Uniparts India Limited (UNIPARTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '25 Earnings Conference Call of Uniparts India Limited hosted by Go India Advisors. [Operator Instructions]. There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Monali Jain from Go India Advisors. Thank you, and over to you, ma'am.

Yes. Thank you, Rami. Good evening, everyone, and welcome to Q2 FY '25 Earnings Call of Uniparts India Limited. We have on the call Mr. Gurdeep Soni, Chairman and Managing Director; Mr. Paramjit Soni, Promoter, Executive Director and Vice Chairman; Mr. Rohit Maheshwari, Group Chief Financial Officer; and Mr. Vivek Maheshwari, Vice President, Financial Planning and Analysis and Investor Relations. We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that company faces. I will now request Mr. Soni to take us through the financials and the business updates, subsequent to which we will open the floor for questions and answer. Thank you, and over to you, sir.

Thanks a lot. Yes. Good evening, ladies and gentlemen, and welcome to the Second Quarter Earnings Call for the Financial Year '25 of Uniparts India Limited. Trust that all of you are doing very well. Prior to getting into the summary of the reported quarter, I would like to reiterate that the core of our organizational company is guided by the principles of passion, innovation, integrity, excellence and teamwork. Our wonderful team of committed professionals has enabled Uniparts to be a partner of choice for the global off-highway vehicle market. We, at Uniparts, believe that by leveraging our engineering competencies and a global delivery model, we are proudly partaking in what we call as building the world and feeding in people. The Uniparts team is navigating the challenging business environment cautiously and creatively while continuing its unwavering emphasis on core strength of the organization's business model. The initiatives influencing medium-term growth, both organic and inorganic, are being pursued with great rigor without taking the focus off the balancing act in terms of protecting core margins and profitability. The company's business continues to be financially strong, providing requisite strength to propel future growth ambitions. With this above background, let me spend next few minutes sharing thoughts with respect to the current operating environment and the business highlights. To start with, in the construction end market, we have seen a healthy rise in business relationships with the global leader in construction equipment, and this is helping in offsetting the overall weakness in North American end market. This particular account is growing approximately 65% to 70% for Uniparts on a year-on-year basis. Our largest global customer is, however, witnessing mid-double-digit decline in this segment. This impact on our sales to them is higher than that due to some of the impacts of inventory destocking. The net impact of end market weakness and increased business with a couple of key clients is about a low double-digit, about 10% to 12% decline year-on-year for Uniparts in the construction segment. As indicated in earlier 2 quarters, the slowdown in large agriculture in U.S. and Europe is hurting overall short-term demand, with some element of inventory correction. However, this is also throwing some new opportunities, which Uniparts is working on. Our relationship with a leading tractor OEM is growing gradually, and we have got some new business with them. This is helping in offsetting the overall weakness in European end market to some extent. The global small agriculture market is witnessing some further weakness in the short term, leading to a low to mid-digit, say, about 50% decline for Uniparts in this segment year-on-year. Coming to the aftermarket, the inventory correction cycle appears to be over for now, and that part of demand is seemingly normalizing over coming quarters. This -- in fact, this segment is likely to grow 25% to 30% year-on-year in this fiscal. Addition of the new customer late last fiscal, who is the second largest group of retail stores in North America, is helping the growth and has more room to grow. In the reported Q2 revenue number, approximately 2.5% additional adverse impact was due to inability to ship from our company in Augusta, Georgia, U.S.A. facility during September in the month due to the Hurricane Helene in the United States. The Q3 on -- of the ongoing fiscal could be sequentially lower, while Q4 is expected to be -- have highest run rate of the fiscal. Overall, the second half of fiscal could be flattish over the first half. The company's balance sheet continues to be net debt free, with group net cash position at about INR 173 crores. Business continued to witness healthy free cash flow at 19% of revenue from operations during the reported quarter. The new award pipeline remains encouraging with added traction in all product verticals, including PMP, large agriculture equipment assemblies, agricultural machinery in India and the high-horsepower 3-point linkage as well as further geographical expansion in below-70-horsepower tractors is also gaining traction. The end market softness may have some bearing on the implementation time line. The evaluation of entry strategy for starting operations in Mexico is at advanced stage. The company has already been awarded business of approximately USD 6.5 million annually by a prominent OEM customer for local supplies in Mexico to start from the fourth quarter of FY '26. This awarded value is a mix of some existing business and some new business. But this strategically adds to nearshoring elements to our overall global strategy. Active evaluation and engagement towards inorganic growth options also continued. Our focus on safety, quality, delivery and cost remains high, and we continue investing for long-term growth. With this, I would like to hand over to Vivek Maheshwari to discuss the details of our financial performance during this reported quarter. Thanks and over to you, Vivek.

Thank you, sir, and good evening all. I would like to share following financial and business highlights of the quarter ending 30th September 2024. Revenues from operations for Q2 came in at INR 241 crores, which is a quarter-on-quarter change of minus 7.6% and a year-on-year change of minus 17.8%. Reported EBITDA for Q2 was INR 41.9 crores, which is a quarter-on-quarter change of minus 8.8% and a year-on-year change of minus 23.3% while reported EBITDA margin was at 17.4% for the quarter. Operating cash flow generation for the quarter was approximately INR 56 crores. The net working capital, comprising of big 3 elements of inventory, accounts receivable and accounts payable, as a number of days of trailing 12 months revenue from operations, stood at approximately 151 days as on 30th September 2024. Net working capital during the quarter decreased by approximately INR 19 crores. Uniparts' balance sheet continues to be net debt free, with group net cash position at approximately INR 173 crores at the end of September 2024. Cash outflow towards CapEx commitments during the quarter has been approximately INR 6 crores. Total new business award valued during trailing 12 months has been approximately INR 177 crores, which is typically the annualized potential value of underlying project. With the backdrop of revenue degrowth, operations team has been closely working on commensurate cost rationalization and optimization measures. Inflationary pressure on operating cost remains in the medium term, to be partially mitigated through operating efficiencies. Macro concerns over global economic slowdown, geopolitical uncertainties...

