Endurance Technologies Limited (ENDURANCE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Endurance Technologies Limited Q3 FY '22 Earnings Conference Call, hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishit Jalan from Axis Capital. Thank you, and over to you, sir.

Thank you so much. Good morning, everyone. Welcome to Q3 FY '22 results conference call of Endurance Technologies. From the management team, we have with us Mr. Anurang Jain, Managing Director; Mr. Ramesh Gehaney, Director and COO; Mr. Massimo Venuti, Director and CEO, Endurance Overseas Business; Mr. Satrajit Ray, Director and Group CFO; and Mr. Raj Mundra, Treasurer and Head, Investor Relations. I'll now hand over the call to Mr. Jain for his opening remarks, post which we can start the Q&A. Over to you, Mr. Jain.

Thank you, and good morning to everybody. I would like to share details of how we have done in the third quarter of this financial year and the first 9 months also of this financial year FY '22. In India, in the third quarter of FY '22, as per SIAM data, the 2-wheeler industry sales de-grew by 19.7% compared to the previous financial year. Scooters de-grew by 25.87% and motorcycles de-grew by 16.38%. The automotive industry as a whole in India had a de-growth of 17.4%. In Europe, in quarter 3, there was a de-growth of 23.4% in the European Union automotive sales. On the financials, I will briefly talk to you about the third quarter of FY '22 and then the first 9 months of FY '22. During quarter 3, our consolidated total net income was INR 18,965.89 million as compared to INR 20,467.03 million in quarter 3 of the previous year. Consolidated EBITDA was INR 2,106.74 million as compared to INR 3,579.71 million in quarter 3 of FY '21. Consolidated EBITDA margin was at 11.1%. The net profit was INR 946.36 million at 5%. There was no Maharashtra state mega project incentive in this quarter, in quarter 3. There was also no net debt as there was a positive cash available of INR 3,785 million. During quarter 3, our stand-alone total income was INR 14,939.05 million as compared to INR 15,320.49 million in quarter 3 of FY '21. Stand-alone EBITDA was INR 16,999.50 million as compared to INR 2,632.90 million in quarter 3 of FY '21. The EBITDA margin was at 11.4%. Stand-alone net profit was INR 878.46 million at 5.9%. There was no Maharashtra state mega project incentive in quarter 3. The reasons for lower EBITDA margin percentage as a whole, firstly, in India was due to the large commodity price increase, mainly in aluminum alloy and steel rates. There was no mega project incentive in quarter 3 of this year as compared to quarter 3 FY '21, which had a mega project incentive of INR 239 million. There was a drop in volumes in quarter 3 of FY '21, leading to a loss of contribution on lower sales. In quarter 3, the 2-wheeler industry, as I mentioned earlier, was down by 19.7%, largely due to the chip shortage. As far as Europe is concerned, the lower EBITDA margin has been deeply affected due to the high drop in passenger car volumes due to chip shortages and a huge increase in power cost, which will be later explained by Mr. Massimo Venuti. During the first 9 months of FY '22, our consolidated total net income was INR 54,987.02 million as compared to INR 44,379.61 million in the first 9 months of FY '21. Consolidated EBITDA was at INR 7,358.64 million as compared to INR 7,318.77 million in the first 9 months of FY '21. Consolidated EBITDA margin was at 13.4%, and net profit was at INR 3,245.21 million at 5.9%. This includes the Maharashtra state mega project incentive of INR 590.43 million for the first 2 quarters of this financial year. During the first 9 months of FY '22, our stand-alone total income was INR41,754, sorry, INR 41,574.16 million as compared to INR 31,850.57 million in the first 9 months of FY '21. Stand-alone EBITDA was INR 5,465.87 million as compared to INR 5,057.19 million in the first 9 months of FY '21, with an EBITDA margin of 13.1%. Stand-alone net profit was INR 2,670.09 million at 6.4%. This includes the Maharashtra state mega project incentive of INR 590.43 million in the first 2 quarters. There was no net debt and there was a positive cash available of INR 2,788 million. The detailed financials are available with the stock exchanges and on the Endurance website. I would now like to share certain key points for the first 9 months of this financial year. In the first 9 months of FY '22, 75.6% of our consolidated total income, including other income, came from Indian operations and the balance 24.4% came from our European operations. In India, in the first 9 months of FY '22, INR 5,854 million of new business was won from OEMs, other than Bajaj, which included HMSI, TVS, Hero MotoCorp, Royal Enfield and Ather Energy. This included INR 1,390 million new orders for EVs, including INR 530 million orders from Ather for brakes and INR 700 million orders for the Polarity Smart Bike, is a company in Chakan, Pune for suspension and brakes. New order win also includes non-automotive casting business of approximately INR 1,000 million for applications like gensets and the 5G telecom. These businesses will start in April 2022. I would like to mention that we have INR 18,936 million worth of request for quotes from the OEMs. We're happy to announce that we've added a new product vertical, which is the drive shaft. The drive shaft is high-technology proprietary product in an automotive application. A drive shaft transforms the torque generated from an engine through its transmission to the wheels. The application is for 3-wheelers and 4-wheelers, including some LCEs. The drive shaft is an EV agnostic product required for EVs also. It has lucrative margins and competition in India is mainly from GKN Driveline and Nexteer Automotive. The Indian drive shaft market is approximately INR 20,000 million per annum for 3-wheeler and 4-wheeler applications. We are starting business with Baja Auto in May 2022 as a new state-of-the-art plant has already set up at Waluj, Aurangabad. We are at an advanced stage of orders from TVS for 3-wheelers and from Mahindra for 3-wheelers and 4-wheelers, including for their EV applications. We have already filed 5 patents to make the products superior to competition. Our shortened development times, competitive price, our world-class manufacturing and a strong supply chain is our USP, which will help us in business growth in the future. At Endurance Overseas, we have acquired 100% stake in a small company called Veicoli SrI, Italy. Veicoli enables fleet operations to increase route efficiencies, enhances safety, optimizes maintenance activity and lowers fuel costs. This is done by monitoring vehicle movement, engine parameters and driving habits of Veicoli