Ladies and gentlemen, good day and welcome to the Q2 FY 2021 earnings conference call of Tube Investments hosted by Axis Capital Limited. As a reminder, all participant lines will be in the listen- only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Kashyap Pujara from Axis Capital Limited. Thank you, and over to you, sir.
Good morning, everyone, and thank you so much for standing by. It's a great pleasure to have with us the senior management of Tube Investments to discuss the Q2 FY 2021 earnings. From the management side, we are represented by Mr. Vellayan, who's the Managing Director; Mr. Mahendra Kumar, who's the CFO; and we also have the Business Head, Mr. Mukesh, on the call. Without much ado, I'll hand over the floor to Mr. Vellayan. Mr. Vellayan, many congrats for a fantastic set of numbers. I think we've matched up on Q2 top line last year. We've shown cost cuts and taken margin higher, and I think I've not seen this kind of working capital levels that we are at over so many years of me covering Tube. Over to you and leave the floor to you, sir.
Thank you, Kashyap, good morning, everybody. Welcome to the TI earnings call. I'll just go through the quick commentary as usual, and then be happy to turn it over to you for questions. Our standalone Q2 PBT was at INR 129 crore, which is a growth of 17% over the same period last year. Our revenues were at INR 1,033 crore in the quarter compared to INR 1,056 crore in Q2 last year. PBT was at INR 129 crore, like I said, and that's before exceptional items. Our ROCE is now 26% for the quarter compared to 24%, and we generated free cash flow of INR 246 crore for the quarter, which is 256% of PAT. The PAT for the quarter was at INR 96 crore as against INR 90 crore in the corresponding quarter in the previous year.
In terms of individual businesses, revenue for Engineering was at INR 565 crore compared to INR 554 crore in the same quarter last year. PBIT for that business was at INR 84 crore as against INR 63 crore in the same quarter last year. Cycles and Accessories did revenue of INR 212 crore compared to INR 217 crore in the same quarter last year. PBIT was at INR 18 crore compared to INR 6 crore in the corresponding quarter of the previous year. The Cycles' team has done a great job of basically improving efficiencies and bringing down the overall cost and the cost structure and therefore kind of making ourselves much more competitive. For Metal Formed Products, revenue was at INR 353 crore against INR 379 crore. The difference in the delta is predominantly driven by lower railways revenue, because the railways business has been slower in starting up. We do believe, though, that the rest of the year we should be okay.
PBIT for this business was INR 38 crore against INR 40 crore for the same quarter last year. On a consolidated basis, we were INR 1,146 crore versus INR 1,191 crore. PAT was at INR 101 crore versus INR 93 crore. Shanthi had revenues of INR 54 crore against INR 71 crore, so they had quite a bit of a drop, but PAT was at INR 7 crore versus INR 8 crore. I would just like to say that the team has done a phenomenal job in coming back from COVID, as with the entire company. They've really, I would say, it's been a Herculean effort, given the toughness of bringing back our supply chains to normal. Everybody on the team, including the leadership who's here with us, has really gone above and beyond the call of duty to get back to normal.
Not only that, most of the senior management team has basically been double hatting as we also try and get an impending acquisition to closure as well. I would really say that this whole quarter is just dedicated to the people who just put in such an incredible effort on all fronts to make what happened, happen over this quarter. Let me stop with that commentary and turn it over to all of you for any questions that you might have. Thank you.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question, then please press star and one on the touch-tone telephone. If you wish to remove yourself on 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 is from the line of Abhishek Ghosh from DSP Mutual Fund. Please go ahead.
Yeah, good morning, Vellayan. Thanks for the opportunity.
Hi.
Hi. Just a couple of questions. If you look at the individual segmental margins, your Engineering division has moved up to something like a 15% margin profile. If I look at your quarterly revenues, you're still down about a good 20%-25% from what peak revenues you had done in three, four quarters of FY 2019. I'm saying whenever, because of the operating leverage factor, do you believe you can be that 17%-18% margin business whenever you reach those peak utilization? I just wanted to get some understanding around that.
No, actually, obviously, there are several things that happen because of this COVID-like swings. When you go to shutdowns, there are some things in terms of price realization on steel that got adjusted. Basically, there are several things I would say that are there in a particular quarter. If you're asking me in the long term, can we get to those kinds of margins? Our belief is that, yes, but it requires much more work on the, w e're still doing a lot of things basically on the, like we said, on the quality front, productivity front, the shift to lean. All of those initiatives continue.
I would say that definitely if volumes were to go back, see, in different businesses we're in different positions, but if volumes in all of our businesses were to go to peak 2018, 2019 levels, yeah, definitely our margins would be a bit healthier than where they are today.