Participants, the line to the management has been disconnected. Please wait while we rejoin them. [Technical Difficulty]

No, so the opening address is completed. So we can start with the question and answer.

[Operator Instructions] The first question is from the line of [ Rajesh Shan ], individual investor.

Yes. Am I audible?

Yes.

[Foreign Language]

Hello. Sir, are you there?

Yes, I can hear it. So [ Rajesh ], this is Paramjit here. [ Rajesh ], I think that we had given an indication that Q2 will be also weak and Q3 also will be weak, and I think that is continuing with the end market. [ Rajesh ], the key here is if you look at how much our largest customer is declining versus how much we are declining, I think we are outperforming the market there. The market -- the whole business model was designed -- it's a cyclical industry, both ag and construction, and the whole business model was designed to be derisked from -- have equal volumes in both different industries. But this is the first time I've ever seen that both industries over here are almost in a decline together. So essentially, what we are doing at this stage is to make sure that we are outperforming the market. We're controlling the margins, and we're getting new business awards, but at the same time, we're keeping our strategic position and adding to the global delivery model by adding the nearshoring solution in Mexico. So if you recall our earlier strategy had been with the global shoring and take the risk out. And with that, we had dual-shore manufacturing also add in. And now with the new opportunity in Mexico with nearshoring, I think we continue to focus on making our business model stronger. It's historically -- whenever we face the downturn, [ Rajesh ], our history has been that we buckle ourselves in the downturn. We still outperform the market. And when the upturn comes, we significantly outperform the market. That is the way we've been managing our business historically. And while I understand that you invested some time ago and from a timing perspective, it's working out to be an issue, but I think the light at the end of the tunnel should be -- is around. I see the interest rates changing in the U.S. now. And second half of next year is where customers are indicating that at least the small tractor and maybe the small construction equipment will start coming out. The aftermarket has already come back like we indicated earlier. So that's already growing 27% already this year. So it's a timing issue, [ Rajesh ]. Nothing is wrong with the business model and the strategy is all I can say.

So Paramjit, can you explain some of our competitors' name so as to -- whether their people are also reducing their business, net profit and EBITDA margin also?

Say again, [ Rajesh ].

Paramjitji, can you explain your -- some of your competitors' names so as to compare our company's business with them with their financials?

We don't have any direct competitors that you can directly compare. I have competitors in every field, but nobody is a real mirror for us. We have competition like, for example, in 3-point linkage in the higher-horsepower segment or in Europe and America. They're not even based in India. If I look at competition for the 3-point linkage in India, then they are locally only servicing the India market and not the export market. So you will not find a mimic of this, and none of them have a global delivery model. I think the key for you to is -- look is look at our largest customers, look at John Deere, look at Caterpillar and see how they are performing. And if you look at their performance versus our performance with respect to them, I think we're outperforming the market there.

Okay. And last thing -- and the last suggestion and the last thing. We have started our con call 7 minutes late, sir. And in between them also, we have 2 times disconnected. Please take it properly, sir.

I think I deeply appreciate your concerns. I'm not happy about it either.

The next question is from the line of [ Rushabh Shah ] from KRChoksey Shares and Securities.

Sir, in our business, cyclicality will always be there. But what measures are we going to take to derisk the business further and get growth from further platforms and also adding more strategic elements to our business?

So if you look at the business, like I said, let's talk about derisking, that historically, strategically being done today, I mean, from a business which used to be 100% in agriculture is now almost 35% in construction and 65% in agriculture. We've also done geographically -- at one time, we were 100% in America. Today, about 52% of our sales in America, and Asia is forming 22.5% and so is Europe at 22.5%. So we kind of -- we've continuously been doing it. So moving from -- to come to your product strategy, our strategy has always been to stay within this space. However, the strategy has been to extend our system boundaries. And what do I mean by that? We basically know that the number of vehicles in the ag and construction equipment are limited. They're not like the automobile. Having said that, our goal was to increase value per vehicle. And hence, we looked at where our system goes currently and what's the next system attached to it, and then we would add that on. We've already predefined power take-off, hydraulics and fabrications of attachment systems as the synergetic areas, and we're actively pursuing these. When we look at our inorganic strategy, these are the 3 areas on which we are focused to do something inorganic, and hopefully, we'll have something coming soon on something like that. And so essentially, there are 2 product platforms. I do expect the third product platform should be coming in inorganically once we succeed with our endeavors. And as soon as that is done, I think you will see a way more derisked business, not just product-wise but also region-wise and even currency-wise in different ways. So that's something that I look at all the time.

And so we are on the third product platform. In the past, we had stated that we'll be working on the PTO, hydraulic and the fabrication platform. So what is the progress on that? Are we waiting for the segments in which we are operating to stabilize? Or what is it?

Absolutely still looking in that, and we are making good progress there. So I think let's -- we are working on projects internally, but I can't announce them just now.

Okay. And my last question is, sir, I'm more interested in the aftermarket part of the business. So how big could it be in the next 4 to 5 years? And are we focusing on it?

