Subros Limited (517168) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Momita, moderator for the conference call. We welcome you all to Q2 FY '22. Conference Call of Subros Limited hosted by Aditya Birla Money. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand over the floor to Mr. Vidrum Mehta from Aditya Birla Money. Thank you, and over to you, sir.

Thank you, and good morning, everyone. On behalf of Aditya Birla Money, we welcome you all to Q2 FY '20 Earnings Conference Call of Subros. From the management side, we have Mr. Pramod Kumar Duggal, CEO; and Mr. Hemant Kumar Agarwal, CFO and VP Finance. Ms. Shradha Suri, who is Chairperson and Managing Director would also be joining the call very shortly. Before we start, may I remind you of safe harbor. There may be some making forward-looking statements that have to be understood in conjunction with the uncertainty and the risk that the company faces. Now I'll hand over the call to the management for opening remarks, followed by interactive Q&A session. Thank you, and over to you, team.

Hi. Good morning to all of you. Good morning, ladies and gentlemen. A warm welcome to all of you for Subros Investor Call for Quarter 2 2022. First of all, let me wish and hope that all of you and your families are safe and healthy. It is fair to say that this has been a challenging quarter for us. Having seen a solid recovery through a pandemic and coming out of pandemic in July 2021. But August and September of this year, had to contend with the semiconductor shortage and impact of COVID waste elsewhere in the world as well. Apart from this, there are many other challenges in supply chain disruption due to high commodity prices, big increase in container cost, rising diesel prices, increasing packaging cost and other operational challenges, which has a big impact on our financials, especially on material sales ratio and EBITDA margins. Today, you may have many clarification or questions in this regard. I'll try to elaborate this in my subsequent remarks. The result of Quarter 2 are shared with stock exchanges and also posted on our website. Let me elaborate some of the result one by one. First, I'll update you about the industry, which is relevant for our business. In this quarter, the single vehicle industry has performed better and has grown by 4% on production basis in comparison with the corresponding quarter of the last year. Whereas Subros Passenger Vehicle segment, terminal product growth is 12% in Quarter 2, as against industry growth of 4%. We have done better than industry performance due to model mix and also impact of incremental business, which we secured from Mahindra for their new Thar project, which is doing well in the market. Commercial vehicle bus segment has registered a growth of 18% in this quarter. Subros has registered an overall 28% growth in bus segment as compared to the corresponding quarter. Talk the tourism sector, school bus business is still to be revised but ambulance sales are still happening to fill up the deficit and also each state government is improving on their medical infrastructure to deal with the emerging situation on COVID in the future. Further, in Commercial Vehicle Truck segment for N2 and N3 category, which is relevant for our AC or a blower business has shown upside trends after a gap of two years. The industry has grown by 57% in H1 as compared to the previous H1, whereas Subros' growth has been 137% in this segment, mainly because of increased AC fitment ratio, consumer preference is shifting towards AC truck as compared to the normal curve. This is a good scenario, potential and opportunity for Subros. After extended lockdown, in view of opening marketplaces in various parts of the country, impacting home appliances sales, this sector is also showing a promising growth. And for Subros, in this quarter, Home Aircon sales has grown by 170% as compared to the corresponding quarter. Overall, revenue from operation has been recorded at INR 529.48 crores, from INR 530 crores in this quarter. Corresponding quarter was INR 458 crores. Overall, there is a growth of 16% over a period over the corresponding quarter and 10% against quarter 1. So overall, on the revenue side, still the performance is satisfactory. Now let me explain on each segment-wise contribution to the sales during the quarter. In quarter 2, car and noncar segment contribution ratio is 92% and 8%, respectively, as compared to 94% and 6% in corresponding period. Maruti and Suzuki Motor Gujarat sales has contributed 81% of the total sales during the quarter as against 89% in the corresponding quarter. In this quarter, Home AC contributed INR 13.46 crores revenue, which is approximately 3% contribution to our overall revenue. Our share of business in Passenger Vehicle Air Conditioning market is 41%, although it is lower by 1% as against 2021. And in Truck segment, we have share of business of 52% and in Bus AC segment, we have share of business of 36%. Let me talk about the operational performance now. As I mentioned before, there are a lot of challenges in supply chain which has never been experienced by anyone so far. Commodity price increase, logistic cost escalation has impacted the margin in big way. Significant increase in lease time of import shipment and subsequent reduction of schedule by the OEM due to the semiconductor shortage has impacted our inventory levels, which has increased by almost 20% and blocking the cash flows. Commodity price fluctuation and upside to the extent of 30% to 60% in various commodities in the last 6 months have impacted significantly on the material sales ratio. And this you will see while comparing the material sales ratio as compared to the corresponding or the previous year period. Though there is a compensation formula for our regular commodities with the OEM, but there is a quarter lag. Further, there are certain non-regular commodities, which are used by our sub-supplier as well. The first impact is huge for that also. We are in discussion with customers for compensation of such fluctuation as well. Container demand and supply imbalance causing steep price increase of import consignment and diesel price increase leading to increase in logistic costs are also a key contribution to the margin stress. The company has realized EBITDA of INR 37.07 crore in quarter 2, which is 7% of the net sales. If you compare EBITDA margin against quarter 1 of the current year, it has improved by 17%. If you compare EBITDA margin of H1 versus the last year H1, we have improved by 142%, but it is not comparable because the corresponding period has a larger lockdown period. And if we compare this with the corresponding quarter of last year, it is down by 35%. Profit before tax in quarter 2 is INR 7.67 crores, which is 1.45% of the net sales. Again, if we compare PBT margin against quarter 1 of the current year, it has improved by 54%. If we compare PBT of H1 versus last year H1, it has improved by 151%. But if you compare with the corresponding quarter of quarter 2, it is down by 73%. Mainly, the profit after tax in Q2 is INR 5.12 crores, which is 0.97% of the net sales. So finally, the summary of financial results is a revenue of INR 529.48 crores, EBITDA of INR 37.07 crores, PBT of INR 7.67 crores, PAT of INR 5.12 crores. Now I'll update on the business side, business outlook for quarter 3 is also more or less similar to quarter 2 because of unclear plans from customers on semiconductor availability. And other challenges are still ongoing. There is no clear visibility that we will be mitigating the impact in near future. Growth in this year is expected to be increasing trend as compared to the last year. We will watch the situation and keep ourselves adjusted to the situation. Despite all these odds, as we have grown by 10% or 16% in quarter 1 and H1, we are likely to grow in double digits in this year by end of March 2022. New business and product development side, a significant success in securing new business from our customers, business lineup up to 2025 is almost completed, and this will ensure our sustainable growth in the future. Business expansion in tractor radiator is also significantly improving, showing growth opportunities for us in line with our changing direction to expand business. We have got success in getting tractor radiator business from Mahindra & Mahindra for their important forthcoming program. Development activities for new programs for all customers are in progress, and they will be launched as per the customer vehicle launch schedule. Business negotiations are also on for subsequent business from all the customers. As we reported in the previous call, we secured business from Maruti Toyota Alliance project, which will be assembling cars from their Toyota plant in Bangalore. We are preparing our Chennai plant to supply thermal product to Toyota plant for this project. This will improve utilization of Chennai plant and also add to the top line significantly because this is additional business for us. SOP of this project will be mid of next year. So now thank you very much. Now we are ready to take questions from your side, any feedback.

