Tube Investments of India Limited (TIINDIA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Tube Investments Q3 FY '22 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anupam Gupta from IIFL Securities Limited. Thank you, and over to you, sir.

Thanks, Lizelle. Good morning, everyone, and welcome to the post results conference call for Tube Investments. It's my pleasure to have the leadership team from Tube Investments joining us for the call, including Mr. Vellayan Subbiah, the Managing Director; Mr. Murugappan, the Chairman; Mr. Mukesh Ahuja, who heads the Tubes business; Mr. Srinivasan, who heads the Metal Formed business; Mr. K.K. Paul, heading the Cycles business; and Mr. Mahendra Kumar, who is the CFO of the company. I will hand over to Mr. Vellayan, for the opening remarks, post which we can have the Q&A. Over to you, Mr. Vellayan.

Thanks, Anupam, and good morning, everybody. We're just discussing our results for Q3. Our PBT for the quarter was at INR 161 crores. Revenue in Q3 was INR 1,701 crores compared to INR 1,309 crores for the same period the previous year. The PBT was at INR 161 crores as against INR 145 crores the previous year. The return on invested capital annualized was at 49.6% compared to 51.7%. And the free cash flow for the quarter was INR 172 crores, with improved NWC levels from Q2 FY '22. The PAT for the quarter was at INR 120 crores as against INR 107 crores for the same quarter last year. Just a quick summary on our -- on each of the businesses. For Engineering, revenue was at INR 996 crores compared with INR 733 crores. With all the businesses, one of the reasons for the revenue jump has also been the price of raw materials. The PBIT for the business was at INR 87 crores as against INR 102 crores in the corresponding quarter of the previous year, primarily due to higher fixed costs incurred towards special maintenance expenditure and planned layout changes. Metal Formed Products, the revenue for the quarter was at INR 330 crores compared to INR 315 crores in the corresponding quarter of the previous year. PBIT was lower at INR 32 crores as against INR 38 crores in the corresponding quarter of the previous year due to lower volumes in railways and door frames. Mobility registered a revenue of INR 280 crores compared to INR 234 crores in the corresponding quarter of the previous year. PBIT was flat at INR 15 crores due to higher 3-wheeler pre-op costs, which are also part of the Mobility team right now. And Others, the revenue was INR 159 crores compared with INR 79 crores. Industrial chains has done very well and PBIT for the quarter was INR 11 crores against INR 8 crores in the corresponding quarter of the previous year. At a consol level, obviously, now we're consolidating CG and Shanthi. The revenue was INR 3,410 crores as against INR 1,700 crores the previous year because they didn't have much of CG in it last year. The PBT was INR 353 crores as against INR 158 crores in the corresponding quarter of the previous year. CG Power, in which the company holds a 52.61% stake, registered a consolidated revenue of INR 1,551 crores as against INR 820 crores in the corresponding quarter of the previous year. And PBT, before exceptional, for the quarter was INR 174 crores as against INR 64 crores the corresponding quarter in the previous year. Shanthi Gears, in which we have a 70.5% stake, had revenue of INR 95 crores as against INR 65 crores in the corresponding quarter, and PBT for the quarter was at INR 17 crores as against INR 10 crores in the corresponding quarter last year. Commenting on the financial results, Mr. Arun Murugappan, Chairman, TII, said the results for the quarter show a steady performance by all businesses. The company is closely watching the impact of challenges of the drop in auto industry performance, which has impacted domestic Tubes and our Metal Formed business. Performance in exports has witnessed healthy growth in Tubes and Industrial Chains business and CG Power has also delivered consistently higher results across all of its business segments. So broadly, let me stop with that. I mean I think like Mr. Arun Murugappan's comments, our concern on the auto businesses is really what's going to happen to demand in the coming quarters because of the drop that we saw especially starting in December last year. So otherwise, we were quite encouraged by growth opportunities and otherwise, I would say kind of things are more or less in line with what we expected. So let me stop with that, and I'll turn it over to you for questions.

[Operator Instructions] The first question is from the line of Nishit Jalan from Axis Capital.

Congratulations on a decent set of numbers despite tough times. Sir, my first question is on exports. This is one segment which we have scaled up very well on the Engineering side, especially. Just wanted to get your sense as to where are we in terms of overall share of exports in our total revenues? What would be the target in the medium term? I think in the past, you have shared about target to scale up exports in the Cycle segment as well. Would we have some opportunity on the Metal Formed business? Can exports be a significant part of revenues in the next 3 to 5 years compared to where we are today? That would be my first question.

