Divgi TorqTransfer Systems Limited (DIVGIITTS.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Divgi TorqTransfer Systems Limited Q2 FY '26 Earnings Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mihir Vora from Equirus Securities. Thank you, and over to you, Mr. Mihir.

Yes. Thank you. Good afternoon, everyone. On behalf of Equirus Securities, I welcome you all to the Q2 FY '26 Post Results Call of Divgi TorqTransfer Systems. From the management side, we have Mr. Jitendra Divgi, Managing Director; Mr. Hirendra Divgi, Whole-Time Director; Mr. Sudhir Mirjankar, CFO; Mr. Satvinder Singh Sabharwal, Chief Growth Officer; and Dipak Vani, COO. I will now hand over the call to Jitendra, sir. Over to you, sir.

Yes. Thank you, Mihir. Good afternoon, everyone, and a warm welcome to our Q2 and H1 FY '26 earnings conference call for Divgi TorqTransfer Systems. On behalf of my team and the organization, I want to express my appreciation for your time and interest in joining us today for this discussion on our performance for the quarter and half year ended September 30. As Mihir mentioned, I'm joined by my colleagues, Hiren Divgi, Executive Director; Sudhir Mirjankar, CFO; Satvinder Singh Sabharwal, our Chief Growth Officer; and Dipak Vani, our COO at Divgi TorqTransfer Systems; and also SGA, our Investor Relations advisers. I hope you've had the chance to review the results and the investor presentation, which are available on the stock exchanges as well as our company website. So I would like to begin by highlighting an important milestone on our strategic initiative to deepen our presence in key international markets. This particular point was alluded to in our previous earnings calls. And I'm very pleased that these efforts are now beginning to translate into tangible outcomes. I'm pleased to share that our long-standing focus of taking our legacy product line, which is transfer cases to global platforms has achieved now a very, very significant and major milestone. We have secured a nomination from a very leading Japanese OEM that is a market leader globally and in particular, in Southeast Asia, to develop the transfer case for their iconic pickup truck platform with SOP starting from H1 FY '28. This is a highly strategic win for us given the OEM's strong global presence and the overall scale of this particular platform and the models that come off it. As part of the development cycle, we have already built a proof-of-concept unit, which is undergoing some testing on one of our vehicles. Early performance results have been encouraging and are helping us refine the product for the upcoming validation phases. The idea is that we will first focus on localization for the Indian market. And as we consolidate on our operations and quality, we will plan to expand supplies to regional markets around India. This nomination is not only a major milestone in our global expansion journey, but is a very strong endorsement of our engineering depth, product reliability and manufacturing capabilities. It further strengthens our position as a competitive and credible supplier in the international drivetrain market, opening the door for additional opportunities with global OEMs in the future. Looking at our financial performance for the first half of the year, I'm really pleased to share that your company is not only firmly back on track, but has significantly accelerated now its improving performance. In Q2 FY '26, we achieved our highest ever quarterly revenue of INR 88 crores, taking our H1 total income well beyond INR 160 crores, representing a strong 39% year-on-year increase. EBITDA came in at INR 41 crores, up 35% from the previous year, while PAT rose to close to INR 20 crores, delivering an impressive 43% year-on-year growth. Overall performance also strengthened quite meaningfully. Better capacity utilization drove better cost absorption, resulting in enhanced profitability. Gross margins remain healthy at over 60%, EBITDA margins are in excess of 24% and the PAT margin is improving and currently at around 12%. Exports, this was most encouraging, contributed nearly 16% in H1 and more significantly, over 20% in Q2 FY '26, helping us make progress towards our medium-term target of 20% to 25%. Overall, the business continues to demonstrate resilience, operating efficiency and consistent execution across key parameters. I will now take the time and opportunity to go into individual segments of our overall business. On transfer cases, we delivered a strong performance in the first half, growing 42% year-on-year and demonstrating continued momentum in this vertical. This has been demonstrated -- this has been driven by sustained volume offtake from our main anchor customer, which is Mahindra, but also additional customers like Tata and Force Motors, with monthly averages now at par with FY '24. We expect to surpass FY '24 transfer case volumes and are well positioned to accelerate further growth in the coming quarters. During the quarter, we also saw a volume-led price correction based on the agreed contractual threshold, which you could interpret as a healthy sign that reflects sustained demand and strong long-term volume visibility. The segment's performance was further supported by increasing adoption of 4-wheel drive systems in the market and the successful launch of new customer models. And this continues to expand the addressable opportunity for our transfer case portfolio. Looking ahead, our focus for the transfer case segment remains on accelerating growth across both domestic and international markets. On the domestic side, we are actively collaborating with leading OEMs on many of their upcoming platforms. And on the export front, we are making meaningful progress in globalizing our transfer case portfolio. As shared earlier, we have secured a nomination from a leading Japanese OEM to develop the transfer case for their iconic pickup platform, which is a significant milestone in our international expansion efforts. As part of our long-term strategy, we are also evaluating the feasibility of establishing a manufacturing footprint in the U.S. market to support future growth and deepen our global presence. We expect this study to reach some sort of a conclusion before March end '26. Shifting to now the EV transmission segment. The performance remained muted on a year-to-year basis, a trend that has continued over the last few quarters. EV volumes in the market were subdued during the period, resulting in range-bound sales for our EV transmission business broadly in line with the previous quarter. However, we expect volumes to improve meaningfully in the second half as we commence production and supplies of the new Sigma platform to our key customer, Tata. With deeper integration across multiple EV platforms, we anticipate a strong volume ramp-up in H2, while also maintaining the current run rate of volumes on models that are already there, which should strengthen the growth outlook for this segment. Broadly, we are expecting about a 20% to 25% improvement in volumes on EV transmissions. Moving forward, our key priority for the EV transmission segment is to enhance capacity utilization by expanding into newer platforms. We remain closely aligned with emerging growth opportunities across both domestic and international markets. And we are actively seeking out opportunities in the United States and in