Yes. If you look at it, aftermarket, as Gurdeep mentioned earlier, at least that part of the business is doing well this year. So the aftermarket at one time was 16%, 17%, but it went down with the inventory decycle. It became like -- last year, it became only 14.5% to 15% of our business. This year, because of the nice growth in that and some of the fact that the OEMs were slower, it's already 20% of our business. It's forecasted to be 20% of our business this year. So Gurdeep also mentioned to you in the call that we added the second largest retail store in the U.S., and that is successfully implemented. So we continue to make good progress over there. We have a leadership position, and I think we're adding more products into it as well. So I think that market grows nicely. In fact, during this downturn with the OEMs, that part of the business has really, really helped us.

[Operator Instructions] The next question is from the line of Madhur Rathi from Counter Cyclical PMS.

Sir, when I look at your longer-term guidance of 15%, 16% growth that will come from industry growing 5%, 6% and the remaining will be from new adjacencies. But sir, when I look at the last 3 DRHP for the decade that we have tried to do an IPO for, sir, the market has not grown. Similarly, sir, our market share has not grown. And we have told that we will go into adjacencies in 2013 as well. We have highlighted hydraulics as well as other segments, but we haven't grown. Similarly, sir, both segments, the 3PL as well as the precision machined parts, sir, there, our market share has been stagnant in the like plus/minus 5%, 10%, but we haven't grown a lot. Sir, so I'm trying to understand what gives us right now the confidence to give this number? And how do we plan on achieving this? And the next part would be, sir, we are guiding that we -- you have mentioned that there is a total addressable market of $10 billion that we are trying to work on or increase the wallet share, but sir that hasn't fructified yet. So similarly on that line, sir, why do we have the confidence to grow from this -- like the stagnant revenue for the like past decade? And why do we think that we'll grow going forward?

So thanks, Madhur. So the way -- let's go back to the 2013 since you brought that out. If you look at that, that's a good period to start because the last slowdown was also -- in the 2014, '15 period, there was a slowdown. So if you look at that cycle also, during that slowdown, if you compare the numbers, you will realize that as the top line -- how much the market came down and how much we came down, we outperformed at that time. And what we achieved from 2013 to 2018 was a complete transformation of the business. The business used to be at 12% -- 11%, 12% EBITDA business in 2013. And we completely remade ourselves and took it up to a 20% EBITDA. Right now, you're seeing a slightly lower number in the 17%, but that's only because of operating deleverage. And our robust -- our margin control and everything still is good. So that phase was actually literally very, very highly focused on bottom line. And that frankly changed our complete return on capital employed and ratios as well as where the fact that every downcycle that I go through, so this downcycle that we've been through, we've actually gone through with reasonably decent margins and a very strong cash position. So each time we go through a downturn, I think we are coming out much more stronger at the other side of it. Talking about the growth, it remains -- I think, Vivek mentioned to you that the trailing 12 months, you see new awards of INR 177 crores. So if you're looking at that itself, the run rate for the new award is running at the 16%, 17% just now. It's -- I think we were basically stuck at this stage, at a time with where I said the cyclical nature, you got into the ag business, and then you said, "Oh, this is cyclical. Let's get into the construction side. It's a similar side, and that will be the business." Unfortunately, we're seeing back-to-back cycles. The ag -- large ag cycle actually should have peaked about 2 years ago, and it got pushed out because of the Ukraine war, and it's happening now. So the construction cycle, which is now going in, is interest rate impacted. And as soon as it comes out, I think we'll see the growth over there. So the key here is look at how we are outperforming from the market, look at the new award run rate, look at the strategy fixing where we came with the dual-shoring model with one of our large customers, Caterpillar, and that worked nicely. We said, "Hey, we are almost going -- this year, we're growing 50%, 60% with them despite the market being down." Now look at what we are doing for the Mexico strategy in nearshoring, and already, we've got awards starting in quarter 4 of FY '26. So clearly, all these pieces are working. And in terms of the 3 product portfolios, fabrication, PTO and hydraulics, definitely, you will see something or the other come out as becoming a platform soon. So to me, it's a matter of time, but anyway, it is something that we are working very strongly internally. I understand your skepticism. Just give it some more time. We are very strongly working on things.

Sir, I think I understand like the operational efficiencies that you're trying to mention. But sir, when I look, sir, we are a much smaller player than the overall agriculture as the construction industry. And sir, similarly in the main product line that we compete, sir, our market share hasn't grown a lot. So in 3PL, it has been in the high teen to mid-teen kind of range for this year. Sir, when we speak that -- we have done efficiencies, but sir, our market share hasn't increased as well as the wallet share hasn't increased, sir. So when we say that we have INR 177 crore awards in the new business, sir, can we expect this to become more than 10x from here? So can it become a INR 2,000 crore additional market over the next 5 years for our business?

I think it will happen both organically and inorganically. And the answer to that is yes.

So this can scale up to a better height than -- the awards [ to your ] business can scale up to a better height over the next 5 years?

Absolutely, because not just this, but you're also going to see some inorganic coming, and once we have the next platform in, I think then you'll see growth come from 3 platforms instead of 2 platforms.

And sir, is this because the OEMs are looking for new vendors for their current sourcing arrangements? Or is it because the OEMs are getting value out of China and they -- as we already have the capability, they are giving us these orders.

