Uniparts India Ltd
NSE:UNIPARTS
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Good day, and welcome to Uniparts India Q1 FY '24 Earnings Conference Call hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to [ Ms. Sridasha ] from Go India Advisors. Thank you. And over to you ma'am.
Thank you, Sima. Good afternoon, everyone, and welcome to the Q1 FY 2024 Earnings Call for Uniparts India Limited. We have on the call with us Mr. Gurdeep Soni, Chairman and Managing Director, Mr. Paramjit Singh Soni, Vice Chairman and Executive Director; Mr. Rohit Maheshwari, Group Chief Financial Officer; and Mr. Vivek Maheshwari, Vice President Financial Planning and Analysis and Investor Relations.We must remind you that the discussions on today's call may include certain forward-looking statements and must therefore be viewed in conjunction with the risks that the company may face. I will now request the management to take us through the financials and the business outlook, subsequent to which we will open the floor for questions and answers. I will now hand over to Mr. Gurdeep Soni. Thank you. And over to you, sir.
Thank you. Good evening, ladies and gentlemen, and welcome to the Quarter 1 FY '24 Earnings Call of Uniparts India Limited. I would like to extend our heartfelt gratitude for the continued support and interest from investors, analysts, and capital market participants. Before we get into the details of the reported quarter, I would like to reiterate that the core of our organizational functioning is guided by the principles of passion, innovation, integrity, excellence and teamwork. The Uniparts team has worked diligently and with passion over the years to establish Uniparts as a preferred supplier to the global off-highway vehicle markets.The world today is prioritizing food security as well as infrastructure build-out and modernization more than ever before. These strengths are likely to continue in the long term and we at Uniparts believe that we have a robust global business model to cater to these trends through our off-highway focus and well-positioned product offerings to marquee customers' portfolio. Uniparts is present both in the OEM and after-market segments in the off-highway industry with strong global operating models and wide customer base, comprising of 125-plus customers from across the globe. Our products are shipped to over 25 countries worldwide. With the above backdrop, let me spend next few minutes sharing my thoughts with respect to the current operating environment and the business highlights for the first quarter of FY '24.To start with, the North American small ag market demand continues to be subdued in the short term. There is softness in the aftermarket segment in both Europe and U.S.A., and this is extending a little more than earlier estimated. This includes inventory level rebalancing at customers' end as one of the drivers for the softness. The North American large ag and construction equipment market is performing well with healthy end-user demand. Demand from Europe-based OEM customers is stable. Demand in Indian domestic tractor market made a slow start of the year, but it is expected to pick up in the balance year.With the foregoing reasons in the backdrop, the overall demand outlook remains soft in Q2 of FY '24. Our new enquiries, engagements, our conversions owing to the China Plus One team continue to be -- have very good traction. The progress on new initiatives, namely the 3-point linkage system for the Utility Terrain Vehicles as we call them UTVs and the newly acquired account in U.S.A., which is the second largest retail store group for farm equipment and accessories in North America is progressing well on the expected lines.During the current phase of mixed external environment we continue to focus on the following. We are closely monitoring the macro and micro factors like need to have bearing on short to medium-term demand, identifying opportunities to expertising business implementation, operational efficiencies and costs, and augment the digital platform, creating further agility and optimization to our business. Our efforts continue to be focused on executing on medium-term business plans. We stayed core on our operational endeavors, leverage our deep customer relationships, global business model and strong financial profiles to optimize the opportunities emerging in the rapidly changing and evolving operational environment.We further believe that our 5 key strengths, that is our leading market presence in off-highway system segment, our global business models, our engineering and design capabilities, our robust financial performance metrics and our experience and well-passionate team continue to drive Uniparts forward. As large global players are increasingly looking beyond China, India's manufacturing sector is expected to benefit significantly from this. And we continue to witness favorable impact on new inquiries.Further the argumented global need for food security as well as infrastructure build-out and robust income levels of global agricultural industry are expected to keep demand for new equipment at healthy levels.With this, I would like to hand over to Vivek Maheshwari to discuss the details of our financial performances during the reported quarter. I hand over to Vivek [indiscernible]. Thank you.
Thank you, sir. Good evening, all. I would like to share following financial and business highlights of the quarter ending 30th June, 2023. Revenues from operations for Q1 came in at INR 297 crore, which is a year-on-year change of minus 14.4%. Reported EBITDA for Q1 was INR 60.2 crore, which is a change -- which changed year-on-year by minus 20.9%. EBITDA margin reported at 20.3% for quarter 1. PAT for the quarter came in at INR 37.1 crore, which is approximately 26.5% lower year-on-year. Operating cash flow generation for the reported quarter was INR 46 crore. The networking capital, which comprises of the big three elements of inventory, AR and AC as number of days of revenue from operation on [ PCM ] basis was approximately 147 days. Working capital comprising of big three elements improved in absolute value by about INR 9 crore during the quarter.The business therefore continues trended higher-than-guided cash flow. Uniparts' balance sheet continues to be net debt free with group net cash positioned at approximately INR 54 crore at the end of the quarter. CapEx for the quarter has been approximately INR 8.2 crore. Inflationary pressure on operating costs remains in medium term to be partially mitigated through operating efficiencies. Macro concerns over global economic slowdown and impact of worldwide interest rate hikes continues to remain a key [indiscernible].With this summary, I would like to hand over the conference back to the moderator for question-and-answer session. Thanks very much.
