Automotive Axles Limited (505010) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Automotive Axles Q1 FY '24 Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sailesh Raja from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Yes. Thanks, [ Niran ]. Good afternoon, and thanks to everyone who has logged in to Automotive Axles 1Q FY '24 Earnings Conference Call. Today, we have senior management team. We'll be hearing from Mr. Muthukumar N, India leader, Cummins-Meritor; Mr. Nagaraja, President and Wholetime Director, Automotive Axles; and Mr. Ranganathan S., CFO, Automotive Axles. I would now like to turn the call to Mr. Muthukumar for the opening remarks, followed by Q&A session. Sir, you may begin now.

Thank you, Sailesh. Good morning, ladies and gentlemen. Thanks for taking your time to join your company's investor call, and we really appreciate your time. And we have -- like, what Sailesh said, we have Mr. Nagaraja and Ranganathan, are with us. They're going to take you through the presentation about the company, the products, the ESG initiatives, how the financially we have performed and how the market is. I think it is one of the questions that used to come so we are just putting on how the commercial vehicle market is and how we have performed, followed by the focus of the company. With that introduction, ladies and gentlemen, thank you once again for joining. I will hand it over to Mr. Nagaraja to talk about our location, product and ESG initiatives. Over to you, Nagaraja.

Thanks, Muthu. Good afternoon, ladies and gentlemen. My name is Nagaraja Gargeshwari. I'm President and the Executive Director on Automotive Axles. So just for those people who are not familiar with Automotive Axles, just an introduction here. The Automotive Axles established in 1981. So we have 40-plus years of existence here. We have been growing. We have 4 locations in our 2 in Mysore, and then 1 in Pantnagar, and in 1 Jamshedpur and 2,600-plus employees. We are the largest -- the #1 axle manufacturer for commercial vehicle in India and also the #2 when it comes to brakes. And as you can see, we have products that range from 7-ton GVW of vehicles, all the way to 55-ton tractor trailers. All major OEMs are our customers, Ashok Leyland is our largest customers. We also supply to Mahindra, UD, Tata, Caterpillar and [indiscernible]. Next slide, please. So this is our financial information. As you are aware. Revenue was [ 584 million ], EBITDA was [ 611 ], and PBT was [ 505 ]. And again, we are catering to the diverse market. We not only cater to the on-highway, but also the mining segment. We also the off-highway and bus and coach segment. I'll ask Ranga to run through our financial performance slide. Ranga, over to you.

Thank you, Muthu. Thank you, Nagaraja. As far as Q1 2023, '24 is concerned. Our revenues are at INR 534 crores and EBITDA at [ INR 609 crores ] and PBIT [ INR 509 crores ]. I really see compared to the last year, our revenue has grown by 7%, and our EBITDA has grown by 16% and EBIT grown by 22%. If you really see our EBITDA last year, the same quarter is 10.5%. EBITDA for the current quarter is what 11.4% and last year, we had the PBIT at 8.3%, currently is about 9.5%. So though the revenue has grown only about 7%. We have improved our EBITDA year-on-year as part of the strategic initiatives and also a larger extent, thanks to the commodity reductions in the last 2 quarters. So this is a financial performance for the Q1 and Muthu, can you take it over the economic outlook and market outlook? Hello?

Nagaraja, did you touch on the ESG initiatives and awards [indiscernible]? Those are the 2 slides.

No.

