Ramkrishna Forgings Limited (RKFORGE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ramkrishna Forgings Q1 FY '22 Results Conference Call, hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishant Vass from ICICI Securities. Thank you, and over to you, sir.

Thanks, Lisa. Good day, everyone, and thanks for joining us today for the Ramkrishna Forgings conference call. The management is represented by Mr. Naresh Jalan, the Managing Director; Mr. Chaitanya Jalan, Whole-Time Director; Mr. Lalit Khetan, ED and CFO; and Mr. Rajesh Mundhra, Company Secretary. Now I'd like to hand over the call to Mr. Lalit Khetan for his initial and opening remarks. Over to you, sir.

Thank you. Thank you, Nishant. Good evening, and thank you, everyone, for joining our Q1 FY '22 earnings call. We hope all of you and your loved ones are keeping well in these tough times. I have with me Mr. Naresh Jalan, our Managing Director; Mr. Chaitanya Jalan, Executive Director; and Mr. Rajesh Mundhra, Company Secretary. I hope you have been able to go through the results update presentation we have uploaded on the stock exchanges. I will just give a brief update on the industry right now. The Indian government's PLI scheme for automotive sector with an outlay of INR 57,042 crore is expected to spur manufacturing and growth for the whole sector. The scheme still awaits approval from the cabinet. But as per report, incentive rates may range from 2% to 12% of the incremental sales/revenue depending on the product category and sub scheme. RKFL stands to qualify under the Automotive Champion scheme, considering we meet all the registered criteria set out for the component makers, that is more than INR 100 crores from the overseas operations, at least INR 500 crores for overall revenue and global investment of minimum INR 150 crores. Once the final scheme is approved, we will evaluate the same and share our plan to capitalize on this opportunity. Demand and consumption in the domestic auto sector remains subdued during the quarter. However, from the later part of June 2021, normalization of economic activity restarted and we expect a strong demand in domestic market in Q2 FY '22. On export front, as per the latest data provided by the SIAM, total vehicle exports during the April to June quarter of the current financial year stood at 14,19,430 units compared to 4,36,500 units in the same period in 2021. Commercial exports in the first quarter stood at 16,006 units as compared to 3,870 units in the April-June period of the last year. Globally, markets are showing signs of resurgence. European truck market is continuing to recover with new registrations expected to boost -- expected to rebound by 18% this year after a 27% plunge in 2020. Supplier side delays following disruptions and shortages will slow the upward trend. But order book suggests the recovery will last into 2022, full year -- full calendar year 2022. Additionally, U.S. new light vehicle and U.S. fleet sales grew by 30% and 5%, respectively, compared to the same period in 2020. In view of ever -- as of, we are confident of achieving good sustainable growth in the near future in terms of top line in domestic as well as export market and further improvement in overall operating margins on account of new order wins, on existing as well as new customers and development of new products from existing customers. We have presented all the information on financial performance for Q1 FY '22 in the investor presentation uploaded by the company. Before starting question-and-answer session, I would like to request participants to not raise any customer-specific queries during the call. And we will now open the floor to questions and answers.

[Operator Instructions] The first question is from the line of [ Dipen from BS Investments ].

I had a slightly more macro question. Could you give us some further insights into how do you see the commercial vehicle market in India and also in the export market panning out over the next 2 to 3 quarters? And specifically, you made a comment that your order book suggests that calendar '22 should be a good year. If you could throw some more color on what exactly do you mean by that? And if at all you can provide some numbers in terms of order book, that will be great.

Thank you. I think regarding domestic market, domestic market, like Lalit explained in his opening comments, that post opening from mid-June onwards, we are seeing a lot of traction in the market. And we are extremely confident that commercial vehicle as a whole industry should do well in second quarter and going forward in -- we are -- in the third quarter, there is a festive season. So we expect this whole year, rest of 9 months, for commercial vehicle in India to do extremely well. In terms of export market, we are seeing a lot of resurgence in terms of Europe and as well as the market in U.S. is extremely bullish going into FY '22 also. And in answering an absolute number of my order book, I don't think that is possible because it keeps on fluctuating month-on-month. So I cannot give any number to the order book, but we are extremely confident of doing well with the current scenario, whatever we see that the whole year is going to be -- whole year is going to pan out extremely well for us.

