Ador Welding Limited (517041) Earnings Call Transcript & Summary

[Audio Gap] We have entered the U.S. market. We have appointed two distributors in the U.S. market, along with an employee. We also have someone sitting in Australia. We've added an employee in Australia and also added distribution over there. So in the international market, our focus area is slowly branching over and beyond the Middle East areas, which have also continued to do well and seem to have a lot of promising growth. On the half yearly basis, the sales grew by 5%, and the international business grew by about 19%. Gross margins were at 29%, and EBITDA margins declined slightly due to increased fixed costs. PBT at INR 46 crores compared to INR 57 crores. And exceptional items amounting to INR 10 crores has been accounted for merger related expenses, obsolete inventory, and gain on sale of property. And therefore, we have a consolidated PAT at INR 26 crores as compared to INR 42 crores for the half year. I will now -- sorry, I have to go back. I will now request Surya to walk through a few of these items, and then I'll come back to [ merger ].

Good afternoon, everyone. I think one item in the accounts for Q2 was this exceptional hit of about INR 41-odd crores that we have taken in. This was mainly constituted by a provision on the valuation of one of the subsidiaries that became the subsidiary of Ador Welding based on the merger with Ador Fontech. 3DFT, as it's called, is into the aligner business. And based on our core strategy and sustainable line of business, the Board felt that we should revise the valuation downwards. So we took an impairment of close to about INR 32-odd crores. We had a merger related expense of close to about INR 5.7 crores that we have provided in the book. This basically accounts for the stamp duty and other legal service fees that would be related to the merger cost. We also had a reward and recognition to non-service employees who have been with us at Ador Fontech. That spend was close to about INR 3.8 crores, which had happened in Q2. Based on the Ador Welding inventory policies, we decided to write-off our -- we decided to take a provision of close to INR 1 crores in the current quarter on account of inventory of Ador Fontech company. And during the quarter, we also sold a property in Cochin, which gave us an income of close to about INR 0.5 crores that have been recognized in the quarter. All this put together has a onetime exception of close to about INR 41.7-odd crores. Looking at the business for the half year, if you look at it, almost 78% of our total business comes through the products division. Services contribute to about close to 8%. And M&R, which is the erstwhile Fontech business, was at about 14% of our total business. Segment-wise margins. We have -- as you know that Q2 was a little subdued, the margins across all the three categories were slightly on the downward trend due to higher input cost and product mix. We did see the product margins for Q2 at about 10%. M&R margins were close to 15%. And services, of course, had a negative 4% margin. On the working capital front, we did make a lot of effort. And the operative working capital has come up by about 9 days. Inventory has slightly increased from March, but on the receivable front and on the payable front, we have been able to optimize on the same and focus is on improving better cash flows, thereby improving the ROCE of the company. If you look at the PBT margins, there's a slight drop for H1 compared to last year, where we closed at about 11%. Margin we are down to about 9%. The ROCE has subsequently fallen from 21% to 19%. All these figures are without the exceptional hit. The debt to equity has virtually been at negligible 0.04% as of -- sorry, debt to equity is at 0.08% as of September.

