Ladies and gentlemen, good day and welcome to the Q2 and H1 FY25 earnings conference call of Happy Forgings Ltd. These conference calls may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as of the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. 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 touch-tone phone. Please note that this conference call is being recorded. I now hand the conference over to Mr. Ashish Garg, Managing Director from Happy Forgings Ltd. Thank you, and over to you, sir.
Yes, hi. Am I audible?
Yes, sir. Please go ahead.
Good morning and a very warm welcome to all of you to Happy Forgings Ltd's Q2 FY25 earnings call. With me, I have Mr. Pankaj Kumar Goel, our CFO, and Strategic Growth Advisors, our Investor Relations Advisor. I trust everyone has had the chance to review our financial statements and investor presentations for Q2 and H1 FY25, which we have filed with the exchanges. Let me start by outlining the highlights of our financial and operational performance this period. In Q2 FY25, we achieved growth in both absolute revenue and profit numbers as well as profit margins despite challenging conditions in underlying industrial segments. We saw steady broad-based improvements with revenue, gross profit, EBITDA, and PAT, all showing year-on-year and sequential gains.
For Q2 FY25, revenues reached INR 361 crores, with EBITDA at INR 105 crores and PAT at INR 71 crores, marking a year-on-year increase of 6.1% in revenues, 13.6% in gross profit, 14.8% in EBITDA, and robust 23.8% growth in PAT on adjusted basis. We continue to deliver industry-leading profit margins and our gross margin and EBITDA margin for Q2 FY25 surpassed 58% and 29% levels, respectively. The gross margin expansion for the quarter resulted from increased value addition with our product offerings, complemented by the favorable impact of declining steel prices. Our realization trends continue to improve steadily due to enhanced value addition, with Q2 FY25 realizations at INR 253 per kg, up by 3.6% year-on-year on adjusted basis. For H1 FY25, realizations stood at INR 249 per kg, growing by 3.7% on adjusted basis despite a decline in steel prices.
Finished goods volume remains steady, with Q2 FY25 and H1 FY25 volumes up 2.4% and 2.6% year-on-year, respectively. Let me now walk you through some key segmental highlights. Our machining mix improved further sequentially to 89% in Q2 FY25 and stands at 88% as of H1 FY25. Our endeavor going forward would be to increase the portion of machined components with relatively higher value addition content to improve our realizations and margins further. We have proactively pursued revenue diversification across industries and geographies, increased our share of new businesses, and expanded our wallet share with existing customers. This strategy has improved our resilience against market cyclicality and downturns, enabling us to achieve growth that outperforms the broader industry. Our segmental performance this period reflects the success of this approach as most underlying product segments, both domestic as well as exports, excluding steel prices, face degrowth.
International and European CV, farm, and off-highway industrial segments are facing significant degrowth. Despite this, we are able to grow our direct export business by 5% year-on-year in Q2 FY25. As a result, the share of direct exports in total revenues has remained more or less stable at 19% year-on-year on adjusted basis. The passenger vehicle business segment continues to perform strongly, steadily increasing its contribution to overall sales, and now contributes to almost 4% of the total revenue mix. With deliveries of North American EV segment products scheduled to begin in the second half of FY25, the segment's share in the revenue mix is anticipated to rise even further. Domestic and European markets are experiencing a challenging year. The major European CV OEMs are projecting a 12%-15% decline in CV sales for calendar year 2024.
Domestic truck production is down by 7% year-on-year in H1 and fell by 13% in Q2 in FY25. Against this backdrop, our CV segment has outperformed the underlying market, achieving a modest year-on-year growth of 2% in the first half of FY25. In H1 FY25, domestic tractor production volume showed a marginal increase of 2% year-on-year. The European agriculture market segment continued to remain challenging, with leading OEMs expecting a degrowth of 15%-20% in unit sales for calendar year 2024. We were able to manage a better-than-industry growth in the farm equipment segment in H1, especially in Q2 '25, where both revenues and volumes increased by more than 10%.
