Varroc Engineering Limited (VARROC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited's Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded. Varroc Engineering Limited's management is being represented by Mr. Tarang Jain, Chairman and Managing Director; along with Mr. Christian Päschel, CEO, VLS business; Arjun Jain, President and Head Electrical and Electronics business; T.R. Srinivasan, Group CFO; and Bikash Dugar, Head, Investor Relations. I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.

Thank you very much, and good evening to everyone here. I'm Tarang Jain here, and I would like to thank you for joining this call. You might recall that on February 14, we intimated the stock exchanges at the time of notifying the quarter 3 results of the group that we were evaluating interests received from certain parties for a strategic stake in our global lighting systems business. Subsequently, we've entered into a securities purchase agreement with Plastic Omnium of France on April 28 to divest our lighting business in the Americas and Europe, along with the R&D team located in India supporting their global business. The divestment is being done at an enterprise value of EUR 600 million and excludes our global 2-wheeler lighting business, which has operations in Italy, Romania and Vietnam, our electronics operations in Romania, our 4-wheeler lighting business in India as well as our stake, our 50% stake in the China JV. We expect the closing of the transaction during Q2 of FY '23 on receipt of requisite regulatory approvals, et cetera. The details of the divestment have been provided in the presentation uploaded in our website, and you may refer to the same. The divestment marks an important milestone in the evolution of Varroc by significantly strengthening its balance sheet and well positioning it to leverage the significant growth potential in the identified priority product segments of EV components, high-end electronics, connectivity solutions, in addition to the core India business with a wide range of products in lighting, electrical, electronics, polymer and metallic components. With this, we are happy to take your questions now. Thank you.

[Operator Instructions] The first question is from the line of Basudeb Banerjee from ICICI Securities.

Am I audible?

Yes, sir, you are.

So a few questions. One, the accounting period for this deal will be counted from beginning of fiscal '23 or post the first half legal closure, as you said?

Srini?

Yes. Financial period for effecting in the accounts would be at the date of closing.

The closing of the legal closure?

Yes. Correct.

Second thing, sir, post the deal of EUR 600 million, all liabilities, debt and payables, how much will be left as equity from that deal, sir?

Okay. I hope you had a chance to have a look at the presentation we uploaded in the website some time back. So we try to address some of this question. So basically, net of tax and some amount we have to keep in escrow, we expect to receive, Varroc India expects to receive an amount in the range of EUR 150 million to EUR 175 million at closing from the divestment. So this will, after taking care of all borrowings overseas at the VLS entity level, including the Dutch holding company level.

Mr. Banerjee, you have any other questions? Seems like we lost the connection for the current participant. We will move to the next question from the line of Aditya Jhawar from Investec.

Congratulations to the entire team for achieving this big milestone. My first question is, what is the thought process for China JV? Specifically, do you think that there could be value unlocking down the line? That is the first question. And similarly, for the India lighting business, what is the plan? Because as compared to some of the other Indian players, it would be relatively a smaller business and the R&D support that we used to have from VLS team would not be there. So that would be the first question, China and India.

Yes. So Aditya, let me answer this question, Tarang Jain here. So for the, where the China JV is concerned, see, today, we are on a JV. It's a 50-50 partnership, which has been going on for many years now. And China, as you know, is the biggest market in the world, and it's a very important market. But yes, going forward, we are looking at certain solutions in the Chinese market. We're looking at certain other options, but that's something we cannot discuss at this point of time until we have concluded a more clear way forward. We will keep you apprised of the same. But having said that, post this transaction, we'll still have a technology transfer agreement in place, I mean, for a few more years from Plastic Omnium. So we will be continuing our four-wheel lighting business, and we will, of course, be ensuring that the requisite technology is in place to take care of the future technologies and to take care of the future customer needs. But there, in the Chinese market going forward, there will not be a noncompete with Plastic Omnium. So we will be also there in the Chinese market with a technology transfer agreement, and then we will have to look at a further way forward, which we have already started working on. Secondly, when it comes to the Indian market, in the Indian market, our revenues are anyway growing and quite strong with the current customers. In the coming year, we are looking at more than INR 500 crore to INR 600 crore plus revenue for the four-wheeler lighting business. Here, we have a very clear kind of agreement with Plastic Omnium. There'll be a technology transfer agreement, a technology agreement, which includes all the latest technologies for the Indian market for 5 years. And also, there's a noncompete for the Indian market for 5 years. So here, I think going forward, we can look forward to a very good growth here. And this is our market in India and is something very important for us. So this is something we will be present from a long-term standpoint.

Okay. Okay. That was quite helpful. My second question is that what should we expect asset turns to be? So if you look at the current India business, polymer business has been a chunky one. But in the last couple of years, the growth of electrical, electronics has been picking up quite well. So to be a little bit more specific, what should be the asset turn we should expect from the electronics business? If, Arjun, you can comment on that.

So in terms of asset turns, I think I'll probably rely on Srini. Srini, I'm not sure, I will refer to...

Sorry, Arjun, we're not able to hear you clearly.

