crores, and you said you can do INR 300-I NR 350 crores of revenue at peak utilization. This is my understanding. If my understanding is right, your per piece utilization is around INR 3 lakhs.
The CapEx is less than INR 100 crores.
Okay. Understood, sir. When I come to the realization, your realization is around INR 3 lakhs per piece.
Correct.
At peak utilization.
Yeah.
Is my understanding correct?
That's assuming an 80% capacity utilization, yeah.
Yeah. Now I just want to understand, let's say there is a data center that is to be constructed. Let's say it's a INR 100 crores worth of data center project. How much out of that will be your liquid cooling systems scale? I just want to understand the total addressable market with respect to this particular business.
So obviously, it depends a lot on the entire layout of the project, where it is being built, what is the megawatt of the project, how many floors, and how much is the space. Because ultimately, liquid cooling also depends on how much megawatt is being put on a particular piece of land, if I may say so. Also, it varies from operator to operator. For example, a data center built by X would have a different design for liquid cooling as compared to a data center built by, say, Y or a data center built by Z. Because each one wants to have their own proprietary technology for this particular investment. As to, again, tell you about the global market size for liquid cooling right now, the global market size as it stands currently, it's about almost close to $3 billion.
And it is growing at a CAGR of about 33% every year. I'm talking about the international market. Now, that is poised to increase to about $21 billion over the next six to seven years. So that is the market size of the total liquid cooling.
Understood, sir.
You can actually divide that by the data center market, so you will get an idea about how much is the liquid cooling market as compared to the total data center market.
Understood, sir. And sir, with respect to HydAir, what is our current capacity utilization, and are we planning to have any further CapEx with respect to this?
Yeah. So at HydAir actually works on CNC machine. Most of the products at HydAir are. We are in the process of increasing our capacity in HydAir as well. The same is poised to be announced very soon. Right now, we are working at. In terms of the capacity, in terms of number of pieces, if I can say so, as per the number of pieces, we are running at about 70 odd percent capacity utilization. But obviously, we plan to add a few more machines and a few more new machines, which will help us to increase our capacity on our existing machines as well. So, with that, we expect HydAir to grow over the next year or so. HydAir capacity is planned soon. I will be able to share the numbers in due course of time.
Initially in previous calls, you mentioned that HydAir at optimum capacity can do INR 45-INR 50 crores of annual revenue. Is my understanding correct?
Yes, that's correct.
Okay. My final question is with respect to export. What percentage of your total revenue is exports? If you can bifurcate the export, like where it comes from, how much is U.S.A., how much is EU? Will the current FTA signing with EU and U.K. be beneficiary for you in terms of growing your export order book?
Right now, about 74% of our total business comes from export. Out of that, almost 85%-90% comes from the EU and U.S.A. If I talk about EU and U.S.A. combined, they contribute around 85% of our overall export business. Now, definitely with the FTA which was announced a couple of days back, definitely we are going to see over the next couple of years, higher traction coming in from the EU sector. If you see in this quarter itself, our total exports have grown by about 30%. Out of that, EU was a major contributor in that.
Obviously, in the last quarter, there was no FTA, but we strongly feel that with this FTA being signed and obviously it will come into operations in the next few quarters, we definitely feel that it is going to be a big boost for us. Also considering the fact that it will also make our products even more competitive in the EU market, especially in terms of competition from players or manufacturers based out of Turkey who they are getting duty-free material to be exported to EU. That would be very beneficial to us as well. Yes, definitely with the EU, would be, I would say, the strong growth area for us in the near future.
Understood, sir. Just a follow-up. 85%-90%, can you just give a split with respect to only EU and only U.S.A., if possible?
The EU right now is about 30%, and the U.S.A. is about 55%. Thank you, sir. I will join back end of queue. Thank you so much.
Thank you. The next question is from the line of Viraj Parekh from Carnelian. Please proceed.
Good morning. Am I audible?
Yes.
Yeah. Sir, just my first question is a follow-up on the previous participant. More than the quarterly revenue, I am interested in the nine-monthly revenue. Exports has kind of been weak this nine-month financial year ended, and primarily we have seen growth from the domestic market. Correct me if I am wrong.
Yes.
Right?
Yeah. It has been bad.
So-
Yeah, it has been good.