Yes. So let me just -- first, I'll let Mukesh talk about exports in his business in the Engineering business, and then we'll come back and give you an overall perspective because Mukesh has the largest part, and so let him talk about exports in his business, and we'll come back and give you an overall perspective. Mukesh?

Yes, Mukesh this side. This year has been a very good year for export, which was a part of our strategy to keep on enhancing exports as a total pie of the Engineering division. And we are getting closer to the target what we had set it for ourselves but there is still good headroom available for the new product category for which we just finished even a CapEx cycle in Q3, and we are bullish about exports going forward. And to just give you numbers, maybe our revenue from the exports is around 20% in the Engineering division for the tubes, which is getting exported. Sir, you can continue.

So again, coming back. So I think the encouraging news for us is that in the Engineering business, like Mukesh said, he gave 20%. We'll have to see what numbers we sustain at. We would like to get to 25% to 30%, at least starting in the Engineering business. TI Cycles is another area where we have an opportunity for export. And that's something that Paul and his team are just starting off on. So it will take a little while to pick up. In general, the other area in which we've had good export growth is on the Industrial Chains side. And Industrial Chains is getting a significant portion of their revenue now, almost close to 40% from exports. So these are the 3 segments in which we see immediate opportunity. And like I said, Metal Formed will kind of continue to take a while. But in the segments in which we see opportunity, we definitely like at least 30% of the business to come from exports, and we love to see when we can get there, hopefully in the next couple of years.

Okay. Sir, just to get slightly more details in terms of, this exports have scaled up very, very quickly in the last couple of years. Do you think that it's mainly because of the kind of plus one strategy, which are the key reasons, regions, what other countries which you are targeting or where you are seeing stronger traction in exports across both Industrial Chain and Engineering segment?

So definitely, it has been because we've been very focused on it from a strategy perspective. Mukesh, do you want to talk about your regional split kind of in terms of Engineering kind of where you're getting your exports from?

Yes. Like Vellayan explained, we, as a part of our strategy, we are very really focused on the exports. And the major focus has been how we can continuously increase the OEM business as well as whenever the opportunity comes, we need to focus on the distributor side of the market. So this year, maybe there is a good increase in the U.S.-based volumes for TPI and even the large diameter segment also. We've done a very good exports for the Europe market, which has given a very good run for this year. And we hope to keep this momentum sustained going forward, and we improve towards like Vellayan was trying to say around 25% going forward for Engineering division to increase the exports revenue.

Okay. Thank you for the clarification. Sir, my second question is more on your strategy on electric vehicles. I know that you're developing electric 3-wheelers already probably we will see that product in 1Q. Recently, you acquired a 70% stake in Cellestial E-Mobility as well, which is primarily into electric tractor segment. So because what our understanding was that probably we will see electrification happening more in 2-wheelers, 3-wheelers and probably in lower-end LCDs, right, but tractors electrification could be at a much later stage. So just wanted to understand what is the strategy that we are looking at? And are we looking at Cellestial more as our technology kind of a thing? Or we are actually looking to get into electric tractor segment in a bigger way?

Yes. So the short answer is we are actually looking at getting into the electric tractor segment. We definitely see that tractor segment is a big opportunity. So just to give you a broad approach to our electric vehicle strategy itself. The one thing that we see is that we see a much better approach to electric vehicles at the productive end of the spectrum versus the consumptive end, right? So the areas we're staying away from are like 2-wheelers and passenger cars, which are more consumptive. And we are focused on the more productive end of the spectrum where the vehicle is actually an asset that earns income for the owner, right? So if you take 3-wheeler pass and cargo, that's definitely the case. And all the segments that we're looking at in electric are going to have that characteristic, which is the focus on the productive end of the spectrum. Now let's talk about tractors for a bit, right? We actually think that -- and so basically, both 3-wheeler and tractor, the reason we chose them as the first and second category to get into is because we think that these 2 categories are very ripe for disruption. The 3-wheeler, if you take kind of the battery capacitization, as you know, the battery basically drives between 40% and in some cases, 50% of the cost of the vehicle, the battery and BMS and in some cases, the controller as well. So in a sense, what happens with battery capacitization if we take the 2-wheeler, for example, the average 2-wheeler travels 40 kilometers a day, so it's about 1,000 kilometers a month is what an average 2-wheeler travels 40 kilometers a day. But if you don't capacitize the battery to over a 100-kilometer range, people have range anxiety and don't buy it. And so there's a slight mismatch because we end up with a higher cost point than you need to deliver on the vehicle to get over range anxiety. With 3-wheeler, we see this as almost perfectly match because the 3-wheeler on average does about 100 kilometers a day. So you capacitize it to about 130 or so in range and kind of the economics are being working on a lot better. The second is that we really believe that in 3-wheeler, the user, right, kind of either the autorickshaw owner or the autorickshaw driver, in some cases, they can be the same will definitely see the financial benefits in a much more tangible month-to-month basis in terms of how if used looks at their cash flow. And we begin -- and we're seeing the tractors have a very similar characteristic, especially because power, in some cases, is kind of quite subsidized in the agri area. And therefore, if you take the running cost per day of a diesel tractor, especially during cultivation season, it's extremely high because of the diesel consumption of the tractor. And therefore, we see the economics of moving to battery has beginning to play out. And we actually think that the crossover point on both 3-wheeler and tractor is going to come much before the crossover point in other vehicles. That's between EV and IC. So we are actually very excited about the tractor space. Our sense is that we will come out to the market with a lower horsepower tractor, which also has its niches. In India, almost, I would say, 80% of the market is between 40 and 50 horsepower. I mean, so if we take north of 35, right the 35-horsepower north, north of that. But we'd like to come out with a lower horsepower tractor by the July time frame, if not earlier and bring that tractor to market. So our intent is definitely to get into the e-tractor segments. I don't know if that answers your question.

