Avalon Technologies Limited (AVALON) Earnings Call Transcript & Summary

Ladies and gentleman, good day, and welcome to the Avalon Technologies Q3 FY '24 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital. Thank you, and over to you, ma'am.

Yes. Good afternoon, everyone, and a warm welcome to the Q3 FY '24 Earnings Call of Avalon Technologies. I have with me the management being represented by Mr. Kunhamed Bicha, Chairman and Managing Director; Mr. Bhaskar Srinivasan, President; Mr. Shriram Vijayaraghavan, Chief Operating Officer, Group; Mr. R. M. Subramanian, CFO; Mr. Michael Robinson, CEO, U.S.; and Mr. Suresh V.R., Head of Corporate Planning and Investor Relations. At this point, I would like to hand over the floor to Mr. Bicha for his initial remarks, post which we'll open up the floor for Q&A. Over to you, sir.

Ladies and gentlemen, on behalf of Avalon Technologies, I extend a warm welcome to our Q3 FY '24 earnings call. I'd like to express our sincere gratitude for your continued trust and interest in our company during the past few months. Before we dive into the financials, let me provide a quick introduction to Avalon Technologies, particularly for those who are joining us for the first time. Avalon Technologies was established as a key player in electronics manufacturing services with a global reach. Our journey began in 1997 with the vision of introducing top-tier electronics manufacturing to India. Today, we take pride in our leadership in a high-mix, flexible volume manufacturing, serving a diverse range of industry verticals, especially in integrated solutions that require significant engineering expertise. We currently operate across 12 manufacturing facilities in India and the United States. And we are also adding 2 new manufacturing facilities in India. Our 3 key differentiators are: one, vertical integration. We are a one-stop shop offering a true box-built solution that involves PCB design, new product development, cable assembly, sheet metal, plastics, magnetics, testing and logistics. We do end-to-end development for PCP design to manufacture final product. Global presence, both in terms of manufacturing and customer base; three, optimal mix of established industries like industrial, rail, aerospace, auto, medical and emerging industries like clean energy. Now turning to our business performance. As previously discussed, our operations in the Indian market is on a positive trajectory. We have seen a 12% year-on-year revenue growth for the 9-month period ending December 2023. Importantly, our Indian manufacturing, which represents 77% of our business remains highly profitable with operating margins of 12.8% and PAT margins of 8.7% during the 9-month period ending December 2023. We are consistently attracting new customers and expanding our clientele across diverse sectors, including power, clean energy, EVs, industrials, automotive and medical. With increasing demand from our clients, we are focused on enhancing our capabilities. We are nearing completion of 2 new plants in Chennai, which one expected to be fully operational by Q1 [ FY '25 ] and the other to kick into gear over the next physical year. Coming to our U.S. business, we continue to win new opportunities from our U.S. customers that will be manufactured in India. Some U.S. clients have begun productions for contracts that were previously on hold due to factors like inventory rebalancing and macro uncertainties. We anticipate the recovery of the U.S. market to commence in H1, FY 2025 and gain significant momentum in H2, 2025. Having said this, it is crucial to acknowledge that the performance of our U.S. business has been challenging and our assumptions regarding the recovery timelines were somewhat optimistic, despite the anticipation of improved market conditions this quarter, the U.S. remains volatile. Persistent challenges in the U.S. operations have led to losses of INR 22 crores over the 9-month period ending in December 2023. These losses in the U.S. operations are temporarily overshadowing the strong performance of our Indian operations and impacted our overall results. In our ongoing effort to enhance efficiency amidst challenging times in our U.S. operations, we are actively addressing short-term challenges in the U.S. These initiatives involved 2 specific measures: one, optimizing production allocation from our U.S. plant to our India plant, rationalizing costs with our U.S. operations, we believe the results of these initiatives will be more visible in FY '25 performance. Despite these pressures, it is critical to highlight the pivotal role played by our U.S. manufacturing presence that serves as our front end. It facilitates customer onboarding and strategically acts as a beachhead to expand our market reach. Additionally, it allows us to enhance our positioning in alignment with the inflation Reduction Act in the U.S. As highlighted in our earlier call, our strength lies in our global outreach. With over 50% of revenues originating from the U.S. this has allowed us to gain deep understanding and complexities of operating globally interconnected economy. Like any export-dependent business, we are currently navigating the near-term economic headwinds emanating from the U.S., while our diversified customer base across U.S. and India coupled with the hybrid operations has historically been advantageous, It also exposed us to prevailing global trends particularly those things to the U.S. market. The Indian and U.S. markets are currently operating in remarkably different environments and their respective performance reflects that. For the full financial year '23, '24, we expect our overall business to report a degrowth of 8% to 10% on a year-on-year basis. Although our previous expectations for higher consolidated growth have been adjusted due to uncertain demand environment in the U.S., it is important to note that the execution timelines of these contracts have been extended, and we have not lost any customers. Our margins directly correlate with the throughput from our revenues and therefore we anticipate subdued operating margins of around 7% to 8% for FY '24. As revenues increase, we expect a proportional rise in operating and operating profit margins. The gross margin of 36% for 9 months ending December 2023 indicates that we remain highly value accretive, delivering complex box-builds and maintaining our premium standards to uphold our position as key partners to our customers. Despite the challenges we faced in FY '24, our organization is filled with enthusiasm as we recognize a significant decadal market opportunity that lies before us. Transition to an update on the new businesses in the order book, in summary, our order book stands at INR 1,275 crores as of December 31, 2023, with an executable timeline of 12 to 14 months. Additionally, we hold long-term contracts amounting to INR 843 crores, which are set to be executed over the next 2 to 3 years. Now let me give you a brief on a few of our select wins. For a U.S. Clean Energy customer, the commercial production is set to start from late H1, and ramp-up production is expected to start in early H2. In the aerospace, wiper blade assembly project, we are happy to share that we have successfully delivered the first wiper blade assembly samples marking a key milestone in our aerospace segment, and we anticipate commercial production in the second half of next year. In the server vertical, we are proud to announce that Avalon is now a strategic manufacturing partner for C-DAC, playing a pivotal role in advancing India's capabilities in high-performance computing through the Rudra program. We have been involved in the process of Rudra through providing advanced PCB designs and prototypes. We'll have more details on this opportunity and timeframe in the coming quarters. In the mobility segment, we are working with one of India's innovative EV manufacturers, and we expect production to commence in the first half of the next physical year. Additionally, we have also have some major wins in U.S. and India. These include customer wins across verticals such as rail, power, industrial, clean energy. Our role as a strategic partner to our customers is evident in our ability to retain all our customers in the U.S. even during these difficult times. In summary, our recent emphasis and execution in the Indian market has yielded positive results, and we anticipate sustaining this momentum. Furthermore, we expect our U.S. business to recover in H1 FY '25 and gained traction in the second half of 2025. It is essential not to lose sight of the long-term vision and opportunities while dealing with short-term challenges. We are preparing our organization for years of growth ahead. Avalon stands strong, navigating adversity with the resilience and focusing on building a business of profitable growth in the long term rather than growth at any cost in the short term. I will now hand over the call to our CFO to walk you through the financial performance in detail. Thank you.

