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Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q2 FY '22 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.Joining us today from Varroc Engineering Limited management is Mr. Tarang Jain, Chairman and Managing Director; along with Christian Päschel, CEO, VLS business; T.R. Srinivasan, Group CFO; Mr. Arjun Jain, President and Head, Electrical and Electronics business; and Mr. Nitin Kalani, Head of Treasury, FP&A and Investor Relations.I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.
Thank you very much. Good evening, everyone. I am Tarang Jain and I would like to thank you for joining the Q2 FY '22 earnings call of Varroc Engineering Limited.I will start with the India business. The Indian 2-wheeler industry volumes in -- were weaker, even lower than the subdued Q2 FY '21 amid the COVID first wave. The 2-wheeler production volumes in the quarter declined by 6.2% over Q2 of FY '21. As against this, our revenue in the second quarter of FY '22 grew by 36% year-on-year, which was mainly attributable to the lower commodities base in Q2 FY '21. Our EBITDA in India was at around 10%. The margins were impacted negatively by the high commodity costs. I will now move to our global lighting business. The semiconductor shortages continue to persist. This is the third quarter sequentially where the industry has seen a dramatic decline in volumes. The volumes in the current quarter in Europe, for example, were down 40% over Q3 of FY '21, which was the first -- which was then the first normal quarter after the COVID first wave-related lockdowns were lifted.The European region, including Morocco, for us constitutes more than 3/4 of our overall VLS revenue. Similar is the case in North America and China, where the volumes were down 21% and 30% respectively over Q3 FY '21. The supply-constrained environment led to key customer OEMs shutting plants and reducing the volumes. This led to a number of our production lines shutting for a major part of the quarter, with others running at substantial lower utilization. Our revenue in the quarter continued to -- continued declining trend seen in the previous 2 quarters, with the Czech Republic revenue declining at 20% quarter-on-quarter on top of the 21% quarter-on-quarter decline seen in the previous quarter, the Q1. The newer plants in Europe -- in the European region also did not grow as expected due to poor customer uptake. As a result, the EBITDA margins in the lighting business declined sharply in the quarter due to significant underutilization seen across our plants. While the current demand for semiconductors is continuing to outstrip supply, we continue to hear from customers and suppliers that the semiconductor capacities are being added. These additional capacities are expected to ease the supply situation gradually over the next few quarters.The pace at which the situation is expected to improve is a little uncertain though at this stage. The revenue ramp-up to the desired level at new plants in Poland and Morocco, in addition to certain other improvement actions, will help us reach closer to the EBITDA breakeven performance in these plants. We have started actions to reduce our fixed costs and implement industry best operational practices under the umbrella of Project RACE. We expect the benefits from project RACE to start showing its impact in the second half of FY '22. A sizable portion of the benefits will be visible FY '23 onwards.Our debt levels have increased as a result of weaker operational performance and CapEx. The debt levels are expected to remain elevated as we navigate through the challenging environment, at least over the next 2 quarters.The order booking, I'm happy to inform you is that our India business has been able to secure an overall net business win in this quarter of INR 1.2 billion equivalent annual revenue. And most of these orders are new business wins.For the 6 months year-to-date, our order wins in India are at INR 1.95 billion.Our VLS business, as we've also been able to secure additional orders worth nearly EUR 46 million in this quarter, the overall order intake for this year-to-date is at EUR 145 million.With this, we're happy to take your questions now. Thank you.
[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.
Firstly, in terms of Europe operations, are you seeing any improvement month-on-month in Czech plant and U.S. plant and all?
So see, the issue has been that, as mentioned, that the issues of revenues -- so we have a lot of capacities which we had set up a few years ago, also some expansion programs. We have some of the best programs in the industry.But the problem of the semiconductors is still persisting at the moment. And we do expect that this problem is not going to go away for some time. Probably -- it will take probably another 1 year for things to really normalize. But we will see probably a quarter-on-quarter improvement in supply of the semiconductors as we go along.But presently, I think we're at a low point when it comes to our revenues and -- revenues to our capacity. So at the moment, I would say that our main plants, which are the Czech Republic and the Mexico plant, though we have very good programs, but the production is subdued because of the semiconductor shortages.