Sir, in that, if I look at Europe and America, I feel Europe has been flat. I think it was INR 59 crore last year versus INR 60 crore this year in terms of nine months. America was INR 129 crore last year and INR 136 crore this year, approximately a 5% kind of a growth, which is approximately 55%-60% of our business. If you could just share some highlights in terms of, last quarter we spoke that not a single customer canceled the orders. Probably they are deferring them. Are we supposed to be a spillover in Q4? Is Q4 supposed to be very strong for us, or is there a lot of more pessimism in the American market for the entire year? I just wanted to understand your thoughts of what the on-ground situation there.
Yeah. Okay. Thank you so much for the question. I just wanted to update you. If you see our Q1 results, we had a very, I would say, a very bad Q1 number. Because of that, you see that our nine months numbers still don't appear as good as what they are. It's because of, I would say, a very bad Q1. That's why if you see the growth, even after 30% of growth in these particular markets on a nine-month basis, our growth is still in the single digit. But obviously, things nowadays change on every quarter-over- quarter. Now, we're seeing that there's strong demand that we're seeing from the export market. Obviously, in the U.S. market, like I mentioned, we did not have any order cancellations, and now we are starting to receive repeat orders coming on from our existing customers.
The only issue that we are facing in terms of the tariffs is obviously getting new customers and new OEMs on board, which is taking a lot more time because of these tariffs. But our existing customers are continuing to place order to us, because right now they don't have any alternate supplier. With regards to the EU, like I mentioned also in a couple of my previous earnings call, we felt that the EU would be a strong market for us in the near future, and that is what we are seeing in the EU market, that over the next, I think, few quarters, we expect the business from EU to increase. Obviously, this FTA, once it is implemented, would definitely be a booster for us in terms of our business to the EU.
Yes, domestic market over nine months has grown, and the international market has grown lesser than that. But I would say that the kind of disruptions that we had in the international market were nowhere near as compared to. As in, the kind of disruption that we had in international market was much more as compared to the domestic market, where we did not have anything. So we would also have to see the growth in terms of the challenges that we have been facing. But I would say despite that, I think the last quarter has been extremely good for us and we expect the same to happen in the current quarter, which is ongoing, and also in the next financial year as well.
Just a follow-up before I ask my second question. Domestic, as you rightly said, we have been doing well. Can you highlight certain areas where we have done well? Are we competing with whom? What are we doing? Are we gaining new customers? Are we gaining more wallet share with an existing customer? Earlier, you used to give some kind of an end user industry mix, and I think for this quarter it has not been given. Just wanted to request that if you could just stay a bit consistent with the disclosure so that it is easier for us to track the performance as well. If you could just highlight in domestic, where are we doing well in the end user industry mix? Where are we seeing more traction, more growth? Because that has been a phenomenal nine months for us in the domestic market.
Yeah. In the domestic market, we have seen the two major industries where we have seen significant uptake. One is the steel industry that we are seeing good demand coming in, and we have seen it from the ports and terminal industry where we are seeing significant uptake in orders from various ports and terminals for our various products. These are the two industries in the domestic sector. There are smaller industries with regards to construction and food and all. But the most prominent ones are the ports and terminals and steel. Specifically talking about HydAir, so over there we are seeing a very good traction coming in from the railways industry. These are the three major industries where we are seeing strong traction coming in.
Also I asked if we have gained new customers or increased wallets and existing customers in domestic market.
Both. Like I mentioned, we already had customers in the steel industry and ports and terminals. So we have gained more business from them. Second, we have also entered into new ports where we did not have our presence earlier. In fact, some of the steel industry, there is no major new customer, but the major new customers have come in in ports and terminals and in the chemical industry.
Got it, sir. My second question is just a bit on the planned pipeline of CapEx which we have. If you could firstly just bifurcate the CapEx that we have done in this financial year up till date in hoses, in bellows, in the liquid data cooling solutions and versus the cash we have on the books, including the amount that we recently raised. Also, if you could just help me understand the kind of capacity utilization we are on, especially in the hoses side, and at what level are we seeing, because I think we are very confident on that demand growing strongly. How are we seeing that growth forward in the domestic and the export market at whatever capacity utilization we are envisaging to be in the next two quarters or the next financial year? Just the last question would be on the liquid cooling solutions.
If I understand correctly, we are using bellows capacity as a feedstock to. It is a mixture, like a skid is a mixture of multiple components, if I am correct to understand it. What kind of margins are we going to see? Because I think bellows were supposed to drive our margins upward, being a niche product. You have given a INR 3 lakh average revenue per piece. What kind of margins do we see given the exclusivity we have with the U.S. partner?
