Varroc Engineering Limited (VARROC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q2 FY '24 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Basudeb Banerjee from ICICI Securities. Thank you, and over to you, sir.

Thanks, Neerav. Good evening, all participants. Thanks to Varroc Engineering management for giving us the opportunity to host the call. We have with us the senior management represented by Mr. Tarang Jain, Chairman and Managing Director of Varroc Engineering; Mr. Arjun Jain, Whole-time Director; Mr. Mahendra Kumar Karumanchi, CFO; and Mr. Bikash Dugar, Head, Investor Relations. So I'd like to hand over the call to Mr. Tarang Jain for his initial comments. Over to you, sir.

Yes. I'm Tarang Jain here. Good evening to everyone, and I thank ICICI Securities for hosting this call. To start with, the geopolitical situation in Europe and the Middle East has created uncertainty in the global business environment. The interest rates may come under pressure if inflation goes up further due to a spike in oil prices. Despite the uncertainties in the global markets, we see a resilient and a growing economy in India. The Indian economy has sustained its growth momentum in FY '24 so far. Though urban demand has already picked up well, we're expecting the rural demand will also pick up with the current festive season. The automobile production in India during quarter 2 FY '24 grew on a year-on-year basis for most of the segments. The passenger vehicles grew by 5.6%, 3-wheelers registered a strong growth of 19.16% and commercial vehicles grew by 8.8%. Only the two-wheeler segment has degrown by 1.5% as the early festive season helped Q2 during last year. Sequentially, that is quarter-on-quarter, we have seen growth in all the segments. The commercial vehicles have grown 7.9%, passenger vehicles have grown by 12.7%, three-wheelers by 33% and two-wheelers saw a growth of 13.6% on a quarter-on-quarter basis as Q1 is generally a sluggish quarter. In terms of operations in quarter 2 FY '24, we continued our journey of improving operational and financial performance. Our revenues from operations grew by 3% on a year-on-year basis to INR 18,868 million despite a weak growth in the overseas markets due to the holiday season in Europe. The reported PBT for the quarter was INR 739 million, which includes profit from a joint venture of INR 80.6 million. Our balance sheet has strengthened in half 1 of financial year '24 as we pulled ahead some of the debt reduction initiatives to Q2 and reduced our net debt significantly by over INR 2,714 million at a net debt-to-equity ratio to below 1x. Our debt servicing ability has also improved as net debt-to-EBITDA is now at 1.35x compared to over 2.13x at the start of the financial year. The annualized return on capital employed for the half 1 '24 is around 23%. We continued to win the trust of the customers as they are awarding us more business. This is reflected in the new order win. In half 1 of financial year '24, a new lifetime order wins is INR 36.0 million. In quarter 2 of FY '24, we have added 3 new customers for supplying components to the EV models. In the quarter, we also won business from 2 customers for supplying components related to the EV powertrain. These new orders will enable us to strengthen our presence in the EV component space. Our revenue from supplying to EV players in quarter 2 of FY '24 was approximately 4.4% of our overall revenues. Our effort to increase our technical capability was further enhanced in half 1 of FY '24 as we filed 9 patents in India and 1 overseas. As you might have noted from our submissions to stock exchanges, we've also signed agreements to procure power from renewable energy sources to the tune of over 36 megawatts. We see annually for a consumption in the states of Maharashtra, Karnataka and Tamil Nadu. We will continue to look for more such opportunities in the near future. We continue to enhance our engagement with OEMs and showcase our ability to deliver advanced technology solutions at affordable cost to them. We are also working on various other efforts like capacity utilization, prudent capital allocation and cost reduction across the board to make our business more robust. With this, now I will ask MK our group CFO, who will walk you through the presentation, which is already uploaded on our website and submitted to the stock exchanges also.