The merger, as we've discussed many times previously, the value creation we expect to see in the manufacturing and supply chains, in fact, a lot of that has already taken shape. We've already formed the necessary divisions and already things have started moving on accordingly. There's a lot work happening on product development as well as on synergizing of cost structures. And we seem to be moving quite fast, which we were ready to do. We were just awaiting the order and now it seems to be rolling out fairly quickly on that front. A few updates on some key products. We are introducing a higher range of welding equipments. Most of these are competing against imported products. And we are continuously upgrading our technology accordingly. And we should see a new range of products being released over the course of December and January. In addition to that, we have developed an in-house first time battery operated welder, which is now gaining traction, not only in select international markets, but will slowly get pushed in the Indian markets as well. And we expect this to play out over the next financial year quite well for us, subject to a few approvals and all. The product has also received CE approval and all of that. Now we need to get some customer approvals, and we expect that to play a big role going ahead. This is just a few more features on the product related to the customer management of the product. And we are right now doing trials at UK Rail and in the process of getting it approved for track repair. In addition, in the international market, we participated in our biggest market, which is Saudi Arabia. We participated in a very large exhibition, and in October had very good traction. We expect that market to continue to play a very large role going forward. These are the other brand initiatives that are out there. Continuous engagement and all of that on social media front is helping to deliver at that order. We now leave it open for question and answers -- before I come to question and answers, there are two or three very, I would presume, standard questions that arise that I'll focus on. You can remove this slide. The first is on the welding margins. Welding margins are abnormally lower in Q2, and we expect to return fairly fast to not only the steady state level we had prior to that, but within our target of pushing upwards from there to a few percent, which we think is definitely possible. So it's not like we now recognize the Q2 margins to be the new level, not at all, it's an aberration on that perspective on the welding front. On the flares front, we're happy to report that it's progressing in a much, much stronger basis right now. We are in the last six to eight months of the project and we're getting a lot of confidence from the team in terms of their execution. We're very happy in terms of the monthly checks that we have and where we're hitting them, and it remains a tight period. And as I said, we've been very conservative on our accounting. We've remained as such and I hope that as this project reaches a close, there will be a back-end benefit that will come into the entire... These are the two important things that I know would be on most investors' minds. And I'll leave it open to questions, so please go ahead.

[Operator Instructions] Now I'll hand it over to our moderator, Ms. Nisha. Nisha, over to you.

Good evening, everyone. My name is Nisha and I'm the moderator for today's Q&A session. Our first speaker is Mr. Pritesh.

So my question first on the products business, if you could share the H1 volume growth and why we don't see revenue growth in H1 and quarter 2. My second question is, with the services business, this EBIT loss, you know, how should we see the shape up of this segment in the future quarters? And my guess is, is it to do with the large order that we have taken and execution with respect to that, or could share the progress of that order? And my third question is the new division which gets added in case of merger. Obviously, we haven't spoken on that particular division earlier because there was no conference call on Ador Fontech. So now with this division, what is the growth plan? And how should we look at this division in terms of growth or outlook?

Okay, sure. So Pritesh, 2 or 3 quick points we can get into. We've basically been -- on the product side, which is basically we're looking at volume being fairly flat to about [indiscernible], is it correct? On H1 basis or the Q2 basis? On H1 basis, it's been pretty much a little bit 2% down as such. The revenue dip has happened as steel prices have tended to drop fairly sharply during this period. We are now seeing that bottom out sort of happen and kind of flattish around there. So we should see that kind of get into a better scenario going into Q3, and we have seen that slightly better than we did in Q2, so far in Q3. On the revenue perspective, like I said, that's got to be steel prices. The EBIT loss in the services is very much related a lot -- in large part to that project at ONGC Group. It is a very large part and is related to that. And as I said, we've been very conservative on our accounting on that front. We expect that, that traction has improved a lot. Like I said, over the next 6 to 8 months, there is no -- we should be seeing a much different margin play out over there over the next coming quarters. On the M&R division, I think you'll see the margins were presented on the M&R division. We presented that. I think we should be along those lines of what it was in Q1, Q2, a little closer to that -- Q1, more along the lines of what it was in Q1, not Q2. Q2 was a little bit of a dip. We had certain expenses over there. The M&R business does not intend -- is not the type of business that will outperform IIP and stuff like that on a very large level. You basically look at the margins very particularly and you look at growth. And there is some low-hanging fruit, especially on certain applications. And the low-hanging fruit for us is also the international market, where we're pushing it more now that it's a part of Ador. I expect that growth rate to be pretty much in the region of anywhere between a 10% level, up and down a little bit on that front.

Yes. I didn't understand the answer to the first question. You said the volumes are flat. You always say look at our business in link with the steel consumption. In your opening slide, steel consumption growth was from 63 million to 74 million in H1 to H1.

Not in the last 3, 4 months. No.

No, no. H1 to H1, your slide itself has a -- first slide on steel had a 13%, 14% volume growth.

If you want to pop it up again to see. But Q1, we did see a good pickup. Q2 we saw a big drop.

So I was wondering, in H1, why is the volume...

[indiscernible] higher volumes than we did in Q2 in terms of the growth. It's pretty much been at 12.3%, 12.4%, a little bit flat like that. We've not seen much of a movement in that front. No.