Yes, I will take that question. Yes. Traditionally, our electrical, electronics business in India operates at, let's say, a lighter asset base compared to the rest of the businesses like polymer and metallic. So historically, they have been having asset turns of 3.5 to 4 kind of a thing, which we expect we can continue on that or even improve on that because some of the newer products we are coming out with in the EV space, et cetera, would be, let's say, require a lesser CapEx than the traditional products fortunately what we have. So we expect to maintain at that level of 3.5 to 4 or even slightly improving going forward.

Okay. That's 3.5 to 4x. My final question is that you gave a good presentation explaining the cash surplus that we'll have. So if you have to think about next 2 to 3 years down the line, what kind of cash deployment here we should expect? And do you think that a lot of incremental cash would go more in electrical, electronics or do you also expect that lighting business or the polymer business would also? So what could be the ballpark thought process of spend in CapEx? And one, should one expect also that dividend, which in the last few years we have not been able to focus because of the VLS. Should one expect that our dividend policy would also change with this cash flow in hand?

So let me just answer this question. So see, going forward, if I don't have to include the Chinese kind of revenue, so the larger play will be obviously the India play. And the balance will be, of course, our two-wheeler lighting plants and electronics plants in Europe in this one plant in Vietnam. Now to the basic premises and also how we have been operating is that the CapEx needs comes out of the, whatever the profits one is making. So it's well within that. For example, I mean, I don't think that in India, we are at the moment, even with one of the investments we have made so far, we are crossing something like INR 175 crores to INR 200 crores on an annualized basis for the past 2 years. And with this kind of investment is far below what is our EBIT or EBITDA kind of a generation. And this will continue. So our focus will be, obviously, like we have mentioned, let's see, we, in the India market, anyway, we are looking at unlocking a lot of growth when it comes to the EV products. We already have one major customer, and we're making quite a bit of inroad also with some of the other EV players. We have chosen a few emerging EV players. And of course, there are traditional OEMs who are anyway customers to us in India. We're also looking at 1 or 2 OEMs also abroad in this. And the electronics is not just going to be limited to two-wheelers. So one is on the EV space, which is today more two and three-wheeler. And there is a global electronics space which is more global in nature. So other than, of course, the electronic fuel injection where we will see going forward that we're able to cater to more than 1 million units in a single year, we are also going to be kind of focusing a lot more on some of the camera systems, the internal, external camera systems globally where the markets are there for the fleets as well as for the OEMs. We see China and India as higher growth markets where it comes to such kind of high-end electronics. So this is where our play will be other than, of course, the two-wheeler LED lighting, which is more, I mean, abroad. In Europe, it's more for the premium vehicles, the premium players, and that will continue. And that's where our focus has been a little bit lacking over the years. And now we're going to focus in a much stronger way that whether we can grow further on a two-wheeler LED lighting. Also some other non-two-wheeler lighting, maybe some off-road marine, other things as what we will look at, which is high margins. So our CapEx will be well within our EBITDA on this thing. We will not be needing any debt to finance any of our future growth when it comes to our existing India business or even a global business. Yes, on the electronics side, on the high electronics side, if we are able to get a good opportunity where it puts us in a good shape, we might look at inorganic. But presently, I think we want to stabilize at least for the next 1 year and then look at if inorganic it will be only in the area of probably high-end electronics. So we're not looking at something immediately over there. So we are looking at good free cash flows in our business as we move forward. That's the objective, free cash flows, high ROC, more than 20% on a consistent basis, probably 25% is something we will be targeting as we go along. And this is very much possible now.

Yes. Perfect. So the part on dividend?

So on the dividend, obviously, see, the point is that we had been paying dividend until about a couple of years back. And obviously, I mean, for the last couple of years, we have faced these headwinds in our four-wheeler lighting business abroad. So obviously, we've not been able to do that, but we will continue with whatever is our stated dividend policy. That's something we will be honoring as we move forward. So that's something which we will do, obviously. Once we are making money, we want to, of course, give back to the shareholders.

The next question is from the line of Ashutosh Tiwari from Equirus Securities.

The question will be, firstly, what is the debt number for India right now? For VLS, what is the debt number? And this EUR 165 million to EUR 175 million is ex of this debt. So I just want to know the debt number for India.

Srini, you can maybe answer that. You know the numbers, yes.

Yes. Yes. I will take that. Yes. End of March, roughly, we were in India about INR 850 crores or so. That was the debt we had. And yes, so that is something which, I mean, as you know, part of this borrowing also going to finance, support VLS in the last year, 1.5 years or so. So that's where currently at the moment so.

And you'll get around, say, INR 1,400 crores from this once you get that EUR 175 million you were talking about. Then your net debt, net cash will probably be around INR 600 crores, right?

India, so investments in India, then we also have, probably have some interim financing requirement between March and closing, right? Because closing will happen sometime in, let's say, July, August, kind of a time frame. There'll be interim funding requirements as well. So taking into account, yes, probably we'll end up with, still we will end up with negative net debt. That's what we are projecting. So it's a bit difficult to put a precise figure, but could be in the region of about INR 200 crores plus/minus.

