Automotive Axles Ltd

NSE:AUTOAXLES

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Automotive Axle Limited Q1 FY '23 Earnings Conference Call, hosted by Batlivala & Karani Securities India Private. [Operator Instructions]. Please note that this conference is being recorded.

I now hand the conference over to Mr. Sailesh Raja from Batlivala & Karani Securities India Private. Thank you, and over to you, sir.

[Sailesh Raja, analyst]

Thanks, Rijju. Good afternoon, and thanks to everyone, who have logged in into Automotive Axles Q1 FY '23 Earnings Conference Call. Today, we have the senior management team of the company, Mr. Muthukumar N., President and COO of Meritor HVS India Limited; and Mr. Nagaraja, President and Whole-Time Director of Automotive Axles; and Mr. Ranganathan S., CFO, Automotive Axles Limited.

So I would now like to turn the call to Mr. Muthukumar N. for the opening remarks, followed by Q&A. Sir, you may begin now.

[Narayanswamy Muthukumar, executive]

Thank you, Sailesh, and good afternoon, ladies and gentlemen. Thanks for joining for this investor call of Automotive Axles. We really appreciate your time and your interest in taking time to join for this call. I have with me my colleague, Mr. Nagaraja, who is the President and Whole-Time Director of Automotive Axles; and Mr. S. Ranganathan, the CFO.

Last time during this investor call, most of your questions were revolved around Cummins acquiring Meritor. And we are very pleased to announce you on 3rd of this month that was a day 1 of formal acquisition of Cummins -- has acquired the Meritor and the day has passed. And I'm very, very happy to present you the feedback from the Cummins Executive Chairman, the acquisition strengthens Cummins' industry-leading range of powertrain components and accelerates the development of electrified power solution.

Mr. Tom Linebarger, the Cummins Executive Chairman, said, Meritor is a market leader, and the addition of their complementary strengths will help us to address one of the most critical technological challenges of our age, developing economically viable 0 carbon solutions for commercial and industrial applications. We can understand the excitement at the Cummins level. They are very, very supportive of this acquisition, which is going to bring a lot of transformation and growth to the organization.

Dr. Baba Kalyani, Chairman of Bharat Forge, says, I warmly welcome Cummins as our new partner in Automotive Axles and Meritor HVS. Bharat Forge has a long relationship with Cummins as a supplier and also the user of their engine in our special products, and we look forward to bigger relationship now as partners in the venture and also as a supplier. I wish the new venture all success. Unfortunately, I'm not able to personally be there to make this announcement jointly with Ms. Anjali Pandey of Cummins, but look forward to this new relationship, which will benefit all of us.

Ladies and gentlemen, on the 4th of this month in the evening, the Cummins management team has come to Automotive Axles in Mysore. We had an employee town hall, which makes the communication to all the employees about this acquisition process is over.

With that, I think we are excited about this acquisition, and this progress is happening, which will make our company very, very strong in the days to come.

I'm moving on to the next slide, please. Those of you who are attending for the first time, I'm just giving a snapshot of our sales. Our sales of FY '19, '20, '21, '22, we are always growing ahead of the market in terms of the revenue, in terms of the EBITDA.

For those of you who are attending this meeting for the first time, we have 4 manufacturing locations, the mother plant being at Mysore. We have facilities in Jamshedpur for supplying to brakes and allied products for Tata Motors. We have a facility in Pantnagar, which supplies for the brake for Ashok Leyland at Pantnagar. And we have a facility in Hosur. And these companies equity share is Meritor holds 35.5%, Kalyani 35.5% and the rest is in the public.

We have more than 2,000-plus employees of white collars and blue collars across the organization. As you all know, our major customers are present in the commercial vehicle segments of medium and heavy commercial, and we are also present in specialty and defense OEMs. As you all know, the product what we have is for the commercial vehicle axle, brakes and suspension systems.

In terms of the independent axle supplier, we are #1 in India where -- and we are #2 in brakes. The company continuously works with customers in terms of launching the product, penetrating into the share, which I'll leave it to Mr. Nagaraja to tell at a later point of time.

Ladies and gentleman, your company is also taking a Mission 2028 Sustainability Roadmap, which is showing in the next slide. We earlier talked about the 6 pillars of our governing system for sustainability. And the company has done an extensive progress in terms of achieving the net 0 in the days to come.

As a first step towards that, about more than 30% to 35% of our power consumption is coming from solar, and the organization is moving towards water positive, getting into more than 80% by solar and also taking an aggressive target of reducing 50% of energy by doing a lot of conservation projects. On top of this, the company is also bringing in, in terms of the gender equality, corporate governance, which will all be -- we'll be communicating to you on all this.

One of the initiatives, the next slide I move in, is on bringing in circular economy to make sure that the Mother Earth is not dumped with the products. So right from the design stage, in the manufacturing stage, in distribution, in consumption and [ reuse ] and in collection, we are working with the OEMs. We are working with suppliers to make sure that our product is 100% recyclable at the end, so that the waste is converted to wealth, and we are not dumping the Mother Earth with any of this material.

In the days to come, maybe we will continue to keep you updated on our sustainability focus, and what's the progress that we are doing towards net 0 or what we call as a destination 0.

With that, ladies and gentlemen, I will hand over it to Mr. Nagaraja to talk about our customers, the products and what we are doing, and then to Mr. Ranga on financials. Over to you, Mr. Nagaraja.

[Nagaraja Sadashiva Gargeshwari, executive]

Thank you, Muthu. Good afternoon, ladies and gentlemen. I'm Nagaraja Gargeshwari, President and Whole-Time Director for our Automotive Axles.

