CG Power and Industrial Solutions Ltd

NSE:CGPOWER

Earnings Call Analysis

Company Reports Q1 Market Share Growth

The company has reportedly seen a 300 bps increase in market share for large industrial machines in Q1 as per IEMA data. Margins in the Industrial Systems segment could be affected by rising input costs, but executives believe they can be managed unless costs escalate significantly. The expansions in Power Systems are seen as return-accretive with good IRR and payback, indicating prudent investment decisions. The export portfolio, comprising small-level exports of transformers, switchgears, and motors, is targeted for growth in the coming years. The future mix of exports, balancing motors and transformers, is yet to be determined. The Power Systems division's margins, currently at 16%, are subject to variability due to the nature of individual orders.

Impressive Growth amidst Expansion and Litigation Settlement

CG Power and Industrial Solutions Limited reported a strong financial performance for the second quarter of the fiscal year 2024. The company achieved a 20% increase in sales year-on-year, amounting to INR 1,900 crores, marking the highest ever for this period in recent times. Profit before tax also grew by a robust 24%, reaching INR 293 crores. The year brought not just revenue growth but also a swelling order book, which ascended to INR 5,229 crores, indicating a buoyant future for the company's operations.

Sectoral Insights Show Varied Progress

Diving into segment-based performance, the Industrial Systems sector experienced a 17% year-on-year increase in sales, achieving INR 1,283 crores. The Power Systems segment did even better with sales soaring by 25% year-on-year to INR 619 crores. This significant growth in the Power Systems division was propelled by favorable export orders, improved pricing, and better operating leverage. Moreover, the company's consolidated financial results, which take into account its international subsidiaries and holdings, reflected a congruous 20% growth in sales, amounting to INR 2,002 crores.

Strategic Expansions and Settlements

The company's Board of Directors approved substantial investments for expanding manufacturing capacities in various divisions, including INR 155 crores for Switchgears, INR 31 crores for Power Transformers, and INR 35 crores for High Tension Motors. Additionally, CG Power concluded a settlement with JC Flowers Asset Reconstruction Company, resolving pending litigations by making a payment of INR 42 crores, thereby extricating the company from potentially onerous legal obligations.

Addressed Concerns Over Industrial Orders Slowdown

Amidst the commendable overall performance, a hiccup arose with a modest 4% growth in the Industrial Systems' orders, prompting analysts to question the order intake slowdown. The company clarified that this was not indicative of a market downturn but rather a conservative approach from channel partners who, facing a volatile external environment and forthcoming elections in India, opted to curtail stocking activities. Management remains optimistic as this does not reflect an actual decrease in underlying demand.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to CG Power and Industrial Solutions Limited Q2 FY '24 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Renu Baid. Thank you, and over to you, ma'am.

[Renu Baid, analyst]

Yes. Thank you. A very good afternoon to everybody on the call. On behalf of IIFL Securities, I would like to welcome everyone for the 2Q FY '24 earnings call of CG Power and Industrial Solutions Limited. From the management, we have with us today Mr. N. Srinivasan, Managing Director; Mr. Susheel Todi, Chief Financial Officer; Mr. Ramesh Kumar, President Industrial Division; Mr. Mukul Srivastava, President, Switchgear Division; Mr. Ajay Jain, Vice President, Transformer Division; and Mr. Chidambaram Balakrishnan, Vice President, Railway Division. So all the business heads are here with us along with the senior management team. .

Without taking much time, I would now like to hand over the call to Mr. Srinivasan for his opening comments, after which we can open the session for Q&A. Thank you, and over to you, sir.

[Natarajan Srinivasan, executive]

Yes. So thank you, Renu. Good afternoon, ladies and gentlemen. Let me first extend a warm welcome to you all for the Q2 FY '24 earnings call. I'm Natarajan Srinivasan, Managing Director of the company. My colleague, Ramesh Kumar, Mukul Srivastava, Chidambaram Balakrishnan, Susheel Todi, they are all with me in person or over the call. They've already been introduced by Renu Baid.