Okay. And if I understand from the investor update, which you had given that our overall capacity will be about approximately 1,80,000 tonnes. So if I have to just -- and in the first quarter -- so currently, what would be the capacity utilization? Is it around 70% or so? And by when do we expect to reach the full capacity? And can we go more than 100% utilization? I'm slightly new to the sector, so not very much aware about that. But what is the maximum capacity utilization level which we can achieve? And by when do you think we should be achieving that?

I think in first quarter, we did close -- we have had a utilization of close to around 70%. We never toned down our production levels, and we kept on producing. In spite the industry did not -- was not absorbing all things, we built up the inventory, looking into the pent-up demand going into future. And in terms of utilization, going forward, in terms of capacity, I think as you are aware that we have added capacity in this quarter. And going forward, we feel by the fourth quarter of this year we should be looking at close to 90% utilization of the installed capacity.

Okay. So is it 90% of 1,80,000 tonnes, approximately that much?

1,87,000 is a full year annual capacity, but for a quarter I think it is divided by 4 and 90% should be the utilization going into fourth quarter.

Okay. Okay. And sir, any further impact which we expect out of the raw material increases? And if at all, you can give us some guidance of what -- how should we look at the operating margins, the EBITDA margins going ahead.

No. In terms of raw material increases, it is not in our control. It is absolutely steel -- decided by the steel mill and the international steel pricing. We will not predict what is going to happen going forward. But in terms of policy, we have a pass on policy with our OEMs with a 1-month lag. So we are able to pass on most of our price increases of steel till now, and we expect to do it in future also.

Okay. So we have achieved our highest EBITDA margins in the current quarter. So do we -- should we expect in the next year going ahead we should be achieving somewhat similar margins, if at all not the exact number?

We tend to remain at these levels going forward. We expect our margins to remain stable, and our outlook is extremely bullish.

[Operator Instructions] The next question is from the line of Abhishek Jain from Dolat Capital.

Congrats for a strong set of number in tough time. Sir, there is a fast movement in the gross margin in this quarter. Is there any one-off like related with the past quarter under-recovery as the RM impact was passed on in first quarter, with 5% jump in domestic realization?

No, no. See, Abhishek, there is no one-off item in our income statement. And it's a consistent revenue and consistent cost. It's only -- there is an improvement in certain realization and -- which is going to continue. I think this level is going to continue going forward.

But in the last quarter, you have mentioned that the export -- there was a under-recovery in the export realization, and that will be passed on from this quarter only? So is there...

That is materialized. That's not a problem. That is materialized.

So what would be the sustainable gross margin in the coming quarters? Because will it be sustainable at this number? There won't be any price fluctuations?

See on the price fluctuation, it depends because we can't comment on the price fluctuation, but whatever will be the price fluctuation, that's going to be passed through to the customer. It's a matter of time lag, so 1 month left -- this is a general time lag. And on the margin side, we are looking at right now what margins we have achieved, and we would like to achieve the margins in this range only going forward.

Okay. And there is a fast jump in the employee expenses during this quarter. So is it because of the capacity addition? Or is it because of the hike in the salaries?

No, it's a combination of that. This is -- there is some hike in the salary, and certainly, we have paid back the employees what we have deducted in earlier year. That also we have paid in this quarter. So this is on account of that. And we have paid some incentives to our employees also. So that's why a bit high. Next quarter, you will see the normalized salary.

Okay. And in first quarter revenue from the Europe has shown a strong improvement. Can you throw some light on it? Have you won any new business? Or what is the reason?

I couldn't got your question, Abhishek. Can you repeat it?