software platform. With this acquisition, we seek to expand our innovative solution offerings in the mobility sector in Europe. I would like to mention that Endurance is focusing on a more value-add and profitable product mix in its future business, which includes braking, suspension and casting supplies, to 2-wheeler and 3-wheeler EV OEMs and start-ups, 200 cc-plus motorcycle brakes and clutch assemblies with the help of acquisition of Adler and Grimeca in Italy in the year 2020. The 200 cc- plus motorcycle brakes business have already started from October 2021 and the 200 cc-plus motorcycle clutch business will start in the next financial year. Our other product mix focus areas are the paper-based clutch assemblies replacing cork-based clutch assemblies for motorcycles with a higher value add. We're starting continuous variable transmissions on automatic clutches for scooters. We are at advanced stage with Hero MotoCorp where the testing has already been cleared. We are also increasing the anti-lock brake systems or ABS business for 150 cc-plus motorcycles with our collaboration with BeijingWest Industries. We've started supplies to Bajaj Auto and -- from September 2021 onwards. We're also increasing our business of 200 cc-plus motorcycle inverted front forks and adjustable rear monoshock absorbers. This is with the help of our collaboration partners, KTM AG. We are working with KTM to increase supply of both on-road and also start with off-road motorcycles, higher technology inverted front forks and rear shock absorbers and we have made a 3-year plan for it and the volume will substantially increase in the next 3 years. We are focusing on also fully finished machine castings as compared to raw casting and semi-finished castings for 2-wheelers, 3-wheelers and 4-wheelers. As far as disc brake assemblies are concerned, this business is growing with addition of Bajaj, TVS, Royal Enfield, Yamaha, Hero MotoCorp and HMSI new business. The increasing supply of disc brake assemblies from 285,000 brake assemblies to 570,000 brake assemblies a month, and this from 375,000 numbers a month to 675,000 numbers a month by March 2022. We'll have the capacities in place. Our second plant at Waluj, Aurangabad, has already started operations. In September 2021, we've also started supply of aluminum cylinder head low-pressure die castings at our Pantnagar, Uttarakhand plant. This order is for 720,000 machine cylinder heads per annum. As mentioned earlier, we've already started 2-wheeler ABS assemblies from September 2021. I'm really happy to inform you that from this evening, we are starting ABS assembly supplies to also Royal Enfield. Our plan is to reach a run rate of 400,000 ABS assemblies per annum by September 2022, which is mainly due to the short supply of ABS ECUs, which are dependent on, as you know, the chips. As you maybe aware, competition is mainly from Bosch, which controls a major market share in the Indian ABS motorcycle market, which requires approximately 3 million to 3.5 million ABS assemblies per annum. This is a large business opportunity for Endurance, as there are very few suppliers and all our foreign companies due to the high technology requirement. We also focus on supply of our products for EV 2 and 3 wheelers. We have already started supply of brake assemblies, suspension of aluminum castings for electric scooter and 3-wheelers. Our focus is to supply our EV products to 2 and 3-wheeler OEMs, both existing and new, including Ola Electric, Ampere, Okinawa, Ultraviolette, Ather, and Hero Electric. We are also focusing on E-bicycle business, not the E-bikes, but E-bicycles, especially for our suspension and brakes and we're already in advanced talks with certain OEMs. Due to increased orders from Bajaj and Yamaha India, and a new INR 1,446 million alloy wheel order from TVS, which we recently got, we have added a new plant at Chakan to help increase supplies from 240,000 alloy wheels a month to 320,000 alloy wheels a month. This plant will start operations in this month, the supplies to TVS will start in June 2022. As far as Europe is concerned, in quarter 3 of FY '22, we are happy to inform you that we have won EUR 53.91 million business from Porsche, Daimler, CNH, BMW and Stellantis. This includes a recently won EUR 40.5 million new order for transmission housings for the mild hybrid and the full hybrid EV applications for Stellantis. This business will start in second half of 2023. I would also like to point out that Endurance both in India and Europe is actively pursuing its focus on gaining access to new technology and focusing on new product organic and inorganic growth. I'd also like to mention that Endurance has entered 2 backward integration product areas, which are import substitutes also. First is aluminum forging asset plant required for inverted front fork requirements. Endurance has entered into a technical collaboration with [ SMG ] Italy and supply to start at Aurangabad plant from this month. The second product is a wire steel braided hoses for ABS applications and mid and high-end bikes. This supply has already started in June 2021 from Aurangabad plant. Both these above projects will help us in our future profitable growth. In the first 9 months of this financial year, our aftermarket sales grew by 50% from INR 1,917 million in the previous year to INR 2,874 million in this financial year. We are exporting our aftermarket parts to 30 countries and we are adding 4 more countries -- 4 more countries in the next financial year, most probably in the first quarter of the next financial year. We also started, as mentioned earlier, trading in 2 and 3-wheeler tires for both India and exports. The export sales for India standalone business increased by 22.7% from INR 1,162.41 million in the first 9 months of FY '21 to INR 1,426.12 million in the first 9 months of this financial year. On the environment front, I would especially like to mention that Endurance is striving to be in carbon neutral in its plants by effective use of solar power and wind power, creating carbon sinks by driving tree plantations and thereby creating dense forests and driving use of natural gas and LPG in place of electric power and furnace oil. We are focusing on lowering hazardous waste generation and to achieve zero waste to landfill. At Endurance, it will be a continuous endeavor to grow through organic and inorganic growth with a focus on technology upgradation, quality improvement, cost and environment, health and safety. We will do our best to fulfill all our stakeholder expectations by following the 5 values of customer centricity, integrity, transparency, teamwork and innovation. With these opening remarks, I would now like to invite questions from all of you. Thank you.

