Ladies and gentlemen, good day and welcome to Avalon Technologies Limited Q1 FY 2024 conference call hosted by Ambit Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Dhruv Jain from Ambit Capital. Thank you, and over to you, sir.
Thank you. Hello, everyone. Welcome to Avalon Technologies Q1 FY 2024 earnings call. From the management side, today we have with us Mr. Kunhamed Bicha, Chairman and Managing Director, Mr. Bhaskar Srinivasan, President, Mr. RM Subramanian, the CFO of the company, Mr. Michael Robinson, the COO for U.S.A. Business, and Mr. Suresh V.R., Head of Corporate Planning and Investor Relations. Thank you, and over to you, sir, for your opening remarks. After which we will open the floor for Q&A. Thanks.
Thank you, Dhruv. On behalf of Avalon Technologies, we extend our sincere welcome to all of you for our Q1 FY 2024 earnings call. We deeply appreciate the unwavering support we have garnered since our listing, and we are committed to continue earning your trust as we move ahead. Given that a comprehensive business overview was presented during our first earnings call, we intend to provide a condensed version for the benefit of those who are new to our discussion today. Avalon Technologies is one of India's leading players in electronic manufacturing services with a global delivery footprint. Our journey started in 1997 with two aspiring entrepreneurs with a vision of bringing world-class electronics manufacturing to India. We are one of the leaders in high-mix, flexible volume manufacturing and are present across multiple industry verticals with a focus on complex integrated solutions with a significant engineering content.
We have 12 manufacturing units located in India and the United States and are now adding two more manufacturing units in Chennai. Our key differentiators are vertical integration in its true sense, enabling us to be a focused box build player. Global presence, both in terms of manufacturing presence and customer base. And three, focusing on winning opportunities not only in mainstream sectors but also in emerging sunrise sectors like clean energy and high-margin businesses like aerospace. One of our core differentiators is that we offer vertical integrated solutions. Today, we are a one-stop shop offering true box build solutions. That includes 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 the final product.
We proudly extend our services to a range of industries, including clean energy, industrial, rail, aerospace, electric vehicles, medical, and security infrastructure. Moving to our business performance, let me begin by acknowledging that our Q1 results have been comparatively subdued. However, in line with our past trends and industry comparisons and our previous communication, our second half is significantly stronger than our first half. Currently, we are observing distinctive growth dynamics between the Indian and U.S. markets in the near term. The Indian market displays remarkable buoyancy, but the U.S. market presents immediate short-term challenges. To share a perspective, in Q1, 45% of our business is from India and 55% is from the U.S. Notably, our Indian customer segment demonstrated robust growth, achieving a 50% increase in revenue during Q1 FY 2024 compared to the same period in FY 2023.
As I anticipate, this growth is likely to be around 35% on a full-year basis. Conversely, revenue from our U.S. customers remained relatively flat year-on-year in Q1. This trend is a consequence of current hurdles posed by a slowing U.S. economy and inventory rebalancing steps taken by our customers from a 40- 50-week lead time to a 20-week lead time, which was there during pre-COVID levels. Throughout our journey, we have encountered intermittent short-term declines, often followed by periods of renewed market strength. While our U.S. customers' revenue grapples with immediate challenges, we also anticipate benefiting when the U.S. market regains its stride. Avalon has always played the role of a partner rather than a vendor and will continue to stand by our customers to serve our customers through all phases of the business cycles.
The fact that we have not lost a customer during this slowdown is testimony to our partnership. We had earlier guided for a 25% revenue growth in FY 2024. As it stands, our Indian customer segment continues to outpace industry growth. Yet, meeting our full-year revenue growth guidance hinges on the U.S. market resurgence. If I were to wear a conservative hat, then the near-term revenue growth in FY 2024 may range between 15% and 25%. While macro conditions remain beyond our control, and we have spoken about the growth perspective, allow me to shift our focus to what we control, our profitability. Our financial success is not solely tied to delivering high-mix products. It is also rooted to our commitment to operational efficiency. Given the near-term challenges in the U.S., and as we strive to be operationally efficient, we are implementing two measures.
