Ladies and gentlemen, good day, and welcome to the Avalon Technologies second quarter fiscal year 2024 earnings conference call hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I will now hand the conference over to Bhoomika Nair of DAM Capital. Please go ahead.
Yeah. Thanks, Allison. Good evening, everyone, and welcome to the Q2 FY 2024 earnings call of Avalon Technologies. We have the management today being represented by Mr. Kunhamed Bicha, Chairman and Managing Director, Mr. Bhaskar Srinivasan, President, Mr. Shriram Vijayaraghavan, Chief Operating Officer, Group, Mr. RM Subramanian, CFO, Mr. Michael Robinson, Chief Operating Officer, U.S., and Mr. Suresh VR, Head Corporate Planning and Investor Relations. At this point, before I just hand over the call to Mr. Bicha, just want everyone to bear in mind that any forward-looking statements that are made during this call are subject to potential risks and uncertainty, both known and unknown. Without further delay, I now hand over the call to Mr. Kunhamed Bicha, CMD. Over to you, sir.
Good evening to everyone on the call. Ladies and gentlemen, on behalf of Avalon Technologies, I extend a warm welcome to our Q2 FY 2024 earnings call. I would like to express our sincere gratitude for your continued support and interest in our company during the past few months. Before we dive into the financials, let me provide a quick introduction to Avalon Technologies, particularly for those who are joining us for the first time. Avalon Technologies has established itself as a key player in electronics manufacturing services with a global reach. Our journey began in 1997 with a vision of introducing top-tier electronics manufacturing in India. Today, we take pride in our leadership in high-mix, flexible volume manufacturing, serving a diverse range of industrial verticals, especially in intricate integrated solutions that require significant engineering expertise. We currently operate across 12 manufacturing facilities in India and the United States.
We are also adding two new manufacturing units in India. Our key differentiators are, one, vertical integration. We are a one-stop shop offering a true box build solution that involves PCB design, new product development, cable assembly, sheet metal, plastics, magnetics, testing, and logistics. We do end-to-end development from PCB design to manufacturing of final product. Two, our global presence, both in terms of manufacturing presence as well as our customer base. Three, optimal mix of today's established industries like industrial, rail, aerospace, auto, medical, and tomorrow's emerging industries like clean energy. Now moving on to our business performance. In line with our prior discussions, our H1 results were tempered by the challenging economic conditions in the U.S. Despite our robust domestic demand and acquisition of marquee global customers, our India growth story is promising with a 16% increase in revenue and 26% expansion in our order book.
In fact, our Indian manufacturing operation, constituting 75% of our business, achieved a robust 8.7% PAT during H1. However, the ongoing difficulties in the U.S. market have resulted in a decline in our U.S. operations, leading to losses that have temporarily overshadowed the strong performance of our Indian operations. Avalon excels in its global outreach with over 50% of our revenue originating from the U.S. This has allowed us to gain a deep understanding of operating in a globally interconnected economy. Our presence in export markets has given us a competitive edge historically. However, it exposes us to regional economic headwinds like what we are experiencing today. The Indian and U.S. markets are currently operating in remarkably different environments, and their respective performances reflect that. During H1, our Indian market revenue grew by 16%, while our U.S. market revenue declined by 14%.
On that note, I'd like to highlight the hybrid nature of our operations. Since inception, we have firmly believed in our ability to capitalize on a unique combination of Indian cost arbitrage and global margin profiles. At the same time, our U.S. manufacturing presence plays a critical role as it acts as a gateway to acquiring customers within the U.S. market. Having said that, presently, 75% of our revenues are manufactured in India and 25% is manufactured in the U.S. This 75% India manufacturing segment continues to generate industry-leading profitability, reporting around 8.7% PAT during H1 FY24. In contrast, 25% of U.S. manufacturing segment is dealing with the effects of economic slowdown in the United States and is posting a loss. Current circumstances prompted us to seek greater efficiencies. As highlighted in our last conference call, we have taken proactive steps in response to short-term challenges in the U.S. market.