[Operator Instructions] My first question is from the line of Ashutosh Tiwari from Equirus Securities.

Firstly, on this Europe power cost impact that you highlighted, what is the power cost as percentage of sales in Europe? And by when -- what is the increase where you can pass on the impact to customers or we can pass on?

Okay. I will request Mr. Massimo Venuti to answer this. Mr. Massimo?

This impact in the third quarter of 2021-2022, in the European market was EUR 2.8 million only due to the increase of energy cost. So, please consider that the average price of gas in Endurance Overseas in the last 3 years was more or less [ EUR 20 ] per megawatt. And in December, we reached EUR 166 with an average of EUR 100 per megawatt, 5x compared to the past for the gas and the same for electricity because the average price in the last 3 years was EUR 50. In December, we reached a peak of EUR 400, 8x, but the leverage was EUR 240, 5x compared to the previous year. So, as you can imagine also, the suppliers are requesting to us to recognize the price increase. We are doing the same with our customers. This is a situation absolutely strange because the energy reached a level -- an unprecedented level. For sure, there are many reason, geopolitical reasons, first of all, due to the confrontation on Ukraine between Europe, United States and Russia. And also the delay in the approval of the Nord Stream 2, it is the new pipeline directly connecting Russia to Germany. Also, [indiscernible] there was the shutdown of several [ UPR ] plants in France and also in Germany. And so these are, unfortunately, endogenous factors that are affecting our profitability. We are discussing as 100% of our competitive with our customer in order to find a solution and to recover as soon as possible this big situation. But frankly speaking, I don't believe that this situation can go ahead in this way. On top of as Endurance what we are doing, we are trying to offset to reduce the risk for the future quarter and we are doing [indiscernible] in order to fix the price because the future, fortunately, of gas and energy are showing as an important reduction starting from September 2022 and also for the next financial year. And for this reason, we are trying to do [indiscernible] in order to fix the price that is not at the same level of the past but not at the same level of the actual market. And certainly for sure, we are doing as a medium-term action, we are accelerating the initiative for the installation of solar plant in all our plants. But during the quarter, only for the impact of the energy, we have had an impact of 6.2% of reduction in our EBITDA.

So you mentioned that roughly there is impact of EUR 2.8 million, right, in this quarter?

Yes.

Okay. And what was the…

If you consider -- sorry, but in this quarter, we have had turnover of 47.6%. This is the impact of 6% in our EBITDA.

And what was the -- can you share the sales EBITDA and PBT number or PAT number this quarter in euro terms?

Absolutely, yes. We closed with EUR 47.6 million turnover, with 5.2% -- EUR 5.2 million EBITDA, 11% and EUR 1.1 million of net result, [ 3.4% ]. The same amount -- the same data without the impact of energy and aluminum increase, the EBITDA margin would have been 17.8%, completely aluminum compared to this year. So profitability decreased due to endogenous factors, I repeat, I would be more not worried if there was a reduction in our efficiency, but we are maintaining the same level of efficiency as we did of the previous financial year. In the previous financial year, we closed the quarter with 18% and without the impact from energy should have been 17.8% in this quarter.

So, if I get it correctly, the power cost will probably take some time, but aluminum cost, will that be passed into the quarter lag?

Yes. In fact, the aluminum is not a problem because we recover every 3 months, the increase of reduction in our price. But for sure, if you have an increase of aluminum, for sure, this can impact your EBITDA. In fact, the EBITDA of the quarter has been 11%. Without the increase of aluminum, the EBITDA should have been 11.6%. And so there is a reduction of EBITDA of 0.6%, only due to the increase of turnover due to the increase of aluminum.

Secondly, on this drive shaft business that you discussed about in India, can you share more light like what business we have got and also [indiscernible] and what's the time line, especially the products over there?

So basically, we're tying with Bajaj Auto in May and so see the line of sight with Bajaj, TVS, Mahindra, we think we should do about INR 2,000 million by FY '25. That's a line of sight. But it depends on the pickup. So we're starting volumes on the 3-wheeler requirements of Bajaj, advanced stage of talks with TVS as well as Mahindra for 3-wheelers, Mahindra also for 4-wheelers. So, volumes are quite good. And as long as 3-wheeler industry is doing well and the 4-wheeler also, there's a very, very good potential. So no -- so we are -- because see, this is a new product, we are starting, but this is a high technology part if you look at our margins. And we identified this because the major competition is GKN and Nexteer, actually all, both in a way international companies. So there's a very, very good scope for growth. The market in India is about INR 2,000 million, like I said. And we have already filed 5 patents, where -- which makes our products much more competitive, superior in terms of safety, we also filed 1 patent for our electronic version, like a lower-cost electronic version. So I think, I also -- I mean I've always said we start a bit slowly, but then we will pick up first.

So, the current business that we've got is mainly for your normal -- your CNG or petrol vehicles, right, ICE engine, it's not for EV right now?

