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Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q1 FY '22 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.Varroc Engineering Limited's management is represented by Mr. Tarang Jain, Chairman and Managing Director; along with Stephane Vedie, President and CEO, VLS business; T.R. Srinivasan, Group CFO; Arjun Jain, President and Head Electrical and Electronics business; and Nitin Kalani, Head of Treasury, FP&A and Investor Relations.I now hand the conference over to Mr. Tarang Jain. Over to you, sir.
Thank you. So good evening, everyone. I am Tarang Jain, and I would like to thank you for joining the Q1 FY '22 Earnings Call for Varroc Engineering Limited.I will start with the India business. The first quarter of FY '22 witnessed country-wide lockdowns due to COVID-19 second wave. The Indian 2-wheeler production volumes in the quarter declined by 38% over the previous quarter, and the passenger vehicle by 24%. Our revenue in India declined by 23% Q-on-Q, and our EBITDA in India was at 7.7%.Moving on to our global lighting business. The semiconductor shortages intensified, leading to several passenger vehicle OEMs shutting plants or reducing volumes. Both Europe and North American market declined quarter-on-quarter as OEMs had to work in a supply-constrained environment while consumer demand continued to be strong. This led to a number of our production lines shutting for a major part of the quarter, with others running at substantially low utilization. Our revenue in the quarter continued the declining trends seen in the previous quarter, with the Czech Republic revenue decline intensifying at minus 21% Q-on-Q, while our Mexico revenue further declined by 6.5% over the previous quarter. The plants in both these countries account for more than 75% of our overall wheelers revenues. As a result, the EBITDA margins in the lighting business declined sharply in the quarter due to the significant underutilization seen across our plants.While the current demand for semiconductors has continued to outstrip supply, we continue to hear from the customers and suppliers of semiconductor capacities are being added. These additional capacities are expected to ease the supply situation gradually in the second half of FY '22, and this is likely to improve margins from Q3 onwards in the VLS business.The revenue ramp-up to the desired level at a newer plant in Poland and Morocco, in addition to certain other improvement actions, will help us reach closer to the EBITDA breakeven performance in these plants. The implementation of project RACE findings arising from a diagnostic exercise on improvement opportunities are currently in progress, being conducted is expected to start this quarter onwards. This will help us improve the performance of the European plants after 6 months.The depreciation and amortization costs have started to stabilize during the quarter, Q-on-Q decline of 7%, as the CapEx intensity has reduced since FY '21, while the finance cost has declined year-on-year to the reduction in the gross debt level over the last year.Regarding the order bookings, I'm happy to inform you that our India business has been able to secure an overall net business wins of roughly INR 2.8 billion equivalent annual revenue. And most of these orders are new business wins. Our VLS business has also been able to secure orders worth nearly EUR 100 million overall in the initial 4 months of this financial year.With this, we are happy to take your questions now. Thank you.
[Operator Instructions] The first question is from the line of Basudeb from AMBIT Capital.
Yes. So nothing much to highlight about the results. The numbers itself speak, as you also mentioned. So the only thing what I can ask is if you can take us on the parts ahead maybe September quarter should also be similarly bad because of chip shortages is continuing? But how [ Bain ] consulting work is going on? And how do you see the numbers feed in second half of the year and next fiscal and overall fundamental, if you can highlight?
Yes. So yes, I mean, you're right. Actually, the numbers really speak for themselves. And of course, I think that we have been on a recovery path, where it comes to the operations of VLS over the last quite a few months, including in Q4 of the last financial year. In fact, the Project RACE also, I'll come to it a little later. The Project RACE also had just started a couple of months back. The diagnosis started, and we'll be addressing a lot of areas in the Project RACE, whether it's to do with our suppliers or our plant operations or even a little bit at the -- I mean at the customer end.Now this -- see, this quarter, the June quarter, what has really happened is that because of the semiconductor shortage, one thing we have not been able to do is really optimize our manpower cost and also our levels of inventory. The reason is that the EDIs in the system from the customer side has been to our budgeted levels. So basically, no OEM today is willing to reduce their requirements in the EDI system.So what happens is, that we are planning for whole extra resources, whether it's manpower or materials, to be able to meet these -- I mean these budgeted volumes every month. And what happens is, when we come closer to the date of supply, week on week, we see that an EDI is not there and the lifting is not there with the customer. Because no OEM, no customer is willing to reduce their OEM. Because if they reduce that -- I mean reduce the EDIs, the reason is that they reduce the EDIs, then that is like accepting that they will -- that we'll be able to cancel some of the electronics on the lights to the competition. And that's what we are seeing in this quarter.But now what we have decided is that this -- because the recovery in the semiconductor market is going to be gradual because the issue is not one of demand. The issue is one of supply on the electronics side, and this recovery will be gradual. It won't be a V-shaped curve like we saw last year for the point of view because that was more a demand-related issue because of COVID, not really a supply-related issues.So now we