Ladies and gentlemen, good day and welcome to Varroc Engineering Limited Q1 FY 2023 Earnings Conference Call, hosted by Ambit Capital Private Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Nishit Vakil from Ambit Capital. Thank you, and over to you, ma'am.
Thank you, Neeraj. Good evening, everyone. We have with us, Mr. Tarang Jain, Chairman and Managing Director, Mr. Cristian Päschel, CEO, Varroc Lighting, Mr. Arjun Jain, Whole Time Director, Mr. T.R. Srinivasan, Group CFO, and Mr. Bikash Dugar, Head, Investor Relations. I now hand over to Mr. Tarang Jain. Over to you, sir. Thank you.
Yeah. Thank you, Nishit for hosting the call, and good evening to everyone. I want to thank all of you for joining the Q1 FY 2023 earnings call of Varroc Engineering Limited. Q1 of FY 2023 has started with a stable outlook for the Indian automotive sector, on the back of the forecast of a normal monsoon. The growth is visible mainly due to the lower base of Q1 FY 2022, which was impacted by COVID wave two. The semiconductor supply constraint continue to impact the premium two-wheeler production volumes, whereas the passenger vehicle manufacturers are seeing improvement in supplies. In India, automobile production for all the segments in Q1 FY 2023 rose on a year-on-year basis due to the lower base of last year, which was impacted by the COVID wave two.
On a sequential basis, two-wheeler production grew by 8.4%, but other segments fell on a quarter-on-quarter basis due to the seasonality which we generally see from Q4 to Q1. Against this backdrop, we are focused on completing the divestment of our four-wheeler lighting business in Europe and America as per timeline. As stated earlier, the divestment will help the company to strengthen its balance sheet, and invest in identified focus areas to drive future growth. In terms of operations, revenue from continued operations grew by more than 36.3% to INR 16,283 million, despite our top customer production only rising by around 1% on a year-on-year basis. We continue to improve our profitability on a sequential basis, as gross margin improved by more than 340 basis points.
The EBITDA margin also improved by 210 basis points for the continued operations, and it came in at 8.2%. The operational PBT before JV, before joint venture for continued operations has become positive in the quarter and it is INR 138.3 million. The reported PBT was impacted negatively by mark-to-market on forex items of INR 96.8 million, and a JV loss of INR 45 million. The reported PBT is INR -3.6 million. It is heartening to see that all the businesses within our continued operations have shown improvement in EBITDA margin on a sequential basis. The India operations EBITDA margin improved by 20 basis points to 9.9% in Q1 FY 2023.
VLS remaining operations EBITDA margin improved by 290 basis points to 1.7% for the remaining businesses, which is mainly the forging business in Italy, which is IMES. The EBITDA margin improved by 1,730 basis points and came in at 6.8%. We continue to have strong order wins for new business in Q1 FY 2023 across business units. This would enable us to continue to outperform the industry growth, and in improving the profitability. During Q1 FY 2023, lifetime revenue from new order wins is INR 14,673 million, and out of that, business wins from EV customers is INR 4,837 million. Profitable business wins, appropriate capital allocation, setting of our assets, commercialization of our R&D efforts, and control on costs remain the focus of the company.
Mass production of traction motors, controllers, and the telematics shows the capability of the team to industrialize a new product first time right. The R&D team also developed the electronic fuel injection for our Xtreme customer in record time, and the production has started from June 2022. Our effort remains to move to a double-digit EBITDA margin in the next two to three quarters. The focus on operating leverage, and expansion in gross margin across businesses will help us in achieving the same. We remain committed to take the EBITDA margin to 12%, and ROC above 20% over the medium term. In our financials, the business which we are divesting is now accounted as discontinued operations, and only the profit and loss from discontinued operations is shown as a one-line item in the income statement as per the accounting standards.
Please also note that as per Accounting Standard 105, the assets which are held for sale cannot be depreciated. Thus, the depreciation for Q1 FY 2023 for discontinued operations was nil. Here also sequentially, we have seen improvement in the gross margin by 210 basis points in Q1 FY 2023 as compared to Q4 FY 2022. With this, I'm now handing over the call to Mr. Srinivasan, our Group CFO, who will walk you through the presentation which is already uploaded in our website and also in the stock exchange.
Thanks, Tarang. Good evening, everyone. You already have the presentation with you, I presume, so I will just quickly touch upon a few points. Starting with the highlights for the quarter. During the quarter, we started mass production for both traction motor and traction controller for our anchor customer, and the value of these two products put together is more than INR 15,000 per vehicle. We also commercialized electronic fuel injection system for our largest customer in record time. Our R&D team was able to turn around this very quickly, which shows our technological capabilities. This will also lead to other businesses with the customer, so this is a big breakthrough for us.