Thank you, Tarang. Good evening, everyone. This is Mahendra. So let me take you to the highlights slide in our presentation, which is Slide #2. As our Chairman explained, the year-over-year revenue growth was about 2.9%. Maybe this was partly moderated by the early Diwali, which we had in Q2 of last year. So the revenue closed at about INR 1,887 crores or $18,868 million. In terms of profitability, we are continuing the profitability journey. We are close to about 10% EBITDA or about 3.9% in terms of PBT. The absolute PBT was about INR 74 crores. Our balance sheet has been significantly strengthened. You may recollect that in our earlier discussions, I mentioned that in H2, we will be able to reduce that significantly. But this time, we actually could pull ahead most of that to Q2 itself, taking advantage of the higher revenue, so we could do more of factoring. And similarly, the higher realization or the realization from the sale of divestment last year, which were realized in the month of July, that also helped us. So with that, we would actually reduce debt by close to INR 300 crores compared to what it was 1 year ago. With this, the net debt-to-equity comes down to below 1 or 0.94 to be precise. Net debt-to-EBITDA is at 1.35. Business wins, of course, our Chairman touched upon already. In H1, if you see the total business won, it was like close to INR 36 billion. We also added 3 more new OEMs to the EV segment. And in terms of the EV revenue as a percentage of total, it's about 4.4%, which should actually grow based on the new orders, which we won recently. And like how we explained earlier, we are focusing more on cost reductions. And one of the areas is energy savings. Previously, we mentioned that we are actually tying up with a few firms to source more of renewable energy. So those things are in place now. There are still a few more things to come, but we are still working on them. Going to the next slide about the industry. The two-wheeler industry degrew by 1.5% year-over-year and by about -- it actually grew by 13.6% quarter-over-quarter. Passenger vehicle grew by 5.6% year-over-year, and sequentially, by about 12.7%. So we still need to see what kind of impact all these geopolitical developments will have on the economy and the industry going forward. But we are hoping that the festival season should help us to some extent in Q3 also. Going to the next slide, which is about the consolidated financials for Q2. So like how we explained earlier, 3.9% was the PBT in Q2, which is up by 2.2% compared to same time last year. And you might have noticed that the interest cost actually went up compared to the previous quarter. That's partly because we prepaid some of the high-cost loans during Q2 that should actually help us in the future, plus the higher factoring discounting also is something which we actually consciously did it to repay the debt. So those are the main reasons. Going forward, we are hoping that this interest cost should come down in the coming quarters. In the next slide, we give the overall H1 picture, like how we explained earlier, we are always aiming for a faster PBT growth compared to revenue growth. So you see that H1 to H1, if you really see, the revenue grew by 6.4%, but EBITDA grew by 21% and then PBT was almost like 3.5x. So we are hoping to continue this kind of improvement journey going forward with a heavy focus on growth as well as cost reductions. Then, in the next slide, we give the details of net debt. We are close to INR 1,000 crores now in terms of net debt as of 30 September, INR 1,006 crores to be precise. So the net debt-to-equity ended up at 0.94% and net debt-to-EBITDA at 1.37%. The growth was 23%. And coming to the revenue breakdown, more or less similar to what we showed earlier, the overall two- and three-wheeler revenue comes to about 71% of the total and about 15% of revenue outside India compared to 85% within India. And the outside India revenue was also partly impacted because of the holiday season in Europe and other markets. In terms of the order win, about INR 36 billion, for the lifetime business wins in H1. And interestingly, you may see that nearly 1/3 of that actually is in the EV space now, which is an encouraging trend for us. So that's it from our side. We are now happy to take questions.

[Operator Instructions] First question is from the line of Aashin from Equirus.

Sir, my first question is regarding margins. So we have -- so margins on a quarter-on-quarter basis has remained flat at 9.9%. So could you help us extend how do we plan to go to the 11%, 12% margins going forward? And what sort of margin do we expect for the next 2 to 3 years?

Yes. So thanks for your question. Mahendra here. See, first of all, we don't give this kind of guidance going forward, but I'll broadly tell the direction which we're planning to take. Definitely, revenue growth plays a role and the related operating leverage should actually help us to a large extent because in most of our businesses, our capacity utilization is only around 60%, 65% levels. So without incurring any extra costs or additional investment, we should be able to scale up our revenues in most of the areas. So the operating leverage should help us. On top of that, we are also working on various actions towards improving contribution margin. In the next couple of years, we have certain targets internally we are working on. Energy is one of those areas which I mentioned earlier in my presentation. But there are also certain other areas that we are working on. Plus, a continued focus on fixed cost control is another area. We just want to ensure that fixed cost doesn't grow in line with the revenue or our internal target is to ensure that it grows at a much lower pace than the revenue growth. So that should also help us in terms of bigger improvement in the overall margins. And going forward, we'll be monitoring the businesses for performance based on PBT, not so much on EBITDA. So when it comes to PBT improvement, the interest reduction -- interest cost reduction will also help us because that is already close to INR 1,000 crores. It should come down further in the coming year or so. So that should enable us to reduce the interest burden. Plus, the CapEx control also is going to help us in terms of reducing the overall depreciation burden in the coming quarters. So with all this, we are expecting that the PBT level, there should be some reasonable to good improvement in the coming quarters or coming years.