I think China Plus One continues to play. If you look at what we are doing this year with the -- let's say, the large one at Caterpillar, where we said we're going with the dual-shore manufacturing. That's something we had done 1.5 years ago, so you're seeing the growth today. I'm already saying to you today, we are doing the nearshoring part with Mexico. That is all China Plus One. And now if you look at what's happening in the U.S. in any case now with the current election situation, and if, actually, you get a situation where the tariffs on China go up significantly more, then the implications of that are huge. So -- but still, time will tell what happens there. But clearly, the direction is headed in that direction only. So China Plus One continues to strengthen, and I think Uniparts is positioned nicely for it. So we built -- at the end of the day, global sourcing, everybody suffered with China. Our model was based on take the risk out of global sourcing. We had redundant manufacturing in U.S. We built the dual-shore manufacturing. Now -- so which means we could do some onshoring here if needed. And at the same time, now we have added the nearshoring. So strategically, we positioned ourself brilliantly for China Plus One. I can't think of any other company in our space which is doing this.

Okay, sir. Sir, that makes sense. Sir, just a final question. Sir, on the margin front, sir, our margin in -- like the FY '19 were around 13 -- FY '20 were around -- in that range of 11% to 13%. Sir, I guess that our warehousing parts increased from around 20%, 25% to 40%, 45%. So that was the reason for margin increase. But sir, still, there is a difference between, I guess, from the 13% to the 20% steady-state margin. There is additional 3%, 4% margin differential. So why has that margin come or -- and is this sustainable?

So here is the situation. I think we -- and this goes back to things that we had done on pre-IPO only, frankly. We, at that stage, had very clearly taken -- we had divided our business into these different delivery models, and we said, hey, we produce in India, sell in India. We produce in U.S.A. We sell in U.S.A., which is what we call our local delivery models. So these were historically the lower margins, the 9%, 10% EBITDA margin businesses. And then we had a direct export, which was produced in India and shipped globally, and that used to be a much higher-margin business with almost 20%. And the warehousing was even significantly more than the highest one. So what occurred? Warehousing, you've taken one leg of it. Well, the other part is we had, at that stage, if you go to '12, '13, a lot of our domestic manufacturing was being produced in our Noida locations. We took that out, and we -- and our 4 shops were in Ludhiana. We moved all that -- a lot of the manufacturing up there to take some cost reductions there and improve the margins on the domestic side. We also took a lot of business in our U.S. portfolio. And we said we have very systematically sliced and diced it and clearly said, this is where we make money. This is where we don't make money. And clearly, wherever we were not making money, we either figured out how to make money on that by moving it to India or changing prices with customers or getting rid of that business. So I was willing to sacrifice top line growth if it wasn't going to make money. I'd much rather do lesser business but at a better margin. So we dropped that. And that is -- so I started that whole exercise thinking I'll go from 13% to 18% in my EBITDA. But because we dropped negative-margin business, we actually went to 20%. And so these are structural changes that we made to the business. So to answer your question if these are structural changes, they stay. And I think -- and if you look at what we had said 2 years ago, when we were talking about the warehousing businesses, hey, it's 42%, 43% of our business, we expect it will go to 48%, 49%. Well, guess what? I thought that was going in 4, 5 years us. It already happened. So that -- so the entire business model where the customers are going towards the warehouse solution despite a slightly different price, I think that still maintains because of the key factor of you take the risk out of global sourcing. So to me, this is not a game of chasing price to the bottom. This is a question of being a strategic partner to a customer and how you participate in managing the global supply chain, which, I think, is increasingly more and more important. So to me, onshore manufacturing, dual-shore manufacturing nearshoring, if we do not do these strategic things, then you can't play the margin game that you're talking about. The margin game is only if you do this. Does that make sense?

Yes, sir. Sir, it perfectly makes sense.

[Operator Instructions] The next question is from the line of [ Tijana Mehta ] from [ Latnaya Capital ]. As the current participant is not answering, the next question is from the line of [ Sharmaine ] from Fractal Capital Investments.

I have a question regarding your Mexico operations. Will the margins be the same as the current company margins? And what will be the investment that's required for this?

So we are doing this in 2 steps. Step 1 is actually just similar as transferring from warehousing there. And it will be like our warehousing margins, okay, which means product is still produced in India, it comes to Mexico, and it's sold to -- because one of our customers are moving their manufacturing lines to Mexico. So we're going to service them locally. Step -- so in the first phase, that's what you're going to see. So our first awards in business are there. We've already had traction with 3 large clients on this. I talked about one. I think this has already been said that there was a $6.5 million annualized one. There's another customer who's going to move another $2.5 million there. Another customer has awarded us another $800,000. So as I'm getting into -- in calendar year '26, we're already looking at a base case of close to $9 million to $10 million of sales starting from there. That gives me enough to take care of any overheads over there and to maintain my margins. Phase 2 of Mexico is going to be to be able to produce in Mexico what makes sense in Mexico. Our model has traditionally used to be -- if I go back 20 years ago, we said, hey, low-cost country model, produce in India, right? We then kind of said, no, taking the risk out of global sourcing is more important, and the -- everything can't be produced well in a low-cost country. So let's produce what makes sense in the U.S., we produce in the U.S., and what makes sense in India, we produce in India. And hence, we shifted to what I call as the best-cost country model. Adding Mexico to it is simply an extension of my best-cost country. There are things that will make sense to produce in Mexico. And hence, we will do that. We will produce in Mexico what makes sense there. We will produce in India what makes sense there, and we will produce in U.S.A. what makes sense there. And we will use our global logistics and delivery chain to handle our last mile with the customers and our relationships to make sure that they are growing with us and to make sure that we are growing healthily with them. So my strategy for Mexico, to answer your first question, no margin erosion over there. First stage, hardly any CapEx because I'm not putting much equipment, and it's just a warehousing start-up there, right? The second phase will probably have CapEx. Even if it comes, it may just be a couple of million dollars.

