Sona BLW Precision Forgings Ltd

NSE:SONACOMS

Earnings Call Transcript 2023-Q2

[Operator]

[Audio Gap] in today's conference call may be forward-looking in nature, and we request you to refer to the disclaimer in the earnings presentation for further details. The management will also not be taking any specific customer-related questions or confirm or deny any customer names or relationship due to confidentiality reasons. So please refrain from renaming any customers in your questions.

Now I will hand over the floor to Mr. Kapil Singh, Nomura, Head of Consumer and Digital Commerce Research India and Lead Auto Analyst. Kapil, please go ahead. Thank you.

[Kapil Singh, analyst]

Thank you, Gigi. Good day, everyone, and wish everyone a very Happy Diwali. To take us through the Q2 FY '23 results and to answer your questions, with us, we have the management team from Sona Comstar led by Mr. Vivek Vikram Singh, MD and Group CEO; Mr. Kiran Deshmukh, Group CTO; Mr. Sat Mohan Gupta, CEO of the Motor Business; Mr. Vikram Verma, CEO of the Driveline business; Mr. Rohit Nanda, Group CFO; Mr. Amit Mishra, Head, Investor Relations; and Mr. Pratik Sachan, DGM, Corporate Strategy and Investor Relations.

I will hand over the call to Vivek for his opening remarks, followed by a presentation. Over to you, Vivek.

[Vivek Singh, executive]

Thank you, Kapil, and hope everyone had a great Diwali. I have a slight -- I actually got the flu a couple of days ago. So I'm not that well and my throat's a little strained. So do not please misunderstand it for a lack of enthusiasm or optimism. Anyway, on behalf of Sona Comstar, I'd like to welcome all of you to the earnings call of what has been our best quarter ever across all the financial metrics of revenue, EBITDA and net profit.

While we are understandably proud of that achievement, we believe that when talking to shareholders, bad news should take the elevator. So as we always do, we will begin with the negatives. First, one of our major erstwhile markets, Europe continues to remain under pressure from the demand perspective. On the cost side, like we predicted last quarter, raw material prices have started cooling but not by much. So pressure on margins from the input side is not completely alleviated. Additionally, there was a large onetime inventory correction, I'd say, at one of our major EV customers early on in the quarter. So while sales have resumed at the normal run rate, this has made our Q2 EV revenue percentage share lower than it would have been otherwise.

There is also -- and we do get questions around this a lot, a lot of macroeconomic uncertainty about the world in general. And instead of adding a voice to an already crowded field of opinions, I guess we'd just like to tell our shareholders that, look, we built a solid, resilient and diversified low fixed cost business model. And this is obviously good times. But on a relative basis, we are quite brilliant in bad times. I mean you just have to look at our history. We have built a business which does relatively outperform in harder times. And I mean, just look at this quarter, right? EV sales were lower than last quarter, so lower sequentially. Differential assembly sales were lower sequentially. Europe, which is one of our higher-margin markets was much lower, continues to be weak.

And yet we have delivered sequential as well as year-on-year growth in revenue, EBITDA and profit. Not only that, we've also managed to improve our margin sequentially. So I think that's the thought I want to leave you with and not ask us too much about macroeconomic outcomes and forecast because, to be honest, a lot of you listening in know more than we do about those things. All we can assure you of is how strong our business is.

With that, we move on to the good news part and there was quite a bit of that this quarter. We have added one new EV program, which is perhaps not so important because of its size, but it is fairly important directionally because ever since our IPO, we've got a lot of questions on this trend of how much is in the OEM and how much is going to be outsourced. And I'll talk about this later. We've also added a new product to our portfolio, Spiral Bevel Gears. It has taken us many years, I would say, more than a decade.

This project has been going on from before my time. Many years of engineering effort to get this product made through the forging route. And because it opens a new market and a new revenue stream for us, it's an extremely, extremely gratifying outcome for Vikram, Mr. Deshmukh and the entire Driveline team. We have also updated our product road map. We have an annual strategy exercise every August. And we've added some new and exciting future products that we intend to introduce in the next few years. And Mr. Deshmukh will talk more about these later. As a company, we talk even in our Board -- even in our Executive Board, [indiscernible] meeting 90% of the time on technology. So I hope some of that reflects when we talk to our shareholders as well.

In another good news, a lot of the programs that were launched last year, we won last year, kind of started coming into production from this quarter, which has contributed to revenue growth and will continue to contribute to the growth in the next couple of quarters. Lastly, the domestic auto market has been growing significantly year-on-year, and that, obviously, because we are dominant in our presence in differential gears in India, that has added a tailwind to our numbers.

Right. So to the numbers, sequentially, we've had a double-digit growth across all the 3 metrics. However, what we'll talk about on this slide are year-on-year basis. We've seen a robust revenue growth of 12%, while EBITDA and net profit have risen by 7% and 5%, respectively. BEV revenue in absolute term grew by 6%, while the BEV revenue share was 21% due to the onetime inventory correction that I spoke about that happened in the last quarter.

If we were to leave those few weeks of zero schedules out, the revenue share would have been much higher than this. Also, quite importantly, our EBITDA and PAT margins have returned to our normal range of 25% to 27% and 14% to 16%, respectively, after 2 quarters of unusual margin pressure. This is an encouraging sign for us, and I hope input prices continue to cool in the quarters to come.

Coming to H1, I'm proud to report that we managed to increase our revenue, EBITDA and PAT by 15%, 5% and 5%, respectively, over what was a pretty strong H1 in FY '22. And this is despite unprecedented inflation and both supply side as well as demand side disruptions in almost all of our key markets.

Now coming to our strategic priorities, so first electrification. Our BEV revenue share was 21% in H1 FY '22. This has increased to 25%. In absolute revenue terms, at INR 294 crore almost, the BEV revenue has grown by 33%. We continue to build on our EV order book. And in Q1, we have added one new EV program, which is from an existing customer, but this is for differential assembly. So with this addition, we now have 37 EV programs across 23 different customers.