No, no, sir. Thank you for the detailed answer. Sir, just one follow-up. Would you like to highlight on your distribution strategy on 3-wheeler, electric 3-wheeler because we need to set up distribution lease for that? And a connected question is, would you look to get into electric segment in your Cycle segment or you would want to stay away from that as well?

Yes. So we'll definitely get into electric on the Cycle as well. As far as the distribution strategy for electric 3-wheeler, I'll let Kalyan Paul answer that, who's on the call today.

Hello, this is Paul here. I think for the distribution strategy on 3-wheelers, we'll start with the southern state look to consolidate there and then gradually move towards rest and north, that's the strategy that we have. So in line with that, we've had the distribution network initially for people who would be interested, we've worked out a formula, we've discussed with them and we are quite bullish about moving forward with that.

Okay, sir. Sir, my last question would be slightly more accounting relating. You had talked about a few nonrecurring expenses in the Engineering segment because of plant layout and also 3-wheeler operating expenses on the Mobility segment. Would it be possible to quantify these nonrecurring expenses so that we can get a sense of underlying profitability? And the related one is your unallocable income has gone up significantly, almost INR 20 crores, it used to be INR 10 crores loss. So I think this is also something which has impacted your segmental margins. So any change in accounting over here?

Mahendra, do you want to answer that?

Yes, yes. Yes. So as far as this onetime expenditure in TPI, our engineering business is concerned, I think it was close to about INR 12 crore, between maintenance and some layouts related expenses. And then similarly, EV-related expense also, I think we spent close to around INR 8 crore to INR 10 crore over the last 5, 6 months. Then what was your other question? Other income is it?

No, sir, within the segmental levels, if you see, we have seen a much sharper margin but I think your unallocable income has gone up to INR 20 crores. This used to be INR 10 crores loss. So there's almost a INR 50 crores swing in which is unallocated to segments. So just wanted to understand why is that.

Okay. So the unallocable income is basically the other income, which comprises various things...

Sorry to interrupt, sir. Mr. Mahendra Kumar, we're not able to hear you clearly.

Is it better now?

Yes, sir. A little better. Please proceed.

Yes, the unallocable income basically comprises of various things. It includes things like for example the exchange impact, the exchange and we also gain something in the export incentive which we did not recognize earlier for part of the period, which we recognize now. And then we also have things like there was certainly property-related receipts, which we sold in the earlier part of the year. So that was like sale of intangible assets. So those were the gains which happened in the last 6 months.

We'll move on to the next question that is from the line of Abhishek Ghosh from DSP Mutual Fund.

Sir just a couple of things. In terms of -- if you look at while revenue growth has been very strong, but that's also because of the steel prices, so I think volumetrically, understanding the company may be a little better. So in terms of utilization for the plant, if you can just help us understand because we are seeing constant decline in 2-wheeler volumes and your Tube goes major part there? Or is there a market share gain that you've been able to kind of offset the decline in volumes at the industry level? Some thoughts that will be useful.

So now I would say, in Engineering, we do have more -- it's not as full out as we were in kind of the first and second quarters. So there's slightly more capacity there. Definitely, we've seen slight softness kind of because of the auto slowdown. And so from an utilization perspective, I would say that we have bandwidth in kind of all of our businesses right now for growth.

