Ladies, and gentlemen, good day, and welcome to Varroc Engineering Limited Q2 FY 2022 Results Conference Call. 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 the operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. Joining us today from Varroc Engineering Limited management is Mr. Tarang Jain, Chairman and Managing Director, along with Christian Päschel, CEO VLS Business, T.R. Srinivasan, Group CFO, Mr. Arjun Jain, President and Head Electrical and Electronics Business, and Mr. Nitin Kalani, Head of Treasury, FP&A, and Investor Relations. I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.
Thank you very much. Good evening, everyone. I am Tarang Jain, and I would like to thank you for joining the Q2 FY 2022 earnings call of Varroc Engineering Limited. I will start with the India business. The Indian two-wheeler industry volumes in were weaker, even lower than the subdued Q2 FY 2021 amid the COVID first wave. The two-wheeler production volumes in the quarter declined by 6.2% over Q2 of FY 2021. As against this, our revenue in the second quarter of FY 2022 grew by 36% year-on-year, which was mainly attributable to the lower commodities base in Q2 FY 2021. Our EBITDA in India was at around 10%. The margins were impacted negatively by the high commodity costs. I will now move to our global lighting business. The semiconductor shortages continue to persist.
This is the third quarter sequentially where the industry has seen a dramatic decline in volumes. The volumes in the current quarter in Europe, for example, were down 40% over Q3 of FY 2021, which was then the first normal quarter after the COVID first wave-related lockdowns were lifted. The European region, including Morocco for us, constitutes more than 3/4 of our overall VLS revenue. Similar is the case in North America and China, where the volumes were down 21% and 30% respectively over Q3 FY 2021. The supply-constrained environment led to key customer OEMs shutting plants and reducing the volumes. This led to a number of our production lines shutting for a major part of the quarter, with others running at substantial lower utilization.
Our revenue in the quarter continued a declining trend seen in the previous two quarters, with the Czech Republic revenue decline at 20% quarter-on-quarter on top of the 21% quarter-on-quarter decline seen in the previous quarter, the Q1. The newer plants in the European region also did not grow as expected due to poor customer offtake. As a result, the EBITDA margins in the lighting business declined sharply in the quarter due to a significant underutilization seen across our plants. While the current demand for semiconductors is continuing to outstrip supply, we continue to hear from customers and suppliers that the semiconductor capacities are being added. These additional capacities are expected to ease the supply situation gradually over the next few quarters. The pace at which the situation is expected to improve is a little uncertain, though, at this stage.
The revenue ramp-ups to the desired level at our newer plants in Poland and Morocco, in addition to certain other improvement actions, will help us reach closer to the EBITDA breakeven performance in these plants. We have started actions to reduce our fixed costs and implement industry-best operational practices under the umbrella of Project RACE. We expect the benefits from Project RACE to start showing its impact in the second half of FY 2022. Sizable portion of the benefits will be visible in FY 2023 onwards. Our debt levels have increased as a result of weaker operational performance and CapEx. The debt levels are expected to remain elevated as we navigate through the challenging environment, at least over the next two quarters.
The order booking, I'm happy to inform you, is that our India business has been able to secure an overall net business win in this quarter of INR 1.2 billion equivalent annual revenue, and most of these orders are new business wins. For the six months year-to-date, our order wins in India are at INR 1.95 billion. Our VLS business has also been able to secure additional orders worth nearly EUR 46 million in this quarter. The overall order intake for this year-to-date is at EUR 145 million. With this, we're happy to take your questions now. Thank you.
Thank you. Ladies, and gentlemen, we will now begin with the question- and- answer session. Anyone wishing to ask a question may please press star and one on your 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 is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.
Yeah, hi. Firstly, in terms of European operations, are you seeing any improvement month-on-month in Czech plant and U.S. plant and all?
The issue has been that, as you know, as mentioned, the issues of revenues, you know. We have, you know, a lot of capacities which we had set up a few years ago, you know, also some expansion programs. We have some of the best programs, you know, in the industry. But the problem of the semiconductors, you know, is still persisting at the moment, you know. We do expect that this problem is not gonna go away for some time. It will take another one year for things to really normalize, but we will see, probably, you know, a quarter- on- quarter improvement and supply of the semiconductors as we go along.
Presently, I think we are at a low point, you know, when it comes to our revenues, you know, and revenues to our capacity. At the moment, I would say that our main plants, which are the Czech Republic and the Mexico plant, though we have very good programs, but you know, the production is subdued because of the semiconductor shortages.
There is no improvement, say in October, November versus what it was in July to September?
I don't think. You know, what I feel is that at the moment things are still quite subdued. I think this quarter also, I think it will remain subdued. We have to see of course now how December is. But we do feel that probably from January onwards we can see, you know, an improvement, you know, in supplies. Now see where we are concerned, frankly, you know, we are impacted basically, you know, by one manufacturer of semiconductor. 99% of our problems come from this one semiconductor manufacturer. And we see a clear visibility of a much improved supply situation only from actually April 2022.
The situation is not really, I mean, if we are down in volumes by probably 30% or, you know, around there, it's not because of the situation of a lighting systems business. It is that the OEMs are not able to produce cars because of the other electronics. It's not because of our lamps. Maybe we could have been short in lamps by maybe probably 10%, you know. Why we 30% down is because the OEMs are not getting the full supply of the, you know, of the electronic products. That's the reason, you know, that the volumes are down to this extent.
You mentioned about this Project RACE savings of EUR 75 million in FY 2024 at full potential. Now, that is assuming what kind of revenue run rate in that year?
Basically, the Project RACE was something where we wanted to reach an in-industry level best benchmark, you know, of a 7% EBIT. That was basically in the European perimeter. This project is more for Europe, which is about 3/4 of our revenue, including Morocco. We started this project with a big consulting house, you know, in the month of June. The implementation of the execution of this project, all the initiatives have started only in September, you know. Now we will see that, you know, whatever the volumes may be down, but whatever, I mean, are the volumes on that, we will see definitely improvements in Q3, Q4 in our results because of these actions internally.
Internal actions are basically they cover recoveries from some customers, from customers also. It could be some underutilization, cost obsolescence, it could be some price increases. There are some other initiatives which we are doing of design to cost, improvements in our plants. Then of course, optimizing a lot of the manpower also in line with the revenues which we are going to have probably in this year and probably in the part of the next year. So a lot of these initiatives are across customer side actions and internal actions both also maybe from the supplier side.
We are looking at all round, and the execution of this has only started in the month of September, and the project started in June, you know. The other thing I just wanted to also add to this is that, you know, for the till September, beginning of September, we were not really able to kind of downsize our costs because all the OEMs, all our customers, you know, have been putting very high orders in the system. The EDI is what you call, you know, orders in the system, and they're picking up very less. When you come closer to the date of supply, you know, then they don't lift it because they're not getting semiconductors from the other companies, you know, the bigger companies.