So you refer to volume flat for quarter 2?

Volumes are flat. For H1, they're 2% down. For Q2, the volumes will be slightly lower than that, if I'm not mistaken. Correct?

Yes. H1 is pretty much flat.

Can you share the volume number for H1? Just like last year, you had a 60,000 ton volume. Can you share the H1 volume?

No, I don't have that volume right now, but I have seen it, it's pretty much flattish compared to last year, very little...

And on the second division, the answer which you gave, so this loss that we see, is it to do with that project or it's the division loss?

So it's through that project, which is encompassing most of the revenue and loss at the moment on that. And that is feeding through the entire system. And as I said, we were very conservative on our accounting, not only on that project, in that division. So we're expecting that to turn towards the end.

And what do you mean by in six months' time, we'll see completely different? So what, you will see the project getting executed or the project going away? What it is?

You'll see the project getting executed over the next 6 to 8 months in its entirety. And you will also hopefully see the benefit of the conservative accounting coming back in some way or form.

So out of INR 150 crores, how much is pending to be executed?

I would say somewhere in the region of approximately 35% to 40%.

Yes, basically 35%. As far as revenue is concerned, we put only 50%. So revenue will come.

So balance revenue is 50% of that.

So costs have been booked for in your conservative accounting, the revenues will flow. When will it start -- when we will start seeing that reflecting in your P&L?

H2 you'll see it, let's put it that way, but it's already started. November, December, we have a fairly strong billing plan, but the bigger billing plan is Q4.

So is it that 15% of INR 150 crores? Is it that we have a INR 20 crores, INR 25 crores of profit to be booked on that project, because...

That's a bit of a stretched number on that account because of certain budget increases and stuff like that. So I won't give the exact number. It's a little more conservative than that.

We have next question from Mr. Kiran.

Sir, a couple of questions. One, from a revenue growth perspective, of course, bad monsoons and steel, obviously the industrial activity was lower in H1. Do we expect -- not the project per se, but do we expect the growth in products to come back? And can we expect the FY '25 performance to be very similar to FY '24? That's my first question.

You know, to be very honest with you, the simple answer to that is, we saw, post the election and stuff like that, the results have been slightly more severe than we had all expected. Sort of just momentum of order booking or cash flows through the system, all of that is a little softer than we expected. Indicators are there that it's better right now than it was then, for sure. I don't know if you're yet at an exuberant level to show tremendous growth, but on an HY2 basis, we remain hopeful we will be able to show some good growth.

Got it. Second question, sir. So this large ONGC order that we are executing, I mean, majority of the sales or revenue will get recognized over the next couple of quarters or two to three quarters. So FY '26 growth then on this higher base, just wanted to get your commentary around, because this is a large revenue number that we are recognizing. So FY '26 again, this project is done? And is there any other similar size project that's going to come, which will cover our FY '26 growth, or are we starting back at the base?

No, we have some projects. There will be some spillover billing firstly that will go to FY '26, and then we have some other projects as well. You may not, in this division, see big growth. Through the flare and process equipment line, we could get some growth through our repair fabrication services line. But I would not expect that to be a very big growth on this account in that division. What you will see or what we are aiming very hard to do is, of course, improve the margin realization of that division very significantly to prior. And more importantly, have some good growth if the market conditions are good, some good growth in the products business, which will automatically lead to a better overall margin.

Got it, sir. But there will be a revenue, at least -- even if we grow by 15%, we will just cover up the revenue that we had done in -- or we will do in FY '25. That's how I read it.

This year margin expansion.

Kiran, just to also tell you that we may not see very large offsite projects being taken on, but what we will see is smaller projects with higher margins, because there's going to be more margin focused projects that we are taking on. And also what we are doing is it will be small, but volumes will go up.

What our learning basically has been, for those who have been shareholders for a while and who have attended calls earlier is, biggest learning has been that we don't believe it's in our DNA and neither are we very good at managing projects which have large site work. So when we rejig this division based on the learnings that we've had, we've now said that we want to focus on projects which are in our manufacturing control, within our plants, primarily with minimal to no site work, which is what we have rejigged our order book towards all of that. So that is what will play out over that time. We should hopefully have much better margins and other key financial metrics will be better as well, return on capital, all of that.

