Aeroflex Industries Limited (AEROFLEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Aeroflex Industries Limited Q1 FY '26 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Asad Daud, Managing Director of Aeroflex Industries. Thank you, and over to you, sir.

Thank you so much. I hope I'm audible to everyone. Good morning, everyone. I welcome you all to Aeroflex Industries Limited's Q1 FY '26 earnings call. Joining me today are members of our senior management team and representatives from Strategic Growth Advisors, SGA, who is our Investor Relations partner. I hope that you have had a chance to review our Q1 results and the investor presentation, which is available on the stock exchange and also on our company website. This quarter has been a challenging one, as you have seen from the results. And it has been the first time in a very long time where our performance has deviated from a consistent record. The decline in revenue was primarily because of external macroeconomic environment, especially the issues regarding tariff and the consequent disruption in the buyer segment across several key geographies in the export market. This regulatory uncertainty led to a temporary dip in the procurement from our customers, which also resulted in delayed orders and also cautious offtake. But we believe that this dip is only transitory, and we have started to see signs of stabilization and sentiment coming back to some sort of normalcy. And we have also started to see the order flows starting to move from Q2 -- in Q2, I'm sorry. We remain confident that the impact, which has been seen in this quarter will be offset over the remainder of the year. And we strongly believe that the long-term demand for our products continues to remain strong and our strategic road map is also firmly intact. Some of the key highlights of the quarter. So one of the most significant developments that happened is our entry into the next-gen cooling technology for the data center infrastructure. We are proud to announce that we have signed a long-term agreement with a listed U.S. corporation with a market capitalization of -- which has a market capitalization of over USD 50 billion. This agreement is for the supply of liquid cooling solutions for the data centers. I think this is a great sector for the company to enter into considering the multi-decade growth opportunity that this high potential sector provides to the company, not only in India, but across the world. Our state-of-the-art bellows plant and our engineering and our R&D team are the key factors that help us to get this opportunity. I'm also happy to share that we have received the first order of about INR 7.8 crores for providing these cooling solutions to the data centers. This order entails development of advanced flow control components, which will be used for the cooling systems. Now talking about our performance for the first quarter. Our total income stood at INR 84.67 crores, which is a decline of 6% on a Y-o-Y basis. Our EBITDA stood at INR 15.8 crores, which translates to an EBITDA margin of about 18.68%. Our profit after tax stood at 7.7%, which is a PAT margin of around 8.46%, which is mainly due to higher depreciation. From a margin perspective, our hoses and assemblies segment continued to deliver strong margins in the range of 22% to 23%, which is in line with the trends over the past few years. However, the overall margin for the company on a consolidated basis saw a reduction primarily due to a couple of factors. One is the ongoing expansion of operations at our subsidiary, Hyd-Air Engineering, which is currently in the scaling phase and also the metal bellows plant, which has not yet reached the optimum capacity utilization. So these are the 2 projects that we have -- in which we have -- it's for the long term and where we feel that over the next few quarters, we'll be able to see these 2 segments contributing both in terms of revenue and also in terms of margin. So these are the strategic investments CapEx that the company has made. And as their capacity utilization increases, we expect operational efficiencies to improve and also the margins to normalize over the next few quarters. The segment of our assemblies continues to contribute more than 50% of our total sales, which is in line with our full year targets. Despite this temporary blip, we expect to continue with our planned capacity expansion as we see that this is just a temporary blip, which will be normalized in this quarter and the growth to resume after that. To sum up, I think Q1 has been softer than what we had expected. But it -- but we are firmly -- we firmly have the belief for our long-term outlook, and we remain focused on execution, on scaling up, and we believe the business is well positioned to bounce back in the next few quarters with renewed momentum. Looking ahead in terms of this financial year, outlook continues to remain positive. Our capacity expansions are progressing well and are in line with our long-term objectives and growth. As expected, these ongoing investments led to a slight dip in our margins. But as the new capacity scale up and fixed costs get absorbed, we expect the margins to gradually increase over the next few quarters. Our foray into the cooling solutions space, it provides a strategic opportunity and it opens new doors to high-growth sectors such as data centers and advanced thermal management technologies. This will enable us to move from traditional business to enter into this new age, next-generation innovation-led industry. We are focused on deepening our capabilities and also strengthening our product portfolio. And we are building a more globally diverse presence across the world. Looking ahead, we are confident in the overall growth trajectory of the company. And we are putting in all our efforts to fulfill our targets for this financial year. I would like to thank all of you for the continued support and trust that you have had in the company. Last quarter was just a blip, and we hope normalcy will resume from this quarter onwards. With this, I conclude my remarks. And now I would like to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Raman KV from Sequent Investments.

