Ladies and gentlemen, good day and welcome to Sona Comstar Q2 FY 2027 earnings group conference call. Please note all participants' lines are in the listen-only mode as of now. There will be an opportunity for you to ask questions after the presentation concludes. Please note that this call is being recorded. We request that you place your lines on mute except when asking a question. Some of the statements by the management team in today's conference call may be forward-looking in nature, and we request you to refer to the disclaimer in the earnings presentation for further details.
The management will also not be taking any specific customer-related questions or confirm or deny any customer names or relationships due to confidentiality reasons. Please refrain from naming any customer in your questions. Now I will hand over the floor to Mr. Kapil Singh, Deputy Head of Research, India, and Lead Auto Analyst at Nomura. Kapil, please go ahead. Thank you.
Sorry, I think I was on mute. Yeah. Good evening, everyone. To take us through the Q2 results and to answer your questions, we have the entire management team of Sona Comstar. Mr. Vivek Vikram Singh, MD and Group CEO. Mr. Vikram Verma, Whole-time Director and CEO, Driveline Business. Mr. Sat Mohan Gupta, CEO, Motor Business. Mr. Praveen Rao, Group CTO. Mr. Rohit Nanda, Group CFO. Mr. Amit Mishra, Head, Railway Business. Ankit Agrawal, Investor Relations. Pratik Sachan, Head, Strategy and M&A. I will now hand over the call to Vivek for his opening remarks, and the presentation. Vivek, over to you, please.
Thank you, Kapil, and welcome, everyone. There are times when everything comes together in a perfect synchronicity. This was that quarter. Q2 was almost a perfect quarter for us across all metrics: financial performance, new order wins, technology and new products, cash flow generation, and our total quality management. We delivered our highest-ever revenue, EBITDA, and PAT. EV revenue also reached an all-time high, and for the first time contributed more than half of our automotive revenue. We commercialized three new products, the most we have ever done in a single quarter. We also recorded our third highest-ever order additions in a single quarter, with wins spanning across almost every major product segment.
Last quarter we had outlined, as you would remember, our ambition to grow 10x over 10 years under our Sona Comstar 2.0 vision. Q2 gives us much higher confidence in our ability to deliver on that ambition, b ut as always, while talking to our shareholders, let me begin with the challenges. Let me start with addressing the margins upfront. Last quarter, I had spoken about margins improving on cost pass-through coming through from customers. However, this quarter the continued margin pressure has been there but it is mainly driven by change in product mix.
Traction motor demand has significantly exceeded even our own internal expectations. The business has grown almost 50% quarter-on-quarter. That has obviously pulled down the overall margin percentage a little bit. Inflation was, and still is, the second factor. The war in West Asia continues to add to cost pressures with further increases in steel, copper, and oil derivatives. Freight rates have also risen sharply. They have nearly doubled from previous quarter's level. Strong growth and better operating leverage is what has helped us absorb most of these pressures and continue to at least hold the line on margins.
Looking ahead, stronger traction motor demand is changing our mix, and broader inflation linked to West Asia remains uncertain. Both these factors are largely beyond our control, which makes near-term predictability a little difficult. However, it is mostly good news because absolute margins continue to improve at a very high clip. Let me return to the positives, and there is a lot of positives to talk about this quarter. Let me start first with demand. Demand for EVs continues to accelerate. Our EV business grew by an almost unbelievable 129% year-on-year.
In India, strong demand for electric two and three-wheelers was the biggest reason. This is what drove a very sharp increase in traction motor sales. Globally, the shift towards EVs has supported the strong growth in our EV driveline revenues. Suspension motor, which is our fastest-growing product driven by its success in China, is also in an EV customer. So we are seeing growth across products, across markets, and across vehicle segments. Frankly, it shows the strength of the EV portfolio that we built.
Second, our business development efforts saw many meaningful wins in this quarter. We secured our third highest order wins by value and ended Q2 with the second highest order book in our history. These wins cover almost every major product category, like I mentioned, from differential assemblies and gears to traction motors, controllers, starter motors, sensors, as well as railway products. Third, we commercialized three new products, our highest ever number in a single quarter.
Most companies would count themselves fortunate if they have three new products in three years. For us, this is a quarter. We have introduced a helical limited slip differential, air springs for railways, and rear radar sensors for two-wheelers, and Praveen will talk about these in more detail in his section. Fourth, cash generation. We delivered our highest ever free cash flow from operations. In just six months of this year, we have generated more than 1.5 times the FCFO we generated in the entire FY 2026.