Okay, because there is a slide before the financial. Okay, I will talk about the market and we'll come back on to that. Ladies and gentlemen, I think last time, there were many discussions about how the commercial vehicle is going to be. So we had a discussion, we took up with SIAM time various other sources, [ IMF ] and all, find out how -- India continues to be the fastest-growing economy. You all know that [indiscernible] we are in a very, very advantageous situation at this point of time [indiscernible] even though the stock continues to be good. The projections for the next year is good [ checkpoints ] as you. With the diesel prices standing flat and the realization for the rental of truck going good and with the amount of infrastructure boost that is coming up from one side from the government, the 1 and 3 vehicle scrappage policy available here. We are looking at how we can continue to grow. The commercial vehicle segment, its ability to be very, very positive. I think you have more information that you would have heard from various OEMs, but we are quite confident that the market is going to be flat or single-digit growth, which is going to happen for the next couple of years in our industry. With that outlook, [indiscernible], here also showing you how the market has performed over the period of last 5, 6 years. If you see in FY '24, the first quarter as [ 97,000 ], even though the market is less when compared to the Q4. Traditionally, to look at, we're similar to last year of Q1 and the rest of the 4 quarters looks very good. So at this point in time, we are very, very confident that the commercial vehicle market, 7.5-tons and above will cross about 430,000, which we are taking a very, very pessimistic of view 3%, but it can be more than that on the market outlook. Lastly, most of you asked the question on, hey, how -- what's happening between -- how you guys are growing? If you look at the slide, the growth strategy, what we are giving. In the year 2018, '19, our revenue was INR 1,942 crores. The industry volume at that point in time was the highest of 476,000 vehicles. We had an EBITDA of 11.9%. If you look at over the period of years, in '22 to '23, even though we have -- the commercial vehicle market is still about 16% to 17% less, your company is able to grow from INR 1,946 crores to INR 2,340 crores, which is about 17% to 18%, which clearly shows that are dependency on non [indiscernible] business is coming down, and we are growing in other segments. We have been asking for numbers in other segments like exports [indiscernible], but we thought that this particular slide will give you a confidence on how much we are growing. Even though we haven't given an updated number to you, I just want to let you all know between 2020 and now our exports have grown up by more than 24% of the -- for the global market. Also in the bottom, if you see our earnings per share was given. In the 2018, '19 when we were at the peak, earning per share is about INR 80. And now for the '22, '23 INR 107.23 which continue to the add value to the [indiscernible]. We will take any questions on this during the question answer session. But going back into the focus areas, we are seeing that the market would grow at about 5% to 8%, what I said. We will continue to -- the plant will continue to focus on Industry 4.0 last time Nagaraja presented you on how the company is taking the digitalization initiatives and how we are going towards paperless office, the focus will be there. Panda was mentioning that the commodity price soften. However, we continue to focus on commodity recovery from the customers on one side. At the same time, the plant will continue to work on conversion costs and the cost reduction material. The focus on improving conversion and material cost performance will continue to be there. While on the top line, we continue to penetrate into the market share of revenue growth in non-heavy business, we continue to be there [indiscernible] cost during the quarter. We can achieve these only by enhancing the customer value. The company is making more and more reliable products and the product reliability is getting improved. And also, we'll work with customers to make sure that we are responding to the customer is much better whereby the customers consider us as a preferred supplier and preferred partners. Nagaraja sets upon on the new products that we are launching, and all the new products are modular design, which means [indiscernible] in the scale growth [indiscernible] can be substantially driven. We, as an organization believe it will make a difference and continued work on employee recognition, employee engagement, and operational excellence will continue to be our focus area. The next slide talks about emphasis on people and the environment. We know that we need the intelligent quotient, emotional quotient and technical quotient for people. A lot of training in both in terms of the technical training, management development program, supervisory development program. And feedback and learning reviews are going to the team to make sure that our team is a competitive team and always they stay ahead in the market. We are corporate responsible citizens and we owe it to the Motherland also the society we live in. We continue to focus on skill development in the area of [ greenhouse gas ], developing a green environment, conserving water and making the people [ aware of this ], and of course these are the milestones are starting [indiscernible] developing a positive attributes for the drivers and city bus drivers to make sure that the [indiscernible] communication and also getting into the safe driving behavior in the city of the Mysore where operate, along with the different types of locations. Diverse greenery to be an inclusion for teams and the gender diversity biases would be identified and the team is working very, very positively on that. In terms of sustainability and governance quarter positive 80% energy from renewable source by end of next year or some of the milestones that the team is working on to achieve this. On to the next slide on the key actions to manage the business successfully, employees will be -- our organization still depend on how well our employee is trained. The employees will continue to be a focus area for us. After the [indiscernible] is the amount of opportunity that is opened up by month. We will continue to increase our exports, continue to increase our addition. Alternative technology, disruptive innovations and [indiscernible] leading whereby, we are always competitive with the customers and the customers [indiscernible] Automotive Axles as a preferred solution provider. Company has an ethical code of conduct [indiscernible], and we continue to make sure that the every part of our operation, the office, the people will follow this and even towards the journey [indiscernible] zero or towards zero carbon emission continues to be focused. We just missed one slide on -- the Slide #5 on the awards. Last month or -- for the year of '22/'23 we have been awarded the exporter award by the Karnataka Government this quarter. So we will [indiscernible] numbers is to understand the government execution for our commitment to keep on export [indiscernible]. Your company has also awarded with best performance in the ESG by our largest customer, Ashok Leyland looking at the systems and process in our company the journey towards [indiscernible]. With Mahindra trucks and bus division, normally a supplier is awarded with improved delivery, improved quality, but with the overall performance of the organization, your organization is awarded with -- that best business partner of the year, which clearly gives us an [indiscernible] over how the customer see, the customer doesn't treat us just like a [indiscernible] but they feel that we are a business partner, working with them and making their business to grow. If you see, all the 3 awards are coming to the front end companies that have been [indiscernible] contribution from the [indiscernible]. With that, ladies and gentlemen, I'm just opening it to the question answer session. Ranga and Nagaraja, do you want to add anything before we leave it to question and answer?

No, we are good.

Okay. Thank you, Sailesh, over to you to take us to questions.

[Operator Instructions] The first question is from the line of Aditya Welekar from Axis Securities.

Yes. So thanks for this opportunity. So I just wanted to understand, It means now we are seeing that HCV market will grow -- will growth rate will moderate to 3% from a strong growth of 37% in FY '23. So what are our key growth figures going ahead means given that the pace of CV industry growth is slowing down as compared to last year. Are there -- are there new products, which will drive our growth or exports or any capacity additions? What are your midterm or long-term plans for getting away from the volatility of this cyclical space and coming up with a sustainable growth outlook?

