ABB India Limited (500002) Earnings Call Transcript & Summary

So hello, and welcome to this focused interaction with the leadership team at ABB. Please join me in welcoming Mr. Sanjeev Sharma, CEO and Managing Director, ABB India Limited; and Mr. T.K. Sridhar, CFO and Head IR at ABB. Let me straightaway request Sanjeev and Sridhar to give us all a brief opening remark, post to which, we will -- he's -- they'll be happy to take a few questions to make this a more interactive session. Thank you, and all over to you, Sanjeev.

Sridhar, you may like to go ahead.

Yes. Thanks, Sanjeev. Good morning to all of you. Thanks, Amit, for this opportunity. I think you talked to quite a few people on this call, right? And I think we did have a bit of an interactions earlier, but there were different set of people. But I think it's always wonderful to talk to people after we have a good result, and that gives us a bit more confidence, to be honest. And India definitely is something which is now booming with a lot of confidence on the manufacturing sector and other investment topics as well. So on that ground, I think we did a good, strong Q2, which is April to June 2023, just to be precise because here it always gets confused whether it is April to June is the first quarter or the second quarter as per the Indian listing because ABB follows Jan to December. So, therefore, April to June is the second quarter for us. So we did publish our results. And also, we did a couple of more things. I think we gave a bit more elaborate press release to help people understand what's happening in the different sectors and the different topics. I think that should have provided more highlights. And also we did some analyst call wherein Amit did attend and a couple of other, his colleagues. So I think we do have these interactions and looking forward for this now, which is more pointed towards a few people and a few nonrelevant topics on this, right? Over to you, Sanjeev.

Thank you, Sridhar. I'm glad to be part of this group and this discussion. Well, it's been -- it's been interesting period that we are experiencing in Indian market and also to mention how we observe the global markets development and on a relative scale how Indian markets are acting and behaving. And also, we see the direct impact of that on our books in terms of how our portfolio is accepted and kind of flow our portfolio has in the market. And we are exposed to different market segments. So just to give you an idea, ABB in India is manufacturing for last 75 years, and we are in 18 business line and exposed to 23 market segment, which gives us a fairly good pulse of what's going on in different corners of industry as well as the markets, both relative to private spend -- direct private spend and also government-led initiative, which has, again, an impact on the private spend towards our fourth quarter. So I'm glad to see that there is an interest to know more about ABB within the investor community. And yes, for the last many quarters, post-COVID lockdowns, I think we have seen quite strong customer loyalty and confidence in ABB portfolio in terms of how we supported them during COVID period, which was a very difficult period of time. And I think that's where we see a mentorship in the customers wherein earlier everything used to be around negotiating price to allow us spending, but now we see that the new behavior that customer has a preference for more reliable solution -- more reliable suppliers as well as people who make commitment and they're able to deliver with their commitments. So there's a marked shift there. So not only the growth in the market that we see, which is coming because of the investment by the government as well as private sector, but we also see shift of certain customer behavior from buying from Tier 2 suppliers to -- coming to Tier 1 suppliers like us. And also coupled with that on sustainability, there's a high level of consciousness in -- especially in the large and the medium-sized players in the market. And they are also demanding quite a bit on the energy efficiency portfolio, which is sweet spot of ABB, a portfolio of services within electrification, motion, and process automation. There's quite a good expansion of manufacturing. And we are presently surprised how apt people are, now how open people are to apply robotics, automation in their shop floors, whether it's a large-scale manufacturer of automobile or even a welding workshop somewhere in Ludhiana for that matter. There is a very high consciousness that if they have to compete or they have to be part of this supplier chain, supply chain of large players, so large manufacturing company, they have to keep the quality consistent and also make sure that use the available technologies to be more productive. So that's kind of an overall sprinting effect we are seeing on the 23 market segments into our ABB business. All of them are doing well. And Sridhar would have -- will explain to you further. We run a debt-free company. We have good kind of cash on our balance sheet. And we have a good land bank around our plants. So for us to expand organically, which we are continuously doing and also spending more money on the productivity measures on the existing shop floors by automating them. And also future-possible inorganic opportunities as they develop in front of us whether they get initiated from the global side or we close some possibilities locally, which will be the bolt-on kind of the acquisitions on the existing business model. So our idea is that any inorganic opportunities should be bolt-on to the existing business model, which would add more value to the customers we are served in -- serving. And while we look into that, we are also seeing certain new market segments, which are emerging, and we are focusing on them. It will take 1 to 3 years for their readiness to be big contributors to us, just like data center was 4 years ago. Now it is a big contributor. So we are seeing some 2, 3 new market segments emerging on the horizon, which we want to take benefit of as we go forward. So this is where I will stop in terms of my entry point and then we are open for further discussions.

Yes. Sanjeev, always interesting to hear you. [Operator Instructions] Yatin from Fidelity.

Just wanted to understand, a few years back, you guys indicated a total addressable market, which was close to $5 billion. And I'm excluding the power projects part because that has been divested from then on. How has the TAM changed over the last 3 to 4 years, specifically, 2 parts in this. One is that we have also increased -- we have a similar product offering, but we have also increased the depth of our product offering. And secondly, the overall market buoyancy has returned in India, it seems after multiple years. So how are we looking at the overall macro market shifting for us?

Okay. Sridhar, do you have a number or should I give the number I have on top of my head?

Yes, you can give a number, Sanjeev. I think it's more authentic when it comes from you. So from me...

So see -- So I think that's how we play between -- I give more directional input, Sridhar is more precise. So I think in our outlook, how we assess the market and that's how actually we make our organization chart. Our organization chart is not how much revenue we do, how many employees we have. We put into the organization chart what is the addressable market each one of us are doing. Let's say, what is the consolidated number at a country level and then it gets broken down to each of the business areas and then to division because that gives the clarity and then you can calculate the market share out of it. So now with the current portfolio and the current market mix, we estimate our market size is between $11 billion to $12 billion.

Okay. And will it be possible to break it down between the segments?

