Landmark Cars Limited (LANDMARK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Landmark Cars Limited Q2 FY '24 earnings conference call hosted by Monarch Networth Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Dani from Monarch Networth Capital. Thank you, and over to you, Mr. Dani.

Yes. Thank you, Nirav. Good morning to everyone. On behalf of Monarch Networth Capital, we're delighted to host the senior management of Landmark Cars with us. We have with us Mr. Sanjay Thakker, Promoter and Executive Chairman; Mr. Aryaman Thakker, Executive Director; and Mr. Surendra Agarwal, CFO. I would like to hand the call to Mr. Sanjay sir for his opening remarks, and then we'll move to Q&A. Thank you, and over to you, sir.

Thanks, Rahul. Thanks the Monarch team for hosting this call. We are in midst of transformation in India. Such transformation comes maybe once in one's lifetime. There is a consensus among the world that it is India's time now. The same sentiment is shared by the Indian customers who are finally loosening their purse strings and spending. We operate in a segment where sentiments play a very big role. Thankfully, the customer sentiment is holding strong when the situation globally turns cautious. I was in Munich recently for a global Mercedes conference, and I can tell you that India was the star of that show. The overall Indian auto industry grew at 5% year-on-year in the second quarter. This is in line with most estimates as we are coming from a very high base now. As I had guided in the last call, our partner OEs have started participating in this growth, and we are covering up for the shortfall of the first quarter. The sales numbers for Honda, BYD, Jeep as well as Mercedes-Benz are increasing based on the new launches and better supplies, though I should add that the demand for Mercedes SUVs and top-end cars is still far in excess of the supplies, and we have many months of waiting period here. Let's see what were the highlights of the last quarter. In the last quarter, we partnered with 2 fastest-growing brands in India, MG Motors and Mahindra & Mahindra. The operations of MG Motors in Indore and Bhopal started in the month of August and is already profitable from the first month of operations. The Goa operations of MG will soon start. We are looking at starting it maybe end of this month as quickly as that. Our Mahindra operations in Howrah and the outskirts of Kolkata will start from the next quarter. We have been focusing on increasing our revenue per transaction that we do, may it be sale of vehicles or servicing them. I'm happy to share that this razor-sharp focus is showing excellent results. The average selling price of cars that we sell has increased 15% over last year to over INR 20 lakhs and the average service revenue has increased again by 15% to touch -- to cross INR 26,000. The EBITDA for aftersales has jumped 30% year-on-year due to this. You will also notice that the profitability has grown at 20% for aftersales for the half year period. We had spoken about building a unique preowned car business model and the third pillar of our profitability. I'm again happy to share that we have made very good progress in this. We are well on our way to surpass our INR 100 crores revenue guidance for the year. One should remember that we are buying and selling only our brand of cars, and the business is profitable. We are aiming to double this business in the next year. We have a strong pipeline of opportunities, both organic and inorganic, that we are exploring vigorously, many of them in quite advanced stages of discussion. In our business, we shall see some lumpy growth based on new car launches, availability and success of the new cars that are launched. The aftersales business is a predictable annuity type of a growing business and the POC business, the preowned car business, which is a sunrise business for us. The combination of all these 3 make us confident about our future. I'm reminded about the words of William Wordsworth, who said, "Bliss it was in that dawn to be alive, but to be young was very heaven." Thank you. I now hand over to Surendra to tell us some -- to talk about some numbers of last quarter and the last half.