have started already kind of optimizing the cost overall at a plant level, reducing those costs, the overheads also. And also, we have -- we're also looking at how the recovery will take place. We are also optimizing our overall global district overheads also. So not only the plant level, but also the globally -- so I think that even in this quarter, I think we will see certain impact, a positive impact of those reduction in cost.But this is something we have been doing only from August onwards. We didn't do it in July. We were waiting for another one month, but we are not so -- basically these steps have we started taking only from -- I mean, from August. So July and August, we will see revenues also because of the holiday season in Europe, we will see, of course, subdued revenues. But from September onwards, we are expecting the revenues to go up. Because the holiday season is over, and we see the demand actually increasing, which will then continue.Now we don't know to what extent. We don't know to what extent that the revenues will increase. But definitely, it will increase. So -- but in the North American market, we see an increase in volumes from August itself. So whatever we have been experiencing in the last 4 months in North American market is changing from the month of August, but not so in the European market. That is going to happen more from September onwards.China also -- I mean we have seen that because of the semiconductors, we are impacted in a volume, not from a major customer there, but some of the other smaller customers who are not able to produce or lift the requirements because of semiconductor. So to answer your question, I think we -- I mean I'm optimistic that we will see better results than what we've seen in Q1 and Q2. And also because of the India piece -- for India, we have returned to a normal cycle from July onwards, and that should do well in August also, we see a similar kind of a volume. So we do see India coming back to normal, which will help the results. And we see also better results also in VLS in this quarter.And then, of course, we will start seeing this project we are doing with the international consulting company firm. So we see the results now. We also see the results, that quick wins starting to also come in from this exercise from the third quarter onwards. So the thing is that we have got many investments, including in all our new plants, where we've not been experiencing the level of sales for the last couple of years and the new plants also.New plants also, we are at about a utilization of not more than probably 50% still also because of the semiconductor. So we are hopeful that with the semiconductor -- recovery of the semiconductor supplies, I mean, that whatever the revenues we increase, it will be on a better cost base, which would help our margins. So still, our outlook is that, at a given level of revenues, we should perform better. And -- but coming to a normal level of revenues, I think probably we'll have to probably wait till the last quarter. But I don't see that we come into a near-normal recovery in the VLS volumes before the fourth quarter. So that is basically listing the understanding.But to reiterate, I remain confident that we will recover and return to the double EBITDA margins. What we need today is basically the revenues coming back also in our new plants where we have made substantial investments in the last 3 years -- over the last 3 years.
Sir, if I look at the numbers, the decline in revenue, definitely, it is, but the percentage decline doesn't look optically that any basis compared to EBITDA margin coming down from the low levels of 5%, 4%, even now negative level. So does that mean that cost of sourcing of semiconductor, et cetera, was elevated for you?
I'm sorry. Can you repeat the last part? I didn't -- I couldn't get it. There was some noise.
Concerning the costs of sourcing of materials were elevated for you because impact on margin ideally look more from a cost of sourcing or logistics, rather than near revenue decline?
So if you talk about the VLS business, we have -- so our raw material costs are below materials is around the same. There's been no increase as a percentage to revenues over there. The -- see, what has happened there is that, like I said, the major cost is -- the biggest cost is the bill of materials. That has remained the same, where we have not been able to flex our cost is the manpower cost. So manpower costs are not at all, flexed including in India. In India, of course, we didn't want to kind of flex the cost because we thought it was a temporary measure. And if we reduce all our contractual manpower, it would be difficult to get them back in the short term. And we have suffered the last year also because of that.When it came to the [indiscernible] like I mentioned earlier was that the customers were -- I mean, right from April onwards, the EDI in our portal, that means that the requirements are very high at the beginning of the month, which had disappeared during the month, which resident at 30% less revenue overall. And this was a phenomena we were seeing from all the OEMs, all the OEMs over the last 4 months. So now we have decided, and that's the reason we could not flex our manpower cost. And because we could not flex the manpower cost, that's what has affected our EBITDA in a big way.Otherwise, our EBITDA would have been much higher if we have -- would have flexed it like we did in the last year. In the last financial year, when we heard of the COVID, we immediately got into action, and we reduced the manpower. But this time, we could not do it because the requirement the customer have not reduced in the system. They're only reducing til we came to the -- close to the supply situation in that week. So that was the problem.And -- but now from August onwards, we are fixing that cost. We're reducing the manpower costs, I mean, so that we can probably not have a kind of result we've had in the first quarter. So the basic difference has been the manpower cost in VLS over Q4.
So any outlook on the reduction in breakeven revenue for VLS on this current level? EBITDA level breakeven?