Sir, I just wanted to understand that in Q4 also, there was a revenue degrowth due to shipment delays. And you mentioned that those will be spillover in terms of in Q1 with respect to most of the delayed shipments were sent in April. And again, in Q1 also, there was a delay. So basically, I just wanted to understand, one was that there was a spillover of previous quarter also. And despite that, there was a revenue decline. So I just wanted to understand going forward, will there be revenue decline for next 2 quarters as well.

So in terms of, for Q1, the majority reason for the dip in sales is because of the new orders or the new decline in the demand from the international market. The exports degrew in the last quarter. However, the domestic market grew by more than 30% in Q1. So the decline in sales in Q1 is mostly due to the temporary dip in demand. So I hope -- and for the next 2 quarters, so, like I mentioned, we've already started to see things coming back to normalcy. Obviously, we will not be able to give specific numbers, but we have seen that we have started to already see the order flow from our export customers become much better in the month of June and July and hopefully in the next few -- in the next few months as well. I believe that the last quarter was just a temporary blip in the growth of our company.

Okay, sir. And sir, with respect to the data center order of INR 7.8 crores, which you received, what is the execution time line?

So it will be executed mostly in H2 as in dispatched.

And sir, what is the market opportunity of your product? Like I want to understand you are supplying liquid cooling solutions with respect to data centers. What is the total addressable market domestically as well as internationally?

So in terms of data cooling, the estimated market size as the market estimate is somewhere around $4.4 billion, right? But that's for the entire cooling solutions for data centers. And we obviously form a subset of that. So specifically the products that we are giving, it will be hard to give a market size of that particular product. But if you see the overall data center cooling market, that's around $4.4 billion, and that's growing at a CAGR of 20% worldwide right now. So it is expected to become almost 5x in the next 7 years. So that's the market size in terms of -- obviously, this is our first order that we have received. Also have multiple discussions lined up subsequently as well. So we are hoping that this particular division will have a substantial contribution to the overall business of our company over the next couple of years.

Sir, my final question is with respect to your guidance. You earlier in Q4 guided about 20% to 25% PAT growth in FY '26 as well as EBITDA margin improvement. And you said metal, bellows, and Hyd-Air will contribute INR 30 crores each. Are we sticking to the guidance or now that there has been a degrowth in terms of market demand, it will be revised?

Yes. So in terms of our guidance, right, yes, we had given a guidance of the EBITDA growth of 25%. And I think as a company, we believe that once we have a certain target, the entire team puts in their 150% in order to achieve those targets. However, obviously, there are some situations which is beyond the control of the members or the company, right? But our internal target is obviously to achieve our annual targets. But since obviously, the first quarter has not been as per our planning, but we estimate that our growth would continue to be in the range of more than 20%.

20% PAT growth or revenue growth, sir?

No, EBITDA growth. Reason being PAT growth will be slightly lower because we have higher depreciation. So a lot of our investments in our CapEx. So if you see the Q1 results, you'll see the depreciation has increased. So hence, that is why we have given the growth guidance for EBITDA.

And sir, this metal bellow and Hyd-Air, they start contributing INR 30 crores each in this year?

Yes. So we expect metal bellows and Hyd-Air to start -- so Hyd-Air has already started to contribute to the sales of Aeroflex. Obviously, the scale is yet to reach, but we expect this year that both of them will have contribution. I think combined, both of them should contribute at least 15% to the -- 10% to 15% to the overall sales on a yearly basis.

The next question is from the line of Viraj Parekh from Carnelian Asset Management.

Just a follow-up question on the first participant. In the last quarter, you said there will be some spillover of orders in the next quarter in May and June. So given that Q1 has also been weak, should we assume that if the spillover was not there, the numbers should have been lower than what we delivered this quarter?

