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

Good day, and welcome to the Q2 FY '23 Earnings Conference Call of Rico Auto Industries hosted by S-Ancial Technologies. [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 Q2 FY '23 Earnings Conference Call. From the management, we have today Mr. Arvind Kapur, Chairman, CEO, and MD; and Mr. Kaushalendra Verma, Executive Director; Mr. R.K. Miglani, Executive Director; Mr. O. P. Aggarwal, Chief Adviser; Mr. Surendra Singh, Chief Adviser, HR & Admin; Mr. Rakesh Sharma, CFO; Mr. Sandeep Rajpal, Vice President, Marketing; 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 the floor for the Q&A session. Thank you, and over to you, sir.

Good evening. This is Arvind Kapur, and welcome you all to the conference today. Sorry, we had to postpone. We postponed 1 day and we were hoping that we will all cheer for our Indian team yesterday, and we didn't want to disturb all our investors. But unfortunately, we did not cheer well there. Very sorry for that. Having said that, the market has been good. As we've been talking to various people all over, the economy seems to be doing very well. And we do talk to the bankers, we talk to the market and everything is doing well. And there are very few things which are not -- fortunately, we had the festive season also and in the festive season automobile, in particular, did very well. And this is the first time after a long time that the 2-wheelers also rebounded back, and they also did very well. And we are hoping that the 2-wheeler industry would also carry on because almost about 25% to 30% of our turnover does go to the 2-wheeler industry, even though we are growing in the 2-wheel industry. So your company has -- we have grown since last year. Our revenues from last year was up by almost 24% and -- when you compare it quarter-to-quarter. And this quarter also, we seem to be -- there is a lot of pull from the customers, and we are hoping that this quarter should also be good. Even though we've noticed that the month of December is normally on the lower side. But so far, the customers are all bullish about -- the car industry in any case has a shortage and there is a waiting of cars. And so whatever Maruti and Kia Motors and Hyundai and Renault-Nissan produce, they are all selling. So we think that this quarter will also be as good, if not better than the previous quarter. Our exports will pick up further, even though we have done better than before. Our growth over last year was over 22%, and we are hoping that -- and our growth -- our share of exports at the moment is 26%. The slight fluctuation keep on taking place. This quarter, the exports were -- would have been higher, but the month of September is the time when Europe goes on holiday and so the pickup is less. And -- but this quarter, again, we see a lot of traction that is taking place despite the tension and other things that are happening in Europe. And we are hoping that the war will also get over soon and with the help of the Indian -- Mr. Modi and the Indian team as well as the German team, we understand there is a lot of discussions that are taking place. The commodities have started stabilizing. They've come down, and we are taking advantage of that. The semiconductor availability has also gone up for 2 reasons. One is, of course, the production -- the volumes have gone up. And also the volume of some of the equipment which were used at the time of COVID, work from home or those, the demand has come down, and mainly the laptops, et cetera. So availability is better. But we are hoping that the choice of it gets freely available by the end of '23 would be absolutely okay. But at the moment, the availability is better, and that's the reason you see the volumes of Maruti and others also going up this year. Passenger vehicles are doing well, commercial vehicles are doing well. The exports are doing well. And 2-wheelers fortunately have bounced back and we are hoping that the 2-wheel industry would stay like this. And -- but we are still growing with the 2-wheeler industry despite whatever little growth has been there. So our growth is faster than whatever they have done. And the freights for exports have also come down, they have stabilized. And so we're taking advantage of that also, even though most of the customers did compensate us for the extra freight for the period that the freights went up. The commodities, whenever they go up or go down, of course, those are adjusted, but there is always a lag effect and so that now we are taking advantage of that at the moment. If you look at our customers, Toyota, their volumes are solid and they are going up. In fact, whatever investments we had done for the Toyota project, the demand, they have told us to ramp up the production by almost further 40% to whatever the maximum they had committed earlier. So that's a very good sign. So the acceptability of the hybrid is very good. That's the reason that the demand is going up. We've also got a similar order from AISIN SEIKI for, again, the electric vehicles and electrification vehicles. And that will go into -- we will give the sample by early next year, and the production would also start next year. Okay. And just 3 days back, we got another order for exports, again, for electric vehicles and that is from BMW. So we are -- your company is focusing on electric vehicles and electrification. And the total -- the order book that we have is close to about INR 1,300 crores. That is the -- and the annualized value is about INR 200 crores a year, out of which almost 85% is for the electrical vehicles. So that is the change that you see. And we are negotiating further for some very, very large orders for, again, the electrical vehicle components. So our percentage of the contribution of electrical vehicle is going up. And we're hoping that by next year or the year after that, we are hoping to touch 40% as far as the component of electric vehicles are concerned. The debt -- our debt equity ratio remains within 0.5%, 0.6%, and we will continue to retain it here. Our Board will not let us cross this. The CapEx that we do is primarily the balance sheet company we are doing, but I think we will be doing some CapEx for ICE and also for this new project that has come for BMW, but that will be done next year and the year after that. These are long-term planning that we have done. Yes, that's it. And I mentioned earlier the festive season was very good, and I think all the companies, the car, especially passenger vehicles and the 2-wheeler industry, they are doing well this year. The monsoon has also been good. And as -- even though the rains, which came later, they did destroy some crops, there will be some disadvantage there. But by and large, the monsoon has been good, and I think we will see the impact of that in the rural side also. And once the rural side picks up, then, of course, we'll see a big increase in the demand for the 2-wheelers. We are hoping for that for a very long time now. And let's hope that it happens this year. That's it from me, and I am open to questions.