I'll straightaway move to company performance, Q2 FY 2023-'24 performance. Sales grew year-on-year by 20% and profit before tax grew by 24%. Both the sales of INR 1,900 crores and profit before tax of INR 293 crores achieved during Q2 of FY '24 is the highest ever for Q2 in recent times. Order book as on hand as at 30th September 2023 aggregate to INR 5,229 crores.

Financial -- stand-alone financial results. Aggregate sales for the quarter were higher at INR 1,900 crores, recording a growth of 20% year-on-year and higher by 8% quarter-on-quarter. Profit before tax before exceptional items was at INR 293 crores 15.4% of sales, in Q2 of FY '24 as against INR 237 crores, 14.9% of sales, in Q2 of FY '23 and INR 256 crores, 14.5% of sales, in Q1 of FY '24. Margins were higher year-on-year on account of execution of export orders with better margins and lower finance cost.

Our annualized ROE for Q2 FY '24 was at 44%. Free cash flow generated during the quarter was INR 319 crores. Order intake for Q2 FY '24 was INR 2,232 crores, that's 22% growth year-on-year, and unexecuted order book as on 30th September 2023 was at INR 5,229 crores, a growth of 44% year-on-year.

Segment-based performance, Industrial Systems. Aggregate sales for the quarter were higher at INR 1,283 crores recording a profit of 17% -- profit growth -- recording a growth of 17% year-on-year and 2% quarter-on-quarter. Profit before interest and tax was at INR 207 crores, 16.1% of sales, in Q2 of FY '24 as against INR 195 crores, 17.8% of sales in Q2 of sales, in Q2 of FY '23 and INR 197 crores, 15.7% of sales, in Q1 of FY '24. Margins are in line with Q1 of FY '24 margins. Order intake for quarter 2 FY '24 was at INR 1,113 crores, a 4% growth year-on-year, and unexecuted order book as on 30th September was at INR 1,866 crores.

Power Systems. Aggregate sales for the quarter were higher at INR 619 crores, recording a growth of 25% year-on-year and 21% quarter-on-quarter. PBIT was at INR 103 crores, 16.6% of sales, in Q2 of FY '24 as against INR 55 crores, 11.2% of sales, in Q2 FY of '23 and INR 63 crores, 12.3% of sales, in Q1 of FY '24. Margins were significantly higher year-on-year on account of execution of export orders with better margins, improved pricing due to demand environment and better operating leverage. Order intake for Q2 of FY '24 was INR 1,118 crores, 47% growth year-on-year and unexecuted order book as of 30th September 2023 was INR 3,363 crores.

Financial results consolidated. Consolidated results include performance of operating subsidiaries at Sweden, Germany and Netherlands, CG Adhesives Products Limited and other nonoperating and holding subsidiaries. Company has received proceeds against sale of subsidiary QEI in USA in this quarter. Aggregate sales for the quarter were higher at INR 2,002 crores, recording a growth of 20% year-on-year and 7% quarter-on-quarter.

Profit before tax was at INR 303 crores, 15.1% of sales, on Q2 -- in Q2 of FY '24 as against INR 237 crores, 14.1% of sales, in Q2 of FY '23 and INR 263 crores, 14% of sales in Q1 of FY '24. Unexecuted order book of Drives and Automation, Europe as at 30th of September 2023 was INR 121 crores.

Some key events. The Board of Directors today approved a proposal to expand the manufacturing capacity of Switchgears at the plant -- at its plant in Nashik at INR 155 crores; Power Transformers Bhopal at INR 31 crores for additional 10,000 MVA capacity and High Tension Motors in Bhopal at INR 35 crores.