Lastly, and absolutely not the least, I am particularly proud that our driveline division has won the 2026 Deming Prize for Total Quality Management. Vikram Balaji and his team have worked towards this for nine long years and improved processes and systems manifold along the way. So take a bow, Vikram Balaji, wherever you are, and many, many congratulations to all of you. Okay, now let me take you through our Q2 performance. Revenue grew 35% year-on-year, while EBITDA and net profit increased by 23% and 29% respectively. The business has grown quite strongly and, well, frankly, ahead of our own expectations. I want to thank the entire team for delivering on this performance.
Turning to BEVs, we continue to see electrification growth, with growth accelerating to 129% year-on-year. For the first time, BEVs contribute more than 50% of our automotive revenue. Even if you look at it sequentially, BEV revenue has grown 40%, even as U.S. EV market, the deliveries have broadly remained unchanged. This demonstrates that our EV business is becoming more diversified and less dependent on any single customer or single geography. On a personal note, our EBITDA this quarter was INR 356 crore.
When I joined this company, that was roughly our revenue for the whole year. To now generate that much EBITDA in a single quarter is a meaningful milestone for me and also a reminder of how far we have come, even for people following our public journey. When we IPO'd, I think this was roughly our annual revenue that we now do in a quarter. For H1 as well, the numbers are strong. We delivered strong growth across every single financial measure. Our revenue, EBITDA, and PAT grew by 43%, 34%, and 36% respectively. Our return ratios have also improved, and we expect them to continue improving.
Rohit will walk you through the details of this in his section. Now we come to our strategic priorities, and there is one change I want to highlight here. We are broadening our first priority from electrification to EPIC mobility. For the sake of repetition, this stands for electric, personalized, intelligent, and connected solutions. As we have started winning orders in robotics, physical AI, and other intelligent and connected solutions, it is the right time for our stated priority to reflect that broader opportunity and that broader change. Let's now look at it on a combined basis.
Our EV business obviously has had a very strong quarter. The first half BEV revenues have crossed the INR 10 billion mark. This revenue share was, I think, 30% in H1 last year, and now it's 48% for the first half. We also secured four new EPIC programs during the quarter, three in BEVs and one in intelligent and connected solutions. At the end of H1 FY 2027, we have 75 EPIC programs across 37 customers. Of these, 44 are in production and 31 are yet to start production.
Let me also touch upon some of the key order wins of this quarter in EPIC. First, we won an order for our new helical limited slip differential. It's quite a mouthful, but it's a far more improved product. It is in an existing EV customer, and it helps us be first, and it also gives us higher penetration in another geography. It is easily among our most advanced and highest value driveline products for cars, and this win reflects a lot of effort from our engineering team to deliver on this.
Second, we won an order for a rear radar sensor. This is for a two-wheeler customer in India, and for us, this is a new customer. This is the first time we are working with them. This expands our two-wheeler offering, of course. It adds radar sensing to our traction motor and controller portfolio, so opens up a new market. Third win is for an integrated motor controller. This is from an existing EV customer, and we also see our ability to offer more integrated products.
Fourth is additional traction motor volumes from an existing customer where we have got a revised PO with increased volumes, which also shows our ability to keep penetrating and increasing wallet share even with existing customers. Do not want to leave our old and ICE businesses behind. I know our new horses are running fast, but our old horses continue to run at speed as well. We won three new notable ICE programs, I would say. Actually, the second one is the entry into differential assembly for ICE passenger cars. As you know, we have been fairly successful in EV differential assemblies.
With this one, we are starting for ICE as well. This was an existing customer for differential gears who have now converted into a differential assembly customer. The initial order size might look small, but if you look at the TAM that it opens up for us, it is a very large market for a product that we already make, and in the EV segment, we are one of the world leaders in. There is also a starter motor program that is not mentioned. This is for an existing customer and several new differential gear programs across the board in North America and India.
What I would like to say is if you take all of this together, these wins are improving not only the quality of our order book, it is also the breadth of our order book across powertrains, geographies, customers, as well as product categories. If you look at the quarter as a whole, we won INR 36 billion worth of new business, which is the third highest quarter for order additions. Unlike those previous times, it is not anchored or moved on just one very large order. It is distributed across several wins. Thanks to that, we have closed Q2 with a net order book of INR 251 billion as we continue to win new business in EVs and, albeit small, but the robotics and physical AI order book also continues to be built. It is 4%.
We are hoping in the decade to come, this becomes what EV has been for the last decade for us. Let me now close my section, at least with the diversification piece. We continue to see meaningful progress across all fronts. When we make the strategic decision, and I wrote in my annual report letter to shareholders about our Look East policy. Eastern markets contributed about one third of our revenue at that time. This quarter, if you look at that chart, they contribute almost 2/3 of our total revenue. It is quite encouraging to see how quickly we have executed on that decision and pivoted so meaningfully in just two years.