One, optimizing production allocations, strategic relocation of some of our production activities from our U.S. plant to our India plant. Two, rationalizing costs in the U.S. operations. We have taken concrete steps in initiating a plan aimed at optimizing our U.S. operations. This process is already underway. The positive outcomes of these measures will become increasingly evident in the forthcoming quarters. As we address some of our short-term challenges, what truly excites us is the multitude and scale of opportunities that are coming our way. We are witnessing India's emergence as an accepted manufacturing destination, coupled with rapid growth of domestic electronics manufacturing. Let me highlight some of the customer wins and opportunities. We have made significant inroads in terms of customer breakthroughs in geographies and new segments. To give some examples, we have added three new clean energy customers, with one of them being in the EV space.
The ramp of the sale is expected in late 2024 and 2025. Furthermore, some of our previous clean energy wins are expected to transition to volume production in two to three quarters, with expansion estimated in FY 2025. We entered a new segment, received the first tooling orders for plastic parts for use in interiors of commercial aircraft. We are also entering the thermal blankets, heat shields inside the aircraft engines for our aero customers. We have also entered a new geography for delivering complex PCB design and development, a strategic step that can open up a new avenue of growth. It is not always about the near term. The business environment we are experiencing now is challenging outside India. We endeavor to build an organization that can win and deliver on these opportunities that are unfolding over the next decade.
Towards that, we are proactively adding seasoned senior management professionals across operations and business development. We are also expanding capacity. We are adding two new plants in Chennai. With that, I would like to thank all of you for joining the call. I will hand it over to Mr. Subramanian, our CFO, for his detailed financial commentary.
Thank you, Kunhamed, and good evening to all. Thanks for joining the call today. I would like to start this conversation with a discussion on last quarter gone by. In terms of numbers, in Q1 FY 2024, our revenue from operations is INR 235 crore, an increase of 19.9% year-on-year and a decrease of 14% quarter-on-quarter. Coming to gross margin. Gross margin is about INR 77 crore, up by 9% year-on-year, and a decrease of 24% on a quarter-on-quarter basis. EBITDA margin. EBITDA is at INR 16.2 crore for the last quarter, up 17% year-on-year, and a decrease of 61% on a quarter-on-quarter basis. If you look at EBITDA margin, that stood at 6.9%, a decrease of 307 basis points on a yearly basis, and 823 basis points on quarter-on-quarter basis.
PAT stood at INR 7 crore for the last quarter, down 24% year-on-year and 69% quarter-on-quarter basis. PAT margin stands at 2.9% for the last quarter. Coming to IPO funds utilization. We mobilized about INR 320 crore from IPO as a primary capital, and our approved IPO fund utilization consists of debt repayment of INR 145 crore, working capital of INR 90 crore, and general corporate purpose requirements of INR 64.4 crore, post-issue expenses. We have fully utilized all our IPO funds that have been made available to us. A small amount of IPO funds are left, and post-reconciliation with the BRLMs, the same will be utilized this quarter. Utilizing a mix of IPO and company-generated internal accrual funds, we have repaid approximately INR 200 crore of outstanding debt, compared to pre-IPO levels in the Indian entities.
As of today, at group level, by end of this quarter, we are left with approximately INR 100 crore of debt in our U.S. subsidiary, Sienna. Our Indian entities are almost fully debt-free now. Moving on to the balance sheet side. Our working capital days was at 151 days in Q1 FY 2024, comprising of 108 days of inventory, 67 days of receivable, and 24 days of payable. Encouragingly, we are witnessing initial indicators of decline in working capital demands as the supply chain situation gradually normalizes. The once upward trajectory of inventory, which was seen in the last one year, has reached a stabilization point. Balancing the imperative of working capital efficiency alongside supporting the growth objectives presents a complex challenge. We will do our best in terms of managing it and maintaining the balance without compromising growth.
I must add, while we are focused on growth, working capital cycle may fluctuate in line with customer requirements, including strict delivery lines, testing new prototypes for customers, et cetera. We continue to focus on reducing our working capital cycle and expect to decrease by 10- 15 days by end of FY 2024 compared to FY 2023. As on 31st July, we have about INR 125+ crore of cash in cash, both from IPO as well as from internal accruals. Out of this, INR 40 crore is earmarked for investment in our U.S. subsidiary, Sienna, to pre-pay cost source of funds, and the balance 85+ crore will be surplus maintained as a reserve and growth capital. Additionally, we prefer to keep the existing working capital lines in India available amounting to INR 175 crore.