[Operator Instructions] Our first question comes from Mr. Ashutosh Tiwari from Equirus.

Yes. Firstly, on this Mahindra business tractors you talked about. So has it started, or it will start in future on tractor side, radiator business?

Tractor radiator business which we secured, the SOP is next year's maybe quarter 1 of next year. So that is an important project, which Mahindra has planned along with Mitsubishi. That is the collaboration project, so that SOP is next year.

Okay. And okay, this is with Mitsubishi, okay. And what could be the peak revenue from here?

It would be around INR 20 crores per year.

Okay. And do we have -- are we supplying any part for this XUV700 from Mahindra?

XUV700, we are supplying only some part partially, not the full system.

Okay. But which part you are supplying over there?

It's basically the hose piping arrangement.

Piping. And what was the ECM revenue in the current quarter?

AC?

This ECM radiator sales in the ...

Radiator business. So radiator business in this quarter is INR 73 crores.

I mean is primarily with us now Maruti only? Maruti and SMG?

Yes. It is Maruti and SMG. So that are two businesses as of now. But as I mentioned that in the future, it would be to Toyota supply as well under this Maruti-Toyota collaboration project.

And this will start in mostly second half of next year, you said?

Yes, second half of next year.

Okay. And so in the first half in this -- the Home AC business, I think we have done roughly around INR 41 crores-INR 42 crores. So what would be the full year revenue we are looking at?

So on AC, so far, we have done as correctly, you said INR 41 crores, we have already done. And based on the visibility so far with the business outlook we have, maybe in quarter 2 -- in quarter 3 and quarter 4, we would be crossing INR 100 crore mark. So it would be in the range of INR 130 crores to INR 140 crores.

Okay. For full year, Okay. And I mean in this fourth quarter will be more heavy basically. I mean generally, that's ...

Yes, because it is the seasonal business, so it starts normally in November, and it goes up to April or middle of May. So fourth quarter would be very heavy.

And currently, what do our share of business with Tata and Mahindra?

So in Tata and Mahindra our share of business for overall data buying, whether for CV and PV, we are around 26%. And in Mahindra, we are around 32%.

Okay. And are we expecting this number to increase going ahead?

Of course, so there are two opportunities with us for increasing share of business with both Tata as well as Mahindra. Mahindra, of course, with their growth, we will play a substantial role as part of the thermal product supplier but also the new businesses, which we have tied up or which are in discussion right now will definitely, our target is to increase to 40% in the next 2 years' time. So that's where we are working strategically on that. So subject to the business growth as per the market expectation, which is currently volatile. In [indiscernible] also, we have kept a target of 40%, but still Truck market or the CV market is still to see a very aggressive growth plan. So it is dependent on the market growth. From a business tie-up point, a few, definitely that much potential we have, subject to how market is performing on that.

And while you mentioned that in Tata, you have 26% share in PV and CV put together. My guess is that you will have higher share in the CV segment with them.

Yes, of course, CV is -- we have quite substantial share, but PV, we lost a few businesses in the past, but we are trying to revise that in few of them.

And lastly, on the gross margin compression, obviously, I mean, consistently, we are seeing the increases in RM. So the first part is that, will be any further inflation in the third quarter. And secondly, by what time we expect these gross margins to normalize, like say, will it be 2-3 quarters' time frame earlier; how you are looking at it?