Thank you. I will divide your question into 2, one is what we are doing internally, what we are doing externally. Commercial vehicle market, you are saying that it is slowed down, but we strongly believe that the slowdown in first quarter is just an inventory correction, and we are really seeing that the market is picking up in this quarter. So we strongly believe that our projection of 3% to 6%, 7% single-digit growth will definitely happen. The trigger for this indicators if you see, the voluntary vehicle scrappage policy, the government spend towards public transportation. If you see last 3, 4 years, the government spend on public transportation was not very less a large amount of bus drivers are coming. So the company will continue to [indiscernible]. The third is the amount of infrastructure projects and the road work that's going on. We believe that the pick up will continue to be good. And the country is also looking at a favorable monsoon even though it's not going to be more than -- but it's on the average monsoon, which means the agriculture output will be good, and we'll have a good amount of -- good transportation. These are the external indicators we see on top of the government initiatives and our ability to export more to the [indiscernible]. These are all the indicators that we are looking at externally. Internally, as I said, between 2020 to now, we have almost grown our exports by 2x. The average percentage during the product strategy, which I will ask him to talk to you later, most of the new products that we are introducing at a higher content per vehicle and also the reliability is more. We are penetrating more shares in both axles and brakes. So we believe that, that will make us to grow in [indiscernible] segment. The growth in aftermarket, the growth in exports and the growth in [indiscernible] depend, will definitely help us to mitigate a reasonable amount of the cyclicality, what is available in the car [indiscernible] fleet the market. Nagaraja, do you want to add something on the products and how you're improving the reliability to take it at the market and customers?

Yes. Just a couple of comments on the new products what we have introduced in last 20, 18 months. We did talk during the last face-to-face meeting. We have come out with an axle, which is the largest axle that's being used in India. We call it MS185 with a 500-millimeter ring gear which has essentially replaced the uncertain tractor application instead of 2 tandem axles, the 1 single axle is able to do that. And so we are seeing a good response from the customer. And also this reliability is much higher. So the 2 new -- 2 other products, what we call is 59 and 165 axles mainly you, one use for line-haul another tipper applications. We are the only axle manufacturer giving axle housing case with 16mm housing, again, has a very good response from the customer. Not only we have not been able to develop these products ahead of time. But at the same time, we have been able to also ramp up when the customer need a detail. So I believe the new products that we have introduced. And we also have a couple of other products which are in the pipeline. We have got updated our next size tandem axle for heavy tipper applications. They're already been developed and final free testing is going on. So in next 12 to 24 months, we are expecting to introduce at least another 3, 4 products. which are very, very unique for India market.

Understood. Sir, my next question is on coming to the financials. So in non-operating income in this quarter, we have seen a substantial jump both on year-on-year and sequential basis. So is there anything one-off in that, which we have to consider or that will be a run rate which we can see in future quarters?

No. As far as other vehicles are concerned, yes, I really see Q4 of peak volumes as we have given us in a good cash position as far as the Q1 is concerned. And -- but the dividends are expected to distribute in the month of August and that one advantage of earning some better return on the surplus cash is what witnessed in the Q1. That is one. And definitely, our realization on the scrap has also been better in the first quarter. So those are the 2 major reasons. Definitely, we are taking a lot of initiatives to see that how we optimize the return on the surplus cash we have. You will see the small momentum in the coming days but it's more towards -- though there's an increase, but the share is increasing because the overall volume is down compared to the Q4.

Understood. My last question is that in previous calls, you have touched based upon new segments like construction equipment and off-highways, where you are planning to enter and gain some market share. So any update on that?

Sir, we continue to focus on our offense and defense is what I said last quarter. Of course, while the defense has picked up to some of the new programs that we launched in terms of the construction. The Indian construction market is completely different from the global, and these products what we needed to go for, it's a high cycle of product development. So we have currently 2 products that's running on with few customers, but the rest of the products we are developing, and it will take about next 2 quarters for us to get into the customer into launch.

[Operator Instructions] The next question is from the line of Amar Maurya from AlfAccurate.

Congratulations for a great set of numbers. Sir, I wanted to understand. So our FY '23 or gross margins were slightly under pressure because of RM inflation and this quarter, there has been a very healthy recovery in the gross margin. So is this because of recovery in RM inflation or is this because of some mix change? And can we expect our gross margin to sustain or improve from here on?

No, I'll take this call. See as far as the Q1 is concerned, as Muthu was mentioning at the beginning that, on-highway business is a little softer in the first quarter. And we are able to get a good share from the export and the aftermarket due to the reduction in metal. Of course, aftermarket, this quarter, we had done better than the last quarter. definitely, that is -- actually which is one other contribution. Second, our -- a lot of cost reduction initiative as part of the Mission 25 that is the second important point. And these are all basically the 2 -- and definitely, last year, you said that the increase on the commodity price little softened. That's also marginally contributed for improvement. So in terms of sustenance, so again, off-highway picks up, definitely, the door to exports and the aftermarket, the volumes continue to play the same role, a slightly better role, but on-highway picks up that share may come down, that may neutralize the margin. But to -- just to reinsure that our strategic initiatives in terms of metal cost reduction, it is the continuous focus we are giving from the management perspective and improve the gross margins. So commodities is not in our control. But other than that, all others are commodity -- all other strategic initiatives in terms of getting a better pricing from the customer as well as getting -- and also working on the commodity material cost optimization is continuous [indiscernible] a dedicated team working on it. We will try to make our best effort in terms of improving the gross margins in the coming days. But definitely, the first 2 elements I mentioned is about the mix. It was quite favorable as our on-highway soften in the first quarter is 1 of the main contributors. But definitely, our metal cost reduction as part of machine productivity contributed a bit more in the Q1, which will continue the rest of the quarters.