This additional cushion should allow us to aggressively bid for and execute significantly large orders which are in our pipeline, and also be open for any inorganic growth opportunity which presents itself. In summary, our Q1 performance was characterized by significant growth in domestic business and slowdown in U.S. geography, along with the related fixed costs that will be seen in the reduction in the margin. But we believe the U.S. customers should come back in H2, and coupled with new business pipeline, we believe we can reach the guidance of the top line, which as CEO gave for this financial year. With respect to the margin, in spite of the headwinds, with saving interest cost and optimization of our manufacturing operations and cost rationalization measures in U.S., which as CEO talked about, we are confident of maintaining our FY 2024 margin at similar levels to that of FY 2023.
Having talked about past performance, we will move your attention to the market opportunities in medium term. Avalon has been in the sector for more than 20+ years, telling the story of India manufacturing to the world. But we have not seen this level of new business activity in terms of global customer interest, number of plant visits, customer orders, and last but not the least, the support from government of India for this sector and industry. This is one of the best times to be in the industry, and as much as we are focusing on short-term performance, we need to focus on building the organization for future to exploit this industry tailwinds.
We are cognizant of the substantial market opportunity in front of us, and the early indication suggests that multinational firms and global firms who are desirous of creating alternative supply chain and diversifying their supply chain beyond China. I must highlight, nevertheless, EMS industry is a long-term play dedicated on customer relationship and our performance. As a result, the China Plus One strategy will evolve over a longer time frame. One more aspect that I'd like to share is that we are engaging in organization that can handle the ensuing growth momentum. This is in terms of right talent recruitment, both at senior and mid-levels, processes for production delivery, and working capital management. We expect that by implementing these initiatives, we will be able to take advantage of expanding market opportunities and increase the long-term shareholder value. With this, I request the moderator to open the floor for Q&A.
Thank you.
Thank you. 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. The first question comes from the line of Rahul Gajare from Haitong Securities. Please go ahead.
Good afternoon, gentlemen. Thanks for the opportunity. I have a couple of questions, and I think you touched on some aspects of the question that I had on the performance during that quarter. Now I understand performance has been impacted by softer U.S. business, which I think you were expecting. Therefore, H1 was expected to be soft. But incrementally for us to have a better understanding or better projection of the financials, is it possible that you could, when you are guiding for the revenue growth, you could actually talk about India business and U.S. business separately at the revenue level itself so we have better predictability on the revenue side. You talked about 35% growth that you're expecting in this year for the India business. What is the kind of growth that you are expecting for the U.S. business? That's the first question.
Okay. There are two or three aspects to this. One is we are signing multiple new customers in the U.S., which are going to give us revenue in the later part of the year. That is the greenfield coming in. Number two is some of these larger customers who are rebalancing inventory. We think they will stop cutting. This is after four or five years of continuously building up inventory, first during the COVID times and then the supply chain issues. Things have all quietened down now in those two elements. And they were at a 40- 50 weekly time now coming back to the pre-COVID levels of 20 weekly time. So them coming back itself will get us to our normal levels, new customers coming in.
And three, some of our clean energy customers who have had delayed starts, they're also supposed to come in in the later part of this year. Did that answer your question, Rahul?
No. If I were to quantify the kind of growth that you would expect.
That's a little bit tricky to answer because I think because of the when the customer is going to cut back in. But we would see similar growth like last year.
Fair enough. My second question is on the profitability. You did talk about being able to maintain margins of between 12%-13% in FY 2024. Looking at the first quarter performance, obviously you would be expecting a bump up in profitability in the second half. My question is, you talked about rationalizing costs from your U.S. operation. Could you touch upon how do you intend to ultimately cut costs in the U.S. and whether this 12%-13% margin is something that will be sustainable for a longer period of time?
Yeah. Subramanian here. In terms of how we plan, I think we said maintaining the profitability at the PAT level is what we like to maintain it and hopefully we are confident of achieving the same in terms of FY 2023 levels. That's point number one. In terms of what the latest measures we are doing, Kunhamed did talk about starting with product rationalization, leading to product optimization in terms of where we manufacture and that corresponding leading to in terms of cost optimization at the U.S. level. That's what, at a very high level, we are going to work on. Considering the sensitivity of what it is, we would not like to get into the individual details of what we are doing it, but this is a measure which we have started.