On the product side, we are seeing progress across our product portfolio. EV suspension motors was our fastest growing business this quarter, and I think it has already reached 7%. If you look at railway brake system, suspension motors already equal to that for the first half. Newer products continue to gain scale and our established differential gear and differential assembly businesses also continue to grow fairly strongly. So if you look at DA plus DG together, you will see that on a year-to-year basis, a 37% increase has come in our old traditional business as well. I think the biggest driver for this diversification has been new product development.
If I were to put that into perspective, a way to look at it, or the way at least I look at it, traction motors and suspension motors were both developed through our in-house R&D completely organically in just the last four years. Together, if you take them, they have an annualized revenue run rate of INR 1,400 crore. This is roughly equal to the revenue of the entire company in FY 2021. So we have built almost another company just through two new products, and that is the power in engineering of the ability to continue to make new products.
This compounding is what is central to not just Sona Comstar 2.0, this is what led us from where we were to our first decade, and we very strongly believe that this is what will lead us into the next decade as well. There is not much to talk about in the market segment. I think apart from the obvious one that is staring at everyone, that e-two-wheeler, three-wheeler is now 14% of our revenue. Beyond that, the split of 70-30, 70 auto, 30 non-auto continues. Technology, again, I would like to re-stress that technology is the reason we are able to deliver the financial results that we do, and that is the bedrock of what we will continue to build. With that almost perfect segue into technology, let me hand over to our Group Chief Technology Officer, Praveen, for the tech update. So over to you, Praveen.
Thank you, Vivek. Welcome, everyone. Next. I would like to take you through our technology roadmap. As you all have noticed, we have commercialized three new products this quarter. Helical limited slip differential for passenger cars and SUVs, air springs for railways, and a rear radar sensor for two-wheelers. The first product is a helical limited slip differential. A limited slip differential or what we call LSD, improves vehicle traction by limiting excess speed difference between the two driven wheels.
Helical limited slip differential is a type of LSD that uses parallel axis helical pinions interacting with the side gears to generate internal axial and radial forces. This passive mechanism delivers smooth, progressive torque transfer without a conventional clutch pack or external actuation. LSDs are typically used in performance vehicles, off-road SUVs, and 4x4s. The next product is air spring. Air springs are used in most modern railway coaches, including LHB coaches.
These coaches use a two-stage suspension system. The primary suspension uses coil springs to filter high-frequency track vibrations, while the air spring forms the secondary suspension connecting the bogie to the coach body. Air springs enhance passenger comfort, maintain a constant ride height, and isolate body movement. Together with the dampers, which control oscillations, they provide a smoother and safer ride at high speeds. The third product is a rear radar sensor for two-wheelers.
Two-wheelers are amongst the most vulnerable vehicles on the road, making timely warnings critical to rider safety. A rear radar sensor does precisely that by warning the rider of potential rear-end collisions or a vehicle in a blind spot. It provides valuable time to maneuver to a safer position. As a pioneer in automotive radar, we recognized early the potential for applying this technology for two-wheelers. Together with safety systems, this product can make a meaningful contribution to improving road safety. With this, I turn to our Group CFO, Rohit, to update us on the financials. Over to you, Rohit.
Thank you, Praveen. A very good day to you all. It is my pleasure to share our second quarter and H1 results for FY 2027 with you. First, the quarter's results. Our revenue for the quarter grew by 35% year- on- year to INR 1,546 crore. Compared to the previous highest revenue of INR 1,310 crore, which was clocked in the last quarter only, it was higher by 18%. The higher revenue was led by 129% growth in our BEV revenue year- on- year, which now constitutes 51% of our automotive product sales. Our EBITDA for the quarter grew by 23% to INR 356 crore. EBITDA margin was 23%, which was lower by 2.3% compared to the same quarter last year.
The margin was lower primarily on account of change in the product mix and higher input prices, which were partially offset by a positive impact of the operating leverage. Profit after tax grew by 29% to INR 223 crore. PAT margin was 14.4%, which is lower by about 0.5% compared to last year. We had a positive impact on the PAT margin from a lower depreciation percentage, whereas the margin was pulled down by a lower EBITDA margin. Moving on to the H1 results. Our H1 revenue grew by 43% year- on- year to INR 2,857 crore. Our BEV revenue grew by 119% to INR 1,042 crore and constituted 48% of our automotive product sales.
Our H1 EBITDA grew by 34% to INR 659 crore. EBITDA margin for the half year was 23.1%, which is lower by about 1.5% compared to the same period last year. The reasons were largely similar to what I just stated for the quarter, so primarily changes in the product mix and higher input prices, and a positive impact of operating leverage, which helped us offset part of this impact. Profit after tax grew by 36% to INR 404 crore. PAT margin was 14.1%, which is lower by about half percent compared to last year. We had a positive impact on the PAT margin from lower depreciation percentage, whereas it was pulled down by a lower EBITDA margin and lower net finance income in the first half.