Yes, we have been talking about gross margin on material-sales ratio for last maybe 4-5 quarters now. And we have seen substantial improvement. We reached to 69% MSR. We again come back to around 73% now. Overall gross margin also crossed 11.5%. Again, we came back to this much number now. But these are all external subjects, which we need to deal and wait for how market is going to stabilize. Commodity prices are continuing on a rising trend. Every quarter, we have seen 18% to 25% growth in the commodity prices. And as I mentioned, the compensation formula is quarter-lag. So one quarter, we have to observed that and next quarter, we'll get there. That is where the overall formula is. We are not sure when it is going to stabilize because -- maybe the global situation on commodities are unclear. We are not sure how China will respond, how China manufacturing situation will be because of this coal crisis. Power availability in India, which is going mainly for raw material supplier is also one of the key constraints and also demand and supply imbalance is also pushing these prices on the upside. So it may take more than 4 to 5 quarters, but it is not clean. We are not sure on that. We have to just adjust ourselves based on the market situation.

[Operator Instructions] Our next quarter is from Mr. Abhishek Jain from Dolat Capital.

Sir you are also making AC for the hybrid and electric cars. And there will be a lot of changes will come, especially on the compressor side. So content per vehicle will increase significantly. So how do you see this opportunity and how much you are ready for that?

Yes, you're right that when this will move to hybrid or electric cars, only the change point in our kind of product is compressor side. Rest of the component will remain the same, whether it is condenser, piping or HVAC size. So there's no significant impact on the technology change for us. So compressor, we -- our partner, Denso is a global leader for electric compressor as well. So that product range is already available. The only gap right now we have in introduction of such products to Indian market is, OEMs are not yet clear about what are the final specs for battery charge or a compressor side. So we are still adjusting on these specs. As and when we have formed, we will go for sourcing of these parts from our partners. So product availability point of view, product testing and validation point of view, all are ready. So we have to only adjust the final requirement of customers.

So are you also looking for the opportunity in export for this particular product?

So I don't think export would be the key priority as of now because if India has to change for this electrification or hybrid, India market will have huge potential to first realize. So our concentration being an Indian company is first to meet India requirement. And once we address that suitably, then we will look at the export opportunity.

Okay, sir. And sir, how do you see the revenue in the Bus Aircon business, given the increasing standardization of the EVs, the [indiscernible] contained permits 1.5x versus the normal? So -- And as you mentioned that this quarter, the number was quite strong. So what is your target for the Bus Aircon plus that Truck Aircon business for the next 2 to 3 years?

So Bus Aircon is definitely part of our long-term strategy, and we are very aggressive in that. And as you said, that this market is moving to electrification faster -- So our products have also been now lined up. They are at a final testing stage at many OEMs. So we are ready for Bus Aircon, electrification as well, even with the IC base both sides. So this segment, as part of our long-term strategy has to cross INR 100 crores. Maybe now because of this 2 years of deferment of the market, it may take another 3 years or so, more than 3 years, but definitely, our targets are [ end ].

And sir, in your Railway segment, your products are only available in the driver's cabin. You were also looking to move into the railway coach. So what sort of the opportunity size is there, if you move into the railway coach? And how is your target for the medium term?

Yes. So from driver cabin, we have already started working on the coach side, but not on full AC coach, but tower AC coach. Our products for railway coach are under final validation with RDSO. By maybe December end, we will be able to get it through and start participating in big tenders. Overall opportunity on the short-term basis, we are looking at around INR 40 crores to INR 50 crores per year revenue from this extended segment overall from railway. And finally, we have to reach to around INR 75 crores in maybe 4 to 5 years' time.

So the total opportunity you're looking at INR 75 crores for the next 2 to 3 years in the railway side?

Yes.

Okay, sir. And my last question is related with this battery cooling models. So have you secured some business for the -- from the foreign players in this particular segment?

-- so battery cooling model, as I mentioned, while commenting on the electrification, [ BCM ]model is only required when AC-- the battery charge per charge is having some spec, which is over 500 kilometer or so. So this is one final connecting point with the customer if they want to enhance battery charge per charge battery capacity, then BCM model will be applicable. So as I mentioned, product is ready, but OEM has to freeze their final specification to include such products into their profile.

And how much big opportunity is there for -- what would be [indiscernible] the vehicle realization?

So per vehicle realization will be between 4,000 to 5,000, but how much will be the revenue stream from that, that depends upon how many people required BCM? But of course, this will have a delta revenue number.

Yes. sir, my last question is related to the supplies thermal products to the Toyota. So what could be the incremental opportunity given the current size of Toyota business?

So this alliance project is right now for only one model, which is given to us. So that SOP, as I mentioned, would be the middle of next year. So for us, the incremental revenue would be in the range of INR 160 crores to INR 175 crores. So that's the number in case they reach to the RFQ number, our projection. So this is the incremental opportunity for us.

[Operator Instructions] Our next question is from Mr. Aditya Makharia from HDFC

Yes. Sir, just had a question on market share. We mentioned that we have 41%. But I believe at some point, we have even reached as high as 44%. So have we sequentially lost some share?

Yes, you're correct. We reached up in one of the quarter at 44%. Right now, we are at 41% because Maruti has dropped their share of business. So this has a direct reflection on our share of business. So whenever Maruti will catch up to their normal share of business, we'll definitely will be recovering.

Okay. Fair enough. Second thing is on Tata. Are we supplying these new compressors for their Nexon EV and the Tigor EV?

No, not yet.

Okay. Okay. And thirdly, sir, just on a broad note, with Denso coming in with a higher equity stake, maybe 1-1.5 years ago, any export opportunities or global sourcing opportunities which are visible, or anything you can throw light on?

So Denso collaboration enhancement through equity model is mainly for providing us more business opportunity in India and also to give us more technology for India application. That was the primary objective. So first, we need to realize that before we start talking about export opportunity or participating in their global strategies. So right now, our emphasis is that we need to update our product lines to meet the requirement up to 2030. So that technology road map, we are almost on a final verge of completion with Denso. So that we secure our business till 2030, or if required technology, suitable upgradation, product upgradation we need to first amass to. So that's our engagement right now.

