Rico Auto Industries Limited (520008) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Rico Auto Industries Q3 FY '22 Earnings Conference Call hosted by S-Ancial Technologies Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Gyanchandani from S-Ancial Technologies. Thank you, and over to you, sir.

Thank you. Welcome to Rico Auto Industries Q3 FY '22 Earnings Conference Call. From the management, we have Mr. Arvind Kapur, Chairman, CEO and Managing Director; Mr. O. P. Aggarwal, Chief Adviser, Finance and Accounts. Mr. Surendra Singh, President and CEO; Rakesh Sharma, CFO; Mr. Sandeep Rajpal, Vice President; and Mr. B.M. Jhamb, Company Secretary. Now I request Mr. Arvind Kapur to take us through the key remarks after that, we can open up the floor for Q&A session. Thank you, and over to you, sir.

Good evening. My name is Arvind Kapur, and I'm sitting in the boardroom, along with my colleagues here at Rico. Q3, normally, I think as we look at it every year, it's lower than the rest of the quarters, primarily because in the month of December, most of the companies, they take a shutdown. They close the plants for maintenance and the productions are normally less. But having said that, we also have the period of Diwali when there's full pressure to increase the production. But this year, unfortunately, the pressure was not so much, but nevertheless, I can run you through what happened to Rico, vis-a-vis the industry. In the 2-wheeler, it was a big challenge. The 2-wheeler industry were -- because of the rural areas is not [indiscernible] expected that this particular quarter, the fourth quarter also, they would just be okay. They were not -- there's no aggression as far as the 2-wheeler industry, and this is what we have seen. The car industry is doing very well. There's a waiting. There's a shortage of vehicles at the moment, primarily because the production is not there. And the reason for that is the chip shortage, which we had discussed the last time. And I think it's -- the whole industry knows about it because of the chip shortage, the volumes are limited. Maruti is producing less even the other vehicles Kia or Hyundai or if you look at the Renault Nissan, they are all producing less. And everybody is hoping that by the month of June, this chip shortage would get okay. And -- but this last quarter, the fourth quarter that we're talking of, I would say Maruti is saying that they would be tucking about 90% or 95% of the total volume. And so are the other carmakers also very hopeful that with the additional chips available, they'll be able to sell more. And fortunately for the industry, the car industry, there is a waiting list and there's a -- even today, the people visiting the showrooms is good, and the bookings are also very good and so we are all hoping that once a chip shortage gets over, there is enough pressure in industry for them to supply. With commercial vehicles, they did better than last year, and they performed -- now I'll just tell you about the performance. In the 2-wheelers, this quarter was negative, if we compare it to the previous quarter. But Rico grew by 7% with the 2-wheeler industry. That is primarily because we took a larger share of the components that we are supplying to the 2-wheeler industry. And in the 4-wheeler, overall, there was a negative growth and -- but Rico grew by 10% in the car industry. That is, again, taking a larger share of the component that we are supplying. And also introduction of newer components which went up last year, which have come into production now. In commercial vehicles, they grew by 16.3%, but Rico grew by 21%, again, a larger share of components. And I must give you 1 good news that our 2-wheeler sale is about 30%, 35% of our total production. And the 4-wheelers, we are now at about 52%, 53%. And the good news is that we have made good inroads in the electric vehicle sector. And earlier, we were only 2% of our total sales. And this year, we should be more than 15% to 16% of our total sales in the electric vehicle sector. And so the growth is pretty good as far as the electric vehicle is concerned. And we are further on the electrification side, we are investing more. We are producing more. And next year again, there'll be new progress of Toyota and the other vehicles which will also come up. So we are very hopeful that with the chip shortage going away, the demand that has seen in the industry at the moment if that remains. And I think the car industry will do very well, but the commercial vehicle sector, we are -- there's a lot of pressure from Cummins and the other customers that we should supply more aggressively, and we need to wrap up some capacity. And -- but on the 2-wheeler front, we are doubtful that the growth will actually take place. And we are hoping that growth takes place. But having said that, we will further increase our share of the business that we are getting the 2-wheeler industry so that our growth actually happened in the 2-wheeler industries. This is as far as the industry -- exports are pretty good. And the only problem is that the containers are available now and the rates have also come down. But in the U.S., there's a huge congestion at most of the ports. And in some cases, there's a waiting of almost 15 to 20 days and to -- in some cases, even more than that. And after you clear it from the customs in the U.S., then transportation by rail has become another pain, and that takes another 15 to 20 days because there's a congestion there also. So these are some of the issues we are battling with. And hence, we are shipping more and our turnover would have actually been more because there's a lot of consignment sale which we had to take place because of the containers not reaching on time, we have started shipping more. There would have been a difference of almost about INR 10 crores in sales that would have also happened in this -- in our last quarter. In Freight and Packaging, we've, despite the costs which have gone up tremendously. And these days, of course, it has come down slightly. We have been able to save on the Freight and Packaging by reorganizing our packaging and also the staffing of the containers. The chip shortage remains that's a big challenge, and we are hoping and everybody is hoping that by June, it should get over. This quarter is going to be better than the last quarter and the quarter following that should also be even better. So we were hoping that, that would also improve. And the profitability, there's a lag impact of aluminum to the tune of about INR 10 crores to INR 12 crores, which we will get it only in the next quarter. And -- but the good news is that from -- in this particular fourth quarter onwards, with the [indiscernible] seems to be more stable. And hopefully, the lag should also diminish now. I think we can open it to questions and answers, that would be better.

