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Varroc Engineering Ltd
NSE:VARROC

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Varroc Engineering Ltd
NSE:VARROC
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Earnings Call Transcript

Earnings Call Transcript
2021-Q1

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T
Tarang Jain
MD & Executive Director

Thank you. Good evening, everyone. Tarang Jain here, and I would like to thank you for joining the Q1 FY '21 earnings call of Varroc Engineering Limited. As you're well aware, the last quarter, Q1 was a challenging one due to the rapid spread of the coronavirus and the consequent decision by the governments in various countries to import strict lockdown measures which severely disrupted economic activity. Our plants across India and in various countries across the world were closed for the entire April and most of May 2020. Production resumed in a small wave towards the later part of May, and we have been gradually ramping up volumes over the last 3 months, though there have been challenges relating to availability of raw material, labor, et cetera, along with localized lockdown measures. As is required of any prudent business, we initiated a number of steps to mitigate the impact of the COVID-19 on the business. We've also taken steps to reduce the fixed cost base through various measures, resulting in savings of about 20% overall. At the time of the Q4 call, we announced that we will be reducing our recurring SG&A cost savings by almost 25% and product development spend reduction of more than 15%. I would like to update you that we have implemented these savings in Q1 FY '21. The full benefits of these changes are likely to be seen in the second half of FY '21. We have also prioritized securing and preserving liquidity until the operations have fully stabilized and the visibility on business prospects has improved. These measures helped us weather the storm and navigate our way through the crisis and emerge stronger with a lower cost base and more efficient operations. I'm glad to inform you that we are now operating at almost 80% of the pre-COVID volume levels. The demand indications we have been receiving from the OEMs for the near future also have been encouraging, though the sustainability of the demand remains to be seen. Our profitability as well as cash flow have turned positive in the month of July '20, and we hope to build on this over the rest of the year to deliver a strong performance and lay a strong foundation for the next year. Apart from cost optimization, we have reduced our CapEx spend for the financial year to about half of our average annual CapEx spend in the last 3 years, during which time we have built 4 new plants, acquired a company in Turkey and invested in upgrading our Czech facilities. We are now coming to the end of our investment cycle. Once we are able to fully utilize the capacities within the last 3 years, we should be able to see a significant improvement in our profitability and the cash flow metrics. I would also like to highlight that during FY '21, after taking into consideration the COVID-19 disruptions, we expect our new facilities to start contributing meaningfully to both top line and the bottom line and stop being a drag on profitability as we ramp up volumes in the second half. Our net debt increased during the quarter due to disruptions in working capital cycle, continuing fixed costs, CapEx payments and adverse currency movement. The cash drawn down in March '20 helped us in meeting the liquidity requirements during the quarter. As operations stabilized and the working capital cycle resumes, we have started seeing a reduction in debt levels. Our target is to bring down the net debt by the end of the year to the same level as was in March '20. With this, we are happy to take your questions now. Thank you.

Operator

[Operator Instructions] The first question is from the line of Basudeb Banerjee from AMBIT Capital.

B
Basudeb Banerjee
Research Analyst & VP

A few questions. On your result note schedule -- if there is some INR 94 crores of contingent liabilities and provision-related matter detailed on [indiscernible] for VLS, if you can clarify on that?

T
T. R. Srinivasan
Group Chief Financial Officer

Yes. I think we are relating to the qualification in the auditor's opinion. This is related to a warranty claim received from one of the customers for the VLS business. And we -- as explained in the note, we think this claim is very highly exaggerated. And our liability under the contract is very limited. And in fact, we have actually settled claims for a fairly good amount in the last couple of years. So I think the incremental liability we see is quite limited, and we have made a provision for that asset towards that in Q1. And so -- but since the amount of claim is fairly large and the outcome of the issue is uncertain at the moment, so it does have given a qualified opinion in that regard. Right now, we are in active negotiations with the customer to redo a settlement, and we expect that to happen fairly soon. And the initial indication is that we should be able to settle for a much lower amount. So that's where it's at the moment.

B
Basudeb Banerjee
Research Analyst & VP

So is that routed through P&L, the...

T
T. R. Srinivasan
Group Chief Financial Officer

Sorry?

B
Basudeb Banerjee
Research Analyst & VP

Is that routed through P&L already provisioned and reversals will happen?

T
T. R. Srinivasan
Group Chief Financial Officer

Yes, we have made a provision of, let's say, about, 20% of the claim amount. And that is a -- that provision is booked in the P&L. And the settlement we expect will be around that amount, steady plus or minus. We don't expect a significant additional liability on top of the solution we have.

B
Basudeb Banerjee
Research Analyst & VP

And how to -- because I remember you were focusing on reversals and based in quality improvement of VLS plants. So what -- how to look at such warranty claims down the line? Why did it arrive at all for such a quantum?

T
Tarang Jain
MD & Executive Director

I think that maybe, Stephane, you can answer that question.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Yes. So I think if you speak about the specific warranty issue, this is a problem that dates back from 2016. So this is absolutely not in line with the kind of performance or the kind of results that we are experiencing right now with our customers. We see a good trend on our warranty. There is a good reduction right now. And then we continue to receive recognition from our customers. So this last month, we received 2 awards from GM, General Motors, 1 from our Mexico facility, 1 for our Pune, India facility. A few weeks ago, we received the Q1 gold award from Ford with one of our major customers for the performance of our facility in Mexico. So we continue to really show a good trend in term of quality and a good improvement in warranty.