Got it. Sir, my last question then is a little more detailed. So from a 3D write-off perspective, write-off, I mean, we've done the conservative accounting. Sir, what I'm trying to understand is Ador Welding and Ador Fontech has the same top management, barring a few executives, right? Ador Fontech, when we kind of merged it, we are writing off such a massive amount, and we did not reveal that information before we decided the merger issue. So just trying to understand how did we suddenly find we're going to write it off and then get it back whenever that value gets realized.

It's good you asked that question. It's a very, very valid question. So there are 2, 3 elements here that you have to keep in mind. First is the nature of the dental aligner business, I would say, in the last 6, 8, 9 months has changed quite drastically, which has obviously forced business projections and the reality on the ground to be slightly different, number one. The second thing is the merger process was taking slightly long. And I personally, nothing to do with the Boards and stuff like that, I've always been a little conservative to say, let us try to ensure that the merger process happened correctly, because those who were tracking 3DFT at the Ador Fontech level were aware of the losses, as it was always being shown and declared accordingly. There was never anything that was a surprise on that front. So the idea was that we should just be a little conservative in terms of recognizing a few of those things. The third thing is we reevaluated with the Board very seriously on this business. And now that you've given the scale of a different business and seeing what we are seeing on the burn as well as the potential of the 3DFT business, we felt we should realign ourselves. And given the fact that we were doing what I would call pretty much a good cleanup in this quarter, we said let us be correct in terms of how we position things. So that's the logic of where we are today and why we decided to take it right now. But I think most shareholders from the Ador Fontech days, who've been tracking it, would have also seen that those losses have been there and would have known to some level that this could be a potential thing that could come. On a consolidated basis, we don't have anything on the consolidated...

So Kiran, just to answer you a little more also, if you look at the consolidated numbers, you will not see this impact come on the consolidated, because the losses have already been absorbed. So the net worth of the company had already been taken care when we used to consolidate. And that's why when you see the consolidated accounts, the exceptional items would be shown -- would be only to the tune of about INR 10-odd crores compared to INR 41-odd crores in these standalone books. This will not have any cash impact or anything. This is just a value in the standalone.

And there might be some recovery, or we are not expecting any recovery of amount, sir?

See, the business will continue as of now. We are not saying that, you know -- as a Board, we said, let us decide and see the valuation. On the future, we will come back to you.

Because it was running losses. I'm just worried, sir, to be very honest. The major worry -- I understand there was no cash loss, my major worry is if the dental aligner business continues, that will continue to run in losses and start hitting our Ador Welding margins to a little extent, a minor extent, so that is the worry.

So that is where the Board is very clear that we would not like that to happen. So we will be very clear on that. Just give us a little bit of time and we're working out how to do that correctly. That's exactly what the Board is on the same page, it's exactly that.

Sir, we have next question from Mr. Naysar Parikh.

So just a couple of questions. One is, when we compare our this quarter numbers with your peers, the listed one did around 10% growth. We are down even after we -- and that's after we are executing a large order on the flare side. So I just want to understand, can you just talk a bit about our market share? And what are you seeing in the market? And how should we look at H2 in that context?

So I won't comment on our peers or anything like that, because I don't think that's a fair comparison, or in my position to comment, to be honest. I will tell you that on the market share front, we do not see anything of any concern at all. I think what you have to keep in mind is that the business model for player to player is undergoing certain changes based on their global outlook. So I think you should just keep that in mind. Otherwise, I don't see on the ground anything of concern as such. What I do have a concern is on the margins in Q2 for sure, which we are working on improving. But on the sales front, I don't have a concern.

And in the margins, is there any impact of, you know, higher discounting or something like that? And have we taken as in pricing actions?

Yes, we have been slightly more aggressive in terms of clearing off a little bit. We have been slightly aggressive in terms of certain clean-ups that had to have been done and stuff like that. Yes. So we are seeing a little bit of impact on that for sure. As I said, it's an aberration of margins. It's not any new steady state margin or anything like that. So yes, we've done a few things that we just had to conservatively. So we've done that right now. We don't see that as a telling on the next quarters in any way.