[Operator Instructions] The first question is from the line of that Aditya Sen from RoboCapital.

I had a few questions. The first 1 would be on the CapEx that we are doing. So I wanted some guidance regarding this, but from where are we funding this CapEx? And until when will this get commissioned, the CapEx of INR 101 crores that we talked about in the last con call.

No, it was more than INR 101 crores, it was about INR 125 crores, that is for -- now this is the investment that we are doing in Chennai. This is related to primarily the -- for electrification again. And this is a Toyota project in particular. And we got the order for that. So we had to make a new building and order new equipment, which is coming in, we were done already about -- in that particular project, we've already invested about INR 80 crores. And the balance -- the production comes -- we are supposed be ready for production by the month of June. And so -- and the wrap-up also takes place almost immediately after that. And the wrap-up is more than whatever we had factored initially, what we had planned for initially when we got the orders for this particular electrification project. And it has gone up by almost about 25% to 30%. And we are very excited about this project for Toyota. And we -- this is the first time that the -- these particular components would be made for the Indian market and also export back to Japan and also to the other Southeast Asian countries. So we are very excited about it. And Toyota is also involved with us. The investment will continue and on this particular project.

Okay sir, in fact, we are also excited about this Toyota project. And on this, I wanted to know that, will this be EV-centric only like we are supplying to the Toyota's EV products only or for the entire Toyota's products?

This is for the Hybrid project of Toyota. And Hybrid Toyota normally makes it in-plant. This is the first time they've actually given it out to a supplier to actually make it. And they would like to make it for this particular model, they would like to make it as center for -- center of excellence for shipments to Japan and to India to Southeast Asia and other places.

Okay. And...

Having said that, we are also bidding for the further electrical components of Toyota, that is again for the huge project. We are looking forward to do that also.

So we are highly aggressive on EV. And the next thing is...

That's no choice because we made a lot of engine components and everybody questions us as to what happens with the engine project that we already have running. And even though we are very confident for the next 15, 20 years, next 15 years, definitely, we'll be still ramping up the capacity and these components will survive till then. And -- but having said that, our focus is primarily on the EV components. And having said that, some of the Maruti components that the orders that we have got and whatever we have declared earlier, they have almost doubled now primarily because of those vehicles which are selling more. And we had been asked to produce 1,100 to 1,400 components a day. Now we are producing almost 2,000, 2,200, much more than the capacities that we had set up for those components. Same thing goes for another 4, 5 components of Maruti.

Okay sir, I get that. And the next 1 would be, I assume that in quarter 2 -- the quarter 3, the capacity utilization must have been quite low. So can we expect because capacity utilization for quarter 4 to be around 80% to 83%, that is a our target earlier?