[Operator Instructions] The first question is from the line of Aman Vij from Astute Investment Management.

My first question is on our defense portfolio. So in February, you had talked about we have submitted our products for trial and it will take 2, 3 months for the same. So any progress on the same?

No. On the defense side, there were trials which took place, and there has been a lot of chaos that has happened in that. And the -- in fact, even today, my people are sitting at the Ministry of Defence, and there are discussions going on because there were some -- they were trying to bypass the private sector, and they were trying to pass on the orders only to the public sector undertaking. So there has been some chaos there. And it appears that they'll have to recall the tender, and I think everything starts from fresh again. So this is all defense works and so that's -- we are fighting for it. And even though all this happens and everything have been submitted, but there was obviously some favoritism and some sidetrack on the component. But having said that, let's see what happens on this meeting, which is taking place in the ministry. Because the army desperately needs the stuff that -- the fuses that we had offered. They need them very, very urgently and I don't think they can afford to wait for too long. Let's see what is the outcome of this. And -- but I am sure something will have to be done and it is at the Ministry of Defence at the moment.

Sure, sir. So just to understand this more, we submitted bids for the fuses. Is it for the artillery fuses or for grenade fuses as well.

It's mainly for artillery.

Okay. And the situation you are talking about -- so my memory corrects me right, in 2011, '12, the same issue has come up that most of the orders went to the public sector, ECIL and Bharat Electronics. So are we facing the same kind of situation.

In 2011, '12, they were the only people who were authorized to make these fuses in India. And there was only allocation of suppliers, but not -- there were no tenders as much. Earlier, it was only ECIL and later on then BEL also came in, and so they would only be allocated the supplies. And not all the models, some of the models will be made by ECIL and some of them made BEL. And now they wanted the private sector to come in and that was a very clear information that was in the tender that this is meant only for the private sector. Later on they sneaked in the public sector undertaking, but we said, okay, that is most welcome. And -- but then there's got to be fair trials for all. You cannot favor anybody. And we were very confident because the company we tied up with they are supplying to NATO and they're supplying all over the world. And so we were very confident that we will go through and -- but unfortunately, when the favoritism started and the failures started taking place in the PSU product, then they wanted to shortcut a lot of things. So -- but in any case, if -- if at all, there is some supplies that are required by the defense and the they -- if they buy from these PSUs, we will be supplying most of the things in any case because we have the capacity to make those components.

Sure, sir. Just 1 final clarification on this part. So are our products totally indigenized? These products 100% indigenized versus PSU what I understood they were still importing. Is that the difference?

The difference is that we have given the plan that within 2 years we'll indigenize everything. There was a clause in the tender that within 2 years one needed to indigenize everything, including the electronic portion, which we said -- and the battery portion which we told them that we'll do it within a year, we'll localize that. We've already started taking the steps on that. And whereas the PSUs are still importing almost 60% of the stuff from South Africa and other places.

And sorry, who are the other private players who bid for the same, sir?

There were 3 other -- 4 other companies, but 1 withdrew, there was only 3 left. One was our company, then HFCL and Himachal Futuristic and 1 more company from Hyderabad, which are the 3 companies who are left.

Okay. So only 3 of us -- and sir, you have talked about it is like INR 6,000 crores opportunity. So do you...

It's closer -- between INR 6,000 crores to INR 10,000 crores I would say. Over 10 years, by the way.

Yes, yes. But most of it is electronic fuses or mechanical fuses?