In the off-highway segments and industrial segments, the domestic market for mining and construction equipment is estimated to witness a decline of 6%-7% in unit sales in FY25 due to general elections, slower project awards during the year, and tightening of financial environments. On the other hand, sales of construction equipment in Europe are expected to witness a decline of 15%-25%. Consequently, our sales in off-highway segments witnessed a mid-single-digit decline in H1, but industrial segments showed a mid-teen growth year-on-year on adjusted basis. While underlying segment conditions impact our business, our continued focus on diversification has played out and insulated us from downturn in export and domestic market segments. Our new product developments and new business segments have supported our growth during this phase.
As a result, we have been able to grow better than the underlying market, and when the tide turns, we are hopeful that we will be able to register outsized growth as our share of business remains intact, and we continue to build a pipeline of new businesses. Our installed machining capacity at the end of H1 FY25 now stands at 57,000 metric tons, and production on newly installed press of 6,300 tons also commenced during the quarter, thus expanding our forging capacity to 127,000 metric tons. We will be further adding machining capacity in H2 2025 as well, and we expect production ramp-up on these lines, enabling us to execute and create capacity for growth.
While market conditions will continue to be dynamic, our steadfast focus on maintaining a strong balance sheet and focusing on high-quality and value-accretive products businesses, medium-term macro growth enablers for the business remain positive, and we believe that investments in world-class infrastructure will enable us to scale up organically, ensuring appropriate returns on investment. Now, I would like to hand over the call to Mr. Pankaj Goel for an overview of the financial performance during the quarter. Thank you.
Good morning, everyone. Myself, Pankaj Goel. I hope I'm audible to all of you.
Yes, sir. Your voice is audible. Please go ahead.
Thank you. I would like to take you through the brief on financial results of Q2 FY25 and H1 FY25. As mentioned in the previous quarter, our financials in Q1 and Q2 FY24 were favorably impacted by some higher realizations received on one order on account of logistics costs. This positive impact for H1 FY24 was to the tune of INR 13 crores in revenue, INR 9 crores in EBITDA, and INR 7 crores in PAT. Furthermore, we also recorded a non-recurring income of INR 6.40 crores in Q2 FY25 on account of maturity proceeds on one insurance policy, impacting PBT by INR 6.4 crores and PAT by INR 4.8 crores. To facilitate a fair YOY comparison, we have additionally provided adjusted margin growth and revenue share numbers after adjusting for these impacts in H1 FY24 and Q2 FY25. Revenue for the quarter stood at INR 361 crores for Q2 FY25 and INR 703 crores for H1 FY25.
This represents a YOY growth of 6.1% and 6.4% for Q2 and H1, respectively, on an adjusted basis. Despite declining in steel prices, which had an impact on our revenue growth, our realization improved by approximately 3.5% YOY for both Q2 and H1 FY25 on an adjusted basis. Finished goods volume increased by 2.6% YOY for H1 FY25 and 2.4% YOY for Q2 FY25. Our EBITDA margin is closer to 29% and stood at 29.2% for Q2 FY25 and 28.9% for H1 FY25, growing at 14.8% and 9% for Q2 and H1, respectively, on an adjusted basis. PAT grew to INR 67 crores for Q2 and stood at INR 130 crores for H1 on an adjusted basis, showcasing a YOY growth of 23.8% for Q2 and 15.8% growth for H1. Our balance sheet continues to remain robust.
Total net worth stands at INR 1,700 crores approximately, and our debt-equity ratio as of September 30 continues to be lower than 0.1x. We hold a cash liquidity of approximately INR 250 crores as of this quarter, including INR 156 crores of long-term fixed deposits reflected in our non-current assets in the balance sheet and remain positive about our cash availability that pushes us strongly to capitalize on any organic or inorganic growth opportunities in the future. Gross margin was 20.6%, and ROE stood at 16.3% for H1 FY25. We expect these return ratios to improve as we deploy the capital raised last year and improve utilization rates. That is all from my end. I now invite Mr. Ashish Garg for closing remarks. Thank you.
Thank you, Pankaj. Our continuous endeavor would be to navigate industry-wide challenges and times while increasing our market share in the new businesses. We are all geared up. Our robust engineering and machining capabilities, coupled with the advanced technologies we employ in our manufacturing operations, position us well to capitalize on the market opportunities. With this, I would like to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with me or Strategic Growth Advisors or Investor Relations Advisors. Thank you.