[Operator Instructions] We take the first question from the line of Sourabh Jain from Sunidhi Securities.
I have a few questions. My first question is, sir, last quarter the impact of inventory destocking was INR 25 crores to INR 30 crores as you had mentioned on the last call. So you, had mentioned that this might go on for a couple of quarters, but the impact may not be of this quantum. So could you tell us what was impact of destocking in this quarter and what would be the course going forward?
This is Paramjit Soni here, Sourabh. Thank you for the question. Sourabh, my estimate of the inventory destocking in this last quarter is in the region of INR 27 crore, so ballpark in that number of INR 25 crore to INR 30 crore that I had mentioned, I think we're within that zone. We still see some of this cycling down. I had already mentioned last time that Q1 and Q2 will be soft. And so we do, I do think Q2 will be soft. I don't think it'll be to the level of INR 27 crores. I think it will be lesser as some of this is getting in our rear view mirror. My gut sense is that, while it's difficult to tell, my gut sense is like this destocking may take another quarter or a quarter-and-a-half at best and then we are out it. But Sourabh it's a moving target because it's very hard to predict these sort of things.
Okay, got it. Also, sir, during the last quarter we had already toned down our top line guidance for FY '24 from 15%, 16% to high single digits. That's what we had mentioned. So considering this quarter's performance, how do you see the year paying out? Would you further tone it down or high single digits look good with you still. And how is the scenario shaping up in U.S. and Europe, particularly in small equipment and precisely in this fiscal for the second half? Since you have already mentioned that Q2 also is likely to be a bit softer, so. And if you could also give us some data how our clients are doing in terms of volumes in last two quarters, how John Deere or Kubota have faired? And what is the guidance from them for the rest of the year?
Okay. So as far as giving the guidance for the full year, I think I want to refrain a little bit for the full year just now. I do believe it's a tough year. Quarter 2 will be tough as well. I may give you a better guidance once I'm in half 2 or something as I get closer. But the sense on the -- to answer your question on the overall markets and where it's going, I think the U.S., like Vivek mentioned, the U.S. small tractor market is, seems to be more severely hit than what was earlier anticipated. And consequently, the inventory cut downs are also significant over there. The other aspect of our business, which has taken the hit is the aftermarket, which is where it's very difficult to do with data because the aftermarket isn't predicted that well for you. The OEMs still you have some data but the aftermarket is more difficult to predict. But there also we are seeing significant more cuts than earlier anticipated. And the inventory adjustments there are high. The construction equipment market in the U.S. continues to remain robust. So when you ask me for -- and so does the large ag equipment continues to be good. Europe has become a little bit more stable now. I thought it was slight between stable to up 5% for me till the last call. I think it's more stable now as far as I'm concerned. And the Indian market, I think the Q1 has been soft but it is expected to pick it up. So, Sourabh it's a little bit of a mixed bag. Sorry for the elongated answer, but the, our market is divided into so many different segments. And two segments are not doing well, the other segments are doing well and some are stable. So it's not a simple answer unfortunately, it's a long answer. Having said this, I think the robustness of the business model [indiscernible] participating and making it more risk-mitigated kind of remains. And I think we are seeing the benefits of that. The key factor go forward is actually the amount of interest we are seeing on the new business. And I think the rate at which we see this come in has significantly gone up, Sourabh. From an earlier situation, we used to have a run rate of about INR 200 crores of business a year come in. And awards, already I'm looking at the trailing 12 months at about INR 330 crores. So it's actually significantly jumping. And how much of this will translate into Q3, Q4 and -- Q4, I think you may see a quite a bit of numbers. But frankly, a lot of it you may see in the next year. And so that part remains very, very good. The traction on the UTV side remains very, very good. So there are some pluses and minuses on this, Sourabh.
Okay, sir, my third question is on margins, sir. Our gross and EBITDA margins have fallen on an annual basis. And during all our previous interactions we had mentioned that profit margins are likely to improve on account of rising share of warehousing and many other factors. So your comments on that?
I'm still maintaining my earlier thing that, yes, on the long term they will continue to improve, and that is what I expect. If you look at what's happening just now, and I mentioned this earlier as well, last year, as commodity prices and freight prices were going up, we had some benefit come on to the -- on our inventory side. And I had said last year as well that in our financials there was a INR 15 crore benefit. As freight prices and steel prices are cycling down through the levels, I think you will see some of that correction happen. Part of the drop in revenue also you're seeing is because of the price corrections. And freight, frankly, has come back to about what it used to be pre-COVID levels now. So all that cycling through has already occurred. As you see this go forward, I think the margins are robust in each one. Do you see part of it is going to be, if you look at the material, for example, looks slightly more higher. But then, Sourabh, if you drop the freight by -- and I think the freight may have dropped between 3% to 4%. So if you drop the freight from the selling price and the expense, technically you have a lower denominator hence the material looks higher. But overall, if you look at the combination of material and freight together, I think that's still in the same region. This quarter you're only seeing it a little bit simply because of the slightly lower volume and hence maybe the operating delever on that. But other than that, the key material cost, all our conversion cost, everything is still in good shape. Coming back, I had said to you earlier that our highest margins come from the warehouse business model. That still continues. Frankly, till the last call, we were saying, hey, we were at 44% and I would go to between 47% to 48% over the next 3 to 4 years. This quarter we're already at 47%, not because -- and I can't take credit for that. It's actually happened because that side of the business did not take as much of a hit as the aftermarket business, which is more coming from direct exports out of India. So because the direct export went down, you see the warehouse business looking higher. But longer term, I still -- so maybe this will cycle back a little bit, Sourabh. But then it will go back again to the 47%, 48% of what I had told you earlier. So I'm maintaining my guidance for that. So even despite the lower sales, Sourabh, we're still over 20% in EBITDA.