That's the reason, you know, we have been saddled with high level of inventory, which we have now started cutting from the month of August, and also high costs like direct labor, other costs. We have only started cutting these costs from September. Even in our Q2 results, unfortunately at a low level revenue, knowing very well that, you know, that, we could cut this, we could cut these costs earlier on, but because of the customer orders and because they were telling us that they will lift the material month on month, we were not able to, you know, rationalize these costs. That's also a reason for our poorer performance in VLS, that we were not able to act because of the customer advice in the first, you know, five months of this financial year.
That I understand, sir, but my question is more like, is this cost saving that you're referring to, say, on the profit base or EBITDA base of FY 2020 when things are normal, or this is you're referring to on the loss base, the basis of this, the loss that you reported in this year. Because if I look at, like, say, in FY 2020, our EBITDA margin in VLS was say around 7%-8%. If this number that you're saying you're talking about it really comes through on that basis, FY 2020 levels, then probably we're talking about EBITDA margin of 14%-15%. Is that really possible, or we are referring to the costing of the base of losses that we're doing currently?
No, no. This is a project, let's say, that if you're able to. See, today, let's say we have a capacity, you know, as a group, you know, production revenue we can do of about close to. We can even do close to about EUR 100 million of revenue a month. Today, we are at about EUR 65 million-EUR 66 million, so we are down, you know. What I'm saying is that at a, at an industry level, you know, whatever we want to say at industry level benchmark of 7% EBIT, which is like a 12% EBITDA, you know. That can only happen if we are able to reach that. I'm not saying EUR 100 million, but even if we're able to do EUR 90 million-EUR 95 million of revenue, but revenues are important, you know.
You know, we can definitely achieve that 7% EBIT. In the meantime, of course, these results, I mean, which you see in quarter two are more because one is that we now started executing on this Project RACE, which we are now very proactively and aggressively started doing it from the month of September. Secondly, what I was trying to explain also was that we could have reduced these costs, you know, in the second quarter, but we did not do it because our customers were not allowing us to do it because they said that we had to keep the people for the higher orders, but the orders never came, you know.
We were not able to kind of follow the level of revenue which we actually were achieving month-on-month. What I'm only trying to say is that Project RACE is something which is definitely, because of lower revenues, you reduce certain costs. But we have identified further initiatives like some more recoveries from customer, let's say, design to cost, some improvements in the plant, cost reductions, some more savings from suppliers. These are the things which have been identified in the diagnostics we've done in the first few months, I mean, with the consulting house.
You know, this will definitely help our results even on a lower revenue. Let's say this quarter also is gonna be lower revenue, but we will not see a result like what we have seen in Q1 and Q2. That's what I'm trying to say.
India operations, if I look at standalone, because I don't have full India gross margin, there's a compression of say around 240 basis points in the standalone gross margin. What's the reason which we are seeing more pressure basically over there? What would be trend going ahead when we see we can expect improvement in India margins? Because...
In India, frankly, okay, our EBITDA margins were probably around 10%. Our revenue growth in this Q2 was 36%. I would say 40%-45% was probably half of it probably was more because of the commodity increases, which we're seeing right from October 2020 onwards, you know. That is because of the commodity increases. I would say that today, I mean, it's not that two-wheeler. See, predominantly we're in the two-wheeler market. More than 85%, 87%, we are selling two-wheelers. Two-wheelers also have been a little bit, you know, kind of subdued. I mean, we were expecting higher volumes, so probably I think we're at least missing, you know, I think it's at least about 10%-15%.
I would say we were expecting more of volumes from the two-wheeler market. That has not happened, you know. The increase is there, I mean, because we have in the past years, we won a lot of business, lot of cross-selling and all this thing also happened. The thing is because of commodity price increase over the last one year, and also our margins are a little bit impacted also because we have to absorb a one quarter lag. When there's an increasing trend, which we've seen in the last one year, quarter- on- quarter, you know, we have to absorb one quarter of commodity price increases. That's also a reason, you know, for a little bit of a subdued kind of a profit margin at 10%.
Because we should be more towards 12.5% of an EBITDA, you know, with the kind of you know volumes we do. We need higher revenues, you know, also to help us out with higher margins. I think now we see that some of the commodities in the third quarter in India also are stabilizing. Hopefully now we don't have to really absorb another one, too much of one more quarter of, you know, commodity hit. There will be something, but it won't be to the extent we have seen in the last one year. I think it will improve now.
At the moment also the sales, I mean, some of the two-wheeler business in India is strong, but somehow, you know, we are somehow still able to do a certain level of revenue, which is good for us.
Lastly, in standalone employee costs, we have seen a substantial increase over the last few quarters. Even this quarter, it is gone up by 9% quarter-over-quarter. Any particular reason why this such a high inflation in India, standalone employee cost?
I don't know whether it's employee costs have really gone up by. I thought it was some of the other expenses. I think employee costs, I thought that we were probably. See, today, I mean, I think our revenues have that way also gone up compared to last year. Revenues have gone up, so there would be, I don't think, I think we're controlling very well the fixed part, you know, of the employee cost. You know, but when it comes to the variable part is where we have had issues. I told you already about VLS, that knowingly we kept more people of direct labor, for example, you know, on the plants and all, knowing very well that we could have reduced that cost because, you know, the customers were not allowing us to reduce, you know.
In India, obviously, a little bit it has gone up. I mean, on the direct side, it's more related to the volume, not on the fixed side. The fixed side, I don't think there's much of a cost increase. I think it's more on the direct labor side where we see you know impacting us you know a little bit more you know overall in the business. That's something I think in this quarter you know we will. I think you will see a lot of correction when it comes to manpower, especially in VLS.
Okay. Thank you.
Thank you. We'll move on to the next question. That is from the line of Aditya Jhawar from Investec Capital. Please go ahead.
Yeah. Thanks for the opportunity. On the margin front, both India and the global business, is it a lag impact that, you know, maybe we'll recover the cost in the subsequent quarter? Is there an element to recover the cost from the customer with a lag in both India and overseas business?
Aditya, on the India side, I think the margins, you know, are a little bit flat. We have one is that because of the commodity price increases, you see India is like a normal thing. It's just that, okay, we are on an increasing trend of commodities, so we've had to absorb for one quarter, every quarter, you know, this increase in commodities which are not paid by the customer. They pay after three months, you know. That is one reason, you know. Second reason of course is that, see, the percentage of EBITDA will go down if your revenues are, you know, kind of positively impacted just because of the commodity price increases, you know.