And sir, you said that we've added a few new customers on the EV side. Could you please highlight what sort of business wins have been done and which are the key product areas where we are seeing good results?

So within the EV product lines that we have, our focus is really on the EV powertrain, which is the motor and the motor controller. And also on our connectivity devices. And the businesses we've won are around the powertrain.

Okay. And sir, about the customers, which you've added.

So we can't reveal the exact names of the customers, but one is a domestic start-up who will start -- who has not yet started production, but we expect to start soon with our powertrain. And the other is an export customer on much larger capacity powertrain.

And sir, lastly, on the profitability on the EV product side. So given the fact that now FAME 2 subsidy has been reduced, so do we see any impact of that on a profitability given the fact that OEM might want to pass on that to the vendor?

I think our OEMs are very mature buyers of products, especially from us. So -- I mean, again, I can't comment on OEM strategy. They also have replacement benefits in place instead of a FAME tool like a PLI for example. But in my -- in our view, at least, our pricing with respect to EV product line is sustainable, and we expect that, that trend will continue.

Next question is from the line of Aakash Gopani from Investec.

Taking forward that EV question. Can you highlight what would be the time line when we can see this revenues flow into our consol operation? And any tentative time line pertaining to when can we see this revenues reach peak in our EV revenues?

Okay. So I think the first thing to say is in terms of reaching peak, I think it's much harder to comment, right? I think -- because I think it depends -- there's a lot of variables around OEMs reaching their peak needs. From the standpoint of by when we could expect to start seeing revenues coming in, I would say, within 12 months, right? We've always been fairly consistent in terms of saying that our products are ready, our platforms are ready, our manufacturing lines are ready, which means we should be able to ramp up very quickly. And I think that's why OEMs like us. Let's say, within 12 months, we would expect to start seeing revenue.

Okay. And Arjun, would it be right to assume that the ASP for this product would be somewhere around INR 16,000?

I cannot comment on specific segments, but yes, I mean, it will be significant. And the larger the powertrain, the higher the price point, of course.

Got it. Okay. Coming to the non-EV business side, over there also, we have seen a sharp increase in our order book. So any significant order win on breakthrough in OEM, which the company has been able to do over here? Or any increase in share of business with particular OEM we are seeing over here?

I mean, today, we are present really across the entire two-wheeler segment, and we're present with multiple customers even in the passenger car and the commercial vehicle segment, right? So of course, we report EV separately in terms of business wins for multiple different reasons. But I think the rest, I would say, is really just [indiscernible]. We keep driving penetration, we keep driving improvement. Certain -- within that, if I had to call out certain technology products even for an IC engine, we would have an integrated starter generator, for example. So I think that would maybe be a highlight. But most of it is just whatever normal sales growth and normal sales wins in the capacity that we have available already.

Okay. Got it. And lastly, any comment on the lighting revenues decline Q-o-Q, which we have seen? Any particular reason? Is it pertaining to European operations?

Yes. So like we said earlier, Europe has shut down in this quarter. So that would definitely be a primary driver. The other thing also is that I would say with India, I think we've been supplying it peak capacities for a lot of the OEMs. So we'll have a little bit here and there, et cetera. But I would not say that, that is a major contributor.

[Operator Instructions] Next question is from the line of [ Vishal ] from Svan Investments.

Sir, I have a question regarding the top line growth seems to be muted over last few quarters, if you see. So what are the measures you are taking to push the growth? Any guidance you can share in terms of the topline growth which you can give? And you were always -- you're focusing on the content per vehicle increase. So any light you can provide, road map in that terms going forward?