So there's no improvement, say, in October, November versus what it was in July to September?
I don't think -- what I feel is that at the moment, things are still quite subdued. So I think this quarter also, I think it will remain subdued. We have to see, of course, now how December is. But we do feel that probably from January onwards, we can see an improvement in supplies.Now see, where we are concerned, frankly, we are impacted basically by 1 manufacturer of semiconductor. So 99% of our problems come from this 1 semiconductor manufacturer. And we see a clear visibility of a much improved supply situation only from actually April 22. But the situation is not really -- I mean if we are down in volumes by probably 30% or around there, it's not because the situation of lighting systems business. It is that the OEMs are not able to produce cars because of the other electronics, not because of lamps. Maybe we could have been short in lamps by maybe probably 10%. But why we're 30% down is because the OEMs are not getting the full supply of the electronic products. And that's the reason that the volumes are down to this extent.
And you mentioned about this Project RACE savings of EUR 75 million in FY '24 at full potential. Now that is assuming what kind of revenue generated in that year?
So basically, the Project RACE was something where we wanted to reach an industry level best benchmark of 7% EBIT. That was basically in the European perimeter. This project is more for Europe, which is about 3/4 of our revenue, including Morocco. And we started this project with a big consulting house in the month of June. And the implementation of -- the execution of this project, all the initiatives have started only in September.So now we will see that whatever -- the volumes may be down, but whatever I mean are the volumes on that, we will see definitely improvements in Q3, Q4 in our results because of these actions. Internal actions are basically they cover recoveries of some customers, some customers also, it could be some underutilization, cost obsolescence. It could be some price increases. There are some other initiatives, which we are doing, design-to-cost, improvements in our plants, then of course, optimizing a lot of the manpower also in line with the revenues, which we are going to have probably in this year and probably in the part of the next year.So a lot of these initiatives are across. It is customer side actions and internal actions both, also maybe from the supplier side. So we are looking at all around, and the execution of this has only started in the month of September. The project started in June.And the other thing I just wanted to also add to this is that for the -- till September, beginning of September, we were not really able to kind of downsize our costs because all the OEMs, all our customers have been putting very high orders in the system. The [ EDI ] is what you call, orders in the system. And they're picking up very less.So when you come close to the date of supply, then they don't lift it because they're not getting semiconductors from the other companies, the bigger companies. And that's the reason we have been saddled with high level of inventory, which we've now started cutting for the month of August and also high cost, like direct labor and other cost.So we have only started cutting these costs from September. So even in our Q2 results, unfortunately, at a low-level revenue, knowing very well that we could cut these costs earlier on. But because of the customer orders and because they were telling us that they will lift the material month-on-month, we were not able to rationalize these costs. And that was the reason for -- that was the reason for our poorer performance in VLS. And we were not able to act because on the customer advice in the first 5 months of this financial year.
That, I understand, sir. But my question is more like, this cost saving that you're referring to, is they on the profit base or EBITDA base of FY '20 when things were normal? Or this is you're referring to on the loss base, the basis of this -- the loss that you reported in this year?Because if I look at, let's say, in FY '20 and all, our EBITDA margin realized was, say, around 7%, 8%. So if this number that you're talking about really comes through on that base of FY '20 level, then probably we're talking about EBITDA margin of 14%, 15%. Is that really possible? Or we are referring to the cost saving on the base of losses that we're doing currently?
