AXISCADES Technologies Limited (532395) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the AXISCADES Technologies Q2 and H1 FY '23 Earnings Conference Call organized by Orient Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shishir Gahoi, Investor Relations Officer at AXISCADES Technologies. Thank you, and over to you.

Thanks, Mike. Good evening, everyone, and I am delighted to welcome you all to the -- this earning call pertaining to the second quarter and first half year ended September 30, 2022. I hope you all had an opportunity to review our press release and the investor presentation, which are available under the Investors section of our website and the same are accessible in BSE and NSE websites. To discuss our results, we have with us our CEO and Managing Director, Mr. Arun Krishnamurthy; and our Group CFO, Mr. Shashidhar SK. They will take you through our results, after which, we will proceed for the question-and-answer session. Before we begin the conference call, I would like to mention that this conference call may contain some forward-looking statements about the company, which are based on the belief, opinions and expectations of the company as on date of this call. The actual results may differ materially. These statements are not guarantees of the future performance and involve risk and uncertainties that are difficult to predict. I'll now hand over the call to our CEO and MD, Mr. Arun Krishnamurthy. Over to you, Arun.

Thank you very much, Shishir. First of all, I know you all must be very disappointed with the outcome of the India versus England match, and we are all hoping to see India go through the final, but that's life. But I hope our results will be able to cheer you up a little bit. I take pleasure in welcoming you to this earnings call, the first time since I took over as the CEO and Managing Director about a year back. At AXISCADES, we are consistently raising the bar with our performance, with growth delivered over the last several consecutive quarters and delivering double-digit growth across key financial metrics. Historically, we have been focused on aerospace and heavy engineering verticals and derived majority of our revenue from some of the biggest global clientele in this space who have been our valued clients for over a decade. While these verticals continue to sustain and expand, registering double-digit growth, we are currently on a business transformation with 3 strategic focus areas, namely vertical diversification, customer diversification and digital first. This is in order to diversify our revenue streams and expand our client base. We are seeing very good traction with respect to new verticals and new logos, such as in energy, automotive, payment solutions and medical. We are continuously enhancing our competencies and growing our team size to deliver to cater to existing business and new businesses. One of the highlights from this shift is the exciting prospect of the automotive industry. This is our new focus area, and we are positioning ourselves to be a preferred partner in this space. In this regard, I'm happy to announce that we have signed a long-term deal with a Tier 1 global automotive major in Q2. This is in addition to an existing global major who is also our client. We plan to strategically build domain expertise within the automotive industry and enable our clients to leverage the fast-paced technological evolution, which are developing in this sector. As vehicles get increasingly feature-rich, there is a long runway for growth and a massive opportunity to be exploited. We are also growing our relationship with global majors in the energy space and the payment solutions space and hope to be strategic vendors to each of our customers in the coming periods. I'm also happy to inform you that the Board considered and approved the 100% acquisition in a phased manner of add solution GmbH, Germany. This is a company which specializes in automotive solutions to global OEMs. It provides services in the areas of wiring systems, testing and automation to global automotive OEMs. The proposed acquisition will provide a strategic foothold to AXISCADES in the automotive space besides a firm contract with marquee automotive OEMs. This also will give us a presence in Germany, which is, as you know, the biggest market for automotive. This acquisition is subject to completion of all regulatory compliances. Despite global headwinds across multiple sectors, our relentless efforts are paying off with robust growth across all our verticals. The acquisition of Mistral Solutions is on the verge of completion. Mistral is a leading global player in system engineering and product design and is focused on the embedded space with a successful track record spanning over 2 decades, serving marquee customers in the product solutions space, homeland security and the growing area of defense. This acquisition will strengthen our embedded electronic factor significantly. It will also provide a further impetus to our growth by unlocking cross-selling opportunities across our global client base. We are currently in the process of integration of both our businesses and are already realizing the incremental benefits from this synergy, both in terms of additional business and competencies. I'm confident that we are in a pole position to capture the opportunities in the global engineering space, and our aim is to continue to generate value for all our stakeholders. I thank you and seek your support in this journey. I would now like to hand over to our CFO, Mr. Shashidhar, for a brief overview of the quarterly results. Thank you.

Thank you, Arun, and good evening to everyone. As in the case of Arun, this is my first earnings call after I joined here as a CFO in January 2022. We are delighted to share with you that we have delivered a robust growth in revenue and profitability for the second quarter and in the first half year. In Q2 FY '23, our revenue stands at INR 1,937 million, recording a 43% year-on-year growth. And in H1 FY '23, our revenues were at INR 3,769 million, where we grew 53% year-on-year. Our EBITDA margin for Q2 FY '23 is at 19.3%, an improvement of 690 basis points quarter-on-quarter and 1,110 basis points year-on-year. Our H1 FY '23 EBITDA margin is at 15.9%, an improvement of 720 basis points year-on-year. Profit after tax stands for Q2 FY '23 is at INR 211 million, registering eightfold growth year-on-year and adjusted profit after tax for H1 stands at INR 338 million, registering a eightfold growth again year-on-year. And if you look at segmental performance, the overall revenue growth of 43.4% in Q2 FY '23 was driven by increased traction in the aerospace, defense and energy clients. Engineering Design Services grew by 28% year-on-year, both from existing customers in aerospace and recently added clients in automotive and industrial products as well as energy vertical. Aerospace vertical continues to grow and is -- by 44.2% year-on-year. The growth is attributable to the recovery in this sector and the increased business from new clients. Heavy Engineering Group grew by 16.2% year-on-year driven by new service offerings to the existing clients. Automotive vertical witnessed a growth of 27.4% year-on-year. This vertical will continue to grow as we have signed up with the another Tier 1 automotive company for whom we will undertake projects in the area of embedded mechanical and hardware. The energy vertical registered a 58.5% growth year-on-year. We continue to invest in this vertical, build competencies and acquire new skills to cater to the growth opportunity in this sector. The revenue from product and solutions delivered 129.5% growth, with a strong order pipeline, which is visible in this sector. To conclude, we are confident that we'll continue to maintain and build on the momentum going forward and both with respect to revenue and profitability. We will pause at this stage, and we'll now open the floor to questions and answers.

