Sona BLW Precision Forgings Ltd

NSE:SONACOMS

Earnings Call Analysis

Sona Comstar Sees Strong Growth in Revenue and Strategic Acquisition

Sona Comstar enjoyed a prosperous second quarter, reporting a 17% revenue increase to INR 925 crores, while EBITDA rose 14% to INR 255 crores. Notably, BEV revenue soared 53%, now making up 36% of total sales. The company is strategically acquiring EKL's Railway Equipment Division for INR 1,600 crores, projecting earnings accretion in the first year. The firm anticipates a continued strong order book, with EV programs contributing substantially to growth. Despite market challenges, margins have improved, and the financial outlook remains robust.

Strong Quarterly Growth Amid Market Challenges

In the second quarter of FY '25, Sona Comstar reported a robust revenue growth of 17%, reaching INR 925 crores. This performance is notable, especially since its primary markets in North America, Europe, and India faced a light vehicle market decline of 2%. Furthermore, the company has seen its battery electric vehicle (BEV) revenue soar by 53% year-over-year, now constituting 36% of total revenue, reflecting a significant shift towards electrification.

Profitability and Margin Improvements

The company's earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 14% to INR 255 crores. After adjusting for higher employee stock ownership plan (ESOP) costs, the actual EBITDA growth was 18%. Additionally, net profit after tax (PAT) grew by 23%, amounting to INR 158 crores. The adjusted PAT margin improved by about 80 basis points, supported by net finance income.

Strategic Focus on Electrification and Diversification

Sona Comstar's strategic shift towards electrification is clear, with the BEV revenue share rising from 27% in H1 last year to 35%. The company continues to build its EV order book, showcasing its dedication to reducing dependence on internal combustion engine (ICE) technologies. Currently, 78% of their net order book of INR 231 billion is attributed to EV programs, indicating a promising future in the electric vehicle space.

Recent Acquisition Set to Enhance Growth

Sona Comstar has made a strategic acquisition by purchasing the Railway Equipment Division of Escorts Kubota for INR 1,600 crores. This acquisition is expected to be earnings accretive from the first year and fits within the company's long-term vision of expanding beyond automotive to broader mobility solutions. The acquired business, which generated approximately INR 950 crores in revenue last year, aligns with the company’s focus on green mobility, bolstering its capabilities in the railway sector.

Future Guidance and Market Outlook

While Sona Comstar expects continued growth, there are challenges to be aware of, including projected slowdowns in certain market segments, particularly in commercial vehicles. Geographically, North America remains the most significant market, contributing 44% of revenue, while Europe has declined from 26% to 22%. Looking ahead, the company is optimistic about its order book translating into revenues, forecasting further improvements in margins as operational efficiencies are realized.

Financial Health and Capital Management

Sona Comstar has maintained a solid financial position, generating INR 467 crores in cash from operations against an EBITDA of INR 506 crores for the first half of FY '25. Their capital expenditures were targeted at INR 224 crores, leading to a free cash flow of INR 243 crores. The recent QIP has bolstered their cash reserves, providing ample capital for strategic initiatives and investments.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, thank you, and welcome to Sona Comstar Q2 FY '25 Earnings Group Conference Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] Some of the statements by the management team 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 future -- for further details. The management will also not be taking any specific customer-related questions or confirm or denying any customer names or relationship due to confidentiality reasons. Please refrain from naming any customer in your question. Now I'll hand over the floor to Kapil Singh, Nomura, Head of Consumer and Digital Commerce Research India and Lead Auto Analyst. Kapil, please go ahead.

[Kapil Singh, analyst]

Good day, everyone. To take us through the Q2 FY '25 results and to answer your questions, we have the management team of Sona Comstar with us. I'll just introduce them quickly. Mr. Vivek Vikram Singh, MD and Group CEO; Mr. Kiran Deshmukh, Group CTO; Mr. Praveen Rao, Group CTO Designate; Mr. Sat Mohan Gupta, CEO of Motor Business; Mr. Vikram Verma, CEO of Driveline Business; Mr. Rohit Nanda, Group CFO; Mr. Amit Mishra, Head, Investor Relations; and Mr. Pratik Sachan, Group GM, Corporate Strategy and Investor Relations. I will now hand over the call to Vivek for his opening remarks and the presentation. Over to you.

[Vivek Singh, executive]

Thank you, Kapil, and welcome, everyone, to the earnings call of what has once again been our highest ever quarterly revenue, EBITDA, BEV revenue and BEV revenue share. But before we discuss the quarterly performance in detail, we have an important strategic announcement to share. As we continue to grow as a company and to keep expanding the canvas in which we paint, we need to look at different opportunities, and we need to expand our focus beyond the automotive sector to broader mobility areas if we are to achieve our long-term growth ambitions and continue the growth momentum that we've displayed for the entirety of our 25-year-old journey.

And with this thought in mind, if you remember about a year back or 12 months back, we had updated our vision statement to reflect the shift and we had taken out auto and inserted mobility. And since then, in the last 12 months, we've been exploring various areas of mobility. While doing that, and as some of you may already know, we have said this on multiple occasions, we have a few filters that we put regardless of whether it's an organic opportunity or inorganic opportunity that we put in to evaluate it.

The first is the products; are they expected to exist for at least the next 15 years or not? In this case, we are confident trains will have brakes for perhaps much longer than 15 years. Second, we aim at sectors that are not only sizable, but also fast growing because I think Bob Iger, it was, who said that do not be a trombone oil salesman because even if you are the best at it and the market leader in it, there is only a very small amount of trombone oil. So the market has to be large enough as well as fast growing. And whatever we acquire should have the ability to take market leadership in its product category.