But these are all the electronic fuses.

And do you expect private payer to have maybe 30%, 40%, 50% market share combined in this?

In this case, the tender would have been allotted to 1 company for supply. So that's -- for a particular model. If you put the whole bunch together, there were about, I think, 6, 7 types of fuses. And we were focusing mainly on the INR 5,000 crore, INR 6,000 crore thing, and which constitute I think 3 or 4 types of different fuses. And we were focused on that. And we would have definitely won the tender. We were the lead. But in any case, we are on it. We're not going to leave it.

This could be a game changer, whenever it happens for the company. Is my understanding correct?

No, no. It will be one of the additions. But then Rico itself would have also grown a lot. And we -- our exports will be touching about INR 1,000 crores a year and our domestic market would be much higher also. And we would be in that almost INR 4,000 crores, INR 5,000 crores bracket in any case. So that would be an add-on to the total business that we will be doing.

But margins would be much better, right, in defense.

Yes, defense margins are definitely better. That I agree with you.

What kind of margin should we expect? Like 20% plus or higher?

[Foreign Language] 20% [Foreign Language] but ultimately, [Foreign Language] but I think it's 15% plus in any case.

And working capital, sir?

Working capital, we haven't worked it out so much, but we would have managed that very easily. There won't be too much requirement there. Because there are lot of advances that are given by the -- when the tender comes in. And there are certain percentage of advances which come in. So a lot of money, we would have gotten about I think almost INR 100 crores as advance from there.

The next question is from the line of Darshil Zaveri from Crown Capital.

Congratulations on a great set of numbers. Very heartening to see our performance as we are growing quarter-on-quarter. Sir, I would just like to talk about what do we see as a sustainable growth rate because we've been doing great numbers recently. So what could we see in the next year and maybe end of this year, what kind of revenue are we seeing?

This year, our budgeted revenue is about INR 2,350 crores, INR 2,400 crores. That's what -- INR 2,400 crores. That's what our budgeted revenues is for this year. And we are fairly confident that we will be around that, plus minus INR 50 crores. That's what where we are. Because we've already done 50% of whatever in the half year earnings. And we are fairly confident we'll be touching that. And next year, we should be INR 3,000 crores plus. That's what belief that we would have, and we are still working out the numbers. Because this new order, which has come in, the INR 100 crore order, that would add from '25 onwards, but we are getting similar orders from other customers as well. And those we are not factoring at the moment, but month of February, March, which we're very clear as to what we would be doing the next year.

That's great to hear, sir. And with this increase in our revenues, could we expect better margins like what we've done historically, we've gone above 10%. So can we see a growth or journey towards maybe 10%, 12%? Or could we just have some idea of what are we targeting our margins to be?

See, like we said that every quarter, you see a change, and our target is to be -- the first phase to be at around 12% and then go up to 14%. That's what we are internally working at. And on the export front, it is all above 15% in any case, but averaging out comes down. So average has come down mainly because of the older components that we are supplying, which are at lesser margins. And so you will see a 0.5 percentage to 1 percentage improvement almost in every quarter.

Okay, sir. So the 12% target is for next year, correct, sir?

Yes, that's the target for next year.

Okay. That helps me a lot, sir. And sir, sorry, but we were talking about some order books, so I could not get that. So we were talking about roughly INR 1,300 crores order that we've received just from BMW or that was our total order book that we were...

No, no. That's partly BMW, partly AISIN, which is for the hybrid and electric vehicles, partly for Toyota, which is Musashi, which is the Japanese company, again for electric vehicles, from Maruti and from -- [Foreign Language]. And then Bendix is the other one. Volkswagen is the other one. Cummins is the other one, yes. All companies come together, but BMW is the largest.

Okay. Okay. So in terms of -- so here, I think that helps me a lot, sir. And so our export target, as you mentioned it to reach nearly INR 1,000 crores, correct? So we will see an increase in uptick of our exports and...

Yes. On year-on-year, you'll see the increase, and you'll see that increase taking place year-on-year.

The next question is from the line of Aditya Sen from RoboCapital.

Sir, this question is regarding the tax rates. So as of now, as I see the tax rates are quite high. And what could be the possible reasons behind this? And until when do we look for to see this stabilizing?

See, in our case, the applicable tax rate comes to around 34%. So that is the rate you are seeing it here. But actual cash outflow is to the tune of around 18% because we are paying under MAT. So once we utilize whatever MAT credits are available to us, after that, we are planning to adopt the new scheme, where the effective tax rate will come down to around 23%. So right now also, there is nothing wrong about it. Actual cash outflow is at the rate of 18%, but we are utilizing those MAT credits. So once that is over, we will adopt the new scheme, where it will be around 23%.

