Automotive Axles Ltd

NSE:AUTOAXLES

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Automotive Axles Q4 FY '23 Conference Call hosted by Batlivala & Karani Securities India Private Limited. [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 Limited. Thank you, and over to you, sir.

[Sailesh Raja, analyst]

Yes. Thanks, [ Seema. ] Good afternoon, and thanks to everyone who have logged into Automotive Axles Q4 FY '23 Earnings Conference Call. Today, we have the senior management team. We'll be hearing from Mr. Muthukumar N., President and the CEO of Meritor HVS (India) Limited; Mr. Nagaraja, President and Whole Time Director, Automotive Axles; and Mr. Ranganathan, CFO, Automotive Axles.

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

[Narayanswamy Muthukumar, executive]

Thank you, Sailesh, for taking time. Ladies and gentlemen, thanks for keeping [indiscernible] interest in our organization and joining for this call. We really appreciate and value your time and your support for our organization. The presentation consisting about 9 slides that have already been shared with you. I'm just going to again give you an opening remark followed by Ranga and Nagaraj will talk to you in detail.

For those of you who are joining for the first time, you all know that this is a joint venture that is established between Mr. Kalyani's [ flagship company ] and also Meritor globally. Currently, it is acquired by Cummins globally. This is a very, very long standing successful joint venture in India, which is about 42 years old, and we are the leading suppliers of drivetrains, braking and suspension systems and aftermarket in the commercial vehicle space. Of course, we are also establishing our presence in the industrial market.

Just want to update you as on 31st March, '23, the AAL has moved up in the ladder and we began the 566th company of the top 1,000 companies with market capitalization at about INR 3.57 lakhs. We have 4 manufacturing sites with more than 2,000 plus co-employees. And as an independent axle manufacturing, we are #1 and we are holding the #2 position but continue to increasing our -- the businesses with various things. We have diverse end markets.

We have presence in commercial vehicle. When I said, we have presence in truck, trailer, buses, off highway, [ extend ] military and aftermarket mean, most of the OEMs in India are in commercial vehicle space. We are present with Ashok Leyland, Tata, Mahindra, Daimler, Volvo Eicher and, of course, Bharat Forge, supply for their defense. In terms of global, we supply UD Trucks to Thailand. We are supplying to Caterpillar. We supply to VFJ factory for their defense products. A little business with BEML, Godrej and [ completely ] Cargotec. We continue to expand our business with various customers by introducing innovative products. But before we talk it, I leave it to Ranga, CFO, to talk about the quarterly and the full year performance to you all, and then I'll come back on the new product. Ranga, over to you.

[Sankaran Ranganathan, executive]

Thank you, Muthu. Thanks for giving an introduction. Just want to give you an update on the financial performance to all of you. As Muthu said, all of you are watching us very closely. So we really see the last quarter performance is about INR 694 crores. In terms of sales, as compared to the previous year about INR 552 crores and a growth of about 26% on a quarterly basis.

EBITDA, we are at 11.4%. And in terms of absolute values, at INR 790 crores. And of course, there are about 4 commodities. We have accounted -- 3 commodities, we accounted this quarter. So -- and the PBT is about 9.8% as compared to 9.3% last year the same quarter.

If you look at the [indiscernible] 12 months performance, the total year, the overall revenue reached a milestone of INR 2,328 crores, close to about 56% growth. Last year, we are close to about INR 1,500 crores level. And EBITDA, we are at 11.3%, which was 9.3% last year the whole year. So in terms of the absolute money, I think we have shown a growth of 89%. And PBT, we were at 9.4% this year, which was 6.7% last year, and it's about growth about 118%. And so that's the overall summary of it and -- for the full year and the quarter performance. If there are any specific questions, we'll take it up in the question and answer. Thank you.

[Narayanswamy Muthukumar, executive]

Thank you, Ranga, for giving a summary of quarterly and full year performance. I'm sure that there will a lot of questions. But ladies and gentlemen, may I request now Nagaraj to talk about the new product launches, which is very, very key in the business and what we are working on, what type of product penetration we are going to do and how we are improving the reliability in the market. Nagaraj is going to talk about that and also the initiatives that we have taken on circular economy for creating a sustainable society. Over to you, Nagaraj.

[Nagaraja Sadashiva Gargeshwari, executive]

Thank you, Muthu. Good afternoon, everyone. Once again, thank you for calling in to this conference. As Muthu mentioned, one of the key strengths of Meritor and Automotive Axles is new products or the products. We cater to the market, any -- for any commercial vehicle, 7.5 tonnes and above. And as you can see, last year, we have launched 7 products. Out of 7 products, if you look at MS 185 and 160 EVO, these are all new products to the market, both of them are developed and customized for India-specific applications, and we also hold the patent in these 2 products.

These products are -- the way this has been designed is to ensure that total cost of ownership for the customer has come down. So -- for example, MS 185. It replaces a tandem axle, but still does meet the durability requirement and application requirement of the customers for a 55-tonne tractors or even for the 10x2 [indiscernible] tipper. So the 15i 18TG BGS is one of the kind that has been introduced in India. This has a 16 mm housing designed for a heavy-duty application, for tipper application, especially in the mining. And again, this has been launched and ramped up in [indiscernible] period.

Our 395 Brake is not new to India, but the team has been able to develop a very specific application for one of the customer. And as Muthu was mentioning, we are not only -- until -- at present, we are #1 independent axle manufacturer, but our goal is to become a #1 brake manufacturer also and supplier also. And the Dia 360 and Dia 394 Brakes launched with our customer is going to take us there.

Next slide. So again, how do we get there? One is bringing in the performance, bringing in the financial performance, operational performance. But at the end of the day, can we do it in a very responsible manner and ESG exactly helps us in going to design our way, design our products, design our operation and process so that we also work towards environmental sustenance. So the Destination Zero is one critical goal that our company and organization is committed to. We did touch upon this during our earlier investor call also. I'm just going to give you a little bit of update on what we have done.