[Operator Instructions] The next question is from the line of Apurva Sharma from Helios Capital.

One of the questions I had was, can you throw some color on the wallet share that you would have with the top customers? know you have different competitors for different products. But if you could give some sense on that, and then I would have another question.

So you mean how much share of -- how much business we do with each customer?

What I'd like to say if that you supply, suppose, 3PL, how much is it that you and your competitors have that share in that 3PL to a particular customer? I mean to say -- I mean you are 50%, 70%, 30% for different products. Can you shed some color? I don't want specifics, but just...

So it's going to be a slight -- because we are a bit diversified. I think it's going to be a little bit slightly smoother -- longer answer to that. So if I look at the below-70-horsepower tractor for 3-point linkage, okay? If I look at the United States, I think we have a very high wallet share because the major tractors are done by Deere and Kubota, and both are my customers. And over there, there's not that much that they take from anybody else. So we would be very, very high on our wallet share there. When I say very high, I'm talking about 80%, 85%, okay? If you go -- for the same product now in India on the 3-point linkage, we have domestic competition there. And I think our wallet shares in India could be in the region of 28%, 29%, okay, of the Indian market. So that geographically, whether it's Mahindra, whether it's Deere, will be higher, and TAFE will be high. So clearly, you have it different with different customers, right? But I'm just giving you geographically over there. Otherwise, it becomes a very, very elongated answer. Similarly, when you go into the higher-horsepower 3-point linkage, we said we don't have that much market share and we were working mostly in Europe on this. And if you look, some of our new awards are coming from there, so that's the area where we really try to grow our market share. That's the investments we have done. And in India, there is frankly nobody producing greater-than-70-horsepower tractor models out of India and doing anything. So my competition is only in Europe, and frankly, only in Europe. It's all produced in Western Europe, in Italy and in Germany. So clearly, that's where we have room to grow. If I take the same thing in Japan, they only have a small 3-point linkage. And there, Japan and Korea -- South Korea, both are markets where we are working with all the majors. And I think there, the market share may be more like in the 30%, 40% of the wallet share, and some are local Japanese customers. The Japanese will always have some local loyalty by which it's working locally over there as well. So there is a certain thing you'll do there. If I go into the construction equipment, again on the small construction equipment, if I go specifically to, let's say, skid-steer loader, then we have a high share. If I go to a mining equipment, then I have a low share. So it's a little bit complicated to answer that question. And so what we've got as a strategy is essentially to say, hey, we know this is where our market share exists. This is where we can grow geographically. This is where, in this segment, our market share is lower, and hence, we can grow it. So all that market mapping is done in very high detail at our end, and our marketing kind of focus is based on that. But if you take the overall 3-point linkage, then I think we are one of the top 3 over there. If you look at below-70-horsepower tractors in the world, then we are the largest in the world on that, for 3-point linkage.

These are both ex China, obviously, right? Or how is it?

Sorry? These will be both like what?

China. Largest in the world ex of China, right?

Yes, the ag side, below-70-horsepower, 3-point linkage, yes, we would be the largest over there. And that's to be because India is the largest producer, and if you have a nice share in India and the rest is distributed out, and then in the U.S., you have a large share, Japan, you have a share, then obviously, you become the largest, right? Europe doesn't produce too many of those below-70-horsepower. So clearly, I think there, we have a large share. But if you look at 3-point linkage as a whole, then we are amongst the top 3 globally. And the other 2 are sitting in Europe. And then frankly, one of them is my customer. So I'm in an interesting position where I'm -- even a competitor is a customer to me at times. So...

Right. And just, I mean, 2 questions on this. One is that Kubota in India, right, I mean how those relationships would, I think, obviously transfer to India as well or are already there. So what do you see that as going forward? And...

We are gaining some things with Kubota in India as well. So that continues. We had a relationship with Kubota in India before also. I think with the Escorts one, they had some internal ones also over there. So there will be somebody else as well, but I think we are participating in the growth over there as well. And -- but with Kubota, I think globally, we are doing pretty well. We're doing well in Japan. We're doing well with them in Germany. We're doing well with them in the U.S. So I think we strive to do them all across. So it's a very strategic relationship.

And one last from my side. Just when you work on new programs, right, I mean, not in the short term but in the medium to long term, what is the return on capital that you look at in terms of -- it is a mix of margin and asset turnover. But overall, then how do you -- what do you look at or target internally?

Internally for me, I definitely have to be north of the 25%, but when I start quoting, I'm looking at north of 30%.

Yes. I mean when the operations stabilize, right, because return on...

Yes. But if you look at it before this downturn, we had reached a 30%, 31% number on ROCE, right? Now because of the downturn and some lower leveraging, we'll be slightly lower. But clearly, long term, I don't want to be below 25% very clearly. And as soon as you're out of this downturn and the deleveraging effect if you take out, I think we'll be back to our numbers.

So -- and what is the capacity utilization roughly, I mean, of the 2 major programs that you would have, I mean? That would be my...

At this stage, obviously, we have a lot of capacity, which is why the CapEx is not much, right, because of the -- we have 2 downturns back to back, right? So we're sitting on...

Utilization would be how much roughly?

I think at this stage, I don't have an exact number, Vivek, but my gut sense is it's not more than -- it's got to be in the high 50s or low 60s.