Okay. First of all.
Let me break it up with cash.
There were a lot of questions.
Yeah.
I would like to-
I think I'll just break up. If you just do on the cash and the capacity front and the post-AGU unit economics.
Yeah. Just to update, we have not yet received the fund from the preferential allotment because we received the in-principle approval from stock exchanges in this week itself. Most likely, in the upcoming week, we would be receiving the money and allotted or getting the funds from the preferential allotment. That is to clarify on one point. Second point with regards to the total CapEx that we have done across the entire spectrum in this nine months, which is in the current financial year, is approximately INR 36 crore . That is spread across the various, the hose business, the liquid, the cooling.
Obviously, the investment in the liquid cooling, the major investment in the liquid cooling would start now, because initially what we did, like you mentioned, is we utilized some of the machines from the bellows plant, and then we bought some of the other machines to kickstart the project in the first phase. Now, since we are expanding or planning a bigger expansion in capacity, we want to now invest significantly in the liquid cooling space. That was that. In terms of obviously, anything else that I missed out from your question?
What is our cash in hand right now as on date?
As of 31st of December, it is approximately about INR 20 crore as the cash balance in bank.
In your presentation, you have written assemblies, you have added some six assembly stations. I think nine months you have said you have done INR 36 crore. Can you bifurcate into hoses, bellows, assemblies and cooling solutions?
Okay. In terms of assembly, it is part of the hoses because that is just one part of the project. I will just give you the broad numbers. Approximately till December 31st, we have invested approximately INR 9 crores for the liquid cooling. These all data are as of December 31st. For the bellows, it is around INR 5 crores. This is for the nine months I am talking about. For the hoses and for assemblies and for assembly stations and the building, all of that is about INR 22 crores. This is for the nine months.
Right. For the next months, what was the planned CapEx amount?
First, obviously, the remaining CapEx to be done for the hoses division. As we had announced in last month that we are going to increase capacity for skid assemblies. The CapEx would go into that. The third one would be for the annealing plant along with the automated and robotic assemblies that is required along with the annealing plant for a specific project that we have from a couple of our customers.
What would be the amounts?
Those amounts have already been given in the last board meeting. I would suggest you to refer to that, because the overall CapEx, including working capital and all that we have planned, is around INR 97 crores. That includes working capital and CapEx.
Just wanted to understand what would be our peak debt with all the CapEx being done next year?
In debt?
Yeah, I am assuming that we are taking-
There is no debt.
A part of it.
No, sir. There is no debt. We have not taken any debt.
No, sir. As on date, I know. I am saying that right now we have raised the money, funded CapEx. Post that, we will be taking a little bit of internal accruals and some part of debt to do the second line of CapEx for the liquid data cooling solution. We just want to understand what would be our debt number at that point.
As of now, we don't plan to raise any debt. In case we require in the future for any short term, I think that would be decided at that time. But as of now, we don't plan to take on any debt.
Got it. Sir, this is last question. In terms of the unit economics for that liquid data cooling solution, what would be the margin profile for this?
I think I mentioned this probably in my last earnings call as well. Since right now we have an exclusive contract with this U.S. customer, it will not be possible for me to give you a specific number of margin of this business, obviously due to confidentiality reasons. But along with this particular business, I think we expect our overall margins to remain as expected or as we had mentioned in the range of 23%-25% over the next couple of years.
Got it.
Because right now, this particular business is dedicated for one customer. I hope you understand that it's not possible for me to openly share the margins on a public forum.
Sure, sir. Thank you so much. I have a few more questions-
Yeah.
I'll get back into you. Thank you so much.
No worry.
Thank you. The next question is from the line of Singaraju Ram. The next question is from the line of Pritesh from Lucky Investment. Please proceed.
Yeah, hi. Just from a slightly longer horizon perspective. At what sales level is your metal bellow quarterly sales level or annual sales level in FY 2026 and utilization? For the capacity that you have put, in which year do you see the peak utilization and the peak revenue on the current capacity? Same way on the liquid skid assembly side, this 15,000 unit and this INR 350 crore of revenue, which is the year or the quarter where we start seeing the peak utilization of this piece?