In August of 2023, the company and JC Flowers Asset Reconstruction Company, to which Yes Bank has assigned its stressed loans, have entered into a settlement agreement for the pending litigations on the company, making a payment of INR 42 crores. JCFARC will unconditionally withdraw all the cases pending and initiated and the company will be fully discharged from all the obligations, if any. Unaudited financial results with detailed notes are available as part of stock exchange filings and the company's website.

Between myself and my colleagues, we'll be happy to answer any questions. Thank you.

[Renu Baid, analyst]

Yes, we can move to the Q&A session now.

[Operator]

[Operator Instructions] First question will be from the line of Ankur Sharma from HDFC Life.

[Ankur Sharma, analyst]

Great numbers this quarter as well. So first question was on the Industrial Systems business. While the top line deposits, of course, are very good, just on the order inflows where we see a 4% growth for the quarter. So if you could just help us understand where is this slowdown in orders coming from? Is it -- either is it because of channel destocking? Is it because of some rail orders getting deferred or is there a slowdown in some other sectors? Just trying to understand this slowdown in orders this quarter on the Industrial side.

[Natarajan Srinivasan, executive]

So I think you answered the question yourself. So in this year, motors actually a large part of the sales take place through channel partners. So a large part of -- therefore, the channel partners, depending upon the external environment, they decided to go slow or go faster on stocking. Currently, because of the difficult environment both globally and also in India given the elections, et cetera, they would like to be a little cautious. While we are not seeing any slowdown or dipping in the underlying demand, but the channel partners actually have been very conservative in meeting the orders on stocking. We hope -- I think this will continue for some more time.

[Ankur Sharma, analyst]

Okay, okay. And anything to talk about on the rail side as well? I mean, is there any slowdown in terms of ordering from the rail side from ICF? Or any other thing you want to talk about?

[Natarajan Srinivasan, executive]

So they have a system of tenders after which -- time to time, they release tenders. The -- only the large orders like further Vande Bharat trains, et cetera, that I think that we do know. It only happens when it is announced probably public there whether it will come now or after the elections, et cetera, are not very clear. But normal procurement is going on as per schedule.

[Ankur Sharma, analyst]

Okay. So the regular one is still very much on, okay. And lastly, sir, on the T&D side, the Power T&D side, clearly, order inflows have been very, very strong, so have been margins. So if you could just help us understand where are these orders coming from? Because clearly, Power Grid has been struggling for some time. So is it more state orders? Is it more private sector-driven orders? Because TBCB orders haven't really been a lot, right? So where are these orders coming from, if you could help us.

[Natarajan Srinivasan, executive]

Look, we have been generally -- prefer to accept orders from EPC contractors than private parties, except some select utilities. I think the orders are for everyone out there.

[Operator]

The next question is from the line of Mohit Kumar from ICICI Securities.

[Mohit Kumar, analyst]

Congrats on a very, very good quarter. Sir, my first question is on the CapEx, which you announced on the Switchgears. Is it primarily made for transmission? Is my understanding correct?

[Natarajan Srinivasan, executive]

Mukul, can you answer this?

[Mukul Srivastava, executive]

Yes, sir. I think our expansion projects for Switchgears is in all segments, both for consumables and distribution.

[Mohit Kumar, analyst]

Okay. Understood. My second question is on the -- of course, the order intake for industrial has been low. Does it mean that the growth on industrial side will get impacted for the next few quarters and you start to pick up maybe post the election? Is that a fair understanding?

[Natarajan Srinivasan, executive]

Yes. I think I answered this question earlier. Beyond this, I don't think -- your clarity is as much as our clarity.

[Mohit Kumar, analyst]

Understood, sir. Is it possible to let us know, sir, the growth in lower-tension AC motors in H1 and large industrial motors separately?

[Natarajan Srinivasan, executive]

We don't give this data separately.

[Operator]

The next question is from the line of Ravi Swaminathan from Spark Capital.

