Ladies and gentlemen, good day and welcome to Q2 and H1 FY25 earnings conference call of Varroc Engineering Limited, hosted by Investec Capital Services. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aditya Jhawar from Investec. Thank you, and over to you.
Yeah, thank you. Good evening to you all. From Varroc Engineering, we have with us Mr. Tarang Jain, Chairman and Managing Director, Mr. Arjun Jain, Full-Time Director and CEO of BD-I, Mr. Dhruv Jain, CEO of Business Unit 2, Mr. Mahendra Kumar, Group CFO, and Mr. Bikash Dugar, Head Investor Relations. We started the call with a brief opening comment from the management, followed by Q&A session. I would now like to invite Mr. Tarang Jain for the opening remarks. Thank you, and over to you, Tarang.
Thank you, Aditya, and thank you, Team Investec, for hosting the call, and a good evening to everyone who has joined the call. To start with, the India GDP growth for Q1 of FY25 was at 6.7%. This was lower than the earlier projections given by the RBI and lower than the growth levels of the previous few quarters. While urban consumption is down, rural consumption has been improving during the financial year. It's also reflected in the good growth seen in the two-wheeler industry. During Q2 of FY25, the two-wheeler and three-wheeler segments registered good growth. However, the passenger cars and the commercial vehicles remained challenged on a year-on-year basis. Two-wheelers grew by 12.5%, three-wheelers grew by 6.3%, passenger vehicles degrew by 0.7%, and the commercial vehicles degrew by 13.3%.
However, on a quarter-on-quarter basis, we saw growth in almost all segments other than commercial vehicles due to the early festive season. The two-wheelers grew here by 6.8%, three-wheelers grew by 29.3%, passenger vehicles grew by 5.7%, and the commercial vehicles degrew by 5.2%. De-stocking by dealers before Euro 5+ and lack of growth driven by lower consumption is impacting the European and the American two-wheeler market. In the Asian region, the growth was largely driven by low-end segments, and the premium segment continues to struggle for growth in this region. During Q2 of FY25, the company has registered a revenue of INR 20,808 million, with a growth of 10.3% year-on-year. The India business reported a growth of 13.4%. The profit before tax for the company was at 4.4% for Q2 FY25 due to the positive operating leverage seen in the India operations.
The consolidated profitability remains impacted by degrowth in the overseas businesses, R&D spending, and overseas operations for future growth. On a quarter-on-quarter basis, the company reported improvement all round. The revenue on quarter-on-quarter grew by 9.6%, the EBITDA margin improved by 60 basis points, and the PBT margin by 150 basis points. The company balance sheet continues to strengthen along with improvements in the return ratios. The net debt of the company in first half of FY25 reduced by INR 1,554 million, and net debt to equity has reduced to 0.5x at the end of first half of FY25 from 0.64x at the end of FY24. The absolute net debt figure is INR 8,273 million. The annualized return on capital employed at the end of first half of FY25 stood at 19%. The CAPEX spent in first half of '25 was INR 1,030 million.
The CapEx spending in first half of FY25 will increase, driven by the need for additional SMT lines for electronics and the increased EV capacity needed. We are also investing in land in southern and western parts of India for future growth. As indicated earlier, we are working on various initiatives to drive cost reductions across several categories of costs, with special focus on fixed costs. Some of these measures have already started showing impact on our bottom line, but most of them will fully get reflected by Q4 of FY25. We have also rationalized headcount levels across businesses and functions. We continue to look at avenues to make the organization more lean, nimble, and agile, and to increase speed in decision-making. The order book for first half of FY25 continues to remain healthy, and we continue to build the order book in both India and the overseas business.
the first half of FY25, we have achieved net new business wins with annualized peak revenues of INR 6,046 million. The order book from EV models constitutes more than 37% of these wins. In the first half, we added various new age technological advanced product portfolios in our business. We started the production of integrated starter generators and soft-touch door panels for Mahindra, whereas we won business for battery management systems for electric vehicles, thus further increasing our content in the electric vehicle space. We also won business for interior ambient lighting from a global player, which helps in increasing our offering for four-wheeler vehicles.
