Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Pennar Industries Limited Q2 FY '22 Earnings Conference Call hosted by PhillipCapital (India) Private Limited. Kindly note, this conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Vikram Suryavanshi from PhillipCapital (India) Private Limited. Thank you, and over to you, sir.

Thank you, [ Jani ] Good morning, and very warm welcome to everyone. Thank you for being on the call of Pennar Industries. We are happy to have with us the management of Pennar industries here today for question-and-answer session. The management is represented by Mr. Aditya Rao, Vice Chairman and Managing Director; Mr. Shrikant Bhakkad, Vice President, Pennar; Mr. J. Krishna Prasad, CFO; Mr. Manoj, Head Corporate Affairs; and Mr. K. M. Sunil. Before we start with the question-and-answer session, we will have some opening remarks from the management. Over to you, sir.

Thank you. This is Aditya. Good morning to all the stakeholders of Pennar Industries, and welcome to all of you for the... [Technical Difficulty]

I'll request participants to please stay online while we have the management reconnected. Sir, you are reconnected to the conference. You may please go ahead. We lost the audio for few seconds.

Okay. Thank you, As I was saying, good morning to all of our stakeholders, and welcome to the Q2 Fiscal Year 2022 Financial Results Conference Call. As in the prior calls, the structure of the conference call will be the following. I will first take us through the company's financial numbers for Q2 and provide my comments on our performance. Our CFOs will then present their overview of the numbers and their commentary on what went as per planned during the quarter. We will also cover major financial metrics. After this, we will open the call to questions from our investors. So for my initial comments, we recorded in the quarter, consolidated net sales of INR 551.7 crores. Our EBITDA was INR 43.5 crores and our net profit was INR 8.13 crores. Cash profit was INR 20.9 crores. All of these numbers are higher than the corresponding Q1 numbers. In Q2, we further improved our profitability from Q1. We can project further double-digit percentage growth in our PBT for the following quarters. In spite of a highly volatile commodity price environment right now, we don't currently project deduction in our [Technical Difficulty]. We're quite confident that the third quarter will be substantially stronger in PBT compared to Q2, as Q2 was for Q1. So from a profitability point of view, I think steady improvements, consistent improvements, sustainable improvements is way forward. From a liquidity point of view, we have brought in substantial improvements in our working capital cycle. The number of days and overall cash outflow to cash inflow cycle number of days is down to 103 from 128 in the first quarter. Our goal is to reach 90 revenue days in working capital utilization over the next few quarters. The next point I will address is our growth. Several of our initiatives, which include our BIW plant, which will start operations soon, and we'll be achieving positive PBT also very soon. Along with that, other business units that we have, it will all continue to scale and will contribute significantly to this financial year's profitability itself. Our U.S. metal buildings plant, Ascent, has achieved a large order book, almost $30 million right now and has achieved its target PBT in the third quarter. Our exports to the U.S. and other geographies continue to pick up steam and combined with margin improvements across most of our revenue streams in India, we are very confident that we will be able to continue to grow our profitability in Q3 and Q4. So in conclusion, I would like to speak about our medium and long-term growth drivers. As I mentioned on my last call, over the medium and long term, our focus will be on three metrics: sustainable profitability, appropriate usage of working capital and ensuring adequate liquidity; and lastly, ensuring sustainable growth. We are well on track to achieve our financial year projections. I strongly believe that fiscal year 2022, the current financial year will be a very strong year for us on these metrics. Our goal is to have the best financial year in our history next year, and we are on track to achieve this. From a run rate basis, we will achieve that during this financial year itself. Thank you for your time. I will now hand the call over to our financial controller, Mr. Shrikant Bhakkad and Krishna Prasad for their brief on our second quarter performance.

Good morning to all the attendees. Wishing you a very happy Diwali. Just to talk through the main highlights of the financial performance for the quarter ended September 30, 2022. We have increased from 488.0 to 551, Q1 comparison with the Q2. If we take the comparison, increase of INR 63 crores, an increase of 13% in terms of net sales. When we compare to the last quarter, there is a substantial increase from last year, September, 161 to the present 551, close to around 42%. Half yearly, also, we have grown the numbers from INR 557 crores to INR 1,040 crores. So there is an increase of over INR 483 crore in terms of half year last year's basis to current half year last year basis, which is an increase of 85%. Last year it was due to pandemic, the numbers looks slightly different, that's the reason. So we have done the comparison for Q1 to Q2. And Q1 to Q2 also, there is an increase of 30%. Taking you through the EBITDA numbers, EBITDA also has [one-off] of INR 40.8 crore to INR 45.22 crores, which itself increased not in terms of percentage but in terms of absolute numbers, close to around 13% increase. What you see in revenue, some of the percentage increases there in terms of EBITDA. PBT levels have gone up from INR 9.03 crores to INR 11.02 crores, and that is close to around INR 2 crore increase in terms of the PBT numbers. In terms of that, it has increased to INR 2.22 crores, with both double-digit high growth and in terms of percentage, it has increased by 15 basis points from last quarter to the current quarter. Taking you through some of the balance sheet highlights. We have eliminated goodwill based on the sale of Oneworks BIM Technology. A specific note has been included there in the 4B financial results. That's the note that is there in the SEBI [Technical Difficulty] and the profit of INR 1 lakh, which is being [written] in the payable account. In terms of number of days and in terms of working capital also, we have significantly reduced. To take you through the specific numbers in terms of receivable, we have reduced from 106 days to 80 days. And in terms of inventory from 193 days, 163 days. One of the main drivers for us was the Ascent which we were telling for our U.S. operations and the U.S. asset has come into operations in Q3 of the current financial year, and it is up and running. In terms of borrowing, we have not increased our borrowings even though there is an increase from last year. This is because of the positive working capital controls and the cash flow controls that we have kept. So overall, there is an increase only by INR 5 crores in terms of the overall number from 576 to 581. Cash flow from operations have been positive, close to around INR 40 crores is the cash flow positive that we have for the half year. And for the half year, we have INR 21.32 crores in cash flow positive. This cash flow positive is helping us to reduce our finance costs and overall, the borrowings. So this is the main highlights of the financial performance. I would like to hand it over to [Technical Difficulty] for further questions for taking it forward.