Sir, given that the underlying MHCV OEMs profit activity has also improved dramatically in last 2, 3 quarters and we are also investing behind operating leverage, we are investing for automation initiatives. So do you see our EBITDA margin improving to 12% or more levels or do you think there is -- because of the lower industry growth, there could be some headwinds to this?

So as far as -- see if you really see -- just last few years, the market -- the 5% to 8% is our minimum growth what we are anticipating in the market, okay? We have to wait and watch out the next 3 quarters, MHCV [indiscernible] growth. We have also a little optimism in looking at the market more than the 5% to 8%, what indicated in the presentation. We are optimist -- we are quite positive about that. But we have to wait and watch. But minimum 5% to 8%, we are anticipating, plan number one. Plan number two, as the volume is good. As of today, the -- the [indiscernible], what we are seeing is we are seeing a good Q2 and Q3, we had to wait and see that how it's going to be actually materialize. So the volume definitely increased, you definitely have the leverage benefit in the system and definitely, our aspiration to controlling the fixed cost and optimizing the material cost is always on the card. So definitely, the margins has good potential to improve as long as the volume increases in the next 2 quarters.

Great to hear. And lastly, on the new product initiatives. So this year, can we expect any increasing contribution from off-highway in CV and also the suspension segment. So we were evaluating, investing for the trucks [ extend ] segment. So whether the contribution of revenue from these segments should be increasing from here on?

Muthu, just take the call?

Yes, certainly Ranga. So in terms of suspension [indiscernible], we already said that it is a very, very cost-conscious segment and we are fighting against the OEMs [indiscernible] manufacturing. So with more and more tonnage going in, we don't see it from the segment, but looking at some of the other segments like off-highway. As I said, we are making some new products, which is going to substantially come up maybe in the next 2 to 3 quarters, we will be coming out with this product. As I said, exports, we are growing up between 2020 as a base, we'll definitely it's a mix [indiscernible], we will try to find out [indiscernible] with how we've grown in every segment, keeping from brakes. I think Ranga is working on this model because every time when you're asking and we're not able to answer segment-wise, we feel it's not good. So we'll definitely provide you some information. But your company is continue to work on the cyclical issues of on-highway and try to see how we can grow. Though, I'm not able to give a clear specifically [indiscernible] offer in the business. But one thing that I wanted to tell you as caution, the off-highway entering into the segment is extremely challenging because of the initial barrier that we have. But once we get in, because our priority will be focusing on off-highway, defense, aftermarket and export all the four to make sure that how we do this [indiscernible] business.

[Operator Instructions] The next question is from the line of Dhaval Shah from Girik Capital.

Firstly, can you share the revenue from axle and brakes segment for the quarter and also for the last financial year?

Ranga, over to you.

See, at this moment of time, we are -- the axle is generally takes a major portion of the revenue. So we'll definitely come back to your question [indiscernible] feedbacks about to share or not. So at this moment of time, you can be rest assured, the axle takes the major share of the business and brakes will be the half of the size of it. So.

Okay. And so in the -- on the brake side, what sort of market share are we eyeing? What some like medium- to long-term periods maybe 3- to 5-year. What is the market share we are eyeing here? Axle, we already have a very large market share in India.

Muthu?

Yes, Ranga. Well the -- like what you said, we have a high share in axle as an independent axle manufacturer, I want to correct because there are a lot of companies which are making brakes -- the axle. In the Brake, we continue to expand. At this point of time, the way in which we are going, I can only tell you by '26, '27 we will be the largest commercial vehicle brakes company. I can tell you between 2020 to now, we have expanded 33% of our market share in the breaks, in commercial vehicle segment and moving to become the #1 player. And the rest information [indiscernible] able to share at this point of time. Ranga you want to add anything or Nagaraja?

No, it's good. Definitely, our aspiration, and I think our marketing team working closely with the customers with the products as well as our penetration with the customers. We are not #1 today, but as Muthu said, we have progressed a lot. Next about 2 to 3 years, we have an ambition to be a #1 brakes player as good as axles as of today.

Wonderful. Sir, second question is on the -- what new products or integration benefits we can derive from the Cummins platform? Like 2, 3 quarters back, risk take, given the planning stage, any clarity there?

I just wanted to let you all know, we had completed 1 year of acquisition on -- exactly on 3rd of August yesterday, [indiscernible] celebration. Very, very clear long-term strategy for being drawn out. While we will not be able to introduce a new product like what you're asking because Cummins is an energy-driven solution to [indiscernible] different entity at this of point of time but we are working a lot of areas where we can synergize with them and going to the customers together. We have a very, very strategic advantage in India, as we have told you earlier, like there are some commercial vehicle manufacturers where we are [indiscernible] where Cummins can leverage it, and there are a lot of customers where Cummins [indiscernible] where we can leverage, including the off-highway business. So we continue to work towards the leadership team. We continue to work to a global company leadership team to see that how we can leverage. We have a very clear aspiration, our Mission 28, I think Mission 25 out there. We have communicated to you about our focus areas. The sales will be already finalized our Mission 28 on where we need to be in Mission 28 where we'll be completely leveraging the acquisition of Meri -- and Cummins and Meritor. So we will soon come back to you there with the overall plan of where we're going to migrate. And but rest assured that this is a great combination between them and also our [indiscernible] we can really help to [indiscernible] to take it forward. Not only in India market, but also in the global market.