Hello. Thank you, Sanjay bhai. A very good morning to everyone, and a warm welcome to one and all attending the earning calls. I would like to start by some operational metrics before getting into the financial numbers. We continue to be the highest contributor in terms of volume for multiple OEMs, and this translates into the meaningful number for all of our OEM partners. In the half year gone by, we have serviced 1,58,000 plus cars and sold 307 used cars under the -- our new model of the used car trading. In the cars sold, we saw an ASP increase, average selling price increase of 19% rising from INR 16,56,000 in H1 '23 to INR 19,65,000 in H1 FY '24. Similarly, in the service, ASP also increased by 12%, rising from INR 22,500 in H1 '23 to INR 25,280 in H1 '24. In the last quarter, our new car pro forma sale was around INR 866 crores across all our OEM partners and aftersale revenue was INR 211 crores. As highlighted, this is extremely predictable business with repeat customer. And once we hit the tipping point in certain OEMs, we are on the course to see tremendous growth. The average selling price of cars sold in the quarter has gone up from INR 17,50,000 in the quarter Q2 FY '23 to INR 20,18,000 in Q2 FY '24, showcasing a growth of 15% year-on-year. So our average selling price of cars is continuously growing, this rise in ASP on the back of higher sale of top-end variant being sold and shifting trend towards premium and luxury car due to higher disposable income. Coming to the financial numbers. Our total pro forma revenue for the quarter stands at INR 1,120 crores as compared to INR 1,148 crores in the same quarter of the previous year. This symbolized a degrowth -- marginal degrowth of 2.4% year-on-year. Sequentially, the previous quarter pro forma revenue was INR 934 crores. This is -- this accounts for a growth of 20% quarter-on-quarter. We have made up a lot of lost ground in the quarter. We'll look into the half yearly numbers. Total pro forma revenue for H1 stands at INR 2,054 crores as compared to INR 2,179 crores H1 of the previous year. Let's talk about the profitability now. The gross profit for the quarter is INR 162 crores with a 14.5% margin on pro forma revenue as against the gross profit of INR 152 crores in quarter 2 FY '23, 6.5% higher than last year. This year, EBITDA stood at INR 57.1 crores for the quarter versus INR 63.6 crores in the same quarter of last year. EBITDA margin clocked in Q2 FY '24 being 5.1%, while the same in quarter 2 FY '23 was 5.5%. Similarly, PAT stood at INR 20.5 crores with a 1.8% margin. There is a 21.6% year-on-year growth in PAT over INR 16.9 crores in the same quarter last year. Now for the corresponding figure for the half year period, our gross profit for H1 FY '24 was INR 30.5 crores -- INR 305 crores as against INR 292 crores in H1 FY '23. EBITDA for H1 FY '24 stood at INR 104 crores, and the corresponding figure of H1 FY '23 was INR 116 crores. Profit after tax of half year stood at INR 27.8 crores versus INR 35 crores last year for the same period. Cash PAT for the semi-annual period of -- is INR 52.6 crores as against INR 54.95 crores in the same period last year. This is clear evidence of our streamlined operation and efficient cash management. We are aware that our inventory has gone up as on 30th September. This is due to starting of MG operations, POC business, festive season buildup. We have already seen downwards in the [ inventory ] and hope to get to normalization inventory in the current quarter. With this, I would like to hand over the call to moderator to open up floor for questions.

[Operator Instructions] The first question is from the line of Deepak Lalwani from Unifi Capital.

I just wanted to...

Deepak, can you please speak a little louder? You're sounding a little soft.

Yes. Is it better now?

Yes, it'll all good, Deepak.

Yes. Sir, I just wanted to understand the volumes in our aftersales business. It's flat on a half yearly basis, and in fact, it's down in this quarter, so just wanted to understand what is happening here.

Yes, sure. So there are 2, 3 answers to this. And it's -- the answer in all is a combination of 2, 3 factors that we will see. During the last year, we -- last year, we had our Renault operations, which we have shut in this current year. So the number of cars -- the small cars that we were servicing, some of them has gone away. So that is one thing. The second thing is that the aftersales business also has a kind of a seasonality factor around it. And the reason for that is that the cars that you sell in, say, good months like, say, a March or a Diwali come for a 1-year service exactly after that, or a 6-month service is kind of timed that way. So we believe that the numbers will increase in the second half of the year. That is what we believe will happen. The other thing is that we have focused -- we are focusing on getting more revenue from the services that we impart. We have taken, as you know, the car care product agencies. We are focusing on our own white branded stuff, accessories and all that. So this is all playing out very well. So once the volumes kick in, you will see a double impact of this going ahead.

Okay. Got it. But sir, the ASP increases that we have seen in both the vehicle sales and the aftersales businesses should stay at these rates, right? Is there any risk to these numbers coming down?

Not meaningfully. Not meaningfully. It should kind of stay where we are.

Sure. And if you can just explain what is driving these higher ASPs? Or have you taken increases in our services or...

So you are asking for the sales part or aftersales part?

Both, sir, both.

So as far as the sales is concerned, the vehicle prices that we are selling has been continued. The mix is changing. Within Mercedes-Benz, as you know, the top-end vehicles are selling more. The prices of vehicles keep on going up. And again, I believe from January, there will be a kind of a uniform price increase. This is what all the Indian manufacturers do. So I think come 1st January, and you will see a higher selling price of, I think, 100 out of 100 products that will be there in the market, where this will play out. Our product mix has also -- as you see, we have kind of gone away from the smaller cars and are selling the more expensive cars. Honda Elevate, which is, again, a meaningful number for us, the average selling price is higher than the Jazz and the WR-V, which went out of the consideration right now. The same is playing out that way. And as far as the aftersales is concerned, I think I answered the question by saying that we have white labeled our own products, be it the annual maintenance contracts, extended warranty, our own kind of accessories, which are there, plus the car care product agencies that we have done. So there is a combination of a lot of effort that goes into our ecosystem. In fact, by -- maybe if we are having an Investor Day, which we are planning to have in the next quarter, we will showcase to you the technology that we have built, the apps that we have built to kind of do it. It's a little difficult to explain on the call, but once you will see it, you will feel happy about what Landmark has built.

Sure, sir. Got it. And sir, just wanted to understand, as a company, do we have a thumb rule on the debt we want to maintain, the working capital debt and the inventory in our books that we want to maintain on an absolute number or in terms in terms of number of days? So is there any thumb rule on these 2 numbers?