These actions encompass two measures concerning our U.S. operations. One, optimizing product allocation from our U.S. plant to our India plant. Two, rationalizing costs in our U.S. operations. We have been diligently working in these measures over the past few months and already seeing some positive results. To illustrate in terms of rationalizing U.S. costs, we have already achieved half of our targeted improvements, and the remaining changes are expected to be seen the next three to six months. The outcomes of these measures will gradually become more apparent in our upcoming quarters. While discussing our U.S. operations, I would like to take some time to highlight the crucial function carried out by our U.S. manufacturing presence. It functions as our front end, streamlining customer onboarding, and serves as a beachhead to expand our market footprint.
Additionally, it empowers us to position ourselves better from the perspective of the Inflation Reduction Act, a substantial $390 billion initiative advocating adoption of clean energy utilization. These elements underpin the significance of our U.S. operations in the overarching narrative of Avalon's growth. While we are optimizing our U.S. operating costs, our organization is filled with enthusiasm as we recognize the significant decadal market opportunity that lie before us. Now transitioning to an update on the new business we have secured. In summary, our order book stands at INR 1,244 crores as of September 30, 2023, reflecting a 13% growth from June 2023. These are orders expected to be fulfilled over a span of 12- 14 months. Additionally, we also secured contracts and letters of intent for an additional INR 750 crores with execution timelines spanning two to four years.
We're excited to share progress with our two significant clean energy clients, one in the U.S. solar inverter and battery system sector, the other in the hydrogen electrolyzer domain. Both partnerships are on the verge of production, set to commence in Q4 FY 2024. Our aerospace wiper blade assembly project in India is advancing smoothly. We anticipate commencing product delivery in the second quarter of this year. Additional to this, our aerospace cable projects have been approved for production into next year. In terms of new customer acquisitions, we are excited to share that we have secured a large contract from one of India's innovative EV manufacturer, who will entrust us with the manufacturing of the charger and data transmission systems. Additionally, we have also had some major wins in the U.S. We are diversified across verticals.
These include video surveillance systems for industrial applications, grid flexibility systems for clean energy, heat transfer products for the automotive sector, medical equipment, and residential ventilation solutions. Our role as a strategic partner to our customer is evident in our ability to retain all our customers in the U.S., even during these trying times. We are also excited to announce that C-DAC has extended Avalon Technologies an opportunity to receive the Transfer of Technology or TOT as part of the National Supercomputing Mission for Rudra 1, India's indigenous server program. Avalon Group has been a longstanding collaborator with C-DAC within the National Supercomputing Mission, and has actively contributed to the PCB design engineering of the Rudra 2 liquid code server platform, currently in development at C-DAC.
When we want to capitalize on these decadal opportunities, it is essential that we do not lose sight of the forest for the trees and plant the seeds of tomorrow. We are preparing our organization for the years of growth ahead. As a significant step in this direction, we are pleased to introduce Sriram Vijayaraghavan, our new Group Chief Operating Officer. He brings valuable operational experience from his previous roles in Wheels India, Caterpillar, and Hertz, as well as strategic experience from his previous position at McKinsey. We are also strengthening our business development team in the U.S. by welcoming about three seasoned professionals, each boasting over two decades of experience in the EMS industry. As previously highlighted, achieving our full year revenue growth targets depends on the resurgence of the U.S. market.
While our performance in the Indian market remains robust, currently we lean towards favoring the lower end of our initially provided guidance with a negative bias. While we acknowledge short-term challenges, we maintain confidence in our strong underlying fundamentals and remain committed to achieving a stated long-term goal of 25%-30% revenue CAGR over the next three years. To sum up, Avalon stands strong, navigating adversity with resilience and focusing on building a business of profitable growth in the long term rather than a growth at any cost in the short term. Before I hand over the floor to our CFO, we appreciate your continued trust and support as we work together to realize our vision. RM.
Thank you, KB, and good evening, everybody. Thanks for joining the call today. I would like to start this with talking about the critical issues influencing the company's performance, which KB has touched upon. I would like to reiterate them. These include the headwinds in the U.S. economy, which has led to a significant decline in sales from the U.S. market. Number two, our unique hybrid business model, which involves export-oriented sales with manufacturing facilities both in India and U.S.A. While our export-driven model typically yields higher margins and better profitability, the current market conditions pose substantial challenges, much like other export-focused industries such as IT. As a company, we are actively working on adjusting our business strategy to align with the current market conditions.