The program which we won, like I said, is to an existing customer in India, where we have been supplying differential gears for their ICE as well as EV variants for years, but we are now moving up to supply differential assemblies for their next generation of [ born ] electric vehicles. And this is quite an important win as a trend because, like I said, I've often got this question. So this is now the second customer, and hopefully, there will be a third in time to come, where we have moved from being differential gear suppliers to differential assembly suppliers, which indicates that when it comes to the electric vehicle transmission, there is higher outsourcing than used to be earlier.

Obviously, in commercial terms, it means our value per vehicle goes up by anywhere around 3 to 6x depending on whether there is a final drive gear attached or not. And lastly, also, I should mention that this program that we won has a start of production in FY '24 itself, which also speaks to the increasing OEM urgency to launch new EV variants.

This brings me to our net order book. Now we did consume some parts of the order book as some programs entered season production or ramped up. And that's the key reason for our sequential growth. And the addition of INR 4 billion means that our net order book still [Technical difficulty] at INR 205 billion at the end of Q2. The only change worth mentioning here is the increased proportion of EV going up to 68%.

With this, we come to diversification, which is one of our key strengths. The weakness in European and Asian markets in the first half, and if you remember, Q1, Asia was very, very weak because of the zero COVID shutdowns, et cetera. It means that the revenue share from hybrid and micro hybrid has been lower as compared to previous years, which is quite natural, as these are the 2 markets with the highest proliferation of hybrid vehicles.

Stepping away from just the first half, on a longer-term trend, the increasing share of BEV and decreasing proportion from ICE seems to be continuing unchanged. Geographically, things have been quite volatile. As you can see, Europe and Asia used to be 40% of our revenue in FY '22, and this is reduced to only about 25% in H1. The gaps of course, have been filled up by the U.S. and Indian markets, which continue to be quite robust. They've increased to 42% and 32%, respectively.

Now relative market shares are always a little tricky, especially in the times of strong growth, right? Because in a growing thing relative has to be seen in the context of absolute numbers rather than just relative percentages. So Europe also, you notice that if you look at Q1, Q2 was better than Q1 at least. So that's an improvement. However, like I said initially, it is far, far away from how strong Europe generally used to be.

Coming to product mix, the same geographic factor is visible as micro and plug-in hybrid starters fall from 26% to 21% in H1. And although just this quarter, the numbers were reasonable. Again, the other notable trend that repeats here in the vehicle segment is traction motors are now 4%, which is also the electric 2-wheeler percent, which is 4%, which is ahead of our own internal estimates so far.

So with this, I will turn the call over to our Group CTO, Mr. Deshmukh. He has some fairly important progress to report on the technology front. So over to you, sir.

[Kiran Deshmukh, executive]

Thank you, Vivek. Good evening, ladies and gentlemen. We have been sharing this technology road map in every earnings call. And since the market conditions are dynamic and the technology landscape continues to evolve, we keep tweaking our tech road map to align with the changed realities. This time, for example, we have fine-tuned one product and added as many as 6 new products in the white area, representing the products under development or being explored.

As I mentioned during our past earnings calls, our vision is to become a significant player in electric, autonomous and connected vehicles, offering integrated solutions to our customers. We are exploring partnerships and acquisitions of technologies such as sensing hardware and software solutions that address the burgeoning autonomous and connected vehicle space. As a tweak to our technology road map, we have removed the DC-DC converter from the chart and introduced an integrated motor controller that uses the available resources also to do the function of a DC-DC converter. This way, we believe we can provide a more efficient and cost-effective solution to our customers.

To augment our content in the final drive units for EVs, we are developing epicyclic gear drives consisting of several helical gears. We also have leveraged the competencies of our Motor and Driveline businesses to build an electronic locking differential, EDL. This device, located in the differential, electronically allows both wheels to turn at the same speed, providing additional traction, should the vehicle becomes stuck. We recognize that our metal forming know-how can do much more than the net-formed bevel gears we are known for. We have been exploring how we can bring value to our technology while making the products in an EV drivetrain, more stronger, more durable and cost competitive.

As a result of this study, we are now developing 3 products where the bulk of the machining will be replaced by forming. Our forming process will save the input material and provide additional strength to the products. So we have created 2 essential parts of the EV drive mode using this method, steel rotor shafts and non-ferrous end caps. We are also in an advanced stage of developing formed park gears. So all these products are now displayed into the white area showing what we are developing. And as they get developed and matured and get commercialized, they will move to the blue area.

Finally, I would like to share a significant breakthrough we accomplished during the quarter. Vivek mentioned it earlier. We have successfully developed net-shaped spiral bevel gears. Perhaps for the first time in the world, spiral bevel gears made by forming rather than cutting the gear teeth have been commercialized, and we'll soon be supplying these gears to global farm equipment manufacturer. This development is big because it is poised to do to the automotive spiral and hypoid gears, what this technology did to the straight bevel gears several decades ago. Because net-shaped gears are made with lesser steel and have a more favorable grain structure than their machined counterparts, they offer an unmatched price performance ratio.

With decades of expertise in designing and making net-formed straight bevel gears, we can now provide the same benefits for spiral bevel gears. Soon, our customers will be able to get spiral and hypoid gears far superior to the current machined gears at a competitive cost. We have always directed our R&D efforts towards creating groundbreaking products that give a unique value to our customers. This is one of those examples and we will continue to be on that path in the future.

With that, I hand over to Rohit to cover the financial update.

[Rohit Nanda, executive]

Thank you, Mr. Deshmukh. A very good day to you all. It's my pleasure to share our second quarter and first half results for financial year '23 with you. This quarter, we've clocked the highest ever revenue, EBITDA and PAT at INR 657 crores, INR 166 crores and INR 93 crores, respectively. In terms of revenue, we had a growth of 12%. Where BEV revenue grew by 6% year-on-year, our non-BEV revenue this time grew by a strong 14%, while our top 3 geographies of North America, India and Europe grew by only 4% in light vehicle sales. A large part of this growth has come from the ramp-up of some new programs, which strengthens the credibility of our diversified business model once again.

