Ladies and gentlemen, good day, and welcome to the Q4 and FY 2026 Earnings Conference Call of Tenneco Clean Air India Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Himanshu Sharma, Head Investor Relations of Tenneco Clean Air India Limited. Thank you, and over to you, sir.
Thank you, Alric . Good evening, ladies and gentlemen, and a warm welcome. Today we have with us Mr. Arvind Chandra, Whole Time Director and CEO, and Mr. Mahender Chhabra, Chief Financial Officer. A detailed presentation on the business and financial performance is available on the company's website and on the websites of the stock exchange. We will begin with Mr. Chandra providing a business update, followed by Mr. Chhabra covering the financial results. We expect the update to take around 15 minutes, after which we will open the floor for a Q&A session of about 45 minutes. Before we proceed, I would like to draw your attention to the cautionary statements included in the presentation.
With that, I now hand over to Arvind.
Thank you. Thank you, Himanshu. First of all, good evening, everyone, and thank you for joining us for the Tenneco Clean Air India's Q4 and FY 2026 earnings call. I am very delighted to share that we have had the best ever year on a full-year basis for our company. I'm very happy to report that in this year, we doubled our value-added revenue growth rate versus the prior three years, registered the highest ever EBITDA margin for our company, best ever ROCE, strong order booking, ending the year with a very strong balance sheet and zero debt. As we reflect on the past year, our record stock market listing this past November, we have once again revalidated the strength of the operating model we've been building over the last several years. A model that is resilient, diversified, and execution-led.
The performance in the quarter and the full year under review demonstrates that this approach continues to deliver consistent growth and strong profitability, even in a volatile operating environment. For the full year, we delivered value-added revenue growth of 12.3% year-over-year to INR 49,180 million, supported by sustained traction across both business segments. EBITDA grew by 13.5% year-over-year to INR 9,255 million. Importantly, we achieved our highest ever EBITDA margin of 18.8%, expanding by 21 points over the last year. This margin progression from 14.3% in FY 2024 to 18.8% in FY 2026 reflects the cumulative benefits of our P3 operating model, driven operational discipline, improved cost absorption, and timely commercial actions.
Turning to Q4, this quarter was particularly strong across all key metrics despite elevated geopolitical cost pressures. Value-added revenues grew 17.5% year-over-year to INR 14,058 million, while EBITDA increased 17.6% to INR 2,573 million, with EBITDA margin at 18.3%. Profit after tax came in at INR 1,668 million, up 18.8% year-over-year, with PAT margin at 11.9%, reflecting continued operating leverage. Beyond financial performance, I would like to highlight a few strategic and commercial developments that are central to our long-term growth story. Our focus on customer-centric execution and quality excellence continues to be recognized. In our Advanced Ride Technologies business, we were honored to receive, in this quarter, the Zero-Defect Supplier Award from Toyota, reinforcing our position as a trusted high-quality partner to global OEMs.
A defining highlight this year was the strong validation of our technology leadership through the adoption of DCx DaVinci , a first-in-the-world advanced mechanical suspension system using shim stacks. This was taken up by a leading Indian OEM for a next generation flagship SUV platform, and I'm delighted to share that the scope of this is being further expanded with multiple new DCx applications across other OEMs also. Our patented DCx reflects our commitment to India, bringing global suspension expertise tuned for local road conditions through a purely mechanical architecture that avoids the cost and complexity of software or electronic-heavy systems. This combination of performance, affordability, and speed to market positions DaVinci DCx as a market-ready solution for all mid to premium passenger vehicle segments, including SUVs. It is a total game changer and disruptive to the conventional mechanical dampers, which still dominate over 90% of passenger vehicles in India, as OEMs are increasingly pushing ride quality as their top market differentiator.
Similarly, when it comes to the high-end premium PV segment, we continue to play a key leadership role with electronics-enabled semi-active suspension technologies. Now, coming to Clean Air and Powertrain business, we won in Q4 a significant Clean Air program and achieved a strategic entry into the bearing systems business with a leading Japanese passenger vehicle OEM, marking entry into a previously untapped segment. This year's big announcement earlier in Q2 was a big breakthrough win for our Clean Air business with a leading Japanese passenger vehicle OEM in India, marking entry into a previously untapped Clean Air segment at this customer. This has opened our growth cadence significantly in future years due to the significant market share that this particular OEM commands in India.
Another strategic program was booked with a leading European commercial vehicle OEM in Q3 for a Clean Air after-treatment solution tailored to customer-specific cost and performance requirements. Just recently in Q4, the company completed a strategic proof of concept with a leading European truck OEM for a Euro VII–compliant C lean Air solution, thereby strengthening capabilities in advanced emissions technologies and readiness for future legislations, and to further India as an export hub for the world. All of these developments underscore our ability to deepen customer relationships and unlock growth opportunities through technology differentiation. Turning to order book, the momentum remains strong. As of March 31, 2026, our lifetime order book stands at INR 124,000 million, after accounting for net additions in programs that commenced production this year.