In spite of, let's say the market growth, as well as the growth in volumes of our largest customer not being so robust, we still managed to record a 36% year-on-year growth in terms of revenues, which is quite predictable. As Tarang mentioned, the EBITDA for continuing operations improved sequentially by 210 basis points to 8.2%. During the quarter, we also won new business from various customers, totaling INR 14.7 billion, out of which almost one third of it was orders from three customers for EV three-wheeler, both EV-specific components and also other components like plastic parts, seats, and lighting and so on. It's very heartening that, the share of EV business in our new wins is going up.
It's almost 1/3 now in the last quarter. The second slide has overall industry performance, volume performance. The growth you see year-on-year is mainly because Q1 last year was impacted by COVID wave 2, which is reflecting in good growth numbers for this year. If you look at sequentially, slightly different, t wo-wheeler still recorded a good growth, but three-wheeler, passenger vehicle, and commercial vehicles actually showed a decline, mainly because in Q4, typically there is an uptick in volume because of tax, to avoid tax implications, many corporate customers you know advance their purchases into Q4. Q1 is comparatively slightly slow. That's why this was lagging back.
Two-wheeler has started the year on a good note, which is very important for us as a segment. We hope the festival season and going forward, the growth momentum will pick up. In the next slide, you see a summary of the financials for continued operations. You see revenue quarter on quarter was flat, but we were still able to improve EBITDA margins because our price realization improved in this quarter. That's mainly because, as you all know, there is a one -quarter lag normally between the commodity price increase, and the price increase we get from customers. During the last quarter, commodity prices more or less stable, but we got an increase in relation to Q4 of the last year. That's reflected in the margins. That's why you see a better operational PBT.
During the quarter, we also recorded mark-to-market forex loss of about INR 9.6 crores, because of the weakening of the euro on the intercompany loans given by us to the VLS business to support them for their liquidity requirements. In the previous quarter, it was a profit of INR 11.9 crores. There's some mark-to-market at the moment, so it's notional. China JV had some challenges in overall performance, so it's still at a loss. Because of the lockdown imposed in Shanghai and other places, the market volumes have not really picked up yet. Overall, at profitability level, we were kind of close to breakeven compared to the losses incurred in the last quarter and also last year. In the next slide, you will see the revenue breakdown in a different dimension.
From a business unit perspective or a product perspective, PBU or plastic components form the largest part, about accounting for more than 30% of the revenue. Lighting, which is a combination of four-wheeler lighting in India, two-wheeler lighting in India, as well as a global two-wheeler lighting business we have, in Italy, Romania, and Vietnam, together accounted for almost 24%. Electrical and electronic components in India was about 18%. Metallic components, which is the transmission-related components and valves together was about 12%. The aftermarket business, what I mentioned in the earlier call, Tarang, is seeing a much faster growth and the profitability margins there is also pretty good. That has now reached almost 10% of revenue of continuing operations, which is a good sign. This is also helping in the overall margin improvement for the business.
Others, which is under others, for our reporting, contributed 2.6%. On a segment product segment basis, two- and three-wheeler accounts for 63%. Four-wheeler is 32%, almost 1/3, and the rest is others. From a geographical perspective, India, the continuing operations accounts for 80% and just 20% of the revenue coming from outside India. From a customer perspective, Bajaj, on a total basis, contributes to more than 1/3. In India, they are I think above 50% and the rest of the customers together are about 2/3 or 30%. In the next slide, we have tried to give a split of the performance between the different business units, or segments we have.
The India operations, which is basically the two-wheeler focused business, improved EBITDA margin from 9.7%- 9.9% in spite of supply demand mix that's flat. The overseas operation remaining the part which we are not selling, which is the global two-wheeler lighting, electronics and so on, and also the four-wheeler lighting business in India together, improved the EBITDA margin from -1.2% to 1.7%, so almost a 3% improvement. The other operation, IMES, business has turned around where we were able to pass on the commodity price increase as well as energy cost increase to the customer, because commodity prices, that's also including the margin there. Overall, for the continuing operation that resulted in 210 basis points margin improvement.
Going a bit to net debt level, we have maintained debt, the remaining debt more or less constant over the last three quarters. By end, this INR 27 million improved from advances we got from customer liquidity support, actually a small amount. On a net debt basis, yeah, lot of this debt is, about INR 1,000 crores is in India, the rest is abroad. The debt abroad will be fully repaid excluding like we have communicated, and the debt in India will come down. That's the plan. On the next slide we have given, kind of some insights into the new order wins. The new order wins will contribute a revenue of, let's say INR 212 crores in current year and INR 780 crores coming from the subsequent years.