We will continue to innovate by further strengthening our engineering capabilities, streamlining our operations to further cost reductions, and working capital optimization. Our endeavor will remain to expand our presence through focused products to drive sustainable growth and deliver value to our shareholders.
Beyond business, we continue to focus on various ESG aspects to make the organization more sustainable. We have published our first sustainability report, which can be accessed on our website. Our efforts towards giving back to society are also being recognized. The Kham River Restoration in Aurangabad was recognized by the WRI Ross Center for Sustainable Cities as one of the top five finalists globally for their prestigious award. This project also received a globally recognized prestigious award, the St. Andrews Prize for the Environment. With this, I will now ask MK, our Group CFO, to walk you through the presentation and give more insights into the financial performance. We have uploaded the investor presentation to the stock exchanges as well as on the website. Over to you.
Thank you, Tarang. Good evening, everybody. Let me take you to the highlights. Most of these points have been highlighted by your chairman already. Basically, we had a revenue growth of 10.3% in Q2, but India business registered a strong growth of 13.4%. Profitability was at 4.4% at PBT level during Q2, versus 3.9% last year. EBITDA came in at 9.7%, marginally lower from 9.9%, which we saw last year. The net debt reduction journey continued, so we brought it down to INR 827 crores now by the end of last quarter. In terms of lifetime orders, the cumulative H1 FY25 lifetime orders were INR 32.5 billion, which has the potential of annual peak revenue of INR 6 billion. And more than 37% of the business is related to the EV vehicles. The other highlights, of course, our chairman covered already.
I just want to bring your attention to the new products which we listed out here. These are the four new products which we are working on and which are going to give us the future growth potential. This is basically the interior ambient lighting, soft-touch door panel, battery management system, and an ISG, which is integrated starter generator. Going to the next slide, which is about the industry trend. You really see the trend by segment. Year-over-year, two-wheelers grew by 12.5% during second quarter. Three-wheelers also registered a growth of single digits, 6.3%. Passenger vehicles and commercial vehicles had a degrowth.
Passenger vehicles degrew by 0.7% and commercial vehicles by 13.3%. However, on quarter-on-quarter basis, two-wheelers grew by close to 7%, 6.8%. Three-wheelers by strong 29.3%. Passenger vehicles grew by about 5.7%, and commercial vehicles had a degrowth. EV two-wheeler volumes on quarter-on-quarter grew by almost 74%.
So those are the highlights. In terms of H1, again, two-wheelers grew by about 15.8%, three-wheelers by 7.6%, passenger vehicles by 2.4%. Coming to the financials, there's 10.3% growth in top line we talked about already. So this resulted in a 4.4% PBT for us. Indian operations, of course, grew by 13.4%. The profitability, of course, registered a significant growth compared to sequential quarter. Compared to Q1, the PBT went up by 62%. And compared to the same period last year, the PBT went up by about 23%. So these are the significant growth numbers which we could see in the profit levels. And if you really look at the H1 in total, all of you know that in Q1 we had some challenges in terms of the overall growth.
H1 growth came in at about 7.8%, PBT at 3.7%, more or less similar to what it was last year. Indian operations in total, of course, grew by about 12.4%. On the next slide, we talked about the consolidated ratios and the balance sheet numbers. The net debt came down to INR 827 crores, equity of INR 1,640 crores. Some of you may remember that about two years ago, after the divestment, it was the other way. We had debt of close to 1,500 plus crores, and EBITDA was close to about INR 800 crores. It actually now shifted the other way. That's a significant development. Net debt to equity is now very comfortable at 0.5, and net debt to EBITDA is at 1.11 based on the annualized EBITDA level. Return on capital employed is also strong at around 19%. The next slide, we get the revenue breakdown.
We give the breakup by business unit and also by segment and customer and geography. By segment, if you really look, 75% comes from two-wheelers and three-wheelers now, and India revenue is close to about 88% of the total. Bajaj revenue, of course, strengthened from 40.6% to 45.3%, mainly because of the increase in EV business. On the new lifetime order win, of course, we discussed this already. It's about INR 32 billion, giving us a 6 billion of annual peak revenue potential. The lifetime revenue breakup, if you really see, two-wheeler and three-wheeler constitute about close to 46% of the total, and Bajaj at 47%, and interestingly, the EV part of the overall order intake is close to 37%. On the next couple of slides, we explain what these new products are all about.