No, right now, it is not for EV, but we are discussing for both -- with both TVS and Mahindra for the EV and of course, also in future with Bajaj, because Bajaj will also need it, because drive shaft is EV agnostic is required, whether it's CNG or it's petrol or it's EV, so it's required for all applications.

Our next question is from the line of Arvind Sharma from Citi.

Sir, first of all, would be the question in Indian operations in terms of the gross margin. They have declined and you cited that aluminum alloy have gone up. In the future, do we expect a recovery in these things from Endurance? So, can we see a reversal of these cost pressures going forward?

See, it depends on the market. Steel is already softening, steel, certain steel rates, already softening. Right now, aluminum alloy has not softened. But we have to wait and watch. But I think the increase in third quarter was unprecedented, if you ask me. So, I'm hoping this quarter, there would be a softening overall on the RMC rates. So, let us hope for the best. And so as far as the raw material rates, but I'd like to add, as you have asked this question, also see one is on the RMC. So, the second is we have lost a lot of our premium business of 150 cc-plus, including the ABS, where we have a capacity of 400,000 per annum. And like I said, we're starting with Royal Enfield. I mean, the orders are full. The problem with the ABS is on chips. So, we will do, imagine against order of 3,000, 35,000, we're doing 10,000, because you see I mean, whatever we supply is going to be taken by these customers, by these 2 customers. So, it is affecting our inverted front fork business in India, it is affecting all our high-end products. In fact, all our products, the front fork, shock absorbers, clutches, brakes. It is affecting everything, the chip shortage. I mean, I was talking to one of our major OEMs, we are losing 40,000 a month on the high-end vehicles because of the chip shortage. And let me tell you that when I talk to OEMs, there's a strong pent-up demand, which is building up. And soon as this chip shortage recovery happens, which I think should happen for March, what I'm hearing from OEMs, I think there would be a pretty decent growth from the first quarter of next year. So, the issue is, of course, the RMC, maybe a bit of softening, but cannot say. I think one more thing which happens to Endurance is that in spite of all our consolidation and a stronger base, the economy of scale, we have a branch, which is set up for Hero, one plant in Halol, HMSI and Sanand and Kolar. And what happens is when the volumes go down, then the economies of scale, which are great when the volumes are normal and when the volumes go down and the 2-wheeler industry has really gone down in quarter 3. But as soon as it comes back to normal, the incremental margins are great. So, that you must keep in mind. And margins also depend on the economies of scale at each plant. So, that is where we have suffered in quarter 3.

But in the contract, is it the raw material price have passed-through? Or do you take the hit, because --?

What happens is that the raw material prices, of course, pass through. Only there is one customer which is lag, which is HMSI, which is the second largest customer. It comes with a 1 quarter lag. Now, what happens is that sometimes there are certain spot increases, which I mentioned earlier or sometimes you have certain increases what we placed in quarter 3 was silicon increase [indiscernible]. Now, what happens is that these kind of increases which happen short term, the customer may not pay. So, there could be a difference there in spot increases and increases -- unusual increases of silicon, which is about 6.5% to 7% of alloy, aluminium alloy, A356 alloy which we use. And so this kind of feels the best. So yes, there will be a small difference. In fact, unusual situations where the increases are -- which happened like this, which we're experiencing since quarter 3 of FY '21. The last 5 quarters have been just crazy, just very, very erratic, which we've not seen. Yes, so there is a shortage. But normally, the material prices are passed on. There is no issue there. But what happens is the mathematical calculation, which I've always mentioned that when your RMC goes up what I'm saying is, like it went up. In fact, it went up by almost, I think, 5.8% to sales, approximately quarter 3 to quarter 3. When these things happen, then, of course, it also a mathematical impact on the EBITDA margin, which is a mathematical thing which happens. So, you have to see it from that angle also when you look at margins.

Sir, the second question would be on the new segment, you've already given details about the market size. Is there any market share aspirations that you have for maybe next 1 or 2 years? Just looking at ballpark revenue contribution, is there any target right now?

So, according to me, 3 dealers, though we have 2 strong competition who are there for years. And as we say, I told you our USP with our competitive pricing are differentiating USP in terms of the performance, the patents we have applied and we have a world-class manufacturing plant. I like to invite you to Waluj, Aurangabad to see. I mean it's one of the best, I think it's the best plant we have in terms of automation. And so I think at least from 3 dealers we like to get maximum market share. I don't want to put a figure for sure. 4-wheelers will take its own time because there, we are going to go step by step. So of course, it is 3 years I've already indicated you about INR 2,000 million we would like to do based on the line of sight we have. Okay? Of course, outside uncertainty, is not in my control like I've always said. But of course, the 4-wheeler will be a slower pace, so 3-wheeler we'd like to act very fast, the 3-wheelers, for sure, which is about 1 billion 3-wheeler market in India.

So, 2,000 million is the line of sight for this new segment over the next 3 years?

Yes.

Sir, if possible, just one very small question on the Maharashtra government incentive. Is it done for good? Or can it come back over the next quarters?