B
Basudeb Banerjee
Research Analyst & VP

Sure, sure. So these are regarding legacy productions, not of last 12, 18 months-related assets?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Absolutely.

B
Basudeb Banerjee
Research Analyst & VP

That's great. Next thing, sir, this is a very technology-intensive segment where halogens to LEDs to new age technologies coming up. So for the cash flow or margin management, how to look at the 15% cut in R&D expenses as a sustainable tool? Don't you think that will hurt your product development efforts?

T
Tarang Jain
MD & Executive Director

Not really. I think that like -- see, R&D is, of course -- this is a technology product. The proprietary item is a jewelry of a car, and obviously, very important for every customer. Having said that, I think, yes, there is an R&D expenditure here. And today, it's somewhere between 5% and 6% is something where we are trending as an engineering cost. That's something which -- this thing, quite normal -- I mean, this thing in the business. This cost, of course, covers all the new innovations and also the regular developments we do on the programs, this thing which we win. But I don't think -- I think the way -- I mean, the way the pricing is done, I think, there are not so many players also in the market who are into the lighting business. I'm talking about people who have this level of technology. It may not be more than 7 or 8 at the -- I mean at the max. So the issue today, I mean, let's say, where we are not probably achieving a level of profitability has nothing to do with the R&D. In R&D, as you -- as I mentioned, we've already reduced the cost by 15% further in this year. That's not -- the issue today for us, where it has been a little challenging for us has been our investment, which we have embarked on 2 years ago on a EUR 225 million investment, out of which we have already covered EUR 160 million till the last financial year-end. And the balance will probably happen in the next 2 to 3 years. This major investment is -- and the underutilization of this investment is what is causing issues, I mean, at present. And also the market, as you know, has been a little bit subdued since October '18. So -- which we see now probably returning to certain levels, going forward, starting from September onwards. We see a good level of recovery in sales and utilization of, not only our old facilities, but also of the new facilities, which we have set up. So having said that, I think once that happens, you will see a clear kind of good level of profitability being generated in our VLS business.

B
Basudeb Banerjee
Research Analyst & VP

So will it be right to look at because Q1 results are inconsequential? So as you were saying, you are already at 80% of pre-COVID level production. So one can understand Q2 revenue is prorated, what you were saying. And will it be right to look at other expenses, absolute number, say, what was in Q3 or Q4? It should be flat, 25% lower than that level, irrespective of revenue increasing. Should that be the way to look at?

T
Tarang Jain
MD & Executive Director

Yes. So fixed cost, so the whole objective has been to lower our breakeven point, and there was a lot of possibilities. And I think there's something -- not only because of COVID, but this is an exercise we started anyway in the last financial year. So this has been going for 1 year. So this 20% reduction not just happened -- because this is like a sustained reduction, which we will do. So you're absolutely right. Once we see the larger volumes come back, our fixed costs are not going to go up. So fixed cost, 70% is the manpower cost in the fixed cost. The others would be like traveling and that kind of stuff, which is also, as you know, at the moment, not happening, really. So we see this lower fixed cost sustaining itself as we move forward. So we will see that with the increased sales volume and lower cost base, we can achieve a better profitability and a better free cash flow as we move forward. And Q3 and Q4 will clearly demonstrate that. And -- yes.

B
Basudeb Banerjee
Research Analyst & VP

So last question, if I remember your peak revenue before this EUR 225 million CapEx for the addition of greenfields and a bit of brownfield, I suppose was EUR 1.3 billion, roughly?

T
Tarang Jain
MD & Executive Director

No, no. It was less, actually. We were actually at about EUR 1 billion in sales.

B
Basudeb Banerjee
Research Analyst & VP

No, no. I'm saying your peak revenue capacity, not actual execution. Peak.

T
Tarang Jain
MD & Executive Director

Yes, yes, you're right. So peak revenue capacity, you're right, was at a level of, I would say -- probably, I would say, more like 1 point -- capacity was there, but what we achieved, whether it may be a level of production -- production revenue at a level of probably about EUR 1.1 billion. Lastly, we have about EUR 100 million of revenues coming from our tooling sales. So about EUR 1.2 billion, EUR 100 million of this thing and EUR 1.1 billion is what the peak we have actually gone up to, the production and tooling together, so far. But of course, I think it was much higher. Capacity, you can say, can be for EUR 1.3 billion.

B
Basudeb Banerjee
Research Analyst & VP

Yes. And now, with this EUR 225 million CapEx, that figure, a peak potential revenue will be moving up towards EUR 2 billion?

T
Tarang Jain
MD & Executive Director

No. So this EUR 225 million, I mean, once it's fully done -- like I said, is about EUR 160 million we've achieved last year. And this year also will be maybe around EUR 20 million, EUR 22 million more, which we -- as for the commitments given towards programs to customers. So I think that this level of investment could take us to around probably EUR 1.6 billion, EUR 1.7 billion. Of course, there'll be some incremental CapEx also because this is -- the EUR 225 million on top will go only towards the new plants and our acquisition in Turkey. It's not the expansions in our current plants. So that will also -- there will be a further CapEx happening, but the CapEx, which will happen now going forward will be at probably 50% levels of what we have been doing in the past. So it will not be that heavy CapEx cycle because of the new plants, which we have kind of -- we had to do to be a larger global supplier in this business.