Our EBITDA grew by 7% to INR 166 crores. Our EBITDA margin for the quarter was 25.2% against 24.2% in the previous quarter, showing an improvement on a sequential basis. Compared to the second quarter of last year, the margin was lower by about 1.2%, which is largely on account of arithmetic effect of material price increases despite material cost passthrough. Our PAT was INR 93 crores, showing a growth of 5% compared to the second quarter of last year.

During the first half of the year, our revenue grew by 15% and stood at INR 1,247 crores. Our BEV revenue grew by 33% at INR 294 crores, and it constituted 25% of our total sales. Our non-BEV revenue grew by 10%, whereas light vehicle sales in the 3 key territories, declined by 6% over the same period. Our EBITDA grew by 5% to INR 308 crores though margin percentage was lower by 2.3%. But again, this is primarily due to the arithmetic effect from the RM price increase despite the cost passthrough. Our first half PAT grew by 5% to INR 168 crores when compared to the adjusted PAT of first half of the last year. Last year, first half PAT, as some of you may recall, had an exceptional income on account of reversal of IPO expenses, which have been adjusted to arrive at a fair comparison of the numbers. There was also an improved margin transmission from EBITDA to PAT during the first half, mainly due to lower finance costs.

Moving on to the first half cash flow. The company generated INR 231 crores of cash flow from operations. An important takeaway from the cash flow summary here is that high organic growth of the company has continued to be cash generative so far as we've managed to generate INR 65 crores of free cash flow during the first half, even after deployment of INR 166 crores in CapEx. Besides this, we also paid dividend of INR 45 crores during the first half.

This brings us to the last slide of our presentation in which we report the key ratios. The first one being a value addition to employee cost ratio. It has further improved to 6.2x, which shows that marginal growth in value addition continues to improve relative to the growth in employee cost of the company. Our return ratios of ROCE and ROE continue to be strong, above 25%, though they are a tad lower than the last 2 years, primarily due to higher working capital and ongoing CapEx expenditure. The return on equity also had an adverse base effect due to the primary equity raised in the IPO last year.

Our net debt continues to be negative, reflecting a balance sheet potential to raise debt to support future growth. Working capital turnover ratio is also largely similar as earlier period at 3.8x, indicating that growth in working capital has been largely in line with the growth of the underlying business. Lastly, fixed asset turnover ratio has come down a bit to 3.9x, mainly on account of capitalization of our new unit in Pune, which we've set up to support execution of the growing order book on the Driveline business side.

This brings us to the end of our Q2 and H1 earnings presentation, and I'll now hand the proceedings back to the Nomura team for Q&A.

[Operator]

[Operator Instructions] So first up, we have Mr. [ Garfit ].

[Unknown Analyst]

Am I audible, sir?

[Vivek Singh, executive]

Hi.

[Unknown Analyst]

Sir, my question is from basically demand side. Actually, how we are seeing the demand trends going on in Europe and Americas currently and in the upcoming quarters, specifically from the EV side, sir?

[Vivek Singh, executive]

Although I did mention that [Technical difficulty] to add on versus to macroeconomic, I will tell you what we see on 28th October at 4:25 p.m., and it may not be valid even a month out because things have become so dynamic. North America is quite strong, actually, demand-wise. EV demand, like I said, continues to be strong. India continues to be strong for off-highway passenger vehicle and commercial vehicle. Europe's been weak all through this year, I think ever since March this year, Europe has been weak and continues that way. Obviously, all of us read a lot, we hear a lot, but this is where things stand as of today, as of now. This is what I see.

[Operator]

So next up, we have Mr. Jinesh.

[Jinesh Gandhi, analyst]

Am I audible?

[Vivek Singh, executive]

Hi, Jinesh.

[Jinesh Gandhi, analyst]

So a couple of questions from my side. Firstly, given the 27 programs are yet to get into serial production...

[Vivek Singh, executive]

Can you speak a little louder, please? It's very feeble.

[Jinesh Gandhi, analyst]

Sure. Is it better now?

[Vivek Singh, executive]

Little louder.

[Jinesh Gandhi, analyst]

Yes. So given that 27 programs are yet to go into serial production, can you give some flavor on how many programs you expect to go in serial production in second half and for FY '24 and '25?

[Vivek Singh, executive]

So I won't talk about second half of this year, but a majority of them should enter production within the next 6 quarters, so the full next year, because there have been delays, I won't obfuscate that. There have been 2 or 3 programs that were supposed to actually start this quarter, and they haven't. Maybe they'll start by end of next quarter, maybe they'll be delayed even further because although -- and I think you remember we had this conversation, the semiconductor-led supply chain shortage is not a shortage anymore.

It's a supply-demand mismatch, the right kind of chips for the right kind of component to the right kind of OEM. And those kind of things still persists. So it's such a weird thing to have that there are places where people have everything, all the means of production, but demand's an issue. While there are some people were demanding -- not an issue, but they can't get the supply chain thing sorted. So it's still a little messy to try to pinpoint for the extremely short term, but most of them, I think, will start in the next 6 quarters.

[Jinesh Gandhi, analyst]

Got it. And second question pertains to the new product net spiral bevel gears. So can you give some color on the size of the opportunity? And you talked about some orders in hand. So how big is the order? And by when do you expect commercialization of that?

[Vivek Singh, executive]

So the first order is not that big. Like I said, we're first starting with a very specialized off-highway vehicle product. We also want to make more before we keep taking it public. And for passenger vehicle, once we make the same thing in high point, then it becomes passenger vehicle, and that's when the big market is at. I would say the market opportunity, addressable, is as big as the differential gear market in total size. However, I mean, to get to where we are in differential gears to like 7%, 8% world market share, it took us 20 years.

Now it won't take us 20 years to do this again because now we are somebody. At that time, we were a startup. But still, I mean, give us 5, 6 years minimum to reach something of size. But yes, it's a big enough market. And value-wise, some of these products are fairly very large. And the same -- I don't know if you got that point that Mr. Deshmukh made that exact same rationale and USP or right to win, what we did to straight bevel gears, when we made it through forging route, the exact same thing happens to spiral now basically.

[Operator]

So next up we have [ Anay ].

[Unknown Analyst]

Mr. Vikram, can you hear me?