Europe. We remain closely aligned with emerging opportunities, as I said, in both domestic and international markets. So on the export front, we are expanding our global reach to engage with international OEMs like Ford and Tesla, also Toyota, aligning with their evolving platform requirements and strengthening our presence in key geographies. Moving on to the components business, which has been led primarily by exports. This has been consistently increasing its share in the overall mix over the last 6 months. As was indicated towards the end of calendar year '24 when we had said that in '25, we will begin to see an uptick in the export business. The segment continued its strong momentum throughout H1, delivering a stellar almost 100% year-on-year growth in H1 FY '26. This performance was primarily driven by volumes from a major Tier 1 export customers that include BorgWarner and Magna, reflecting the growing acceptance of our components in global markets with iconic pickup truck and SUV manufacturers around the world. Export markets remained encouraging despite global uncertainties arising from recent U.S. tariff actions. Coming to U.S. tariffs, I want to highlight that we do not foresee any short-term impact of these actions on our components business. India, despite this action, continues to remain competitive in the light-duty application segment in the United States, where -- and I want to emphasize this, the duty structure is not 50%, but limited to 25%. The other thing that adds resilience, I think, to our business is we operate in niche segments and the specialized nature of the components that we supply where the parts are highly engineered, both from a design standpoint as well as the design of the manufacturing system that is needed. And therefore, these are not easily substitutable. What truly differentiates us in the markets we operate in is our ability to deliver far more than just simple components. These are precision parts, highly engineered with a high standard of metallurgical science involved. We have consistently demonstrated our capability to provide integrated high-value solutions that combine logistics all the way to the doorsteps of our customers in all over the United States. And so the overall value proposition continues to remain quite compelling. We have a strong pipeline of opportunities under development on the export side, both for new business acquisition and for engineering next-generation components. Over the past few quarters, we have successfully diversified our revenue mix and continue to make focused efforts to expand our export portfolio across multiple markets and geographies, including markets like Portugal, Austria and Germany. These initiatives are progressing well across these markets, and I expect it to be important drivers of our export-led growth over the next few quarters and years. Several new products are currently in the approval stage, and we anticipate many of this to be converted into firm orders in FY '27. Demand for critical components across both domestic and international markets remains steady and the prospect of an imminent trade deal with the United States, which has been in the air for some time now, will only further strengthen our business prospects. I now want to switch to a few remarks and observations about the next-generation transmissions that we are working on. So this continues to be a key sort of focus for us because our long-term growth strategy is expected to come from here. FY '26 has been a year of steady progress on this front. And we are now at a stage where in the automatic transmission domain, the likely advent of tightening emission norms are bearing down on how automatic transmissions are designed and integrated into vehicles. And in order to sort of leapfrog this dynamic market, we have made a decision to go straight to 8-speed transmissions instead of 6 or 7-speed transmissions. And given the commonality that exists between -- to a significant extent between manual transmission -- the manual transmission ecosystem in India and what is needed for dual-clutch automatic transmissions, we have elected to work with dual-clutch technology, wet clutch dual-clutch technology for the passenger segment in India. We have submitted quotations and drive trials with the type of technology that we intend to deploy in India, drive trials are currently underway with OEMs in India to demonstrate the superior performance, shift performance, but also the considerable improvement in fuel economy that we are expecting. On commercial truck applications, we are investigating rear-wheel drive automatic transmissions that complement our line of transfer cases from pickup trucks to light commercial vehicles. In our manual transmission business, our focus continues to be on strengthening relationships with existing OEMs and providing end-to-end strategic supply chain solutions. As mentioned in our previous earnings call, we have received a significant RFQ for a five-speed manual transmission from one of India's largest commercial vehicle OEMs. Building on that, discussions have progressed further, and we are now engaged in deeper evaluations to align product requirements with our manufacturing and engineering road map. Additionally, we have submitted proposals to a second OEM in tandem with our 4-wheel drive transfer case. So this is an integrated transmission transfer case value proposition, further strengthening our positioning in high-value drivetrain systems. These initiatives collectively reinforce our objective of maintaining a competitive and future-ready position in the conventional drivetrain space even as the industry transitions towards hybrid and electrified architectures. So with that, let me bring my opening remarks to a close. Before I conclude, I want to highlight an important -- another important achievement for us this quarter. A few weeks ago, we showcased our state-of-the-art drivetrain and transmission solutions through actual exhibits at the Mahindra SUV Proving Track, MSPT as it's called, at a place called Cheyyar in Tamil Nadu on the occasion of the Mahindra Technology Day. This platform allowed us to demonstrate our advanced engineering capabilities, next-generation technologies and the depth of our product portfolio to key members of Mahindra top management. And this included drive trials on vehicles into which some of our products have been integrated. The response from the OEMs leadership and technical teams was highly encouraging, further strengthening our engagement and reinforcing our positioning as a trusted innovation-driven partner for Mahindra & Mahindra. FY '26, I'm pleased to note that has begun with a good dose of vibrancy marked by robust execution, deeper customer engagement and meaningful progress across many of our strategic initiatives. We remain focused on driving sustainable growth, enhancing operational efficiencies and expanding our presence across both domestic and global markets. The opportunities ahead are substantial, and we believe we are well positioned to capitalize on them. The near future holds many exciting possibilities, and we look forward to sharing further updates with you in the upcoming quarterly earnings calls. So with that, let me conclude my opening introductory remarks and hand over the proceedings to my colleague and CFO of our company, Mr. Sudhir Mirjankar. Thank you very much.