So until when -- approximately until when will this happen?

Two years more. So within 2 years, we will be switching to the new scheme.

Okay, sir. And the other question. In your opening remarks, you said that Toyota will ramp up to 40%. Can you please explain this? I couldn't understand this part.

Okay. The components that we supply for the hybrid vehicle, those are very large castings and fully machine components that we supply. And that's for the hybrid portion of the hybrid vehicle and -- which initially was being exported back to Japan. And now they have started using it for some Indian model for supply to Maruti as well as Toyota themselves and also exports to Southeast Asia. So initially, when -- this is a new hybrid transmission that they have developed and they -- it's performing very well, and the demand is more than whatever they had estimated earlier. Earlier, it was around 11,500 or some components we were supplying per month. It's gone up to 16,500 components.

Okay. So just because their demand is increasing, so they have given us more orders like that?

Yes, that's the reason it's gone up, yes.

Okay, sir. That was all the questions.

And this is the first time this hybrid components have been given outside the connect-throughs or Toyota owned entities, this is the first time these components have been given outside. So we are very happy that Toyota trusted our skills, our capability and engineering skills. And Toyota also they were very good partners with us and supported us absolutely in this, and we're ramping up in the product as well as the ramping up of the total volume. We are very, very excited about this project.

Yes. Actually, that's a matter of pride for us. That's pretty big.

Similarly, the electric vehicle components that we have just got from BMW, that we are again single source for that. And we've been supplying similar components to BMW for the, let's say, 2007, '08 and 2008 onwards. And -- but these were very, very -- they were -- the accuracy requirements were much higher than earlier. So -- and our people, our engineers and our teams actually put forward a very good presentation, which convinced them that we would be the right company to actually do it.

The next question is from the line of [ Anand Jain ], an individual investor.

Congratulations on a good set of numbers, sir. And thanks for the opportunity. I have some follow-up question on the fuses, which Aman Vij had asked. And my first question is that the current issues that we have, are they more technical in nature? Or are they like very similar issues to what we had 10 years back? So are we clear from a technical perspective? That's my first question.

So technical perspective, we are absolutely clear. But what is happening is that the fuses, when the selection of fuses have taken place, there were some preferences which were being -- some of the -- private sector was being sidelined and preference was being given to the public sector. And when they did the testing of the public sector fuses, the failure was over 50%. And that made the situation even worse because the public sector has been supplying fuses for the last 15 years or 10 years, what happens to the fuses which are in stock. Are they 50% okay, 50% which are not okay. So it's become a major political issue and a major issue for the defense people also that how can they possibly keep on acceptance fuses which are not working or 50% only work. And whereas we are guaranteeing 100% working. So there was -- there's obviously a historical path, which was actually -- which was going to PSUs. But in the testing, they collapsed. So I mean, like that went in our favor.

My question here is that then like what is really scary also is that for the ammunition that is currently with the army, most of the fuses coming from BEL or ECIL, in the testing phase, half of them are like not working. It's a pretty scary scenario in that sense.

It's a very scary scenario. That's exactly what we pointed out to them, that what are you depending on. So I mean like the Army is aware it, and the Army is also very cut up about this. And they want to make changes in environment immediately.

I mean ideally, if there had been a private sector company, it would have been blacklisted, right? I mean that's what I would expect if somebody was...

If they're blacklisting, the problem [Foreign Language] so that effort all just goes up, and there'll be a lot of head which will have to roll. So now what -- let's see what happens because now because we have written, we have represented right up to the PM and also to everybody. So even today, there's a meeting going on in the Defence Ministry. And we have told them that 1 is fairness and #2 is you cannot risk the lives of our soldiers.

Absolutely, sir. I think this is fantastic what we have done. The only thing is it takes so much time that it becomes frustrating as a shareholder and for you as a promoter.

You're asking us, we've been on this for almost 5 years as well. And we've been working on it and working on it. But anyway then, for the defense of our country, if we sacrifice a little, we are okay with that.

My next question is on this, sir, like between the 3 of few companies that you mentioned, HFCL, HBL and AAN, which is our subsidiary, are we present in the entire range of fuses or each of us will cater to -- each of these 3 private sector companies cater different specialties in fuses? I'm not too aware of it.