Okay. So there's an element of operating leverage which will still play in when you get higher volumes is what I was trying to understand.

Definitely.

Okay, okay. Sir, also, if you look at last 3 quarters, you've generated almost about, I think, combined close to about INR 450 crores of free cash now as per your press release. So if we can just broadly understand the capital allocation strategy going forward? Because at a consol level, your debt levels have come down significantly. You barely have any debt on balance sheet. So how should we look at it now in terms of capital allocation? there's a strong free cash generation that is happening. So part of it is going to EV, we do understand. But beyond that, how should one look at it? And also cash flows from CG Power, will you till CG Power, will you -- will CG Power do its own investments? Or will it come into Tube and will you look at it on a consol basis? Some thoughts that it will be very helpful for our understanding.

Sure. No, I think, yes, definitely on that front, the situation is quite encouraging because, like you said, both businesses are generating cash. CG also went net debt free, so -- because we were able to sell that Kanjurmarg property. So in my sense, we will have both Kanjur -- I mean both CG and TI generating at least north of kind of INR 400 crores each in free cash flow. And so CG will do both. Next year, we will likely kind of dividend some of that back to TI. But CG will continue on expansion initiatives that it's identifying internally. And we've looked at several areas within CG where we will drive expansion. So you can -- and one of those, obviously, is going to be on the EV motors area where we still have to find a partner, kind of look at a way of getting into that business. But there are opportunities for investment within CG itself. Then if you take the money that CG dividends back after TI and you the free cash flow in TI, that's where I will say we've been fairly busy through kind of the whole lockdown period identifying opportunities for growth especially after we finish the CG acquisition, we started looking at several areas, electric vehicles kind of being one of them. We are pursuing and beginning to look at kind of other businesses as well, which as soon as we take through and get approval internally, we will start discussing with you. But we actually see this as kind of the beginning of investment in -- as we've articulated TI-2 and TI-3, there is some investment that are going to TI-1 but I think significant investments are going to go on to TI-2 and TI-3 in the next -- definitely in the next calendar year -- sorry, actually in the next fiscal year, I meant to say. So all the segments into which we obviously announced electric vehicles, but there are 2 more additional segments into which we will be investing. Now we're currently doing our complete diligence on them and identifying opportunities there. So there will be both organic and inorganic investments into these new areas of growth. Like we've always articulated, we want to kind of move away from being an auto supplier. So a lot of this is either focused on EV, for example, that makes us an OEM in the categories that we go into or it can be into new areas, which we're exploring. So my sense is we're going to deploy significant capital towards those areas. And I honestly think that India right now is really primed for looking or investing in growth segments like that because there's so much opportunity opening up on the industrial and the manufacturing side. So without stating the specific segments, which we will kind of discuss with you over the next 2 quarters, I will say that we've been kind of very busy identifying investment and growth opportunities across the whole spectrum in both TI-2, especially in TI-2, I would say.

[Operator Instructions] The next question is from the line of Sameer Dosani from Carnelian Capital.

Am I audible?

Yes.

Yes. So my question is towards Shanthi Gears. So what is your overall outlook for Shanthi Gears, seeing that the CapEx sector is going to pick up? That' one. Second, what is the capacity utilization currently given that we have delivered almost around INR 95 crores of revenue over there? And what is the time period in which we think that the order book of INR 275 crores will be executed in Shanthi Gears?

Okay. So I think the question was on Shanthi and -- so yes, I mean, I think that, obviously, last quarter was very good revenue numbers. That was also -- it had some overflow from the previous quarter. But in general, we feel like we can hit close to those revenue numbers that will be a great target for the company. And at that level, kind of the utilization on -- the utilization is a bit tough to kind of define in a place like Shanthi Gears because of the number of bespoke machines. I would say that utilization is pretty high at these revenue levels. And I think your third question was how long does it take to run through the order book. Typically about 6 to 9 months, but obviously, kind of the order book will also get more input coming into the next few months as well.

The next question is from the line of Romil from Electrum.

Hello. Am I audible, sir?

Yes.

Yes. Sir, my first question is on Shanthi Gears. So I just want to understand, I think a lot of CapEx is happening on the railway side. So if you can just briefly let us know what kind of pipeline is there by the government on the railways, which areas we are working on maybe any new products from the Shanthi Gears side? And some absolute number on the order book so that we can understand where the growth can lead to?