Then finally, we also gave some pictures of the new or additional CapEx which we are going to spend, basically for growth. We are going to invest in SMT lines to take the numbers from 10 to 15 to basically meet our demand for electronics. We are also expanding an existing plant to cater to the additional demand of EVs. We are also acquiring land both in South India and also in West India to further strengthen our relationship with a couple of OEMs to cater to their requirements. That's broadly what it is. In the subsequent slides, of course, we explain the business, each business separately. Let me stop here, and then we can take questions. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone 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. We'll take a first question from the line of Arvind Sharma fro m Citi. Please go ahead.
Yeah, thank you, sir. Taking my question. First question would be on the gross margin in this quarter, or slightly on the weaker side quarter on quarter. So, any specific reason for that?
Yeah, I think there is a couple of reasons. I think firstly in EVs, we've had a change in our sales model to the customer, which has contributed to the gross—which has contributed notionally to gross margin increase. And then further, I think there's also been a level of mixed impact. And there are also some resin-related lags in our RM pricing or in resin-related RM parts and lags.
Got it. So is it going to stay at these levels, or going forward, there could be a normalization, like an improvement in gross margin?
So the resin will, of course, normalize, but the notional impact in RMI due to the sales model to the customer, that is here to stay. But that does not impact the bottom line per se. It's only notional in the gross margin.
There's no impact on the absolute number. There's only the percentage which will look different.
Got it. Thank you, sir. The second question would be on your outlook going forward. Which segments are the ones where you believe that there could be significant growth?
So I think what we see in Q2 is the programs that we had already, or the businesses that we had already SOPed, and in particular in EV, are now seeing volume expansion, which is starting to, which is starting to flow into our revenue. And I think that is a trend that will only continue and strengthen. Further, the order book that we have declared, I think the program launches are also now taking place. And this is really across segments, across two-wheeler and passenger car both. And I think that's also reflected in some of the businesses and SOPs that we've talked about, even in terms of new technology. So I would say it's a mix. I would say it's a mix between two-wheelers and passenger car. But yeah, I think the order book is translating into, the order book translates into real revenue now.
But if you talk about the segments, of course, as you know, lighting is a very big segment. All around, lighting will, of course, see with this two-wheeler, and four-wheeler lighting will see a strong growth. Also on the plastic molding side, whether it's two-wheeler and the four-wheeler side. And like what Arjun mentioned, the EV side will see a growing momentum. All the EV powertrain and non-powertrain parts for two and three-wheelers, especially, will see also quite a high growth in electronics in general. So therefore, we were looking also earlier at investments coming in next year. But we had to prepone some of the investments for our EV motors as well as for a lot of the electronics. So we are now preponing a lot of the CAPEX in this regard now to at least six months earlier. So which is a good sign for future growth.
Got it, sir. And just if I may ask on the tax part, the tax rate was quite high. So any specific reason for that in this quarter? And what should be the normalized tax rate for second half and FY26?
Yeah. So there are a couple of reasons here. One is, of course, on some of these overseas businesses where we are actually incurring some losses, we haven't recognized the deferred tax asset as of now because we need to see the turnaround to actually get that confidence and give that confidence to the auditors. So once we do that, that will get corrected. But otherwise, it is the normal thing only. Going forward, the stable effective tax rate could be in the range of around 27%.
Thank you. Thank you so much. That's all from my side. Thank you.
Thank you. Before we take the next question, we'd like to remind participants to ask a question. Please press star and one on your phone. We'll take our next question from the line of Aditya Jhawar from Investec. Please go ahead.
Yeah. Thanks for the opportunity. A few questions here. On the new business wins, for example, the BMS order win, can you talk a little bit more about it? Did you mention it is for M&M number one?
No. It's for two-wheeler customers.
This new BMS win is for a two-wheeler customer. So if you can, Arjun, if you can elaborate whether it's a new OEM, existing customer, incumbent, and how do you see volume ramp up on this?