Three of us were talking of the same fuses. And in fact, the first few tenders -- the total tender was about INR 10,000 crores, out of which INR 4,000 crores, they delayed it. And the balance INR 6,000 crores was mainly for the electronics fuses, but variety of electronic fuses. And so all 3 of us in private sector as well as the public sector, they are all talking of the same fuses.

Okay. So the INR 6,000 crores, which is INR 4,000 crores is delayed, INR 6,000 crores which is there, we have 3 and there are 2 public sector companies, ECIL and BEL.

Yes.

The last thing, which I just wanted to understand from you, is that even for now these guys have been importing from South Africa a lot of their important spare parts. So even if the PSUs get the tender or win the tender somehow, will they now be buying from India or will they still be importing?

I mean the condition of the tender is that within 2 years, we've got to localize it 100%. And so that is the condition. So -- and there are big guarantees with -- bank guarantees, which have been driven which would possibly be in cash in case we don't meet up with those requirements.

Okay. Thank you and wish you all the best further.

We will not leave them. We will also work on it for the betterment of our defense forces, definitely.

[Operator Instructions] The next question is from the line of [ Bhaskara ], an individual investor.

I think some time last year, you mentioned about the land sale in Noida and Gurgaon. Are you planning to sell that one because right now the...

I couldn't hear you too well. Can you repeat your question, please?

Yes, sorry. Actually, last year -- before last year, you mentioned that we had some land parcel in Noida or Gurgaon, you were planning to sell it at the right time. As the interest rates are going up, are you planning to sell that particular land?

This is a land where the factory is located in Gurgaon. And this is 27 acres -- almost 27 acres, 26.5 acre land that we have here. And we are in the market to sell it because we've already made arrangements. In all other plants, we have enough space and land bank available and buildings available where we can shift the equipment from there. But [Foreign Language]. There should be somebody who should be able to buy. It's a large piece of land and a very expensive land. And so we are in the market and the day we get the opportunity, we will do it. And pricing have gone up a little, and we are -- we will encash on the opportunity whenever we can.

Okay, sir. And the other question is like we got order from BMW. I think last quarter or before that, you mentioned that you were planning to -- you were about to get some big order from BMW. Is that the same order you mentioned?

No, no. This is the first order we got. I mean, there are others that -- our people are sitting there. Those are even larger than this.

And the other one is like since last many years, I've been shareholder of this company, but we can see the increase in revenue, but we are not able to see that in profit. At the same time, even though we're getting good number of some of those profit in stand-alone but we are losing money in consolidating. So what is the reason? How to mitigate that in coming quarters? Because we are getting a lot of revenue but not necessarily converting into profits. So until and unless we've don't show a net profit, and therefore, people like me who are actually investing since last 10 years won't get any benefit out of this.

Yes. If you see our console numbers also are improving quite impressively. If you see the H1 comparison with respect to the H1 last year, the revenues have grown by 32%. And the net profit has also grown by 208%. So compared to stand-alone also, our subsidiaries are also doing good. So -- but of course, the progress, the increase in the percentages are quite low at present, which we are trying that it should increase at a faster pace. See, one of the companies is Rico Jinfei which makes wheels, one of our -- so that has turned around and that has started making profit. And as the utilization of capacity is getting better and better there and you see the profitability also going up there. This quarter, they've shown profit. And the next quarter, they'll be showing better profit because the utilization of the plant equipment is much better now. Our capacity is close to about 4 million. And we are -- at the moment, we are at about almost 2.5 million, 3 million. And as we have got more orders in that company and as we keep on ramping up the capacity and utilize the equipment better, you see the profitability gains there. So a lot of work is happening there in that particular front. And the other company, Rico Fluidtronics, that turnover -- after we split from Magna and the turnover came down drastically. Now the programs have -- we got a huge order from Maruti and in fact, we are single source to Maruti for...

Oil pumps and water pumps.

For oil pumps and water pumps, which are the requirement for almost the next 8 to 10 years. And we are single-source supplier for almost all the models and that's going to be -- that -- those have kicked in and you see the turnover of this company, it has come down to about INR 45 crores, INR 50 crores, is going back to about INR 100 crores this year...

INR 125 crores.

INR 125 crores this year. And next year, we'll ramp -- we'll be going up further. We are pulling up more orders there. So you'll see a sea change that is happening now.

Okay, sir. The main reason I'm asking you is because in 2012 I've got few shares. Now close to -- me and my family hold 0.3% of shares. So I invested a lot but I haven't seen much profit. So that's the reason I'm asking these questions. The last one actually -- before last year, I think we closed one of the subsidiaries, which is making loss around INR 20 crores to INR 25 crores. When we can see that coming into our...