Certainly, there is our plan to plant, like a power capacity was fully utilized. That was above 85%. And our capacity in Gurgaon, and there were a couple of lines which are not running to full capacity. Otherwise, most of the lines that we're running at about almost about 70% capacity. But now we'll be running at some of the lines, we'll be running at almost 110%, 120% capacity because we'll have to, of course, supplement and [ come ] and also -- the productivity in those equipment. And also run 24/7, so that we are able to meet the customer requirement. And -- but in Chennai, that was where we were running at almost half the capacity and -- and with the chip shortage improving with the ships being available now, we are hoping that we should be able to run that plant also at 80%. And during the last quarter of the year, every customer is also pushing better. They have the maximum sales for the year.

[Operator Instructions] We have a follow-up question from Aditya Sen from RoboCapital.

Okay. So I'll take 2 more questions. One is, aren't we too much dependent on Hero MotoCorp because I think it is around 30%, 35% of our revenues, one that impact our profitability at times when the Hero MotoCorp is down individually.

Our dependence on Hero was almost 80%, and we've been able to bring it down to almost about 34% -- we are at about I'd say 30% dependent Hero. And we are also dependent on Bajaj and others and Honda. So the dependence is there. But having said that, despite Hero's production being a 20%, 30% lower than whatever was budgeted, we have actually increased our sales to Hero by taking a larger share and also spreading our wings as far as the components are concerned. But what you are saying is correct. We've been working on this, on any customer our dependence,, it should not be more than 20%. That's what our internal target is.

Okay. And the last one, going back to the CapEx thing. How is that CapEx being funded? Are we raising debt, or that's from internal accruals?

Mainly raising debt and also partly internal growth.

What would be the proportion, if you can answer this?

Like one?

What would be the proportion of the debt and internal accruals in the CapEx?

It's about 80-20.

80% debt, 20% internal accrual, right?

Yes, yes, yes.

[Operator Instructions] As there are no further questions...

Aditya just to add another to HeroMotor. We have no intentions of reducing our business as the Hero. We will continue being aggressive as far as Hero is concerned. But what we are trying to do is to reduce our dependence on 2-wheelers, we are aggressively following up the electric vehicles and also the 4-wheelers, the cars and also the commercial base.

Sir, we have Rishikesh Oza from RoboCapital in the queue.

Sir, my question is regarding -- if you could give a guidance for FY '23 regarding our revenues and EBITDA margins?

'23?

Yes, yes.

Well, let me be honest with you. We are actually waiting for all the details to come from our customers. And because depending on the availability of the chips, the car people are good will give us all the details by the end of this month so that we can also plan a budget for next year. But having said that, our growth this year would be over 35%, but next year also we are anticipating about a similar growth to take place with this also got new components that are there. And we are hoping that the bounce back would also take this as far as the industry is concerned. And having said that, the profitability obviously goes up -- will go up very well, primarily because of the utilization of the capacities that the investments that have already been made.

Okay. And in previous calls, you'd also mentioned about you're achieving a double-digit EBITDA margin. So any indication by when we can achieve that? I believe Q4 is what you had indicated previously, but any update around this?

The Q4, it solely depends on the commercial, the auto industry, how well they perform. Because say it is utilization of our capacity, and we were told earlier that by the end of the year, the chip shortage should go away. Then we were told it's going to be the first quarter. Then we were told the second quarter, so this is what is happening. But we are -- now we are also checking with the chip makers as to what is happening globally. And now we are fairly certain, at least of now that June would be the month where they would be close to normal now. They won't be absolutely normal, but they'll be close to normal. And so our EBITDA will be our -- we will be in the double digits positively next year. And -- but this year, you see an improvement taking place, but it all depends on the utilization capacities. And this quarter, hopefully, the capacity utilization will be much better. But for this quarter, in particular, our target is to be in double digits.

Okay. So we are targeting a double-digit EBITDA margin for Q4, you are saying?

We are targeting that, yes. Yes, our internal total discussion on that and total pressure is on that.

Okay. That's great. Also, the debt that you set for the new CapEx of INR 125 crores, so that debt will be recognized by when?

Debt will be recognized by when? Next year, early next year.

Okay. And even the CapEx given the fixed assets will be going up by the same month by next year?