If you split the orders between EV and ICE vehicles, 1/3 of the new orders is from EV vehicle manufacturers and the balance 2/3 coming from ICE manufacturers. Bajaj accounts for about 1/3. The non-Bajaj is 2/3 roughly in line with the revenue share. The new order wins in the two and three-wheeler segment is about 2/3 and 1/3 is from four-wheeler, which is an encouraging sign because the share of four-wheeler both in new business wins and revenue is going up, and four-wheeler typically has better margins as well than two and three-wheeler. The next two, three slides we have tried to give you an insight into all the components we have available.
We are able to offer to the customers from the specifically targeted EV segment. Some of this we had gone through in the previous quarter as well. The main highlight was the commercial production of traction and motion controllers, which started during this last quarter. The following slide gives the status on the divestment, s o we are on track to close the transaction by end of September. The shareholder approval was received some time back. Lender's approval is an ongoing step, but all lenders have expressed their support, s o the documentation is in progress. From the regulatory perspective, we have got the regulatory approval in three out of the four geographies, U.K., European Union and Morocco. Mexico is the pending one. It is also expected to come through end of this month or early next month.
Right now we are well placed to close the transaction end of September. The following slide gives a brief overview of the financials of the discontinued operation breakup. Mainly, you see the improvement, is because of that we have stopped charging depreciation on the assets of the discontinued operation u nder Ind AS 105. Otherwise, the performance is kind of comparable to the previous quarter. That's briefly a quick recap of the Q. Now we can go ahead with the questions.
[audio didtortion], open the floor for questions.
Yes.
Thank you very much. We'll 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 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'll wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. Anyone who wishes to ask a question may press star and one. The first question is from line of Aditya Jhawar from Investec. Please go ahead.
Yeah, hi. Thanks for the opportunity and you know, congratulations on delivering resilient performance in challenging environment. My first question is on VLS. You know, actually you mentioned that the transaction is expected to close in September. What about, you know, the cash flows? You know, by when we would see the cash flow coming to Varroc? H ow much amount we have budgeted for cash burn? Y ou know, [audio distortion] in line with our estimates? Y ou know, related question is that we also see that there will be a fundraise, you know, of about to the tune of INR 500 crore. What would be the objective of this fundraise?
Okay. The fundraise part is purely enabling resolution, so there's no.
Yes.
No specific plans to raise any funds at the moment. Typically, if we don't take approval now, then lead time to get approval at the time is more relevant to hold an AGM and all that stuff. That's why we are taking just an enabling thing. There's nothing more to it. From a cash flow perspective, the money net of the escrow account and everything will come to us immediately net of loan repayments and so on. Maybe sometime early October 2027. Thank you.
My second question is on new order wins. It is encouraging to see that we have one order for an electric vehicle from other than our anchor customer. For the next two new customer other than our anchor, if you can highlight that, what is the order win? Is it traditional product, existing product, or there are EV components?
[audio distortion]. These are our traditional product only, but the encouraging thing is that we have both incumbent as well as new customers on the EV side. The new and incumbent customers are there for our product. We have started engaging with them for our EV product related. Sooner or later, we will get orders for those also.
Okay. Thanks, Tarang Jain, y ou know, just wanted to check on one thing. We also mentioned that you know, for traction motor and controller f or our anchor customer, we you know, we'll be ramping up production. When we look at slide number 13, where we have quantified that you know, total revenue from EV could be at about INR 1,000-odd crore. Here we don't see you know, mention of traction motor and controller.
No, it's mentioned out there, no? Traction motors and controller.
No. I mean, you know, the order that you have quantified INR 700 crore and INR 300 crore, it is not against traction motor and controller.
No, I think that is just a combined number.
Okay. Yeah, I think, thanks a lot, Tarang. I mean, I think that's it from my side. In case of any question, I'll call back. Thank you. All the best to y'all.
Sure.
Thank you.
Thank you. Participants, you may press star and one to ask a question. Ladies and gentlemen, you may press star and one to ask a question. The next question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead. Ashutosh, may I request you to unmute your line from your side and go ahead with the question, please.
Yeah. Hi. Audible now?
Yes, sir.
Firstly, if I look at this IMES operations where margins have improved YoY QMT while the revenues are dropped, is it sustainable? What will happen over here?