So just like what Muthu mentioned, Meritor has been always a very strong player in commercial vehicle segment or industry. And as you can look at it, we address the diverse end markets and supply to most of the major customers, not only in India, but also in the Asia-Pac. So whether it's a truck, a trailer, a bus, military or aftermarket, we have a product line, which I'll be showing you in a couple of slides later. We have a presence in starting from 5-tonne vehicle, all the way up to 55-tonne tractor. So we continue to drive the innovation, continues to upgrade our product, continue to come out with innovative solution to address both our customer and end-user requirements.

Next slide, please. You can see here, there's -- probably there maybe a myth sometimes customers talk to us, like Meritor, your products are a bit expensive. But what the companies have always been trying to do is we are trying to bring down the total cost of ownership. And as Muthu mentioned during the last investor's call, this company has introduced more than 5 new products in the last 18 months and no other -- none of our competitors or anybody for that matter has been able to successfully introduce innovative product and also continue with the production. So here is a prestigious award Ashok Leyland Gold Award passed on to the Meritor for improving the total cost of ownership.

Next slide, please. Again, as I mentioned earlier, we have a product range addressing 5-tonne axle the way up to 55-tonne tractor. And then if you really look at the product, the product has been placed in such a way that we will be able to address every requirement of our customer. And so in the brake also, if you can look at it, starting from 310 dimeter brake and all the way to 410 brake. And also, we are pioneer when it comes to disc brakes.

Next slide, please. We have been able to achieve it because of our team. Meritor always believes in investing in employee engagement, developing our people because we think that human capital is the most important to be successful in the business and rightly so. We not only invest in developing hard skill, but also on the soft skill. As we speak just today morning, Muthu inaugurated our leadership program here at Mysore for some of the upcoming leaders in our company. We not only focus on the timing, but also we want to engage. Work-life balance, as you are all aware, is taking a very important role for every employee.

So we continue to engage with our employees, meaningfully celebrating festives, and then also, we are driving the diversity. In fact, we are very proud to say that in our company, nearly 10% of our employees are women. We continue to invest in not only gender diversity, but also, we are investing heavily at the -- we want to be an equitable employer for every possible person from every corner of the country with every type of experience. So we continue to invest there.

And the last one is not only we invest in employee engagement and development, but we also believe that it is very important for us to recognize the value that this team is bringing in and also share and reward them. So as you can see here, there are several critical, whether it is on IoT or whether it is automation, the team has been engaged in and we celebrate the success as soon as we accomplish those goals.

Kaizen is one area where all of our clients are fully engaged in. And on average, anywhere between 200 to 300 Kiazens are implemented at all levels, starting from an operator level and going all the way up to the manager level. So these are all the things what we have been doing is going to help us to continue to meet your expectation, meet the industry's expectations and make sure that we continue to grow and prosper.

With that, I will pass it on to our CFO, Ranganathan.

[Sankaran Ranganathan, executive]

Again, a very good afternoon to all of you. Thanks, Muthu. Thanks Nagaraja. Quick snapshot of the financial performance. I hope all of you might have already seen our financial results. .

For Q1, our total revenue is about INR 501 crores as compared to INR 256 crores at the same time last year. Year-on-year growth is close to about 96%. As far as the EBITDA is concerned, I know this quarter, we did about 10.5% compared to 6.5% last year. But in terms of percentage, it's about 62% increase in the overall EBITDA, largely contributed by the volumes and also a good contribution on the [ metal ] performance.

And as far as the PBT is concerned, we are at 8.3% for the last quarter end of June and compared to 3% in the same quarter last financial year. So as mentioned, it's about -- the commodity is one of the key challenges we are facing it and definitely, we are expecting the coming days, the commodity may got soften and this amount of challenges may get reduced and we have to wait and watch in the coming quarters. Obviously, our focus is continuously to be on our strategic initiatives as part of M25 is about grow revenue, grow profitability. And definitely, there's a setup team, is continuously working on to drive these strategies and improve the performance holistically. So both digitization and application of Industry 4.0 is on our core objective, and we have been working on this journey for the last 1 year, 1 or 2 years, and that will continue the future, too.

Next slide, the M25 strategy is concerned, as one of the things, we'll definitely grow as per the market. This year, the market expectation is about 370,000 vehicles plus. And definitely, we grow along the market. And always, our internal strategy is to grow beyond the market. I think -- and Muthu and the entire team is more working very closely with customers in all initiatives to grow revenue.

As far as the profitability initiatives are concerned and also the operational excellence are concerned and bringing the overall value to the customers are concerned, we are on the track. The subsequent 2 slides basically about the key actions and the customer wins, Muthu will touch up on it. Muthu?

[Narayanswamy Muthukumar, executive]

Thanks, Ranga. I'll go through that. Ladies and gentlemen, I think the team did an excellent job. Nagaraja talked about post-COVID, one of the key initiatives that the team -- the leadership team here drives the engagement of the people, and we've been very, very successful in retaining our talents and taking them to the next level of performance. Thanks Nagaraja and thanks Ranga for leading those initiatives in the plant to make sure that our people, as always we've been saying, they are our assets.

Team, I think, we have done a very, very key initiatives like what Ranga said. We have a business growth strategy. We have a cost measures and safety continues to be our focus area. The -- all the peoples in the plant has not only been done vaccination of 2 doses, but also been taken with their booster dose for all the people. Like what I presented earlier, the ESG strategy is on and then the implementation is under progress. Even though the COVID levels have come down, the continue -- company continue to practice the COVID protocol to ensure that our plant is always safe. Having said that, our team has started receiving the customers for audits, our team has started visiting suppliers, but following all the protocol.