Yes. So while we get newer customer profile. Will we be able to participate in any of the EV programs, which Cummins is running at the current level?

Absolutely, the Cummins is coming with hydrogen IC engine. They have a lot of [indiscernible] that's coming in, which involved, but we are trying to go into every customer. The customers, there's a different vehicle configuration at this point of time, like a remote mounted motor, like VXL and many things. And this year, there are a lot of modification that needs to be done in that [indiscernible] even for the remote mounted motor. Currently, we are supplying to many customers. Almost, I would say that 50% of the EV vehicle manufacturers on the OEM. We are supplying axles to them for their remote mounted motor configuration. It's a very, very small market at this point in time, particularly in commercial vehicle market, but we don't want to leave anything left at this point in time. So we will continue to work with most of these companies and try to see how we can leverage this relationship further.

Got it. And the last question will be, we have consistently maintained our EBITDA margin. Now with the inclusion of newer products and newer -- we were expanding our target market as well. Can this -- can have a company march towards 14%, 15% EBITDA margin, say, over a 5-year period? Is it there in Mission statement? Or are we thinking on that line? Is it possible?

If you are asking, if possible, I would definitely say it is not impossible. It is definitely possible, okay? But we are in a very, very competitive environment and trying to expand our margin, but also to penetrate into this newer legacy axle manufacturers, all the newer people are coming in. You know our Board direction is very, very clear to expand the margin. If you are asking them, that is a part of the Mission statement, yes. We need more margin to make sure that we have enough money to flow back into the systems on the development and all. Your company is targeting to move to that. Whether you're asking 14%, 15%, we normally don't share, but we will try to see it out in our Mission 28 when we communicate to you, we will do that. But at this point in time, it is on the target and we are moving towards that.

The next question is from the line of Amit Hiranandani from SMIFS Limited.

Congratulations for a reasonably decent set of numbers. Sir, first on the bookkeeping side, if you can give some CapEx outlook for FY '24 and FY '25 please?

Ranga, you can give the areas where we are investing in continue to keep focusing.

Yes. See. See, with the last CapEx we expanded in the year '19, '20 and major capacity expansion to [indiscernible] market growth we have invested. To that level, the investment as of today, we are not anticipating. However, as you can see that the automation, especially industry driving the industry for [indiscernible] use a continuous focus. ESG is one of the key pillars of the strategic focus. So we are definitely driving our CapEx to improve the hurdles or automation in the operations line and improving the kind of capacities within the -- our manufacturing line. And so overall, enhancing the efficiency and effectivity of the operation, we are going to invest in. So definitely, if you really see that both '22, '23, what the investments you're looking at, more or less the same level will be there in '24 and '25 too at this moment of time. Definitely, there will be a marginal increase will be coming up to [indiscernible] what type of the export business or the domestic business we are getting it to meet a new product, definitely, there will be definitely the increased CapEx will be always be there. So at this moment of time, the plan was, we don't have a substantial investment client like in '19 and '20 but definitely, this year and next year, we'll have a reasonable investment mainly on automating the product, improving the quality as well as the operating lines improving the capacity and the output of the respective lines. So that's basically, rest assured, just wanted to give an update. '24 and '25 may not be as good as '19, '20.

Sir, what would be your present capacity utilization? And how much peak revenue is possible from the current capacity?

The current capacity -- and on average, if we look at '22, '23, we have utilized in 70% to 75%. So sometimes in the month, we would have touched about 80%, 85% also. but more or less is around 70% to 75% is what we are seeing it today. But we have still capacity of close to about 20%. The market goes even up to the '18-'19 level. We have enough capacity to meet the expectation of this.

Okay. Sir, next on the demand side. So the CV industry outlook from your side looks to be on the conservative side for FY '24. And just wanted to know your realistic picture for the coming 2 years and the on-ground situation at present, please?

We are a little conservative because we are [indiscernible] when the aggressive people say the [indiscernible] election is coming next year, why are you so aggressive? And then we are a little conservative you are saying that to be more honest with you on the first quarter numbers, what is coming in, we believe that this year will be definitely good unless there was something major changes. As I said, the indicators are the diesel price being flat, the realization of rentals for the people, good agriculture which means a good amount of [indiscernible] movement [indiscernible] interstate. And at on top of this amount of construction activity that is going to be done and good amount of progress. These are the things that we see very, very positive indicators at commercial vehicle. There is the 2 major volumes in India, somebody is talking about 8%, somebody is talking about 16%. Not only for the year, at least -- but our main basic customer is predicting about 6% CAGR between now to 2028. You would have heard in their investor call. So we wanted to be lined with this, but we believe that the market for next 2 years is going to be very, very positive and robust.