Escorts Kubota Limited Railway division is already the market leader in railway brakes in India. And we believe with the right investment and the right focus, it has the capability to become one of the market leaders globally as well. Third, it should further our long-standing strategic priority of diversification, whether it be in our market segments, in our customer mix or our product offering, which this obviously does.

Fourth and obviously very important from a shareholder perspective, it should be a good financial investment. In the current case, we expect that this acquisition would be earnings accretive from year 1 itself. And lastly, but at least to the management team as a group, very, very importantly, it should be good for the world we live in. And hence, the opportunities we explore must be in the cleaner part of the mobility system.

Now railways is the most environmentally friendly mode of motorized transport available today. With this acquisition, Sona Comstar reaffirms our commitment to promoting green and clean mobility solutions. So this is -- there are some elements are repeated here, but I'd say more than repeated is reemphasizing that the acquisition of the Railway Equipment division of EKL checks all our filters to screen new growth opportunities.

The railway industry, and we will cover it in a little bit, presents long-term growth opportunities. And with the Railway Equipment division business, we see significant potential to broaden our product range by doing what we as a company have done best so far, which is incorporating advanced technology and engineering products.

Now taking these things point by point, Indian Railways, as some of you may already know, has the second largest railway network in Asia and the fourth largest globally. The railway component market in India offers a significant opportunity to the various, I'd say, long-term growth factors and considerable, and I will want to restate it to mark the emphasis, considerable entry barriers, especially in critical products like brake. Why? If you look at the second half of this slide, this potential, if you look at the increasing investments in expanding the railway network and the various modernization initiatives of railways, the total investment has grown at an annual growth rate of 17% over the last 10 years. This is one of the highest investment categories that is there in India today. And despite it being a 200-year-old industry, even after all these years, it is amongst the most economical and environmentally friendly modes of transportation for large population.

We expect trains with brakes to exist for the next several decades, if not more. Again, to reiterate that point, Indian Railways has a fairly high barrier to entry for component suppliers due to a very strict vendor approval process. And this is especially true for critical components like brake systems. Escort Kubota's Railway Equipment Division or RED has over 60 years of experience in the railway component industry and has been a long-term partner of Indian railways and major private railway OEMs. I think the revenue split is 50-50 broadly. And it, I would say, easily has one of the most extensive product portfolios among railway component suppliers in India. RED is a market leader in brake systems for various types of rolling stock. It is also one of the top suppliers of couplers, suspension systems and friction products.

I think as we look at it, even more importantly, it also has a robust pipeline of new products. This is where Sona Comstar ownership can make the greatest delta. And with the significant potential of growth this business already has, I think if we accelerate new products through the R&D process, we can go the distance on this acquisition.

Coming to the financials. RED has a fairly strong record of financial performance across all the 3 key areas that we consider important, revenue growth, profitability and return ratios. Last year, the business reported revenue of approximately INR 950 crores with an EBIT of INR 179 crores. Over the past 5 years, the company has had a CAGR of 19% in revenue and 18% in EBIT, while consistently maintaining return ratios above 35%. This, of course, as I said, is very important to us because as a management team, we believe that any product we make must benefit society and the world. This acquisition aligns with our goal of promoting clean mobility. I mean if you look at Delhi NCR or anywhere in North India, you will understand and appreciate the criticality of this goal as most of the management team of this company lives here, this is an important thing for us.

Railways are among the most green and clean modes of motorized transport today. And if you look at the bottom half of this chart, it includes metro rail, electric buses, national rail, electric cars and plug-in hybrid vehicles. As you know, we offer multiple products for electric cars in both BEVs as well as PHEVs. And we are also developing powertrains for electric buses. By acquiring RED, we are entering the railways as well and this rapidly growing railway component market should help us contribute more to greener mobility solutions.

Now coming to the terms. We will acquire the RED business at an enterprise value of INR 16 billion or INR 1,600 crores. After closing, we expect the transition to be EPS accretive for us from the first year itself. Our strategy for this business will be similar to the approach we have taken with the Comstar acquisition in 2019 and Novelic acquisition in 2023. We believe very deeply in empowering the management of the businesses we acquired. We actually spent a lot of time evaluating the management of the business we acquire. And only if they are capable, do we take that lead. And by empowering them and providing them with the capital to invest in growth and R&D as well as fostering a culture where they have the freedom to take risk and learn from failure. I think that's the kind of M&A that we do.

With Comstar, I mean, if you take it as an example, it was 100% starter motor business focused on ICE. But the same team under Sat's leadership and Praveen has been a large part of it, it has pivoted towards large EV motor and inverter business as well.

We are doing something very similar, similar transformation at NOVELIC, where we're trying to shift from a service-led business model to a product-driven model. We intend to do something very similar from a strategy perspective with RED, empower the management team to invest in R&D and develop more and more innovative products for our customers because what this opportunity gives us is also a channel into expanding an existing business with Indian Railways or the private OEM supplying to Indian Railways.

Yes, it is an asset purchase and not a share purchase. In fact, I think there will be more to that, that we can take up in Q&A.

Now coming to the where at least for this quarter, slightly more mundane has kept the regular performance update on our business. So financing terms, as I said, we achieved our highest ever revenue and EBITDA. Revenue grew by 17% on a year-on-year basis, while EBITDA and net profit increased by 14% and 16%, respectively.