Of course, as we said before, we generally don't provide guidance for the future. From a top line growth perspective, I think we are -- we do expect generally the cycle for most customers is that SOPs generally take place post Diwali so that we have a fair amount of launches that will take place post Diwali. But really, I think from a top line growth perspective in the spaces that we want to be in, we have a healthy order book and revenues will come.

Okay. Okay. So perhaps this is why if we see your vehicle-wise growth which you have -- numbers which you have reported, two-wheeler business has grown by 4%, whereas overall volume in two-wheelers have grown by 15% on a Q-on-Q basis. So the growth in the two- and three-wheeler segment have remained muted. This is because maybe some outgoing platforms and we are awaiting for the new platforms to come in and that may kick in the growth. Am I understanding right in that regard?

I don't think we've had any outgoing platforms per se, but of course, the largest -- our largest customer has degrown to a certain extent, right, quarter-over-quarter, which definitely impacts us. But I think if we think about it again from the perspective of our content per vehicle and where we are seeing volumes grow in the market, we do have significant content per vehicle, right, which is something that we'll keep panning out over time. Further, again, right, we said -- like we stated from an overall growth and revenue standpoint, we do have revenue that comes from Europe, both in two-wheeler as well as from IMES, for example, which is heavy forging, which, yes, in this quarter, will -- there is a summer holiday, which impacts sales to a certain extent. But yes, there is no -- I mean, to put it differently, there is no platform that have gone out perse which has impacted us.

Okay. Okay. Sir, any guidance you can give in terms of your CapEx spend? So for the half year, you have spent around INR 116-odd crores. What will be the full year CapEx for this financial year?

Yes. Mahendra here. We may spend maybe another INR 100 crores or below INR 100 crores in the second half.

Next question is from the line of Shubham Jain from NV Alpha Fund.

Sir, my question is regarding the comments made by Mr. Kumar on the decreasing interest cost and increasing our PBT margins. Can you please tell me on indicatively, as of now, we are paying INR 200 crores interest cost per annum. What should the interest cost start looking at going on incrementally over the next few quarters?

Yes. So we don't want to give exact number, but like what I explained earlier, we have now close to INR 1,000 crores of debt left now, in terms of net debt,, plus we typically do discounting of receivables of about INR 500 crores at any point in time. So based on this, we can broadly work out what should be the future costs. There could be some working capital swings in Q3. We are working on various initiatives. So there may be some temporary disturbance during Q3. But going forward, once we reach end of the year, I think it should stabilize and it should come down based on the levels which I indicated just now.

Sir, so at what level of net debt-to-EBITDA,, today it's at approximately 1x, at what level of net debt-to-EBITDA would you be comfortable to stop doing this factoring and incurring this excess interest cost?

Yes. So we target to bring it to about 0.5x that -- what we are aiming for. But it may take some time. It may not happen immediately. It will take maybe a year or more to actually to get to that level.

Okay. And what is the factoring cost -- interest of INR 500 crores, you said is factoring. So what is the cost on that approximately?

It's cheaper than the debt cost. It's anywhere between 8% to 8.3% per annum.

8% to 8.3% per annum. So this is off balance sheet. So you paid 10% to 12% on INR 1,000 crores and you pay 8% on INR 500 crores. Is that right?

The debt interest is around 9% now. So we also accrued some interest. The interest cost on loans is about 9% now. We recently renegotiated some of the rates with the lenders based on the inflows which we got recently. So the average cost of...

And this is visible in the next quarter or so?

Yes, it should be visible going forward. Like what I said in Q3, there are so many things which are moving around. You may not see a big swing or big reduction in Q3. But going forward, in the medium to long term, you should be able to see this kind of reduction.

Okay. And second question from my side, sir, we see that your depreciation as a percentage to gross block is slightly on the higher side as compared to other auto ancillary companies, which again suppresses the PBT margins. Any comment on that? Have you studied this as compared to other or auto ancillary companies?

Yes. So it depends upon the kind of, what we call, the mix of assets we have also. If we are talking about this particular quarter, we also took some kind of accelerated depreciation on some of the overseas assets just to keep the books neat and clean. So that impact may be there, maybe until end of this year. And thereafter, I think once we actually control the CapEx spending in relation to the depreciation that we are incurring, slowly, I think the depreciation burden should come down in the coming quarters and years.