In terms of cost measures, cost reduction has been one of the key, and you all know that we all talked about that the loss elimination [indiscernible], the significant savings expected through M2022 time frame. The cost measures in terms of whether it is a conversion, the material or manpower cost is always under our focus and keep going.

In terms of the business growth strategy, like what Ranga said, the market is set to grow and rest assured that your company will grow more than the market. And we have completed the successful implementation of the LTA agreement with 2 top customers. Nagaraja talked about the hard work did by our team in terms of the plant team, by the engineering team and innovation team. As you all know, the Meritor has been focusing on 3 things: focus on customers, focus on innovation and focus on people.

With this, the company, which has changed the perception of the customer, saying that Meritor is comparatively -- I'm not saying it's a cheap product, but the total cost of ownership of the product is much, much better, and that is what has come back as a Gold Award to us. The new business wins and opportunities are in the pipeline. We have done 2 long-term agreements, both with Tata Motors for the brakes and Ashok Leyland for axles and brakes, expanding our current share.

To improve operational performance and increase share of business with OE is one of the key things that what Nagaraja is working. Our quality [ PPM ] has done substantial improvement over past and a lot amount of improvement is happening. Other product developments and launch of new product. Currently, we are working with OEM for the launch of product that is going to be done in '23 and '24 to make sure that we are ahead of the curve and compatible. The driving e-mobility business, we touched upon this earlier. We continue to work on e-mobility business, and we have become a preferred partner for Ashok Leyland for their e-mobility solutions in medium and heavy commercial vehicles.

Digitalization and implementation of Industry 4.0. Nagaraja touched upon this, and we are going as per the plan. And the plants, which is more than a 35-year-old plant will become completely Industry 4.0 post our Mission 27. Geared up for the capacity to cater the rising market demand, while we are very, very skeptical about the market how it comes -- control the cost, we are also geared up to taking the market demand.

With that, ladies and gentlemen, once again, thanks for all your support of this organization to grow, and I give it back to Sailesh for organizing question and answer session. Thank you very much.

[Operator]

[Operator Instructions]. The first question comes from the line of Sagar Parekh from One-up Financial Consultants.

[Unknown Analyst]

Yes. I have a few questions. So firstly, on the -- so during the AGM, Mr. Kalyani, he spoke about new business -- I mean new segments that we are focusing on, and one of the segments that he touched upon was the construction equipment industry and off-highway industry. So if you can give some color on that in terms of what is the -- like the kind of market size of that industry currently? And I know it's a very small part of our total business right now, but if you can give some more qualitative or quantitative details in terms of what can it be for us in next 2 to 3 years, it will be really helpful.

[Narayanswamy Muthukumar, executive]

Thank you for the question. See construction industry is going, like what Chairman was saying, and the Board -- and the Chairman and Board have set us a target that we should penetrate into this for our long-term growth. We have been -- we have created 3 products at this point in time, and we are working with 2 different -- 2 customers who are larger customers in off-highway and construction. And the initial trials are on. You know this industry takes at least almost about 1 year for the product validation and introduction.

So we are working on those products for those customers. And typically, we -- whatever we are doing today, by 2025, we want to double. That is what our objective of working on this. And I'm sorry, I'm not able to give you the exact target what we are looking at for from construction segment at this point of time because we don't share. But we want to derisk our dependency on commercial vehicle business by introducing this.

The second segment, which he said defense. And today, you know that for 100% of the requirement of Ashok Leyland, we are supplying, and we will continue to get orders from the other customers. We are working with various other customers to see that how we can supply our axles. We are supplying both tactical and strategic axles to the customers, and we are working on those.

[Unknown Analyst]

Just on this defense part, just a clarification, which I wanted was this Bharat Forge has recently developed this Kalyani M4 armored vehicle. So are we like supplying the axles for that vehicle?

[Narayanswamy Muthukumar, executive]

We are supplying some components. Kalyani M4 is buying the components and it is being assembled along with the vehicle. So we are supplying components.

[Unknown Analyst]

Okay. So they have recently won this INR 200 crore order from the government, so -- which will be executed in FY '23.

[Narayanswamy Muthukumar, executive]

You know the -- just I wanted to clarify that because it's not an axle on which it is mounted, okay? It is like a tractor industry, where it is mounted along with the assembly. So it goes in the subsystem. I should not have used the word component. It's a subsystem on which it'll be getting assembled, which we are supplying.

[Unknown Analyst]

So we are supplying the subsystems for that, right?

[Narayanswamy Muthukumar, executive]

Subsystems, yes.

[Unknown Analyst]

Okay. So but that will be classified in the defense segment for us going forward. So this year, we can see some bit of that number coming through...

[Narayanswamy Muthukumar, executive]

Very, very less number, but I think as and when the business grows -- see, our product is approved in the prototype, and you know once it be approved in the prototype, we'll continue to move.

[Unknown Analyst]

Right. And just one more question was on this successful implementation of LTA agreement, which was mentioned in the presentation. So what exactly is this? I heard you said that there was -- I mean, we have -- for Tata Motors, we have disc brakes and for Ashok Leyland, axles and brakes. So could you just elaborate on this particular part?