Well, I won't have immediately those numbers, but I think they are available somewhere. So we can look at that.

So Yatin, to -- just to help you on back-of-the-envelope calculation, right? See, 70 percentage our -- I mean the offerings come from our products. So naturally -- which is basically split equally or slightly between differences between EL and MO, which is Electrification and Motion, right? So if you take $11 billion to $12 billion is what Sanjeev was mentioning, right, 70 percentage of it or 75 percentage of it will come distributed between these 2 business areas. And then you have 15 percentage-and-odd with 20 percentage from the projects, which is a process automation part of it, and the balance in 5, 7 percentage to the robotics portion. So there's just a back-of-the-envelope calculation, assuming that it is equally distributed, okay?

Okay. Just second part to it is, and this is a slightly more macro. There seems to be around $300-odd billion of potential spend around energy transition. Now a large portion of that would be module, but energy transition, and when I combine it with EST with -- targets with the companies have that, that looks like a reasonably large market. How much of this market play would we be involved in? And in terms of base business, how much of base business would be coming from this piece, so to speak?

So I can tell you with my recent -- so you're absolutely right. I think energy transition is a big story and substantial amount of cash flows of the companies are being diverted there. Like, for example, only last week, we closed a contract with a large steel major. And in fact, the key criteria for them to decide about was energy efficiency. In fact, that was the only element which was taken for in-depth discussion and of course, you negotiate price and settled at some point. And that's the basis how it gets concluded. So I would say -- when I look into the large players who have been our traditional customers, be it in the chemical oil and gas industry, steel industry, or aluminum industry and cement, for example, energy efficiency is one of the key drivers for decisions. And also in our process automation, when we apply solutions to energy efficiency equation in terms of how much we are saving for them because that's directly correlates with their GHG emission, relative to same amount of production they carried out in previous time is a strong factor. Now what I know, I cannot -- maybe you can consolidate those numbers based on the multiple input, but I can talk more about the client behavior. I know of a large oil and gas company, which is a global company, probably one of their CEOs was also available last week in the B20 conference. They are spending about 40% of their cash flows in the energy transition with a view that they would reduce their fossil production by -- to 40% of current levels and rest of it will be complemented with the renewables or low carbon footprint. So that's a kind of an impact and the shift is happening in terms of the future direction as well as the reinvestment of the current cash flows by the key customers that we have. So we see that impact in our energy efficiency portfolio and process automation portfolio, and that's where we see. I'm not able to assess the complete consolidated numbers. We have not assessed the market that way. But since we have a very stable market segment base as well as customer base sitting under it, so we focus on the client behavior as well as meeting their demands with the proposition we have.

Any other question?

I'll come back in queue. I have a few more.

Sure, sure. Maybe, Sanjeev, I will have one question until others warm up to it. See -- basically see both parent and -- you and Sridhar have been very vocal about years of underinvestments by ABB in India in the past. And maybe at least last 1 to 2 years, we've seen statements from both the India team and the global parent talking about accelerating investments in India. So which are the segments where you will be keen, and you've touched upon some of this -- a lot of this in the con calls. But still, if we take 2 to 3 areas where you would want to expand capacity, what would it be?

I don't know. I have not heard the comments that we have underinvested in India by the group or if Sridhar has been taking private session, I don't know. Definitely, we are not overinvested in India that I can confirm. Because what we do is, given that we have the 18 divisions in the country and all these 18 divisions are really finely tuned to the market segment which are relevant to them, and we watch the demand very closely. And what we try to do is our focus is always on localization of our portfolio. So that's where the continuous investment continues to take place on our portfolio. So that means if you continue to reduce your import content and you continue to have a higher level of localization, 2 things happened, one is our product positioning becomes more competitive. Our deliveries become faster. At the same time, we also have an import impact on the profitability. So that has been our kind of a key focus for each of the division, and they have been doing a good job. Now wherever there are gaps in the product portfolio that there is a product which is available globally and Indian market or Indian customer is ready for that product. What we do is we keep bringing them, and that's where we kind of have been expanding our portfolio. And also where we find there is a enough demand now created for that product, where -- that's where we expand our manufacturing capacity and we start localizing it because then we have substantial volumes available for that particular product category. So that has been our approach, and that's where we watch our capacity utilization and we also see how much bandwidth we have with the number of shifts that we can run in our factories that determines how much we should do a carry on the future investment. Now with respect to future investment, as I said, our balance sheet as well as both in terms of the land availability and terms of cash is quite robust. And we may -- we spend that money more meaningfully. We spend that money where we can think that ABB as well as our shareholders can get good returns out of it. Our return on capital employed is good at the moment, and that's what remains as one of the criteria for us to choose those segments. So we have been expanding quite a bit on MO. We are expanding and spending quite a bit of money on EL. And also in the pipeline, we have quite a bit of investment planned there. Already a lot has gone in and lot will continue to go. And you should keep in mind that anything which is running and working, what happens is lot of investments go onto the productivity improvement. And that's our favorite area of investments, not the immediately going for brick-and-mortar investments. One example is our factory here in Bangalore, wherein now in the same shop floor, we are producing 30% more in 30% less space by having totally robotized as well as automated it. So we didn't have to construct another brick-and-motor factory and show the capital expenditure there. But instead we do a lot of process improvements and make sure that reliability of the delivery statement. So those are continuous. And these, to out benefit, are incremental investment rather than big-mover investment. And that's where you can see the kickups you are seeing in our profitabilities because it comes because of those elements because we have been investing in a right way. Now in terms of expanding, we recently, last year -- early this year, we invested in a large GIS factory because earlier, the market used to buy air-insulated switchgears in medium voltage side, but now the market is shifting to GIS, and we have invested quite a large sum there and it's a brand-new factory. Our base factory is in Germany. But when our German engineers when they visit India, because since it has been done from scratch, this factory is most modern factory anywhere in the world for manufacturing GIS switchgear of ABB. So that's the kind of a benefit we have. And once you establish that, not only domestic market, and sometimes our global guys can also get more motivated to buy it from these factories. So that's the kind of investment we are doing. So EL, MO, RA we have already invested a lot, but now we are expanding more on the application and the kind of the customer experience center because robotics, for example, our investments are not to produce robots. Our investments are to really creating client solutions, and that's where we are investing a lot. Lot is coming in electronics manufacturing, a lot is coming in the precision engineering, lot is coming in different kind of manufacturing sectors. So we are setting up a lot of new kind of centers wherein customers can come and experience it and experiment with us and then they become our regular customers as we move forward. So these are the few areas where in we feel our investments will continue. And even in the certain sectors of process automation, we have some investment plans. And not to mention since, within MO to highlight, we have a good -- because of the electrification of railways, there's a quite an uptick on demand on our portfolio -- underlying portfolio, and that's where, again, we are considering expanding our capacities.