Thank you, KB, and good evening, everybody. Thanks for joining the call today. I would like to start by reiterating the critical factors influencing the company's performance that remind the same as mentioned in the previous call and this includes the challenges faced by the U.S. economy have resulted in a significant drop in sales within the U.S. market. To point number 2, our distinctive hybrid business approach includes export-focused sales and manufacturing facilities situated both in India and U.S.A. While our export-driven model yields higher margins and better profitability, the current conditions pose substantial challenges much like other export-focused industries such as IT. The volatile U.S. market conditions are still prevalent longer than we anticipated a few months ago, and we see the execution timeline delayed as a result of this. While we continue to retain all our customers and actually grown our order book, we now expect in FY '24 to perform below than our earlier expectations. As a company, we are actively working on adjusting our business strategy to align with the current market conditions. Our efforts include: one, heightening our focus on the Indian market to achieve a 50-50 ratio between the U.S.A. and India, and all the while maintaining our presence in the highly profitable U.S. markets. Two, shifting more of our manufacturing operations to India and optimizing our U.S.-based operations accordingly. Three, adjusting our manufacturing mix gradually towards a ratio of 85-15 within India and U.S. While we are noticing improvements in all the 3 fronts, please note this is an ongoing effort to realign our strategy and reduce business risk, and reducing business risk is work in progress and may take a couple of quarters to yield tangible results. In the interim, it is crucial to view this quarter's performance within the context of the above mentioned near-term challenges. Now moving on to the performance in last quarter in detail. In Q3 FY '24, our revenue from operations is INR 214 crores, a decrease of 7.9% year-on-year and an increase of 6.6% quarter-on-quarter. In 9 months FY '24, our revenue from operations is INR 650 crores, a decrease of 3.4% year-on-year. Gross margin is INR 79 crores, down by 5.3% year-on-year and an increase of 6% quarter-on-quarter basis. Gross margin as a percentage stood at 37 percentage an increase of 104 bps year-on-year, and a decrease of 21 bps quarter-on-quarter. EBITDA is at INR 16.5 crores, down 18% year-on-year and an increase of 31% quarter-on-quarter basis. EBITDA margin stood at 7.7%, a decrease of 96 basis points on a yearly basis and an increase of 145 basis points quarter-on-quarter basis. PAT stood at INR 6.6 crores, up by 14.7% year-on-year and a decrease of 9.6% quarter-on-quarter basis. PAT margin is at 3% and increase of 59 basis points year-on-year and a decrease of 50 basis points quarter-on-quarter basis. Coming to IPO fund utilization. Our approved IPO fund utilization consists of debt repayment of INR 145 crores, working capital requirements of INR 90 crores and general corporate purpose requirements of INR 64.57 crores, post-issue expenses. We have fully utilized all our IPO funds that have been made available post-issue expense, and we are now applied for the release of bank guarantee with SEBI and expect to carry out soon. This will bring the IPO process to a close. Utilizing a mix of IPO and company-generated funds, we have repaid our debt in Indian companies balance sheet completely, and are left with approximately INR 100 crores of debt in our U.S. subsidiary. Moving on to working capital management. Working capital days were 155 days in Q3 FY '24, compromising of 124 days of inventory, 68 days of receivables and 37 days of payables. The increase in inventory days can be attributed to accumulating inventory holding to assign new customers and initiating a production process from the sale. Our supply chain has almost normalized, and we will derive the benefits from it while going forward. While we had earlier anticipated a sharper improvement in working capital, we now expect to take a longer time frame due to the reason we mentioned above. We continue to improve payable days and are aspiring to reduce our working capital cycle by 10 to 15 days over the next 6 to 12 months. As of the end of Q3 FY '24, we have a surplus cash of approximately INR 103 crores in the form of short-term investments, out of which INR 50 crores earmarked for debt repayments in our U.S. subsidiary. The prepaid cost as source of funds and the balances for the purpose of reserve and funding the growth. Additionally, we prefer to keep the existing working capital lines in India available amounting to around INR 185 crores. The open working capital lines have markedly improved our ability to bid for larger orders aggressively, which will reflect in the upcoming quarters. In summary, our Q3 FY '24 performance was characterized by significant growth in our domestic business in spite of the U.S. geography slowdown and the related fixed costs. While we had earlier anticipated the revival of the U.S. business to begin in Q4 FY '24, we now see production timelines extended by 3 to 6 months. We see a gradual ramp-up in H1 FY '24 and expect to strongly continue in H2 FY '25. In spite of lower than expected operating margins for FY '24, the consolidate level, the healthy profitability parameters of the Indian manufacturing part of the business, transforms the fundaments of our manufacturing operations in one impact. Further, I would like to mention that we are beginning to see the efforts from our efforts to optimize operations. Additionally, we continue to win customers and maintain our premium brand value with industry-leading gross margins. While FY '24 might have been a difficult year for us, I have no doubt that upcoming years will be very fruitful for Avalon. Thank you for all the support. Bhoomika, over to you.