Got it. And just last housekeeping question. The Car AC business turnover in this quarter was how much?

Car AC business turnover in this quarter is INR 486 crores.

[Operator Instructions] Our next question comes from Mr. Ashutosh Tiwari from Equirus.

This Car AC sales number that you told INR 486 crores includes the ECM, right?

Yes. Car AC -- care business means including ECM and ECM as I mentioned, is INR 73 crores. So net of that is INR 413 crores for Car Aircon.

And what was revenue from this commercial vehicle truck segment in this quarter?

Truck segment has contributed around INR 14 crores.

And you mentioned that you are seeing the improvement in share of ACs in Truck. So what is the share of ACs at industry level maybe last quarter or this year so far?

So far, our relevant business, which is N2 and N3 category, share of AC business has improved when we -- maybe in January '19, when this regulation was. This regulation was changed from Aircon to blower. And at this time, the AC ratio was around 9% and which has already improved to around 20% now. So we have seen that even with the optional number, the Truck Aircon business has improved to around 20% of total N2, N3 category.

And roughly, what is the content of these AC in a truck? It is around INR 2,000?

No. Blower is having range between INR 2,500 to INR 3,000. and AC would be between INR 12,000 to INR 14,000.

Okay. Okay. Okay. And buses would have been very low in this quarter, the revenue from buses?

Yes. Because the market is still opening up for relevant to the Bus Aircon.

So I think initially next year, the growth will generally driven by one industry revival and new business in ECM and truck revival, these three will be main drivers. Railway and all will probably come through in 24, FY '24. Is that correct assessment?

Yes. So the main drivers will be these what you said, mainly dependent upon how the market is going to revive and how fast is this going to revive unless all challenges are addressed suitably. And of course, the delta business, which we have secured for next year, they will be the key contributor.

Okay. I got it. And CapEx for this year will [ INR 44 crores ], the full year number will be how much?

So this year, the overall number base CapEx would be between INR 80 crores to INR 90 crores. That is mainly because of the new projects which are currently lined up, so investment on that new technologies, which are lined up. These are the investments which we have already committed, so they will be there.

[Operator Instructions] Our next question is from Mr. Abhishek Jain from Dolat Capital.

Sir, this year, as you mentioned that you are targeting around INR 130 crores, kind of the revenue from the Home AC segment, although the first half was quite weak. So for next year, I mean, for FY '22, what is your target for the revenue and margin from Home AC segment?

So as I mentioned before also that Home Aircon is more of a seasonal market. So it is not comparable between quarter-on-quarter. So normally this season start between November to mid of May, also April end or mid of May. So that's why they are not comparable from a period perspective. So as I mentioned, this year we are targeting around INR 130 crores. Next year, we have to cross that. So based on the market situation, how the revival is and how the other risk factors are, definitely, the numbers growth will be much higher than what we are going to close in March '22. Margins, of course, are challenging in this segment because of the major commodity price and mainly the dependency on copper, aluminum, they are the major contributor here. So OEMs have to adjust prices based on that. So that's how the margin can be kept on that. So still this is a key challenge as of now in this segment.

Okay. And my next question is related with the PLI scheme; are you looking to take a benefit of the PLI scheme through some CapEx?

So we are at the final stage of finalizing our product lineup for eligible for PLI scheme. So we are in discussion with the government also if we can factor in certain products, which are for a technology upgrade or for localization, which can be made eligible for PLI scheme. So such discussions are around. Give us more time, maybe another 2 to 3 months' time, maybe next call, we'll be able to have more clarity on how government is going to accept us. But of course, we are very keen and we are very aggressive to qualify under PLI scheme for our future projects.

So you are applying a PLI scheme for the Home AC segment or is it -- or in Passenger AC segment?

Passenger. We are targeting for Passenger at this stage.

And what would be the CapEx size?

No, we have not yet concluded. Please wait for one more call. I think we'll be much more clear about the lineup, which kind of product we are making this eligible under PLI scheme and how much would be the investment, please wait for that.

So our next question from Mr. Aditya Makharia from HDFC.

Just wanted to clarify in terms of major raw material, would it be steel or will it be copper and nickel?

In which product you're asking?

For the Car AC.

Material is all, commodities are currently at a peak. So normally, what we are using is aluminum at the first consumption number. Then it is steel, plastic material, various fresh grades of plastic and then copper. So copper mainly going into Home Aircon, but less into the car or a Bus Aircon products. But of course, all commodities have impact. So only the quantum may be different, but impact is there.

Thank you, sir. The next question is from Mr. Dhiral Shah from PhillipCapital.

Okay. So by -- you think Okay. So by -- you think My question is pertaining to our EBITDA margin. So whatever margin impact we have seen because of the hike in the raw material cost. So are you able to pass it on? Or we have to take some kind of a hit on our margins, sir?

So in my opening remarks, I elaborated on that. So there are two aspects to that. There are certain regular commodities where the compensation formula is available with the OEMs. So there only -- the gap is, there is a quarter lag for compensation. So one quarter, we have to observe, but next quarter, we'll get the recovery of that. So only the volume change impact between quarter would be the hit on the margin side. That is one. Number 2 is there are certain extraordinary variation in commodities where the compensation is not there. It will be onetime claim. So we are in discussion with the customer for that. Right now, they are charged from the P&L. So that's why the impact is visible on MSR as well as on EBITDA. But as and when we settle with the customers, we will try to adjust our financials accordingly. And the third area where the hit is maximum, there is no compensation formalized on the logistic side. We have the container cost, the logistic cost increases are there. So they are also under discussion with the customer for price adjustments. So again, whenever we get that settlement done, we'll adjust our financials.