Very helpful, Sanjeev. Kiran from Franklin.

Yes. So I have 2 questions. So I'll start with the first one. So when I look at this whole electrical engineering value chain, I see that the profit pool has massively expanded over the last couple of years, even like a high-voltage transformer companies talking big in terms of demand and margins are expanding. So there are 2 parts to this. Of course, there is a demand surge and the supply is taking its own time to respond. But how should we think about it? Is the industry currently over-earning, not really specific to you because you have very differentiated offerings in many of those verticals, but the way I'm figuring out, on one hand, maybe Europe is slowing down, maybe U.S. will potentially slow down, domestic is holding up as of now. But again, if domestic factories are only at the beginning stage of capacity expansion, electrical consumption actually comes maybe 1 or 2 years into that cycle. So maybe there is more leg in terms of growth on the domestic side. So maybe your thoughts in terms of the demand side, then maybe on the supply side, whether the industry is over-earning right now would be helpful.

So you see, just like our individual portfolio, like I'm sure each one of you manage your individual portfolio. As such, each company though may they look similar, but they also have very individual portfolio and characteristics. So comparing one company and the other becomes a little bit difficult because the characteristics and how we are in the journey of our development, it can be different from one company to the other. Now as far as ABB in India is concerned, we -- if you really go back even 4 years, we have been growing in our MO, EL portfolio for the simple reason, even if the market was quite stagnant. For the reason that we found certain pockets of growth within the country, which was under -- kind of under-addressed by us, and we kind of started focusing on those, and that started bringing us good volume. So that -- it depends upon which side of the equation you are. Now if you look into the current situation, I think demand in all the 23 market segments and plus 3 or 4 more segments forming, I think that is the story of the country. Now let me give it a bit of an eye up. If I take you about, say, 18 years back in these market and industry, ABB used to be exposed even with Hitachi and everything that Power Grid portfolio on about 7, 8 market segments, right? Because that -- those we used to call as the core market segments or the core sectors for that matter. I think that's how we like to define it in India. And that's what is. And if those go up, our volumes will go up that too in projects, and otherwise, our balloon will shrink and the numbers will not look at 2 or 3 or 4 years down the line if the NPA cycle kicks in because of those large investments. So I think that's something we have gone through. My journey with India started about 2016. That time, we were exposed to about 8 or 9 market segments, right? So from a company perspective, we have come a long way. And also, as a country perspective, we have come in a long way that lot more market segment have got activated in the company. So that has expanded the market. And also, we also started focusing on these market segments and started addressing those market segments. So that has created a much more resilient market space for us. At the same time, we had certain business divisions which were quite marginal in size. We also focused on them. We made investment in them, both in the leadership as well as in the space. And they also have come on their own being by being able to address reasonable and good size of projects. So that also created a capability and capacity for us to be able to address different market segments, but also with a good competence on the potential businesses, which were undersized earlier. So that is another area which is great for us. And the third area, the Indian market was foreseen as if it happens in Mumbai, Bangalore, Chennai, or Kolkata and plus 100 kilometer. That was typical attitude how we dealt with the market. But last few years, what we have gone is, we have gone totally into Tier 2, Tier 3 and even bigger -- deeper markets because the real formation of -- real formation of wealth and real formation of entrepreneurs, machine builders, integrators is taking place in these cities because cost of capital is low, the availability of the manpower is there and people are quite enterprising to be able to connect with anybody and everybody to supply it. So this has expanded the base in a good way for us. Now if I look into it in the current perspective, all these areas, I would say majority of it is on the high swing on the demand side, and only there are minor corners, whether it can be on a particular market segment or it could be a particular geography or it could be a particular portfolio, that's where you see but those are the ones which peak and they plateau and then they come down and then they come back again. So that's kind of an experience we have right now, Kiran. But how the demand will sustain? Given India as a country is underinvested relative to the rest of the world. Rest of the world has a demographic problem in terms of creating lot of manufacturing capabilities. India, if it plays its cards right, I believe this journey can be quite prolonged. That's my view. I'm not looking at 2 years. I would say it would be a decadal journey for Indian market provided we don't have any self-goals created in the policies. So that would be my view.

And fair to say that the competitive intensity has been rather benign in the last 18 months or so compared to the previous 7, 8 years?

Well, competitive intensity -- let's say, when I look at it, when we do a competitive analysis, it's very difficult for us to do for 18 divisions. I can't do it at a company level because each one of them is exposed to a different names in competition, different size and different intensity. Really -- what really matters for us is that we are really focused on the right market segment and the right customers. And once we find those sweet spots, then the competitive intensity typically goes down because what happens is if you try to be everything for everybody, then of course, you face the competitive intensity. But if you're very selective and you know exactly the customers who respect your proposition as well as your portfolio than the competitive intensity stays moderated. That's what we try to do. Not all the time we succeed, but most of the time we do.

So the way you define these micro markets, in these markets, your shares would be in the 30 percentage ballpark or maybe 10 percentage, what's the kind of number?

