Uniparts India Limited (UNIPARTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Uniparts India Limited Q2 and H1 FY '26 Earnings Conference Call hosted by Go India Advisors. [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.

Thank you, Amshad. Good evening, everyone, and welcome to Q2 and H1 FY '26 Earnings Call of Uniparts India Limited. We have on the call Mr. Gurdeep Soni, Chairman and Managing Director; Ms. Tanushree Bagrodia, Director and Group Chief Operating Officer; Mr. Rohit Maheshwari, Group Chief Financial Officer; and Mr. Himanshu Sharma, Deputy General Manager. 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 can open the floor for questions and answers. Thank you, and over to you, sir.

Thanks a lot, Monali. Good evening, everyone. I welcome you all to the quarter 2 FY '26 earnings call of Uniparts India Limited. The global off-highway market after a prolonged period of softness is showing early signs of stabilization, particularly within the Construction Equipment segment. Uniparts quarter 2 performance remained consistent with quarter 1, delivering a 14% year-on-year growth. This is in line with the guidance we shared in earlier calls and reinforces our confidence in achieving double-digit growth for the FY '26. Our operations remained stable through the quarter despite the untimely and severe floods in North India, which is a testament to the resilience and agility of our team and the robustness of our operational processes. Our dual shore manufacturing model continues to offer customers flexibility and risk diversification, thus strengthening our position as a strategic supplier. This model has also enabled us to effectively mitigate tariff-related challenges for our customers in U.S.A. As we navigate an evolving global environment, our teams continue to grow stronger, more agile and better equipped to manage volatility and deliver consistent performance. Let me give you an industry overview of our business. The off-highway equipment market appears to be stabilizing with encouraging signs seen specifically in the construction equipment segment. The agriculture industry is seeing differentiated performances across segments and across geographies. Let's start with large agriculture. The North America large agriculture market continues to be soft with a forecast continuing to be a high double-digit degrowth. This is largely driven by continued subdued commodity prices, high input costs and still high secondhand inventory. The European large agriculture market is faring much better, driven by lowering input prices and with some markets showing an improving momentum of agricultural exports. Uniparts growth in this segment is supported by new business awards from our European customers. Talking about the small agriculture, while still soft, the North American small ag market is better than the large ag market, expecting to degrow between 5% to 10% with the compact equipment segment showing momentum. However, in Europe, the small ag demand is showing better outlook than the North American market in India. And in India, of course, the good monsoon, the high traction utilization and the recent GST rate cuts are expected to generate anything between 4% to 7% growth in tractor volumes in this current financial year. With strong domestic footprint and growing export market, Uniparts is well positioned to capture mid-teen growth in this segment. Coming to the construction side, this increasing spend on building AI infrastructure is aiding construction industry growth in North America markets, leading to improved end customer demand. In Europe as well, the government spends are encouraging the demand of construction equipment, especially with the focus on developing green power. Uniparts continues to grow ahead of the market, supported by strengthening customer relationships and new business wins in both Europe and North America. And thirdly, for the aftermarket, this segment continues to be an important business driver for Uniparts, and we expect to grow in single digits in this segment year-on-year. Let me talk about some operational updates and strategic outlook. Uniparts remains focused on deepening customer partnership and expanding our footprint in large agriculture and construction equipment segments. In fact, our new business award pipeline continues to be robust at around INR 200 crores. In addition, the Mexico warehouse has become operationally ready in October 2025, in line with our planned schedule, ensuring we continue to meet customer delivery time lines seamlessly. A brief about our financial performance. In quarter 2, our EBITDA margin expanded to 22.6%. Cash flows remain robust, and the company continues to be net debt free with a net cash balance of INR 226 crores as on September 30, 2025. In fact, the Board had approved and paid an interim dividend of INR 37.7 crores for the quarter FY '26. In fact, in addition, there was a special interim dividend of INR 22.50 per share amounting to INR 101.55 crores approved and paid in October 2025 as well. With that, I'll hand over to Rohit Maheshwari to present the detailed financial performance for the quarter. Rohit, over to you, please.

Thank you, sir. Good evening, everybody. Here are the financial and business highlights for the quarter ended September 30, 2025. Quarter 2 total revenue was INR 283 crores, reflecting 1.3% quarter-on-quarter increase and 14.6% year-on-year growth. Quarter 2 EBITDA stood at INR 63.9 crores, up 11% from Q1 FY '26 and 53% year-on-year. Operating cash flow generation for Q2 was INR 34 crores with net working capital comprising of the 3 elements of inventory, account receivable and account payables as number of days of TTM revenue from operations stood at 155 days as on 30th September 2025. Uniparts remains a net debt-free company with a group net cash position approximately of INR 226 crores at the end of 30th September 2025. CapEx outflow during the quarter was approximately INR 6 crores. New business awards over the past 12 months totaled approximately INR 200 crores in the annualized potential value. Key monitorables include global economic slowdown, geopolitical uncertainties, evolving trade tariff, persistent inflation and elevated interest rates. With this summary, I would like to hand over the conference back to the moderator for question-and-answer session.