[Vivek Singh, executive]

Anay, I can hear you very loud and clear.

[Unknown Analyst]

Vivek, I might go to this topic again on the Europe trend and demand, right? So sorry for that, but I need some clarity, specifically 1 or 2 areas, right? Are you seeing any trend where a customer has a budget for a particular EV project and they are putting those on hold because of ongoing whatever? It's like too many things are happening at the same time. Are you seeing trends on those lines, number one? And number 2, when you said that other markets like particularly India, you said that demand is strong and we have domestic consumption and stuff and infrastructure is booming here in India, so are you seeing any demand like those offsetting your near-term losses in other geo?

[Vivek Singh, executive]

So thanks. I'll take the second part first. I mean this is the first time we've even crossed INR 600 crore revenue in the quarter, so we are actually at INR 650 crore plus. So this is the best we have ever done.

[Unknown Analyst]

No, no. First of all, I would congratulate you for that, Vivek.

[Vivek Singh, executive]

Just to give you the challenge of when you grow that much, relative share is slightly misleading. So if you look at Europe share, even now in absolute terms, it's not that bad. It's just that on a relative basis, where everything else is growing a lot, it hasn't grown at all this quarter. So there is a bit of actually confusing signal even to us because we also go by our customers and what they're telling us and what -- even more importantly, right, actions speak way louder than words. How much are they buying and how much are they picking up every month is the biggest indicator. This quarter was higher than last quarter for us. So it's -- although the commentary don't seems much so optimistic, the numbers aren't so bad in Europe.

Other markets, like I said, North America and India are doing fairly well. So nothing to say. But even you know the problem that you can't stick your neck out for too long because you don't know what's going to happen in a month or 2. The best thing we can do is be dynamic and act with alacrity. So there is no loss to make up because, in a sense -- and I'll be more realistic and slightly brutal, if sales are gone, they're gone, you're not going to get them back because if guys delayed their purchase decision by 6 months, it is not going to come in this time frame. And if you lose time in pursuing anything as valuable as it may be, time is the most valuable commodity. So you have lost that. So I don't think anything is made up because we cater to the global vehicle market. If enough global vehicles are sold anywhere, we'll be okay. But yes, if something happens that affects the whole vehicle production, that's more challenging.

[Operator]

So next up we have Chirag.

[Chirag Shah, analyst]

Am I audible?

[Vivek Singh, executive]

Yes, Chirag, very much.

[Chirag Shah, analyst]

Two questions. One, last few quarters, if we see, there have been a series of disruptions happening, due to OEM volumes, higher RMC, et cetera, et cetera. So if we take a step back and we have to assess where are we today in terms of volumes or like-to-like benchmarking, where are we today terms of volumes, say, a year back where we were and where are we today? If you can give a ballpark understanding, taking into account the geography mix issue, the product mix issue that we are going through? So that is the first question, because we all focus on revenue for the company, right? There is -- so it helps us to understand where are we in terms of your benchmarking.

[Vivek Singh, executive]

So Chirag, this is a very interesting question. I mean, the whole presentation is the answer to that in one sense. The thing is, it's hard. It's not just the last 4 quarters by the way. I was given charge of this company in February 2019 so I have never seen a normal quarter, so I don't know what a normal benchmark is anymore. I think what that has allowed us to do is build a business which handles volatility relatively well. I won't say we are anti-fragile, but fragility doesn't shake us as much as it would other, let's say, peers. Again, reason's very low fixed cost, very high value addition, compound employee costs, don't choose products which are very commodity or market-linked that one market goes down and suddenly you're out of business there. And you have seen that, all of those tests being applied.

So I would say, we continue to be focused on that, that as a business, we are strong and resilient. Market has not been great. I mean if you look at it, and there are enough reports. I mean, Nomura, BofA, all of them do a very fine reporting line by line of each market on light vehicle, et cetera. No market has really done well, if you look at the last 6 quarters. It is just now that we talk about year-on-year, so we compare this quarter or this half with the corresponding half last year.

But if we go back to 2018, and you being an auto analyst yourself seen all of this. Between '21 to 2018, like clockwork, the automotive market used to grow by 5%, 4% every year. I think those days are just not there anymore. And companies like ours, which are [ fit ] and built to handle volatility and shocks, I think that is more important than just looking at trends and saying this market grows, I'll also grow. What can you do in a dynamic environment where there are many moving parts? I think that's what our benchmark is. Our benchmark is how much money did we make? How much returns did we make? Did we deploy our cash properly? That's what our metric is. I get the cash balance, by the way, every day. We are very extreme metric. We prepare for the worst literally. What is the worst? Your revenue goes to 0, absolute 0, right?

Every day, we have a number that the executive board gets, which is how many months we can continue like we are today without a single paisa of revenue. And Rohit obviously knows that answer well. We may not want to share it, but it's a long tale. And that's what we build our business for, that what is the worst that can happen and what do we do in that time? These are the benchmarks that matter to us as well. The others that we report, of course, they matter, they're metrics that are -- that help analysts [ commonalize ] people, compare A to B. But for us, it's this. How strong are we? Because we believe the world will continue to be volatile and uncertain.

[Chirag Shah, analyst]

Just the second question was the new product, the white part of the product chart that you have. So I understand that first concept happened then after that you add a product over there. But if you can elaborate more on that, generally, at what stage you add a product over there? And how should we look at the development life cycle? See, I understand that you may have your own set of successes and so on and so forth. But internally, how do you look at when you add a product in that particular white area, if I use that word? And what are your aspirations and how fast you want to make it a commercial product or at least a product ready for approval stage from OEMs?

[Vivek Singh, executive]

Great question, Chirag. So I'll let Mr. Deshmukh answer it in detail. However, you're right, the variance is fairly high that there are products there which could enter commercial production in a quarter or 2, and there are products which, frankly, may never also enter. Even this spiral bevel gear, by the way, like I said, it's taken us more than a decade from starting to actually getting it done. So it's a very good question. Mr. Deshmukh, sir?

