Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q3 FY 2022 Results Conference Call. As a reminder, all participant lines will be in listen-only mode. 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 and zero on your touchtone phone. Please note that this conference is being recorded. Varroc Engineering Limited management is being represented by Mr. Tarang Jain, Chairman and Managing Director, along with Christian Päschel, CEO, VLS Business; Arjun Jain, President and Head, Electrical and Electronics Business; and T. R. Srinivasan, Group CFO. I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.
Thank you very much, and good evening to everyone. Tarang Jain here, and I would like to thank you for joining the Q3 FY 2022 earnings call of Varroc Engineering Limited. Let me start first with the India business. The Indian two-wheeler industry volumes were lower on both year-on-year and quarter-on-quarter basis by 23.7% and 13% respectively. Against this background, our India revenue in the quarter increased marginally by 2% year-on-year and declined only by 4.2% quarter-on-quarter. This is mainly attributable to the sharp increase in commodity prices during the year, most of which was passed on to the customers. The EBITDA margin of the India business was at around 10%, with margins impacted negatively by the time lag in passing through of the commodity prices, price increases to the customers.
Speaking about the global lighting business now, the semiconductor shortage continues to persist globally and is expected to normalize over the next six to nine months. The passenger vehicle volume during the quarter have shown some recovery as compared to the previous quarter, but are still significantly below normal levels. The passenger vehicle production volumes in the current quarter in Europe were down 25% year-on-year, North America was down 13%, and China was down 3%. This resulted in a 15.1% drop in VLS revenues year-on-year in euro terms, though it was 10.7% higher on a quarter-on-quarter basis. The VLS EBITDA margin improved by 510 basis points quarter-on-quarter due to the sequential revenue growth, customer recoveries for lower volumes and commodity inflation, improved operating efficiencies and better cost controls.
Our China JV revenue also grew by more than 20% on both quarter-on-quarter and year-on-year basis, with improvement in EBITDA margins. The quarter-on-quarter increase was of 250 basis points. Our Project Race, launched in Q1 of FY 2022 to improve the profitability of VLS Europe operations to best-in-class levels, has made good progress in identifying improvement opportunities across various parts of the business, and implementation of the identified actions is currently underway. The impact of the same will be more visible towards the later part of FY 2023. Our overall net debt levels have reduced during the quarter by INR 370 crores due to improved operating cash flow and a weaker euro. The VLS operations are expected to start generating positive free cash flow from Q4 due to the improved revenues and a better operating performance.
Our order booking, I'm happy to inform you, is that our India business has been able to secure an overall net business win of INR 580 crore or INR 5.8 billion on a year-to-date basis, and most of these orders are new business wins. Our VLS business has won EUR 105 million worth of new businesses on a year-to-date basis, though new ordering activity at the customer end is muted due to the backlog of current model volumes as a result of the semiconductor supply shortage. Finally, I would like to mention that we've received an interest from certain parties for a strategic partnership in our global lighting vehicle systems business. The management is in the process of evaluating the interest with respect to scope, valuation, timelines, et cetera.
The investors are currently carrying out their due diligence of VLS, and there is presently no firm or binding offer that has been received by the company as on date. With this, we are happy to take your questions now. Thank you.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to withdraw 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, I said, firstly on this, debt reduction by INR 370 crore quarter-over-quarter, this is mainly due to what? Let's say material reduction or debt coming down? What are the main reasons behind this?
Yeah, I will take that question. Basically, this is driven by two factors. One is in the VLS business in the last quarter, we have seen
Sequential revenue growth about 10% in EUR terms. That has contributed to improving the operating cash flow. In addition to certain initiatives we have taken in working capital improvement. During the quarter, we also came to certain settlements with customers for some claims we had related to commodity cost increases and capacity underutilization during the year. Overall, you can see the VLS EBITDA margins sequentially have improved by 510 basis points, which contributes to the improved cash flow. In addition, the India business continues to generate positive free cash flow, which is also helping in reducing the net debt. The third factor is EUR weakened against the rupee during the quarter about two INR per EUR.
That means the debt denominated in euro also reduced in rupee terms to the extent by about INR 60 crore out of the overall INR 363-70 crore reduction we had. I would say roughly 20% due to exchange rate and 80% due to better operating performance, working capital management
There's still losses in the quarter, so your EBITDA level as well. This is mainly due to working capital only, I guess. I mean, I want to understand whether it's a payable increase which drove this or inventory reduction. What happened exactly in this quarter?
Yeah. Payables have been fairly at a constant level. It is mainly inventory reduction and also some faster collection of receivables. Certain payments which were on account of tooling and engineering, et cetera, which are due from customers we have been able to collect earlier. That mainly has driven plus the India overall positive free cash flow.
