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Subros Ltd
Earnings Call Analysis
Summary
Q2-2024
In a promising turn of events, Subros Limited reports a marked recovery in the automotive industry, with sales and profitability trending upwards. This second quarter saw a 17% rise in sales to INR 814 crores. Notably, the passenger vehicle (PV) segment grew by 17%, outperforming the industry's 6%, with Subros also seeing a rise of 37% in commercial vehicle buses and 11% in both N2 and N3 categories. Improved localization driven by operational efficiencies led to a 66% surge in EBITDA to INR 73 crores and a staggering 183% increase in profit before tax (PBT) to INR 41.66 crores. Profit after tax (PAT) rose by 172% to INR 26.73 crores. Looking ahead, Subros intends to embrace technology shifts with advancements in alternative fuel technologies, forecasting sustainable double-digit growth and setting a goal of carbon neutrality by 2040.
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Ladies and gentlemen, good day, and welcome to the Subros Limited 2Q FY '24 Post Results Conference Call hosted by Batlivala & Karani Securities India Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities India Pvt. Ltd. Thank you, and over to you, sir.
Thanks, Malcolm. Welcome to Subros Limited 2Q FY '24 Post Results Conference Call. From Subros management, we have with us today Mr. Parmod Kumar Duggal, Chief Executive Officer; Mr. Hemant Kumar Agarwal, Chief Financial Officer and Vice President, Finance; Mr. Sukhbinder Singh Gill, Assistant Vice President, Finance. We will start with the opening remarks by the management to be followed by question-and-answer session. .
Over to you, sir. Congratulations for the good set of numbers, sir.
Okay. Good morning. Thank you, Jayaraj. Good morning, ladies and gentlemen, and a warm welcome to all of you for Subros Investor Call for quarter 2 for FY '23/'24. The surge in automobile sales is a clear indicator of overall stability within the industry. We are observing a sharp recovery month-on-month in the auto market sales and this positive trend is anticipated to continue in the rest of the period.
The festive season is a major catalyst for the automotive industry. While the expectations are high, initial trends of regional festive period has shown our mix positive momentum. A lot depends on a 1-month festive period, which starts from the mid-October. OEM has built inventory in anticipation of strong growth. The initial modest 4% decline in the April '23/'24, the overall vehicles retail has not only a reflection of the dynamic nature of the automatic industry, but also precursor to the story of gradual recovery and growth and would unfold over the subsequent months accumulating a robust 20% Y-o-Y growth in the month of September. The conclusion of quarter 2 in FY '24 present on a mixed outcome where sales for this quarter reflect a sharp improvement and the profitability also shows a positive trend.
The company achieved the sales exceeding INR 814 crores with a 17% growth with a significant improvement in profits. The results of quarter 2, '23/'24, has been shared with the stock exchanges and also posted on our website. Let me elaborate the summary of results one by one. First, an update about the industry relevant part of our business. In this quarter, passenger vehicle industry has shown growth of 6% on production basis in comparison of corresponding quarter of the last year.
Whereas Subros PV segment, Thermal Products growth in quarter 2 is 17% in comparison of corresponding quarter of last year. So our performance is better than the industry and some differences due to model mix. Commercial vehicle bus is also improving because of tourism sector and public transport system has sharply recovered. Basic equipment ratio has also improved and industry has shown a growth of 63% on a production basis in comparison of corresponding quarter of last year.
Subros has registered a growth of 37% in comparison of volume of corresponding period of last year. Further on commercial vehicles trucks, N2 and N3 category, which is relevant for AC or a blower application, industry has shown a growth of 11% in quarter 2 as compared to the corresponding period and Subros has registered a growth of 11% in quarter 2, '23/'24 in comparison of corresponding period. Our AC fitment ratio has improved by 9% in this quarter, resulting in a faster compensation to the volume drop earlier. In home AC space, we are still muted ourselves in view of the escalation in the commodity price and the stress on the profitability.