So last year, it was -- so the last quarter, there was the spillover of the dispatches, the orders. In terms of the dispatches, it moved to this quarter. So yes, so this quarter, obviously, the demand was lower specifically in the month of -- in the early parts of the quarter. But like I said, July has been a good month where we are seeing the things are coming back to normalcy and also with this new project that we have and that we have received, I think we have a lot of positive things happening in this month already and start of this quarter already. So I think a [Technical Difficulty] blip. And I think we expect Q2 to be normalized and then Q3 to see back the company into the growth trajectory.

In terms of percentage terms, how much would be the spillover from Q4 to Q1?

I would not have the exact percentage right now, but I can get back to you post call.

Sure. Just second question, sir. We are saying that things will get normalized in Q2 and the rest of the year. If I'm correct, this year out of Europe has been significantly down for us as a region and U.S. for -- as you highlighted in the last quarter, there is tariff uncertainty, but Europe particularly catches my eye because I think we are at a INR 14 crore quarterly run rate for Europe, which is the lowest in the last 5 quarters. So if I'm to assume that we get back to Europe is a similar run rate as last year, there would -- it would require a 40% to 45% growth from the current quarterly run rate. So can you help me understand is this possible or not?

Yes. So we had a decline in Europe also and also in the U.S. as well in terms of the sales. Obviously, Europe was also significantly impacted because some of our largest customers who we sell to, they ultimately use our products in their machineries, and they also have a lot of exports to the U.S. So hence, their demand also saw a slowdown wherein it actually affected us. So Europe got doubly affected; one, obviously, from the demand itself in Europe and second, because some of our customers of Europe, they supply their end products across the U.S. as well. And they also got impacted. So that is why -- see, U.S. continues -- even after this drop, U.S. continues to be our biggest market, right? And our focus has been to grow the U.S. market and to increase our presence in U.S. because the European market has been a topsy-turvy over the last few years. And we will continue to focus on increasing our presence in this market. Also, like I mentioned that we have seen an uptick in demand in this month in July from some of our European customers where they believe that the things are starting to get back to normalcy. Also recently with the deal with the EU and the U.S., right? So I think that's also going to help the demand to come back in Europe as well.

The next question is from the line of Prem Luniya from Astute Investment Management.

So sir, actually, going back to the first question of the cooling market, which we have cracked in. I wanted to understand the customer in which we have cracked in, was this a replacement of a company who was already providing and now we have started providing -- or was it a completely new product? And if it is completely new product, if it was a replacement, can you just tell me what was the complete procurement by that company so that I can understand what is the market which we are catering to and what can be...

This is a completely new product and a new project. So this product is obviously being utilized in the U.S. and in Europe. But this is the first time in India where this company is utilizing the product manufactured in India for the data center. So this is basically a completely new demand. It's not replacing any existing competition or any existing customer. In terms of the -- so this project is with regards to the new technology, which is the liquid cooling. So just to explain to everybody, the old data centers were generally cooled through air cooling, which was when the computing power requirement was not very high. But now since over the last 2 to 3 years with the use of -- or the increased use of AI, with the increased use of high power and high-speed computing, air cooling is not sufficient to cool the data centers. There is a new technology of liquid cooling where using a chemical and through the process of thermal cooling, you -- that is actually the data centers or the disks of the centers are cooled through this particular chemical, which flows through a piping system. So hence, this is kind of a new -- like a new technology, which is, I think, I would say, probably less than a couple of years old. And hence, this is a completely new area that we entered into and we want to supply. And obviously, with the increase in adoption of AI across the world and also in a lot of sectors, not only tech but also in the non-tech sectors, obviously, there will be a huge demand for data centers. And the data center, especially with high-speed processing and high-power processing, they will require liquid cooling. So hence, the demand for this particular cooling system is only going to see exponential growth over the next few years.

Right, sir. Just can you quantify that where do we see this business going to, let's say, 10%, 15% 1, 2 years down the line? And also, will it have the same type of replacement cycle as the other industries where we cater to? And just one more question was on -- can you please quantify how much was the market share of Aeroflex in Indian exports of our particular products?