Okay, got it. Now, secondly, on this, VLS EBITDA, now, if I look at the two plants that you highlighted, Poland and Morocco, there the EBITDA losses actually has gone up by almost EUR 3.5 million quarter-on-quarter. There's overall reduction of EUR 10 million in the EBITDA. The other plants would have contributed an EUR 13.5 million improvement. While actually in terms of revenue, Mexico was flat. Czech was only EUR 10 million increase quarter-on-quarter. This EUR 13.5 million improvement in EBITDA came from where? Is it like some element of receivables from customers of the commodity business which came to our previous quarter result in this quarter?
A lot of the customer settlement happened late to the current quarter actually. We during the quarter received, let's say, maybe settlements of something like, let's say about EUR 12 million. Out of that, EUR 8 million or thereabout relate to current quarter and EUR 4 million relates to previous quarter, roughly that's the broad split up. Essentially just certain price correction, which we got effective during the current quarter, which was under discussion because of the cost increases which had taken place, through the year, right from the beginning of the year onwards. Plus some capacity underutilization which was there because of the lower volumes. It's a combination of that. Yeah. On the newer plants specifically, there are two reasons why you still don't see an EBITDA improvement.
One is because the commodity price increases have been sharper this year. Which has offset certain operating leverage we got with the higher revenue. Plus there have been some supply chain disruptions in terms of availability of materials, especially semiconductors, because of which there have been frequent changes in production line and some expediting charges, et cetera, which have also contributed to lower operating performance. Both are kind of expected to stabilize in the current quarter and starting forward.
Ashutosh, do you have any further questions?
Sorry. If I get it correctly, EUR 12 million that we got this quarter, EUR 4 million is related to previous quarters, right? In terms of past due.
Correct.
Secondly, there were some price correction. Will that also include something related to previous quarters that we got in this quarter?
No, no. Those are all prospective, effective in the current quarter. Out of 12, four is previous quarter and INR 8 million is current quarter.
Just to clarify, the EUR 4 million was on account of some underutilization claims on certain programs of one of our major customers, which had to be settled before December end. Because, you know, the customers have, you know, December end as their year-end. Also some of these programs end of life was also achieved. The claims were due as per our purchasing conditions. That was EUR 4 million. The EUR 8 million was a general increase already granted by one of our major customers effective November. Obviously the commodity increases have been quite sharp in the last one year, you know, more. Therefore we are expecting, you know, certain increases which would come in, you know, more from the January period onwards in Q4.
INR 8 million was by one of the customers who has actually kind of granted us price increases due to commodity-related you know inflation from November onward of last year.
That will continue in the current quarter.
That will continue. I mean, well, it's like compensating us for the commodity price inflations. Actually, over the last two years. You know, people, like in India, for example, we have a quarterly settlement, while abroad, probably sometimes annual or sometimes, in case of some special situation where the increase in commodity prices are really tremendous, then we can go back and ask them. That's what's happening now, that we will see, you know, you can say a reimbursement of this commodity inflation going forward.
Okay. You're saying that INR 8 million is related to the last one year, November 2020 to around December 2021.
No, November 21. Only November and December.
INR 4 million is related to previous.
INR 4 million is related to the underutilization of these few programs of a major customer, you know, over the last probably 1 or 1.5 years because of the COVID situation.
Okay, got it. How do you see Q4 like, say, versus Q3 in VLS? What kind of revenue increase we can see quarter-on-quarter?
See what has been happening so far in the first nine months, if I have to just state it simply, that, you know, with all the investments we had made in new plants and overall, VLS as a production revenue, you know, including of course China, 50% of China, we should be doing a production revenue of EUR 100 million a month. You know? But what we have seen is that due to the chip shortages, you know, we have seen an average, you know, of only EUR 68.8 million in production revenue in the first nine months. We are almost 30% down overall. It depends on which plant is more or less, but that's the issue and that's the reason why there has been a cash burn for us in the first nine months.
Now we see from January onwards, we already see an improving revenue trend, where revenues are increasing by at least 10%, you know, 10%-15%. This of course will help an overall situation of, you know, no more cash burn. Also these price increases, you know, due to commodity inflation, the reimbursement of that, you know, we already got it from one customer and we are also seeking from other customers in Q4. This will result in a positive, I would say, free cash flow.
Also at the same time we have seen that, you know, we have got this Project Race, which we have discussed, you know, in the last two quarters also that we have started Project Race in June 2021, and we started implementing the ideas from, you can say, September, October of 2021. Here also we see a momentum growing. This also will result in better operational this thing and overhead performance, you know, in Q4 onwards.
Okay, got it. Thanks.
Thank you. Participants, if you have any questions, please enter star and one. The next question is from the line of Aditya Jhavar from Investec Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. My first question is that we have to, you know, repay a debt of about, say, EUR 50 million by March 2022. Does that mean that the strategic sales decision that we are planning to take, you know, the resolution will come before that?