Okay. Just coming to the Cycle division as well, for the same revenues, you've moved up to that 8.5%- 9% kind of a margin profile now. Obviously, cost efficiencies you've mentioned in your opening remark. Is there a pricing improvement because of competition, one of the key players shutting down their operations and exiting the market? Has that helped, and is the overall demand scenario helping on the pricing front?
Yeah. Pricing has been driven a bit by overall demand. Overall demand definitely is up. There seems to be, at least from what we can tell, a structural shift where we're seeing a lot more people want to consume in that area. Which I think is good for the market, not just in the short term, but in the medium term. Just to give you a sense, that trend is not just domestic. That trend is a fairly global trend.
What the Cycles' team now is gearing itself up to do, no pun intended, is basically that they're beginning to look at exports in a big way. I think that that will also be something that's encouraging in the medium term, right? Honestly, the challenge we're given, which is we wanted all of our businesses to be 10% PBT. There were some businesses that if you'd asked me two years ago, I'd said, maybe they won't make it. I think that the teams are just showing us how resilient they are. Some of what we're seeing from a performance perspective is just demonstrating that. I'm extremely bullish as a result of that.
Sure. [audio distortion]
Yeah. We can't hear you.
Hello, can you hear me now?
Yes.
Better, sir.
Yeah. In the Metal Form division, you mentioned in an opening remark that the railways has pulled down the overall revenues and what we see about a 7% decline. Is railways slowing down on their CapEx or is it more of a temporary phenomenon? If you can just help us understand that.
Yeah. No, I'll tell you. KRS is on the call or?
Yeah, I'm here, sir.
KRS, why don't you answer?
See, the railways is finding it difficult to ramp up operations in their plant. That is the reason the top line has not grown in this division. As we speak, they are ramping up the operation and Q3 and Q4 are likely to be much better than Q2. That's how we see the quarters.
Okay. That's extremely helpful. Congrats to the entire team and wish you all the best.
Thank you. Thanks so much.
Thank you. The next question. Ladies and gentlemen, to ask a question, you may press star and one now. The next question is from the line of Manoj Bahety from Carnelian Asset Management. Please go ahead.
Hi. Good morning, everyone. Sir, I have a couple of questions. First one is, recently the kind of shift which is happening from China to China Plus One, across our various division, mainly Engineering and Metal Forming . Also I think you have aspiration to grow export proportion of your sales. In this scenario, how are you seeing this opportunity? Are you also planning to have accelerated buildup of capacity, CapEx going forward on this? This is my first question, sir.
Yeah. I think that definitely we see opportunity from the China Plus One strategy, right?
If you ask, yes, everybody is beginning to see that there is opportunity and we have to go after it.
The broad answer to your question is, yes, we are seeing that opportunity and yes, we will start ramping up capacity.
All right.
Where we ramp up capacity will change because obviously in certain businesses we are seeing that opportunity be more rampant than others. Therefore our focus will be on businesses where we see more opportunity. Specific examples include the bicycle business, industrial chain. For example, in Engineering, we are developing a new product for which we're getting new capacity.
Investing in that capacity as well, in the tubes business.
I'll say across, we do see that opportunity, and yes, we are focused on it.
Mm-hmm. Sir, if I look at your business verticals across, it ranges from Cycle chains to Engineering, where you are also pioneering into some of the products which will contribute to your margins. On this, if you can give us some broad level transformation which is happening from, let's say, to low margin product to a high margin product, where the entry barriers are, I think, you'll be better placed in terms of competitive landscape.
Yeah, I think we've articulated this in our prior calls as well, right? That's the reason for some of the shifts to OpEx and kind of going further up the value chain in the businesses we're in. Broadly, that is the approach we're taking, right? Which is each of the businesses understands that they need to be in therefore, start altering both their product mixes and their business strategies to support that. I think each of the business teams has articulated their approach towards this, as we have on prior calls as well. I think this is in line with how we're approaching it overall. I don't know if you're looking for specific commentary on a particular business, but that's in line with how we're approaching it overall.
Okay, sir. Particularly, this Metal Formed business, where I think you are targeting some new products, especially the door frames of cars, where it will make some kind of headrooms into few of the OEMs on that. Also, you have spoken about truck building capabilities, which you are building across, where you are targeting large unorganized market. On those two parameters, if you can comment.
Yeah. KRS, do you want to comment on the Metal Formed part of it?
We are a very prominent player in the BIW space through door frames to almost all the four-wheelers in the country. We continue to enjoy a very big, major share in this segment. Like you asked, are you actually profitable? Yes, we are profitable.
Sir, your voice is not audible.
Sorry to interrupt, Mr. Srinivasan, your audio is not clear. It's breaking in between.
Okay. Now is it better?
Yes.
Yes, sir.