[Operator Instructions] First question is from the line of [ Venkat Subramanian ] from [ Organic Capital ].

A couple of things. In your opening remarks, you kind of alluded that next year, you probably will have the best year in the company's history. This should be probably aided to a large extent by your U.S. operation. When you kind of -- when you said it will be the best year in the company's history, can you talk to us about [Technical Difficulty], Aditya.

Sure. I hope my voice is clear. There seems to be a fair amount of static on the line. If not clear [Technical Difficulty]. So your question is that in my commentary, I have said that next year, we project to be our best ever financial year. By that, I mean we would have our highest ever PBT. We would have our highest ever cash flow generation and working capital cycles would be in control and optimized to reach our target goals. There is -- that projection is coming to you on the basis of, yes, our U.S. operation is doing well, but also Indian operations in multiple revenue streams is picking up. In Q2, for example, only 10% of our PBT was from our U.S. operations. So there's a lot of growth that's possible there. We project that will reach 30%. Now U.S. operations are industrial components division, solar and even other business units like our [ pre ] and buildings line are projected to do much better in this quarter, which is Q3, Q4 out of the next financial year. We've been through around a pretty strong order booking. So we see recovery in the capital goods sector in India over the next few quarters and definitely next year. We definitely see our U.S. operations doing quite well and combined with liquidity, working capital improvements, we strongly believe that the projection that we have given you is viable and is based on a pretty sound strategy that we have put in place. So what you can expect is continued growth in profitability quarter-on-quarter until we reach the stage where we are at a stronger run rate month-on-month, quarter-on-quarter than we've ever been, and our working capital also is in control. So that's what I alluded to in my comments.

We missed out actually talking about what we're doing in France through that acquisition. Do you want to throw a little more light on that?

Let me just give me a few seconds on that. I just want to make sure, from a governance point of view, what I can say and cannot say. Just give me 5 seconds. Thank you. Currently, in France, there's a company there called Cadnum. We're currently in discussions with them regarding them being acquired by us. We have taken Board approval for it. Cadnum themselves have taken their board approval for it. We're in the process of completing that. And this will be towards growing our automotive and aerospace products machining business. We currently already have Airbus as a customer. I think once we acquire them, we also get their production capacity, their design capability and the addressable market in Europe. So that is the rationale behind this potential acquisition. But right now, where we are is in advance stages of negotiations and closure.

What would be indicative numbers here in terms of an addressable market and what kind of investments that we used?

We do have these numbers. At this point, I would hesitate to share that. What I can comment is that once the transaction is completed, we can be more forthcoming on what the addressable market and other numbers for Cadnum and what it will enable us to do. For now, we believe it to be obviously attractive. It will move the needle. It brings strong technical capabilities in machining, service assembly and also surface treatment to Pennar. So at this point, I will not get into those numbers. With permission, I'll give it next time.

And my second question is regarding financials. A couple of years ago, we have had to take almost about INR 40 crores, INR 50 crores write-off. And we said, A, these are 2 things. It's not a write-off in the growth sense of the word because it was only because auditors required us to do so. And you said there could be some recovery. So if you can kind of quantify as to whether it's happening. And B, whether there are some slow-moving inventory and some receivable issues, et cetera, that we need to back on an ongoing basis.

The first part was the INR 40 crores provisioning 2 years ago, which dealt with the projects we had with NPCIL and others. Shrikant will answer that question. And post Shrikant answer that question, I'll take up your question on our inventory and any aging or any current asset write-offs, let's call it that way. So Shrikant, if you could answer the first question.

Yes. In terms of total receivables that was required because of the expected credit loss method, it is -- has gotten it and these are NPCIL recovery. We have made those provisions. Those monies are coming in, and those amounts are reflecting in other income to a certain extent, not the full amount, but over a period of time or a gradual period, this amount will reflect. And because of the change in the method, the way we do the receivables provision from the bucketing system earlier to the expected trade loss method, this is actually a little increase that [ PRC ] in the provisions while compared to the actual realizations. But we are confident that monies will be received over a period of time. We have this project, NPCIL project, which will get completed in 2025. Most of that project were, 3 projects we have will get completed. And over a period of this 2022 to 2025, the recoveries will happen.