Thirdly, obviously, you know, is that, you know, we have not kind of achieved the level of revenues we should have. You know, I mean, because of a little bit subdued volumes, both from the two-wheeler and the four-wheeler market in India. You know, four-wheeler more because of semiconductors, that there has been some impact. And two-wheeler also, you know, as you know, there has been a subdued demand. You know, it is just that in our case because we have won a lot of businesses in the past year and still continue to win, that we are still, I would say, kind of okay. But I think that going forward in India also in probably in this quarter, you know, I think with more stabilization in the commodity prices, you know, we'll see, we will see a better margin.
Where it comes to VLS, definitely when it comes to, you know, you know, margins and everything, one is that we will see improved. I mean, we'll see of course lesser loss, I would say, you know, and, you know, because of, you know, that we are gonna rightsize the people, and that's already happening in quite an aggressive way. To answer your main question, you know, in India of course from a customer side, those actions are on a regular basis, so there's nothing different. Here, you're right.
Here we are going to be, you know, kind of taking in some recovery from customers, not only to help the cash flows because we're keeping high inventory, but also we are going to be taking in probably through some price increase or not passing on some LTAs, you know, in January. Also, you know, kind of taking in some money recovery for underutilization obsolescence. We are looking at all these areas, you know, to be able to recover from the customer and that's something, you know. I don't know whether Christian you want to add something on this point of customer recovery.
Sure. Yeah, we are of course. As you said, not so much to add. We are looking, let's say, forward to next year and we are receiving some, let's say, positive signals. In most cases we have to, let's say, balance.
Yeah.
There was no, you know, premium freight or warehousing charges that we had to pay in this quarter, right?
No, that was not much. I don't think we had those kind of issues because see, I think the volumes were less. There must be a small portion somewhere because, you know, there may be a little bit of a portion, but I don't think it was anything like what we experienced when we had a high level of revenues, you know, in Q3 and Q4, where we saw that impact. As we mentioned also some of the costs were not really, I mean, because of us. At the moment we don't see much of a, you know, a premium freight or the issues of any overtime. Those kind of costs are not there really now.
I see. Moving on to the India business. You know, in India, for specifically for EV components. What we understand is that we are supplying to Bajaj. Firstly, like which all products we are supplying and what is the share of business? That is number one. Second is that, how many more customers, whether it is existing OEMs or startup we are at advanced stage. Third question to this, you know, related to this is that the profitability of the EV component, how different it is from the India business margin?
Yeah. I think probably Arjun can answer that question better. I think we have a significant portfolio when it comes to the EV, particularly for the EV, the powertrain and everything. That I think Arjun can explain. Other than that, of course we do for every EV we are of course doing the plastics and the seats and, you know, the other items, switches and all those other items also for the EV. The content of course for every EV is very big. For the moment I think our first customer is Bajaj, but I think that we still have to start the production. I think there has been some delay, you know, and I think that we will soon be starting that probably.
Arjun can throw more light on the latest situation and also on the situation we have with a few other, you know, OEMs we are pursuing and for which products. On the margin side, I think the margins are fairly decent. I would say the margins are generally, I mean, in line with whatever electronics we are doing. Our electronic margins generally are good. I think whatever we are doing on the electronic side of EV is in a similar way. Which is, I think, we have a fair margin I would say over there. We are not complaining. Maybe Arjun, you want to throw some flavor on what the situation is on the EV and what are we doing on the EV side?
Yeah. You know, of course, on the Chetak for Bajaj, we have already begun production honestly in November for you know, telematics for the onboard charger. We make the PCBAs already and over time, we expect to be able to do the entire charger along with Delta-Q, and also on the VCU. In either towards the end of this or the beginning of next month, we will also begin with the motor, the motor controller, and also the DC-DC converter and the BMS. Further down the line, we will also do the three-wheeler, and on the three-wheeler we will do a similar set of components, though of course, I don't think is.
We'll do a similar set of components and we are essentially 100%, you know, SOP on the motor and controller over there. On the two-wheeler, we are 60/40. We are 60% for the motor and controller.
Okay. What about other customers?
You know, again, other customers, you know, we continue, you know, to be engaged with. There is you know, the distraction always. There's a couple of global OEMs that you know, we're in pretty advanced discussion with. There's a couple of local OEMs, one local OEM in particular. You know, I think you know, it's also a little bit a question of time as they crystallize really what their localization and their local supply strategies are gonna be.
Okay. Any discussion with any startups, Arjun?
Yeah. You know, we're engaged, I would say, with two startups in particular. With one we are discussing non-EV specific components only at this stage. With the other, we are discussing the full range, including the EV components.
Yeah. Just a final question, Arjun. On this, what has been your experience and when you are engaging with these OEM, that whether these OEM would want to use their own technology for products like traction motor, BMS, controller, or Varroc is also providing some kind of technical expertise and developing these solutions for the OEM?
Yeah, you know, I think every OEM, I would say. Okay, let me not say every OEM, but a lot of OEMs, it is very traditional and standard behavior for OEMs, right? They like to know exactly what is going into the vehicle. You know, there is for sure a desire to control, in particular, the software at this stage. However, you know, again, I think like we said before, given the newness of these components, and especially on something like a traction motor, you know, there's a lot of IP involved in manufacturing also. Today, for example, on a traction motor, I think we are quite possibly the only fully localized, you know, large player, you know, that can actually make a traction motor. Yeah, you know, it varies, I would say, component by component.
Every OEM has their own strategy. Generally, again, I will repeat what we see, especially on vehicle functions, sometimes also motor control functions, OEMs like to own the IP themselves, especially to start with. On some of the other components like the BMS, sometimes even the telematics, et cetera, it is, you know, every OEM is following their own path. Some places they would like to be software responsible in particular and design responsible. Some places they are open to the idea of not really having the responsibility. We also see OEMs who are very open to sourcing proprietary.
Even for a product like the motor and controller, which is essentially the powertrain, we are now starting to see OEMs that are very, very open to the idea of sourcing a completely proprietary part.
That's very encouraging to hear. Thanks a lot. All the best.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star and one. The next question is from the line of Anish Moonka from JST Investments. Please go ahead.
Yeah, thank you. At the time of our IPO, we had over 1,500 engineers globally. Now going by our recent filings, that has dropped to 1,100, even though our capacities have grown. I understand the situation that we have gone through. My question is, will these lower numbers create bottlenecks to our growth in an upcycle? How will we address it if it does? Was it just some excess hiring that Varroc did in anticipation of growth that hasn't yet materialized? Thank you.
You're talking about the R&D engineers, right?
Yes, R&D engineers.