Yeah. In BIW space, we are a dominant player, and we continue to enjoy a large market share, major market share in that segment. We'll continue to grow that. We are a major player with Hyundai, and we are trying to expand our offerings to customers so that for the same level of investments and fixed overheads, if we get more business from the same customer, naturally your profitability will increase. That is the approach we are taking as far as door frames are concerned. Does that answer your question?
Yeah. That's it. On, sir, truck building-
Sorry to interrupt, sir.
opportunity, if you can comment on that also.
Sorry to interrupt, sir. May I request you to return to the question queue for the follow-up question?
Sure. Thank you.
Thank you so much. The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi, sir. Good morning. Thanks for the opportunity. A very strong delivery despite a very tough situation that we have been seeing for the last six months, sir. Many congratulations on that. Sir, my first question is on the Cycles, we have seen a very strong margin, EBIT margin and ROCE improvement therein. For the first time in several quarters, both of these metrics have gone through the roof, if I were to put it that way. Are these metrics sustainable going forward from an ROCE perspective as well as the margin perspective? If you can give some color on that.
Yes, sir.
You're talking about Cycles and which other business?
Cycles, sir. Cycles.
Yeah. Cycles, our belief is that we are going to get more and more competitive. In general, the belief here is yes, that the team will be able to kind of sustain better numbers than we have in the past. Obviously, this is dependent a bit on the demand side. Demand side is strong now. To hedge on domestic demand, we're also developing capabilities for export. As long as the demand side holds up, Shyam, answer would be yes. If not KKP is not on the line, no?
Sorry, sir.
Sorry, his call is not available today. Otherwise, we would have got him to comment.
Mr. Srinivasan line got disconnected. We are connecting him.
To your point, Shyam, I believe if the demand sticks at the current levels, yes, we will be able to hold up.
Understood. [crosstalk]
We'll hedge on that.
Understood. Sir, the second question is on the sustainability of the cost levels, specifically on the commodity prices, we are seeing a very sharp increase in the base metal prices per se. I believe the price negotiations would have happened for the second half. Going forward, as we look into the second half, how are we looking at the commodity cost trending for our business across various businesses therein? If you can give some perspective. Can we maintain these levels of the RM cost as per the sales, after we have passed on the cost to the customers? Is that something that we are looking at?
Understood, Shyam. I think, actually, Mukesh is on the call, and his is the largest business that is affected by that. Though KRS also is to an extent, but I'll let Mukesh answer that question.
Yeah, Shyam, thank you for the question. You are right. Maybe let's say the commodity prices are really going up. The steel prices, particularly, maybe we see from last two, three months, is going substantially up. Maybe let's say we have our arrangement with all the customers, with the OEMs as well as customers, and we are fairly confident we'll be able to recover that going forward.
Okay. There could be a one quarter lag in that sense.
That's what we told, we have a prevailing arrangement with all the customers. Maybe whether it is a reduction or whether it is increased, some lag will be there, but maybe let's say that is as per the usual practice, and we are confident that maybe, let's say, in this difficult environment also, we'll be able to recover it fully.
Sure. One last question, sir. On the non-auto business, both from Engineering and Metal Forming. Metal Forming, we did allude to the railway business being weaker now, which will pick up later. From an Engineering side, on the non-auto side, and from Metal Forming, industrial chains, et cetera, what is the outlook that we are looking at as we look forward now? Secondly, on the export side, other than the new products that you talked about because of moving away from China, what is the existing business exports looking like? Thank you.
Actually, both are our actually focus area in the Engineering business, particularly. Maybe going forward, the margin improvement and maybe even the market growth is going to come from the export market, which we are putting even a CapEx for the new product development also, because we always want to invest in area which is the newer, maybe, let's say, not existing in the country and participating in the exports market. Coming to the non-auto hydraulic cylinders part of the business, which is taking, I think, some time to catch up because of the commercial vehicle and off-road vehicle industry. We are hopeful that Q4 onward, that business will also start growing going forward.
Okay. Understood, sir. Aftermarket has been holding up pretty well, sir. Is that a fair understanding?
Yes. Maybe let's say from Engineering business, we generally give it to OEMs. They do the aftermarket business. Aftermarket right now is very strong. Whatever maybe, let's say, material we provide for aftermarket, maybe we see the good quantum of growth is happening on those areas also.
I was more referring to the Metal Forming chains business, et cetera. Is that also holding up very strongly, sir? Has that come back to the?
I'll request KRS.
Yeah. I will answer that, Mukesh. Sir, KRS here. I will answer that. Yeah, you are right, aftermarket is very strong today. Last three, four months have been very good, and it continues to be promising going forward as well.
Okay. Understood, sir. Thank you. I'll fall back into queue. Thank you very much, and all the very best.
