Pennar Industries Limited (513228) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Pennar Industries Limited Q1 FY '25 Conference Call hosted by PhillipCapital India Private Limited. 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 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 now hand the conference over to Mr. Vikram Suryavanshi from the PhillipCapital India Private Limited. Thank you, and over to you, sir.

Thank you. Good morning, and very warm welcome to everyone. Thank you for being on the call of Pennar Industries. We are happy to have the management with us for question-and-answer session with the investment community. The management is represented by Mr. Aditya Rao, Vice Chairman and Managing Director; Mr. Shrikant Bhakkad, Chief Financial Officer; Mr. Manoj, Vice President, Corporate Planning; and K.M. Sunil, Vice President, Investor and Media Relations. Before we start with the question-and-answer session, we will have opening comments from the management. Now I hand over the call to Mr. Aditya for opening comments. Over to you, sir.

Thank you. On behalf of Pennar Industries, I would like to express my sincere gratitude to all our stakeholders who are participating in today's investor conference call for Q1. Your engagement on this call was valued, and we appreciate your time and support. Our agenda today, as usual, begins with a review of our performance for the quarter. We will cover key areas such as revenue, our profit before tax and our working capital utilization. We will also cover our strategic growth initiatives. After this, our Chief Financial Officer, Mr. Shrikant Bhakkad, will present his analysis of our financial results. And post that, we will open the floor up to questions from the participants on the call. So the summary of the first quarter. For the first quarter, we reported a total income of INR 740.89 crores and the PBT of INR 35.43 crores, while revenue decreased by about 2.6% compared to the same quarter last year, our PBT increased by 20.31%. We generated a cash back of INR 42.94 crores. The decline in revenue is attributed to 2 primary factors: one, our strategic exit from lower-margin revenue streams and slower-than-expected realization of new gross revenues. Our order backlog in PEB India and PEB U.S. have reached the highest levels they have been at. The reason for the revenue perhaps being, where it is, one, while we do plan for the exit out of the lower-margin revenue streams, some of the PEB Indian and PEB U.S. revenue they are counting on to come in the last quarter underwent a little bit of delay, primarily execution delays, including the 3-month postponement in the commissioning of our Raebareli plant, which impacted our ability to turn out revenue. And we do anticipate, however, the plant will be in its peak capacity by September. Also in the U.S. due to permitting delays and other operational issues, which we expect to resolve in this quarter, revenue came in lower than expected. Since these challenges are internal and not market-driven, we remain confident in our short and medium-term revenue growth prospects, specifically our order backlog for process equipment and Hydraulics is also at peak levels and continues to grow. We also expanded our engineering services business development teams, and we have added 12 new customers in the U.S. and in Europe. These factors collectively support our outlook for consistent revenue and profit growth. Our key growth drivers continue to be PEB U.S., PEB India, Hydraulics, process equipment and engineering services. So even though the quarter came in lower, the combination of that was exit from older low-margin revenue streams and newer revenue streams not growing in the timeline we had wanted to. However, these are internal issues. Our order backlogs are, as I mentioned, at their highest ever levels, over INR 800 crores for PEB India and over $52 million for PEB U.S. So no concerns as far as our ability to scale revenue or concern in the short term. Our PBT margin for Q1 stood at 4.83%, and this is in line with our strategic shift towards higher margin businesses. As we had guided in the previous conference call, we expect further improvements in margins in the upcoming quarters. Working capital, too, there's been a good improvement. As of June 30, our working capital cycle stood at 74 days. We are actively working to further optimize our current assets, especially in sectors that we are phasing out -- business units that we are phasing out with the goal of reducing our working capital days to 72 over the next few quarters and longer term to get to 60 days. Our growth vectors, as I mentioned, primary growth drivers will continue to be PEB India and U.S., hydraulics, process equipment. With PEB India order book exceeding INR 800 crores and PEB U.S. again at $52 million and growing strong, we do expect that these businesses will generate a fair amount of growth in the next few quarters. Hydraulics also our order books have increased to a record high, and our process equipment business is scaling well, and probably will double in size compared to last year in this year. Also for Hydraulics, we should probably double in size. Engineering services continues to expand, as I mentioned, 12 new customers, a growing delivery team in the U.S. And we've also improved our org structure to be tailored more towards both acquiring new customers and increasing per revenue -- per customer revenue share. So this concludes my overview of our financial performance for the quarter. I now invite Shrikant Bhakkad to provide a more detailed financial analysis.