So sir, I mean, we sold at EUR 600 million. And I think our net debt as of, at consolidated level overall INR 270 crores as of December '21. So this, I mean, is there a big transition? I just want to understand that where this EUR 600 million is coming in. And then despite that, only the INR 270 debt as of December. I think the amount is getting -- net-net is only INR 600 crores after all this debt repayment. So is the tax as well very large or very large working capital, which is they've taken over by then so there's some kind of disconnect over the year.

Yes. There are 2, 3 things you need to keep in mind. The borrowings overseas level, VLS level, entities plus including the debt security level itself will be in the region of about, let's say, to EUR 265 million, EUR 270 million. That's number one. Then we have working capital adjustment, which will count into the enterprise value, the equity value for it. Then we have tax, but tax is not a very significant figure. We expect it to be in the range of not more than between EUR 15 million to EUR 20 million overall or even maybe a bit less. So that's on the tax. And then there is an escrow involved like Tarang mentioned in the presentation. that would be in the region of around EUR 30 million, which will be released over a period of time. So adjusting for this, the amount we expect to be received at closing would be in the region of EUR 150 million to EUR 175 million. That's what we have indicated in the presentation.

Okay. Okay. So net-net, I think, okay. Got it. Secondly, India lighting, you talked about the four-wheeler lighting can become a INR 500 crore business over the next few years. So what it is currently at?

So what I'm saying is that the business next year will be between INR 500 crores and INR 550 crores. That's the revenue we already have in the four-wheel lighting business, and that's something we want to take it forward and grow in a more effective way in a, I mean, with our customer base. And here, like I said, in the Indian market, see, we have a noncompete arrangement for 5 years with Plastic Omnium. And plus, of course, we have a technology transfer agreement in place, which takes care of all the future technologies also in lighting high definition of four-wheeler lamps, the surface LED, another thing. So here, we are very much protected for the next 5 years. And then, of course, we have to see how it goes. So therefore, we do see a good growth. And we have developed in VLS a very good level of technology, I would say. We're amongst, as you know, the leaders when it comes to technology with some of the other bigger players in the global marketplace. So here, I feel that we are very well positioned. Also, we have a very good relationship with PO. It's not that PO, Plastic Omnium is a company not new to us. We did have a JV with them many years ago in India. So they are known to us. And we have a very good relationship with them. So going forward, I think India is a market, they do recognize is our market, and they're going to support this, I mean, in the coming years.

Just to get it right, you said that India four-wheel lighting currently on INR 400 crores to INR 500 crores sales.

The 4-wheeler lighting is currently probably last year probably was around INR 400 crores, INR 350 crores, INR 400 crores, which is going to INR 500 crore, INR 550 crores in the coming year, the 4-wheeler lighting in India.

The two-wheelers, this is part of...

Yes. Two-wheeler is separate.

Okay. And like you said, the Plastic Omnium will support India lighting. The same is not true for China? China, you have to...

China is the biggest market. So obviously, I mean, nobody is going to leave China. India is relatively a smaller market today when it comes to four-wheeler lighting, I mean, four-wheelers. China is the biggest market. So there will be no noncompete there. We have a technology transfer agreement in place. But there as we move forward, we'll have to see about the future of our Chinese lighting business, what we have to do. Yes, it is a profitable kind of region, the biggest region. We would like to play there, but then we have a technology transfer agreement in place also for a couple of years there. So in between, we have to find some other solutions also going forward, what do we do there with this business going forward. We would like to be there, but that's something we still have to contemplate and we will decide on the way forward.

The next question is from the line of Arjun from Kotak.

Just a couple of questions. The first one, the escrow of EUR 35 million, are there specific deliverables from our side in terms of working capital, et cetera?

Srini, maybe you can say about the reps and warrants and the usual stuff. Yes, you can.

Yes, yes. It's mainly related to the reps and warranty, which are part of the SPA. And this is standard in any agreement, right, in terms of, so typically, 10% to 15% of the equity value is kind of retained in escrow for reps and warranty, which is what kind of we have agreed basically on the lower side. And this will be released over 2 to 3-year period depending on how things progress.

So I think every year, you will see a release from the EUR 35 million, could be about EUR 10 million to EUR 15 million. So that's the way it works, and that's the understanding we have reached. This would anyway be there in any kind of a transaction of this kind.

Sure. So if I see Slide #6, essentially, that's without this EUR 35 million, right?

That is correct.

Right. Sure. Sir, the second question is in Romania and Poland, we had set up SMT lines of 50-50 JV. Could you help us with what's the capital deployed out there? We haven't quite seen output from that. So when do we expect output from that? And what's our view in terms of longer term for that unit given that VLS have been sold out?

Are you talking about the Romania electronics plant, the new plant we have set up?

Perfect.