Okay. Sir, lastly, on the margin side, we -- in the presentation, you have given the target is 80%, you'll get from the renewable sources. So presently, how much power we get from the renewable energy. And by when the 80% sourcing will come? And what will be the cost savings [indiscernible] by then? Continuing with the margin side, just if you can give your take on the commodities going forward and any internal target to take the margins in the mid-teens by FY '25, '26, please?

In terms of renewable power what you asked is, we are currently at about 30%, but I'm just saying between 25% to 30% [indiscernible] about 8 megawatts, or it will be less [indiscernible] like what Nagaraja presented during the presentation, we'll happy to think about 80% by 2040. If you're asking the savings for that -- the savings for [indiscernible], we are talking about the savings with respect to the current electricity bills and the electricity will keep on changing. So we are becoming a good captive and then we are moving into that and definitely, that will add to the bottom line more than the bottom line, both in the financials, we are more focused on the carbon-neutral that we are -- the journey that we are going in and achieving the Cummins target of destination deal. Just for information, we just don't work only on migrating to convention power to the renewable power, but also the plant is taking other initiatives to reduce the consumption of power. The plant is trying to find out that goods movement for both inbound and outbound by using vehicles, which are using less carbon-emitting systems like moving into CMV or working with LNG or battery. So many more initiatives are being taken to reduce the carbon emission in total. Last up for the savings specifically, I think it's a bit difficult at this point of time to share specifically on to that. At a cost reduction, I think Ranga and Nagaraja both of them explained earlier, we continue to stay focused on making sure that every time the commodity changes happened, how we'll be able to save in terms of improving the yield and working and somebody asked us earlier whether we are targeting towards 14%, 15% that we give on the Board direction. Yes. the Board direction [indiscernible] the margin and the team is continuing to work on this. We work in everything, conversion, fixed cost in terms of the efficiency of conversion, procurement and raw material. The first in the design cost. All the segments going there, which makes sure that we work on expanding the margins.

The next question is from the line of Amar Maurya from AlfAccurate.

Just wanted to understand on the off-highway segment, what could be the size of the off-highway segment right now in India that for the product you are targeting? And who are the major competitors? And is the pricing in the market leading to more margins, are more competitive than the MHCV segment? Or is it more import-driven and hence margin can be better here?

Sir, off-highway segment, if you ask if the [indiscernible] is profitable than on highway segment, it again depends on the organization, the ability in doing this. I don't want to do this comparison, but I can tell you that it's going to be very, very tough on competition. Even if you look at the entire market, most of the team is making their enough manufacturing. And we don't have a ready-made global product, which can be brought into the system because the type of vehicle work India, for example, the JCB backhoe is not available anywhere outside the country. It is unique, and they are making by themselves. They hold more than 80% share. So most of these companies are making by themselves, so it becomes extremely challenging for us to penetrate into that and also get into the cost reduction. At this point in time, our estimate says that we will be equal or less in terms of when we migrate into this, but a huge amount of investment in terms of product development and time is needed at this point in time. Having said that, wherever we are already present, we are trying to see with how we can expand this market and penetrate into this. Hope I answered your question. [ Market price and all ], it is available. I know what is the more total market potential of off-highway, but that depends on so many other concerns, and it will be extremely challenging for us to talk without any proper document at this point in time.

Okay. And we are developing both axles and brakes or we are working only on the axles front?

In those axles, we are supplying with brakes and the full [ wheeling ] so that it makes better content and better quality for them.

[Operator Instructions] The next question is from the line of Dhaval Shah from Girik Capital.

Sir, my question was regarding, again, the margins. So in our past conversation, I understand that in 2016, '17, '18, we had adopted automation, IoT, and we were quite early in adopting that. So have we -- what sort of benefits have we seen of that -- on the margins? Or that the benefit has been negated with the increase in cost, other cost items?

Sir, I will leave Ranga to tell, but I think thanks for taking the lead from 2016, '17, and you are tracking our information. You could have very well seen that how our -- the cost of conversion and cost of fixed cost has come up because of these types of automation that we have done in the plant, okay? While it is not completely negative, but there are a lot of new products that -- actually, the customers before in 2020, the market warranty for those products is [indiscernible] 18 months and 150,000 kilometers, right?

Yes.

But today, all the products that we are making has to be a reliability of about 300,000 kilometers and 3,000 hours. So not about the product engineering, product input is also going into this. So it is not negative, but also, you should understand between 2016 to now that you're looking at really percentage. The commodity prices have gone up substantially between 2016 and now. And every time when it goes up, we get recovery back to back only on the material. The rest of the cost seems to be high. So there is a huge base impact between 2016 and now. I don't want to tell exact number, but it will be around 2%. Ranga can validate my number. And that is the effort that we have done to bring it back. So it is not definitely negated by this. It's only the percentages you are seeing that are different. I think Ranga, I hand over to you because you will be the right person to explain various matters.