[Operator Instructions] We have the first question from the line of Jeevan Patwa from Sahasrar Capital.

I want to understand the total acquisition details that we have done with Mistral. So how much we have decided to pay? How much we have already paid? And how much is remaining to be paid?

Thank you, Jeevan, for the question. Shashi, can I request you to pick that up, please?

YEs. So the acquisition with respect to Mistral commenced way back in 2017 and the total purchase consideration was at INR 292 crores. And of course, the acquisition was supposed to have been in various phases. And today, as we stand, they were tested for Phase 2, where we are supposed to acquire about 40% of the shareholding in Mistral, the rest of -- all the -- entire acquisition is over. And the total consideration, which we already paid to them is an amount of INR 210-odd cores. And the Phase 2 is essentially a share swap through a merger process of an entity called Explosoft, which is valued at about INR 72.13 crores is the total Phase 2. So to answer your question, the total purchase consideration of around INR 292 crores, of which INR 72 crores is required not to be paid in cash, but as a share swap of AXISCADES shares to the shareholders of Explosoft.

Okay. So basically, you are saying out of INR 292 crores, we have already paid the cash consideration and INR 72 crores is needs to be paid, which is in the share swap?.

Right.

Correct?

Correct.

Okay. And that INR 72 crores will be paid at what valuation, so actual cash valuation, I'm asking?

Yes. So the cash valuation is at INR 207 per share, and we are supposed to, I would say, issue them 3.5 million shares.

Okay. 3.5 million, it's almost [ 90% ] dilution?

That's right.

Okay. And that will be -- so that will be given this quarter?

Well, the process of -- merger of this entity called Explosoft into AXISCADES is currently in the NCLT process, and it is supposed to be completed by 30th November, which is unlikely to be because of the fact that the NCLT bench in Mumbai has a queue in terms of considering these cases. We do expect that the entire merger process and the share swap as it stands today, is going to be completed by the year-end.

Okay, by the year-end. And right now, whatever numbers we see in the consolidated, so that is including 100% of Mistral, right?

That's right.

So we are considering all 100% Mistral?

Yes, that's -- the reason being we have a management control of Mistral. In fact, as we are speaking, the integration process with Mistral is ongoing, despite the fact that we still have to acquire this balance 40% shares in Explosoft. And we are consolidating the number of Mistral right from day 1 when we acquired them in 2017.

Okay, okay. And now just looking at your balance sheet, so we have almost INR 200 crores of total debt, right, short term, plus long term I'm seeing.

You're right. You're right.

And you have certain items on the asset side. So you have cash and bank -- cash and cash equivalent, and then you have a bank balance of some INR 70 crores. And there is something financial -- other financial assets. So what are these 3 items? So cash, I can understand, second and third item. So what is that bank? And third is other financial assets.

So basically, with respect to -- as I said, the bank balances are nothing but the margin money. So in the process of acquisition of Mistral as a result of the arbitration order, we were required to provide them bank guarantees worth INR 65 crores for the completion of Phase 2 and for the long-term fees. And we have placed a margin money of INR 44 crores with the bank that is what you see here in bank balances as what you see here. And other financial assets are essentially the unbilled revenue, which we recognize on the -- at this period.

Okay. So that other financial asset is complete unbilled revenue?

Majority of it, yes.

Okay. Okay. Perfect. And what is this purchase consideration paid INR 132 crores?

That's exactly what we paid to Mistral in this period.

So INR 132 crores is paid and remaining INR 62 crores has come in the bank guarantee.

That's right. INR 65 crores of bank guarantees.

Yes, INR 65 crores bank guarantee and INR 132 crores paid?

Yes, for this period.

Perfect. Perfect. And one more thing, sir, on the business side. So you are basically -- today, there was an announcement saying you have appointed Edelweiss Financial Services to support the company's fundraising. So is this the equity fundraising we are talking? Or is it the debt? Or what is it?

It is essentially a primary money which we want to [ write ] for the growth capital of the company. And the company, as you have seen that is going at a very big space and we are required to -- no, we are planning to write some primary capital to aid this growth. And that's the reason we have [ broken ] this mandate to Edelweiss.

So that is a QIB basically, you're planning to go for QIB?

That is the -- yes, the preferential offer, yes.

Preferential offer. Okay. Okay. And what was the need for this, sir? Is it for -- more towards working capital?