So we are on our way to achieve the 80% of power consumption through renewable energy. We have already initiated some of our formats. If I have to give an example, our formats, which is basically we're using LPG, we've already moved into LNG, which is slightly better. And also some of the pre-heating and other things, we have already switched over to electrical. Our goal is that over a period of time, we can eliminate the LPG use except for some critical areas.

Similarly, reducing packaging, we did talk about -- Muthu was talking about, in all the exports what we are doing, we have already with one of the key export customer, we have already switched over to a fully returnable containers or metal containers, eliminating the wood. We continue to do that. As on date, 90% of our supplies will happen either with returnable container or we don't use wood. And we are on our way by 2028 to eliminate 100% of wood for packaging.

So -- and we continue to engage in social issues, working with technical institutions, working with other institutions where we can help the specially abled and some of the class -- society classes where they will be requiring support from organizations like us. And diversity and inclusion initiative is another area probably [indiscernible] last time. We are not just looking at the -- improving our gender diversity, but we are also looking at how we can bring in all classes of society and -- in both at our organization, also with our supply chain partners. Employee safety is we have made a big improvement in this area. We continue to invest in our processes, which will take care of our employee health and safety.

So with that, I will hand it back to Muthu.

[Narayanswamy Muthukumar, executive]

Thank you, Nagaraj. We touched upon all the points. Ladies and gentlemen, as we indicated, we continue to focus on circular economy in our aspiration to become Destination Zero. The point what Nagaraj touched upon, 80% of power consumption through renewable [indiscernible] start. Many more activities are happening, and the team is doing an excellent job.

We have a Mission 25 growth strategy that we have presented to you. And Ranga was talking. I think he's going to talk about this slide from the key initiatives. But I just want to tell you, everyone, last year when the market is still lower when compared to the 2018, '19, your company will be able to penetrate more because of the various initiatives we have taken, like what Nagaraj said, there is some new products, creating a modular design, increasing the new product is more reliable, which is also putting -- the customers are demanding a lot more when compared to what was it was previous.

There are companies which are going up to 6 years and 6 lakh kilometers in warranty, and we are also continuously working to upgrade our products, both technologically and at the same time, innovatively to make sure that we contain our cost, but at the same time, providing the value to the customer. I would request Ranga to touch upon the Mission 25 growth strategy where we are and what are our focus for the company in ensuring that we have managed the business successfully and taking it forward. Over to you, Ranga.

[Sankaran Ranganathan, executive]

Thank you, Muthu. Once again, good afternoon to all. As part of Mission strategy, all of you must be knowing that we are really committed to grow our top line as well as the bottom line through our employee engagement and new product development. So as Nagaraj was telling that as a method and process, what we wanted to do is more holistic, taking into the green initiatives part of the growth strategy. And when it comes to the performance, I just wanted to bring you -- all your attention. The MHCV production for 2023, roughly around 407,000 vehicles. But still, as Muthu mentioned, is lower than the 2018, '19 level.

But really you see our revenue for this year is one of the highest in Automotive Axles' history, about INR 2,300 crores plus and higher than the peak of 2018, '19, and -- though the market is not geared up to the value. So also in terms of EPS, I think [indiscernible] Automotive Axles, this is the highest EPS we ever declared in this -- in the whole financial year. So that definitely is happening only through our keen focus on Mission 25 initiatives.

As the Mission 25 initiative [indiscernible]. As Muthu said, the market definitely need a new product. We are working with the customers' new product to -- the new product requirements and the warranty expectations as well as ensuring the value benefit at both the sides. Our focus continues to be grow along with the market and try to work -- try to ensure that we grow slightly above the market growth is always our ambition. We have been trying to demonstrate that, and we'll continue to focus on it. So market expected to grow this year about 5% to 8%. That's a little bit of conservative from our side, but it's got a high potential, but we wanted to pick it at this point of time by 5% to 8% at the beginning of the financial year as far the MHCV is concerned.

I said that the operational excellence is a key for the growth, and our focus continues to be on Industry 4.0. And [indiscernible] paperless office to digitization is our key focus for 2023, '24 and further years too. And our focus continues to be on improving the conversion cost and material cost performance through various methods that again, we have a specific team is working on it as part of the Mission 25 to improve the performance of material and the conversion cost year-on-year.

And one of the key points, which is probably a dynamic which we have to manage around, we have been managing it reasonably well, is the commodity fluctuations and movements. Sometimes it's often, sometimes it is [ hard impacted ] to take it. But we have to see really our initiative to see that this commodity fluctuations are managed well. Just more -- 2023, '24, the commodity price softened, but we have to wait and watch. But looking up, still prices are going -- go up in '24, '25. But probably we might work on the performance of the company that the commodity price fluctuation is not really impacting us. So that definitely be a challenge, but definitely, it will be a focus area from our side too.

That's the point from. And the last slide, Muthu, you want to take it?

[Narayanswamy Muthukumar, executive]

I suggest that if you complete our key actions to manage business successfully, then I'll come back. Please do it.

[Sankaran Ranganathan, executive]

Yes. The business growth strategy, we have already signed up [indiscernible] customers. And you take it up, Muthu...

[Narayanswamy Muthukumar, executive]

Thanks, Ranga. Ladies and gentlemen, I just wanted to reassure to most of you that while the company continues to do the growth strategy what we're doing, continue to expand our margins by doing the cost measures and also value engineering, but also bringing in more focus on safety and diversity, inclusivity in the team. Please rest assured that your company will do everything to make sure that we continue to excel in what we are doing and increase the values to our shareholders.

Also, I wanted to give an update you all, ladies and gentlemen, the Cummins integration into our acquisition of Meritor has been approved. And in India also, the [indiscernible] approvals have come. And we are now the Meritor acquisition -- Cummins' acquisition of Meritor is complete now across all the regions.

With that, over to you, Sailesh, for the opening up the question.