Yes. 50 -- mid to high 50s.

Mid- to high 50s, Vivek, okay. So I wasn't too far off there. Okay.

[Operator Instructions] The next question is from the line of Shrinjana Mittal from Ratnaya Capital (sic) [ RatnaTraya Capital ].

So am I audible now?

Yes, ma'am, you're audible.

So I just want some color on the segment-wise performance. You mentioned that the small agri segment in the H1 witnessed like a 50%-odd degrowth. So what could be the share of the small agri segment? And I also wanted to know about the PMP segment, like what is the share and what is the performance in the first half?

Yes. Vivek, do you -- can you take that question? Or do you want me to do it? I think you may have more specific direct numbers in front of you, Vivek.

Yes. So help me understand the question a little better. You're asking what...

What share of business in construction and ag and all that stuff.

Proportion we do in these segments, correct?

Yes, right. And what has the growth been like in the first half -- the growth or degrowth like, what has the cadence been like in the first half?

Yes. So in construction, it is around 37% to 38% currently of our revenue. Small ag and large ag, together, are approximately 46% to 47%. Out of this, small agriculture is slightly higher, which is about 27%, and large agriculture is around 20%. And currently -- I'm talking about this year numbers. There were a little different a year or 2 years ago because obviously, there wasn't this downturn. And hence, agriculture number were higher back then, right? And then aftermarket is in high teens. And probably those are the big things. [ That's a little bit about it ].

Understood. And on the precision manufacturing part, what is the cadence? Like are we -- is it flattish? Is it in the degrowth? Or what is that like?

[ I think that ] is coming mostly from the construction equipment side, and the construction equipment, I think, is looking negative at about 10% to 12%. And then some of it is in the large ag, which I think is taking a bigger hit.

Right. And the large ag...

The PMP and large ag is not that much. The larger driver for you in PMP is construction.

Right. And the 3PL large ag part, that part of the business, is that also -- is that recovering a bit? Or is it still like...

No. The large one is -- so far, not -- frankly, that's the one which is driving a lot of the problem. Even though it forms only 20% of our business, the reductions that our customers are seeing on that are very, very large, and there, you are also seeing the coupling of the inventory reduction at the same time. So that's what's driving the larger drop in the whole business. And it's not so much the construction, but it's the large ag. Smart ag, because while the business is going down as well as the total end market, but there's a lot of the inventory downcycling. The channel inventory downcycling is more or less behind. So that's at a different stage. And that is I'm saying that this one, as soon as the interest rates regime changes, you will see the first one that will come back out is the small ag. Large ag, I actually think, is going to take about a year to come back. Small ag, I think, we're looking at mid next year. And construction also mid next year because I think on the homebuilding and everything with this change in interest rates, you should look at a change coming there. And aftermarket is actually -- the problem with aftermarket was 1.5 years ago when they were reducing the inventory and cutting things down and all the inventories that are piled up because people with all the logistics issues, people had overstocked. And I think now you're seeing this year already like we're seeing between 25% to 30% growth in that segment. So that's, I said, the aftermarket, which used to be -- traditionally was 16%, 17% of our business, went down to maybe about 14% last year, and now it's back up to -- like Vivek said, to maybe about 19% or so.

Understood. So in the India aftermarket, we're expecting 30%-odd growth. Is that correct?

We don't do anything in the India aftermarket. All my aftermarket is coming from exports. It's from mostly America and Europe.

Right. Right. No, I was just asking that the growth -- that outlook for aftermarket is something around that range, and that's largely from the new customer addition that we have done. Or from the existing customers also, are we seeing some growth?

This is only maybe 5%, 7%. We are growing about 25% to 30% because we've added customers over there. So you can attribute some of that from gaining more market share.

So just one small correction. I wish to correct one number, which I just mentioned. For large agriculture, the current year is around 17%. 20%, which I mentioned earlier, was more last year. So...

Yes, yes. And that's where -- yes, it dropped from 20% to 16%. And similarly, what you see is a significant shift last year. Aftermarket was like 14%, and that shifted to 19%. So that kind of tells you the story of how the large ag is causing the bigger issue even though it was just 20% of our business, but -- so -- but it's been compensated a lot by the aftermarket.

[Operator Instructions] The next question is from the line of Aditya Shah from Vikram Advisory Services.

Sir, I have 3 questions. The first question is regarding, when do we expect this downturn cycle to end? And would we be back to growth? The second question is that in your experience of last 30, 35 years or more in this industry, how many times do you see these kind of downturn cycles come? Like what is the period of these downturn cycles? Do they come every 10 years, 5 years, 4 years, something like that? And the third question is the third segment that we are adding to our business, by when can it contribute around 20%, 25% of revenue?

Okay. So let's start with the downturn, when. I think some of that I answered when I was answering the previous question. So let me -- because that answer, I have to give you segmentally. If you look at the construction, I actually think on the small construction equipment with the homebuilding segment, I think you will see -- most customers are telling me growth second half next year, okay? If you take the very large mining equipment and all, I'm not sure that will do as much because of the commodities and stuff like that because that's driven by some commodity prices and whether mining and all that is going to happen, and it's not China driven, okay? But we don't do very much in it. And then the -- a lot of my business comes from the small equipment at this time. So the relevant one for me is second half next year for the construction.

Sir, second half, when you say, is next year -- is calendar year or our financial one?