That is the plant in Dharuhera which was like -- which was not producing anything. And whatever we were producing, we're producing at a loss, primarily because, a, it was the older plant. And so most of the programs had almost ended and we were at the fag end and/or supplying only to the aftermarket requirement of the OEM. And the volumes have come down, the prices of the component was terrible, and we had a huge workforce which we were paying for, and we were incurring a lot of losses because of the extra workforce. So we finally closed that down and that is still like closed.

Okay. So actually, they should be getting more profits, right, sir, because we closed a loss-making one, around INR 20 crores kind of plant. Then...

The other thing that was happening was there was a lag impact of the raw materials. Most of the cases, it is a 3-month cycle when we get this month -- this quarter, we've had some advantage. Next quarter, we'll get even further advantage. But in some cases, the lag impact was up to 6 months as the change of pricing was taking place average of 6 months. That impact will start coming from next quarter onwards. So you will see that change coming because of the lag also and also because of the better utilization of the equipment all over and the -- with the volumes going up and also you'll notice that the investments that we are doing now is mainly balancing equipment, and it's not totally the way we have done in the past. We are utilizing our equipment much more efficiently and better. And most of the equipment we are invested in where some of the projects that got delayed, they want to kick in. So there's a lot of excitement that's happening in all the plants.

Got you. Sir, 1 last question. Can I expect a better kind of revenue this quarter, this current quarter, the September to December one compared to the last one?

[Foreign Language] you see a quarter-to-quarter change because we got to cross INR 2,400 crores. And for that, we'll have to have better revenue in this quarter and the last quarter would be even better.

The next question is from the line of Aman Vij from Astute Investment Management.

My question is on the EV side of the portfolio. So is it safe to assume the margins there will be like much better than our current margins? Or are they similar?

EV margins, see it depends on who you supply to. The EV margins on exports is definitely better. And the EV margins on some of the domestic companies is not as good as the export, but it's better than the other domestic items that we supply.

Okay. Okay. So BMW EV, which I think you will be exporting will be the top end margin versus say the others?

BMW EV we've been exporting for the last 5, 6 years by the way, and 6 years now. And we've been exporting to BMW, we've been exporting to PSA in France. And we were the first and single-source supplier for those components to these companies. So when they developed their EVs, we were the ones who actually developed those components for them. In fact, there was a lot of technologies that we had actually put in. And because even making the alloys, et cetera, were very specific special alloys, which are made and now everybody in the industry is following that same alloy. And so we have been supplying for EVs for a long time. And -- but now since we are focusing more on EV, we are trying to -- of course, we don't leave the orders for the IC engine, but we are focusing more on the EV vehicles now.

That is great, sir. My next question is you mentioned that in the trial run, the private -- public sector had failure rate of 50%. But did the private players all have like 0% failure rate or did some players have higher failure rate and some lower?

Well, one of them was -- one failed absolutely. And we were okay and the ones -- that was his own technology, which he had implemented. So I don't blame them for that. But it was very interesting to see that somebody in India had done the total development and made investments. And the only thing is he could not do testing mainly because you require a range and you require a gun to test it. So he couldn't do the testing of that. But otherwise, it was very heartening to see that somebody had actually assembled everything and put everything together.

This player is HBL or HFCL you are talking about?

No, let's not take name.

Okay. But the failure rate, we were 100% successful though other players...

We were okay till they stopped our trials and when the whole [Foreign Language] started taking place. So we were absolutely there. And we were confident really because the same products have been supplied to NATO and the NATO guns are using -- all over the world, they're using this.

Yes, yes, that you have a partnership with the Ukraine company, right?

Yes, with the company there. They are the leaders.

Okay. Sure, sure. And sir, there was a Defense Expo recently held in Gandhinagar. So were we able to do any MOUs with the different maybe companies like Munitions India or maybe...

There are a lot of discussions taking place and a lot of interesting things are coming out. And so let's see what happens.

No extra business because of the defense expo for us.

[Foreign Language] defense business [Foreign Language] before you really get the business, so before you really start thinking of some returns. And especially because of the -- even the bureaucracy that is there, and now, of course, they have started accepting the private sector as one of the major suppliers of defense equipment and we've seen the success of Mahindra and Tata. And so now the mindset is changing. But otherwise, it was very, very, very tough to really get into sensitive products.