It will take some time to cut in, but coupled with the interest cost saving and these measures, we are confident of reaching the profitability levels at the bottom line level.
Subramanian, do you want to explain the 70%?
Yeah. Just to add to it in terms of the way our business is organized. Basically there's about 70% of the manufacturing is done in India and that 30% is done in U.S. as of date for this quarter. If you look at an India business level, India manufacturing level, we have been able to maintain the profitability in terms of at the last year levels for the India business. It is a U.S. business where we have been impacted. The reasons are very clear. It is because of the U.S. economy slowdown and the consequent top line impact. The fixed cost being what it is.
Coupled with all of these measures in terms of cost rationalization, we should be able to achieve it and that is how we want to do it in the long term as well and try and keep the U.S. front end, but do as much as manufacturing in India and try and service the customers in the U.S., which is a high margin business. This will not dilute our focus on India business, which continues to grow at 50%+ of what we said and guidance also given in terms of what we will end up for the future. I do not know if I answered but
Yeah. Fair enough. Just to take this point further. The breakup of revenue has been pretty much like it was last time, where industrial was a large piece followed by mobility and then clean energy. Which is the area where you actually faced headwinds on profitability side? If that is something you can talk about, that will be helpful.
We have not guided or we do not give guidance specifically in terms of segment-wise. I think individually what we are spread out across all sectors that you know we are spread across. What we are seeing is a significant growth opportunities in clean energy, which is growing better than the rest of the sector. In terms of profitability, we do not track at an individual segment level.
Sure. Thank you very much.
Thank you. The next question comes from the line of Ravi Swaminathan from Spark Capital. Please go ahead.
Hi, sir. A very good afternoon. Congrats on the good growth that you had reported during the quarter. My first question is with respect to the strong traction that we are seeing in the India market. Which are the sectors that are driving this growth? If you can throw some light on it.
A lot of it is coming from our industrial and some of it is clean energy passthrough to the U.S. as well as our largest segment. We are seeing the railway side pick up quite a bit compared to last year.
Got it, sir. From a futuristic aspect in terms of the India business, are there any plans to get into the high volume segments like auto, consumer durable, et cetera, which can drive the India business growth?
We are actually, when we say clean energy, one of our largest customers is in the EV space. We hope to finalize and start later part of this year, and that will be a high volume product.
Okay. And durable space also. Any thoughts on that? Are there plans to foray into that kind of categories also?
Ravi, we always try to. Not that we don't like the business, then our mindset needs to change for that. But saying that, I would say in the future we'll relook at it, but for sure, not as of now.
Got it, sir. In terms of working capital, how much scope is there for it to improve going forward? Because if you end up reducing that, your return metrics can improve significantly forward. Asking from that angle.
Yeah. Subramanian here. I'll try and answer this question. If you look at pre-COVID levels, we were operating about, in terms of inventory, which is where the real numbers have gone up. We were operating about 80- 90 days levels. Today, we are significantly higher. So there is a good scope for us to look at it. And we believe we can do about 10- 15 days reduction on that side. The only thing is we need to keep balancing between the growth opportunities which comes. Because when you have a new customer kicking in, you cannot look at efficiency. But we will continue to manage this balance and work on working capital. Once the customer stabilizes, we definitely can improve the inventory levels on that.
Got it, sir. Yeah. Thanks a lot.
Thank you. The next question comes from the line of Aadesh from Motilal. Please go ahead.
Hello, sir. Thanks a lot for the opportunity. Sir, I just wanted to understand that with this slowdown in U.S., you mentioned that growth will be similar to what you did in last year. Right? If only the domestic growth sustains. Last year, we did around 12%-15% top-line growth. Is that the number we are looking at?
When I mentioned that, I thought I was asked, Aadesh, about U.S. growth. That is the answer for the U.S. growth, because we are seeing very flat lines now. That was the answer to the U.S. growth when I was asked.
Okay. Sir, when we are talking about cost optimization in our U.S. operations. Does that imply somewhat of defocusing U.S. at least for the near term and putting more focus on the domestic, where actually the growth and predictability is?
Sir, as you all are well aware, India is going through phenomenal growth rates compared to all the markets around the world. In the near term, our cost optimization is to make sure that we deliver to what we have promised. We will rethink it six months down the road, but we are not stopping the process of optimizing costs in the U.S. with both transferring products to India as well as looking at what we need not do there. In the same sense, we are increasing our business development activities in the U.S.