Okay. So in terms of the replacement cycle for this, so it will be difficult for me to give a number because this is the first time that we are developing this product. And mostly, it depends on the amount of the quantum of the cooling that is being utilized. Obviously, there will be requirement for replacement parts or spare parts and also the contract that we have signed with the company involves supply of spares and supply of parts in case of any replacement as well. In terms of market share of Aeroflex's exports, so I don't have the exact number in terms of market share, but I would say the Aeroflex is the largest exporter of hoses and assemblies from India. So we are by far the biggest player in terms of export. Also, we are the largest in terms of the domestic market as well. So we are the leaders both in the domestic market as well as in the export market. Difficult to give an exact market share number, but we are #1 by far.

The next question is from the line of Aastha from Pkeday.

Can I know what would be the revenue contribution from each of the segments going forward? And what was the contribution from each of the segments? I understand that you have given the split between assemblies and the other segment, but did we get any revenue from metal bellows?

Yes. So we had about approximately INR 1.3 crores of business in the metal bellows. So we expect that over the next couple of years, at least 10% to 20% of our revenue should come from these businesses and plus the new liquid cooling solutions project, right, that will be executed using our bellows facility and our machinery for bellows. So that will also see a significant uptake in terms of the percentage of contribution from this particular division.

So sir, this 10% to 20% will be by which year?

This is I'm talking about this year should -- so in this year, with all the new projects of bellows of this -- of liquid cooling and of Hyd-Air, 10% to 20% of the business we can expect in this year from these particular divisions. It will be difficult to give an exact percentage, so a ballpark figure of 10% to 20%.

Sir, what would be the margins in metal bellows?

In metal bellows, the EBITDA margin is around 28% to 30% at an optimum capacity utilization. Obviously, right now, the utilization is not at that capacity. Hence, you're not seeing that those margins in the numbers. But once the bellows plant reaches a certain capacity utilization, you'll see the margins of 28% to 30% because the gross margins in the metal bellows range anywhere from 50% to 60%.

Okay. Sir, what is the order book as of now? Do we have certain order book in each of the segments?

So in terms of metal bellows and for -- obviously, in terms of the liquid cooling, we've already mentioned the order that we have received. In terms of Hyd-Air and bellows, obviously, the scale at which they are, right now, the order book is small. But we're seeing that we have started to -- so we have also got certification from the American Society of Engineers where -- which is one of the requirement for metal bellows. We have already received that certification. And we have also applied for a couple of more certifications for metal bellows, which we are expected to receive by September or October of this year.

Sir, but my question is that do we have any order book in hand? I know that we have approximately INR 8 crores in metal bellows. But apart from that for assemblies or other segments as well?

Yes. So those order book are -- so we have -- we divide our orders. So in terms of the overall business of Aeroflex, we have 2 sets of customers. One is those customers who give us a tentative quantity on a yearly basis and then they place periodic POs based on their quarterly requirement. And then we have certain projects that we work with the customers. These are long-term projects wherein we start working with them on prototypes, then testing. Obviously, first comes design, then prototypes then testing and then it goes into production. And then we have the set of distributors or assemblers who buy the regular product from us, and they mostly buy on 2 containers, 1 container basis. So those are ongoing orders which happened on a quarterly or a monthly basis. So we specifically don't have like a specific number for an order book of a certain value or a certain amount.

Got it. Got it. Sir, my last question would be that who else we are competing with when it comes to data center liquid cooling products. And if we are competing with the player like in India as well as in the foreign market and in the foreign market, how much would be the price difference in percentage terms?

Okay. So right now, the project that we have got it for supplying to the India market. So the U.S. company has received the contract for the data center cooling for the India market, and we need to supply our products in the India market. So specifically in terms of price comparison will be difficult to tell you because once we were in the international market, only then we'll be able to share with you the exact price comparison. In the international market, our competitors are already supplying these kind of systems to the data centers, the likes of Senior and the likes of a Parker. Both of them are supplying the cooling systems to the data centers. So they are our competitors in this segment as well.

[Operator Instructions] The next question is from the line of [ Jeevan ] from [ Jeevan ].

Sir, this quarter was due to the tariff issue, it is lumpiness or normally also quarter 1 is weak as compared to quarter 2 or quarter 3 versus quarter first.