Okay. Got it, sir. Sir, one thing, we have been mentioning our market shares in 3PL and PMP based on FY '22 estimates. So it's been several quarters [indiscernible]. And do you think there is any possibility that we have lost our market share in any of these segments? And if you could talk about a little bit about the competitors, how they have fared during this period? And also, if you can talk about our orders in hand?
So, Sourabh, in terms of market share, obviously the last mapping we did, that I have -- I don't -- we don't actively map that every quarter or anything. But in terms of your question of do you think you've lost any market share, I don't think so. In contrast, I think we may have gained a few because, for example, we gained new business with Case New Holland on the large tractors, right? So as you're getting this, it's coming off somebody else because with all this resourcing happening, even on the China Plus One, theoretically, we are gaining market share as well, right? China's -- that product is shifting. So do I have it mapped, Sourabh? The answer is no. Do I believe have lost market share? I don't believe we've lost market share, on contrary I think we may have gained a little bit. But I don't have the exact mapping to answer your question to that level of detail just now. I can only give you my macro sense on it.
Okay. Any thoughts about order book or something?
The order book is still -- is good. Like I said, quarter 2 is looking tough. But quarter 3 and quarter 4 are looking good based on the new business as well. But the customers are still fluctuating the order book quite a bit, especially as the market is dynamic, we've seen -- like I said, in last quarter, for example, Europe, I was flat to up 5%, but now I'm saying Europe may be flat because I think they're reducing their order book go forward a little bit. But the U.S. construction equipment continues to remain strong. The U.S. large ag continues to remain strong. The aftermarket and the U.S. small ag actually are even more worse hit than what I thought they would be. So those 2 are actually getting pretty badly hit. And India is expected to be flat. So that's how the outlook is looking.
Okay. My last question, sir. This quarter we have skipped our regular slide of revenue breakup in terms of product verticals, geographies and market presence and agri and CFM segments. So if you could provide us with the numbers or if you want can take it offline, but that's a request that any -- going forward we should provide these details. That would be helpful.
But I can give that. Sourabh, it's -- so as far as the geographical mix is concerned, Sourabh, there is no significant change, America. And again, this is -- you should -- you should look at the full year versus the quarter rather than not quarter-on-quarter, but to give you -- so when I'm giving you these numbers, these are full year FY '23 numbers versus Q1 of FY '24. Because if you look at them quarter-to-quarter, the variations may be larger. But looking at it in this way, Americas is still about 50% of our market, that remains. Europe is still 23%, that remains. India has actually slightly moved up from 15% to 16% of our market because Indian market hasn't been going down, it's more flattish, right? And then Japan has actually moved up from 5% to 5.7% of market. And the rest of the world has kind of dropped from 6% to 4%. So not a significant change per se. The larger change that you will see is more on product verticals. Our 3-point linkage business has actually dropped from 56% to more like 47% now. In contrast, our PMP business, which is more focused on the construction has gone from 40% to 51%. This is in sync, Sourabh, with what I've been saying. The small ag market in the U.S. and the aftermarket, which is also in the smaller tractor, that is hitting the 3-point linkage, whereas the construction is robust. So you're seeing that shift happen. From a margin perspective, it doesn't bother me with the shift because my margins are similar on both, okay? And this is frankly part of our risk mitigation, Sourabh, when one segment is not doing and other one is doing better. I think that's the robustness of our model. If I look at it by the delivery channel, Sourabh, we moved on the warehouse side. We used to be 44% for FY '23. Quarter 1 actually has been at 47.6% of the warehouse. And direct exports have gone down from 29% to about 23%. And so clearly you are seeing that shift, which I had mentioned that the way warehouse has gone up a little bit. Similarly, Sourabh, when I look at the OEM and the aftermarket side of the business, OEM was 84% in FY '23, is actually 87% now in the aftermarket, which was 16%, has dropped to 13%. Again, in sync with what I'm telling you how the aftermarket is a bit softer. And if I give you the mix from an agricultural and construction market, ag contributed 71% of our business, now it's contributing 66%. Construction moved up from 29% to 33%. So I hope that gives you all the different permutation combinations you need on this, Sourabh.
The next question is from the line of Pranav Muchhala from Reliance General Insurance.
Yes. My question was that particularly that what we've seen is if I look at on a Y-o-Y basis also, particularly we've seen the top line degrowing by INR 50-odd crores at INR 297 crores. So if you could help me understand how much of that would be an impact particularly from aftermarket and rest from other segments? And also, if I could also understand that what has been the root cause for a sudden decline in the demand for U.S.A. small tractor market, which has been hit much, much more than our anticipation.