B
Basudeb Banerjee
Research Analyst & VP

So broadly, as you said, EUR 1.6 billion, EUR 1.7 billion will be the foreseeable peak capacity, say, in next 2 to 3 years?

T
Tarang Jain
MD & Executive Director

Over the next, I would say, 3 years is something -- that's what we'll be achieving.

B
Basudeb Banerjee
Research Analyst & VP

Sure. So now, as you mentioned, revenue actual execution was close to EUR 1 billion. And my guess is this fiscal, it will be below EUR 800 million as such. So as a promoter, how do you envisage -- where do you see, say, in fiscal '23, the EUR 800 million moving towards, as per your order book and demand scheduling as per your visibility? Not this year, not next year?

T
Tarang Jain
MD & Executive Director

So I -- for '22 -- it will be -- I would say FY '22, I see it going to overall revenues of about EUR 1.2 billion in the next financial year. I expect that to be at a minimum, what we see as -- I mean, as the sales from this business. As we go -- EUR 1.3 billion, EUR 1.4 billion like that. As we move along, the sales will go up by EUR 100 million, EUR 150 million a year.

B
Basudeb Banerjee
Research Analyst & VP

Only for VLS?

T
Tarang Jain
MD & Executive Director

Only for VLS. I'm only talking about VLS in euro terms.

B
Basudeb Banerjee
Research Analyst & VP

So sir, it will be great for everyone to understand on what driver you are confident that EUR 800 million this year will move all the way to EUR 1.2 billion, if you can give those breakup of orders in which you're confident.

T
Tarang Jain
MD & Executive Director

No, see, I can explain to you now, the first quarter was like a washout. You saw the revenues we achieved. I mean, whatever the major part of revenue came only in June. And July and August also, the revenues are going to be a little bit subdued because of the holidays in Europe. So I'm just saying that we are going to see strong revenues coming in from September. After all the holiday season is on and everything is over, September to March, we'll see, I mean, a higher level of revenues in the VLS business. And that will make us achieve a revenue of about EUR 800 million, the production revenue. We'll go to about EUR 800 million. And of course, plus the tooling revenue, whatever we have, about EUR 100. million. So probably, we can see a revenue, as we see today, at about EUR 900 million in this financial year.

Operator

The next question is from the line of Ronak Sarda from Systematix.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

First question on the China JV. I mean, a pretty sharp uptick in top line and profitability at the JV. If you can just explain us how does the full year -- FY '21 looks like? I mean is this operation sustainable right now? Or this was more of -- I mean, a quick recovery and pent-up in China?

T
Tarang Jain
MD & Executive Director

See, since April, we see a very, very strong growth, and the strong growth is -- because, see, when you achieve the volumes in China, you see the profitability, because the profitability is quite high in China once the volumes are there. It's not something we have seen in the last -- the past 1.5 years. Yes, we have seen lower volumes because of the China-U.S. dispute from October '18. But now, we see the volumes coming back. And I think maybe I will let Stephane a little bit kind of expand on this. But I mean, the way I see it, I think this demand will continue for the rest of the year. Stephane, you would like to add? Because you would probably have a better idea of the China market.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Yes. If we look at the China market overall, this is the fourth month in a row that China is increasing year-over-year. We've seen that the COVID crisis has changed a little bit the behavior of some customers. The one that used to take a big transportation, they don't necessarily want to be among other people. And the one that can afford, they decided to buy new vehicles. So we've seen that there is a strong demand right now. Every customer is pulling very nice volumes. And for the fourth month in a row, we see the China market increasing. For us, in a month from now, we are also starting to ramp up very important projects with Volkswagen -- the joint venture of Volkswagen in China, the one that we are already producing in Europe. And this will add incremental revenue also to our Chinese JV. So we see a strong year for China, and we think that the performance that you've seen in the first quarter will be consistent. We see already as the mid of August and will continue until the end of the fiscal year for sure.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

Okay. That's very helpful. Second question is on VLS. I mean, you mentioned July is almost 92%, and August, maybe because of holidays, it could be slightly lower. But on this, I mean, utilization level, what would be now our breakeven level? Maybe in terms of utilization level or in terms of revenues, where would be on the breakeven level right now, given we have seen a very sharp recovery again?

T
Tarang Jain
MD & Executive Director

See, presently, I think the level of sales in July and August, I think by 92% we meant compared to the previous year sales. Because July and August, like I mentioned, and like what you said also, I mean, there are holidays. There are about 3 weeks at least of holidays between July and August when there is a total shutdown. But having -- so obviously, the sales are at 90%, but they're still at a lower level in July and August. Not to say otherwise, because I mean if these OEMs are open, then of course, the sales would have been at a much this thing high level. Of course, at the level of sales we have now at about EUR 40 million, EUR 60 million there -- would be production revenue, not the tooling revenue. EUR 60 million. I think that, of course -- EBITDA is, of course, very much positive. But I think we would probably be a little bit off on the PAT side. On the PAT side, only what we'll have I'm talking about. We were a little bit off on the PAT side. But I think that -- I mean, when we reach a level of about -- between about EUR 67 million to EUR 70 million is when we're going to see a PAT-positive kind of a result.