You can see there are 3 things with respect to how we want to use this money. One is, of course, to aid the growth, we are continuously adding people to our, I would say, payroll in terms of the growth at what is coming. And there is usually a lag of 3 to 4 months before the people start to be productive. So to fund this lag #1. #2, in terms of the various digital and automation initiatives as what we have taken. And the third thing is we are taking some senior level people in our various global locations as well as in India to support us in this growth. So essentially as what we said, it's basically to aid growth, and you can call that as working capital.

And how much it would be?

We are trying to raise about INR 100 crores.

INR 100 crores. Okay. But -- okay. But at current valuation, you think it's the right valuation to go for the fund dilution? Because I think we are -- so if I compare with other companies like KPIT or Tata Elxsi or other companies in defense side. I think we are valued at a very low multiple right now. So is it a good time to go for dilution at this price?

See, I do not -- rather I would say we have floated this mandate all -- as you rightly said, it depends on the enterprise valuation, which a prospective investor will come up with. And obviously, we'll be able to kind of recognize the synergies as what we have got with the acquisition of Mistral and the growth of what is happening and the business transformation is what is happening. So it depends on again on how Edelweiss will be able to locate an investor who are able to recognize the value and we'll take a decision based on that.

Okay. Because I feel this value is actually very low. If you actually compare with comparable peers, what are they are listed in the Indian market, considering the capabilities that we have and considering the pipeline that we have. So this is I think a wrong valuation. That's what I see.

So as I said, the actual valuation depends on how the prospective investor will kind of recognize this value, and we'll wait for that.

[Operator Instructions] We have the next question from the line of Deepak Poddar from Sapphire Capital.

A big congratulations for a wonderful set of numbers. And so my first question is, now this new verticals that we have been discussing about. So how do you see that? I mean, revenue mix changing in the next 3 years from this new verticals as compared to our legacy aerospace, heavy engineering and other verticals. So how do you see that mix changing? And will that be margin accretive for us? I mean this new vertical will give us better margins than what we currently are garnering, yes?

Yes. So Mr. Deepak, this is Arun here. I can take your question. So the reason that we are going into new verticals is that we want to diversify the sectors that we are present in. As you'll understand, if we are present in only a couple of sectors or 3 sectors, you tend to get exposed to seasonalities and headwinds, which might happen from time to time. So the reason we're going for automotive, energy and medical is because, #1, these are sectors which are extremely vibrant from an engineering perspective. As you can see in automotive, there's a lot of technology trends coming in. There's a move towards electrification, connected cars. And there's a lot of engineering and investment which is going in there. Similarly, with energy, we're seeing with the Ukraine crisis that the oil prices are going up. And we're seeing the oil and majors -- oil and gas majors and the Tier 1s actually opening up their capital budgets and looking at spending more than industry. So -- and of course, medical devices, we all know after the pandemic, that's been a very vibrant market. So we want to diversify the sectors that we are present in. And in terms of the sector mix, of course, for us, aerospace and heavy engineering are sectors where we have a lot of credibility, and we actually work with the best names in this sector. So this is a sector that we'll continue our focus on. But given that sectors like automotive and medical have a large spend of engineering, it is likely that we might see faster growth in some of these sectors. And if you look at it -- if you look at the whole engineering market, if it's about [ 1.3 trillion, 1.5 trillion ], depending on the report you look, automotive is something like [ 400 billion to 450 billion ]. So it is a large component of it. So that's the reason we feel that the spend in that area can be quite rapid because there's legacy OEMs, there's Tier 1s, there's new age companies, all of them investing in that. And in terms of margins, your question that you asked, we are in these new verticals, very focused that we will want to grow in embedded and digital. And these are 2 areas where the margins are very good because there's a lot of new technology, which comes in, there's a shortage of skills, and there's a lot of innovation. So the focus for us is to leverage Mistral's capabilities embedded and also to look at the digital capabilities that we are developing to penetrate these verticals. So we want to grow in these new verticals, and we want to grow at margins which are healthy.

Fair enough. And in 3 years, we can expect 25% revenue from these new verticals.

So I don't want to comment on -- I don't know to give a forward-looking guidance, but the industry level growth is anywhere between 15% to 18%. And we are currently -- last year, we grew at 17.6%. This year, we are on a very positive trajectory. So I'm very confident that we'll be above industry growth rates. I don't want to comment on specific percentages, but we are on a good trajectory.

No, I'm talking about this new vertical revenue mix basically. In 3 years, this new vertical can form 25% of your revenue?

Yes, it could form 25%. Yes.

Yes, yes. That's what I want. And my last question is regarding your sustainability of margins. I mean, in the second quarter, we have seen a big jump in your margin to about 20%. So some inputs that how sustainable is that? Or is there any kind of one-off or something? Or is it a sustainable margin that one can expect going forward as well?

Yes. So I've been...

Arun, can I take that question?

Yes, Go for it.

I just want to temper the -- I would say, the margin -- EBITDA margin as what we have registered for the Q2 of this year, which is at 19.3%. In this -- our immediate subsidiary, which is AXISCADES Aerospace & Technologies, there was a very big chunk of service revenues which had a very large gross margin as a result of which our margins for Q2 stands at 19% and that you would see in H1 of this year, our margins -- EBITDA margins around 15%. So I would say that the normalized margin, even for Q2, if you take away the impact and normalize it, it is also around 15%.

Okay. And I missed it, the big chunk of revenue came from your service business.