Yeah, the margins, more or less, we would like to sustain it because we have got some customer price increase of last year in relation to the energy costs and the metal prices which have gone. Unlike in India, where the pass-through happens on a quarterly basis, in Europe it's on annual basis. Now we have got that price increase, and we would like to sustain this kind of a EBITDA margin and see that how can we utilize our capacity further to further bring the efficiency into that business.
Does this EBITDA also include some basic compensation for last year, or is this normal or for this quarter only?
This is normal for this quarter.
Okay. We're not getting compensation for the last.
Nothing really. No, this is something which is normal now, you know. It's a normal margin.
Okay. Secondly, VLS running operations, they're also like say, 1%-something percent margin this year, despite almost at least 10% higher revenue versus last year. How should we look at this business? How should the margins improve over a year?
See, these revenues here are coming basically, you know, from our lighting business, our two-wheeler lighting business abroad, which has got plants in Italy primarily and Vietnam, which continues to have a double-digit EBITDA. Our electronics business within Romania is on a ramp-up stage. Going forward, you know, I think once it utilizes capacity, I mean, we will see, you know, EBITDA going up, you know, up to probably, you know, up to 8%. This is something, you know, which will mean also a PAT positive kind of a performance from the EU, and this is something which should happen probably in the coming months. Thirdly, our VLS former lighting business in India, which also I think we will see improved numbers.
Here also our target is that in the coming few quarters that we reach a double-digit EBITDA. I think with all these together, I think going forward in the next quarters, we will be striving that we take this EBITDA up closer to a double-digit kind of a number. For this, we are talking about the VLS remaining operations, which are going be our continued operations.
Okay. India, is there a possibility of margin improvement from here?
We will be going up because we see an increasing our revenues increasing in the second quarter, you know and you know right from July. Here we will be definitely at a double-digit EBITDA. Here, of course, we have said before also in the medium term we will be reaching this 12% EBITDA.
Okay, b ecause the point is that despite this EBITDA improvement, because of higher depreciation charges we have now in the remaining operations still, I think at the PBT level, the margin is not very good. Is depreciaion also increased going ahead or how should we look at it? Like, say, can the PBT margin improve significantly from here?
Yes. No, for sure, you know, because see here the way I see it is that the EBITDA margins are going to grow, you know, across and especially in the bigger businesses of India as well as the continued operations of VLS. We will see significantly improving margins. We will see that from a PBT point of view, we will see there are interest costs. Post the transaction will drastically reduce, which is quite high today, you know. That's something which we see, you know, going down, you know, kind of considerably. Therefore, we are looking at obviously a good, you know, PBT performance, you know, post, I think with the transaction, you know, happen, you know, this thing happening.
Here, also even in this June quarter, as you can see, we had a foreign exchange loss of about, you know, INR 97 million, you know, which also was the reason why we had a small loss of, you know, say INR 3.9 million . INR 3.6 million , you know, for this quarter. You know, otherwise we were actually a performance, you know, gross of that forex loss, you know, was positive.
Lastly, I probably missed initial part of the call, but in terms of net debt after completion of the transaction, how should we look at it? Like say considering whatever losses you are making right now in VLS discontinued operations.
We have already mentioned earlier that we'll be net debt negative, you know. That is clear. We are going to be net debt negative, you know, if we have to take, you know, after repayment of all the loans, and also if we do not repay 100% loans because there are some working capital loans, you know, we will have cash in the books, you know. We'll be net debt negative on the whole as a balance sheet.
Yeah. Will the cash be like higher than INR 300-INR 400 crore or it is just getting net cash position?
No, last time we had said that we'll be about INR 200 crore plus, but there will be.
Yeah.
A little bit of a cash burn because, you know, that we do see, you know, because of the inflationary conditions, you know, in Europe. That's something which will be there. There will be some, you know, adjustments. Probably EUR 200 could go down to EUR 150 or you know, things like that. We have to see how things pan out. It's a question of another month and a half. It's not that long also at the moment. We do see some risk, but the main thing is that we'll be net debt negative. That's the main, our statement. Little bit here or there is something we can experience, and we will come to know September end really, you know, where we are, you know.
We already know our situation, you know, where we are today. Going forward, obviously the focus is going to be a lot on the India side because that is going to be our major revenues. There we will see, there we have, you know, a strong growth, you know, potential going forward. We have a lot of business wins. Here, I mean, unlike probably, maybe global markets, but in India we continue to do, you know, kind of well, you know. Here we will see definitely, you know, improving margins also as we go along.
Cool. Thanks a lot.