[Operator]

[Operator Instructions] We take the first question from the line of Mr. Pratik Kothari from Unique Portfolio Managers.

[Pratik Kothari, analyst]

First of all, congratulations to the team for such a wonderful performance. So my first question is a couple of years back we had embarked on this journey to enter new segments, LCV, [indiscernible] on the MHCV side, [ e-mobility ], slipper suspensions. So if you can just talk about where we are in that journey, how is the feedback, how is the adoption in the market?

[Narayanswamy Muthukumar, executive]

Thank you, Mr. Pratik Kothari, for starting the question. As indicated in our past meeting, we have an aspiration to go into off highway, in the defense and also LCV segment. We have already penetrated in ICV segment in about 6-tonne vehicle. You all know that we have been supplying to Ashok Leyland in terms of [indiscernible] few segments. We have a product called 11X, which we are using for those and -- 10X and 11X for those. But we are continuously evaluating our strategies. And the market, the way in which the electrification of new [ fuel ] is going to come. The adoption is going to come much faster in the LCV segment, bus segment and then followed by the commercial vehicle. So with that, keeping in mind, we -- while we continue to work on the platform, going some extent at this point of time, we are evaluating the credentials of investment at this point of time and holding it back. So that is just we wanted to let you know.

[Pratik Kothari, analyst]

Sir, and what could -- quantitatively, what could be the contribution from this new segments currently?

[Narayanswamy Muthukumar, executive]

Quantitatively means? Sorry.

[Pratik Kothari, analyst]

I mean numbers-wise, what kind of numbers are we doing there?

[Narayanswamy Muthukumar, executive]

We don't share the segment, but whatever the segments we are supplying to them, we are 100% to them now. If those vehicles where the product we have segmented, for Ashok Leyland and Mahindra, we are supplying 100% to them. But I don't -- see because there are a lot of other customers available. The overall market is different. And we also don't share our [indiscernible]. But whichever the segment we developed, the product, it's not only for India market, even if it's going out to export for those vehicles where our customer uses, we continue to be 100%.

[Pratik Kothari, analyst]

Got it. And sub-6 [indiscernible] where you said you are reevaluating given the changes happening in the industry?

[Narayanswamy Muthukumar, executive]

Well, [indiscernible] is already running it. Nagaraj, you want to add...

[Pratik Kothari, analyst]

Sub-6 [indiscernible].

[Narayanswamy Muthukumar, executive]

Sub-6 [indiscernible], we are taking over it, but Nagaraj can give you an update on our 10X and 11X, how we have penetrated into the market and what level of quality improvement we have done. Nagaraj, do you want to touch up on 10X and 11X?

[Nagaraja Sadashiva Gargeshwari, executive]

Yes. No, the 10X and 11X, usually, we develop these products mainly for the truck application. But based on the customer request, we have already applied it to the minibus application also. And some of our customers are also kind of using it in Asia Pacific or Middle East application also. So we are seeing growth coming in there. Like what Muthu mentioned that every segment wherever we apply our product, we just want to make sure that, that meets all the customer requirements, end customer requirements. So we have developed what we call it [indiscernible] noice sensitive gearing for that. So it is doing pretty well at this point of time.

[Narayanswamy Muthukumar, executive]

Thank you, Nagaraj.

[Pratik Kothari, analyst]

And sir, my second question on margins. So given the cyclical peak that we saw in FY '19, for the next 2, 3 years, we did a lot of -- brought down our breakeven costs and a lot of measures that we have taken on our operating side. And our expectation was if we go back to those numbers there, and we are significantly higher from there, our margins should substantially shoot up maybe mid-teens or what we had bought up. So just one, why won't we see that? And we are making this -- are we reinvesting it somewhere?

[Narayanswamy Muthukumar, executive]

Thank you for the question. I know this is there lingering in your mind, please you look at this. I know that in terms of percentage, you are comparing. But look at the amount of commodity in this business, we get compensated only for the material cost of it and nothing else from the OEMs. And it is a very, very tough market when the migration with BS-VI is happening. The amount of improvement that has been done by the operating team led by Nagaraj or in terms of the strategy team with Ranga has really helped us in at least sustaining -- the percentages are improving from it. But if you can see the growth in the absolute margin, what it was there in 2018 and now, an amazing growth which has happened.

And you can see in the 12-month performance of FY '23, how the team has done it. All the initiatives that we have taken, whether it is the control to material cost, whether it is control to conversion cost, whether in terms of the people cost, while we are very, very sensitive in terms of making people to grow, at the same time cost -- component or cost per axle continues to come down. These are the initiatives that we've taken, and we continue to do those initiatives to make sure that we [ can ]. But in terms of profitability growth, I understand your concern, but there is a huge material commodity increases between 2018, '19 and now.

And ladies and gentlemen, I just wanted to let you all know that even though the market has not come back to the FY '18, '19 level, you can see the amount of penetration what we have made, which is purely because of the various initiatives that we have taken. Our top line has grown significantly when compared to the previous peak of the market. But still market is about 15% lower than that level. Ranga, you want to add anything, Ranga?

[Sankaran Ranganathan, executive]

No, you exactly said, Muthu. I just wanted all of you to understand that market was -- compared to '18, '19, was 15% lower. And if you really see, our growth is 20% higher than what really is done in 2018, '19. One of the critical factor -- [indiscernible] factor in the whole aspect is about the commodities. And also the real -- a lot of other penetrations that we had with the customers, what Muthu was explaining. So if you really look at the profitability also now, it's really seen we have substantially grown as compared to the profitability year-on-year to 120% growth and all that is purely -- it comes through our penetration to the top line, and the growth in the top line as well as the various cost initiatives we have taken [ either. ] Otherwise, this commodity, it could have been adopted a very normal approach to the entire thing, then probably, [indiscernible] manage the commodity very well.