No. This thing also because -- partly next year. Goods which are coming by [ LC ] from the Italy and Japan and all. And those are [ SCs ] and those get -- some are getting delivered, some are in March end, some are in April, some are in May. And that's what is happening. But some of the machines that are locally purchased and some also come in from Japan, and those have already been installed there.

CWIP is reflecting right now.

Okay. Got it.

It is now also it is reflecting in CWIP. And next year, it will get capitalized in Q2.

Okay right then. So by Q1, you will be totally capitalizing it, right?

Yes, it should be by the end of Q1 or middle of Q2, yes, yes.

Okay. Okay. I got it. And that new capacity, what is the revenue potential there?

The capacity that we are putting -- INR 170 crores. I think about INR 170 crores, that's what we had mentioned earlier also. That's what we would think. But now earlier, we are mentioning about INR 140 crores, but then that jumped up in some component went by almost 30%. And so that capacity would also be part of that. And having said that, we've also done from a tri-quarterly [ dispensive ] for Maruti here and so there would be a further revenue increase in that also in the Gurgaon facility as well as the Bawal facility.

Okay. And one last question. Sir, are we currently seeing any commodity inflation pressure, any container shortage or anything like that?

See, there was never a shortage. There was always a price to pay. So that is what is happening. Now the only thing is that this war in Europe, if that happens, then of course, there are people as far as the oil and gas is concerned and there could be a possibility of commodity prices actually dropping then. And -- but we are hoping that, that does not take place and what direction that takes and what direction the commodity takes place after that, that is a big question mark. But the oil prices will certainly shoot up. That's for sure. And -- but if you look at the aluminum and all, they are both stable now, the steel price is also more stable and the corporate prices are also actually come down. And if we look at the all the exotic methods that we talked about, they have also tapered off, they've also come down. So we see a downward trend as far as these commodities are concerned, and they -- like I mentioned earlier that there is a lag of almost INR 10 crores to INR 11 crores on the aluminum front alone, which we need to take from the customers. And we will get paid off in the next quarter, that's the formula that we are working on. And hopefully, this particularly in the fourth quarter, we should not have that issue for the next quarter.

The next question is from the line of [ Shankar Narayanand ] from Seraphic Management.

This is [ Mohit Shankar ]. Just wanted some clarity. I believe that 3, 4 years back, we used to have gross margins of close to almost 50%. Now it's come down to almost 42%. And I believe that we if we -- have understood properly, we were told that as the new programs come in, your EBITDA margins and your gross margins will be higher, which means some kind of double-digit margin will move to kind of mid-teens and your gross margins will get better and so your overall mix will get better. But I think because of the industry, what they've gone through, I can understand what has happened. But what is the target that we have in terms of going back to the kind of gross margin given that we have a more elastic vehicle component as we're now coming into play. And as the new programs come into play, how do you see that gross margin trajectory going up and [ concomitant ] with your capacity utilization increasing, how will it play into the EBITDA margin?

See, the capacity -- like you said, capacity utilization is a very, very important part because we make the investment on truck, to give an example. Like Kia was doing exceedingly well and we were, in fact, running short of capacity as far as the supplies are concerned. Then all of a sudden, they kept on telling us that they are not impacted by the chip shortage, primarily because they're getting support from Hyundai as well as Samsung and Japan, in Korea, which is supporting special supply of chips. And we took it as freight and we bid adjustments in our supplies. And all of a sudden, the crash took place. And there were almost 0 pickup for almost 2 months. And for the next 2 months also, it's going to be a little slow. So now that utilization is got to come back because the investment is huge. 1-month, machine gas costs is almost INR 25 crore, INR 30 crore. And we've got to keep those machines running. Even though they are flexible, they keep us switching from one component to the other component to whichever other customer has more demand, we do that. But there is only a limit to which we can actually go up doing that. And hopefully, with the chip shortage going it there will be no exclusive by the OEMs that there's a shortage, and they are unable to produce -- and fortunately, there's a tremendous acceptability of the Kia Motors, and we are hopeful that they would be back to normal. Similarly, Renault Nissan. With Renault Nissan, we were asked for a compensation for the capacity underutilization that has taken place. In many cases, what we've done is rather than making fresh investments for new components we've diverted those capacities for the newer components. And so we have done it. And almost 30% of the cases. And -- but the only thing is that ramp-up takes a little while before we can actually come back to those things. So we are doing all the shuffling that is happening. But next year, we'll surprise you. We'll show you very good EBITDA margins, which will please you all.