Okay. So by -- you feel that our EBITDA margin would again bounce back to double-digit figure here?

It depends upon how the market is going to stabilize because last -- maybe 2 quarters, we have seen each quarter has different challenges, and there are spikes coming in between quarter-to-quarter. Once market gets stabilized, only after that, we can get benefit of our operational efficiencies. Right now, we are struggling to meet the challenge or deal with the challenges, which are there in quarter-on-quarter basis. Right now, for example, in last quarter 2, we are hardly consuming our capacity. So the utilization is low because almost 40% to 50% volume fluctuation is on the downside. So definitely, all the surpluses will hit the margin performance.

Okay. So at least for next 2 quarters, we will see, because of the lower utilization also maybe our margin would be suppressed.

Yes.

[Operator Instructions] Our next question from Sonaal Kohli from Bowhead Investments.

Sir, my query was that once -- I mean, you just answered that for next two quarters, you expect the margins to be suppressed. So do you expect that you will not achieve your full capacity in next two quarters? I mean...

I have answered this question before as well, but it all depends upon customer recovery from the current crisis of semiconductor. So on the one side, the demand has not come down, but it is mainly issue of supply of commodities as well as semiconductor availability with the OEM. Whenever they will resolve this issue, we will be very fast in ramping up and utilizing our capacity to the full -- to the previous level. So it all depends upon how customer schedules are. And right now, we have no visibility beyond the two months. That's where are adjusting on a short-term basis. Whenever a customer will announce plan for more than two months, definitely, it will be more clear how the performance be would. It is right now on a guesswork only.

Sir, second, my query was considering all the raw material cost as for you to pass through. As and when, whenever, whether it is March quarter, June quarter, or September quarter of this year or any other year, you start achieving your optimal capacity utilization and the metal prices stabilize, is there anything else which will prevent you from meeting our 11% kind of target margins you had mentioned. Is there anything else beyond these too?

No, we have to reach to the normal level as and when the situation improves and come back to the level of maybe -- The best year we had was '18-'19. So if we resume to that level of capacity utilization as well as on commodity price on the margins, so definitely, we'll be achieving such numbers. So maybe another two quarters we have to wait to comment on final conclusion, but with a sustained level of performance.

But sir, isn't it fair to assume that your margins will be less because, I mean, you'll be getting a fixed gross profit per vehicle or do get compensated on a gross margin basis. So let's say, metal prices goes up 50%, your gross profit per vehicle will eventually not go up 50%.

Of course, because the compensation will be for as a reimbursement. So that much impact will be there. But we need to see how the commodity price normalize to the previous level, then we will be able to get the proportionate benefit. But as of now, your resumption is correct.

Sir, lastly, when you were answering the Denso question, my line got disconnected for a minute. What I wanted to ask you was on the Denso front, on the domestic side, are there any products or initiatives, my apology if you answer this, would you expect over the next 2 years, which should help you increasing top line and what [indiscernible]is the material or these would be your response.

So the question which I answered before was that what are the key growth driver for subsequent year. And the answer given was that growth drivers are dependent on the market growth, our market is going to revive next year. And of course, the basis are low because '19 '20, '21, '22, we had a COVID period and the substantial part of the year was under lockdown. So from that comparison, the growth drivers will be from -- compared to the 2-year performance will be much higher. In addition to that, we had some new businesses, which will be lined up in '22, middle of '22. That is Maruti-Toyota project, collaboration project. that would be adding to delta, and there are certain more few orders which we got, which will be commissioned next year. So they are the key driver for the '22-'23 performance. And of course, it would be -- as per our current expectation, it would be better performance than previous.

My query was specific to domestic Denso. So are there any products from domestic Denso, which you would expect, let's say, over the next 2-3 years period, which could help you further? That's...

From domestic, Denso, you said?

Yes. You some new products introduced by Denso which would help you scale up further.

So in new product lineup, I think we clarified this and before also that we are launching a new technology compressor, which is Vane Rotary' Compressor, that is already lined up for WagonR, it has started production last year. And now it will be going into the new Baleno. So that would be how the utilization of new compressor would be. That is mainly to meet the regulatory norms by the OEM because of the CAFE and BS-VI requirement. Of course, there will be some delta because that rollover will be too much larger family of models as compared to the existing. So there would be delta, but that delta would be -- if you see a short-term view, it would be between INR 50 crores to INR 90 crores delta. But going forward, it would be substantial.

And there's nothing beyond this you expect to Denso over the next 2-, 3-year period?

No, no. In the short term, no.

When you say a short term, you mean 2-3 years or the mean next 6 months?

2-3 years. 2-3 years is the short term.

I see. And you've already answered the question that there's no plan as far as to cater to Denso's export business as of now.

Yes.

The next question is from Mr. Nikhil Deshpande from Axis Capital.

Sir, could you just guide on how has been October in terms of production levels with OEMs? And how has the Guided for the next few months? Regarding the...

So October month is no more different from September. So it is more or less in the same line because the semiconductor shortage remained constant. Whatever short was there in September, same is there with October. So most of the OEMs are maybe keeping the same production level of September and currently, the visibility of November is also in the same line of October, although the number of working days will be lower than October, but maybe the number -- final output would be in the same range. There will be a -- maybe a delta increase of 5% -7%, but not substantial.

And so when are we expected to come out of this issue? Not the normal, but to a reasonable level.