Our efforts include, point number one, heightening our focus on the Indian market to achieve a 50/50 ratio between the U.S.A. and Indian market, all the while maintaining a presence in the highly profitable U.S. market. Number two, shifting more of our manufacturing operations to India and optimizing our U.S.-based operations accordingly. It's important to note that this ongoing effort to realign our strategy and reduce business risk is a work in progress and may take a couple of quarters to yield tangible results. In the interim, it's crucial to view this quarter's performance within the above context and the above-mentioned near-term challenges. Now let's move on to the performance in last quarter in detail. In Q2 FY 2024, our revenue from operations is INR 201 crores, a decrease of 17.9% year-on-year and a decrease of 14.5% quarter-on-quarter.
In H1 FY 2024, our revenue from operations is INR 436 crores and decrease of 1% year-on-year. Looking at margins, our gross margin is INR 75 crores, down by 14% year-on-year, and an increase of 7% on a quarter-on-quarter basis. Gross margin as a percentage stood at 37.2%, an increase of 173 basis points year-on-year, and 303 basis points quarter-on-quarter. Moving on to EBITDA. EBITDA is at INR 12.6 crores, down 56% year-on-year, and a decrease of 22% on a quarter-on-quarter basis. Look at EBITDA margin. That stood at 6.3%, a decrease of 541 basis points on a yearly basis and 62 basis points on a quarter-on-quarter basis. Moving on to PAT. PAT stood at INR 7.3 crores, down 51% year-on-year, and an increase of margin 3% quarter-on-quarter basis.
PAT margin is at 3.5%, a decrease of 235 basis points year-on-year, and an increase of 59 basis points quarter-on-quarter basis. Coming to IPO fund utilization. As you know, we raised funds about six months back. Our approved IPO funds utilization consists of debt repayment of INR 145 crores, working capital requirements of INR 90 crores, and general corporate purpose requirements of INR 63.5 crores post-issue expenses. We have fully utilized all our IPO funds that have been made available. GCP of INR 64.4 crores, which is arrived based on estimated cost of issue of INR 20.6 crores. The BRLMs have reworked and earmarked INR 21.57 crores for the issue expenses and transferred an amount of INR 298.43 crores into the monitoring agency account, which has been fully utilized.
Utilizing a mix of our IPO and company-generated funds, we have repaid approximately INR 200 crores of our outstanding debt in the Indian entity. As of today, at the group level, by end of this quarter, last quarter, we are left approximately about INR 100 crores of debt in our U.S. subsidiary, CNA. Our Indian entities are almost fully debt-free. Moving on to the balance sheet side. Our working capital days is 151 days in Q2 FY 2024, comprising 112 days of inventory, 65 days of receivables, and 26 days of payables. Encouragingly, we are witnessing initial indicators of decline in working capital demand as the supply chain situation gradually normalizes. The once upward trajectory of inventory has reached a stabilization point. Balancing the imperative of working capital efficiency along with our growth objectives presents a complex challenge.
We will do our best to manage and maintain the balance without compromising growth. I must add that while we are focused on growth, working capital cycles may fluctuate in line with customer requirements, including strict delivery timelines, testing new prototypes for customer, et cetera. We continue to focus on reducing our working capital, and with the current headwinds in our key market, we expect to fluctuate in the short term and hope to achieve a reduction of 10-15 days over the next 6-12 months. Coming to cash position. As of October 31, we have approximately about INR 125 crores of cash in terms of both cash bank balance and investments. Out of this, INR 50 crores is earmarked for investments in our U.S. subsidiary, CNA, to prepay some costlier sources from there, and the balance INR 75 crores approximately will be meant for surplus as a reserve and growth capital.