[Operator Instructions] Next question is from the line of [ Darshil ] from Crown Capital.

So some of my questions have been answered. So just one broad-based question. Sir, in terms of macro environment, what kind of ceilings are we getting? Are we seeing that there is now going to be accelerated growth? Or how do we see the environment as? And also in terms of our seasonality, so would it be fair to say due to Diwali, our H2 will be higher in terms than H1? Will that be a fair assumption, sir?

See, I think for us, we definitely feel that a half 2 revenues will be more than the half 1. Largely, I think, see, what we see that the Indian market, we still see a growth in the Indian market compared to the markets globally -- the other markets globally, where the sales growth is quite subdued even now. And today, I think we are also hoping that in a two-wheeler entry level also see some traction in this season. So overall, I think we still remain bullish on the growth here. And I think there's also the elections which is coming up and we do see that consumption should be there -- consumption should go up also because of the forthcoming elections. Yes, there could be maybe some impact depending on this new war which has started on the oil prices, which could be inflationary in nature for India also. But I think, overall, I think, we remain optimistic and bullish where the Indian market is concerned, which gives us today more than 80% of our revenues. So we do see a better second half compared to, I mean, the half 1 from the point of view of our revenues growth.

Okay. So would it be fair to say it would be around 55-45 split in terms of H1 -- H2-H1? Or it could be even higher in terms -- like in terms of pure seasonality?

I can just say it will be better. We don't know, but it will definitely be better.

Okay. Okay, sir. And sir, just one question in terms of, I agree, we cannot give guidance, but in terms of qualitatively, do we see that -- are we -- in terms of our revenue, are we stuck in a band of revenue and that will get accelerated as the market improves? Or any statement, maybe not an exact guidance per se, but then do we see that, okay, we will be able to cross the INR 1,800 crores, INR 2,000 crores revenue that is possible over the next year in the quarters coming by. Again, not a firm guidance, but maybe like are we stuck in a range which is finally now we'll be able to open up and come swinging? Will that be a fair way to look at?

I would say, in fact, explicitly not, right? I think in many ways, right? I mean, if you think about the last few years, our focus has always been two-wheeler, three-wheeler and it has not been an industry that has been growing, but we have still been able to drive significant growth as a result of very content-focused strategy, right? And I think that is something that continues to play out, right? So as EV increases in sales and volumes and especially as our customers ramp up as stories around premiumization, urbanization, et cetera, also continue to pan out, I think we will only see growth. We will -- I think we're one of the first to really benefit from the growth in revenue that takes place. So put simply, I don't think we're stuck in a band. In fact, I think we are in a very good place where -- I mean we're in a very good place, right, if we compare half to half, H1 of last year and H1 of this year, the industry has degrown for two-wheelers, the two-wheeler industry. But as a matter of fact, we have still grown by 6.5%.

Correct, correct. In terms of our growth, we don't see any risk or challenge, right, except for maybe some war-like situation. Other than that, we don't really see any kind of risk, right?

No.

[Operator Instructions] Next question is from the line of Sachin Kasera from Svan Investments.

Congrats on a good set of numbers. Just one question. The strong order wins that we have reported, so when should we start to see the benefit of that, more of H2 of the current financial or it will be more of FY '25 phenomena?

This will be FY '25.

And more from the second half.

And it will be the second half.

Second half of FY '25.

FY '25.

Okay. So 12 months from now. That's when we start to see the real benefit of this, strong order win that we had recently.

Yes, which we have just reported.

Next question is from the line of Prateek Poddar from Nippon India Asset Management.

So a couple of questions. One is maybe if you could just touch upon when you see Q-o-Q growth as reported in your presentation also, across vehicle classes, it's quite strong, right? While Y-o-Y you've outperformed. On a Q-o-Q basis, the revenue growth looks quite muted relative to the automotive production group of India on the two-wheeler side, three-wheeler PVCBs. And in fact, even the largest customer on a Q-o-Q basis has grown. So I'm not able to reconcile as to why have these not grown at 4% this quarter.