[Operator Instructions] The first question is from the line of Sumant Kumar from Motilal Oswal.

So for domestic market, our growth is 14%. And when we see the overall industry growth and other companies growth is higher double digits. So I can understand the U.S. market is setting challenges. For the domestic what are the -- why we are not growing at high double-digit growth and if not, we are growing -- what are the key strategic decision, the manpower recruitment and the product development? What are we doing in this front to accelerate the growth in domestic markets?

Sumant, thank you for the question. Just to remind our investors that we were primarily -- if you look at us 3 years back, a very export-oriented business, we were around 70% exports and only 30% India. It is in the last 12 to 18 months where we are very worked on getting deeper into the Indian manufacturing environment. At the same time, India's manufacturing environment has grown and we are starting to see the initial growth. And in the coming few quarters, you will see these numbers looking a lot better as we capture some of the potential of what is coming out of India. And I think for us, we are late entrants into the India market and we are seeing a good resurgence for us with the growth in India. If you look at us today, we are 53% export and starting around 47% India. And 3 years back, like I said initially, we were 70% export and 30% India. So our growth story in India is beginning now, and we can see that happen across multiple industries, whether you take EV, whether you take rail, whether you take industrial, we are starting to see the orders come in and the contracts, which will expand to the rate which you just mentioned in the coming years. Did I answer that question, Sumant?

Yes. So now talking about the U.S. business, what are the indications we are getting, is there a possibility of the CapEx cycle revival on rate cuts or any -- in the clean energy side, we see huge opportunity. What are the challenges currently happening and when we can expect you were saying 1H, but what are the key challenges? And what are the indications you are getting from your clients?

So our primary challenge, if you look at it, I think putting in simple there were 2 challenges. One was the inventory correction coming out of the supply chain challenges and before the COVID, customers operated at a 40-week inventory term. And when things -- the interest rates went up and things were tightening in the U.S., everybody wanted to go back to the 16-week lead times which was prevalent during pre-COVID times. So a lot of that is getting cleared. We are seeing some of our customers come back with at least 50% of their products. So which is a good thing. We have not lost any customer through this process. So I think we are in the beginning stages of seeing the revival of the inventory correction happening. And the interest rate cuts is everybody's guess -- how -- which direction it's going to go. And I think it's going to go downwards. That's a personal thought into the future and that will make things better for us. Not saying that, we are seeing a lot of customer traction in the U.S., whether it's auto, whether it's industrial, some of the initial prototyping and some of the initial production is starting, but it will all play out into the next few quarters.

[Operator Instructions] The next question is from Meet Jain from Motilal Oswal.

Just following up on the previous participant's question. In terms of the mix, you mentioned currently, we are 50% each -- 53%, 47% of India and U.S. This is just because the U.S.A. business is not performing. However, when -- if our target is to reach 50%, our India business is at a very strong pace. So which segments are you focusing on right now in the India business, where we can get a good comfort from the growth perspective?

Meet, sorry, I didn't get the last part of the question. It didn't come out clearly...

Yes. So which all segments are we focusing on where we can get a good comfort for the growth we are anticipating from the India business?

So one of the key areas for us is rail. And we've been in rail for the last 10 or 12 years. We are seeing big opportunities. Of course, we've been in signaling, we have been in braking. Now our main customer has got into Kavach, got approved for Kavach. We are jointly developing a certain product as well as working with them to get it ready for the Kavach program to launch. And in the Vande Bharat, we have certain customers of us who are part of that our existing customers. Sometimes they've got a good piece of the Vande Bharat business. So we anticipate rail to be one of our fastest-growing sectors. Saying that, the next sector in the market we are looking at is industrials, whether it's clean air monitoring, and these are for some international companies getting into India, as well as energy sector where we're working with a few of our customer partners. And we've already started shipping, but the volumes will kick in, in the next I would say, in the next second half or the early -- late first half of next year when the rail volumes kick in. Then on the EV side, on the vehicles, we have multiple products on the same vehicle, the electronics, which go into the vehicle, 4 or 5 different products. That we expect to have the launch, the volume kick in the first half of next year. So please, just to explain, it's coming from different places like -- the one you're seeing in India is the brightest spot where growth is happening, and we are playing right into that.

Okay. And on the other part, I understand we are a very good client base on the U.S. market and that some part of U.S. clients are also getting into the Indian market. So how much percentage of mix do we have that are getting to both the Indian markets and the U.S. markets, where we can leverage our relationship and grow in the Indian market?

So that's a very good question. And most U.S. customers today want to be in the Indian market. So when some of the products, we are talking to them, making it in the SEZ, which is for export. And also working with customers to -- of course, Indian market is a little bit on cost cycle. So we are working with customers to indigenize some of the products to sell through our DTA unit. So it's a mixed bag of good things, where if you're already making a certain product, customers are looking to sell that in India, too.