Yes. I mean I wish I would say that we have it. It's a little dynamic, Deepak, this whole business. And as Surendra explained in his thing, we are aware that our debt and the inventory has built up. Now that has built up for some 3, 4 things which are -- which comes -- one is the seasonality factor. So we came out of a sharp period in September and the festive season started only in October. So there was an inventory buildup, new car launches like an Elevate, for example, the pre-owned cars that we started the business, which wasn't there last year. But we are very, very mindful and we don't want to have more inventory, and there will be a big focus on reducing this inventory, and you will see some good results by December. We are already on our way of doing it. The industry works on possibly 1 month or thereabouts of new car stocks. What we are reporting is also including our demo car, which we could kind of separately show from next quarter just to kind of show this kind of a bifurcation.

Sure. Got it. And sir, if you can just give a sense on how the BYD sales are scaling up, is there any clearance of the homologation that we have gotten it -- that BYD has gotten it? And also the supply challenges in Mercedes, has that eased down significantly or that will take some time to come in?

Yes. So I will -- I was in Munich, and good you asked about BYD. The thing is that now it is clear -- globally, it is clear that there are 2 like elephants in the room as far as the electric cars are concerned. One is Tesla and the other is BYD. They are clearly the frontrunners in taking the pole position. And we are happy that we have kind of partnered with BYD and other largest partners in India. It is a difficult thing to predict as to when the homologation happens. We have been told that it will happen like as soon as this quarter. The good news is that their consignments, which were not coming, are already coming, and we are seeing the sale happening as it was happening earlier. This has started from the month of August if I'm not mistaken. And the sale of the Atto 3 as well as the e6 is going on pretty well within that 2,500 unit thing. The BYD SEAL, which is a fantastic product, will be -- as of now from the information we have, will be coming to us by January, and the bookings of that will also start around that time. So BYD, timing is a little difficult to say. It can happen any time but hasn't happened so far. As far as the Mercedes-Benz is concerned, the GLC, the supplies have started. The GLE has got launched only some 1 week, 10 days back. The supplies are there, but what I can say is that the demand is far in excess of the supply. So what we are -- we could have done better than what we are doing. And I'm hoping that when we -- the company follows a January to December kind of a year. So we will go and meet them in the first week of December for the next year's numbers, for them next year, for us the last quarter. And I'm hoping that the numbers will again show a good growth over this year.

Next question is from the line of Abhisar Jain from Monarch.

Sir, just wanted to know in the aftersales business, we have this segmentation into 4 different parts. And I just wanted to know that what percentage of the aftersales business will be from only collision and repair services, approximate?

Yes. So actually, we are getting some learnings as this is only our second, third earning call. And every time, we are wanting to improve on our disclosures, our presentation, the granularity of the business that we do, and I'm hoping that by next quarter and the quarter after that, you will see more meaningful dissection of the data. The dissection of the data will also include the high ROCE that the aftersales business does. So what is the capital employed over there? What is the CAGR? We will disclose that. As far as the accident repair is concerned, currently, it is at around 45% of our service -- the aftersales revenue is coming from collision repairs. There has been a big focus on increasing this business. We have kind of gotten into a lot of innovative stuff built on tech and some innovative products. Again, we'll be happy to showcase when we have our Investor Day, and we will be reporting more granular data going ahead.

Sure, sir. Understood. And sir, in fact, I wanted to also take an idea on the approximate capital employed, which you just mentioned that you may start disclosing it. But just considering that almost like 45% of our outlets are in the repair and the workshop mode, would it be kind of safe to assume that the capital employed also would be in that proportion or it will be higher in aftersales per se of the total capital employed that we have?

See, the -- it's a difficult question to answer broadly. What we had done while we were like a few months back where we were doing a unit economic study, what we had figured out is that the ROCE on a very ballpark number, but let the exact numbers come. I don't want to stick my neck out but was in the region of around 50%, 5-0 percent upwards. So once I give you that, you will have a better sense. And we'll try to do it very quickly.

Sure, sir. Understood. Okay. And sir, the next question was on the preowned car business. By the way, congratulations on a great scale-up there that we see in the H1 of this year. What I can see, sir, from the PPT is that we have sold around 300-odd cars with a GMV of around INR 45 crores. So this is for the H1, right? And this you are not accounting in the new car sales? Or is it like accounted there and then you're calling it out separately here?

We are calling it out separately.

So is it included, sir, in the new car sales already?

Yes, it's included, and we are putting as a separate number in the presentation as well.

Okay. So as of now, 300 cars that we have done is for the H1, right?

So 300 car, what we mentioned is our new model where we are buying and selling the preowned car. That is the thing. We also do back to back. That's where we get the commission. Those numbers are separate.