No. See, there are 2 things happening let me tell you. One is that now going on in the future, we still have no incentive left for the next 3 years. So similar incentive, which was booked in this year will be booked in the next 2 years and a smaller incentive is [indiscernible]. This is a 2013 scheme. But having said this, we've also applied for the 2019 scheme, okay? So, once we -- which is based on, I think, an investment of INR 3,500 million. So, once we cross it, it should be by the end of this calendar year. So, once we cross this figure, then we are eligible for second incentive under 2019 scheme. So, that we will tell you the details once we get the eligibility certificate. But you know, Waluj is a great area to be in because whether you invest for electric vehicle or you invest like the electric vehicle in Maharashtra is the same as PLI incentive. So, Maharashtra and especially Waluj is a great place because you get this mega project incentives, which includes electric vehicle investments also. So, we are the first place has actually Waluj, Aurangabad. So, RC operation, next 2 years will be similar incentive as you've taken in this financial year and third year will be smaller. And plus, we hope to add in 2019 in future. The figure details will give you once we get the eligibility certificate, which is end of this calendar year.

We'll take the next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

First question on the drives haft business. So, what would be the order book from the Bajaj Auto, of this INR 5,854 million order book, which we have won in 9 months, how much would be for drive shaft?

The order book is good, but don't ask me to give you figures as per competition, which gets these figures. So, this I will not be able to answer. I can only say that it's a pretty decent order book. So, let me leave it at that. [indiscernible] investment unless we see a very good future. I'll just leave you at that. You can see our plant in Aurangabad.

Secondly, is there any synergies with the existing business with drive shaft business? Or this is different --?

Completely new product vertical, mainly for 3 and 4-wheelers. There is no synergy, except I think, of course, a subset of suppliers are also new because it requires different sort of suppliers, which is that. I think that I mean the synergy could be, I think, in terms of operational efficiency and the support system of our suppliers, some of existing outsource suppliers, which we can use, but mainly it's a completely new process completely, new operations completely and is a very good high-end area to be in because the margins are pretty good.

And this product is developed in-house or do we have any technology partners for the same?

No, this is all in-house done by our team, that's why we have filed 5 patents. And I'm not -- I've not been talking about it or have been working on this for the last 4.5 years. Now, the plant is set up, we want to start [indiscernible]. That's the reason I'm talking to you now but not on --. Very good talent in our team.

And you talked about INR200 crores of revenue by FY '25. This should be largely from 3-wheelers, right? This would not be factoring in--?

3-wheelers and a bit for 4-wheelers. So yes, as we are speaking, I'm speaking to many 4-wheeler companies also and other 3-wheeler companies. So right now, I have just told you advanced talks with TVS and Mahindra to I told you, Baja, we've got those orders. But as we're speaking, the potential is 20,000 million, of course, it is larger in the 4-wheeler, I agree. But so we have a long way to go, but this is an indication line of sight, which we have.

Second question pertains to the impact of aluminum prices and overall commodity prices in their business, particularly in third quarter? And how do you see that in the coming quarter, first quarter given that aluminum is?

See, fourth quarter overall material may soften a bit because the aluminum alloy has softened in certain areas, but not in all the areas. It has softened compared to quarter 3. We can say the larger 2-wheeler, 3-wheeler, is a major business. But when I look at, say, the aluminum alloy business, which is smaller than our whole diecasting business, there because of the silicon increase, basically a shortage from China. So, that is helping. So, it's softening in this quarter, compared to last quarter, yes, RMC will soften, yes. I mean, that's for sure.

But the [indiscernible] I mean, have been increasing quite substantially even now. So, that should not have any material impact on our RMC in next 6 months?

See, I don't see in this quarter, RMC doing any worse damage than last quarter. So, I think it will soften only. We are softening in certain steel prices, adding alloy, which is used for 2 and 3-wheeler castings. Definitely, we are seeing a softening there compared to quarter 3. But I think we will have to wait and watch. These things are outside our control. [indiscernible] is totally outside our control because mainly aluminum castings and alloy wheel is a large part of our business, and we use a lot of aluminum in proprietary. So, when aluminum goes up like this, it definitely affects our EBITDA margin percentage because of the RMC percentage increase, which happens. But steel, I think, overall has softened for sure, the steel.

Any sense on how big is aluminum as a percentage of our RM cost?

How big is -- okay, I don't have that figure. I can maybe I don't have that figure, but I can just tell you that with alloy wheels, our casting business in India is just about 41, 42. I mean, about 40%. As we have some aluminum parts in our front forks, our shock absorbers, out clutch assemblies. So, it does impact. Mathematically, it does impact. It's some of the spot increases and it's one-time like silicon increases will find for a few months. That is something which is sometimes difficult to get, but we are trying to get it.

Can you share the impact for the third quarter, like in your European operations, you had about 60 basis points in terms of RM cost? In India operations, any number which you can share, the RM cost impact in 3Q?

No, you are talking about in India now?

Yes. Yes. India.

I would just request Mr. Ray to answer that.

Here, the difference between Europe and India is that as far as our cost is concerned, that keeps the bottom line in absolute monetary value. Whereas in India, what we are talking about is when aluminum price changes, we get it back, except for one customer, which happens with a time lag of 1 quarter, and there could be some stray cases where this could not come back. So, the situations are different here. In India, you see a profit drop because of the fact the margin drop is explained partly by the fact that there has been a huge increase in our raw material prices quarter-to-quarter, aluminum and steel. But if you want to understand the rupee drop, you go back to what Mr. Jain said in his initial remarks that on one hand, the prices have gained. So, the sales number don't -- the sales in rupee value don't look too bad, but the volume drop has been substantial. And in that volume drop, we have lost some high-end products. So, there's a mix effect also. So, that's where we have lost out on the rupee value of EBITDA. So, Jinesh, that's the answer to your question.

We'll take our next question from the line of Ronak Sarda from Systematix.

Sir, firstly, just on Europe for just a clarification. I didn't get what Massimo mentioned. So, this power cost is a one-time impact, or this will continue till quarter 2 of FY '23?