Yes. I think we just answered the question on order book, it's INR 270 crores is what the order book is at. And obviously, on railways, yes, we are quite strong in the railways business, and we will continue to invest there. But we see it as a significant opportunity for growth. And so we will continue to kind of invest in that business. And I would say a lot of the revenue that comes off if they come up with so much on the Train 18 side on the -- sorry, Vande Bharat trains, we will basically get that volume itself.

Okay, okay. And sir, the other question is broadly a connected question with regards to our continuous cost efficiency projects that we do, so earlier, we did sort of low-hanging areas. And now I just want to understand what are the other areas that we are working on. And also the impact on the margins going ahead with the raw material inflation that we've seen. So how do we counter that going ahead along with the cost efficiency projects? And what would be a broad margin band that we can look at?

Yes. So I believe that -- so obviously, kind of the raw material pricing, nobody can say where it's going to go. But I would say that there's at least 1 percentage point more that we had from the cost efficiency side and the lean initiatives that we're working on. So at least 1, if not 2 percentage points that we can get from that in the next few years.

The next question is from the line of Sanjay Shah from KSA Securities.

Sir, my -- most of the questions have been answered. There were more on Shanthi Gears side. Can you elaborate something on that side? Are we planning to add any new products to our portfolio? Do you have any growth strategy on that side?

See, actually, we've always articulated that we don't want too many Shanthi questions coming. And now there are more Shanthi questions coming in than TI questions coming. So I think broadly, we articulate because we keep our investor communication that we manage through Shanthi. I mean obviously, we're constantly looking at new products in that area, but I don't think that there's anything on -- I mean, it's again, across all segments, we continue to see opportunity there.

The next question is from the line of Abhishek Ghosh from DSP Mutual Fund.

Yes, sir, I'll come in for some few Tube questions just to balance the call. Sir, a few things. Just wanted to understand in terms of your ability to pass on the price increases with the OEMs, how difficult has been that as a proposition? And how should one look at it? And so obviously, your gross margins have deteriorated, and obviously, you can't go back to the normalized gross margins because the steel prices have moved up, we do understand. But how should one look at that element of it. Some color there will be helpful.

Sure. So we continue to believe that -- and we continue to add the capability to pass on price increases. We are getting into situations now, especially when we went through kind of the last couple of quarters when steel really went through the roof that there were situations where the OEMs were pushing back significantly. But I do believe that those situations are only at the extreme margins, right, which is basically it's only when prices go up as sharply as quickly as they did last year. In most situations, the OEMs have been quite accommodative. And kind of cognizant of the fact that we cannot take those risks on our own balance sheet. So I would say, in general, we're still very confident that we are able to pass on the price increases, but we do end up with some kind of hick ups at the extreme.

So sir, fair to assume at the margins, assuming commodity prices remain stable from here, the gross margin should improve. We can question the magnitude, but at the margin, it should improve.

Correct. Absolutely. I think that's correct.

Okay, okay. And sir, just one thought, railways has been very soft for you all through the entire crisis, but the -- and the expectation is that it might come back stronger. But just one thought, the income from the passenger railways also has been very weak. So any thoughts from you all in terms of can that CapEx be a little pushback given the funding situation because railways may not be in the best position given that passenger income has been fairly weak? Some thoughts there if you're positioning ourselves because CG also drives a lot of revenues from there. So some thoughts that will be helpful.

Yes. You're right in terms of the passenger revenues being weak. I think the big trust now and all the indications that we've got from the railways folks is that they are very serious about these Vande Bharat trains, right? Initially, when the Finance Minister announced this, even I was a bit skeptical, how can they possibly get out 400 trains within 3 years, right? I mean that's like an unbelievably high number for the railways. But the way they are acting actually now looks like they're going to give it a very serious push towards that number, right? And if we get anything close to that number, I think that that's going to help. It will definitely help the CG side much more than TI, but TI also will benefit from the coaches. But CG's benefit will be huge because -- and we do believe that they are going to push towards this number. So we're quite bullish about it.

Sure. And just one last thing. In terms of the exports part of it, had the container availability freight rate is being normal, could you have been better in exports? Or just some thoughts there?

Mukesh, I'll let you answer that.

Yes. Like you indicated, let's say, this container availability is getting normalized, but there was a lot of pipeline inventory and material waiting at the ports, which is slowly getting cleared. So we hope it to be normalized by quarter 4 and quarter 1 of next financial year should be coming back to the normal situation, which will again push the exports demand is the view we get.

No, Mukesh, I think the question was, has there been better container availability, would our exports have been higher?

Surely, yes, sir. Yes.