Understood. So just to take an idea, since you mentioned that this business on its own also is profitable, though, of course, it might not be at the right profitability level because of the scale, how do we see it going ahead? Because this business has been there with us for quite some time, but now we are seeing the scale-up. We are looking excited about it. We have done some interventions, as you mentioned in the earlier calls also. So how should we think about this business, sir, over a 3-, 5-year perspective, given how the industry size is 1.5x in preowned versus the base size of the industry. So if you could give some idea, that will be great.

Yes. This is Aryaman here. So this unique business model has been in force at Landmark only this financial year onwards. where we had taken a target of INR 100 crores of revenue to be achieved. And we are, I think, well on our way to surpass that number in this financial year. The model, just to recap for people on this call, is where we are only focusing on the buying and selling of used vehicles, which are of the brands that are represented by Landmark. Also, we are not investing in additional manpower or other fixed costs like showroom facilities. We are using our existing facilities and manpower to do the sale and purchase of these used vehicles of our own brands. Currently, we are at approximately 4% of margin on these used vehicles that we are seeing. As Sanjay bhai said, we are looking at doubling our used car revenue next year with -- while following a same -- similar model that we are doing right now, and we are seeing good traction so far. And we are confident that this is what we will do. And once we have received a larger scale, then we will press the pedal on increasing our margins as well.

Yes. And just to kind of say that this margin is kind of a net margin that we get, for most people, when they talk about a higher margin of 7%, 8%, they need to take out the cost of manpower, the infrastructure cost as well as the customer acquisition cost. For us, the customer acquisition cost is also 0 and every other cost is practically negligible. So that's the differentiator in our business model. So we should surprise everybody on the upside. We are kind of saying that it will double next year, but it should go bigger than that.

Understood, sir. And sir, just the last bit, in the PPT, we have also mentioned that we do have visibility on a strong pipeline for both organic and inorganic expansion. While organic, I understand because you have had the new tie-ups with MG and M&M and which you can see traction in my view. But on the inorganic side, so I would like to get a little bit more clarity of what kind of opportunities or the size of outlets either by number or by absolute acquisition cost that you are looking for to do in the next 6 to 12 months.

Yes. So the -- what has happened is that we do follow a mix of both of these. And sometimes with the same OEs, the acquisition also kind of comes in. So the Indore and Bhopal was a new one. It started off as an inorganic thing. The Goa MG also happened by way of an inorganic thing where we took over the assets and the locations of the existing dealer partner. So this can happen like that. What I can say is that we are right now focused on buying something at the right value. We have -- we do not want to overpay on kind of acquisition because we don't want it to be dilutive of our ROCE. The growth is something which is with a lag. I'm not the happiest for the first quarter. But we believe that we are well on our way to kind of go beyond this past year. And the pipeline, as I can say, is strong. I'm not in a position to share more numbers now, but I think every period, you will find us doing something meaningful.

Okay. Sir, just a follow-up. So when you said that you look at the right payback or IRR or ROCE, what kind of payback do you generally, sir, opt for in a range?

So 4 to 4.5 years is what we look at. And that's what we will be sticking to and not wanting to pay anything more.

[Operator Instructions] Next question is from the line of Basudeb Banerjee from ICICI Securities.

Congrats for the [ terrific ] numbers.

Basu, your voice is not coming clear.

Here, am I audible?

Yes, Basu.

So first question for Surenji. Last time we discussed that potential revenue from Indore/Bhopal MG outlets, full year will be, what, around INR 130 crores. Is that number correct, sir?

So we are currently selling 100 plus car in the -- monthly. That's the pace we have and...

So it will be upwards of [ INR 100 crores plus ].

INR 100 crores upwards for the year, but this year, it will not be because this year, we started in -- from the month of August.

Sure. Sure. I'm saying on an annualized basis, Indore/Bhopal...

Yes, INR 100 crore plus, the turnover, we'll get it definitely.

Including service or [ any process charges ]?

Yes. So your number, Basu, what you had assumed is correct, and we will obviously add more MG outlets to top it up.

Goa revenue will be proportionately similar, INR 50 crores, INR 60 crores annualized?

Goa will be around, I think, around 40% of Indore/Bhopal. Yes.

Okay. And what about annualized revenue outlook from Mahindra, the assets what you have as of now?

Mahindra operations, Basu, we will start only in the next quarter. So once that kicks in, we will have -- on a steady state once that happens, I think around INR 200 crores of revenue is annually to kind of safe to assume.

From that Bengal dealerships, what you added, sir?

Yes, that's right, Basu.

Okay. And definitely, as the last question, you said that you will be open to acquire both Mahindra and MG outlets down the line. And as you have provisioned INR 70 crores, INR 80 crores in FY '24 for inorganic, I suppose much less than that has been utilized till date.

Sorry, can you repeat the question, Basu? I didn't understand.

Out of the INR 70 crores, INR 80 crores provision for inorganic acquisitions in FY '24, till date, how much would have been utilized, sir?