It is an existing customer. So it is an order, and it will be quite a large volume going forward, but it's from an existing customer.
Okay. Okay. Fair enough. Similarly, for this interior ambient lighting order win, if you can talk a little bit about, is it a domestic customer, overseas customer, and how do you see it ramping up? Do we need to set up a separate facility, or will it be catered by existing facility?
This, I think, Dhruv will explain, but this is, of course, for our overseas business. It's for our overseas electronics plant in Romania. It is from an American customer, but I think maybe Dhruv, you can elaborate a little bit on that.
Yes, so I think just to add to what my colleague just said, so this is for a North American EV customer, and this would be serviced out of our Timisoara electronics plant, and we're expecting the SOP in 2026.
Okay. Any major CAPEX or anything over there in this regard?
Yes. So there'll be no in terms of any specific CapEx. This is also reimbursed by the customer.
Okay. Okay. Fair enough. And Tarang, you mentioned that there is some acceleration in CapEx that you have planned in the second half of the year. So for FY25, what would be the total quantum? And additionally, if you can talk about what would be the CapEx in FY26 as well?
So basically, I think we had given a guideline, and we were trying to also, obviously, be more careful on the CapEx, milk our existing assets. So we had given a guideline of INR 200 crores. But I think seeing this that we are investing now and including on the land also, so this could go up to this year, INR 260-270 crores. And next year also, I think definitely we will try to see that it is around 200, but it could also, depending on the growth. And we are quite aggressive now on new sales wins. So there, again, it could go up to 260, 270 next year also because we don't want to lose any opportunities in the marketplace at present.
Okay. Okay. Fair enough. And one question for MK. Clearly, I think debt reduction is going as per plan. Very, very encouraging to see that. So is there any target in mind for the second half of the year? And you have set a target for debt for FY26?
Yeah. I mean, internally, we have aggressive targets, but I think we should end this year with maybe around INR 700 crores or INR 700-INR 750 crores is what is possible. But we are trying to do something more than that also. But certain things need to fall in place.
Okay. Okay. Fair enough. A final question to Arjun. Arjun, if you can talk a little bit about this new product of your integrated starter motor, what kind of order visibility we have and engagement with customers? And how do you see volume ramp up? Is it one customer, multiple customers you are engaging with on this product right now?
So for one customer, we've already SOPed two models, and we have business win from a further customer as well. And I would say we are engaged in discussion and in prototyping activity with two more customers.
Okay. And if you can get some color on whether it is incumbent, existing customer, new-age customers?
So this is a nice. This is essentially an integration of the magneto, the starter motor, and the armature. So these customers are generally the traditional OEMs. And we supply the, let's say, older version of technology to practically every OEM in the country. So everything is to an existing OEM only. But just to elaborate, I think, let's say Arjun is talking about at least engagement with four customers, and we've already SOPed with one. And the other three also will happen going forward. So two for us, I mean, so two could be. You could say could also be a partial replacement where we are already supplying magnetos and starter motors and armatures. But two are entirely an additional business where we don't supply a magneto or a starter motor or an armature. So two will be totally additional.
So that will give us an additional revenue stream, and it won't be a replacement.
Okay. Okay. Fair enough. My final question, Tarang, is there any update on arbitration proceedings in China? And was there any arbitration costs that you have incurred in this quarter?
So I think the arbitration costs virtually is minimal because all this arbitration is now kind of closed. Now we are just awaiting the final kind of this thing, the verdict from the tribunal in Singapore. And in fact, it has been delayed. But now what we understand is that hopefully this month itself, before the end of the month, we should be able to get a verdict, or it could spill into probably December. But in any case, we have been told it will not pass December 31st. But the signs are that we could get it at an early date now. And once that is done, there'll be a lot of clarity on China, how to move forward in a more clear manner.
Okay. That's good to know. So I'll fall back in queue.
Yeah. Thank you.
Thank you. We'll take our next question from the line of Vinay Pandey from Nuvama. Please go ahead.
Hi. Thank you for taking my questions and congratulations on successful order closure. I have two questions. One was on the order book. So as per the presentation, the order book points to 22,000 CR revenue in FY27. So is it like your expectation, or is it like a lifetime order? How should we think about it?