T
T. R. Srinivasan
Group Chief Financial Officer

And if I can just say, Ronak -- I just wanted to add one point. Basically, July and August, if you see, are seasonally very small months basically, given the holidays. So this is not the benchmark month anyway. What we believe is basically in a normal month, we usually sort of, say, I think, EUR 75 million of revenue. And that's where we make a decent amount of profit after tax.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

No, I understood that. I just to understand breakeven...

T
Tarang Jain
MD & Executive Director

I think breakeven will come around -- after EUR 65 million, I think we can have a breakeven. But I'm saying breakeven on the PAT side.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

PAT level. Yes, yes. PAT level.

T
Tarang Jain
MD & Executive Director

Because we have a high level of depreciation and, of course, some increased interest in this period. That's the reason I'm saying on the PAT side, once things normalize in a certain way with higher volumes, we will see. But that's the level I'm talking about, roughly.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

Yes. And 2 clarifications on the VLS. Have you received any support from government in terms of fixed cost recovery or favorable loans? One is that. And second, earlier, when you spoke around in March, there was a thought process that the holiday season would be shorter given OEMs would be looking to recover production. So is that the case? Or the holiday season is similar to the last year's level?

T
Tarang Jain
MD & Executive Director

I think, see, in U.S., they canceled all the holidays, so we've seen a strong rebound in the U.S. market. And there, we are doing pretty well even in this period of time, July, August. But in Europe, I mean, for whatever reasons, I think they have continued, I think, with their holidays. So therefore, I mean, the sales -- and the larger play for us is in Europe. Almost 60% of our revenues, a little bit more come from the European region. So that's the reason that overall, our sales are going to be probably a little bit lower level because of -- because in spite of the COVID and all, I mean, they are still kind of -- continue to go on their holidays. So that's where we are. What was the other question you were asking, Ronak?

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

Any government support in terms of fixed cost recovery or loans?

T
Tarang Jain
MD & Executive Director

No, no -- nothing on the fixed cost. I mean, in the Czech and Poland, especially, I think we did -- I mean, they did kind of give us some kind of a reimbursement on the salaries of the people. So across the board -- and that was, I think -- in Czech, I think it was extended up to probably August, and it was for 3 months in Poland. That's where we got the major amount of fiscal incentive. And then, of course, the Czech banks also, they had -- they gave us a moratorium up to September on the repayment side for the loans and everything. So that was the other benefit which we received. That would be the extent of at least about maybe EUR 15 million to EUR 20 million of a rollover to -- for September. I think this was some of the incentive. And the incentive side of the incentive must have been around probably between EUR 2 million and EUR 3 million as what we got towards the salaries.

Operator

[Operator Instructions] Next question is from the line of Aditya Jhawar from Investec Capital.

A
Aditya Jhawar
Analyst

You gave a good sense on overall your ramp-up plans, but if you can split by geography. China, we are clearly seeing that it's already doing reasonably strong numbers. But in terms of ramp-up in production by geography, how you see in the next one quarter or so? It would be quite helpful.

T
Tarang Jain
MD & Executive Director

Yes, see, let's say, okay, Stephane, I think maybe you will be a better person to maybe answer this question.

A
Aditya Jhawar
Analyst

Just one small thing. The Y-o-Y numbers, I mean, when you a talk about the production ramp-up, it would be great if you do a comparison on a Y-o-Y number. And VW and Renault orders would only be in base, so Y-o-Y number would be -- give a good sense.

T
Tarang Jain
MD & Executive Director

Yes. So I think probably, Stephane, would you like to -- this thing, then I can probably add to that.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Yes. Okay. So I think we spoke about China. I think China is a very good surprise for everyone. And year-over-year, in China, we will be over last year. So we see strong volume right now. We see strong volume in July. And with the ramp-up of the MAN Volkswagen project that I mentioned, we'll be over last year in terms of revenue. In terms of North America, the volumes have been pretty strong, Tarang has already commented. The summer shutdown has been canceled with most of the customers. Tesla has been pretty strong in terms of demand for the Model S, the Model X. Ford has been strong. FCA has been strong. So we see revenue getting pretty close to last year for the full year. In terms of Europe, we are taking a little more time to ramp up the production at customers, like Renault or like GLR, really needed to reduce their stock before starting full speed the factories. The very good driver for us and boost for our revenue is Volkswagen group. Volkswagen is our #1 customer globally right now. They are launching 2 models. They are called ID.3 and ID.4. These are electric vehicles. They absolutely need this vehicle to be successful in order to reduce their carbon footprint overall. And they are boosting the market and boosting the launch on these vehicles. And we keep having request for volume increase on these 2 platforms on these 2 vehicles. One of the headlamp we produce in Czech Republic, one of the headlamp we produce in Poland. So this has a significant impact on our European business. So year-over-year, despite the profit impact, we see our European business, especially if they include Morocco as part of Europe, that will be slightly -- let's say, at the same level or slightly over last year. So in terms of year-over-year, this is all I would describe it.