So we haven't utilized much out of our kind of an arsenal. What we have paid out for acquisitions is hardly around INR 15, INR 20 crores -- under INR 20 crores for sure.

Next question is from the line of Pranay Roop from Burman Capital.

Am I audible?

Yes, yes.

Pranay, you are sounding very distant. Can you please speak through the handset?

Is it better now?

Yes, it's fine by our side. Thank you.

Sir, my first question is regarding the cost structure, mainly 2 line items, employee cost and other expenses. So I was noting, firstly, on employee benefit expenses, it's increased by around 11% Y-o-Y. And I was looking at your EPFO employee strength, which may not be our entire employee strength, but the EPFO head count has gone down by 5% Y-o-Y. So what could explain the difference in employee? Was there like a one-off bonus that led to this INR 53 crore number that was on employee? And secondly, your other expenses, it has actually remained in a very tight range of INR 40 crores to INR 45 crores. It peaked to INR 48 crores here in Q4, which was a strong quarter for you. In this quarter, we are seeing a number of INR 52 crores, which has increased by INR 6 crores quarter-on-quarter. So if you could just help me understand whether there were any one-offs here as well and what is the normalized level?

Yes, sure. Let me first talk about the manpower thing. The first answer is that, no, there was no onetime bonus because of we becoming public or IPO. There was no such thing. We have a very clear kind of a policy. We are -- we were voted, Pranay, as the best manpower guys by the Forbes Magazine, best people managers in 2019. And what I can say is that we are not somehow the best in revenue terms as far as the industry is concerned. Still people want to work with us, and that is people has been our strength. At the top level, we haven't seen any kind of people going away. The thing is that we have built newer outlets, and let me kind of also say that we have recruited people in some markets, senior people in markets where we want to kind of go and the acquisitions or the organic ones are imminent. So we have kind of put some cost ahead of what we could have done on a steady state. And it also -- the number is also after an increment, which normally happens, which is around 7%, 8% increment is what we kind of go with, broadly speaking. So we are not so much concerned about the manpower cost. We have, in fact, as you rightly said, taken out a few people where -- in some of the OEs where the sales numbers don't look -- didn't look very promising, we have proactively shifted people or let go of people in that. And I think the same answer goes also for cost. We also need to kind of tighten our belt. I think INR 1 crores or INR 2 crores, we will also save. We have also realized that in anticipation of higher sales, we have built in some costs, which we will immediately relook at because we are an organization, which is quite tight on costs, and we pride ourselves with that.

Got it, sir. So it's fair to say that on employee cost, INR 53 crores is a more sustainable level, and on other expenses, it could potentially save a few crores. Is that fair?

It will depend on how much we will grow, how many new geographies we will go at. To put an absolute number will not be the most correct way of looking at it. That's the submission we have.

Got it. Understood. Sir, my second question is on aftersales basis. My initial understanding of aftersales, after you buy a car, you need to first service it after 1,000 kilometers, which can be like 2, 4, 5 months and then again after roughly 1 year. So given your sales have picked up in H2, can we expect a slightly stronger growth in Q4 and then again, a high-teen growth in, let's say, second half of next year? Is that a fair way to think about this business?

So let me just tell you that every brand has a different kind of a service requirement. So it would not be correct to say that it is 1,000 and then 1 year. It depends from manufacturer to manufacturer. But what you are -- let me just kind of tell you -- give you one more statistics. The point is that 2 years back, 50% of our EBITDA came from service and 50% came from sales. Now I was happy with that kind of a mix. Today, our aftersales is 70% of our total EBITDA. Now see, aftersales number in our mind is a given. It is some number that will keep on growing. And you have rightly pointed out that the moment we put more cars on road, we are kind of putting a 7-year kind of an annuity on the road. So we are looking at doing this meaningfully. And yes, next year and the next quarter, which are strong quarters, the service revenue should pick up more.

Got it. Sir, I have 2 data-related questions. Can I just go ahead and ask those?

I don't know. The moderator will know how many questions one can do, but we are okay.

Okay. Sir, on preowned, is it fair to understand that 6%, 7% margins at maybe a GM level when you execute the transaction directly flows down to PBT level?

See, in our case, we said that we are not at 6%, 7%. We will be focusing on kind of initially to build this business. We will be focusing on maybe a 4% margin, not 6%, 7%. And this, we want to kind of keep it a little moderate because everything practically flows down unlike the other players. So we want to be competitive. We want to kind of build this business up and increase in margin is what we will look at once our people are used to selling these preowned cars and we have a meaningful number to kind of look at. But this is the strategy we have thought.

Got it. So INR 200 crores revenue next year would broadly mean INR 8 crores of PBT.

That's one way of looking at it, yes.

Got it, sir. And one last related question. I was noting in Gujarat, your Mercedes -- not your sales. Total Mercedes sales in Gujarat has actually grown 75% Y-o-Y over the last 2 months and as the share of India sales also have increased. Is it because you guys are doing something different or they have added more outlets in Gujarat?