Net profit would have also been our highest ever; however, it was adversely impacted by exceptional expenses of about INR 83 million or INR 8.3 crores related to acquisitions related expenses, which Rohit will explain later. And also in a lighter way I wanted to add that 12 months into the EV slowdown narrative, our overall growth continues to be driven by BEV revenue. It has grown a staggering 53% last quarter and its share in revenue had increased to the highest ever at 36%, which goes to show that sometimes narrative does trump data, but numbers are numbers, and they should be given precedence, it is at least our opinion.

Our first half did continue to do well on all the three financial indicators. Our revenue, EBITDA and PAT are up 19%, 19% and 21%, respectively. We have had a decline in return on equity and ROCE. That is due to the recent capital raise of INR 2,400 crores to the QIP that we did last month.

We expect these return ratios to improve as we deploy and invest the cash from various growth initiatives to come. Now moving to the update on our strategic priority that we do every quarter. The first one most important electrification.

Our BEV revenue share has increased from 27% in H1 last year to 35%. And BEV revenue in rupee terms has grown by 53% to INR 6 billion. For us, the growth in BEV revenues, in fact, with 7x the growth in non-BEV revenue.

The order book, we continue to build on our EV order book. We now have 56 EV programs across 32 customers, 27 of them are in production currently, 13 are mature or completely ramped up at peak volume and 14 are still in the ramp-up phases.

The remaining 29 programs are still not in production and should start during this or the following year, which brings me to our net order book. We have consumed INR 14 billion last quarter, which is the reason why we have grown so much in the last quarter. We have also won business worth 12 billion and added that as an addition.

So at the end of Q2 FY '25, the net order book stands at INR 231 billion, with the EV portion remaining quite high at 78% of the net order book. But interestingly, this is the first quarter in which we also won some CNG start-up business. And this, I just wanted to mention because we do get questions on alternate fuels sometimes.

So the answer is this, irrespective, if it is either way the motor or the engine, whatever powers it, it won't matter. That business will still come. So just reemphasizing that alternate or hybrid powertrains do not really have any impact on other business.

Diversification, which has always been an important KRE, increasing electrification and decrease ICE dependence continues unabated. In the first half, we saw BEV revenue share increase to 35% and ICE-dependent revenue share to only 9%. The Europe demand slow down had meant that the revenue share from hybrid and micro-hybrid vehicle has been lower than the previous year.

Now moving to the other revenue impact. If you look at geographically, North America remains the largest end market, contributing 44% and frankly, the most stable from a demand perspective as well.

While India remains our second largest market with a revenue share of 28%. I mean after a strong recovery last year, we have seen slowdown in demand in Europe. That is why the 26% has shrunk to 22%.

By product, if I come to, our fastest-growing product segments have been EV differential assemblies and EV traction motors. This you can see reflected in the product mix as well.

Another thing which is notable is the weakness in commercial vehicle demand especially in India. Although it is everywhere, but it is even more acute in India, which has resulted in our share of revenue from this segment going from 14% to 10% in the first half. This is quite a decline. The nonautomotive revenue, as you can see in the screen, has also declined. First half or H1 last year, which was 12%, and this year, it's 9%. This is due to the weakness in the off-highway segment, once again, in both U.S. and India.

With this, I turn to our group CTO, Mr. Deshmukh, to update this and update us on the technology section for his last time. Over to you sir.

[Kiran Deshmukh, executive]

Thank you, Vivek. Good evening, everyone. On an earnings call, this is my last address as the company's Group CTO. After nearly 5 decades of the -- in the automotive industry and 4 decades with the Sona Group, I will retire on October 31.

As I conclude my journey, I am filled with nostalgia and gratitude. I joined Dr. Surinder Kapur 38 years ago to help build a [ fledgling ] steering systems company. We have since grown into one of India's top automotive technology firms supplying critical systems to leading OEMs worldwide. This journey required us to unlearn traditions, embrace innovation, experiment, even with failures and cultivate passionate individuals.

Together, we overcame challenges and celebrated milestones, all driven by our commitment to innovation. This far well marks not just my retirement, but a celebration of our collective success.

I'm pleased to pass the baton to my successor, Praveen Chakrapani Rao, with over 30 years of experience, he has held leadership positions across diverse functions, contributed to global product development and played a crucial role in expanding our R&D team. I'm confident he will continue our legacy of innovation and leadership.

Given that Praveen will now lead our technology marks, it is most appropriate for him to explain this slide. Over to you, Praveen.

[Praveen Rao, executive]

Thank you, Mr. Deshmukh. I'm happy to present the technology update this quarter. Sona Comstar has achieved a significant milestone with ASPICE Level-2 certification being awarded for its advanced active suspension system product.

This affirms our commitment to delivering high-quality, reliable and innovative systems and software solutions to the mobility space. ASPICE framework is globally recognized as a standard for assessing software development processes, efficiently implementing automotive ASPICE leads to better process and product quality.

The standard helps to improve cooperation among complex supply chains and between globally distributed development and engineering centers. This capability strengthens our current position in the market and opens up additional opportunities for business with global OEMs.

I now hand over to Rohit to cover the financial update. Thank you.

[Rohit Nanda, executive]

Thank you, Praveen. A very good day to you all. It's my pleasure to share our second quarter and first half results for financial year '25 with you all.

First, start with the second quarter results. We've had a good quarter with a year-on-year revenue growth of 17% to INR 925 crores. In comparison to our growth, the underlying light vehicle market in North America, Europe and India being the largest 3 markets for us, declined by actually 2%.