No. We have a 100% subsidiary which is called AXISCADES Aerospace & Technologies, which is in the offset and defense space, there in quarter 2, the total revenues, which were recorded in that particular subsidiary was -- for the quarter was [ $230 million ]. A large chunk of that was service revenues where there was no material content because this particular, I would say, company also has a product revenue. So in this quarter, it was largely service revenue where there was no material content involved as a result of which the gross margins which were recorded for this particular entity was at a very large scale as a result of which it has favorably impacted the EBITDA for Q2. So if we cannot, I'd say, normalize it, it will be around 15%.

Okay, okay, I understood. So normalized EBITDA margin going forward, one can -- one should look at about 15%, right?

That's our, I would say, the target is.

And this is largely because of air drone supply that we did or what, that big chunk of revenue we're talking about.

Yes. So part of it is the anti-drone which we are kind of executing for the Ministry of Defense. And there was also a service revenue for one of our defense offset customers. So both together, over a large chunk of service revenue.

We have the next question from the line of Akshay Kothari from Envision Capital.

Sir, what was the Mistral revenue during the current quarter?

The Mistral revenue for the current was -- current quarter was INR 626 million.

Sorry?

INR 626 million, which was about 30% of our total consolidated revenue.

Okay. And based on the order book, what could we see for the FY '23?

You see, we would not like to give a specific guidance in terms of numbers. And as Arun was mentioning now, we hope to grow at a much faster pace than how the industry is going. Last year, our revenue growth was around 20%. We hope to kind of, I would say, meet the target. So beyond that, we do not want to kind of commit on specific numbers.

Sir, what was the order book in Mistral as on 30th September.

You see they have a large pipeline of orders because they do a lot of prototyping for the various, I would say, defense orders which they execute. And so they have a large pipeline. Much of it has to actually turn into orders. So in terms of confirmed orders, it is not something which at this juncture, we can divulge.

Okay. Okay. I understand. And just to understand since the -- the product profile of Mistral is not very much clear. Do these orders have a short execution cycle time? Or are they spread over 1, 1.5 years sort of...

Yes, I can probably take that. So typically, the way it works in the defense business is that when you get a new order, your initial period is spent in R&D and you sort of put a lot of effort into developing a prototype. Once a prototype is approved and once that part is approved by the army or the DRDO or whoever the agencies, after that, you get into production phase. And that production phase continues for number of years, depending on the number of products that you need. For example, if we develop, say, a radar for a fighter aircraft. So you would have an R&D phase, which would be the initial 1 year or 1.5 years. And once you develop a prototype, which is approved and then if there are 100 fighter aircrafts, your production would be for [ 100 ]. So typically, the R&D phase is there, there is an element of investment which goes in. And once you get into the production phase, you will see that there is a lot of revenue which comes in at much higher margins because all the R&D is done and which is mainly in manufacturing and [indiscernible] final product.

Okay. I understand. Sir, compared to other defense companies, we actually have a development arrangement with DRDO, wherein all the development expenditure by them are also reimbursed to them by DRDO. So they are getting benefits on 2 fronts: One on the development. And post that, they would also get production. So we do not have -- so our R&D expenditure, does it get funded by DRDO or something like that?

Yes. So depending on the agency that we work with, so it could be DRDO, LRD, BEL, Ministry of Defense, it is a similar model that the other defense companies have.

Okay. So first, for 1 year, our investment would go in, but it would eventually come in as our revenues, right?

Yes. So the investment goes in to develop a product, to conceptualize it and come out with a prototype which has been approved. And once that approval happens, then it goes into production. So those are the 2 phases that happen in defense. Everything is obviously funded by the customer. We obviously do start with a lot of our innovation and IP, et cetera, such that we have an edge over our competition.

[Operator Instructions] We have the next question from the line of Inder Soni from Ruane, Cunniff & Goldfarb.

First of all, congratulations on a great set of results. My question is for Arun. Arun, AXISCADES and Mistral have very large customers where currently you have relatively small revenue. In your previous experience at Wipro, you had the record of taking large clients where there were small revenue and then growing it to large revenues. How do you see this opportunity compared to the success you had at Wipro's Utility business where you grew small accounts at big companies to large accounts at big companies.

Yes. Thank you for your question, Inder. And actually, that's a really good question. So I think the opportunity is exactly at the same inflection point. What we're doing with the existing customers we have, they sort of lowest in a certain way. There's a certain kind of work that we deliver for them. But with the acquisition of Mistral, for example, with the strong embedded capability that we have, we will be cross-selling those embedded capabilities into our existing clients. Because if you look at the engineering space, getting into a supplier and getting a supplier code is really hard work. But once you get a supplier code then depending on your capabilities, you can cross-sell and upsell many services. So with all the leading marquee names that we have in every industry sector, we have a unique position where the door is open. So we will now be repackaging our services as well as taking Mistral in bringing in the industry context, bringing in the client context that we have. And we believe that we will be able to offer much, much more for these clients. So the part of our strategy that we have is exactly that, which is as far as existing clients in the farming business is concerned, how do we develop more and more competencies, Mistral being one of them, but equally digital which we're looking in-house. How do we take that in and grow the business that we have with customers. And of course, the new customers, it's about positioning the knowledge that we have in that particular industry and winning the new business.