Thank you.
Thank you. Ladies and gentlemen, to ask a question, you may press star and one. The next question is from the line of Mr. Kashyap Pujara from Axis Capital. Please go ahead.
Hey, just couple of questions. If I look at the working capital of you, this time around, at least in the mid-year, we are seeing close to what, INR 30 crore or INR 40 odd crore of working capital net, if I was to just look at the cash conversion purely. This is lowest because normally we were having INR 200 crore or INR 300 crore of working capital, net working capital on, say INR 4,000 crore, INR 5,000 crore of sales. This time around, the working capital has really gone down because of payables kind of moving up. Also I can see net capital employed of Cycle, which is at less than INR 50 crore, which was similar to 2010, 2011 levels, and this is despite new capacity having come on board. The question is that, would these levels be sustainable, or do you think that they will normalize and these are one-offs?
Yeah. I do believe the working capital that you're seeing here is like an all-time low. It will go up a bit. Undoubtedly, I think it will go up from its current level. We should kind of plan for that, what level we kind of can fix at. See, honestly, what the Cycles' guys have done is kind of create a massive structural correction. They are currently operating in negative working capital, which I think is fantastic, and my belief is that they will continue to kind of operate like that. Engineering and Metal Forming have also improved their working capital position significantly. They are running at lower levels than what I think it'll have to be in order to take over the Cycle. Because what happened with COVID also is that everybody's inventory is basically kind of got drawn down a fair bit.
What I think will happen is that we will get back to a level that's above where we're at, but obviously not kind of close to where we were at before.
Okay.
Yeah. Kashyap, it is not entirely driven by increase in payables alone. Even inventory and debtors also are lower level.
Correct.
Some of that will get corrected in future.
Yeah. Generally, the channel checks that I'm doing across many industries, especially smaller companies, I'm seeing a trend of debtor tightening incrementally. While the earlier Cycle might be having higher debtor days, but incrementally, most of the B2B businesses also are kind of tightening their requirements of receivable days. The incremental business that is being done across many B2B businesses is on lower receivable days compared to what was historically seen earlier. Would that be a fair assessment, that you would have also come across?
Yeah, definitely we see that happening, Kashyap. I think that, yes, your assessment is correct.
Yeah. Lastly, and I will not hold back the queue any longer. It's a Cycles business. I remember the earlier managing director, and we've always said that this is like a 5% margin business and 7%-8% growth, 5% sustainable margin, broadly as a trend line trajectory. We have seen very healthy margin improvements in Cycles business now at close to 8%-9%. Also incrementally, the trend that I'm seeing, at least maybe post-COVID, is that people are taking more to health and fitness. Since gyms are shut, most of them are taking cycles. In fact, in Mumbai, I must put it on record that there is a shortage of quality bicycles like Montra. There is no inventory available across most of the stores.
Do you see that you might be in for a growth spurt here compared to what was historically seen for us earlier? Maybe the growth and margins both have room for scale up from here?
Well, let me put it this way. The segment that you're talking about is kind of, d efinitely we see that there is opportunity, and I agree that when you take the high performance segment, which is Montra and all that, it's a fairly small percent of overall sales. In general, everybody across our segments, especially in both the recreation, the MTB, and in our performance bikes, we are seeing a shortage. Demand has picked up, continues to be at a quite an elevated level. I do think that that's encouraging. Honestly, that's why I said, I think it's too early to say whether it's a structural change and whether we continue. I definitely do think that it's a good position right now. It is fairly encouraging from that perspective.
Sure. Okay. I'll move on further to the queue.
Okay. Thanks, Kashyap.
Yeah.
Thank you. The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund. Please go ahead.
Hi, Pankaj.
Hi. Good morning, Vellayan. How are you?
Good.
Yeah. Just a couple of questions. You and the team have done phenomenal job in the last couple of years, in improving the profitability, the metrics you guys talked about. If you were to crystal ball gaze for the next couple of years, what are the things probably we would like to improve from here on? A fair bit of profitability across divisions have been done with. For the first time, we saw the demo model which you have always spoken about in U.S., with CG Power coming in. If you were to crystal ball gaze for the next couple of years, what shape and form will the company look like? One. In this journey, what are the challenges you are facing now, which probably could be a headwind from a company perspective for the next couple of years? That will be my two questions. Thanks.
Thanks, Pankaj. I would say that first off, the good thing, like you said, is the different elements are kind of beginning to play out. Like we said, the first part is what earns us the right to do anything, I think, is improving our profitability. Honestly, like I said, there's still a lot of way to go there. I'll come back to, you asked, what do we need to do? I would still say that we're less than, we've not even got to 50% of TQM. In terms of Lean, I'd say we're about 20%. Lean and TPS, I'd say we're at, like, 20%, 25%, and TQM, maybe we're at 50%. There's significant parts on that part of the journey that we need to continue. That's one element of it. The second is, as you said, where will TI be?