Sir, I just wanted to understand that with the commodity price inflation and with whatever volume that we have seen has come down, question I want to understand is that from a 50% kind of gross margin, we are down to 42%. So I can understand the capacity utilization, which can be dip down or fixed costs remaining high and bringing down our EBITDA margin. But on the gross margin side, when can we get back to the gross margins that we used to have -- particularly because we are getting into newer programs like components and stuff like that. So when will -- when do we get back to that 50%. And when we'll be able to pass on the price increases. I can understand that 30% is Hero, and there is some issue there because the industry itself is growing. But if you look at the rest of the business, we should be able to get back to at least 46%, 47% kind of margin, right, if I'm not mistaken.

You'll see the gain coming next year, like I said, and primarily because -- and let me give you another news here. Some of the components that we use to -- the old components that we used to manufacture where the price increases are not being given we've actually pushed the customers to give us the pricing increases those have also started coming in now. And because in those cases, there was a proposal about 15, 20 years old, a component, which we were producing at ridiculous prices. The commodity was being adjusted, but nothing else was being adjusted. But we've managed to get almost I think 60% to 70% of those components, we've got the price hike. So you see that impact actually coming into the next coming quarters. And next year, with the capacity utilization and also the commodity prices stabilizing, you'll see the [indiscernible], we're going to bounce back to whatever we were doing earlier.

And because the problem is, sir, if we meet these kind of substandard margins, the kind of investments that we have made over the last fiscal year, we're not really getting any kind of returns on the investment that we have made. We cannot be at even 8%, 9% -- 6%, 7% margins. Mix to -- the kind of investment that we have made to get some reasonable return on our investment.

The survival at 6%, 7% margin is not there. We've got to be at 12% to 15% margins. And all the newer supporters that are coming in all at better EBITDA margins. They are even higher than that. And so we are very clear in our mind as to what we need to do there. And in some of the cases, where the prices are not okay, we've actually started demanding from the customers that we need to be compensated. And customers are looking at those things as well.

So will we see this coming in the first quarter of next year, sir?

You'll see in the first quarter of next year also.

Okay.

You'll see some improvement even in this quarter.

Okay. And what [indiscernible] is our exports sir, today?

Beg your pardon?

[indiscernible] our total is, currently?

Beg your pardon. Can you repeat your question, please?

Sir, your voice is breaking.

i Said, what percentage is exports, sir?

We are at about 30%, and that does not include the internal export. When I say internal exports, I ship it to Renault plants in India fully packed and they ship it further as such. I'm not talking of the vehicles. I'm talking about the components which are exported as we supply to them to the other countries. So those earlier, we were supplying directly now they have been supplied through the local OEMs. So -- but I'm talking of the direct export we are about 30%.

[Operator Instructions] The next question is from the line of Bhaskar T from -- he's an individual investor.

The first question is, like we are supplying for the couple of years. Do we ever see any profit from that client, Nissan? I think they are -- I believe that they are very tough customers, I never hear that we made a profit from them. More of, but probably adding to our gas revenues. But never see it from the commentary that you made many from Renault and Nissan. Is that correct?

Let me tell you, there is no customer who is easy and nobody wants to share the profit that they have. So every customer is a tough customer. So is Renault, Nissan, but we have left many businesses whenever there was no profitability.

Okay, sir. The second one is like the last call, someone actually mentioned that there was some high-end kind of component from BMW. Is there any progress on that?

We are supplying to BMW for a long time now, and we...

No, I mean like there is some kind of jump into the [indiscernible] kind of components in BMW?

Are you referring to electrical components?

Yes. I think someone mentioned -- yes, I think so.

Yes. No, like I mentioned literally that our electrical vehicle contribution earlier was only 2%, now we are in the region of almost 15%, 16%. And the growth primarily has come from PSA, and from BMW. Primary from these 2 and the next growth is going to come from Toyota.