But is it not 22,000? This is 22,000 million.
Sorry, sir. Can you speak a bit louder, please?
It's not INR 22,000 crores. It's INR 22,000 million. So it's INR 2,200 crores, and the way to read that and it is over the FY24 level.
Exactly.
And that is the annual incremental over the FY24 closure level. So it's not lifetime. It's annual.
Okay. Okay. Okay. So there was one more thing I wanted to check on the luxury part. You said in your opening remarks that the luxury in ASEAN is on a weaker side. How much should we think about in terms of revenue or in terms of exposure? Is it less than 10%? Is it around 5%? Or if you can give a bit of idea on that, that will be helpful.
So overseas business, Arjun, for two-wheeler lighting is less than 5%. And out of that, when we talk about the customer who is into this luxury two-wheeler segment, they contribute less than 50% of our sales. So that segment is getting impacted because the sales in the ASEAN region of the luxury scooters are less as compared to the mass segment vehicle sales. So overall, less than 2-3%.
Okay. Thanks.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. Next question is from the line of Vishal S. from Swan Investments. Please go ahead.
Thank you for taking my question, sir, and congrats on a decent set of numbers. Sir, my question is regarding the top-line increase we have seen quarter on quarter from INR 1,900 to INR 2,100 crores, which is a healthy growth. But in terms of other expenses and employee expenses, have remained to the similar levels of the last quarter. So just wanted to clarify, is this a one-off benefit here? And gradually going forward next quarter, there will be an increase from here on? That is my first question, sir.
Yeah. So in terms of other expenses, in Q1, we had certain professional consultancy expenses which have come down now. So it should more or less continue at this level as a percentage of revenue. And then employee expenses, it should only get better.
Okay. Sir, my next question is regarding our share of business from Bajaj. If you see, year on year, it has grown almost around 23%-24% odd. But except for Bajaj, the other customers, it has remained almost on a flattest trajectory year on year. So how do we see this going forward? Because when I see the order book and the trajectory has been increasing, the share of non-Bajaj is close to around 50%-53%. And this has been every quarter in the presentation which you publish, it has been increasing. So when this number will start reflecting on the overall top line?
From a timing perspective, and especially given how dynamic the market has been, I think it's hard to, let's say, predict an exact FY when we will see some dramatic change in the Bajaj percentages. And even if we look at the business win ratio, Bajaj is a significant portion of that. So today, I think the way we think about it is the business win and the execution of the business win is far more important than really the customer's prediction. And based on timing, based on how different markets perform, whether it's two-wheeler, ICE products, two-wheeler, EV products, how different subsegments in the market perform, how passenger car performs, those percentages can change significantly. Yeah. And also it's because the EV content is pretty high.
As EVs become more and more prominent, obviously, the Bajaj percentage will go up. It's not because we have started taking less from others. It's genuinely because of the change in the EV penetration.
Correct. Okay. I was coming to this question because I just needed a clarification whether there has been some market share loss, one, or there has been some deferment or delay in the new launches from the non-Bajaj customers, which has resulted in this flattest trajectory. Just that clarification I wanted from you.
There is no market share loss, for sure. I think, but again, like I said, it's a timing topic, right? If you look at this quarter, our sale into EV models is 12%, right? Which is materially higher than any quarter before that, and of course, the last portion of that goes to Bajaj, which means that their weight in our mix increases. Tomorrow, for example, if passenger cars start to do better, we will see maybe a reduction in that. Maybe we'll see a reduction in the Bajaj weight, but directionally, this is a mix that will broadly, if market continues to perform the way it is, it will stay and it will evolve in line with the percentages that we are forecasting based on our business wins.
But tomorrow, two-wheeler EV dramatically increases in size, of course, the Bajaj weight will be continued.
Perfect sense. Sir, my last question is regarding just wanted to clarify INR 700 crore debt you mentioned for FY25 as a target, is it the number of net debt or gross debt?
Yeah, net debt. It can be better also, but there are certain things which need to fall in place. We need to also collect some government incentives and all from the government. So if all that falls in place, it can be better than that. But as of now, to be on the safe side, that's the target we are mentioning.