But sir, you were saying we have this backup plan, even if we don't get the direct orders, we'll be supplying to the PSUs.

So what I said was that if at all, we don't win the tender, somebody else wins the tender, he will have to depend on us for the supply of the major parts.

Okay. But at the same time, you were saying we have not indigenized every part of the same, right? So when will we...

We have 2 years to indigenize.

Okay. So you're confident in 2 years, we'll be able to indigenize...

Yes, yes, yes, very, very confident. Yes, yes. Very confident.

The next question is from the line of Pritesh Chheda from Lucky Investment.

Sir, in the last 2, 3 years, we have seen our top line moving substantially from INR 1,400 crores now it is around INR 400 crores, let's say, last 3, 4 years back. Ideally, there should have been some margin expansion? But what I see is your entire operating leverage getting eaten away by gross margin reduction. So it would be helpful for us to understand, first of all, why is this happening? And when you say that margin will move from 8% to 12%, is it a function of gross margin or is it a function of leverage? So these are 2 sub questions within the overall theme if you could answer.

See, for the last more than 2 years, you would be observing that commodity pricing were increasing like anything. It was skyrocketing during this period. And like MD explained earlier also that this rising price has lag impact on us. Although our arrangements with customers are back-to-back arrangement is there and we get compensation but that price increase is effective post facto. It means, for example, we have quarterly arrangement. So last quarter's average we'll get next quarter. So whenever the prices are rising, we lose on that lag impact part. Now the cycle is reversing. So now the prices are coming down. So one major aspect is that where now this quarter also we have gained and this year also, we're expecting that we will keep gaining for some quarters at least. And apart from that, you would have seen that in logistics also there was a lot of problem. And because of COVID also, there were multiple issues that were there during this period. So that is -- these are the type of costs that have eaten away our -- the advantage that we should have got because of the highest revenues. So -- but in future, we are sure that these have been taken care and now we should be improving continuously. You would be noticing for the last 4 quarters at least our margins are also improving, although those are not improving at a very fast pace, but at a low pace, it is improving. So in the commodity front, what have also happened was almost for 2.5 years, it went up every quarter or every month, it just went up and went up. So we could -- earlier [Foreign Language] quarter [Foreign Language] quarter, [Foreign Language] average [Foreign Language]. But this time, it just carried on increasing and increasing and increasing. And like that lag impact would get postponed and postponed and postponed and it would keep on totaling up and it amounted to a huge amount, almost INR 20 crores to INR 30 crores a quarter, it was impacting us. And now, of course, the reverse is taking place, and we are -- you will see the results coming up now.

So there is no change in the nature of business and the 27% gross margin that we had which is now down to about 43%, you will get back those 4%, 5% of gross margin. That's how we should interpret?

Yes, certainly.

Because 4% of...

4%, 5% of net margin. [Foreign Language]. Certainly.

Right? When you say INR 20 crores, it means that 3%, 4%, right [Foreign Language] topline [Foreign Language]. So you'll get that 3%, 4% gross margin back, right?

Yes, yes, yes. But that will certainly come back.

Okay. My second question is, sir, the asset that we have on ground, what is the utilization of that asset and what is the maximum revenues can you generate. And I see you continuously investing. There is a CapEx which goes on and on the other hand, you have all of these assets, which are unutilized. So first question is, sir, here, what is the peak revenue that you been generate on the asset? What are the unutilized or unused capital that you have employed in your business, if you could just give? And what are your efforts to address those?