Thanks, Aditya. Welcome to the shareholders and investors on the first quarter FY '25 earnings call. In terms of key metric, revenue is at INR 733.45 crores from INR 748.89 crores. Our gross margin -- there was an improvement of 184 basis points from 37.95% to 39.79%. EBITDA has reached about 10%, and it is at 10.77%, up from 9.84%. PBT has been increased from last quarter to this quarter. Now the overall number is at INR 35.43 crores, which is up by 20.31%. And in terms of PBT percentage, it is 4.83%. So then, we are on our target to increase the PBT percentage. In terms of revenue, while I explained in detail in terms of how -- on the revenue, we would guide with value in terms of revenues, with our continued focus to improve the margins and cutting down the sales with low-margin businesses in terms of PV solar, water EPC, solar MMS, et cetera, you see the increase in the profitability of the business. Revenue has actually scaled up in terms of metric tons, but revenue has relatively not grown due to lower raw material prices in substrate and due to the reduced offtake for the PEB business. The diversified engineering revenue for Q1 FY '25 was at INR 423.12 crores compared to INR 380.52 crores, which is up by 11.2%. The Custom Designed Building Solutions, which is our PEB business, the revenue has been flatter, but good part is, there was an increase in order book at India, INR 800 crores plus and PEB U.S. at $52 million, and we are confident that the revenue will go up as the year progresses. In terms of other P&L items, the other income consists of deposit income, income from mutual funds, incentives, exchange fluctuations and collection of old receivables. Salaries decreased due to onetime bonus, which we had in the last quarter in one of our subsidiaries from INR 80.05 crores to INR 76 crores. Standalone, there was an increase by INR 1.45 crores from INR 41.32 crores from INR 39.87 crores. If you see the quarterly numbers that have been increased, this is due to mainly increase of our new plant which is coming at Raebareli. Sales resources that we have hired for our U.S., ads for PV Engineering, [indiscernible] the Engineering Services Business and the Hydraulics businesses. In terms of finance costs, consolidated Q1 and FY '25, it is INR 27.04 crores compared to INR 27.85 crores. This is due to lower -- slightly due to reduction in interest rate, while we are able to close on some of the higher interest rates loan and then taking the lower interest rates, and also due to reduction in sales. What we would guide to is in terms of interest on net sales as a percentage. Presently, it was at 3.69% Q1 FY '25 and Q1 FY '24, it was at 3.72%. There is a reduction with 3 basis points. We expected this has to be in the range of 3.75% by December. And our target is by March, it should be reduced to 3.6% to 3.65%. Depreciation in terms of overall number, it is increased from INR 16.42 crores to INR 16.54 crores. Subsequently, there was an increase on account of the new capitalization that we are doing it by INR 22 lakhs. In terms of standalone, there is a decrease of INR 10 lakhs. Standalone even with the additions, the depreciation there was decrease at some of the businesses that we have exited, we are able to include those assets and realize those values based on which overall, there is a slight decrease in terms of depreciation, that is reduced from 25.94% to 25.49%, predominantly due to change in our sales at our U.S. subsidiary asset. And while we will guide you to note that the certain tax is 21% and depending upon the state taxes and the place where we supply, the state taxes fluctuates. So with this number, you would see a difference in terms of the overall tax rate. In terms of overall analysis, revenue has been flattish. We expect that the revenue will improve in our PEB and engineering services businesses. The profitability during the year has gone up due to better margins and change in revenue mix and in standalone entity. Businesses we have exited would have added our profit and revenue higher, but this is where we are. In terms of the last point in terms of order book, the PEB has increased and now it is INR 800 crores. Railways is INR 100 crores and Ascent is at $52 million. So with this, I hand it over to the moderators for taking us through the question-and-answer session of the investor community.

[Operator Instructions] Our first question is from the line of Naman from [ Chandak Investments ].

So I just wanted to know that the PEB order book which we have, INR 800 crores plus in India, like -- until how many months we can execute that?

Typically, our order books go out for about 6 months. Because right now, the challenge is not our order backlog, it's capacity coming online, I think this probably is closer to about 8 months.

Okay. And what are the blended margins for the PEB division?

Could you repeat that? What margin, sorry?

For PEB division, net margins?

What margin? Net margin, is that what you say?

Yes, Yes. Yes. Net margin for PEB division.

Okay. I'm not sure we give the BU-wise breakup of margins, so that we will be unable to provide. But it is higher than the average margin for the company. I can guide you to that.

Our next question is from the line of Ashish Soni from Family Office.

Sir, this lower margin business, when do we think we can completely exit that?

So currently, about 35% of the company is still in the lower margin businesses. So we have been methodical about slowly exiting those businesses while our revenue keeps up. And what we would like to see ideally is sustained revenue growth overall and the sustained exit from these businesses. So over the next few quarters, few years, you would see a complete exit. But for the near term, there will be a blend of new versus old.

And with this Raebareli plant, I think in your opening remarks you mentioned it will reach full utilization. So are you getting orders in hand already? Or what's the situation there?

Both, all of our PEB plants, both in India and in the U.S. and specifically in Raebareli as well, have completely -- have older backlog, which are completely in place. We just need to -- we have commissioned the plant. I think trial production also is underway. I think in September, we'll have much higher capacity utilization levels. I won't go as far as 100%, but am I audible? There is a beep on the line. I just want to make sure I am audible.