Our BEV revenue grew by 53% to INR 317 crores and now it constitutes 36% of our revenue in this quarter. Our EBITDA grew by 14% to INR 255 crores. However, adjusted for the higher ESOP cost in this quarter, the actual growth was 18%. Adjusted EBITDA margin improved by about 20 basis points on a year-on-year basis.

Our profit after tax had an adjustment for exceptional expenses on account of certain potential inorganic opportunities. Compared like-to-like adjusted for these expenses, our PAT grew by 23% to INR 158 crore compared to INR 129 crores last year. On the positive side, net finance income helped our adjusted PAT margin by about 80 basis points.

We move to the first half financials then. During the first half, our revenue grew by 19% to INR 1,818 crores as compared to the underlying growth of 3% in our key markets of North America, Europe and India.

Our BEV revenue grew by 53% to INR 600 crores, being 35% of our total sales. Our EBITDA for the first half adjusted for higher ESOP costs grew by 22% to INR 523 crores. Adjusted EBITDA margin expanded by 0.6% on account of operating leverage and lower material cost.

Our PAT adjusted for exceptional expenses grew by 26% to INR 307 crores. Adjusted PAT margin was higher by about 80 basis points, mainly due to improved EBITDA margin and net finance costs. This brings us to the cash flow for the first half.

So we have generated INR 467 crore of cash from operations against an EBITDA of INR 506 crores in the first half. Our CapEx spend was INR 224 crore, and therefore, our free cash flow was INR 243 crores.

Besides operations this quarter, we also had a net cash inflow of INR 2,370 crores from the QIP done during September month. Temporary deployment of QIP proceeds besides surplus operating cash flow, led to an increase in investments by INR 1,890 crores, net loan repayments of INR 224 crores, dividend payout of INR 88 crores and there was an increase in the closing cash by about INR 385 crores.

This brings to the last slide in the presentation, which is on the key ratios. The key highlights of this slide include further improvements in the working capital and fixed asset turnover ratios. Now close to 5x and 4x, respectively Our net debt to EBITDA went further negative due to repayment of borrowings out of the QIP proceeds. Our return ratios have seen a dip in this quarter consequent to the QIP fund raise that we did last quarter.

With this, we have come to the end of our second quarter and first half earnings presentation. And I'll now hand the proceedings back to Nomura team for Q&A.

[Operator]

[Operator Instructions] The first question, we will open the line for Gunjan.

[Gunjan Prithyani, analyst]

Congratulations for the closure of this deal. Good to see the business diversification continue. I had 2 questions. Firstly, on this acquisition. I just wanted to hear a little bit more from you in terms of what happens to the management team? Is it the entire team coming along when you're buying this business. And more from your perspective, what is the -- I've heard you that businesses that you pursue typically should have a right to win, right?

So I'm just trying to understand when you look at this business, what is the biggest right to win here? And how does the competitive landscape sort of looks like what? Positioning, I know they're a leader, but how -- what -- how the business dynamics? Is it about product? Is it about cost? What is the edge that this business has?

[Vivek Singh, executive]

Very happy to get a non-English group. So first thank you. Management is very, very important to us. That's actually one of the first things. The first question we asked ourselves is, see, buying things, looking at financial metrics, we're not traders. We are permanent. It's easy. You can buy something, it may look good on financials.

How will you run it? And then how will you grow it to become an institution on its own, you would need capable people. We don't believe we are some superhumans who can come into any business and make it great.

We rely on people who have capability and drive and have had some cons, maybe it is constrained on capital, maybe it's constraints on focus. Like in this case, it is a great company that it is part of. But for that company, it is not a core business and hence, it may not have got the attention, that if it got, it might prosper more. That's the thing. All the management team of the current Railway Equipment division of EKL is coming along, and we would like to add more to the team, but everybody will be coming along.

The second part, the Right to Win, I think that question, usually you know the line I have said that is may be before [Foreign Language] which is what is apparent does not usually need evidence. If you have win the largest market share in any product category for decades, you would usually have something. But if you build a market leader in a product category for some time along with high margin, kind of like last time, like in our gear business, there will 100% be some reason for that. It is a 3-player market. So Gunjan, brakes is a very critical thing. So there is -- there are global, really big companies, 1 big European company, 1 big American company, and this 1 Indian company, 3 of them compete.

The product validation process is super strict, and the entry barriers are very high. So these 3 compete amongst each other. Sometimes costs, sometimes technology, depends on which generation of product you are in.

If it's a -- it's same with us, right, like an automotive business, if it's a product that's been same for 20 years, then you have to be much better at process quality costs. If it's a product that is new, then technology and how much better you make it for the customer that comes in also.

Cost will always come. There is no -- I don't think there is a single customer purchase decision in any category of any product where price is no value, maybe apart from Giffen goods that we studied IN economics. Everything does have that thing. Did I miss any part or ...?

[Gunjan Prithyani, analyst]

No, I think this is useful. I mean, the message that I get is it is still a very concentrated market. And it's basically does the validation from the government agencies, which is a relationship over a period of time also matters a lot. Okay.

The second question that I had was on the order book. Now we continue to sort of see the ramp-up in the programs coming through on the full ramp-up line. Typically, you've had this 29, 28 programs, which were -- which have won but not really translating into revenue. So I just wanted to hear again from you given the entire setup in autos with the slowdown, is that -- should we continue to still sort of work with the assumption that this book will translate into revenues 3 years out? Does that still sort of hold true? Or there should be some change to the time lines there?