Well, it is not necessarily linked to that.
Yeah.
What you are referring to mainly is the facility we have in Czech Republic from a syndicate. That we have an extension till March because right now we are in discussions with the banks to roll over for a further period of six months. That negotiation is going on independently. There's some prepayment, et cetera, which I think can be managed out of the operating cash flow plus some additional debt raising that we are working on at the moment. Yeah, I mean, coming to the strategic stake sale, obviously we cannot yet be sure of the timing and the quantum of the investment, et cetera. We are not necessarily depending on that to plan our cash flows and take care of our commitments. This will be independent.
Sure. Thanks, Srini. What could be the timeline broadly, if you can help us understand, for strategic sale?
This is a bit difficult to predict. I think you will know very well from your experience that these things can take longer or shorter depending on how the discussions go. Yeah, we can only say that we have big interest and the due diligence process is ongoing and as and when we have a firm or a binding offer or a definitive agreement, obviously we will update the market and exchange. Yeah, this can take anywhere between three to six months or even longer, depending on the scope of the deal, the associated complexities and mechanisms.
Okay. You know, the second-
We request you to hold. We've lost the connection for management. Please hold while we reconnect.
Okay.
We have the management line reconnected.
Yeah. Sorry, Aditya, the connection dropped.
Mm-hmm.
I think these things are a bit difficult to predict, and there are multiple parties involved. It's not like, we are only engaging with one party. We need to wait and see how things develop, and we will keep you all updated regularly on the process as we go.
Absolutely. The next question is on order wins, specifically on EV, in the Indian market. If you can call out specifically any order wins. So we understand that we have been supplying to Bajaj Auto for Chetak. But other than that, what are the order wins? Are there any progress in discussions we were discussing with startups and few existing OEMs as well?
Yeah. Again, you know, like we've talked about before, we have been engaged with, you know, multiple different customers. However, I think also like we have mentioned before, I think the focus really has been to drive, you know, execution and launches of the orders we have already won, right? I think today we are in a very, very strong position there where we have basically launched almost everything. We have either launched or for a couple of components we are in validation now, so we will imminently launch all of the products that, you know, we've been talking about. I think that's really significant.
Chetak.
Yeah, for the Chetak. That I think is really a significant achievement over the last quarter. Of course, next, we also work on the three-wheeler. I think that is something that happens in parallel. Again, you know, I think now that we will have level of capacity again, I think it bodes well, I think, really for the future.
Yeah. Thanks, Arjun. You know, other than Chetak, are there any projects which can go for commercialization in the next three months or are we at advanced stage of winning orders in EV components?
I mean, well, I think before there's a business win, right? I don't think there is any point in reporting it out. I think we'd rather wait for a business win before reporting it out.
Absolutely. Thank you. The final question is on depreciation, Srini. You know, capitalization of the new facilities, is it largely behind? Should we expect this INR 250 crore kind of a run rate on a quarterly basis? Or how much increase we should expect on this?
I think by and large, capitalization of all the major facilities is done. Of course, there will be ongoing replacement CapEx plus some program-specific CapEx, but that should not kind of exceed replacement rates. It'll be stable around this level. Yeah.
Sure. The final question, if I can squeeze. What could be the EV contribution on a consolidated revenue, VLS and India put together?
Sorry, come again?
What could be the overall contribution from sales to electric vehicles that include, you know, Tesla, you know, VLS as well as the India business?
In India, I think this year is not that much. You're talking about when you talk about EV, you're talking about the EV powertrain only-
Yes.
Over there you're talking about the lighting, right?
Right. Absolutely right.
EV powertrain, in fact, we have just started, as you know, for the Chetak. I think next year, I think if you talk about the EV components, I think we would be at least at a level of about INR 250 crore next year for the India side.
India, yeah.
Just on the EV powertrain.
Right.
You know, which will be largely an additional revenue. When it comes to lighting, see, our lighting portfolio, what we had last, this thing was about between 10 to 15%. No, sorry, that was a market share. Christian, would you be knowing what, out of the total revenue, you know, what percentage, I mean, would be the EV for the EV vehicles? What revenue would it be for the EV vehicles only, roughly?
Yeah. For example, you know, Tesla, you know, and you know, some of the other.
The Volkswagen programs and all that.
Yes.
Roughly, I would say what about maybe 15% or 20%.
See the Tesla is-
I would say.
Tesla is talking about eight, nine. Sorry, I think Christian, sorry, go.
Please go ahead. No, go ahead, Srini. I believe it's between 15% and 20%-25%.
15%-25%.
You can say that, let's say if we are on a production revenue side, if we are around EUR 850 million or EUR 900 million, so you can maybe take 20% of that. Let's say, you know, it could be anywhere between EUR 150 million-EUR 180 million would be towards EV lighting, you know? And in India side EV, you know, we just started, so it'll be a very small revenue this year. Next year, I think, I mean, next year I think the revenue growth should be there in VLS also. This number of EUR 150 million-EUR 180 million will also grow.