So I will request Massimo to clarify that? Massimo?

We reached the peak in the amount of [indiscernible] for gas and electricity, EUR 166 per megawatt for gas, EUR 400 per megawatt for electricity. But I can tell you that in this moment, in the month of January-February, the leverage is 100 -- 105 for the gas and 240 for the energy cost, so 5x compared to the past. So, the situation continues to be very tough. And frankly speaking, I believe that if the government don't solve the problem, the Ukraine situation today, probably the situation will remain at the same level in the next period of time for the leverage absolutely important to understand what we can do with our customer and we are discussing with them.

So, for the next maybe a couple of quarters, we should assume the current run rate of margin at around 10% to 12% as a steady state margin. Wouldn't that be a fair assumption?

[indiscernible] you have to consider that in the third quarter 2021-2022, were not only the impact of energy costs. Please consider that in this quarter, the market lost 24% to 23.4% compared to the previous year. And if you analyze the quarter compare '19-'20. So, I'm speaking about before the COVID crisis, let me say, we lost in European market, 30% in the Q3. And so I was going to tell you that for sure, there was an extraordinary increase of the energy cost that is unpredictable. But in the same time, we have another factor, an important reduction of volume. In the first quarter of this financial year, fortunately, we are seeing an important increase of volume. So, I believe that we reached the lower level of volume after 14 quarter of continuous reduction of volume. And so I hope that with the increase of volume, we can compensate part of this increase of energy and we can improve our profitability.

So, as volumes increase, we have the benefit of --?

The reduction of volume and the increase of energy -- if we are able to recover the volume at the end of the day for sure, we can recover also EBITDA and profitability.

So, with volumes recovering we'll have some benefit of operating --.

I will try to add, that Massimo in quarter 4 energy prices are a bit lower than quarter 3, right? In quarter 4?

If you consider the leverage, as I told you, if you consider the peak of December is more or less 40% of reduction. But in the first quarter, in this moment, we are seeing the price continues to be 5x compared to the leverage of the past for gas and also for electricity.

Yes. So it's more than the past, but maybe slightly lower than the peak of quarter 3?

Absolutely, yes. Yes.

Okay. Okay.

Anurang, the other question on the India business for you, Anurang. I understand the impact of commodity. So, 2-part question here. One, if I look at on a quarter-on-quarter basis from September to December quarter, the volumes have actually improved for most of the 2-wheeler manufactures if I look at Bajaj, Royal Enfield and as such. But the impact of commodities, is that the major cost of commodities have come in this quarter because commodities have been increasing for last 4 to 6 quarters as such and we have been able to navigate the impact? And we understand the denominator and numerator/denominator impact as well. But quarter-on-quarter volumes have increased, while your commodity costs look to be very sharp increase? And at the same time, our top line has not seen a jump because otherwise, if there was a pass-through impact, we would have seen the sales volumes, the top line should have been higher as such. So is there a one-off in this or?

No. The quarter 3 2-wheeler volumes were down by 19.7%. Every 2-wheeler manufacturer has gone down in quarter 3 compared to quarter 3 of --.

Last year.

Okay. Which is -- Bajaj is down 6.1%, Hero is, in fact, down 11.8%, Honda is down minus 13.8%, TVS is down minus 8.8%, Java is down minus 7.6%, and Royal. So, what I'm trying to tell you is that there is a de-growth with every OEMs, okay? So, one part is that, okay? Now what is happening with this volumes, most of my products are really the premium products, the value added is 150 cc-plus, shock absorbers, brakes. All, have taken a built on savings. Okay. So, what you are seeing is sales value up because of 5.8% of sales increase in RMC. RMC which was 62% is now 67.8%. So, this -- there's a mathematical to this, I mean, this I will call it artificial increase in raw material is only an artificial increase of commodity. It's no value add for us. So actually, the sales value is looking better because of this raw material 5.8% increase where the volumes actually dropped in all the premium products because the chip shortage affecting ABS and all is mainly in the 150 cc-plus product. So, I hope that -- so the chip shortage improvement I'm hearing from March, if that happens, then all the volumes will go up, okay? Plus I also believe that the COVID-19 also is sentiment, especially in rural markets, we can see a huge beating which Hero is taking, HMSI is taking on scooters. Once the sentiment improves, the employment improves, I think the rural market, the lower 2-wheeler should also do well because I'm an optimist. And because I've gone through a lot of ups and downs in this [ 3-year ] journey. So it has to come back. And most OEMs I have talked to, are saying there's a huge pent-up demand building up because of this, the demand is there. We are -- my major OEMs, they are losing 40,000 a month, mainly in the 150 cc-plus. So, what I'm trying to tell you is this sales which you see value is because of the mint with RMC. The volumes are dropped. That is where a growing my contribution. Secondly, the economies of scale which I get in my Sanand plant, in my Kolar plant, my Halol plant, I mean, economy of scale, either the profit can go down below a certain level, though we have noted the breakeven points or it can incrementally go up when it goes back to normal. So, we have to see the plant value, also margins. That's why our focus in Endurance is to make our plants -- such plants multi-OEMs and multi purpose. Sorry, multi-OEMs and multi-products, which means do more than one product in the plant. So that's our focus for the future to take care of these risks.

So the question was, again, in the last 6 years of history from listing, you have always delivered a very stellar margin performance, especially on the gross margin side. So, once the volumes recover, we can easily go back to this 14% EBITDA margin mark? Is that a fair assumption?