Yes. So that plant is a plant we have set up just about 1 year, 1.5 years ago. And this plant has been set up for catering to 3 SMT lines. The investments in, our total investment there would be because the building is on lease, probably would be around EUR 7 million or EUR 8 million, about EUR 8 million the investment there. So it is now, we have already started. One line is running fully. The second line is running partially. Third line has just come in. So in the coming year, we're expecting a revenue of between EUR 35 million, about EUR 35 million, EUR 37 million in the coming year. So now you will see that we are able to reach kind of almost a full potential. So from the 3 SMT lines, and these are all for lighting PCBAs, which we are selling to VLS. So these are all for, let's put a backward integration for, so instead of going to all the outside EMSes. So this will be our own like internal electronics facility. But now, of course, with the sale, there is a kind of an agreement in place, a supply agreement in place with PO that we will be catering from these 3 SMT lines, and this will be anywhere between EUR 35 million to EUR 40 million of revenue, which we're getting year-on-year. Now going forward, obviously, we will be catering also not only for, we'll be looking for other opportunities other than for VLS. There are other also lighting players where we can supply PCBAs. That will be one thing. And then, of course, like I said, we'll be looking at also supply of our light-controlled units, light engines, in the future also camera systems. So those also will be produced partially here and partially probably in India. Could be also partially in China. So that's something is what we are strategizing for the way forward. But I think that this is something of a very good business model. It's a high ROC and a good margin business. Here, I mean, as you can see, the about 7 billion to 8 billion, and you are able to get a kind of a 5x asset turn to answer the earlier question. So it's a good business. It's a good profitable business, and this is something we'll definitely focus on, on the high-end electronics side.

Sir, just to correct me if I'm wrong, we had a 70-30 joint venture with the partner in this. Is the ratio correct?

No, no. No, we have no partner. This is 100% it belongs to Varroc now. We let go of the partnership a year before last. So we separated out because at that time, we just felt that we couldn't share the manufacturing IP of such kind of products with a partner. So then we discuss with them and then we became 100% owned about 1.5 years back.

[Operator Instructions] The next question is from the line of Arvind Sharma from Citi.

Sir, this is just regarding some clarification on the reporting format. So as per your presentation, the total decline in revenue would be around INR 32 billion. Is that understanding correct?

When you say decline, you mean the revenue attributable to the divested operations, right?

Exactly, sir. So that INR 32 billion, right?

Yes. That is for Q1 and Q2. Yes. Correct. Q2 and Q3, I mean, Q2 and Q3.

Q2 and Q3, correct. Sir, if you look at your presentation for the third quarter, which you did last year, December ending, the total various revenue for the 2 quarters would have been somewhere around INR 36 billion, INR [ 17 million and INR 18 million ]. So that INR 4 [ billion ] of revenue remains in -- probably in the past that you are not divesting. Just want to know that once you start reporting under the new structure, this INR 4 [ billion ] would still come under our entity called VLS? Or how would you account for that? Sir, I know it's a very reporting-focus question, but just to understand better that going forward, where will this INR 4 billion be attributed to?

Yes. So first of all, going forward, we will have to relook at the reporting in terms of how we split the businesses because, traditionally, like you know, we have been sitting with VLS, India and others, right? So now going forward, obviously, we have the two-wheeler lighting business, which stays with us. We have also the four-wheeler lighting business in India and China. And then we have -- I must -- and then we have the [indiscernible]. So we'd like to reshuffle a little bit, I would say, in terms of how we report. But yes, the amount, which is not divested, will be still part of the global lighting business. That's how it should show up. But probably we will -- can provide more clarity in the Q4 reporting.

And sir, this INR 4 billion for the -- primarily for Poland and Romania families.

Italy, Romania, Vietnam and Poland, yes.

All right, sir. That's great. Sir, second question -- sorry, I missed that. The breakup that you provided for the EUR 600 million. I could give that tax of 15 20, escrow of 35. What was the debt at VLS, anything that is a part of this JV? I missed that number, sir.

It's about, all put together, including the Netherlands level, the holding company level will be around [indiscernible].

[indiscernible] All right.

The next question is from the line of Ronak Sarda from Systematix.

Firstly, congratulations on the deal. Srini, a couple of clarifications just on the numbers part. So firstly, on this EUR 600 million total deal, you said EUR 270 million is the borrowings. The working capital adjustment I could understand, what does it pertain to? And can you quantify it?

Yes. The working capital adjustments and some other adjustments related to the bridge is mainly related to a comparison of actual working level to a normal working capital kind of comparison and adjustment. So obviously, now that because of the semiconductor issues and the COVID, et cetera, the business is not operating at a normal level or a normal operating cycle. So there has an impact on different elements of the working capital like inventory and payables and so on. So the adjustment relates to a normal level of how the business will work in a normal scenario vis-a-vis the current level. So those are -- the adjustments primarily pertain to that.

Sure. Sure. Got it. Got it. And just a clarification on the table provided on Slide #6. When we say post data -- post divestment, pro forma financials. So the standalone EBITDA, which you have given in, let's say, Q3 numbers of what we have for YTD, and this INR 208 crores EBITDA. So the balance negative contribution would be from the 2, 3 businesses left, right, the China business, the Romania business? That's the way, right? This includes China as well?

Yes. China, we don't consolidate at EBITDA level because it's the JV [indiscernible].