T
Tarang Jain
MD & Executive Director

Yes. Just to add to that, if you were asking about Q2, talking about Q2, we safely see a 10% increase over the previous year in euro terms. So July, August, September, will be 10% more than the previous year in euro terms.

A
Aditya Jhawar
Analyst

Yes. That's quite encouraging to here. Stephane, you mentioned that in China, the new order of VW should come in, in the second half. And what about -- is there any delay in the order execution from Geely?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

No. The main impact for us is coming from the Volkswagen joint venture. So that's the platform I was describing, these ID.3, ID.4 vehicles. We have won the platform in Europe, we have won the platform in China and we have won the platform in North America. So we have already ramped up in Europe, and the volumes keep increasing. And now, we will start in production in China. North America will come only next year.

A
Aditya Jhawar
Analyst

Yes. But I was asking more about -- we had 2 big orders kicking in from second half of FY '21. That is on VW and Geely. So you mentioned about the second OEM that we are planning to start in second half. Is there a postponement of that order?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

No, it's not postponed. It's more towards the end of the calendar year.

A
Aditya Jhawar
Analyst

Okay, okay. And just one clarification. The incentive that we received in EU for the salaries, is it by way of kind of interest -- lower interest loans or we don't have to repay that money received?

T
Tarang Jain
MD & Executive Director

No, we don't repay. That's like a grant. The reimbursement of the -- a part of the salary cost.

T
T. R. Srinivasan
Group Chief Financial Officer

Up to a certain limit, sir.

T
Tarang Jain
MD & Executive Director

Up to a certain limit.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

When we are keeping the people at home, our operators at home, a portion of the salary is paid by us and a portion is paid by the local government. It's different from Czech Republic, Poland, but that's basically what it is.

A
Aditya Jhawar
Analyst

Okay. Now coming to India, as we are in middle of August, are you seeing some order backlog from customers? So are we still facing certain meaningful bottlenecks meeting customer requirements in India?

T
Tarang Jain
MD & Executive Director

See, overall, Aditya, you know that, of course, there is huge issues with getting skilled manpower, and also, there are issues on getting components from our suppliers. Even imports, to some extent, are an issue. But -- so a lot of suppliers are having issues with this. Not that we are not having issues. But in our case, we are not losing a single -- I mean, a single order. So we have been able to manage quite well in this period of time since I think the production started in a small way in May from various customers. Yes, the demand is ramping up because it's like a weak curve when it comes to definitely the Indian market, especially the 2-wheeler market, where we have a -- this thing, a larger play. But what we are seeing is that we are able to -- whether the share of business is there, we are able to supply more, which is good for us because we are able to manage our resources in a better manner across all of our plants in India. So we are able to kind of increase the share of business in this period of time. So it's been a positive for us, I would say.

A
Aditya Jhawar
Analyst

Okay. Okay. Just my final question. Srini, if you can give us a CapEx number for FY '21 and '22.

T
T. R. Srinivasan
Group Chief Financial Officer

Well, aside from --see, what I can give you an indication. FY '22, obviously, we have to go back to the prime rework, supply and et cetera.

T
Tarang Jain
MD & Executive Director

Yes. But I think I can step in here. See, this year, the CapEx -- the overall CapEx in India will be not more than -- I mean, new orders, I'm saying, will not be more than probably INR 140 million, INR 150 crores. Normally, we do INR 250 crores to INR 300 crores every year. And in the VLS business, it will not cross EUR 45 million. I mean, last couple of years, we have done EUR 85 million to EUR 90 million, but this year onwards, I don't think -- I think this year, definitely EUR 45 million. And going forward, also, we'll be limiting CapEx, where the larger part of the CapEx cycle has already ended, which was related more to the new plants, which we set up. So now, I think we are going to be extremely conscious on how do we kind of -- the thing, do our CapEx in the coming years. So even FY '22 probably, we will see what is the demand, but I don't think it will be probably more than this number. Because we have enough capacities also which, I mean, unutilized at present in both these businesses, which we need to fill up.

Operator

[Operator Instructions] The next question is from the line of Hitesh Goel from Kotak Securities.

H
Hitesh Goel
Associate Director & Senior Analyst

I have 3 questions. First question is on China JV. This quarter's performance in terms of EBITDA margin has been quite significant. What I wanted to understand is that even if you grow 20% this year in China JV, you will be at a revenue of INR 8 billion, right? And you had reported EBITDA margin of 15%, 16% at INR 12 million of revenue. So is this margin sustainable? Or what can be the margin levels, sustainable margin levels at these kind of revenues?

T
Tarang Jain
MD & Executive Director

I think -- I mean, I can say very clearly, I mean, you've seen the past experience in China that if you make the sales numbers like they are today, you're definitely going to be achieving this type of profitability. But that's the level of profitability which exists in the Chinese market. So going forward, I think that we have a higher level of sales, probably even these numbers could probably go up a little bit. So I am pretty confident of the sustained performance in China because things are very stable there, when it comes to all resources, and there's no issue at all. And I am very confident of the sustained performance month-on-month in the Chinese market. What do you feel, Stephane?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

I feel that the numbers we are seeing in terms of profitability, they are the direct results of the actions we have taken last year. Last year, we had a difficult situation. The market fell significantly, so we have adapted our breakeven point. We are adapting our fixed cost. And exactly what we are doing now in the rest of the world, we have done last year in China. And this is really the consequences and the result of the work that we have done last year.