I don't know because this is beyond our assessment because semiconductor manufacturing is currently a constraint and especially in one or two areas where the constraint is maximum, but we have to go by the OEM schedule. We can't make any assessment on when the OEMs will be reviving, but we are just adjusting based on the OEM declaration of schedules.

The next question is from Preethi RS from UTI AMC.

Sir, I have a basic question on what is the difference in realization for AC kit that goes into the diesel car, petrol and also EV in future?

So there is no per unit difference between AC going into CNG or petrol or diesel. So there is no criteria of differentiating Aircons between these 3 applications. That is one. Number two, if you compare to electric, so from a basic AC look, there is no change other than compressor and compressor if it has to change, the delta is between 8x to 10x. So electric car definitely will have -- overall, if you compare AC to AC will be around 4x on a full system basis. But between IC, CNG and diesel, there is no change.

Okay. So do you confirm it could be 4x more compared to our [indiscernible]architecture? Is that what you think?

Yes, if it is electric, purely electric from the conventional AC.

Sir, do we have the technology and also the product in place already? And what is the -- what stage we are in, in terms of, let's say, validation, et cetera, with the EVs that are already in the country?

So EV products range is available through our collaborators. So there is no constraint on that. But right now, the volumes are not enough to push for any localization investment because we have unclear plan of ramp up. Each OEM has a differential aggression on how the EV vehicle will be moved into the market. And also because of this COVID situation, the plans are further derailed. So we need to keep watch on maybe by '23, and we'll have more clear number projection till 2030, how these numbers will be because, of course, for electric compressor, if you have to localize, the investment would be very, very substantial. We need to be careful of taking investment decision based on customers' final assumption on how they will be ramping up on the electrification.

And just last question on the same. Could you help us understand what is the difference, why it requires a different compressor, et cetera, in EV? And hence, [indiscernible] footprints and realization?

So the technology is completely different in case of conventional IC engine or the technology's fixed displacement and in the fixed displacement the drive is engine. So engine drives compressor and compressor generates the compression part of that. But in the case of electric, there is no engine. So drive has to be built in inside the compressor. So it will -- that is how it is called electric compressor. So this technology is completely different from convention.

[Operator Instructions] So our next question is from Mr. Nikunj Gala from Principal AMC.

We understand there is an issue on the supply side on account of semiconductor shortage. And hence, it becomes very difficult for us to understand the actual demand of PV on ground. According to your experience, if the situation on the supply was normal, when do you think on a PV we can see a significant up-cycle starting significant in the medium term?

So again, I am not able to make any estimation or destination at this stage when the semiconductor issue will get revived. But my only point which is more positive from my thinking is that demand of vehicles have not come down. It is only the availability of vehicle which is impacting the overall market. So demand remains the same. So whenever there would be a supply side normalcy, I believe the lead time for demand growth will not be more. Same quarter, you will see a drastic change in expected numbers. And of course, the lead time will not be very, very high.

Okay. So in the normal scenario of supply side, do you believe we are in an up-cycle of PD starting in this year or next year? Because we have seen last 2-3 years of significant lower volumes in PV side.

. No, we are not into off-cycle. I think the market was into a V-shape recovery whenever we just came out from first wave of COVID. And V-shaped recoveries are happening only in 2 scenarios. When, one, you have off-cycle recovery period. And second, people are holding onto their demand because of any other circumstances, but whenever the market is available, the demand is pushing the market. So we still expect that whenever there will be normalcy in the supply side, this V-shaped recovery still remains, at least for next 2 to 3 years' time, that's my assessment. And that is only my assessment.

Okay. So of course, from your own experience, we need your comment. But despite the total cost of ownership increasing on account of fuel increase or commodity inflation, you believe that up-cycle is still there and demand would be still intact. So there won't be much of an impact?

Indian consumer is having a completely different sentiment when the petrol-diesel were at INR 12, INR 50. We made the same comment. And now it is INR 100. It is -- the total cost of ownership can be seen from a different perspective. So mainly on the application side, cost is not the deciding factor, primarily, and the only influence of 5% to 7%, but not completely.

Sure, sir. And secondly, I just want to understand on the capacity utilization front, on our total gross block, currently, what would be our capacity utilization?

In the current scenario, we are utilizing not more than 50%. So we are at around 45%, 50% only. Whenever it was cheap, at that time the utilization was between 80% to 90% on a variable basis. But right now, we are below 50%.

So in that case, even the up-cycle remains strong for next 2-3 years, our CapEx requirement won't be that high, apart from the greenfield, which we are doing.

Yes, it will not be substantially high. It will be only for de-bottlenecking or certain new capacity or new project investment, but there will not be a substantial -- no greenfield investment is planned for next maybe 5 years so far.

Sure, sir. Okay. And lastly, on the profitability, I think in one of the comments, I missed the -- your comment on whether we make on a per unit basis or on a percentage profitability in the up-cycle of the raw materials?

So yes, the comment was basically that if we get the compensation of commodity and other cases, the margins will not increase proportionately because we are getting only the reimbursement in the top line and the same is impacted in the cost side also. So that was the comment, and which we clarified.

Okay. So just for my understanding, if INR 100 [indiscernible]55:11 and we make INR 10, when raw material goes from, say, INR 70 to INR 90, so our realization will increase only from INR 100 to INR 120. And hence, on INR 20, we won't make any margin, right?

Yes, INR 20, we will not get that 10% margin, which is there in 100 base. So that was the clarification.

Okay. But this is the phenomena in the short term or in the long term if INR 20 persist, then we would be compensated for that?