I think kind of first, it's a continuous kind of engine that we're trying to build. I've always, I think from the first meeting, we've talked about this concept of engine design. What are you designing the engine to do? From TI's perspective, we have to have an engine that's a free cash flow generator, that then the free cash that's generated can be deployed to TI2 and TI3 . Each of those entities then has to become free cash flow generators over time. We still have to prove that TI2 and TI3 can become their own free cash flow generators. That's something that we have to prove over the next two years. That's an imperative for us, because I think we've proved and hopefully this will sustain.
I am confident, given my knowledge of the team and what it's done, that TI1 will continue to sustain as a free cash flow generator. If the teams manage to do that in this environment, I have full confidence they'll be able to do it in most environments. I think that basically that's what we're trying to build. We're trying to build a core free cash flow engine that keeps getting enlarged over time, to build more and more capacity, to allow the company to scale at the levels that we've set out. Which is basically, we have to bring back the number we've not delivered consistently is that 17% revenue growth number.
Yes.
We are sure we can deliver that also, aided by TI2 and TI3 , hence the acquisition, of course. Now the second thing to prove is that each of those entities in TI2 and TI3 can become their own free cash flow engines as well. That part is still unproven. Like I said, the second part that's unproven is that I mean, not unproven. The second part that we're still early in our journey, is on Lean/TPS and TQM. The third part really, that we're starting to think more and more about, Pankaj, is talent. Basically, if we've got 20 BUs today and we want to be at 100 BUs, in the near future, we need 80 more BU heads, right?
How do we start grooming that talent? Honestly, here again, we've articulated the approach. Which is broadly that I do in year one, the team has to do in year two. I mean, my direct reports need to do in year two. Then, one level down from them needs to do in year three. That's something that we're constantly striving to do. As a matter of fact, even with kind of, like I said, the transaction's still not closed yet, but a lot of the integration work, a lot of the work that has to be done post that, will be driven by the team, not by me.
Constantly we're looking at how do we push that envelope. I would say the biggest question is talent and talent development, and that leadership development is where we're going to move our attention front and center, hopefully in the near future here.
Great. Thank you, and all the best for that.
Thank you. Thanks, Pankaj.
Thanks.
Thank you. The next question is from the line of Vikas Khemani from Carnelian Capital. Please go ahead.
Hello, sir. Congratulations on the great set of financial performance. I have two questions on CG Power. If you could share some thoughts of [audio distortion]
I'm sorry, Mr. Khemani, but your voice is breaking. Can you please check?
Hello? Check, is it okay, better now?
Yes.
Sir, I have two questions on CG. One is that, if you can just share some broad thoughts on how you plan to sort of turn that around over the next couple of years. Secondly, specifically on that, how do you plan to fund that? Would you have some sort of capital raise in TI at some point in time to capitalize CG Power?
Yeah. I'd say specifically, we're not having any conversations on CG, because first that transaction hasn't closed. We are unable to basically have conversations on that. Right now it's its own entity, so we'll only pass commentary on that after we've closed the transaction and once we've had a chance.
What's the timeline of that, sir? Any broad hints you have on that?
It should happen in this quarter.
In this quarter. Okay. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Niket Shah from Motilal Oswal. Please go ahead.
Hi. Thanks for the opportunity, and congratulations on a good set of numbers. Couple of questions, sir. First, on the margin side of it, I think it's been a phenomenal journey from where the margins were earlier and where we are right now, almost at 11.5%. How much room do we have and where are we in this journey? Because our top line has not grown in the last few quarters, and yet we've seen efficiency gains coming in. Do you think that incrementally from here on, we will see a situation where top line will also start going up and that will kind of seep in incremental more margin expansion? That's the first question. The second question was on the break-even point of the plant. During COVID, how much have you brought it down?
Do you think some of the cost initiatives that you would have saved because of bringing down the break-even point are sustainable? Sir, those two are the questions.
I'll say, I'll tell you, let me just have both Mukesh and KRS answer those questions for you, because they can talk about their individual perspectives in their businesses. Then if need be, I can add some overall color. Mukesh and KRS, can you answer those two questions?
Can I take it first, Mukesh?
Yeah, KRS, please go ahead.
Yeah. I'm KRS here. I take care of Metal Formed Products division. Your question is valid. In fact, we are looking at top line growth in the coming years, which will further push up the profitability because of contributions kicking in with disproportionately.
The coming year also, we are looking at some good top-line growths in various verticals of all the Metal Formed Products within the business units. About your question on breakeven, yes, we have brought down the breakeven significantly in this year, in these two quarters, using the disruptive situation. We would like to sustain it going forward, though there would be some small corrections when the operations scale up. Mukesh?