Yes, you're audible. And PBT margins moving up to 7%. When do you think it can achieve. Earlier you guided, I think 4 to 6 quarters, I think, 2 quarters back. So where we stand there in PBT margins of 7% on overall company?

Okay. So we will not be exactly able to provide you a precise timeline for us to reach 7%. What I can tell you is that our goals are to reach and exceed that number. We are currently at around 5%. Over the next few quarters or next few years, we intend to gradually scale up our margins.

And last question, this U.S. election perspective, do you see any order book challenges in next 1 or 2 quarters in PEB especially?

So typically, we don't -- because our market share in U.S. is so small, microeconomic factors shouldn't impact us because we are sub-2% market share in the U.S. in the metal building and the PEB space. However, that being said, yes, the U.S. election, there's always a little bit of a slowdown. We're not too worried about in at least medium term, we are not worried at all. But it's only a few months away. And even now, I think quarter-on-quarter there's improvement. So I wouldn't factor in too much impact from the US election. But yes, usually, when there is a little bit of uncertainty, nonresidential construction activity does tend to slowdown in the U.S. a little bit. But our order backlog is, as I mentioned on my initial note, higher than it’s ever been. It's growing quickly. We are expanding our addressable markets as well. Margins are stable, operating margins are stable. So no concerns really from a macro point of view, for our U.S. business.

I think in one of the earlier conference call, you alluded that you can increase your U.S. market share. So any ambition we have? Because I think 3, 4 quarters back, I think you mentioned that you can increase it substantially. So I know you have been hiring a lot of sales person, if I recollect from other conferences. So any update on that you want to give?

Yes. We are expanding capacity. We have substantial treasury operations in the U.S. as well. So we -- all of our CapEx growth plans are well funded, and we're quite confident of being able to scale our U.S. business, that will take our market share up over the next few quarters and the next few years. But we don't have an aspiration to reach the 10% market share, but I think we'll need to cross 5%. That by itself also means that we dramatically expand our current revenue base in the U.S. So that is the current Phase 1 plan right now. Once we reach the higher market, let us say, capacity utilization and, let us say, the higher market share numbers, we'll then look at the longer term. But as of right now, yes, our market share in the U.S. has increased.

Our next question is from the line of Nilesh Shah from Arrow Investment.

Congratulations on a good set of numbers. If you can just give some color on the projected guideline in terms of our top line and bottom line for the year, given that we are exiting out of these non-core businesses which are low value-added, and in terms of the Raebareli plant going live. If you can give us some color on the top line and the bottom line projected for the year.

Currently, the growth drivers in the business, as I mentioned, are PEB India and U.S. But we had some teething issues in the last couple of months. These are internal capacity commissioning issues, some labor issues in terms of availability. All of those are short term, very, very short term, I would say. So overall, we are quite confident that revenue growth in spite of the exit of low-margin businesses. So overall, for this year, I can definitely guide you to our revenue being higher than it has been last year, which would mean we will have our highest ever revenue and our highest ever profit this financial year. That we can definitely guide to.

All right. So I'm just looking at the repeat from '23 to '24 in terms of our growth. So just to get an idea in terms of 10%, 15%, 20% kind of growth lines in terms of numbers that you can put in some perspective on that?

Guidance will be difficult, but I think we are looking at definitely a double-digit growth in our profitability, yes.

Perfect. And my second question is on the land bank that we already have. I do -- I think we have our factories and projects over there. But given the kind of appreciation on the 500 acres plus, I think, if I'm not mistaken, you can correct me on the land bank, is there any plans of monetizing any of our land that we already own and which are not being used?

There are several issues we are discussing with the Board and once we have something concrete, we'll share with you. But as I've mentioned the last time, there is a substantial land bank within the company, and it's a source of some strength from a balance sheet point of view because it is right now not at all appearing on our balance sheet from our asset acquisition value, so it's obviously a very, very low number. But we will make plans for this. And when we have something to share, we'll share with you. As of right now, nothing to share on this, Nilesh.

Are we going to look at revaluing the assets and adding it up in our balance sheet to strengthen it up?

No, sir. When we said then we will record it. That's what we did with the last sale of land asset we had when we sold. But we will not be -- basically, you’re saying, revalue of the land assets and then bring that into the balance sheet. So no, I don't think we want that.

Our next question is from the line of Chirag Jain from Yogya Capital.

So first question is on the U.S. PEB business. So what's the contribution of U.S. business in the overall revenue?

From a revenue standpoint, about 25% is our U.S. business, which we call PGI, Pennar Global.

Yes, fair enough. Sir, second question is on the -- we are talking about increasing the U.S. PEB business. So what's the strategy for increasing our business? Would it be grab existing players' market share or gaining the exponential market growth over there?

Are you talking about engineering services?

Yes.