[Operator Instructions] The first question is from the line of Viraj from SiMPL.

Congrats on good set of numbers. So just a couple of questions. First is if you look at the current quarter, our gross margins have been one of the highest ever in our history. So just trying to understand what drove such high gross margin for us. Was there any element of FX gain or any other element? And similarly, the slight increase in OpEx cost as well. So if you can just give some perspective? That is the first question.

Hi Viraj. Tanushree Bagrodia here. So Viraj, you asked a question on our gross margins and on our overall other expenses, right? So if you look at our material cost as a percentage of revenue, typically, it is in the range of about 35% to 37%. And this has eased to about 32.5% in the first half. And in the quarter 2, it's at about 30.5%. And this is largely due to the rupee depreciation, which has improved inventory valuations across our U.S. and European businesses.

Can you specify the quantum?

Yes. So if you look at this, a large part of it is coming because the rupee depreciated about INR 3 against the dollar and the euro, both. So about 85% to 90% of the impact that you are seeing on material cost is because of the FX movement. And to a smaller extent, there is an impact of product mix and of tariffs as well.

Can you quantify both the parts -- the impact in Q2, both at the gross level and also at the other expenses?

So on the gross margin, like I said, 85% to 90% of the impact is due to FX and the balance is a mix of product mix and of tariffs. Now coming to your question on the operating expenses, you would see some higher costs on employee costs, which is largely driven by actuarial valuations. And the next impact that you see is on other expenses and those other expenses are largely up because of onetime expenses.

Okay. So if we were to kind of weed out the impact, at the gross level, which is positive and the expenses and other exponential costs, then what should be a normalized operating profit should be for us in this quarter?

So Viraj, what we've always maintained is that with the market picking up, we are back to looking at the 18% EBITDA level. And I think after normalizing for all the gross margin and the fixed cost impact, right, we are well in the range of 18% EBITDA margin...

Okay. Second question is, if you can just give some color in terms of our performance when it comes to large ag, small ag and construction. And a related question is, if I look at the aftermarket business, if I look at last 2 quarters, we've seen subdued sales, maybe minor decline or kind of flattish kind of sales. So what is happening there? Because I think we were looking at ramping up the supplies to large U.S. retailers. So any color you can give on both the parts.

Okay. So let's start with where the markets are and where we are performing in terms of the market, right? So as our MD also mentioned in his opening address, the North American large ag market continues to see soft crop prices and higher fertilizer costs. And hence, the large ag segment continues to be weak. However, the recent agreement that has been achieved between U.S. and China on the soybean purchasing by China is going to be beneficial for U.S. farmers. The Fed rate cut has come in October, and that should be beneficial for farmers as well. Secondly, we also see while the inventory levels are high, the inventory levels in large ag also are consistently reducing. These factors indicate that the large ag market still has some pain to go through, but is potentially bottoming out. And in this backdrop, our business in North American large ag market is flat, right? In the European large ag market, the input prices have stabilized and the Southern European farm output exports are looking up. The European agricultural market seems to be coming out of the trough this year. And this region is definitely faring better than the North American market. And Europe is currently driving Uniparts growth in the large ag segment, which is fueled by the new business wins that we spoke about in our earlier investor calls. And with the improving market sentiment, we are getting an additional uplift. Then when we talk about the small ag segment, I think the Asian market, which is largely a small ag market has been performing relatively well. And we've actually won new business, and this is also driving growth in our -- in the Asian market. Now in India, monsoon, steady farmer demand and the GST rate cuts is driving tractor sales. And I think here also, we are outperforming the market, a, because we have a dominant position; b, we also see that this GST rate cut has provided some impetus to this market. In the European small ag market, this segment has clearly bottomed out, and we are leveraging this upturn and securing new business and again, outperforming the market. So I think that overall gives you a color on how we are performing in the small ag segment. Needless to say that our very strong leadership and dominant position in this market is helping us outperform every geography in this particular segment. Then when we come to Construction segment, this segment is showing green shoots across the U.S. and Europe. In U.S., as Chairman mentioned, it's driven by the spend on AI infrastructure. In Europe, it's by green energy focus. But clearly, this is a segment which is driving growth for us both on new business wins that we are executing currently and the businesses that we had won in the recent past having done exceedingly well for our customers. So this segment also remains extremely strong for us. On the aftermarket side, we definitely haven't degrown. We have seen growth. It's just that the growth is less compared to what we saw in the previous year. Again, let's look at aftermarket in Europe versus the U.S. I think in Europe, our aftermarket customers are sitting on higher inventory and hence, their buying from us has been lower and hence, the growth is a little subdued. In the U.S. while the OEMs have seen 0 impact of tariffs, the aftermarket has seen some impact of tariffs and hence, there has been some slowdown in growth. Having said that on 31st of October, there was a new notification from the U.S. government, which came out that certain HSN codes, which come under tractor, bus will now be subject to 25% duty.