I think the R&D engineers what we have today I would say it'll be close to about 1,100, 1,100 to 1,200 engineers. Probably what we had done was that you know we were on a path to grow. It's not that we have reduced any engineers in India because India anyways on a strong growth but we had to rightsize an engineering team you know to the level of revenues you know because you know we were experiencing you know. I mean for example we saw the downturn in the auto market from October 2018 and we held on to the people. When pandemic struck you know last year then we had to rightsize because at that time we didn't know what was happening you know as such.
Then, you know, the whole idea is that, you know, how do we kind of focus more, you know, and drive more efficiencies with the people we have? You know, that, I mean, that's the idea, whether it's on, you know, whether it's to do with, you know, addressing certain future technologies. It is the development of existing products, working on design to cost ideas or VAVE ideas. Now the thing is that we are focusing more. Everything, it depends on the volumes. If the revenues are there, then fine, you can always hire more people, you know. But yes, you have to kind of definitely look at your overall cost. We don't want to increase more than 5%-6% of our revenues in engineering. That is also there, you know.
It's not that we are not winning new businesses and all. We are winning new businesses. You know, it may not be level of EUR 400 million-EUR 450 million earlier. What we have seen in last year in the pandemic in FY 2021, but when you do the level of, you know, programs being awarded is also reduced. Program extensions have actually increased in this period. I mean, for the reasons, you know, of, you know, whether it was a downturn in the market and then now the semiconductor issue. But of course, we have still continued to win at a certain pace. We have won about. In VLS also, we won about EUR 145 million of business in the first six months, which is I think quite good, you know?
We continue to win businesses, but I think that we also are driving a level of, you know, efficiencies also within the team. I don't think at the moment we need more than this number of people what we see going forward. We can easily manage all this product development with the number of people we have and also the other activities within engineering.
Fair enough. What is our blended cost of capital and what is the blended return on capital employed that we want to achieve in our businesses over the long run? Additionally, what percentage of debt are you targeting as a percentage of your capital structure? Thank you.
The blended level of margin should be at 12%. That should. That's something we've always said, that's something we want to achieve. Yes, for that, we do need sales, you know, because you can't be saving yourself out of a crisis. You need to sell. We need volumes, you know. 12% EBITDA, ROC has to be pre-tax at 20, you know, that's one thing. Debt, honestly, I mean, the debt must go down. At the moment, it's elevated at over, you know, the net debt is over INR 3,000 crore, you know. I mean, of course, it has to go down. Firstly, you have to deliver level of EBITDA, which is also not possible with the level of revenues we have, especially in the lighting business.
That's something we want to achieve a certain level of EBITDA, you know. I think we will see the improvements, you know, this thing as we move forward. I mean, if you ask me the objective, of course, in probably the next, I mean, I don't see in the next two quarters, I don't see the debt going down. I think the debt's gonna be at probably this level, maybe slightly more because of the. We don't expect the revenues to really come back to a very, very normal state. In the coming year, when we see that, you know, from January, we see improvement in revenues, and in April, of course, better revenues, then definitely I think we have to start looking at, you know, the net debt levels going down.
I think that our EBITDA to net debt should not be kind of, it should be at least maybe 1.5x or 2 x or something, you know, kind of a thing. Our net debt- to- EBITDA should not be probably more than 1.5x-2 x, I mean, probably in FY 2023. That's what we wanna achieve.
Noted, sir. The question here is, like, we recently heard one of your VLS customers attributing to the fact that they have at least five to six months of 100% production backlog, whether be it due to low inventory across the supply chain or customer-side orders. Is there a possibility that we see the real ROCs the company is targeting for all the newer facilities once the semiconductor situation is behind us in the next one to two years, at least for a few quarters?
The point is, I can definitely tell you that once you know we see the revenues going back, I mean, to level of capacities we have, which is about at least EUR 95 million a month of production revenue, I mean, we can definitely see a good double-digit ROC coming automatically, you know. You know, and because, see, that will happen also because we are working also on the margins parallelly, you know. The margins of wherever the areas are where we felt there were opportunities, you know, customer side actions, internal action, design side action, supplier side, we are doing all that now, you know.
Obviously, when the sales come back, yes, we are going through a tough phase, right for the last, you know, right from January 2020 when the pandemic struck and then, you know, and then the semiconductor. Yes, we are facing very challenging times, but at the same time, we are not just sitting and, you know, brooding about it, you know. We're trying to do something about it. Therefore, we are very aligned with the customer on the business wins. Then we're looking at all areas, how we can improve our performance, you know. We are still working on that. Once the revenues come back, I can definitely say that we can definitely achieve the 12% EBITDA, you know.
Today also our major CapEx cycle is behind us. We don't have to do so much of CapEx now because all those footprints have been set, which we had put up for, you know, people like the Volkswagen Group and Renault Nissan and in more regions, you know. Just before, I mean, probably, you know, just before pandemic struck. We invested a lot of the money, you know, to align ourselves with the big players and the winners in the market, you know. Once I think we have some of the best programs, you know, in the industry when it comes to lighting. Some of the best programs. We just need, you know, sales. When sales come back, you will see that the results are coming, you know.
That's what I want to just say.
My final question is, while I was reading Varroc's QIP document, it was visible that all the top five leaders in exterior lighting have lost market share from 2016- 2020. Although it's great that we are gaining market share, this question is more broad-based to understand what's happening in the whole industry. Because I would assume significant consolidation would happen through a downturn which is not visible, as this industry does require huge capital and R&D investments and entails very sticky customer relationships. Does whatever is happening could act as a risk for Varroc Lighting Systems also? Thank you.
Yeah. You know, Anish, your point is correct because it's not that we are the biggest of players, you know. A bigger part of our business is the lighting business. It's 65% of our revenues, and 35% comes from India. India does, I would say, fairly well. Today, obviously, I mean, when you see continued issues that comes to revenues, that we're not able to do revenues or pandemic-related other issues, yes, definitely, you know. You know, I mean, it is a challenge and obviously one has to think, you know, also strategically long-term, you know, what one should do, because obviously one is not going to, you know, not take the right steps when it's necessary.
Yes, I can definitely say that today we are okay, we are fine. We are going through a challenging time. If it comes to it, that maybe some decisions have to be taken. One will take those decisions, you know. I mean for the interest of the organization, for the company, for sure.
Sir, I meant that all the top five players who are above us, they are losing market share. What is exactly happening in the industry as a whole? We are gaining market share that works better for us.
No, but see.
Why are the top five players losing market share?
No, they are not. See, they've lost market share, I mean, to us over the last four years because we have aligned ourselves with the big players like Renault and Volkswagen, and we have won a lot of the important programs from them in the last years. You know, and that's the reason we gained that 1.3% market share over the last four years. You know? It's not that they're not. So today, I mean, everybody is suffering because of the pandemic and because of that. So they have lost. I mean, we won market share on the basis of our competitiveness, you know. We won our market share over the last four years with the clients. That's why we invested so much of, you know, in new plants.