No, no, no. So this is a project, let's say, that if you're able -- see today -- let's say, we have a capacity as a group, production revenue, we can do of about close to -- we can even do close to about EUR 100 million of revenue a month. Today, we are at about EUR 65 million, EUR 66 million. So we are down.So what I'm saying is that at an industry level, whatever -- we want the industry level benchmark of 7% EBIT, which is like a 12% EBITDA. And that can only happen -- that we can only achieve if we're able to reach that. I'm not saying EUR 100 million, but even if we're able to do EUR 90 million to EUR 95 million of revenue, revenues are important, then we can definitely achieve 7% EBIT.But in the meantime, of course, these results, I mean, which you see in quarter 2 are more because one is that we have not started executing on this Project RACE, which we are now very proactively like [indiscernible] started doing it from the month of September. And secondly, what I was going to explain also was that we could have reduced this cost in the second quarter. But we did not do it because our customers were not allowing us to do it because they said that we have to keep the people for higher orders, but the orders never came.So we were not able to kind of, this thing, follow the level of revenue, which we actually were achieving month on month. So what I'm only trying to say is that Project RACE is something which is definitely -- one is that, okay, because lower revenues would reduce certain costs. But one is that we have identified further initiatives like some more recoveries from customer, let's say, design to cost, some improvements in the plant, cost reduction, some more savings from suppliers.So these are the things which have been identified in the diagnostics we've done in the first 2 months, I mean, with the consulting house. So this will definitely help our results even on a lower revenue. Let's say, this quarter also going to be low revenue, but we will not see a result like what we have seen in Q1 and Q2. That's what I'm trying to say.
Okay. And India operations, if I look at stand-alone, because I don't have full India gross margin, maybe completion of, say, around 240 basis points in the stand-alone gross margin. So what's the reason which we are facing more pressure recently over there? And what would be trend going ahead when we see -- we can expect improvement in India margins because...
So in India -- so in India, frankly, okay, our EBITDA margins were probably around 10%. And our revenue growth in this Q2 was 36%. But I would say 40%, 45% was -- probably half of it probably was more because of the commodity increases, which we're seeing right from October 20 onwards. So that is because of the commodity increases.I would say that today, I mean if not the 2-wheeler -- see, dominantly we're in the 2-wheeler market. More than 85%, 87% we're supplying 2-wheelers. But 2-wheelers also have been a little bit kind of subdued. I mean we were expecting higher volume. So probably I think we're at least missing, I think it's at least about 10%, 15%. I would say, we were expecting more volumes from the 2-wheeler market. That has not happened.So the increase is there. I mean because we had in the past years, we won a lot of business, a lot of -- I mean a lot of cross-selling and all this thing also happened. But the thing is that our commodity price increased over the last 1 year. And also, our margins are a little bit impacted also because we have to absorb a 1 quarter lag. When there's an increasing trend, which we've seen in the last 1 year quarter-on-quarter, we had to absorb 1 quarter of commodity price increases.And that's also a reason for a little bit of a subdued kind of a profit margin at 10% because we should be more towards 12%, 12.5% of an EBITDA with the kind of volumes we do. So we need higher revenues also to help us out with higher margins. And I think now we see that some of the commodities in the third quarter in India also are stabilizing.So hopefully, now we don't have to really absorb another one -- too much of 1 more quarter of commodity price increase. There will be something, but it won't be to the extent we have seen in the last 1 year. I think it will improve now. And at the moment, also the sales -- I mean it's not that the 2-wheeler -- 2-wheeler business in India is strong. But somehow -- we are somehow still able to do a certain level of revenue, which is good for us.
And lastly, in stand-alone employee cost, we have seen a substantial increase over the last few quarters. Even this quarter, it's gone up by 9% quarter-on-quarter. So any particular reason why there's such a high inflation in India in the stand-alone employee cost?
So I don't know whether employee costs have really gone up by -- I thought it was some of the other expenses. I think employee costs, I though that we were probably -- see today, I mean, see, our revenues have that way also gone up compared to last year. The revenues have gone up. So there would be -- I don't think -- I think we're controlling very well the fixed part of the employee cost. But when it comes to the variable part is where we have had issues. I told you already about VLS, that knowingly we kept more people of direct labor, for example, on the plants and all knowing very well that we could have reduced that cost because the customers were not allowing us to reduce.And in India, obviously, a little bit of it has gone up. I mean, on the direct side, it's more related to the volume, not on the fixed side. Fixed side, I don't think there's much of a cost increase. I think it's more on the direct labor side, where we see impacting us a little bit more overall in the business. But that's something I think in this quarter we will -- I think you will see a lot of correction where it comes to manpower, especially in VLS.