Okay, okay. And the whole steel price arbitrage also which was kind of helping in exports. Is it still continuing? Or even without that -- or because there were a lot of dynamics which are playing higher freight rates, steel arbitrage. Are those things normalizing? And will you be still competitive in a normal scenario as far as the exports are concerned, Mukesh, if you can just throw some light?

Yes, we will be competitive even going forward. But like you rightly pointed out, this container freight and the steel arbitrage was there, which we hope in next 3 to 6 months' time, it should -- the margin should be, let's say, the gap would shrink. But even after shrinking it, we are going to be competitive in the exports.

And any new geography that you are now seeing because the U.S. came back very strongly for you. Is there any new geography that is giving you a lot of optimism in terms of the sustenance of this export growth?

More likely, we earlier said that we are very focused on the OEM side of the story, which takes almost 2 to 3 years kind of a cycle for the product development, where a lot of programs are in the pipeline which we are on verge of the closure. And in this year itself, almost close to 2 to 3 new programs, which we were not earlier bid in the business, both approved and the journey will continue. We are very, very focused on the product categories where we want to be globally present and the strategy will continue.

[Operator Instructions] The next question is from the line of Anupam Gupta.

Yes. A couple of questions from my side. Firstly, in the Tube business, we understand that large dia Tube has been growing very well, but I think the capacity utilization there also has reached quite an elevated level. So incrementally, when you are targeting more large dia tube sales both in India as well as in exports, how do you cater that? Are you looking at incremental investments there? Or what's the plan?

Yes, we're definitely going to expand capacity. Where we choose to expand capacity, we will decide, but we will definitely expand capacity on large dia in the next financial year.

Okay. Understand. And in terms of the second question, in the Mobility segment, the 3-wheeler launch, which is due next quarter. Can you just slightly elaborate on 2 assets, one is on where you are in the product say, at this point of time, has the testing happened or what sort of responses we have seen there? And secondly, on the distribution part of it, while you said that you'll start off in the south and then go North and West, but given that you don't have so much of B2C sort of expertise directly in the company, what sort of organizational sort of investment have you done there?

So again, I'll let Paul answer that. Just to give you a bit on timing, I think the timing for launch will actually kind of move to this July, August time frame. So we are slightly delayed, the timing for launch will move to July, August. But I will let Paul answer the specific question.

See, I think from a perspective of B2C, actually, we have some experience in Cycles because Cycles is also basically B2C as well. So we've taken that level of expertise and seeing what needs to get done at the distribution side for the 3-wheelers. And so we worked out various models, et cetera, what kind of consumer experience do we want to get? What is the benchmarking you need to do there? How will we get there? And then we tested out some models. Products have undergone extensive testing over a period of the last 1 year. Even now there are all saying prototypes on the final version that is undergoing reliability test at different stages. That's where we are at in terms of this. We're also looking at how do we build in a better class of consumer experience, and that's what we have concentrated on and got some models there in terms of taking our relationships forward. Just as we are speaking, we have a whole sort of distributors dealer interested who has looked at also what is going to be their return on investment and how will we sustain that even in the first year is the challenge in terms of this. How do we keep the investments at a level where they can make a return at the end of the year in terms of this is the kind of initiatives that we've set. We build up a separate EV team also that will specifically focus on the areas of technical, on marketing, on sales, after sales service, branding. What do we do with the social interface, what can be applicable in a 3-wheeler segment and how do we move forward? Those are kinds of work that we've done. Of course, because of COVID some amount of setback has happened, but we follow modular levels and minimum viable products to test all these concepts that we've been talking about internally to see that when we hit the road with the launch, we should fixed up all the areas so that we can get finally the consumer a very good experience.

Understand. And just one last question, Vellayan to you. You highlighted that capital allocation, obviously, looking at investments in TI-2 and TI-3. TI-2 per se seems to be a smaller investment, which grows over time depending on the viability. But in terms of TI-3, what sort of size will you be looking at in terms of investments which in the next 1 year -- couple of years?