This provides 100% visibility of our FY 2028 internal revenue target and underpins a double-digit growth trajectory over the medium term. Export order book has also been strengthened and will continue to grow as we add more techno commercial talent in the regions this year. To support the order book and growth forecast, we are making disciplined capacity investments. Alongside our previously announced Clean Air facility in North India in Q3 FY 2026, we are now setting up a new greenfield Advanced Ride Technologies plant in West India. Together, these projects represent an announced CapEx of approximately INR 1,400 million, ensuring we are well positioned to meet future demand while maintaining operational efficiency. Before I conclude, I would like to briefly reflect on our IPO journey. Our issue was oversubscribed 61.8x with qualified institutional buyers subscribing 174.8x their allocation.
Since the listing, our stock has delivered returns that outperform both the BSE SENSEX and the BSE Auto Index. Our IPO marks a significant milestone in the evolution of Tenneco Clean Air India Limited. It reflects years of focused execution, disciplined growth, and teamwork across the organization, and the confidence our parent company and investors continue to play in Tenneco India's manufacturing capability, engineering depth, and long-term growth opportunity. This achievement belongs to many people. To our tenacious teams across our plants, engineering centers, and offices in the 12 locations who live The Tenneco Way culture every day, to our fantastic global leadership at Tenneco for backing this journey with conviction, and to you all, our dear investors who chose to place your trust in us.
As a listed company, we have continued to strengthen governance disciplines that support long-term performance and stakeholder trust. Our board and committees have provided oversight across strategy, risk, compliance, internal controls, and operational performance. As we look ahead to FY 2027, we remain focused on building on this foundation. With a strong order book, expanding capacity, and a disciplined operating framework, we are well positioned to sustain profitable growth while continuing to create long-term value.
With that said, I will now hand over to our Chief Financial Officer, Mahender Chhabra, to take you through the detailed financial performance. Thank you.
Thank you, Arvind, and good evening, everyone. Let me briefly take you through our financial performance for Q4 and also for the full year FY 2026. As you know, we track our performance using value-added revenue or VAR, as it excludes pass-through substrate costs and provides the most accurate view of our underlying operating performance and margins. Let me start with Q4 FY 2026 first. We delivered a strong and well-rounded performance with growth across the business regions. Revenue from operations grew 17.1% year-on-year to INR 15,524 million, while VAR increased 17.5% to INR 14,058 million, supported by higher volumes and ramp-up of new programs. At a business unit level, Clean Air and Powertrain Solutions grew 9.9% to INR 6,905 million, while Advanced Ride Technologies continued its strong momentum, growing 26% to INR 7,153 million.
From a profitability standpoint, EBITDA increased 17.6% year on year to INR 2,573 million with margins remaining stable at 18.3% of VAR. This was despite the cost pressures arising from the geopolitical development. These pressures were effectively mitigated through timely commercial actions and ongoing operational efficiencies, reflecting the discipline embedded in our operating model. Profit after tax grew 18.8% to INR 1,668 million, with margins improving to 11.9%, supported by operating leverage and higher other income. Coming to the full year 2026, it reflects consistent growth alongside record profitability. Revenue from operations grew 10.5% to INR 54,040 million, whereas VAR increased 12.3% to INR 49,180 million. This was driven by volumes and the new program wins. At the segment level, Clean Air and Powertrain Solutions delivered INR 24,296 million, growing 5.5%, while Advanced Ride Technologies delivered INR 24,885 million, growing a strong 19.7% year on year, continuing to outpace the broader market.
Importantly, EBITDA grew 13.5% to INR 9,255 million, with margins expanding to 18.8% of VAR, marking our highest ever full year EBITDA margin. This improvement has been driven by P3-led operational efficiencies, better fixed cost absorption, and disciplined commercial recoveries. Over the past several years, we have focused on building a more resilient, efficient, and scalable organization by embedding Tenneco's global P3 operating framework: people, performance, and pride. This standardized operating system defines how we run our plants and distribution centers globally, driving consistent execution, operational discipline, and adoption of industry best practices. By actively leveraging the P3 framework, the business is driving continuous improvement across safety, quality, delivery, and cost, while maintaining facilities that meet the highest global benchmarks. This disciplined approach underpins our ability to deliver best-in-class operating and financial performance and positions us well for sustainable long-term value creation.
Profit after tax for the year stood at INR 6,044 million, up 9.3% year-on-year, with margins at 12.3%. This includes the impact of a one-time labor court charge, which was partially offset by stronger operating performance and higher other income. From a capital efficiency standpoint, FY 2026 has been a standout year. Return on capital employed improved significantly to 94%, up from 57% in FY 2025, reflecting both higher profitability and efficient capital utilization. Fixed asset turnover improved to 9.6x from 8.4x in FY 2025, while our cash conversion cycle remains strong at - 23 days, highlighting continued discipline in working capital management. Our balance sheet remains very strong. We are a debt-free company with a net debt to equity of negative 0.4x, providing ample financial flexibility.