This quarter, we have done -- maybe sale of INR 1.3 crores, and we are now watchful on this industry as the new season is progressive. Revenue from operations has been recorded, as I said, INR 814 crores in this quarter and corresponding quarter was INR 695 crores. Overall, there is a growth of 17% over a correspond period. Let me explain the recovery in each segment. In this quarter, car and non-car segment has contributed around 94% and 6%, respectively. Maruti Suzuki and Suzuki Motor Gujarat has contributed around 86% of the total sales and 14% is contributed by other customers.
Our share of business in passenger vehicle air conditioning products has improved by 2% during this quarter and now our share of business is 42%. Share of business in truck AC segment has also improved by 3% and share of business has crossed 50% mark, and we are at 51% now. Bus AC segment, our share of business is 18%. Now let me explain the operational performance. As I mentioned before, there was a lot of challenge in supply chain due to global increase in demand, and there was experience of almost last 2 years, we were muted on our profitability.
Commodity price fluctuation has started easing out now and which is now reflecting on our financial results. The company has realized EBITDA of INR 73 crores in the quarter 2 of FY '23/'24 as against EBITDA of INR 44 crores in the corresponding period of last year. There is an improvement of EBITDA by 66% as compared to last year's same quarter, and 50% as compared to the previous quarter. Profit before tax in quarter 2 is INR 41.66 crores, which is 5.14% of the net sales. PBT margin with the corresponding quarter of the last year has improved by 183% and PBT against last quarter, that is quarter 1 of FY '23/'24 has improved by 111%.
Profit after tax in quarter 2, 2023/'24 is INR 26.73 crores, which is 3.3% of the net sales. And as against the corresponding period of quarter, it has improved by 172% and against the previous quarter, it has improved by 99%. As a summary, revenue of INR 814 crores, with a growth of 17%, EBITDA is INR 73 crores with a growth of 66%, PBT of INR 41.66 crores with a growth of 183%, PAT of INR 26.73 crores with a growth of 172%.
On the business side, there are a few updates. As I mentioned that we have been working on EBITDA improvement, PBT improvement for the last 8 quarters. And now the operational efficiencies start contributing an improvement of EBITDA and PBT activity level. Localization level has significantly improved over the period, as I have been reporting in part. We have reached to almost 84% of localization level to our revenue so far. 16% is the total import percentage of the total revenue, and our target is to bring it down by 6% and keep it around 10% in next 2 to 3 years' time.
On new business and product development, the mobility landscape will fundamentally be transforming in the next 8 to 10 years, and we are now getting ready for all this technology transformation with the support of Denso. Many new arrangements, technology improvement and technology upgrades have been in pipeline. There is a significant success in our new business acquisition from our customers. Business line up to 2026 is almost complete. All new RFQs are either received or they are in progress or negotiation. And based on that, we feel that we will have sustainable growth in future, almost in double-digit form. We are also now prioritizing to move into alternative fuel technologies and thermal business for alternative fuel is also lined up now.
As of now, we are -- 15% of our total revenue is coming from alternative fuel technologies where our thermal products are being used, whether it is a strong hybrid, battery electric vehicle or CNG vehicles. Few new launches and initiatives, which are significant for our new strategic move in the various segments. Mahindra new tractor, Oja; M-Star for U.S. market, BB project and Mahindra pickup vehicle are the new businesses, which we have lined up and the SOP work is in progress. Few areas we have already done the SOP and few are in pipelines. So there will be a significant improvement in Mahindra business in the next 2 years' time.
SOP of k2 tractor that is Oja has already started and a few other SOPs of Fronx and Jimny also started during this half year. Business engagement for truck air con that is for N2, N3 category is ongoing, and we are at very advanced stage of negotiation and finalizing the specification for AC system applied to such trucks. Coach air-con, kit development and approval from RDSO has also been successfully completed, and now we are participating in new tenders from Indian Railways. We are very optimistic to have a good business development in this space. Subros is also set to prioritize innovation, infrastructure expansion and sustainable initiatives to foster growth.
In accelerating our digital transformation and adopting new technologies, our primary drivers will be cost reduction and quality enhancement, and we are also committed to the environment and the company has set up a target of carbon neutrality by 2040. That's all from my side.
Now we are ready to take questions.
[Operator Instructions] The first question is from the line of Resham Jain.