So let me just practically -- see because basically, when you see, right, even Cellestial is slightly larger than an investment that we might have made in a classic TI-2 play, right? So we also have been kind of debating that, right, which is like -- so TI-3 kind of the reserve for the slightly stressed kind of larger deals that we look at. But -- so I should actually say that we're going to see more activity in TI-2 right now, right? But there are going to be some slightly bigger deals. There is a sense like sort of with INR 200 crore plus EVs could be going even larger. So the general approach we've taken, which we've kind of consistently articulated for the last 3 years is that the maximum we will go to in terms of debt levels is like twice annual free cash flows. And so that's still kind of our approach to it, right? But basically, what we see is that now the time seems to be very ripe for a lot of investment opportunity because there are a lot of white spaces that because of all of these different things that are getting announced by the government in PLIs and different areas. It actually -- it's not just PLI. And if you take kind of just the fact that exports are picking up in a lot of segments because of China plus one. The domestic market is becoming fairly large, and there are no defined players or in some cases, import substitution. So we've been kind of doing a broad scan across industry segments. And I've shortlisted a few in which we see there are good white spaces that can become significant areas of -- significant platforms for TI over time. And so we're going to start seeding those white spaces in the next financial year. And I think you're going to see some of that activities over the next couple of quarters. That's what I was talking about. And so specifically, I think it's going to be more in TI-2, but it will be slightly larger deals than we've traditionally done in TI-2, right? So it's not like the INR 20 crore, INR 30 crore things anymore.

We'll move on to the next question. That is from the line of Niket Shah from Motilal Oswal Mutual Fund.

I have 3, 4 questions. One is you did highlight about PLI in auto. Just wanted some sense that how is Tube looking at that opportunity? And what kind of products or role would you play in PLI?

Yes. So PLI and auto, we've looked at it. I mean, the only categories that kind of -- actually EV is the only category that kind of actually make -- seems to make sense for us, right? And so that's what we're exploring right now as far as PLI and auto are concerned.

Got it. And the second question was on the EV 3-wheeler launch time line. Are we now on track to just launch in the first quarter? And the similar question to that was, historically, you've seen in the IC side of the market where some of the 2-wheeler OEMs have gone into international markets and it becomes very difficult for the company to come back and we have market share in those markets as far as exports is concerned. So will export also be a part of the EV 3-wheeler? You will do it parallelly or you might launch it after a few years?

So first off, on the EV, we are delayed. I think we're now pushing kind of the end of July, maybe early August as a launch for EV 3-wheeler, we have been delayed. But second to your question, I don't think we'll wait 2, 3 years. But initially, we won't -- initially, we'll focus on the domestic market and then we'll determine how quickly we can go to export markets.

Sure. That's helpful. And the third question was, while you put all the EV business into one company, will you be looking at partnership at that company level to a JV route or diluting for some strategic partner. Is that an opportunity? Or if you just get to -- get more focus as well?

Yes, that is an opportunity. We definitely think at the right stage, if there are partners with interest, we will do.

Got it. And just final question as most of the questions have been answered. Your margin guidance of about 13%, 14% range over the next 2 years. Does that stay given the current raw material situation that you have given the cost-cutting programs that we already initiated?

Yes. Obviously, the raw material prices, if this stay at this kind of elevated levels. I mean the thing is if they stay at very elevated levels and even a smaller percentage will get us the same benefit. So I would say that the benefit to be had is still there. The percentage will depend on kind of what is happening with raw material prices.

Sure. And is any product mix change because in the last call, you did highlight that you essentially won the higher-margin products to really increase the percentage of revenue that one will do take up the margin range higher. So should we assume that given the current raw material environment, the product mix has to do a far much -- far bigger job as compared to raw material costs coming down and related denominator really playing out there?

I mean, the biggest opportunity on our legacy business side continues to be exports, right, because the exports is something that can help our margins definitely. So I say more than the mix side is exports being a big driver of the business.

Understood. And one booking question is how large is the auto business now within the Engineering and the Metal Formed business?

Do we have a sense, Mahendra? Total auto business as a percentage of Engineering...

The total level, it is about 55%. 55% is auto and rest of it is non-auto.

And across category side, Engineering and Metal Formed business, give or take?

At a company level.

The next question is from the line of Rahul Ranade from Goldman Sachs Assets Management.

Just any update on the optical lens business, where it stands right now? I think the last comment that I remember is that because of the chip shortage, there were still some issue with demand coming on stream. So I just wanted to get a check on that.

Yes. So at this stage, we're waiting on -- it's in -- we're in trial orders with a potentially large customer, and we are waiting on kind on product certification. If we get product certification, hopefully, we will start scaling that in the next quarter.

Okay, okay. And can you remind me what's the size of investment that has gone into this capacity right now and what's the capacity currently?

It's really small, it's about INR 34 crores at this stage. So it's still kind of almost at a pilot level. So we'll only scale it up once we get comfort with that. But we will put in about INR 34 crores.

All right. And do we have any kind of an anchor customer who kind of ties up for a meaningful part of the capacity and then the rest depends on the demand supply conditions? Is that the way it works?