Got it, sir. And sir, I see quarter-over-quarter, there is a slight dip in your order book. Obviously there would be some execution also, but has the run rate of order inflows also slowed down for you?
There are two pieces to that. If you look at how we look at orders is what is executable in the next 12- 14 months. The rest of it comes either in letter of intents or contracts, multi-year contracts. You see our contract speeds actually increase. But on the negative side, coming in from the U.S. customer base, especially when you are rebalancing inventory, you don't expect new orders to come in for the short term. Okay? So it's a combination of two, where the order book is actually increasing in the longer term, but not in the 12- 14-month term, which we have very much covered for this year.
Got it, sir. We should see some moderation in your order book growth as well. And sir, can you throw some more light on this inventory normalization which is happening? In which segment it is happening? It is happening in U.S. Solar, U.S. Wind, or U.S. general industrial?
As you know, we are well diversified. Normally, during COVID times, the aero business went to zero. It didn't affect us because something else picked up, right? But in this scenario, what we are seeing is that the overall optimism in the U.S., it's been there for too long, and with the monetary tightening there also, people are across the board. It could be one clean energy, one auto, one healthcare. So it's not just one industry or so. It is across the board phenomenon with customers there and their mentality today. Normally our first reaction out there, whether you want to increase or decrease, they'll react first. But unfortunately, lot of our customers are doing it together.
Okay. C ongrats, sir. Thank you.
Thank you.
Thank you. The next question comes from the line of Renu Baid Pugalia from IIFL Securities. Please go ahead.
Yeah. Hi, good evening team. Few questions from my side. First, sir, I missed some of the initial comments. I am not sure if you answered. Can we have some more updates on the clean energy? Last year we had a delay in the shipment for Enarka. So where are we this year in terms of the first shipment plus the rest of the volume ramp-up? Apart from that, how is the outlook for rest of the other segments? While you did mention that the U.S. is seeing a broad-based slowdown across diversified industries, but if you also understand there, the government has been very aggressively giving incentives for some of the clean energy transitions. Is it not that some of the clean energy segments would be growing at a much better pace from these startups compared to the rest of the economy or the industry there?
That is the first question.
Renu, could you just repeat the first part of the question, because there were two or three questions there. I didn't want to.
Okay. First update on how has been the optics for Enarka and the clearances that they were waiting for.
Okay. Got it.
When do we expect the shipments picking up for them?
So we believe that, as of today, I know there's been a couple of delays, but the first 100 sets or so, it's around INR 50 lakhs-I NR 70 lakhs per set. Should start flowing out late part of Q3 and Q4. So that, from what we know today, has started, and we also have an LOI for 600 units for the next two years. Did that answer your question, Renu?
Yes. That's the first part. And the second part, in general outlook on the clean energy and-
On the U.S.
On the U.S. Yeah.
Absolutely, there is lot of activity in the U.S. and we have signed up two or three more, two in the U.S. and one locally in the clean energy space. It is all the hybrid manufacturing model where the labor-intensive part is done in India and the final assembly and the automated part is done in the U.S. That is going strong. One of our other larger customers, we expect there have been two delays in start. I know that will be your next question. The latest info we have is that they will start in Q4 of this year, which is a substantial piece for us.
Broadly, if we take a three-year view, in your sense, what should be the size of your clean energy business portfolio, given large customers which are in pipeline and products are on the way? Conservatively, in your view, how could we see the size of the business three years down the line?
Today, we have always committed to is that 35% of our business in the next three to four years will come from the clean energy business, and mostly out of the U.S. geography, with most of the manufacturing done in India and the final assembly done in the U.S.
Sure. Secondly, if you look at the railway segment, clearly, government has been going very aggressively with upgradation of the old network, both rolling stock as well as signaling telecom braking systems. Can you share updates in terms of how are you looking at the pipeline from your customers for the domestic market building up, and any global export opportunity of having manufacturing for some of our Japanese customers, which was under discussion some time back?