So engineering services, typically for us is structural engineering, building information, modeling, component design and product development, all things we do in-house, but provided to our competitors and other peers in the field as well. So growing well, high-margin business and the addition of our new BD team and the structuring that we have put in place, both in the U.S. and in Europe, we are seeing revenue come in and we are planning for a substantial increase in our revenue in this field, and it will continue to be high margin.

Okay. Fair enough. Sir, previously, in Q4 FY '24, you mentioned about -- mentioning that you will be doing some CapEx for FY '25 and it will be provided in Q1. So any update on that?

Our CapEx trends right now are fluid in the sense that we are looking at it in terms at a BU level and our BU plans for the next 5 years are being finalized as we speak. So I will request some more time from you to explicitly share what our plan for FY '25 is. But we do expect to grow our Hydraulics business, and we do expect that there will be CapEx for Tubes business as well. Those are the 2 sectors which we will be investing into in this financial year. PEB is already done. PEB U.S. already done for the most part and not substantial CapEx there. But these 2 business units are what will effectively what our CapEx will be going to.

So do we have any ballpark number in mind currently?

I will get back to you on that.

Our next question is from the line of Deepak from Sapphire Capital.

Sir, just one thing I wanted to check. I mean in terms of this 35% of your revenue is in low-margin business. So can you just give some details on the differential between your low-margin business and high-margin business. So what sort of margin we have on this 65% pie in terms of EBITDA or PBT margin? And what sort of margin we have on this 35% pie?

I think I can give you a broad level of guidance on this. So the lower margin business is effectively and let me speak from a PBT perspective, typically end up at around 2%, 3% from a PBT perspective. The higher-margin businesses are -- the operating margins are all high. They're above 15%, above 20%, even above 30% in some cases. As these other businesses grow, they will contribute higher and higher. So from a peak PBT percentage perspective, it can be as high as 10% or above 10% as well as a blended margin. But as of right now, there is about 6%, 6.5%. So the blend when you take it is coming to about 5% right now. But we expect as the higher margin increases, then the overall margin, blended margin will keep increasing. At the peak level, it will be substantially higher than what it is today, which is at about 5%.

Understood. So -- and in how many quarters we are looking to completely exit the 35% pie?

That also is something I want to get back to you. It will go step wise. One of the things we want to ensure is that there is no lack of growth from a revenue and profit perspective. So that, in a sense, controls it. There are other concerns such as while we are exiting these businesses, it's important for us to do that well enough so that our customers are well taken care of, that we don't rush through projects which take a little bit longer time, which have a longer lead time. So it may take some time. But the way, we are planning this out and mapping this out is consistent revenue increase, profit increase and margin increase and over the next few years, getting to the numbers that we have indicated are our goals. So I would guide to that being the metric. I think a hard closure date we don't currently have for completely exiting all of these businesses. That may take a little longer, but there will not be a lot of capital or any capital growth going into these businesses. So they will continue to represent a smaller and smaller portion and over time, it will -- that number will drop to zero.

Zero. So maybe what, one, two years would be a rough range. I mean I just wanted to understand the...

I think that's the range that you can do. Yes. Yes. That's fine.

So when we completely exit then automatically our PBT margin, I mean, as per current level would come to around 6%, 6.5% rate, I mean. And there might be some improvement in that new business also, I mean, new business, I mean, high-margin business for the margin improvement scope that you mentioned above?

We would aim for a number, at least a blended margin even in the short term, next 2, 3 years, we are aiming at a number higher than 6%, 7%. 6% and 7% isn't very, very far away. I mean I think if – when you have Hydraulics at an operating margin of 20%, Engineering Services at an operating margin of about 30%, 35%, we don't -- there is no cap. I mean, 6% to 7% is something you would still consider to be low from a PBT perspective.

Our next question is from the line of Ashish from Growth Sphere Ventures LLP.

Sir, in last con call, you had basically given aspirations to become a billion dollar company. So my first question is, where are we on that? And second question was with respect to CapEx, my earlier participant had asked the question, we wanted to confirm what is the peak revenue expected through the CapEx, which takes place in the next 2 to 3 years? If you could throw some light on that, it would be really great. And congratulations for a very good set of numbers.

Thank you. So let me do my best to answer those questions. Both are -- can be considered to be guidance related. So I think what I would – how I would like to answer your question, your first question on a plan to be a billion dollars. We have growth aspirations. Our addressable markets for the 5 major growth drivers for the company are all quite high. All of them have multiple thousands of crores in terms of revenue potential. So focusing on acquiring market share in these segments will make sure that we grow and grow well beyond a billion or more than that. And that's the plan that we have in the company, and we will continue to try to execute that over the next few years to get to a larger number. Right now, from a gross sales point of view, which is the metric we use, they're close to about INR 4,000 crores, and we expect that to grow and scale. We will not be curtailed from growing by the market. We'll have to execute well internally and that is what we intend to put in place. So that's from an overall growth point of view. We are not capped by a billion or even more than that from a revenue potential point of view. The second question you had was about peak revenue, if I understand it. So there's no such thing as a constant peak revenue. I think you will see revenue growth this year. You will see profit growth this year. I guided on our previous call to at least double-digit growth in profitability. I think that definitely is something we will -- we can commit to and will achieve. Most importantly, our margin outlook and our capital efficiency outlook is important to see. We're not fully chasing revenue, so revenue growth is important. It's critical. The #1 priority for us is capital efficiency and margin improvement. So our ROCE, as you would see, has gone from 10%, 15%, 21%, and the annualized ROCE of the last quarter was 21.7%. So our goal is to bring that up. The business, we're investing in have a ROCE of about 30%. So getting the return on capital employed about 30% consistent margin improvements is what we have demonstrated over the last 4 years, and we will continue to do that. And that would be what I would guide to. There's no such thing as peak revenue. As we keep doing this, our revenue will increase.