So see -- the breakeven is something we are working on. I don't want to give a number. See, earlier, I used to always probably feel that we can be a breakeven at about EUR 65 million to maybe EUR 70 million at that level of revenues per month, EUR 65 million to EUR 70 million due to have one that we should try to breakeven. And that's something which is our objective as we move forward because we want to now reduce the fixed cost on a permanent basis and also if you go back to EUR 90 million, we don't increase that fixed cost. So our objective still is, in the coming months and also to the Project RACE, that we optimize the overall overheads, which includes the big manpower, for there has been other overheads, other contracts. So there are other consultants.So the other -- so we are looking at all measures to see that this breakeven, like you correctly said, goes down to between EUR 60 million to EUR 70 million that we are at a breakeven point. So that is basically our objective.
And last question from my side, sir, in the presentation where you highlighted the increase in debt from March '21 levels to a peak by September. And then again, normalizing back where end of fiscal '22 the number is slightly higher than fiscal '22, not significantly. So that estimate is factoring in the whole weakness of Q1, Q2 numbers. And at the worst-case scenario where we are standing all those things are built in that estimate, sir?
Yes. So we have built all that in the estimates. We also built in some improvements in the second half from the Project RACE, which we expect some positive results. So that's also built in. And so we feel fairly confident on that debt number. I mean, at the peak at the moment, going down as we move forward because we do see a recovery in our volumes from September. And gradually increasing quarter-on-quarter, we do see an increase. We do see a better supply situation on semiconductors. So we are pretty hopeful so improve in sales and at the same time optimizing overall costs on a permanent basis at a plant level and at a global overhead level. So we feel comfortable of our net debt going down, I mean, to the levels which we are showing March end.
And one last question for Nitin, if I can chip in, how much of that INR 28 billion gross debt on the presentation is short-term loan payable, which is in the current liability of balance sheet?
So are you asking about the total short-term debt, what is there out of the total debt quoted? Is that the question?
No, but debt repayable in this year, which is not in the gross base balance sheet number generally. It's closing number was INR 1,240 crores in FY '21.
[indiscernible]
Pardon?
So this includes all current maturities as well as long-term maturities. This is all...
Just trying to understand the quantum of current maturity in this INR 2,800 crores.
Current maturities are 9 -- sorry. Give me a second.
Pardon?
One second.
Current maturity, as we said, within the INR 2,800 crores.
Yes, current maturities are INR 685 crores.
And it was INR 1,240 crores end of fiscal '21?
Yes, the INR 1,240 crores because of certain debt getting classified as short term due to financial covenant breaches.
Okay.So now it is...
[indiscernible] INR 685 crores.
So that is now down to INR 680 crores.
Yes, that is, obviously, we don't expect any of the banks to sort of collect the debt basically, so it will be -- it is only purely the sort of debt maturing in the next 12 months. It's classified as 12 maturity.
The next question is from the line of Ashutosh Tiwari from Equirus Securities.
Yes, sir. So if I look at the volume number that we have shared for industry, like say, North America was down 8% -- sorry, 11%, Europe was down 8% quarter-on-quarter. But our decline is almost 16% quarter-on-quarter in sales in the year. So what's the reason why we underperformed industry in this quarter? And also related to that is that -- is it that for a particular model OEM takes from two suppliers and maybe they gave difference to other suppliers when volumes are lessened. Is that also a possibility?
No, no. So see, for all lamps, there is a single source only. It all depends on which programs you are playing in. And so what the OEMs are doing is that, when there's a -- because of the semiconductor shortage, they are deciding which programs they will use the semiconductors. So basically, the best-selling programs is where they will use the semiconductors. And that may be at the cost of certain other programs. So for example, you're absolutely correct. Let's say, today, we have got two customers in Europe. Because see Europe -- and like I said, I mean, Czech and Mexico are our two biggest regions. I mean -- they control, I mean, almost 3/4 of our revenues. And here in Europe, we have seen that two customers, two of our big customers have declined. I mean customer A declined overall by 65% because they were not producing the volumes of those cars and diverting it to the better selling cars. Similar thing also happened with another customer in Europe, but they were not able to procure the semiconductors and they were 31% down. When it comes to North American market, we have seen that one of the customers, one of our big customers has been down almost 60% to what we had kind of budgeted over there also because there have been -- I mean we're supplying to the premium models, but they have been diverting it to the more economy models, which have been which for them are more important at the moment.Then there's another one customer, a global customer who is down 39%. So the problem is that it all depends on which models you're in. So here, there are 4 of our customers, I would say, in the European and the American regions who have been more impacted, I mean, for us because of the certain models we are playing in. But then there are two -- but there are two other bigger customers who have been able to manage the semiconductor as well, and they have not been so impacted in this first quarter. So it's been like that also.So you're right that it is just that our product mix has been unfavorable in the situation of semiconductors shortages. And we have actually, as a company, suffered more on those models because of that reason.
Okay. And even in China, when industry has grown, we have declined, so -- and declined over 27% quarter-on-quarter. You mentioned the smaller custom...