I think -- so we'll have to see each division, right, for that part of it. So if you -- though I'm representing ABB India today in this call, but I'm representing 18 divisions and 18 business leaders, right? So sum total of those results is ABB India, right? So if I had to drill down, I drill down on each business division. And in each business divisional, we have different product lines and all of them have their own business models, which are exposed to different competitive and different market share intensity. But quite frankly, when we drill down and we look at it, I think we are quite okay. We feel we have quite a good runway ahead of us.

Okay. And my second question was on the PLI theme. How big is -- in the scheme of overall CapEx, how big is this PLI as a theme? And also, would you like to share some of those new markets you are thinking of entering? Are they related to this theme?

Sure. So PLI is being enjoyed by our customers, and we get these sprinkling effect on us with our portfolio because PLI, people are encouraged to expand capacities at scale. And when they expand capacity at scale, naturally, they look for products and solutions, which are reliable, available, maintainable and also are serviceable. So that's why a sweet spot for us, and our reputation there is quite good. So that's where we get the benefit. Now when it comes to different PLI sector, I think they are being gated. Electronics is definitely one of them. And food and beverage, we see quite a bit expansion of that particular market segment for the same reasons. Now the news market segment, which are -- and data center, I don't know whether they are in PLI or not, but that's something which has become a substantial market segment because anything which has a very high energy density is a good customer for us. Whether it's a petrochemical plant, refinery because these guys consume a lot of energy, and that energy is used in the electrical form to run their processes, that becomes a good place for us to place our technology and equipment. So data center is also one, which is nothing but power flow to servers and their server density is very high. It's almost like grid connecting a resistor in front of a power plant, and the distribution of power as well as cooling, all those aspects, our portfolio gets connected to it. And then, of course, we have the size customers in pharmaceuticals and the new technologies which are being developed. Now in the new areas, hydrogen, for example, I think that's on the experimental stage, and that's part of the energy transition. Electrical vehicle, or EV space, be it the EV charging or the EV space wherein somebody is trying to create a battery modules for, say, for EVs, and not with an Indian ambition, but a global ambition, and using new materials, but then those materials cannot be handled manually. They need robotics to kind of deal with it. So that's creating a special solution, which nobody has created before, you get into those kind of areas. You get on to the drawing board, create a solution and that company tries to provide those solutions to local as well as global industry. So EV is another area, which is in progress and it is developing. Battery manufacturing. Of course, it's correlated with EV, but it's also correlated with the energy storage for the future because once we get that -- the equation right, it will also go into the energy storage distributed around the grids or maybe around the large compounds of things. And also, the new technologies will be required, like for example, if you produce, let's say, very large solar energy next to a refinery. So what you do is some of your feedstock, which you're using to do the captive power generation that will be replaced by the solar energy. But then you will be still creating excess solar energy, which will be required to kind of -- it can be used to produce green hydrogen, you can set up another green hydrogen plant next to it. And once you produce green hydrogen, of course, you can again put that as a feedstock to your plant because, again, you can use hydrogen as a green stock. Then you may still have excess energy because solar energy capacity is very high. Then you start bringing these big battery banks which are lined up to the peripheries of the plant. And what you do is you store those. And then any time there's a power shortage, you can use the peak load shaving by using these battery banks or keep feeding the grid and continue to gain some kind of tariffs out of these ones. So these are the solutions which are yet to be developed. And this configuration, some of them are very unique to India. And now we have been challenged by our customer to work out some solutions, which requires automation and the management of these resources and the timing of it, how you manage it, how the energy flow should take place so that the plant site remains stable. But at the same time you prioritize which energy to use at what time so that you know to make the maximum benefit of the low carbon intensive energy. So I can go on. So there are a lot of such areas wherein we are exposed to. So that's where you can see after a lull of, say, 10, 20 years and not so high development in the core technologies, now it's a good time for the core technologies to be not only used as they are, but also to be redefined how they will be...

Anuja, you can go ahead with your question.

Overall, the question, sir, is on profitability over the next 2, 3 years, given that you're doing a lot more innovative work across your customer segment, does that mean that profitability improves? And the second question is, obviously, India may benefit if it becomes a large manufacturing hub. But from the parent perspective, are there propositions to kind of make ABB India as a manufacturing location? And for what kind of products or technologies is the parent really focused on? These are the 2 broad questions.

So second question, I can take. Sridhar, do you want to take -- make a -- take a call on the profitability side?

I think, Sanjeev, you take the second question, I'll come the answer of the first later. So because -- and it has a sequence to it.

So see, as far as you should know the, I can be very open with you, character of a multinational corporate. Multinational corporation is, it's already present across the world, right? So we already have substantial manufacturing in all the markets, which are relevant for us. The very reason we are in India is because we are very interested in India. So that domestic market is core focal area for ABB in India. And that's how exactly we have been growing and how we have been reshaping ourselves over the last few years and to a certain successful degree. Now going forward, our view, as a local management team as well as global team, is to continue to sophisticate our manufacturing operations in the country, not on the labor arbitrage basis because that's not the right way to look at it because labor arbitrage goes away after some time. We are looking at keeping the labor arbitrage, but also creating a very large productivity arbitrage for future. So that -- those are the things we are testing out on our shop floors as well as manufacturing. And we need to get the productivity level as high as anywhere in the world. That's our focus at this point, right? Once you have the productivity arbitrage as well as labor arbitrage then it becomes quite easy to integrate such factories with the global supply networks for different markets. So that's something we are seeing. Already certain manufacturing expansions have taken place in last 2, 3 years, which is 50% domestic-oriented, 50% export-oriented, and that has been quite successful experiment. Those are the experiments we keep on doing it because global markets have very stable market base, and they are used to buying for certain factories. So as and when the market start accepting products delivered from India, those markets we keep opening and those markets, we keep taking advantage of. So it's a journey, we will perform. But in terms of percentage of export, my view is that the domestic market growth will be stronger than the export market, not only for us, but as an export market pool. And we will -- percentage-wise, it may or -- may oscillate around 12% to 15% because the domestic growth may be much stronger.