Perfect, sir. Perfect, and all the best to the team, sir. Thank you.
Thank you.
Thank you. We'll take our next question from the line of Iqbal Khan from ICICI Prudential Life Insurance. Please go ahead.
Yeah. Hi, sir. Just wanted to understand about your new.
Can you use your hands a bit more, please? Your audio is not very clear.
Is it better now?
Yes. Please go ahead.
Yeah. Hi, sir. Sir, just wanted to understand from your order win perspective, around 37% of it is from EVs, right? So can you please elaborate on what all products are there and what is the market size of those products? And how much is Bajaj or how much is non-Bajaj or if it? Yeah. So just wanted to get more clarity and sense on this EV products, new order win. When we say EV customers, so these are also we spoke about the interior lighting business, which we have got from US-based EV four-wheeler player. That is one thing. Then there are four-wheeler customers in India also, especially for their polymer parts. They'll be supplying them starting this year. So that is also there. And yes, there are incumbent two-wheeler EV players to whom we will start supplying BMS. So that is also part of this.
All right. All right.
And just one last about the net debt, you mentioned that INR 700-750 crores of net debt by the end of this year. Is this what I heard is correct?
Yeah. Yeah. That's right.
It will be from your internal cash generation, right? I mean, nothing off or is there any other way you're planning to reduce it?
No, no. It's through internal generation only.
Okay. Fair enough. Thank you, sir. I'll stand with you.
Thank you. We'll take our next question from the line of Jay Prakash, an individual investor. Please go ahead.
Good evening to all. Thank you for taking my question. My question to the management is that since March 2018, I mean, last four years, there was no reward for the individual investors. Despite there is a growth in your top line as well as near bottom line also. Whether you have any discussion or you are focused on rewarding the investors, there is no dividend, there is no buyback, anything. That is my question.
Okay. So yeah. Thanks for the question. So as of now, like how we communicated earlier also, we are first focusing on strengthening the balance sheet and reducing the debt. And at the same time, we are also giving importance to growth. So if these two happen anyway, the benefit will flow to the investors indirectly in terms of the value enhancement. But having said that, yes, at some point in time, we will discuss this at board level on when to declare dividends, and we will start that.
Thank you.
Thank you. Before we take the next question, we'd like to remind participants to press star and one to ask a question. Next question is from the line of Pawan from Geojit. Please go ahead.
Yeah. Hi, sir. Just a couple of questions. With more and more EV business, how should you think about margins for this part of the business? Is it different from the existing business or?
It's more or less similar to the existing business. It won't be very different.
Okay. So from current level, how should you think about margins for next, say, one or two, three years?
We don't give that kind of guidance, but definitely the operating leverage should definitely help us as we continue to grow our business, particularly in the EV segment. So that itself should help us. On top of that, we are also looking at various cost reduction initiatives. Like how our chairman explained in his speech, most of these will start showing results from Q4 onwards. So it should get better from the current levels. That's where we stop.
Okay, and in terms of revenue growth, sir, if you could give any color going ahead?
See, revenue. Our stated position is definitely our effort is that we want to be at least 6%-8% more than the market growth. We understand that that's not happened at the moment so far. But I think going forward, that is the direction we have that because we place the most importance to revenue growth. So growth is definitely on top of our minds. Besides the other initiatives we are anyway taking, so this is something we will keep driving. And then we are seeing a good amount of success also when it comes to new business wins and engagement with various customers. Again, please don't take it as the future guidance. Yeah. And one more thing we'd like to remind all of you is, yeah, we also talked about these overseas challenges, which will take some time to stabilize. Yeah. So.
Yeah. But almost 85%-90% of the business is domestic. So sir, I mean, my question is that whatever orders we've won in last few quarters, does it give a visibility that we can achieve this industry higher, 6%-8% higher than industry growth for FY26?
Yeah. Yes. It does. It does.
Oh, great. Great. Thank you, sir. All the best.
Thank you. We'll take our next question from the line of Rohan Vora from Envision Capital. Please go ahead.