So that INR 40 crores provision was substantially because of a single project? Was it?

Three products, 3 projects, what we call FIP, Field Instrumentation Project, heavy water project and another -- but 3 projects in total which auditor and we agreed that the best way to account for that is as on an accrual basis as those -- as the funds come in, and they are coming in, and we will -- we don't currently project that -- any of that as a write-off. We strongly believe that capital is coming in. Regarding your question on inventory and any current assets, we right now follow a process of provisioning for all questionable current assets. We remove it monthly. As of right now, we have no inventory write-offs plan. We have no inventory reduction. Most of our inventories are primarily either steel or other bought out items. These, by the very nature, have a very, very long lifetime. Steel is essentially eternal. I mean you can -- even if it's scrap, then it gets melted and becomes steel again. But we have no write-offs in any of our current assets.

Okay. If I can just squeeze in one last question. On input cost pressures, how much are we kind of absorbing in what lag, what time lags are we able to pass on? And is there acceptance for new pricing.

It's a very good question. So it's a little complex for me to answer. I'll do my best. So when you talk about input cost increases, which would typically be factors of production, like raw material, electricity and others. Right now, we seem to be in a commodity bull run. So we are seeing not so much volatility, but a lot of price increases in the cost of steel, in the cost of transportation even and other factors of production. Different business units deal with it in a different way. For our automotive businesses, we follow the SIAM index. So there's an automated process by which any commodity price increase automatically triggers an increase in our invoicing, so our margins are protected. That's how our contracts with our auto customers are considered. For our Engineered Building Systems division and others, we have for some contracts price variation clause is already baked in. And for other clauses, we are actually have to go to our customers to get price escalations where appropriate. On a third -- a third way we deal with it is that we have a slight advantage compared to some of our competitors because we have quarterly rate contracts with some of our suppliers. So we see a price increase 3 months after it happens. So it gives us a little bit of a buffer period to pass through these price increases. It's not an absolute edge by any means, but it gives us that time frame in order to pass through these increases so that we don't face immediate margin prices. But effectively, I don't anticipate rising prices, whether they be in steel or whether they be in glass or whether they be in cells or in transportation and other factors of production to -- I don't believe that they will impact our profitability. We can pretty strongly project that we will maintain and grow our margins in spite of commodity price increases. Wonderful, you guys have been doing a great job.

[Operator Instructions] The next question is from the line of [ Arvind Joshi ] from [ Bateleur Advisors ].

I had a couple of questions. One of our biggest problems was the slowdown of the absolute inertia that was seen in the railway business. Recent tube investment call has been talking of significant [Technical Difficulty] of railway resources and focus on wagons and coaches is coming back quite strongly in the next couple of quarters. What's your view and are you getting any feed for that?

I would not also disagree with that, sir, but I would say, I don't currently see a massive improvement in railways addressable markets. We are present in the coach business, we're present in the wagon business. Every large wagon producer, every large coach manufacturer in India is our customer and have been for a long time. I don't currently see my order books having increased to the point where we would project a massive increase over the next one or 2 quarters, at least? No, I would disagree from ICF, MCF. There's other customers which we're adding, we're focusing on exports, which could potentially increase railways but at this point, we have -- I am not -- railways is not a business unit, it's profitable. It's good, good margins. But I'm not -- I don't have the view that these numbers would increase by a lot over the next -- a lot of profitability used to come from railways. We have now reached a point where less than 10% does. And I don't see that going up to 20%, 30% or massive growth in railways, addressable markets, leading to our order books increasing. I don't see it right now.

Okay. No, because this is one large segment, which in the past has done quite nicely for us. So largely, we have to remain reactive in this segment. We can't really de-risk and add some additional footprint or tweak our business to ensure that railway continues to remain a very strong focus, profitable part or it will have to be depending on the vagaries and the moods of the Indian Railways, how they order and all that.

For now, what you said is exactly true. So right now, we are -- but we are taking steps to ensure that we broaden our product profile so that railways -- broader, not so much a product profile, our market offering, so that we are looking at export orders. We're about to, we think, book a large book order. These are in the realm of not hard commitments, but aspirational things. But in the short term, what we said is true. In the medium to long term, I have every confidence that railways is a forever business for us, and we will be able to scale up that business revenue profitability. But as of right now, the exact words used are, we are subject to the vagaries of the Railway Board, yes, that is a true statement.

So the non-railway -- non-Indian Railways business would become significant only in the next couple of years with reasonable profitability or that is a long call?

I think a couple of years is a fair amount of time for us to affect these changes, and that's our target right now. We are working hard on this. We may have some substantial news for you next quarter itself on this. I mean, it has to be cooked before I can comment to it. Right now, it's -- what I'm saying right now on railways is an aspiration statements, sir. But 2 years increasing our market size, getting into exports, other private railways, Bombardier Alstom, yes, that is what we are...

Do we project any special significant competitive advantages in the export market compared to other players, our cost structure or access to low, slightly cheaper quality steel or maybe our domain expertise. Any competitive positioning that you'd like to share with us, which tempts you to look at the export market with some hope and anticipation?