Yes, yes. I mean once the raw material goes back to normal I've already told you the range, that's no issue for us. Even if you mathematically do it, you will get margins like that, between 13% and 14%, even if you mathematically do the working side. You should get similar margin.

And a couple of data points. So, what was the Maharashtra incentive in 9 months FY '22? And if you can --?

See, we got it in the first 6 months only. I think what I -- we have booked, I think, INR 590 million. How much have we book Satrajit?

INR 590.4 million.

INR590.03, and I said similar will be booked in the next 2 years of FY '23 and FY '24 and FY '25 will also be booked with a smaller figure. But like I said, that we have already applied for the 2019 scheme. That visibility will get end of this calendar year once we reach an investment of INR 3,500 million in the area of Aurangabad, Waluj, Aurangabad area, which we hope to do it by the third quarter of the next financial year. So, that will be, of course, extra to this.

And how is the ramp-up for Hyundai and Kia in the 4-wheeler --?

Yes, that ramp-up happened well in Vallam plant. We're increasing our sales with Hyundai, Kia, as well as for Royal Enfield. We've won a non-automotive business for Aptiv and [ Generic ], which will be additional in the order of 1,000 million, which I said that will also start from April '22, what I told. So that -- so Hyundai, Kia is doing well, new order of TVS of INR 1,440 million starting from June in a phased manner. It is also there, which is a good business to win. So, I mean we are going all out after business. So, already in 3 quarters, we have won more business wins compared to the whole year of FY '21.

So I mean, I wanted to understand the ramp up. So, is it now the plan is also breaking even in that sense? Or it's still in the ambit phase and --?

So, these plants -- but what happens, our Sanand, Vallam as well as Narsapur and Kolar, all are doing okay. But the question is the incremental profit margins which we have been doing, which is basically our volumes. See the RMC impact will be there with a percentage to sales increase, but the volumes [indiscernible] in the economies of scale and incremental margin. So, that is what we are looking to get back with a better situation after the COVID goes down, sentiment goes up and chips increases, because chips is very, it's a very important thing for us. I mean it's the last of the things we expected, if you ask me after the first quarter of this financial year, the chip shortage has become a major concern. We never even dreamt of it. And imagine, ABS this thing orders, of whatever I can supply, even it is 40,000, I can supply 40,000 a month. I mean in 10,000, I have a full plants ready. So, you can imagine what we are going through. Same in inverted front fork. Full plants are ready, but not -- we are looking 40,000 a month of such orders. I mean, 40,000 vehicles requiring more front forks. But I just hope it goes back to normal fast because I've always said since the IPO, external environment is not in our control. We can only do our best in the company.

And the final question, just -- I mean, in your opening remarks, you highlighted the new order from EV. I missed the number. So, you said from Ather and Polarity. So, can you just repeat the --?

Yes. I'll just go through that. So, just give me a minute. Yes. So, we have won about INR 1,390 million of orders, including from of a leader for the brakes largely and there was a company called Polarity who is coming with Smart Bikes. And I believe the Maharashtra government has eased off for the first 70,000 vehicles [indiscernible] and it's a very low cost, I think smart bike is INR 40,000, it is a very good bike. That's why we're getting this kind of GST incentive, it's in Pune and they are starting, I think, in the second half of the next financial year. It's what I -- I think it's next financial year, yes, I think in FY '23. So, it's a good order for brakes and suspension and these are brakes. Like I said, we hope to give a lot of you more good news. We are here to each and everybody or mention the names also. So, we are very, very much targeting the EV market. And like I said, also looking at new products, apart from the drive shaft, so we are at quite advanced stage even in there. So whenever it happens, we will let you know.

[Operator Instructions] We'll take our next question from the line of Aditya Jhawar from Investec Capital.

Sorry, for asking this question again on margins.

I'm sorry to interrupt Mr. Jhawar, if you're in a hands-free mode, can you switch it to handset mode, please. We can't hear you that well.

Yes. Yes. So yes, can you hear me now?

Yes.

So my first question is on margin. So, in this quarter, you mentioned that you saw unprecedented increase in commodity inflation. So HMSI, we understand that it's a 1 quarter lag, but due to the stress in the 2-wheeler industry, are there certain other customers which postponed taking on price increase or there's a possibility that they might not go with the price increase?

It looks like Mr. Jain's line has just dropped out. Ladies and gentlemen, we request you to please remain connected while we rejoin Mr. Jain. Mr. Jhawar, please remain connected. Ladies and gentlemen, thank you for your patience. We have the line for Mr. Jain reconnected. Mr. Jhawar, you will have to repeat your question, please.

Yes, sure. So, on margin again. So, is there an element of unabsorbed commodity inflation and that has not been able to pass on either some customers have requested so other than HMSI, some customers have they requested for a delay in accepting the price increase?

No. All customers have agreed. But of course, like I said, the price increases are driven by what the competition and what they think, I may ask for 25, they may give me 23, so that is possible. But that could be a small loss sometimes. But definitely, the spot increases, and I said like the silicon type increases for alloy wheels which are for a few months, these are tough to get. We try our best to try and get. And of course, the HMSI lag also has -- we have lost our very importantly, we hope to get that largely back in quarter 4. So, but otherwise, RMC is a pass-through. I mean, we are -- this is an unprecedented situation over the last 6 years. I've never seen the seen such kind of increase in the last 5 quarters, as I'm seeing it now. It's just unbelievable.

And congrats on this acquisition of the software platform in Italy, can you help us understand the broader thought process? Is there an element of getting the product in India and expanding our hardware capability to include more software and then possibly even expand to electric vehicle component? What is the broader purpose on the software platform acquisition?