[Vivek Singh, executive]

See, there isn't much that gives me any ground in my view. There is -- there are 2 programs that are delayed. One is European program that's delayed by a year. And there is one Indian EV 2-wheeler program that's already been delayed for 6 months.

Apart from those 2, I don't have any instances to say one way or the other. So -- and that frankly, Gunjan, as you know would happen with -- I don't know if it's a powertrain, that model launches getting delayed happens. It is more a factor of, I would say, overall economic situation or customer readiness levels, I don't know which one it is.

[Gunjan Prithyani, analyst]

But fair to say INR 231 billion or INR 230 billion over a span of 3 to 4 years should translate into revenues? You don't see a major risk of...

[Vivek Singh, executive]

So I can tell you this. I don't think there is a single program there and Pratik please do confirm, started later than 2028, like at least start of SOP. Fully ramped up or not, I don't know. I think there are some in there which are beginning 2027 calendar. But '28, I doubt. Pratik, would you?

[Pratik Sachan, executive]

Yes, yes. So that's completely right. So most of the programs will start by FY '27.

[Vivek Singh, executive]

Correct. Because Gunjan, as you know [indiscernible] 24 months, I mean beyond that is really, really -- it will be exceptionally unusual.

[Operator]

We'll go to the second investor, [ Pratik Sen ].

[Unknown Attendee]

Sir, can you help me understand the domestic EV traction motors and controllers market? And how is this market evolving and what's our market share?

[Vivek Singh, executive]

It has been our fastest-growing product category, I think, for the last 3 years. But that is because the base was incredibly small. And this industry was growing quite fast till the first shot came when the first duty withdrawal happened, if you remember, May last year.

Then I think now, again, we are where it's coming to a stable thing and all our growth comes from new programs starting. Actually, that's been true for most of the industries we operate in.

If you look at underlying and Rohit does a good job, each time each quarter he talks about it that industry underlying growth was like 2%, 3%, whatever, and our growth was this. We have always grown faster than that because we grow on the order of new orders basically means either you increase wallet share within same customer or you get more customers to increase market share.

That is how we have grown. Right now, I don't think EV 2-wheeler industry is growing very fast now at this stage. Market share, I think is very complicated because what is the denominator then; EV 2-wheeler, plus EV 3-wheeler, plus EV 4-wheeler or just EV 2-wheeler. So it varies and also, by the way, the complication also varies month-to-month.

If you notice the EV 2-wheeler sales number, the fluctuations are quite wide. And depending on which OEM is doing better or worse, our market share also fluctuates a lot every month. But let's say it, Sat, maybe you cannot answer this and he can do the denominator also. How many would we be selling per month?

[Sat Mohan Gupta, executive]

Right now, we are selling around 20,000 per month.

[Vivek Singh, executive]

Correct. So on an average, Pratik, 20,000 per month, so if you take -- and most of it is in EV-2 wheeler, so if you take EV 2-wheeler market, I don't know exactly how many vehicles are sold every month, but use that as a denominator because each one will have exactly one motor, none of them have 2, you will get our market share or get close. Did that help? Pratik?

[Unknown Attendee]

Yes sir, that is very helpful. Thank you.

[Operator]

We go to the next investor with a question, [ Rowson Lewis ]. You have 2 questions.

[Unknown Attendee]

Recent purchase of EKL, right? So I just wanted to understand like what is the kind of revenue that you anticipate it adding on to the overall company's performance in the upcoming years? And secondly, what are the kind of competitors that you anticipate to be competing alongside EKL, the braking system and the other businesses that EKL is involved with?

[Vivek Singh, executive]

So I will let Rohit or Amit Mishra answer this. Also in tribute to their role on this transaction, these 2 gentlemen led and closed the entire transaction. I did a very light lifting. So I'll let these 2 answer the question.

[Rohit Nanda, executive]

Amit, are you taking this one?

Okay. So I think the last year revenue from this business was about INR 900-odd crores, and there EBITDA margin is about 18%. So that's where this business is currently.

[Vivek Singh, executive]

Rohit is it EBIT or EBITDA margin?

[Rohit Nanda, executive]

Yes, sorry, EBIT. Yes, that's what they report, so correct. So that's where they are. That's the size of the business currently.

[Vivek Singh, executive]

I should answer that thing which Rohit has, I just threw it to him. He got caught off that. We don't give future guidance for our business, neither will we give it for this after acquiring it. So we can only give historical what is the...

Is there a follow-up question on this?

[Operator]

Would you like to go ahead, Kapil?

[Kapil Singh, analyst]

Check if there is any follow-up question on this or can I take questions from the chat, if you can just check.

[Unknown Attendee]

I just wanted to understand the flavor on the competition alongside EKL for the Railway business in the business that EKL is involved in. Any competition that has involved against which you call would be working towards?

[Vivek Singh, executive]

There are 2 other big competitors. One is a large U.S. origin brakes maker, and one is the large European brake maker. You know we don't take names of other companies in our presentation. But it is a very [ grand ] market in that Brake category. There are other products in which they have competitors, but that's on the slide.

And second, may be just to help and maybe we can go to that slide. Pratik can you take us to the financial slide, which may be #6 or #7 of acquisition part. And why we don't want to guide it[indiscernible]

Pratik, so this one, #9. So if you look at it, this is a very, very high growth rate, right? It was in FY '21 INR 479 crore with this and now it's INR 950 crores. Every year, though it won't be like this. It is in a fast growing period. There will be some years which will be not so.