Certainly, I think from a competitive positioning point of view, we are one of the -- there's maybe one other player in India only who has a unique set of capabilities, which includes product development, substantial fabrication and sub assembly capabilities and also some machining capabilities.

Would that be Titagarh?

No. That's not Titagarh but yeah, Titagarh Wagons is obviously -- has pretty strong capabilities, but that's not the company I was going to...

Sorry, I interrupted. Please continue. So you're talking about our competitive positioning and special strengths.

Yes. So I believe that the reason that export of our products and subsystems in railways presents a significant advantage to us, and why we would have better margins compared to some other suppliers or existing suppliers right now is we can marry the product development and the manufacturing and the subassembly part. We also have a lot of presence now in exports. We have access to the U.S. markets, Europe markets. So technology collaborations are also something that we are working to put in place. I think the combination of all of this would build a business unit, which has high margins, high sustainable margins, a diversified addressable market. So we don't have to worry about one player or one railway board taking a decision, which impacts us substantially. So all of those risk factors go away. And that's the initiative here. But as of right now, a lot of this is aspirational. I think by -- over the next couple of quarters, we do our job right, we'll be able to get railways up and running on the moderate to sustainable growth. That's our goal. We don't only look at...

And you remain confident that this slight headwind from the slower railways business will be more than compensated by the strong tailwind you'll see in the other businesses.

Absolutely. No doubt at all about it. I think we're well passed a thing where our projected profitability, our projected revenue growth, we have -- we have moved past being a railway dependent company to railways being one of the things we do. And our growth plan for the entire company will not, in any shape or form be derailed by what happens in railways. It may help if ICF, MCF come back, if they start increasing their coaches from back to what they were doing pre-pandemic, sure. But if that doesn't happen, it doesn't mean that our plans will be in any shape or form altered. Our commitments are...

That's very gracious thing to hear. Okay, and Aditya, one more thing, like we have been picking up from general market information, trade information that industrial water treatment is also picking up extremely strongly. We are quite decently positioned, especially in the chemical segment also. So how do you envisage the growth in this segment. We were very hopeful a few years ago, then the market just tapered off. Now you see some good times, a few years of great times for this business, too?

Our order book for that business are going up, sir. And in fact, the order books in all of our business are going up. So yes, but I would be cautiously -- I would be cautious on commenting this. I think we need to let the order books convert the revenue first. We have good orders from good customers in our water EPC vertical, industrial water vertical. So I think we are at a place right now where probably the next couple of quarters, we'll see that. But as I said, just like railways, industrial water EPC is not currently one of the growth drivers that we are projecting. If it becomes one, that's good, but that's not one of our focus areas. We are focused far more on hydraulics, our industrial components division, our PEB division growing, solar growing, our U.S. business growing. These are the major growth drivers along with others. And that itself is enough to give us well more -- I mean, more profitability than we ever had over the next few quarters, and that's what we'll focus on.

You said, let the execution happen. You seem to have good orders from good people. Why the apprehension?

I think the EPC business in general is something that we have -- we want to treat with [kid gloves] on. I wouldn't consider PEB to be an EPC business because we manufacture, call it EMC, if you will. Water treatment and other the -- they're said EPC businesses, right? So effectively, that's very predicated on our working capital control, cash flow management. So while our order book quality is good and we'll only take it from good customers, I honestly feel that when we look at -- look at dividing us as a products company, project company and a services company, I feel the ROCEs, the growth rates and the competition is much lesser for top 2 but as competitive intensity for water treatment projects seems to be higher. That doesn't mean that we're not going to do well in it but at the current juncture, I think we know what our growth path is, we know what our growth drivers are. We are not projecting -- currently not projecting what industrial water and wastewater growth as one of the things. We will have -- we have those capabilities. We have very good references for desal plants, demineralization plants, effluent treatment, effluent recycle.

We'll be able to handle independently desalination plants or we'll need to get into a tie-up with somebody.

No, we've done it after. We've executed multiple desal plants for Hetero Pharma. We built a 2 million liter per day plant in Nakkapalli and several others. Desal plants are something that's well with...

That is going to be a hot area, I think next 5, 10 years, I think it's going to be a good strong growing segment.

We've just received a large order from the Department of Atomic Energy for their desal plant as well. For orders, it's not that I'm bearish about this. It's just that I don't consider EPC businesses to be growth drivers. I consider design manufacturing, our value-added businesses to grow.

And finally, now looking at certain areas of your business model, are they experiencing extremely strong tailwinds. So in light of that, are you going to give a very strategic look at your footprint and your financial allocations to certain segments, looking at the kind of visibility that we have in certain segments for 3 to 5 years or probably some areas even more. Would you see Pennar morphing into something slightly different than what it is currently, especially in the areas of footprint and capital allocation to certain area because we have been doing a reasonable job in the past with a good process-driven approach. But do you feel you'll have to really put down our heads and plan for the next 3 to 5 years with a totally different fresh mind and outlook?