Thank you very much, sir. We will now begin the question-and-answer session. Participants present on the audio bridge who wish to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Our first question is from the line of Pankaj Tibrewal from Ikigai Asset Manager. Please go ahead.
Good morning, and thank you for the opportunity. First of all, congratulations on great margin improvement. There were very few B2B companies in India which crossed margins in excess of.
Sorry to interrupt, Mr. Pankaj. Your voice is not audible. Can you hear me now?
Yes, yes. I can hear you well.
Yeah.
Yeah. So no, thank you for the opportunity and congratulations on good margin improvement. Actually, what I wanted to understand from you is that from a two-to-three-year perspective, what are the growth levers the company is evaluating which can give them a higher growth rate from a three-year perspective, both from auto side and industrial side? If you can talk us through, it will be great. And congratulations on margins because very few companies in India on a B2B basis can show margins of gross margins above 50%. So hopefully, we expect that that should sustain going forward. But from a growth side, if you can talk us through what are the growth levers the company is evaluating from a three-year perspective. Thank you.
Thank you, Mr. Pankaj. So if you look from the perspective of the current tranche of business, which is almost more than 50% of the business, you witnessed the growth of almost 40% in quarter two and almost 11% in H1, whereas the legacy forged business, which largely caters to off-highway segment, has seen a degrowth. So going forward, we feel that Crankshaft as a product which goes to various segments, industrial, passenger vehicle, off-highway, will continue to grow for us. We have entered into businesses for industrial segment, both for portable gensets as well as higher horsepower, which will form a major part of growth going forward for us. Wind sector business is a new business for us, which company started two years back. We expect it to be 8%-10% of companies' revenues going forward in the next two years.
We have witnessed a good growth in that segment as well. Largely, components are heavy. We also expect to be a good part of business going forward. Passenger vehicle, as a new sector which was started last year, has contributed meaningfully, which is around 4% this year in H1. We expect it to be 8%-10% going forward in 2026-2027. We have already won orders from North American markets. We are already in touch with these customers for new RFQs and businesses which we have quoted. Even in the domestic side, we are working on certain PV products. So within forging, this is the business that we are already doing. We also project to enter into the ring-rolling business, that is the ring forging, which we are not doing as of now.
We already have plans and ordered certain capacity, which will be an additional component with which we can cater to the bearing industry as well. As well as the company also has plans to expand its product as well as the weight range. So currently, we are catering up to 250 kg. Going forward, we also have plans to enhance this product weight range from 250 kg to a one-ton category size. So this is, I hope I am able to answer you, Pankaj.
Great. And on the export side, any thoughts on key client wins, key penetration in markets where we are absent now, and how big this export revenue could be for us as you move ahead? And second, on the machining side, you are at 89% already. How much more you can grow from here in terms of value addition so that the margins which we are seeing can have an upside? Or do you think margins at 28%, 29% can be maxed out? Just some thoughts on both sides. Thank you.
As of now, we are not restricting ourselves only to machining business. If we see opportunity to grow and ask for the business, we'll be more than happy to do that. But the businesses that we have in hand, most of the businesses are for machined components. We expect that this range of 89%-90% will continue. In fact, we can see a higher rate as well because most of the businesses currently that we have are for machined components. Within machining, the more complex components that we are doing now and the investments that we have done are going for the BS6 range of vehicles and also the Euro 6 emission, which is, in fact, a better contribution. If you look at our realization, despite the falling steel price, the gross contribution has improved by INR 5 a kg on an average basis.
That means the newer businesses that the company has captured have come up with better realization. So this will definitely be there. This will be a part of our strategy to continue to grow ourselves in a niche business segment. And exports, as we said, that today, 20% is direct exports, 9% is steel exports. Next two to three years, we expect this growth, the export, to be in the range of 30%-35% because most of the order wins, if you see, 60%-70% are from global players.
That's great. That's great. Thank you and wish you all the best. I hope you keep on growing year on year over the next few years. Thank you.
Thank you, sir.
Thank you. Participants who wished to ask a question, may press star and one at this time. Our next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.
Yeah. Hi, Ashish. Congrats on a good set of numbers. Quickly wanted to check, one of your customers, American Axle India has been taken over by your competitor. So can you talk about what kind of revenues do we get from them and how do you see that business shaping? I'm presuming that that business will go away gradually. But what is our exposure to American Axle in India?