Yes, because -- see, all these compensations are on an actual basis. So whatever is our impact on the bottom line, the same will get compensated. Customer is not going to add margin on the compensation. So, but on the point is if it remains with us for 23 years, we can optimize on the efficiency side. And then only it will contribute to the margin. But from a mathematic point, it is extended to the top line, and rest is impacting on the bottom.

Okay. So what is the threshold ROC we are working with Japan in that case?

So ROC, it was a normal business, we reached 18%. And before equity, it was touching 19.9% or so, roughly around 20%. So that is the threshold we want to achieve initially as a base and then we will ramp up from there.

Yes. So at any point of time, on account of inflation or on account of decline in the margins, if that threshold ROC goes to 15% or 14%, we can negotiate with the OEMs and get it back to 18%. That understanding is correct?

Case to case basis, it depends or otherwise, we have to ramp up our margins through internal efficiencies.

But sir, is there any further scope of improving the efficiency from here on?

Yes, possible. Because productivity is something which is a more dynamic subject, which require a continual improvement, and that can add to the efficiency in the margins as well.

Our next question is from Mr. Sachin Trivedi from UTI Mutual Fund.

Just one quick clarification on the CapEx that you cited. Let's say, I know it's a hypothetical question at this point in time or too early. But you said that when you went in an EV scenario, there has to be a substantially higher investment. Is there any quantification of, let's say, for like-to-like current capacity? What kind of investment that we might have to take? And what kind of fungibility of existing infrastructure would be there in the new environment?

So I clarify at this point, I'm again, re-emphasizing on that. On electrification or electric car, HVAC, hose tube, condenser, there is no change in technology. So there is no investment, additional investment for technology per se. It will be only for the capacity as and when we cross our threshold. But in case of compressor, it's a completely different technology. Electric compressor require to have a self-drive, whereas in a conventional compressor, it is an engine drive. So investment size, investment timing will depend upon when a customer is going to freeze on their electrification car specification. So -- and also the substantial numbers should be there and the clear visibility [indiscernible] should be there to kick off such investment for how much capacity for what kind of specification it could be there. So all these are yet to be concluded. So at this stage, it will be unfair for me to quantify any investment and give excitement to the market.

Sure, sure, sure. Okay. And just -- so okay, there is no investment guidance that you want to say. But -- and just one final question on the existing structure that we follow with our OEM. This is with respect to, let's say, you were answering in the previous question as well, that like-to-like customer will give us the compensation for the entire raw material inflation. But how about, let's say, in the inflationary environment we have to hold higher inventory as well. So does the customer give us some compensation for that higher inventory as well?

Not as yet because we have not seen such a big fluctuation or some -- such a big volatility in forecasting and keeping inventory with us. So far, that experience has not been there. This is extraordinary situation, and we are in discussion with the various customers, but at this stage, I can't comment whether the discussions are progressing well or not, but we need to wait and watch because nobody has any control on any number or any impact of this number in the whole value chain. So we have to be fair with each other.

Our next question is from Mr. Sonaal Kohli from Bowhead Investment.

I have 4 queries. Firstly, 2 straightforward ones. considering there's not major CapEx you're expecting, what would be your depreciation within 2023? And what kind of tax rate would you be subject to, let's say, in 2023 or 2024 on a reported basis?

Well. You have question about depreciation forecast for 23 and the tax rate for next year. That's what your question is ?

Yes.

Hemant will answer this.

So depreciation forecast for the next financial year is approximately INR 100 crores. It will be slightly higher. On taxation front, from P&L perspective, yes, it will remain 33%. And definitely from a cash flow perspective, since we are paying under MAT, so it is 16.5%.

And sir, do you expect at any point of time the tax rate to converge to the reported corporate tax rate and if so, in which year?

Yes. So corporate tax rate from a P&L perspective will be 33%.

But let's say, beyond 2023, would you expect that to fall?

We will come to 22% in the financial year '24-'25.

We'll come to 22% on a reported basis in '24-'25?

Yes.

Right now, we have a MAT credit, by this time, this will get rationalized. So after that, we'll come to the normal corporate rate, which is available. And sir, as far as 2024 is concerned, would your tax remain at 33% or what would you receive?

Could you repeat this?

For 2020, but you told me about 2023, told me about 2025. My question was what happened in 2024? Will it remain at 33%? Or will it start falling in 2024?

Okay. The company is having a MAT accumulation. The company has already paid the tax to the department, which is yet to be realized. So we have paid the tax under the MAT, which we get squared off in the financial year '24-'25. So once our MAT accumulation will be adjusted then we will start paying under the new tax regime of 22%.

And before that, even in 2024, your tax rate will remain 33%, right?

Yes. Yes. Yes.

And considering you don't have much CapEx plan, the 2024 depreciation should not be very different than 2023 depreciation.

Debt level will not be. Depreciation will be around INR 100 crores.

Okay. And sir, as far as your EV business was concerned, assuming normalcy obviously in all sections, have implied [indiscernible] even made a second forecast. Considering the metal price in [ Diesel ] sector, what will be an equivalent forecast. So let's say you had a forecast of, if I remember correctly, INR 250 crores to INR 200 crores, somewhere around that range. In between [indiscernible]what should be the normalized production? Or has certain assumption change like [indiscernible] itself not viable [indiscernible] .

I'm not able to get your question. Can you be just little louder here?

My apologies. My question pertains to your Home AC business. Earlier, you were expecting a INR 200 crores to INR 250 crores turnover over a period of time in your Home AC business. Considering the metal prices have increased, obviously, you're not going to charge the customer saying what you had told us 2 years back. So what I'm trying to understand from you is what will be the equivalent number of that INR 200 crores-INR 250 crores, which you would have told us, let's say, a year, 1.5 years back in 1 of these calls. What will the equivalent number at current metal prices of that business?