[indiscernible]

So there is -- so these were initially falling under the 50% duty because 25% duty and 25% Russian oil tariffs. Now this is flat 25% duty and it's an exempt from Russian oil tariffs. With this new ruling coming in, we are seeing some green shoots in the U.S. aftermarket already. So I think that's some color on the aftermarket figure...

Last question, I'll come back in queue. Will you give mix in terms of channel warehousing, direct export, local production, both for Q2 and H1.

So I think it remains pretty much the same where our sales from warehouses remain the highest at about 50% and our direct export is about 25% and the balance 25% is local -- made to local sales.

[Operator Instructions] The next question is from the line of Prolin Nandu from Edelweiss Public Alternatives.

A few questions from my end. Firstly, you sounded slightly more positive on construction equipment side than the agri side, right? So just to understand, let's say, in your order book or maybe FY '26 revenue, how should the mix look like between construction equipment, large ag, small ag and aftermarket?

So I think if you look at Prolin, thank you for that question. I think before I go on to what our order books are looking like, I think we have been maintaining that the construction industry has seen a sooner revival than the ag industry. I think what's a clear indication within the ag is that even the North American small ag market probably the bottom is behind us. And in the case of the large ag industry, now we are seeing that the potential bottoming out should reach soon. The European industry is definitely -- ag industry is definitely seeing green shoots. So I think that trajectory is now becoming more and more clear as we've gone by one more quarter. What we are seeing is that our construction business is roughly about, I'd say, about 40% to 45% of the total business that we have, right? While the large ag is roughly about, I'd say, anywhere between 17% to 20%. And the small ag business obviously is larger, right, with about 25%.

Okay. So just to summarize, right, if I were to probably think about this capitalizing kind of a system, so what you're saying is that construction equipment is purely green, small equipment is more like amber and there's still some red on the large ag side, right? Is that a fair summary?

Again, I'm going to temper it by saying that large ag in the North American region is red. I say small ag plus the European large ag is in amber and construction is green. And India and Asia Ag, which is the small ag is all green as well.

Okay. That's very helpful. My second question was on the inventory adjustment, right, which explains 80%, 85% of the gross margin expansion. Now this is only on inventory, right? How does the -- how do we pass on the depreciation of currency towards end customers in terms of pricing? I'll tell you where I'm coming from, right? Some of the channel checks that we have done, right, what we understand is that in terms of pricing when the raw material inflation goes up, we are quite quick to pass on the same hikes to our customers. Maybe while declining, we are slightly late, right, in a way. So we probably maybe lose out on wallet share or lose out on some of the customers. So has there been any such instance in the past where we have lost out on a customer or lost out on wallet share because our pricing was slightly on a higher side. But -- so -- and how do we factor in all these factors, right, currency movements as well as the raw material movements? And how do we pass it on to our customers?

Prolin, If you look at our customer contracts, our customer contracts are fairly clear. Our customer contracts talk about raw material, inflation and about FX. There are bands at which there is a clear decision point saying if the raw material goes up or down, how is the passing on going to happen. On the FX side, I think one thing that we need to understand is that FX is not looked at in isolation because FX also comes hand-in-hand with inflation, right? Because if the rupee depreciates, there's also an inflation in India, which is there. So we always go to the customer with a transparent contract, which looks at what we need to do for raw material and then in combination with FX and inflation. So for us, these pass-throughs are transparent, are done timely and contract to contract, it depends what the frequency at which the reviews will happen and when we do the pass on. As a supplier to our customers, we are actually a strategic partner. And what that means is that we have a seat at the table when any of these discussions come up to engage in open detailed conversations and then find a solution which is balanced and contractually agreed to by both parties. Now that's also the reason that we've been able to pass on all tariff impact with P&L neutrality and not losing any business. So I would like to say that any pricing discussion that happens, happens timely, contractually and given the strategic nature of our relationship. We do this in such a way that we are not losing wallet share or business with the customers. Even post that, tariff, we've not seen a reduction in RFQs also.