[Ravi Swaminathan, analyst]

Congrats on a good set of numbers. My first question, once again, is in terms of the order inflow for the motors business. Yes, we understand that domestic, there seems to be kind of a temporary pause in terms of growth. But in terms of exports of these motors, earlier in the calls, you used to mention that exports is another avenue, which we are kind of exploring. But given the domestic demand, we are able to cater to it. Now can that be a big growth driver incrementally? So is that something that can happen over the next few months or few quarters until elections get over?

[Natarajan Srinivasan, executive]

No, Few quarters means I don't know. But otherwise, the exports is something, which you have to do a lot of spade work. The products has to suit local conditions, [indiscernible] ability to service, find dealers. A lot of things are there. So therefore over a few quarters, it can happen. If you ask me immediately, I'm not sure.

[Ravi Swaminathan, analyst]

Got it, sir. And if you can touch upon the other possible growth drivers like supply of motors to EVs and also the consumer durability piece, that are the -- what is the kind of run rate that we are doing in terms of revenue, if you can share that will be great.

[Natarajan Srinivasan, executive]

So the supply of motors to EV will take some more time. [indiscernible] long-term project, it will take some more. I'm not seeing this happening at least in this financial year. Similarly, on the consumer goods, actually. See the industry is actually in a little bit of a slowdown. There's nothing great to talk about.

[Ravi Swaminathan, analyst]

Okay. Would we have seen growth this quarter in the consumer durable piece? And what would have been the revenue run rate in that particular subsegment?

[Natarajan Srinivasan, executive]

So revenue, we cannot say. We cannot give separately. We are giving it on segment only. So very, very marginal growth, I would say.

[Operator]

The next question is from the line of Nitin Arora from Axis Mutual Fund.

[Nitin Arora, analyst]

When we look at -- your revenue growth for the first half is still 16%. You articulated even in the last quarter that you're facing a little capacity challenge plus now the destocking which we're seeing...

[Operator]

I believe we have lost the questioner. So I see that we have the next question from the line of Charanjit Singh.

[Charanjit Singh, analyst]

Congratulations on a good set of numbers. Sir, my first question regarding the transformer market itself. If you can touch upon the overall demand/supply scenario, how you are seeing from the overall demand perspective this market growth in the next 1 to 2 years and the supply. How much gap you think is there in the transformer demand/supply?

[Natarajan Srinivasan, executive]

So I may not be able to tell you how much gap will be there because gap can be sustained in longer period of time. Somebody if you are not -- you can say somebody if I get quote today, I will say, "I'm booked for next 10 months so I'll be able to give you after 11 months." Because of the huge investment that is happening in the power sector, demand for transformers has generally been growing. All the transformer manufacturers have got good orders. So to answer to your question next 2 years, definitely, they are good orders.

[Charanjit Singh, analyst]

Okay. And sir, on the realization front, are we able to take any kind of a price increase? Or the price remains very competitive on the transformers market?

[Natarajan Srinivasan, executive]

So generally, it depends on customer to customer. It is all based on tender. Therefore, you can take a call whether you want to accept the order or not. So if it is utilities, they go strictly with tender. And if it is EPC and private, there is some scope for negotiation. So I would say we have been getting -- our price is that we have been getting actually quite a decent amount.

[Charanjit Singh, analyst]

Okay. Sir, last question from my side on railways specifically. If you can give the number for the first half, what was the revenue run rate? And any further specific applications for railways which you are working on? And maybe within the traction transformer, motors and power electronics, how is that split currently for us, for Indian Railways?

[Natarajan Srinivasan, executive]

So the railways, generally, we don't give a separate turnover. We give along with Industrial. But generally, we are continuing to grow -- continuing to perform as what we performed in the last year. There is no issue. So with respect to the other question, unless there is very -- power electronics is a big thing. All of us are working on various initiatives. But nothing there specific I can answer. Otherwise, it is difficult for me to give an answer.

[Operator]

The next question is from the line of Nitin Arora from Axis Mutual Fund.