Got it. And I think we've written off some -- INR 1 crore or something of inventory also. Is there anything more we think that we still need to write off or...

To be done now? I think nothing extraordinary to be done. Most of it has been done.

Understood. And can you just talk a bit about the exports also? Obviously, you know, last year, exports did very well. And sorry, I missed the slides of the first 5 minutes. So just what was the export growth? And how are we seeing exports for the remaining part of the year?

So last year, we closed exports at approximately INR 120 crores, which had doubled from the year before. We have grown so far in HY1 at about 20%. I'm hoping that we close the year at approximately 25% to 30% in terms of growth for the exports. It continues to remain strong. I'm also buoyed by the -- margins also seem to be technically improving a bit as is the product mix. We've also entered new markets. We entered the U.S. in our own brand, which is something we're very happy to have done. We have a person on the ground. We have 2 distributors on the ground. The Saudi market continues and the UAE market continues to be buoyant. We've just about started to make an entry into Australia. So on the international front, so far going to plan, and we're quite happy with the way it's moving.

We have our next question from Mr. Anand.

A couple of questions. First is some restructuring costs, M&A cost. Have all of these been brought out in this quarter, or some are to be apportioned in the remaining...

I think, Anand, it's all taken in this quarter. And just to share with you, the M&A, the merger related costs are basically costs related to stamp duty, legal fees, et cetera. That's pertinently only for the merger. The merger was affected on, I think, 25th of September, and we have provided for all the known expenses as of now.

Got it. The second question is, from the perspective of product -- in the product segment, consumables and equipment, if you can give us some context, which one got hit harder in...

The consumables got a slight dip. We now try and separate -- look at it slightly differently. But just to let you know since you have been studying it previously, the consumables is a slightly bigger dip, which is why the margins will automatically get dipped a little bit. But we do not expect that to continue through the year.

Okay. So consumables margins, and in terms of sale, was there any particular...

Consumables sale and margin both.

Got it. And from the perspective, this is more -- not related to this quarter, but from the perspective of ownership, we see several surnames names coming up, Malkani, Advani, Lalwani in case of -- so if you can, for the broader understanding of the people on the call, help us understand which families are involved in running, which families are in the ownership?

Sure. So basically, the primary controlling or holding company of Ador is a company called J.B. Advani & Company. J.B. Advani is a 116-year-old company, which is owned by 5 partners and continues to operate as a private company. These 5 partners have 5 -- their surnames are Malkani, Advani, and all of that, which is basically there. We also have individual shareholding, for example, in Ador Welding, which is why you're seeing some transactions happen. For example, I recently had a transaction where my sister wanted to personally sell some shares and I bought her shares and all of that goes on. So that's basically it. In terms of -- they sit on the holding company as well as they sit on the Board. The Board -- the rest of the company is professionally managed. I basically look at it from the Managing Director perspective, and then the rest is professionally managed. I think they will be classified as promoters as well in the shareholding team. So that's it. So the Board is an independent Board primarily from that perspective.

Got it. No, that's very helpful. And one last question. When we look at J.B. Advani & Company, they have 90% of their revenue coming from Ador. And this promoter company has been not showing -- not being as profitable. In fact, it had losses in some of the years. So can you comment on what exactly...

So J.B. Advani's revenue in terms of from Ador is actually tiny. It's about somewhere in the region of, I want to say, ballpark INR 20 crores is what we do. The rest of it is basically primarily an asset holding company and stuff like that, and we have rental income. So that's why it's fairly separate. However, from a revenue perspective, what has happened over many decades is, in order to protect certain copyright issues on equipment and stuff like that and to manufacture in a more low-cost manner, we have a small unit of J.B. Advani in Pune that manufactures for Ador. We have a very clean cut related party transaction pricing system, which is audited at Welding as well as at J.B. Advani. All of that is checked not only by a separate auditor and the stat auditor accordingly, very minor sort of -- and at the end of the day, the business we're talking about is in the region of INR 20 crores. So it's nothing major in terms of revenue.

We have next question from Mr. Jason.