[Narayanswamy Muthukumar, executive]

We will be -- see, Meritor is a preferred partner for both Leyland in terms of axle and brake and in terms of Tata Motors it's the brakes. And in this agreement, which is running up to 2025, we'll continue to supply with an expanded business, which is going to assure the business for a longer time because of the new introduction of the product, and we have been consistently delivering the value to the customers. So we have currently an agreement, which is running up to 2025, to continue to supply axles and brakes within India and to share our business, it's for both of them.

[Unknown Analyst]

Okay. So this is just basically a continuation of the agreement that we are -- because we are already supplying these products to both of -- both the...

[Narayanswamy Muthukumar, executive]

The level what we have been supplying earlier and now, we'll be penetrating more into that.

[Unknown Analyst]

So we'll gain market share on both.

[Narayanswamy Muthukumar, executive]

Absolutely. You're right. Absolutely, you're right.

[Unknown Analyst]

Okay. Fair enough. Fair enough. And just my last question with Cummins coming on board, would it probably make entry into Tata Motors axle segment a little easier since they have some business agreement -- I mean, business arrangement with Tata Motors?

[Narayanswamy Muthukumar, executive]

See, I don't want to give any forward-making statement. But for your information, it is going to definitely make much better. They're present in off-highway segment. They're present with Tatas. Will definitely give an advantage. Maybe not the current product because they are making by themselves, but for the new generation product. When it is going to come, whether it is going to be an electric axle, when it is going to be new-generation axle, it is definitely going to give much more revenues and opportunity for us to work together and successfully. We are looking at this.

[Operator]

[Operator Instructions] Next question comes from the line of Sunil M. Kothari from Unique.

[Sunil Kothari, analyst]

Really good job in this very difficult commodity environment, commendable performance. Sir, my question is on with now Cummins coming in -- and I understand it's very difficult just now to clarify the strategy. But would you talk about the possibilities of this Automotive Axles becoming sourcing base for maybe some other countries, other plants, opportunity possibilities because defense is already we talked during AGM and now also. So some talk on the possibilities of the Automotive Axle base as an outsourcing for Meritor and Cummins now.

[Narayanswamy Muthukumar, executive]

Thank you for the question, and thanks for your appreciation on our performance. We will continue to meet your expectations and exceed that.

In terms of the opportunities, yes, see, the world is looking at India today. Earlier, there are a lot of other Meritor sites. I'm talking of -- let me come back to Cummins a little later, let me talk about Meritor. Meritor has been sourcing components from India and whatever the value addition, but Meritor is also sourcing globally from China and the sources and becoming really competitive and cheaper, they were looking at it. But you know that there is a substantial perception changes, not only in terms of the cost, but in terms of the reliability, ethics on business and all.

I think the world is looking at India and India will definitely have more opportunity to develop. It's up to us, and we are exploring continuously to see that how we can double the exports in 5 years, we can move on. So we have been -- we have already been proved out that we are a reliable supplier. We are -- our quality levels are high. So your company will continue to work on to see that how not as an axle put together, but systems and subsystem to be exported from India to the other countries of Meritor, it will definitely go up.

I'm sure that their procurement from other countries will come down, and they will look at India, not only from just cost of the product, but the total cost of ownership and reliability and ethics in doing the business. So we will get some more opportunities. I think the team is working on. My 4 leaders are extensively working on to see that what are the other opportunities that's available, and we will continue to explore in this area.

With Cummins coming in, you're asking -- Cummins is basically doing an engine business. And what type of synergy at this point of time, we do not know whether -- our capabilities for manufacturing in Mysore. I'm sure that there is a team from Cummins is coming, they're going to evaluate. We are going to go there and find out the -- explore the opportunities. If there is any opportunities, obviously, we'll become a very preferred supplier and then we will ensure that we grab those opportunities.

[Sunil Kothari, analyst]

Great, sir. And sir, my second -- this is not, I think, question, but as the shareholders, what we expect from you is the way you are reducing total ownership cost, the way you innovate, the way you would take awards from the customers. But these are not reflected in the margin, which normally any MNC company, which achieved having a very high R&D, high development capabilities, very high innovation capabilities. So over a period should we expect some respectable margin because this 10%, 11% is not that good margin. So that is in our opening. Would you like to comment on this?

[Narayanswamy Muthukumar, executive]

Ranga, do you want to comment on this on [indiscernible].

[Sankaran Ranganathan, executive]

No, if you really look at it as a commercial industry, what we serve and the products that we do. Basically, largely, all of you know what we are supplying, largely brakes and axles. And each margins are quite different. So it's difficult to say that aspiration is good, definitely working towards it. But if you really look at it in the 2018 to '19, we have done a phenomenal job as far as the bottom line is concerned.

But if you're really looking at a percentage, per se, what you're saying is true. But the value addition is not reflecting the percentage because of the base impact is largely creating on account of the commodities. At least if you remove the 2018 base and remove the base, the base impact coming, at least, you can count about 2 percentage points to what we are performance -- 2 to 2.5 percentage to the base performance what you're seeing today. But it's not fully retracting in terms of the percentage because of the commodities by and large.

But nevertheless, having said that major piece, which is probably not -- Having said that, definitely, our -- if you really see the cost parameters, whether to the growth what we have, both in terms of fixed cost and conversion cost is extremely under the control, okay? And metal cost performance, we have a dedicated M25 team, which is really working on. You know the inflation and the commodity is a pressing factor for us. We have -- in spite of that, we are outperforming to the challenges what we have only because of the initiatives of Mission 25 of what we.

Your point is valid. We are working towards with the customer in terms of where it is possible, where we can maximize the prices with customers. But in automotive industry, it's not that easy to get a price increase from the customer. But we are working very hard in terms of giving holistic solution where we also gain, they also gain. Muthu and team done a phenomenal job. Hopefully, in the coming days with the current arrangement, we can be able to penetrate a little bit.