Thank you, sir. Good afternoon to everyone on the call. Before presenting the financial numbers for the Q2 and H1 of FY '26, I would like to highlight a few key points. We began the new fiscal year with robust volumes in Q1, and I'm pleased to share that we successfully sustained this momentum through H1 of FY '26. The growth has been broad-based across our 2 major segments, transfer cases and components, both of which continue to demonstrate strong traction. Our transfer case business benefited from healthy volume uptake from key OEM customers, while our components segment, which is predominantly export driven, continued its strong upward trajectory as global demand for our high precision components remained steady. Speaking on financial performance of H1 FY '26. For H1 FY '26, our total income stood at INR 165.1 crores, marking a 39% year-over-year increase from INR 118.6 crores in H1 FY '25. This growth was led by sustained momentum in transfer case volumes throughout the first half and continued robust performance in component business. So on revenue mix, the transfer case segment delivered strong growth of 42% year-on-year compared to H1 FY '25. We witnessed healthy volume traction in Q1, and this momentum continued through Q2 as well driven primarily by higher offtake from our key OEM customer. We remain confident that this momentum will continue in the coming quarters. The EV transmission segment declined by 5% in FY of '26 compared to H1 of FY '25. The segment has been largely range bound due to subdued EV volumes in the market. However, we expect a ramp-up in the second half of FY '26 supported by stronger customer offtake and deeper integration across newer EV platform. The components segment continued its robust performance, growing 113% in H1 FY '26 compared to H1 FY '25. This exceptional growth was largely export led despite global market uncertainties. We expect this momentum to sustain in H2 of FY '26 as well. Exports continued to steadily increase its share in the overall total income mix. In H1 FY '26, exports contributed around 16% of total income, and we are progressing well towards our medium-term target of 20% to 25%. Gross margins for H1 FY '26 stood at 63%, expanding by 119 basis points over H1 FY '25. This improvement was primarily driven by higher volumes and a favorable sales mix with increased contribution from high-margin component exports, further supporting overall profitability. EBITDA for H1 FY '26 came in at INR 41 crores, registering a healthy 35% year-on-year growth from INR 30.5 crores in H1 of FY '25. The improvement was largely supported by a better product mix and operating leverage benefits arising from higher volumes, which resulted in improved absorption of fixed costs. EBITDA margin for the period stood at 24.9%. Profit after tax for H1 FY '26 stood at INR 19.7 crores, reflecting a strong 43% year-on-year growth from INR 13.8 crores in H1 of FY '25. This performance was driven by enhanced operating efficiency and higher volumes in major segments, leading to further strengthening of overall profitability. PAT margin stood at 11.9%. Coming to the quarterly numbers. In Q2 of FY '26, we delivered our highest ever quarterly total income of INR 88.3 crores, registering a strong 49% year-on-year growth from INR 59.2 crores in Q2 of FY '25 and a 15% sequential growth over Q1 FY '26. EBITDA for the quarter stood at INR 22 crores, reflecting a 33% increase from INR 16.6 crores in Q2 FY '25 and a 15% sequential growth over Q1 of FY '26. EBITDA margin for the quarter was healthy at 24.9%. Profit after tax for Q2 FY '26 came in at INR 10.7 crores, marking a 37% year-on-year increase from INR 7.8 crores in Q2 of FY '25 and a 20% sequential rise from INR 8.9 crores in Q1 of FY '26. PAT margin for the quarter stood at 12.2%. This consistency in performance reflects the strength of our product portfolio, the results of our customer relationships and the disciplined execution by our teams across functions. With the visibility, we currently have the opportunities in the pipeline, we expect this positive momentum to continue in the coming quarters as well. That's it from my side. Now I would like to open the floor for questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Mahesh Bendre from LIC Mutual Funds.