Our next question is from the line of [ Ankur Kumar from Alpha Capital. ]

Sir, I wanted to ask in the last con call, we said there would be a Q-o-Q growth in PBT, which unfortunately has not happened this quarter. Would you call that due to labor issues and capacity commissioning? Or how should we look at that?

I think the revenue base last quarter was about INR 800 crores. This was about INR 740 crores. We do expect consistent quarter-on-quarter -- previous quarter last year, this year that we are certain of committing. From a Q4 to Q1, typically, Q4 tends to be our best quarter. So you are right. I think our expectation internally was that would be higher than that. And because of these execution issues, we lost a fair amount of revenue and a fair amount of profitability. It's not very far off from our peak last -- from Q4, but we will do -- we have done the repair work internally. And while we have grown profitability well in this quarter, our internal targets are far more stringent. And I think you are -- in Q2, Q3, Q4, you can look forward to profit increases. And certainly, in Q4, we will be at a substantially better profit picture than Q4 last year, which is that -- I guess, that follows from quarter-on-quarter growth. But yes, you're right. We are not happy with our performance in this quarter.

Got it. And sir, in this WIP, when will that going to commission? And when will the benefit starts accruing to us, Sir?

Could you say it again, sir?

The work in progress -- capital work in progress, how that capacity will be going to come for us?

It will come online this year. In the next quarter, you will see those numbers get -- the plants get commissioned and get built up all the way to full capacity.

So we can expect benefit in the second half?

Yes, sir.

Our next question is from the line of [ Venkatesh ] from Organic Capital.

Complements for excellent execution on spoken part. I have a couple of questions. One, on the U.S. subsidiary, what have been our broad learnings because it's after all a new territory, we have been there about 18 to 24 months. While we have grown, we would have probably had a lot of challenges. How are we kind of equipping ourselves to address the large market there?

I think the U.S., as you mentioned, the markets, we're present in, are all massive, the PEB metal buildings market in the U.S. is in excess of $8 billion. So even a moderate market share gets us to a revenue potential, which is larger than the current size of the entire company. So that's a good thing, we'd like to see from a market perspective. However, large addressable markets doesn't automatically become high revenue or large revenue. And to do that, I think our learnings over the last few years has been -- the U.S. is a very relationship dependent market, much more so than in India. It is less cost conscious. It is far more reliability, dependability and execution oriented. So we have expanded our business development base, our engineering base. They're treated not as a subsidiary of ourselves, but as a discrete business by itself, and ensure that our market share gains there come not just from an order book increase, but from a very good execution outlook. And quality is extremely important. The same product we make here was what we make there in the U.S. It's much higher quality. I struggle sometimes to explain internally why that is also. But whatever is, the work ethic there is much higher. It's important for us to take into account that quality has to be top-notch, delivery has to be top-notch, what we say we have to do. So imbibing these qualities has been the biggest learnings for us. Not that we didn't have them before that. But it's important for us to prioritize those in our growth journey. And it's not just a question of getting larger and larger order backlog, which we are doing anyway. We also need to execute well, and which means good operating teams, good Op structure. And we are focusing hard on building a proper team there. I mean, we now have over 220 employees in the U.S., and I know that we will continue to grow from strength to strength in their geography.

On Body in White, we haven't heard you mention this in the last one or two calls. How are we positioned there? What is your focus on that?

So Body in White, while we have had a good amount of growth and we have stabilized it and Stellantis continues to be a customer, we've added a few new customers in the past. We've received [indiscernible] We are working with -- we're trying to get Kia and Hyundai as customers as well. There will be RFQs going out. So we will add more customers and already there have been more and more customers that have been added. Product development is taking place. Over the next year or so, this is a slower growth business, I think, but it's also in a sense -- good in the sense that revenues won't suddenly drop in that business because there's protections in place for that. So it will be a slow growth journey, but a growth journey all the same, but that's where we are at right now. So in BIW this year, we will see substantial growth compared to last year as well.