At the same time, we generated cash flow equivalent to 58% of our EBITDA, and this is after investment of CapEx equivalent to INR 1,150 million during the year. Just to summarize, FY 2026 has been a milestone year for Tenneco Clean Air India. We have delivered double-digit growth, record margins, sharp improvement in capital efficiency, and strong cash generation, all while continuing to invest for the future. Combined with a robust order book and disciplined capacity expansion, we enter FY 2027 with strong visibility and a resilient financial foundation.
Thank you. With this, now I hand it over back to Himanshu.
Thank you, Mahender. We request participants to kindly limit questions to two at a time. If you have additional questions, please rejoin the queue. I now request Alric to commence the Q&A session.
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 Nishit Jalan with Axis Capital. Please go ahead.
Yeah, hi. Good evening, everyone, and congratulations on good set of numbers, and thank you for taking my question. Two questions. Firstly, you had talked about exports being part of the order book in the previous quarter. Just wanted to understand, on export side, how should we look at in terms of new order wins and ramp up, right? We had talked about scaling up exports quite substantially. Can you give us some visibility as to how it will pan out over the next two to three years?
Secondly, you have talked about new plants and some new orders that you have received on bearing side, on commercial vehicle side. Just wanted to understand on timeline of execution of those orders and commissioning of the new plants. Yeah, these will be two questions from my side.
First of all, Nishit, thanks so much. Hope you're doing well. The first question on exports. Yes. Our current exports as a percentage of sales is very low. You know that because we never had exports load as a strategy in the past, right? We're only at about 5%-6% currently. Our order book, and you rightly pointed out, that the order book for us is somewhat between 14%-20%, right? That exports order book growth is both with moving business or exporting to third-party OEMs, and it's also exporting back to Tenneco entities, right? Tenneco Europe, Tenneco US, and so on. There's a couple reasons for that. One is technology equalization, right? India is now equal in technology, whether you look at clean air exhaust systems or with shock absorbers.
We have BS6, 6.2 with RDE. Europe has the same thing, Euro 6 with RDE. The same essential products can be exported. On the shock absorber side, with the semi-active suspension, we can also export the same technology, right? Technology equalization is new, and we are taking advantage of that. The second reason is many of the OEMs from a China+1 diversification, or let's call it supply chain diversification standpoint, are looking to India as a source for products, and we are also benefiting from that. The third one is just the improving labor cost arbitrage. All right? India's always been a source for, let's call it best cost labor. Also now with the currency that is depreciating, it also makes our overall products more export-worthy or more competitive, so to speak.
Yes, to answer your question, our exports are coming in way stronger than our current level of exports, and they're coming in very strong on both sides, by the way. They're coming in very strong on the Clean Air powertrain side and also on the shock absorber side. In fact, Clean Air, we're booking a lot of new business there for exports across the regions. Again, it's also covering multiple geographies, North, South America, Europe, and also Asia. Clearly, exports is gonna be a very key vector of growth for us beyond content per vehicle. To answer your second question on the new plant, yes, we've got two new plants that we announced, one in the last quarter and one in this quarter.
Last quarter, we announced was the Clean Air plant expansion in north of India to support, of course, our Japanese customers in the north as well as for commercial truck and off-highway customers. The new plant we announced just recently is for west of India for shock absorbers. That's because the overall market itself is growing. Again, I can take names of Mahindra, Tata, they're all growing volumes. At the same time, new technologies like DaVinci DCx as well as semi-active suspension, they're all growing as well. We're growing in volume because of the India Inc. growth or the GDP growth, but we're also taking over market share. We're growing faster than the market, and that's the reason we're setting up a new plant.
On the bearings side, we haven't still mentioned the actual value because this is just a significant entry, let's call it a strategic entry into this customer. At some point, we will publish the exact numbers when they become available. Will we set up a new plant for that? That still remains to be seen. We're still working out the capacity situation in our existing plants to see if we can accommodate in the existing location. The point I want to make is that bearings, it was difficult to get into this particular customer's bearings for a very long time. The fact that we have been able to enter the supplier panel is very strategic for us, which means we can now grow with this Japanese customer in a bigger way.
This is the same story like we had in the earlier quarter where we got into the leading Passenger Vehicle OEM in India with a Clean Air product on the hot end, that was a gasoline particulate filter, which again opens the door for much faster growth for Clean Air starting late 2027, 2028, and onwards. I hope I answered your question, Nishit. Yeah?
Yeah, thanks for the detailed answer. Actually, what I also wanted to understand primarily was, yes, you are starting this plant and you have won these orders on both export and domestic. I just wanted to understand the timeline when these orders start or when do these plants commission, and will export revenue ramp-up be more. Will it happen in a smooth way over the next two, three years, or some of the orders are backended, so the commissioning will be late, right? Will the six go to eight, 10, 12, or will you see exports being slightly backended increase in terms of mix of our revenues?
All right. The timing, we've started the work on setting up both the plants in North India and West India. We just got the board approval for the one in West India. Those plants will take somewhere between six months to a year to commission, and the volumes will start. I think the actual peak will happen somewhere in mid 2028 to 2029. Typically, we have a 1: 3 ratio CapEx going to, let's call it steady state revenue. Again, I can't eyeball it, but I would say it's somewhere between 2028 and 2029 when it starts peaking. To answer your, sorry, your second question was about?