Yes. So the largest customer has only grown about 2.7% Q-on-Q and have [indiscernible]. So the industry -- two-wheeler industry has grown by 13.6%, but the largest customer two-wheeler volume, their production number has only grown by 2.6%. So as earlier stated by Tarang sir and MK and Arjun, it's better to look at H1, and H1, we have grown by 6.5%, whereas the industry has only -- two-wheeler industry has degrown by 0.2%. And there are new businesses whose SOPs are going to start in the second half of this financial year. And as we stated earlier, we remain confident that we'll do better than the industry growth.

Okay. Okay. And the other is when I look at your employee cost, very sharp accretion. In fact, it is something which has detracted your operating leverage on a Y-o-Y basis as well as on a Q-o-Q basis. Just curious why has that happened.

Yes, Prateek. So a couple of things happened. One, we had some onetime good news in Q1. That's one of the reasons. The second reason is we also -- we are trying to change the composition of the workforce. We recruited some GETs and also some workforce at the entry level, which would actually give us benefit going forward in the long run. So that's another reason.

Yes. But we remain conscious going forward on all fixed costs.

So just to double-click on this changing or pyramidization which you're doing, is it in anticipation of the additional orders which are yet to be executed? And then we see the operating leverage? Is that the way I should think about it? So we are building capacity for future growth, but the capacity is built at a lower cost because you've hired entry-level graduates, et cetera.

Yes, that is one reason. Secondly, we are also reskilling considering the growth prospects we have.

Okay. Got it. I think one of the participant did ask and you did say that by H2 FY '25, we'll start seeing the new order book being executed. What time frame is this? In the sense when you have won these new orders, in what time frame would you execute? Like is it 3 years or 18 months or 2 years?

So again, Prateek, every customer and every program will generally offer a development timeline. Passenger car development time line is generally longer than a two-wheeler development time line. Within passenger car, within two-wheeler, within commercial vehicle, different customers have different philosophies, right? So I think it's hard to put a -- I mean, it's hard to put an exact number on it without actually explicitly delivering revenue guidance. But I think like we said, I think FY '25 is when we expect a lot of this will go into manufacturing.

And the new orders, which you have won, these are not replacement orders. These are over and number of your base business if you really do, right? So these are essentially filling up of capacities, which will drive operating leverage. Is that a fair understanding?

Yes, absolutely. We don't report any replacement numbers at all. These are only new order wins.

Okay. Fantastic. Last question. When you look at your largest customer, they have been quite vocal at least in this conference call about new product launches on the EV side, be it two-wheelers as well as scaling up their three-wheeler EVs. Is it fair to say that their scale up, the content per vehicle in the EV for them would be far higher than our base business, and that would drive operating leverage or that would drive revenue growth for us once their three-wheeler and two-wheeler EV business starts becoming more popular or start gaining traction?

Yes. I think that is definitely fair to say.

And would you have 100% share of business over there with them?

No. I think platform by platform, model by model, it will vary. But I mean, as you...

You are the pre-dominant supplier, is that a fair assessment?

We will always be significant.

Some products, we could be single source, but in some products, there would be a sharing of business.

Got it, sir. Got it. And sir, correct me on the interest cost, a bit puzzling, right? You called out debt interest costs, you called out factoring costs. When I do the math and when I annualize your interest cost, it doesn't add up. How is that? Because look, you have INR 200 crores of interest cost. You said INR 1,000 crores of net debt at 9% interest, that's INR 90 crores; INR 500 crores of factoring cost, that's again 8.3%, that's INR 40 crores. So INR 90 crores plus INR 40 crores should be, whatever, INR 130 crores versus INR 200 crores. Can you help me understand where is the INR 70 crores additional coming from?

Yes. So there are also things like the lease interest, which is part of that, plus there are bank charges, plus there are things like prepayment costs, which we paid this time to get rid of some of the high cost debt. So if you annualize all this, it may actually work out to be that number. But going forward, some of these may not repeat.

What's the lease cost last, maybe you can just call out that?

This is the lease -- the interest component of the leases that we have.

Yes, yes, I understand that. What's the lease cost, like per quarter?

I don't want to give the exact number, but you can broadly work out the difference. And second thing you need to keep in mind is this is like net debt versus gross debt, right? We also have about INR 200 crores to INR 250 crores of cash which will scale down going forward. So we need to apply this on the gross debt also.

Understood. And what is this foreign exchange gain pertaining to?