Great. And you have great strength in 2 areas: defense and auto, both very large segments that are very exciting right now. Can you just comment a little bit upon them? I think you had attended defense expo in Bangalore and you've just bought a company in Germany. So can you just talk a little bit more about your plans for defense and auto, please? And that's my last question.

Sure. Yes, absolutely. So as far as defense is concerned, it's a huge market now because obviously, we've seen that the Ukraine crisis that every country is trying to become self-dependent as far as their defense needs are concerned. And of course, we have AatmaNirbhar Bharat. So there's a big initiative to make in India as well as that the Indian government has also empowered senior military officials discretionary budgets of up to INR 300 crore. So they don't have to go through a planning process. But if there is an immediate need, up to INR 300 crores or something they can spend. And I was at the defense expo at Gandhinagar, and we showcased the capabilities that we have, both through Mistral as well as AXISCADES. And there was a huge uptick. We had a lot of interest, a lot of visitors. And as you know, in defense, drone warfare is becoming mainstream and some of the products that we have, the anti-drone system, et cetera, got a lot of interest. So we see defense to be a very, very vibrant sector. And the good thing with defense is that if you're in, you're in. If you're not in, it's hard to get in. Given that both through AXISCADES and Mistral, we've been working in defense for more than 20 years. We have very intense relationships. We built the credibility through 20 years of developing products and deploying them in various defense products. So we are very bullish about defense, and that's a big market as well. As far as automotive is concerned, like I said, the market share is huge. I actually come with a lot of automotive background because prior to joining AXISCADES, I was at Tata Technologies in London, and I used to manage the entire Europe business for automotive. So I know automotive extremely well. I have a lot of relationships. And this is a very vibrant market. And with the whole ADAS with connected cars with electrification, a lot of the work that's being pushed in automotive is towards digital and embedded. So you're having the concept of a software-defined car where it's no more -- it's less about mechanical engineering, it's more about the features which come in through embedded and digital. So this is where we are focusing on, and Mistral has very good capabilities in embedded, which we can re-purpose to automotive. And of course, digital is something that we are developing. So we are, again, targeting this sector. We started with a very multi-client, big German customer, and then we added on a big U.K. Tier 1 automotive company. And the rationale for looking at add solution is that in Germany, the big 3, which is BMW, Daimler and Volkswagen. If you need to penetrate them, the only way to get in is through acquisition because the vendor ecosystem is very secure. And this company that we're looking at has a very, very strong 15-year relationship with one of those big OEMs. And it's in a very active area of software testing as well as wiring harness. So for us, we will want to unlock Germany, get in, grow the automotive business in Germany. But equally, the German automotive capabilities are the best in the world. So we will want to take that through add solutions to the U.K. to U.S. and of course, to India. And again, we will look at like we're doing with this Mistral, taking it to our other customers, we will look at taking the add solutions capabilities globally through our sales force.

We have the next question from Ketan Gandhi from Gandhi Securities.

Yes. Sir, it's regarding the anti-drone system. Last year or so, we have backed the order. Is it the order along with the Bell? Can you throw some light on this order? And going forward, how we are looking at the repeat order of this kind -- of the same anti-drone system?

Yes. So the order is not with Bell. It is something that we have won, and we have a partner with who -- between we are developing the product. And the customer is Indian Army, but equally, there are potential customers like the Air Force, Coast Guard, Navy, et cetera. We have already delivered a few of these, and we already have a repeat order, which is coming in. Again, we can't disclose the numbers and the orders because, obviously, that's of competitive significance and we want to keep that with ourselves. But just to let you know, the first part of the order is being delivered and it will get completed sometime towards the end of this financial year. And the repeat order is already in our books, and we will start servicing that as well.

Sir, is it possible for you to share the number of units of anti-drone systems?

Yes. It's about -- Shashi, it's about 100 units, right, that we have the order for?

Yes, it's about 100 units, yes.

Yes. So about 100 units and about close to 50 have been delivered. Rest of them are being delivered.

And after this, we will be getting the repeat order of this kind or higher numbers?

That's correct. Right.

And sir, in the space of radar, I mean, where are we? Like we do in X-band, S-band. And do we have any role in AESA radar, which has been developed recently known as Uttam AESA radar. So are we in T/R modules or subsystem? I mean I just wanted to know our capabilities in terms of the radar space. I think that is one of the biggest in the defense segment.

Yes. And that's exactly the space where Mistral is in. I mean, we can set up a separate call to go into the technical details. But what Mistral delivers for the defense sector is the radars and the sonars both for air force and for Army and for, obviously, for the Navy. We can get into further details, but our unique differentiator and our strong capabilities are in the radar space.

Okay. No. So okay, we'll talk this off-line because I really wanted to know -- understand the company's capability in terms of X-band, S-band or various other kind of stuff.

Sure. We can get somebody technical to set up a separate call.

We will have the next question from the line of [ Nikhil Shah from Ambika Financial ].

Arun, and Shashi, congratulations on a very, very good set of numbers. You guys are on a sweet spot, both in defense as well as in the R&D space. My question is relating to Mistral, one, they are working on the defense side. But I thought they were also working on the semiconductor side. Could you elaborate a little bit on that?

Yes, you're absolutely right, [ Nikhil ]. 50% of the revenues come from defense and 50% of their revenues come from the semiconductor industry and all of that are overseas customers. And they're all, again, big leading names in the U.S. and in Europe. So you're absolutely right, 50% of the business is semiconductor.

