Ladies and gentlemen, good day and welcome to the Varroc Engineering Q3 FY 2025 earnings 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 an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Mihir Vora from Equirus Securities. Thank you and over to you, sir.
Yeah, thank you. So good afternoon to you all. From Varroc Engineering, we have with us Mr. Tarang Jain, Chairman and Managing Director, Mr. Arjun Jain, Whole Time Director and CEO of Business Unit One, Mr. Dhruv Jain, Whole Time Director and CEO of Business Unit Two, Mr. Mahendra Kumar, Group CFO, and Bikash Dugar, Head, IR and Finance Controller of Business Unit Two. We'll start the call with brief opening remarks from the management, followed by the Q&A session. I would now like to invite Mr. Tarang Jain for the opening remarks. Thank you and over to you, sir.
Yeah, thank you, Mihir. Tarang Jain here. Thank you to Team Equirus for hosting the call and a good evening to everyone. The Indian GDP has slowed down a little as compared to the last year, but still remains strong as compared to the world's global growth. The rural consumption has remained strong in the past two quarters. The income tax cut by the government in the budget and interest rate reduction by the central bank augurs well for India, as it will help in further improving the consumption of the discretionary goods like automobiles. During quarter three of FY 2025, the two-wheeler, three-wheeler, and passenger vehicle segments registered moderate growth, whereas commercial vehicles and three-wheelers showed degrowth on a year-on-year basis. Two-wheelers grew by 8%, passenger vehicles grew by 2.8%, commercial vehicles degrew by 1.8%, and three-wheelers degrew by 2.6%.
However, on a quarter-on-quarter basis, we saw degrowth in almost all segments due to the early festive season and postponement of purchases due to the year-end. Two-wheelers degrew by 5.5%, three-wheelers degrew by 16.2%, passenger vehicles degrew by 7.8%, and only commercial vehicles grew by 4% quarter-on-quarter. Before moving to the operational performance of the company, I would like to highlight a few events which have taken place. Firstly, the company received NCLT approval for amalgamation of Varroc Polymer Limited with Varroc Engineering Limited, effective 1st April 2024. The effects of amalgamation are considered in the Standalone Financial Statements. An exceptional cost of INR 112.7 million is recognized towards estimated costs like stamp duties directly attributable to this merger. This merger simplifies the group structure and operations and further improves governance.
Secondly, the China Joint Venture has been recognized as assets held for sale, post the arbitration verdict which requires us to sell the stake to the JV partner in lieu of CNY 310.5 million. An exceptional cost of INR 796.5 million is recognized since the net realization, including the estimated taxes and other expenses, will be lower than the carrying value of the investment. Now, coming to the operational performance during quarter three of FY 2025, the company registered a revenue of INR 20,753 million with a growth of 10.1% year-on-year. Various new programs which we won in the past period moved to production during the quarter. Thus, the tooling sales in this quarter was much higher. On the other hand, higher tooling costs had a one-time impact on our gross margin.
Despite that, our EBITDA on a year-on-year basis remained the same at 9.2%, whereas on quarter-on-quarter it fell by 50 basis points. Our PBT before exceptional items and JV has improved by 80 basis points on a year-on-year, mainly due to control on CapEx and generation of free cash flow, which is resulting in lower depreciation and interest costs. On a quarter-on-quarter basis, the PBT has fallen, which is adversely impacted by forex translation losses. The company balance sheet continues to strengthen along with improvement in return ratios. The net debt of the company in nine months of FY 2025 reduced by INR 1,967 million, and net debt to equity reduced to 0.5 times at the end of nine months of FY 2025 from 0.64 times at the end of FY 2024. The absolute net debt figure was INR 7,860 million.