H
Hitesh Goel
Associate Director & Senior Analyst

Okay. So INR 8 million, INR 9 million of revenue in China, the 15% EBITDA margin to continue. That is what I wanted to add. So I think you're quite confident in that.

T
Tarang Jain
MD & Executive Director

Yes.

H
Hitesh Goel
Associate Director & Senior Analyst

And sir, my second question is on depreciation. I have actually not seen such a high depreciation rate in the new company. Your depreciation rate on gross block comes strong 15%, 16%. I know you did an accounting change in terms of amortization. But how should we forecast this number now, because in 6 years, you're depreciating a gross block. So can you just talk about how should we look at this depreciation number?

T
T. R. Srinivasan
Group Chief Financial Officer

See, there are 3 things, 3 components to this depreciation, okay? The first component is the regular depreciation on the property, plant and equipment, the traditional, particular depreciation. It since has gone up over the last 2, 3 years because of all the investments we have made in the new greenfield facilities at Brazil, Morocco holdings, et cetera, which have all [indiscernible] capacity utilization is still quite low. So the revenue is not there at the level to justify the full depreciation charge. That's number one. Second part what we have, what is called -- we capitalize the engineering costs incurred in development of products, which are subsequently recovered through the pricing to customers. This capitalized engineering costs are then amortized to the life of the program, which is between 3.5 to 4 years. And the amortization of this engineering cost also comes under this line, depreciation amortization. This is the change which came when Accounting Standard 115 was implemented effective FY '18. The third component of the depreciation is the capitalized lease, which is, as for Accounting Standard 116, which came into effect in FY '19 -- sorry, FY '20. Sorry, my apologies, FY '20. Earlier, all operating leases, the rentals were charged to the P&L under operating expenses, whenever the lease rentals are paid out. Under AS 116, they are treated more like a finance lease. The entire future lease rental payments over the life of the lease are capitalized and then amortized over the life of the assets. Part of the cost goes into amortization and part of the cost, the discounted part, after future rental, goes under finance costs. So which is why you'll also see the finance costs has also gone up compared to last year. So -- and as a part of our strategy in all the -- most of the new facilities, we are not investing in land and building. We have taken the existing long-term leases. We only invested in plant and emission. So the capitalized value of those lease -- planned building leases, which are typically first period ranging from 10 to 15 years, this are capitalize on the balance sheet and amortized, which is a [ certain component I was referring to ]. So a combination of 3 factors is what you see over the last 2 years to 2.5 years. Depreciation and amortization cost going up. Apart from a little bit of amortized intangibles due to the acquisition we had in Turkey and the CarIQ and team concept equation in India and so on. So this is basically the thing. So going forward, the acquisition and amortization cost, billed amount should not go that much. But once we start utilizing the capacity to a larger extent, the revenue growth will be faster. So as a percentage, it will start coming down, so over the next couple of years.

H
Hitesh Goel
Associate Director & Senior Analyst

At the annual report and in other income, actually, your -- there is an element called net foreign exchange of INR 48 crores. So what is this? And also, I think you raised money at the end of the year, right, in March '20? That is why you see a cash balance of INR 1,000-odd crores in the balance sheet, but the interest income is very low of around only INR 22 million in FY '20. Am I right in my understanding?

T
T. R. Srinivasan
Group Chief Financial Officer

Yes. You're right. Taking the ForEx part first, it is basically the impact of translating the closing balance sheet. And currency -- the difference is a function -- in reporting currency, we have to restate -- and taking to the balance sheet so that we had gained last year, which we have put into that. And coming to the borrowing part, yes, actually, in the last 2 weeks of March, we drew down all the unutilized facilities, limits we had at various places, Czech, U.S., Morocco, Netherlands and even in India, and kept the cash. That's why you will see a large cash balance flow from the balance sheet as of 31st March. And since we drew down only in the last 2 weeks, the impact on interest cost itself in Q4 last year was very small. So the impact actually was in Q1 this year, so that's basically the story.

Operator

[Operator Instructions] The next question is from the line of Ronak Sarda from Systematix.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

Just follow-up on [indiscernible] contingent liabilities, there has been a sharp increase for corporate guarantees and guarantee for loans by, I think, VLS. Can you explain? I mean, is this something of more of a temporary nature? Or given our debt leverage position, has this been asked by the banks as such?

T
T. R. Srinivasan
Group Chief Financial Officer

Yes. So basically, this guarantee is given by the group holding company, Varroc Engineering Limited, to third parties, mainly in VLS, on account of 2 things. One is certain new borrowing facilities we had during last year. Like, we had a EUR 60 million facility at Netherlands level to fund our share of the CapEx in Morocco, Poland, Brazil, et cetera. The rest is funded through local borrowings. So that amount is guaranteed by the parent company. And like I said, we have also entered into some long-term leases for facilities in Morocco and Poland and so on, and Brazil. And those leases are also guaranteed by VEL. The reason we do that is to give a higher level of security to vendors, which are the third parties, which brings down the interest cost and rental cost. So that's the comfort they have. So it's a product of overall listing. And yes -- and as per the whatever RBA limit we have, we are well within the RBA norms of 4x the network kind of a thing for profit guarantee. So that's it.