So revenue from the Europe region has gone up significantly in the first quarter. Can you throw some light on it?

No, Abhishek, I think we have already expressed in last several calls that we have won large businesses from Europe. And it is -- now this has started coming into our income statement, and it is going to continue to grow. Europe is going to be a significant contributor in top line going forward. This is only some highlights which has come into this quarter. But this is -- on a continued basis, this is going to -- Europe is going to continue to grow.

So what is your revenue target from the Europe in FY '22?

No, we don't have any guidance in terms of FY '22. Basically, our intent is that in export side, Europe is going to be a substantial portion. Earlier only we -- our substantial portion of contribution from exports was coming from North America. But now Europe is going to become a substantial part in our income statement.

Okay, sir. Sir, your total capacity for press line has gone up to that 1,07,200 tonnes after adding the new press line of the 7,000 tonnes. So total capacity addition in first quarter stood at 24,650. Is it for the 6,300 tonnes press line or 12,500 tonne press line?

No, no. Abhishek, see, we have added hollow spindle line last year in December. So 10,200 tonne was for that account. But for the -- we had -- well did for only 1 quarter. That's why in the result we have seen it 2,550 but it was 10,200 added last year and 17,000 tonnes on account of new 7,000 tonnes press line, making a total 1,07,200.

And is it for that -- it is for the heavy press line or the 1,600 tonne press line?

7,000 tonne press line.

7,000 tonne press line. Okay. And sir, you have also mentioned that you have furthered into road in the mining segment in domestic market. What is the revenue visibility you're looking from this business?

From mining segment, we do not expect a huge revenue. But we have just made a significant entry. This is going to show in coming quarters. It is going to become -- slowly become a significantly going -- and a growing business going into FY '23.

Okay. So you are not expecting any business in the -- significant business in the mining segment in FY '22?

No. We are already doing -- in the mining segment, we are doing an annualized business of close to around INR 40 crores to INR 45 crores. This is going to become -- this is going to increase by 10% to 15% in this year, but this is going to become a significant business in FY '23.

Okay, sir. And sir, in last quarter, you have also mentioned that you have won the business of around $25 million -- annualized business from the LCV business. So when it will start to reflect in the PL? It is only in FY '23 or...

It is going to be in FY '23. This year -- we have already mentioned in that call that this year, we are going to give samples and field trials. And next year, there is going to be a business in the income statement.

Okay. And my last question is related with this gross and the net debt on your books at the end of the first quarter FY '22.

Gross and net debt. Okay. So total net debt is about INR 1,100 crore, Abhishek.

INR 1,100 crores. Okay. And that is the net debt?

No, that has marginally increased due to higher utilization on account of working capital because there was very less domestic sales, and there was much higher export sales. So that's why a little bit increase due to working capital utilization, but it will again come down in upcoming quarter.

And sir, your CapEx plan for FY '22, considering this -- taking the benefit of the PLI scheme?

See, once the PLI scheme will be out, then certainly, we will work on that and examine that in the finer details. Then we will decide on the action plan as for PLI scheme. Right now, for this year, we are going to complete our pending of the last year projects. So that's INR 60 crore on that account, another INR 20 crore, INR 25 crore on the maintenance and another little bit on the machining side. So we will be adding between around INR 100 crore of CapEx this year.

The next question is from the line of Aditya Makharia from HDFC Securities.

Yes, sir. Just a couple of questions. Firstly, on the debt, what is the plan to deleverage? We have about INR 1,050 crores, INR 1,100 crores, as you said. What's the level we are comfortable with? And secondly, in the U.S., with regards to the Class 8 truck sales, is the semiconductor shortage out there over? And what is the CY '21 or CY '22 U.S. Class 8 sales number you think is realistic?