Understood. At a broader level, Aditya, we are continued about what, INR 130 crores, INR 140-odd crores of cash flow. You would probably aim to maybe about triple that in about 4, 5 years' time. That would still amount to the same numbers that you're kind of projecting, which is about 5%, 6% PAT kind of margin and just about $1 billion kind of company. So is that a broad expectation?

I can speak to you rather than give that as a guidance. What I can tell you is what we are looking at and what is possible. So maybe that's a better way to answer the question. So we look at a company in the field that we are in with a similar positioning as us. If they are looking to grow in these business units and each of these business units have addressable market in which are that size. So you do have the expectation of your revenue more than doubling in the timeframe that you mentioned, in the 3- to 4- to 5-year time period. And if your operating margins move up at -- in the level that they should, considering market margins in that, it is very possible for us to imagine a company which is substantially larger than Pennar's size, more than twice our size. And the impact on our cash generation, when you have net margins moving from 5% to, let's say, closer to 10% would be not a doubling of cash, but the doubling of revenue and doubling of that would mean at least a 4x return on a cash point of view. So that is what is the possibility we have to execute well. There's -- by no means am I saying that is our guidance. What I'm saying is those -- that's the possibility on the table right now in 3 to 4 years.

Our next question is from the line of Vikas Puri, an Individual Investor.

Am I audible, sir?

Yes, sir.

Congratulations on great set of numbers. Sir, our company a lot of depend on USA. And we are observing that we are calling anti-tariff policies. How did that impact our sales growth or revenue growth there, sir? Or is it doesn't impact at all?

I apologize. Your voice is a little muffled. You said what policies, sir? Sorry, anti?

Sir, U.S. are installing anti-tariff policies like we are Make in India, they are now doing Make in America like those things. How did that policy impact our sales there?

I'm afraid that your voice is very muffled. I was not able to make out exactly what you're saying. Let's try again, Could you say -- you said in the U.S., anti what policies?

Am I audible now?

Sir, I request you to use handset while speaking.

Sir, now I'm audible?

Yes, loud and clear.

Yes. Please go ahead.

So I am saying that the U.S.A. is installing anti-tariff policies. They are putting more and more tariffs whenever there is import there. So how does that impact our company because we have a lot of dependency on U.S.A. in sales and in profit a high-margin business? Or is it -- doesn't affect us at all?

Sir, I understand. Let me answer that. So our U.S. business, so to speak, is majority dominated. I mean, well over 80%, we manufacture in the U.S. and we stamp drawing engineering work in the U.S., though the detailing work can happen in India. PEs are present in the U.S. So it considered U.S. work. So tariffs, duties don't apply at all. There are some verticals such as Hydraulics business where we do centralized production in India, and we don't intend to change that. We are also an importer of record in the U.S. So I don't see -- we have mapped out the tariff businesses in any business where there can be a high tariff impact, we have exited those businesses already. So tariffs is not something that will apply to us at all because we manufacture locally, we design locally, we supply locally. And the products we tend to ship there, which are higher value added, for example, Hydraulics, there are no tariffs. So -- or very, very low levels of tariffs and it would not be practical for -- so tariffs for the U.S. are typically on commodities, on less margin value-added margin products. So we do not have -- because of this and as being an import of record also in the U.S., IOR certified, we don't anticipate an issue because of this.

Okay. Sir, another question is that you are aspiring to be a $1 billion company. And by 2030, I think you are guiding. Is it right, sir?

So as I said, sir, we will not be giving guidance in that sense. But what I can tell you is addressable market times your market share is our revenue. So our goal is -- our addressable markets are all massive, our markets will need to grow for us to be able to grow. Our market share is low. As we create more good quality assets as we improve our operating efficiencies, they are also completely revamping our entire business process mapping here. We are working with a good team in order to make sure that we optimize what we're already doing. The combination of all of this means that our market share will grow. I have a high degree of confidence on that. So they're not curtailed by anything in the market. There's no top limit to what we can achieve. So yes, I'm confident of our continued sustainable growth at Pennar is something we are very, very confident of.

Our next question is from the line of [ Dilip Kumar, ] an individual investor.

The question is more on qualitative side of the business. You talked about operational issues, execution issues and internal issues. And it looks like you are not very happy with the current quarter number. But as an outsider the number looks quite reasonable to me. So I just want to understand what exactly you are seeing, which is something I'm not able to see. Can you just elaborate on these issues that you are facing in terms of execution?