R
Ronak Sarda
Vice President of Auto, Auto Ancillary

Got it. So the letter of guarantees for loans for third parties, that is for the leases, which is a higher amount, given the new CapEx of INR 790-odd crores or...

T
T. R. Srinivasan
Group Chief Financial Officer

Yes. The one increases during the last year would be both combination of borrowings as well as the leases, so both.

Operator

The next question is from the line of Pankaj Bobade from Axis Securities.

P
Pankaj Bobade

Can you please throw more light on the Turkey acquisition which you have done? And secondly, I would like to know that are you -- would you be focusing only on lighting as a segment or we would be adding new products to our product basket?

T
Tarang Jain
MD & Executive Director

On the Turkey side, of course, Stephane will explain to you about the future of the Turkish market. But I can tell you one thing is that we are going to be focusing largely in the lighting business only. This business, when we had acquired it, was doing small lands. And now we are going to be adding headlamps and rear lamps here. Going forward, there could be also some more of electronics, which we are also probably planning to kind of pursue as a business unit. But having said that, I think probably, Stephane, you could add on the reasons why we have modeled the Turkish market and its potential for us.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Yes, yes. So we made the acquisition of the Turkish company, Sa-ba, back in July 2018. This was the second-generation owned by 2 brothers. The revenue at that time was about EUR 30 million, EUR 35 million. This company was focusing on what we call small lighting, so everything exterior, except the headlamp on rear lamp. With our technology, we are bringing the possibility now to this footprint in Turkey to produce also headlamp and rear lamp in Turkey. This is a market producing about 1.5 million vehicles a year. We had only 2 competitors locally, and there was not much competition. So the customers were encouraging us to make this acquisition. We have been very successful in growing this business. We have an order book now that's showing above EUR 110 million, EUR 120 million of revenue. One of the marquee projects that we won, one of the highlights is the Ford transit. We won the headlamp, the rear lamp, the stop lamp. And this is a commercial vehicle, a long-term project, very stable volume in the range of 250,000 vehicles a year. In addition to this, you may have seen that Ford and Volkswagen, they have made a partnership in the field of commercial vehicles. So there will be, in addition, Volkswagen version of this commercial vehicle coming. And the lamp should be pretty similar or maybe common. So this should be ours to lose, this should be our really additional volume that we could take. So far, we have been very successful in growing this business. We are happy about the team we are putting, the way things are ramping up. And one of the targets that we had also was to get really more sticky with the customer presence. So we thought it's really panning out with FCA. We have a good momentum with Renault. There will be the Renault CLIO project that's coming for request for quotation at the very end of our fiscal year. That's an interesting platform. And then thanks to Turkey, we opened the doors of Hyundai. So we won our first business with Hyundai roughly a year ago. Two months ago, we won a second business with Hyundai and the Hyundai Accent in Turkey. Thanks to this, now Hyundai is considering us as a global partner, also including India. So this -- so far, the strategy that we have put in place is executing and is panning out well.

P
Pankaj Bobade

So as you mentioned that you'll be specializing only in lighting segment. So what all new additions could be brought to bring growth going forward? Would there be any technological headway or anything like that?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Yes. Maybe I was not clear enough. So this company was producing what we call small lighting...

P
Pankaj Bobade

No. I'm not talking about -- at the group level. I'm talking about for the group level -- not Turkey's company only.

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

Okay, okay. So at group level, lighting remains our #1 focus, exterior lighting, mainly headlamp or rear lump. We continue to play an important part in the increase of technology content of the products. I think Varroc is really one of the main players trying to convert right now the halogen technology into LED. We have some very good products, low-cost LED systems that are really able to replace today halogen in most of the developed markets. So that's really a trend that -- where we see -- we don't see yet the upside. There continue to be opportunities there. Then I think in previous calls, we have also mentioned the fact that we -- in our headlamps and rear lamps, we are integrating more and more of the new components for ADAS. So we see a trend where we are able to integrate in our headlamp and rear lamp radar or LIDAR or camera or sensor. So this is becoming more and more real. And this will generate also some additional revenue for us. So electronics, as a consequence, is becoming more and more important. We are already developing all our electronics ourselves. We have already a strong partnership with Ford to develop their ECU, LDM, HCM. We see ourselves growing in the field of electronics, growing in the field of control modules, where we have this engineering expertise, where we have no -- good manufacturing footprint in India and our joint venture in Romania for Europe. So this is the other additional revenue stream that we see developing. But clearly, lighting will remain and is remaining our #1 focus.

P
Pankaj Bobade

So what is the share of LED and halogen on global level?

S
Stephane Vedie
President & CEO of Varroc Lighting Systems

On global level, I think we need to make the distinction between headlamp and rear lamp. But basically, on the headlamp side, LED penetration is in the range of, I would say, 65%. On the rear lamp side, we should be in the range of 75% going forward.