So American Axle India businesses for us stood at around INR 45-50 crores. And yes, it has been taken over by one of the peers. But we feel that the main strategy of buying out for the peer is to expand the global footprint in the axle business as we already own another axle company in India, which is Automotive Axles. So from the strategy perspective, we have a very wide range of product range that we caters to American Axle in the domestic sector, which is almost 20-25 components that which are approved by OEMs in the last couple of years. So we expect that business to continue. And it's a competitive business which is going on from 2011, 2012.
Okay. Okay.
The business of American Axle & Manufacturing that we have won and which we are doing directly is going to stay as it is, and it is going to grow as it is. So because it's not in a separate entity.
Right. Got it. And lastly, please.
The existing American Axle team is that we can also see this business growing because the business was not growing too much for the last couple of years as was kind of stagnant. So we can see a big growth coming in that business as well.
Right. Right. Got it. And secondly, with respect to our industrial segment where opportunities are quite few for us, I mean, quite many for us, and some of the orders are in hand. So can you talk about roadmap for how industrial segment will shape up over the next two to three years based on orders in hand? How will the contribution of this segment move over the next year? That will be my second question.
Largely, the industrial business today contributes around 12%, 13% to the revenues, which we expect will continue to grow. We expect this business to be in a range of 18%-20% going forward in the next two to three years. Largely, sectors like wind gearboxes, where we are already ramping up the genset business and portable and high horsepower range of gensets are the main streams. Besides this, we are also working on certain programs for heavy axles, which are used for material handling systems. The industrial business could be in a range of 18%-20% next two to three years for sure, the way the new businesses are pouring in in this sector.
Got it. And particularly the crankshaft for genset, when are we expected to commercialize that part of the business?
Jinesh, we have already started that, but there are more customers also which we have gained on the portable genset side and also the high horsepower range. So there's a complete range, and it's in a phase that we should be starting ramping up for the other customers as well from quarter four and next year, H2.
Got it. Got it. And lastly, with respect to 14,000-ton press, so can you talk about what is the utilization of that press currently? And by when do we expect that press to reach optimal utilization of 80%-90%?
So currently, the utilization is around 50%-55% on the line. And effectively, we can touch 80%. So we have around 30%-35% capacities available on this line where we are growing our wind segment business, which we expect to grow in the coming year. Also, the front axle beams which are launched for CVs, we have received approval for those, which we will be ramping up from quarter four onwards. So with the forging of front axle beams and the wind sector business, we expect to touch around 70% in the coming financial year, in the next financial year.
Okay. So in that context, our realization as well as gross margins logically should further improve. If I put everything in perspective, 14,000-ton press ramp-up happening, industrial business and exports going up. So logically, would it be fair to say there is headroom for margin expansion and realization expansion?
We also have front axle business planned on the line. So front axle business will not be in a similar realization rate as our crankshaft business. But we have a couple of crankshaft lines and the machining capacity coming in in the third quarter and the fourth quarter as well. So with the utilization of the crankshaft capacities going forward, we expect, yes, the margins, the gross margins could improve. So if you look at the crankshaft business, we have already grown by almost 14% in quarter two and 11% in H1. And we expect this business to grow going forward as well, which is kind of driving the entire contribution.
Got it. Got it. And sorry, just some clarification on the realization for the quarter. We have seen improvement despite the pass-through of steel prices. So any quantum, any number which you can share about what percentage was the impact of steel price pass-through?
Our impact is to the tune of 18-20 crores in H1, Jinesh. I hope I'm able to answer your question.
18%-20% crore in first half. Great. Great. Great. Thanks, Ashish, and all the best.
Thank you. Thank you, Jinesh.
Thank you. Before we take our next question, we would like to remind participants that you may press star and one to ask a question. Our next question is from the line of Amber Shukla from Motilal Oswal. Please go ahead.
Yeah. So thanks for the opportunity. So my first question is related to demand and growth. So our key segment, CV, which now contributes around 30% and 40% of revenue, is seeing some slowdown. And of course, the recovery doesn't seem at par with expectations. So how do you see this going forward? Because crankshaft CV has also high margin for us, so in that way.