The annualized ROCE at the end of the nine months of FY 2025 was at 19.3%. The order book for nine months of FY 2025 has further strengthened, and we continue to build the order book in both India and in the overseas business. In nine months of FY 2025, we have achieved net new business wins with annualized peak revenues of INR 10,847 million. The order book from EV models constitutes more than 55% of these wins. It is more heartening to see business win in our overseas operations. We have two big business wins in our overseas operations. First one is front drive and rear drive inverter electronics for the electric passenger vehicle. The second one is interior ambient lighting. The start of production will take place from FY 2027. These wins are a testament to our dedication to excellence and showcases our advanced electronics manufacturing capabilities.
In the Indian operation, the order book which is worth mentioning is a win for power electronics, that is traction motors and controller for a three-wheeler player. The SOP of this will happen in the next calendar year. Our endeavor will remain to expand our presence through focused products to drive sustainable growth, improve the gross margin, keep control on fixed costs, and optimize the working capital. All of this will help us to deliver value to our shareholders. 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 uploaded the investor presentation to the stock exchanges as well as on the website.
Thank you, Tarang. Good evening, everyone. Let me take you through some of the highlights of Q3. The revenue grew at 10.1% year-over-year during Q3 at INR 20.7 billion. Profitability for Q3 came in at 3.2% of PBT, which is 2.4% during Q3 of last year, and the EBITDA remained flat at 9.2% compared to the same period last year. The journey on net debt reduction continues, so we have now reduced that to INR 786 crores. In terms of the lifetime business won in nine months, it was coming to INR 59.74 billion with annual peak revenue potential of INR 10.85 billion. The interesting point here is 58% of the business win is relating to the EV vehicles. This includes a significant win in overseas operations from a reputed OEM. So this will be operational, or this will be starting production during FY 2027.
Another important point here is, similar to what we indicated earlier, the revenue from EV-related products comes to about 10.5% of revenue now. If we take nine months together, also it is pretty close to 10%. This is in line with what we indicated earlier. The arbitration verdict, of course, we disclosed, and our CMD also talked about in detail. The NCLT approval is also in place now, so that removes a lot of complexity in terms of our internal operations, in terms of treasury management and other things. In terms of the new products of the interior ambient lighting and front drive inverter and rear drive inverter, these are the new two products which we added in the overseas order. Going to the next slide, this is about the industry performance. If you compare it with the last year, same period, the two-wheelers grew by about 8%.
Three-wheeler had a degrowth of 2.6%. Passenger vehicle grew by 2.8%, and commercial vehicle had a degrowth of 1.8%, so it was like a mixed bag between growth and degrowth. On a quarter-over-quarter sequential basis, if you really see, most of the segments had only a degrowth, with two-wheelers having degrown by 5.5%, three-wheeler had a degrowth of 16.2%, passenger vehicle 7.8%, and commercial vehicle alone grew by about 4%. The point to be noted here is the EV two-wheeler volume also on a quarter-over-quarter basis had a degrowth of 6.8%. Going to the next slide, which is on consolidated financials, so the EBITDA came in at 9.2%, flat as last time. PBT at 3.2%. The exceptional item of INR 91 crores includes basically two items. One is for the impairment for the China investment, which we have to recognize now based on the arbitration verdict.
And also the expected stamp duty and other expenses relating to the amalgamation of VPL with VEL. The next slide, looking at the nine-month performance, the PBT is coming to 3.5% before exceptional items. The overall growth in terms of revenue, total revenue comes to 8.4%. India operations within this grew by about 11%. The PBT improvement year-over-year was like 0.5%, 3.5% compared to 3% last year same time. This is largely helped by lower interest costs and depreciation. The next slide, we gave the net debt levels. It was at INR 786 crores as of 31st December compared to INR 827 crores at the end of Q2. And compared to the beginning of the year, we reduced that by close to INR 200 crores. So with this, the net debt to equity stands very strong at 0.5. Net debt to EBITDA is also very strong, close to 1.