Okay. So yes, we gave a forecast of INR 200 crores, INR 250 crores on this domain. And subsequent to that, there was a metal prices fluctuation. Now we have certain - in a few cases, some formula with the customer either for a month lag or a quarter lag. That's how we are adjusting the cost impact on such product segment. The forecast will remain thin. Only we have given you a short-term site of INR 130 crores-INR 140 crores for this year. And for next year, we will be adjusting based on how the market will be and how the other risk factor would be. But since these products are going for home appliances to the retail market, I believe we hear customers have some visibility of existing price and price to the end customer and give benefit back to us. So accordingly, our overall forecast has not changed. That INR 200 crores-INR 250 crores still remain. Only there would be period gap, maybe a gap of 1 year, we'll come back to this target level.

But if the metal price remains high, if your volume forecast is same, would not the revenue forecast increase?

It will increase. It will increase by 10% to 15% because that will be the impact on the overall unit.

Well, that's it. okay. [indiscernible] And sir, lastly, on the Toyota business, while it may be a little too early to ask you, what do you think is the potential for this business from you over next, let's say, by 2025, 3 years down the line. You could make wide-range estimates, but what could be -- could it be a real? Could this be the biggest moment for you after the car's recovery? Or when you look at your growth drivers from a 3-4-years perspective, in addition to Maruti's growth rate, what would be the #2 growth driver for you? Would it be this one?

So answering, your question has 2 different aspects. One is from the Toyota side, what are the growth opportunities available. So right now, the visibility, which we have is this Maruti and Toyota alliance is only limited to one project. And that project, we have got 100% business. So whenever this project will be launched and whatever ramp-up will be for the capacities, they have agreed between both the companies, that much number we will get. And that's how I indicated a target of around INR 175 crores as a [indiscernible] at worst. Now substantial to -- I mean post that, how Toyota would be growing and how we'll be contributing. Right now, we have no engagement other than this project with Toyota directly. So this is the first project which we have to experience with them, and there's no additional RFQ also, which is in pipeline. That is on the first set of your question. Second is, after Maruti and Suzuki Gujarat, the key driver for us in our kind of product domain is definitely Mahindra, which is quite promising and Tata. These are 2 key customers, which we are working with, and they will be participating in our growth story on our Passenger Vehicle segment. And of course, on Commercial Vehicle segment, we are present with all the OEMs, so we'll meet their requirement wherever it is. But of course, we are eyeing on that new regulation, which is expected, which was utilized in January '19. Originally, it was Aircon and N2-N3 category, but it was normalized to blower. But once we reinstate that original recognition, the delta of INR 150 crores, INR 180 crores of turnover definitely will be there because AC will become mandatory for that category of cars. So these can be the key drivers as of now. But right now, the situation is fluid. You have to just bear with us.

But from a 3-year perspective, it's fair to assume that the regulation will flow into, right?

Yes, that's true. That's what I said, the opportunities and potential is available with a span of 2 years, 3 years' time, but we need to just adjust from the current market situation, if it is prolonging and if it is not reviving as we are expecting.

And sir, considering the kind of complexity in all the changing vendors, is it fair to assume that there's more scope talking of -- as far as existing products are concerned for doing [indiscernible] with Toyota. That would be only for the new products wing.

Yes.

The next question is from Mr. Ashutosh Tiwari from Equirus.

You mentioned that the content of AC in EVs is 4x higher. Is it only the compressor part, because other parts will remain similar? So with inflation, 4x is for compressor only or other parts, will say compressor is only 40% of the total AC, right 42%, 40%.

So yes, as I mentioned, the change point is only electric compressor. So rest of the part, technology wise, there is no change. So that's how, as I mentioned, compressor is 7x, 8x. But on the total overall system, it will be 4x. That's how this number.

Thank you. And the last question comes from Mr. Nikunj Gala from Principal AMC.

Sir, what would be our normal maintenance CapEx per year?

So normal CapEx in the normal year is between INR 40 crores to INR 50 crores. That is for maintenance CapEx for any machine replacement or for adjusting the peak or bottleneck operation that's the CapEx we normally have.

Okay. So given that -- assuming there is no growth and if today's plans are going to sustain for the ongoing concern basis, we have to incur INR 40 crores to INR 50 crores, right? So in that case, reported depreciation of INR 100 crores and the maintenance CapEx. So from the cash flow perspective, there is a cash inflow of INR 50 crores, right?

So that's what we said that mostly our investment will be through internal accruals only. And if internal accruals are that our investment is less than the depreciation, so definitely will be more productive.

Thank you, sir. Now I hand over the floor to the management for closing comments.

So broadly, we have covered most of the points which everybody asked, and I understand the curiosity is more on when the market is going to stabilize and unfortunately, I don't have a direct answer to that. But still we are hopeful that our hope is more positive because demand is not reducing. It is only the availability of vehicle which is impacting the overall market. So whenever we reach to the normal level, the market is going to grow. Still, we are hopeful that V-shaped recovery, which was there before the second wave will remain available. And that will help us in growth for our long-term targets, which we have fixed in. We are very clear in our plans for expanding each and every segment so that our dependency on one segment will come down. So these are the things which we are working on right now. So with that, this is all from my side. Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of Aditya Birla Money, this concludes the conference call for today. Thank you for your participation. You may all go ahead and disconnect your lines. Thank you, and have a good day, everyone.

Thank you.

Thank you.