There are chances of it going up to, you know, maybe INR 180-INR 220 or INR 230 million next year, at least.
Okay, perfect. That's it from my side. All the best, team.
Thank you.
Thank you. The next question is from the line of Abhishek Jain from Dolat Capital. Please go ahead.
Thanks for the opportunity, sir. How is the revenue contributions, Europe versus North America in nine months, FY 2022? How much growth or degrowth in each geography?
I think, if you really take on a quarter-on-quarter basis, you know, Q2 to Q3, North America actually was down about 1.4% in revenue terms. If I talk about individual plants, I would not just say Europe. On a quarter-on-quarter, Czech was up by 10%, Poland was up by 40%, and Morocco was up by 17.7%. This one I'm saying quarter-on-quarter, the increase in revenue. When it comes to a year-on-year change, obviously, as you remember last year, you know, in this third quarter was when we saw a V-shaped recovery. You know, obviously compared to year-on-year, I mean, North America is down 26%. Czech is down 33%.
Of course, Poland and Morocco at that time were at a, you know, very, very low level. There, Poland has grown 54% and Morocco has grown 48%. To last on year-on-year basis quarter.
Sir, I was asking the mix, revenue mix for the nine months FY 2022, Europe versus North America.
Yeah, yeah. If you take it on a nine-month basis, North America from a production revenue perspective will contribute between 17%-18% of the overall VLS revenue. Europe together is about 55% across Europe, which is Czech, Poland, Morocco, all put together. The rest of it is contributed by India, Brazil, then the-
Turkey.
Turkey.
China.
Italy, Romania, Vietnam, and all that put together.
Oh, okay, sir. Given the geopolitical issues and sharp increase in the energy cost, how is the outlook for Europe for growth and margin in fourth quarter and FY 2023?
Christian, you wanna take that?
Please say it again, please. I was unable to catch the question.
Sir, I was asking about the outlook for Europe. Given the geopolitical issues and sharp increase in the energy cost, how is the growth and margin outlook for VLS?
For me the outlook, let's say it's depending of course on the availability of the semiconductor. The overall situation is improving, let's say month by month. We have let's say some good agreements in place. Let's say the dominating effect is the semiconductor. On the other side, we were able to reduce our costs and therefore I see a strong improvement on our side according to the revenues we see. Again, for me, more important is that we have secured production and as I said, we have some good agreement made with the customers. Therefore, I'm looking really positive to the next quarter.
Okay. How is the margin outlook for the VLS for the quarter four?
Okay.
Okay. Would you like?
Yeah. I'll take that. Sequentially we should see an improvement on account of 2-3 factors. One is we are getting some price compensations from customers for the raw material price increases which have happened, including the energy cost that you mentioned. Those things, some of it came in during Q3 effective first November, which continue into Q4, plus there are some more agreements getting finalized now which will be effective in Q4. Then we also see 8%-10% higher revenue in this quarter compared to the previous quarter because of the improving situation on semiconductors that Christian talked about. Lastly, Project Race, a number of those initiatives are under implementation now, and those benefits are also starting to get realized and adding to the bottom line. That also will contribute.
With this, in Q4, we hope to have a positive EBITDA margin in VLS overall and we see an improvement over Q3 and improve that further in the next year going forward.
What is the current break-even point for the VLS in revenue terms after taking all cost cutting exercise?
Okay. If you say in EBITDA terms, it depends a bit plant specific because the different plants have different operating costs. If you say overall at EBITDA level, if I say if we can do a revenue of, let's say EUR 75 million-EUR 80 million per month, roughly in that range, production revenue, we should be able to have a positive EBITDA generation.
If the revenue goes up to the EUR 120 million first, then what EBITDA can we expect?
Well, currently we have capacities with which we can reach a revenue of EUR 100 million per month.
EUR 1.2 billion of production revenue. At that level the EBITDA will be a double digit.
Yeah.
Plus.
Close to double-digit, yeah. Just about that.
That is for the VLS, no?
That's for VLS.
We only talk about VLS.
Can we expect this sort of the numbers? Can it be possible in FY 2023 if the semiconductor shortage issue easing up?
Yes. It depends on the rate of improvement, right? Because right now, it's very difficult to say when things will become totally normal. Everybody is kind of, people are saying it can take anywhere between nine to 12 months, so that's the expectation. It depends on the rate of normalization, but yes, if things become totally normal and that means the OEM volumes go back to normal level and capitalization improves, then maybe towards the last quarter of FY 2023, we can look forward to-
Basically next year we are expecting that that we should try, we should be able to reach, because the situation is anyway improving on the semiconductor shortage front. It's improving, but it's not normalizing like, you know, what was said that, you know, we can only expect not before third quarter of next financial year, kind of a normalization.