That's true. I think we have to do lesser things, fewer things and do them better. I think we choose amongst our current business themes, which are super long-term sustainability, comprise the majority of our profitability, build those. So there's about 2, 3 business verticals, which are on the smaller side, which either the one is big or never really realize their potential. I think the healthy thing to do here is to stop those businesses, realize, do fewer things, do them sustainably and reallocate that freed up capital to the growth of the better businesses. So the automotive space is going to be big for us. The energy and the -- that space is going to be big for us as far as solar is concerned. Railways is something that we are going to be focusing on and the infrastructure space, which is PE. So these 4 market verticals, stick to that, do 4 things really well instead of doing 7, 8 things. So that realignment is happening. We will free up capital from businesses which are not really part of our longer term, which won't fit into these 4 buckets and then reallocate that. That is going to happen. I don't think it will be 5 years, but it is a multiyear plan, yes.

Okay. And you seem to be very optimistic on the auto component business. Are we seeing some positive signs even from the transition to the EV segment now? Because I don't think our product mix is going to get altered dramatically because we don't make any engine competition parts or any transmission part. So overall, we don't seem to be set. In fact, we could probably leverage that and grow a little more into the [ press ] parts and the tubes and all that. How do you look at that?

You're absolutely right. I think I can back up my optimism on our automotive sector as well. I think that our order books are doing really well. And really, it's just a question of us building up capacity and increasing as much as we can. And it's not very capital-intensive also. The hard work is being done, especially things like Body in White. I think we have orders from Stellantis. We have orders now from other vendors also coming in. And I'm quite confident that the addressable market here is so big that we could keep and the margins are very decent. So as we increase our revenue and order booking here further as we increase our capacity, we'll be able to grow this. So I'm very bullish. Those are good forever business and a lot of the parts were working on, we are also doing -- we also have Body in White design capabilities for several of the larger auto companies are now doing their...

We'll be doing direct exports now or we'll be again going to somebody. Now we'll have the capability to either scale to export directly to the customers overseas?

We're, right now, going to be exporting directly to our customers. The revenue streams start very soon. And we'll be exporting directly to Brazil and Europe.

The next question is from the line of Vikram Suryavanshi from Philip Capital.

One is that implied cost growth is relatively higher this quarter, if you look at Y-o-Y. So can you share this implied cost, is it related to normal business or is there any other things which have impacted in this quarter?

Could you -- if I understand your question, so you're saying that our fixed costs or employee costs are higher than in Q2 than Q1? Is that what you're saying?

Yes. And growth is, yes, much higher. So looking at the revenue growth and other?

Okay. Yes. In terms of overall employee benefits cost last year, one of the reason is we did not have Ascent plant, which is now up and running. So that cost is added, including the BIW. And also last quarter, we had some salary deductions and other things, which we have rolled back the salaries to all the employees at the -- all the employees are being paid. That's the some of the reasons where the employee costs have increased.

Understood. So this Ascent plant is now up and running. So the further investment of what we have done -- announcement that we'll be investing in Pennar Global, will that money be used for Pennar Global business or it will be again reinvested either in Pennar Global metal or asset? And how is the performance? So Ascent, I guess, is mainly for PEB structure and all that. If you can highlight more on the Pennar Global metals opportunity and how it is performing and growth, I think that would be helpful.

So the additional few crores that we are giving them is the working capital that they would need in order to grow their business. Ascent has grown -- in a way, it's a good problem to have. So the order book, we are expecting and what they're actually doing is far higher. So since they've been able to get to that traction a little earlier, grow a little earlier, this is the last bits of working capital finance we'll be doing. So the picture I would like to give you -- this is pretty much the end of it, this few crores that we last that we are sending when are global in order to increase their working capital. And so then they get a certain revenue and profitability level, which they, frankly already have, but this allows them to sustain that and maybe grow it a little bit also. But this is where it sits. We don't envision any further CapEx going to PGI. I think it came in on track because the revenue growth was higher, the order booking was better, we had to give them the last few crores. But this is pretty much it, and we are also going to make all the regulatory filings that are necessary when we send capital from here to the U.S., especially end-use with the RBI and others. And once that clearance is given, we will turn that over and close the capitalization for Ascent and our U.S. businesses overall also for now. I think they're all well. They can grow on their own strength now. I think they retain 10% PBDT. So they can grow on their own. They don't need any more help from the here to Ascent.

Got it. And another question was on performance of Pennar Global metals. I think that include our tubes export and all that. So if you can highlight on that as well as earlier, we were quite talking about this design engineering opportunities and all that. So how it is performing.

So our export revenue verticals would be, as you said, Ascent even exports as U.S. manufacturing, but tubes export from here, CDW or Hydraulics exports from here, our structural engineering services, which you can consider an export even though it's a service and other industrial components that we supply. This is now reaching a substantial number. I think this financial year, it will be about 25%. They remain some of our more profitable businesses, and they seem to be very scalable. So we are going to work on improving our revenues in this -- in all of these fields. And the markets are quite [Technical Difficulty] and services can be grown. So I think we will continue to have further growth in these lines. But right now, those are our major export revenue verticals.

The next question is from the line of [ Rishabh Shah ] from [ RS Capital ].

So you mentioned that there is some substantial news you might have for us in the next quarter in the non-rail business. I don't want any specifics, but if you could just give some light just to where we're heading.

Okay. Sorry, could you say that again? I didn't get the question.