[Kiran Deshmukh, executive]

Yes. So as in every R&D project, the success is not assured. So we keep on working on it. And of course, we work on those projects where success is a -- probability of success is quite high and probability of commercializing that product into something which will be a commercial success is high. That's what we look at. So there are products which -- in the white area today, which may come into the blue area next quarter. There are some more products there, which may not see the light of the day. Like Vivek just now mentioned, the spiral bevel that has entered the blue area now this quarter, we've been working for more than 10 years. So it's a long journey, and there are a lot of products which we drop and there are a lot of products that will come into it. It's a dynamic chart. And depending upon the technology landscape, how it shapes, depending upon the market conditions, we keep on -- we have internal discussions regularly. We have strategy sessions, and we keep on modifying this chart based on these realities.

[Chirag Shah, analyst]

If I can sneak in one last question. So in general, Vivek, your view on demand, especially in China, how should we look at the ramp-up? Because we hear a lot of news flows coming across from China, but you are probably the right person to indicate how should we look at the ramp-up in volumes happening -- what's happening over there?

[Vivek Singh, executive]

So -- I mean this quarter has been exceptionally good in China as all the news flow will indicate. How sustainable is it? We will all have to wait and watch. I'm not 100% sold that it is intrinsic and structural. I think there are other elements, there may be subsidies, there may be incentives, there may be other factors at play. Unsubsidized latent demand converting to actual demand, that's a real thing, right, when you have a huge class of people who want to buy and then they eventually have the means to buy those vehicles. So again, I will be slightly more skeptical about that.

[Chirag Shah, analyst]

But if you look at next few quarters, say, next 4 to 6 quarters, can we assume that this kind of run rate that we have seen last quarter is sustainable in short term, say, next 4 quarters or 6 quarters, that is the indication you're getting from your OEMs?

[Vivek Singh, executive]

No. So are you talking about us or are you talking about the China automotive market in general? Because we are very small in China and China is a very big market, so very different things.

[Chirag Shah, analyst]

Yes, I was actually trying to figure out for both, to be very frank.

[Vivek Singh, executive]

There the macro and micro are very different, Chirag, because see, micro growth can double, because that's small, right? You just have to win one new program and you can double. So that is -- and that is not very consequential, to be honest. I would focus more on North America, India and Europe in that order for growth.

[Operator]

So next up, we have [ Nitin ].

[Unknown Analyst]

Firstly, I wanted to go back to the technology road map. It seems the range of components you are working on in current and legacy categories is way more than what you have in legacy. So let's say someone has to think of what is the revenue potential from these components on a 3-, 5-, 7-year kind of a basis. What -- how should we -- one think of that? And also in your order book, is there any contribution coming in from the current components?

[Vivek Singh, executive]

Nitin, so firstly, Happy Diwali. Good to hear you on this. So again, the black ones were legacy. This is what we started with when we -- let's say, 2016, 2017, right? All the blue ones are the ones where we actually produce and have orders for therein. So these are all products that we have and we offer. The white ones are the ones where there is a degree of uncertainty on when would they enter or add to our revenue stream, right? That's the question?

[Unknown Analyst]

Yes. And I don't know, I mean, is there any way to quantify it a bit in terms of -- obviously, there are probabilities of successes you have and the further you are and the commercialization, the more uncertain it is. But let's say, if you think of the blue part of that chart, is there a way to think of what's our total revenue potential and then think of probabilities of success?

[Vivek Singh, executive]

Yes. You don't have to think of probability if it's blue. The order book is the value. So blue plus black is equal to the order book value. All those products are...

[Unknown Analyst]

How much of the order book is blue?

[Vivek Singh, executive]

I would say a large part, right, because the starter motors and differential gears won't be that big, all differential assembly is in blue. And yes, I mean, if we were to look at it, I think about 60% -- maybe 65%, 70% would be in the blue. I know what you're asking, Nitin, you are asking, left-hand side, in excel sheet, how many rows and then how do I add the columns, right? But all I'm saying, probability is not there. That is order book only. The white is where probabilities come in, because that is where you could be 0 or you could be 100. And that is hard to predict because, as you know, I mean, we only add to blue when we get a purchase order and it acts as order book. So blue is certain. Probabilistic is all white. But if you met me in 2015, 2016 and you come to our office, we made one product, that differential gear. So this is -- all that blue is just last 6, 7 years of work, and our revenues would be perhaps one -- I don't know, Pratik, what's the revenue share from differential gears? 20%? less than that?

[Pratik Sachan;Corporate Strategy and Investor Relations, executive]

In the order book it is...

[Vivek Singh, executive]

No, what is today our revenue from differential gears as a product? It's on the chart, just go one chart back actually, 2 chart, yes. This is it, right? differential gears is white, this is 31% of our revenue. Like I said, all of this has been added in the last 5, 6 years. So hopefully, 5, 6 years later, all of the business that is there today becomes again 30% to 40%. And that's exactly -- by the way, I was not being philosophical when I was responding to Chirag's question. That's how you build a business that can withstand stresses in a falling market and all of that, that whatever you have 5, 6 years later should only be a portion of the revenue of that time. And that's the [ internal ] and we keep making new things and we keep gaining market share in the things we have. That's it. These are the 2 things.

[Unknown Analyst]

Okay. Got it. And secondly, what kind of potential benefits are you thinking from the PLI scheme?

[Vivek Singh, executive]

Large, but we have not quantified it. And as we've spoken before, you know that the scheme outlay is fixed, but the number of claimants and exactly what they are entitled to is kind of still up in the air, right? So all of us -- if I were to apply the percentage in a lot of our parts, which are electrical and high tech, which would qualify, they qualify then theoretically for the highest percentage. But I don't think that is possible because that's a very, very large number of incentive.

[Operator]

So before we open the floor for further questions, I will now pass to [ Sid ] to address some questions we received from the Q&A box. Sid, over to you.

[Unknown Attendee]

On the road map, we had shared in the past on various technologies like Enedym, IRP, et cetera, on the motor side, which we had done, and we had planned to sort of start production in the next couple of years. So any update or any progress can you share about where are we in terms of clientele and the plan to sort of start those?