Yes. So it has both operating and nonoperating parts of it. Operating is simply the restatement of these export receivables and all. Nonoperating is relating to these loans and advances which we gave to our overseas subsidiaries and the businesses which we have there.

Can you call out the nonoperating one please, if it's possible, sir?

Broadly, you can say 50-50.

[Operator Instructions] Next question is from the line of Miyush Gandhi from Cognizant Capital.

Sir, would it be possible to quantify the impact of European shutdown in this quarter? And in terms of revenue, how much would we have missed?

Yes, it's difficult to -- I mean we don't want to reveal that kind of breakup between overseas and India, but you can broadly say that for nearly more than a month, most of those businesses were closed for holidays. So that's the...

Would it be fair to assume, given the shutdown in the margins or probably EBITDA would be far lower, I mean, for this quarter again versus the previous quarter?

Yes, obviously, because that revenue was not there, but costs would continue. That will continue.

So next quarter, maybe once the business comes back to normalize then there is some tailwind from that part of the business that can come through.

Correct. Correct. That's right.

And would it be possible to quantify the impact of falling raw material prices on our top line? I mean, we've seen in the whole of 1 year, both metal part of the business and the plastics part of the business would have seen some deflation in the products, so that would have been passed on, right? So I'm just trying to understand what is the underlying growth versus the inflation, deflation that hits our top line.

We can broadly say maybe it's close to 1.5% to 2%.

Okay. Not very large. It's not that large as such.

Correct.

Fair enough, sir. And in this quarter, particularly because of this shift in festive season, that would also have had some impact on our top line growth, right?

Correct.

Any number that you would like to put?

How would we estimate this. It's difficult to give a number to you.

No, the whole idea of asking these questions is to understand the underlying top line growth because we've been in this 1,800, 1,850, 1,900 range for the last 3, 4 quarters, and we were actually hoping given this is the biggest quarter for us, this quarter would have been a little better on the top line front. So that's why I'm trying to understand where is the miss coming from. That was the underlying thought process, nothing else.

No, I understand. Yes, I understand your question. I respect that also. But difficult to quantify it is what we're saying.

You've got the annualized numbers. You should look at how much we have done in last 4 quarters and compare that to the previous 4 quarters number. If you annualize the numbers, then you will see that we've significantly grown.

And I would also say, I think if you compare H1 of this year to H1 of last year, we have grown. To be honest, I think, as a result of semiconductor challenges that took place through 2022 or basically FY '23, some of the revenue last year was a little bit maybe lopsided. But if you look at the half overall, the only real difference is the impact of the festive season, but we've still been able to drive a level of growth.

Fair enough. Fair enough. Sir, I may be completely wrong on this and pardon me if I'm wrong. But if I recollect properly, our domestic lighting business, we were supposed to start a plant and we were supposed to in-house, in-source the entire LED light products. Is that already happened? Or I'm reading something wrong?

Yes. No, so we had already in-sourced. Okay. So we had not got any outsourced lighting production even last year. We were -- yes, we are starting a new plant. In fact, it has partially started already. And I think that ramp up into -- from the old plant into the new plant will continue. But it is not an in-sourcing activity that is taking place. It is a location move that is taking place because unfortunately, in the old plant, we ran out of space.

And how much more capacity would the new plant have? Because you also mentioned in one of the answers that we are running out of capacity on the lighting side of the business.

So I would say space more than capacity. But yes, we have the ability to -- I mean, we have the ability to add 40% more volume.

Okay. Okay. And just one last question. Any update you would like to share on what is happening in the China business? We were in an arbitration procedure with them.

Yes. So the -- both the approaches are continuing. The arbitration proceedings are continuing. On the other hand, the discussions with the partner on split are also progressing well. It may take maybe a little more time to actually conclude. So in any case, we are assuming that we should actually come to an end before end of this year, financial year.

Next question is from the line of [ Vignesh Iyer ] from Sequent Investments.

I just wanted to know, after the prepayment of this debt, what would be our now cost of debt after this repayment is done?

Yes. That's what I was answering in the earlier part of this discussion. You can roughly say 9% is the average cost of debt right now across maturities plus factoring is anywhere like 8% to 8.3% is what we are incurring.