Thanks. Like KRS mentioned, there's good headroom available today, maybe on the top line. Maybe we have already invested in our Rajpura plant, and we see that, maybe, those capacities are also catching up.
Given the automobile industry has maybe almost bottom line, maybe which can go only up, and also our focus on the exports market, as well as we are doing some CapEx on the new product development. Which are the growth levers we are going to apply going forward. We are pretty confident that growth is going to follow, which we could not do it in last two or three quarters because of the environment. Going forward too, maybe, let's say, breakeven, we have done a good quantum of work in maybe last one and a half years' time and by bringing the breakevens down. That is the reason, maybe, let's say, our performance was visible in current quarter, irrespective of the difficult environment.
Still, like Vellayan mentioned, a lot of work is still pending on the journey of TQM, in the journey of the Lean. Even the working capital front, we have done a great work, but still we feel there is good headroom available going forward by bringing the Lean approach and improving on the quality. Mixture of this quality and the Lean approach is also going to give us further headroom to be more sustainable, even grow margins going forward. This is our view.
Just one more point I would like to add here. Just like how Vellayan explained at the beginning of the call, there are also certain raw material price negotiations which got finalized during the quarter. That also gave some encouragement to the margin. Having said that, like how Mukesh and KRS explained, there are also certain actions which are in place or which are in progress to improve margins further.
Sure. Sir, on the margin side, just to complete the loop, is it safe to assume that we are halfway through and going to 14%-15% PBT margin is a possibility?
See, you can get direct commitments from Mukesh and KRS. Obviously, that's our aspiration. Again, I think we should set that as kind of, yeah, we would like to get there over a three- to four-year period.
Sure. The second question was on CG Power and obviously not asking specific questions on CG Power. Just wanted to understand on the funding side of it, is it safe to assume that at a future date, we might look at a capital raise to keep our balance sheet light?
See, we don't want to provide any commentary on things that we have to stay silent on. Like I said, we won't discuss any of those matters. Yeah, I guess that's my short answer.
Sure, sir. Perfect. Thank you so much.
Thank you. The next question is from the line of Ratish Warrier from Sundaram Mutual Fund. Please go ahead.
Yeah, hi. Just couple of questions in terms of Cycle business. Understand what will be a market share in the Cycle division. That is one. Second, one of the earlier participants, Kashyap, asked you if there is a demand and you don't know whether it is sustained for next two, three years. If that's sustained, how is our ramp-up plan there in terms of investment either in the distribution segment or do we have that distribution segment ramped up if the demand sustains here? One more question in terms of margins here. Looking at where the steel prices have moved up, are these margins sustainable or can these pricing be passed on at current environment? Thanks.
Your first question, Cycle's market share, I believe we're somewhere at about 25% or so is where we're at currently. Second question was, so do we need to ramp up? Both on manufacturing and distribution, I think, the distribution we have been ramping up. That's been helping our growth. We'll continue to ramp up on Cycle's distribution. Manufacturing, we've got adequate capacity because we've also got the Rajpura plant there. I would say we're not even using more than 60%-65% of our capacity right now at assembly capacity. The challenge with the market supply right now is because some component shortages are there, which we're also working to correct so that we have more capacity to ramp up even quicker there. You had another question, no? What was the other question?
In terms of margin sustainability in the business. Steel prices are moving up, so can it be passed on to the customer?
Already answered the margin sustainability question. Mukesh, again, you can answer it again.
We mentioned earlier, we will be able to pass on the steel price increases with our customers, with the prevailing agreements, whatever we have with our customers. We are pretty confident there'll be no effect on margins because of the steel price.
Okay. Just one more thing on this. In the Cycle business, product mix, when you are saying 25% market share, when you talk about the base cycles, premium cycles. Can this product segment anywhere, compositions or anything can change whereby that can even more benefit our margins, our realization, et cetera?
Well, see, I think what you're seeing is that the team is doing the right things. The team is focused both on supply side and demand side, and is doing the right thing. Obviously, one of the things that we have started altering is product mix. We will continue to look at that and keep altering that. If your question is have we done everything we can, the answer is no.
Okay.
Thank you.
Thank you. Reminder to the participants, anyone who wish to ask a question, you may press star and one. The next question is from the line of Hardik Doshi from White Whale Partners. Please go ahead.
Yeah. Thank you, Vellayan, for taking the question. As part of your strategy, you had mentioned that one of the pillars is to seed new areas to expand into. Can you just give an update on where we stand out there in terms of the different initiatives? Also, given the CG Power acquisition, are we really looking at capital allocation out here, maybe over the next couple of years or so?