No, you mentioned sometime back that you might have some substantial news in the non-rail segment for us in the next quarter. I don't want a specific, but just trying to understand where we're heading in any direction. If you could throw some light.

Substantial news, I apologize, just to make sure I understand the question. Substantial news in what sector?

On the non-rail segment.

Non-rail business.

Non-rail segment.

Non-railway. So most of our growth vectors right now are non-railways only. As I mentioned on a previous question, we're not really dependent on railways for profitability anymore. We were about 2 years ago. But so if rail comes back, fantastic. But if not, then the news is that our PRB markets are growing, our order book is growing quite strongly. Industrial components is doing quite well. Our U.S. business is scaling up very well. Our exports to the U.S. and to Europe are also scaling well. Engineering Services has done well. Our building information modeling is one of the services we offer. For example, that is also scaling quite well. So overall, all of our revenue verticals are poised for growth. Railways, we are working on, as I mentioned to one of the previous questions. We are working on a plan where we derisk ourselves. We don't depend so much on ICF. MCF, the Railway Board because their addition making then becomes my market and by revenue. If they give orders, I get revenue otherwise. And there has been an intent by the railways to privatize. So long story short, I guess what I'm saying is the news that you speak of is primarily to do with our PRB business, our industrial components, our U.S. exports, our engineering services, even our CDW tube to exports to the U.S. and also our automotive BIW line, which we are very bullish about. So those are the growth vectors, and all of them are firing, all of them are holding on to strong order books and growing order books. So railways, we'll do the hard work of building a more sustainable addressable market position over the next few quarters, next few years. And then in the meantime, ICF, MCF come back, very good. If they don't also, it won't affect our profitability projections, which we are making, which is that quarter-on-quarter, we will see improvement. You will see growth and substantial, not like 5%, 10%, but you will see substantial growth. That is what we are projecting. That is what we're committing to, and it is not contingent on railways. That's -- does that answer your question, sir?

Yes, sure. And one more thing you sound very optimistic in a while or so. Is there any plan to increase the promoter holding going forward or something?

I think I can assure you that any promoter holding increase, we will make the proper declarations. And that, historically, we've been increasing. I think 10 years ago, promoter holding was less than 25%. And our goal is -- and I'm speaking now as a promoter and not as a Chief Executive. Our goal as the promoter group is to keep increasing our stake, and we will work on doing that. And whenever we do that, we will give out the proper account -- reporting and all of that. But as of right now, we are not giving any new information on this, I think. Historical trend, I think then that will continue is what I would say.

One more thing, on the debt side, where do we stand going forward? Will it be the same level? Or we might reduction or it would increase in the end of FY '22 or next year?

So the way we look at debt is that it has to be commensurate. There is good debt and bad debt, there's healthy levels of debt, and there's over usage of debt. So what we would like to look at is debt as a percentage of revenue growth. And most of our debt is in noncash working capital debt, instruments like LC, instrument like BGs. So these are always backed up quite strongly by current assets. If I just take my current assets and I take my current liabilities or debt, so to speak, my quick assets are hundreds of crores positives. So that is good debt, that is healthy. So I think what we can definitely guide you to is that debt will be -- cost would be a certain percentage of our revenue, very low single digit percentage points. But I think there's some 10%, 20% optimization, which we can get and which we are working to, which is why if our working capital days comes down, then our overall debt usage as a percentage of revenue comes down. And that is the goal. And there's some -- there's definitely substantial improvements, which we can make. We are going to do that. So overall debt, no, because our revenue is going to go up. It will be more or less here but debt efficiency of using capital in terms of revenue, I don't know. Debt divided by revenue, for example, that number will definitely fall because there's substantial improvements we can bring in.

And I'm just seeing the cash flow statement. There is some INR 7.6 crores of write-offs, which has been made in the current year half-yearly. If you can add what is that and do we see this in next year as well?

There's a normal provisioning that we do every quarter based on the expected credit loss method.

So this is a run rate we can continue.

Routine procedure for us. We just remove INR 7 crores and provision for it. It's a provisioning.

This will continue.

Yes, we'll continue. Provisioning is part of the overall plan.

The next question is from the line of [ Dilip Saha ], individual investor.

Yes, so this is regarding the employee cost, you alluded on the change in employee cost reason. Now your standard on employee cost has grown up by some 14%, 15%, I think, as per the growth of [Technical Difficulty] 30%, 40%. I'm assuming because of the U.S. revenue. Can you tell me where exactly in U.S. revenue -- U.S. employee cost, what kind of increases? Is it like you are setting on the manufacturing plant and [hence] or is it you are adding new sales team? Can you just elaborate little bit on the employee cost and maybe the new standard? Is it going to remain?