But to be very, very specific to your question, I think you have posted the same question in your AGM also. And I definitely -- I drive towards the percentage, what you're expecting is our aim also. But Automotive Axles stand-alone getting to the point '17, '18 maybe next 1 or 2 years, it's very challenging. So -- but nevertheless, you will definitely see a significant improvement to the current performance what we have. But nevertheless, as the equation changes, the business proportion changes and the share of the various vertical changes. And more and more, the exports are coming in, in future Cummins coming in, definitely, it is quite possible.

And our aspiration is always to reach out the best out of us. So we take your inputs and expectations in our mind. But definitely, if there is any possibility that we can be able to significantly improve, we grab each and every opportunity, sir.

[Narayanswamy Muthukumar, executive]

Thank you, Ranga, but I.. sir, normally, you know that we don't tell exact percentage of share segment base profitability. But I'm very little curious when you said that the decent profit, can you just tell me what is the magic number, what you are looking at?

[Sankaran Ranganathan, executive]

No, there's no magic number, but sir between 15% to 20% EBITDA margin is across the company, which is having a very good technical capabilities, which is not just doing some very basic value addition. Having so much innovation. Those are the companies. That is what we would like to understand...

[Narayanswamy Muthukumar, executive]

Understood. I'm sure that we understood your point. Like what Ranga said, we will continue to do that. But let me tell you, I wanted to reemphasize our focus. Our focus is on customers. Our focus is on innovation. Our focus is on people with us. We strongly believe that if we are going to exceed in this, we will be giving a sustainable growth and take it forward. Like what Ranga said, there will be 101 reasons in terms of percentage we could not grow because of the base impact. There's a huge increase in the commodity prices that has happened. But your company will continue to work on this, and we will move towards your expectations.

[Operator]

[Operator Instructions]. Next question comes from the line of Radha.

[Unknown Analyst]

Hello? Am I audible?

[Narayanswamy Muthukumar, executive]

Yes, Radha. Go ahead.

[Unknown Analyst]

Congratulations on very good set of numbers. Sir, my first question was that -- so you mentioned in your opening comments that it is an endeavor for the company to grow ahead of the industry. So in relation to that, incremental to CV industry growth, I believe that there are 4 key drivers for the growth in the company, which is a share of business increase with customers, entry into new markets, new products, like slipper-type suspension, and also exports. So could you give me some kind of guidance as to what is the expected revenue opportunity in these incrementing revenue drivers?

[Narayanswamy Muthukumar, executive]

Thank you, Radha, for the question. But unfortunately, we don't share the segment-wise revenue, but I can just give you some more information on what you are asking. In fact, during my discussion, we said by 2027, '28, we want to double our exports as I indicated. Also, thanks for asking the question on slipper-type suspension. Last time, I said that while we introduced this product, we could not run it. Now we restarted the supply to Ashok Leyland, smaller numbers now. So we believe that by '24, '25, this system will become a very, very sizable business for us, and we'll be able to penetrate a good amount of vehicle for Ashok Leyland with slipper suspension because they believe that this is adding a lot of value to them. So we'll continue to work with this and then enhance the business.

But if you -- for your specific questions on what will be the revenue potential when you go? We don't give the forward statement, but these are the same questions that are asked in the AGM also where our Chairman said, we cannot give the number, but yes, your calculations are right, and we'll be giving the margin numbers this year.

[Unknown Analyst]

Okay. So the next question is that in exports, other than Volvo Thailand, is there any addition of new customers in the overseas market?

[Narayanswamy Muthukumar, executive]

At this point of time, the Volvo Thailand is one which we are working outside the Meritor umbrella. But you also have to keep it in mind that globally on every region, we have the team available of Meritor and they are supplying to the customers. So we will be focusing on exporting a subsystem because there's a huge penalty for shipping the axles out India because of the logistic cost disadvantage. So while we will be exploring the option, our main approach is exporting towards our Meritor plants, on systems and subsystems, where it will be competitive. And there, we have an accessible team for doing the [indiscernible].

[Unknown Analyst]

Also sir, could we talk a bit about the off-road vehicle business opportunity, like what is our market share? And who are the key OEMs that we are supplying to?

[Narayanswamy Muthukumar, executive]

Currently, as I said, there is very, very less compared to the market, and we'll be around not even 2% to 3% of the market. But having said that, as I told you, we are with 2 OEMs and we are developing the product. We had an extensive market survey to find out what type of issues that they are having in the segment, and we are taking 2 products and working with 2 customers to get into this product.

We're getting into the off-highway segment and construction segment, a lot of product development is there because it's not a volume game, I mean it's more of a varieties that we need to come in and lot amount of engineering time and development time is needed. So we will be working sow, but we -- and steady. But this is the direction, I think as Chairman said, the focusing on defense and construction equipment is a challenge that they have given to us, and we will continue to work on that market to expand.

[Unknown Analyst]

Okay, sir. Coming a bit on the financial side. So on a Q-o-Q basis, there has been a revenue decline of INR 50 crores. However, I can see that the other expenses have increased by around INR 2 crores. So could you give me a reason for this?

[Sankaran Ranganathan, executive]

No, Radha, you need to probably look at it in terms of revenue. I think overall [indiscernible] the auto component industry the Q1. More likely the MHCV industries people are serving, you can see a general trend in terms of the decline and it's not stand-alone Automotive Axle, per se. But nevertheless, with whatever the reduction of 10% quarter-on-quarter, what you could see, we did our best in terms of the margins.