Could go into the fourth quarter also, but we will see an improved revenue than what we have seen in FY 2021 and FY 2022. You know, so we are expecting it is a production revenue to be over at least EUR 1 billion, is what our expectation is, you know, and hopefully that should happen.
Okay, sir.
Actually, from my side, I can underline this, let's say because it's not only on semiconductors. You know, we have set countermeasures together with the customer to get rid of the critical components inside our PCBA. Therefore, let's say we can as well improve. But I would like to underline what Tarang was mentioning.
Okay, sir. Sir, rupee is appreciating versus euro. Although it's a positive for the overall debt reduction side, how would it impact on the revenue terms of the VLS?
Yeah, I mean, definitely it has some impact, which we have seen in the last quarter as well, because in EUR terms, the revenue grew by 10% plus, but in INR terms it was less at 7% or so. This is something which obviously is beyond our control. I think more important is to have a sustained margin recovery in VLS, which will lead to overall improvement in the consolidated result, which is what we are focusing on. Yeah, and the exchange rate may bounce back like it's already doing in this month. We have already gone back up after the end of December. Those things, movements will be there, but that we cannot influence or not to be distracted by that.
Overall, rupee appreciation versus euro is positive or negative for the company if this set up from the revenue losses from the benefit of overall rate reduction?
Overall, once the operating performance comes back to normal levels, which mean EBITDA generation at the normal levels, et cetera, et cetera, obviously, euro strengthening rupee will be a positive one for the business. The operating cash flow improvement will outweigh the debt increase, so to say, in rupee terms. That's what in the normal course. Now it is. We are not in the normal situation, so that's why it's a bit of a mixed bag right now.
Sir, during this quarter, you have incurred MTM losses of around INR 22 crore on intercompany loans. What is the size of the loan? As the rupee is appreciating, MTM losses will reverse in the coming quarter?
Yeah, that is the expectation. Once exchange rate reversals which are imminent, happening during February, the losses, mark-to-market losses will get reversed. We are roughly talking about EUR 100 million intercompany loan.
Okay. My last question is on in India business. In Chetak, what all components you are supplying right now?
We supply the motor, the motor controller. We supply the vehicle control unit. We supply the-
DC-DC converter.
Yeah, the DC-DC converter. We supply also the switches, the telematics, the BMS and also the charger.
How much is the content per vehicle, sir?
I think we had a slide around that. Of course, you know, we can't reveal the exact content for specific vehicle because vehicle to vehicle it will change. I think in terms of what we stated in terms of the total content that we would expect to do in an electric vehicle, a two-wheeler we expect we do around INR 37,900, around INR 38,000. In a three-wheeler, you know, we would expect to do around INR 46,000.
What would be the SOV in this Bajaj Chetak?
Again, right, I think defining an SOV factor at this stage, I think is probably doesn't make the most sense, right? Because the market is still evolving. Today in general, like I said, you know, like I spoke about, right? Actually executing everything we've executed, right? This is not just the Chetak, it's also the new Pulsar which is also running in the background. With the semiconductor backdrop we have, I think that is really our position of strength right now with our customers. I think, utilizing that, I think we'll see where we go, whether it comes to, you know, whether it comes to SOV, whether it comes to content, whether it comes to new business wins.
All right. Thank you, sir.
We have the major market share when it comes to the Chetak, and when it comes to the three-wheelers, we are a single source.
Okay. Great. Thank you, sir. That's all from my side.
Thank you. The next question is from the line of Basudeb Banerjee from ICICI Securities. Please go ahead.
Yeah. Okay. Thanks, ma'am. Just continuing with the previous question, where you said for two-wheeler EVs, roughly INR 35,000-INR 37,000. That must be including the existing components which you are supplying to normal petrol models. Adjusting for that, how much one should look at for core EV, which is new per se, which were not supplied for petrol models?
I think in the calculation today, we have assumed. I would say. I think we've assumed around INR 6,000 for non-EV components. I would subtract from INR 38,000, INR 6,000, so around INR 32,000.
Okay. Understood. Sir, especially if I look at just standalone numbers, you know, if I missed something in the initial comments, where revenue sequentially is down with domestic two-wheeler market being weak. Your other expenses up almost 20% sequentially, and your interest outflow also moved up sharply to almost INR 29 crore, up almost INR 12 crore from previous quarter. I think these are the two line items which has largely resulted in PBT negative numbers. Anything one-off or how to look at them, sir?
Yeah. The finance cost is impacted by the FX exchange rate, mark-to-market thing we booked on intercompany loans. That's a notional cost, that's not a cash out. Part of it or most of it will revert as and when the exchange rate reverses. That-
How much is that, sir?
That is INR 21.8 crores for the quarter.