No, no new outlets have been added. We are -- we generally do better. So thank you. I mean, that's what we do. We have increased our penetration on Mercedes-Benz. So our contribution in some of the months, you spoke about September and all, my sense is that we were upwards of 17% of that contribution. So our people, I hope they are listening to this, and I'm happy that if they are there on the call, my CEO or our Director, we should congratulate them.

[Operator Instructions] Next question is from the line of Kunal Sabnis from Nine Rivers Capital.

I have 2 questions. The first on the new car sales margin, that has dropped Y-o-Y from 3.2% to 1.7%. What should we read into this? And does this also include the commission on financing? Because net of that, the new car margin then looks really low. So if you could throw some light on that. That's the first question.

Just a second. Allow us to relook at these numbers.

So on presentation, Slide 16.

You are talking about an EBITDA margin on Slide 16. That's what you are saying, the INR 15 crores that we are talking about? Yes. So basically, the volumes is something that was a problem in the first 1 or 2 months of the quarter. That has kind of taken off right now, and we will -- we believe that this will go up. But Surendra, does this include the ROTF margin?

Yes.

Yes.

So the sales pro forma revenue has dropped from, say, INR 960 crores to INR 908 crores, but the EBITDA has dropped from INR 30 crores to INR 15 crores, so yes, I mean just wanted to...

Yes. So the cost of everything otherwise remains the same. It's a volume effect. The moment we have the volumes coming in, this will normalize. We didn't have supplies of a lot of vehicles where the cost of manpower, the showroom rentals, et cetera, was in any case incurred.

Got it. So the operating leverage will take care of that.

Operating leverage will take care of it, Kunal. I mean that's the point. Yes.

Kunal, I just want to add one more point here, is that our gross margin is -- if you look at the gross margin is higher on the sale, whereas the -- because of the volume, our EBITDA is a little lower because we have the facility cost is incurred, but the volume has not happened that much. That's why the EBITDA margin is lower, whereas the gross margin of the trading gross margin is higher as compared to Q1 -- Q2 like for like.

Got it. Perfect. And the second thing is on the inventory. Now you mentioned 3 points. So the seasonal effect will sort of go away. But then you also said about the pre-owned inventory and also the MG business. Does that sort of swing our historical inventory days, which were around 45, 50? I mean, going forward...

No, no, it does not. It does not swing either way, so it will normalize.

So you should be back to about 50 days in -- by March. Is that...

Yes, yes, yes. 50 days is with the demo cars. The -- and that's how we have been reporting. For new cars, it will be like a 1-month inventory that we will want to hold.

Next question is from the line of Amar Kant Gaur from Axis Capital.

I have a couple of questions, firstly, on the Mercedes side. So as we can see, the Mercedes business from the stand-alone business, that it has performed exceedingly well, and now it is contributing about more than 50% to overall EBITDA. So my question now is, for the rest of the business, there has been some volume uptick, especially from Honda, while Jeep volumes continue to remain weak. Could you provide some outlook on those sides and maybe some of the other brands, how they are doing?

Yes, that's a good idea, Amar. So last time, I kind of started my speech by kind of giving a run-through through -- about all the OEs. Now Honda, the Elevate continues to now clock in the numbers as was predicted. So this is something which is a heartening fact. Honda has loyal set of customers, and the numbers just keep on happening. So my sense is that Honda, which, in the first quarter, degrew at 37%, that was the kind of the steepest drop that we had seen, will make up for every kind of lost number in the first quarter and I think for the year, will close higher than last year. That will be quite a kind of a run in the next 6 months, and we will see the numbers. The Jeep fortunately also has seen a better offtake from September onwards where 4x2, the Compass has been introduced. So this will be not back to the 1 year back numbers, but it is -- my hope is that it will be at least around 50% more than what we have done in the first quarter. So this is something, which is also heartening. In Jeep, the aftersales business, as I think in his speech, Surendra mentioned, the Jeep aftersales volume have reached a tipping point and now are contributing meaningfully for the aftersales business also. The other brands, I've already spoken about BYD. MG is the fastest-growing brand amongst them. And you will, I'm sure, hear more about MG in the times to come. Now Volkswagen for us, we have increased our market share of our contribution to Volkswagen's sales by nearly 1%. So we are more than 10.5% of their sales now. So we are clocking good numbers over there. The Ashok Leyland business, which is -- which nobody really talks about, is also showing decent numbers for us. Renault is what we have not -- we have reduced the number of outlets because we want to focus on premium and luxury cars. So this is something which we are not seeing any great numbers coming in, but the company is supporting us financially so that we do not burn money.

On Jeep, particularly, however, our exposure is much higher in the Delhi region where there is a sort of apprehension towards buying diesel cars, and Jeep is only available in diesel. Do you see that as a risk to our numbers for Jeep specifically?