Operator

The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

N
Nagraj Chandrasekar
Vice President

Congratulations on a good performance, especially with the recovery in China. Just on Slide 8, the debt situation update and the slide for FY '21 from the June and INR 3,410 crores number. How much of the decline to your projected INR 2,600 crores is going to be from a normalization of working capital? And how much of it will be from cash profitability? That's number one. Number two, if we stay at current levels of utilization that we are for all our markets, not for 1Q or the June levels, but the current August levels, what sort of EBITDA should we end up making for FY '21?

T
T. R. Srinivasan
Group Chief Financial Officer

Okay. In terms of the [ projection ], it's difficult. We haven't made that kind of a split, but roughly, let's say -- for the rest of the year, let's say, we do about INR 4,000 crores revenue per quarter kind of a thing, roughly, let's say, and around 10% EBITDA or slightly more, right, so about INR 12,000. So yes, I mean, that will be including China. So we need to probably take out China. And yes, probably about -- yes, close to INR 1,000 crores in terms of EBITDA, we should be able to do in the 9 months. That's what we are expecting. So that's -- so less tax and interest would be the accretion to cash -- so out of that. So let's say out of that, at least, INR 500 crores to INR 600 crores should be the cash profits, I would expect, roughly speaking. And then the rest should broadly come through working capital. And of course, there is also some, I mean, CapEx. So while we have controlled, as is -- [ as we were saying ], we will -- CapEx will be upper half of the last year or strictly more, and we are looking at probably INR 600 crores thereabouts for the full year. So probably, we'll do about INR 400 crores, INR 450 crores for the rest of the year, let's say, 3 quarters to go. So that will be the outflow on the CapEx account. So yes, if I had just add up these numbers, let's say, yes, about INR 700 crores thereabouts improvement should come from the working capital side, I would say, roughly. So...

N
Nagraj Chandrasekar
Vice President

Understood. And the INR 500 crores to INR 600 crores cash profit would exclude China?

T
T. R. Srinivasan
Group Chief Financial Officer

Yes, yes, because China, we consolidate only at the PAT level. So we are not counting that cash. And that cash is also not immediately accessible, except through dividends. So...

Operator

The next question is from the line of Apurva Mehta from AM Investment.

U
Unknown Analyst

I just wanted to know -- '21, we understood everything. Now what about '22? Can you break up the '22 sales, what we are pressing like VLS, India and China to some up where we can go in '22? What is your rough estimate on everything?

T
Tarang Jain
MD & Executive Director

Yes. So I think that when it comes to the VLS business, I've already said that we'll be EUR 1.2 billion, including China -- including the China market, of which EUR 1.1 billion will be the production revenue, which we'll get out of our customers -- I mean, through our various plants and the capacities we built. EUR 100 million of that is, of course, the tooling revenue, which we do every year. So EUR 1.2 billion is what we expect in FY '22. And in India, I think we expect a revenue of at least about INR 4,500 crores in the coming year. So it will be EUR 1.2 billion, which, maybe if you were to multiply by roughly INR 85, how much is it come to? So EUR 1.2 billion, EUR 2 billion, can someone just tell me?

U
Unknown Analyst

That's roughly INR 9,500 crores.

T
Tarang Jain
MD & Executive Director

Yes. So INR 9,500 crores, and you can take another INR 4,500 crores. So this is, I would say, INR 14,000 crores is what something we expect to do in the -- I mean, in the coming year. We're obviously clearly a double-digit profit.

U
Unknown Analyst

And the EBITDA margin will be upward of 12%?

T
Tarang Jain
MD & Executive Director

Let's see, but it'll definitely be more than 10%. I don't want to give a number at this stage.

T
T. R. Srinivasan
Group Chief Financial Officer

Maybe around 12%.

T
Tarang Jain
MD & Executive Director

It'll be closer to probably 11%.

Operator

I now hand the conference to the management for closing comments. Thank you, and over to you.

T
Tarang Jain
MD & Executive Director

So I feel that -- I would like to thank everyone for their questions. And also thank all our -- all the investors who have stayed invested in our organization in spite of facing tough times, especially in the last probably 15 to 18 months. I just want to kind of just say that the India business, of course, we have grown. We are pretty stable and everything. But the lighting business was a business which we acquired it in 2012. And of course, in 2016, in 2017, we kind of decided that we have to be a more relevant player in the lighting business, for which we had to make substantial investments to become a more relevant player in the lighting business, increase the market share with the top OEMs in the world. To become more relevant, yes, that's been a vision of the organization, to be a bigger player. Yes, there have been some hiccups along the way in the last 1.5 years. But I just want to say that probably the people to stay -- I just want to reiterate that please -- this thing, have the confidence, and let the confidence be -- remain in the organization. We are fairly confident that with the cycle coming back -- the volume cycle coming back, I think we'll deliver on the results also in VLS. And we will see that in the coming years that whatever investments we have made will bear fruit. So I'm pretty confident of this business. We're in the right business. Please do not think that there is a very high R&D cost here or it's an unviable business, the lighting business. It's not true. I mean, lighting business is one of the most profitable businesses in the world, and we are in the right business. And as we go along, we will produce the results. So with that, I just want to kind of thank you once again, and please stay safe and healthy in these special times. Thank you.