It's not that, you know, it's not that they don't have enough business. They also. Okay, we have got, I mean, over the top five or even the people who are, you know, seven or eight, we have gained market share, which doesn't mean that they don't have enough business. They all have enough business, you know. It's not that they don't have enough business. They all that way would do well anyway. In today's situation, everybody is challenged.
Thanks and all the best, sir. Thank you.
Thank you. The next question is from the line with Chirag Jain from DAM Capital. Please go ahead.
Yeah, thank you for the opportunity. Just wanted to check the timelines for the 7% EBIT margin guidance for the VLS. How much that would be dependent on revenue recovery. I mean, if you were to split, let's say, margin improvement because of revenues and even at current revenues, whatever measures that we are taking, if we were to split, let's say, between these two factors.
Basically, see, this project, we want to reach a 7% EBIT level, you know, in the European perimeter, which is 35% of our revenues by December 2022. That is the target, December 2022. That has to come. It cannot be at today's level of revenue, which is quite less in the European perimeter. You know, it's quite less. Here, I'm just seeing overall as a group, I mean, we are EUR 67 million today per month. We should be at least, I am saying EUR 85 million-EUR 90 million to achieve a 7% EBIT, you know. That's something we expect in the year of FY 2023. That it is. We have a capacity of almost up to EUR 95 million-EUR 100 million if we have the orders, you know.
We need EUR 85 million-EUR 90 million in production revenue, not overall revenue, not the tooling revenue. Tooling revenue is different, you know. That may be another EUR 8 million-EUR 10 million on top a month. I'm talking about the production revenue. We need to at least achieve EUR 85 million-EUR 90 million to achieve that level of EBIT of 7% or 12% EBITDA. That will only happen once all this Project RACE initiatives are implemented, and our target is December 2022.
Okay. Are we in a way more impacted in this chip issue based on the OEM mix or regional mix or probably the model mix? Because what we are hearing from global OEMs, obviously because of the supply chain challenges, they are also optimizing their overall product mix to maximize profitability. In some sense, any color on that vis-à-vis, let's say the overall industry, are we more impacted?
We could be probably more impacted depending on the model, because obviously when there's chip shortage, I mean, all the OEMs will direct the chips towards the most profitable programs, you know. Obviously it all depends on which are the most profitable programs, you know. If you're not in their profitable programs, then you will suffer on volumes. Today, I'm just saying that we are down by about 30% +. You know, it is with whatever product mix we have. It's not that our product mix is bad. We have got some of the most important programs, but still we are down, you know.
I mean by that, but it all depends on, you know, in the region and who, and which programs and to whom you are supplying.
Okay. Just last thing, I think the OEMs generally are saying that obviously September was a very difficult quarter because of multiple things. I think Malaysia lockdown and obviously fire issues in Japan and stuff like that. December onwards, they expect some recovery. Obviously, still the overall situation in calendar 2022 would also be relatively tight on supply side, but still they expect improvement from December quarter onwards. Whereas your comments, even though you did mention about improvement compared to first quarter, second quarter, it doesn't appear to be that great, and it could be more towards, let's say, March and probably June quarter of next calendar year. Maybe any clarity on that front?
We see improvements in volumes honestly, probably from January. I mean, the earliest would be January. You will see quarter-on-quarter improvements, but this problem is not gonna go away for sure. You know, it is gonna remain for another one year overall. That's what I'm trying to say. You know, we have to deal with that, you know. We have to accept it and do whatever it takes then to see that you're able to, you know, kind of optimize, you know, your cost of whatever other actions as a customer and in a good way, you know. That you're able to even at a lower level of revenue, you're able to actually reach a certain level of performance.
That's what we're trying to do, because I don't see really, you know, this quarter also that the supply of semiconductor is gonna be really much better or something like that. I see the earliest probably from January onwards.
Okay. Just last thing on the CapEx side. Any revisit on the CapEx numbers? Because obviously, to optimize cash flows.
CapEx, I told you, see, our target. We are not gonna be doing, you know, more than probably EUR 45 million. That is our budget, you know, every year now, because there are specific programs and everything. We will see how many programs are there. EUR 45 million, you know, because you need to keep winning businesses, you know, for your future. In VLS business, EUR 45 million. In India, you know, we try to limit it to maybe INR 175-INR 180 crores or something. Because here I think also because both the places we have done major CapEx cycles. Now it is something, you know, only incremental. If you really get a very, very good project, that's a different thing in an organic way. There's no M&A now.
You know, basically if there's something very good comes up, we will invest. Otherwise, obviously we are not going to, you know, be investing more than this. This is what we see the budget is, and there's no way we can anyway cross this budget, you know, in this year or in the coming few years.
Okay. Thank you. That's it from my side.
Thank you. The next question is from the line of Joseph George from IIFL. Please go ahead.
Thank you for the opportunity. I have three questions. Firstly, when you talk about you know, the semiconductor situation, we understand that the September quarter was like a low point. From here, you know, things will only improve. To normalize this maybe-
Oh, George. George, sir, we are not able to hear you clearly.
One second. Better now? I'm just switched on to desktop. Hello?
Yes, sir. Please proceed.
Is it better now? I've switched on to your phone.
Yes, I can hear you.
Let me try again. The first question that I had was in relation to semiconductor issue. You know, we all understand that the September quarter was like a low point for the global industry, and we also, you know, understand that things will not come back to normal, at least say for the next 12 months. That is, you know, a given, for things to completely come back to normal, it will take about 12 months. But what I wanted to understand from you know, based on what you are hearing from your top three customers, will the December quarter be substantially better compared to the September quarter? Or you think, you know, December quarter will also be similar to the September quarter, and hence you do not really, you know, see significant improvement?
No, we see the December quarter to be better because we have started all our cost initiatives. We don't see the quarter better from the point of view of revenues. I don't see the revenues improving.
My question is more from a revenue perspective.
Yeah. From a revenue angle, I don't see that this quarter is gonna be better, you know, I mean, to the last quarter. I'm talking about only VLS. I'm not talking about India. I'm only talking about the lighting business.
Okay.
India could be better also. Not the VLS business. That will not be better from a revenue angle. The revenue angle I feel will only become better, you know, from January onwards.
Okay. Understood, sir. The second question that I had was, when I look at your balance sheet, I noticed that, compared to the March 2021 period, the inventory levels at the end of September 2021 period was higher by about INR 300 crore. When I look at consolidated numbers, your
How much?
INR 300 crore.
I'm sorry, I didn't hear you.
INR 300 crores.
How much was higher by?
INR 300 crores.