So I mean, we are currently at the run rate numbers that Shashi talked about are at about $30 million, $35 million of revenue a year. I mean, how do we see that scaling up? As you rightly mentioned that you do some work initially on an embedded side on defense and then it scales up big time. So is it that we have reached an inflection point on Mistral?

Yes. I think if you look at the defense business, like I said, there is an R&D phase and then there's a production phase. And we are actually seeing a lot of our products which have gone through R&D now coming into the production phase. Equally, there are some new orders that we are working on, which is brand new, where there will be an R&D phase. And in general, the defense sector is very vibrant, and we have very, very good connections. So we are seeing the benefit of those connections coming to fruit. So we're seeing a lot of that business. And of course, semiconductor is like any other services business. It is -- we both pick a client, we take a piece of business and kind of what that we do is very high quality, high margin. So there, it is more traditional services business where we take projects and deliver that to our clientele.

You guys are in an exciting phase right now.

We have the next question from the line of Naveen Bothra from Subh Labh Research.

I'd like to congratulate Mr. Arun and the entire team for the excellent set of performance within a strong period of less than 1 year after learning all the new management tools. Sir, my -- most of the question regarding Mistral and fund raising has been answered. So I would like to restrict myself to the -- recently Tata and Airbus have announced their project in the Gujarat. So our association with Airbus is on the civilian side as well as the Ford Gujarat plant with Airbus and Tata. Are we going to have any association with this vertical also?

Yes, Mr. Naveen, thank you so much for your questions. Yes, so the collaboration that's been announced between Tatas and Airbus is for the production of the C295 aircraft, which is a transport aircraft So our association with Airbus is on the airframe and aerostructures. So there is a lot of -- and this is both on the civil as well as defense as well as helicopter side. So there's a lot of these capabilities and skills, which we will be able to take over to setup which has been established in Vadodara and Gujarat. Obviously, we are in conversation with Airbus, and we are in conversations with the Tatas as well. But I don't want to comment more than that. But what we do for Airbus is something that is exactly replicable for this joint venture as well.

And if you can throw some more light on the add solutions, numbers and all these things, revenue numbers have been said, the EBITDA numbers and something like performance and all this year's performance up to 3 quarters, if you can share?

Yes, sure. And Shashi can add on, but add solution, so their financial year is from Jan to December. And their forecasted completion this year will be about EUR 8 million, and they actually have very healthy EBITDA. So they're at about 12% to 13% EBITDA, which for a German company is very, very good because, as you know, usually, companies which are either only German or European tend to be in single-digit budgets. So these guys are actually very profitable and the forecast that they have for the next year also is pretty good because, again, software testing is an area which is very important in automotive because most features that are developed are either software or embedded. So software testing is an area which will grow more and more. And these guys have very good labs. I visited their facilities. They have very good labs. They have good test benches and they're actually working on the latest platforms of the OEM that they are working with. So very good revenues stand-alone that they have. Of course, we will also look at how we can do some synergies by taking them to some of our clients and to new clients as well. Shashi, you want to add anything?

Yes, I think you said it all. So as I said, for a German company, they have a reasonably good EBITDA margin. So this year, they are aiming at about INR 98 crores in terms of revenue with the cap in EBITDA margins we talked about.

Okay. So next follow-up question regarding this add solutions for Mr. Arun. This is basically in the mechanical and all these things. So will the add solutions will add to our EV and ADAS and all these thing capabilities, along with the Mistral embedded [ practice ] our specialization in all these things, if you can throw some more light. And how big it can be in the coming 5 years. This automotive space along with the automotive type solution if you can say something like...

Sure. So add solutions actually is not in the mechanical space. So they work in 2 areas. One is the software testing area. So if you look at the whole infotainment system in a car, a lot of software development happens there, a lot of diagnostics is done. Your audio and your streaming and navigation, all of it is based on software. So what add solution does is they do software testing for those modules. And before the car is released or before a version upgrade is done, there's a lot of software testing happens and you set up what are called test benches by which you can simulate a real-life environment. So software testing is the area that they're in, that's #1. The second is around wiring harness. So this is all electrical. So this is how you do the wiring in the vehicle. And of course, with the EV coming in, the wiring harness becomes that much more complicated because you don't have an internal combustion engine. It's on an electric motor and it's all batteries. So wiring harness becomes very critical to it. So this is a company which is in the software space, The intersection of software and engineering and electrical. So actually, they don't do any mechanical work at all. And that's the reason we feel this will be very complementary to us because we have very, very good mechanical engineering skills through our heritage work that we do. But through this acquisition, we will be able to develop the software capabilities as well as the electrical capabilities, which are actually the growth areas in the automotive field. Just in terms of numbers, again, like I said, we don't want to really give a forward-looking guidance, but all I would say is like automotive is a large share of the engineering spend. And in that automotive spend, the software and the embedded part is again a massive chunk. So we are in the right areas. So I think we will be able to exploit the opportunities that exist there.

We have the next question from the line of Rajendra Shah from Fidelity.

Yes. I just wanted to get a feel for the operating leverage in different verticals. So to get a feel for the kind of profitability growth that you can have. So like for example in defense, you mentioned that once you put in the money for R&D and prototypes, when we get a production order, then all that hopefully will translate into a lot of operating leverages. So can you just give us some feel for the operating leverages in different sectors and type of work that you're doing?