Just in terms of competitiveness, where does the Indian factory stand as compared to, say, some of the best factories for ABB around the world, like when you say the focus is on improving the productivity levels?

So I would say scale matters. So competitiveness comes when you are running -- if you're running a factory in Italy, which is 10x my size, and which is fully automated. Naturally, that scale gives the benefit to that location and also you have the supplier base, which is connected close by. So what you have to do is when you create a scale, you also create an ecosystem around those manufacturing locations. And we should not overstep there. What we do is we always stay very relevant to our customers. So this ecosystem in certain areas is already developed in the country, and there are many areas where yet to develop. Like for example, power electronics, there's no supply chain available in power electronics in India for that matter. I hope PLI invite certain customers who become power electronics core producers in the country over a period of time because that goes mainly into energy efficiency equipment, EV charging equipment, solar inverters, a lot of other areas, power electronics is applied, but that ecosystem is not there. So it's much better to produce that core electronics close to the point wherein that solution is available at a scale and distribute it to the rest of the world. But if I put a time arc of 5 to 10 years, I think it will change substantially in favor of it.

Very good. Thanks, Sanjeev. And I think to come to your next question of expansion of the bottom line, right? So I think first of all, all these actions, what we have taken until now over the past 3 to 5 years, has started to show its positive traction on the margin so far, right? I think a couple of years before and after the post-COVID, we started to say -- give a commentary that we would like to stabilize at a double-digit PBT level, which is the profit before tax. And we have done that continuously for the last at least 4 to 5 quarters. And now that with the consistent flow of orders and our ability to command the price in the market for the special offerings what we have and also the market expansion topics that what Sanjeev had built upon earlier has definitely given us a good mix of orders and a profitable scenario, what has actually happened in the last few quarters. So, therefore, it has actually now we are able to transition that into a good profit expansion even at the PAT level, right? So I mean, for the last 2 quarters, we have been giving a double-digit profitability at the -- on our profit after tax level. And I think it's quite necessary that while we have a scenario of market which is developing and we have the elections also coming in the next quarters, I think it is reasonable for us to have an ambition to say that we see stabilized on these double-digit profitability or the PAT percentage for the next 4 to 5 quarters because we have a strong order backlog at this point of time, which is INR 7,700 crores. And a bulk of it is also coming from projects, right? So while we have a good visibility of revenues, there is also something to add with the book and bill orders what we'll receive in the next few quarters from the market. So I think all these playing out, I would suggest that while it is good to have an ambition of margin and profit expansion, it's more important to have an incredible run on the profit after tax for the next few quarters so that we're able to stabilize on that as well. So that has been our sort of a mantra so far, and we would like to follow it consistently so that we are able to meet the consistent estimates as what we would have built in for us.

Sir, if I may, like double digit can mean a lot, right, in...

No, I'm talking of in the range of, say, 10% to 12% is what we are at this point of time.

And my question was more longer term, right? Like as we move towards, say, some of the newer technologies like energy efficiency, energy storage, hydrogen, does that really bump up profitability because some of those innovative technologies or solutions may be only provided by ABB and not by some of the other companies that are present, so more on a structural basis. And I understand you're talking of a shorter duration here, but...

Okay. So I think Sanjeev can give a more ambitious sort of a direction. And what I can give you a direction from a CFO standpoint, okay? So as what Sanjeev was mentioning, so we have 15 percentage of our revenues coming from exports and 85 percentage is coming from the 23 market segments locally, right? That's basically a given fact and we would like to stand by that. So out of this, right, so what comes from the core sector is still 50 to 55 percentage, right, which is your cement, steel and sort of stuff, which always is the core, which is high because we have an installed base. We have products that are pretty much suited. And also while we are definitely focusing on the high-growth sectors, which is the -- from the next 40 to 45 percentage, right? So the trick is how do we balance this particular portfolio? Like can we sort of only focus on the high-growth sectors and not focus on the -- a less focus on the growth sectors in the -- on the core sectors is something which has to play out. So for us, I think core sector will still remain a key market. And in that particular market, so naturally, the profitability is a bit of a -- not an ambitious range or a corridor which we could expect because it's more open to a lot of players there. But whereas the other faster-growing sectors are something where our strategies are working out, and that will also continue for the next few months or a few years to come, right? So having said that, that's why I said, I think -- and operating it at in a corridor of 10 to 12 percentage and expanding it later on could be a more realistic assumption rather than sort of an operating in the higher percentage than that, right? So -- and not to forget that we have certain topics which have to be dealt with in the country level in the next year to come. So I think we need to also keep that in mind. Sanjeev, over to you, if you want to add some color more to that?

Thanks, Sridhar. I think the -- it's a good question. And you can see that our portfolio change in 2019 has led to this kind of a step change in our performance and also our exposure to more product and ETO-oriented business, which is -- products is the MTO, MTS, which is the made to order, made to stores, and the ETOs is engineered to order, which we use our own product, create more value-added and then send it out as a finished product which can be used by an OEM or an end user. That is about 70-plus percent of portfolio. Now that's a function of the market strength. If the market stays strong and the volumes continue to rise in that area and we keep on putting measures on the productivity side, while we kind of take the -- those factors, those directly go into the bottom line, minus whatever money that we will kind of spend for acquiring those additional volumes in the new segments and the geographical market. So that's something which is a positive story. But if the market slows down, that's where it can -- it stayed -- the numbers remain at the same level, then it starts plateauing. I think that's another element one has to watch for. And then the service business, again, is a robust business with all we have created this continuously this installed base for the last 60, 70 years that requires a lot of attention and service to keep it more productive and reliable. That's about 10%, 15%. And then remaining is projects. So that means when you carry this mix in a growing and a strong market, unless nothing happens to the market and it stays with the trajectory of 6% to 7% growth, I think we are on a good path. Predicting future is very difficult, predicting profitability is even more difficult, but I think we can only look at the trajectory of it where it is going and try to keep ourselves on that trajectory mark.