In terms of debt, I think we have already guided in the last call that we are looking at reduction of debt on an annualized basis of close to around INR 75 crore to INR 100 crore in this year from internal accruals. And in terms of Class 8, we cannot predict whatever -- right now, we get the sentiments that there should be 2,70,000 to 2,90,000 for the full year in calendar year '21 and calendar year '22 also looks to be robust and at these levels only it may continue.

Okay. But is the semiconductor shortage an issue out there? Because what we understand is the fleets are running full, but the new truck deliveries is delayed for some reason.

No, new truck deliveries are delayed because of semiconductors as well as the supply chain issue being faced because of a sudden surge post COVID.

The next question is from the line of Mitul Shah from Reliance Securities.

Congratulation on good performance. Sir, again, a follow-up on gross margin side. In terms of raw materials per kg, sir, if I do that calculation based on your volumes, then it comes INR 74 per kg compared to past many quarters it was in the range of INR 81 to INR 85. Can you throw some light how come this instead of dicing it because of the commodity inflation it has come down significantly?

See, this all depends upon the product mix. There is no reduction in raw material prices. So raw material prices are constant as per the last quarter only, and it was consistent. And I don't have a detailed number how you derive this number of INR 74 right now. But certainly, the -- it's inconsistent with the prices what we have in the last quarter. And see, if you are comparing the value or value per tonne in terms of sales and cost, it may not be the benchmark because product mix may differ quarter to quarter. And well, top realizations are also different. So it may have a different value. But the raw material prices have not gone down. So it should remain consistent with the last quarter only.

Sir, I am taking -- I'm not taking anything from the revenue side. I'm taking purely raw material costs given by you in the P&L and dividing it by volume given by you.

So I think you have production value, correct?

Right.

Abhishek (sic) [ Mitul ], if you look at last quarter also, last quarter my production was more and the raw material was -- I think the production is wrong. Last quarter, my production was 37,000 tonne and my cost was INR 272 crores. And this quarter, it is 35,000 tonne and cost is INR 263 crores. So almost it is in line. How is it you are deriving a 10% difference, I don't know.

Okay, sir. I'll take it offline.

Because it has been very consistent with the last quarter. So I think there is some error in your calculation.

Sir, my second question is, again, on a working capital line, you indicated it has gone up marginally. Can you give numbers roughly how much was it in last quarter, working capital line, how much it has increased?

Actually the last quarter to this quarter, the working capital numbers have been increased by around INR 30 crores. And whatever because long-term debt we have paid around INR 20 crores, but that also has been drawn also same amount on account of continuing CapEx plan.

Sir, last question on the margin side. As you reported historically high margin, but this is again a quarter wherein your export volume is nearly half of the total volume. So can you indicate that export margins are sizably higher than the domestic, and that is the reason these are the margins?

I think, Abhishek (sic) [ Mitul ], like we have expressed in earlier questions also and in the past also we have said, we are always working on improving the margins, and this is going to be consistent with the future earnings. And it is not that the export has higher margins. It is basically the product mix which derives the profit. And we are driving in terms of in product mix to earn better margins going forward.

Yes, sir. This is Mitul Shah. Lastly, again, just reconfirmation. Earlier, we indicated non-auto segment revenue would be somewhere in the range of INR 300 crores in next 2 years. Still, we believe that we can do in FY '23?

Yes. We still believe because I think post-COVID, things are working out well within domestic industry and things are coming up very fast. So we feel that going forward, whatever we have commented we will be able to achieve by FY '23.

[Operator Instructions] The next question is from the line of Viral Shah from Enam Holdings.

Sir, just a question on the debt. I think we said our debt is around INR 1,100 crores, and we plan to reduce it by around INR 75 crores this year. So sir, is this number the peak debt that we will see despite of growing export where we have a large working capital cycle? So can you just throw some light on the debt side? I mean have we seen the peak debt? And how confident are we of being able to reduce our debt numbers from here on?