[Vivek Singh, executive]

Thanks, [ Siddharth ]. I'll ask Mr. Deshmukh to respond to that. I think 3, IRP and Enedym and C-Motive.

[Kiran Deshmukh, executive]

IRP, Enedym, C-Motive. With IRP and Enedym, the projects are in very late stage. I mean, they are at very advanced stage of development. And they should be ready for commercialization in next 2 quarters -- next 6 months. Again, it depends upon the final results, final test results. And like I said before, R&D projects are binary, you succeed, you don't succeed, depends upon what results you get. You may have to do some tweaking, you may have to take one more iteration, in which case, it may take longer time. But if everything goes fine, then we should have products coming from these 2 partnerships, which is IRP and Enedym. Both are magnet-free motors, should be ready for commercialization in next 6 months. C-Motive is the third company with whom we are working. It's a completely new technology.

[Vivek Singh, executive]

Sorry, sir, I'll take that. It's a bit of a moon shot, to be honest, because it's an entirely different way of making motors through electrostatic technology. So that, I don't think you should consider for any forecast or estimate. Even for us, it is one of those things that, if it works out, changes the way motors are made. And if it doesn't, well, the option value is not that high. It's like an option, right? We put in about $1 million behind that research. It is trying to eliminate all of it, the rotor, even the [Technical difficulty] also go. It's a very different way. Hence, the probability is obviously lower because the closer you are to the way things were made, the probability is higher.

So Enedym, obviously, is higher because it is a way motors have been made earlier, but they had a problem called torque ripple, which is that the torque literally rippled, if you made a graph, instead of being a very steady way, it was a rippling way. And I think the work we're doing with Enedym is trying to solve that torque ripple. And if we do solve that, it becomes a very, very proficient magnetless motor. Hence, the higher degree of certainty. Electrostatic is -- I mean through static charge trying to develop magnetic current, which is obviously much further away from how things are normally done right now.

[Unknown Attendee]

Got it. And for the existing motors like BLDC and PMSM, which we are already supplying, and given the strong preference we are seeing for some of these electric models, would it be possible to share any numbers in terms of your capacity, how you are -- you have built currently and depending on the sort of [Technical difficulty] you are getting, how much do -- the capacity will touch in the next couple of years?

[Vivek Singh, executive]

Sure. So, Sat, if you could touch upon installed as well as capacity utilization.

[Sat Mohan Gupta, executive]

Yes, Siddharth?

[Vivek Singh, executive]

Siddharth wants to know the capacity we have for BLDC and PMSM 2-wheeler, 3-wheeler motor.

[Sat Mohan Gupta, executive]

Okay. So right now, we have a capacity of around 250,000 for hub motors and around 75,000 to 100,000 for the PMSM motors in our Chennai plant.

[Unknown Attendee]

And the utilization levels will be?

[Sat Mohan Gupta, executive]

Utilization level, as you know, I mean it depends upon quarter-to-quarter and right now...

[Vivek Singh, executive]

Last time it was around 40%, I guess?

[Sat Mohan Gupta, executive]

Yes, around 35% to 40%.

[Unknown Attendee]

Okay. Got it. And lastly, sir, on the CapEx side, if we look at again for the next couple of years, what is the number you are looking at? Any change to that? And broadly, in which areas you are planning to sort of do the CapEx? That will be all for me.

[Vivek Singh, executive]

So Rohit?

[Rohit Nanda, executive]

Yes. So next 3 years, we are estimating the CapEx to be between INR 900 crores to INR 1,000 crores to take care of the existing order book.

[Vivek Singh, executive]

It only goes up and down depending on, if you see that the near term, something is not going very high or whatever, then you kind of push out the cash flow. So cash management of CapEx is a different thing from commitment of CapEx. So we are fairly actively monitoring that. I think the second part, Rohit, he wanted to know is which areas? So I'll answer, most of it is actually towards, I would say -- the largest would be differential assembly and spinal gear and other EV transmission parts that we also showed in white, some of it we'll obviously start doing. The second largest would be towards the IM -- the integrated suspension module product. The third largest would be towards adding more differential gear capacity, which also serves, by the way, the differential assembly business. And fourth would be the traction motor. Obviously, there is 0 CapEx deployed for starter motor.

[Rohit Nanda, executive]

It would be 18% for the Driveline business and about 20% for the motor business.

[Operator]

So next up, we have Basudeb. [Operator Instructions]

[Basudeb Banerjee, analyst]

A couple of questions, sir. One, as in your presentation also you have explained and earlier also we discussed that the optical effect of metal inflation impacting margin. So with metal prices correcting since, what, almost June, how much of the revenue is reflecting metal deflation this quarter? And what part of the potential optical reversal in margin is already there in the numbers?

[Vivek Singh, executive]

Thanks, Basudeb. Not much has happened for alloyed steel actually. Only INR 5,000 per tonne was the reduction that we got. So not that much as we were expecting. But yes, it is already in the margins. Rohit, Vikram, you want to add to that or if you're seeing anything more?

[Basudeb Banerjee, analyst]

Just expected to understand how much potential of that reversal is still pending compared to the 300, 350 bps of negative impact?

[Vivek Singh, executive]

Huge. I mean we are still at almost the second highest steel prices have been in perhaps a decade.

[Basudeb Banerjee, analyst]

And this INR 5,000 per tonne is on a base of how much, sir?

[Vivek Singh, executive]

So Rohit, you want to share -- do you have a slide on the buildup, how it has kept going up? I mean INR 5,000 gets us to what the prices were in March 2020.

[Rohit Nanda, executive]

Actually, April, we had a large price increase. In fact, July price decrease doesn't even take care of the increase we had in April actually. So it higher than March price.

[Basudeb Banerjee, analyst]

So broadly speaking, with operating leverage not being that substantial, huge scope for this reversal in base effect, definitely, plus PLI being unaccounted so the margin has a huge scope to move up per se.

[Vivek Singh, executive]

Yes, like I've said before, Basudeb, I think to you also that the largest variable is steel price. That is the biggest variable. If you remember, 2020, our margins had reached almost 30% because steel prices became quite low. And since then, we just kept climbing, climbing, climbing to this level like Rohit rightly pointed out that this is actually not even the price increase that happened in April and also not been reversed. So this is the second highest price point in the last, I don't know, how many years.