Exports.
Yeah, exports. Exports, it's not front-ended or back-ended. I would say it's more middle-ended. A lot of that exports start hitting the ground around 2020 to 2028 timeframe. Right. That's when we see a lot of the critical mass of exports hitting us. It will already start ramping up around 2027, 2028, and then 2029 onwards it will continue. Like I said, our exports order book is coming in at a much higher rate than our current export sales, exports to sales, overall sales.
Okay. Thank you so much.
Thanks, Nishit.
The next question comes from the line of Ravi with Incred Capital. Please go ahead.
Yeah, thanks for the opportunity, and congratulations on the great set of numbers, team. My question regards on the car exhaust system. Can you talk about the car exhaust system content per vehicle versus commercial vehicle content per vehicle? Yeah, I understood that you are supplying to Japanese OEM. Are you in talk with any other OEM to supply this in future? Secondly, on this car exhaust system, is this similar for diesel, petrol, CNG, or maybe for the hybrid, or there is a differentiation among all these type of systems? Any color on that? Thanks.
Yeah. On the content, I won't get into the actual numbers because it really varies. Depending on the vehicle, depending on the gross vehicle weight and the engine displacement, they can vary a lot. Even between one passenger vehicle to the other, right? I think I would just say that if the car exhausts like a typical passenger vehicle exhaust system, and again, by the way, it also changes between diesel and petrol, as you know. Also even within that, there's the difference between hot end and the cold end, where the hot end has all the aftertreatment and the cold end has the muffler, et cetera. It's very hard to pinpoint, but luckily if I could just do it in terms of X, 2X, 3X, I would say a typical passenger vehicle exhaust system is at X.
A commercial system exhaust could be somewhere between 3X-4X. In the case of a vehicle like a tractor, currently there is no exhaust aftertreatment. At some point when you add all of the particulate filter and SCR systems and Oxy-cats and so on, you can even go from X-10X. It's hard to pinpoint a specific CPV, content per vehicle, but needless to say, it could be a factor of 3X-4X and all the way up to 10X. Some of the real low volume applications like construction equipment can be even 10X-15X because they really need very strong aftertreatment, et cetera. Some of our aftertreatment systems are very small, and I'll come to the second question in a second. Some of the others for commercial vehicles and construction equipment are very intense.
In terms of also the kind of substrates and platinum, palladium, rhodium loading that they carry, they can be very significant. To answer your second question, I think it's a very good question. Obviously, between diesel and petrol, you know that diesel requires a higher aftertreatment because of higher NOx and particulate matter. You need a diesel particulate filter, you need an SCR system, sometimes you need EGR systems and so on. The hot end of diesel versus the hot end of petrol, is a bit different, which means diesel has a higher content of hot end versus petrol.
Now increasingly with gasoline direct injections on petrol engines, what's happening is they are forced to implement a particulate filter because the amount of particulates that come out of a gasoline direct injection, although it lowers your CO2 for CAFE purposes, it also increases the particulate matter and therefore petrol engines also are starting to have higher content starting 2027. I think mid-2027 is when the CAFE norms come out. That shows you the difference between diesel and petrol. Talking about CNG and hybrid, for all of these, CNG, hybrid, they will need exhaust systems. In fact, we don't think in terms of content there'll be any reduction or loss of content. In fact, for hybrid vehicles, because what happens is one is the aftertreatment, but you are essentially trying to improve the emissions performance and also manage sound in a very small space.
Hybrid vehicles actually can have the effect of taking our content from X to 1.5X to even 2X, because now you might have to add an adaptive valve or some sort of an acoustic valve to manage the sound transition as the vehicle goes from an electric to a ICE mode. Right?
Got it.
All of these, now unless it's full EV, anything less than full EV, that's a great question also because remember that the markets in the U.S. and Europe are sliding back from an EV to more of a compromise. They're going to more of a, what I would call a hybrid or a range extender solution, even in markets like China, you're seeing some signs that hybrid and let's call it compromise solutions between an ICE and an EV are starting to take shape. For all of these compromise solutions, anything from a traditional ICE petrol diesel engine, all the way up to just short of a full EV, our Tenneco Clean Air business has a lot of potential in terms of content per vehicle. That's the summary.
Got it. Right. Secondly, on the new suspension plant, are you adding new OEM for it or maybe it is for the existing clients? What kind of suspension are you going to make? Is these are for the conventional one or are you going to manufacture semi-active or maybe the higher ones? How is it you think about it?
First of all, I'll just give you just an overall summary. For what, 60, 70 years, India's only had one tuning. Which means one tuning fits all. Whether you're on a highway or on an uneven road or on a speed breaker bump or a pothole, you only get one tuning, and that's been the case for 90%+ of the vehicles. Even today, if you go out most vehicles have the traditional shock absorber that for whatever reason never got premiumized. I mean, cars moved to SUVs, but the premiumization of SUVs never happened. That's changing dramatically, and this is where Tenneco comes in.