Okay. The metal bellows right now is at an annual run rate of INR 12 crore as of now. We expect this to increase to about INR 36 crore, the run rate, in the next few quarters. Obviously, being very honest, it is a little behind our schedule. We expected it to be much faster, and I think I just mentioned before a couple of questions back in terms of the U.S. market. We expected a big business to come of metal bellows from the U.S. market, but because of this tariff the timelines have slightly gone up. We also participated in an exhibition recently and we saw a very good lead generation from that. We expect the bellows business to achieve a run rate of INR 36 crore over the next few quarters.
With regards to the peak utilization, I think we expect the bellows plant to achieve the peak utilization in about two years' time from now.
Peak is INR 100 crores, right?
Yes, INR 100 crores.
Peak?
Actually INR 85-INR 90.
So two years, which means it will go in FY 2028 or FY 2029 basically.
I think it will be by the end of FY 2028 and start of FY 2029.
I am writing FY 2029 for safety purpose, metal bellow. Then the liquid cooling?
Liquid cooling, with the CapEx that we have planned, and we should expect the liquid cooling peak utilization should be achieved in, I would say two and a half years. Two to two and a half years.
Peak of about INR 350 crores.
Yeah.
In FY 2029 again.
Yeah, 2029.
What are the margins in liquid cooling and margins in bellows? GP and the operating margin.
I just spoke regarding the margins for liquid cooling. I mentioned that it is not possible for me to share because
Okay.
I cannot deal with just one customer. On a public forum, I cannot share the exact margin.
Okay. But directionally, are they better or inferior to the existing margins that you have in hoses?
No. In terms of the hoses, they are better than the margin in the hoses. They are almost in line with the margins that we have our assemblies.
The margins are better than hoses and in line with assemblies. Okay.
Yeah.
Okay. Done, sir. Lastly, on the hoses side now, you have a capacity on ground, then you have these challenges. I don't think that the international challenges are rectified in terms of the tariff and et cetera. How do you see the growth in the assembly side or the hoses side?
When I talk about hoses, we have to talk about both hoses and hose assemblies because they're-
Correct. No, hoses. Yeah, correct. Hose and hose assembly.
Yeah.
Yeah.
If you see this circle, the last quarter we had very good sales in the international market. If you see over nine months, yes, over nine months, the growth might be in single digit, but obviously the Q1, like I mentioned, was very modest for us, and hence the overall numbers look not as strong as what they actually are. In terms of the outlook, I think with this FTA, I think we'll see increased business coming in from the EU because over the last three years almost, I think we had more or less flat sales or very minimum growth in sales from the EU region. But I think over the next one year, and hopefully with this FTA being implemented very soon, we'll see higher business coming in from the EU market. U.S. market from the existing customer point is strong.
Obviously, like I mentioned, with the new customers, there are still some challenges, especially with regards to the tariffs. Hoping that if the tariffs also get resolved soon, we will see a significant uptick also coming in from the U.S. market, which continues to remain our biggest market still.
Okay. Thank you very much.
Thank you so much.
Thank you. Participants, please limit your questions to two per participant. The next question is on the line of Singaraju Ram from Omvetri Holdings. Please proceed.
Hello, sir. Am I audible?
Yes, you are audible.
Sir, I have two questions, both regarding our liquid cooling Secondary Fluid Network solutions. One, if our SFN systems are not available, would customers need to redesign their entire cooling system, or can they substitute components without major changes? The second question is, can the SFN liquid cooling solutions and technologies be adapted beyond data centers? For example, electric vehicle engine cooling or semiconductor die direct chip cooling, et cetera. Something like that, sir.
If I have understood your question correctly, first question is, if SFN components are not there, then will the liquid cooling work? Is that correct? The first question.
No, sir. If our systems are not available, can the customer have to redesign their entire cooling system? Or simply can they substitute our components with the competitor's products?
As of now, we are one of the first movers in this space in India in terms of the component. As of now, if we are not providing the system or there is delays from our end, the only option available to the customers would be to import it. As of now, the customer does not have much option. And what was the second question that you said?
Sir, can these technologies, SFN, be adapted beyond data centers? For example, to electric vehicle engine cooling or semiconductor die direct chip cooling, some other applications, sir.