Sir, we have released a press note which mentions that we have won a contract from Toyota Tsusho. It's, I think, INR 62 crores of contract. So does this for Indian vehicles? Or is it for their international operations?

Yes. Thank you for asking that question, Mahesh, because it gives me the opportunity to clarify many things. So this is in collaboration with, as the press note suggests, Toyota Tsusho, which in itself is a big deal for us. But the OEM is not Toyota because of nondisclosure agreements, you will appreciate. I cannot divulge that detail right now. But it is an iconic pickup truck maker of the world. The platform that we are working on is a global platform, okay? And it is a market leader right now in Thailand and ASEAN. The global volumes of this platform and the models that the OEM makes using this platform exceed 1 million. So from a strategic standpoint, this is a big deal for us. In fact, I would go to the extent of saying it is pretty historic because till now, no Indian company has sort of opened up an opportunity with its own proprietary product technology on European, Japanese or American or Korean platforms. To that extent, this development, small as it may be, is extremely historic. And it is a watershed moment, I feel, in the history of India's automotive industry. So what this gives us is it is up to us now to use the goodwill we have with Toyota Tsusho. Toyota Tsusho is an $80 billion conglomerate based in Nagoya, Germany. It is part of the Toyota Group. And we have their massive global network of pushing our product lines into the universe, if I may say so, of Japanese OEMs. In earlier discussions, quarterly discussions, this may have escaped the attention of -- because we had mentioned that for the purposes of business development with Japanese OEMs, we had signed an exclusive arrangement with Toyota Tsusho. And after many years of hard work, this partnership has now fructified with this win that we've secured. It has been great teamwork on the Japanese side as well as the Indian side at Divgi, and it has taken enormous amount of hard work and innovation of our sales, marketing and engineering teams to convince the Japanese OEM that what we have on offer is a damn good and compelling value proposition. What I would, therefore, say is that this is very much -- the initial application will be India, but the platform itself is global. And if we do a good job, not only with this OEM, but this could open the gate with other OEMs globally. I hope I've answered your question.

Yes. And sir, what I heard correctly, you mentioned this is a proprietary technology belong to us, right? So this is not a design coming from OEM?

No. This is our proprietary technology. And the genius of this solution we have given is that we have helped them cut costs. We have improved the technology because we have reduced the weight of the transfer case from the 45 kilograms of the Japanese mechanical transfer case to 32 kilograms of the Divgi technology while preserving the electronic circuitry and the in-vehicle networking through that -- the Japanese ECU on that vehicle. So this has been, how should I say, very depth and adroit and imaginative engineering by the Divgi TTS team to kind of secure the confidence of the Japanese that without disturbing their electronic and software architecture, we have given them an extremely elegant mechanical solution.

Will this open new -- I mean, will this open us more orders for us for global operations?

We certainly hope so, and that is the -- we have the solid backing now of Toyota Tsusho. And I can tell you that this has taken a lot of work. We have a lot of support from their headquarters in Nagoya in Japan. And since they are part of the Toyota Group, the implications of this win are not lost on Toyota Tsusho. And in time to come, we'll certainly look forward to expanding on this win. We also continue to work with Toyota Tsusho globally. I'm sure a little bit of research will tell you that Toyota and the Toyota Group is extremely strong in the United States. And they have a tremendous brand image for performance and reliability on pickup trucks. So using this partnership, we are also looking at opportunities in the United States.

The next question comes from the line of Saania Jain from Care PMS.

On the components business, I had a question. On the INR 90 crores export front, what is the contract duration for that?