The other one I ask -- like in the last call, it has been mentioned that there is one customer who probably may get into non-auto components once, is there any progress on that?

Yes. Yes, we have submitted samples and those have been approved. And hopefully, I think in this particular fourth quarter, I think there would be some sales in that as well. We've done some selling as far as the sampling is concerned and also for the [ dyes ] that -- amendments that we have done.

How much it will be in the revenue side?

[Foreign Language] this quarter won't be too much, but I think we are hoping that, that will turn out to be a good new business.

Okay. At least some INR 10 crores around the...

Other thing, if you are referring to this defense, there is a lot of progress that has happened there also. And we had mentioned about a tender, which is almost -- I think it's about INR 5,000 crore to INR 7,000 crores for over 10 years, split over 10 years, and the government gives you an order over 10 years. And that tender has finally started moving the samples that we're just submitting the samples either in next week or 10 days' time. Everybody is going to be submitting the samples for trials. And hopefully, another -- the trial will take about 2 to 3 months because the actual firing actually takes place in the old areas and hot areas and other areas and humid areas. So hopefully, the trials would get over in the next 2, 3 months. And thereafter, that order should also be placed. We are very gung-ho about that particular order.

Okay, sir. The last one is [indiscernible] the last 12 years. But especially since last 4 years, like we didn't see much of progress in kind of net profit because until and unless -- because most of us today retailers [indiscernible], the price will go up until and unless the net profit actually forfeit. So basically, your freight especially kind of really in the from a retail perspective. It's kind of last 40% kind of revenue pertains everyone. So how you are going to improve the net profit? Graph is okay because the graph may be going up because of the inflation spread also because it's the cost of the iron or whatever it is [indiscernible] increasing because it's actually calculating the product. When we will see actual improvement in net profit because pre-net profit of INR 45 crores, but we are nowhere near to that since last 3 years.

Next year, you'll see the results next year. You'll see a lot of change that will happen. And let me tell you that we are focused, we do look at the top line first and then also look at the gross margins. And -- but net profit is what we are actually focused on. Our discussions internally is always on net profit. It is when we are talking to the market people, they are talking of the gross margins. But internally, it is net, net, net profit that is all that we talk of. And those are the challenges that we have here and those -- that's where the focus is at the moment. And we -- you will see a change coming now onwards. You see, last year was exceptionally bad, primarily because of COVID, et cetera, et cetera. And now you will see that since we are back to -- we see that we'll be back to good volumes and full volumes. And we see the pull that is happening with Maruti and the others like I mentioned earlier, in most of the components, we are almost 20% to 30% above the capacity we have actually created. In some cases, 40% above the capacity. And all of a sudden, we are surprised actually why that pull is also there. And we never created a capacity for those components also [indiscernible] assets. So that is seen have a major impact on the profit. And these are all new components we are talking about, these are not the old components. So you'll see a change, and the lower -- and our focus -- internal focus is always the PBT.

One last thing, like just for my investigation side. When will you see like net profit of INR 50 crore, INR 75 crores and INR 100 crores in like next 5, 10 years, like when we will be able to see these figures?

Well, I think you see it -- you see the change in next year and the year after that also, you see major -- the figures that you are talking on will probably be around those figures.

You mean INR 75 crore, INR 50 crores or INR 100 crores sir, in the next 1, 2 years?

I don't want to be speculative, but we are internally targeting those figures.

As there are no further questions -- we have one more question from the line of Anand Bhatt from Agrawal Securities.

My complaint was that your IR has not been able to even get 3 people for a conference call, for a company which has been 2,000 -- having turnover of close to INR 1,600 crores to INR 1,700 crores. What I felt was your communication to shareholders either by way of quarterly communications or otherwise has been lacking because there is not one single institutional investor on the call. Should not the management spend some time and money going to Bombay or going to the institutions that matter, speak about the company which is doing this sort of a turnover, which is supplying to this sort of the various types of companies like Renault, Volkswagen, Maruti and all that. And we are still quoting at [ 14, 15 ] though business for donkey's years now. I think change in perspective, either from your IR or from the company management who look at investor market pricing, we pay to raise money possibly 1 year down the line for a INR 200 crore expansion or INR 300 crores expansion with this sort of equity price, we would not never be the -- most of the Delhi, Faridabad companies are all supporting [ 25p, 30p, 32p ]. Don't you see that there is something matching in our communities to shareholders or to the investor community at last. I'm sorry to sound a bit positive. But I just wanted to give the message over to you all.