Okay. Okay. And last question is on the U.S. So we mentioned we're facing challenges in form of inventory correction and what about demand slowdown? So is there a demand slowdown, because there has been a good infrastructure built on the clean energy part. And the government there also is pushing on having a rooftop solarization, what recently the Indian government also has mentioned. So are we seeing a recovery or what kind of -- trying to understand the basic scenario of the market there, if there is a demand in government push, what is the main challenge in terms of our order book?

So we have not lost any orders. We have -- the orders have been pushed out, and we believe the growth is still there with the existing customers. But when you look at us, you have to look at -- we have 3 engines of growth. One is, like you mentioned, our existing customers coming back to full scale production, our U.S. customers. Second, engine of growth for us is the new customers who are kicking in, both in India and U.S., and we have got substantial headway into that. And three is the Indian market itself is -- I would say, dynamic -- the most dynamic markets we can see today, and we are excited that we are hoping 2 or 3 or all 3 will kick. I mean that's what we're looking into the future.

Next question is from Neel Nadkarni from Dalal & Broacha.

My question was regarding on the latest partnership with C-DAC. So what would be the opportunity size over here and what kind of margins do you expect over here? And also -- does this allow us to compete in the supercomputing market going ahead also?

So Neel, we've signed the transfer technology with C-DAC. So that means we can resell the product anyway if we choose with the technology. Apart from the requirements with C-DAC have themselves, the quantum is still not there. Once we know the quantum what the C-DAC requirements are, we're going to come out and say that. And I think the 3 players who have been approved, I think the size is big enough for all 3. So we are excited about the program, but the quantum and size, which is coming out of the government, I believe, it is tied to the budget definitely. But we are excited that we are in with them, we have worked around 2.5 to 3 years with them in prototyping and the PCP design of the various products going into this. And ultimately, we will see a sizable chunk coming out of there. So to be honest, we don't know the exact numbers, but it will be between the 3 -- 3 of partners for C-DAC.

The next question is from Navid from Bastion.

I have 2 questions. Yes. So first one is on the employee cost. So our employee cost continues to be very high and also growing despite more and more manufacturing taking place in India now. So just wanted to understand a bit on how are we planning and deploying manpower. So if you can give a sense as to how it used to happen, let's say, pre the slowdown which we are looking at in the U.S.? And how are we trying to change it right now? And how should one look at maybe in the mid- to long term, if you can give a sense on this?

Yes. I'll take that. This is Subramanian here. In terms of employee cost, as outlined in the earlier talk, we are taking multiple measures. I think which is trying to realign the U.S. operations. Firstly, we are trying to move production from U.S. to India, which is ongoing the customers there end and then move to India. So that's one initiative. Other is also trying to relook at the operations and the cost, fixed costs corresponding to that, okay. So this being a personnel cost in terms of the way it plays out, it does take time in terms of picking that. Then what we need to do is to make sure that the ongoing operations are not disturbed. So we are working on both the initiatives. The long run our target is to keep about 85% of our operations in India and keep the U.S. operations in the front end the minimum. As we said and outlined in our speech, we wanted to do manufacture in the ratio of 85-15, because U.S. does have significant strategic advantage having a front end there. And this initiatives what we are taking will play out in the future, and we'd like to maintain this scale of operations so that as the sales kick in, it will flow down to the bottom line.

If I can add to this, what we are truly trying to do is that with the transfer of products from U.S. to India, from my existing customers in the U.S. plant to India plant, there is going to be time frame where the products have to be approved in India plant and then the customer has given us the approval to move it. So that's taking time. But saying that, we are halfway through our cost reduction exercise -- in cost optimization exercise in the U.S. So you would see like RM said, a lot of the results showing up in the first half of next year.

Okay. Okay. So that's helpful, sir. So again, asking from a mid- to long-term standpoint, can we estimate a significant rationalization in our employee cost to take place. I mean not asking you to give a number, but just to give a sense as to what one should -- how one should look at given substantial realignment in production which is taking take for us?

Navid, the direction you're taking is possibly very correct, yes.

Okay. Okay. That's helpful. Sir, second and the last question is on the working capital situation. So the working capital situation continues to become difficult and difficult for us. Inventory, especially is continuing to climb. So are we stocking more inventory in terms of better demand, which we are anticipating in the future? Or how is it shaping up right now?