Yes. So there also, our major customer has done well. I mean it's -- but then all the -- so our biggest customer has done well, but all the other customers, they have not done so well. And that's where the impact is more there on the volume because of the others, not because of our biggest customer. They have done well.So the people who are the biggest in the market are able to control the semiconductor supply in a better way for themselves and also for their suppliers. And they have been less impacted or a little impacted. But some of the people who don't have that level of strength in the global marketplace, they have suffered in volumes. And programs that they are playing is where we have then also suffered to that extent.But what I understand in the market is, especially what I know in the market, especially in Europe and all, most of the competition and also in the months of June and July, where we will do electronics, has suffered in quite a big way. At least 20%, 25% as a minimum. For the months of June and July, we have seen -- we see August.
And is it because of their semiconductor shortages are also at our end, because we also need electronics, we also were not able to serve enough quantity. Was that also a reason or that is not the reason?
No. So for us, actually, whatever we have been asked to supply, we have been able to manage. I mean we have our own, I mean, CFT team. And we are managing to get the electronics for the help -- sometimes with the help for the customers also. They're also helping us. But I think the bigger issue in the semiconductor is more the bigger players in the electronics. They are not able to supply to the OEMs. And there into the bigger product, the ADAS products, the other things. So the volumes are not decided by people like us. The volumes at the OEM have decided by the bigger electronic players. They are the ones who are deciding the volumes of the OEM and for a particular program, they supply to.
And is there risk that those models were already volumes are less than we are supplying, they will not go back to normal? And that it all whenever things normalized they already are low-volume models?
No, no. So actually, I mean, relatively they maybe lower like last year, if you see the last year when the recovery happened. I mean -- and you have seen that, okay, our performance was not good in Q3, Q4, where VLS is concerned, but the volumes are strong, and the volume was strong across, mostly, largely even -- I mean the models where we are suffering today from April, those models still did well. Maybe they were relatively a little bit lower than the more stronger players, but they still did well. So it was not a question of because demand for all these models is good even today.The issue is not of demand. The issue is that how the customers are allocating the electronics. That is one thing. And secondly, also, what the bigger electronics players in the market, I don't want to name them, for which models they are also able to supply or willing to supply. So therefore, the big electronic guys are also aligned with each OEM. But then it all depends in the end between them what they decide. So that decision is not with suppliers like us, it's with a much bigger electronic players with the OEMs.
Okay. And lastly, this Czech plant, which is almost like 55%, 60% of your sales. And we have seen decline because this [ 300 ] shortage over the last two quarters. I would imagine that the profitability would be much the highest in this plant. So for our recovery and profitability, second, more critical and probably a more core Poland plant ramp-up. Because I think when we saw a decline in volumes for these two plants, we saw maximum impact on the profitability. Are you seeing a trend of Czech recovering in September, basically? Because that is more critical. Am I thinking correctly over here?
Yes, yes. No, you're right. See Czech and our Mexico plant -- Czech and Mexico is 70%-plus of our revenues. And I can tell you here that these plants from a cost angle are very well optimized. So the sales return in the Czech there are two plants Rychvald and Novy Jicin and then our Monterrey plant, when the sales come up, you will see the margins. I mean, so here, there is -- it is to do with revenues only.The problems we've had in the last 1.5, 2 years has been where our PAT has been impacted more has been because of a new plant, where the investments have gone in largely in the last 3 years. That's why we have been more impacted on PAT side like and majorly large, largely more the Morocco, Poland, a little bit of Brazil, Chennai, that's where we've been more impacted on the PAT front, where they contribute to a bigger -- a negative PAT performance.So here, if we are able to achieve a normal sales for which we made investments, we can really have good results and results -- and at the right level of sales, a normal level of sales, I think we can also cover some of the losses which we make in Poland and Morocco. But we have not seen the level of sales yet at the moment. But I'm just saying, if it happens now, whenever it happens now, we will see that strong recovery overall as a wheelers business. So I'm just going to, say, the Czech and Mexico, get the normal sales, we will see a strong performance.
I got your point. But actually, when this Poland, Morocco was lower, say 9 months of '20 or '19, we still around 8%, 9% margin. Only even these two plants, we are seeing the ramp-down in production, we are seeing a bigger impact on EBITDA margin. So...
So you're right.
If they go back to normalcy probably...
Yes. So I think -- so if they go back to normal on the EBITDA side, you will see that level what you're talking about once Mexico and Czech are at that normal level of revenues. That's for sure.
The next question is from the line of Aditya Jhawar from Investec.
In terms of VLS, what should be the share of revenue coming from EV? I understand that the North American EV manufacturer is about 3.5%. So overall, what would be the share of EV revenue for VLS? Number one. Number two is that Stephane, if you can still highlight that which are the EV platforms we are present in? That is the first question.
So basically, the overall share, like, say, our overall share in the lighting business was 5.6%. But EVs will be 11% of what we last know. About the EV programs, maybe, Stephane, you would like to kind of share some of this EV programs we have presently or what we have won also?