Happy to see good results. Sir, just 1 question on the overall. This quarter has been quite good generally for the PV segment and as an industry as well. And in this quarter, we did close to 8.6% margin, which probably would be at a good scale. So -- and if I look at the overall kind of return ratios even at this kind of margins, it is close to 12% only. So how should one think about the margin going forward given that even in a quarter like this, our overall return ratio seems to be closer to cost of capital only.
So Resham, thank you very much for your question. See, if you have followed our trend for last 6 to 8 quarters, we have been struggling with the profitability and the margin improvement, and we have been regularly commenting that we will improve on that. And now this quarter onward, this trend we have set up now, and we are trying to sustain this level and improve from thereafter. So going forward, I believe the situation will be much better. We'll be able to first realize the best results so far, which we achieved in 2020 and then surpass on that. So just wait for another quarter or so.
Okay. So basically, you are seeing a margin could further improve from current level? That's the only way our overall ratios could improve?
Of course.
The next question is from the line of Lakshminarayanan K G from Tunga Investments.
Couple of things. First is, if you look at your operating margins, it is at a particular level, and what are the levers you have to increase the margins from here? And would it be more of the gross margin hike you can actually get from here? Is it precontracted? Or what are the levers you have?
Okay. So there are 3 major elements of -- as a key driver to improve margin. One is, of course, on the operational efficiencies as we increase asset set definitely, there will be a proportional improvement in the margin. Two, our ongoing efforts on cost reduction and using or compensating the impact of cost escalation that also is the second key driver where we have been successful in last quarter, that's why you could see the reduction in metal sales ratio as compared to last quarter has substantially improved. Third, of course, as we progress further and the growth factors will be there and capacity utilization in other segments other than car would be high, that would also contribute significantly to the margin.
Sir, what is the first lever you said? I didn't hear it well, sir.
Operational efficiencies.
Okay. Okay. And second, what is your share of business from the top client for you? For you, it is around 85% or so. You mentioned from the clients' perspective from the top customer, what is the share of business to you?
So if I see 3 top customers. So in Maruti, we have total share of business of Maruti's purchase is around 74%, 75%; with Mahindra, we are around 25%; with Tata CV side, we are having around 48%.
Got it. And is there any lever on after sales for us? Is that something which we can -- you can take advantage of? Or it's only OE sales is what as a company would always focus on?
No, no. We are into aftermarket also and aftermarket business also has substantially grown as compared to last year. We have grown by almost 45%. So we are very active in aftermarket as well.
What's the contribution to aftermarket for us, sir?
On the total sales?
Yes.
On the total sale, it would be roughly around 2% -- 1.5% to 2%.
Got it. Got it. And in terms of capacity expansion, are we -- what kind of capacity expansion you would envisage for the next 2, 3 years?
So we are watchful of the industry movement. And as the OEMs have already declared their plans for capacity expansion, namely Maruti has already announced Kharkhoda project in Haryana. So we are aligning all such requirements. And based on that capacity expansion plans are in progress. A few capacity expansion projects we have already completed and few are in pipeline. So they are as planned.
What's your capital outlay. Last year, you spent around, I think, around INR 110 crores on CapEx. So on an annual basis, is that something which you would do or you could be much more than that INR 100 crores to INR 120 crores range?
So this is our normal range. So as part of policy, whatever we earn, we reinvest into the business. So around INR 100 crores to INR 120 crores is our normal CapEx, which includes a replacement, which includes technology, which includes a new program development also. So we will be in the same range only.
And you mentioned that around 90% of your sales is from -- sorry, is from passenger cars, right? Am I right?
Yes.
Okay. Okay. And how -- what is your outlook for the year? You mentioned that things are actually shaping up well, but based on the schedules you have, what kind of growth you expect for the full year for the industry?
So I'll not be very specific to the number. But yes, as I mentioned before, that we will be in double-digit growth only. So maybe industry will be doing between 6% to 8%. But we'll be crossing that milestone and will be in double-digit growth overall.
Got it. Sir, 1 last question is the -- because of all this greenhouse gas emission and a lot of things around the refrigerant gases, does it -- as a company do you actually have to change your process moving to lesser emission refrigerant gases? Or how do you think or you are actually -- it doesn't matter for you because you manufacture the systems?