Viral, see, by and large, I think we are there at the peak level, depending upon certainly this quarter performance, which maybe 5, 4 here and there. But as domestic demand is going to improve from here on, and so the cash flow certainly on the domestic side is much better. And when domestic sales improves, cash flow improves and drawdown levels will certainly go down. So we are very much confident of reducing debt from here on, and we are hopeful that there is an uplift in the demand in domestic market.

Sure. Sir, second question, I think you did allude to the fact that your production volumes on a quarter-on-quarter basis were largely kind of constant despite a sharp drop in CV production volumes. Sir, can you just throw some light why so? I mean, why did we kind of keep our production levels at an elevated level?

We actually felt that there is going to be a lasting post COVID when the market suddenly because of pent-up demand went ahead of prediction. We were caught offguard and we were not able to sufficiently utilize the opportunity for higher sales. So this is the time when we thought that it is better prudent to be -- keep on producing. And in case there is a pent-up demand, we will be able to make out the market and utilize that opportunity to be on the upper cycle of the market.

Sure. Sir, can you provide an update on the Amtek acquisition?

It is still in NCLT, and we are still getting dates. We are not able to get update or any confirmation from the judiciary right now. So we don't have any time lines as of now by when we expect things to get materialized.

Okay. And just last point on electrification, sir. Sir, do you foresee, on the CV side, there could be kind of an upsurge in electrification or maybe hydrogen fuel cell technology in the next 2 to 3 years? And if so, how does that impact our company?

I think our sales are not into -- majorly into any engine component. So I don't think we will be able -- be affected majorly or any way by electrification or in terms of hydrogen vehicles. But to just keep you updated, we have already started on working on EVs also with a lot of OEMs, and we have just very recently received significant order book for EVs from existing OEMs to start producing and supplying them. So we are -- as and when this sector starts developing into EV, we will also significantly make inroads into it.

The next question is from the line of Abhishek Shah from Valcore Capital.

One is, sir, you mentioned that you are -- just confirming. You mentioned that by Q4, you're looking at 90% utilization on the 1.77 lakh metric ton capacity. Is that correct?

Yes.

Right. And sir, that's assuming like Q3, we did about 30,000 tonnes volume. And so where do you see that incremental growth coming from? And what will be the domestic and export split in that? I mean just to ballpark just trying to understand where do you see incremental demand coming from.

I think it is extremely difficult to say what is going to be the premix of -- in terms of export and domestic. But as you know, we have already said that the current market scenario for CV was sluggish, and we expect the demand to come back in these coming quarters. So we expect with this capacity, we will be able to sufficiently utilize the current demand, which we feel that is going to come back to the industry in next coming quarters.

Right, right. And sir, higher domestic volumes, do you expect the margins then to sustain at these levels, at 23%?

I think with the utilization improving, obviously, the cost -- fixed costs are going to come down significantly. We are extremely bullish that our margins are not only going to sustain, we are going to do better in terms of margins going forward if the capacity utilization improves.

The next question is from the line of [ Dipen from BS Investments ].

Sir, I had a follow-up question as far as the electric vehicles are concerned. Do we currently supply to any customer for their electric vehicle? And if at all, we have any plans about how to proceed on those lines? If you can just throw some more color on that, sir.

I think I have just answered to a question previously that we have just received a significant order from -- for electric vehicles from an Indian OEM. This is our first entry into electric vehicle, which is concerned. While we are working with a lot of customers on offshore in terms of electrification and components for electrification. In terms of making any equipment or making any assembly, we are right now not there. But yes, we are going to be part of assemblies for EVs going forward, and you will be able to hear in these coming quarters for -- RKFL getting into significant businesses with offshore and domestic customers for EV.

[Operator Instructions] The next question is from the line of Faisal Hawa from H.G Hawa and Co.

Yes. So my question is that how do you feel that in 4 to 5 years, what is the kind of turnover of the revenue that we should expect? And what are the kind of investments we need to make for the company to be really sustainable and in a high-growth phase?