Moving on to the cash flow slide. This has been a high cash yielding first half of the year for us, as Vivek has already briefed you. We generated INR 594 crore of cash from operations, which was 90% of our EBITDA for this period. This was supported mainly by release of INR 44 crore from working capital, despite a very high revenue growth in this period. Net of CapEx spend of about INR 148 crore, we generated INR 446 crore of free cash flows, which was more than 50% higher than what we generated in the last full financial year.
Other key movements in the cash flows included dividend payment of INR 112 crore. There were cash inflows on account of additional borrowings of INR 224 crore. There was an inflow on account of ESOPs exercised by employees, about INR 108 crore, and finance income of about INR 32 crore. Consequent to all these movements, as of end of September, we had cash and investments worth INR 1,966 crore. This brings us to the last slide, which is on the key ratios.
Here, all these ratios except for VA to employee cost showed improvements in the first half of the year. In case of VA to employee cost, the ratio, there is a decline compared to previous period, mainly due to change in the product mix in favor of assembly products. Our return ratios continue to show improvement. Post absorption of QIP fundraise impact, the incremental returns from businesses are now supporting this improvement every quarter. Net debt to EBITDA ratio continues to be in the negative territory for obvious reasons.
In terms of the turnover ratios, both these ratios showed significant improvement in the first half due to a robust revenue growth. In case of working capital turnover ratio, though, it was also supported by release of working capital despite a significant jump in revenue. With this, we have come to the end of our earnings presentation, and I will now hand over the proceedings back to the Nomura team.
Thanks, everyone. We will now open the floor for the Q&A session. If you wish to raise a question, please use the raise hand function located at the bottom right of the Webex page. We will unmute your line and prompt you to speak. Or you may submit your question via Q&A chat box addressing to all panelists. Please be reminded to keep your questions to maximum of two questions. If you have more questions, please return to queue. Thank you. We have a question from Arvind Sharma.
Hello.
Arvind, please go ahead. Thank you.
Hi, am I audible?
Yes.
Great. Good evening, sir. Thank you so much for taking my question. The question on the suspension motors business, which has seen a very strong growth, since Vivek said almost 7% of the revenue. What is the key driver for this business to see such a strong growth in this quarter? Is it possible to shed some light on the order pipeline in this specific segment?
Thanks, Arvind. The question is interesting. The problem is the answer is not very linear. See, when a new product is launched in the world, and this is the first of its kind fully active suspension system, it is very hard to predict the trajectory. The first time it was launched by our end customer, and this is public information, so I can share, it was with NIO. Their first model that it was launched on did not do so well. That wasn't to do with this product, it was to do with that model did not do well because of pricing or what the consumer opted.
When they launched it in their new model, it has exceeded everybody's expectations on how well that new model has done. Eventually, regardless of how good we are, how good our OEM customers are, eventually the consumer, she decides what all of our fates are. That is the thing with initial. But now that we have seen the market appreciation, the market adoption, this would be your typical S curve. The order book so far is limited to that one customer across, now it will span across variants.
There are significant conversations going on with other OEMs, and as those orders are won, we will obviously report them. But the future looks fairly bright. When customers realize that adding a new technology product helps them sell more vehicles, that's when you start doing well. I know I can't give you anything definite because I don't know anything definite in this. It looks bright. How bright, we don't know, but it has the potential to be massive.
Got it, Vivek. No, thank you. That is very helpful. Anything that you can share more on the DENSO tie-up, or is it too premature to talk about it right now?
Yeah, I think from last quarter we shared the announcement of JVs. Now we have to finalize and close those. JV one, of course, has its legal timeline. I think Rohit or Sat, who would want to take that?
We are targeting to close this by at least the JV one part of it, which is carving out of the business, by end of December. Because of the year-end holidays, there is a possibility it may spill over to January, but that is the kind of timeline we are looking at. JV Two, maybe I will request Sat to chip in what sort of timelines can be communicated. Sat?
Sorry, I was on mute. No, JV Two, it is not yet firmed up, but we are targeting to close and have it sometime in the first half of calendar year 2027.
Got it, sir. Thank you so much for taking my question. That is all from my side, sir.
Just a clarification, the holidays are not for us. We do not really go on holiday in the winter, but our advisors and partners sometimes do, so that does make us slower than we would like.
Got it, sir. Got it. Thank you so much.
Next question is from Chandramouli Muthiah.
Hi, good evening, and thank you for taking my questions. I have two questions. The first question is on the competitive situation in Europe. We have seen our legacy businesses grow and pick up in the first half of this year after a slightly more easy competitive situation we have been facing there. I just want to understand how that is shaping up, how long we expect the legacy businesses to continue to grow at this healthy clip before possibly you enter more modest, mature growth rates on that part of the business, similar to what it has been historically.