We are now able to go to more frequency dependent damping, where depending on the road forces, we're able to use valves very creatively and hydraulics to control the flow of hydraulics in a way that will have nonlinear damping. Which means not one size fits all, but different tuning depending on how the road conditions are. That's what DaVinci does. DaVinci has these shim stacks, like wafer thin aluminum discs on either side of a piston that will selectively allow hydraulics to flow in and out.
Depending on whether you're on a rough road or a pothole or a speed bumps, which I guess in India these are quite common, the vehicle responds very differently. That's well-documented on the Mahindra XUV700. Hey, don't take my word for it, you can check it on YouTube, on Instagram. I mean, there's hundreds of influencers that have said wonderful things about this product. For me, I look at this DaVinci DCx, it's called the ultimate mechanical suspension that is also affordable, that will cover all the mid up to the premium range, maybe up to INR 35 lakh MSRP. Anything above that, INR 35 lakh onwards will be a candidate for the CVSAe, which is the semi-active controlled valve suspension, which has electronics and software, which takes you the remaining 10% of the way.
In terms of comfort, the DaVinci takes you about 85%-90% of the way with a small delta cost, and the CVSA, with electronics and software, takes you all the way, maybe up to 98% in terms of comfort. That's how we segmented these products, so that each product represents a different level of disruption at a different price segment. Does that answer your question?
Okay, sir. Thank you. Yeah, that's all from my side. Thanks.
The next question comes from the line of Radha Agarwal with Motilal Oswal Financial Services. Please go ahead.
Yeah, hello sir. Thank you for the opportunity. Sir, firstly, on the exports front, as per the agreement with the Tenneco parent company, can we export only to Tenneco group entities or can we also export direct to customers overseas as well?
Yeah. We have a very good arrangement with our Tenneco group entities. We are not there to compete with each other. In fact, we look at us, Tenneco India, as supporting Tenneco Europe, and supporting Tenneco U.S. for them to become more competitive. We are quite happy to supply them child parts or sub-assemblies or even finished goods, depending on whatever their needs are. We work in partnership with our Tenneco sister divisions. For example, there might be also customers and segments that the Tenneco group is not targeting, and that happens. Sometimes they're focused on a specific segment, and they're not interested in a certain other segment because of cost or profit reasons. We, Tenneco India, for us, it works a lot better because our labor cost advantage over, let's say, Tenneco Europe, is much better, much stronger.
We are able to directly then, with their permission, talk to the OEM directly and say, "Hey, here we are. We are competitive. This is the selling price." We can actually win business with their permission. We work very closely. We have very good, regular cadence of export opportunities, both from a third-party OEM perspective as well as intercompany sales. We'd be selling child parts, subassemblies, and even finished goods, depending on what the needs are. We're very flexible. I think flexibility is key, and we come at this as partnership rather than direct competition.
Thank you, sir. On the suspensions business, you are not present in the two-wheeler. I wanted to understand, are there any plans to enter into this segment, or do you think that this is a comparatively lower margin business and you want to remain on the CVs?
Yeah, Radha, good question. I think if I understood your question, it is, are you going to expand suspension beyond four-wheelers, right?
Yes, sir.
Okay.
The margins of three-wheeler four-wheeler.
Obviously, we are a high-margin company. You see from our EBITDA numbers, 18.8%. These are pretty nice numbers for automotive sector. We want growth. We do want growth, but growth has to be profitable growth. We're not gonna directly jump at any opportunity that comes our way just because we are not in a certain segment or at a certain customer. Sometimes we have deliberately avoided in the past, for example, Clean Air, we've deliberately avoided two-wheelers or three-wheeler, auto rickshaws and so on, purely because it doesn't give us the right margin potential for us. Having said that, we want to enter segments and markets and new customers using technology as our differentiation. That's been the key.
If we do enter, let's say, the two-wheeler market for Clean Air or for suspension, it will be something that brings something unique to that segment. We don't have to play a commodity price game, because we're not that kind of a player. We are an MNC. We want to play in a segment where the customer and the consumer is looking for some level of disruption, like you're seeing in the passenger vehicle for shock absorbers. We're gonna be very careful and meticulous about where we enter. We don't want to be trying to cover all of the segments like two-wheeler, three-wheeler, just because it's there. We will be very careful in where we invest. Again, we are not just looking at organic, we're also looking at inorganic.
We said, during our pre-IPO and during our IPO and post that as well, that we would be looking at M&A as well as other strategies to get into areas which also give us a good shot at good margins. I hope that answers your question, Radha.
Yes, sir. Sure. Sir, last question, if I may. The DRHP mentions that via localization, you want to increase your presence in CVs as this is a relatively under-penetrated category. Are you talking about the Clean Air division here, and can you please elaborate further on this point?
Sorry, Radha, can you just repeat the question again? I heard something about localization. Can you finish the sentence again, please?
Yes, sir. There is a statement in the DRHP that mentions that via localization, the company wants to increase the presence in CVs because this is a relatively under-penetrated category. Is it fair to understand that you're talking about the Clean Air division here, or just wanted you to elaborate further on this?