Additionally, we prefer to keep the existing working capital lines available amounting to INR 185 crores. This additional cushion should allow us to aggressively bid for and execute larger orders which are in our pipeline, which [inaudible] talked about, and also being open for any inorganic growth opportunities. In summary, Q2 FY 2024 performance was characterized by significant growth in the domestic business in spite of the U.S. geopolitical slowdown and the related fixed cost. We hope to achieve the lower end of the guidance with a cautious outlook, and it is based on the U.S. market resurgence and our strong domestic market outlook. Thus, in terms of FY 2024, we expect the H2 will be stronger than H1.
With respect to margins in the upcoming quarter, in spite of the headwinds, with measures like saving interest costs, optimization of manufacturing operations, and cost rationalization in U.S., which our CEO talked about, margins will be under pressure in the near term, but we are hopeful of maintaining or achieving the margins similar to that of FY 2023 levels. With this, I request the moderator to open the floor for Q&A.
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. Our first question today will come from Navid Virani of Bastion Research. Please go ahead.
Hello, am I audible?
Yes, Navid, you are audible. Can you hear us all right?
Yes. Perfect. Thank you. Thank you for the opportunity, sir. Firstly, it is encouraging to see a gross margin expansion. I wanted to understand around the sustainability part of this, as well as what is expected to drive the same going forward because it is sustainable.
I will repeat the question. This is Subramanian here. You talked about the gross margins, and you talked about sustainability of the gross margin. Is it right? That is the question?
Right. That is what I wanted to understand.
Let me answer that. We have achieved a margin about 37.5%, which is obviously good. What we like to say is this quarter has been characterized by good margins in terms of a couple of service business as well. In the long run, I think, we have been consistent saying 33%-35% is something which we will look at the numbers, okay, in terms of the gross margin. This time it has been much better, but we cannot take it as a long-run average.
Yes, sir. That is helpful. And sir, second and the last question which I had was that the growth in the Indian business which we saw this time was around 16%. Now, if I see this in the context of the current industry positioning, this growth looks slightly on the lower side. Can you give us some understanding on this as well as how do you see the future outlook there? That is all. Thank you.
Absolutely, Navid. This is Kunhamed here. See, historically, we've been an export business. If you go back three or four years, we were 70%-75% export and 20%-25% India. To be honest, the potential of India was realized in the last, I would say, 6- 12 months, where we are actively pursuing Indian customers in the longer term. That's why you're starting to see the growth actually grow significantly. Now it will grow significantly as India is doing extremely well compared to the global economies. Did that answer your question, Navid? We started a little bit late to getting into the Indian market. We were primarily an export-driven business.
Thank you, sir. Thank you for the understanding. Wish you all the best and Happy Diwali.
Happy Diwali to you too, Navid.
Our next question today will come from Renu Baid of IIFL Securities. Please go ahead.
Yeah, hi. Good afternoon, team. My first question is, if you can just share more details about the finance. If you can split the financial performance between India and U.S. You did mention about revenue, but how was it at the EBITDA and PBT level? What was the EBITDA loss from the U.S. business in the console numbers and PBT loss?
Okay. This is Subramanian here. I will try and take that question. In terms of India and U.S. business, India and U.S. manufacturing business, that is something which we do not publish, but just a broad brush numbers in terms of allocating cost based on that. The India manufacturing margins remind EBITDA is about 12%-13% in terms of EBITDA, and PAT is about 9%-10%. Okay. And we have achieved about a INR 15 crores profit in terms of India manufacturing business in terms of the quarter.
INR 15 what, sir? Sorry, I missed the number.
INR 15 crores. Okay.
INR 15 crores profit.
Yeah. Okay. In terms of the U.S. manufacturing, as KB talked about and I also indicated, there is a drop in sales and the fixed cost is higher. So that's into losses. And what we are seeing is a net impact about INR 7.28 crores in terms of consolidated profit. So overall, I think the U.S. business in terms of both EBITDA and at PAT levels continue to remain healthy and profitable, and the business model, what we want to continue and sustain on, and it's a U.S. manufacturing business which we need to focus on. And we have started work on that. It will take couple of quarters to yield results, but that's what we want to continue in terms of onboarding customers in U.S. and then moving on to India, which is the way we should continue to make profit there.