Yes. So...
Tarang, you mentioned 11% market share. Is it? I was asking about...
[indiscernible] market share of our revenue. 11% of -- no, no. Market share -- are you asking about -- revenue 11% of revenues or market share in the EV segment?
Revenue contribution in EV.
So revenue contributors of EV -- so revenue contribution from the EV is 11%. And I think our percentage of the EV is 14%.For the overall EV market. Yes, Stephane. Sorry. Go ahead.
About the main platform, so I think we discussed in this forum in the past, but you should be aware that we are the supplier of the front lighting with LED matrix technology for the ID.3, ID.4 for Volkswagen. This is becoming the #1 selling electric vehicle or electric platform in the world. So we are the supplier for Europe. We are ramping up right now in China, and we will be launching very soon also in North America for their plants in the U.S. So this is a major platform.Then we have a program that we will be ramping up soon in North America for Rivian. Rivian is one of these new electric vehicle start-up. Their main shareholders are, as you may know, Ford and Amazon. So pretty solid business plan, and we are the supplier for the [indiscernible], their first vehicle for the full rear lighting.We are the supplier for [indiscernible] ZOE. This is the highest selling Renault electric vehicle, but the replacement of the Renault ZOE the project code is PCB. We are also on this vehicle, and the launch will be later this year in our Moroccon factory. We see volume expectation from the customer on this PCB that will replace Zoe much higher than the Zoe. So Renault is becoming very bullish on electric vehicle as well.We are the supplier of the Mustang Mach-E we do the rear lighting on this vehicle. So Ford cannot sell enough of these vehicles. There is a long list waiting list, and they are running requests with suppliers to increase even capacity so that we can increase capacity going further. We are in the development for electric platform for vehicles in North America, EV platform. So this will be launching in two years from now. And then historically, we have always been present strongly with Tesla Model S, Model X. And we have also some content on small lighting in Model Y, Model 3. We have the business for the small lighting Model Y, Model 3 in China and also in -- for the Berlin factory. So still pretty strong with this important EV customers.Otherwise, we are also present with JLR on the iPad, the only electric vehicles that JLR today. But as you know, JLR is showing strong ambitions for electrifying their full lineup. So we see opportunities coming up for us.And we are on the vehicles like [indiscernible] Fiat. We have on the Mercedes EQA with Daimler. And then several of our programs in China also EV vehicles with Changan, for example. So it's not an exhaustive list, but that gives you a good idea of a well-balanced portfolio of customers. Well balanced portfolio of successful platforms right now. That's why we have such a strong market share on EV lighting right now.
Yes. That's really very impressive. Stephane, Awkward Tesla Cybertruck, I mean, clearly, Tesla decided to continue supplies for Model Y of Model 3. Any incremental update on Cybertruck?
Nothing for the moment.
Fair enough. As far as moving on to the India business, if you can talk a little bit about our EV product development. So currently, what are the products that we are supplying to Bajaj Cetus? And is there any incremental discussion or update on traction with other OEMs in India on EV for 2-wheelers and 3-wheelers?
Yes. I think Arjun may be he is in a better position. I think he can explain in a better way. Arjun, can you explain?
Yes. So I think with Bajaj, on the Cetus, for example, all the electrical -- electronics on the vehicle. So the motors, motor controller, the telematics hardware, the backing management system, the onboard charger and also the vehicle control unit. We will manufacture all of these. And I think it's an SOP that we expect imminently at this stage. So this month or the next month, maybe. Further, I would say in respect to other OEMs, I think, as we said before, we continue to speak with them. We continue to have increasing full conversation.And I think by the time we speak next, I think we should have some significant opportunities to potentially discuss also. But really, I think we're in touch with all of the elation OEMs. We are in touch with all of the start-ups. But once we get these products out into SOP, I think we should have a level of development capacity also available to start taking more new business also.
So Arjun one question on this, so what we understand is that Bajaj's specialty is these guys have kind of developed their IP around some of these products. So if you are engaging with other customers, what about our technical competence to develop a separate solution for them? Is that CapEx-intense? Do you need technological ties to develop a traction motor controller because what we understand that Bajaj Auto has shared some of their IP of traction motor and controller. But what would be our capability to attract other OEMs?