See, Jeep, I think what we have seen in the first half, it can only improve from here. The question is how much improvement will happen. Now you are right as far as talking about the Delhi apprehension, and it is a correct apprehension except that Mahindra & Mahindra, which is also predominantly diesel or Mercedes SUVs, which are also predominantly diesel also sell in the NCR region. So while this is there on a macro basis, the things on the ground are not as bad as you believe. They are pretty okay. In fact, this month, the Jeep numbers, from what I see, are clocking decent numbers from the contracts that we are receiving before Diwali.

Understood. That's heartening to know. And my final question is a little longer term. So we are seeing some talks about FTA between India and U.K., which could allow the CBUs and CKDs to be at a much lower duty structure, particularly from, let's say, the JLR. What kind of risk do you see in those terms and if you could shed some light on what kind of duty structure do we have currently on Mercedes and what could change in the near future?

More than FTA, Amar, what we are reading today nowadays in the newspaper is about the electric cars being allowed at a concessional duty. We see the Tesla headlines all over every few weeks or so. So the talk is that there will be a reduction in the duty from, say, 100% to 15% only. Now for people who are wanting, the manufacturers who are wanting to kind of import electric cars mainly with the promise that they will invest the money, some amount of commitment as far as the employment and investment in India over maybe the next 5 years or so, and they will have to provide a bank guarantee. If they don't do that, then it will be encashed. Now this is a risk as well as an opportunity because what will happen is that a lot of models of, say, a Volkswagen Group, just to give you an example, can also start coming in. It will not only be for one or the other manufacturer. So the good part is that we are well diversified, and there is always something good, which will emerge from here. So one doesn't know -- because people talk about different regulations at different points, we really don't know what -- in which form it will come, whether it will come before elections or not, whether this -- because the Chinese are clearly ahead in the electric car game. So how will that also pan out if BYD can sneak in through this? I don't know.

And I have some specific questions on the duty structure, which I can take offline later.

Next question is from the line of Sagar Parekh from One Up Financial.

My question is answered.

Next question is from the line of [ Manan Poladia ] from [ MKP Securities ].

Am I audible?

Yes, [ Manan ].

So like I've read your results and I saw that basically Q2 versus Q2 last year, we're obviously 10% down in terms of total revenue. But from what I understand, most of that is from the new car sales that you spoke about, the model slowing down, right? Sir, what I want to understand is for the next 3 fiscals or so, what do you think your aftersales business can grow at. Also, you just spoke about how we are focusing on less services but services that are making more money, right? So I just want to understand how that -- how you're thinking about it and what you're guiding for the next 3 or 4 years.

You are asking about aftersales, [ Manan ]?

Yes, aftersales, specifically aftersales.

Yes. So aftersales, [ Manan ], we have grown for the last 9 years at 20% CAGR. And this year, though we could not grow at 20% CAGR in top line terms, we have grown at the bottom line terms. So we want to kind of maintain that pace, and I don't see any reason to kind of change that trajectory of ours.

Correct, sir. Also, sir, I want to understand how that business is basically structured fundamentally in terms of -- so when you say aftersales business, are these vehicles that come to you, you repair them and you give a single bill? Or is there some sort of warranty structure that you are bundling with the cars that you're selling as well? So if you could just explain that.

Yes. So every car comes with some kind of a warranty. And within that warranty period, if they need to be repaired, then the manufacturer pays that money or the insurance company who has insured given that extended warranty -- given that warranty. So we do warranty work. We do annual maintenance work. We sell our own contracts also of annual maintenance contracts. And then there is, as somebody asked earlier, a collision kind of work that we were -- we do. So accident repairs, so 1 in 3 cars that you see on road or what we sell meets with an accident or comes to our workshop for repair every single year. Understand this. So this is a -- the more cars you put on road, the more you are ensured of the revenue.

Correct, sir. That's great. Just one short follow-up on that. If you could explain the spread between all these different kind of businesses in your aftersales revenue. Secondly, is there a differential in margins when you charge the company or the insurer per se versus when you charge an individual car owner?

No. I'll answer the second question first. So the manufacturer, if there is a warranty repair, then there is a little bit of a discount that they get. They will not pay as much as the insurance company or the end customers. But the warranty percentage normally is much lower in our revenue. So that's the thing. And as I had kind of answered this earlier, we will try to dissect this business further in the next quarter or the quarter after, and I'll give -- we will be happy to give more granular details going ahead.

Next question is from the line of Mithun from Kiva Advisors.

Just wanted to understand this quarter. The EBITDA from the new car sales business is appreciably lower than last year. Just wanted to understand what is the sustainable sort of margin in this business, if you could just throw some light, especially with the new vehicles that you're launching from different brands as well.

I'll have Surendra answer this.

So our margin -- EBITDA margin for the sales business in the tune of 2.5% to 3%, 3.5%, only particular of the quarter 2 is some volume impact and the cost which we have maintained to -- for the future growth. That's the reason. But in the steady state, it will be in the tune of 3-plus percent kind of thing.