Let me broadly give an idea of why. I mean, yes, the numbers obviously are good, and I'm not denying that. But what I wanted to submit is that internally since the quarter has already gone, we can talk about it with a lot more clarity. And we expect much, much better numbers, and much, much better numbers are possible. See, what – there are external factors and internal factors. We should ever allow internal factors to not allow us to grow and scale in my view. So even though with a large order book, for example, we have the potential to do a lot better. So we understood that what needs to happen for us to improve, to create the foundation for future growth as well. We need to have more robustness in our systems. So I think let me give you examples of what we will work on to address this. So we will be completely revamping our business processes to give -- get towards revenue, profit and tax efficiency growth. We have good systems already in place, SAP, but I think they're going to be over the next couple of quarters changing that completely. So business processes get realigned and internal automation gets brought in a lot of areas where things get jammed up. I think that can, by itself, can add a lot of value to us. Other issues such as proper procurement, proper execution, labor supply being allocated properly. All of these are issues which we, as a company, at our level of maturity should not face. So that is -- it was more -- on that issue, where we are internally not happy with what we have delivered in the quarter. Numbers may look good, but -- or may look all right, but our job is not all that. Our job is to make sure that we perform up to industry market standards, and I think that's what we're going to achieve in Q2, Q3, Q4 for the rest of the year. We're confident of delivering growth, revenue and profit, and we have no issues from an order backlog customer point of view. It's not market forces that are preventing us from growing. So we will make sure we get growth in quickly. So it's more from that perspective, not that there's anything.

Understood, understood. The second question is a little bit of confusion on this so-called low-margin business. I thought that we had around 14%, 15% of low-margin business. And if you start with, now you are saying that 35%, at the current level, it's around INR 1,100 crores of the consolidated number. Obviously, it lies in India, which means half of our India business of INR 2,200 crores, INR 2,400 crores is a business you don't want any more. So where does this INR 1,100 crores business lying? And if you water down by INR 300 crores, INR 250 crores, it like 3 years for us to water down this business to zero. So can you just give me some elaboration on what exactly is low-margin business and where it is lying?

So typically, a low-margin businesses are businesses where -- there are 2 things, let me call them low margin and lack of scalability, right? So these are business that Pennar has been presented from a legacy standpoint, which we really, we don't see a growth part to high levels of growth and high levels of PBT. So let me give you an example, for example, of our CR business. We're a cold rolling business as well. Special grade, obviously, not commodity cold roll, but special grade. These are manganese chromium alloys, 16MnCr5, vanadium chromium alloys. So this -- while the product is good, the problem here is in order to hit the higher margins, the 5%, 6%, 7%, 10% PBT margins, you need to have scale. And we have JSW and Tatas and ArcelorMittals all with 20 million tonnes per annum, 30 million tonnes per annum. So our -- we will be unable to scale that business. So we would want to gradually reduce the dependence on the percentage basis, the revenue attribution wise, as the company growth comes down, but also just gradually exit those verticals. Because going into them and scaling those verticals means that they become a commodity player, and that is not what we want to do, similarly for railways as well. They fabricated components unique for them, main walls, outside walls, roof assemblies. Now that is not -- that is a business that has become very competitive. At one point of time, it was okay, not that competitive. But, the problem is that there's no product development in there that's owned by ICF, MCF. So any business which doesn't have this engineering and product development angle or a continuous margin and revenue scaling potential, our businesses won't take it. We call these low-margin businesses, but you can accurately call them low-margin, low scale businesses. So yes, as you said, as you noted, 35% of the business, of the company's business being in those lines, does mean that another -- on about INR 300 crores, INR 350 crores -- more than about INR 400 crores, INR 500 crores in that business. But we will -- I'm quite confident that it won't take 3 years for us to liquidate that fully. I think closer to about a two-year timeframe. Either we'll liquidate them or we'll absorb them into the other BUs and make sure that some of them can generate some scale. But the revenue drop from those businesses preventing us from seeing higher levels of revenue growth overall, that problem goes away. That's what I would like to say.

Sir, when you meant 35%, you meant 35% of the domestic business?

Could you say it again, please?

I'm just asking for a clarification. When you said 35 -- yes, I'm just asking for a clarification. I can come in the queue otherwise.

I think this is an important question. So if the -- moderator, if it's okay, can we just take this question.

Just a clarification, yes, I wanted. So when you said 35%, you are essentially meaning 35% of domestic business, which is INR 2,400 crores, INR 2,300 crores. Is that correct?

No, that's not correct. It's 35% of our overall revenue base. So the math you did, which says that on a domestic basis, it will be higher than 35% is accurate, it's correct. But it won't take us 3 years, sir. That's not -- every quarter there is improvement, every quarter is...

Just to get the size and the reason I'm a bit concerned is this, see 5 years back, we thought alloy steel tube is the business to be in, we invested a lot, I think INR 50 crores, INR 60 crores in setting up capacity. And after 5 years, if you are saying that is not a business we desire, it's still a bit of concern as investor. How is our process of -- how do we have -- how do we know that today, what we think is good business will become after 4 years bad business. That's my only concern.

That's good. But just to correct you, sir. Tubes is a growth vertical for us. Tubes isn't considered a low-margin or a low-scale business. Primarily CDW, DOM is our product there, and the operating margins were above. And we are actually investing capital, as I mentioned for previous question, we are investing capital into our large-diameter tube business, as I had mentioned that the CapEx will primarily this year going to Hydraulics and our Tubing business. So no, there's not -- I would agree, that would be a viable concern, but that's not what's happening, we are growing our Tubes business.