So yes, hi, Amber. So Amber, if you look at, yes, you are right that the domestic CV, M&H CV space has seen a decline of almost 8%-10%, whereas this decline is over and above, thereby 23%. And export CV is also seeing a decline of 12%-15%, which at the moment we are not seeing, is expected to improve. But yes, we are kind of maintaining our share in the CV business. Despite this, it has grown by almost 2%. And we have also started doing Tata trucks which were kind of in a ramp-up phase. We have received approvals, and we have started ramping up in the third quarter for the domestic CV clients. We expect to maintain good growth even in the CV business going forward. We are not losing on the CV volumes.
Okay. Okay. And my second question is on industrial. So in other segments, especially for exports, we have seen delays in different categories at global level. So what is the status for industrial categories? So just some clarity on demand scenario in different industrial segments where we are operating right now.
There is a degrowth, but we need to see even if we look at the industrial segment. But as most of the projects were moved for us, we are able to grow in the segments. And going forward, because it's a continuity of the business which was started one and a half years back, so we still have a chance to improve and ramp up on the share of business. The share of business is improving even though the total market size has reduced over there. So wind sector will be further growing for us.
Okay. So since we have orders in our hand for industrial category, as of now, are we seeing any kind of delays in execution or something, I mean, from the client side?
Yes, there are certain delays, but the approval processes have been completed. So we also have a lot of cost pressure, if you see, globally because of the slowdown, which can actually trigger the businesses from India. That is what I've seen.
Okay. Okay. Thank you. That's it for me.
Thank you. Our next question is from the line of Sonal Gupta from HSBC Mutual Fund. Please go ahead.
Yeah. Hi. Good morning and thanks for taking my question. Ashish, earlier you'd mentioned that there was some constraint on machining capacity, and there was a delay in receiving the machines, and we were going to see a ramp-up in Q2, Q3. So just wanted to check, I mean, is all that capacity addition happening on track? And really, I mean, with that coming on stream and also I think the 10,000-ton press will come on stream, how are you looking at ramp-up in the next few quarters, or is it going to be mainly driven by the underlying industry performances? How do you see the overall environment in the near term?
Thanks, Sonal. So Sonal, if you look at it, the machining capacity has increased to 57,000 tons by end of H1 from 50,000, which further we expect that we'll be touching close to 62,000 tons in H2. And the process is ongoing. And that is the reason the crankshaft business has grown by almost 14% in quarter two and 11% in H1. We expect this business to grow positively in third quarter as well as fourth quarter as the new lines are coming up and the ramp-up is happening. But yes, because of the industry slowdown, the ramp-up is also impacted, but we are ramping up for these customers. CV business has picked up the domestic CV players for which the testing has been completed. We are ramping up. So that's all on track, and the capacities have also planned well for the third and the fourth quarter.
But yes, we have witnessed a sharp decline in our legacy forged business, where the contribution is less, but yes, that has been affected because of the off-highway programs in the Europe region. But as far as capacity is concerned, 6,300-ton line, which is planned for the PV segment, is already installed and up and live. So the PV business that we expect to start from fourth quarter is also on track. And also, the 10,000-ton line is almost ready in Europe right now, which will be coming in next financial year. So in terms of capacity, yes, the way we have planned, it is on track. In fact, there are certain more capacity additions which we'll be announcing very soon, which are in discussion in another one month's time, which we are in discussion with our customers, which will be from the different product profiles.
Got it. Got it. And in terms of right, so this is a 6,300-ton line would be dedicated for PV components, right?
Majorly for PV and the portable genset products.
Okay. Because I thought we were also looking at some 4,000-ton press for portable genset.
Yes. No, that is again for PV. That's kind of again, those are for PV small parts, which is coming in next year.
Got it. Got it. But I mean, these capacity ordering is sort of backed by orders is how we should understand it to a fair degree. Obviously, you cannot have like, but I'm just trying to understand how much of this ordering is in anticipation versus really, I mean, you have some line of sight on some of these utilization of some of these capacities.
6,300-ton line is kind of will get fully utilized by next year because it's part of the PV business, and PV business is kind of picking up. It's like 4% this year. We also have the genset business coming on, going on with this line. 4,000-ton line investment is kind of a dedicated investment for one of the customers, which is where the capacity is fully committed by that customer. That's an American customer for PV.