No. Whatever changes which are required for moving from R-1234a through 234a that has already been done now because existingly all the export vehicle are using the new refrigerants. So that is already lined up. So there is no significant change required other than the oil change. So that has already been incorporated. So we are ready for all transition to these new refrigerants.
[Operator Instructions] The next question is from the line of Aashin Modi from Equirus.
Congratulations on decent set of numbers. So sir, my first question is regarding the outperformance. So if we see our sales have grown by 17% quarter-on-quarter, whereas our key customer has grown by 11% quarter-on-quarter. Could you help us understand where the outperformance has come?
So there are certain businesses which we received where the growth is substantial because OEM overall growth consisting of ABC segment and our business where the SUV -- businesses are more SUV growth. Overall, it's more than 25%, 26% within the OEM. So that has contributed significantly in our growth.
Okay. Okay, sir. And sir, my second question is on the gross margin side. So we used to make 30% sort of a gross margin from your end. Currently, we are at 25%, 26% level. So we said that there are 2, 3 levers. One is the pass-through of noncontractual items because of the cost increases are there? And secondly, improving profitability in the newer businesses that we have won, which have higher import content. So any thoughts on that? Where -- how do we see gross margins improving from hereon?
So gross margin improvement has seen now because as we reported larger, there are certain cost escalation, which are not compensated by customers. Once it starts easing out, their benefit also will be retained because contextually, if we have nothing to pass on, so that would be retained here. We have seen some softening on commodities and softing on logistic costs, which was a substantial cost element last year. So that may not be this year a key contributor to the cost escalation. So margin started improving, and it will continue improving now in next 2 to 3 quarters.
The introduction of the new product line like railways and that will also add to the gross margin improvement.
Okay. And sir, you mentioned that AC fitment ratio in trucks increased by 9%. So where is it now and where it was, say, last quarter?
So earlier, it was around 15%, 16%. Now it has improved to 23%, 24%. Still it is an optional action by the OEM, not as part of the regulation. From January '25, this will become regulation. So by the time, we'll have more product range available to all truck segments. So finally, we have to reach to 100% of AC fitment ratio. But right now, it is in the range of 23%, 25%.
Okay. And then lastly, if you could share the non-car revenue breakup in terms of home AC, truck, bus?
So total non-car business turnover during the year -- half year is around INR 85 crores. And out of that, total truck -- INR 42 crores, INR 20 crores is approximately bus and aftermarket is around INR [ 14 ] crores.
[Operator Instructions] The next question is from the line of Abhishek from Dolat Capital.
Congrats for good set of numbers. Sir, as Maruti is gaining market share in the SUV segment, how do you see benefit in terms of your content per vehicle and revenue growth?
So content per vehicle will not substantially change. But yes, there would be around 3% to 5% price delta, which we have in terms of SUV versus A segment or B segment vehicle. So that would be the relevance. But of course, if SUV sale at Maruti will increase and since we are almost having 100% business of SUV, it will have a direct reflection on our growth.
And you are also supplying radiator in SUV as well, no?
Yes. The radiator is going into SUV substantially.
And what is the cost difference between the radiator and Sedan radiator?
Between 8% to 10%.
8% to 10%. So most probably that in this quarter that the outperformance come in a passenger vehicle, is it -- this is because of also the market share gained by the Maruti in SUV segment?
Yes. That's what I mentioned in my initial remarks that overall share of business also improved at 2%, both in passenger vehicle and in commercial vehicle segment. So that is the contribution to out performance.
Okay, sir. And right now, the tax rate is quite high around the 30%. So what sort of the tax rate can we expect in FY '25.
So we expect '24/'25, the tax rate is 25% as against 35% existing. So there will be delta reduction of the tax outflow by 10%. Probably if based on the existing growth, it will definitely positively impact the EPS by INR 2 to INR 3.
Okay, sir. And as you're talking about the sharp improvement in the gross margin in the coming quarter and because of the fall in the commodity prices, and so can we expect the double-digit margin in FY '25 or the earlier number of 11.5% or 12% kind of the margin, what you had?