[Operator Instructions] Our next question is from the line of Sai Ganesh from Square 64 (sic) [ 64squares ] Capital Advisor.

I just want to get the idea about, what was the contribution of our total percentage of sales from the low-margin business of FY '23 and FY '24?

Could you say that again, please? You said the contribution of...

Contribution of low-margin business of -- for the year of FY '24 and FY '23.

Yes. So FY '24, which is March 2024, what we are now designating a low-margin, lower-scale business, was about 45%. But allow me to get back to you with more accurate number on that. That number is now lower.

Our next question is from the line of Ashish Soni from Family Office.

Sir, what is happening on the auto and aerospace business in France. I think, I didn't hear from almost a year now.

I'm sorry, your voice is not clear.

The France auto and aerospace business, what is happening on that, we didn't hear from you for last one year almost?

So as -- call on the previous question that you asked, Body in White business is doing well, it is growing, but I do want to differentiate this is not one of the core growth businesses. It takes a long time for us to acquire businesses. So it's doing well, and we continue to acquire businesses and -- sorry, our customers and grow there. And we are working to add 3 more blue chip automotive component manufacturers. Aerospace is also the same story. I think we are working with Airbus right now, and that also is growing well. But these are small businesses where I mean, BIW in its entirety was about INR 100 crores last year. And this year, it may touch about INR 200 crores. But it takes a long time for these businesses to scale. So they're doing well, and they will continue to do well.

And you mentioned the CapEx this year will be in the Hydraulics and Tubes. So is it India only or U.S. also you're planning to CapEx?

Most of our revenue in Hydraulics is out of India, it is export oriented. Tubing is domestic and export.

So you'll do CapEx for Tubes in U.S. also? Or how is it?

Currently, no plans. But it is interesting if you say that. But currently, no plans, but specifically in the large diameter segment, there are -- there is a good potential market in the U.S. for and the cost economics workout. But right now, we don't have plans.

And last question is Water Treatment Chemicals & Solutions, there's a lot of focus by government of India on this. So do you think this business can scale up? What's the thought process there?

Which business, Sir.

Water treatment.

No, that's one of the, what we call our legacy business. In fact, Water EPC, we have completely exited. We are not taking any orders. We have stopped taking orders on that also. Because of the margin and scale and no real entry barriers. So we could not -- we have decided to -- So -- and there are companies doing very well in that business. And -- but we are not going to be -- going after that addressable market. Our current addressable markets are enough. So we'll focus on fewer markets and try to be larger scale and then -- rather than having several subscale businesses.

Our next question is from the line of Hari Kumar, an individual investor.

Sir am I audible?

Yes, please.

Yes, my only question is regarding the heating process equipment division. Like the sector has now turned positive like the power generation. What are the potential for this business? And are you investing in that furthermore?

Yes, sir. Our process equipment, as I mentioned, is a growth vertical. Doing well, record order books. You are right, I was in Trichy recently and our order book from the power sector has grown. I -- we are not looking at that as the major driver of our markets in our process equipment business. I think we're looking at the sector, we typically target. So cement, sugar, steel, these are where most of our products in the process equipment business are going to and we want to increase that. Power is doing well right now. But as you also mentioned, and the order book in that is up. But the majority of our order book is nonpower.

Can we enter into green hydrogen business, sir?

We have no plans to enter in the green hydrogen business.

Our next question is from the line of Dilip Kumar, an individual investor.

Yes, Aditya. I just wanted to know the start-up costs that we have factored in last quarter in the Raebareli plant.

In what plant, sorry?

Raebareli plant.

You said start-up in the CapEx, sir?

Yes, the pre-opening costs, I think you can't talk about onetime cost. One is, of course, the salary has come down because the bonus [indiscernible]. And there has been an other income gone up because of the start-up cost in Raebareli plant, the pre-start cost.

I will ask Shrikant to answer your question.

Yes, there are 2 clarifications, I would like to clarify. One in terms of salary cuts and one in terms of other income costs. In terms of other income cost, it predominantly include the deposits from mutual fund, interest income and the collection of old receivables there. In terms of salary cost, predominantly, there are 2 components, one is India salary cost and the other is the U.S. salary cost. In terms of India salary cost, that has been increased because of the new people we have deployed at Raebareli plant, the sales, engineering that we have hired for Engineering Services and Hydraulics. So that's the reason there is an increase in the India salary cost. But in terms of the consolidated salary cost, there is a decrease because there was a one-time bonus, which was there last year, the previous quarter, which is not there in the current year. I hope I answer your question.

Thank you. Ladies and gentlemen, that was the last question for the day. I now hand the conference over to the management for closing comments.

So thank you to all of you for your presence and your time and attention on the call today. We will continue to execute our plan for the rest of this financial year. And I'm grateful to all of you for your continued support. Thank you so much.

On behalf of PhillipCapital India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.