Okay. I still wasn't clear, but I think I understand your question. Look, localization is a very key element of our strategy. One is the new technology. Of course, we have the luxury of several thousand patents that we have globally between the U.S., Europe, and so on. We're able to bring those patents to India and apply it in the Indian context, whether it's engine or vehicle architecture, and we're able to sell those to our India-based OEMs. Localization is very important because that's where our profit margins come from. We have on both the Clean Air, the shock absorber side, which is the ART, as well as Powertrain side, we do want to make sure that we are localized as much as possible. Even with some of the critical components, like for example, pistons for shock absorbers.
Those would be key localization strategies that we would pursue. Currently, our localization is about 89%, 90% level. We want to keep that. Obviously, with new technology, initially, we might be importing some of the sub-components and child parts from our sister divisions or from other suppliers. We will make sure that we are consistent with our 90% localization strategy in the long term. It may not happen the very next year. It will take some time. New technologies, once they start, in a post germination, once they become established, the idea is to make sure that we slowly creep up to that 90% level of localization.
Yes, the answer is yes. We want to localize as a key strategy for maintaining and sustaining our profits.
Sir, actually, it is mentioned that localization is because CVs are relatively under-penetrated. Here, for CVs, are you talking about the Clean Air CVs or the suspension CVs?
When you say CVs, that would be for Clean Air. Yes. It wouldn't be for suspension, because typically suspensions are for passenger vehicles only. Although you could argue that there is a demand for DaVinci-type suspension for cab dampers, and so on, axle dampers and so on. I think what you're referring to here, and what that DRHP refers to is, commercial vehicle for Clean Air product.
Thank you, sir. Thank you, sir. All the best.
A reminder to all participants, you may press star and one to ask a question. The next question comes from the line of Vipul Agrawal with HSBC Bank. Please go ahead.
Yeah. Hi, sir. Thank you for taking my question. First question is on the margins part of the business. On the standalone margins, it has improved by almost 200 basis points, that's mostly from your Clean Air business. Despite the Clean Air business, I would say, has kind of lagged from the overall industry growth. Like industry, CV industry has grown by around 18%, but CV business has grown by around 10%, 11%. Can you help us understand what are the key drivers for the margin expansion over here? Is it seasonal or is it sustainable on quarter-on-quarter basis? How should we look at it?
Vipul, first of all, good to see you, good to hear from you, Vipul. You're talking about Clean Air growth or Clean Air margins?
Clean Air margins and growth both, basically.
I'll kind of summarize, and Mahender you can add to it. I think, look, our Clean Air story, if you remember from, I guess the IPO and subsequent quarters, Clean Air business for us is a high margin business. We are not present in the number one PV OEM in India today, right?
Yes.
That automatically eliminates us from 2.5 million vehicles a year you could say. That changes, right? In 2028, we have already secured entry into the supplier panel for this largest PV OEM in India, due to CAFE norms with a gasoline particulate filter. We're hoping that once we enter the panel, our growth will increase quite a bit, and we'll be able to do so with equal or better margins, simply because it is a high-tech product, right? It's a new technology product, right? In terms of Clean Air growth year-over-year, you might argue that it's a bit tepid, but that's mainly because we've had some within OEM mix and between OEM mix issues. We have not really lost any share of business versus the competition.
What has happened is that within certain OEMs where we had strong market share, they have sold more of their lower-end SUVs versus the higher-end SUVs. In between OEMs, for example, there's a European OEM where they sold more electric vehicles rather than more ICE vehicles. It's just a combination of factors where the mix has changed at the vehicle level. Nothing has changed for us, right? We have not lost any competitive share versus some of our key adversaries or competitors. Overall, the growth has been along with market volumes, minus the fact that we are not present in a certain passenger vehicle OEM. Again, things like the GST benefit, which favored this particular OEM, we were not part of, right? That changes in the future. 2027, 2028 onwards, 2029 onwards, we do participate in this OEM.
The other good news for Clean Air is that the addressable market, if you look at CAFE III and BS VII, the addressable market is as much as INR 1,300 crore -INR 1,400 crore of additional content per vehicle. That's something that we're going to target, and obviously, even our competitors will target that. That tells you that there's a lot of runway still left in terms of content per vehicle for CAFE III and BS VII. The other one is our export order book for Clean Air is coming to be very strong. It's also very profitable. The combination of a higher export order book and the fact that the margins are better is helping us. That's the growth story. In terms of margins, maybe Mahender can add more flavor to this.
Yeah.
Thanks.
Hi, Vipul. Vipul, like I mentioned in my opening comments, we have built a more resilient, efficient, and scalable organization with the help of the unique operating model that we have, P3, which is people, pride, and performance. This P3 operating model runs across the BUs. Be it Clean Air, Powertrain, or Advanced Ride Technologies. Really helps us, how do we run our plants, how do we drive the efficiencies, how do we do the execution on the ground? By leveraging this framework, we are driving the continuous improvement across safety, quality, and the cost. Yes, our margins are the result of the unique operating model that we have, and hence we see improvement in the margins, and we also expect these margins to remain stable.