In terms of the cost point, what you are trying to mention is, I think the cost is not out of proposition. And definitely -- and I request you to look at it holistically for the year, you definitely see that the cost is well within control. So there is no exception as far as the numbers are concerned.

[Unknown Analyst]

Okay. Okay. Sir, also current -- what kind of utilizations are we operating it now? And if we -- assuming that we reach 100% utilization, what could be our operating margins? Like what could be the operating margins of the company at 100% utilization?

[Sankaran Ranganathan, executive]

I mentioned earlier also, the margins are probably -- it varies from the brake products and axle products differently, okay? So we don't give you the what is the percentage on the segment wise, but definitely it is quite different. So obviously, thus, product mix do play a role, okay, point number one. Point number two, our utilization is not 100% at this moment of time. So definitely, if you really look at it in 2018, the market [indiscernible] in 70,000 or 80,000 level. Today, the market is just working towards about -- towards 350 or 360 this financial year. So obviously, the market is running at close to about 70% level. So at this moment of time, as the market is running at about 60 or 65, Muthu can able to see that. So utilization is going in line with that. So Obviously, as the market volume grows, our capacity utilization definitely will substantially improve. Obviously, there will be a leverage, benefit will definitely come in to this.

[Unknown Analyst]

So you mentioned that the product mix will change and so the utilization, the margins cannot be stated. But assuming the current product mix, so if we assume the current product mix...

[Sankaran Ranganathan, executive]

Quite a bit of -- quite good bit of possibility of utilization goes up, you definitely see better leverage, benefits will come, not doubt about that. Keeping the operating margin remains same. There's various elements to it. The one is about the commodity, the price stability in the market. And definitely, that remain constant, I'm telling that the current product mix, and we were able to perform both 80% and 90% of the capacity what we have. Definitely, there's a good amount of improvement in the profitability can be seen. So we have to wait for the market to improve on it.

[Unknown Analyst]

Okay. Sir, with respect to the CapEx plan, given that the company is generating a lot of cash now, what could be the CapEx plans and other capital allocation plans for this year and maybe for the next 2 years?

[Sankaran Ranganathan, executive]

Nagaraja can answer it. But broadly, I give you a perspective to you in terms of capacity, the maximum investment we already made over 1.5 years of 2 years before. So in terms of capacity, we may not substantially invest, point number one. Point number two, we do invest in terms of streamlining the processes, productivity improvement, automation and digitization areas. Industry 4.0 is one of our main objective, which we have been driving the operational excellence in the manufacturing in the last 2, 3 years. And definitely, in those lines, there will be definitely investment. It may not be very substantive, but definitely there will be an investment there.

[Unknown Analyst]

Okay, sir.

[Nagaraja Sadashiva Gargeshwari, executive]

Also on top of this -- one minute Ms. Radha, on top of this, we will also be spending capital on the new technology and new processes that we are working with. We have to continue to upgrade the process. Even though we may have capacity, we'll be creating new processes, which is going to substantially improve the reliability. And so we will be working on growth for the capital expenditure.

[Unknown Analyst]

Okay. So just, you mentioned previously that you will continue to take price hikes from Ashok Leyland and other customers. So on the basis of that, I just wanted to know that on what basis do we take price hikes with customers? Like is it on a monthly or quarterly basis? When the steel price is in an increasing scenario, so how frequently do we change the negotiation terms? How frequently do we change the negotiation terms with the customer?

[Nagaraja Sadashiva Gargeshwari, executive]

Okay. I want Sailesh to note down we are getting into the conversation, and there are a lot more people are waiting. So due respect to you, but I will just answer this. I don't remember, I have ever said that we just go and take price increase from the customer because no OEMs today at this point in time is willing to give a price increase, and they have said with the availability of excess capacity in the market, they say, either you supply, go down on your costs or get lost. I think that's the message that comes from OEMs.

So it would have been so easy to go and get -- give a check and then get it. We would be very, very happy, but which is not happening today in the industry. However, we have a business agreement with them. And we will try to see that vast level of commodity increases that is happening to that level and we are working with them.

See, to be more honest, let me also -- let us also tell the equation in the organizations. Very, very easy to go and increase the prices to the customer and say we'll not supply. But if my customer is not willing to give it to the end customer, who is looking for a reduction in the cost, they will lose the share of business, and we will have all the businesses only in paper, not reality. So we work very closely with the customers to make the customers competitive and also expand our margins. I think this is the philosophy that with which we are working, and we will continue to work on come this, which is what is helping us to grow in the business. But the commodity like whatever you are asking, whenever the commodity price is going up or something, we will have a discussion between steel mills, with the customers, and we'll try to agree them.

[Operator]

[Operator Instructions]. Next question comes from the line of Shashank Kanodia from ICICI Securities.

[Shashank Kanodia, analyst]

Sir, in the presentation, you have marginally lowered the production guidance for the MHCV space domestically. If I remember correctly, last con call it was something like 380,000-odd units system. This time it is 372,000-odd units. So any specific concerns [indiscernible]?

[Nagaraja Sadashiva Gargeshwari, executive]

Sorry, I think your line was not audible. Can you repeat the question a little slow?

[Shashank Kanodia, analyst]

Sir, I think that in your presentations, you have marginally lowered the MHCV volume guidance for the industry. So in the last presentation, it was quite of 380,000-odd units. And this time, it mentioned at 372,000-odd units. So why would that be the decline? Any concerns that you witnessed [indiscernible].