Neeraj from White Oak.

Coming to the trajectory of growth, just one question on the order inflow. We've seen it coming at about 10% in the last quarter, which is substantially lower than, let's say, the average of the last 7, 8 quarters. So is this a more sustainable sort of run rate as we have seen commentary from many players in terms of mentioning customers normalizing the ordering activity, which might have been sort of higher due to supply chain issues, there was advanced ordering, inventory levels are normalizing. Is this sort of a more normalized? Or should we -- I understand a quarter-to-quarter, it doesn't make sense to look at. But on an annualized basis, is this sort of 10%, 12% a normal run rate to look at going forward?

Okay. So Sanjeev, so I think I'll just do a bit of a color then you could add from the market perspective. So Neeraj, I think the question which you asked is why 10 percentage now while you were growing at 20 percentage earlier quarters, right? So that's a question first which I'll answer. I think the first thing is that when we need to compare, we need to compare with what was the last quarter's -- and it was the last quarter, as we said, was a really high base. And in spite of the -- that, we grew on 10 percentage. So if you normalize that particular base for the last year, so probably then we would be feeling that we would have grown at a higher percentage, right? So on a cumulative basis for the half year, we are at 22% as what you would have seen. So now going with -- I think if you really look at how ABB has its patterns, of course, the first quarter, because the industry is looking at a quarter of -- the last financial quarter of their accounting period. So normally, the decisions are pretty fast in the last quarter of the year, which is Jan to March, okay? So then the next quarter, which comes up, unless, until you have any large orders with spillover, then the base order seems to take a bit of a slowness because it gets decided on the budgets, which is -- which rolls in from that particular period for all companies and all organization. So it's a bit of a slowness. And then it starts to pick up again in Q3 slightly and then sort of peaks up in Q4, which is our October to December quarter and then again gets into the sort of a crescendo in the next quarter, which is Jan to March. And this is a cycle. And if you look at the order patterns over the years, and this actually you could see it so open, vividly in that particular conundrum. So now, coming to the question is, right, is this 10 percentage of order growth is going to resemble to what the future intake is, right? Answer to that is today I will not be able to predict to you that whether it was going to be 10 or 15 percentage going forward. But actually, we want to make sure at every quarter we grow double digit between 12 to 15 percentage, and that's what we have been seeing because with the spread of the orders between the fast growth sectors and the core sectors and then exports what we have, I think that should be a reasonable scenario to look for.

Understood. Great. And just one more question from me is, we're hearing, obviously, a lot of talk on government push on CapEx in specific sectors like railways, which you spoke a bit about as well as investment in renewable, power generation, transmission, distribution. So if you can just touch upon what is the scope of growth for us in these specific sectors?

So...

On the -- yes, Sridhar, go ahead, first you.

First of all, Neeraj, we don't give income, I think, which is basically specific to what is the growth on these particular sectors. I think so we always give a clear sort of a direction as to how those markets are giving some meaning for our growth, right? So Sanjeev, you could complete it from there.

So the investment that is being made by the government in the railway, modernization of railways. One is to really electrify all the tracks. So that is a big mover, and that is causing quite a bit of expansion. And moving away from diesel, that's again, is another energy transition story, at a very large scale in railways. And then we are having the new locomotives as well as new trains. So we have a play in all of those elements, and we are getting well kind of benefited out of it. Same thing goes for the metro expansion as well. The metros expansion in all the cities and our portfolio goes in there as well. Now when it comes to other areas like city power distribution, I think -- then the urbanization is on the up. One of the side effects, so I think not many people talk about and realize, is about this smart city projects which were being talked about. I think we figured out how to really have a framework for power distribution in dense urban cities or Tier 2 cities or Tier 3 cities. Earlier, the technology was not in play in order to assure that the feeders going to the residential colonies as well as industrial colonies should have a stable power. There used to be unidirectional power flow. Now it has a kind of fail-safe technologies, which are there, which feeds into industrial as well as residential corridors. And that's where our technology comes in play. And it is not visible, but then if you're in Mumbai or you are in Delhi or you are in Bangalore, you'll see those technologies are getting added into the -- into these. And all states have realized it, and all cities have realized it and we see quite a bit of uptake there. And also on the building side, when you have the more expansion taking place on the building side, there again, I think, a good amount of our EL and MO portfolio gets consumed. So the government-led investment, of course, has a direct play but also a lot of investments which are being made are encouraged and different other sectors, they also have the indirect effect. Quite frankly, it is not of our much interest, and you should give us a little bit of a discount there. We don't overanalyze our customers. What we do is we really connect with our customers, and we see how the demand is forming at the feet of the customer, and that's how we go about kind of capturing it. Be -- it could be an end user who is directly buying from us, or it could be a contractor who is delivering a project for them. It could be an EPC, which is doing the complete execution of it, or it could be OEMs, which are just building machineries which will find their place in their plant, or it could be the road-building project or it could be a kind of a railway project. So we capture this breakdown of such a kind of the head investment into different market segment which we focus on. But quite frankly, we don't overanalyze. We simply stay connected with the customer base we have and we also watch which are the other customers which we are not kind of -- we are not referred to our expanding, and that's how we continue to grow. So we do some analysis, but not -- we don't do overanalysis of it.

So maybe we'll take one last question if somebody wants to come. I think 1 or 2 last questions, Sanjeev. I think -- yes.

Can I go?

Yes, Yatin, please.

Yes. Sorry, just on the profitability piece and I'm so sorry, I'm repeating some part of it. But just to adjust for the seasonality. If I see H1 this year versus H1 of last year, 35% of incremental profit has come from other income, which is interest income. And of course, that's because we have had a higher cash generation which has come through. Now given our business is slightly more short cycle and given where the commodity -- how the commodity has moved over the last 6 to 7 months, how are we thinking incrementally, specifically, one, in terms of and RM to sales, because that has been stable now for 3 quarters. But with commodity coming down, we'll probably have to pass on some of the benefits to the customers? And second, how are we thinking of overall underlying operating leverage in the business?