The second question is just on robotics. You have mentioned that Sona might have aspirations to make actuators. India as a market, historically maybe has not had as much of a legacy in making actuators. I just want to understand what are some of the internal milestones that we have in mind before we can make robotics-ready actuators. Thank you.
Sure, Chandramouli. It is good you asked me this, and I will try to say this without sounding immodest. India does not have the history of people doing 9%-type world market shares in any product. Any product that you pick up of ours will have a high large world market share. That you can say for any single product. You can say we shouldn't even be successful at motors. No Indian company has had that market share. Even if you take a nascent product like traction motors, and you actually do the market share ex-China, and you will find that it is about 9%, 10% of the world, even in traction motors, this company from India.
Just the fact that it hasn't happened does not have any bearing on what could happen. Technology and engineering are not determined by where you are from or who you know. They are truly democratic, and if you are good, you will. There is also no legacy of someone making a new product that goes into a vehicle, and then it does exceedingly well in China, from India. So we have faith in ourselves. We will continue to believe in ourselves and continue to believe in our engineering, and we will try.
More often than not, we have succeeded, but that we will leave to God to determine and fate to determine. The first question is interesting. Europe, we are winning more business, and we are seeing a lot more traction as a lot of European OEMs want to have an alternative supply chain to China. That would be good for India overall, but very good for Indian companies who can meet global quality standards and have their own IP and design capabilities.
Coming to how fast we can continue to grow legacy business, I would say for a fairly long time. Even in differential gears, we are barely about 9% of the world. In differential assemblies, now that we make ICE and hybrid differential assemblies also, we should take it as a total, we are barely 3% of the world. I think it's many, many years before we say, "Oh, we are running out of room to grow." I don't think we are there, that we have to start thinking that we are so big that we will start plateauing in growth. That's a very long time away.
Got it. That's helpful. Thank you very much, and all the best.
Next question from Gunjan Prithyani. Gunjan, please go ahead.
Yeah.
Gunjan, please go ahead.
Yeah. Hi. Thanks for taking my questions. First question is on the traction motor business. Pretty huge growth in this quarter. I think it is far ahead of where the industry growth has been. I am just trying to understand, how do I think about this business in terms of the scale-up? Is it the larger wallet share that we are getting with the existing customer? Maybe a little bit color on three-wheeler business adding and more meaningfully now if you can share more insights on how big that business is. Was there any new program which commissioned in this quarter?
A little bit color on this quarter and how do I think, because there is clearly a significant change in outlook in terms of the revenue acceleration that we have seen with the traction motor business. The second question is on the differential assemblies business. Again, after many quarters, meaningful improvement in the differential assembly business as well. You mentioned that N.A., North America, as a market has been stagnant in terms of the overall EV numbers. If you can give some color on what led to this. Is it new program? Is it geo mix change or some thoughts on that?
Certainly. I will invite Sat to answer the details of why the motor business has grown, because I do not want to steal his thunder. Gunjan, how to think about it is very optimistically and very positively. That is the answer for that. Sat can give details on what has happened this quarter.
Gunjan, for motor business, it is both. There is an increase in the wallet share, as well as our existing OEM business has grown compared to the previous quarters. It is contributed by both. Second is that, we have got good traction on the three-wheeler business, in addition to the two-wheeler business. Going forward, it is looking pretty good, because we will be launching a few more products in this quarter. Overall, it is a combination of market growth as well as the wallet growth.
Any color on the three-wheeler, like how significant is it of the overall traction motor business now? I think that was pretty small so far. It was supposed to see a new program addition. The number can be quantified, how big it is?
May not be the numbers, but yes. As I said that we are launching another product in this current quarter, so that will further increase our share in EV business.
We did not fail to keep other sub-segment. How many sub-segments will we continue to keep tracking then? It is meaningful. As you know, if we look at the programs we have won and the customers we have won, our market share is substantial in three-wheelers in electric. As those programs start ramping up, this should kick in. Second to your point that why is it higher than industry growth? See, any time when there is a difficulty for good reasons or bad reasons, bad reason like when magnets problem was there.
Because of our technical capability, we were able to circumvent that, go to light rare earth and scale up faster and gain market share. Even in very high demand situations when people are struggling with supply chain, a lot of people can't ramp up their production that fast. We have the capability and the capacity available to do that with agility. Whenever OEMs are challenged, whenever it's not business as usual, in fact, those times are the best times for us to gain market share. So that's in a nutshell why this has happened. On differential assemblies, all three of our large customers in that space in EV, all three of them have picked up this quarter.