No. Mr. Anand, thank you so much for the message. And we were -- regular business is to Bombay and the other centers. And because of COVID for last 2 years, there has actually been no travel. And -- but what you are saying is absolutely correct. I think we can start better communication by even direct communication with all our investors. I think that can also be done. And besides that, we will be again starting on the process of meeting all the investors and also future investors in our company. So we even look at that. We've taken your suggestions. Your observation is absolutely correct, and we will make amends there.

Sir, my only suggestion is you're doing such a big project for Toyota and EV there are people who are doing INR 50 crores, INR 100 crore turnover and they shout EV, EV everywhere. The hybrid vehicle of Toyota is supposed to be one of the exhibits for the world and you are supplying to them, then nobody knows about it.

Point noted and we will make changes there, and we will certainly come up to your expectations as far as communication is concerned..

The next question is from the line of Shankar Narayanand from Seraphic Management.

Sir, I have a follow-up question, just wanted to understand the EV part, you said is almost 15% of your turnover, which means approximately I think it's almost INR 60 crores per quarter. So which means on an annualized basis, you're updating it at around INR 240-odd crores of EV business. Is that the right way to look at it, sir?

We had mentioned this earlier also that we'll be crossing INR 200 crores this year in one of our meetings, we had mentioned that.

Okay. So this means we are run-rating at almost INR 250 crores, right? Kind of.

Yes, yes, yes.

Okay. So in terms of margin profile, sir, that should have been much better than what we currently -- or is it because it's still very small. Once we cross -- so what is the threshold of turnover in EV when you start making really good margins?

No, no. See being supported to what has happened was. And now when we got the orders, I'll give you one example. In one case, we were told that the requirement and annual requirement, this is for France, would be about always 50,000 or 60,000 sets per year, and there was a set of 4 components. And when we started the production, they would not even pick up tax for the first year. Then the second year, all of a sudden, instead of 50,000, they wanted 75,000 and then 100,000 and then 120,000. So we see the change that is coming about and then the investments were very consistent and we had to do them again and again. Even with case of BMW, what that initial target was close to about 65,000, 70,000. Because they were also introducing newer vehicles and they were also not very clear as to what and how the demand will be. But fortunately, for them, the government support was tremendous there, the subsidies that were given in Europe, there's also the pressure of [indiscernible] norms, which came into Europe and that also put a lot of pressure on them to actually focus on the electric vehicles. So what we are supplying is now is more than the capacity that we have generated, but we had to make consistent investments. The margins are definitely certainly better. And let me tell you the components are also tougher to make because the metal -- there's a metal change. [indiscernible], but the alloy is absolutely different. We have never worked on that alloy before, neither at BMW, nor at PSA, nor at Renault, Nissan. And now, of course, we've got to hang of it, and we are going full blast on those components. So it's been a big learning curve for us also. And these are -- for us, for BMW for PSA for all the customers as well. And we are using that learning for the Toyota project and the other projects which are coming -- further new electric vehicle components that we are picking up.

So by next year, what percentage -- in the next couple of years, rather, I would put it that way. What percentage that would be? Due to [indiscernible].

There'll be one issue next year. This year, the IC engine, the conventional engine there has been less production this year as far as India is concerned. So next year, we must expect that, that should also come back to almost normal. And Maruti is saying that India should produce 3 million vehicles this year, and let's hope they beat that target. And next year, they're all targeting much higher volumes for that. So that we have trust both on the electric vehicles as well as the -- on the iV engine. And the electrical component that we are supplying primarily to the European market and partly to Renault, Nissan in India, because it is being exported to China. And next year onwards, we'll also be starting the Toyota project, which is, again, electrification that, that would also be a major input at Toyota. So that we see a growth in both of them.