Hello. Thank you for the opportunity. Just one question was the CAPEX that we've put, so some color on what are the products where we are seeing interesting demand trends and what is the current capacity utilization for those products, so around that. Thank you.
So like we've displayed, the capacity constraints we face are on electronics and in particular PCB assembly. This goes into many products, right? So that is where we need to drive capacity expansion, and we're driving significant capacity expansion there. And the other one is in terms of the EV product lines where we also now face the need to expand capacities.
And also on the painting business and all.
Yeah. And sorry. And the third one is in terms of painting.
Okay. And then.
In particular for the northern region.
For the northern customers.
Understood. Understood. And sir, in case of PCB assembly, so what is the current utilization and how long can the current capacity support before the new CAPEX comes in?
At this point, for PCB assembly, we are fully utilized, which is why we are driving the capacity expansion.
Understood. Understood. Thank you, sir.
Thank you. We'll take our next question from the line of Vinay Pandey from Nuvama. Please go ahead.
Hi. Thanks for another question. Just want to check on the if you can give us an idea about the content for EV and ICE for your products that.
Sorry. Can you repeat the question?
If you can give us an idea about the content for?
To use your hands a bit more.
Hello?
Yeah. Please go ahead.
Yeah. If you can give a little bit of idea on the content for electric vehicles and ICE given such a big order from electric vehicles.
If you look at if I compare the EV models with the 125cc vehicle, so the content on an average with our incumbent customer in two-wheeler ICE for 125cc, it will be around INR 4,000-INR 5,000 per vehicle. Whereas for EV, it will be around INR 25,000-INR 30,000 content per vehicle. So that's around 5 to 6x of the ICE content.
Okay. But the margin is broadly similar for both EV and ICE components, right?
Yeah. Comparable.
Okay. Okay. Thank you.
Thank you. We'll take our next question from the line of Nishant from Geojit. Please go ahead.
Yeah. Hi. Am I audible?
Yes. Please go ahead.
Yeah. Hi. Thank you for taking my question. So firstly, I think you already mentioned about some startup costs related to the new plants that were coming up in Maharashtra. So could you just help us understand, I mean, where are I mean, those costs still reflected in Q2 and how they would be going ahead?
Yes. I think we are at a place of far more stability now versus Q1. However, of course, there is always room for improvement across all operations. But yeah, I mean, in all seriousness, we are definitely past the initial startup cost now.
Okay. Any number that you could put around, I mean, what percentage of?
If it's a fix, as Arjun pointed out, it's getting better, certainly.
Okay. Thanks. And secondly, I think there's some notional impact on gross margin that was mentioned earlier by Arjun. Could you just expand a little bit? I mean, I didn't get that part clearly.
So the notional impact is, previously in one of our foreign plants, we were selling X material. So the material cost was not part of the price. There was no material cost in the price. However, the customer has changed the model now. So the material cost is now once again a part of the price. So earlier, we were only getting the conversion cost. Now, both material is part of the cost, and the corresponding revenue is also part of the revenue. So it's only for one of our major customers in that plant, in that forging plant.
Okay. So the arithmetical impact, both numerator and denominator.
Sorry?
Sorry. So that had some negative impact on our gross margin?
Yeah. It's purely arithmetic. Both numerator and denominator, if they go up by the same number, you'll have some impact on the percentage.
Okay. Okay. Fair enough. And lastly, if you can just help me with what would be our average interest rate on the debt side?
See, right now it's around 9%.
Okay. Okay. Thank you. Thank you so much.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. We'll take our next question from the line of Shridhar Kallani from Axis Securities. Please go ahead.
Good evening. Thank you for the opportunity. So kindly pardon me, I was a little late to join the call. On the EBITDA front, on the standalone basis, we can see that we have almost clocked 11.4-11.5%, but on a consolidated basis, it is lower than 10%. Now, I understand that there was some gross margin impact on your international business. Just wanted to understand if there is anything else that has impacted the margins in the European business, and what steps are we taking to improve the same. This is my first question.
Yeah. I think Arjun explained it earlier. Maybe you weren't there at the time. So there are two factors here which happened. One, of course, there was some change in the mix of businesses. Plus, there was also some lag in recovering some of the inflation cost in terms of input cost, which should get corrected over a period of time. The second part is the arithmetic part, which we just explained.