Yeah. I'd say a couple of things. For example, on our new growth areas in TI2, a couple of those have been a bit slowed down because of the demand environment. Also for the lens business and the optics business, the challenge we had is that all the equipment was all imported, but we needed people from outside the country to come and set it up. They've not been able to come into the country, so we trying to do it on Teams. Not the optimal way to basically set up and start a new plant. We have been working on it. I'd say it's a bit slower, but in my mind, the traction is definitely going to get there, so I'm not too worried about it.
I think what you've seen in terms of capital allocation, in the end, I always say that my line has always been this, that in the end, we are a South Indian. Till we get to a state where we feel comfortable with the debt level, we're not gonna go out and do anything crazy. That's basically broadly the way I look at it. Is there enough capital required for both organic growth plus something like CG? Yes, there is.
Would it be fair to say at least for the near term, I guess the focus will remain on the lens business, and probably, not incrementally seeding any more new businesses?
No. Those businesses don't take up a lot of capital. That's what I'm saying.
Okay.
This is like, not chewing up any massive amounts of capital. In our CapEx programs, all of that's already included there. The free cash flow you look at is basically after we've incurred that standard capital required for that.
Okay, got it. Great. Thanks.
Yeah.
Thank you. The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management. Please go ahead.
Hi. Good morning, everyone.
Good morning.
Fantastic performance. I just wanted to take your perspective, Vellayan, on the Cycle business. I'm sure two years ago, when you came in, there would have been a different strategic perspective on the Cycles business and the way it's come back. I remember you telling us once on a call that they have taken it up as a challenge to prove themselves otherwise. How are you looking at this business now? Are you going to be investing a little more? Are the plans changing for this business?
Yeah. Like I said, I think even in my earlier commentary, the first thing I admitted was that it's been an amazing change, right?
Correct. Yeah.
It's absolutely fantastic. The thing that's encouraging for us now is that we see an opportunity. They themselves, as a team, are just redefining their future. Honestly, like I said two years ago, we gave them a challenge. What they came back to us with, and unfortunately, KK Paul, who runs that business, is on vacation or he wouldn't be here with us. What they've done in that business is that they've basically come back and talked about and developed how they're going to become the number one division in TI.
Yeah.
I don't know whether Mukesh or KRS will let them. The point is that, I just think that that's a level of confidence that they've come at it with, and they're delivering the performance to support that. Capacity is not that much of an issue for them, both in Sri Lanka and in India, they have adequate capacity. It's not a capacity constraint. They're just really showing the will and the capability to outperform, which is encouraging. I would just support that as long as they continue to deliver like this.
Right. Any expansion plans that you are pushing them towards now that they have crossed the hump or the first challenge? I'm just trying to understand, is there a Cycle 2.0 that you could give us some clues into?
I don't push anybody, man. No, I think definitely they've come up, and they have actually developed a whole vision for mobility. I would basically say that, what they have shown is that they have a fairly exciting road ahead. As far as Cycle, they're beginning to explore pedelec. Basically, they're looking at both export markets and India markets and saying, how are they going to basically push the envelope in terms of what exists. I think that it's a very exciting plan that they've suggested.
Okay. Why I'm just dwelling into this a little bit is this is the only B2C kind of business that you have, and if you can make a success out of this, then it opens up completely different avenues of growth for you.
Absolutely.
Yeah.
Good.
Thanks, Vellayan.
Thank you.
Yeah.
Thank you. The next question is from the line of Shyam Sundar Sriram from Sundaram Asset Management. Please go ahead.
Yeah. Hi, sir. Thanks again for the follow-up opportunity. My first question is on this PLI localization schemes that are being talked about. Are there any specific large product segments that we are eyeing that can come through over a two-year timeframe from this localization thrust of the government per se? Is there anything that you are seeing as an upcoming opportunity, which may evolve over a two-year period? Any such opportunity that you can comment about, sir?
We're exploring. There's nothing specific yet, but we are exploring that area.
Okay. Which category, sir? Is it on the-
Don't want to say, man. Let's just say that we're kind of looking at it in a few categories.
Okay.
We don't want to talk specifically about what we are looking at.
Okay, sure. Sir, just one other question. On the export side, we were developing new tube products, and even on the vision system side, we were about to start the operations and then ramp up over a two- to three-year timeframe. How are those initiatives panning out? Because our exports in FY 2020 was sort of a down year compared to the prior peak in FY 2019. From that perspective, going forward over the next nine, 12-15 months, how is that trajectory looking like from the new product as well as the existing business? You just commented the export is a focused area, but some specifics will be helpful, sir. Thank you.
Mukesh, you want to comment on that?