I mean we are currently in the high-growth phase and I think with the capacity utilization improving, I don't know what is going to happen after 5 years. But as far as company is concerned, we aim that in next 2 years, company should be looking at close to around -- at least in terms of achieving top line at least 50% to 60% growth on an annualized basis from here on.

So in 2 years the strategy or the DNA of the company will remain same only, to grow faster?

I think strategy is very simple. We continue to grow with the market. We are working both on content of the vehicle as well as getting into new geographies and new varieties in terms of automotive segment.

The next question is from the line of Mitul Shah from Reliance Securities.

I have a question again on the LCV side, sir. What is the status currently? And what is the outlook on that side? Are we similarly bullish the way we are positive on the Class 8 and domestic MHCV?

We are extremely bullish into all the segments of the commercial vehicle, whether it is a light vehicle or whether it is heavy vehicle. We are working extremely efficiently on both the markets and we are getting new businesses as well as increasing our content in existing business also in terms of share of business and new component. So we are extremely bullish. And if you see by what performance we have given in the first quarter, while the industry -- most of the industries in India were on a shutdown basis and there were practically 0 sales, we have been able to clock a significant sales in domestic industry also. That is basically only because that we have improved our content per vehicle as well as share of business per vehicle.

Sir, secondly, on the export side, can you indicate any major addition of client from North America or any -- apart from this Europe, any other country?

No. As of now, we have nothing to inform. I think already we have given a press release a few weeks back regarding our order win for Europe, and we do not have any new information to share with the investors.

[Operator Instructions] The next question is from the line of Sagar Parekh from Deep Financial.

My question is, again, on the gross margin. Sir, I'm still not able to understand. You gave a clarification, but can you again help us understand. So if I look at your last quarter's raw material costs, that is raw material consumed and stock adjustment put together, that was about INR 264 crores in March 2021. And if I look at June 2021, which is the current quarter, your raw material cost is about INR 162 crores.

Correct. Yes. Carry on, Sagar.

Yes. So basically, I'm looking at about 11% improvement in gross margins sequentially. So could you clarify how that happened? That's a pretty big jump. So on the realization front, I understand that your realization increased quarter-on-quarter by 7% and 9% on domestic and export side. But on the absolute growth -- absolute cost, how did it come down is what I'm trying to understand.

Again, it certainly depends upon the product mix, Sagar. And certainly on the export side lot of heavier product has gone, and that gives us a little better margin on the raw material side also. So that has yielded in this kind of a margin.

So this could be the sustainable number? So if I just take the -- on the percentage terms, if it's coming up...

See, the number are -- is going to remain nearby in terms of what Nareshji earlier said. See, we are expecting improvement in capacity utilization. So product -- certainly, the export and domestic mix may change in upcoming quarter a little bit. But the export is going to remain strong, and we are also looking to improve on the export numbers also quarter-on-quarter. So with that, we are extremely confident of achieving similar kind of margin or we may improve upon that.

Okay. And just to clarify, this European OEM order that we won of EUR 15 million that will start from FY '23, right?

Yes. It will start from FY '23.

Okay. So this quarter's European numbers does not include that. So that is from the earlier orders that we got?

Earlier order wins. It is there in the current income statement. And gradually, this is going to grow over next couple of quarters. And EUR 15 million new order book is going to -- this year it -- samples and field trials are going to happen. And this is going to completely come into the new order book next year.

Okay. So how big do you think can Europe become? Like right now, it's about 25%, 26% of export sales, but broadly...

I think, as a company, we are estimating or we are working on basically 50-50 in terms of Europe and North America exports. That is the intent. Basically, that is the intent we are working with.

Sure, sure. And just last question on -- from my side. We have guided for INR 75 crores to INR 100 crores of debt reduction for this year. But if I look at your -- and you have also said that next 9 months are looking very promising, both on export and domestic. So your margins are also going to improve. So about -- even if we'd like do INR 450 crores, INR 500 crores of operating profit and then -- so you will have significant cash flows, right? So what am I missing? It's just the increase in working capital that will lead to lower debt reduction because your CapEx is also just INR 100 crores?