Yes. So, I will request Massimo Venuti to explain that to you. Massimo?

Yes. So, Endurance Overseas acquired 100% of stake of the Veicoli SrI on 12th November 2021, as Mr. Jain told you for EUR 0.7 million. Veicoli SrI is a small software company and a provider of fleet management services. Its software platform is able to manage fleet operator or increase efficiency and also improving cost of fuel consumption, maintenance and also the capacity to drive the style of driving and also activity linked to the safety prospect. We believe that this acquisition can allow to Endurance to have a different vision about the ability. For sure, this is a small company. To give you an idea in the previous financial year, January-December, they have turnover of only EUR 500,000 with an EBIT of EUR 70,000, net result more or less 0. We bought the company. We met them the previous owner because this company has only 3 employees that are also the founder of this company because we believe that we can make synergy in our activity due to the fact that the software started to be strategic not only for the super mobility, but also for our existing business, considering that we are developing after the acquisition of Adler and Grimeca. A lot of activity in order to enter in the aftermarket for the brake system and clutch. And also because, as you know, as Endurance Overseas, we are actually specialized in the high level of automation. And today, 90% of our machines are completely depend from software. So, I always be sure that there is absolutely important to start to have this knowledge inside. But for sure, our expectation is to grow also in the specific business. So, now we are preparing a business plan with the previous owner, now our team in order to understand as we can reinforce the commercial activity, hiring people and to try to increase our turnover and to prepare a business plan for the next 24, 36 months, as I understand, which is the potential power discount into the market with behind a strong company from the financial point of view as Endurance. This is the strategy.

Just a final question to Mr. Ray, sir, in this quarter, we have seen a decline in depreciation sequentially both for the India and European operations. Could you please explain that? And should we take that the current quarter run rate as a more sustainable number?

No. But depreciation, if you look at this quarter, in India, the depreciation, what's the difference that we are talking about, just a sec, this quarter, the depreciation that we've booked is INR 50.4 crores and last year quarter was INR 62.6 crores, if I remember correctly quarter-to-quarter, right? This has an impact because if the number of dies, dies follow a different pattern of depreciation vis-a-vis other assets. It's based on the number of shots and the depreciation percentage, that's compared whichever is high. So, if die depreciation reduces due to lower volume in our die-casting plant, you will see an impact like that. So therefore, there's nothing more to be read here. Quarter 3 FY '21, the volumes were great. So, that's why you saw 52.6% quarter 3, quarter 3 this year, the volumes are not so great. So you're seeing 50.4% on account of lower die depreciation.

Our next question is from the line of Pramod Amthe from InCred Capital.

This is with regard to the new drive shaft business, if I understand rightly, you were more of the stationary application support and this is a more power transmission components you are picking up. So, in that sense, will you be buying the forgings for this? Or will you be making in-house? And second…

So, forgings will be bought from outside. We'll be doing only the subsequent machining operations, the surface treatments as well as the SME.

And will it also expand your scope considering that you are now entering into power transmission type of products? Will it improve your engineering capability and hence, your addressable market, you can look into more newer products like this?

Yes, of course, and that's what we are doing. Right now, we're in the process of doing quite a few products, which we are really studying, some are at a very advanced stage for the future and which are also EV agnostic or required for EVs.

And would you like to name a few of them because it's a wide gamut of things, right, once you touch that --?

That's why I did name you the drive shaft for the last 2.5 years. I do not name the products because it's too sensitive for the competition and --.

And one more question is with regard to the aluminum cost pressure, even though the other commodities seems to have come down. So, aluminum still seems to be inching up into a new territory altogether. So, in that context, considering that many of your customers and you being one of the large aluminum suppliers, how do your process improvements to reduce the consumption of aluminum, one? And does that give you any competitive advantage, also your peers to reduce the content of aluminum and hence position yourself in a better manner to the OEMs?

See, we are doing 2 things. One is, of course, on the operational efficiencies in terms of OE, operational equipment efficiency, how we can lower the in-house I would say, scrap rates because when you have higher scrap rates, it goes for remelting, okay, which requires more aluminum because of the melting loss, which you had in the remelting. How we can reduce the in-house scrap is a focus on all our die-casting plants. Or we are really working very closely. I have my own monthly review to improve the efficiency. At the same time, our casting engineering and tool room is working on the product design as well as the dies, how we can lower the weight of the castings. And that's why we are also looking at multi-cavity dies instead of single cavity also. So, the gross weight per shot comes down when you have a 2 cavity compared to a single cavity. Also, even if it's one cavity trying to lower the weight of the casting through value engineering, so there's a lot of work which is going on. Already, we have implemented it in many of the castings. So, this is a continuous process. So, this has been happening for many years. And we have a very strong, I would say, casting engineering center and tool room in Chakan, Pune. So there's a lot of work going on there.

Thank you. Ladies and gentlemen, that was the last question. I would now request the management team of Endurance Technologies to give closing comments. Over to you, sir.

No, I would just like to say that these are unprecedented times, never seen such kind of raw material increases, not seen such kind of cost increases in Europe, 5x. And we keep doing our best to maintain operational efficiencies and also most competitive buying from a strong vendors, which we have. And I can only say we'll keep doing our best. Only that the outside conditions are not in our control. We can't do anything about it. So, please look at Endurance always in the long term and not in the short term of 1 quarter, is that what -- that's what I'd like to say. Anyway thank you all for all your support. And again, I'd like to invite all of you to Waluj, Aurangabad to see our new drive shaft plant and our test track to whoever has not seen it. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.