Yeah. Shyam, I will say, like we shared earlier, this CapEx is progressing well. We expect that CapEx to get over by Q4 of this financial year. Post that, we'll be starting our development process with a few customers. We'll be getting approval and getting those customer approvals and ramping up the business. As far as exports growth is concerned, I will say, because we are going to enter into a new segment, it'll be market share gain at a global level. That is going to give us a headroom going forward. It is a very safety-critical product where we are going to expand our business going forward.
Okay. One can assume that we can cross the prior FY 2019 exports over the next 12- 15-month period. That is fairly positive. Is that something that you are?
Yes.
Okay. Understood. Thank you very much, sir. I come back to you.
Thank you. The next question is from the line of Ashutosh Tiwari from Equirus. Please go ahead.
Yeah, sir, congrats on strong set of numbers. Sir, firstly, on the Cycle's part, I have a question. In our mix in Cycle sales, what would be, say, a share of premium cycles, and has that changed significantly over last few months?
Sorry, your question is, what is our share of ladies cycles and what?
No, premium cycles. You have basic cycles and premium cycles, health related cycles. Is the share of premium cycle increasing in the overall mix in Cycle sales?
Premium cycles is very small.
Okay.
Increasing? Yes, it is.
Okay. I want to understand whether the low-cost cycle that, like I said, the entry-level cycles, is that share decreasing or that also has not changed much over the last three, four months as well?
Initially, coming out of the thing, we did lose some share. Now we're basically gaining that share back month-on-month. We believe by in the third quarter, we'll be back to kind of a higher share than we were before.
Okay. Sir, secondly, on the Metal Forming side, how is the industrial chains doing right now? Like I said, where we are versus pre-COVID now.
Industrial chain is doing very well, both export and domestic. We are back to pre-COVID levels, and profitability is higher than what we were before.
Okay. Lastly, any opportunity that you see in terms of replacing the things which come from China in our business? In Cycle, is that happening or not right now?
Sorry, I didn't understand the question.
I'm asking that, are you seeing any possibility in terms of replacing some of the product [crosstalk]?
Yeah, we answered that question earlier. Definitely, yes. We do see that opportunity. We are exploring that in all of our businesses and channels .
Okay. Okay, sure. Thanks a lot.
Thank you.
Thank you. Ladies and gentlemen, please restrict your questions to one per participant. The next question is from the line of Devesh Kayal from Carnelian Capital. Please go ahead.
Hi, good morning, sir. Sir, when will the plant of this Optics be operational? Because I think it's earlier mentioned Q2.
Optics is operational now, it's just not scaling up. Basically, it's not scaled up yet.
Okay. From these new businesses, truck body and this Optic and the other one, what kind of revenues are you? Is it fair to assume INR 500 crore type of revenue over the next three, four years? Is what are you targeting internally?
That's why, I've always told people, for these, please don't put them into your models. Sometimes I kind of always feel like the easiest thing is just not to talk about them at all. Right. Because you have to look at this, it's like these are like VC-type options that we are developing for the company, right. I don't think any of these VC guys get asked these types of questions, right. Some of these businesses, you just have to let them grow at their own pace. Nowhere in our internal models do we basically build out these into our revenue models or our numbers.
Thank you. The next question is from the line of Hiten Boricha from Sequent Investments. Please go ahead.
Hi, sir. Good morning. My first question is, each and every segment is growing really well. We are seeing a good margin in the Cycle segment as well. As you mentioned, that we are expecting this margin to sustainable. What kind of revenue growth we are seeing, let's say, in FY 2022, FY 2021? Any internal target for our growth?
You're saying revenue target?
Yeah. Revenue growth, yeah.
I think it's too early to comment. Nobody knows what this environment is going to be like. It's too early to target because it's too early. Nobody knows yet. We don't have that kind of visibility, we don't want to offer commentary on that.
Thank you. The next question is from the line of Sailesh Raja from B&K Securities. Please go ahead.
Thanks for the opportunity, sir. How is the response for the new product, like SSID product under large diameter? Is there any plans to introduce the same in the overseas market as well? What is the market potential in domestic and overseas market, and application of this product?
Large diameter, Mukesh, do you want to take it?
Yeah. We are in process of development of this particular specific category what you talk about, SSID tubes, and we have maybe sent the samples to global markets, and we are awaiting the feedback. Based on the feedback, we'll be ramping up this segment going forward.
What is the market potential in domestic and overseas market?
Domestic is not much here. Maybe let's say largely potential comes from the global market only, and it's a large market.
Thank you very much. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Kashyap Pujara for closing comments.
Thank you. Thank you everyone for being on the call today, and thanks to Mr. Vellayan and all the members of Tube management to patiently answer all the questions. In case if there are any unanswered questions, apologies for the same, and please feel free to write to me or Aditya, and we'll get the questions answered through the management.