We'll move on to the next question, that is from the line of Aditya Jhawar from Investec Capital.
On the margin front, both India and the global business, is it a lag impact that maybe we'll recover the cost in the subsequent quarter? Or is there an element to recover the cost from the customer with the lag in both India and overseas business?
So Aditya, on the India side, I think the margins are a little bit flat. We have -- so one is that because of the commodity price increases -- so India is like a normal thing. It's just that okay we're on increasing trend of commodities. So we've had to absorb for 1 quarter every quarter this increase in commodities, which are not paid by the customer. They pay after 3 months. That is one reason.And second reason, of course, is that, see, the percentage of EBITDA will go down if your revenues are kind of positively impacted just because of the commodity price increases.And thirdly, obviously, is that we have not kind of achieved the level of revenues we should have, I mean, because of a little bit subdued volumes, both from the 2-wheeler and the 4-wheeler market in India. 4-wheeler more because of semiconductors that there has been some impact. And 2-wheeler also, as you know, there has been a subdued demand.It is just that in our case, because we have won a lot of businesses in the past year and still continuing to win that, we are still, I would say, kind of okay.But I think that going forward in India also, probably in this quarter, I think with more stabilization of the commodity prices, we will see -- we will see a better margin.When it comes to VLS, definitely, when it comes to margins and everything, one is that you will -- we will see improved -- I mean, we'll see, of course, lesser loss, I would say, because of that we are going to rightsize the people. And that's already happening in quite an aggressive way.But to answer your main question, in India, of course, from a customer side, those actions are on, on a regular basis. So there's nothing different. But here, you're right. Here, we are going to be kind of taking in some recoveries from customers. Not only to have the cash flows because we're keeping high inventory, but also, we are going to be taking in probably through some price increase or not passing on some LTAs in January and also kind of taking in some money, recovery for underutilization obsoletes.So we are looking at all these areas to be able to recover the customer. And that's something -- I don't know whether Christian, do you want to add something on this point of customer recovery?
Sure. Well, of course, so as you said, not so much to add. So we are looking, let's say, forward to next year. And we are receiving some, let's say, positive [indiscernible]. But in most cases, we have to, let's say, [indiscernible].
And there was no premium freight or warehousing charges that we had to pay in this quarter, right?
No, that was not much. I don't think we had those kind of issues because, see, as the volumes were less, there must be a small portion somewhere because there may be a little bit of a portion. But I don't think it was anything like what we experienced when we had a high level of revenues in Q3 and Q4, where we saw that impact.And we mentioned also that some of the costs were not really, I mean, because of us. But at the moment, we don't see much of a premium freight or the issues of any overtime. Those kind of costs are not there really now.
Moving on to the India business. In India for -- specifically for EV components. So what we understand is that we are supplying to Bajaj. Firstly, which all products we are supplying and what is the share of business? That is number one.Second is that how many more customers, whether it is existing OEMs or start-up we are at advanced stage?And third question to this -- related to this is that the profitability of the EV component, how different it is from the India business margin?
Yes. So I think probably Arjun can answer that question better. But I think we have a significant portfolio when it comes to the EV. Particularly only for the EV, the powertrain and everything. That I think Arjun can explain. Other than that -- but that, of course, we do -- for every EV, we're, of course, doing the plastics and the seats and the other items, switches and all those other items also for the EV.So the content, of course, for every EV is very big. But at the moment, I think our first customer is Bajaj. But I think that we still have to start production. I think there has been some delay. And I think that we will soon be starting that, probably Arjun can throw more light on a later situation. And also on the situation we have with a few other OEMs we are pursuing and for which products.On the margin side, I think the margins are fairly decent. I would say, the margins are generally -- I mean in line with whatever electronics we're doing. Our electronic margins generally are good. And I think whatever we're doing on the electronics side of EV is on a similar way -- is in a similar way, which is I think -- we have a fair margin, I would say, over there. We are completing.So maybe Arjun, you want to throw some flavor on what the situation is on the EV and what are we doing on the EV side?