It was about INR 1,200 crore at the end of March, and the inventory at the end of September stands at INR 300 crore. Now, assuming that the increase is, you know, finished goods inventory and not unprocessed raw material, it seems to suggest that you've been able to produce, but the problem is that the OEs are not taking deliveries of what you're producing. Is that the right understanding in the sense that, you know, you are able to do a better job compared to what the OEs are doing with respect to their own, you know, production levels?
No, see what is happening.
Otherwise, your inventory wouldn't be increasing.
See, our inventory increased, like I said in the beginning, you know, that right from April onwards, I mean, the EDIs in the system, which is the orders from every customer is, has been, I mean, quite high. I mean, it's basically whatever our capacity is, they would take. Frankly, they're taking much less. They're taking probably only 50%-60% of that, you know, every month. The thing is that we have been ordering the material based on the EDI. We're keeping the inventory at a high level when actually we could have optimized it right from May onwards. Seeing April, we knew that there was a problem, but we weren't allowed to, you know, kind of, this thing.
In my view, whatever you see here, at least EUR 35 million in VLS business is higher inventory, which now from September we have started acting to reduce it. You know, and hopefully over the next few months we bring it down up to a good level. Because at the moment the inventories are very high, and it's not only finished goods. Finished goods is of course there, and that we are pushing the customers to take because it is as per their EDI. That we will push out. Maybe EUR 12 million-EUR 13 million of finished goods inventory we'll push out, and that's what we are negotiating with them.
Other than that, we have also bought, you know, we have kept other materials, you know, electronics, wiring, and there are other items also which we could not kind of really, you know, act on, you know, before August end, I mean, before September, you know. Now, the cycle to turn takes about three months. That's why the inventory is. I would say that frankly speaking, I am not happy with the elevated inventory levels. They're still quite high. Today I would say that the OEMs, you know, are not keeping inventory. The OEMs are pushing the inventory on the supplier side, you know, because they don't want to keep it. They will order the material and then they will ask you to produce.
Suddenly one fine day they will say that tomorrow, you don't supply us, you know. That's how the behavior has been in this last five, six months especially, you know, what we see.
Sure. Okay. Understood that. The last question that I had was in relation to CapEx. When I looked at the consolidated cash flows, I noticed that the cash outflow for CapEx is about INR 375 crore in the first half, and cash outflow for intangibles is about INR 116 crore. Total is close to INR 500 crore in terms of, you know, total outflow for capital assets. I wanted to understand what will be your total CapEx this year for the full year. I know you gave some numbers, but those numbers look, you know, relatively small in the context of INR 500 crore in the first half. Also, given that your production levels are lower, in that light, can you give some guidance for next year's CapEx, including intangibles, including capitalization of intangibles? Thank you.
Yeah. I think that is some of the CapEx. Frankly, there's cash flow issues because of the losses, funding of the losses, the inventory. The inventory was really unnecessary.
Sir, my-
You know, CapEx.
Sorry, sir. My question is only in relation to CapEx. It's got nothing to do with working capital or operational losses. My only question is what is the CapEx for this year, including capitalization of intangibles? Similarly, if you can give a guidance for next year as well at the consolidated level.
CapEx outflow also we wanna keep. I know that the first six months we have really kind of spent a lot, especially in VLS, on the cash flow for the CapEx. It's not the new orders of CapEx. It is the cash flow that we've had to spend.
Mm-hmm.
You know, more money there. That's something we'll control in the coming six months because we will not want to spend or the outflow should not be more than EUR 45 million. That is still our target.
Okay.
You know? Yes, we have spent a lot in the first six months, but the next six months, you know, we would like to control that part.
Understood. For next year, would you have a similar number? Instead of EUR 45 million, would it be substantially lower given the-
Yeah. EUR 45 million, that is our budget.
Even for FY 2023, is it?
Yeah, that's on the VLS part. India will have INR 150-INR 200, depending on the investment in the-
Sir, my question is should we go with the same assumptions for FY 2023 as well for both VLS and India, EUR 45 million for VLS and, you know, INR 150 crores-INR 180 crores for India plus about, say, INR 200 crores of intangibles?
Yeah. That would be kind of reasonable. Yeah, I would say.
Understood, sir. Thank you.
Thank you. Ladies, and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The next question is on the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.
Hi. Most of my questions have been answered. Just one question to Arjun with respect to the EV components for two-wheelers. So how is our content in electric two-wheelers, maybe say for motor controllers and then for ADAS and onboard chargers? If you can throw some light on that. Thanks.
Yeah. I think Nitin has shared a slide in the investor presentation. I think for two-wheeler it is based on whatever is the industry expectation of price is around INR 37,000-INR 38,000, and on the three-wheeler it's closer to INR 45,000-INR 46,000.
that is only for our EV parts, right? The EV, I mean, the EV powertrain parts only.
I would also include, for example, the switch, which is something that we already do for the Chetak. But yeah.
not our other parts like seats and plastics and all. That is additional.
Yeah. That is included. Of course from a value standpoint, I think the seat will be relatively smaller.
Okay.
EV standalone, EV component standalone, I think you know, especially at full maturity when we drive, for example, even the full charger localization et cetera, I think we'll probably come to around a similar number also.
Sure. Just to clarify, our share of business in Chetak for motor controller is 60%.
Yeah.
Is that what you think is?
Yeah.
Okay, great. Thanks. I'll call back in soon.
Yes.
Thank you. The next question is on the line of Basudeb Banerjee from Ambit Capital Private Limited. Please go ahead.
Yeah. Thanks, sir. Most of the questions have been asked. Just, I was looking at your market cap and your standalone earnings. With all these EV two-wheeler related products, electrification in two-wheelers, so much buzz and domestic business more or less operating normally, margins to be back with the metal inflation stopping as you mentioned. Broadly, what INR 50 crore of earnings can be achievable quarterly for standalone business very much. INR 4,000 crore of market cap. Largely it implies that the market is not paying anything for the VLS as such. Whereas on your books almost INR 3,000 crore of debt largely because of funding VLS' losses.
Ever strategically it comes to your mind that why not focus on the India business and high volumes VLS, which will reduce all these issues and managing of so many geographies? Debt issue on balance sheet rising up. As sir you still said that the semiconductor issue is at least a matter of one more year, and even at say 7%-8% EBITDA margin VLS, it is hardly EBIT neutral. For PBT number to be substantial, those double-digit EBITDA margins are desirable. Even post Project RACE. If you can give some thought from that angle.
No, what you are saying is absolutely correct. Anybody, any promoter has to keep all these options open looking at one's own situation, you know? Obviously, I mean, just to answer your question, all these options are, what you are mentioning is all open. We will see how it goes, but, you know. You are absolutely right. I mean, in your analysis, you're absolutely right. Obviously, I mean, it's not that I am not thinking in the same way, you know, it's everything the same way, but of course one will have to take the right decision at the right time. Like you said that the India business is doing well and I think, it'll also grow in the future, you know. Obviously we cannot put the India business at risk.