Okay. Okay. But can we -- I mean, as a part of the Ind AS statement, I understand that you have to show interest cost. But as part of the notes, can we have the bifurcation shown for better clarity as to what is your regular part of the interest and what is prepayment or bank charges, if any, that is getting debited under interest?

I mean this is a onetime thing. It's not that every quarter we are going to have, and there is no requirement of Ind AS that we have to give this separately as a disclosure. But this is a onetime thing, which should not happen going forward.

Okay. Okay. I mean because there is some discounting charges as well, right? That is a recurring nature...

That will continue because that is the cheapest source of financing for us. But that'll be the last one to be taken out.

Next question is from the line of Abhishek from Dolat Capital.

Sir, we have seen a strong growth in the polymer business in this quarter. So have you won any new business in this segment? And how is the outlook ahead?

Yes. So polymer in general, right, across whether it is molded plastics, painting, seats, air filters, I think we have won new business which goes into production. We have -- we continue to win business as well also. So again, the growth is driven by a combination of, let's say, businesses that have been executed from past year. In some places, we also have, let's say, higher content, especially on topics like painting and also in some places, maybe a level of natural growth from the OEMs.

Okay. And sir, how much difference in the cost of discounting of debtors versus loan cost? And how much benefit we get? And what is the normal payment terms you give to the customer usually?

Yes. I think I answered this earlier on the call. The debt is at around 9%, and factoring is somewhere between 8% to 8.3%.

And how much is the normal payment terms to the customers?

Sorry?

How much normal payment terms you give to the customer?

Payment terms, of course, vary from customer to customer. Most -- a large part of the customers in the range of about 30 to 45 days. And then, there are also certain customers in the range of 60 days from now. We're trying to rationalize that. But yes, you can say average, maybe around 45 days.

[Operator Instructions] Next question is from the line of [ Rohan Prasad ] from Renaissance Investment Managers.

Sir. So this is again on growth. So if I look at your largest customer...

Rohan, sorry, your voice is not coming clear.

Hello, am I audible now?

Slightly.

Is it better?

Yes.

So again, my question is on growth. So if I look at your largest customer, H1 to H1 revenue growth is something like 17%. So isn't it better to look at revenue-to-revenue growth versus volume growth and considering that our growth is just about 6%, so could you explain this?

Sorry, I'm not clear what exactly is the question. Are we saying that we have grown more with...

Sir, I think your largest customer, Bajaj, has grown, H1 revenue has grown at 17%. I'm not talking about volumes, I'm talking about revenue. And we've grown at about 6% and even Hero has grown at 4.5%. So in that context, our revenue growth appears to be on the lower side, H1 to H1 I'm comparing? Or maybe if that's not the right way to look at it?

Honestly, it is hard for us to comment on customer...

pricing and their revenues.

Yes, it is hard for us to comment on customer value or revenue growth. I think, of course, pricing strategies, how -- I think it's best to speak with them. I think from a supplier perspective, I think looking at the volume and comparing their volume growth with what is our revenue growth, I think it makes a lot more sense.

Okay. And just to -- can you actually repeat what is the CapEx you're planning for this year and next year? CapEx?

CapEx, we may spend about another INR 100 crores or so in H2.

And how much have we done in H1?

It's close to about INR 110 crores or INR 113 crores.

And should we expect a similar number for the next 1, 2 years?

Yes, it should be around INR 200 crores or thereabouts.

And just trying to work out your cash flow. So there shouldn't be any meaningful change in the working capital cycle that we have as of now.

Should not be. It should only get better is what we are trying. In between, there could be some ups and downs, but going forward as a trend, which should not get worse than what it is right now.

Okay. Great. So we think net debt next 2, 3 years would be good on free cash flow generation for us.

Yes, yes. Again, it is not a guidance, but yes, that's what we are aiming for.

Yes. So basically, what I'm trying to understand is that, I mean, with about INR 1,000 crores debt, we should be -- max 2 years, we should be net cash. It should be maybe even early perhaps, but anyways.

Yes. Ideally, yes.

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

So thank you all for joining the call. And I would again like to reiterate that will continue to drive profitable growth, be prudent on our capital allocation and focus more on free cash flow growth and also on the cost reductions. Thank you once again.

Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.