I think basically Lalit has already answered to this question. Basically, when domestic sales improve, the inventories are going to go down, and that is going to create cash in the books to pay off the debtors. So short-term debts are going to -- we are looking at reduction of short-term debt going forward from INR 75 crores...

No. So why only INR 75 crores to INR 100 crores? Why not more is what my question is because you would make much more cash flows then?

See, Sagar, it depends upon certainly cash flow. And if there is cash at level that INR 75 crores or INR 100 crores is -- was our target right now. That's on the conservative basis or I will say optimal basis. And if we have more cash, certainly, it will go on only, reduction in working capital debt only.

Okay. So are we actually factoring in any Amtek acquisition during this year in our INR 75 crores to INR 100 crores? Or if -- so let's say, if it happens, then will our debt reduction target further go down or...

No. Amtek acquisition is altogether separate from all decisions because right now we don't have the clarity on that. Once the clarity will be there, then we will comment upon that, including the debt number. Right now, we are not considering that in our -- any of the statement.

Understood. So this interest cost of INR 18 crores to INR 20 crores kind of quarterly run rate will continue for this year also then?

Yes, yes.

[Operator Instructions] The next question is from the line of Nishant Vass.

Sir, could you shed some light in terms of the progress in the domestic non-auto business? How are you seeing that play out specifically in categories like railways? Any -- can you shed some update on that?

I think, Nishant, in terms of railways, we have had a very high number. But because of COVID, we do not see any great improvement. But it is a pleasure for us to inform that we have received development orders for manufacturing of shells for locomotives, and we will be supplying -- and each shell is costing close to around INR 80 lakh. We have received an order for close to around 8 pieces. And this requirement from Indian Railways is close to around INR 250 crore. So we will be supplying this development order within next -- in the third quarter of this year. And post that, we expect a significant business next year for manufacturing of shells for locomotives from Indian Railways. And in terms of further -- other nonautomotive business, we have entered a segment, which was missing in our portfolio. That was tractor. We have made significant inroads in this quarter in the Indian tractor industry. And I think going forward in next 2 quarters, we should do significant business from tractor. And next year, it is going to be, again, 8% to 10% annualized business for us from tractor segment.

And sir, in the same construct on nonauto exports, are you seeing some improvement in your category in the new offtake?

Yes. We are seeing good traction in oil and gas and locomotives in our offshore business. And I think it is very nascent right now to comment on what we will be able to do. But whatever indications we are getting from the oil and gas industry, I think, we should do a significant business in this year as well as next year in oil and gas. As you are aware, because of the high oil prices, CapEx has again started in the oil and gas sector. And we are going to -- we are extremely bullish going into next 2 quarters -- maybe second quarter may not result in a significant business, but the second half of the year we are going to do a significant business in oil and gas.

Okay. Sir, just the second question is more in terms of what would you think would be -- because obviously your capacity sometimes is tangible. And obviously, it's a function of product mix and sometimes standard is not the right reflection. And in some categories, utilizations have been higher than 100%. So how should one think about your potentially utilization -- peak utilization on the space of your capacity?

I think, Nishant -- I think peak utilization can be somewhere between 88% to 90% of the capacity we have declared. That is going to be the peak, beyond which we will need to do further CapEx to augment further capacity.

Okay. Okay. Fair enough. And my third question is more in terms of previous cycle to this cycle. So how would you put your sales -- without naming any customer in terms of categories, how do you think your content per vehicle is likely to evolve through this cycle vis-à-vis the previous cycle? And in terms of also potentially, will that be positively impacting your gross value add? Just some directional trends on that.

I think, Nishant, we do not see anywhere the volumes to return back to what was there in 2018 in near future. But whatever was the pre-COVID level, if that also happens, we will be, I think, significant contributor to both in top line and in the bottom line from the domestic industry. I cannot put an absolute number to it, but in terms of content, whatever improvements we have done, if pre-COVID level also comes, then also we will be able to do significant business in the domestic industry.