Yes. So we have -- as you may be aware, we have a manufacturing plant in the U.S., in Tennessee, in Nashville, called Ascent. They are in the business of metal building systems and components. They have done well and built up a $30 million order book. The revenue has started. And in this quarter, they're even hitting their target profit. So it's one of our major growth vertical. In order to make this vertical, what it is right now, we had to build a strong executive team. And as it is for running a factory, we had to hire labor workers, permanent on staff, also some engineers, though we do the building design for the engineering here, so there's some moderation there but we have a 90-member workforce in the U.S. for Ascent right now. We have about a 4-member working for our tubes import, a record business as well, but that is not very material in terms of the overall U.S. cost. What I would like to guide you to is that this cost will remain stable from now on. The reason for the increase is that Ascent had to start operations and to hire. And these are by definition, the U.S. is a higher cost from a man hours point of view. The cost per man hour for either its manufacturing work or even other executive work is higher than it is in India. But that being said, the margins are higher. If we get a 15% or 14% operating margin in India for metal buildings, we are right now at our order book in the U.S. is at a 28% operating profit. So it pays for itself, our PEB percentages are higher in the U.S. than here. So this is a sustainable cost. It's a cost that's not going to increase precipitously. And it's a cost that is in line with our expectations for our business in the U.S. and it's predominantly the 90-odd workforce that we have in Ascent which is our workers...

You are saying henceforth, the operating leverage will kick in and revenue growth will have better -- the people are going to be pretty much same.

Yes. I would -- you're right, yes. But instead of operating leverage, I would say that it was -- we can't capitalize preoperative costs. Our auditor doesn't allow us to do that. So you saw the cost last quarter, but you did see the revenue. Now we are going to see the revenue and the profit relevant to that and the cost is not going to change. That's what I'm seeing. So that's quite -- it's operating leverage only. You can say revenue increase resulting and operating profit drop into PBDT. But yes, I just wanted to clarify that.

You have got a good order book. So I think that will play out in the next 3, 4, 5 quarters.

Yes, I think we -- there are good things to look forward to from our international businesses and also domestic. Both are going to...

My second question is regarding this acquisition. Or whenever -- so my question is, is it a customer-led acquisition? Is it that like the company got referred to you by the customer? Or so what is -- is it like a reach out? Will it add our reach out capability? Or is it like manufacturing skill scale? What exactly is both, sir.

I mean it's interesting question. But yes, it is -- they were our customer. Cadnum is our customer, and we want to acquire them because we believe the capabilities they have work well with the capabilities we have. It increases our value proposition, which increases our addressable market. And yes, they have strong capabilities and tooling. There have strong capabilities in machining, surface treatment. And yes, they have -- their customers are good customers. They're either the major OEMs themselves or Tier 1s. So we've met the customers. We've discussed it, and that's why we believe this will act significantly to our capabilities. And quite frankly, it can open up the European market as well. But this is not cooked yet. Once it's done, once we have signed on an agreement, then we can. Right now, I have the go-ahead to tell you that we are discussing an acquisition. But the rationale behind it is what I just described.

Understood. Are you -- after a long time, we are seeing improvement in the operating metrics there and congratulations. You have been talking about it for a very long time but when exactly we'll see this reflecting in our profitability. I understand we are in investment mode in U.S. and so on and so forth. But while we have gone to the pre-COVID level, at around INR 500-odd crores of run rate, I hope or more, so when we go to that 5% PBT and double-digit operating margin, when and how that can happen, Aditya?

So I think margin expansion is the metric that we have to do. If you are not expanding our margins, we will get into trouble. That for an engineering industry, that is something that is important to understand. So what we intend to do is continue to add revenue stream. So everything we're adding is high margin. So what the impact that has is, over time, it improves our overall net profit margin. Right now 2% net profit is not good. And I'm sure anyone would say that. But I think what's important to see is where is this number going. Historically, we've been at 5%. I see no reason why we can't meet and exceed that as well. What would it take for us to do it? Add revenue or get any revenue that is being -- that is already -- any revenue that is already there, which can be improved, so to speak. We'll make sure that our overall margin, which falls to PBT, EBITDA -- even once you've reached your breakeven level, your operating profit drops to your PBDT. That is what we want to see, that drop. So if we add, let's say, INR 1,000 crores in revenue, but we added, let's say, an operating profit of 15%, so that adds INR 150 crores to PBT. That is what we want to see and that is what we're trying to create. And all of our initiatives are yet to making that happen. So if you do that, then the blended PBT and the PBDT grow up a lot. I would also, at this point, draw your attention to our PBT and our PBDT as well because we have a very high depreciation, and the vast majority of the equipment we set up basically last forever. I mean it's not 10 years. It's -- they can last for 30, 40 years. So if you were to look at a cash profit, then that is at a higher percentage, which is about 7%. So growing our PBT and our PBDT percentages are defined strategic objectives for us. And the way we do it is by adding revenue, which is at higher contributions, higher operating profits.

Yes. So I understand that but you know..

May I please request to re-join the queue for your follow-up as we have many people waiting for their turn. The next question is from the line of [ Rishabh Shah ] from [ RS Capital ]. As there's no response from the current participant, we take the next question from the line of [ Arvind Joshi ] from [ Bateleur Advisors ].

I just wanted to know, you were looking at some very good times in the solar business. Any learnings that we can put to use from the last solar small upturn and then the -- means that we were left with any strategic learnings, you can share and implement.