[Nitin Arora, analyst]

Sir, my question was just in the last quarter, you articulated that you are a little capacity-constrained and not able to execute the full orders, and it is clearly reflecting in your first half revenue growth, which is 16% despite auto growing much faster. Plus now that destocking thing, which is happening also partly because of slowdown what we hear. How one should track business? Should be the revenue growth run rate one should maintain until the new capacity comes, at least for the next 1, 1.5 years?

[Natarajan Srinivasan, executive]

1.5 years, I won't be able to say. At least for the remaining part of the year, this is something which we [Technical Difficulty]

[Nitin Arora, analyst]

Got it. And sir, just on the destocking part, I understand because when we -- it also is driven sentiment -- by sentiment itself. Though, as you articulated, that ground reality could be different. But generally, as far as inquiries are concerned on the Industrial side specifically, can you throw some light have the inquiries gone up in the last 6 months? What is happening in the ground level sector-wise, which you normally talk about? Just a few lines on that.

[Natarajan Srinivasan, executive]

Actually from the industry side, inquiries or the CapEx spend has been -- it has not very much increased over the last 6 months, but it is not gone down also. And the finalization and the procurement is getting delayed a bit. So that is how we are able to see some degrowth in that. This generally happens just before the elections. People will be very, very careful in expanding it.

[Operator]

The next question is from the line of Rahul Gajare from Haitong Securities.

[Rahul Gajare, analyst]

Sir, I'm coming back to the order intake number of 4% in this particular quarter. I want to know if this has -- the lower copper prices, and therefore, did you have to take price cuts in the power -- in the Industrial business, which is getting reflected in the order intake? Is there a connection on that front?

[Natarajan Srinivasan, executive]

See, last time also, I have told the same thing. See, when sudden rise and sudden drop, that definitely affects the sentiments of the people who are stocking it. So we don't know where the bottom is for the copper. So that is the way. Generally, market also expects the price cut. So that is the reason we have also been very, very careful in booking the orders from -- especially from channel partners. So they are also very careful in stocking the material because of the price fluctuation. So that is how this little bit of low order input. Because we also don't want to take a long -- because our deliveries are 4 to 6 weeks. So we don't want to take long commitments of orders into our system.

[Rahul Gajare, analyst]

But you are saying that you have not taken any price cuts. That's how one can interpret this.

[Natarajan Srinivasan, executive]

Yes, yes.

[Rahul Gajare, analyst]

Okay. Sir, now with respect to your export business, I know maybe a year, 1.5 years like you were talking about -- it will take about 1.5 to 2 years to set up a branch network, service network in overseas market. So I want to understand where are we on our export journey, given that we are ramping up capacity also? So both on transformer side and motor side, where are we...

[Natarajan Srinivasan, executive]

It will take time. See, we are ramping and we only announced -- we have only started implementing. The capacity buildup will take 2 years' time. The transformer project will get completed in about 15 months from now. And even then after that, the domestic demand is so high I don't know whether we'll immediately start exporting transformers. It depends on how much order book we have. So it is a little bit time away.

[Rahul Gajare, analyst]

Okay. Sir, if I'm not mistaken, your transformer capacity was hovering around 55% to 60%. Is that right? Or that has materially changed now, utilization?

[Natarajan Srinivasan, executive]

I don't have the number with me. I will have to check. See, I think transformers -- some amount of transformer capacity will have to be given for servicing some of the requests from the customers. So that will go some amount, Some amount will be used for production. It may be close to about 70% or 70-plus.

[Operator]

The next question is from the line of Subhadip Mitra from Nuvama Institutional Equities.

[Subhadip Mitra, analyst]

Sir, I wanted to understand that given that you are seeing capacities that are being added across transformers as well as switchgears, with the expanded capacity that you now have across both Power and Industrial, what level of revenue are you looking to reach? I mean, how much of revenue can this expanded capacity support?