And now we are generally looking at ahead of the commodity changes impact of the business. And we drive our cost improvement strategies in such a way that we try to compensate and bring it more than the impact which is coming to the P&L [ that ] generally be there. But as an outset, rather than looking at it on a quarterly basis, I appreciate if you look at it on a yearly basis. And -- because quarter-on-quarter, there are very fluctuations being there, though we are trying to perform it alongside the growth.

But overall, if you look at the year, I think we have performed really well in terms of 120% growth in the PBT level. So it's very significant, means our fixed cost in control. And variable costs also contributing as EBITDA's absolute value is also going down. In terms of percentage, sometimes it gives you a [ misnomer ] picture as Muthu was indicating. The commodity, when you are taking [ into a system, ] it may create a kind of a base impact. But in terms of absolute values, we have substantially grown. The absolute value money is impact with organization. That's only summation I have it for you.

[Narayanswamy Muthukumar, executive]

Giving a comfort to you or to put this, post-COVID what happened is, I think our biggest challenge was our supply chain and -- to make sure that those people are intact, and we continue to deliver. Most of the focus, I think I wanted to appreciate Ranga and Nagaraj and their team. When the market again come back last year, I think we could be able to penetrate market because we -- our response time to the customers was much better than our competition and that is why we could be able to go more. While we could have taken a decision for holding only us, but we have taken the entire supply chain, the value system, which is created is all taken care during this period and done it. You also [ notice ] that the Ukraine war that has happened, there are a lot of cost increases in terms of the conversion, whether it is petroleum cost that has happened or in terms of the tools, [ carbide, ] which are getting imported.

But the team did a tremendous job in terms of -- I think there is an average about more than 25% to 30% increases in the conversion that has happened, but the team has mitigated it very well in terms of approaching the half cost approach or in terms of converting to sustainability model. It was an eye-opener for us to understand when Nagaraj and team did [indiscernible] well in terms of sustainability initiative. It's also supporting you in terms of bringing your profitability.

So I understand your concern, but your organization irrespective of the market, the market continues to be -- they're all predicting about flat or 5% more for next year just because it's an election year before that. But ladies and gentlemen, we are believing that India is going to be the center of stage and center of excellence and more and more business is going to come to India. The component business in India is going to go very, very high, and we are also working out to see our strategies on how we need to grow in the market and what is the opportunity that is going to come from other countries to India, during that time, how we need to capitalize. Thank you very much.

[Pratik Kothari, analyst]

Just for an understanding, sir, we should look at our volume numbers of MHCV or tonnage numbers? I mean how are we more linked to? Or what are we most linked to?

[Narayanswamy Muthukumar, executive]

See, there are 2 things that happened. When compared to -- I can roughly give you, I think the OEMs are very, very authoritative and they are the subject matter expert of this. But I strongly believe that when compared to 2018, '19 tonnage we have crossed. But believe me, our content per vehicles also we have increased it by going in for a new product, which is bigger than what it was. So we are selling the same number of axles, but our realizations have gone up substantially. I think that's what Nagaraj talking to in the products that what we have introduced like 185, 160 EVO, these are the -- that 185 is the largest axle that is being produced in India. So the same axle what we are supplying earlier for a 49-tonne vehicle, now with a 59-tonne vehicle, we have increased the size of axle to -- so it will be only one axle from us.

So we continue to work, but you are right. In terms of tonnage, we have already -- India has crossed the 2018, '19 number of vehicles into tonnage what is produced. That is happening because of 2 things. One is the axle load rating changes that has happened. And that -- when the OEMs introduced in 2020, the BS-VI model, most of the upgradation has happened. And you know the shift that is happening in India towards tractor trailer and towards [ more of ] tipper, the high tonnage vehicles are being produced. And we are upgrading our models like 185, 18TG axle. 18TG axles and all are used in the same truck as the tandem axle, but the axle content is much, much higher.

[Pratik Kothari, analyst]

So the reason I asked this is because if India has crossed the tonnage and if we compare our numbers, our revenues are up 20% from the last peak, which we say in FY '19. And almost all of it or more of it can be explained by the raw material price increase, which has happened [indiscernible].

[Narayanswamy Muthukumar, executive]

No, no, no. It is not because of -- all is not because of raw material increase. There is a content increase in the axles what we supply to them. [ Per axle ] realization has considerably gone up on top of this. While I'm not in a position to give you what is the exact split-up of commodity increases, commodity increases is not 20% over a period of time.

[Pratik Kothari, analyst]

Over 3, 4 years, wouldn't it be that much?

[Narayanswamy Muthukumar, executive]

Sorry, sir.

[Pratik Kothari, analyst]

Over 4 years, wouldn't it be that much?

[Narayanswamy Muthukumar, executive]

No, no, no. It is not 20%. Because [indiscernible] 2018, it went down in 2020. Just wanted to let you all know, in 2020, the market went down on commodity, again picked up from '21, '22. So if you see the -- you are comparing again 2018, which Ranga spoke. That's why I'm saying that when compared to 2020, the commodity has gone up substantially. But when compared to 2018, '19, it's not the same level, slightly up when compared to that.

[Operator]

We take the next question from the line of Mr. Deepak [ Jain ] from Enam AMC.

[Unknown Analyst]

Sir, on the new products, each of these products, let's say, 185 you talked about or maybe the brakes, which are addressing the large addressable market? And any customer approval has come for these new products?

[Narayanswamy Muthukumar, executive]

Thank you, sir. For example, the 185, we already -- about more than 3,000 -- correct me if I'm wrong, Nagaraj, 3,000 vehicles [indiscernible] in the market and the volume is growing. Already customer has purchased, and the product is in application. We are looking at more customers to expand this market. See, that's the objective, right? Our products like 185, 18TG, when we're going to expand this market, the reliability of product is going to go up, our content per vehicle is going to go up. And at the same time, our realization for axle is going to go up.

[Unknown Analyst]

Okay. And on the brakes, which you have introduced?