So first, like this year, there has been election year, so it will not be the fastest, FY '25 might even might most likely be flat. But by the time we get in, which will be -- by the time we'll take some time to close also in fact, we don't know exactly when.

Only then does the journey begins for us. The past and what growth has been in the past is not necessarily a great guide for the future, but it does give indication that if investments into the railway sector, investments into building new tracks and new locomotives continue, the growth rate can be expected to be fairly high.

How much that will be? Like I said, we don't guide because of the very simple reason. I don't think any of us, all of us exult in trying to find certainty in a world, which is inherently uncertain and the future is inherently unknown.

There is no way for us to know 9 months later, whenever the railway budget comes, what exactly may be response. So instead of trying to do that, we focus on trying to do what is in our control, trying to do the right thing, trying to develop new products, win new contracts, win new businesses, work on costs, work on R&D, and we will continue to do that as we have for the last 3.5 years that we've been public, you've been seeing us.

That's exactly what we will do with this business. That's exactly what we do with that business. We will continue to do those things in that nature. Guessing what will happen and trying to predict that and then share it with the world. I don't think that is something we have done or we will do.

[Kapil Singh, analyst]

I'll take a couple of questions from the chat box. So these questions are from Ayush. The first question is, if the team can explain lag with respect to addition of orders to our order book. Also, are we seeing any delays in execution of other especially concerning European geographies?

[Vivek Singh, executive]

I did not quite understand the first part, but I can answer the second part. We had one -- I actually did answer it that there is 1 European [ client ] EV-related new order, whose SOP is delayed by us. Apart from that, we have not seen any other delays outside India and one India EV 2-wheeler, I think I've already answered. The rest is demand thing in it.

Europe PV, India CV, U.S. off-highway, these 3 segments are seeing a fairly bad slowdown. The good thing with diversified avenue streams like ours is, even in this environment, we can do good things. Yes, there will be quarters when the headwinds will be so high that you can't do it. But these are the 3 that for now, I can say are the most affected. The rest are flat or mostly flat. [indiscernible] But was that the question, I think there's a lack of audibility.

[Kapil Singh, analyst]

I mean I've just read from the chat box, so not really sure what is being asked here. May be Ayush you can raise your hand or reach out directly.

[Vivek Singh, executive]

Correct. Write down again in the box and what is the meaning, because see, you get a purchase order. From purchase order to SOP will always take between 18 to 24 months. Sometimes it's faster if it's a running product and you're replacing someone, but that's not always usual, especially if you're a build-to-spec or black box type a company like we design the product. So design process has a longer time. Or if it's a very new type of product, then sometimes it goes to even beyond 24 months. That's the thing.

[Kapil Singh, analyst]

Okay. One more question was there from Ayush. The fairly new plant set up in Mexico, can you talk about the capacity utilization of that plant? And how are the synergies which we are aiming to achieve in America market coming along since this acquisition.

[Vivek Singh, executive]

From which acquisition?

[Kapil Singh, analyst]

I don't know. I think maybe this is just related to the plant in Mexico only.

[Vivek Singh, executive]

Okay. Because we've not acquired [indiscernible] commence production. So capacity utilization is coming because we have to put up the equipment first [indiscernible] Vikram, when do we expect it to start production?

[Vikram Singh, executive]

Q2 or Q3 of next year.

[Vivek Singh, executive]

Yes, calendar, right?

[Vikram Singh, executive]

October time frame.

[Vivek Singh, executive]

October '25 and only a quarter after that, those capacity utilizations number have any meaning.

[Kapil Singh, analyst]

And then 1 question is there from Mike. The EBITDA margin of railway business you're acquiring is lower than the company average. So should we expect it to converge up to the current company average over time?

[Vivek Singh, executive]

So I'll let Rohit answer that. But one, we don't know the EBITDA margin because it's never been reported. But no, I doubt that. I doubt it will converge up to the current company average.

[Rohit Nanda, executive]

Sorry, Kapil, could you please repeat the question?

[Kapil Singh, analyst]

Yes, sure. So the question is EBITDA margin of railway business you're acquiring is lower than the company average. So should we expect it to converge up to the current company average over time?

[Rohit Nanda, executive]

I think this would be too premature. Let's assume the current EBITDA margin continues for now, okay? But having said that, the PAT margin would be largely in line with our current PAT margin. So at a PAT level, it should be having a similar margin.

[Kapil Singh, analyst]

Okay. And then 1 question is there from Narottam. I want to understand the rationale for Escorts to sell the business and were there other potential acquirers?

[Rohit Nanda, executive]

So I guess that's for Escorts to answer and not for us to answer. I guess their board meeting is coming up shortly, Narottam can reserve this question for that meeting.

[Vivek Singh, executive]

Well all jokes apart. But, I think it would be their schedule. So I'm pretty sure they would have put up on exchanges this decision. When there are 2 listed companies are involved, communication would be there. But I would say you know that Escort Kubota Limited is owned majority by Kubota, Japan, which is one of the largest farm equipment manufacturers in the world.

For them, if you look at this railway equipment division as a percentage of the global revenue, not just a part of Escort Kubota Limited, even as a part of Escort Kubota Limited, I don't know, it's like 13%, 14% of the revenue. But if you look at it as a global thing, it would be a very small part, maybe 1%, maybe less. It isn't their focus. It is something that is not aligned with the rest of their business. I think that's the reason. And I am -- anything more than that, seriously also not in a lighter way, I think you should address to experts portal.

[Rohit Nanda, executive]

I just gave the same answer because I was not joking.