[Natarajan Srinivasan, executive]

So I think the transformer will give you about -- when it is fully expanded and fully used on capacity utilization you have to assume of 90% or so. So the transformer will give me about INR 1,500 crores and then Switchgear will give me about INR 600 crores.

[Subhadip Mitra, analyst]

Okay. Understood. And on the motor side, your existing capacity would be able to support how much revenue?

[Natarajan Srinivasan, executive]

Existing capacity means we manufacture -- so different categories are there. We manufacture roughly about 1 lakh motors per month.

[Subhadip Mitra, analyst]

Right. So is there any ballpark number of revenue that one can look at from motors based on existing capacity before you need to go for CapEx?

[Natarajan Srinivasan, executive]

We only have CapEx to double the capacity. Motors, you have the amount and capacity to double the manufacturing capacity.

[Subhadip Mitra, analyst]

Correct, correct. So I was just trying to get an inkling as to on that double capacity, what is the max top line that one can look at, let's say, over the next 2 to 3 years?

[Natarajan Srinivasan, executive]

No. It will take -- as and when the project is completed, and assuming 85% to 90% capacity utilization, you can say about INR 2,800 crores to INR 3,000 crores volume growth will be there.

[Subhadip Mitra, analyst]

Understood. And my next question is actually with regards to the Power segment margins, and I think we've seen some very robust margins in this particular quarter. Is there any one-off or any export related order or anything of that sort or this can be the sustainable margin going ahead?

[Natarajan Srinivasan, executive]

Some export orders that we have given in the comments also. Export orders definitely are there, the product mix probably has contributed to this extra margin.

[Subhadip Mitra, analyst]

Understood. And do you see that this quantum of exports is something that will sustain going ahead? Or it will be sporadic?

[Natarajan Srinivasan, executive]

So I cannot say it's not sustainable. Like I can't say every month or every quarter, this will be there. I can't say that.

[Subhadip Mitra, analyst]

Perfect. Lastly, would you be giving any guidance for how you see, let's say, top line growth and margins over the next, let's say, 1.5 years, 2 years, let's say, over '24 and '25?

[Natarajan Srinivasan, executive]

We don't give guidance, sorry. We don't give guidance.

[Operator]

The next question is from the line of Ashish Golechha from [ Ajit Securities. ]

[Unknown Analyst]

Excellent set of numbers. Sir, my 2 questions here. First question was, as per the recent TV interview, there was a discussion that the company is in talks to acquire a listed or an unlisted firm in the transformer sector. So I wanted to understand how close we are to that thing? And would that acquisition be EPS accretive from day 1?

Second, sir, with respect to railways, are we planning to build a consortium with any large partner if it is in line? And with respect to the cash on the balance sheet, as for the numbers declared, what do we plan to make use of it. I see INR 149.4 crores as on the half year numbers.

[Natarajan Srinivasan, executive]

So I think on the questions on acquisition and then bidding for a consortium, the answer is no. There are no such things that we can report on as of now. The third aspect is cash is there but likewise we have got expenditure also. We have to pay tax, we have to pay dividends and we have to finance all the CapEx expenditure. So that would be cash in use for all this.

[Unknown Analyst]

But the acquisition is still on, sir?

[Natarajan Srinivasan, executive]

What?

[Unknown Analyst]

The acquisition is still in process or it will take some time?

[Natarajan Srinivasan, executive]

Nothing is -- if there is anything that -- not -- I don't have anything that I can report.

[Operator]

The next question is from the line of Ms. Renu Baid from IIFL Securities.

[Renu Baid, analyst]

My first question is to understand while you have mentioned and articulated the power supply [ buoyancy ] and demand and supply constraints, so the kind of price equation which has now turned in favor of the suppliers, do you foresee that this situation should sustain for 2 to 4 quarters if companies or suppliers expand capacity? And as a result, can we expect margins in the Power segment, the EBIT level could be closer to the mid-teens for a few more quarters?