Okay. So if you have the -- overall in the industry, right, different OEMs are taking a different part over the development of these product lines, right? If I was to break up really the product life cycle into design, development and manufacturing, almost everywhere we will do the manufacturing, but different OEMs and different perspectives in terms of where they would like to drive design, where they like to drive development. So from that perspective, what I would say, especially on motor controller, the motor -- the motor controller and the telematics. We have the ability to drive a full-service supply. And we have the ability to drive a full service supply.These are the product lines that very early on we are driving engineering investment into also. So again, what I would say is, as we go to the future, right? I don't think we have a very rigid mindset that we would like to -- for any particular vehicle model, we need to own the IP of the design. So where we're flexible, if the OEM would like us to only IP design and provide our own solution, we are more than capable and we are ready or ready today, I would say.But at the same time, right, if an OEM would prefer to, let's say, develop a controller themselves and outsource the development and manufacturing, I think we're very open to that as well. Further, I would also say there's a lot of IP involved in manufacturing there is -- to be honest, the technology on the motor, the technology on the controller, just simply the components and the way it is assembled. This is not ready to [indiscernible] too many places in the world, let alone India. And when I say in the world, I mean in the automotive industry.So from that perspective, we, let's say, manufacturing investment already in place we feel very confident that a significant lot of value that we have to add [indiscernible], whether traditional or start-up EV.
That's great. Helpful. Just as a final question, in case of subtraction motor, considering of the government's requirement of having OEMs locally source of product, if you can help us understand that what could be the pricing difference of a comparable traction motor when a company like Bajaj is sourcing from all sorts of international -- from Europe? And similarly, if another OEM is procuring from China, what would be the pricing differential of the opportune Indian manufacturers?
So okay. I'll answer that question in two stages, right? I would say the first stage is, one, I think there is an import duty also on getting traction motors from -- importing traction motors into India, and I think that's at around 15%. So that is straightaway a benefit that we enjoy. Secondly, from a -- in terms of where the cost really lies, right, I mean, in terms of manufacturing costs, really the conversion cost, I think India is, as a geography, is extremely, extremely competitive. So from that perspective, I don't think anyone in any other countries is really going to enjoy an advantage, even labor rates in China, for example, are much higher than India.From a BOM standpoint, I agree -- from a BOM standpoint, we have an ecosystem that is already ready and producing millions of, let's say, electrical parts for the IP engine. Now of course, there is a step-up to start making the BOM components for a traction motors. But I think that is a step up that we have quite successfully driven already the first SOP that we will have, I think will really kind of reflect that.So in my view, if you personally -- to give you a number, actually, 15% is the minimum, but I would expect even more for internal permian on motor. So in -- but it -- really, could be even larger, right? I mean we won't talk about it competitors, especially like Bosch, I think in terms of the scale and the volume that we enjoy in the Indian market in this very good few and further in speed, which we're able to operate also in very, very few.
[Operator Instructions] The next question is from the line of Nishant Vass from ICICI Securities.
So my first question is on VLS. We heard you mention about the -- this is the lack of revenue being the key reason for profitability. But if we take a look about, say, first half of '20, when your revenue levels were largely between the EUR 210 million to EUR 230 million levels in terms of euro million. Obviously, your profitability structure was much better than what it is today. So just even if we call out the new plants, it definitely seems that the underlying profitability has suffered.So my question is 2-form: a, obviously, you're doing the Project RACE. So and you mentioned that you assume some benefits from it. So just to understand, like obviously, I think the project is still under working. So how are you anticipating the potential benefit from it as in terms of fortifiable. Because I think from a cost base standpoint, considering revenues have remained flat for such a long period of time and you being in the business for such a long period, you can easily see the major issues on fixed cost. So just trying to understand what is the major challenge? Is it the programs that we are from a pricing standpoint, one, obviously, there were issues when we did those [ 5 to 10 points ] a legacy problem when those programs run out we can't really get out of the situation?Or is it actually a people fixed cost situation where you can't you kept cutting people down? So just trying to understand where is the big headwind. And what is this consultant bring on table. And like you've been doing this business for such a long period of time. What do you think they will materially suggest to you which will be such a different structure to bring profitability up?