But at the past [indiscernible]

Yes, that level is there. But mainly at [ IMS ] business, [ forging ] business we have based in Italy is one, which is has a negative EBITDA plus PAT because of the overall business situation [indiscernible]. And the other operations like electronic operation, two-wheeler lighting also have been impacted to some extent or other because of the automotive demand situation. So [indiscernible] currently performing below par. So if you look at India, stand-alone, would be the EBITDA is in the region of 10% to 11%.

10% to 11%, yes.

Yes. The rest is all contributed by the overseas. But I think that -- yes. That also should improve with overall industry outlook improving [indiscernible].

Great. Great. And a couple of questions on the business side for Tarang and Arjun. Sir, on the electronics side, we have seen a lot of the business on the power electronics, the motor and controller business coming to a lot of Indian names. So if you can just help me understand how do you see the supply chain ecosystem developing, especially on the electric 2- and 3-wheelers. And how do you see the market shares for various players like you and the others who are competing for this business? Because traditionally, we have seen a component player has, let's say, at least 30% to 50% market share when the volumes scale up. How do you see the overall consolidation happening here in the power electronics and the motor controller space?

Arjun, do you want to answer?

Yes. Sure, sure, sure. So I think last thing in a lot of ways, the product is still continuing. If I talk about where we stand to be, I think the biggest topic today is around supply chain.

Sir, sorry to interrupt, but your voice is a bit muffled.

Okay. So let me try again. So I think if you look at where we [indiscernible] I think the biggest topic -- is it better now?

Yes.

Yes, sir.

Yes. So I think if you look at where we stand today, I think the biggest topic is essentially semiconductor supply. And I think that is really what in a lot of ways has been constraining volumes across the board. I think as we look forward, I think that it is a situation that kind of begins to resolve itself with the capacity increase also that are coming in place really all over the world. If we look, let's say, even further forward in terms of really what market share could look like in 3 years' time, in 5 years' time, I think honestly, I would say it's not making the most easy to kind of [ produce ]. But if I think about where we stand today, I think we are very, very confident in terms of what is the quality and the reliability of the product that we have, what is really the functionality and use case that it really provides for the OEMs and really also from a comprehensive operational capability and [indiscernible] in terms of the amount of localization that is already driven where it's in terms of the capability that we've already built within the organization. So as we've taken the first program through to, let's say, large production, I think it places us really well, right? So if I put it differently, I think we are totally localized. The manufacturing is totally localized. Of course, [indiscernible], et cetera, we import. But even over there, right, we enjoy a very significant scale advantage versus really most of competition. So I think if I put those 2 together, there will be an ability for us to be fast through the market. As customer needs -- keep evolving and as customers -- as we see volume expansion, we will look to, let's say, explore with other sources as well. I think we are very, very well placed to attack the communities [indiscernible]. I hope that makes sense.

Okay. Got it. And the other way to, let's say -- I mean on the Slide #8, you have highlighted the number of products on the electronic side. So let's say from product #1 to 5, do we have an anti customer? Or are these products fully under mass production today? Or are they still under development and maybe they'll come into production in the next 1 to 2 years? Any color on that?

Every product you see there is in mass production.

Okay.

Now of course, right, when we say mass production, volumes continue to mature. So I would definitely not say we have made millions of them already. But obviously, the market itself is [indiscernible]. But yes, we're in mass production. We understand our OEMs plan to scale. We will scale along with them. And we continue to look out for opportunities. And because of the localization that we have achieved, I think our ability to be faster to the market, I mean, definitely continue very strong. And I think that is what we really count on to win incremental customer as well also.

The next question is from the line of Sonal Gupta from L&T Mutual Fund.

I just want to understand what is the size of this global two-wheeler business and what is the profitability. If you can give some rough idea.

So presently, the global -- two-wheeler -- I mean when I talk about global means, and I'm not talking about India here. India, obviously, is a more profitable market. So it's a good double-digit, anywhere between 12% to 15% on the lighting side, especially the LED lighting. When it comes to our business abroad, which is more like Italy and Vietnam and Romania lighting, there, I would say, it's more like a high-single-digit, at about 9%. But here also, the fact of the matter is that here, we have a lot of underutilized capacities. And I think going forward, there'll be a much larger focus abroad on the two-wheeler lighting bit because there are certain OEMs we are still not dealing with. And other than two-wheeler lighting, these two-wheeler lighting plants also, we want to look at some other off-road and non-auto applications, which may not be mass volume. There may be a lower volume, but highly profitable. So those are the things we will look at of how do we -- how are we able to achieve a good double-digit EBIT margin or EBIT margin as we kind of move forward in this lighting business. Today, it's about probably around EUR 45 million in size abroad. That's the size of the two-wheeler lighting business, abroad, I'd say.

Right. So I mean, just going back to the previous question that Ronak had asked that overall, when you see 7% [indiscernible] margins, and there are some other loss -- I mean, low margin pieces. So just trying to understand then what is the drag here versus India. I mean India, obviously, is making 10%, 11%. So what is pulling you -- and you're saying this two-wheeler lighting is also 9%. So what is pulling you down?