What we are providing is basically a cooling or a flow solution. Ultimately, it is used for cooling. Right now it is used for cooling data centers, but actually it can be used for cooling any other kind of system or any other kind of application because ultimately it's a flow control. You can actually change the design of the flow control and instead of, say, cooling data centers, you can cool, tomorrow, say, a large machinery or, say, a semiconductor plant. And specifically the machines that we have or that we have already installed and are also in the pipeline to install, they are not specifically meant just for data centers. I'm just saying tomorrow, if just for any reason the entire data centers industry collapses, we can still use our machines to manufacture the flow controls for other HVAC industries.
Okay. Fine, sir. Thank you so much.
Thank you so much. Thank you.
Thank you. The next question is on the line of Nikunj Bhanushali from Kosh Wealth. Please proceed.
Hi. Thank you for the opportunity. I wanted to go over through the peak revenues from each division. We have the current four to five divisions, right? First is the hose and assembly business, then there is metal bellows, there is miniature metal bellows, liquid cooling, and then there is HydAir. So peak revenues from each of the divisions, if you could give me the numbers.
Yeah. Okay. With regards to the liquid cooling, I think already we just a couple of-
Yeah. That's-
Questions back.
INR 300- INR 350 crores.
About INR 300 crores- INR 350 crores at the peak utilization. In terms of the hose and the assemblies business, at the peak utilization of capacity of 20 million we would reach, and considering if 70% of the sales comes from the assemblies, we are expecting a turnover of between INR 650 crores- INR 675 crores. In terms of the bellows, as I said already, around INR 85 crores at peak utilization. HydAir, as of the capacity right now, is about INR 45 crores based on the current capacity.
Okay. Metal bellows is for both miniature as well, right?
Yeah. Miniature, as I mentioned in my speech, we are redeploying some of the capital from miniature metal bellows to the other project.
Right.
Miniature metal bellows right now, the peak utilization would be about INR 8 crores-INR 10 crores.
Okay. All right. And metal-
Yeah. Overall, if you see, it would be somewhere about close to, I think more than 1,000 crores over the next three years that we expect to generate.
Right. Yeah. That was just the question.
Yeah.
Yeah. Thank you, sir.
Thank you so much. Thank you.
Thank you. The next question is from the line of Vansh from Invest Analytical Advisors. Please proceed.
Yeah. Thanks for the opportunity. Am I audible?
Yes, you are audible.
First question is on the liquid cooling adoption. Even that many of these data centers still use air cooling. What makes you confident that liquid cooling will see a meaningful need despite being more expensive upfront? Specifically, what are the key triggers that will drive the shift? That is the first question.
Sorry. If I have heard you correctly, you are saying that what makes the shift from air cooling to liquid cooling. Am I right?
Correct.
Yeah. Okay. A lot of the old data centers or the data centers which were up and running for many years, they were in the traditional air cooling system.
Right.
Now, the reason for them being on the air cooling is because the capacity of those data centers were actually very small, and liquid cooling as a technology was not developed, I would say, four or five years back. Now with liquid cooling and also with the chip capacities increasing. We have the chips, we can compute much more power. If the chips are using much more power, they need much more cooling and at a faster pace. Hence, if you go through air cooling, the running and the recurring cost of air cooling is huge. Obviously for any data center, especially at a large scale to be viable, the recurring cost has to be lesser. Hence, obviously the technology of liquid cooling has evolved or was invented.
For all the new data centers that are coming up, 99% of them are coming up with the liquid cooling only in some form or the other. The reason is because the liquid cooling, the initial investment is higher, but the recurring cost is significantly lower.
Okay.
Hope I was able to answer your question.
Yeah. On similar lines, one question. What is the life cycle of this liquid cooling solution when it is deployed in a data center? What drives the replacement demand?
Obviously, in terms of the life cycle, I think it can stay for at least a minimum four to five years without much repairs. But obviously if there is some component or some part of the system which gets damaged or which needs to be changed, I think that can be changed easily with the current liquid cooling system that we're developing. Say, for example, if a part of the line there is some damage. We have built the system in such a way that we can actually bypass that particular line for a short period of time, replace the part, and then again bring it on the line. We have designed it in a way that the replacement becomes very quick.
Okay. The replacement demand is because like we are seeing-
Just a Vansh.
Yes.
May we request you to join the question queue for your follow-up questions, as there are other participants waiting for their turn.
Okay. Just waiting the follow-up only. That battery plus the VRLA core technology upgrades
I am actually not able to hear you. I am sorry. You said?
I said, please repeat the second one, by way and year, which technology will play? That is this last question.