Got it. And cumulatively for the first half of the year, what was the net loss from the U.S. business?
Again, broadly, it's about INR 15 crores.
Okay. Got it. So effectively-
Yeah, go ahead. Go ahead, please. Yeah.
So this almost INR 7-INR 8 crores kind of quarterly loss which this business is generating, after the various cost out actions that you have undertaken in Q2, which you plan to do in second half, what are your targeted guidelines for bringing down the losses in the next two quarters, assuming things in the U.S. remain the way they are or may worsen in the third quarter?
Okay. I think we did talk about the measures which we are taking. The measures are at two levels. One is looking at the operating cost and fixed cost, personal cost coming down, and also moving some of the production from U.S. to India. As you know, moving production does take time in terms of a product. We need to work with the customer. We have started the process and the effect of that will be felt over next one to two quarters. Okay? On a consolidated basis, we hope to achieve the margins of what we have achieved last year, and that is what our target is in terms of moving forward.
Renu, if I can add.
Yeah, sure.
If I can add to. What we are trying to do is reduce, optimize our personal cost, which is very high in the U.S. At the same time, move some of our existing customers to India who have been there with us. Because the U.S. costs are rising, not for us, for everybody in the U.S. So that transition is also happening. It is twofold. One is reducing cost and one is transfer of products. We intend to keep only clean energy product manufacturing in the U.S. 50% of our customers agreed. The other 50, we are in the process of making them agree, let us put it that way. Okay? It is a work in process.
What is the estimated reduction in cost for the U.S. operations that we have in our mind or which we are targeting? Fixed overall.
I don't want to give a number, but it's a percent.
Got it. Surely. Second, while you've highlighted entry into automotive EV business, can you share a bit more details in terms of what applications are we getting within the EV portfolio? You mentioned about charging solutions for the EV major. By when do we see revenues kicking in from this customer? Will this be parked under the clean energy segment or the industrial business for us?
I'll answer the last bit initially, if that's okay, Renu. It will be parked under our clean energy business because we've been doing that. If it's EV, we are doing that. We are actually doing all the pieces for the vehicle. Okay? Any electronics part, it's end-to-end solution with three or four different products going into the vehicle. We hope to start the initial runs in Q4, and we have secured orders for the next 12 months.
So when you mention you're doing everything, is everything relating to the powertrain or also other electronics, including infotainment, lighting, and other solutions for the four-wheeler?
Okay, I know. I do not want to say the four, three or two-wheeler, but it is three or four different boxes for the vehicle.
Got it.
It is not important.
Is this on a box build basis?
Exactly. All of it is box build, yeah.
Sure. Thirdly, on the C-DAC development which you have shared. Just trying to understand the revenue potential from this initiative of Make in India. Recently one of the other leading EMS company had also announced getting approvals with C-DAC for one of the super computing machines under the same mission of localizing these computing machines in India. Just want to understand Avalon's role here, the opportunity, addressable market, and in your view, how many other vendors are working with C-DAC for the same solution?
From what I understand, I cannot speak for C-DAC. It's only going to be three vendors and you know the other two, is what we understand. We've been working with C-DAC for the last four years. Since our entry aggressively into the Indian market has been the last year. Okay? We are looking at. The target numbers is all over the place. I cannot pin to a number. You may have a better number on it, but it could be a three-way split, in that case, or it could be three vendors trying to support what they can.
But can this become a $5 billion business portfolio for us in the next three to four years?
That's a difficult. It's the choice in how they-
Trying to understand the potentiality of this IT products vertical for us.
So because it's servers and it's higher end, that's why our interest.
Yeah.
Since we are vertically integrated, we do a lot of the pieces internally, and we have done for Rudra 1, apart from the PCB, we have done all the parts for them internally. Rudra 2 is coming up. I think that's where the scale is going to come. So I'm hoping that we get a better understanding on the scale and scope, as the government decides what they want to do with it. Because the whole IT policy is in different stages today. Once the clarity comes is when the Make in India feels because I don't think it's going to be a $5 billion opportunity, to be honest.
Billion rupee opportunity, sir, not dollars. Sorry.