Got it. Got it. And just lastly, anything in terms of we were earlier also planning to invest in Jammu for machining capacity. Is that plan on track? How does that shape? I mean, what's the timeline there?
The Capex on Jammu, we have already filed two proposals with the Jammu government, and it is kind of decision is kind of awaited with a tune of INR 100 crores and INR 60 crores. So if we have approval in hand, we can go ahead. So far, we have not done investments, but we have gone ahead with forming a subsidiary and applying for it. Because of elections, there is some delay. If we have clarity over it, we will be going ahead for it.
Got it. Got it. Great. Thanks, Ashish. Thanks for taking my question.
Thank you. A reminder to the participants that you may press star and one to ask a question. Our next question is from the line of Dhaval Shah from Girik Capital. Please go ahead.
Everything is taking us there.
Hello? Mr. Dhaval? Hello?
It's like this.
Our next question is from the line of Rakesh Garg from Electrum Portfolio Managers. Please go ahead. Mr. Rakesh? Hello?
Hello. Am I audible now?
Yes, yes. Please go ahead.
Yeah. Yeah. Thanks for the opportunity, sir. So considering the growth drivers that you mentioned previously, what kind of top-line growth are we seeing for the next three to five years? And is it safe to assume that these 29% EBITDA margins are sustainable and growing upwards?
Sorry, can you come once again?
My question is that considering the growth drivers, like you previously mentioned, what kind of top-line growth are we looking at for the next three to five years? And is it safe to assume that these 29% EBITDA margins are sustainable and going upwards going ahead? Okay. So I'll just give you the brief on all the industries and how we plan it. Definitely, in terms of margins, we expect to maintain our margins in a similar range because in a range of, say, 27%-29%.
At the moment, we are not giving any guidance upwards of 29%. The gross contribution level is a major factor, which is helping us in maintaining these margins or improving these margins. That is because of the machining mix and the product mix, which is changing for us. More and more critical components we are machining within the same product range because the crankshafts today that we machine for the PV sector as well as for the commercial vehicles, as well as for the export sector, are far more critical and superior in comparison to the off-highway sector we used to do. Also, the realization on those businesses are far superior. The criticality and tolerances are far more superior. That we will continue as the learning curve. We will continue to go in for more and more critical components.
And the idea is that we maintain a very healthy Gross Margin going forward as well. But at the same time, we will not restrict our growth on the export businesses if we see that. So on the growth side, as already mentioned, that industry has witnessed a sharp decline, especially on the CV side, whether it is domestic as well as globally. And on the Off-Highway segments globally, we have seen a major impact as well. We have seen the inventory correction happening on the CV side as well as on the farm side because the min-max levels for our inventories have corrected sharply, where we have almost seen in certain customer range kind of a 40% decline in quarter two.
So we expect the market to continue and markets to come up to the flat levels where we see we get the guidance for 15%-18% type of growth on a medium term is sustainable looking into the new projects which we are doing, looking into the new businesses we are going in. So on the PV side, the new segment that we have added on the PV side as well as the industrial side will keep on helping us besides the business and the new products we are developing on the CV side as well as on the off-highway side. Okay, sir. Thank you for the detailed answer. And sir, what would be the CapEx number for FY-25 and FY-26? So as of now, it's in the tune of INR 200-INR 250 crores per annum.
Okay, sir. Thank you.
Thank you. Our next question is from the line of Mihir Vora from Equirus Securities. Please go ahead.
Yeah. Hello. Am I audible?
Yes, Mr. Mihir.
Yes, you're here.
Yeah, so thanks for the opportunity. So basically, I wanted to check whether the farm equipment segment saw a good growth in this quarter, which was outperforming the industry production growth. So, was it led by our existing business, or are we ramping up some new orders here? And was it domestic-driven, or are we also seeing some export traction in this segment?
So far, our forging business's impact on the global level, it is impacted because we are tier two in some of the businesses on the farm side. But the farm sector growth is largely driven by the new businesses, where we have kind of ramping up for one of the new players on the crankshaft side. And we continue to maintain this as there is a dedicated investment we have done in H1. So it's because of these businesses and also because of some of the new product range that we have developed for our existing customers, which we were not catering earlier. So it's because of the product addition as well as because of the new introduction.