Thank you. Participants, you may press star and one to ask a question. The next question is from Abhishek Jain from Dolat Capital. Please go ahead.
Thanks for opportunity. Sir, so, what is your revenue guidance for the FY 2023 and 2024?
See, we have said, you know, we will be like this year for our parameter, you know, we have said that, you know, not counting China, because China is still in a JV, you know, that we'll be at about INR 7,000 crore. Then we have said for the coming years, I mean, whatever the market growth is, we are going to be 8%-10% more than the market growth, you know. We're going to perform better than the market by at least 8%-10%. That is our guidance for the coming, I mean, three years.
VLS remaining operation, which revenue stands at around INR 3 billion on quarterly basis. What is your outlook for the revenue and the margin going ahead? As you have mentioned that you are looking at margin of 8% versus the 1.3% right now. What is the roadmap for there?
There the roadmap is that we will reach, you know, 8%, between 8%-10%. In the coming two to three quarters, we will achieve that, I mean, that percentage to EBITDA percentage to revenues.
What would be the revenue size for FY 2023 from the VLS remaining operations?
India, I think we had said close to about INR 5,500 crore and the balance without China was INR 1,500 crore. That's the breakup.
Okay. Overall margin would be that, 10%-11% for FY 2023.
Yeah. Double digit is what we are trying to push for.
Okay. Sir, currently four-wheeler contribution is around 33%. What mix you are targeting going ahead? If you can throw some more light on the winning new business in the four-wheeler lighting system, and other parts like in the polymer and metallic side.
Yeah. See, our focus is definitely when it comes to the Indian market. Definitely we expect future growth in our Indian lighting, four-wheeler Indian lighting business and also on the plastic side, plastic interiors, where we do quite a few products. We have also a lot of new technologies here, like 2K molding. We have some very unique parts like, you know, the roof rails, you know, which are there for the SUV in the growing SUV market. Here we are. Both for lighting as well as for our plastic interiors business, we see a huge growth, you know, and double-digit growth for the in the car market under these two segments.
Other than that, we are also looking at, you know, some of the transmission parts which are engine agnostic, even something to do with the EV, whether it's to do with, you know, shafts or there are other parts. We are discussing with various customer on export side, which is also, you know, higher margin business. Here we are looking at, of course, the domestic market, but also more importantly in the export market where our metallics is concerned. Probably going forward in the metallic side, we could in the coming year see a shift more towards, you know, four-wheeler, you know, as compared to the two-wheeler as we move along.
Recently you have won the business for the four-wheeler lighting system in India. I think it is for the Mahindra & Mahindra and for the Toyota. If you can throw some more light on the winning new business in the lighting system, and what is your revenue right now from the lighting part only?
The Indian lighting business you can say we will be INR 500 crore plus in revenues in this financial year. Our major customers in the four-wheeler lighting business today are the Volkswagen Group, Mahindra & Mahindra, and Renault-Nissan. These are three, also Tata. Tata is smaller. Here we are presently focusing on these customers. Of course, we are also looking at winning business with a few other four-wheelers where we are strongly engaged. Today, actually, frankly speaking, we are very well utilized in our both our plants when it comes to both Pune. Pune being the larger plant, 80% and 20% in Chennai. Here we are very much engaged with our customers for future business wins.
Like I said, in our lighting business also with these customers and a couple of other new customers, you know, with whom we are talking to, which I can't name at the moment, we are looking at a double-digit growth also in our lighting business going forward in India.
Thank you. Sir, my last question is related with the CapEx plan for the next two years.
I think that when it comes to India, I think we are going to be at probably approximately about INR 200 crores, you know, or INR 2,000 million year on year. That's what we are looking at for the kind of growth I have mentioned. Abroad also there will be a certain level of investment for the continued operations, you know, which also could be another probably, you know, maximum, you know, it could be about probably up to INR 50 crores or INR 500 million, up to.
INR 250 crore sort of the CapEx will be in the next two years, right sir?
Yes. I mean, per year.
Okay, per year.
Per year. The investment, yeah.
As you are targeting around INR 1,000 crore side of the revenue for FY 2025 in the EV segment, most probably the CapEx will be at the higher side to get this business.
No, see, we have already created a lot of capacities in our electronics factory on the assembly lines. We also have a good capacity on the motor side, you know. Yes, I mean, what I'm talking about the growth, even if it's for the EV side, it'll be within this investment. It's not the mostly. I think more of our investments will go more towards our plastics business and our electronics business. That's where we see major investments going. You know, as we go along, there will be less on the metallic side. We'll be leveraging more existing capacities to utilize the capacities better, including for the four-wheeler components in India or for exports. We have still enough capacities available.