Yeah. As you well know, it's already increased this quarter, and we were very, I would say 20%-30% this quarter already in the railway side. We are expecting a lot more coming in the next two or three quarters. It's relating to government releases. But once the releases happen, I think our immediate business, which we already do, whether it's braking or whether it is interlocking, is going to see a substantial increase. And some of our customers, Japanese and Indian, are getting into the new Kavach systems. But that's not immediate. That's in the longer term. And also, in the metros, into gates and most of this is from the Japanese and French customers. Does that answer your question, Renu?
Partially, yes. Can we quantify the addressable opportunity size for us over the next couple of years, or say from three-year, four-year perspective, our addressable market, what size are we looking at?
It's really interesting that you ask that, because I asked the same thing to our customers in Japan a couple of weeks back. And they said it's all related to the government releases. But they said, "Get ready for a substantial increase," which is three or four times what we do. But they're not sure how much is the release to that. But in our mindset, we can execute it fairly straightforward once it comes through. Because we've been doing this for seven, eight years.
Yeah, right. So when they say "get ready," does that really mean that while on an average today we are working at 60% utilization levels, we may have to upgrade our capacity for rail segment of the market?
It's not that. Our buildings are getting built or getting finished in the next four or five months. For us, the longest lead time is the building and the infrastructure. We believe if we need, we've got enough capacity in the short term. There's always 8 month, 9 month lead time to get this thing going from our customer. There's enough time to get equipment if required, which I think in the near term, we are very much covered with the capacity which exists today.
Sure. Lastly, a question related to IT PLI. While we know you're not directly there into IT products, you also deal with customers on the communication and networking devices. Do you think the recent government initiatives to drive localization and have import duties and restrictions on direct imports can drive substantial growth for you also in this business? Or this would not be one of the core areas for you?
No, there is some strategic elements we are doing, which I cannot discuss on the call. But we are looking at two large entities or government bodies who we'll be working with.
Got it. I have a couple of more questions. I will come back in the queue.
Okay. Renu, thank you.
All right. Yeah. Thank you. All the best, sir. Thank you.
Thank you. The next question comes from the line of Amar from AlfAccurate Advisors. Please go ahead.
Hello, Amar. Hello?
Am I audible?
Yes, you are.
Yeah. Sir, firstly, on the growth guidance which we are talking about. What we are seeing is that India looks strong, and when we are guiding for a 25%-30% growth rate. So ideally, we are talking about a 24%-25% growth rate even from the U.S. business, right?
Yeah. That was the initial thing. With the slowdown, we have little concerns on that. That is why we rationalized and said 15%-25%. It is not 25%-30% as we initially were saying. But we very much hope that customers kick back in as well as our new projects kick off, if that is okay.
Okay. So at least we are talking about 25% we can do.
We said 15%-25.
Oh, that means a variation. Secondly, sir, in terms of the margin guidance, which we talked about 12%-13%, in this quarter, if I see our gross margin, all the pressure of EBITDA is largely from the gross margin. So what should we assume going forward? Is this a change in the product mix led to this kind of gross margin?
Yeah. Subramanian here. On the gross margin, as rightly said, the key reason is change in the product mix. In terms of the geographies as well, some of our high-margin customers tend to be from U.S. have slowed down. But as we see an uptick from the U.S. customers moving forward, we should get a clawback. If not to the previous levels, definitely 100, 200 basis points increase is a possibility. In terms of overall profitability, taking into account all the measures which we are taking in terms of cost optimization, product rationalization, at the bottom line level, at the PAT level, we should be able to reach last year levels, which is about 7%-8%.
7%-8% at a PAT level?
Yeah.
Okay. That means what? 12%, 13% at the EBIT level, right?
Yeah, you can factor the numbers. There will be a saving in the interest cost as well. That's how overall it'll come down to that.
Okay. And sir, at one side, we are talking about the second half is going to be stronger for us because of the new customer signing which we are doing today. Why we are becoming cautious on the U.S., because we already have the large pipeline of U.S. customers which are going to become the deliverables, let's say, in the second half. I think that was the story even earlier also for us, and we always guided for that first half will be muted and second half will be the strongest. Still we were guiding about 30% kind of a growth rate. So what is changing here? That story remains same, right?
Yeah, the story remains same. I think we may be talking two little different things. Even if it's a U.S. customer, 73% of what we do is done in India. Okay? Today it's 23% in the U.S. Our goal is to have an 80/20 mix. Historically, we have said that 80% of manufacturing will be done in India. Only the front end of 20% will be done in the U.S. So the rationalization there is to say if it's slowed down for U.S. manufacturing, that's the only thing which is getting affected. Nothing to do with the 75% of what we do in India for the U.S. market. Does that explain?