No, that's very encouraging to hear. I'll just pose one last question, right? And that's on inorganic growth or acquisition. What is our plan there given that the payout has been very high on dividend side? Is that plan temporarily off the table? Or are we still evaluating to do something on the inorganic side? That's it...

Global inorganic growth remains a core part of our strategy. And at all points in time, we've maintained that and we continue to maintain that. We continue to focus on these areas around our key platforms of fabrication, hydraulics and PTOs, right? These are the areas in which we see strong potential for value creation and strategic alignment. I think the decision to declare the special interim dividend was because while we are evaluating potential inorganic growth opportunities, the Board believe that distributing surplus cash to shareholders was a prudent use of the capital. At the same time, it reflects our commitment to disciplined capital allocation. As the profitability of the company is improving and it's indicated by our half yearly results, you can see our EBITDA and you can also see that we continue to generate strong cash flow. We are very confident that this interim dividend that we paid out will slowly come back to our buffers. And it was most prudent to deliver value to shareholders at this point in time. Also because we are a net cash company, we remain debt free and any opportunity that also materializes, I don't think we are constrained in making an acquisition at this point in time.

[Operator Instructions] The next question is from the line of Rushabh Shah from Buglerock PMS.

My question is in one of the calls you had mentioned that South America is an undiscovered market for you and an opportunity is coming up. So are we taking any efforts to increase our business in that particular region?

Sorry, Rushabh, your voice is not clear at all. We can't understand your question.

Am I audible now?

Yes.

So in one of the calls, you had mentioned that South America is an undiscovered region for you and an upcoming opportunity. So any update on that front? Are we taking any steps to increase our business in that region?

Rushabh, North America has historically been about more than 50% of our total revenue. In H1 '25, it was 55% of our turnover. And in H1 '26, it is ...

No, madam. South America, not North...

South America? So if you look at our strategic intent, we've always said that our strategic intent is to have about 40% of our business from North America, 30% from the U.S., about 25% from Asia and 5% from rest of the world. So clearly, we've been focusing on growing our business in Asia and Europe. And to that extent, first half of '25, Europe was 23% of our turnover. And at this time, it is 25%. So you're seeing a clear growth in the European contribution in a growing top line that we have. And Japan was at 5% H1 '25 and in H1 '26 at 6%. So you can also see the Asian element growing, right? I think South America for us comes in rest of the world, which is a smaller bucket for us. So we are going to focus on the larger markets first.

Okay. My next question is when we talk about 3PL and PMP, what has been our market share, let's say, now versus 4 to 5 years back? And how has it improved over the years as we say we have a dominant market share in this space?

So Rushabh, I think we continue to enjoy a double-digit market share in the small ag market. What is it currently at the moment, we haven't done a market review in the last 3 months so that I won't be able to tell you. But in the recent past when we had done it, we were at a double-digit market share in the small Ag -- in the -- sorry, in the 3PL business. And in the PMP, we are in single high digits. That's the market share that we have. Now I think the way we look at this is that in the large ag market, in Europe, we continue to win new business, and we continue to solidify our position. Even in the small ag segment, be it North America, be it Europe, be it Asia, we are winning new business. So this -- and this is despite the markets being weak, right? So our position, if at all, is staying where it is, if not improving. And similarly, in the construction industry, actually, we've just been growing tremendously, right? We've been growing with multiple customers both in the U.S. and in Europe. And there also, our position is only getting solidified despite North America facing tariffs because bear in mind that what has made people really set up during the tariffs in North America is saying, here in Uniparts, not only are the best country manufacturer, but they also have dual shoring. And now with our Mexico warehouse becoming operationally ready, we can give them so many tools in the kitty to be able to mitigate tariff impact. So I think our market share is only solidifying.

[Operator Instructions] The next question is from the line of Dheeraj Kumar from Alpha SQR.

I have a couple of questions. The first question being, so if you see our historical earnings, right, I think the peak earnings was somewhere in 2023, where we did about INR 45 to INR 50, right? So when do you anticipate, right, based on the current visibility of all the different industries you are currently catering to, when do you anticipate we can get back to such a level?

So if you look at how we have been indicating FY '26, we've been saying FY '26 should be in the mid-teens growth. And if the trajectory of the markets continues to be where it is, I think FY '27 or mid FY '28 is where we definitely should be where we were with the peak revenues.