I'm talking calendar at this time because that's what customers are telling me, okay? Customers are telling me second half next calendar year, all right, for construction. For small ag, again, it's a similar story. It's driven by interest rates. I think next year, you will see a slight increase but not a significant one because even if it comes in the second half, first half, you won't see. Second half is where you'll see bulk of it. Large ag, I don't think you'll see the downturn end in next year. I think what you'll see is a slight improvement because this year, we are seeing the impact of inventory reduction. Next year, probably that is not coming in. So that may have -- when it looks -- when you look at it over that base, it looks different. The aftermarket is already doing reasonably well and growing. So 2 of the big ones, construction, and small ag, I think second half next year is what you're looking. And large ag, maybe it goes to the calendar year, FY [ probably in ] '27, right? So -- '26, sorry, '26. And to answer your second question on cycles, typically, the ag and construction cycles are 4-, 5-year cycles. So -- and -- but what you have to -- if you look -- analyze the graph, you will realize that each time you come out from one cycle, the peak of the next cycle is higher than the previous peak. So clearly, you will see the 4-, 5-year cycles, and you'll see the peak go up. And I think, like I mentioned -- I think, maybe in the earlier part of my call, I said, I thought the ag cycle would have finished. The peak should have finished maybe 2 years ago. It got delayed because of the Ukraine problem and all the commodity, high -- commodity prices are high, so equipment sales were still going on. Now that's a completely outside thing which affected the cycle and not really the normal thing, right, okay? And because of that, what's occurred is what should have been a bad cycle 2 years ago, the bad cycle is hitting me today. Construction, which should have seen that cycle come in now and the upturn comes distinct there also is parallel happening because the infrastructure bill spending kind of went through, and now we're waiting for the interest rates kill that cycle on the housing. So if you see the interest rates come down, I think you should see that change. The small ag typically in the U.S., which is the largest market for this. Here, it's completely -- it's obviously not used for farming, that tractor. It's a utility tractor, and it's a large property owner tractor. So it's more as a consumer product here rather than a farming product, and hence, it's more interest rate driven. And -- but India factor is doing all right. I think we -- so India is the only hit we took is -- most of the tractors that India exports, they contain our 3-point linkage. So while somebody was asking me, share, while we do have maybe 30% share in India, but if you take only the export tractors out of India, we may have like 80%, 90% share there because literally, they don't trust some of the other competition's quality for the export markets. And so for us, obviously, since we are exposed more to the export in -- from India as well, that gives us a little bit. But overall, India is doing all right. And Japan also, I think, will be fine. But Japan is only 4%, 5% of our market, so -- at this stage. And so it's got plenty of room to grow. To answer your third question -- sorry, go ahead.

So largely 1 year from now...

I think, yes, second half for 2 segments, large ag later, but the big...

From 1 year from now.

No, but the bigger deals, keep in view the new awards because while you're looking -- see, this is a cycle, and the markets will do what the markets will do, right? If you look at the run rate of the new awards, I think that's the key because the new business that we are awarding and as that productionizes, I think that's what's going to make us outbeat the market. The key is to outperform the market, and that's how we'll do it, okay?

Right. So the third question, then?

The third segment. Like I said earlier a couple of times in this call, I think we're working very hard on it, and we're working on something just now. It's a little too early for me to announce, but my goal is to have this platform actually come to us within the next year or so. So if that occurs and we are successful over there, then yes, you will see something come from there pretty soon.

[Operator Instructions] The next question is from the line of Madhur Rathi from Counter Cyclical PMS.

Sir, I'm trying to understand that, sir, if I recall correctly, sir, in the fourth quarter of last year, sir, we were doing some pilot projects of some UTV. Sir, so is there any progress on that front?

Yes. We launched the project, and so it was a -- test pilot was launched on it in about 230 stores. And now they're assimilating the results of that, and we are redefining the advertising platform for it. So it's running a little slower than what we anticipated, but we are continuously working on it. So it was launched, and the product is good. The comments are coming out good. But I think we need to do some more advertising and marketing on that because it's getting into a consumer market there.

Sir, so I mean we should not expect a full scale-up or some big revenue from that segment?

You will continue to see revenue come up but not very big. You will see a few million come from there. But is it going to suddenly give you $5 million? No, that's not going to happen, okay?

Right, sir. And sir, since you mentioned that our capacity utilization is varying in the 50s, sir, so -- firstly, sir, how -- so can we operate at full capacity, provided demand is there? Or is the nature of the industry is such that we can only reach 80% or thereabouts of our installed capacity?

So the way it operates is we are not like an automobile where you have line manufacturing and you have dedicated capacity. We have more discrete manufacturing, and our capacity is a little bit more fungible. So for example, I don't see treatment or paint lines. These are not specific to a product, and even our machining, a lot of it is discrete. So our ability to do -- flex this is quite high. And so yes, the moment I reached about 85% utilization level -- frankly, at a 80% utilization level, I start investing more significantly because it takes 6 months to 1 year to set it up. And if you're seeing that, then you don't want to be left behind, right? And -- but I don't -- at 85%, 88% is about the most you'll go up, okay?

Sir, so by and large, since we almost did INR 1,366 crores in FY '23, so safe to say that roughly INR 2,000 crores top line we can achieve from our current installed capacity provided demand is there?

I want to say more like INR 1,600 crores, INR 1,700 crores at this stage. But each year, we keep doing balancing CapEx a little bit. Like this year also, I think we -- normal CapEx for me typically is 2%, 2.5% of sales. So we are not very high CapEx intensive. And even at this stage, even if I'm doing 1%, 1.5% as CapEx to sales, then we should be okay to maintain these levels. So I'm not investing into significant capacity at least just now. I'm sitting on it. So CapEx is not going to be a bigger issue. I think the key for us is to make sure that Mexico gets up and running and some of our -- and where we are spending money is on the greater-than-70-horsepower, where we're getting new projects awarded there. There, obviously, we need some different equipment, so we're investing in those.