Yes. So just -- so I will answer this quite a interesting question. See firstly, talking about Q1, I think the impact was not only revenues on results. But like I said, is also lack of flexing of manpower cost, not because we could not do it. We just that, in this kind of a market, like I mentioned earlier, whether the semiconductor shortage, no customer, no OEM is willing to give a reduced schedule month-on-month. So they still hope that they can get the semiconductors from the big electronic companies and then take the supplies from us.But that doesn't happen. And that's why we've been carrying, like I said, extra manpower costs and extra inventory also in the system, which now we have started to correct from August onwards. So there's a dual impact. Sales decrease and lack of flexing of manpower costs or some other costs, which we have started doing. And we will start seeing the results there.So coming to your second point, that a few years back that at the level of revenue of 200 million and everything, we were that we had a better profitability, probably 8%, 9% EBITDA, but that's true.But we had -- there were two things which happened. One is that we went for extra revenues. And for those extra revenues, from, let's say, EUR 800 million, EUR 850 million, we went to EUR 1.2 billion. That was the whole thing. We won the businesses. With FY '18 to FY '20, an average of EUR 400 million of new business wins were there or events were there. And that also meant that we added 5 to 6 new plants, including one acquisition in Turkey.Now because of that, obviously, when you are planning for a EUR 1.2 billion revenues, which should have probably come in FY '21 itself, obviously, you add to your capabilities across functions. And that's something this thing which we have done since then. But then we also optimize it to some extent last year. But again, when we saw a V-shaped recovery from October. And again, we had to add that capability.But at that time, nobody mentioned to us about this big semiconductor shortage coming in. No OEMs and all were talking -- we knew they were going to have some issue, but not to the extent, I mean like this. So therefore, obviously, we did not take any further action on the fixed cost side til now. But now we decided about 2.5 months back that -- 3 months back that we want to get in the international consulting company. Basically, because see, what happens, you're right. I mean we've got experience. I mean I've got probably 35 years of experience, but the point is that most of the experience is in India.So India is a different ball game, one market. But when it comes to the international business, it's not that I'm that experienced. Yes, there is some experience. But still there's still a lot of learning over there. Why we got them? Because we want to understand what are the benchmarks? So today, we are in all these plants, and I'm talking about Europe, in Eastern Europe and in Morocco, what are the best benchmarks? What are our competition? What are the people in the automotive component side? What are -- I mean what are the cost benchmarks? What are the bill of material benchmarks? And what should we be trying to achieve? That's something I was not very clear about.And then once you know the benchmarks, then how do we -- I mean, basically, you're absolutely right. The drive has to become from our side. They're only a support. They give the benchmarks, they put in our team. I mean they help you with the analytics, but ultimately the execution is from our side. We have to execute -- So now we have got the benchmarks. So we are like last two months, we have now received certain benchmarks. And normally, the whole diagnostics is a 4-month exercise. We don't want to wait for 4 months. So we are -- I mean, probably from next month, within 3 months now, we are hoping to start seeing some quick wins in this -- I mean in these plants.So we have taken them for understanding what the benchmarks are. To reiterate something we already know that, okay, these are the areas we have to do more. Sometimes you don't know that, okay, that where you do more because we are consulting group, they have these benchmarks. So bill of material was the largest, manpower cost being the second largest, we want to be optimized there. And also, as a global overhead for a company of our size, what should really be a fixed cost on a global level? So these are the things they are supporting us with. And with their support, we are trying to see that we are able to kind of lower the breakeven point and at the same time increase the profitability in each plant. That's a whole basically -- basic objective. And this is something, of course, doesn't happen overnight. It will take us to really that industry -- best industry benchmark anywhere between 1 year to 18 months. This is a time line. Of course, we are also available to hurry, but things can't happen overnight, but we're very confident that we'll be able to achieve that. But like I said in the last quarter call, it's not rocket science. You're right. I mean, universally, I mean, if you're running a plant here, a plant there, you have to understand the local culture. Of course, you've got to be sensitive to the culture in Mexico, how things run there is different for the Czech Republic because those things, of course, you understand unions over there, how they operate, what are the laws of the land. So you have to believe there'll be different there.But in spite of that, we should be the best -- we should be best operating plant in that particular region. That's the basic objective. And that's why we need them actually for this purpose. It's not for a very long term, but it's more for like, say, one -- at the moment, they are with us only for one year is what we have contracted them for. And then probably after one year, we could do things on our own, take it forward on our own.
Understood. Thanks for that detailed answer. Obviously, that is heartening to hear. Just to pick your brains on whatever you saw because, obviously, you've seen if I could put it rightly, you've seen a knowledge gap in which you try to address some an external source. .So whatever feedback you are seeing on various points, specifically the BOM cost, this is obviously from a marketing standpoint? What are the bigger challenges? Is it more on the pricing side? Or is it more in terms of how you optimized your manufacturing process? Because I will begin the first part, which is on the external side of marketing, I think those customer renegotiations might take longer duration of time as programs run out or some new programs are coming in as you fresh it. But the other one, which has potentially on the process side, you can still manage in a shorter period of time. So can you shed some light in terms of where are the bigger gaps on the benchmark side?
The three areas where I see the gap is not on the pricing side. The pricing side, price is decided by competition, not really by the customer. Competition decides your price. So it's not the price. It is, basically, I think what we are realizing is sometime a design to cost. I think we should -- our design to cost should be more optimized. So that's an area we're working on how to go for more standardization of components in the electronics. Electronic area, which is something which has happened very fast in the business. I mean when we bought Visteon's business, it was on [ 12 ], they were largely all halogen lamps. I mean this whole conversion, to edit it happen more in the last 3 to 4 years. We've seen a very fast conversion from halogen to LED. And probably -- and at the same time, we have grown very fast. We have grown very fast. And our design-to-cost capability, a level of standardization not kept paced with the level of growth. So that's one area because that affects the bill of materials. So we could be a little better there.Secondly would be on the operations side. We see a gap. Operations I feel we have to be a little bit more efficient. And that's an area we're looking at how do we optimize our overheads and our manpower cost on the plant side. That is one thing. And thirdly is what should our fixed cost -- global fixed cost as a percentage be to sales, for the level of revenue. This I feel there is an opportunity there, how we structure -- I mean, how do we go for a new -- what kind of operation design, how do we kind of probably have a flatter organization. So these are the three areas where we are working to see that we are best in class. So that's where our focus is, basically.