Understood. So currently, the EBITDA margin is, I think, in low single digits for your European business.
Yeah. So I think we should look at it at the consolidated level. So consolidated level gives the right picture. So yeah, so that's where it is now. Should get better going forward.
All right. And on the tax front, you had mentioned that this is a one-time deferred tax expense, right?
No, no, no. See, the deferred tax asset, which we created end of last year, will have to be recognized or taken to the P&L every quarter or every month, rather. So that is the impact which you see in the deferred tax line item. On top of that, where we are losing money or where we're incurring loss in some of these overseas operations, we haven't recognized the tax benefit on those losses as a deferred tax asset because that requires a strong confirmation that the future is going to be highly profitable to recover those losses. So once that confidence comes in, we will certainly recognize that particular asset also. So right now, it's on conservative basis.
So the auditors have not disallowed recognizing the DTA because of low visibility. Is the understanding correct?
No, it's not disallowing or anything. We also did not take it because we also wanted to see that positive news coming in, and then we'll start recognizing it.
Understood. Understood. Thank you so much.
Thank you.
Thank you. Ladies and gentlemen, to ask a question, please press star and one on your phone. We have a question from the line of Praveen from Kotak Securities. Please go ahead.
Hi, Team. Thank you for the opportunity. I just have one question. So in your notes, it mentioned that the company received an order from GST for appropriation of GST duty rate to a tune of 63 cores.
Praveen, can you use your handset mode, please?
Yeah. I'm using my handset. Is it better now? Can you hear me?
Sound a bit louder?
Yeah. Is it better now?
Yeah. Yeah.
Yes. Please go ahead.
Yeah. I was just referring to the footnotes that the order that you got from GST rate pertaining to GST dues. If you can throw some color while the company is planning to contest for the penalty and the interest rate in the court, but what will be the likely impact in 3Q?
We don't expect any near-term impact here because the base duty has been paid already, so that is settled. The dispute is only about the interest and the penalty. And this is an industry-wide issue, not just pertaining to us alone. So there is a classification confusion which got created because of the inadequate explanation in the tariff codes, which is being contested by many participants of the industry. So we will take the legal recourse for this, and once that issue is settled, this will get settled. But we don't see any immediate or near-term impact because of this.
Okay, but the 63%, whatever is paid, it will be recognized in the third quarter, right?
No, no. That is already done. I mean, it is basically the GST, which we are recovering from customer, and customers are taking credit. So there's nothing to be further recognized on the 63%.
Understood. Thank you so much.
Only the interest and penalty, which is under discussion.
Okay. Understood.
Thank you. We'll take our next question from the line of Ashwini Agarwal from Demeter Advisors LLP. Please go ahead.
Hi. Good evening.
Hi. Good evening.
Ashwini, unable to hear you.
Mining equipment and construction machinery business. You had hoped for an improvement in the outlook there. Are you seeing any green shoots there?
Can you please repeat it? I want to hear you. We lost you in the beginning.
What I'm saying is that one of your European subsidiaries has an exposure to earth-moving equipment and construction machinery business, right?
Absolutely.
Are you seeing any improvement in the outlook there? Because you were hoping to see some turn there.
Yeah. So here with this company, we are definitely very strongly engaged for getting more business from them. So they're a large customer. So the discussions are on there, and we are hopeful that we will win some more business on an immediate basis. So those discussions are on with this customer already. And we are hoping that we are able to win some additional business from this customer.
Okay. But nothing visible right now?
Nothing has been clarified. We know what is possible, and that's what we are discussing on but till it's confirmed, we cannot say anything.
Okay. All right. Thanks. All the best. That's all from my side.
Thank you.
Thank you. Ladies and gentlemen, we'll take that as a last question for today. I will now pass around the conference over to management for closing comments. Over to you.
So thank you once again to all for joining this call and for your continuing support. See you again in the next quarter.
Thank you, management members, of the management team. On behalf of Investec Capital Services, that concludes this conference. Thank you for joining us, and you may now disconnect your line.