Mr. Amar, may we request that you return to the question queue for follow-up questions. The next question comes from the line of Neel Nadkarni from Dalal & Broacha. Please go ahead.
Hello, sir. Thank you for the opportunity. I just had a couple of questions. One was regarding that, so you have mentioned that we have entered a new segment that is heat shield, and as well as we have received order for plastic components for the commercial aircraft business. So, can you just give some color on this? What is the market size and what is the opportunity size over here?
To start off with, these are parts of the aircraft where when you sit in a seat, you touch on top. On plastic side. We've got the tooling order. That's a big, huge win for us. We've been working on that for a couple of years, and it's a start. If you look at it'll take 8- 12 months to get started, but the start itself will be around $3 million-$5 million a year, but just on one part. And we expect to expand because we are getting into plastics in the interiors of aircraft for the first time. We've been doing smoke detectors in planes before this.
Yeah. Thank you, sir. Also, you have mentioned that we do a lot of work in the railway side also. Sir, what will be our market share for that in the railway category, in India especially?
I think, I'm not exactly sure of what our customer's market share is, but these are substantial shares in what is happening in interlocking. And in the braking systems, it's normally two to three vendors, and we are one of the larger players in that. And we've been doing this for years. It's 7- 10 years.
Okay. And also, sir, this time around, I believe our box build share has gone up. It reached around 52%, right? Versus last year it was around 47%. What do you expect our box build to be a total part of our revenue going ahead? And what is the margin profile for this? Is it significantly higher compared to just the plain PCB and plastics?
Yeah, we always try to take any product, whether the product only has cable, PCB, metal. We may start up with any commodity, but our endeavor is to get the whole product. It takes a few years to go there, but sometimes it is immediate. So our endeavor always is to increase our box build capability, where it is a total solution provided for the customer. There was a second part of your question and I have missed it.
Assembly.
Yeah. The good thing, it goes up and then it is not a huge margin difference. Two, three points are there if you do a box build more than just PCB or plastics or so.
Okay. And lastly, sir, can you give some color on how is the seasonality across the industry vertical through the year?
Sorry, can you repeat the question, please? Sorry.
He missed it. Couldn't hear it.
What is the seasonality across industry verticals across the year?
Seasonality. Generally, if we look at our past, the H1 generally is lighter and H2 is stronger. That's the essential seasonality we are seeing. Otherwise, it's spread across both U.S. and Indian geographies. And we're not seeing any specific seasonalities other than the H1, H2.
Okay. Yeah. Thank you, sir, and all the best for your future.
Thank you.
Thank you. A reminder to all participants that you may press star and one to ask question. The next question comes from the line of Navid Virani from Bastion Research. Please go ahead.
Hi, sir. Thank you for the opportunity.
Hi, Navid.
First one is on margin, sir. So as far as my understanding goes, that box build and the export business have a relatively better margin than the others. If I try to correlate the increase in box build percentage to our revenue and also export being a significant part of our revenue, I am finding it difficult to correlate with the substantial margin hit which we have taken during the quarter. Your comments on that front initially, sir, will be very helpful.
Yeah. I think in terms of the box build margin, what you say is true if you look at only from the box build perspective. But there are also other factors playing in. The key factor, which in terms of leading to the margin dip for us this quarter, if you look at it, is essentially coming from the way our business organized into the India business and U.S. business. India manufacturing, U.S. manufacturing. Just to give a number, 70% of the India business is manufactured here and if you look at the margins, the margins are similar to the last year and we have been able to deliver on that. It is the U.S. business where the top line has gone down, but the fixed costs remain. That is where, because of the operating leverage in the reverse side, is where the margin come down.
So at a consolidated level, you are seeing an impact. That is where the hit in the margin comes in. But if you look at on a standalone basis of what you said, just for the box build, what you say is true, but what is playing out for us is this factor, because of which you are seeing the dip in the margin. Did I explain it?
Yes, sir. That is very helpful. Also, secondly, we are saying that 75%-80% of our production is happening here in India, and the rest is happening in the U.S. But, sir, if I look at our employee cost and just try to compare it with our peers, our employee cost seems to be substantially high. Just want to get your sense on how one should look at employee cost going forward.