So I don't have that breakout, but I can tell you, out of the INR 50 crores, like I was answering the earlier question, about INR 27 crores of that actually came out of just inventory destocking. So about 50% plus of what you're seeing is actually not related to the true consumption at the end customer. It's actually coming off the portion of the inventory destocking happening. On top of that, I estimate close to about INR 8 crores to INR 9 crores of that has come off from price downs related to freight and this thing. So the real volume reduction has not been that high, Pranav. And to answer your question on the, why the U.S. small ag is going down. I think this is, the small factor here is more a utility tractor and with the interest rates going up and stuff like that, I think this is the kind of commodity that has got hit here. It's not a farming tractor. The serious farming tractors are over 200 horsepower here. And because commodity price -- the farm income still remains strong, that segment is still growing 8% to 10% in the U.S. on the large ag. I think the small one is more becoming a consumer thing, and this is maybe the consumer while the consumer spend in the U.S. is good, I think it's the big ticket spend on the consumer side may be slowing down a bit.
Okay. Sir, one more update which I wanted to understand is that we had recently tied up with one of the major players in aftermarket, especially TSC. And we were pretty confident of making inroads with them and boosting our aftermarket sales with them. So how is that fructified? Has that not been good enough to nullify the impact that we see over here in the small tractors? Has that not picked up well enough?
No. It is running, from an end-market perspective they are also equally hit from a perspective of what the end-market is doing and the inventory destocking is doing. So they are no different to anything else on that, right? But our sales to them continue to be, but they are also performing the way the rest of the market is performing. What is really, really working well with them for me is they are the ones that used to actually launch the UTV platform for us for the 3-point linkage. And that frankly has been going phenomenally well. And I think the interest that we are seeing there is absolutely amazing, and it's on track. And like I had mentioned even the last time, that, that opportunity alone is actually equal to almost the entire 3-point linkage market on the small tractor that I have in the U.S. over the next few years. So that with TSC is growing rapidly. We are exploring new China Plus One opportunities with them on other products which they want to resource out of China. That's still in the pipeline, a little bit at the early stages. But the UTV ATV is doing phenomenally well with them. And at the same time, while I'm partnering with them to launch this, we've already started our work on all of this with, let's say, other aftermarket chains. Like Gurdeep mentioned, we've got the second biggest chain now. And now I'm actually taking this out to those guys with a slight 6-month to 8-month lag from TSC, we will open the next ones on this. And everybody is showing a lot of interest on that. So the relationship with TSC is actually very, very robust.
Okay. Sir, the reason I was asking is that, sir, seemingly, we -- I feel that we seem to be stuck. If I look at Q3 top line, INR 330 crores, Q4 INR 328 crores, Q1 close to INR 297 crores. So seemingly, we seem to be at stock and with a decelerating trend. What is that we are trying to do that is over and above the inventory destocking which you know which is what it is, that we try to diversify to at least up the hill and [indiscernible] in terms of a deceleration in the top line.
Which is all the new business, which is what Gurdeep referred to earlier that we are going to implement all this new business and speeding it up. I mentioned to you already the award last year were about INR 200 crores. This year on a trailing 12-month basis they're already at INR 330 crores. So you're seeing a significant jump in the new awards. We are focused on the execution of that. The UTV ATV, well, you will start to see sales of that starting on quarter 4 when the launch happens. So clearly you will see a few of these things. So what can we do? The market is the market, so you are going to go ahead and make sure that all your other aspects on China Plus One, the projects which you're executing as well as the other strategic projects you're executing, those run on track and go faster. So we are executing on those.
Sir, how much does our order book stand as of now to get a perspective, sir, if you could share?
The aftermarket doesn't give me an order book beyond 90 days. So it's difficult. So if I give you an order book, I'm going to give you an order book go forward, right? But the OEM order books clearly we have all the way up going forward, but the aftermarket doesn't. So I can't really answer that question of how much does the total order book stand? If you're looking at the total order book on how the OEMs go or something, I can get those numbers out and call those out for you. But I don't have them off the top of my head just now, though.
Okay. Okay. And sir, one question which I wanted to understand is that since U.S.A is 50% for us, what are the challenges for us to move up in terms of HP up in the tractors where it can hedge us in terms in terms of the impact that we are seeing in terms of the small HP or the small tractor size? Is there a possibility where we can move up the HP and that can potentially hedge the impact?
In that, we are doing that. You're absolutely right there that one of our growth areas were the greater than 70 horsepower. We've made inroads already with Case New Holland in the United States this year so that we'll see that come into the focus in production in next year. Similarly, the larger of this is actually being used in the European market. I think if you look at the large horsepower, let me just segment that again for you. When I say small tractor, I mean below 70, and when I say large ag actually it's, for me it's over 100 because there's really no category between 70 to 100. And then when you go from 100 to 200 is really the farming tractor in Europe. In the U.S., there is still a little bit of that, but literally 200-plus is the real farming tractor in the U.S. So the 200-plus horsepower tractor, a lot -- Deere, for example, produces those linkage in-house. Now till such time as they don't outsource that, that opportunity is limited. So we focus more on the 100 to 200 horsepower. And I think over there, we are making some gains not just in -- with Case Holland there, but we're also looking at some projects in Europe with AGCO. And at the same time, we've also looked at some projects with the companies out of Korea, which were further exporting these into Europe and the U.S. So all those, Pranav, continue on track.