Okay. Sorry. It could be. When you said 5 billion, I apologize for that. Yeah.
INR 5 billion is a very realistic number, I thought so.
Okay. That could be, I would say that is possible. I heard it was billion for some reason.
No, I am not talking in dollar term. Sorry for that.
It is okay.
Lastly, while we spoke about all the new opportunities and the restructuring underway in the U.S., what would you like to comment in terms of the revised guidance for FY 2024? Net margins, you have mentioned you want to target same levels as last year, but in terms of revenue growth, how should we look at the year-on-year EBITDA margins?
See, as our focus is a three-year journey, and 2025 and 2026 are looking really strong today. Apart from this, we have added another seven customers. One in the Rail segment, two in the Industrial segment, one more division of one of our existing customers in the Rail segment. We feel very confident of the future. The immediate question mark for us is how soon will the U.S. market come back? There are different views on it, and we believe that some of the inventory correction that is happening is very much underway, and we may possibly see all these customers come back in the near term. But it is a toss of a coin when they are going to come back. I believe that is the crux of where the range will be.
That is why I said we are on the lower end of our guidance with a little negative bias that could change drastically if one of our customers is back in production. Saying all this, we believe we have not lost any customer through this whole process. It is just wait and watch for the business to come back. These are customers who are very consistent with us for the last five or six years.
Sure. Just if you can remind us what has been the lower end of the guidance. Maybe I have missed that number.
Yeah, go ahead.
Yeah. Renu, Subramanian here. In terms of the revenue guidance, we have talked about 15%-25%. As our CEO said, we are hopeful of achieving the lower end of the guidance. Again, the key thing is to be when the U.S. market comes back, because we continue to be focused on the export-focused market. Yeah.
Got it. Maybe 10-15 may be a more realistic number to expect for the current year.
I leave that for you to work through it, but the U.S. economic macro conditions are difficult under pressure. This is what our hope, and we are working towards it.
Done. Thanks much, and have a good session. Thank you.
Thank you, Renu.
Our next question today will come from Meet Jain of Motilal Oswal. Please go ahead.
Right, sir. Thank you for the opportunity. Am I audible?
Yes, Meet.
Yeah.
You are welcome.
Hi, sir.
Hi.
I just wanted to understand the end user mix right now. We can see clean energy. Clean energy mix has been going down, and the Q1 also has witnessed sluggishness. Earlier in our con call, we said that our clean energy mix is growing at a very fast rate and will always be around 35%. This 35% is including this new orders of EV, I guess, talking about, or it is entirely the U.S. orders?
Meet, it's a mix. We have two of our larger EV customers where we predicted that it's going to go to 35%. We still believe over a period of time it's going to go to 35%, and the EV is an additional part to that. Does that answer that question?
Yes. Thank you. Next is on the aerospace part. Can you give the ballpark growth? How did the aerospace division build in this quarter and the first half, and the new orders which we talked about, the factory transfer and the plastic tooling, how are they progressing?
The usual aero business is going relatively the same. The wiper blade, as we have started the processes to get that into production. We see that coming on board in Q2 of next year. The number of wiper blades, I think, is close to 200. The first set will start to go through in the early part of next year. The other good opportunity we have is in— Not opportunity. We have already have FAIs approved for cables in planes. Okay. These are in the cabin space. Secondly, a new customer, a different division of one of our customers, has also given us first articles to be approved for cable. These are substantial piece once the approvals come through. So for metal, we went to plastics, and now we are in cables. Mostly in the cabin and some part in the engine.
Understood. The last question is on the industrial side. Industrials and the order book side. Current order book of almost INR 200 crores. Can you provide a broad mix of how much is for U.S. and the India business?
See, our goal always has been going into the future to do 50% India and 50% U.S. because of the reasons you see today, the economic changes on both sides. To capture both, our intention will always be to get to the 50/50 mix. In the last quarter, I think the orders from India were much larger in comparison to the U.S. But again, we are getting six or seven new customers coming in the U.S. Though the economy is slow, we are acquiring customers. We are also invested in three new regions for our sales folks with new hires on business development. Though we are reducing costs, optimizing costs in other regions, we are still investing in business development. We are a firm believer when the U.S. economy comes back, we would have much more to deliver.