[Narayanswamy Muthukumar, executive]

See, the brakes is -- basically, 394 or 360 is all -- 360 is to penetrate into ICV vehicle, earlier we didn't have the product. The 394 products and 325 is again in ICV, smaller vehicle. The 394 brakes is again a value-engineered product to the customers, and that is what has helped us to gain a huge share in the market. We have grown substantially in brakes, while we are not in a position to give you the split of axles and brakes. But you can see the growth to what has happened in the market in commercial vehicle and how we have grown. We have grown every segment [ on highway axle,] off highway axle, brakes, export, every area.

[Unknown Analyst]

Okay. Sir, on the broader question, with Cummins coming into the picture, is there any new products for global sourcing or any strategy change, which you would have -- which you would like to share due to that?

[Narayanswamy Muthukumar, executive]

So with Cummins coming in, we are looking at synergies both within local India because of -- they represent a very strong relationship with Tata, our relationship with Ashok Leyland. Both of us are trying to complement each other and try to see how we can grow in the local market. At the same time, it's not only because of Cummins coming in, Cummins coming in is going to accelerate. But look at what is happening globally. India is becoming a preferred location for manufacturing in the days to come. We strongly believe by [indiscernible] when India is going to reach towards [ INR 10 trillion ] economy [indiscernible] it is good to happen, more and more manufacturing [ process ] to come.

And I'm sure that Cummins-Meritor globally will look at India as a best cost country sourcing. So it is -- more and more is going to come from -- to India, and we need to -- we also need to upgrade our plan. For all of you know, not all the products we produce in India. These are all India-specific applicated products. There are certain global products also, but we'll continue to work on to see that how we can synergize this Cummins integration and try to make the company from good to great.

[Unknown Analyst]

Okay. Sir, now in terms of revenue growth, I was looking at last few quarters, it has been very strong and more than the underlying industry growth. So one part is due to the inflation and there is a volume part. So now when you are guiding for going forward, FY '24, you have guided for 5% to 8% growth. So you would intend to grow much higher than the industry? Or it will be more reverting to the mean volume growth?

[Narayanswamy Muthukumar, executive]

Our strategy is multifold, okay? I'm just not taking quarterly. I know that you have touched upon the point every quarter we are growing. Look at between FY '22 to FY '23, we have grown 50%, whereas the market has not grown by 50%. The market has grown only by 24%, 25%. Our strategy for the growth, the increase in revenue, even though I'm not able to quantify, I can give you rough number. Maybe about -- something due to commodity, it's very -- nearly double-digit, I would say. There is an increase in the penetration of the share of business. There is an increasing content of the vehicle. Also, there is an increase in our share in other segments like what we are doing in export, what we are doing in off highway in those segments which we introduce.

All these things put together, it's growing. Our aspiration is always -- I know it is very, very tough. But we wanted to definitely outgrow the market growth. Market growth is one, but our growth will never [indiscernible] with the market growth. We want it to be -- our aspirations are high, but we want to be definite. I cannot say this number, but we wanted to be more than the market growth. You can see it by yourself, last year, our growth is much, much better than the market.

[Unknown Analyst]

Okay. Sir, one last question. The regulatory changes, which we have witnessed in the recent past, let's say, BS-VI, what was the content increase due to that? [indiscernible] not much.

[Narayanswamy Muthukumar, executive]

In terms of -- thanks Deepak for asking this question. In terms of the market, what [indiscernible], the OEMs adapted a different strategy. There were some OEMs which has taken that increase in the cost only now. There were many OEMs, which I don't wanted to mention. I think you should take it up in their call. Some OEMs have done it even from the BS-VI Stage 1. So in terms of the product, we have tuned our product to those customers who have done it now. But in terms of the content of our axle or something, it's only a change in the little processes and our -- change in our application of the product and not much change in the content of the vehicle from our side. This cost increase of onboard diagnostics or emission system management is mainly towards their emission system and only few support from the axle changes.

[Unknown Analyst]

Okay. So basically, whatever major growth, as I understand, is from the market penetration and new products only? Or is it from...

[Narayanswamy Muthukumar, executive]

Market penetration comes because of new products and also our growth in the business. Of course, on top of this, the content per axle, per axle because like a bigger axle when you introduce, the content [ goes up per axle. ]

[Operator]

We take the next question from the line of Mr. Sagar Parekh from One-Up Financial Consultant.

[Sagar Parekh, analyst]

Two questions from my side. So if I heard you correctly on the Cummins integration, I believe you mentioned that the synergies will come from, one, on the relationship with Tata that we can possibly explore; and the second could be the export opportunity for Cummins, I mean, for global market from India. Is that the 2 big synergies that we can tap from the Cummins coming into the picture?

[Narayanswamy Muthukumar, executive]

See, Cummins is a great company and Meritor is definitely fortunate to have this association. I just said as an example of -- it's not only with Tata. Cummins has a very, very strong [indiscernible] with some OEMs in India and if Meritor is not present there, I said -- Automotive Axle is not present, I said we can have a synergy for the local customers. It's not only Tata. There are many customers where when we are not there, how we can synergize is what I said. Of course, for exports, I said Meritor is continuously working from sourcing more from India in terms of exporting [ to other. ] We are not directly competing with any other region. We are supplying subsystems to the other countries because the customers are being serviced by Meritor.

But what I said is Cummins will accelerate or catalyze this transition much faster because the global is looking at India for the center of excellence and having more export because of the trust, reliability, you can call anything with the current geopolitical situation what is happening. So that is why I said, Cummins. It's not only on the growth that we are looking at from Cummins, there's a lot of good systems and processes either in terms of safety, in terms of diversity, in terms of sourcing, supply chain in terms of the manufacturing practices, the organization is going to get a window of opportunity to go and expand and synergize in all the areas is going to happen.

[Sagar Parekh, analyst]

Right, right. No, my question was actually that this Meritor would be having a lot of global manufacturing capacities. So Cummins -- actually the Cummins Inc., they have, I think India and China are the 2 major sourcing hubs for global market because they do not have capacities across the world. But Meritor would be having capacities globally. So in spite of that, we can still tap -- like they can look at India as an export hub is what you are saying?