Mm.
Secondly, you know, yes, a lot of the debt, whether it's India or VLS, is largely more towards, you know, managing the debt of VLS.
Mm.
It's not an Indian debt from that point of view. You know, obviously we don't want. We are not comfortable with this level of debt. That debt, I mean, we would like it to be substantially down also, you know. These things are obviously there in your mind, and you're right that the market is not gonna improve in the passenger car segment, you know, for at least a year. Improve in the sense normalize. It'll improve, but it won't be a normal state. Yes, I mean, options are all open, you know, and the thing is we will see what to do, you know.
Basically your INR 200 crore-INR 300 crore quarterly losses might normalize down to neutralish or very small earnings, but that's not going to help to reduce the debt in a short time span as such. Basically from that angle, if cost of capital is
Yeah.
Higher than ROC for a prolonged period, then erosion of value is happening. Even large corporates even thought on those angles. Our Indian promoters owning car brands and on foreign soil also thought on those angles.
No, that's correct. What you are saying is correct.
Sure, sir. Thanks. All the best.
Thank you. We'll move on to the next question. That is on the line Nishant Vass from ICICI Securities. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question is on, just to understand it with a more granular construct on the Project RACE improvement. You mentioned about a necessitation of EUR 90 million, kind of revenue run rate. On your current revenues, it's like, roughly 35% revenue growth. That is one, let's say point that you need for your operating improvement. Can you mention, because you talked about your costs, and I'm sure the consultant has done some analysis, but can you share more details into which portions of fixed costs will you pull out and what kind of, reduction, let's say at a break-even level or at a various cost level, major cost items are you targeting over the next 12 months? That would be helpful. That's my first question.
The first item I would say is on the pricing of the products. Because the volumes are less, we'll be looking at certain important products for a price increase, and not passing on, you know. This is a part of Project RACE only, yeah. Not passing on the LTAs. You know, because the volumes are less, which we normally give in the month of January. That is one thing we are gonna be looking at, is seeing that we wanna drive that kind of improvement and that definitely kind of helps our margins. Also one-timers like getting some, you know, underutilization money, obsolescence money out, which always takes time, but you know, that's something we would like to also pull out from some of the OEMs.
You know, this is one part which we say customer performance. Second is, I would say the design to cost. We find that there are opportunities in some of the programs which have got a little bit higher bill of materials on our side. Here we have talked to a couple of OEMs to see that we are able to kind of give them a newer, more optimized design which can help our BOM cost overall go down in some of these programs which have got higher BOM costs. So there's an opportunity also which we've had an understanding with a couple of OEMs, and we are already working on that. So that is another thing which will happen probably over the next six to nine months that we will get the realization. Third is basically the improvements in the plants.
You know, in plants, how to improve the level of productivity. You know, okay, one is of course, you know that with the low revenues, you anyway remove all the agency workers or the contract labor and everything. But other than that, also we are looking at scrap reduction further. You know, how do we kind of have a better layout? Those kind of operational side by which we can, you know, kind of, improve the expense side. So the plant side would be, of course, direct labor is quite obvious. Indirect labor, the overheads of the plant, some of the other, you know, launch costs also, the salaried people. So there also we want to optimize the plant level also.
The right level of the best industry benchmark, that's something we have also received from the consulting house we are working with. We know the best industry benchmarks, what is in the plant level cost, that is something we want to also address, and the other improvements in the plant. Of course is on the global SG&A and engineering. That is a corporate cost. There also, I mean, we were going more towards that at one time towards EUR 1.5 billion of revenue. Obviously, things have changed after the pandemic. Obviously we have started taking some actions. Yes, we had reduced the number of people, you know, in April, May, June of last year. Again, we hired a lot of people because when we saw the V-shaped recovery, we thought that the pandemic is over.
Now the semiconductor was a totally new problem. It's also a result of the pandemic only. You know, so we want to rightsize our overall SG&A, and also engineering level costs and still be able to achieve. That's also an area we are focusing on, how to rightsize the corporate side. You know, I mean, the people side. That's also this thing, another area we are looking at. These are, I think, some of the major areas. I don't know whether I'm missing one more area. Christian, do you remember? I think there's one more element, right? There's one more I'm missing maybe.
No, no problem. Just if you can just elaborate, how much are you expecting your people cost to come down in VLS over the next 12 months on a broad percentage?
Sorry, before I answer that, the other is on the purchasing side. That is actually resourcing of electronics. We have our own Romanian facility. We want to do more of electronics. We get a 10% saving there. Also some resourcing, you know. Without any change of design, the PCBAs today we're buying at a certain price. There are opportunities to resourse about five major programs where we want to resourse.
One, next.
Hello? Hello?
Yeah, Sandeep, go ahead.
One is the re-sourcing of electronics, and there are some other opportunities also on the pricing side of certain commodities. That also is a big number. All these put together, you know, is what we are kind of looking at. What was your question on manpower?
Yeah, I was just trying to on a broader line item, any thoughts on how much is manpower cost likely to come down by next year in VLS?
See.
After all of these effects.
I mean, today I would say that probably there is opportunity overall as a company. I'm just saying that we should be at least trying to target at least probably a couple of percentage points. Overall, I'm saying, I'm thinking including plant level now. Including at the plant level, that's what we should try to achieve. This thing could be a little bit more also, but understandably conservative. We have our actions. Let us see, because there is a benchmark on global SG&A.
People say it should not be more than 3.5% gross, you know, your SG&A, out of which your manpower cost is at least 70% of that. We have to. You know, these are benchmarks. We don't wanna be more than 5% of our revenues on engineering. You know, at a plant level also, there's a certain level of direct labor as a percentage to production revenue. There's a certain percentage of direct labor, indirect labor, salaried people. Those things, you know, we have those benchmarks, and that's what we are trying to achieve, you know, for a best industry benchmark level. That's what we have in front of us, and that's what we wanna do till before the end of December 2022.
Actions are already on, and we're pretty aggressive over there on the people side already.
Understood. Thanks. Appreciate the detailed answer. My second question is again on VLS. I see that your order wins net basis, the pace has come off even from quarter one, and you have a high base effect over last year. So any thoughts? Is this underlying market situation or you're kind of being more cautious in terms of bidding for orders in terms of better pricing and stuff, so that's why you're not going after larger order sizes? Some thoughts on this, why the order wins are trending a bit softer?