Okay, thanks.
Other expenses were also higher.
Hello.
The other expenses also were higher.
Oh, okay. Other expenses are number of things included in that. That includes certain legal costs we are incurring in fighting off some patent litigation, and some other costs included as well, plus some other operational costs, one-off, incurred in the VLS business because of the, let's say, supply disruptions on semiconductors and so on. It's a combination of multiple items.
This patent infringement or one-off VLS costs are accounted in standalone.
You are looking at-
He's talking about the India side, not VLS.
Oh, you are talking about the standalone. Okay. Standalone is mainly the legal costs and some other professional fee we had during the quarter. Yeah.
Almost, sir, I can see about INR 25 crore QOQ increase, which is on a base of INR 129 crore, is close to 16%-17%. How much one should look at as one-off in this number?
Standalone, if you're looking at the standalone financial statement, not in the presentation, then the mark-to-market loss on the exchange rate on intercompany loans is booked under other costs. It is not under finance costs.
Mm-hmm.
The finance costs went up because last quarter we issued non-convertible debentures of INR 375 crore.
Mm-hmm
Which was mainly to fund VLS for their liquidity requirements and some loan repayments. That is the one which contributed to a higher interest cost. It's mainly related to supporting VLS operations.
Standalone interest cost, there is nothing one-off, but how much one-off will be in the standalone other expense then?
Since I have to put a figure, I need to. Maybe. Exchange rate is INR 21.8 crore, which is another-
Yes. Yes.
Yeah. Other than that, I would think it could be about specifics, could be about the range of INR 3 crore-INR 4 crore. That's what I broadly remember, but I can check and confirm back to you later.
Okay. Broadly, INR 25 crore means QOQ it will be normal. That extra part is the one-off part of the fee.
Yeah.
In your results also, if you can explain about that patent infringement stuff where you also highlighted no provisioning for that, what is it all about, sir?
Yeah. On the patent infringement, basically, there are total of six cases which are going on overall. They're in different stages of hearing, et cetera, in the court. We had preliminary ruling in couple of those cases, which basically said we had to make certain disclosures in our supplies to customers regarding potential patent infringement and the risks associated. So far there has been no quantification or decision on any claim, either by the party who filed the claim or by the court. That is still open because we have contested the patents on prior art basis, which means those original patents granted to the other party were not valid because those were already widely and publicly known design information in the public domain.
Those claims have not still been decided. Those are still under adjudication by the court. Based on the legal opinion we have, currently, chances of, let's say successfully fighting off this is, let's say, reasonable and based on which, it's not possible to quantify any potential liability. That's why we not made any provision but just made a disclosure. There are more hearings coming up in the coming months, so where we will get a clear direction on trade as well.
How much has been the legal expenses for this in VLS, as you said?
In this case, probably we'd have spent something like, my guess is about EUR 1.5 million, something like that, over the last year or so.
Okay. Last question for Tarang sir. Like last quarter, you may also mention that, because VLS is like going so adverse for a prolonged period, so even you are envisaging if at all there is a good deal for VLS and it can get sold to some other global lighting makers. Any advancement on that angle, sir?
Here actually, like what our CFO just mentioned earlier. Here I think, you know, there has been expression of interest by, you know, a few parties or from the, also from the auto space, you know. We have been discussing with them, but we still have not received, you know, a binding offer yet. The process is on. Just to clarify that, see, we are absolutely open to a strategic investor for our lighting business because, for the simple reason that, you know, going forward, we do see that the semiconductor shortages will remain for at least nine months, you know, to one year. We also have to then, you know, invest money. We have to invest in the growth. There's CapEx involved, other things.
It's good to have probably at this stage, because already two years have gone during this COVID times and, you know, obviously the revenues have been disrupted. We already made a large amount of investments which still has to see that level of revenue coming still in, which will take probably to reach that kind of capacity utilization, what we expect probably will take another eight to nine months. Therefore, I think we had, like last time, you know, there was a little bit of a mention there that we are in, so we are looking at that and we are in discussions now. It's going to be
You're looking at partial stake sale or full sale as such?
No, it will be a kind of this thing. It won't be a full stake sale. It will be like a JV.
See, all those things are part of the discussion.
It won't be a full stake sale.
Which entity, which geographies, what percentage stake, all those things are, I mean, still open. We are discussing. It's too early to say whether it'll be a minority stake or a majority stake or whole of VLS business or part of VLS business, et cetera.
It also depends on the valuation, you know.
Yeah.
We'll have to decide based on that. There is a good amount of interest. That's all I can say. That's all we can say.
Basically standalone India business, if it's able to do some INR 5,000 crore revenue at 12% EBITDA margin, almost INR 500 crore of annual EBITDA, that will be good enough to suffice for the valuation where there will be no debt and if you hive off, the whole debt issue will also be gone. It will be a new growth part altogether. That, from that angle. As you rightly said, further three to four more quarters of lower production can continue to impact balance sheet. That will be the continued risk for us here.