So first of all, I just wanted to know, I mean, of course, I understand that steel is a very, very big raw material for us. Now I just wanted to understand that when you look at steel, if you go 1 year back, steel prices have almost corrected by 13%. From INR 55,000, HRC has come to around INR 48,000, INR 49,000. And when you look at -- you said that volumes were flat 1H, but our growth as such is around 4% if you compare 1H to 1H. Now I understand there is the equipment business also, which you have clubbed into the products piece. But still -- so there is a 13% dip and it's a 4% growth. Now I just wanted to understand how does the steel cost being a pass-through, how does it work? If you could just give me some more color on that how the cost pass-through works?

So on a normal basis, ideally it should work on a 4- to 6-week cycle. This is normally how you should do it on a steel price basis. However, it also depends on what sort of demand you're sort of seeing. What happened in Q2 was we were normally trying to push that out over 4, 6 weeks while the dip was happening. What happened in Q2 was the demand drop is much more significant than was expected to happen. I'm sure you must be following the steel guys also, they would also tell you a sort of similar kind of commentary on that. Because of that, you cannot play out over 4, 6 weeks, and you have to take a call in terms of movement of inventory and production. So we have to shorten that time line a lot. But normally, on a steady state basis, 4 to 6 weeks.

4 to 6 weeks. Okay, that's okay. But is it a complete pass-through, whatever the dip -- I mean, whatever the cost of steel coming, is that a complete pass-through to the customers? Or how does it work?

Yes, complete pass-through.

Okay. Sure. And also, I just wanted to ask, I mean, of course, when you go back, you were looking at the CapEx cycle doing well in terms of a host of industries. But our growth has been kind of, you could say, not optimum. You could say we have the potential to do a lot more. So I just wanted to understand from you, is there something else like probably the unorganized sector is gaining market share or the Chinese are gaining market share in the consumables segment? Or is there any other factor being played out, which is hampering our growth?

I don't think so. Firstly, I honestly believe that core sector growth has not been as exuberant as it was expected, in the last few months, I'm not talking about [indiscernible] year, I'm just talking in the last few months. There's nothing that we specifically heard, but you're always correct that there is room for us to keep improving, and that's what we are working very hard towards. But I think the last few months has been a little soft in various core sectors. So I'm hoping for that, and we can see little signs of that improving.

[indiscernible] loss asset for the Chinese or the unorganized sector or anything of that sort?

No, I don't personally get very concerned about that all. I think people work on sort of qualitative products that we work on and the approvals and stuff like that, that we work on. I never get too stressed about that. On the equipment front, of course, imports, because 65% of welding equipments are imported, so that always does play a role a little bit, but not to a level where you should see a significant dip.

Okay. Okay, sure. And Aditya, also just wanted to ask you, what's -- so of course, Q2 is soft. Now could we expect for a better H2? What is your outlook going ahead?

Yes, for sure. I think it's -- as I said, it's an aberration in Q2. It should be a better H2, especially in terms of margins. In terms of demand, it seems to be, like I said, little signs are there being better than they were for those 3 months in the middle. I don't have a crystal ball to go much beyond the next 6, 8 weeks and 2 months sort of to see which ways moving. But I definitely think on the margin front, on the execution of the projects or all of those things, where we are seeing a lot more optimism than we've had for the last few quarters on those issues.

Sure. And just a related question. You had mentioned Champ 500 on your slide regarding more new launches on the equipment piece. Now I just wanted to understand that in terms of cost competitiveness, how is the product as compared to the imports, of course...

[indiscernible] cost competitive. But this is an application-based selling. So you have to also be able to sell correctly. It's not only that. But I'm not stressed about that part. I'm actually more stressed about how do we ensure we get the reach of the market and the application selling part of it. The rest I'm not too worried about.

Okay. Sure. And just about this ONGC project, I wanted to understand. Now I believe when you look at the project, it was -- net of GST, it was a INR 123-odd crores project. Now I believe you had said that probably we'll execute a lot more in FY '25, 75% to 90%, and 10% spilling over to next year. Do you still stick to that? And also...

There are slight changes on that. Right now we should bill...

[indiscernible] already in the 50%. Another 20%, 30% we will do in this. Maybe rest 10%, 15% will go to...

15% I think will go into the next financial year. So close to what you're saying, 5%, 7% difference will be there.