Right. But Y-on-Y, sir, it's halved, right, the EBITDA?

Yes. Y-on-Y because of the volume impact.

But the revenue fall is not as significant as the EBITDA fall. So...

If you look at -- I'll tell you, our gross margin percentage term, if you look at, it is higher than the Y-on-Y. But being there, the volume is not there, though the volume is not sustained the cost. So that's the reason the percentage of EBITDA is lower.

Also, just to answer your question, I understand what you are asking. The contribution of Mercedes, as somebody mentioned, went up in this quarter because the other brands were not performing as well. The Mercedes revenue basically has pulled it up. The other brands, the infrastructure was all in place. It is -- we are kind of a combination of a lot of brands which happen. So if some of the brands don't kind of perform, the cost remains where it is and the revenue doesn't kick in. So once they start kicking in, you will see a steady state increase in this going ahead immediately.

Understand. Understand. And just wanted to understand like, over the next 2, 3 years, how do you see the brand -- the new sales business, which are the brands you think will drive your growth?

So that's why we have realized that some of the brands that we have today don't have as strong legs as the market requires. That's why we have partnered with MG and Mahindra. So what I can say is that the 3 Ms, the Mercedes, Mahindra, MG, are likely to be kind of -- for the foreseeable future are driving our thing. The BYD, if it comes, it's a complete dark horse, which will happen. The other brands will kind of contribute with Honda SUV coming or one or the other launches happening. But I mean, at the top of the mind, this is what I'm saying.

Just one last one. Since you mentioned that your focus will be more on high-end car, is there any sort of agreement with Mercedes that you can't launch or get into other dealerships of high-end cars?

No, there is no such agreement, and we can get into selling of the other high-end brand cars.

So there is no plan to get into, say, the BMW, Audi or other brands that you -- high-end brands?

So we may have these plans, but the Mercedes will have no objection to that.

Next question is from the line of Suraj Chheda from 3P Investment Managers.

Am I audible?

Yes, Suraj.

Yes. So my question was on aftersales services revenue. If I look at last 10 years, the CAGR has been around 20%. And obviously, the scale was low. You're also growing well from the low base. So if I look at 1H numbers for FY '24, the revenue growth has been 12%. So from the medium-term perspective, can this business will be more like, say, low to mid-teens kind of growth CAGR? Or how should we look at this?

So Suraj, my point here is that the moment we start new businesses like MG we started, we had some amount of car park, which was there, and that started clocking in. The moment we start, say, Mahindra in Howrah, Kolkata, there is a huge amount of car park over there, which will start giving us the revenue. So it's just that we have been a little slow in getting into these things. It has taken us a little bit more time. The moment we do either acquisitions or we kind of set up our own, which is, as I said, a lot of it is in the pipeline, my sense is that, over a period of time, it will all go to this level or thereabouts. It's a little difficult to kind of predict 3, 6 months or 1 year forward, but it will all even out.

Okay. So in the medium term, say, over the next 3 to 5 years, can this business grow at, say, 15% to 18% kind of CAGR or...

Yes. The answer is yes. Yes.

Okay. Okay. And second question was with respect to your EBITDA margin for this aftersales business. So in the past, you have mentioned that this is more like 18% to 18.5% stable margin business. So are there any growth drivers which can improve the margin in this segment? So obviously, 2Q, we have delivered 18.8% margin. But what should be the sustainable margin for this?

Yes. So if we are able to have a mix, which is in favor of white labeled stuff, which I mentioned that we have introduced things at our end and which are really annual maintenance contracts or extended warranties that we are white labeling and our own accessories, if we are able to push more of that, our margins will increase. Else it will remain in this zone. So difficult call. I'm not saying that it will significantly improve from here, but we'll try to push up a percent, 1% here or there.

Sure. And one last question from my side. What will be your CapEx guidance for FY '24? So if I look at 1H numbers, you have spent around INR 38 crores on CapEx and around maybe INR 23 crores in the -- in terms of inorganic expansion. So any target for FY '24 full year?

So our routine CapEx, which is the relay of our existing showroom or the service centers will be tune of INR 15 crores -- INR 10 crores to INR 15 crores. The last quarter, we had the MG acquisition and some other CapEx of the complete relay of 1 or 2 locations of Mercedes and Honda. That's why this CapEx incurred in the last period. But in the refit CapEx is in the INR 10 crores to INR 15 crores, and then the organic or inorganic growth, that will be the additional INR 15 crores.

Ladies and gentlemen, due to time constraint, that will be the last question. I will now hand the conference over to the management for closing comments.

Yes. No, thank you all for joining this call. I'm reminded of the Afghanistan-Australia match, where Australia came from behind to win the match. I think we are taking some kind of inspiration from that, and we want to kind of go ahead and win the match in this year based on that. Thank you.

Thank you very much. On behalf of Monarch Networth Capital, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.