I think what we have decided is to be a good strong player in the solar space, you have to have strong technical capabilities and also manufacturing. I think EPC is not where the money is or where the growth is, frankly, there's no entry barriers to that business. So I think if we become stronger in product development, stronger in design, we are able to incorporate. We are now expecting some larger orders in tracker as well. And these are international orders, export orders again. So our view there is very confident that investing in strong product development capabilities will ensure that we have sustainable revenues as opposed to just a commoditized or an EPC-based business model. So my learnings from that is don't depend on -- we used to have a huge expansion advantage and that disappeared with GST. We used to have strong capacity in roll forming, and that obviously went away. I think what will happen, solar as an addressable market will be huge. But the more product development you can bring in, in MMS design in panel design in layouts, I think that will determine who does well in this business. And our goal is pretty simple, make sure that all of our businesses are profitable and capital efficient. There's a fair amount of space in the solar -- in the solar field for us to do this. So quite excited for solar, yes.

And the next question is from the line of [ Venkat Subramanian ] from [ Organic Capital ].

Aditya, we have large opportunity actually in the design services. We have probably what about 250, 350-odd engineers now. Do we see a higher focus there? And do you see larger opportunities here? That's my question, first question. Second is, because of the small downturn that we've had, we would have probably wound down a little bit. Are we now more prepared for the larger opportunity that's presenting itself on the management side.

So engineering services is an important growth vector for us. The primary growth vectors that are -- that will drive our services business is structural engineering design detailing and also our building information modeling services. Automotive engineering also is quite strong, but I think there's a little bit of work we need to do. But the opportunity, as you said, is vast, right? I mean there are INR 1,000 crores engineering services companies. So I think since we have a very large bank of engineers, as you mentioned, it's well over 350 now for structural engineering alone. We also have automotive engineers and others. So I think slow and steady growth. These are all, by definition, high-margin businesses. I think slow and steady customer acquisitions going as the market grows, building information modeling, will grow very quickly, and we have very strong capabilities in them. So I think that would be what we are going to work on. That will be our growth, the growth driver for engineering services. The next part, you said is about management bandwidth, I think and whether we have the gun powder, so to speak, to take advantage of opportunities. I think we worked through our CEOs and our BU heads. I think the 4 sectors have outlined all we have a cohesive strategy plan that is in place. I don't believe we'll lack for bandwidth. And I think -- but I think it's also important that we don't lack for capital and risk management. So we will have -- we'll have that balance in place. We don't want to grow too quickly also. I think anything we do, we want to do sustainable. So some of the promise I can make is you won't see our profit dip. We are trying to build a system to make sure we are robust enough that, okay, we have 1 or 2 business units, which have a little bit of a dip. Railways, not quite where it needs to be. That shouldn't affect the entire story. That should not affect our entire profitability. So the other system we have set up, we will make sure that we have the management bandwidth to take -- to focus on 3, 4 core areas and just grow those. Don't do 13 things. We when we need to risk management wise get out of businesses we don't need to be in, which are small, which don't contribute to profitability, free up that capital and free up those man hours as well. So in answer to your question, the resources we always say is management bandwidth, capital and risk management. All 3, we will make sure is well geared up to take advantage of opportunities. I will be clear and upfront with all of you. And I -- as we speak quarter-on-quarter, I can assure you, I see no headwinds to our growth right now. There's a lot more gun powder there that is there for us. And we are on the growth part, and we're going to stay on the growth path. I don't see -- from a risk management point of view, I don't see that man hours or raw material price volatility, other things affecting our current model.

And lastly, on the Ascent side, they will be able to leverage any of their financial leverage they can do internally there just now, right? Going forward, you don't need to send them...

We are looking into that, sir. We will -- yes, obviously, cost of finance in the U.S. is vastly cheaper than cost of finance in India, and we are looking into that. And just since the revenue is high, there's possibility there. But as of right now, can't commit, but by next, I'll make a note of it. By next quarter, we will give you but we are working on this. I'll talk next quarter on what can we achieve on this.

The next question is from the line of [ Rishabh Shah ] from [ RS Capital ].

Yes. I just want to clarify, in the initial comments, you mentioned that next year would be the best for the company in its history. Is it correct?

I think it's poor [indiscernible] to give projections. I think it's a mark of our intent. It's a statement of intent, and I request you holders accountable for that. Yes. I've said it now, and I think I will respect it, and we have our plans in place, and we have diversified revenue streams. And even if we make on the steps, one mistake here and there, I don't think that affects the overall goal and strategy that we have. So holder is accountable for that.

This was in FY '18, '19, I believe in the last 10 years was sort of the best for years in terms of PBT. We made around INR 135 crores PBT. So we said we'll be bettering that.

I don't think we had INR 135 crores PBT. So that -- I mean, no, I think -- I will not talk about the numbers, sir, but as I said, whatever our historical -- look back at our PBTs for the last 10, 15 years, but we really need to go back only 7, 8 years, not much more than that. Before that, we were at definitely lesser than what we are at right now. Also, we will make sure that we are -- but I'm not saying -- well, I'm not saying INR 135 crores right now, but I can promise best of profitability.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

Thanks to all of you for your questions. We will endeavor to make -- ensure that the commitments we made to you, we meet, and we are confident that our best days are ahead of us, but thanks to all of you for your support and your candor opinion.

Thank you. On behalf of PhillipCapital (India) Private Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.