And the return on capital employed annualized comes to about 19.3%. Coming to the revenue breakdown in the next slide, for nine months, the business-wise breakup is given there. In terms of segmental breakup, 78.5% comes from two-wheeler and three-wheeler now compared to 75.2% last time. This is also because of strengthening of the two-wheeler EV business. And then in terms of geographical distribution, 88% of revenue comes from India now and 12% from outside. Similarly, Bajaj's share of the total also goes to 45.2%, again because of the increased content on EV products. The next slide on the total order wins, this is what we just spoke about. So INR 59.7 billion in terms of total lifetime value with annual peak revenue of close to INR 10.8 billion.
With this significant order win in the recent times in the overseas markets, now the overall two-wheeler and three-wheeler comes down to 63.33%, and four-wheeler goes to almost 37%, and the EV-related percentage win also goes to almost 56%, and the non-Bajaj share of the total business comes to 68.66%. On the next slide, we briefly explain the two new products which we recently won as an order: basically, about the front drive and rear drive inverter, and also the ambient lighting, interior ambient lighting. Just some details about the products. So that's it. Let me stop here, and we're happy to take your questions. Thank you.
Thank you very much. We will now begin with 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 the handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. We take the first question from the line of Aditya Jhawar from Investec. Please go ahead.
Hi. Thanks for the opportunity. My first question is on China JVs. Now, just a clarification. So we have accepted the offer given by the verdict, right? Is that understanding correct?
Correct. Correct.
Yeah. Now, since the 45 days have lapsed, and I'm assuming that we haven't received any money, and there might be further to and fro with a JV partner. So any timelines, MK, if you can indicate in terms of when we can get that money and what could be the realization after net in hand?
Yeah. So thanks, Aditya. First of all, it is difficult to clearly put a date to it. But you're right. The 45-day period is already over. It's already overdue. But having said that, both the parties are actively engaged in the discussions. There are certain procedural formalities to be completed, like for instance, how to determine the tax impact. And then we also need to create an escrow mechanism so that the documents and the money get exchanged. So those kinds of things are under discussion. But yes, it's taking more time than what we initially expected. But the discussions are in progress. Coming to the net realization, of course, the tax impact is still under discussion. But based on whatever opinion we got, I think there will be a 10% capital gains tax, which will be taken as withholding tax deduction, plus some costs and all.
Broadly, around INR 320 crore-INR 330 crore of net realization is what we should see.
Okay. Okay. That's helpful. Second question is on overseas operations. So very encouraging to see getting big orders in the overseas operations. Now, it would be great if you can give a little bit of perspective. You mentioned that SOP is 2027. So I'm assuming for both the product, ambient lighting as well as the inverter electronics, SOP is 2027. So what would be the order size typically for this? And the ASP and what opportunity size we are looking at? Any color? And I'm assuming that the manufacturing of this would be in Poland and any CapEx that we'll have to incur for supporting this order?
Yeah. I think maybe you can reply, no?
Yes. Yes. Yes. So just to answer this question, so when we're expecting these businesses to go into production, it would actually be around middle of 2026. So it will be fiscal year 2027. However, it will be most likely calendar year 2027, at which point these businesses will hit their peak revenue. In terms of what we're expecting roughly in terms of annual revenue, it would be in the range of $30 million per year. So that maybe gives you some insight. And just to clarify, this would be produced in Romania, in our Romania electronics facility.
Okay. That's helpful, Dhruv, and what would be the CapEx for this?
So in terms of CapEx, yes. So in terms of the CapEx, we are expecting this to be up to, I don't want to give you some wrong numbers, but essentially in the range of $2 million-$3 million.
Okay. Okay.
And we're hoping as incremental.
Most of the infrastructure is already in place. Only certain program-related CapEx is what we need to incur.
Okay. That's helpful. Now, just, I think, overall on overseas operation, if you split the business into three parts, the new products that we got, and we have premium two-wheeler lighting and IMES. So what we understand is that premium two-wheeler lighting was struggling a little bit because of end market and customer-specific issues. If you can give us an overall update that what should we expect in each of the three kinds of businesses? So I think Romania-Poland is still relatively small, but what is the update on premium two-wheeler lighting and IMES?