Right. Okay. And sir, since you alluded to the fact that the typical cycle lasts 4, 5 years. So basically, we see them in FY '23. So does that mean that 2, 3 more years are there to go roughly for us to see a revival?

No. When I say 4 years is peak to peak, right? So you will see a decline, and then you will see the upcycle also come. So to me, the bottom -- the large ag, you just -- the downcycle has just started, okay? So you're still on the downcycle, and I'm saying the downcycle will continue for another year. And then maybe in '26, you will start seeing the return come from there. Small ag and construction, I'm already telling you, we will -- small ag has already been down 2 years. I'm telling you, give it another 6, 8 months, and second half of next year, it should turn around. Construction, on the small one, you've seen the decline because of the interest rates. Now that the interest rate regime is changing, we should see still an increase come in the second half again next year, okay?

Right, sir. So sir, and also since 60% of our revenue is coming from tractors, so I understand there must be some strong correlation with food prices with basically agrocommodity prices and tractor sales. So if we see the FAO Food Price Index, which peaked at around 144 in FY '22 calendar year. And sir, our revenues also peaked in FY '23. And sir, since then, it bottomed out in January of 2024. And sir, now it is at 127 versus 144 peak in FY '22 -- in CY '22. So basically, should we wait for this FAO index to reach the 2022 levels of previous high for us to basically see revival?

That's a very interesting question. Internally, we don't track it to that. But we do track it to commodity prices. So we look at prices of wheat, soybeans and -- so we track those. I internally have never tracked this index that you're referring to. But if this index is represented among the commodities, then I think it may be a good index to refer to. I can't answer that question because I don't know -- I don't track that index just now. But I can answer your question that, yes, as commodity prices on food -- if they're up, then definitely, the farmer has more money, and his balance sheet is stronger. And right now, at this stage, with the soybean prices down and wheat prices down, I think it's -- the farmer doesn't have the money, so farmer is going to be tight just now in their capital expenditure spend. So that's -- I'm not saying that -- I'm clearly saying large ag, even if the decline has started, I don't see the end of it. So you see the problem all the way to next year, and '26 is when you see that change. Again, you never know -- see what happened. When the Ukraine crisis happened, wheat prices shot up through the roof. And that's what shifted that pricing on commodities. If you have some severe weather globally and you have some bad crops, then commodity prices will go up. And so it's a little hard to predict that, right? Like even in India, if you look at it, at the end of the day, I think we all think, hey, tractor sales are related to the monsoon, right? At the end of the day, it's the monsoon which is driving that over there. In this part of the world, that doesn't happen. But having said that, these global events are more critical. I don't know what Trump will do with China on trade tariffs and if that causes any disruption on exports of agricultural commodities to China or to other places and if that changes even more supply chains on the agricultural side. I think that's a little uncertain just now.

Right, sir. And sir, lastly, sir, once you mentioned in the con call like, that whatever gets attached to a tractor or to a construction equipment, you want to be there. Sir, so in that case, sir, is there any application for our products in the defense sector? Because, sir, I understand there are many equipment, I mean, moving -- I mean, basically heavy vehicles, what BEML, et cetera, make, which also has some kind of similar attachment which we do with tractors. So is there any application over there?

I'm pretty certain there would be. We haven't mapped actually, but I'm pretty certain there would be, but that would be done by the construction equipment makers, and we would be selling parts to them. So I think if part supplies happen, they will happen to the primary vehicle maker, right? It won't be to the -- directly to the defense side.

Right, sir. So in that case BEML, et cetera, would be our customers? Are they our customers?

Absolutely. Not just now, but there's another project I'm working on, which will bring all this into our fold. So it's an area we are looking at. And obviously, India -- frankly, India as a construction growth market, I think, is -- so far, India only forms 15% of our revenues. And when we are strategically looking at this, we believe that the kind of growth that India is going to see, we need to have a higher presence in India. So clearly, some of the next strategies we are taking in product growth, we are focusing on some of the India growth story as well.

The next question is from the line of Shrinjana Mittal from Ratnaya Capital (sic) [ RatnaTraya Capital ].

Just one question. So in Q4 FY '24, we had mentioned that we had some new order wins of about INR 175 crores, INR 200-odd crores. So I just wanted to know, where are we on that? Like has -- are those new orders already flowing in? Or like what is the status like in that aspect?

I think those projects are predominantly on track and which is why Q4 you will see sequentially to be our highest quarter.

So those orders will flow in, in the second half, you're saying, in the current quarter?

No, no, no. So Q3 is still the current quarter. Q3 is still going to be weak. Q4 is where you will see the growth come in. And Q3 traditionally has been weak because of Thanksgiving, Christmas breaks. So few days, it's lesser here and with the -- it's a little hard to do construction activity or farming when there's snow on the ground. So that's typically our low season. I think when you get into Q4, you are going to see the impact of, one, the seasonal impact as well as some new business flowing in over there.

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

Thanks a lot. So dear all, we continue to focus on our core strength and on build stronger business franchise by strategically partnering with our customers in their journey and success. Our focus and efforts are aligned towards achieving the targeted growth in the coming years. With this, I would like to thank you all for taking out the time to be in the call, and I apologize for the little late start of the call, but I'm sure that would not happen again. Thank you very much.

Thank you. On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.