Okay. So the percentage may not grow much you are saying, but you're saying overall the volume will go up.

For the overall business will go up, but the percentage will -- may not go up to that extent and -- but we want to take the electric components to almost 25% of our turnover.

Okay. Sir, again, going back to my old question on gross margin. So by next year, with the aluminium price correction happening, stability coming back, do you think we'll go back to that price run 48% kind of gross margin by next year?

Members of the management, we are not able to hear you. Please confirm if you're able to hear us. [Technical Difficulty]

We should be in the region about 30%, 35% next year.

35% of what, sir?

The gross margin -- the value addition that will happen.

No, because our gross margins are at 42% now, sir. And we are previously at around 50%. So I'm saying by next year, should we go back to 47%, 48% gross margin. What I'm trying to say.

Just a minute, please. Now, are you basing it on [ RMC ] percentage?

Yes, yes, basically on our RMC because RMC is now just on RMC basis, we are at 42% gross margin, and we used to be at 50% before. So will we come back by next year to 47%, 48% gross margin, raw material cost out?

Please realize one thing that earlier, the aluminum used to be INR 110, INR 115 a kilo, and now it is a region of INR 200 a kilo. And there's an increase of almost 100% does in some special cases, INR 253 a kilo. So INR 110, INR 120 is gone to INR 253, is almost 100% increase. So we are -- hopefully, this -- the peak will not remain as this will start coming down, and you see the reverse actually taking place. But I don't see it coming back to INR 120 and INR 105 -- INR 110, INR 120, INR 130. So that is one challenge that we have. But having said that, all the new components that we pick up, we actually do the costing based on the current metal prices. So that -- you'll see the newer components in a better bracket than the older component, which were given to -- 2 years back or 3 years bank of 4 years back. So you'll see that this will be a combination of both the components that we will be making.

So would we see at least 30 basis improvement in gross margin next year?

No, we'll come to 53% -- 52%, 53%. We'll come down to that level in any case.

Okay. Okay. So basically, that's exactly what I was trying to say. So from 57% raw material cost, it will come down to 52%, 53% in it means your gross margin will go up from 42% to 46%, 47%? It was exactly what I was saying.

Yes.

As there are no further questions, I would now like to hand the conference over to management for closing comments. Management members, please proceed with the closing comments.

Well, thank you so much. And despite all the turbine that we had in the last quarter, we had COVID, et cetera, et cetera. And despite that, my colleagues have actually performed. We are -- we are now on a much stronger wicket and this particular quarter, this should be -- results should be even better. That's the fourth quarter I'm talking of. And next year onwards, you'll see a major change that's happening, and we are hoping to fall back into whatever we were used to do earlier and come back to the profitability that we used to have earlier. And we would like to show that. And hopefully, the war should not take place in Europe. That's the only thing that would be against us. Freight, the container shortage, this and that, that will keep on happening. We'll keep on struggling a fight with that, that is okay. But the wars are 1 thing that can destroy everything and the economy. So hopefully, everything should be okay and nothing happens in Europe, and hopefully, the businesses will improve. The -- even in India, we see a lot of pull from the commercial bit as well as the car industry bidding very well. 2-wheeler, we have not been able to understand as to why there's so much -- the customers are out there willing to buy at the moment. Is it because of the EVs, which have come -- the electric vehicle scooters, which have come -- but at the moment, the supply of the electric vehicles is so low as far as 2-wheelers are concerned, that should really not impact the total sale of these. And hopefully, Next year should be better for all of us. And in the 2-wheeler industry. So overseas improves that, of course, the whole thing changes even more dramatically, but we are determined as far as the passenger vehicles are concerned, commercial makers are concerned to meet the requirements of our customers. And to ramp up the capacity as per the requirement. There's a challenge at the moment to really ramp up capacity with Maruti and with Kia. Again, they are being aggressive now. And hopefully , that the car sales will carry on like that throughout the year. I must thank everyone for taking out the time. Thank you so much.

Thank you very much. On behalf of S-Ancial Technologies Limited. That concludes this conference. Thank you for joining us, and you may now disconnect your lines.