So maybe I'll just go first, Aditya, and I will talk more about the two-wheeler lighting in Italy and Vietnam. So here, we actually have also added some new customers this year. So we've had some success. We've added a major premium two-wheeler lighting customer. Having said that, if we look at the next 12 months, we're not really expecting any revenue increase. So we're expecting that the revenue that we have experienced the last 12 months, it will be along the same levels. I think that's the answer to that question, but on EMS, perhaps.
So, just to clarify, so see, what we are looking at. Now you said three businesses. See, one is, of course, the electronics business out of Romania, which today, I mean, is very much underutilized, probably at about 15%-20% utilization. That we will start seeing utilization going up from July of 2026, and then in some months, it will reach that peak of $30 million annually, and that's good. And that will occupy a large part of the capacity, and maybe we can do even more in the current facility we have, but then, of course, it is fairly profitable with that level of revenue. On the two-wheeler lighting, of course, there has been this pain in Europe because we have two facilities there, one in Italy, in Turin, and then one in Vietnam. So there, the larger customer has been so far over the years, Piaggio.
We have seen some fall in sales with Piaggio. Going forward, we see sales in the next financial year to be similar in two-wheeler lighting as the current year. Of course, the two-wheel lighting on the whole is profitable. We won orders already from one premium customer with a large, I mean, revenue size of almost EUR 3 million per year. That business will start in FY 2027. Similarly, for two-wheeler lighting, we are pursuing the Japanese OEMs and also another European OEM out of Vietnam. In the future, we see more revenue growth in Vietnam as compared to Italy because people want lower cost and everything. We will see from FY 2027 a good level of growth in Vietnam year on year in two-wheeler lighting business. We have. That's what we see.
In the case of IMES, so IMES has been profitable year before last. But this year, it has been challenged because of the market situation. Our major customers there are the Caterpillar Group and, of course, the oil and gas business. Whereas the oil and gas business has done well, but that's only about 20% of the revenues. 80% comes from the Caterpillar Group. And that's where the volumes have been lower. But we have been pushing for some more business with Caterpillar in this forging facility. So there is also a gain of revenues. We are expecting that next year, we should have a higher level of revenues. We already seen some revenues go up from January. But it's not enough. So we do expect higher level of revenues from April overall.
So with that level of revenues, I mean, our basic objective is that we try to reach at least a PBT neutral kind of certain instead of a PBT negative, which is there today in this financial year. So there is a lot of effort going. Plus, we're also looking at more customers. So we're in discussion with a couple of more customers also for these kind of forgings. And there also, we are expecting some level of success where some business can also flow in next year, the second half. So there also, we are more optimistic that the results next year in IMES also should be better than the current financial year.
Yeah. So currently, this IMES, it is in a way relatively lower synergy as compared to other businesses. So was there any thoughts or consideration to divest this business over a period of time, or it's not on the decision table?
So, at the moment, we are not really thinking, though I agree with you, it's a little bit of a non-core, but at the moment, we want to make it really profitable. Then once it's profitable, then we can think about these kind of things.
But at the moment, we don't have that thought process at all.
Sure. That's helpful. Final question to MK. Any number that you would like to indicate in terms of CapEx for this year and next year, as well as targets of debt reduction this year and next year?
So your regular CapEx will be just about INR 200 crores plus. We are also investing in land for this year. So finally, we may end up this year with about INR 260 crores-INR 270 crores. Next year also, the regular CapEx could be in the range of maybe INR 200 crores-INR 250 crores. But next year, again, if required, we may have to invest something in the land. So that's where it is. So basically, Aditya, what is happening is that now we are nearing last few years, we have been adding to our capacity utilization in all the plants. The time has come that we need to buy more land. So definitely in the Pune region or in the northern region. So definitely, there will be kind of a significance. So we would have to budget.