All right. So we can expect it to outperform in FY-25, FY-26 as well, given the new customer addition then?
Yes, we have a very strong relationship, and we expect to grow with new products. Our endeavor is to grow with new products and with new clients. So definitely, and if we see that the market is coming back on track, that will definitely help us in a positive momentum.
Sure. Sure. And my second question is on looking at your numbers, the other expenses seem to be higher in this quarter. So is there any one-off there, or can you point out something?
Pankaj is just checking in. Just give us a few minutes.
It's somewhat on account of the logistics cost on the export side, one particular there, where you can see the extraordinary cost has been increased in the.
The correction. Yes, yes. The main factory has been that one, and nothing more than that. Neither is that one.
This is expected to continue, or will it sort of cool off? In terms of sales, this is now 21% of sales, so will it, as such, you are seeing some cool down there going ahead?
So our other manufacturing expenses include, as we do a lot of machining, so there is a lot of tool cost, lubricant cost, packaging cost, everything including maintenance cost, part of the other manufacturing expenses. But the cost which has gone up for us is the logistic cost, largely on account of the Red Sea Crisis, where some bit of it is kind of passed on by international OEMs, but there's some bit that we are still taking hit.
All right. So does this come with a lag or something like that, like if you can get realizations on this and increase some realizations to cover it?
It is kind of passed on an average by around 60% by different OEMs, some by 50%, and some by 75%. But we expect this to come down. So it is because of the geopolitical and global conditions, it still remains to be high. But if it cools down, then definitely we will have a positive impact.
Another cost will be on account of capacity utilization that will be adding our capacity utilization, but at minimum, cost has been there.
Since we have a 55%-60% capacity utilization in terms of the forging, you can say unavoidable maintenance costs would have also been there, which we think down the year, when our capacity utilization will be optimum, this percentage will have some softness on that front also.
Sure. Sure. Sure. Okay, sir. So that's all from my side. Thank you.
Thank you. Our next question is from the line of Amar Kant Gaur from Axis Capital. Please go ahead.
Hi. Good morning to everyone, and congratulations to our chief and team on a wonderful performance this quarter. I had two questions. One was related to the outlook on the farm side. One of your customers yesterday on their call talked about decent traction being seen in the farm industry and revised their outlook upwards. But at the same time, they talked about some higher inventory being there and some correction may be required. So how are you seeing the farm segment performing for you for the rest of the FY-25?
So at the moment, we have just seen some positive revision from one of the OEMs on the domestic side. The growth that we have seen in the last month on the farm side year on year in terms of October numbers could be, we have to see the November sales as well because last year, Diwali was in kind of 10th of November. So we also have to see the sales impact of November versus November to actually conclude if there is a meaningful growth. So yes, there is a positive revision by one of the OEMs, and if we see this revision, definitely, we can have a positive impact of the domestic sales. But on the other hand, on the European and the North American side of off-highway business, most of the players we are seeing quarter-on-quarter degrowth.
Because of this, there is some inventory restocking, which is kind of going on, which we expect to clear up by December in most of the cases.
Understood. Understood. And my second question was on, pardon me if I got you correctly, where we're getting into the ring forging business as well, right?
Yes. We are already doing.
So what kind of capacity addition would we have there, or would existing capacity be sufficient for that? And what is the outlook there? What kind of addressable market you're looking at? Any numbers, targets, anything you can indicate on that?
We are catering to the wind segment from our existing 14,000-ton press line, where we are able to forge components up to 250 kg, and also our 8,000-ton lines, where we are doing fully machined components. This business will continue to grow for us within the industrial space. Currently, the wind business is almost 7% of the total business. We expect this business to grow by almost 20%-25% going forward in the next two years because of the businesses that we have in hand.
Understood. Understood. Thanks very much, and all the best.
Thank you. Our next question is from the line of Deep Shah from YES Securities. Please go ahead.
Yeah. Hi, Amit. Thank you for the opportunity. So just a question on the gensets opportunity that you have just talked about. So there are a few subsegments that you have mentioned. First is some portable gensets, and the second is higher-weight gensets that you have talked about in the past as well. So overall, from two to three years' perspective, how big this opportunity can be as far as the revenue share is concerned within the industry? And second question related to that is, what's going to be a dedicated CapEx, especially for gensets as a business? So that's broadly what I wanted to understand.