I am so sorry. I think there is some noise from the bank, so the voice is not clear. I am very sorry. I am not able to hear you. I am sorry.
Okay.
Thank you.
Okay.
The next question
Yeah, we can take the next one, yeah.
The next question is from the line of Asha Kapadia from FrontWave Research. Please proceed.
Hi. Thank you for the opportunity, and congrats on good set of numbers. I was just going through an investor presentation of last quarter versus current quarter. If I look at our capacity addition plan, there's a delay across all our categories like hoses, assemblies, as well as bellows. Specifically for bellows, if I look at metal bellows, the capacity addition plan was INR 1.20 lakh- INR 3 lakh units. For miniature bellows, it was INR 2.4 lakh units. Now, that has been curtailed significantly to 60,000 units, and for metal bellows, it's INR 1.2 lakh units. Just wanted to understand this significant curtailment it looks like. Just wanted to wrap my head around this. What's the particular reason behind it?
Yeah. To clarify on a few points. First is the expansion of metal bellows from INR 1. 20-INR 3 lakh was part of the phase two. If you see in the last presentation, the phase two was, as informed in my previous calls also, that we would only start work on phase two once phase one is up to an optimum capacity utilization. That was anyways planned for a later time. First of all, that. Second of all, as I mentioned in my speech as well, we have reduced our capital expenditure in miniature metal bellows from INR 23.5 crores to about INR 10.5 crores. Obviously, with that reduction, there will obviously be a reduction in the capacity.
The reason is that we feel that right now, as per the demand that we are seeing from the international market for miniature metal bellows, we feel that the first phase, it is better for us to deploy lesser capital, get the ball rolling, and then over a period of time, as we see demand picking up, then putting in more capital. The idea for us is that we want to deploy our capital. We've seen over the past three to four months that we want to deploy now our capital to the area where we are seeing a significant demand coming in, and we want to redeploy our capital to those areas where we are seeing the demand as of right now, as compared to investing in capital where we see demand coming in maybe one or two years down the line.
That is the strategy that we have. It also helps us in a faster payback. It also helps us to make money faster. That's the business call that we have taken.
Understood. That's really helpful. Thank you, and all the very best.
Thank you. Thank you very much.
Thank you. The next question is from the line of Vinayak from Xponent Tribe. Please proceed.
Hi, sir. Thank you for the opportunity. I just wanted to ask you, liquid cooling skid solutions. In the previous call, you mentioned that they are part of your domestic revenue and not export revenue.
Yes.
I just wanted to ask, are we exporting these skid assemblies firstly to your customer, and then they are bringing it back, like assembling all the stuff and then bringing it back? Or are you just providing them in the country itself?
No, no. We are not exporting any liquid assemblies, sorry, skid assemblies. All the skid assemblies that we are manufacturing or the orders that we have received for the skid assemblies is for the India market only. Right now, as of now, there is no export. It is just for the India market as I see it right now. Maybe six months down the line, we may start with exports, but as of now, there is nothing in export. There is no export of skid assemblies.
Okay, so you are supplying your customer domestically and not exporting it.
Domestically, yeah. Yeah, domestically. Yeah.
What is the visibility we have, like current visibility in the liquid cooling space? For the next one year, two years, if you could give an idea about that.
Well, next one, two years is obviously, we are doing the CapEx for the skid assemblies based on what visibility that we have been given by our partner. Accordingly, we are deploying the CapEx for that. If you talk about the immediate business. Right now we have a pipeline of about INR 45 crores that we already have, which is planned for dispatches as per the schedule given by our partner. That is the immediate plan that we have. But yes, our entire CapEx for the skid assemblies is based on the projections and the discussions that we have had with our partners. We are actually doing the CapEx based on the demand forecast that has been given by our partner.
And so that, the INR 350 crore number and the future utilization, when do you expect that to be done?
FY 2029, like I mentioned earlier.
Sure. Thank you.
Thank you so much.
Thank you. The next question is from the line of Nidhi Tiwary from Adroit Financial. Please proceed.
Hello.
Ma'am, you can unmute now.
Can you just speak up a bit? Yeah. Little bit, but you can go ahead with your question. I'll let you know if I'm not able to hear you.
For now, I have gotten all answers which have been raised by the other companies. For now, my question is, are there any plans to target new retail market beyond the U.S. and current export destination, where we can diversify our demand base? I had one question about. Yeah, sorry.