[Narayanswamy Muthukumar, executive]

I don't think. See, In the -- from the manufacturing perspective, Cummins manufacturing plants cannot produce axles, and axle producer cannot do this. I don't think nobody will stop the manufacturing at U.S. and buy it from India. It's not going to be economical because there is a huge pressure in every country, particularly U.S. on the local content also. You all know about it, and I don't want to get into that. So exporting a subsystem is going to happen. Cummins [indiscernible], but it will be more depending on the lead time [indiscernible] to the customers. And you know the U.S. market has continued to be strong at this point of time, and we have a good order book that's available.

But there was also a lot of talks about the global recession that's going to happen. But at this point in time, we see a very strong U.S. market, whereas in Europe, we see a flat. So it all depends on the situation, but definitely Cummins acquiring and bringing in more and more to India is also [indiscernible] at the same time, the geopolitical situation of Cummins more to India. And of course, what Nagaraj and team are doing in terms of improving the reliability of the product, delivery activity, the quality and the precision supplies what we do.

[Sagar Parekh, analyst]

Right. And Cummins, actually, I believe in the last call, you had mentioned that Cummins is very strong in the off highway segment where they supply the engines to the mining sector, that could be one potential area that we can look at in terms of synergies, right, where...?

[Narayanswamy Muthukumar, executive]

We are working very, very close with them to go to those customers and see -- see, off highway is a different cup of tea, where there are certain suppliers who [ merge ] engine, transmission, driveline, everything to get [indiscernible] to the system. So we are evaluating that, and we are using Cummins expertise to see that how we can accelerate and how we can penetrate into those segments. It's definitely going to happen. Of course, military too.

[Sagar Parekh, analyst]

Sure, sure. And my last question would be on the margin. So well, I understand that last 2, 3 years, there have been massive commodity inflation, due to which percentage margins is not looking as per our expectations. But going forward, as we -- as the commodities deflate -- kind of deflate, then the cost reduction initiatives that we have taken over the last 2, 3 years that we have been talking about, will that be reflective in the margins, percentage margins? And can we expect like kind of 13% to 15% kind of range going forward as the commodity -- assuming that commodities will deflate?

[Narayanswamy Muthukumar, executive]

Okay. Assume commodity is going to deflate, let me tell you, from April, there is already a commodity increase that is going to happen. I don't want to speculate on whether the commodity is going to go up or come down. The impact of -- base impact, what Ranga said, it has to be evaluated for the level of what you are saying about going up by 3 to 4 points in a couple of years. I don't think base impact that commodity is going to inflate to 13.5% or 15%, what you said. And I don't want to comment on that. But one thing that I can rest assured is it is just because of commodity movement going up and come down, Cummins-Meritor performance will not be reflected on that. It will be one of the factor. We continue to put on our product innovation. We continue to launch new products.

We continue to work on cost reduction activities, and we also go to the customers, we find out that what is the total cost of ownership and thereby expanding. All these initiatives will continue to be there, and we'll be marching towards those targets what we have indicated. Our aspiration is there to reach. But within 1 or 2 years, we are going to reach. If it is an arithmetic number in 1 or 2 years, it's different. But this all has to come back with a substantial action and substantial delivery point within the entire value chain system.

[Sagar Parekh, analyst]

Got it. And basically, we have this arrangement with Meritor HVS. Is that going to remain as it is with the Cummins coming into the picture? Or...

[Narayanswamy Muthukumar, executive]

Cummins and both -- I think last time, we introduced the slide the Cummins CEO, Jennifer Rumsey or Mr. Kalyani, the Chairman of the Automotive Axles. Both have been very, very upbeat about the positive relationship what we're going to have. The relationship is going strong, and it will continue to be there in the current system...

[Sagar Parekh, analyst]

Okay. So just - -on Slide #8, there is the first point, the successful implementation of LTA agreement, what does that exactly mean?

[Narayanswamy Muthukumar, executive]

See, at this point of time, we have a very, very successful long-term agreement with various customers like our largest OEM customers. I can tell you that more than 70% of the business by numbers or value, we have our LTA agreement running up for at most next 2 years, which is going to really help us to focus on what more we can do and we have started -- our team is already working on how -- beyond 2025, how do we need to expand, how do we need to grow and what type of initiatives need to be done, [ the very first thing ]. So at this point in time, we have a clear long-term agreement signed with the customers.

[Sagar Parekh, analyst]

So it's largely renewal of contract for next 2 years as well?

[Narayanswamy Muthukumar, executive]

It's not only renewal of contract, but also the new contract that we got in.

[Operator]

[Operator Instructions] We take the next question from the line of Mr. Nishit Jalan from Axis Capital.

[Nishit Jalan, analyst]

Sir, my first question is also again a follow-up on the new product introduction. One of the reasons we were looking to launch this more improved products is to offer a better value proposition to some of the OEMs who are not our customers currently, right? So any breakthrough there? Anything -- any major development there? They have liked our product. They have taken for sampling. Can we gain more business out of them? Because while you are doing your work in terms of better penetration, moving towards higher tonnage vehicles and all, a major part of the growth can come is the largest MHCV OEM can start sourcing more and more from us. So any progress on that front?

[Narayanswamy Muthukumar, executive]

Well, we continue to work on this. It's a little -- I'm not saying that it's impossible. But it's a little challenging because most of them have invested on the axle manufacturing inside their facility. And most of the largest OEMs are doing the axles by themselves. So our innovation, what it is going to happen, if it is going to substantially improve that, the OEMs will come to us. We continue to work on them. It is not that our products are not sold to the company which are making axles. There are certain companies which are making axles by their own design.

Still they are buying the premium products and unique product from us. If it goes to the export, everybody buys it from us, whether it could be Daimler or whether it could be Volvo Eicher or Tata. But how do we penetrate into all the segments is what we continue to work. I think -- thanks for the question, and we look at all your wishes on to us to penetrate and get more business into this segment.