[Nagaraja Sadashiva Gargeshwari, executive]

We have downgraded it by about 8,000 axles when compared to last -- 8,000 vehicles, right?. Basically, what happens with the additional orders that is supposed to come from buses is not coming and the government is not releasing. So with the latest discussion with the customers, we have downgraded from 380,000 to 372,000 based on our discussion with customer.

[Shashank Kanodia, analyst]

Okay. But [indiscernible] industry should grow healthy 20%, 25% this year, right?

[Nagaraja Sadashiva Gargeshwari, executive]

Still the market is going to go up from 300,000 to 372,000. See, these are all based on -- see, we're giving an update to you every quarter and so whatever the best information available, we are trying to give it to you. Maybe in one quarter, the system can change, the sentiment change, but you also take it globally what's happening with the inflation that's going up, the interest is going up. People wanted to control the cash. And there is also a few information about the recession that's going to come sit globally by next year.

So this is also a little bit of sentiment of the people for fleet operators to see whether we they really buy. While we are very, very optimistic that 372,000 will continue to go up, there could be every reason that the end customer is not willing to pay and he want to conserve cash, it may come down. There's one more increase of interest rate has happened a couple of days before, which is very good for controlling inflation in terms of macroeconomics, but it will have a short-term impact on with the sales.

[Shashank Kanodia, analyst]

And second, sir, on the CapEx part, obviously, we will spend [indiscernible] expansion. But for the process improvement and all the structures [indiscernible] like to put some INR 30 crores, INR 35-odd crores [indiscernible].

[Nagaraja Sadashiva Gargeshwari, executive]

Yes. Of course, Ranga, can you confirm that numbers for these?

[Sankaran Ranganathan, executive]

Come again, sorry?

[Shashank Kanodia, analyst]

Sir, for the productivity improvement, process improvement and efficiency measures, so what kind of CapEx spend can you [indiscernible]. So INR 30 crores, INR 35 crores is what we should be working with?

[Sankaran Ranganathan, executive]

Yes. If you see last year, the overall investment is more or less in the same level, sir.

[Shashank Kanodia, analyst]

Right. Right. Sir, lastly, taking a point from the previous participant. So the sequential decline in revenues [indiscernible] 10-odd percent, the other expenses in absolute term should not have gone up, right? So we can understand employee costs [indiscernible] something. But other expense in absolute terms should not have really [indiscernible]?

[Sankaran Ranganathan, executive]

No, no, we can't say that. We are the -- see, there are various things involved in overall aspect of it. So there are a lot of people engagement activities we are doing, a lot of training and development we are doing. So with the various initiatives, we are consciously ensuring that we are -- the people and the process upgradation. And also, I said the process level upgradation is also we're spending money, in terms of the automations in the ERP and the systems around it. So it's okay that the slight variation in quarter-on-quarter, but the whole overall if you really look at, the every increase -- the overall and the fixed cost and other expenses remain same. There's no material change to it. So -- but if you really look at it, there are some variations that is really a planned one towards employees or towards automation, process automations.

[Shashank Kanodia, analyst]

Sir, one last. Sir, are the [indiscernible] open offer given there is [indiscernible]? So I just wanted to understand why there has not been [indiscernible] Cummins side?

[Sankaran Ranganathan, executive]

Your voice is breaking. I'm not able to hear you.

[Shashank Kanodia, analyst]

Sir, I'm saying that for a change in promoter group, there should have been on open offer, right? So are we an exempt for profit action or something, because 35.5% is decent [indiscernible].

[Sankaran Ranganathan, executive]

No, no. We have -- Cummins will take note of it. And definitely, they will come out with any actions around it in the near future, if any. So they are evaluating it. Obviously, just about [indiscernible] each other. And definitely, they are -- they'll be working on it. Have some patience, definitely, they'll come back if there is -- because we also probably wait their response because they have just initiated. So obviously they're evaluating it, maybe they'll come back with the right action.

[Nagaraja Sadashiva Gargeshwari, executive]

But rest assured that the company will take all the statutory and regulatory procedures and we'll update you on this.

[Operator]

[Operator Instructions]. Next question comes from the line of [ Aditya Vilekar ] from Axis Securities.

[Unknown Analyst]

So just want to understand a little more clarity -- a little more clarity, what will be your key margin drivers going forward? So is it -- will it be a product mix or cost control or price hikes? So will it be a combination of all 3? Because now the steel prices have come down, so I guess the commodity costs are a pass-through for the company. So that's not the point here, but what will be the key drivers which will drive our margins going forward?

[Narayanswamy Muthukumar, executive]

See -- go ahead, Ranga.

[Sankaran Ranganathan, executive]

No, just to respond, it's actually a combination of all. I know we can't isolate one piece of it. Our -- generally, our M25 strategic initiatives really grow revenue, is always one of the key initiatives. We try to grow revenues and more profitable wins we want to bring it. That's always our aspiration and we work towards it. In terms of getting the margin improvement, we look forward very sustainable and long-term solutions to the total processes around it.

So obviously, year-on-year, we take targets on those things, whether it's the manufacturing process or the support process improvements, we certainly bring more automation and improve the productivity. Definitely driving the cost down is a consistent basis. Also, we are working a lot of initiatives, including the solar power in terms of initiatives towards the conversion cost initiatives. So all these things will definitely play kind of an improvement in the cost structure for sure.