Last year, so many bad things were happening. So, I started with Q2. There are quarters when everything comes together in a perfect synchronicity. Q1 last year was when all the bad things in the world came together in a perfect negative synchronicity. Life teaches you and humbles you that there are times when even things that are very predictable and seem to be 100% certain can go away from you. This is just reversion to mean, to be honest. Otherwise, a lot of this should have been there always. It's growing.
This momentum should persist then.
Yeah, it was not really normal what was happening at that time, and we were on the wrong side of any luck or fortune-based decision at that time, which has corrected itself. Again, second is always our performance. If you are a supplier who's reliable, who does a high-quality product, and can support customers through thick and thin, over the medium to long term, you will always win.
Got it. All right, I'll join back with you. Thank you so much.
No worries.
Next question from Basudeb Banerjee.
Yeah. Hi, team. Congrats. Vivek, with INR 356 crore EBITDA per quarter, hoping you start delivering INR 356 crore non-operating income per quarter down the line. Just to understand, with two quarters of 23% kind of margin and a rising mix of motor controller to three-wheeler business, rising orders from robotics segment, railways moving up the curve. Leaving aside the commodity situation, from a two, three-year perspective, how to look at the margin mix from your earlier guidance of 23%-25% range? As we know, motor controller business relatively is a lighter margin business. So any change from that perspective with the change in mix?
No. Basu, so first, second, I do not think there is any reason to change our range. I think 23%-25% is fair. We are genuinely in exceptional inflation at this point. If you look around in the world, regardless of whether you are in manufacturing or not, just look around in a daily life, you realize how bad inflation really is. In my career, I have not seen inflation like this. It cannot continue at this level for too long without major disruptions in other things. So I do not see any reason to change that range. Rohit, you can add. We have done an exercise for how the next five years look like, and we kind of have an idea on where margins stack up. So Rohit can shed probably more light on this.
So, hi Basu. I think for now, like Vivek said, holding on to 23%-25% range makes sense. Because like we have already said, there is a large part being played by the product mix also. So, for us also, we project numbers and like Vivek said, this quarter, we have seen, let us say, traction motor growth faster than we had anticipated. Now, the way the product mix will eventually move will also be a determining factor given that it is transparently known that, let us say, one particular product line makes lesser margins. So I think it is going to be a mix of that. But material prices, if they continue to be this high, if they are flattish, I think we should be able to hold on to this margin. Because eventually with the lag, the material prices will pass through to the customers.
The only scenario where it deteriorates is if the material prices can continue to inch higher. That also seems improbable because beyond a point, things start to break down. So I would say, let us say if the world is operating in a normal fashion, I think we should probably, around 23%, I do not hold us to like every 10 basis points or 20 basis points, but I think that is probably ballpark the range we see at least, given how we see the product mix also panning out.
Yeah. Basu, so in short, unless oil goes to $150, when all bets are off, we think we will hold.
Understood. Second question, Rohit said in the call in the beginning, you said cash and liquid investments at INR 1,900 crore out. Is that net or absolute?
That's gross, Basu.
Gross. Yeah.
Net would be between INR 1,400 crore-INR 1,500 crore.
Say INR 1,400 crore-INR 1,500 crore, second half of this year, another INR 400 crore-INR 500 crore of FCF and by year-end, INR 900 crore from DENSO. You'll be sitting somewhere around INR 2,800 crore-INR 3,000 crore of net cash potentially. Just to understand, since IPO, we have only seen NOVELIC as an M&A or some substantial kind of a thing. How such huge driver—
Basu, you are forgetting railways.
No, in core business other than railways. Aerospace is a segment where everybody is looking at. How to understand the deployment of such huge size?
Basu, again, very happy that what you say comes true, but you are forgetting that what we get from DENSO we will pay tax on. We will pay tax in NOVELIC also. We also have CapEx. We also will have some working capital. JV2 also has some amount that we will block for the CapEx for that. We will have a substantial cash balance at the end of the year. M&A is the right way to look at it. But just because everyone is doing it is not the reason we will do it. We will do it if it makes sense for the company. As you know, we are fairly selective about M&A. We have only done three in the last decade. For us, it has to be, and
I will again repeat the four filters that we use to identify this. A product that we believe will continue to be in these devices, vehicles, devices, whatever it may be, for at least the next 15 years. Number two, it should be something in which we can have some kind of market leadership, either today or in the future, that we believe we can be amongst the top five to top 10 in the world. World-class is the only class we want to be part of. Number three, it should make financial sense for us that it should have healthy margins, it should be margin accretive, return accretive, and it should add value to us. Fourth, it should be something that we believe is good for the world. Sometimes the definition of good is on how we define what is our moral good, right?