I think you've nailed what our issue is today. It is because a lot of our employee cost, though there's a lower production out of U.S., is driven by the U.S. cost. If you just look at the India cost, it will be very similar to our peers, I would say. A little higher. Because of the U.S.-India model, of course, we enjoy better margins, but there's also cost to it. That is the rationale this quarter where the business didn't come through, so the costs are shown out. Usually, we've not seen a slowdown in the U.S. like this before. That is the fundamental issue. A lot of the higher cost is because of the U.S. employee cost.
Can you give us, I mean, a quantified understanding as to how this employee cost should look once business becomes status quo as it is?
Yes. This is Subramani. I'll try and answer this question. In terms of the employee side, I think Kunhamed talked about what is the T1. Our endeavor is to keep the U.S. content and the employee cost in terms of the containment and minimal, and our target ratio in terms of the business is 80/20. But mind you, our U.S. market is a high-value market for us, so we'll continue to focus on that. India market is growing at a much faster pace. We'll do that. In terms of the target market, we will be at a 50/50 in the long run. In terms of the employee cost, our endeavor is to keep it the minimum so that our profitability margins are maintained.
Okay. That is helpful. And sir, lastly, if you can give us the contribution of PCBA, wire harnessing, and other segments for FY 2023 as well as for this quarter, it will be great help.
In terms of the tracking bit of it, segment-wise, we do not track it, so that is something which we do not share. What we do is at a business of a consolidated level and in terms of segment of the box build, at a revenue level is what we do tracking, and that is what is tracked.
Okay, sir. No problem. Thank you for all the elaborated answers. All the best for the future. Thank you.
Thank you, Navid.
Thank you. The next question comes from the line of Vishal Singh from Makrana Capital. Please go ahead.
Hello. Am I audible?
Hi, Vishal. Yes, you are audible.
Hi, sir. Thanks for the opportunity. Sir, just wanted to understand, you mentioned something like the margin difference between a normal PCBA and a box build. Did I hear it correct, it was 2%-3%?
Yeah, I would say that, Vishal.
Okay. Thanks. Secondly, I just wanted to understand. Basically, Indian market is growing very fast, and I understand that all the infra, I mean, there is a pickup in infra in India, et cetera. There is a lot of CapEx which is going on. But I want to understand basically, whatever the government of India is doing in terms of creating electronic manufacturing ecosystem in India, in terms of pushing for import substitution, et cetera. I just wanted to understand from you, how is that helping your company in terms of growth?
Personally, I've been a big proponent of import substitution. For years, we've been doing that in India. If you take a railway segment, a lot of that came from outside the country before, and the last few years it's been done. But today it's been very much formalized, or each segment is starting to see that. We only welcome that, and that will lead to a lot of opportunities where you need Make in India, and that is where a lot of the China transfers will start happening. We are starting to see some of that already with some industrial majors we've been working with where the government or the states want it, but they want it with Made in India. They're helping us to transition from China to India.
Okay. If I understood correctly, you are getting more and more business from the companies who are getting their businesses transferred from China, and within India as well, people are giving more and more business to Indian MSMEs companies. Is that correct? Because of the government push.
Yeah. I think that is primarily across the industry, that is not for us. There is an opportunity, and not only for the Indian market, where what used to come from outside will happen in India, and that is our belief. I think the ecosystem is trending towards that.
Okay. Thank you so much, sir. I think that is what I wanted to understand. Thank you.
Thank you, Vishal.
Thank you. The next question comes from the line of Amar from AlfAccurate Advisors. Please go ahead.
Sir, secondly, as you are talking about this destocking issue in U.S., how much time is this going to take to recover this destocking issue?
To be honest, we are hoping tomorrow, but that is not the right way to look at it.
Any understanding from the customer side?
You see, this is all fairly new, starting in the last few weeks. Some of the customers may come back in a couple of months, some may come back in five or six months. We are hoping that they do come back faster. But different customers have different time frames, and as we get closer, we will know more. It is very difficult for us to predict because everybody is going through this kind of at the same time. We are hoping some of it will be short, let us say.
Okay. Perfect, sir.
Thank you. This was the last question for today. I now hand the conference over to the management for closing comments.
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On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.