[Natarajan Srinivasan, executive]

So Renu, you are very knowledgeable but still you are asking these questions. So I think we are working hard. That's all I can say. See, the way moves -- the price of copper moves, other GRG or steel, we have no control on all that. So with all that, whatever best possible we are doing. So -- but generally, I think whatever prices we are getting, the demand/supply, whatever the equation currently is there, it's likely to continue. Therefore, I feel for -- at least for a few quarters, it should be okay.

[Renu Baid, analyst]

Sure. And on a broad basis, given capacity expansions are underway, we are also upgrading our portfolio of new applications in the Industrial segment. Structurally, do we perceive that a business can sustain these margins for a longer-term perspective?

[Natarajan Srinivasan, executive]

A very difficult question to answer. Longer term means how many years? I mean nobody...

[Renu Baid, analyst]

Two to 3 years, if not longer, then near to medium term.

[Natarajan Srinivasan, executive]

See, the external geopolitical environment, 2 days back when I was listening to the TV, some analysts are saying that our steel prices are going to go up. So like that, we have -- in our industry, the material cost is quite large, substantial portion of cost of manufacture. Nobody can predict it long term.

[Renu Baid, analyst]

Got it. On power capacity addition, while the 10,000 MVA expansion, which you have announced today, this will be largely for the domestic market? And any plans to add new capacity or a new facility for export of transformers to the portfolio that we have, especially transformers?

[Natarajan Srinivasan, executive]

So we have to digest this first, 14,000 to from 17,000. Now we are moving to 35,000. We have to implement this in full and get this commissioned and start manufacturing. Then only anything extra can be thought to.

[Renu Baid, analyst]

Sure. And lastly one question for Ramesh, sir. In terms of the industrial business, we did mention of a good traction in the HT motor business for us. So any update in terms of how the market share gains have moved? This was one segment where market shares for CG had compressed a bit in the last 18 months. So how is the trajectory there?

[Natarajan Srinivasan, executive]

Okay, quarter 2 results have not been announced. But quarter 1, we have 300 bps increase in market share for large industrial machines. That's as per IEMA data.

[Operator]

The next question is from the line of Aditya Mongia from Kotak Securities.

[Aditya Mongia, analyst]

My first question was more on the margins in the Industrial Systems segment. Given the recent weakness in incremental growth, is there a case for margins slipping below 15% in the segment? Or can they hold steady at the numbers that are currently coming in?

[Natarajan Srinivasan, executive]

It depends on the input costs. If input cost go up then margin will take hit. Otherwise, we can manage it.

[Aditya Mongia, analyst]

Understood. My second question was on the new capacity expansions that are being talked about right now, which are primarily focused on the power systems division. I wanted to get a sense of that as is going to be the case in Industrial Systems, wherein it is going to be return-accretive or hugely return-accretive, will these capacity expansions also be of a similar nature for Power Systems business?

[Natarajan Srinivasan, executive]

I don't get your question. What do you say?

[Aditya Mongia, analyst]

What I'm trying to ascertain is that at least our thought process is that in Industrial Systems, the capacity expansions announced will meaningfully improve the cost structure and the business returns for the entire Industrial Systems segment. The expansions that have been announced for Power Systems, are they also brownfield in nature, can meaningfully improve the cost structure/returns for the segment?

[Natarajan Srinivasan, executive]

Yes. If not, otherwise, we will not take it up. The Board will not clear, the investment committee will not clear. These projects are per se more than viable. These have a decent IRR plus payback. Otherwise, we will not touch it.

[Aditya Mongia, analyst]

Understood. The last question was more on the exports portfolio and it's a more forward-looking question. You expect exports to become a bigger number in the next 3 years. Let's say, 3 years from now in the mix of exports, what will be the largest component? Would it be motors followed by power transformers or can railways be a meaningful portion as well inside?