[Operator]

Next up, we have [ Jay ].

[Unknown Analyst]

Can you hear me?

[Vivek Singh, executive]

Yes.

[Unknown Analyst]

Congratulations team for a great and a superb quarter, I hope you guys had a great Diwali. So I want to ask you this question, Vivek. So as we've seen in the last few quarters and even prior to listing, majority of our order book used to be maybe 6 to 8 quarters, I mean, in that range down the line. And like we -- like you just said that FY '24, we'll see a lot of ramp up. So in a way, can you say that last 3, 4 years, the industry itself has been adopting the standards to EV, and hence, now the shift will be much more quicker even when you get orders, like I think last quarter, I asked you this question where from the time you finalize the deal and when it goes to production, how much time does it take. And now you see a majority of our INR 205 billion order book coming into production in FY '24. So would you be able to say that now, okay, the curve of adoption can be much steeper?

[Vivek Singh, executive]

So, Jay, look, very astute of, #1, and also Happy Diwali. I did not have that good a Diwali because I fell in, but still. So yes, in a way, if I were to kind of draw visual analogy, the end time for ICE and the starting point for new EV models was actually drawn a couple of years ago. So the people who are late to that point, let's say, who were launching new models or who were starting on new model now, they have very little time to go to SOP. So yes, the pressure on us, though, obviously, increases a lot for these customers. But I think I mentioned today and good I think you caught it that I said that there is this program we won. They want to start next year. This is not usual, 18, 24 months is the usual time. So I think a lot of OEMs are now under pressure to catch up, and this trend will accelerate. And I think Europe's already passed 2035 is now a hard cutoff, right?

ICEs have to drop off if you have to now start doing new model launches. Let's say you're a car maker, right, and you have a car launch in 2027. How many people would think of launching a diesel [Technical difficulty] it's not a question, hope other people also read this and other suppliers. There is a time period beyond which we cannot crash these processes. These are all safety critical things. There is an amount of time that one must put in testing and samples and validation before we go to market. We do A sample, B1 sample, B2 sample, B3, C before we go to production. So it can't be cut down beyond the point also. But you are absolutely bang on, right? The urgency and the tone has shifted to one of those -- everything is linked to [ tomorrow ].

[Unknown Analyst]

Got it. Got it. And just the last question. Now that we are seeing more adoption, and I wouldn't name the OEM, but yes, they have come with another variant where the price of that variant is just half of their actual variant which was doing so great. So would it be that your wallet share per car as -- if you can say it rightly, like if Moore's law is applied and if the cost of cars keep coming down, your wallet share per car might go down, but obviously, your products will go into more number of cars? Can that be a possibility?

[Vivek Singh, executive]

It is, right? I mean if you've seen that chart in which we defined our strategy, we started with very low volume, but very high value and very few number of cars, very high performance. And then we kept moving down to when EV becomes mass. See, still, what I was saying is that, EV is not that mass. It is still -- most of the successful EVs are relatively expensive for most markets. It will become mass one day. So there is a point which will come, but that is, I think, 10 to 15 years later, when EV is the vehicle. There is no other powertrain. There is no competing powertrain.

At that time, that which sector do you want to specialize in, et cetera, because right now, for us, it's how much value in total and how much can that be done, balancing 2 things, return and profit. That's it. There's some things which will have higher EBITDA but lower returns, some will have slightly lower EBITDA but higher return and you've got to balance those 2. But yes, exciting times, next 2, 3 years will be exciting. Yes, it could be a couple of quarters here and there with uncertainties and geopolitical stuff, but I think the direction is pretty clear and I think it's also getting pretty linear.

[Operator]

Due to the time constraint, we will end the Q&A session here. If you have any follow-up questions, please feel free to e-mail your questions to your Nomura sales representative or corporate access team. So now I will pass back the call to Kapil. Kapil, over to you.

[Kapil Singh, analyst]

Actually I'm okay with more questions, by the way. I know some of you have to go attend some other earnings call, but I'm okay. We are here. It's only 5 p.m. It's not that we're going home. Okay. Gigi, do we have any more questions in the queue?

[Operator]

[Operator Instructions] We've got a new raise hand from [ Deepak ].

[Unknown Analyst]

Can you hear me?

[Vivek Singh, executive]

Yes, Deepak.

[Unknown Analyst]

Congratulations for a good set of numbers. I have 2 questions. So the first is, I believe you were looking for some acquisition opportunities for a compatible sensor-based company, if I'm correct. So how far are we in this endeavor or process? And what products in your portfolio, I believe, in the white region would have synergies if such acquisition will ever take place? Is it your controller or inverters or next-generation motors you're working for? The second one is, we are seeing kind of boom in electric 2-wheeler segment in India. I mean recently, I was in my village, where my grandfather, he bought EV, like electric scooter, so it was quite nice. So what Sona Comstar is basically doing to proactively capture this opportunity?

[Vivek Singh, executive]

Thank you for those interesting questions, Deepak. So first one, I'll take. All M&As are binary. Till a deal is done, nothing is done. Once we do, and if we do, we will, of course, inform everyone. You have very astutely already observed that right, inverter and the controller -- we control using an inversion, so that's why it's inverter. Basically, anything -- what is the sensor capability we are looking to add or we are looking to develop that capability is around the software area. We'll not enter the chip or the hardware control of it. It will be how do we get software to control these electronic sensors to perform a function that makes vehicles better for the consumer. That's the objective here. So yes, the capability alignment will be more towards software-driven products.

Second, and very interesting one, and thank you for sharing. I have also always believed that our rural India has a great potential for electric vehicle for -- one of the biggest reasons is obviously electricity being subsidized. When your TCO goes down dramatically, what we are doing as ourselves, we cannot do much because you have to understand that we are B2B2C, so we can't solve end consumer problems directly. However, we are working with a lot of our customers on electric tractors, electric 2-wheelers and 3-wheelers, which can be used for both passengers and goods carrying for rural India.