Capability in what we would look to acquire, not capacity, not customer, and 100% not because other people or everyone is doing it. I think the surest way to destroy shareholder value is to follow the herd and say, "Everybody's doing it, I must also do it." You don't win that way. You do not become leaders that way. Last but not the least, we are happy to be patient. According to our calculation, debt to EBITDA ratio, as long as it doesn't go above 1.5x, we don't have to rush into any decision. So we'll be patient. Whatever we'll do, we'll do very deliberately, and we will do what is best for every single shareholder of this company.
Great to hear that. Thanks.
Next question from Pramod Kumar. Pramod, please go ahead.
Yeah. Thanks a lot everyone, and congratulations on an excellent set of numbers. Vivek and team, congratulations on the Deming Award as well. I think, historically, companies which have got the award in India have gone on to do great stuff for the industry. So hope that journey starts for us. It's already there, and I think it'll reach inflection. On that count, my question is on the humanoid robot opportunity, sir. Because you have previously stated that you plan to target 60% of the BOM in this industry, and when I look at the kind of statements coming from SpaceX, Elon Musk, on the kind of potential here.
If you can just help us understand, what is the kind of R&D spend we are doing here? What is the kind of timeline, in terms of, say, product validation status? And what are the capital allocation plans for this dream of yours to materialize? Also, are you also positioning your existing global EV drivetrain infrastructure to act as a supplier for such large projects with your existing customer, like Tesla? If you can just share your broad thoughts there.
Thank you, Pramod, for that very leading question. But as you know, we do not mention customer names. Our aspiration, of course, is to be global suppliers. You are right, 60% of the BOM is something we have capabilities in. If you take the BOM out and look at the software part also, there also we have enough capability in the perception stack. So hardware as well as perception, we have capabilities in both. When we say robotics, humanoids is one form factor, but one is right in front of you on the screen, AMRs, which actually by units may be a much bigger opportunity set. Intelligent industrial robots is another opportunity set. A robotaxi, frankly, is the deployment of physical AI.
It is far more complex, frankly, than. Apart from the, let's say, degrees of freedom in the hand, if you look at how fast a robotaxi has to maneuver and what a varied environment it has to maneuver, it is quite complex. So all of those are application sets. I think we have the capabilities. We have orders. It is still small. 4% of a 250 million order book is, I would say, small compared to our size. It will grow. As percentage of R&D, when we give our ranges for EBITDA, etc., those are considering all these facts. So one of the reasons also that the margins are not. Because that is not our focus. We are spending on R&D during this time, actually considerable sums for our stand. But Pramod, because everything is in-house, a lot of this R&D is just our time.
The NOVELIC team's time, our drivelines team time. They are doing a full-time job, which may be different, and also devoting a lot of their management bandwidth and time to these technology developments. It will continue. The CapEx, as you know, we had declared, last quarter, I think, that INR 62 crore of CapEx is for this area. That should cover it. I will invite you to Bharat Expo, whenever that happens. Hopefully, we will show you some of these things, and then you can visualize it much better than what is it that we are talking about. PowerPoint is PowerPoint at the end of the day. To see it is to believe it. Bharat Expo , I think in February, we should be able to demonstrate some of these things, including what is on your screen.
Yeah. Then Vivek, one thing. At least if you were to look at the next three, four years, which year do you expect to be the big inflection point for this business of yours? Because the scale is humongous. I am just trying to understand which year, according to you have something which then it becomes a sizable part of the business in terms of order win.
It is a hard question, Pramod, to answer. I do not know is the real answer. Even if you had asked me in 2016, and I was much younger, I was just 36%, so I was super optimistic. I said two years. What actually happened was 2016, 2017, 2018, 2019, it did not really grow. It was 1% of our revenue even in 2019, and now it is 51%. The thing is, when these curves start, it is very hard to predict. Now that we are publicly listed, and this is a recorded call, and you can always hold me to it that that day you had said. Which is why we do not want to stick our neck out on this one.
Whenever it does come, the curve will be very steep. That is something I can guarantee. I just do not know when that point is. The point, I think Kapil can weigh in on. He has shared a couple of reports with me. I hope he can share with you guys as well. Although you guys compete, so I do not know if you will read his reports. With physical AI models becoming open source, with the cost of compute going down by about 1,000 times, the cost side is moving very, very fast on all physical AI devices.
What is not moving as fast is the sim to real, which is the simulation to reality and deployment in real world environment. So one of the things we are doing right now is the AMRs we have developed, we are deploying as we speak on our factory floors to develop those use cases, get that real world training, get that as a feedback loop and improve the products. We do not know is the real short answer. Long answer is, I have already given, but whenever it happens it will be super steep.
Okay, final one. On the railways, the growth outlook, given that we are launching new parts, new components, and we have stepped up the R&D efforts there, what is the growth outlook on this business for the next couple of years?
Since we are in Amit Mishra's home in Faridabad, in his factory, let him answer this one.