No, absolutely right. But whatever, what Muthu said, Industry 4.0, yes, a number we adopted in a couple of lines. And really, the -- like Muthu said is more towards the product reliability and ensure that the increased customer expectations are we meeting in [indiscernible]. So the residual cost reduction is that mainly we wanted to have a product quality, and reliability was the main objective of the automation project. Point number 2 is basically -- I mean we really said that is a benefit. Yes, definitely, that's a benefit. That's part of the Mission 25, which is coming in. Compared to the 2 base periods, commodity increase is very substantial. Only the last year, we have seen little or softening on the commodity prices. Quite a bit of -- if we really see '18, '19 and now my -- very, very high-level estimate, more than 2 percentage points of improvements we have brought in the P&L. If we've not taken any strategy and initiatives towards the cost, all the like, I think we will not be able to sustain this commodity and standing at the grip of the market. So we are proactively taking lot of initiative irrespect of the market conditions that we have a target. We have mitigated the commodity, plus we have ensured that we have improved our margins for the last 3, 4 years. This is a little bit unseen in the financial statements. We all judge the percentage. I completely respect that. And that's how we -- that is a target for us to work on. The point I'm saying that the unseen picture is about the commodity impact of the P&L and how we are taking steps internally in all respects to mitigate and show the improvement in the market. So...

We have -- I mean you guys have mitigated the RM impact quite nicely. The margins have been very stable. That's for sure.

No, no. That's why you see that if you have your benchmarking in your mind, you compare them with '17, '18 or something like that or '18, '19 and compare them how they've grown, where they are from where they are now. And compared to automotive, actually, you can definitely see a story for yourself.

Got it. And sir, these comments. One is that on the product side, which we will get. But anything on the cost side in terms of our supply chain, in terms of better production techniques? Anything of that sort will come in -- get us, which will also help us reduce the cost?

Sir, there is a global integration team operating at the highest level between both the companies, which is working. Looking at various cost like internal transfers or the cost of price, what is the cost of raw material and benchmarking. And this integration is going to bring benefits for both. There are a lot of good practices inherited on automotive vessels, which will definitely get into Cummins, and the same way, the best practices of Cummins will flow in, which is synergy. I think the objective of this integration is going to help. Is it the same thing that was happening earlier between [indiscernible] approach and Automotive Axles or Meritor and Meritor at global and Meritor India. So these synergies at a point of time, definitely is going to bring down the cost in terms of -- see, the organization sector, when it is going to be rationalized with them, it is going to bring down the cost. Various expenses like whether it's the fixed cost, whether it's the conversion cost, it is going to bring down. And you will definitely see that the management is under a fast track for implementing all these changes to bring down the cost.

The next question is from the line of [ Gaurav Agrawal ] from [ Navisha Investment Advisors ].

Sir, if you can throw some light on the order book in the coming quarter, it would be of great help, sir.

Sir, can you repeat? I think I could not hear you properly.

Yes, sir. Can you get my voice?

Sorry to interrupt, [ Mr. Agrawal ]. Can you use the handset mode while speaking and not the speaker phone?

Yes, yes. Sir, if you can throw some light on -- in the order book in the coming quarters, it would be of great help.

I'm so sorry, [ Mr. Agrawal ]. We are not able to hear you. Sir, may we request that you use the handset mode and not speaker phone?

Okay. Sir, your voice is not audible. If my understanding is right, you're looking at the order book for the next 2 quarters. Is that right?

Yes, sir. Yes.

Thank you very much. See, that's the beauty of the Automotive Axles to come into Meritor. We have a defined business, and we focus on the share of business with the customers, and the organization is highly agile. We never lose business just because of our ramp-up time or order book. Whatever the customer is asking and an agreed share and what are the business, then we continue to focus on this. As I said, when the market is set to grow by 3% to 4% in this year, we will definitely see that the revenue at an [ equal end ] level, or in the last 5 years, if you see, we have always been doubling the market. That is what is the uniqueness of it. We'll continue to grow. While we have an order book for reference for the people in the supply chain team to gear up for this, as an organization, Nagaraja and team always works on to meet the customer demand because in many cases, we are single-source, and we can never pay more to them. So we will continue to execute all order which is coming to us. But at this point in time, you can just take the market growth at our numbers.

Okay. And sir, one more question regarding the CapEx. Sir, if you can just quantify the amount, sir, it would be a help, sir.

Ranga?

Mr. Ranganathan, your line has been [indiscernible] mode. Please go ahead. Mr. Ranganathan? Sir, we think I've lost the audio from the line of Mr. Ranganathan. Give me a minute. I'll just connect him back.

Okay. By the time Ranga comes, see, Nagaraja, you are on the line? Okay. It looks like both of them got disconnected, both Ranganathan and Nagaraja.

Ranganathan just connected.

Yes, Ranga -- no, there is a question on CapEx. So how much we are spending and all? I just thought you can -- you'll be the right person to answer.

Sir, like if you can quantify, it would be a great help, sir.

No, I just -- at same point is some -- one more gentleman has asked for it, so I answered the same thing. We'll -- definitely, we'll be investing on the sustenance. The investments are largely based on improving the productivity and automation and quality-related stuff. So definitely, we will be case-to-case basis, we will be investing on the [ NPD ] related based on the new product launches and the customer requirements. This largely be all this put together, we'll see that we call it as a sustenance budget, which, in my opinion, may not go beyond 1% to 1.5% of your turnover.