You are saying diversify beyond the U.S. Is that correct?
Yeah. Beyond the U.S. Yeah, so that we could diversify our demand base for this product.
Okay.
Yeah. My second question is related with. Yeah.
Go ahead with your second question, and then I will answer.
Yeah. My second question is, like with stainless steel, like as a key raw material, how are you managing raw material price volatility and its impact on margin because it is quite high, right?
Okay. All right. To answer your first question, diversifying the risk beyond U.S. So if you see in this financial year specifically, we have focused a lot on the domestic market, and that we have also seen in terms of the numbers. Also, if you see the liquid cooling, the skid assemblies. Right now the entire plan is for the sales in the India market. So that also kind of de-risks ourselves from the risk of U.S.A. But saying that, despite, I think U.S.A. is right now our biggest market, as of today. It continues to be so. We are focusing on Europe also because Europe, especially now with this FTA being announced and it would soon come into force as well, I think we will see a lot of business coming in from the EU as well. So that is one part of de-risking ourselves from U.S.A.
With regards to raw material, specifically in case of our orders, we do back-to-back raw material planning. We do long-term contracts with our suppliers, specifically for our major raw materials which is the same in terms of the hoses. It is the stainless steel wire and the stainless steel coil. We do back-to-back, but obviously, if there is significant volatility in the raw material prices, then it affects the margin slightly. But I think right now we have not seen it as yet. The volatility was there a couple of years back when there was significant uptake and then obviously a significant downward trend in the raw material prices. But over the last couple of years, I think it is more or less stable with minor fluctuations. So yeah.
You have a good retention of orders from U.S. as well. Still you don't have a good retention because you're not getting new orders from them. Will that impact our margin in FY 2025 or in future, like FY 2027, because still our penetration is high in U.S.
Sorry. I didn't get your question. Can you just repeat your question again?
My question is, right now, as per that, we are not getting new orders from U.S., but still our retention is good, right?
I mentioned that we are getting the repeat business from our existing customers. The new customers, yes. We're facing some delays in onboarding new customers, obviously, because of the situation of the tariffs because-
No, I got it. Because of tariff, there is a different impact. But still, their market share is higher. So for next quarter or for next year, there are many different factors because we are marketing new ones. I understood that. We have a retention of the older customers.
Hello, Ms. Nidhi. We are unable to hear you.
I was not able to hear either question, yeah.
Yeah. Ma'am, can you please join the line again?
There is some disturbance-
Yeah.
At your backend. Because of that, we are not able to hear your question correctly. That is why.
Thank you. The next question is from the line of Arjun from Lion Equity. Please proceed.
Hi. Thank you for this opportunity and amazing results. Given the fact that we have a tariff of 50%, and we took a price hit of 8%. How do you see in this backdrop our margins for the next one or two quarters, like Q4 and Q1 of next year?
I would still maintain that we look at our margins from a long-term perspective, right? A couple of years back, our margin was around 20%-21%. Our aim is over the next couple of years to have our margins at up to 25%. Obviously, some quarters would be good, some quarters might not be good, as you would have seen from our Q1 was not so good, and Q3 is. I would still say Q3 is good. I would not say very good, but I think Q3 is good. We expect the margins to continue to grow in the next quarters and in the next year. The target would be to achieve an EBITDA margin of 25% over the next couple of years.
I am just a little curious here, and I would appreciate it if you elaborate this more. Even with the tariff impact, you are saying that we would still maintain a margin of 22%-23% and with the 8% price hit. Am I hearing it right?
Yeah. What happened is when we gave a discount to our customers, we also worked internally with our engineering team, with our production team, with our R&D team, and to also optimize on our costs. The reason is that in terms of when we give out the discount to our customers, we also need to work internally how to ensure that this discount directly does not impact our bottom line immediately. So we worked internally with our teams to optimize our cost. We also worked with our vendors to ask them to bear also some of the costs or some of the price that we had passed on. It was a joint effort from the entire team and also from our supply chain partners to help us to reduce the impact of the discount that we had given.
Hopefully, the tariff would go away soon, and then our margins would be much better. But yeah, the reduction in the price sometimes actually makes you more agile. Because then you work doubly hard to optimize your cost and to optimize your supply chain as well.