Other than the INR 250 crores, INR 200 crores-INR 250 crores for normal CapEx, for some growth CapEx, we will, I think, have to budget next year at least, I think, close to INR 150 crores at least of CapEx towards land because that's something which will be important, which can, again, last us for the next seven, eight years at least. So that's something which will come in one time next year as an extra CapEx.
Yeah. And debt, MK?
Debt reduction, I think you've seen the number. We are right now at INR 7,868. So like what we indicated earlier, we may end this year with somewhere around INR 700 crores to be the number. This is without considering the China realization. China realization, when it comes, obviously, it will be less to an extent. So from there, I think whatever free cash flow we generate next year, minus the investment in land, will decide the debt level for next year.
Perfect. That's it from my side. All the best.
Thank you.
Thank you.
Thank you. Before we take the next question, a reminder to all the participants. If you wish to join the question queue, you may press star and one on your touch-tone telephone. Ladies and gentlemen, if you wish to join the question queue, you may press star and one on your touch-tone telephone. The next question is from the line of Nishant Chauhan from Kotak. Please go ahead. Mr. Nishant, your line is in the talk mode today. Yes, please go ahead with your question.
Nishant, we can't hear you.
Hi. Am I audible?
Yes, sir. Please go ahead.
Okay. Yeah. So my question is related to the employee expense. So if I see quarter on quarter, I think we have been seeing an increasing trend of expenses towards the employees. So could you just help us understand, I mean, what is happening over here and what would be the sustainable mandate of employee expense going ahead?
Yeah. So a couple of things happened. This quarter, we also had some severe severance pay in some of these overseas locations. That's more like a one-timer. Plus, last quarter, we also had certain credits, certain reversals, provisional reversals, which we took. So because of that, the quarter over quarter will appear to be a big variance. Going forward, yes, we are also doing some kind of restructuring currently. So that will bring in some kind of reduction starting from March onwards. So that's how it develops from now on.
Any idea, I mean, where would this settle at a sustainable midpoint of employee expense?
More or less, stay at the current level as the going in level, but what happens is next year, of course, obviously, there will be a merit increase also. That will be partly mitigated by the headcount reduction exercise, which we did recently. But yeah, so other than that, more or less, the current level of spending will continue.
Okay. And secondly, would it be possible to give out the number for, I mean, what would be the nine-month revenue for our international subsidiaries, I mean, the lighting and the electronics business in Romania?
No, we don't give that kind of split. Yeah. So for us, rental business is a total business. But by segment, we have given anyway in our presentation.
Okay. Thank you for your time.
Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may press star and one on your touch-tone telephone. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. The next question is from the line of Mihir Vora from Equirus Securities. Please go ahead.
Yeah. Thank you for taking the time.
A lot of disturbance on the line.
Hello. Is it audible? Is it clear?
Yeah. Yeah. Go ahead.
So my question was basically on the integrated starter motors, the ISG thing, which we are working on. And we can see fewer models right now in the industry, but there seems to be a good scope for that. So can you throw some light comparing it to the starter motor, how much the content increases here, and what is the comparison? What makes the OEM shift to this kind of technology and our engagement with any customers, multiple customers?
So we already have two customers for the product. One is already in SOP, and the other one is in development. Fundamentally, I think there are two or three factors, right? I think one is there is definitely a gain in efficiency and in fuel efficiency. Secondly, I think in terms of rider feel as well, there is an improvement. And thirdly, I think your total packaging space required also reduces, right, from having two independent electrical machines to having one integrated electrical machine. These are the broad benefits. In terms of the, sorry, I think that was your question. Does this address it?
Sorry. Hello.
Yeah. No, sorry. Have I addressed everything in your question?
No, sir. Basically, the question was also on the content value part, like how would it fare against the starter motor?