That's what we're in certification for, right? So basically, if we get the product certified with this customer, they will become an anchor customer for us.

Okay, okay. Got it. And just in terms of numbers, what would the capacity be in terms of number of lenses or?

Our current capacity is fairly small, were at 0.5 million lenses per month. So we'll only ramp up once we get -- first, we need to get a product stabilized only then we can ramp up.

The next question is from the line of Megha from Pi Square Investments.

I just have one question on the CapEx side. What's the total layout plan for this financial year?

For the coming financial year?

Yes.

For the coming financial year, we take it to our Board in the March Board meeting for approval. So we are finalizing those numbers and we'll take it to the Board in March. So we'll be able to give you better guidance after that fall, right? We'll be able to give you better guidance in April.

We'll move on to the next question. That is from the line of Rohit Ohri from Progressive Shares.

I'm sorry, the questions will be related to Shanthi Gears. I ask 2 or 3 questions on a biannual basis. If you allow then, I'd start then.

Sure, sir.

Yes, thanks. So in your comments, you mentioned that the utilization of Shanthi is quite high, and there was even a spillover from the previous quarter. So with the gross margins not moving around and it's almost in the same range of 49%, 51% or so. Is the service part of the business, the aftermarket sales from Shanthi is that the factor that is contributing to the top line?

So it's not aftermarket sales. I do think that I said the utilization has now gotten higher than it was before. So as the increased utilization is what's helping the bottom line.

And if you can just split what would be the share from the service segment for Shanthi Gears from INR 95 crores?

So do you have that number? I think it's about -- yes. I think -- so I'll -- we'll try and get you the number. I don't know, Mukesh, do you have the number off hand?

It's a very small percentage of today service.

Okay.

Total company wise, it's around between 15% to 20%.

Okay. So we're maintaining the guidance over there, okay. If the utilization is higher, and we have this ambitious target of kind of tripling the turnover in next 3 to 4 years and trying to double the profit. So we'll be seeing more of growth CapEx coming in for Shanthi Gears?

Sorry, you said tripling the turnover in Shanthi?

Yes, that was what was mentioned in the AGM.

In the TI AGM or Shanthi AGM?

Shanthi AGM.

Mukesh, you were there. When is the Shanthi AGM?

No, I was not there.

Is it done? Which AGM is this?

This was the recent one, the 40th AGM.

I don't know because the last AGM, I would have been -- I don't know, did we do this virtually? I don't remember giving any guidance on Shanthi for tripling the turnover. So I'm not sure who gave you that guidance because that is not...

Okay, sir. So I'll take this off-line. I'll try to get in touch with you.

The next question is from the line of Sameer from Autus Securities.

I just have 2 questions. First is, where do you see on a consol basis, Tube investment over next 3 years on the revenue side or what par kind of growth the project can give? And the second question is on the return on capital employed side. Over the next 3 years, how do you see the consol ROCE moving for Tube over the next 3 years?

So your first question was consol basis revenue over the next 3 years. When you ask what will the ROIC, we track ROIC more than ROCE again, in 3 years is your question. Then what is the third question?

No, those are the 2 questions, sir.

ROIC, I don't know, we've got a determination. I think what we've kind of guided has been like 17% compounding on revenues. And I believe that we should continue to kind of achieve that on a consol basis. So you can calculate that as a compound is 17% for 3 years, it will take a year annual number.

And what will be the key drivers of growth on it like sector wise or industrial, what will be the key revenues of this growth?

So I think that obviously kind of -- now you can see that first off, on a consol basis, you can see CG is continuing to kind of compound at a good number. So that compounding will continue. Our belief is because there's strong growth levers in CG. But within TI itself, we think we've always articulated this, that we think that the core businesses will grow at about 6% to 9% and that remaining gap of, again, another, whatever, right, about 10% -- 11% or so will come from the TI-2 opportunities and any TI-3 that we do. So it will come from the largest, obviously, bets that we're making is electric vehicles. But like we said, we're going to announce a couple more segments next couple of quarters as well.

Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.

Yes. No, I think thanks, nothing specific from our side, Anupam. But, obviously, like we said, as far as auto is concerned, we will see how things play out. I don't think anybody has any good idea. But we continue to be very bullish about new growth areas. And so those are some of the white spaces that we're beginning to invest in. We've made a couple of announcements in EV and we definitely think some of these segments offer a lot of growth going into the future. So we continue to be very enthused about medium- to long-term growth opportunities.

Yes, thanks a lot again.

Yes. Okay, thank you.

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