[Nishit Jalan, analyst]

Sir, just to probe a little bit more on this. When you say that your axle MS 185 or 18TG offers a better performance, what exactly are we talking about in terms of parameters where these axles will be better compared to the previous axles or maybe some of the axles which are being manufactured in-house by the OEMs?

[Narayanswamy Muthukumar, executive]

This is some of the new launches, which was not available earlier, [indiscernible] tractor trailer and all. But I would leave this question to Mr. Nagaraj to explain because he's an architect of these designs who have created. Nagaraj, over to you.

[Nagaraja Sadashiva Gargeshwari, executive]

Yes. This is with respect to 59?

[Narayanswamy Muthukumar, executive]

No, 185.

[Nagaraja Sadashiva Gargeshwari, executive]

Yes. So again, 185 is a product which can be applicated in multiple areas. So the first one, like I mentioned, for tractors and like 10x2 tippers. This essentially reduces the overall cost of ownership for the customer without compromising on durability or performance. And in fact, for probably just an information for all of you that this is one of the most, I would say, popular kind of an axle in China. So essentially, we are bringing in this technology and then also manufacturing capability and capacity. And we believe that as the infrastructure is improving and more and more tractor trailer application is going to happen, I think we'll be in a very good position to realize on those increased market shares.

[Nishit Jalan, analyst]

Okay. Sir, my second question is defense could also be another growth opportunity for us. I think we already have products in place, but there is -- the order from the government in terms of armored vehicles and all is taking more time. Any progress there or anything you have heard from your OEM customers regarding progress on the defense side?

[Narayanswamy Muthukumar, executive]

For sure, the government has started. I think, thanks, if you go back to the initiatives of Make in India are buying more from the defense, a good amount of progress is happening as a country. I think more and more of the products is being sourced in India, and we are also beneficially because of this. I think while we are not giving the split between the defense and all, we are growing in this segment. And we supply to the major -- our OEMs for their defense, even though we don't supply directly other than VFJ factory, which they were making vehicles, we were supplying axles. But the rest of the things, we're supplying to the OEMs.

[Nishit Jalan, analyst]

So while you can't share the numbers, will defense be less than [ 5% to 10% ] of your total revenues? Is this -- would this be a fair understanding?

[Narayanswamy Muthukumar, executive]

Wow. I think it's a nice way of asking when we know that we have a sale of about [indiscernible], and we don't share the numbers, you are asking 5% to 10%. I leave it to the guessing at this point of time. And sorry about it, that we are not in a position to disclose those numbers.

[Nishit Jalan, analyst]

So basically, why we are getting to it -- or why I am getting to it is basically just to understand what could be the quantum jump or what could be the delta which could come from defense? Will it be a small delta leading to a few percentage point growth, let's say, if industry grows at X%, you will grow at X+2, X+5? Or if industry grows at X%, you can grow at X plus 10%, X plus 15% if some of these things, exports, defense and all starts materializing over the next 2, 3 years?

[Narayanswamy Muthukumar, executive]

I know the intentions, and I'm sincerely apologize for not able to give it to you. But one thing -- one assurance I can give you, whatever the way industry grows, I think we'll be better than the industry growth. That's what I can tell you at this point of time. I'm sure that we will try to see at what time we'll be able to share this information in the future. Sorry about it.

[Operator]

[Operator Instructions] We take the first question from the line of Mr. Aditya Welekar from Axis Securities.

[Aditya Welekar, analyst]

Yes, sir, just to understand. If we remove the cyclicality of both the top line and cost side, so from the top line, we are slightly cyclically dependent on the MHCV cycle. And on the cost front, we have our commodity, steel prices and all. So if you really [indiscernible] your internal EBITDA margin target, long term, which you have in your mind?

[Narayanswamy Muthukumar, executive]

Sir, we are a customer-focused company, and our focus is more on how to penetrate into more and more customers and [indiscernible] target every 2 -- 5 years when we are working [ on the ] strategy, we try to grow in terms of EBITDA. The EBITDA margin is not only for making for us, but we wanted to work very closely with the customers and making sure that the customers who work for us find our products, the total cost of operations is much, much better than competition. Basically, you see that we are continuously growing [indiscernible] the growth that what we are bringing in. 1 or 2, for example, like what Nagaraj said, the product 185 can bring [indiscernible] the market, what we brought in. We could have made another couple of points of profit in there, but what -- the trust what we created with the OEMs is we are providing a solution to them, which will make them to penetrate into this. And that's why more and more OEMs are continuing to stay with us, working with us.

While we have an aspiration to expand the margin, and we will continue to grow on this. Internal aspiration is much, much higher. And I don't think -- I think both the companies, Mr. Kalyani and Cummins, both of them are a technology product and both of them have a huge aspiration to grow. Ladies and gentlemen, trust me that they put the same pressure on us also to expand the margins and at the same time growth. We will never compromise on growth for the profitability or profitability for the growth. We'll continue to work and expand, but the internal target at this point in time, I'm not in a position to share with you.

[Aditya Welekar, analyst]

Okay. Fair enough. So one specific question on this Q4 numbers. So if we see our revenue has grown by 6% sequentially, but EBITDA stood almost flat Q-on-Q. So one reason is the raw material, but the other expense component is also increasing. So -- which I think is in our control. So why it's -- why the increase in the other expense is happening? Any measures you will take to contain it?

[Narayanswamy Muthukumar, executive]

Ranga, would you like to answer on the other expenses?

[Sankaran Ranganathan, executive]

See, we said at the initial of the meeting, there are 2 aspects only for commodity, for sure. And also we have agreed for an extended warranty with the customers. So we have provided a onetime this quarter to make sure that align with the customer expectations. So these are only 2 reasons at the overall basis. So other than that, the financials don't have any dilution as far as the numbers are concerned.