So what is, I think, which is pulling us down today, what is going to be in our future perimeter, so one is our forgings business in Italy. That's something, which is more for the off-road, for the oil and gas business. And that has kind of seen quite a bit of a drag for the last couple of years. And that is also from a revenue angle, which is in our perimeter, it is quite large. And that has not been making a positive EBITDA. So that has been -- I would say that's in the region of at least about INR 300 crores. So that has been one of the drags, I would say, which is the perimeter, but that is something we're looking at improving in the next financial year to at least a level of about 5% EBITDA or something. So it should not be as big a drag as it is today. Other than that, of course, we see -- the other thing is, of course, our Romania plant, the electronics plant, which obviously not seen any revenues -- anything revenues in FY '22, and which will see good revenues in FY '23. So that won't be a drag anymore in the coming years. So yes, I mean, what we have shown here as December end maybe 7%, of course, Q4 would be better. But I'm saying, definitely, whatever in our perimeter going forward would be definitely, I mean, a double-digit EBITDA.

Got it. So just clarifying, INR 300 crores was the revenue of your Italian forging business, is it?

Yes, roughly around that much. Yes.

Right. Okay.

Just for the full financial year. I don't know about the December end and all that. I'm talking about full financial year kind of a revenue around, and we're not making any EBITDA over there.

The next question is from the line of Basudeb Banerjee from ICICI Securities.

Just wanted to understand like if I look at your INR 1,200 crore India quarterly revenue roughly annualized to INR 5,000 crores, you said out of that roughly INR 500 crores is four-wheeler lighting, am I right, sir?

No, no, no. That is not a part of that revenue. That is additional. See, we normally [ plug ] that India four-wheel lighting into our VLS business.

The VLS Chennai plant, that is included in that [indiscernible]

No. So we have 2 plants for four-wheeler lighting. [ Chakan ], which is a much bigger plant, which is [ Pune ]. [ Chakan ] is in [ Pune ]. And then you have the Chennai plant in [ Oragadam ]. So these 2 plants come under the VLS business. They don't get [ club ]. When we -- when you're talking about INR [ 4,800 ] -- whatever that level of revenue, that does not include the -- these 2 -- I mean, our four-wheeler lighting business for these 2 plants, which is that INR 500 crores I was talking about next year.

So now that INR 500 crore will be in the [indiscernible] INR [ 250 ] revenue.

Yes.

And that is beyond the INR 5,000 crore India [indiscernible]?

Correct. Correct.

And similar to VLS being EBITDA negative, what kind of profitability we should look at that INR 500 crore in four-wheeler lighting?

It will be about 9%, 10% EBITDA.

9%, 10% EBITDA. So on a broader basis, if I look at for the Q2 and Q3, your INR 3,000 crore controller business minus profit INR 500 crores. So INR 500 crore residual of the global business, which are continuing with the entity. And out of which, you explain INR 150 crore will be the loss-making Italy forging and it is largely the two-wheeler global lighting. Am I right, sir?

Yes. So -- yes, yes. So basically -- so broad, you can say, in the coming year, just to make it simple, we can look at about INR 1,000 crores -- I'm not calling China here. Just our EMS business, which is a forging business, and our two-wheeler lighting electronics business would be close to INR 1,000 crores. And -- okay. There, the EBITDA, though it will be better for electronics and lighting, it will be lower when it comes on that INR 300 crores, INR 350 crores of revenue of -- out of INR 1,000 crores next year. I'm just assessing approximately. And so the -- so overall, it may not be this thing a double-digit EBITDA overall for the foreign business. But in India, we definitely have a much better EBITDA on the -- and which is the larger piece, which will be between INR 5,800 crores to INR 6,000 crores, including the four-wheeler lighting, the INR 500 crores. That will be the -- so overall, close to maybe INR 6,800 crores to INR 7,000 crores is what we're going to be looking for FY '23, which is in our perimeter. Of course, until we close that transaction up to August end or whatever, obviously, we are also going to be inheriting the results of the Americas and Europe of VLS.

Sure, sure. Sir, 2 more questions, sir. One is, how much debt is businesses will be changing? Because the EV for the core VLS deal, what you said, and rest India debt, what you mentioned, how much will be debt for Italy forging or the global two-wheeler, et cetera, or the India two-wheeler, which will be now coming into the [indiscernible] entity?

[indiscernible] overall. I'm just saying whatever we show as the net debt because whatever we say the net debt is about whatever INR 2,500 crores, you can add INR 200 crores, INR 250 crores, a gross debt of INR 2,700 crores, INR 2,800 is across, but that includes everything. That is including all entities.

As [indiscernible] including everything net of some 200 plus/minus will be net cash.

So you will be -- I mean keeping the escrow account and all that post that, I think it is safely to assume about a couple of hundred crores.

Sure, sure. And last question, sir, like if still one can see some overhanging fruits for divestment in the residual business, one [indiscernible] forging, one is the China JV state and third is India metallic business with EVs and 2-wheelers also will be coming under the threat down the line. Any comments on these 3 areas?