If you ask me, we can't say -- it's a combo of everything, not singular to that. Definitely, when you say that improve the top line and improve the bottom line, the bottom line improvement, it comes to the operational excellence and mainly towards automation. So -- and after the fixed cost optimization is another points, we always keep in mind because that's where we've been very conscious about it. But definitely if you ask me, yes, it's a combo of everything. And so that's always [indiscernible]. We can't say that one singular thing, which makes a different, the answer is no, because everything is contributory. It has got an impact in the overall profitability is concerned. So Muthu, you want to add something?

[Narayanswamy Muthukumar, executive]

I think Ranga, well said by you, I think it doesn't come -- the profitability enhancement doesn't come from one simple something. I think if you look at our Mission 25, which we did, we have to work on innovation to continuously improve the product. It's not pass on the money to the customer, but at least give a customer a product that drives value, maybe lesser value for product, but expanding our margin, that the innovation will help us.

In terms of the growing revenue, thereby using our fixed cost asset utilization, the manufacturing excellence in terms of creating a world-class manufacturing, continue to work on cost reduction, maybe even optimizing on our fixed cost, all the areas has to come. But one thing that we are always there it's not the pass on. The commodity increase and decrease may be a pass on, which is like a transaction layer, but we work with customers on the transformation to see that how vehicle level the product can be innovated so that the total cost of operation comes down. That is what keeping us an enhancing business, at the same time enhancing market.

So we will continue to work on this. I think we'll work with the sourcing idea. I think Nagaraja and team are working with excellent sourcing ideas to find out that how we can bring customers closer, how we can work on various other avenues of the sourcing and to reduce the cost. So every aspect of our cost transaction, the team is working on to reduce the cost, increasing the margin and thereby become more competitive and reliable to the customers.

[Unknown Analyst]

Yes. One other point is means last -- in the last call, you touched rest of all these EV products and as we were discussing on the product mix. So these products like subsegments of tippers, defense, EV products. So I guess, these are the high-margin products. So do we see any substantial improvement from these products in the near future or maybe in the medium term, so from EV perspective?

[Narayanswamy Muthukumar, executive]

Okay. I think last time we presented you the latest studies by big 4, or big consulting firms like McKinsey or BCG or EY. They've shown that in India in 2032, only 15% of the electrification will happen in medium and heavy commercial. Having as an information on that, your company is continuously working to provide a solution to the customer that if the market is going to come ahead, we should be prepared for it. Like whatever indicated, we have been a preferred partner for Leyland for their axle. We have been working on various other solutions on [indiscernible] solution.

I think our acquisition of Cummins is going to give us much more leverage. So we'll work on it. Whether the market -- when the market is going to come? It depends on common situation. Whether your company is ready to launch the product? Yes, we are ready and we are ahead and keeping ourselves ready so that whenever the market comes, we can grab the opportunity. I think that's our strategy at this point of time. We can't change the customer behavior or going to tell him to launch the product. But should we decide to launch, we have a solution.

[Operator]

Next question is from the line of Nikhil Rungta from Nippon India Mutual Funds.

[Nikhil Rungta, analyst]

Sir, just one question from my side. In the presentation, you have mentioned that you are looking Q2 to be slightly better than Q1. And seasonality, if I have to take into picture, then Q3 is always better than Q2. And so can I assume that on a Q-o-Q basis, at least in the current financial year, we are seeing better movement on a Q-o-Q basis for the next 2 to 3 quarters?

[Narayanswamy Muthukumar, executive]

See, the thing why I think Ranga has made the statement in financial, Q2 demand is estimated slightly higher. Most of the industry OEMs have reduced their inventory in the end of quarter 1, right? So they dropped the production in April, May, June end, and July has been seen [indiscernible]. With the inventories cleaned up, we believe, and also because of the monsoon, normally it was a little less during the June, July. We believe that this quarter is going to be a flat or slightly higher. And Q3 and Q4 is definitely going to be good because a good amount of projects on infrastructure, good amount of projects, many, many [indiscernible] pent-up demand available. So we believe that the demand has to come.

The only difference there is interest rates going up and also the predictions about global recession. Ultimately, at the end of the day, it's not purely financial. It's a financial plus also a sentiment that let it better to work it out. So we are a little optimistic at this point in time should the market get into 370,000. That's going to be a slightly higher number. And if it has to come, it will come. That's what the -- that's why Ranga has given that in his financial that Q2 will be better. But for sure, Q3, Q4 should be better. And also, the statement from the honorable minister, Mr. Nitin Gadkari, that the FY '23 you may see -- next year, you may see the vehicle scrapping policy into the practice. They are now declaring about voluntary. That is going to come, [indiscernible] take the market up.

[Operator]

As there are no further questions. We have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.

[Narayanswamy Muthukumar, executive]

Ladies and gentlemen, once again, thanks for the confidence that you have reposed on our organization. And it's our organization, and we'll continue to work on meeting all the stakeholders' expectations and to win the confidence of our customers and continue to focus on innovation. Thank you for the confidence that you reposed on. We're looking forward to continued support in our journey towards making this organization a world-class organization and serving on the stakeholders with a lot of satisfaction.

Thank you very much once again Thanks, Sailesh, for hosting this you and B & K team, and thanks to my colleagues, Nagaraja and Ranga, for joining and taking time to explain this to all of you. Once again, thanks to every one of you and looking forward to see you soon. Thank you.

[Nagaraja Sadashiva Gargeshwari, executive]

Thank you. Thanks everyone.

[Sankaran Ranganathan, executive]

Thank you.

[Operator]

Thank you. On behalf of Batlivala & Karani Securities India Private Limited, that includes this conference. Thank you for joining us. You may now disconnect your lines. .