[Vivek Singh, executive]

Yes. That was my contribution. I can read the Q&A chat box. You are right that it is between -- I mean, we estimate it to be between 18% to 20%, EBIT is right now let's just do last year. So that's 179 upon 950, right?

So that's 18.8%. So yes, 20%, 21% should be the EBITDA.

And those are the numbers Escort Kubota Limited has been reporting the railway division numbers as a segmental revenue. So revenue and EBIT and all of those numbers are there in their public disclosures every quarter, part of the investor presentation. So all of them can be easily found in the public domain.

[Kapil Singh, analyst]

Vivek, I have actually 1 question for Mr. Deshmukh which is there. Since it's the last time we are interacting with him on this public platform. So I would like to know in terms of you're leaving behind a legacy, right? So we just want to understand what do you think is the strength of Sona as far as the R&D process is concerned, the approach to R&D? And what kind of processes have you built so that we or the company doesn't miss your presence as you move out.

[Kiran Deshmukh, executive]

Firstly, I think one of the strengths of Sona Comstar has been R&D. It's a company built on technology. If you see the kind of financials that you are seeing, that is purely because of the technology that it has and it owns. So this company doesn't depend on external help for technology. It is completely owned by itself and developed by itself. And this has happened over the last 25 years.

So the processes for R&D, processes for developing new technology. And when we talk about R&D, it is not just about products, but it's more about also the processes. So both processes and product R&D go hand in hand and the processes for developing the processes and processes for developing the products, they're extremely well defined.

And the company follows TQM practices, as I think everybody knows, in TQM practices, you have very process -- it is a process-driven approach. So everything is -- it doesn't depend upon individual. It depends on what systems you have in place. So already very strong systems in place and therefore, when I leave, I leave with a sense of satisfaction and I have full confidence that the team under Vivek and Vikram and Sat and Darko will take this company to the next level.

[Kapil Singh, analyst]

Dena, we can go back to the question queue. I can see a few raised hands.

[Operator]

The next one, we will go to Mukesh Saraf.

[Mukesh Saraf, analyst]

My question is, firstly, on the acquisition. Just trying to understand one of the key strengths. Is it -- so my question is, is pricing one of the key strengths for the Escort Kubota braking systems?

The reason I'm asking this is, obviously, they're competing with a large giants who have products, technologies throughout the world. And when I look at the margins of, say, one of those companies, it's upwards of 35% in India. So just trying to understand, is pricing basically, localizing some of those technologies here, being able to supply it at a lower price, is that one of the key strengths here for this breaking business?

[Vivek Singh, executive]

Rohit, you want to take it?

[Rohit Nanda, executive]

Yes. So Mukesh, the thing is that, I mean, based on our understanding of the market and their positioning. Vivek already mentioned that this is a market which is -- and especially if we look at Brakes, which is the largest product, it's a market which has 3 players and they have a large market share. So it is both price and quality because eventually, all these orders, railway orders are run through a tendering process. So price cannot be the only criteria. And as you can imagine, Brakes is a safety product. So this is something on which railways or any company would not compromise just for a cost reason. So it has to be both. It has to be quality as well as cost.

[Vivek Singh, executive]

Thanks, Rohit. In general, I don't think there is any category anywhere in which you can win the largest market share by the cost alone. You have to be good and have a good cost. We've been in the auto business for long enough to do that. It is never price alone. You have to do 2 out of 3; either best, cheapest, most convenient. You have to be at least 2 of them. If you have 1, you are gone. But at least 2 or 3, you have to be.

[Mukesh Saraf, analyst]

Okay. So -- absolutely, Vivek. So I also -- the reason I ask this question is, are there cases where you've probably seen in the past that ECL's braking business has kind of brought in a new technology, maybe even ahead of the European competitors. So that's the reason I asked the question. So have you also -- has this business also been technology?

[Vivek Singh, executive]

True, true, true. So Mukesh, yes, answer to that is, yes. We can't talk too much about it, as you know. It is an announcement with an intent to acquire. Till it's closed, we don't actually own the asset, right? So there are something you can't disclose.

But the answer to that is yes. However, there is a very bizarre thing in the business, in the private space if you are first with the technology, actually you have a first mover advantage and you get a lot of [ suppliers ]. In railways, actually because they always have to have multiple suppliers for each product, you have to actually wait for others to also come with the technology, only then will you [indiscernible]. So it's a slightly different from our area.

But the short answer, have they been able to do in the past? Yes. And can we do it in the other product categories also? The answer to that is [ the swing ]. And third, and unanswered part of your question, when there are global people, we love that business. So that is what we love doing.

What do we do in differentials? We compete against big, big global companies. We compete against big global companies. Anyway, in general, if you are an ambitious person who wants to achieve or create something of significance, fight people above you, compare yourself to people bigger and better, not just comparing yourself to the lowest and the lower, be happy and satisfied fighting for that. Let's complete with better people. That's what we've done in every single business that we do. That's what we intend to do in this also.

[Mukesh Saraf, analyst]

Got that. Got that. And secondly, my question is on the core business. If there is any color you can provide on one aspect I was looking at, which is your nonferrous forging. So you have mentioned that now for the last few quarters as future products. So any updates that you can provide. Anything at all on nonferrous. And the reason I'm also asking this is, obviously, now with the new business of railways, how was the top management's focus going to be shared across these business lines. So yes, this question.