Sure. And margin level, I mean, any ballpark...

Margin level will be significantly better than what we have seen. It's below the intentional order when we took it at that time. It's slightly below that for sure. But over the next 6 months, you will see a better margin level play out because of the conservative accounting we discussed and many other things also.

Sure, sure. And just lastly, I just wanted to ask you, Aditya, I just wanted to -- so I understand the M&R piece, Ador Fontech piece will grow as per IIP, which you have mentioned before. Then we have the project business. Now I also wanted to understand, when you look at consumables and the equipment, which is your main business, IIP usually is trending around 5% to 6% post-COVID. So do you think -- I mean, being the second largest player in the welding space with CapEx looking upbeat, can we grow at a pace of 2x. I'm just talking about the product piece here. Can we grow at 2x the rate of IIP?

It's very elastic. So what that means is that if you see IIP being flattish, when I say flattish, means 3%, 4%, whatever it is, then you will see it along those lines. As you see IIP start to move upwards, 7%, 8%, 9%, then you have an elastic impact on that. Then you go up to 12%, 13%, 14%. But if you're going to remain at 3%, 4%, I can't give you a 2x. It's hard to give a 2x number. As you start to move up there, that's when we see the incremental kicking along.

We have our next question from Ms. Harini Dedhia.

So I had a question on the margin front. So pro forma margins for the combined entity are at about 10%, 11% for FY '24. 2, 3 years down the line, right, when we are beyond the flares project and all of that, where could we be in terms of margins? And how much of those gains can come from any low-hanging fruits that we have from the merger that you referred to? And how much of it is something that we have to work more structurally on in terms of equipment margins...

We discuss this all the time. So I think we're looking at about 2% being as low-hanging fruit that needs to be worked on for the next year. And beyond that, we need to push a little harder for another 2%, I think 1.5% to 2%. You're looking at -- anywhere 3%, 4% is what we internally talk about. It's something that we have to deliver on is the improvement in margins. It's something we talk about. That will play out over 2, 3 years. It won't happen immediately. It will play out over 2 years, but that's exactly what we talk about is the improvement that is sitting within our control that needs to happen and should happen.

Got it. So half of that would be more coming from the synergies and then another half would be more from like the equipment going closer to consumables margins?

It's product mix, it's fat being cut out of the system. It's being smarter about how you handle your services division. It's exports growing with the right product mix as well. It's about the investments that we have made in domestic that pay off in terms of realizations. So there are 6, 7 things that we are working on that need to keep hitting. We need to start hitting all of those cylinders to make it happen.

Got it. And the second question I had was when I see Lincoln Electric's call globally, and they called out that they saw some volume growth in this geography. ESAB India, of course, reported numbers. ESAB India may be exporting to other ESAB entities from India, so maybe not a fair comparison. But just wanted to understand a bit more on our volume growth given that these 2 large MNCs that operate in our markets have sort of called out growth opener.

I don't like to comment too much on competitors. I do -- I will tell you that they have certain segments where they are stronger than us, be it renewable energy, where we are seeing a little bit of traction, albeit a few other segments where they are a little more dominant, where I think they would have seen it and plus they have a low base effect on that. Ours is a little more spread across the entire sector -- across most core sectors, so it's slightly different. Also keep in mind, we're talking the last 3, 4 months where this has been tight. Prior to that, we were seeing volume growth we wanted. I don't think -- my only thing would be don't be so quick to draw a conclusion or a result on it yet. Just give it a little more time to see how it pans out.

Since there are no further questions, I will now hand over to Aditya sir.

There's a follow-up question, I think, from Jason, it says, on the text.

Just one follow-up question I wanted to ask. When you look at the services division again, of course, we have that big project. And I believe the other equipment, which is the FPD, I think that will yield a steady-state revenue of around INR 30 crores, INR 40 crores at least annually. Is that a fair assessment?

That's a minimum. It's a minimum level, yes.

That's the minimum level, right? Yes, the heat exchangers and all that equipment, that must be a steady-state level, which adds on to the project revenue as well?

Yes. That at the minimum level, and we should be in a position to be beyond that next year also. Much beyond that. Okay. Thank you very much. I appreciate your time. Thank you all very much.