Okay. So Yatin, let me again give you reply for that question. So first of all, I think it's an -- I like that question. So you have a lot of other income -- I mean, other income, which represents the large portion of income from the interest, which is earned out of the deposits. So is this going to be a permanent source? Answer to that is no, right? I will tell you why, because it could be definitely the capital allocation, it is one of the top of -- the topmost topics or priorities between me and Sanjeev and the group as well, right? So then when this gets invested probably, it gives us more than 7, 8 percentage as what we have on the top line because that's the rate which you get from the deposits, what you have, right? So that having said, so I have full confidence that once if this gets deployed, it should only improve and not deplete, number one, on a long-term basis. So initially even it takes some time for the investments to pick up, so -- but at least you have that, right? So now there are 2 questions. So one is, what do we do in this transition period when the capital which you invest starts to earn, number one? And number 2 is that, so with this 64 percentage is what you're looking at as a material cost going to be there or is it going to be this thing? So I think it's a play of the market, let me put it this way. So because if you look at our markets, which is 15% exports, exports is definitely a better revenue, profitability-generating segment as such. And but if you look at it from the other 85 percentage, I think there, EL and MO definitely have their market position, therefore, they are able to command a reasonable price for their respective shares of business. And so far, I think we have been successful to pass on the risk which we see in the commodities and the ForEx volatility as what we said to the market, and that has started to stabilize because that's also reflecting the scenario that the market -- that the commodities and other prices are stabilizing other than the ForEx, which is volatile at this point of time, right? So my view -- my take is that first of all, I think our target is to make sure that we remain in this corridor of 63.5% to 64.5% in the material cost, irrespective of what it is and control on expenses with the capacity leverage, which will actually add to the profitability, right? So then -- so, in a nutshell, I think if we are able to practice this over the next few quarters, I think -- and this exactly connects to my earlier question, which to Anuja saying that our ambition is to make sure that we have a credible PAT percentage of 10 to 12 percentage is built on the fact that we need to address this as well, right? And as you rightly said, where you -- are you -- will you be able to manage this price increase going forward? I think answer to that could be no because it would have to plateau at some point of time when you have the prices stabilizing as such, right? So our target is, therefore, to maintain the 64 percentage corridor for material cost with the mix and with our ability to command a better prices and the choice of markets what we want to go in, right? And the balance is to leverage out of the capacity, expand leverage, what you have on the optimization side of it, right? So, therefore, right -- so with that particular principles in place, I think we would like to look at a material cost range of 63.5% to 64% in that particular range, right? So once it starts to go beyond it, probably it has an impact on the bottom line as well. So that's something which we need to be watchful of.

Sir, just continuing with this portion you mentioned to Anuja that you were looking to sophisticate also domestic manufacturing. Now that would also -- and that will not be a labor arbitrage, that would be probably more technology-intensive. How do we look at your medium-term employee cost? Because, one, availability of talent. Is there enough talent in the country for us to achieve that? Second, how do we look at our employee cost? Is there any restriction which we'll be looking at or we are okay to invest for the future?

Sanjeev, you want to take it or I could take it and then you could complete it, right? So okay. With respect to the cost, I think we are at -- on a band of 8 to 8.5 or 9 percentage. That's what you would have seen over a period of years. I think if your revenues start to keep increasing at 12 to 15 percentage, I think we are confident of having that maintaining at between 8.5 to 9 percentage. That's what we see. That's very clear. Now in terms of attrition and other topics, Sanjeev will definitely say. But I think in terms of retaining the people, I think we are pretty much on line in retaining the people who are required for the organization, while LTE attrition is also good to have, right? So that's basically what we see. In terms of salaries, I think we are in line with the industry as what it is, if not definitely the highest paying as what I would say in engineering industry, right? So that's something which we need to be aware of. So given that, I think Sanjeev if you want to do some qualitative rounding upon that.

So labor as a component, I think, for a company like ABB is a very important [ integrator ]. We don't see it as -- only as a cost element. From my perspective, we really see an element which can really deliver what we promise to the customer because that's what keeps our forward cycles, our customer loyalty towards us going. So we always ensure that the people we retain, we train them well and they are quite sticky. So typically, we find that the people who have stayed with us 5 years and more, they have a very long longevity. And I think me and Sridhar [indiscernible]. Now when it comes to the general market, I think comments to be made at this point in time, the policy, the labor policies or the labor dispensation across all the manufacturing location we have is quite supportive to what we want to do. I think we are able to get the mix that we want in the -- in our manufacturing location goes with the nature of mix we want and also how much we want to get done outside. So one of the elements of manufacturing is not that everything should be in-house. One of the leverage you always do cleverly over a period of time is what is core and what is noncore. And what you do is you continue to maintain the core inside your own premises and noncore, you spread it out to your supply chain. So that's where if I see in last 10 years, lot of handling is done by that because that got distributed to our suppliers. So our fixed cost becomes variable cost over a period of time. And then as the volumes expand, you add more for people and if the volumes contract, you have an ability to reduce the fixed -- your variable costs very quickly because that's very contractual based. So that's one way to manage it. The other part is that talking about the talent availability, I think we have a lot of people availability in this country. We are not short of that. What we need to do as large corporates is to have very strong training programs, and that's what we focus on, whether it is at the electrician level, ITI level. Only last week, we opened an ITI sponsor program in Bangalore. So what you need to do is -- that's the culture we have that we continue to create a feedstock of trained manpower coming in, who are trained because most of the people who come from the basic education or even some time engineering education are not ready for the industry. And that's where our responsibility comes beyond profit, beyond other aspects, to really make sure that we create meaningful kind of engineers and technicians as well as the shop floor employees. So for that, I think we have been fairly successful. When it comes to attrition part, attrition has been on the -- really on the high-end side of the labor or we call not labor, the employees, maybe in the digital area. I'd say, last 2 years, it was very hot, but now it has moderated out for that matter. So to see the bands of our different talent pools. So it was only few talent pool band which were overheated in the marketplace. But the -- otherwise, the generic side of it or our -- the manufacturing side of it, it has been quite stable. Now cost part, Sridhar has mentioned. This is not an area where I really lose my sleep on at this point of time.