Fair enough. My last question is directed towards -- on the EV program side. Well obviously, you mentioned about a lot of programs, but can you just highlight where are you on the front lighting systems of these programs on the major EV programs that you mentioned because I heard a lot of realize -- realizing on Tesla. Can you mention where are you on the front lighting system?
Stephane, I mean, maybe you can mention the level of technology on EV, I mean, at the moment and then about the HD going forward with the expectation and all that.
No, I think when you look at our portfolio of technology, we are well balanced between Ford and Rivian. So we are producing almost the same number of front lighting and lamps than realizing on the Renault's globally. So specifically to this EV applications, we are the supplier for the front lighting on the ID.3. We are the supplier of the front lighting on the ID.4 for Volkswagen. These are very advanced matrix LED technology has launched. We are the supplier of the front lighting for the new Ford platform in North America. We are the supplier of the front lighting for the Jaguar IP. So as I mentioned, we are pretty well balanced between front and rear everywhere in EV, but also outside of EV.
Okay. So the question -- the clarification earlier when you mentioned the market share of 14%, does that include both front and rear? Like how do you calculate market share from time to time?
Overall lighting. It is for overall lighting headlamps and rear lamps together; even auxiliary lamps. It's all lamps together, what is your market share for the EV vehicles in volume terms.
[Operator Instructions] As there are no questions from the participants, I would now like to hand the conference over to Mr. Tarang Jain for closing comments.
Thank you. So just to summarize, I answered a lot of your questions. But to summarize where we are on our two major businesses of India as well as VLS business, on the India side, we saw a little bit of a -- the second wave, as we all know, was sudden. And we did suffer a little bit in the first quarter. But from July onwards, we are back to normal. And we are seeing a strong performance going forward. I don't really expect the third wave or whatever we're talking about in India to really impact the market to the extent we saw during the second wave. And not only that, I think we continue to see a very good cross-selling of components or products on the 2-wheeler side -- 2- and 3-wheeler side and also our traction on the EV side, the 2- and 3-wheeler EV side, powertrain products.So there, I think I'm very, very hopeful and confident of a strong growth in the coming years. Also, when it comes to our 4-wheeler business, we have -- I mean we're doing very strong, we are going very strongly when it comes to our the plastic interior space, where we won a lot of business as a full-service supplier on plastic interiors for cars. We are winning also a lot of business for our spare capacities, for the engine bars and on our forging, like crankshafts, connecting rods and allied products. So we utilizing the capacity better. So I think going forward, we do expect a good level of sales growth year-on-year. Where it comes to our VLS business, I mean I remain strongly optimistic of a recovery. I'm not saying that the semiconductor shortage is going to go away overnight. It will take a while and we are to live with it. But the point here is like somebody asked earlier, how do you -- the whole objective is how do you reduce a breakeven point? And how do you get in better performance from all our plants? How do we get more efficiencies over there? And how do you do better design-to-cost as we move forward? I mean, so that we can reduce our bill of materials as we move forward. And that's something we are doing strongly. We are doing strongly with this international consulting company with their benchmarks. So whatever -- I mean the situation may be on revenues, I mean, I'm quite confident that we will see improvements from all of our plants as we move forward, even at whatever the level of volumes are there.But obviously, we have made a lot of investments over the last 3, 4 years. And we do want the sales to be at a certain level. That is anyway important. Today, the sales are not at that level, but we do hope that from September onwards we will see that kind of recovery taking place.The other thing, of course, is that our level of debt has gone up over the last 1.5 years. We are not comfortable with the level of debt. It's not a question of net debt only, also the gross debt which has gone up. We were hoping that probably now after the last QIP we did in March, and I was hoping that now we have over with all these issues, and now we will see a good level of debt reduction, but then the semiconductor issue has not held the situation. But what we are doing is that now we are going in a very measured way of new program wins we're going to have rules around that whatever the program wins we do in the future that we don't have to incur much of CapEx.So we want to control the CapEx cycle, focus more in the coming at least short term, 1, 1.5 years more on debt reduction. So whatever the earnings we have, it goes towards reducing our debt levels to a normal level. And that's something we're going to strive to do in the coming days and control the CapEx. This is very important and also control our inventory.Inventory is another area. I think we need to do a better job, and that's also in India, I would say, not only in VLS. But so these are some of the aspects we are -- I mean we are kind of working on. I mean we stay confident in both our business. Yes, I do apologize to everyone for the poor results, which we are showing for the last 15 months. I mean that's not our intention. And we are navigating these difficult times, but I remain confident that we will come out of it gradually as we move forward. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Varroc Engineering Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.