Just one more to add, Vipul. If you remember during the road shows that we did and also all the meetings we've had about, why is Tenneco a high-margin company, right? How is it that we have such a high return on capital employed? This operating model that we have over many, many years has become very standardized and modularized. We are so flexible that any of our lines, let's take a Clean Air line. Any of our high-speed scanning line can make multiple products. I can make today in the same plant on one line, I can make a passenger vehicle exhaust system, or I can make a stationary gen set, or a genset exhaust system, or I can make something for commercial truck. Right?
The other flexibility is I can have multiple plants run the same product. The flexibility is so unique and everything is so standardized. You know the Lego brick model that I had mentioned in the past as well. It's a Lego brick means you only have a few degrees of freedom. Because of that gives us a unique competitive advantage. We can run the individual Lego bricks of a system at very high capacity utilization, and therefore it helps our ROCE, but also helps our margin, because now we are not deploying additional resources to validate individual parts, right? Everything's already pre-validated. All you're doing is like Lego. You're putting it together, forming a system, and then you're giving it to the customer that's already pre-validated.
The time to market is faster, the cost of that product is less, the margins are better, and of course, the capital efficiency is the highest. This kind of model is one of the reasons why we are able to perform at such high capital efficiency and also high margin. I hope I answered the question in terms of how the Clean Air business is growing.
Yes, sir.
The margins are moving in the future, including the exports. Yeah. Thanks.
Thank you. That was really helpful, sir. Just a second question is on the suspension demand, like in the 1.5 L category, one of the mainstream OEM has launched a model with your suspension, and it is gaining quite a traction. There's one more OEM coming next year. Are you seeing like this is something which is competitive edge, it gives a competitive edge to the OEMs. Do you see other OEMs are also approaching you faster than anticipated? Or what kind of ramp-up, or maybe a scaling up of the Passive Plus suspension you are expecting in 1.5 L category?
Okay. First of all, suspensions typically don't go with engine displacements, right? They go with vehicle architecture and gross vehicle weight. You would have a different suspension for cars versus SUVs, right? Now, specific to your question on how things are going with DaVinci DCx, what we call, at least we believe, the world's best mechanical suspension that's also affordable, and many, again, don't take our word for it, OEMs have talked about it. The traction is so good that we have three-four OEMs that are already interested in our product, and this covers other Indian OEMs, Japanese, and also Korean OEMs. They're all interested in our product, and also European OEMs. This product will find its way, and we think, our wish is to make this standard across the entire SUV range from a mid to, let's call it the premium segment.
You know that India's market size for passenger vehicles is about 5.5 million. We are hopefully targeting somewhere about 50% of that to be able to disrupt. Like I said, the OEM interest has been very, very significant. Also purely because there's a lot of media buzz around it, there's social media buzz, everybody's talking about it. The feedback has been fantastic. I think that's what we're trying to capitalize on and of course, the new plan that we're setting up in West India is to also try to manage all of this additional volume. The volume growth with new technology, but also just the basic commodity legacy product that's also growing with the growing Indian market. We've got a double growth happening at the same time.
That's why we think that business is gonna grow pretty exponentially in the coming three to five years.
Sure. Thank you. Thank you for the detailed answer. Just one last question, if I can squeeze in. I will try my luck over here. Maybe, what is the pricing fees an OEM will have to take or a structural change they might need to take while graduating from a passive suspension to passive plus or your FDD suspension? Is it a major change they need to make in their chassis and their overall system, or it is just maybe a simple facelift can also have your passive plus suspension? I am just trying to understand that if an OEM wants to upgrade its model to a passive plus suspension, does it really a very tough thing for them to do, come up with a new platform, or it can be done in the same existing platform as well with minor changes?
I think as long as they stay within the realm of mechanical suspension, I think the, let's call it the envelope that's given to us, we are able to package the shock absorber, damper, et cetera, into the packaging environment that's given to us. All the way from a conventional suspension to a frequency-dependent damping, all the way to, let's say, the DaVinci, which is the upgrade, the next level of that, we are able to package it relatively well. That's why I'm saying, right, the beauty of the DaVinci, the frequency-dependent damping and the DaVinci, the shim stack, is that we respect the packaging environment. The delta cost is less, from an upgrade standpoint. The comfort level is significantly more, right? You're paying a lot less for a significant amount of additional comfort, right?
The problem happens when you have to go into electronics and software, because it's not about the packaging environment, it's about routing, wiring harnesses and cables. You need ECUs. You need to now connect that to a central ECU. That requires additional cabling and additional validation, et cetera. Right. That's why the cost delta going from a conventional to a, let's call it, the Frequency Dependent Damping, then to the electronics and software-enabled suspension. That last prong, delta, is much higher because the packaging environment and the routing of the cables, et cetera, could be challenged.
Thank you. Thanks a lot for the detailed answer. It was really helpful. That is all from my side.
Thank you, Vipul.
The last question comes from the line of Pramod Amthe with InCred Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. The first question is with regard to exports, since it's a new business which is scaling up big time. How are you looking at the currency depreciation? Does it stand in your books? Will it be passed on to the parent? How are the current contracts constructed for you?