Standalone, I would say probably around at least 15-ish, somewhere between 15%-20% value increase.
Oh, okay. Sure. Sure, and so my second question was on the China JV part, so basically, I assume that we would be having some synergies in terms of lighting technology from the China JV, so post this arbitration, post the stake sale, so how do we look at technology transfer or something like that from that China JV, so how does it impact our lighting business in domestic or, say, Romania?
So I can speak for India. I think, I think one from an India perspective, I think we are self-sufficient anyway in India, especially for the technology level required. And further, for the future level of technology also required, I think whether across China or other parts of the world, broadly, we are protected. So we don't see any risk for, we don't see any risk.
In terms of?
Anyway, we do so post this exit from the joint venture. There'll be more from the manufacturing angle. We do want to maintain a level of engineering in China for our two-wheeler lighting, especially on the two-wheeler lighting part. We will have a team and also for the ADAS electronics, which we already do today. We do have some engineers who can drive our ADAS engineering over there. Plus, post the sale, we will want to maintain a strong level of team in China for engineering on the two-wheeler lighting side.
Yeah. Okay, sir. And sir, my last question would be, are we seeing some traction on the four-wheeler lighting domestic part? Also, we predominantly have been a two-wheeler lighting company. But is it that we are seeing some traction on the four-wheeler side as well?
Yeah. I would say we have a decently sized local business. We continue to win business. We continue to deliver. I think most recently, we have executed. We supported a customer with the localization of a full-fledged LED headlamp, which has been completely indigenized. So like with any other market, I would say there is a good level of traction based on the service that we offer.
Right. Okay. Okay. That's all from my side. Thank you, sir.
Thank you.
Thank you. A reminder to all the participants. If you wish to ask a question, you may press star and one on your touch-tone telephone. Ladies and gentlemen, if you wish to ask a question, you may press star and one on your touch-tone telephone. The next question is from the line of Gautam Desai from Valens Capital. Please go ahead.
Hello. My question was more on the slide, which is the Varroc EV product offering and that the total kit value is INR 35,000. So is it possible to give some kind of breakup of the value of each of these seven, eight items? And my second question was that recently, Pricol has released its presentation, and they are doing the instrument clusters for the Bajaj Chetak and the three-wheeler. And they plan to eventually go into e-cockpit as well with the navigation. So my question was, we are also looking at the same space, and they are also looking at getting into BMS. So how do we stand, especially with respect to Bajaj in the EV portfolio?
So again, I don't want to comment versus one competitor specifically per se, but I mean, like with any product group, there will be multiple players in each product group, right? I think the value that we speak about is really, I would say, a total addressable value within the vehicle, most of which is already captured. Now, of course, program to program, product to product, there will be variations. So I would really look at that number that we state directionally in terms of the total addressable value within a vehicle. And of course, like I said, in the case of certain customers and one customer in particular, we've already been able to capture a large majority of that value. I think that's how I would put it.
Of course, that value can also range based on what exactly is the performance requirement of the vehicle and what exactly is the definition of the vehicle. The higher performance vehicle is generally higher value. Lower performance is generally lower value.
Yeah. So I was asking from the perspective that some of our products, they are getting obsolete, like the valves and the RR and the CDI and this kind of product. And at the same time, there are new products that we are launching. So do we see a cannibalization of our revenue because of the loss of certain products? And at the same time, that loss is regained through the launch of more higher value products. And in those higher value products that we get, how do we stand? That was more what I was trying to figure out. And the second was the breakup of the cost of each of these eight items, the value of each of the items.
Okay. So I'll go one by one at the questions. So there is a different powertrain technology, right? I mean, at the most simplified level, the way to think about it is, okay, you have an ICE engine, you have an EV, right? So different powertrains have different component requirements. Today, we have a strong portfolio across every powertrain, and I would include CNG also over there now. So for us, fundamentally, we are placed effectively regardless of which powertrain does what. Now, of course, I mean, it is obvious. If you have more EV, you will have lesser, you have more EV or if EV grows faster than ICE, you could make the suggestion that EVs potentially cannibalize some of ICE's growth. But that is not necessarily the way we think about it, right?