And Ranga, having said that, I just wanted to add up a few points. The product development is very, very key focus. And like Nagaraja presented in the meeting, there are many of the programs that we are working where we will be spending money on such programs depending the customer need. While developing the product ahead of the market is a responsibility when it comes to industrialization, we may have to spend. So what Mr. Ranganathan says is on -- basically on the rest of the CapEx for the capacity or automation and all the product CapEx, [ so pretty ] different. Right, Ranga?

Yes, yes, absolutely. No, that's what I said. The sustenance CapEx is largely to 1% to 1.5% and...

When you touch in CapEx, sir, I just wanted to -- you all to let -- note it down.

We -- definitely, this is a 42-year-old organization, and we are definitely upgrading our manufacturing process and systematically, in such a way that it's not adding burden both in terms of the cash as well as in terms of other quality and other funds. So we are definitely doing it gradually. We are taking good steps carefully so that we manage the margins as well as manage the customer expectations.

I think, ladies and gentlemen, I'm sure that what Ranga said is very, very positive because we, as an organization and like [indiscernible] a 42-year-old organization, we try to balance between the CapEx and also the returns that come from it, which is very well clearly seen from the depreciation level. You all asked the [ question ] in 2019 to be putting so much of money, what's going to happen. I said yes, we will get the business, and some of you even expressed the concern about how much of money you're spending. When the market industry, it falls, what will happen, and you can review our depreciation levels at this point of time to figure how good we are able to replace the assets and debt to [indiscernible] and competitively.

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

Congratulations, first, to the team for good results. So 2 questions from my side. First, you spoke about the MS 185 products. So on this, are new trucks having MS 185? Or [ were they tandem ] axles? And what are the features it is offering? And what is the cost difference of MS 185 versus the actual [indiscernible] it is replacing? How can we -- how much can we replace the old tandem axles in the next 2 to 3 years? And does Tata have such products? And can you try replacing their tandem axles with our new MS 185 product?

Wow, that's [ very ] interesting. Nagaraja, over to you.

Yes. Thanks for the question. As we mentioned, this is a unique product with 500 mm [ ringer ], applicated for [ 55-train ] tractor, which earlier was using either 6 by 4 tractor. Now it has become 6 by 2. I'm sure that our competitors are also probably looking at developing a similar thing, but we are the first one to get into the market. And also, this particular product has been time-tested. This product has been in use in U.S. in a slightly different [ AVTR ] for last couple of decades. So we understand how this product works and how we need to optimize it for India application. Coming to the harmony of the -- in the market, how it is going to change, we are seeing at least one customer who is completely using it. We are also looking at another customer and asking for that we have already supplied the free testing samples. With respect to timing, what happens in next 2, 3 years, probably Muthu can give you that kind of forecast.

Thank you, Nagaraja. I think that was a very, very nice question to ask. You asked for the next 2 to 3 years, how many of the tandem you can replace. I will answer for this. While we offer the solution for the OEM, there are also few fleet operators who have requested for the change in their vehicle to utilize this product, which is being sold as an aftermarket product. I'll stop with this. And getting back into the OEM, like Nagaraja said, we started launching to one of the customers, where the vehicle sales is really good and with [indiscernible] India launching. We are -- see, there are 2 things that's happening in India. One is the tractor trailers as a segment is growing in India, and compared to this, we believe in the next 5 to 10 years, the tractor trailer will go high, and we'll get high hardcore engines and these axles will come. And this product, what we are mentioning like a forward-thinking because we are just launching the product asset when the market is coming up and trying to help the market to launch this product. And these are the reason why your company is considered as a business partner for the OEMs and not just like an axle supplier. Coming back into the volume, whatever the growth that is going to happen in the tractor trailer segment, I strongly believe that this product will be there, whether we'll be able to present in 100% of the cases or whether we'll be able to get it to Tata, we are working with everybody to make it. But it is extremely challenging when somebody has the ability to make these axles, and these are all ideas, and people will definitely pick them. We will continue to focus on this, and this is going to be a substantial volume in terms of the tractor trailer segment. I can't say the exact number, but the industry is looking at growing in around 20% of the tractor trailer segment year-on-year.

Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Sailesh Raja for his closing comments.

Yes, thank you all for attending this session. We especially thank the [indiscernible] Automotive Axles team for their time. Muthu, sir, would you like to make any closing comments?

Yes. Thank you, Sailesh. Thank you, ladies and gentlemen, for the confidence in the organization and your support. Your support and the feedback that you give in the investor calls and during the face-to-face meetings gives us lots of encouragement. And also, it adds our responsibility to meet and live up the expectation. Your company will continue to do everything to make sure that we meet up your expectation. Just wanted you know that we are graduating. We are migrating, with Cummins taking over us. We are migrating. You can see that from just a supplier for applying axles to us, we are migrating ourselves to make a business partner. We migrate ourselves to be an ESG in the average customers [indiscernible]. So your organization continues to put the best of the effort by bringing the best practices from Kalyani Group, from Cummins-Meritor and making sure that we make this organization from good to great. Thank you very much. Thanks for your patient listening. Thanks, Nagaraja and Ranga for joining and explaining to the team very well. Thanks, Sailesh and team for organizing this and supporting us. Thank you very much.

Thank you, sir.

Thank you. Thanks, everyone.

Thanks, everyone. Bye.

Thank you. Ladies and gentlemen, on behalf of Batlivala & Karani Securities India Private Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.