And just sorry, one last comment, not a question. I think it's commendable that we have done India-specific ESG. And we just hope that we continue to meeting our targets there.

Well, thanks for noting that and acknowledging it. It's a topic which is really close to our heart, and we don't do it because we have to show somebody a PowerPoint. We really do it because we know it's the right thing to do. Because once you do that with that intention, then the spread out that sentiment goes across the company very, very well. And that's why it's very, very ingrained in all employees and locations. So thanks very much. And we have programs for the next few years, so we will continue to be on that path.

And maybe Sanjeev and Sridhar you want to take one last question, and then we conclude the call.

We have a raised hand from Anuja.

Anuja, you have a question?

No. I think that's the previous one.

Sure. Sure. So maybe I'll just ask the passing question. If I compare the EL portfolio, and if I compare with some of your global competition like Schneider and Siemens. In India, you have a dominant position in medium voltage, high and extra highs is no more our game. What are those areas where Sanjeev if you would want to, I would not call aggressive, but you would want to be more present product-wise and market-wise in the low voltage where sort of we have gaps?

So in EL, we have a portfolio starts in the medium-voltage switchgear. And that's where the big transition of AIS to GIS is taking place. So that's where we have made substantial investments. So most of the industries as well as cities want to have a smaller footprint where they want to put their power module. So that's where GIS comes handy. And that's a big growth area for us. And those investments have been made in right place and expansion has taken place. So we work to again take benefit of those things which are coming. Now the other area in the EL is that the city power distribution as more urbanization is taking place, that story plays in favor of our medium voltage or ELDS portfolio. Data centers for that matter, I think we're at start of the journey, given how much digital content we consume and how localization need for data. I think this is a very, very long story. Because I have watched it, when I was outside India, I've seen now how it grew in Southeast Asia many years ago. So India will see a very, very large growth in that area. So that's another sweet spot for us for -- especially with the ELDS and medium voltage. And when it comes to ELDS or medium-voltage portfolio, we also have these Tier 2, Tier 3 expansion. So that's where we are creating more and more channel partners as well as integrators. So they do the value-add services for us, for our customer by using our design or their own design. That's another expansion area, which is taking place, and that creates more resilience rather than everything we produce in our factory, we produce core components, and we give it out to our channel partners and integrators and they do more value-adding close to the customers. So that part is expanding as well and quite well. And we have a leading position in that business. Now -- and of course, that business is prime for supporting global businesses on the export side. So already, there's a lot of confidence of the global managers on those factories. So that's another play that we see is going to accelerate for that kind of business. Other side, on the low-voltage side, we have seen quite a big uptake on the productivity side of our low-voltage switchgear business. And there, our volume growth, profitability growth is pretty strong. And we have competitors who have consolidated in front of us. But at the same time, what we find is that the uptake of our product is very strong in that particular markets. So there is something happening in the marketplace but not necessarily consolidation. Maybe it's helping for our competitors. We don't pay too much attention to it. We pay only attention to where our products and services are demanded and can be useful. And that's where we are seeing good traction, and we are also seeing also the productivity and the modernization methods we have taken. That is making us be more reliable supplier in the marketplace at a very, very short response time. I think our response times have reduced dramatically. So that's where the confidence in the market that if they want a component that comes from those factory, they can really get it very quickly. And that also creates a bit of a loyalty as well as the support to our price that we request in the markets. Same way, we have another lower segment, which are the building segment wherein more building-oriented products go. That used to be a suboptimal business, but now it has substantially grown. It has last -- previous year, it doubled, last year it doubled in terms of the manufacturing output, so it is supplying very well in the market and plus also had an export market allocations into certain markets in the west side of the country, and that is also playing quite well for us. So I would say on the EL side, overall, the growth rates and the robustness of the market connect is quite good for us. And quite frankly, we are not competing. We're really competing ourselves from the last year of our behavior to new behavior that we have this year so that we can do better than what we did last year. So that's -- so we are not saturated there, this year good runway ahead of us. Motion side, again, is the energy efficiency portfolio and we mentioned earlier, I will not repeat, that's in the sweet spot of decision making of all the customers who are ESG and sustainability conscious and everybody who wants to have more reliable product, they continue to buy ABB drives as well as motors. And there are certain segments of the market wherein they don't even look at the competitor. They only want ABB, especially for machine builders who are exporting, they don't -- they buy only from us because they feel they have a reputation to protect outside the country. So certain products of ours have a 100% favor in the minds of our customers. When it comes to Robotics, manufacturing is expanding. I have already told you that, that's an area we continue to expand. And Process Automation, again, now the core sector has started kicking up whether it's cement, steel, chemical oil and gas, city gas distribution, you look into the, what you call, in the blending areas. So a lot of derivatives are being planned there. So we are getting good traction in those markets as well as the Indian Oil Corporation or other private players are expanding in those areas. So overall, I would say it's one of the unique periods wherein all 18 divisions, all 23 market segments are positively inclined. And I would say some -- new market segments are growing 15% plus, some mid-matured segments are growing between 10% to 15%. So-called core segments are growing around 6% to 8%, and they are joining the party right now. And that's where our maximum volume comes. So it those kind of segments how they kickup, and they're really bringing the volumes which they have not brought for the last 7, 8 years because of the NPAs they were subdued, and they start joining the party and more expansions take place, I think we'll have a very robust market going forward. But that's our view today, but we don't know how the markets and the other things that show up next year or following year. But we follow very close to customers, so we adapt as we see customers' strength or customers' weakness in a particular market segment.

Thank you, Sanjeev. Thank you, Sridhar. We will now conclude this call. And thank you once again for great color and your time. Thank you.

Very nice talking to all of you. Have a good day.