Okay. Sir, if you could also give me any update on the hydraulic cylinders, where is that going? Are we getting some traction over there? Are we getting some new orders or not?
Yes. Hydraulics, not on cylinders, but on hydraulic components.
Components.
Yes, yes, yes. So on that, we've already launched the one that I had done earlier, which was indirectly going to go to Danfoss. I think that is already in play, one project. And I think there are 2 more projects in the pipeline there.
The next question is from the line of [ Chirag Utama Jain ] from Emkay Global Financial Services.
So just wanted to check, so, one, obviously, despite the tough environment, our profitability and cash flow is quite strong. And obviously we are sitting on a net cash position. And at the same time obviously the external environment is relatively weak. So are we thinking about our acquisition strategy, especially in the newer segments? Can this be a good opportunity for us to accelerate our growth into the new categories in this kind of environment?
Absolutely, Chirag. And I think we are very, very actively looking at it. And the company is sitting on, like in the last quarter, I had said, hey, I was expecting to be net debt free by maybe May or June of this year, but we were actually net debt free already at the end of March. Today I'm already sitting on INR 54 crores of net cash even after paying a dividend of INR 27 crores in the last quarter. So clearly the cash is high, and I think we are very focused on looking at that. So I'm looking at multiple things, Chirag. And but again, I have to do them strategically. I have to make sure my return on capital is protected. I'm very, very -- I'm not going to do something which dilutes any of our core things that we want to achieve. And the opportunities are coming, especially as it -- and some of these things are things cycled down. I think you will, with these high interest rates in the U.S., you will see some opportunities come up and maybe even in Europe. So we will see what happens, Chirag. But we are very actively pursuing those, Chirag, to answer your question.
Okay. And second, in terms of the down cycle in terms of the small agri tractor space. Based on your past experience, typically how long does it last? And especially when obviously when things will come back, I'm sure there will be restocking again to the earlier levels. So any thoughts around that in terms of how long this down cycle could last?
I don't think. See, the small tractor may only last maybe 1 year, 1.5 years as a down cycle. It's a consumer cycle. So I think we'll see how the economy goes when that happens. But here's the thing, Chirag, which I think -- as we -- so there's a down cycle happening, so FY '24 is getting hit. I actually believe in FY '25 was going to happen, Chirag. At the end of the day, you won't see the impact of the down cycle because that's already out of the way. So any reduction in sales we've seen in this year, that will be added growth over normal. Then on top of that, you're going to see, in any case, the run rate that our new business has gone up. So you're going to see that come out. So for me, FY '25 is going to be way higher than my normal 16% predicted long-term growth. While this one is lower, I think FY '25 will be significantly higher in percentages. I'm still maintaining my normal long-term scenario of 16% that we will be able to do over the 4-, 4-year period, 5-year period. So I'm not changing those, Chirag, because fundamentally nothing has changed over there. It's a cycle. In our entire model we knew that cycles come and we've taken only the secular growth of the markets of 4% to 5% through the system and the rest was coming, 11% to 12% of our growth was going to come from the new business, China Plus One and gaining market share. That portion is actually robust. So if you are talking of just the cycles, it will come, it will go. It's not the first cycle I will see in my life. So I do see FY '25 being significantly better. I do see whenever this cycle turns back you will see the increase from the stocking up go. That's part of the business, Chirag, over here.
Yes. And just last thing, just to reconfirm. This kind of cyclical challenges is not impacting our structural initiatives to, let's say, expand our presence in large factors or 3PL for UTVs or even, let's say, China Plus One by and large, so that seems to be on track. I mean there could be 1 or 2 quarters delay here and there, but by and large, let's say, the medium-term story remains intact.
Absolutely, Chirag. In fact, it's like one of my customers says, you've got to have your eyes on the horizon and your feet on the ground. So the horizon part 3, 4, 5 years, all that is intact. And in fact, we are executing. We have our feet on the ground executing everything. So whether it's the hydraulics, whether it's the greater than 70 horsepower, whether it's the UTV, all that is executing. And I think it's all on track. Be honest with you, what's taken me completely by surprise is the scale at which the small factor market came down. If you ask me on the history, I've never seen that large a decline. Does the decline happen? Yes. Does it happen to this amplitude -- that is a new one. But this is where the business model becomes really nice now because as this is happening, we are seeing still growth on our construction equipment side, we're still seeing growth on the large ag side. So I go back to the years where we were only in the small tractor. Can you imagine what would have happened to our company if we were only in that, Chirag. So clearly, I think the entire robustness of the model is -- so my long-term is completely remains. And I've repeatedly said earlier, our company has lived through cycles and we really, really understand how to manage ourselves through cycles. If you look at what I've been saying, I think what I'm building the strength for the company today are to deal with volatility because everything -- when something changes that dramatically, that's what I think we have to build on. We're currently building some phenomenal digital[Audio Gap]
Hello? Hello?
[ Ms. Sanjana ], can you hear us?
Yes, I can hear you.
Yes, please go ahead with your question.
Just a couple of questions from my side. So one is on the demand side. So I'd like to mention that on the small agri business -- so on the demand front, you mentioned that on the small agri business at the end consumers there is some inventory correction which is happening. So I just wanted to understand like what kind of inventory correction is it. Like how much inventory were they holding previously? And what kind of correction is happening on that side? So yes, that's my first question.