See, definitely, you're right. See, today the India, let me answer simple. The India metallic business is a core business. Parts of it are noncore, which we are looking at certain solutions going forward, but that will be not -- that may be a certain percentage only of the metallic business. So metallic business, definitely, we are looking at going forward the EV space, both two- and four-wheeler. And we are -- and of course, we are going to be focusing a lot more on exports as we go forward metallic business. But yes, I mean, I'm not -- but for the metallic business in India will not be a high-growth business. The high-growth business will be our other divisions of plastics and electrical, electronics. That is going to be the high growth for us as we move forward. When it comes to the [ EMS ] business, also, as we move forward, we have to find a better solution here. That is something also, which is there in our minds that what we have to do here because, obviously, it is a little bit of a -- it is a noncore business for us at the moment. When it comes to China, China is very much a, I mean, a good business for us, but we have to see how we can manage. We'll have to find some solutions. We have time of 2 years to find a solution. If you can find a good solution for China, we would like to run that business because I think that market is very good. We can compete in a very profitable market. And that market is not only for lighting. We also want to do electronics, higher electronics in that market. And there's a very good scope there. So we'll have to find a solution. So I would not be too happy to give away China, to be honest with you. But yes, the other thing, which you have mentioned is something we -- it is in our mind that we have to look at solutions over there.

Sure, sir. So we should hope for full balance sheet, P&L of the residual entity with Q4 results?

Yes.

Only after the deal?

No, no. Can you just repeat it? I'm sorry.

Shall we expect the balance sheet, P&L, cash flow pro forma for this new entity after Q4 results or only after the deal gets formally done?

No, no. I think after the deal -- I mean we can give a separate idea or something. But we -- after the deal because we have to do whatever necessary at the moment.

The next question is from the line of Rishi Vora from Kotak Securities.

Sir, can you hear me?

Yes.

Yes. Congratulations on the deal. A few questions on India business. So sir, can you tell me what percentage of your revenues of India business comes from, let's say, engine-related products in the two-wheeler segment?

I think this is something now we'll have to really drive. I would say that it is -- I would say the majority will be engine-agnostic, the majority. But yes, I would say -- if you were to ask me, I would say at least probably 30% -- about 30% to 35% would be engine-related.

Of India business.

Of the India business.

All right. Understood. And sir, if I look at -- let's just stand-alone -- we had a stand-alone performance in, let's say, 2019, '20 because that was the year when two-wheeler [indiscernible] was at its peak. And if I look at even the post-tax ROCE of that business between that time, it was closer to 9%, 10%. So now you are guiding for greater than 20% ROCE. So what will lead to such an expansion in your return ratios?

So see, I am talking about post transaction now.

Sir, I'm talking only about stand-alone business.

See, post transaction, when it comes to India, which -- not counting China, India will be the large -- will be about 85% -- 80%, 85% of revenues will come from India. India, for us -- our margins are improving. The numerator is improving, and significantly, I would say. And also, our -- the capital employed is also improving, I would say, because on the debt side and other things, we are self-financing whatever we are -- even for high-growth levels going forward, we don't define that much of CapEx. So that is driving the ROC over 20 in India comfortably. As we move forward at our FY '23 onwards, and when it comes through the business in abroad, when it comes to electronics, for example, Romania electronics, there, ROC is, I mean, very high. It's in excess of probably 30 or something, like that. And our two-wheeler lighting business, whether it's in Vietnam or in Italy, there, we have not seen much of an investment, frankly. Also, the EBITDA may be lower, but the capital employed is also very less. So overall, to expect a 20% plus ROC, in this perimeter -- I'm not counting China here, I think it's -- I don't think it's something, which is -- it is quite easy for us to assume that going forward.

So sir, what would be currently your capacity utilization for India business for the complete...

Where in -- you're talking about where exactly?

India. Like the overall India business.

India, I think, let's say -- I mean, today, I would say they're not counting the four-wheeler lighting business. We have capacity for INR 6,000 crores of revenue. If we don't have the semiconductor shortages and things like that, I think we can go to INR 6,000 crores, but that will not be achieved because they're still going to face chip shortage in the coming years. So we have to account for that. So I'm just saying the way it is without, I mean, some small investments here or there, we are capable of INR 6,000 crores, not counting that INR 500 crores for the four-wheeler lighting. That is what is there. Let's say we have done about, you can say, INR [ 700 ] or INR [ 1,400 ] crores in FY [ '20 ], that's roughly, like you said INR 1,200 crores -- INR 1,400 crores, but that is significantly less on a capacity utilization point of view. So we can do close to that INR 6,000 crores if things go -- if there is no chip shortage.

The next question is from the line of Ashutosh Tiwari from Equirus Securities.

I just want to understand this four-wheeler lighting business in India. It's part of the legal equity because I remember that our facility [indiscernible] lighting systems in India was merging to stand-alone in [ 2020 ] some time. So this is part of this entity -- is it part of stand-alone only or this is separate? [indiscernible] for this.

It's a part of [indiscernible] limited, the parent company.

This [indiscernible] is already covered in India's standalone business, right?

Yes. I mean it is a part of the entity, but we were only kind of showing it as a part of the VLS business, but it is in this entity only. It is a part of the parent company, but the management has been largely more driven from the global VLS side in the past.