Okay. Thanks a lot, sir. Thank you.
You are welcome, Meet.
Our next question today will come from Karan Sanwal of Niveshaay. Please go ahead.
Yeah. Hello, am I audible?
Hello, Karan. Yes, you are audible.
Yeah, thank you for the opportunity.
You are welcome.
I have a couple of questions. The first question would be, there is an increase on the working capital side, there is an increase in inventory days, and there is a reduction in payable days, which is causing our net working capital to go up. I wanted to understand when do we expect them to stabilize, and what will be the targeted level of net working capital days that we are internally targeting?
Yeah . Subramanian here, and I will take that. In terms of, as you rightly said, net working capital is broadly flat between last quarter and this quarter. In terms of guidance, we wanted to look at reduction of about 10- 15 days in terms of working capital. But considering the market condition in terms of U.S. pressure and also the customer pressure in terms of orders, it remained broadly flat. But we continue to be hopeful of achieving what the guidance gave in terms of 10- 15 days in the next 6- 12 months. Which will be essentially led by reduction in inventory days and also pushing up for payable days a little more. In the long run, we hope to achieve 120 days, which is what we were pre-COVID, and in the medium term, not in the short term.
Medium term, we hope to achieve the same as well.
Okay. Also continuing on the question that the last participant asked, I wanted to understand the mix of order book between segments. If you could broadly highlight which segment is contributing more to the order book or the current order book.
Today, I would believe it will be clean energy and followed by industrial.
If you could give a ballpark number, like how much portion would it contribute to the clean energy and industrial part?
I would say these two will be north of 60% together.
Okay. Thanks for the clarity. One last bit of question. I understand that many participants have already highlighted, but just wanted to understand, when we are saying that we are targeting an EBITDA margin of similar to the last year, we actually need to do around 15%-16% EBITDA margin for the H2 as compared to H1. Just wondered, are we confident enough to achieve that target for the next half of the financial year?
Yeah. This is Subramanian here, I will take that. As you said, yeah. Rightly so. In terms of our focuses is on achieving the bottom line in terms of the PAT and the profit margins. Our focus on end goal will be to achieve the same, typically our H2 is stronger than H1. Okay. What we believe is the market should come back. Though we cannot predict the exact time, the market should come back. We are also working on reduction in cost in terms of personal cost and moving some of the operations into India. All of that should give some more savings in terms of the cost. Coupled with savings in interest costs, we are hopeful of achieving the bottom line in terms of what we achieved last year. H2 has to be stronger than H1, as rightly said. Yeah.
Just last question. You are saying that the Indian market is contributing to the growth. Just want to understand which are the main drivers of growth in the Indian market as of now?
If I can take that.
Yeah.
Yeah. The Indian manufacturing, when you say 75% of Indian manufacturing, it is some of the export as well as the Indian market, okay?
Correct.
Together. Okay. From the manufacturing standpoint, the growth is going to come from clean energy as well as the industrial side. And future, as you very well know, we have been in the rail industry for quite some time. We are seeing substantial projects from our existing customers, as well as we have signed a new global major in the Rail segment. We hope, as India's growth story in rail streams ahead, we will be a very strong part of it in the future.
Okay, great. Thank you so much, and all the very best for the next years. Thank you.
Again, it is star and then one to ask a question. Our next question is from [inaudible] . Please go ahead.
Yeah, thank you for the opportunity, sir. Most of my questions were answered. Just I have a couple of questions over here. Sir, you just now mentioned that the rail industry, you believe that will become a substantial part of your business going ahead, that will grow. Do you expect this also to be in the 10%-20%, or how do you expect this? Can you throw some color on that?
Historically, we look at mobility, which is auto, air, and rail. But EVs we count in clean energy, just for the groupings. We believe rail today is a substantial portion of what we do. And with India growth story, rail will continue to be a substantial portion of what we do. We are in railway interlocking signaling. We are in braking. We are hopefully getting into Kavach, and as well as parts for our customers for the Vande Bharat.