So, Sanjana, it's not the inventory that I am holding at my end, it's the inventory -- the channel inventory that customers and dealers are sitting on, they are cycling that down, which is causing the demand to go down. As like I mentioned earlier, this -- when -- on the previous question, when somebody mentioned you dropped about INR 50-odd crores. And I said already about INR 27 crores of that is my estimate of how much the channel inventory has gone down. So this is not my inventory that is going on, that is something that we manage internally, our working capital and everything separate. The numbers that I'm giving you, the INR 27 crores out of the INR 50 crores is actually just a channel inventory, which has gone down. All right?
Understood. Yes, understood. Secondly, on the interest expense side. So since we don't have debt as of now, like no [indiscernible] was mentioned, we have around INR 50 crores of net cash. So I just wanted to understand why do we have interest expense of around INR 1.1 crores this quarter. Is it related to some working capital debt or? Yes.
No. I think we had some fixed term debt. Working capital debt actually finished pretty I think a couple of months ago only. And so what we are -- there is some term debt, which I -- which just gets paid every month [indiscernible]. So if I look at that, at the end of June, you're sitting at about, Sanjana, between INR 9 crores to INR 10 crores of that is balance. I'm sitting with about INR 65 crore -- INR 64 crores, INR 65 crores worth of cash and cash equivalents. So when I give you my net being positive of INR 54 crores, it's actually taking that INR 64 crores deducting the INR 10 crores that we have there, and I'm giving you that number. So the interest that you see is maybe it's going to keep coming down further because of actually just in July paid off another term date as well. So wherever I can get rid of them, I'm getting rid of them if it makes sense for me to get rid of them, right? But it's a not a concern to us on the -- at this time. I think my bigger concern is I need to quickly deploy the money in an acquisition. So that's what I'm focused on.
Okay. Just one more question, sir. So on the other expenses side, so is it -- it has come down even sequentially and year-on-year. So is it because of the change in the mix there our warehousing share has increased? Is that -- is it because of that?
No. I think that's a great question. That has come down because of freight, predominantly.
And increase in the --
Yes.
So warehousing share has gone up, so in terms of -- like because trade would be less, like that was my assumption that freight cost would be less in when we do a warehousing sales. So that translates into higher -- lower OpEx for warehousing. Is that understanding wrong?
No, no, no. I think -- let's say when -- what do I mean when freight has come down. Whether I ship material to our own warehouses or whether I ship it to some customers where my terms are where I'm paying the freight on a CIF basis or whatever, there was this entire seafreight in the pricing, right? So container cost, to give you a sense, Sanjana, where before COVID started, if you were shipping a container from India to the U.S., you were paying between, all the way inland maybe between $4,000 to $5,000 a container. To give you a sense of this, at its peak it actually went up to $15,000, $16,000 a container. It is now back to the $4,000 to $5,000 a container. So when you -- so technically, when you say lower freight costs, as freight comes down, so freight used to be between 3% to 4% of our sales, is typical pre-COVID. It actually went up in last year in some quarters to as high as 7.5%, 8%. And now it's back to the 4-odd percent levels, and it's still trending down and cycling through the system. So that is what is driving it. So when you see the other expenses come down, if you take 2%, 3% off on just freight, that's the bigger one. The other part is that on the other expense, we changed our agreements with customers where we wanted to use the exchange rate to help us pay off inflation or inflation recovery. And foreign exchange is helping us compensate and delever some of our fixed operating costs as well over there. So it's a combination of both, but the heavy lifting on this has been done by the freight cost. Okay?
The next question is from the line of Chetan Gindodia from AlfAccurate Advisors.
Paramjitji wanted to understand regarding the order book position. So as per last communication, it was over INR 460 crores at that time from the OEM side that were -- that was to be there over the next 4 years. So if you can give any update of order book or any new orders that you have received in the last 3 months, that would be helpful.
Yes. So when you say the order book, that is, I think you're referring to the new business awards that we have, I think that was the 400-plus number over the next few years, Chetan. Vivek, do you have that readily available? I know it was a little over 500, but I don't have the exact number in front of me. Vivek, can you help me out with that? Otherwise, we'll have to come back to Chetan.
Yes, yes. As of now, it stands -- I mean, see, these are awards and values of projects on which we are working and are likely to fade over a 3- to 4-year period. So it is a little over INR 500 crores as of now. And this includes broad buckets of obviously the 3PL for UTV. Then all the construction-related awards that are coming through for the China Plus One reasons. Also the high horsepower projects and hydraulic project that Paramjit Sir mentioned. And also the new aftermarket account and new awards over there and some regular, on our existing business the regular additional award. So those are the key buckets.
Chetan, that number has kind of increased from what we told you last time. And that's in sync with what I'm telling you. Couple of things are happening. During COVID nobody was able to process new RFUs and stuff like that. So everybody talked China Plus One, but who could execute it. I think I've been saying for the last 6, 8 months to 1 year that this is getting into execution mode now. And you see that. You see that in a couple of metrics. You see that, frankly, we see that internally in the number of RFQs we're getting and we're also seeing that in the number of awards we are getting. So like I said, the awards -- the early indicator for you is that the awards are going up. So if that went from INR 200 crores to INR 330 crores, I think that is giving you a think of, hey, what's going to happen in the future, right? And so based with some of those, if you projected -- and these are annual numbers. So when you project that out, go forward, the -- what you are seeking is the 3-, 4-year number, and that's a consequence of all of that. So as these awards are going up, more you will see the other part in the execution go up at a later stage as well.