Yes. I'll take that, okay. If you look at a couple of years back, just pre-COVID, we were operating at about 120 days of net working capital and inventory in a similar range, okay. Today, we are above, essentially on the inventory in terms of slightly above the average of what we'd like to be. And we anticipate a reduction of about 10 to 15 days, which has not happened. That we are working on the same. And this is, as explained in our earlier speech, due to onboarding of some of the new customers, which is happening. And then you have to balance between the working capital efficiency and growth, this is a delicate balance sheet which we need to maintain, and we are working on. But as we move along further quarter, we are confident that we should go back to what we've been operating earlier.

The next question is from Nikhil Kandoi from Phillip Capital.

Sir, I wanted to understand that you said that going forward [indiscernible] can you define how big is the Kavach opportunity? And how can Avalon participate in this opportunity because other players are saying that they will go into Kavach and explore the opportunity? So how confident is Avalon that Kavach opportunity will flow to Avalon?

To say that if I'm correct, there were 3 Indian players approved for Kavach a couple of years back. In the last 2 or 3 months, last quarter, I don't remember the exact dates. There were 2 international companies also approved for the Kavach. We are working with one of them to get the Kavach program going. It will take some time, but we're jointly developing it for the part of the system for the Indian market.

Can I continue?

Yes, please.

Sir, can we expect from Q4 FY '25 orders of Kavach coming in?

No, no. I think we will take a bit longer, a few more quarters down the road. There's a lot of work for them to get approved, right? So they've been approved by the government. The product has to get approved. So it's not something which is kicking in now. But with the budgets and things that way, we have to speed it up.

Got it. And sir, any idea on how much will railway contribute to the overall segment going ahead? In FY '23, I think it was 29% to 30%, if I'm not wrong. Going ahead, what percentage can you expect over there?

So I think in today's context, still all this plays out, we would say we will still grow at the 20%, 30% rate.

Sir, one last question from my side. Sir, in this quarter, we are seeing that U.S. operations have been not performing well. But when we look at clean energy, which is mainly U.S. operation, that has grown 100% Q-on-Q and industrial has regrown around 67% Q-on-Q. So any comments on that on your side?

I don't think that growth is there. We are seeing an overall slowdown in the U.S., whether it is auto, whether it is medical, whether it is clean, but the potential of clean for us is fairly large. So you'll see that play out in the future. But we are seeing an overall slowdown. It's not industry specific. If it was industry specific, we could have easily managed that.

The next question is from Rutuja Thamankar from Asit C Mehta.

But one of your competitors is trying to backward integrate into the OSAT and PCB manufacturing segment. So what are your thoughts? And are you also thinking along the same lines?

So for us, we believe that there's enough opportunity in what we are doing. And with the slowdown in the U.S., we are not looking at it right away. But to say that in a few couple of quarters down the road, when a U.S. site is back, we will for sure look at it. So as of now, we are looked at the metrics, but we have not taken any decision.

The next question is from Ritik from Buoyant Capital.

I have a question on the order book. Can you give me the breakup of the order book and also break up between domestic and export relating to the order book?

So usually, we don't give the breakup. But in general terms, I would say it is equally spread. So historically, since we said 70-30 most of orders will be export. But now the fastest side of our order growth is from India.

Okay. And what would be our CapEx expenditure for the next year?

So for the next R.M you want to take?

We talked about in terms of earlier, our CapEx spend, expected CapEx is about INR 25 crores to INR 30 crores per annum in terms of what we do. We have the buildings which are coming up for completion shifted over next year. So that's part of the CapEx expenditure. Over and above that, we will have a regular plant and machinery which will get added as we along.

And just to add to that, we always look to have asset turns over 9x. And we continue to do that. In that sense, like R.M. says, it's INR 35 crores to INR 40 crores every year.

The next question is from the line of Bhoomika Nair from DAM Capital.

Sir, just 1 or 2 questions. If I look at the Industrial segment for 3Q '24, there's been a fairly steep decline as a percentage of sales for the last couple of years and also for quarters, we've been around the 30%, 35% range. But this quarter, I think it mentions about 11-odd percent. So what has happened for the Industrial segment to kind of seen a sharp decline this quarter where the inventory wind-down has been happening for the last couple of quarters. But -- so has there been some specific issue which has happened in the particular quarter?