Okay. Sir, after the closure of the deal, so you are talking about that you will be the net cash company, so there won't be any debt on the books, right, sir? I mean, from Indian business as well.
On a net debt basis, yes. Now, we're not going to stop our working capital lines. You know, the working capital line will be there, but understanding that to the extent cash available, you know. You know, we're not going to eliminate all our working capital limits, you know. That will continue.
Okay. What would be the size of the working capital you would be required?
I mean, out of the, let's say, we have a net debt equating to the working capital, you know, current working capital, I think it's normally.
Okay.
Overall, I don't think it's going to be more than INR 300 crores or INR 400 crores. At a max, I'm saying on a overall basis.
Sir, that's on the enterprise value only?
No. This is on a continuous basis, what is the working capital?
Normal basis, specifically our receivables are between 45-50 days. Our inventory levels in India is around 30 days on average, and payables are around 60 days. That's the normal working capital cycle we have. You can adjust to the last.
Okay, sir. Thank you, sir. That's all from my side.
Okay.
Thank you. Next question is from the line of Svan Investment from Sachin Kasera from Svan Investment. Please go ahead.
Good evening, everyone, and congrats for a good set of numbers. I just have two, three queries. One was you mentioned that while the net cash will be INR 200 crore post-merger transaction, the cash on the balance sheet will be still higher because you will have some short-term working capital there. Considering that normally, you know, the yield that we get by putting it in treasury is normally lower than, you know, the market pay and there's a negative carry. Do you have any plans, because you mentioned that CapEx is only INR 250 crores, which you may be able to fund from internal accruals. This INR 400 crores of cash that will remain in the balance sheet post the transaction, what are the thought process?
Yes. I mean, that's something we will come out with some kind of a policy, I think probably.
First of all, last three years we have not paid any dividend. I think it is time that we pay out some dividend, give some cash back to shareholders. We'll assess, based on the cash what we have, that's number one. Secondly, it's always a good idea to keep some liquidity in the balance sheet. We don't want to be cut too close in terms of the cash and the liquidity, which we have learned the hard way during the COVID times. I think some liquidity buffer because you can never be sure what's around the corner, right? From the industry perspective, market perspective, sorry, economy perspective. Some contingency buffer is always good. We'll have to evaluate and so that detailed planning.
Immediate focus is to now close the transaction, so that we can move on with a strong balance sheet. We are currently working on our strategy 2030, which also we hope to be ready in the next two to three months. We'll have a clear roadmap of how we are going to deploy the, let's say, the capacity we have in the balance sheet to invest.
The line for the participant dropped. Ladies and gentlemen, you may press star and one to ask a question. The next question is from the line of Saurabh Jain from Ambit Capital. Please go ahead.
Hello.
Yes, Saurabh. You're audible.
I just wanted to understand about the industry outlook. If you could shed some light on how is the demand right now in the industry. Do you see the demand coming back strong or the uptick in the volumes is largely due to the pent-up demand? If you could shed some light on the European demand scenario, given that we're seeing high inflation, and other political headwinds over there. Any color on those fronts would be helpful.
On the India side, we definitely see, you know, a kind of a strong demand pull this year. Today, the limiting factor, frankly, is only the chips, you know. That I can say for the two-wheeler sector and even the four-wheeler sector. We see a strong demand. For whichever customers, if their volumes are down, is largely only because of the chips. I see that in this year, you know, provided the chips are available, you know, for the various electronic products, you know, I don't see really a problem in achieving a double-digit growth for the industry, you know. This I clearly feel.
Even in the first quarter, if there were issues in the growth in volume, it was largely overall, because I feel because of chip shortage, not because of the demand. That's why going forward, we'll have to see how things pan out. Anyway, even in the coming years, you know, I do feel that there will be a growth, you know, in the Indian market, you know, of at least 7%-8%. This is the way I'm quite optimistic about the market growth, you know, going forward, both in the two-wheeler and the four-wheeler sector. We should not compare the Indian situation with the global situation. It's very different. We have our own, you know, demographics here. You know, we have our own situation here, which is quite positive.
Irrespective of the issues, we have inflation in India also. Yes, it might affect a certain segment, but then overall, we do see a, you know, a good growth, you know. Because there's a demand, and I think that the monsoons also this year are quite good, you know, and this is also going to help, you know, demand, you know, in the coming season. I do see a good double-digit growth in this year in the remaining quarters. You know, the first quarter was a little muted. Yes, there are chip shortages still there, but it's improving, you know. I do see, you know, a good growth in the Indian market, which will be a major play for us.
When it comes to the European market, you know, yes, I mean, it is impacted, I would say, you know, I mean, by the Ukraine war. I don't really see, and maybe Christian can also elaborate, I don't see really any softening of any volumes there or demand, because of this. At the moment, at least I don't see it, you know, because, you know. There is inflation, so there are cost pressures there. I don't see really at the moment, you know, a problem of demand, at least in this year, in spite of so many things, you know, taking place, especially the war. Maybe Christian can maybe even elaborate on the volumes, you know, in Europe.
Yes, sure. As you are saying, yeah, the global situation, especially in Europe, the dependencies on the chip shortages. We are improving here, but we have high inflation costs, we have to absorb and BOM as well, the war with Ukraine is influencing.
Got it. Secondly, on the margin spend, you did mention that we had a good 340 basis points improvement on the gross margin front. The primary reason, as you mentioned, was the inflation pass-through that we received in this quarter. If you could, you know, just help us out quantifying as in how much of this reportable basis points might be due to the pass-through effect. Have we seen any material improvement because of the correction in the commodity prices as well?
See, basically, as you know, we had got an overall 8-9% increase from January 2022 from all customers. Now, in fact, what has happened is that that has, of course, resulted in an improvement in the gross margin. In fact, our gross margin should have been better than what we have actually achieved so far. The problem was that there has been an inflation in the commodity prices. In spite of that, there was an improvement in gross margin, otherwise it could have been much better, you know, in our view.
After the gross margin, there was also an impact, mainly because of some labor cost increases and importantly, energy costs. They have gone up, you know, quite a bit because of the war. That is what resulted in, you know, the kind of performance, you know, in the VLS discontinued operation. There has been a different impact there. We've not seen really a problem in the overall volume. The demand has still been there. It is just that, you know, there has been, you know, this. The price increase, which we're expecting, if there was no war, I think the performance would have been better because there would be not so much of inflation, you know, which we're experiencing.
Having said that, we have again asked some of our customers for some price increases from April, and we do expect a settlement of some price increases from April onwards in the month of September, because unfortunately, August is a holiday period in Europe and of course, all our customers are also, you know, the decision-makers are also on leave at the moment.
In India, the gross margin has also improved because of the internal efficiencies which we are trying to bring in the system, be it our sourcing, be it value addition, value engineering. We are continuously doing and that we will continue to do for the rest of the year, so that our gross margins further improves from this level.
Yeah, understood. That's all from my side. Thank you.
Thank you. Participants, you may press star and one to ask a question. The follow-up is from the line of Sachin Kasera from Svan Investment. Please go ahead.
Just one question on the lighting part of the business. If you both in quarter and two, if you could tell us, you know, where do we stand in terms of the LED part of the lighting business? How do you see the market evolving and you know, what is the type of market share gains we are looking there in the next two quarters?
Yeah. Maybe Arjun, you can answer that.
I think, from an India-specific standpoint, I think, really today, if you look at whether on the two-wheeler lighting side or the four-wheeler lighting side, I think the premium segments of the market, I think we're doing very, very well. Now, when I say premium segments, you know, what I really mean is, you know, if you look at 250 cc plus where you really have a full-fledged, you know, class B, homologated headlamps. Today, you know, we occupy all, you know, Bajaj, KTM, all other KTM brands as well also, and I think we'll do fairly, you know, strong volume there. Even the new Pulsar that has launched, you know, we supply the rear functional LED taillamp there as well.
From a passenger car standpoint, you know, I think a lot of the new models that have launched over the last 12 months, especially the XUV700 and all the Škoda and VW models that have launched, you know, we do a very large portion of the lighting. XUV700, you know, we do almost all the lights, you know, that are on that vehicle. You know, I think when we think about the technology that we already have on the road, I think it definitely places us in a very good position as, you know, as more and more vehicles move towards LED.
You know, ultimately today we are fully localized, whether in terms of design, development, manufacturing, you know, for these technologies. We're also vertically integrated with you know, the electronics manufacturing, which is you know, bringing you know, around 50%-60% of the BOM now. We feel we're in a very competitive place, and I think that is really what we could leverage going forward as well.
You mentioned three customers. These are only three ones right now we are working on LED, or are we also working with some newer clients and hence the client addition could be?
Okay.
Because it's about brand, it's about two and four-wheeler as we go ahead.
Okay. If I talk about passenger car, you know, our customer base is, you know, quite competitive. I spoke about Mahindra and VW because they are the largest customers. We also do LED, you know, we also do LED headlamps and tail lamps for Renault and Nissan, so both Magnite and Kiger. We also have LED contract with Tata, especially in terms of DRLs, like on Harrier and Safari. You know, we also have other non-LED businesses also with all of these customers, right? From a two-wheeler perspective, other than, let's say, Bajaj, we do Bajaj, KTM, Ducati, Hero. You know, we truly have a very comprehensive customer portfolio across technology segments. The question was more specifically about LED, so I spoke more about the customers where we're supplying high-end LED, high-end LED products.
Can you, sir, share your market share in LED in two-wheeler and four-wheeler, and how do you see that in the next three years?
Honestly, I would not know it off the top of my head. Again, I think when we think about the LED market, I will definitely share.
Are we in the top two or top three players, or we think how many players are there, if you can just say? How are we positioned, if not a specific market share? We are number two, number three, number four in LED lighting today in both two and four-wheeler?
I think two-wheeler especially, if you're thinking about from a value perspective rather than a volume perspective, I would say we're definitely in the top two, top three. Passenger car, you know, I think there is basically five suppliers, and so we're in, I would say we're in the top five. The exact number, I don't know off the top of my head right now.
Okay. Do you have any expectation through your internal budgets where you're looking at some significant market share gains in this segment, LED, two and four-wheeler segment?
You know, I think for us, again, I repeat, right, I think we are in a good place because we have been an early entrant and a market leader in terms of bringing this technology to the Indian market, right? I think when we look forward, we would expect that customers will trust a supplier who's already done it rather than a supplier who is hoping to do it. I think that is a trend that we hope to capitalize on.
You know, time that we have product on the road, fact that, you know, whether you read, you know, any, you know, you know, magazines like Autocar or Overdrive, et c, you know, the, all the lights we supply are reviewed extremely well. You know, whether from a performance standpoint, reliability standpoint again, we're doing very well. The expectation is that is a trend we will be able to capitalize on.
Sure. My second question is regarding the you know overall evolution of the automotive architecture in India and globally. As we see the world ahead, you know, it is becoming more and more about engineering technology software, and hence it has also become imperative for all the automakers to spend a significant portion of their revenues on R&D and innovation. Where are we in that journey today? How much do we spend or intend to spend on R&D and innovation as a percentage of sales or absolute number? H ow many engineers we have on that? H ow do we see that number in the next two to three years?
Should I take this also or?
Yeah.
Okay. You know, I think, again, I can speak more specifically about India and, you know, I think anybody else on the call can also add about the rest of the world in the Continental perimeter. You know, I think in terms of engineering, I think, really, Mahak, we have always spent on engineering. It's not a new thing, right? We've always been self-sufficient when it comes to, you know, technology. Almost all the products that you see on the road, all the products that we supply is technology that we have developed internally ourselves. Now, of course, over the last few years, you know, there was a result of BS6 and you know, topics like illumination coming to two-wheeler and also now with EV. I mean, there has been a need to drive further investment.
In my view, I think we've already done that. You know, we had a lot of analysts come, you know, to the Varroc Technical Center, visit our tech center, I think maybe last month or the month before. I think we were able to demonstrate comprehensive product development capability, right? You know, so in a lot of ways, we think investment has already been driven. Of course, you know, as technology continues to evolve, we will, you know, stay with it, right? Because for our customers, ultimately, you know, we are the supplier.
You know, I think both our CFO and our CMD you know talked about how we were able to ramp up a fuel injection system in three months, you know, and we supply 50,000 + a month now. You know, I think definitely, you know, I think the technology capability is something that you know we've always had, we've built on further and something that you know I think our customers recognize also.
That's fair, but can you give? I was looking more for some, you know, numbers. Perhaps if you could tell number of engineers we have in R&D innovation and how much do we spend yearly and what is the intent next two years? That would be more helpful.
Number of engineers today, I would say in the engineering center for electrical electronics alone would be somewhere around 450. I think if you look globally, the Continental perimeter have approximately 750 engineers. In terms of the total R&D spend, I would not know that number off the top of my head.
It will be above 2%. I think in our parameter now it will be around 2%-2.5% of revenue.
We intend to keep it there? We intend to increase it as a percentage of revenue going ahead?
We don't need to increase it. I think this is enough.
Sure. Thank you.
Thank you very much. I'll hand the conference over to the management for closing comments.
I just want to thank all of you again, you know, for joining in, listening to us and asking your various questions. The trust and faith of our stakeholders is what motivates us to pursue excellence in our day-to-day life. Thank you very much.
Thank you very much. On behalf of Ambit Capital Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.