Got it. Got it. And just lastly, sir, how much of this INR 500 crore orders are projected to begin in the next 1-year period, I think the UTV ATV order and the high horsepower order from Case New Holland are the ones you pointed out. So what would be the quantum of this that would begin over next -- in the H2 or in, say, next 1 year?
Yes. Vivek, you will have that number readily available. I know we -- that we had INR 92 crores already implemented just now and which was part of that you were even going to see in quarter 4. And I think there is a balance implementation, which is showing you, Vivek. How much is that number? Can you tell me the number is exactly, Vivek?
Yes. So the estimate as of now broadly -- and obviously, this is subject to fine-tuning and it revolves a bit, is in the region of INR 150 crore to INR 175 crore for the next year.
Okay. This includes the INR 92 crore you just mentioned or --
INR 92 crore is more the annualized number. So when you see it in the quarter, you will see 1/4 of that in quarter 4, right? And we use annualized numbers. That's the way we kind of internally look at it, so.
Okay. And this INR 92 crore and INR 150 crore, these are [indiscernible].
When he said INR 150 crore to INR 175 crore that you will see, that is the full new business that you will see in the next fiscal, over and above any existing business that we have. So the way when we budget is we say, hey, what was the already the existing business? And how much -- then we look at, we say, hey, this year, for example, let's say, we started a project worth INR 100 crores, but we only got 2 quarters of sales in this year. So hence, you still have the tail of that and you'll get INR 50 crores next year more because now you'll have a full 12-month impact. Then there are projects which will start within that year as well, and you'll get some of that. So when you kind of -- so we look at these into our Y1, Y0s and Y2s and kind of see where it is coming in. And the number Vivek is giving you is the outcome of that is about INR 150 crore to INR 175 crore new business that we can already see in the next year.
To that end, since we are in August only, so as the year progresses further. So this number is subject to fine-tuning and further -- evolving further.
Because as we do this and we implement some more things, I think you will see that change. But every quarter we kind of review them. But I think the real deep dive happens when our budgeting is happening, Chetan. That's traditionally what we do.
The next question is from the line of Mitul Shah from DAM Capital.
Sir, my first question is on this aftermarket weakness. So whenever we see recovery in this market, is it a steady gradual improvement type of based on your past experience? Or it is a very big spurt happens like post COVID type of recovery in this type of market?
Typically, the speed of these is fairly fast. But like I said, the decline method that we saw this time, the amplitude was very high. I've never seen that bigger decline, right. But clearly, like I've been saying, volatility sits in the business now, and that's how we deal with it. So historically, when it came, it also recovered quickly. And you get the double whammy at that time. People not only want that product or they also want to restock. And hence, when the market goes up by 5%, 7% that time, you will see 20%, 22% growth at that time because everybody wants to stock back up again. So it will come rapidly as well whenever it cycles through. The market, it seems, is getting faster and faster.
So this phenomena can we expect in second half possibly?
Second half of what, next year?
Second half, the year-end FY '24? Or it will still --
No, no, no. I don't think you'll see it come that quickly because it's -- the down cycle has started about 6 months ago, the down cycle once it cycles, so it will take at least a year, 1.5 years for us to come back, no? So I don't think it will -- it goes like that. This is -- see, again, you have to factor this is more a consumer product rather than a farming product over here in the U.S. The farming one is doing fine on the large ag. And again, when you look at the India tractor market, which is also the small tractor market for us, you're not seeing the amplitude of this in India because India tractor market, while Q1 may have been a little slower, but I think it will catch up for the rest of it. And it's still going to be flat. It's only the U.S. market, which is driven by completely different reasons than farming.
Then overall, how much contribution drop has come from U.S. in terms of a broader breakup of revenue? U.S. contribution compared to last 2 quarters, how much it is [indiscernible] in this quarter?
Like I just gave you the thing, in terms of the U.S., when I look -- okay, I haven't compared quarter-to-quarter in terms of contribution. When I give the geographical mix earlier to a question, the U.S. is still the same. It was 50% of our market in FY '23. In quarter 1 FY '24, it's still 50% of the market. So the U.S. wireless contracting to me on the small tractor, it is also increasing on the construction equipment and the large ag. And what is contracting for me on the aftermarket is both in Europe and in the U.S. When I gave you the geographical mix of the year versus this quarter, I said India moved up from 15% to 16%. So that kind of tells you Europe and U.S. is a little bit slower than India. So that's the shift you're seeing. Japan also moved up from 5% to 5.7%. But then those are coming from the rest of the world because Mexico has slowed down, Brazil has slowed down. So some of those have slowed down as well. So but the big ticket markets of Europe and U.S. and India, if you look at it, last year between these markets, I was still 50% U.S., 23% Europe, so 73% in these 2, I'm still in this quarter the same. India has moved 1% up. So as a region, it's different. And as a region, America is still fine for me because of the improvement in construction equipment in large ag.