And sir, you -- in terms of content per vehicle for exports presumably between previous cycle and this cycle there should be improvement. That is the right assumption?

I think that is already showing in the balance sheet, Nishant. I think if you see our historical numbers, I think we -- in terms of quarterly exports, we have done the highest ever exports in this quarter. So obviously, in terms of geography, in terms of making inroads into new arenas, we have done considerably well.

[Operator Instructions] The next question is from the line of Kush Joshi from Kitara Capital.

Sir, can you just explain some -- the inroads which you made to the South American markets? So I'm clear to that.

I think in South America market, it is not a new inroad. I think 3 years back, we were doing significant -- in 2017, we were doing significant business for Brazil. And because of the currency impact that business had gone, and we had no businesses for last 3 years from them. And now post COVID, because of the surge in the market, that business has come back again. And we have confirmed the business plan for them for next 3 years.

So what was the business we were doing in '17 in Brazil?

I think it was close around $5 million, and this is going to be a $5 million for next 3 years for us.

Annually?

Annually.

Okay. And my second question is if you speak to passenger vehicles, so whether any traction that we made there?

No, we have already entered into passenger vehicle segment, but right now our components are on field trial. And right now, we have not made any significant entry. I think going forward, it will take at least 2 quarters to make significant into passenger vehicles.

The next question is from the line of Hitesh from Aksa Capital Advisors.

Sir, it's quite heartening to learn that you have been winning new business. And this is -- I think the wins which you're talking about, these are just not the organic growth that you're targeting, but I think it's also the content per vehicle. Just trying to understand what is driving this order flows to us in the sense how are you -- I'm sure you're dislodging some other players who were already catering to that market. So what is driving that change, if you could help us understand that?

I think I'll not be able to comment that we are taking somebody else's business or not. For us, it's a new business and it is a new component, a new area which we are entering and as well as new geographies. So we are bidding for each and every business and opportunities which we are getting, and that's the way we are getting into new businesses. But whom we are dislodging or why we are dislodging it's up to the buyers to comment. We cannot comment on that.

But are these new wins for the newer models? Or are they even for the existing model of vehicles that is coming in?

It is both, existing requirements and as well as new requirements.

And because of the difference in the steel prices both in India and the overseas market, is it because of that, that we are getting an edge in terms of pricing that we are quoting with our customers?

I cannot comment on that. We are not looking at international pricing. We are working with domestic steel industry. So we are working purely on that. And we are quoting as per our norms and our overhead. So I don't know or I cannot comment right now. Why -- it is up to the buyer to make his decision or what savings he is having. So I would basically only be happy that I get the business, and I continue to supply and get more and more entries into new geographies and new arenas.

Sure. And what would be the typical tenure of these wins that you generally have from the overseas customers?

It is 3 to 4 years.

Okay. And just one last...

Some contracts are 4 years.

Sure, sure. And just the last thing. The railway order that you were mentioned about 8 shells for the locomotives. Is that for the freight locomotives or is it for the passenger locomotives?

It is for electric locomotives, both used for freight as well as passenger trains. These are being manufactured by DLW and CLW in India. But there are 2 basically locomotive manufacturing companies in India and they manufacture and India is converting the entire requirement to electric locomotives, and we have started manufacturing shells for these locomotives.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for the closing comments.

Thank you, Lisa. We would like to thank everybody joining on the call today. We are confident of continuing our new growth momentum by capitalizing on the upfront in domestic and international automotive sector. Increasing content per vehicle along with new customer addition would enable us to maintain optimum capacity utilization of our enhanced manufacturing facilities. For any further queries, we'll request you to get in touch with SGA, our Investor Relation advisers, or you are also free to get in touch with us. I wish you a very pleasant evening. Thank you.

Thank you. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.