Yeah.
Last question, sir. If you can highlight how to look at the sustainable tax rates down the line, because I can see so many comments on tax in this quarter result schedule. If you can explain it now.
Yeah, it's a good question actually. Because currently what's happening, the losses we are incurring in the newer entities, we are not able to, let's say, avail the deferred tax credit from those entities because they don't have an established profit record. Cumulatively, if I had to say as of end of December, I think we have unaccrued deferred tax assets of something like close to EUR 20 million, which technically we can accrue if there is. It's a kind of off-balance sheet asset, if you want to call it like that. That situation will continue for some more time till those entities reach the break-even point and they're getting consistent profits, let's say at least for four quarters, and after which we can accrue.
You may see in FY 2024 or something, a sudden, big deferred tax credit coming into the books, bigger amount once that happens.
Mm-hmm.
On a consistent basis, if taking into account the investment tax credit as well as the statutory tax rates at the different geographies, for VLS, we should have effective tax rate of between 18%-20%. That's what we expect. India obviously will be around 30%-35%, depending on the business, et cetera. Weighted average for the group, I would say is, let's say around 23%-25%, something like that.
By when India can come down to 25?
See, we are carrying some tax credits. Originally we would have kind of used up by now or a little later, but now that's also delayed because of the COVID and, you know, reduced profitability for last couple of years. Now we have to actually do the calculations again and see, but at least it'll be sometime in FY 2024. I expect we can switch over to the 25% region.
Okay. Thanks, sir. That's all.
Thank you.
Thank you.
Thank you. The next question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.
Sir, I think I missed, you talked about, definitely EUR 1 billion+ revenue in VLS next year. At that level of revenue, what kind of margin we can expect at EBITDA level in VLS?
I think it can be a high single digit.
Okay. How should we look at interest costs going ahead, because this debt reduction in this quarter as of December? How should we look at the consolidated interest cost from next quarter?
See, while the debt level we are trying to kind of stabilize and, once operating cash flow becomes strongly positive, which we hope will happen from Q1 next year, this quarter should be kind of break-even still or marginally positive. We can start consistently bringing down the debt. At the same time, we have to also refinance some of the existing borrowings, like discussed earlier in the call. These are coming up for renewal, et cetera. In all this will be a mixed impact, replacing some of the lower cost debts with the higher cost debts for the shorter term. You will see in absolute, finance cost for FY 2023 may not be very different from FY 2022. Okay?
The average debt amount may come down, but the cost, effective cost, the short run may go up somewhat. FY 2024 onwards is when you will see a sustained reduction kicking in, once we repay some of the higher cost debt and improve the mix as well as reduce the debt.
This quarter the interest cost was around INR 51-INR 52 crores. It will come down from that level, right, in the subsequent quarters?
See, if you are looking at the financial statements, whatever interest cost you are saying, that probably will continue. For the purpose of our analysis in the investor presentation, we reclassified some exchange loss into finance cost on the borrowings, which is explained with the notes, et cetera. That amount is not likely to continue. To that extent, you will see lower interest or finance cost going forward.
Okay.
Depending on the statement you are looking at.
Got it. Thank you.
Thank you. The next question is from the line of Nikhil Rungta from Nippon India Mutual Fund. Please go ahead.
Yeah, hi, sir. Thanks for my question. Sir, just one thing from my side. I mean, as a investor, we have seen it's almost eight quarters that we have posted losses now. When is it that we can start seeing company into the green?
I would say probably it'll be probably from Q1 of the next financial year that we can see a kind of a PAT positive, I'm talking on a PAT level, largely because of the higher revenues coming into the VLS business. Also because we will be getting by then a lot of our commodity prices, you know, which we have been incurring over the last five quarters, if not eight. There also we will see that has been compensated by most of our customers. Therefore, I see probably the Q1 of the next financial year to be a PAT positive. That means hopefully with the higher revenues, we are not making a PAT loss, you know.
You know, it's probably a smaller PAT loss, you know, in Q1 in VLS and India of course does a decent PAT. Overall, we see a small PAT positive in Q1.
Okay. Every quarter we have been seeing there is some or the other, I mean, if not one-off, then one-off type of thing. Last couple of years, you said continuing with COVID, auto slowdown, then we have semiconductor issue. Every time we have been impacted by the VLS part. As mentioned by a participant before, Basu specifically, why is it that we are looking for a JV in VLS? I mean, last year as well, we did a QIP, and I believe we have almost utilized the entire amount. Now again, we are looking for a JV partner.
Do you think we'll be in a position to turn around that business with the amount coming in, or won't it be better to hive it off and start focusing primarily only on the India business?