And I genuinely believe rural India has a humongous tapped retention for electric vehicles. I mean just think of electric tractors, because you're not going too far from home, range anxiety is not an issue. The TCO is phenomenal here. What it does to reduce pollution, et cetera, is just a byproduct, just economically, it makes so much sense. So we are working with a couple of our customers on electric tractor products. And I think it's quite exciting. And hopefully, all my best wishes to your father and hope there are many more who purchase this.

I think the problem currently with vehicles are they're not made for rural roads. I think you need a much wider thread of the wheel, you need better suspensions to take those uneven roads, et cetera. But it will get there. There is a great market opportunity waiting to be found.

[Unknown Analyst]

If I can add a small question. So recently, there was a company, I won't take a name, they acquired an electric tractor manufacturing startup, right? So can I say that in future, Sona Comstar can use their expertise to go into this end product or they are only focused on supplying motors or other mission-critical parts?

[Vivek Singh, executive]

So, Deepak, that I'll clarify. I know who you're talking about. We will work with such people and supply them the parts they need. We are never going to invest in or buy a vehicle makeup because that is not our business and it provides a direct conflict of interest. And we can be the best intention at whatever we do, but our actions must be above reproach if we want to be the leaders in our field. So there shouldn't be an iota of a doubt in my customers mind that whatever product that we co-design or re-design for them, I'm going to use for something else because I have a vested financial interest in owning a vehicle company. So that day, we will not let arise. We will help all our OEM customers develop the best products they possibly can. But no, we will not go and make vehicles.

[Operator]

Mr. Vivek, I just want to know if you're okay on time. Would you like to take one more question?

[Vivek Singh, executive]

100%. And actually, Kapil has not even asked me a question, which is usually used to be the first question. So I have to at least answer his question.

[Operator]

So we have [ Sunil ] next.

[Unknown Analyst]

Congratulations for the great numbers. So I have 2 questions. One would be pertaining to China and Europe. What difficulties are you seeing in your plants in China and Europe? And is there any margin dilution happening because of higher input costs like power and other things due to China and Europe? And on the overall consolidated basis, what capacity utilization are we at? I'll ask my second one later.

[Vivek Singh, executive]

Sure. So capacity utilization is, because we have multiple products and multiple processes, quite a tough one. So what I'll try to do is give you product. I think, gears, we're running at about 70-odd percent because we just added a lot of capacity. That's why the fixed asset turnover also you would have seen gone down because we just added a lot of capacity. Differential assemblies, et cetera, I think we're running about 80%, 85%. And starter motor is about, I'd say, 45-odd percent. Traction motor's around [ 35% to 40% like subsets ]. So these are the broad things. We don't have a plant in Europe actually. We only have warehouses. So I know what you mean by the increase in input prices, et cetera. But since we don't manufacture there, it's not consequential. Our China plant is also not very, very big. So of course, there are challenges -- there were challenges in the last quarter. This quarter has been relatively smooth. But Sat, anything you want to add on our China plant?

[Sat Mohan Gupta, executive]

No, Vivek, I think you covered it very well. Right now, we are not seeing a big change in our forecast in the numbers.

[Unknown Analyst]

So any lockdowns or anything else is not really hampering the plant in China?

[Sat Mohan Gupta, executive]

No.

[Unknown Analyst]

Okay. Okay. And my second question was with pertaining to the customers. And also due to the high growth in the BEV and EV segment, is there any cannibalization possible? And do you have a lot of overlapping customers because what I see is you have close to 37 customers in the non-EV and about 19 odd customers in the EV segment? So is there a lot of cannibalization which could kind of take growth a little away?

[Vivek Singh, executive]

Not that much, actually. So if we can -- I think you're talking about the order book slide, right?

[Unknown Analyst]

Right.

[Vivek Singh, executive]

So, not much because if you look at it, passenger vehicle, everyone has an EV variant and usually, we are there. So that's where cannibalization can happen. Off-highway and commercial vehicle, there isn't much. 2-wheelers we were not in, and 3-wheelers, 2-wheelers we've have added only recently after we made the traction motors. It's not really cannibalization. And I think I mentioned this trend in -- when I spoke in my opening remarks that for the gear guys, we are actually moving up. We've already done so for 2 customers. And like I said, hopefully, we'll do it for one more. Instead of cannibalization, it's actually a -- value addition is increasing for us. So that's what is happening for us so far.

[Unknown Analyst]

Okay. That helps. If I could just add on one thing. What -- how do you forecast the next few quarters on overall basis? What should be -- I know you don't give out any guidance or numbers, but a little views of yours to your management?

[Vivek Singh, executive]

Good, I mean it should be good and strong. You know our track record. It should continue to be good. We just don't know how the macros would be because what is harder to estimate is the base that you have already, you know which new order books, how much you'll add. But what happens to the base you have in hand, does that shrink? And if yes, by how much? I mean, in just the last 3 years, we've seen the industry grow from 96 million vehicle producing industry to 72 million. So that's the variable that we don't know. But yes, growth should be there, and it should be robust in the near term, in the medium term, hopefully, also in the long term, but at least we can answer till near term and medium term.

[Operator]

[Operator Instructions] Since we don't have any follow-up questions as of now, would you like to end the call slightly earlier with the closing remarks.

[Vivek Singh, executive]

Sure, unless Kapil wants to add anything. We must take our host's permission before ending things.

[Kapil Singh, analyst]

No, I'll hand it back to you, Vivek, in case there are any closing remarks. Thank you so much.

[Vivek Singh, executive]

Nothing, as always, thank you to all of you who attended and gave us your valuable time. I know there are many things you would maybe rather be doing on a Friday evening, but your questions help us understand our business also, whether we don't look at it in the exact same way the outside world looks at it. So it makes us better. Learning is iterative, and we hope to continue learning and continue to do better in the future. So thank you. And see you again next quarter.

[Kapil Singh, analyst]

Thank you very much, everyone, for attending the call, and I thank the entire management team from Sona Comstar for taking out time as usual. Thank you so much.

[Operator]

Thank you everyone. Thank you again for your time. Happy Diwali. Now you may drop off the line. Thank you.