No, it's just that the customers are not coming out with the new programs, you know, with new models and all because of the situation. What they're doing is they're extending the existing programs. What we hear more and more is extensions by two years, three years. People, I mean, because of the lower volumes, you know, they don't want to invest in new models because that requires a lot of money. There's some postponement of, you know, new programs, you know. Therefore, I think, I mean this year we were also trying to target closer to probably EUR 300 million, you know, of new business wins. Okay, we are at EUR 145 million, but at the moment, you know, because of this, real, you know, semiconductor price shift, people are not really...
It's not that they're not focusing on new program, but they're focusing less. There are less new programs or, refreshes coming in at the moment. Maybe things might change in January. For the moment, the things are a little bit slow, what we see, and that's the reason that's impacting us also. There's no intention from our side not to win new business. There's no intention like that.
Right. No, I was just thinking that because you're trying to do pricing corrections, there might be some changes in terms of what kind of orders you're bidding for. Anyways, my last question is on the finance side. I see a very meaningful jump on a quarter-on-quarter basis on your interest cost. So I know obviously your gross debt levels have gone up. But is there also a blended cost structure going up, blended cost of capital going up on the debt side? Anything that you can share, what's happening on the interest cost side?
Well, definitely the blended cost of capital is going up, but maybe I think either Srini or Nitin can take that question.
Yeah. There is some increase in the borrowing cost, because we had to fund VLS. We had to take some short-term loans in India, which has got a higher rate of interest than the normal case. That is definitely there, including the non-convertible debentures that we had issued last month. To a certain extent, there is an increase in the weighted average cost. Hopefully then we are able to, let's say, reset the debt which we plan to do in the coming months. Hopefully that weighted average cost can come down. We can refinance some of the higher cost debt we have taken recently.
Srini, sir, how should we think about the blended cost on an annual basis? Should it be higher than this last year by 100 basis points, 150? What's your thought on that?
Yeah. For this year, yeah. You can say compared to last year, probably. The next year, probably we should come closer to the last year levels. Assuming we are able to get the refinancing done before the end of this financial year.
Understood. Thank you. Thanks a lot, and all the best.
Thank you. The next question is on the line of Atul Joshi from New Berry Capital. Please go ahead.
Hi, sir. Good evening. Thanks for the opportunity. Just extending to the earlier answer which you have given to the RACE program. Just, I want to know the quantum of this, like in percentage-wise, which is easily achievable for us. Like, if we take design to cost, then there will be changes in the products and then approvals from the customer side, like PPAP approvals and stuff, it may take time. If you look at the productivity side, which depends totally on us and the volume as such. I want to know the quantum of each of these changes and which we can easily adopt from our side.
I think that, see, today, in today's situation, what is happening is something like a design to cost or, you know, even getting a recovery from customer would have been tough in a normal situation. Because of the situation we are in, you know, we are able to, you know, get something out, you know, in this kind of a situation, you know?
Okay.
See the other aspects. I would say that this is a special thing. I mean, getting something from the customer is the most difficult thing.
Yeah.
The design to cost, and that is the most difficult which today, if we are trying to target eventually a net of EUR 76 million through this project at a level of revenue of, let's say, even if it's EUR 1 billion, you know, of production revenue a year, you know. Basically, customer recovery actually, and this is something which is a special thing, which we are able to get. Total is, let's say, about EUR 76 million we're to get out. At least I think probably 25% of that would come from this customer side actions of design to cost and that.
The other things are like, you know, more internal, which anyway we were doing as improvement points. Some of these are okay because of some revenue being down anyway, automatically, like direct labor and all that stuff, which anyway would go down. The other optimization of manpower or taking some more steps for further scrap or other improvements on the shop floor or, you know, you know, those or something more on the purchasing side or resourcing of electronics, those things are more in our hands what we can do, you know. That is something we anyway are confident and you know, all these things, the initiatives we have got, they are all, I mean, they're all like kind of individual initiatives. It's not there's some general number.
I mean, these must be quite a few hundred initiatives, you know. We know that under every initiative, let's say if it's a customer, we know, okay, this customer, this program, so much. It's like that. It's defined specifically. We are addressing it like that. It's not just a general thing that you will go and get something from one customer like that. There are specific actions, program-wise from customer or what we do in a particular plant or with a particular supplier, you know? All the initiatives are written down, and then we track every initiative to see that, you know, it is being executed.
Understood.
Some may be longer.
75% from internal gives a much more confidence that it is doable. 25% depends on customers, and we can manage it, I think. The second question is about the second note in our consolidated financials that the certain alleged patent infringements that we have received notice. Would you like to elaborate on that?
I'm sorry, I did not get it. I didn't hear you very clearly. You know, it was not very clear. I'm sorry.
Am I audible now?
Yeah, now you are. Yeah.
Yeah. The second question about the alleged patent infringement, the second note in our-
The value.
-finance.
The value of patent?
Yeah. Would you like to elaborate on that?
Maybe, Srini, you would like to give an update on that?
Yes, I will give it.
Basically, the matter is under litigation. I think the hearing on one case has taken place, first hearing in the German court. One more hearing is I think scheduled for end of November, if I'm not mistaken. No judgments have been handed out yet, and there are more hearings getting scheduled in other cases. As of now, based on the advice of the lawyers, we are kind of confident that our exposure on this issue will be quite limited. We don't expect anything financially material to come out of it. That's where we are.
Okay. Understood. Thank you, sir. That's all from me. Thank you.
Thank you. A reminder to the participants, anyone wishing to ask a question, may please press star and one. As there are no further questions right now on the conference, over to the management for their closing comments.
Yes, thank you. I mean, in, you know, we had actually. I'd actually thought that FY 2021 was, we've seen the last of it, you know, and the worst of the year. This year, of course, with the semiconductors, you know, obviously it's proving more challenging for us. All I can say is that in both our businesses, whether India or the lighting business, we are extremely focused, you know. Yes, we. The unfortunate part is that, you know, this time it's not a demand issue. It's more a supply related issue too, because of semiconductors, and it's a big issue which will take some more time. You know, that's something. Revenues are not in our hands, but we do need the revenues.
Anyway, whatever, I mean, whenever the situation improves, I think, you know, from the January quarter, I feel the volumes will start coming back. Till then at least we are focusing internally to see what we can do. We are very determined and, you know, in our resolve to see that even with the level of revenues we have, that we are getting improved results, you know, especially more on the VLS side, you know, where we are more impacted on the sales. We continue to kind of stay focused and continue to see that, you know, we have better quarters ahead of us. We will see a better quarter three and quarter four as we move forward, you know.
Hopefully next time when we meet, you know, we can probably be it can be little bit on a happier note than it is, you know, at the moment. That's all I just want to say. You know, rest of course, you know, I have already mentioned and answered through your questions. Thank you.
Thank you. Ladies, and gentlemen, on behalf of Varroc Engineering Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you.