See, to be honest, frankly, I mean, the lighting business is a good business. You know, when we took the business, you know, if you may remember, it was in 2012, it was a very low EBITDA business, you know. With a lower level of revenues, we grew it. We doubled the revenues. You see, we increased the EBITDA from 3.8% when we took it to almost 9.5%, if we include China also, to 9.5% in the December 2019 quarter. The point was that over a period of time, we were able to improve the EBITDA. We could convert even some of the loss-making plants to profitability like Mexico and India at that point of time when we took it over.
That's the reason we were betting, you know, we looked at market share growth in this business. The customers also give a thumbs up because we were doing a good job, you know, in this business. It's just that, okay, I mean, you know, we had not anticipated the virus to be there. You know, the virus, it was a situation which coincided with our heavy investment in the lighting business. That's where we have been navigating this problem for the last two years. We thought, okay, that, you know, there was this shutdown in FY 2021, and then there was a V-shaped recovery. We did not realize the extent of the semiconductor problem. We didn't expect the shortage to be there to such an extent, you know, that it would again.
It's not that we don't believe in the business. This business will definitely turn around. It's only that we need the revenues. We need the revenues. You know, that's primary. Secondly, now we're getting back all the, I mean, the cost we've incurred on material back also from this January. You know, from at least the majority of the customers. Thirdly, we are also now looking at, you know, the Project Race, where we are trying to look at improving our site operations. We're looking at overhead controls and also control of other costs, you know, including even material costs, there are opportunities, you know. We're looking at plus also design to cost.
We're looking at also designs, you know, which can be more optimized. This business is a profitable business. You cannot do anything, you know, without revenues. You need revenues, you know. You can't just save yourself out of trouble. You need to sell. You need to sell yourself, you know. You need sales, you know, to come out of a crisis. You cannot just go through savings. That's where has been the major problem in the last nine months. We see the revenues now, you know, going up, like I said, by 10%-12% already in January. We see that this will sustain in every quarter. We are hoping for a better revenue. The revenue will only stabilize probably by December of, you know, this thing, 2022.
That's the way we see it. Therefore, we said that, look, we should still be there, and we should get in a strong partner, where together we can see how to look at strengthening this business, you know, also going forward. Let's see how it pans out. I mean, we will see how it pans out. We are already in discussions. Let us see how it pans out in the end. We will take the best decision for the company, you know, for Varroc in the end.
Okay. Sir, just to continue from your comments, the last qualitative question from my side. You mentioned that the lighting, VLS lighting is a good business to be in. Is it a good business from the perspective of customer and the management, or do you really think it's good from the shareholder perspective as well?
No, I think it is a good for a shareholder. I think it's a profitable business. It is unfortunate that, you know, we are in this situation. You know, this was not what we had envisaged, you know, to be honest. Like I said, it coincided with a CapEx cycle, you know, in the six new facilities and INR 2,000 crore investment. The problem here was that actually, you know, we have a lot of underutilization in our new plants and then commodity prices. A lot of things have come together, and that's why we've been navigating this, you know, in a business which is a profitable business. So I feel that this business is good for investors. It is not
It is good for the shareholders, it's good for the investors. It is a good business, you know. Yes, I mean, honestly, yes, but we have to be a little bit prudent because of so many uncertainties around. It's good to have a partner, at least, you know. That we realized that alone, running a global business, you know, and in current times where, you know, you can't predict, you know, the external environment so well, semiconductors or other issues. You know, so it's good to have a partner, and I think that today, I think we're anyway working on our costs and also on our pricing, on our designs. With all this, I think this can be a stable business going forward, you know.
I am quite comfortable in remaining in this business, for sure.
Sure. That's all from my side. Thanks for answering my questions. Thank you so much, sir.
Thank you. As there are no further questions, I would now like to hand the conference over to Mr. Tarang Jain for closing comments.
Yes, thank you. I think we were able to answer, you know, the questions both around our lighting business and also the India business. I think now we see after a couple of years, India, of course, has been quite stable in its results, you know, over the last couple of years. When it comes to lighting business, yes, there has been a lot of navigating to do, a lot of ups and downs we have seen in the last couple of years. Now we see definitely the light at the end of the tunnel, where we see that the chip shortages are getting better. You know, the availability is getting better. I'm not saying it's still there.
I think that today, I mean, with, like the three things, improved volumes, you know, getting back the prices on the commodity inflation, and thirdly, our Project Race. We are looking at optimizing our costs at a plant level as well as, you know, our overheads. With all these actions, I'm pretty confident that going forward, that our lighting business will first, you know, generate positive cash profits, and then, of course, positive PAT as we go along over the next nine months to one year. I would say, don't lose the confidence, you know, in Varroc and especially in our lighting business. I think you will see improved results quarter-on-quarter as we go along. Thank you.
Thank you. On behalf of Varroc Engineering, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.