No, on the industrial, I don't see us having a sharp drop...

Because the share is falling down with the funding...

The share is on the medical side.

Okay. Sir, the other thing was in terms of the outlook, I mean, we've kind of toned down our guidance from 30% to 20%, 25%. We are obviously working on a lot of domestic initiatives with a lot of things in the pipeline, plus we are looking at some new client additions in the U.S., et cetera, not to mention some scale-up of the current order backlog is sent which provides decent visibility. So is it that the kind of the improvement has kind of changed a lot or the kind of scale up, which was expected is moving very slow? What is really happening? Because I thought we had a much more in pipeline in terms of the client aspect of it.

See, Bhoomika, most of what is happening in India is starting to happen. And a lot of the wins have been in Q2, Q3 of this year. And we'll see a lot of the traction happen in H1 from the India side. U.S. side, of course, some of the big ones, which we don't want to overcome it, is in process. We will start commercial production in H1 and a ramp up in H2. So we are confident of both. And in that sense, we are hoping that both India and U.S. kick in, we are ready for it to take on both as they kick in.

Right. So if actually things pan out, then the growth can be on the higher end, we're just being cautious in our guidance to that number. Is that the way one should think about it?

Yes, I think you should think about it, and we are also learning as we go. I mean, the expectation of the U.S. going down is not there a couple of -- 3 quarters back, and we thought it will come back earlier than what is happening today. But the silver lining is nothing is lost, and some of the customers are kicking back in.

Sure. Other thing was in terms of the inventory levels and working capital, which has seemingly gone up in this current quarter. How do we see that moving? And can we expect a reduction as one moves ahead or because the shift is happening to India for manufacturing for some of these U.S. clients, Will there be an increase in inventory and really not really a meaningful reduction in the working capital as things are planned?

Bhoomika, I'll take that. If you see on the trade tables, already we have seen an improvement. On inventory, I think this quarter has been a slight increase due to the new customers sign up. So as I said, it's always a delicate balance, and we need to make sure that when somebody is on board with the required inventory, and their schedules are also a little not clearly defined. So that's the stuff. But overall, I think we should get back even if it's pushed out by a quarter or so, but our inventory will go down because it's definitely on the high side, we will go down, okay? But it's taking a little more time than expected.

The next question is from the line of Neel Nadkarni from Dalal & Broacha.

Sir, I just had a couple of bookkeeping questions. Our debt reduction going ahead, do we expect that to come down further from our current INR 100 crores debt is remaining? And going ahead, do we expect our finance cost to remain in this current range or do we expect that to come down? And the other one was on the tax rate. What tax rate going ahead do we expect?

Yes. Okay. So I'll answer this question. In terms of debt, as we told today, the debt is about INR 100 crores, all in Sienna, which is our U.S. subsidiary books. What we are looking forward to repay some of the higher cost that's there in the U.S. So about 50% of them will come down. And interest costs will correspondingly come down, but already interest cost is lower, but it will probably get lower to that extent. Tax rate, I think, overall weighted average rate, and say it's more about like 27.5% is something which is a good number to look at or at a consolidated level. But at the individual entity level, but at individual entity level, it will vary. But as you know, tax is one at entity level. At a consolidated level, you look at that number.

And sir, just a clarification. What was our revised guidance? And going ahead on the medium to long term, what do you expect? Can we achieve an industry growth of 25% to 30%?

So what we are seeing is we are seeing a lot of activity from our different customers. Of course, we're coming from a position of weakness in the U.S. and growth in India. So we are going through a budgeting process now. And probably the next call, we can give you a very reliable number. So we're just keeping that for the next calls as we are going through a whole budget process and to make sure that the growth rate, which is expected and what we look forward is there.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference back to Ms. Bhoomika Nair for closing comments.

Yes, sir. Thank you very much for giving us the opportunity to host the call. Wishing you all the very best, and thanks to all the participants for being there. Thank you very much.

Yes. From the company side, we are heartened by the strong support from our investors in tough market conditions. We will strive to repost the faith that investors have placed in our company. I express my sincere gratitude for your unwavering support and confidence in our company. Together, we are poised for an exceptional journey of profitable growth and success. Thank you to all attending this call.

Thank you very much. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.