So I'll just mention that double-digit margin are as possible and we are inching towards that. Yes, in the next year, definitely, it will be a substantial improvement from the current year.
So can you share some measures you have taken an improvement in margin like consolidation of plant, shift optimization and renewable energy and all those things. If you can throw some light on it.
So, there are 3 basic actions which are taken. Substantial work has been done for import substitution and major projects which have started either in middle of this year or after the completion of first quarter. So that means next year, we will have a full year benefit on that. That is one. Two, the extraordinary costs, which we incurred, which was tuned to around INR 20 crores to INR 30 crores last year in terms of logistic cost escalation. That is not the case now because all logistic costs are now -- has come down to the previous pre-COVID levels.
Third, our product positioning at the relevant plant where the dispatches are happening to the customer, the logistics cost, which we were incurring earlier because of the one location production has been decentralized now, so that we'll be easing out on logistic cost optimization further. And of course, the capacity expansion, which has happened now, assets are sweating and we are utilizing these capacities much more to refract better margins.
And depreciation of yen will also benefit to you?
Yes. Depreciation definitely will be on optimized.
Abhishek, let me add one thing more that 2019/'20 was a COVID period. After that commodity has gone up sky high. So whatever cost optimization initiative company has undertaken in '19, '20 or 2021 after the COVID, now also getting positive results for the company. So the realization is now coming and will continue for the future period also.
The next question is from the line of Lakshminarayanan K G from Tunga Investments.
Sir, 2 questions. One is on the tax rate. When do you think the tax rate is normalized to 25%.
Tax rate?
Tax rate will be 25%, so we'll -- effective from 1st of April.
So FY '25 will be...
We will take this call in quarter 4, but it is expected from the next financial year, we'll move to the new tax regime of 22%. So 25% will be after adding all surcharge and everything.
Got it. So in terms of the logistics cost, right? So when you -- what is the quantum of logistics cost you can actually save? What is it as a percentage of sales last financial year? And how much you can actually save.
So logistic cost of our interplant movement as well as through customer delivery is in the range of roughly 2% of the total sales. So that would be the optimization target that it has to sustain at that level even with the increase in number of deliveries and also either to optimize by product positioning at the relevant plant.
So if I look at it, you are doing approximately INR 2,800 crores of sales. So it's around INR 56 crores is what you spent on logistics?
Yes.
There are 2 elements.
Sorry?
One is that which you are -- which is being reflected as part of balance sheet. Second element is the import base, which is definitely forming part of the material cost. So that is also a very substantial amount on our import. So as you know, the container cost, which was at $7,000, 1.5 years back is now definitely getting reduced to $3,000 or $2,500. The rationalization of that import freight also, it has a positive impact.
So what is the amount? And how much you think it will be there for this year? You said 2% on sales? Or is this an absolute number you want to actually cap it?
No, that's what I said, 2% of the total number, which you calculated around INR 58 crores, INR 60 crores. So that's the number which we have. We are trying to optimize between 8% to 10% of that cost level going forward through various optimization targets.
Sorry, sir. So which means that even if your sales increase, you would actually cap it at around INR 50 crores to INR 60 crores?
Yes, around that.
The next question is from the line of Aditya Makharia from HDFC Bank.
Congrats on a good result. I just wanted to check, what is our import content currently?
So import content is 16% of the total turnover as of now.
Okay. So sir, with the yen going to 150 versus the dollar, we all know the yen is at a substantial low. So can that be one major factor for the expansion in our margins and also the fact that you're guiding to double-digit margin or you'll come close to that. A lot of that is premised on the yen weakness?
No, that will not be fully true because yen is back to back compensated by customers. So only the advantage would be a 1 quarter because next quarter, it has to be passed on to the customer for the commodities which they are compensating. Where they are not compensating that would be the added advantage. But as of now, whatever imports we have, almost 90% is compensated by customer.
Okay. Second question, sir, in terms of this blower policy for AC -- for trucks, they said that AC will become mandatory from, I think, 2025. So last time also, we have seen that there was a lot of lobbying and then eventually the policy was watered down to making blowers only compulsory. So do you think this time, even if the policy comes through, it may be that only the high-end trucks, which is, let's say, a 40-tonne plus truck will have AC compulsory. And for the others, they may just go a little lenient.