So generally, Q1 is obviously kind of the quarters which is generally, I would say, sometimes it's weak because of certain spillover, but it will be difficult to confirm that the reason being because our business depends on a lot also on the projects, right? So some of the projects can start in Q1, so we can see higher demand in Q1. So difficult to just say that whether Q1 is always weak. Sometimes it's weak, sometimes it's strong. And one of the major reasons for the dip in the sales, like I mentioned, is the temporary dip in demand from the customers. It was -- to a great extent, it was related to tariffs. Reason being I might not have informed in the earnings call, but the tariffs on our products increased by almost 3x. So it was earlier -- approximately about 3.5%, and it increased to 10%. So that was also a significant cost addition to our customers as well, right, where they had to bear an additional duty of 6.5% on the products. Hence, we saw a temporary dip in the demand from the customers, especially those who are distributors or who are assemblers who wanted to reduce the inventory who wanted to understand the market because a lot of the panic initially was that due to this high tariffs, there will be a significant decrease in the demand. Hence, one of the customers wanted to carry a large inventory with them. So these were a few reasons where we saw that because of the tariff issue, there was a dip in the demand, which ultimately led to the dip in the order flow and then ultimately the dispatches.

A follow-up to the previous caller. You said that certain competitor in the cooling solution is there. But is there any competitor in India also as we or we are the only supplier in India for the cooling solution to the data centers?

So from the -- whatever information that we have that we are the first ones to enter into this space in India in terms of manufacturing of this product, that's why this -- the company that we have tied up with have chosen us as their supplier for the data cooling solution. So this is a completely new business for India as well.

The next question is from the line of Jyoti Singh from Arihant Capital Markets Limited.

Just a few clarification. Like you earlier mentioned on the focus -- expansion on the focus. So like we are focusing on Europe more or on U.S. because Europe, we already have good presence. And another on the data computing liquid cooling side, any RFQs on the order book side in any certain geography we can discuss? And lastly, on the competitor name side, like you mentioned a few, but it was not very clear. So if we can discuss on the data center cooling liquid side competition, who all are there? And going forward, still we are seeing demand impact because of the tariff, if anything we can discuss on that side?

Yes. So your first question was Europe versus U.S.A. So U.S.A. remains our biggest market and the focus of the company remains the U.S. Europe over the past 3 to 4 years has seen a lot of ups and downs, I think more downs than ups. The U.S. was impacted right now because of the tariffs that I already mentioned. So -- but U.S. will continue to remain our dominant market, and we will continue our efforts to focus on the U.S.A. market in the near future as well. In terms of the RFQs, the orders we have already received the order for INR 7.8 crores for providing the liquid -- providing the components for data cooling for data centers. In terms of competition for this particular segment, I mentioned Parker Hannifin, which is a listed company in the U.S. and Senior. I think they are based in U.K. and they are also listed. So these 2 are our competitors in this segment as well. And your last question was on tariffs. As I think I already mentioned about tariffs that -- one of the major reasons for the decrease in demand in the first quarter was largely driven by the issue of tariffs.

The next question is from the line of Soumya S from Insightful Investments.

I just had a confirmation. I couldn't hear you when you gave the exact revenue for metal bellows for the quarter. Did you say INR 4.8 crores or INR 1.8 crores?

INR 1.3 crores.

INR 1.3 crores. Okay. Got it.

Also just to update to everyone. I think in terms of also -- obviously, we've not yet had any questions on that particular point, but I just wanted to update to all the members on the call. In terms of our QIP, so a lot of the people had spoken to me previously about the plans for the QIP. So I just wanted to update everyone that the whole idea for the company for the QIP works primarily for inorganic acquisitions. And to everyone that we will only purchase for the QIP once we have finalized the terms of the acquisition. So -- and any acquisition that we do will be value accretive for the shareholders. So the QIP will only be done [Technical Difficulty] once the acquisition opportunity. Hence, I just wanted to update this to all the members.

The next question is from the line of Maitri Shah from Sapphire Capital.

Yes. I just had 2 questions. The first one was we're supplying cooling system parts. So could you explain what percentage of parts in the entire cooling system do we cater to?

Sorry, what part?

The parts that we are supplying, what is the percentage of that in the entire cooling system?

It is difficult to give a number for that because the entire system -- the project is taken by the company who has ultimately given us this contract. So the cooling or the cooling solution is just one part of the entire project -- the cooling project that they have taken. So it will be difficult for me to give you a number on that.