Yeah. Hi, Pramod.
Hi.
We don't share business-wise growth outlook, or we don't get forward growth guidance. But I can talk about growth levers. I think the product addition or new product introduction will be the main growth driver over the next three years. We are working on new products within brakes, couplers, suspension. This quarter, we supplied air springs, and it has just started and will ramp up.
Within this year, we have supplied first batch of HVAC systems to customers, so that would also go up in the coming quarters. Electric panels have started in a small way, that's also in the ramp-up. We have multiple products which have started or gone into serial production. And we have orders, and according to customer requirements, we'll ramp it up over the next few years. And we have enough in product pipeline to support our growth over next five years. That is what I can share. It is more dependent on whether we are successful to launch these products on time or not.
Fair enough. Amit, thanks a lot and thanks team.
Yeah.
Best of luck.
Pramod, in short, we have already given our aspiration, which actually does imply a 25% CAGR. There are three stars we have, Vikram, Sat, and Amit. At some time, some will shine brighter than others, and it will be different quarters, different businesses will have different growth rates. But overall, as one company, I think we feel good that in the medium term, we should be able to stick to that CAGR.
Yeah. I'll just take a couple of questions from the chat box. The first one is, what is the scenario with heavy rare earth metals? Will the company switch back to heavy rare earth for performance motors?
Well, they are not available. So it is a fairly hypothetical question, I'd say, because as you know, the restrictions on export of heavy rare earth materials from China continue. So in that scenario, it is not possible. If they were to be once again abundantly available, we would, of course, try and use it wherever it is imperative to use. Yes, there are motors. BH max of heavy rare earth magnets is much higher. But again, right now, that question we have not thought of because they are not available. And right now, we do not see any signs that those restrictions will be eased.
Okay. The second question is on margins. Do not we have pass-through arrangements with our clients that can insulate margins?
Yes, we do. Rohit, you want to explain the numerator, denominator effect on even if margins are passed through, why percentages continue to drop?
Yeah. Like we said before, there is a pass-through mechanism with the customers, but there will be a lead lag effect. The prices will go up first, and then with a lag, the prices get passed on to the customer. One is that impact. Secondly, even when the full pass-through happens, because numerator and denominator change by the same value. The delta to both numerator and denominator is the same. Arithmetically, the percentage margin tends to come down. I think that's the point. Whenever there is an inflationary trend in the material prices, these are the two impacts.
Generally, once the prices start to go up, immediately there is a margin impact because of the lagged effect with which the pass-through happens. Once the prices stabilize, there is an impact because of the arithmetic of it. As and when prices start to come down, the reverse also is true. Then it comes into the reverse mechanism, so the margins will improve as and when the material prices start to come down. That's how it functions.
Yeah. Just to illustrate on a very simple mathematical basis, all things being equal. If the price is 100, 75 is the material cost and 25 is margin. Let's say 75 increases to 80, and you pass it through, and you get it back. What it is now you still make 25, but you make 25 divided by 105, and hence your margin as a percentage goes down. That's what happens in these inflationary times.
Yeah. The last question for the day is robotics and physical AI. Are there any plans to deploy humanoid robots on Sona Comstar's production floors for repetitive tasks?
We are evaluating. Let me be short about it. We are evaluating it, and we are evaluating where it makes business sense. It has to be seen with the lens of that when will the payback be. Like any machine you decide on, this is also one. Sat, I think your thing is not on mute. Sorry. It is a business decision, as you would evaluate any machine. Is the same way we evaluate an industrial robot, same way you will evaluate humanoid. But we are evaluating it.
There may be areas, and the first areas will be tasks that are unsafe or low acceptability to human beings are the first tasks actually that would come, that if humans cannot do it is the better thing for a machine to do it. Replacing humans just for the sake of it is not really anybody's target. In a country with a large population like India, that should also not be a target. It has to make business sense, and it has to be a degree of return higher, only then would we actually evaluate.
Okay. Thank you, team. That was the last question for the day. Vivek, I will pass the floor to you in case there are any closing remarks.
Yeah. What is that? You do not have any questions this quarter?
My peers have asked a lot of interesting questions. In the interest of time, you know.
Yeah. Thank you everyone for attending. As you can see, our financials were so good and heavy that Rohit and Vikram are on one screen sharing the screen to give those results. Thank you so much for asking us good questions. Please, if you ever have any specific and actionable feedback, let us know. We would be happy to incorporate it in our presentation, in our communication, and what we do with others. Thank you.
Thank you, everyone, and have a good day.
Thank you, everyone.
Thank you. Thank you.
Thanks, everyone. We will now conclude this call. If you have any follow-up questions, please feel free to email your Nomura sales representative or corporate access team. You may now drop off the line.