When we are reporting segment-wise number, India business and VLS business, this was part of the India business or is a part of [indiscernible] business? And now you're reporting that we do on quarterly or the [indiscernible]?

Yes. We were showing the [indiscernible].

It is part of the business, yes.

This is not part of India business in the reporting.

Not in the past.

It's part of the business.

Okay, okay. And secondly, it was in the number that we have shown on Slide 6. Can we share the depreciation interest amount over there for 6 months, Q2, Q3, [indiscernible].

Yes. We can take it out and share with you separately. We don't have it readily. Yes.

Okay. And in the Romania JV, we are talking about that it can deliver EUR [ 35 ] million sales next year or maybe at peak, there were no revenue last year in '22?

There was a revenue. The revenue, I think, was quite low. I don't know how much it.

EUR 11 million.

It's about EUR 11 million of revenue in FY '22, and then it will reach its good potential in FY '23. But just to clarify, it's not a JV anymore. It's 100% owned by Varroc.

Yes, yes, yes. Yes, yes. Sorry for that. So EUR 11 million was the revenue number in the FY '22, and you were targeting EUR 35 million in FY '23.

Yes. EUR 35 million in FY '23.

And then it will deliver that high single-digit EBITDA margin.

Yes, yes, yes. Exactly.

And for this, we are back to -- like as we already have contracts with that after the sale that your Plastic Omnium will take from you?

Yes, yes. We have contracts, yes, in place, yes.

The next question is a follow-up from the Arvind Sharma from Citi.

Sorry for [indiscernible]. But as per your current slide, the pre-divestment EBITDA [indiscernible] [ INR 50 crore ] will be for the next third quarter. But if you see the presentation that you get in the third quarter, it's almost INR 76 crores, INR 72.2 crores EBITDA in third quarter and [indiscernible] in second quarter. Is there something that I'm missing here?

Srini?

Are you talking about the group EBITDA or the pre-divestment EBITDA?

Sir, I'm talking about the pre-divestment EBITDA that you have given, that is INR 50 crores in today's presentation versus the group EBITDA that you gave in the third quarter results.

Yes, yes. So until Q2 or even Q2 and Q3, both the quarter, you have to remember that the [indiscernible] system EBITDA was negative. So if you take those figures and adjust, then you should be able to come to the numbers. I think there are specific -- the thing maybe offline. You can participate with [indiscernible], and we can clarify the numbers.

Sure, sir. Will do that. And secondly, sir, just clarifying, sir, since you've given the data on the India business, which was reported under VLS. So is that what accounts for the difference between the divested entity and earlier the reported number? That is a fairly big part of the whole difference, right?

Yes. That does -- I mean there are 3 pieces in VLS, which are not divested. One is the India four-wheeler lighting; second is the two-wheeler lighting business, which in Italy, Romania and Vietnam, which are also a product VLS in our earlier reporting and even the electronics operation in Romania; and the last part is the results of the China JV, which are consolidated PAT level. So all these were part of VLS earlier, and these are not part of the divestment.

So the majority would be the India two-wheel lighting business, which are [indiscernible] around INR 400 crores.

Yes. India also, and even two-wheeler lighting is also a reasonable number.

Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to the management for closing comments. Over to you, sir.

So yes, thank you, everyone, for your questions. I hope we were able to clarify some of your questions or most of the questions satisfactorily. Of course, we are always available separately. If you have any more queries, we would be happy to answer them. All I just want to say is that yes, we are also very happy also with this transaction because -- but I think that going forward, we can now focus on our India business in a more effective way. We are in one of the fastest-growing automotive markets in the world, and I think we can leverage this opportunity with the kind of products we have around the EV, the BS-VI and other electronics, other than lightweighting, the plastic side where we're also growing very strongly. And other than that, globally, we can look at other power electronics also like -- I mean like our camera systems and other lighting assemblies. There's something we want to look at for two-wheeler lighting in a much stronger way moving forward two-wheeler lighting and also look at some of the other kind of segments like premium cards, which are smaller volume, high margins, also some off-road marine, other such kind of applications. So we're going to focus abroad on something, which is high ROC, high-margin kind of products as we move forward. What we're going to keep from a four-wheeler lighting side is definitely India. India is definitely going to be a big focus for growth with the kind of technology agreements in place, which we already have in understanding, a noncompete agreement. And when it comes to China, yes, going forward, in the short term, no issue for the next couple of years. But here, we have to find a solution how we're going to function because there's lighting and there is electronics. Electronics definitely, we want to have a play in China. It's a very important market. But lighting also, we want to be present, but we'll have to find a good strong solution going forward in the coming months. So this is what I want to say. I think our balance sheet now becomes extremely strong. When we closed the transaction, we are debt-free, which is a very big thing. And going forward, like I said, we can generate free cash flows. We don't have that much of CapEx requirements for a good double-digit growth. So I think Varroc, after seeing last couple of years of stress, I think we are in a -- we have been a strong place now. And I think now we should focus now to get stronger results for all our investors. And also everybody in our ecosystem, I think it can be a very strong effective profitable growth for all of us. Thank you.

Thank you. Ladies and gentlemen, on behalf of Varroc Engineering Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.