Sure. Shashi, you want to take that?

Yes. So basically, at an enterprise level, we are now at a level where the operator [ unit ] is kicking in. Of course, I'll not be able to specifically comment on the defense things which you talked about. But as an enterprise, we are at the cusp of, I would say, taking the benefit of operating leverage. So for us, the revenues, any incremental revenues beyond the number of around INR 550 crores is where every incremental dollar or incremental rupee revenue will add close to about 25% plus in terms of EBITDA.

Yes. And I just wanted to add, Mr. Rajendra that what we're doing this year is obviously -- so both of us joined this year, and we are in the journey of transformation. So we are looking at, obviously, how we can get some quick wins, how we can make the company more efficient and how we can bring in leverage like Shashi mentioned. But going forward, what we're focusing on is that we are banking a lot on digital initiatives. So for all the work that we do for our customers, we are looking at setting up teams which will look at more automation such that we can become more productive. And honestly, we want to break the linearity between revenue growth and headcount. And that's where we will focus going forward. So this year is more about exploiting some of the quick wins, looking at how we can make it more efficient and transforming the business to align with profitable growth. But going forward, the focus will be on scalable profitable growth, which will mean bringing in digital initiatives, which will bring -- selling higher value services, which will mean more effective account mining, et cetera?

We have the next question from the line of Vignesh Iyer from Sequent Investments.

Hello. Am I audible, sir?

Yes, you are.

Congratulations on good set of numbers...

Mr. Vignesh, your audio is a bit low. Could you just kindly go off the speaker phone and move on to the handset mode?

No, I'm on the handset mode. Am I audible now?

You're much audible now, yes.

Yes. Okay. Sir, on the revenue by geography that you have given. So if I see you've got around 36% of your revenue coming from Europe, so considering the current situation in Europe, so can you give us an idea if you have order book in hand already for execution in next -- I mean, 1 or 2 quarters. And my second question -- yes. Okay. And this is actually my main question I just wanted to ask. Hello?

So if it's specific to Europe, so it really depends on the sector that you talk about. So if you look at -- so I'll probably just very quickly try to give you a sense of each sector. So if you look at aerospace, the client that we work with, they have a full order book, which will probably extend for the next 4 to 5 years. So if you wanted to order a new aeroplane, that is only going to come into their list 5 years from now. And as you know, in aerospace, there are 2 large OEMs. And the one that we work with is doing extremely well, and they have a market position. So their order book is actually full, and we don't see any slowdown. In fact, if anything, there is more acceleration and more productivity initiatives we are trying to bring in to sort of help them getting faster. If you look at automotive, automotive, there is a massive shift, as you know, again, that's happening towards electrification. There are new age EVs, which are coming, there's connected, which is coming in. All of these require long investment cycles. So typically, there's 2 to 3 years' worth of investment. So especially with the climate control agenda, there is a move towards more electrification, more EV vehicles. And these are R&D projects, which will not stop because once you stop, it's very hard to pick it up again. So typically, with automotive, once they've picked their bets, they will sort of stay the course on it. So again, in automotive, we don't expect a slowdown. What could potentially happen with the inflation and the macroeconomic situation is car sales and availability of cars because of semiconductors might be impacted. But that is more a retail play. It is not an engineering R&D play. So we don't see a big issue with that. And energy, of course, with the Ukraine crisis, I think we all know that energy has again come back into focus. And we will see that energy security becomes important for every country. So there is going to be a big investment, whether it's on clean renewable energy or in oil and gas and fossil fuels are here to stay for some more time to come. So again, that's a vibrant sector. I would say heavy engineering probably is the only sector which could be -- it could have some impact in terms of softening because of the fact that investment spend may not come in and there might be a slowdown. But again, we don't anticipate that because typically, governments would do stable spending, there would be infrastructure spend. And we see that to some extent, that sector would be protected. Defense, of course, I think because of Ukraine, every country is investing in defense. We don't foresee that to go down at all. So actually, this -- the macroeconomic situation that we see in Europe will probably not impact the sectors that we are in, in engineering to such a large extent.

Okay. Okay. Fine. And the second question on this that is on the product and solutions side. I just wanted to know what is the current execution time line of the current anti-drone system order you have in hand and the possible execution time line for your next set of orders that you are expecting? If you could just guide us on that.

So we just talked about the number of units that we have. See, this is competitive information again because, obviously, we bid against our competition to win some of these orders. So I don't want to talk about future business and future orders because that's privileged information between us and our customer. But we talked about where we are with 100 units and 50 being delivered, 50, which are in progress, and there is a future order that's coming in. I don't want to really comment on which specific defense unit, it is or how many units that you are producing because clearly, this is competitive information.

Okay. So you cannot give you a time line for even the 50 units that is yet to be delivered, right?

That will get delivered in the next 6 to 8 months, the remaining 50 units for this order.

Okay, fine. So you've got another 6 to 8 months before the possible new order gets kicked in, right?

Well, it could be sequential. It could be in parallel as well but yes, all the options are on the table.

We have the next question from the line of Jeevan Patwa from Sahasrar Capital.

Yes. So we have actually almost INR 200 crores debt on the balance sheet. So are we planning -- and the debt cost seems to be a little higher looking at the interest cost. So are we planning to refinance that in the foreign currency where we can actually have a natural [ raise ]?