Well, hi, Pramod. Thanks for your question. I think, look, currency depreciation is actually bad in one sense because you have to import parts that might be more expensive. Like I said, if you remember in one of my earlier answers, we are already pretty highly localized at 89%, 90% level. We said that in our IPO deck as well. I think depreciation of the rupee can also be a blessing in disguise. It makes our products more competitive. I can actually lower my selling price, and be able to export and be more competitive to a European OEM or a U.S. OEM. Right. I look at it as something that benefits us. Our products become more competitive. I think the India Inc. story is the India for the world from an export standpoint.
India Inc story when the auto sector, and specifically for Tenneco as the export hub for the world, and also the export hub back for Tenneco, becomes more compelling. I think that's the way I look at it. Mahender, if you want to add something, you're welcome. I think I only see an overall benefit. We don't know where this currency is going to finally land and taper off, but I see this as an immediate 15%-20% improvement in our ability to compete in the global market.
Yeah. No, that's right, Arvind. If you look at our current status, the way the rupee is, I think we are in advantageous position as we realize more INR in terms of whatever we are exporting.
I appreciate that for the future orders. The orders which you have disclosed now in terms of order book, where does the currency, as you deliver, sits in? In your books, or will it go to the customer, or to the parent?
Yeah. Look, for all of these things, even the Mid East situation, we have direct material and indirect material. The direct material like steel, stainless steel, carbon steel, we have a clear escalator agreement with the OEM. Every quarter, the prices are updated to the new commodity level. There, we are fully covered. Indirect is where there's an issue, right? Because you've got freight costs because of the Mid East war. You've got this currency issue. You've got cost of plastics and rubber that have gone up. You have LPG, CNG, crude oil. What we're doing is what other auto suppliers are also doing. Right? We are collating, putting, bundling all of these costs together, and in many cases, we're going back to customers and seeking recoveries.
At the same time, we are also trying to again, recoveries for all of these categories, including currency. We're also, at the same time, trying to cut our costs working on SG&A. We are trying to also improve our factory efficiencies through ideation, the P3 model that Mahender talked about. Also, for example, running equipment off of peak usage times. There are a lot of things that we're doing to try and also mitigate some of these costs. Yes, sometimes these do make for tough discussions with customers because a lot of these are not caused by us, right? These are all external factors, and we have to get recovery for that.
The second question is with regard to CAFE III, which will come for passenger vehicles next year. What type of changes you are being requested to do in after-treatment, if you can technically walk us through, and what's the content per vehicle it can swing in for you guys, purely cars or SUVs?
Yeah. CAFE III is about CO2, right? There are a few ways to reduce CO2, right? One is to do lightweighting. The lighter your vehicle, the lighter your parts, the less CO2 your vehicle generates. OEMs often come to us and say, "Hey, as part of a running change or for this next platform, can you reduce weight? Can you look at different kinds of materials? Can we do something together?" We do that a lot with OEMs. We work with them to try and reduce the actual physical weight of the exhaust system. Because you can imagine the exhaust system all the way from exhaust manifold to the muffler can become very heavy. That's one area.
Again, by the way, if you don't meet CAFE III, the penalties are quite high, because for every gram per kilometer of CO2 you exceed, you have to multiply that with the entire fleet. It's a fleet-level penalty. OEMs don't want to get into that, right? Diesel vehicles already have a CAFE advantage because diesel vehicles generate 30% less CO2 than an equivalent petrol vehicle, right? The issue mostly for CAFE III in terms of meeting the CO2 target is with petrol or gasoline vehicles, right? The problem is you can reduce your CO2 with gas direct injection versus multi-port injection. When you get into gas direct injection, you can reduce your CO2 significantly, and if you combine that with turbocharging, your CO2 goes even lower.
The side effect of that is increased particulate matter, which means you have to add another gasoline particulate filter in the exhaust system. The hot end content for petrol goes up, but the CO2 goes down, right? I think for us, as Tenneco Clean Air, one of our advantages is that we are able to be very flexible. Depending on the kind of vehicle's engine displacement, the vehicle architecture, and the purpose that it is used for, whether it is a passenger vehicle, commercial truck, or whatever, at least now speaking here in terms of passenger vehicles, we are able to offer different solutions in terms of after-treatment. I think for us, the content goes up from somewhere from X to 1.3X to 1.5X. That gives us additional content. We typically say that is another INR 300 crore to INR 400 crore addressable market for CAFE.
The BS VII for us is another INR 1,000 crore. About INR 1,300 crore to INR 1,400 crore addressable market we can go after in the next three to five years.
Sure. Thanks for the detailed answer. All the best.
Ladies and gentlemen, that brings us to the end of the question and answer session. I would now like to hand the conference over to Mr. Himanshu Sharma, Head Investor Relations, for the closing remarks.
Thank you, Alric. Ladies and gentlemen, thank you for your continued interest in our company. We appreciate your time and participation and look forward to speaking with you again next quarter. Thank you and have a good evening.
Thank you, sir. Ladies and gentlemen, on behalf of Tenneco Clean Air India Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.