Right. Thank you, sir. My second question is, historically, sir, what has been your trend like H1 in between H1 and H2? Can you just clarify that?
H1, again, it varies, but broadly in the range about 45, 55. But typically, if U.S. is in more recession, it can be much more stronger. But that's the normal number.
Right. Yeah. The recent customers acquisition which you have done, be it in the U.S. or be it in India. So majorly, when do you expect these customers to ramp up and contribute a significant portion? How much time generally it takes for them to ramp up?
Ideally, it's 4-6 months. In the air sector it's a bit longer. Air and the rail sector is a bit longer. If it's in industrial/communication, and I believe in the EV side, we should be in production 4-6 months. I would say late part of Q4. Primarily a lot of these projects will kick in full stream in 2025.
Okay. Yeah. Thank you so much, sir.
You're welcome.
Thank you so much.
Our next question today will come from Ashish [inaudible] . Please go ahead.
Hi, sir. Good afternoon. My first question-
Hi.
is regarding the equity, which went down from 71% to 50%. What was the reason, sir, and where we utilized that money? This is the first. Sir, my second question is regarding hydrogen electrolyzer you have mentioned in your opening remarks. I want to know about this particular segment about product. In terms of number, in future, how big this concept is, sir? I have two questions, sir. Please.
Okay.
On the equity part, I will take it. I think you are referring to usage of OFS money, which got used between June and September. Basically, this remained in our bank account, and then was subsequently paid off to the senior shareholders. Otherwise, in terms of equity, there is no reduction. Yeah.
Okay.
We have been working on the-
Yes, sir.
on the hydrogen project for the last two years, doing various components. It's a fairly large system. And it's a very expensive system in a normal, running into lakhs. So we're building the first 100 this year, maybe 60-100 units this year. And the projections are anywhere from 300-600 the following years.
Sir, we have seen you recently participated in India Mobile Congress. Sir, what is our contribution in 5G and 6G networks?
Yeah. So we've been working with various, l ike I mentioned earlier in the call, the last six months to a year is when we have truly entered the Indian market. We are very focused outside the country, even that was export was the key. And with the Indian economy booming and Indian market expanding, with China plus one and things. So we believe, we have worked with various customers on 5G, especially getting them from PCB layout to prototype. And we've never taken, t he company complete field production as it's evolving today. We see a big opportunity in certain parts of 5G. That is why we were in the conference. It is multifaceted, and I hope that will bear fruit in the future.
All right, sir. Thank you so much.
You are welcome.
Our next question today will come from Rahul [inaudible] . Please go ahead.
Yeah. Good evening, and thanks for the opportunity. I am not sure if you answered this question earlier on profitability. So I want to understand, the drop in EBITDA margin in this particular quarter, is this all mainly because of the U.S. operations or are there sectors or segment contribution which has impacted your overall profitability?
Yeah. Subramanian here, Rahul. If you look at the gross margin, it has gone up. Essentially, it's not a problem with the margins of the customers. It's been essentially led by the operating leverage impact, which is drop in the top line and the fixed cost being there, which automatically leads to a drop in EBITDA. It's not to do with specific customers, it's more to do with the operations and the higher fixed cost. Okay? And it's dominated by the U.S. market, where the top line did go down but the fixed cost remained higher, so that's been the pressure on.
You did talk about the growth. Is it possible you can give me the contribution of U.S. revenue in the INR 200 crores that you've done in this quarter?
Sorry, can you repeat the question? What you asked? Sorry.
No.
Yeah.
U.S. revenue percentage. As of now, we do 75% of our production is done in India and 25% is done in the U.S., if that answers your question.
Okay, fair. Thank you very much.
Welcome.
Yeah.
As there are no further questions, I would now like to hand the conference back over to Bhoomika Nair for closing comments.
Yes. Thank you to all the participants and particularly the management for giving us an opportunity to host the call. Thank you very much, sir, and wish you all the very best, sir.
Happy Diwali to all, and thank you very much for the opportunity to talk to all of you. And wish you a very good evening. Thank you.
Thank you.
On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us and you may now disconnect your line.