[Natarajan Srinivasan, executive]

So difficult to say it because all of them have got potential. Transformers also has got good potential. And as you know, CG has been in the forefront for our transformers. So supposing good orders comes and value will be in motor -- one order of transformers will be quite large and motors we will have to sell a lot of motors. So both. It's difficult to answer.

[Aditya Mongia, analyst]

Or put differently, at a global level, is your cost structure on a relative basis in motors much better than that in transformers? Or is it -- both parties can win really big over time given the cost structure that you have?

[Natarajan Srinivasan, executive]

I don't have a cost data to answer your question scientifically. I don't want to say what I feel, but I don't have the cost data. What is -- so the transformer, et cetera, is tendered. Therefore, if my thing is accepted then I think there is [indiscernible]. I don't quote a price which is not acceptable to me. Motor is a different cup of tea. We have to produce and then go and stock and then sell. So depending upon what is the exchange rate, et cetera, we'll get the money. So I don't have -- this is very difficult to answer.

[Operator]

The next question is from the line of Rajesh Vora from Jainmay Venture.

[Rajesh Vora, analyst]

Congrats on good set of numbers. First question is on -- is there a capacity constraint that could have led to any sacrifice in revenues in this first half or this quarter, second quarter?

[Natarajan Srinivasan, executive]

What is the question?

[Unknown Executive]

Capacity constraints have led to any sacrifice.

[Natarajan Srinivasan, executive]

No, nothing of that sort.

[Rajesh Vora, analyst]

Okay. And for the first time, Power Systems division EBIT margins have crossed 16% and higher than Industrial Systems division margin. So could you explain the reason why Industrial has seen a decline Y-o-Y? One quarter is, of course, not to really read too much, but just to understand the dynamics. And can Power Systems division sustain this level of 16% EBIT margin on a medium-term basis?

[Natarajan Srinivasan, executive]

So I think we answered this question earlier. So Power System consists of switchgear, transformers. There are a number of orders. Each order will be different. Each -- margin for each order will be different. Export will have a different model -- different margin. And then the type of transformer, each one will be a different. Therefore, we will not be able to clearly see. It's not like a one-set pattern pretty much all the time. This quarter, everything has been quite favorable. Therefore, the margins are higher. But while I cannot say that we will be able to maintain this, margins will be decent, I would say. It will not be very low or we don't see a situation this will be going, but a general trend that is prevailing and our own order book, et cetera, I think margins will be decent.

[Rajesh Vora, analyst]

Congratulations to the whole team. I think in the last 2, 3 years, a tremendous turnaround in margins and even at a company level now, PBT margins are 15% in this quarter, which is record high. And we used to have EBITDA margin at that level. So it is a great job done.

One last point on export side, what are the -- what small exports are we doing that you mentioned in this press release? What are the products and...

[Natarajan Srinivasan, executive]

So exports actually transformers, switchgears, motors all that we are exporting also in a very small level. So the idea is to scale up maybe in about next year or year after. Gradually, we want to scale it up.

[Rajesh Vora, analyst]

So what sort of -- if you can give a little bit of idea about how are we -- what is the sales model out there? Are we going to the distribution channel? Are we putting it in our own brand? How does it work?

[Natarajan Srinivasan, executive]

What are we selling through distribution channels?

[Rajesh Vora, analyst]

Yes.

[Natarajan Srinivasan, executive]

See, others will be responding to inquiry. Transformer and switchgear will be responding to inquiry [indiscernible] tenders.

[Operator]

Thank you so much. As there are no further questions from the participants, I now hand the conference over to Ms. Renu Baid for closing comments.

[Renu Baid, analyst]

Thank you, everyone. On behalf of IIFL Securities, I would like to thank the management for giving us the opportunity to host the call, and audience for being patient on this call. NS sir, any closing comments from our side?

[Natarajan Srinivasan, executive]

No, nothing special I'd say. Thanks -- I want to just thank everyone for the interest shown in the company. That's it.

[Renu Baid, analyst]

Sure. Thank you, and we can close this call on this note.

[Operator]

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