Got it. Got it. That's helpful, ma'am. And secondly, I just wanted to understand because if you see in India, right, most of the precision engineering players have taken different routes, right? I mean, one being defense, aerospace or some of the sectors where there are tailwinds, right, be it mining or be it energy, et cetera, right? Why are we actually restricting ourselves with industries which are -- which are extremely, I would say, they're not growing or they are probably degrowing because of multiple reasons, right? Do we have any plans because we have the capability of doing precision parts. Why are we not thinking about the mining or some other areas? It might be a live question, but I just wanted to understand what is the hunger for the management because beyond INR 1,500 crores, I mean we are not able to understand how the company can really get to the next leg and unlock the shareholder value.

So there are multiple layers to your question. So let me peel the onion one by one, right? I think just to say INR 1,500 crores because that's the revenue we achieved in 2023 is a little bit of a misnomer. I think we can actually achieve that growth with existing customers and existing partners in the time frame that I mentioned. We are constantly looking at organic, inorganic growth and inorganic opportunities. We have the wherewithal to do it, and that will definitely add more value to shareholders. And the reason why we keep putting on so much of effort on this inorganic opportunity is because we just don't want to do an acquisition for the sake of acquisition. We actually want to do an acquisition which truly unlocks value for shareholders and is ROE and ROCE accretive, right? And hence, it's taking us time. I think the third element is today, do we supply to other off-highway segments other than agriculture and construction. Absolutely. We do supply to oil and gas. Some of our precision machine parts go into oil and gas. They also go into industrial machinery. It's just that we don't track them separately. I think what also is not appreciated is that when we say construction, construction for us is not just infrastructure and building. It encompasses mining, metals. It also encompasses what we talk about infrastructure for AI. So I must tell you that one of the new orders that we've win or we've won is actually for a customer that is going into their segment, which is then helping the development of the AI infrastructure. Now for us, there is a huge amount of untapped potential within our customers to take care of some of the segments that you have spoken about, and that's where we are putting our effort. We are expanding into other segments where our capabilities can extend. And then the third one is the inorganic opportunity. So that's the way we look at growth.

Got it. And just last question. So because you highlighted that this gross margin might not be sustainable. I mean it might go to the normalized level. So do you anticipate H2 would be again at that -- I mean, we would see an EBITDA margin of 18%, 19% rather 21%, which we have seen in H1...

So again, when you look at Q1, right, or when you look at H1, again, gross margin, you are right, is impacted by this material cost. But as you would also see that the deleveraging is playing out in our benefit, right. So once we normalize for the impact that we had, we are close to coming to the 20% levels of EBITDA that we have said we would always be trending toward.

[Operator Instructions] The next question is from the line of Saurabh Das from [indiscernible]

I know that we have discussed at length on the margins, but just wanted to again check with you that you did mention that 18% is what you are essentially targeting in the near term with 20% as an aspiration, while the first half is extremely strong. So do we see that normalization likely to happen in the second half itself or it will gradually trend towards 18%, 19% levels?

So, Saurabh, what we are trying to explain is that the gross margin impact that we are seeing is due to the currency, the rupee depreciation, if the rupee depreciation continues, the gross margin will continue to benefit, right? When we normalize for the margin for the rupee depreciation, right, we are looking at the range of 18% to 20% margin. I think what we are saying, it's not that we are targeting 18%. Our target has always been 20% because that's the normal EBITDA level at which we believe we operate in healthy markets and healthy cycle conditions, right? And I think over a cycle, that's what we will end up doing. It's just that at the moment, giving full clarity and saying if you were to normalize everything, we would be in the range of about 18%, 18.5%, 19%...

And my next question is that when you gave the broader color on your end segments, the kind of growth, it kind of comes to [indiscernible] slightly negative to slightly positive between minus 2% to plus 5% sort of end market growth, while we are targeting mid-teens. So effectively, we are maintaining a spread of almost 7% to 10% over our end markets. So is that understanding broadly correct? I can look at it from a next 2-, 3-year perspective?

So Saurabh, I think a couple of things to understand, right? And I'm going to reiterate this. The segment which is rightly said, which is red is North America, large ag, which is where we have a lower exposure to; Europe which is small -- large ag is amber, which is where we've been winning new business in large ag, we have a good position in the small ag. Even North America, small ag is in the amber. So there, we are doing well. And construction is really green and so is the Asia and India ag business, right? So we are really outperforming the market in the green and the amber segment, and we are flat when we talk about the red segment. I think what's key to note in our business is, and we've always said that the real growth comes from winning new business. If we talk about, let's say, a 15% growth, we are saying about 11% to 12% of this comes from new business, while the balance comes from the existing business. And that actually means because our new order business win is very healthy at INR 200 crores.

And just on that new business...