Thank you, Deep. Deep, on the portable gensets as well as on the mid-category size gensets, the businesses that we have taken and the businesses that we are talking about will not need CapEx in terms of forging. We have the forging capacity available, and the part range will be less than 90 kg that we can cater from our existing line. We will be needing investments only on the machining side. As the machining capacity utilization is high for us, there will be dedicated investments for that, and we will be ramping up. As far as the higher horsepower category is concerned, we will be needing certain investments, and we'll be in detail discussing on it because we are still in discussion with our customers. So I think probably in a quarter or so, we'll have more clarity over it.
Okay. But overall, in terms of the opportunity size, the revenue opportunity size, how big that can be, let's say, over the next two to three years' perspective?
Deep, in the next two to three years, probably we will be able to do - we will not be able to cover the entire range because it has a very broad range. We'll be able to cover only a small range of the entire segment. So probably we can expect more businesses on the higher horsepower to come from third year onwards.
Okay. And for that specific segment, we will have incremental investments towards capacity?
Yes. Yes.
That's the fair understanding. Okay.
Yes, but it is clearly a large space to actually work on.
Okay. So basically, what we are trying to indicate is this can be one of the segments within the industrial that can be a large chunk, let's say, down the line in five-to-six years.
Yes. Yes.
Basically, of course. Okay. Okay. Thanks. Okay. Thanks a lot. Thanks from my end.
Thank you. Our next question is from the line of Mitul Shah from DAM Capital. Please go ahead.
Thank you for the opportunity, and congratulations on a very strong performance, especially in such tough environment. Sir, I have one question on a mid to long-term point of view that which are the areas within non-auto space which can be meaningfully big in the next three to five years? And the way other players like Bharat Forge and all have grown in the last five, 10 years on the non-auto side, what are the fields where we are focusing more?
Thank you, Mitul. So Mitul has already mentioned, see, we have to expand the product range. So if you see, when we have expanded our product range from 100 kg to 250 kg, we were able to add businesses on the industrial side, and the industrial business now contributes meaningfully to the revenue. Going forward, we expect to increase this product range from 250 kg and going from 250 kg to 1 ton. If we are able to increase the product weight range, then definitely there are several industries that we can cater. And especially on the large gensets and the large industrial products and also some of the railway gears is something that we can cater to. But that will potentially come from a perspective of three to five years.
But, on the next two to three years, probably the businesses that we are doing on in terms of highway and on the large axle programs and also on the wind programs, which we are able to cater from our existing lines, which are in a weight range of 200-250 kg, that will continue to do well for us as we are developing the entire range of these products, which will largely have components coming from the wind sector as well as from the large axle programs, which is on the material handling systems.
Yes. So anything on the sectors like aerospace, marine, locomotive, huge-sized forging requirement is there?
We have to first expand our base. Yes, on the machining side, we have started working on. We are in a nascent stage. We have started working on some inquiries and some discussions on the defense business as well. It will take some time. Depends on aerospace. On the machining side, currently, we cannot forge the type of size requirement which is there in terms of the requirement.
Yes, sir. As you highlighted, sir, it's very initial stage. But if you can help with slight more detail on the defense side, what are the products or what are the product portfolio where we are focusing over the next one to two years, maybe in a small quantum, but which are the areas to look at?
So Mitul, we have just started working on, because on the defense side, and probably next few quarters, we'll have more clarity over it. But the product range which is under 200 kg can be done on the defense side, which are related to the tank product range or whether it is related to the machining of certain components. So that is something that can be done.
That's directly with the government, or we are supplying to some tier two or tier one companies?
That will come directly with the government, through government end.
Yes, sir. Thanks, and all the best.
Thank you.
Thank you. We'll take our last question for today from the line of Nihaar Shah from Ikigai Asset Manager. Please go ahead.
Hello. Yeah. Hi. All my questions have been answered.
Thank you. As I know for the questions from the participants, I now hand the conference over to Mr. Ashish Garg for closing comments.
With this, I would like to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with me or Strategic Growth Advisors or Investor Relations Advisors. Thank you so much for joining the call.
Thank you. On behalf of Happy Forgings Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines.