Ladies and gentlemen, good day, and welcome to the Varroc Engineering Limited Q4 FY 2023 Conference Call hosted by Ambit Capital. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, 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 Mr. Karan Kokane from Ambit Capital. Thank you, and over to you, sir.
Yeah. Thank you, operator. Good evening, everyone. I welcome you all to the Varroc Engineering 4Q FY23 results conference call. From the management team we have with us Mr. Tarang Jain, Chairman and Managing Director, Mr. Arjun Jain, Full-time Director, Mr. Mahendra Kumar, Group CFO, and Mr. Bikash Dugar, Head, Investor Relations. I'll now hand over the call to Mr. Bikash. Thanks. Over to you, sir.
Yeah. Thank you, Karan and Ambit team for hosting the call. Welcome, all the investors and analysts in this call. Just before we start, just a small disclaimer that today's discussion may include statements which may constitute forward-looking statements. All statements that address expectation or projection about the future including, but not limited to, statements about the strategy for growth, business development, market position, and financial results are forward-looking statements. Forward-looking statements are based on certain assumptions and expectation of the future events and involves known and unknown risks, uncertainties and other factors. The company cannot guarantee that these assumptions and expectations are exhaustive and will be realized. Actual performance or achievement could thus differ materially from those projected in such forward-looking statements. No obligation is assumed by the company to update the forward-looking statements contained today in our discussion.
With this, I would like to hand over the call to our Chairman. Over to you, sir.
Thank you, Bikash. Thank you, team Ambit, for hosting the call. A very good evening to everyone. At the outset, I would like to highlight some positive developments of FY 2023. Firstly, the revenue from continued operations grew by 17.5%. The EBITDA margin improved to 8.7% versus 6.6% in FY 2022. Reduced net debt by INR 220 million since the divestment on October 6, 2022. 15 patents, including five patents overseas, were filed by the group. Commercialization of new products developed by our R&D. Divested the loss-making European and American 4-wheeler lighting businesses. Integrated the remaining overseas operations under one Varroc, have built a strong order book in the new businesses.
Talking specifically about this quarter, that is quarter four FY2023, the automobile production in India during quarter four FY2023 grew on a year-on-year basis for most of the segments due to the easing of the semiconductor issues and improved economic activity. The segment from which we generate around 70% of the revenues, that's 2-wheeler, saw a regrowth as exports are impacted by geopolitical issues and domestic demand was impacted due to lower consumption in rural areas. On a year-on-year basis, 2-wheeler production degrew by 3%, whereas 3-wheelers grew by 7%, passenger vehicles by 13% and commercial vehicles by 6.4% on a year-on-year basis.
On a quarter-on-quarter basis also, 2-wheeler degrew by 5.1%, whereas passenger vehicles grew by 11.9% and commercial vehicles by 22.6% due to pre-buying before BS-VI norms came into effect. Q4 is seasonally a stronger quarter for 4-wheelers. In terms of operations in Q4 FY 2023, our revenue from operations grew by 2.6% on a year-on-year basis to INR 17,011 million. Our EBITDA margin was at 9.5% and it improved on a year-on-year basis by 340 basis points due to a business mix, recoveries and operating leverage. Sequentially also, the EBITDA margin has gone up by 170 basis points due to a business mix and recoveries. The reported PBT for the quarter was INR 411 million.
We could reach agreement with our customers on various claims which had been pending for some time, and the benefit was recognized in the Q4 results. On anticipation of moderate inflation as well as early signs of rural consumption increasing, we will continue to build the momentum in FY 2024, factoring in seasonality. In India, we continue to have strong order wins for new business in FY 2023 across business units. During FY 2023, lifetime revenue from new order wins is INR 51,782 million. Out of this, business wins from seven prominent EV customers is INR 17,968 million. The order books also reflect our effort to diversify, as we see nearly 56% of lifetime order wins from the 4-wheeler business and 44% from 2 and 3-wheelers.
As stated earlier, our effort to strengthen our R&D capability is showing results as not only we have filed 15 patents in FY 2023 from the group that also commercialize products developed by R&D in this financial year. During the current financial year, our businesses will continue to focus on profitability, improvement, free cash flow generation and debt reduction. We also got a IND A+ with stable outlook rating from India Ratings. Finally, I would like to keep you all updated on the final adjustments to be made to the escrow amount and the sale consideration for the deal with Plastic Omnium. The intimation was already given by us on May 17, 2023 to the stock exchange.
The buyer submitted the final adjustment, but failed to provide the necessary supporting details to enable the company to understand these adjustments. Varroc disagrees with the buyer on the proposed adjustments. Both the parties have now mutually agreed to attempt the resolution of their disagreements in accordance with the provisions of the SPA. A qualification was added to this effect. It is not possible to ascertain the exact outcome of the negotiations at this stage. We will keep you informed once the negotiations reach conclusion on this matter. I'll ask MK, our Group CFO, who will walk you through the presentation, which is already uploaded on our website and submitted to the stock exchanges also. Over to you.
Thank you. Thank you, Sir. Good evening, everybody. Since our Chairman explained the highlights and the industry performance, I'll straightaway go to slide 3 in the presentation, which is about the consolidated financials. As our Chairman highlighted, sorry. In Q4 of this year, we actually reported a PBT of about INR 41 crores and a PAT of about INR 40 crores. EBITDA was 9.5%. The important thing here to note here is on full year basis, we actually reached about 8.7% of EBITDA, or close to INR 600 crores of EBITDA in absolute terms, on full year basis. The reported PBT was about INR 83 crores. One point I would like to highlight here is this is after suffering a one-time exchange loss in the first half, about INR 56 crores.
After that, the reported PBT came at about INR 83 crores and PAT at about INR 39 crores. That's about the consolidated numbers. The next slide, of course, we gave the revenue breakdown. No significant change from compared to last year or sorry, last quarter. We continue to be predominantly a 2-wheeler and 3-wheeler player. It's close to 72% coming from that segment and about 25% coming from 4-wheelers. In terms of business unit mix, our PBU continues to be the largest one. It's close to 1/3 of the revenue coming from there. EBU gives about 22%, lighting about 21%, and MBU about 12%. Aftermarket is close to about close to 9%. In terms of customer mix, Bajaj, of course, is our largest customer.
It's close to 38%, 37.5% revenue coming from Bajaj and the remaining coming from various other customers. In terms of geographical distribution, about 82% comes from India and the rest comes from outside India. Now going to the next slide, which is about the net debt movements. Would like to highlight that the equity now touched again back to INR 1,000 crores plus. You may recollect that because of impairment, we had to take some kind of beating earlier. Back to INR 1,000 crores of equity. Of course, EBITDA annualized is close to INR 600 crores, like what I mentioned. The net debt level ended up at around INR 1,278 crores.
Here again, all of you may recollect that when we actually did the divestment, on October sixth, the net debt was close to about INR 1,300 crores. We brought it to INR 1,278 now. In terms of net debt to equity, it actually means we are close to about 1.27. Net debt to EBITDA is slightly above 2 at 2.13. That's on the debt related numbers. Coming to the order wins, of course, our chairman explained that close to INR 5,200 crores of order win or INR 5,178 crores of order win was there in FY23. Most of it came from the 4-wheeler. In fact, 60% came from 4-wheelers and about 44% only came from 2-wheelers.
Similarly, nearly close to one-third of it is in electric vehicles. In terms of Bajaj versus non-Bajaj also, I think, we can see that 86% of these lifetime revenue is going to come from non-Bajaj customers. Again, going to the next slide, which is what we've been highlighting earlier also that these focus areas continue to be very important for us. We are focusing on revenue growth. On top of that, contribution margin improvement is the next focus area. These two, with the stringent control on fixed cost should actually result in PBT growth.
Then on top of this, with very robust working capital management and of course, strong control on CapEx also, this should all convert into a free cash flow generation, healthy free cash flow generation, which will be prudently deployed. Our initial focus will be debt reduction. That's how we are going to follow in the near future. With that, I'll stop here. I think the next slide is about awards and CSR initiatives which we can see from the presentation. The backup details about our company or the overall corporate presentation is also attached in the subsequent slides. Let me stop here. I will be happy to take your 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 1 on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Nikhil Rungta from Nippon India Mutual Fund. Please go ahead.
Yeah, hi sir. Thank you for the opportunity. Sir, 2-3 questions from my side. First is if you can give slightly more details on this auditor's opinion and the details which you have provided on stock exchange on seventeenth. Like, what exactly are the disagreement and because of that will the consideration come down further or increase or what exactly is it?
Let me answer this question. As we mentioned in the stock exchange announcement, it's too early for me to comment on the amount or the direction of these adjustments. As per the agreement, we left about INR 28 million of escrow with the buyer. It is also subject to some final adjustments, which should be done 90 days after the closure date. Those details or those adjustments have been submitted by the buyer, but we find some of them to be not backed up by enough details, that's the reason we actually rejected those, we actually asked for more details. Those details are yet to come to us. Now we are going to have a discussion in person, maybe sometime in June, first week or second week.
After that only we'll get some clarity about what's going to be the future state. That's the position as of now.
Basically this issue is only for the escrow amount. There is no issue on the deal. The deal has been completed, right?
Yeah, of course. Deal is completed, but the escrow amount, so indirectly when the escrow is adjusted, the consideration also may get adjusted. I think that's the meaning. Yeah.
Okay.
Deal is not under question. It is the amount which is what we need to finalize.
Okay. Okay. Got it. The amount can be higher or lower, which might lead to further, I mean, one-time loss or profit in our numbers, right?
Yeah. I mean, we never know. I know we need to conclude this discussion, only we will get to know. Yeah.
Correct.
Directionally, yes.
Got it. Second question is what type of capacity utilization are we currently working at and till what level can we reach? I mean, in terms of revenue, we are already at INR 6,900 crores, wherein our margin is 8.7%. Till what level can we go in current capacity and what could be the margin there?
Yeah. You know, our capacity utilization presently for whatever we've invested, a lot of the investments were actually done also, you know, in FY 2019. We are today, I would say, on average, not more than 60% or 62% of the total. There's a huge upside, you know, which is possible. As you know, you know, we are largely dependent in the 2 to the 3, two wheel sector, about 70%, and that has unfortunately not performed very well, including our main customer. That's the reason why we are at about 60%, 62% of our capacity utilization. There's a huge scope, you know. Our main focus, to hit the nail on the head, our main focus is capacity utilization.
We can go to 80%-85% at least of the utilization. You can, you know, seeing the revenue we are at today, you know that, you can get a sense of what we can really, what kind of revenues we can really drive out of our existing investments we already have. You know. In any case, I think, in the coming year, we are looking at a robust double-digit growth overall from whatever the revenues, you know, we have achieved in FY23.
What type of margins are we looking at at that time?
See, I mean, like we have said, you know, we are striving for overall double-digit. That's something we will also strive for in the coming year. You know, that's something we feel, you know, is possible. Therefore, that's gonna be our objective.
Got it. Sir, last question from my side. Where do you see debt levels, say by end of FY 2024, and what could be the CapEx for FY 2024?
Yeah. Hi Nikhil, Mahendra here again. As far as CapEx is concerned, I think it will be close to maybe about INR 200 crores, at the total level, including overseas and also India. Coming to the debt levels, last, like what I mentioned last time, it's maybe still too early to comment. We expect most of the reduction to happen only in H2. Yeah, that's our main focus area. We won't be able to give a number or place a number now. As you have already seen, we reduced by about INR 22 crores, so we'll continue to put in those efforts. We will see the results in H2.
Got it. That's all from my side. Thank you so much and all the best for the future.
Thank you.
We have the next question from the line of Vinay Jain from Karma Capital Advisors Private Limited. Please go ahead.
Hello. Yeah, thank you for the opportunity. Just had a couple of questions. Firstly, in the opening remarks, we mentioned that there was some benefit of pending claim settlement with various customers during the current quarter. Can we quantify the amount?
Yeah, Vinay, this is Mahendra here. Basically, like how we explained last time, this is an annual exercise which keeps happening in this particular industry. When it happens, it happens across several products and across multiple customers and on a cumulative basis. It is very difficult to slice it for each quarter separately. That's the reason I think the best thing would be to see it as an annual number. If you want to look at the margins instead of looking at quarterly numbers, it's better to see the annual number. I think that will give a better indication.
This would be part of the overall revenues, right?
Correct.
It would be in that line item.
Correct.
Understood. The second question was regarding our China JV. We had plans of consolidating that JV into our numbers. Any progress we have made on that front?
See, as of now, we have taken the numbers based on what they declared in the arbitration proceedings.
Right.
Based on that, we actually took it, but we don't have the audited numbers yet.
Mm-hmm.
That's the reason we did not formally consolidate. Once the arbitration proceedings come to an end or we reach some kind of settlement with them, that's when we'll be able to formally consolidate based on audited numbers. We'll continue to get the information based on these arbitration rulings. That's how we will do it in the near future.
Understood. Lastly, again, if you see on a full year basis, we would be at a gross margin of around 35.5%. Hopefully, like, we should be improving on this number, as you also rightly mentioned in the opening remarks that focus is on improving the contribution margin. This number should improve in the coming quarters and years, right?
Yeah, I mean, we have various cost reduction efforts, which our teams are working on. Yeah, directionally, yes, it should improve. We also need to see what kind of inflationary pressures coming in future and how much we'll be able to pass it on. Yeah, directionally, what you said is right.
Understood. Yeah. Thank you. Thank you for taking my questions. All the best.
Thank you.
Thank you. The next question is from the line of Vishal from Svan Investments. Please go ahead.
Thank you for taking my question, sir. Sir, one question regarding you said that utilization levels are around 60%-62% currently. I am seeing in the cash flow statement there is a CapEx purchase of plant and machinery of approximately around INR 530 crores. Can you throw some light on this number?
Yeah, Vishal. My suggestion would be that you should not go by the cash flow statement because this includes both the discontinued operations also. It has the impact of discontinued operations number also for the for six months. If you want to get a sense of how much CapEx we really incurred in the continuing operations, I think it could be close to INR 300 crores last year.
Okay. Okay. Great, sir. Sir, regarding there is one more item, cost incurred on intangible, which was INR 200 crore last year, and this year also it is INR 67 crore-INR 68 crore.
You're referring to the cash flow again?
Yes, yes.
Yeah. Like what I said, don't go by the cash flow numbers. That again includes the discontinued numbers also.
Okay. Okay. Thanks, sir. That was all from my side. Thank you and all the best, sir.
Thank you.
Thank you. The next question is from the line of Jyoti Singh from Arihant Capital Markets. Please go ahead.
Yeah, thank you for the opportunity, sir. Sir, my question is on the same debt side, what's our view going forward? Second is on the growth outlook side. Like, this time we did it around 17% for FY 2023 level. What's our view going forward?
Yeah. Like, like what our chairman explained, definitely growth is a focus area for us. We will continue to aim for strong growth going forward. Of course, it also depends upon, part of it depends upon the industry growth and part of it on content growth. That is certainly a focus area, but we won't be able to give a number if that's what you are expecting.
Okay. sir, like earlier, we had discussed, like we will going to diversify from 2-wheeler to other segment also. how is this things is going on that front end? What are the strategy that we are following for that?
There's no specific strategy to diversify like how we explained based on the order win. If you really look at the new orders, I think most of them are coming in the 4-wheeler segment only. I think it naturally happens because we are now giving lot of importance to the 4-wheeler segment also, both in terms of lighting products and other products. That will eventually happen over a period of time, but immediately you won't see a big swing in the 2-wheeler versus 4-wheeler percentage because of this.
Sir, like, just kind of assumption, if you can give us, like till what time we will see, our company in a better level to, you know, reducing the debt and making company better and profitable?
Profitable, of course, I think we have already done. Of course, we need to now continue this. As far as the debt reduction is concerned, like how I mentioned in my previous calls also, we have to be little bit patient. We are hoping that H2 is when I think we can see some kind of good reduction. The existing operations don't need any more debt or any kind of debt support. It's only generation which comes from operations which we have to use to repay this debt. Of course, we need to see the other areas. For instance, let's say if the China settlement comes to some kind of a shape, we may have to invest some amount there. Those kind of non-operating areas may have some kind of impact on debt levels. For operations, the focus continues to be debt reduction.
Sir, is there any ...
Ma'am, we request you to please rejoin the queue for further questions. Ladies and gentlemen, to ask a question, you may please press star and one. The next question is from the line of Aditya Jhawar from Investec. Please go ahead.
Thanks for the opportunity. My first question is, you know, just to better understand the new order wins of this, you know, INR 5,200 crores, if you can split us between the completely new order wins and re-wins, it would be quite helpful.
Aditya, these are completely new wins only. We don't report a replacement order.
This is completely new order wins because?
Yes.
Okay. Okay. fair enough. My second question is on the China JV. you know, where are we? I mean, what is the status with regard to separation with the JV partner? If you can throw some light on the revenue growth, margin expansion that we have seen. This quarter, clearly the, you know, performance of China JV was quite encouraging. Was there any one-off in this quarter? If you can throw some light on that.
Sorry, you're talking about the China JV performance.
Yeah. Yeah.
China JV, see the arbitration proceedings are in progress. I think, they may go on for maybe another 1 year or so, 1- 2 years. Having said that, there is also, the arbitrator is also encouraging the respective parties to, sit and discuss and then come to some kind of a settlement. Those things may happen in the coming quarters. That's on the status. Sorry, what was your second question?
Business in China. Yeah.
I think that's doing pretty well. I think last year, as you all know, it had a COVID impact for 2- 3 months. Now I think the business is back in full action.
Aditya, in China, you know, being the largest anyway car market and the penetration of EVs being the highest in the world, you know, I would say as a JV, both the factories have been performing fairly well, you know. We do see a good level of growth also in the coming year. Definitely we do expect, you know, the performance from the JV to do well. What you see actually in this quarter is something, you know, which will continue. You know, we're hoping for actually good results also in FY 2024 from our China JV. Of course, our effort is that, you know, like we said earlier, that the arbitration proceedings are on.
Probably it could continue for, you know, probably up to, maybe, nine months or so. Our objective is that maybe, reach an out of court settlement, you know, with our partner, sooner than later. That's also something which has come out of the arbitration proceedings that we try to, you know, kind of, you know, settle amongst ourselves, sooner than later. That's what the effort is now that we try to, you know, culminate, you know, or rather split, you know, at an earlier date so that we can then focus ourselves, you know, for future growth in China, which we expect to be a good market for Varroc.
Okay. That's quite helpful, Tarang. Clearly there is no one-off in this quarter, right? Because it's almost about 20% of our PAT, the China JV number.
No, it is not a one-off. This is something which would continue.
Okay. That's very good to hear. You know, the next question is, if you can highlight any breakthrough into, you know, OEM for our EV component in this quarter?
Maybe Arjun, if you want to take this.
You know, I think like we said before, right, we continue to be engaged with four, actually five now, different OEMs, locally and abroad with respect to the EV portfolio. When there is something to report, for sure we will report it.
We are very hopeful, Aditya. I think we're very strongly engaged. We have, you know, very strong, highly efficient products which we have developed. We're engaged with, you know, all the some of the prominent, you know, 2-wheeler OEMs in this regard. You know, we are hoping for some results, you know, in this financial year.
Perfect. Perfect. My final question is to Mahendra. Sir, if you can highlight what should be the tax rate assumption in FY 2024?
Final tax rate assumption?
Yeah.
FY 2024, basically if you really look at the applicable tax rates, VGL is at 35% plus of course surcharge and all. VPL, which is a subsidiary, is at 25% plus surcharge.
On a blended basis, how much should we consider, sir?
See, if you are looking at the exact impact on P&L, it's difficult to predict because it also depends upon the movement in deferred tax. It's difficult to actually put a number to it in terms of what could be the effective tax rate. If you really look at the normal applicable tax rates, then you can broadly make it out. P&L is roughly about one third of our business, then you can compute based on that.
Okay, perfect. I'll fall back in queue. Thank you and all the best.
Thank you.
Thank you. We have the next question from the line of Aashin from Equirus Securities. Please go ahead.
Yeah, thanks for the opportunity. My first question is on the other income number. That seems to be high this quarter. Is there any one-off and what sort of other income we should, you know, take going forward?
Yeah. See, Mahendra here. There are basically two major components in it. One is the government incentive, which we get from the state governments for our operations. That we recognize over the period of the 10 years based on the volumes of the respective business. That's one reason. Second reason, of course, every year end, we also do some cleanup in provisions and liabilities. If there's anything which is outstanding for too long a period, we generally reverse it. But these are the main things.
Okay. Okay. Thanks, sir. My next question is on the lighting business. This quarter, the lighting business, there was a sequential drop in the lighting business this quarter. Could you give us a sense on how the global 2-wheeler lighting business is doing and how is the Indian lighting business doing, and what sort of growth do we see in both of them going forward?
I think, our lighting business when it comes to India, we are both in the 2-wheeler lighting and the 4-wheeler lighting business. We have seen actually a good growth, I would say, when it comes to our both lighting business in India. Both 2-wheeler, 4-wheeler, we have won on the 2-wheeler side, we continue to win, you know, various lighting programs, India and abroad, you know, from various customers. On the 4-wheeler also, even recently, we have won, you know, some very prominent business even for the EV vehicles, you know, on the 4-wheeler lighting side. When it comes to abroad, our lighting business is mainly 2-wheeler lighting as we have exited from the 4-wheeler lighting business. There we have our plants in Italy and Vietnam and also in Romania.
There we are seeing actually, a good performance. Also, yes, the growth has been a little bit subdued, you know, in the last one or two quarters abroad. That's something now we will see a growth, you know, in this coming year, moving forward. Overall, I would say India as well as our businesses abroad in Europe and Vietnam, we expect to see actually a good level of, you know, traction, you know, in our overall lighting business. We do possess a very robust and a good level of technology, you know, in both these sectors.
Yeah. Sir, third question is on the order book side. This quarter we have seen very good addition of orders on the 4-wheeler side. If we compare the whole year as well, the 4-wheeler orders have been very strong. What's, I mean, what sort of a ramp-up do we see on the 4-wheeler side? Where are these orders coming from, which segment?
Our passenger car offerings are across lighting and polymer. I think the big reason why we've been able to win incremental businesses is because we've been early to launch, you know, a fair amount of technology over the last 18 months. General development time for a passenger car vehicle would generally be between 24-30 months. Now maybe 20-30 months. You know, it's hard to put a specific month or a quarter on it, but that is the timeline in which we would expect the ramp-ups for these programs that are taking place.
Okay. Okay. Sir, thanks. My last question is this EV revenue, which we have reported INR 100 crores. Could you give us a split on what would be our conventional product and what would be our new product? What sort of a growth do we see in this number going ahead?
It's 80/20, you can say. 80% is our new products and 20% is our conventional products.
Yeah. Yeah. Thanks a lot. I'll join back the queue.
Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.
Hi. Good afternoon, and thanks for the opportunity. Sir, our chairman made a remark that this year we expect to grow around double digits. When our 70% of business is coming from the 2-wheeler, which is expected to do a single digits as well as around 20% of business is from global. If you can give little more color what will drive our growth in double digits?
No, I think it's the same, the same trends, that have driven our growth in this year also, right? Because, you know, when in general, the product portfolio and the strategy that we pursued over the last few years has been to drive content growth. The primary content growth that is taking place in a 2-wheeler and also I would say in a passenger car is with respect to electronics. This is where whether on an IC engine, whether on an EV, we enjoy extremely strong position. The further topic also is, even when we look at the segments, we still see the premium segment, in 2-wheelers doing well, which is again, where we have a significant amount of content.
In our expectation, even as we look at the year going forward, these, the new technologies, the new programs will continue to grow in size.
Is it fair understanding that these are more profitable than our traditional business, which can help us, I mean, apart from operating leverage to achieve a double-digit kind of EBITDA margin?
I would not comment maybe on profitability of specific products and programs, but in general, right, as you said, greater the operating leverage, the better the position it puts us in.
Okay. Thank you and all the best.
Thank you. We have the next question from the line of Prateek from Nippon Asset Management. Please go ahead.
Yeah, hi. Just is it fair to say that QOQ, when I look at your performance, it's very similar to how the automotive markets have behaved. This is primarily because of our largest customer. Ex that there would have been growth QOQ. What I'm trying to get to is basically I can't see the benefit of content flowing through I mean, despite, you know, the automotive markets not doing well. Is it only because of Bajaj?
No, I would say that the content growth actually has, in a way, helped us reach a certain level of revenue. Otherwise, like, you know.
Correct. Correct.
The Bajaj volumes were, you know, quite low. They were quite negative actually for the whole year, you know, including in Q4. It was the content growth, what earlier was mentioned that, you know, because of electronics, you know, is the reason why we have been able to reach a certain level of revenue and, you know, on a very low capacity utilization. Therefore, I think that this content growth is really helping us in driving us at least a certain minimum level of performance in the market.
Got it. Got it. The second question is more on your directional or strategic initiatives of increasing contribution margins, reducing fixed costs. Could you just talk a bit about what how much of that or has any of the strategic initiatives played this quarter? The gross margins have improved. I understand there are some one-offs over there. Even if you see sequentially, EBITDA margins have expanded, right? I'm just trying to get to whether it is mostly attributable to the one-offs or there has been some improvement in terms of controlling fixed costs/improving country margins.
The efforts related to our cost reductions, including the fixed cost control, I think, are just beginning or they have just started. We'll see most of the benefit maybe in the current year. I won't be able to put a number to it. Yes, definitely there we should see some improvement this year.
Got it. Mahendra, just by your guidance of, you know, repaying debt in H2, it looks like most of these benefits will start showing in H2, right? The improvement in margins, which will help you reduce debt.
Correct. On top of that, I mean, we are not just relying on profitability improvement alone for debt reduction. In fact, there is enough to be done in working capital side also. That continues to be our effort. Second thing is if you really see our CapEx versus depreciation.
Yeah.
Yeah. We don't need to really invest INR 330 crores or INR 340 crores, which is our depreciation number. To that extent, there will be, to the extent that will reflect in the FCF generation also, which should help us in debt reduction.
Last question, what's your effective cost of interest cost, effective interest cost? Where can you get this down to with improved maintain cash flows?
If I really look at the recent deals which we are getting, I mean, they are anywhere between like 8.5%-9.25%. That's the range. Obviously we are trying to keep it at the minimum as far as possible. I think we are getting some good positive reaction, maybe this kind of improved profitability will strengthen our case further.
Would it be possible for you to call out, fixed cost initiatives or fixed cost reduction initiatives/improvement in contribution margins in terms of like sub-teams, culture, KPIs, points? Is it possible?
No, we don't want to give any guidance like that.
Okay.
Again, let's wait for a couple of quarters to see them materialize and then talk about that.
Sure. Sure. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Pradyumna Choudhary from JM Financial. Please go ahead.
Yeah, hi. My first question is when you speak about new order wins, when you give a number, how does the calculation take place? Like, what kind of growth do we assume for the product or the modules that we are supplying? Just wanted to get some clarity on that.
Generally any order win is reported based on what is the customer expectation of the volume that they will achieve on that particular model. Of course, we will temper it with, again, there is no, let's say, precise science to it, but we will temper it with what is the reality that we see in the market today also, right? It will generally be a blend of that we pull. Yeah, I think that's the best answer I can give you.
Understood. Secondly, regarding your EV products like traction motors and DC-DC converters and all these, we see quite a few companies talking about manufacturing these. How are we really differentiating ourselves, especially when it comes to pitching ourselves to customers outside our anchor customer?
Yes. I'd say there's two major points of differentiation. I think the first one, I think I cannot state it enough in terms of how much of an advantage it is when we actually engage with customers, is that we are already completely localized when it comes to manufacturing. We have enough product in the field. We've been manufacturing now for more than 12 months. That is definitely a significant advantage for us. The second major advantage at a product level is around efficiency, right? I think the most expensive component in an EV is the battery, right? All of our products are geared towards ensuring we're able to maximize range based on any particular battery life, based on any particular battery size.
Thirdly ...
R&D setup which we have, which helps us to develop and commercialize the product very quickly.
Yeah. Yeah. Yeah. Of course, I should mention that also. I think, you know, when I say localization, one is of course the manufacturing localization, but also let's say the engineering and development capability localization is comprehensive. Now, I think we have said it before also, but, you know, EV products today, you know, are not necessarily mature technologies. I think the validation and testing centers that we have allow us to move through generational maturity very, very quickly. You know, again, when I say we're engaged with multiple customers, I think that's definitely something that they really like.
Understood. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, we request you to please press star and one at this time. The next question is from the line of Arjun Khanna from Kotak Mutual Fund. Please go ahead.
Thank you for taking my question. My first question is just a follow-up to a question by an earlier participant. You talked of a cash release from working capital. When I look at your balance sheet, this inventory plus receivable is equal to payable. In a sense, you're running an extremely tight ship, probably a best in class, compared to even most of our peers. Just curious, how do you intend to release cash from even this position?
There are two, three things we are trying to do. One is of course inventory. There is still enough scope for further reduction. Actually, we started this about 6 months back. I think we achieved some success last year already, but still there is more to be taken there. Second thing is, if you really look at our payment terms also, I think still there is some scope for improvement in that area again. Plus there is something in various other categories, like we have other current assets where certain deposits are locked up. There are certain GST input credits which need to be fully utilized. There's a big shopping list which we are working on, so it doesn't come from 1 single area, but across multiple areas is where we need to take it.
Sure. sir, my second question is in terms of CapEx. While we have brought out roughly INR 200 crores of CapEx, how much would be spent in India and how much outside India? Do we have a break up there?
Most of it is in India only. It is almost like 80%-85% is in India only. The remaining 15% might be abroad.
Sure. Our Romanian unit would be fully built up in terms of SMT lines and new lines you were looking at scaling up on?
You know, I think the way to think about scaling an SMT plant is there is definitely space to scale further. For the business that we have across our different SMT plants, we have enough capacity. Of course, if we have significant order wins, et cetera, that would need, of course, further CapEx also.
Sure. My final question is probably I haven't understood it as well. In terms of China, you mentioned in arbitration, and we have used those numbers. Aren't we in control of the plants? Why would we have to use numbers from arbitration? Won't our people be on the ground?
Yeah. It is like this. What is under our control is one plant.
Sure.
... step-down subsidiary. For consolidation, we need it at the holding company level.
Okay.
We are 50% partner in a joint venture, and this particular plant, which is under our control, is a subsidiary of that particular JV. Unless we get
Sure.
... heavy consolidated number, we won't be able to consolidate here.
Sure. Perfect. understood. The second part to this is, in terms of the auditor qualification, just to reiterate, it's only the escrow amount that's, under consideration, or it is the, even the EV value that could be under consideration?
That-
... or reconsideration?
Yes. See, as per the agreement, the EV consideration is also subject matter of discussion. Having said that, we have significant amount of escrow there of INR 28 million. Which way it goes, we need to wait and see. We need to wait for the negotiations to conclude and then see which direction it progresses and what kind of impact it will have.
Theoretically, it could be lesser than INR 28 million or even more than INR 28 million. Is that the right understanding?
Politically speaking, we shouldn't be talking about that because -
Sure.
- it comes in the public domain and the other party also may be seeing it.
Sure, fair enough. Sure, fair enough. Sure. Thank you.
Thank you.
That's it.
All right.
Thank you. The next question is from the line of Abhishek from Dolat Capital. Please go ahead.
Thanks for opportunity. Sir, what would be the key revenue drivers for polymers business?
Sorry to interrupt, sir. The line for you is not very clear. We request you to please use the handset while you're speaking.
Hello.
Yes. You're audible now, sir. Please go ahead.
yeah. What would be the key revenue drivers for the polymer business? If you can throw some more light on new business wins and new products addition in this particular segment. How do you see RM trend and margin outlook in this segment?
The key drivers for the business again, right? I think over the last, over the last two years, we have been able to... We have productionized multiple processes for the first time in India, right? Whether it is two-way molding with, you know, all-fin flip, you know, technology, you know, even topics like, you know, roof rails, et cetera, which are advertised. These are really first-time products. That within these processes and the product lines that these processes build is where we expect to see the growth, is where we will see the growth.
First, there is also an ability to drive further value add also, you know, for example, whether it is painting, whether it is integration of, you know, certain other data, other featurization, the door panel, which customers are increasingly looking for because there is clearly a increase in the standard of the cabin that OEMs are looking to achieve. Directionally, I would say this is where, this is where the growth for polymer is, this is where the growth for our polymer business is coming.
How do you see RM trend and margin outlook in this business? Earlier the raw material prices was quite high, and that was impacting the margin, but now it is going down. How do you see benefit of it?
We don't comment specifically on, product specific margins.
Okay. sir, in metallic business, which is a high margin business for you, there's a high risk from the EVs accelerations. What is your plan to de-risk it? Have you added new products on this particular segment?
Yeah. You know, again, I think when we talk about EV penetration versus the capacity that we have versus the overall split of the business, I think we feel we are quite comfortable where we are at right now. Even within the metallic business, it's not like the entire metallic business is at risk, and an EV also will need quite likely going forward, transmission assemblies. There is enough, you know, I think we're quite comfortable with the amount of capacity reusability that we have. We also already build, we also already supply certain metallic products, you know, into EV, as part of the for example, for the motor, the shaft, we make in-house. Right.
You know, from that perspective, we don't see a major threat to the capacity, at least over the next 2- 3 years as a result of EV.
Sir, supplying the, this, motor and motor control to Bajaj Chetak, so you have also started to supply this to other E 2-wheeler brands?
No. As of now, we are focused on Bajaj and Bajaj markets.
Okay. Sir, my last question on this performance of the VLS remaining business. This comprises 4-wheeler lighting, 2-wheeler global lighting and electronics. You have mentioned around 18.3% revenue from the global business. Is it the VLS remaining business revenue?
I didn't get it.
Mr. Abhishek, we could not hear you very clearly. We are sorry. Can you please repeat it?
You have mentioned 18.3% revenue from the global business.
Yes, sir.
Is it the VLS remaining business revenue?
That is VLS remaining business and also the export which we do from India.
How much classification in terms of the export from India and the VLS remaining business out of 18.3%?
Business-wise, we don't want to talk about that. This is what we have been reporting, and this is. Export is overall not significant. Yeah.
Okay.
Yeah. It's predominantly office business. Yeah. Export is not so significant at this stage.
Okay.
There is scope for improvement there.
Okay. Thank you. That's all from my side.
Thank you. The next question is from the line of CA Kanwaljit Singh from Balaji Fininvestment. Please go ahead.
Hello.
Mr. Kanwaljit Singh, your line has been unmuted. You may proceed with your question.
Hello. Arjun, m y question is, what are the new avenues that the company is looking forward in the next year, and what will be the CapEx next year?
I think the CapEx question, CF already answered. We would expect it to be around INR 200 crores. You know, I don't think there is necessarily as many new avenues we need to pursue. I think we will continue to pursue the existing avenues that are driving growth for us. Which will primarily be around passenger car, and the businesses that we win in Polymer and Lighting, as a result of the first mover advantage we have on certain technologies over there. Secondly, you know, as a result of, you know, premiumization and content growth, within 2-wheeler, whether that be EV components or higher-end electronic components on premium 2-wheelers.
Sir, the current participant in the queue seems to have dropped from the queue. We will proceed to the next question, which will be from the line of Vishal from Svan Investments. Please go ahead.
Hi, this is Sachin Kasera here. Congrats on financially some improvement in terms of EBITDA margins and getting close to double digits. Hope to see this sustaining and improving going ahead. My question was, when you see the segmental numbers, in the other segment, which I presume primarily refers now to the Italian operations, there's a good improvement quarter-on-quarter. If you could tell us a bit more, whether again there is some one-off in this or is there some structural changes you have done in this business that's become profitable?
Yeah. Sorry, your question was not very clear. I guess you're asking about the overall margin improvement, right?
No, sir. My question was, when we look at the segmental numbers, the other segment which I think primarily refers to your Italian operations, there also we have seen a sequential improvement in profitability. Are there some one-offs in that or is there we have done some structural changes, hence the profitability there has improved?
Yeah. There was no one-off, I think over the last one year or so, Italian operation has been doing well. They are doing a bit of positive. They are supporting profits also. We are hoping that that will continue.
What is the long-term strategic fit in terms of the Italian operations? We continue to run them the way they are with focus or no, just improving the profitability or at some point of time we may look also in terms of the strategic fit of the Italian operations?
You know, the Italy operation, you are talking I think about the lighting business, right? The two-wheel lighting business.
I am talking about the forging parts business. Forging.
See, presently, frankly, we're not thinking too much ahead, you know. We are just thinking that, you know, how do we improve the operations. We have, as you know, significantly improved the profitability, you know, in, in this forging business of ours. We still have some certain capacities which are, you know, underutilized. Our basic focus now is that how can we get in more revenue in this plant at the moment, you know. At the same time, you know, drive also further operational, you know, improvements which are possible. The focus will be revenue growth as well as profitability improvement coming through, you know, driving, you know, further operational, efficiencies. This is our focus at the moment, you know. We're not looking at, something more at the moment.
Sure. Second question was on the contribution from electric vehicles. You have mentioned in the presentation that it was around 1.5% or approximately INR 100 crores. Considering the strong growth in the EV segment, can you give us some sense in the type of order base that we have, what type of growth we could see in your overall EV business in coming year, maybe over 2-3 year period?
No, no. See, basically, I think it was like you said, it was INR 100 crores. You know, we will see, and this was largely coming, I think, from one major customer presently. Talking about, largely we're just talking about the EV powertrain because we've already said that if you have to talk about other products, whether it's polymer or lighting and everything, then obviously we have won a lot of business last year, more than INR 1,700 lifetime revenue orders from the EV space. Talking about the EV powertrain, you know, we expect, you know, a good level of growth, you know, in this, on the EV powertrain space, even from the one customer we have today.
We're already seeing a growing momentum, coming in, you know, from this one customer on their, on their model. We are hoping that the growth will be quite significant in this financial year.
Sure. My next question was on working capital, as mentioned by the CFO that there are a lot of areas other than just inventory. If you could give us some sense that, you know, are we looking at some good number or is it just bringing some efficiency in the overall working capital or the raise from working capital could be reasonably significant and hence there could be a perceptible improvement in the net debt because of the release of working capital?
No, it won't be a very significant number because part of it was taken in 2023 already, but still there is some more left. I won't be able to put a number to it. There is enough scope for improvement. It may not be, if you're expecting it to be a three-digit number, it may not be.
Sure. Sir, just last question to one of the previous queries where you had mentioned that, you know, the ratio of 2-wheeler and PV may not change significantly. When we look at your order book this year, then when we see the share of, you know, passenger vehicles and commercial vehicles almost like 50%. I'm a little confused as to if the order wins has been so strong from the non-2-wheeler segment, why the ratio in terms of where revenue should not change little bit more in favor of PV and CV or rather 4-wheelers?
No. What I meant to say was it will change over a period of time. It won't change immediately. If the same trend continues for, let's say, a few years, then it will change significantly, but not immediately.
Cool. Thank you.
Thank you. Ladies and gentlemen, that will be our last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Yeah, so thank you. Thank you and thanks to everyone again for joining, listening and asking your relevant questions. We at Varroc continue our journey towards generating strong financial performance and creating value for our stakeholders. Thank you.
Thank you. On behalf of Ambit Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.