No, I don't think this time, there will be any relaxation because '17, it was announced and 5 years, 6 years, it was muted because of the request from the OEM. But this time, I think Ministry is quite firm on implementation. And plus we have seen the action from customer side also towards the implementation of this policy. So all the customers are gearing up for N2, N3 category trucks, product development in few cases have already started; in a few cases, specifications have been finalized. So I don't see there will be any deferment or relaxation on this policy as of now.
Okay. So N2 truck will be 12-tonner plus or 20-tonner plus? I mean, how do you...
7.5 tonnes above.
So it will come even on the ICVs in that case, even 16 tonner, the short distance trucks will also have a AC?
It will be N2, N3 category, both.
[Operator Instructions] The next question is from the line of Varun Arora.
Sir, in the railway segment, you actually said something on commentary, but I missed your point. So can you repeat that, please?
So in Railway segment, as you are aware about, that we are supplying air con for driver cabins so far. And for last 2 years, our product development for coach air-con was ongoing and which was due for RDSO approval. Now we are almost concluded that approval process, and now we are ready for our product installation. So now we'll be participating in the tenders which are forthcoming now. Within the next 2 to 3 months, these tenders will be floated. And we see now based on our product development status will be able to get substantial business out of that.
Okay, sir. Sir, based on the 2Q FY '24 performance sir, you also said that next year -- by the next year, you'll be able to achieve the double digit. But can we assume that in the next year, like by fourth quarter, like last quarter of FY '24, you'll be able to achieve like 10%.
I don't want to color with any number as of now. But yes, you just can trust us that efforts are on, and we want to see double-digit numbers coming from the margin side as quick as possible, so just wait for some more time.
Sir, my next question on this -- on hydrogen -- sorry, sir, your new development of a AC compatible with hydrogen fuel process. So what sort of revenue opportunity you are looking for? And since the PM launched this eBus Sewa scheme, which has been launched in this last quarter somewhere around. So what sort of opportunity you're looking from that?
So I don't see this as a number opportunity, but first, the important part as a strategic move from Subros side is that our capabilities for developing first time a complete indigenous kit, Make in India, Designed in India, suitable for hydrogen buses and complete integrated solution, not only for thermal AC for the cabin also for the battery cooling that has been developed. And this is our proud movement that this first initiative we have completed. These kits are now installed in the large OEM who has floated these fleet of buses in late.
The trials and verifications work is almost complete now. And now we are ready for the next round of implementation. Luckily, we also see the hydrogen buses will be floating now as a maybe sample because there is no clear policy that from EV, we are migrating to hydrogen. But yes, as a product segment, it would be available. Most likely, the next fleet will be floating in Delhi also. So our product is ready, our alignment with the customer is ready, and hopefully, we'll see first as a optic that these solutions are available in the Indian market. And then based on that growth opportunities will be as per the OEM plan.
Okay. For this product only. So what will be the margin, if you can share anything, sir.
So margin, definitely will be because high-technology products normally called as a niche product and margin will be definitely better as compared to the existing. So if you are running 10% to 12% EBITDA in regular products, so it would be around 15% to 20% EBITDA in such niche market product.
Okay, sir. And sir, last question. So can you provide information on the market condition? So that might affect the company's performance in the upcoming quarter. So in either case, either a positive or negative?
Can you just repeat your question? I missed out, markets?
Yes. So on the market condition and trend, so that might affect the company's performance in the upcoming quarter. And the positive and negative, both ways, sir, if you can give any color?
What I see as a short term in next quarter number 3, quarter number 4, the market trend would be positive based on the current condition, unless this geopolitical issue is not very significantly increased and that has impact on overall political scenario. Unless that is kept us aside, I see a full recovery in the market, at least in this year. And whatever projection industry has made at the start of year, we will be able to achieve that number.
That is for short term. And going forward, all the OEMs are quite bullish at least for '24, '25. As of now in the current situation, the semiconductor issue is also now eased out and availability is quite in alignment with the customer schedules. So I don't see any challenge '24/'25 should also be positive in all the segments, whether it is bus, truck or passenger vehicle. So I don't see challenge unless, of course, this geopolitical issue is a risk element, which we cannot estimate as of now.