You see, we, of course, had to take on this quantum of debt at a very short period because of the time lines, which were imposed by the arbitral tribunal. We do recognize that it has come at a higher cost, and we are already in the process of refinancing it. And whether we would take a foreign currency loan or a rupee loan, obviously, we are looking at a significant saving in costs in terms of the agencies who we are discussing this with. And we are confident that before the end of the current financial year, we should have the refinancing in place.

Perfect. And second question is for Arun actually. So I just want to understand, you have been at the Tata Technology as well. So you are also aware of what Tata Elxsi is also doing. The way you're talking basically the other sectors like health care and media and all, I think Tata Elxsi is also in the similar kind of vertical. So just want to understand, capability-wise, if I have to put you against the Tata Elxsi or KPIT so KPIT is more towards automotive domain. So capability wise, how do you place yourself, let's say, Tata Elxsi and KPIT.

I would say that the team we have is extremely good. The capabilities that we have are extremely good. The customers that we have, which is the most important part, we have access to the best customers in each industry sector that we service. So that is extremely good. And the reason that I came and joined AXISCADES is precisely this. In my past history, I worked at Wipro for a long time, Tata Technologies. And then I come in -- came and joined AXISCADES. The reason I joined AXISCADES is because it's not as big a company as Tata Elxsi or some of the others you mentioned. But the clientele that we have and the capabilities that we have are equal to the best. So I felt, and I was very bullish that with my experience, here was a good platform to grow the company. And with the right investment, with the right team, with the right focus, the right sales strategy, we will be able to grow it. And as you can see, that's why we have moved quickly, we have looked at organic as well as inorganic growth. So I feel from a capability perspective, we are as good as anybody else. Of course, we need to sort of hire more people, and we need to have a bigger reach and more customers. And that's how companies scale up. So every company goes through an evolution. And I think we are at a part of the story where we think we can grow as well.

We have the next question from the line of Hansal Thacker from Lalkar Securities.

Team, congratulations on a fabulous performance. Sir, taking cue from one of the previous questions. I understand that there are about at best 20 to 25 OEMs. And given that there are a limited number of OEMs, the kind of companies that cater to them almost on the automotive side, be it ADAS, [ AUTOSAR ] or like you said, the wire and harness. Would it be IP essentially that will kind of relationships will get us in the door and it will get us business. But what will help us maintain our margins given that so many people are kind of catering to such a limited set of people.

Actually, if you speak of the automotive sector, the market actually is quite big now because there's a lot of the traditional OEMs. There's the Tier 1 service providers, so they're the component manufacturers. And then you have these new age OEMs, the likes of Tesla, Rivian, [indiscernible] et cetera. And so the market actually is expanding at a rapid rate because everybody is sort of trying to get into automotive in either manufacturing vehicles or in the mobility space, which might not necessarily be manufacturing a product, but actually getting into ridesharing or mobility or associated kind of solutions. So the key to the growth, to your point, is one is that there are certain technologies both in embedded and digital, which will be in demand. So one is we will look at developing competencies in that and developing a cadre of people whom we can deploy to our customers. That's point number one. Point number two, we are looking at platforms and point solutions which are our differentiators. So we will want to take those to our customers, and they will see the value that this is something that they don't need to sort of invest a lot on that, that can be applied to them, and it's a use case, which is very useful. So we will look at investing in some IP and some use cases that are -- where we feel that it can be differentiated, and that's the second way in which we will want to grow the market. And the good thing with having platforms and IP is that it's a replicable model. You can take it to one OEM, and you can then replicate that with minimal cost for other OEMs as well. So we are on that journey of both developing the competency in people as well as developing IP and solutions.

So that would essentially involve some sort of a cost, right, given that either we have to develop or then we'll have to acquire, so do you have any amount or a figure in mind as to what you are setting aside for these kind of acquisitions?

No, we obviously do our annual planning. We have a budgeting process. So we put in some money that we want to invest in R&D. And things like acquisition of add solutions, for example, will go in the same direction where there will be capabilities and solutions that they have. This is something that we've taken during the annual process. I obviously don't want to talk about what the number is, but we have a plan as to how much of it will come in. And to the point of what Shashi was making about raising capital, this is exactly why we want to do it because we feel that the market is big and with some working capital with the investment in senior resources and capabilities, we'll be able to exploit the opportunities.

Wonderful. And sir, last question. So is -- would kind of middleware somewhere feature in our opportunity area?

Yes. So middleware would -- so what we would look at is end-to-end stack. So we will look at right from the hardware level doing the embedded electronics, doing the middleware, embedded software and then the application software and digital. So we want to play right from the hardware -- embedded hardware right up to the digital application software. So all the layers.

Wonderful. Very encouraging, sir. And given your background, it's even more exciting. So congratulations again, and look forward to meeting you and speaking with you again.

Definitely.

That was the last question. I would now like to hand it over to Mr. Nachiket Kale for closing comments.

Yes. Hi. Thanks, everyone, for joining on this call. I would also like to thank the management for answering all the questions today. Orient Capital is the investor relations adviser to AXISCADES. So for any queries or follow-ups, please feel free to reach out. Our details are available in the investor presentation. Thanks, everyone. Have a nice day.

Thank you.

Thank you.

Thank you. On behalf of AXISCADES Technologies, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.