This is fantastic because what I can infer from this is that if when things get normalized, and we hope they get very soon, we could actually see a 400, 500 basis points increase of margins, right? In that case, because, one, we have done an internal engineering to make ourselves more efficient, and two, we have an external environment support.
Yeah. I would not be able to give you the exact number, but yes, definitely if the tariffs go away, our margins would be much higher than what it is right now.
Okay.
I am not able to give a specific number, obviously.
No, I appreciate it. I totally get the sensitivity of it. Just from a different angle, because we are an exclusive player to one of the biggest U.S. multinational company. I am sure they have a huge Asia Pac segment in which they are functioning. How big would India would be in the whole APAC for them? Just to understand how big the size could be. Because we are exclusive for India.
You are talking about specifically for the liquid cooling or for their business?
Yeah. For the liquid cooling. For the liquid cooling, I am assuming this kind of an effort by this multinational company is made across APAC. So how big is India for them in the liquid cooling in the whole APAC?
Well, it is difficult for me to answer on their behalf because I do not know their APAC numbers. I do not know their exact India numbers. So how big is liquid cooling as compared to their APAC? Difficult to give you a number, but what I can say is that their India team is working literally day and night with us to, obviously, it was first to start the first dispatches and now to increase the capacity. So I think they want to make India as the second hub for their worldwide supply. So right now, the Indian team is obviously focused on the supplies to India. But whatever discussion that we have had, their ultimate long-term goal is to make the India entity as a global supplier for skid assemblies over the next, I would say three to four years' time.
Specifically on numbers, I would not have because this company is a multi-billion- dollar company. I do not know their APAC numbers, and obviously they are into a huge number of businesses. So liquid cooling is a part of their overall business. They are into multiple different businesses. So exact numbers, I am afraid I would not have it.
No, true. I totally get that part. One last question from my end, could be a very specific question. If you see the breakup, I see there's a significant traction in your assembly segment for the nine months. You have crossed close to 52%. How do you see this traction going forward?
I think this traction is only going to increase. I think the assemblies as part of our overall sales is only going to increase because the entire focus of the company for us, for the entire team is to increase the sales of assemblies because that's the future that we see. When I talk about assemblies, right? I'm not talking. When I talk about assemblies, I'm just leaving the skid assemblies aside for the time being. In assemblies, the main raw material is basically hose and braid. For us, if we increase the sales of assemblies, we are actually increasing our production of hose and braid also, because ultimately, hose and braid is a part of the assembly. The focus is, for the entire team, is to increase the sales of the assemblies.
Wow. If I can just squeeze one last question. You said that what you've done for the liquid coolants can be also used in other sectors, which I'm trying to say that it is a change in design in the hose, and if I understand it very superficially. What stops other players to come into it if it is just a change of a design? Or is there something which makes us more stickier to the client?
First of all, whatever the design of the skid assemblies that we have developed jointly with our partners. Our partner has worked with us, and we have worked with them to jointly develop this entire system. The expertise lie in the design, in the R&D and in the engineering. Then obviously on the shop floor level, the expertise lies in conversion of the design into an actual finished product, which will be utilized at the customer's end. I would say anyone can start any business at any time, right? That never stops anybody, right?
Sure.
The thing is, first of all, you need to have the expertise to do that. Second of all, you need to have that kind of a customer also to, say for example, if tomorrow, say, I'm just giving example randomly, say if Amazon is having data center or if some other company is setting up its data center. You need to have those kind of customers also with you so that you can actually give them that solution. Your access to those customers is also very important. And third is, we have built this engineering and the skills of the entire flow control over a period of the last 15, 20 years. We know what exactly are the issues that you'll face when you are controlling the flow of any kind of a liquid in an entire cooling system.
Because we have a few proprietary software that we work with. The simulation actually shows that in case of the flow being increased at this particular level, you'll actually have breakage or damage in this particular area. These kind of expertise and skills, they are developed over a period of time. It is difficult for anyone to replicate in a very short period of time. That's why you'll see that there's the moat that we have in this business right now.
Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to the management for the closing comments. Over to you, sir.
Thank you so much everyone for your questions. I think there were a couple of people who I was not able to hear their questions, so I would request them to probably send their questions to the SGA team and we'll arrange to reply to you at the earliest. If I'm not able to answer anyone else's question as well, just request you to get in touch with SGA and we could answer your queries or we could schedule a meeting as well. Thank you so much everyone.
Thank you. On behalf of Aeroflex Industries Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.
Thank you.