And within the products in these new orders, which is a relatively faster growing segment now in terms of product by 3PL, PMP --
From the business break out of the INR 400 crores, INR 500 crores, Vivek?
No. So his question is, in our view which one is a faster-growing segment. So I believe, and sir you can add to it, the awards which are coming through because of the China Plus One theme and which is actually on the construction side is --
So think a lot --
Is one of the faster-growing ones. And 3PL for UTVs, it's a new market. But once the pilot is done, it can turn out to be a good one.
The break up would be also equally helpful if you can give, of the orders.
Sorry, say again, please?
Sir was mentioning about the broader breakup of that INR 500 crores new order, if you can give that will be also equally helpful.
Go ahead, Vivek, give the breakout of the INR 500 crore, where it's coming from ballpark, from China Plus One, construction, and UTV, and 3PL and hydraulics.
Okay. I'll have to revert separately for that. So I'll have to go into the details side.
Okay. Fair enough. Come back to you on that, Mitul.
Due to time constraint, we will take the last question from the line of [ Mr. Shivam ] an individual investor.
As you have been mentioning that you were -- I'm actually a bit new to the company, as you have been mentioning that the margins are going up because of the change in the business model, like more of the focus on the warehousing. So just wanted to ask that is the largest sales in warehousing we are getting because in the last 2 fiscals there was also a supply chain disruption. So a lot of [indiscernible] lot of customers [indiscernible] we have moved towards the warehousing model. So as these constraints ease out, so do you think that there will be a pressure on warehousing model as the supply chain disruptions ease off more?
I don't think. So, Shivam, here's what I believe how we see it. The product we do for our customers forms between 1% to 2% of their complete spend. And I think our -- and we do a large number of SKUs for them. So when you're thinking like that, in your question, you're thinking, hey, lesser number of SKUs, lesser complexity, and hence, why have warehousing, why not bring in direct. Off-highway market doesn't operate like that. We have thousands of SKUs, not the automobile kind of volumes, lower mid volumes. So the complexity is high, and all these people want a rationalized supply chain, which takes all these headaches away from them. So we generally see that they are willing to pay a premium and they want a risk-mitigated solution. I've always said that our global delivery model is the strongest part of our business and that it makes us unique compared to the rest of our competition. And that is offering customer solutions. Customers clearly know today that they can buy direct from India at a lower cost. They also know that they're paying a higher cost running it through a warehouse. That's not hidden from them. They still choose to use the higher cost warehouse model. If you go back, you're saying, hey, COVID 1 or 2 years or whatever. But let's go back even, what 5, 7 years ago, the warehouse was only 30% of our sales, now it's 44%. This is not a 1- or 2-year trend, 1- or 2-quarter trend, this is a longer-term trend. In our business model, I already said, when we are looking at the customers come in from a risk mitigation -- you -- I kept saying, hey, people are talking about near-shoring and onshoring in the U.S., and we brought in the model of dual-shore manufacturing where we will produce a part of it in the U.S., part of it in India. Now what is that model? You produced 25% in the U.S., you produce 75% in India, but you still route that 75% through a warehouse model. So the warehouse model is more and more coming into play where people want this. So I don't see this as other trend. I think the warehouse will continue, and we believe we will be able to drive margins from that.
Okay. And sir, like you mentioned that the warehousing was there still like 5 years ago at 30% of your revenue. So like what did really move the margins from like FY '21 onwards to a higher 20% digits the EBITDA margins? I think if you look at the 4-, 5-year history, you will notice that we did multiple things. We actually -- the warehouse model went up. We during that period took a very hard look at what makes money, what doesn't make money. We got a product which didn't make money. We focused very heavily on the bottom line. We transformed product we were producing in the U.S. We moved that to India to take a lower cost advantage. There were multiple things we did. And that --
So you moved into the efficient model.
Yes. So originally we had moved it from the 13%, 14%, as I said, I'll go to the 17%, 18%. And when we came in, we said, hey, we even performed to the higher one because I actually got rid of business which didn't make money and focused. And that made us such strong financially that our bottom lines are good? Or I used to say at that time we are at 21:14:7 company, 21% EBITDA, 14% PAT, 7% free cash flow. And that is after factoring in the 16% growth. This year, what is happening, the -- north of 20% is still being maintained despite the lower sales. Instead of 14%, we've seen close to what, 12.5%, 13% on that on the PAT. So still been higher because you're seeing -- when I'm not using that much on the working capital, you're still getting more cash flow. So cash flow is still strong. But my normalized still remains. I am not changing from that at all.
Correct. Correct. And sir, so on a broad basis, can you give a guidance of like what's your targeted ROC internally that you want in the next 5 years, that this much should be maintained in the minimum threshold?
I used to say north of 25%, if you had asked me 5 years ago, now I say north of 30%.
Okay. That's it. North of 30% for the next 5 years, not going below that?
Yes. That's my internal one. I used to say north of 25%, but then we already achieved that, and now I'm -- you change your goal post as you move on in life, so.
Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Thank you. Thank you, everyone, for participating. It's really great, and great questions that came in. And we do look forward to the future, and we are still very, very sure that the growth is coming back, and it's going to be a great treat for all of us. So thank you, everyone, for coming in, and goodbye.
Thank you. On behalf of Go India Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.