[Aditya Welekar, analyst]

Okay. So one last question. So any CapEx guidance for FY [indiscernible]?

[Sankaran Ranganathan, executive]

I think, by and large, largely the capacity is in place. So we may not be doing a substantial investment on the capacity side. Definitely, the sustainable CapEx will definitely be there to meet the operational excellence in the Industry 4.0 and digitization. And as Muthu and team is working on various new business, as the businesses mature and it comes to operations, definitely there [ will be need for ] investment that [ will be ] decided then, [indiscernible] business case. But at this moment of time, the guidance will be -- it will not be a substantial capital investment will happen in '23, '24. And -- so it will be a sustainable just to ensure the operating efficiency and operating performance perspective, mostly on Industry 4.0.

Any new CapEx required, [indiscernible] a business requirement and new businesses that will be evaluated [indiscernible].

[Operator]

We take the next question from the line of Mr. Amit Hiranandani from SMIFS Capital.

[Amit Hiranandani, analyst]

Many congratulations to the team for the wonderful performance for the financial year. Sir, my first question is basically the guidance which you provided for the 5% to 8% for the CV industry in FY '24. Is this on the conservative side you're giving? And secondly, on the margin side, sir, how much benefit on margin is expected due to shifting the power cost to renewable energy? And continuing with the margin, what other steps the company is taking to improve margins further in the next 2 years, assuming stable commodity prices?

[Narayanswamy Muthukumar, executive]

Thank you very much for the appreciation -- for your the -- we are migrating to renewable energy for sustainability and to be more frank with you, in India, yes, you are right, it is adding to the sustainability of society and at the same time, the cost of the organization. Our team of Ranga, the company Secretary and Nagaraj team have done an extensive negotiation and believe that we got one of the best price from them. And it's definitely adding up to our -- containing our conversion cost because it's a huge increase in the petroleum prices, huge increase in the car brakes and all. So we will continue to work to control the cost. But obvious...

[Audio Gap]

we are doing. Definitely, we are better than the market in terms of the saving. In terms of the volume for the next year, yes, we are doing only conservative number of 5% to 10%. But I believe, the way we started with April, the market is definitely going to be good. But there are a lot of uncertainties that is coming in -- the real-time emission system that's coming in and OEMs wanted to be very, very conservative. Our business is purely depend on the [indiscernible]. So we want to be conservative. But we have a very ambitious growth plan, and we will definitely outgrow the market. If the market is going to go up, Nagaraj and team are ready to deliver and that they will utilize the opportunity. But we are presenting only a conservative number. Very, very conservative, I would say.

[Amit Hiranandani, analyst]

Okay. Sir, but this time, do you think the CV cycle is going to be a very long-ish one this time?

[Narayanswamy Muthukumar, executive]

Sir, look at what happens is? Right from FY '18, the CVs have dropped. It is not like a normal time where it has dropped and going up, right? From FY '18, we had an IL&FS issue, the issues for the people for getting the loan. Then we had an axle load rating change followed by the BS-VI implementation. And after that, when the COVID came, and the market dropped. And after COVID and all, when the market is trying to come back, the second wave came, it took a little longer time for getting back into the market if you see when compared to what it was earlier at this time.

And with the amount of price growth that's happening and the amount of infrastructure development that has happened in the road, the existing truck utilization also has substantially gone up with the amount of good road. So all these things are putting together on the truck requirement -- it's not the truck requirements are going up. It's a dynamic industry. And depending on the price, the industry will grow. But I believe that this is because of various improvement that happened in the infrastructure, the various improvement that's happening in axle load rating. The actual tonnage movement is going very good, and the market is strong. The amount of infrastructure spend in the government and the aspirations is very, very high, which means that the commercial vehicle segment is going to go up. You all know that commercial vehicle segment growth purely depends on the GDP growth, and we are in the [ first ] to react to that.

So I strongly believe that the various initiatives there, and it is going to stay for a little time because the market has been very, very slowly observing various shocks and it is sustainable. Still, we are not seeing the -- rentals are very strong still. That is one of the lead indicators for us on the commercial vehicle segment. With the rental being strong, with the diesel price reasonably stable for last almost 11 months, and I strongly believe that, yes, there is a good demand, and we are keeping growing. And the infrastructure spending has happened, which is mainly predominantly the tipper segment. Strongly believe that the market is going to be stronger.

Of course, we don't want to get into the next year elections and what is going to happen after that and all because of something. But [ undoubtful, ] a lot of global supplies is coming to India. So I believe this market is going to be stronger for some more time.

[Amit Hiranandani, analyst]

Sir, one last question, if I can squeeze in. Sir, can you please help me with the market share in the axle segment and the average realization?

[Narayanswamy Muthukumar, executive]

Well, I know that's your last question, but [indiscernible] able to share. And thank you very much. I think Mr. Sailesh, we are already 1:10. I know with the participants, I'm very sorry that we are not able to provide that information.

[Operator]

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.

[Narayanswamy Muthukumar, executive]

Thank you, B&K team, for organizing this. Thank you, all the investors, for the confidence that [indiscernible] on this company. And your confidence in making us to feel supportive. I think the amount of trust that you are keeping on the company is making us to be very, very confident in terms of committing an aggressive target and at the same time, keep moving forward. We really appreciate and value your commitment, interest in this organization. And as the management team, we will always stand together to meet up all your expectations of the stakeholders, be it the customers, shareholders, society and whatnot. The company will -- with the strong leadership team from both Cummins globally and also with from Kalyani, you can rest assured that the company will continue to perform and try to exceed the expectation what we're giving.

Once again, thanks, Nagaraj, Ranga and Sailesh, for supporting [ in this event ]. And thank you all investors for taking time to join with us. I really appreciate. Thank you very much.

[Sailesh Raja, analyst]

Thank you, sir.

[Unknown Executive]

Thank you.

[Nagaraja Sadashiva Gargeshwari, executive]

Thanks, everyone.

[Operator]

Thank you. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.