The way we think about it is that you have to be prepared from a technology standpoint in each powertrain, then within the ICE powertrain, because you talked about a product like a CDI, yes, the CDI has already largely converted to a fuel injection system. Every domestic vehicle will really have a fuel injection control unit, which is something that replaces the CDI. This is something that we already do, so within each powertrain, we drive technology progress to capture whatever is the technology level that is required now for the vehicle, so don't really have a concern around, I mean, we don't really think about it from the perspective of cannibalization. We think about it from the perspective that we have an overall market, and you have to be prepared to service each segment of the market.
Then in terms of the value of components, like I said, right, I mean, the value can range dramatically based on what is the performance requirement. So it would not necessarily be correct for me to give you a value. But I think in terms of the broad values, it's quite easy to find out what broad values for, let's say, any powertrain would be, what broad values for a charger would be, broad values for a BMS would be at an individual component level.
Okay. That's helpful. Thanks a lot.
So I also do add, actually, see, today, even the current products like engine valves and all, there's a huge demand for these kind of products. Today, in fact, we're in a situation where we don't have capacity to actually offer to the customers. There's so much of demand because some of the people have exited this business. So there's a lot of demand and pressure on us to deliver. So that's not a business which is degrowing. Actually, it's a growing business for us.
I understand. I understand. That's all from my side.
Thank you. Ladies and gentlemen, if you wish to join the question queue, you may press star and one on your touch-tone telephone. Ladies and gentlemen, if you wish to ask a question, you may press star and one on your touch-tone telephone. We take the next question from the line of Sanjay Chawla from Renaissance Investment Managers. Please go ahead.
Thank you for the opportunity. Can you explain a little bit more? Can you quantify the impact of these tooling sales and margin impact? And what would the margin be like without this?
Yeah. See, tooling generally go with a lower margin than the regular product. So if you see the impact, I mean, if you really see this quarter margin, gross margin with last quarter, I think close to about 0.4% is because of the tooling sale impact.
This is a Q2 impact?
Q3 versus Q2.
Right. And also, you mentioned inventory correction. How much was the impact because of that?
See, these are normal corrections which we take whenever we do the fiscal verification. So there are two, three reasons. One is this inventory correction, plus there are also certain one-timers in the base. So all these things contributed to the remaining gap when you see year over year. But quarter to quarter, this is the only one.
Okay. And can you give some indication or pointers as to where the margins are headed? You're also doing this cost optimization, headcount reduction exercise. So where do you see these margins being headed, let's say, next year?
It should certainly be better. We don't want to put a number and give a guidance to it. But yeah, you're right. There are various actions which are in progress, the cost optimization things. And we are also doing a phase two in renewable energy. Plus, interest saving itself should be significant if we really end this year with below 700 crores. Then similarly, depreciation should more or less stabilize at the current level until we do the next level of significant CapEx. So that way, I think all these things are positive trends for the coming year. But we don't want to put any number to it.
Any savings from the end of arbitration? Any sort of impact on that as well?
Yeah. So the money inflow, when it comes, obviously, it will reduce debt significantly. I'm not even counting on it.
I meant, the impact on the EBITDA margin. Were you incurring any cost in the OpEx side from this arbitration which was going on?
We don't expect anything now. See, we actually incur a significant level of arbitration, legal costs last year itself. So this year, it is not so significant. There may be some closure-related cost once we complete the transaction. But other than that, we don't expect any significant number.
Okay. Okay. Thank you.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Yes, so thank you once again to everyone for joining the call and for your continuing support to our company. Thank you.
Thank you.
Thank you.
Thank you.
Thank you, members of the management. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.