[Vivek Singh, executive]

So first part, EV, I won't even bother Vikram, because it there was an update, we would have shared. You know when the update -- an update has to be that we have won the purchase order. Till then, all updates are in a way meaningless to at least the shareholder community because internally, so you know we track it on the entire technology readiness level, each product. So TRL 1 to TRL 7 is the progress that is all in-house. The TRL 8 is when you get in customer order, only then does the disclosure makes sense. So when that happens, we will. Effort is relentless; result, sometimes we even a best intention doesn't come, but when it does, of course we will share.

The second part, which is top management bandwidth, I think I have partly answered to Gunjan's question, which is why we like buying or acquiring businesses where there is already [indiscernible] -- we don't intend to do much. I mean if you look at our history, Novelic, you know the entire team is there, right? I probably go there once every 4, 5 months. Rohit spent some time with them, but mostly, we do it on a phone call.

It isn't -- is it thus require a very heavy environment in us going and fire fighting, we'll probably not do it. We hold management bandwidth and available time to be very sacred.

In fact, we will even go to the extent of take our most valuable and we don't waste them lightly, but we'll like getting businesses with great management teams and good business. I mean, look, that business has gone from about 450 to 950 in 4 years. And that is they are doing something right -- that is a good team already. If it was a bad team, they won't be able to grow it so fast and so well. They have added new products. They've introduced and are working on new future pipeline, it's a good team.

[Operator]

We shall move on to Nikhil.

[Unknown Analyst]

Congrats to the team on the acquisition. Just had 1 question on some of these new products that you've spoken about for the railway business. Can you just throw some light on them? And also wanted to understand in terms of -- I mean, would you have to go through the entire approval cycle for these new products? Or would it be like a shorter gestation period to that extent, a quicker kind of commercialization?

[Vivek Singh, executive]

So Nikhil, short, I don't know. Entirely helpful answer is shorter than it would if we were complete outsider, but you still have to go through the process. Actually, we tried looking at this organically as well before obviously acquiring because that's the first thing we do.

When we think acquisition related, we do make versus buy and say, can you make it up in the income? What you realize is the approval process, if you want to go in as a non-empaneled guy, it is so long, it can 5 to 6 years. So if you are already em-paneled and doing safety critical products, the time is short, but it still will require the whole process and steps to be complete. But it is relatively easy.

[Operator]

Nikhil, do you have any followup question?

[Unknown Analyst]

Yes. And just want to understand, so for all the new products that you're kind of looking at HVAC and some of these other products that you kind of showed on the slide, -- the plan is to kind of do all the entire manufacturing in-house or kind of source some of these components and maybe become like a system supplier or how are you looking at that?

[Vivek Singh, executive]

That will depend from product to product. And frankly, it's slightly early to be talking about future backend [indiscernible] like it will depend. Again, these are obviously operational decision, but let me just boil it down for you. This is -- by the way, in our regular business. Whenever you get the purchase order for something, even before that, you would have submitted your entire costing to the customer, et cetera.

In doing that, you would have already developed and found supplier, you would have already figured out what you will produce and at what process times, et cetera. So it is different for everything and you take a decision on what is the best for the end customer from both cost and quality perspective. Of course, if there is something that is strategic and can increase value in the long term, for example, software, we give an update on ASPICE at this time, at Level-2. Why do we think software is so core that we keep most of it in house and we have a dedicated team? I mean if you do file for ASPICE Level-2 means we are actually getting certified for automotive software.

I mean 4 years ago, we didn't have automotive software. We are now competing with those companies in that domain because we think it's big. So like that, there will be parts even in hardware, that we will say this is too critical to outsource. There will be things that we will outsource. Forget the parts, sometimes it's also processes, for the same part with multiple process, some we will keep inhouse, some we will outsource. It depends. I know It Depends is these least helpful answer, it genuinely is the answer. It Depends.

[Operator]

We're now going down the list, Rohit Gupta. Seems like he's having some challenges. We shall go on to the next investor, Nitesh Mangal? this has dropped. Let's go back to Rohit. Rohit are you able to speak up? Perhaps you can type your question in text box here, Rohit. We move on to the next investor, [ Pradeep Jain ].

[Unknown Attendee]

So Vivek, I want to know about EV traction motor factory, what is the status of that?

[Vivek Singh, executive]

Sorry, Pradeep you'll have to repeat that.

[Unknown Attendee]

Yes. CV manufactured traction motors, we are establishing the works, CV traction motors. What is the status?

[Vivek Singh, executive]

So we currently don't have any CV traction motor...

[Rohit Nanda, executive]

I think he wants to know about bus motors.

[Vivek Singh, executive]

O, bus. okay Sorry. Sat, you can update on the bus traction motor?

[Sat Mohan Gupta, executive]

Pradeep, we are on track. I mean, as we have promised in the previous investor calls also, we are on target, and we are just in the first calendar year, first quarter of calendar year '26, we are going ahead with the plan. So it's on track right now.

[Operator]

Kapil, do you want to take on?

[Kapil Singh, analyst]

So there are no further questions in the queue. So I'll hand it back to the management in case there are any closing remarks?

[Vivek Singh, executive]

Kapil, no closing remarks. Yes. Thank you, everyone, for being here. Thank you for listening. Thank you for asking questions. Please ask us good questions, makes us better, keeps us in toes. And wish everyone a great Holiday Season and Happy Diwali. See you next quarter. Bye.

[Rohit Nanda, executive]

Bye.

[Kapil Singh, analyst]

Ladies and gentlemen, on behalf of Nomura, we thank you for joining this call and wishing you all a happy Diwali as well. Dina, we can close the call now.

[Operator]

Thank you, everyone, for joining today's call. Have a good evening. You may drop the line now.