Okay, sir. That is very helpful, sir. Any other non-auto venture or business segment where that Subros is currently exploring or considering in the future? Anything in the pipeline right now going on?
Not for the purpose of the market to know, but we have future technology products, new technology products are under development, but has a very initial stage, but not yet concluded for commercialization.
The next question is from the line of Abhishek from Dolat Capital.
Sir, what is your guidance for the second half revenue? Will it be better than the first half?
Yes, it should be based on -- because the festive season has come into the quarter 3. So definitely, it will have some reflection in quarter 3. And quarter 4 normally as the industry always best quarter among all. So I think quarter 2 would be -- should be better than H1 but terms and condition apply.
So what is the market potential of the railway business, especially for the coach air-con?
So it's a large segment. And as government is replacing the whole infrastructure and Vande Bharat are going to grow, coach air-con business is going to grow and the market which we see this market is around INR 100 crores to INR 150 crores based on the current estimation and based on the government plan. So it's a large market. And if we get into that, we will be able to take a substantial portion of that.
And what is the margin in this particular segment?
Comparatively high. So you can take it around 15% to 20% EBITDA.
And okay, sir. And there's a sharp ramp-up in the EV buses now, so where the content per vehicle is very high. So what sort of the opportunity do you see in India in this particular segment?
So EV bus is our product is the final phase, we have given protos to the OEM now to incorporate this into their bus program. So all 3, 4 customers, we have been engaged now with this. And yes, you are right, EV potential is improving. All state transports are now moving to EV fleet only. And next, maybe, as Prime Minister announced, around 10,000 buses will be floating in next 3 to 5 years' time all across the state. So our engagement is on with all customers, and we see a good potential in that also.
How much is the current content per buses in this segment?
From IC to EV bus, the content will be around 20% higher.
And absolute figure, what is the number?
I think you can take around 50,000 -- maybe INR 70,000 to INR 1 lakh delta.
The next question is from the line of Lakshminarayanan K G from Tunga Investments.
Two questions. One is in terms of royalty, which you pay to Denso, right? So it's around 1.2%, 1.3% of turnover. So what is the clause, how long it will be, whether it's like a 5-year reset or a 3-year reset? How do you think about it? When is it coming for reset?
So there's no reset formula here. The royalties for the period of the product life that is there, and it is applied on the net value addition.
Okay. Okay. So how does one think about as a percentage of revenues? Or I mean, how does one...
It would be in the similar range, 1.25% of the revenue, which is now it would be in that range between 1.25% to 1.5%.
And how often you revise it?
No, there's no revision formula. It is product to product different royalty rates which are applicable. So it would be a kind of mix in this 1.25% to 1.5%.
Got it. Sir, your material cost was around 74% -- I mean, in the last quarter -- last year half, it was around 77%, now it has come down to a lesser number. When I look at your -- historically, your -- it has actually gone up to something like 70% also. So is it conceivable to go back to those levels of 70% material margin or...
It would not be because maybe in a periodic manner, the prices stress will always be impacting the overall MSR ratio. We are not likely to go back to 69%, 70%, at least in short-term view. But we will be definitely improving from 74%, which is current level.
So in the next 2, 3 years, what is the range -- band you would actually expect to operate at?
I will not be very explicit in quoting any number which can color the market as of now.
As there are no further questions from the participants, I now hand over the conference over to the management for the closing remarks.
So thank you very much to all of you to have patience with Subros results for last 6 to 8 quarters. And of course, that was a difficult time for us also to -- after the COVID and during the COVID and after the COVID period, the impact of all escalation, we have tried to absorb or we have discussed with the customer, partial compensation we received within that, few are not and which is now -- which has been absorbed in the last 2 years' time. Things are getting easy now. I think we'll be reverting back to the best time which we realized before and try to surpass that as quick as possible Thanks to your patience and stay connected with Subros. Thank you.
Yes, thank you, everyone. Happy Diwali to all of you, and we are confident that we'll increase our revenue and profit and we please our investors well. Thank you. Happy Diwali to all of you.
Thank you very much. On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.