On the asset front, [Foreign Language] we were investing. One thing I'd like to clear here is we never invested in advance like or in anticipation of an order. We only invest after the orders come to us. That is very clear. And so it is always back to an order. It is not anticipating an order coming. Like BMW orders come, we have not invested the single pie on that so far. We'll start investing as and when required, when BMW requires it. But in the case of BMW, they require us to invest at least about 8 to 9 months before the production actually -- before the whole production comes -- before we start producing the component. So that -- for the export front, it's between 8 months to 1-year, that's what our -- the advanced investment takes place but it is backed by the order. It is not that we have done the investment hoping that we'll get the order. So we kept on investing. Now Toyota was 1 project which did not get delayed despite all the chip shortages and despite all the machinery not available in the world. But the other customers, most of them had delayed the deliveries. But they make the investments, they are all backed by the orders. So fortunately, now all that started working and you'll find our asset turnover is going to be much better. We'll be blocking the assets much better than before. We can go up to about INR 3,200 crores in the current assets that we have, and even plus of that, but there would be some balancing equipment that would be required to jack-up the volume. Now I'll give you a simple examples. Like Toyota, they want to increase from 11,500 to 16,500. Now what we are trying to do is, can we do it in the same equipment that is there? Or do we -- what is the minimum equipment that is required? It is not only proportional to the equipment that we had made investments initially. So it is -- we are minimizing the investment that is required to reach those peak levels. So only balancing equipment would be added on. And it would be, I would say, 10% of the total investment we would have done otherwise in case we had taken a new project. Now in case of -- now coming to Rico Jinfei, the investment that we made long time back, but the capacity we created was over 4 million, 4.4 million or something, that was the capacity we had created. But that is for the -- mainly the painting area and also the heat treatment area. And we could not utilize those capacities and because we did not have the orders, we had COVID and other things actually coming up. Now since we are now utilizing those capacities, you will find the turnover -- the asset turnover far above than whatever was done earlier. So these are a couple of places I'm talking about. Then the foundry. Foundry in one place, we were going to expand further in the -- I'm talking about the iron foundry. We were going to expand further in the iron foundry, thinking that the capacity requirement is -- and that is by the plant, it's not that we can add 1 or 2 machines. But over time, we have been able to improve the efficiency so much that we've actually been able to free up almost about 30% capacity there by producing more. And now today, if you ask me, 5 years back also, the product -- the foundry was being utilized about 70%. Today, again, now we're saying we utilize the foundry only 60%, but our turnover is higher than before. And because we are producing more on the same equipment that was there. So we are changing, adding new technologies and other things so that we can better utilize whatever equipment. Now the truth is that, cutting this INR 2,400 crores, there's hardly any investment that we're going to make. And for the new ICE order that we have got, we're trying to take out at least 50% of the equipment from inside the plant. Our equipment got flexible. Okay, 80% of the equipment is flexible. We can switch from one component to the other component by changing only the fitting and the tooling. So we have that advantage of flogging the equipment the best in areas wherever we require -- we wanted to go up. So we have -- a lot of work is happening, the engineering people are on the job. Even today, people are sitting in our plants to see where all we can save on equipment. And -- because our determination is to use the equipment to maximum possible. Total flexibility in our equipment, we can -- today, on the same -- we can switch from Maruti component to a BMW component to a PSA component on the same equipment by changing the fitting and tooling.

So your incremental CapEx will be less than depreciation?

This year, I think it will be around -- it'll be around that only, above depreciation. It won't be INR 150 crores, INR 200 crores like last year.

This is valid for up to INR 3,200 crores revenue this year and next year or it is normal.

[Foreign Language] The Toyota -- we -- what we did was the equipment we had planned for Toyota we started producing most of the component in the current equipment that we have. And before the newer equipment -- because the suppliers all delayed the supply of equipment, especially the die-casting machines and other and each machine costs about INR 30 crores. And those machines got delayed. So we actually start utilizing our other -- wherever capacities were available. Now since the volumes are going up, we delayed those equipment to be delivered from last year to this year and some equipment this year to next year. So that the investment in that particular -- [Foreign Language] carrying forward of the Toyota project [Foreign Language] for the Toyota project. And so -- but that is on the previous of 12,500 -- or 11,500 components -- sets of components that we need to -- that we supply. That is what that. But for 16,500 our investment is going to be minimal, hardly any -- I think not more than 10% of the total investment.

So it seems like we lost the connection for Mr. Chheda.

Well, you can give us his number, we'll dial-in and we'll like to talk to him. [Foreign Language]. Hello?

Yes, sir. We are trying to reach him. Just give us -- sir, his number is coming busy, I think, sir, he's trying to dial-in.

We will call him in any case.

[Operator Instructions] As there are no further questions, I would like to hand the conference over to the management for their closing comments. Over to you, sir.

Well, thank you so much, and if there any more question by anybody, please write to us, and we will certainly like to -- even call us up and we would like to talk to you and apprise you whatever is happening in the company. Fortunately, the market is good, and we are all very excited about all the possibilities. Every quarter, you will see the profitability going up. And hopefully, we should be around 12% soon and we like to make further improvements. With the newer components coming in, of course, there would be further additions that will keep on coming. And INR 2,400 crores this year, that's what we are targeting. And the next is INR 3,000 crores plus. And we -- hopefully, we will exceed that also. And with the current situation of the orders which are coming in and the demand from Maruti and others, the way it's coming in, we're very excited about what is happening. Thank you so much, and have a good day.

Thank you. Ladies and gentlemen, on behalf of S-Ancial Technologies, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.