Yes, yes. So on the -- on the Chetak for Bajaj, we have already begun production, honestly, in November for telematics, for the onboard charger, we make the PCBs already. And over time, we expect we will do the entire charger along with Delta-Q and also on the VCU. And in -- either towards the end of this quarter, beginning of next month, we will also begin with the motor, the motor controller and also the DC/DC converter and the BMS.And then further down the line, we will also do the 3-wheeler. And on the 3-wheeler, we will do a similar set of components. Though, of course, I don't think this is a -- we will do a similar set of components. And we are essentially 100% SOP on the motor and controller over there. On the 2-wheelers, we are 60-40. So we are 60% for the motor and controller.
Okay. Are there any other customers?
So again, other customers, we continue to be engaged with. There is the distraction always. There's a couple of global OEMs that we're in pretty advanced discussion with. There's a couple of local -- 1 local OEM in particular. But I think it's also a little bit a question of time as they crystallize really what their localization and their local supply strategies are going to be.
Okay. And any discussions with any start-ups, Arjun?
Yes. So we're engaged, I would say, with 2 start-ups in particular. And with one, we are discussing non-EV-specific components only at this stage. And with the other, we are discussing the full range, including the EV components.
Just a final question, Arjun. So on this, what has been your experience when you are engaging with this OEM, that whether this OEM would want to use their own technology for products like traction motor, BMS, controller or Varroc is also providing some kind of technical expertise and developing these solutions for the OEM?
Yes. So I think every OEM, I would say -- okay, let me not say every OEM. But a lot of OEMs, and it's a very traditional and standard behavior for OEMs right, they like to know exactly what is going into the vehicle. So there is, for sure, a desire to control, in particular, the software at this stage.However, again, I think like we said before, given the newness of these components and especially on something like a traction motor, there is a lot of IP involved in manufacturing also. And today, for example, on traction motor, I think we are quite possibly the only fully localized large player that can actually make a traction motor.So yes, it varies, I would say, component by component. Every OEM has their own strategy. Generally, again, I will repeat, what we see, especially on vehicle functions, sometimes also motor control functions, OEMs like to own the IP -- like to own the IP themselves, especially to start with. And on some of the other components like the BMS, sometimes even the telematics, et cetera, it is -- every OEM is following their own part.So some places, they would like to be -- they would like to be software responsible in particular and [indiscernible] responsible. Some places, they are open to the idea of not really having responsibility. We also see OEMs who are very open to source a proprietary even for a product like the motor and controller, which is essentially the powertrain, we are now starting to see OEMs that are very, very open to the idea of sourcing a completely proprietary part.
[Operator Instructions] The next question is from the line of Anish Moonka from JST Investments.
So at the time of our IPO, we had over 1,500 engineers globally. And now going by our recent filing, that has dropped to 1,100 even though our capacities have grown. I understand the situation that we have gone through.So my question is will these lower numbers create bottlenecks to our growth in an up cycle? And how will we address it if it does? Was it just some excess hiring that Varroc did in anticipation of growth that hasn't yet materialized?
You're talking about the R&D engineers, right?
Yes, R&D engineers.
Yes. So I think R&D engineers, what we have today, I would say, yes, close to about 1,100 -- 1,100 to 1,200 engineers. Probably what we had done was that we were on a path to grow. So it's not that we have reduced any engineers in India. For India, anyway is on a strong growth, but we had to rightsize our engineering team to the level of revenues because -- we were experiencing and because -- I mean, for example, we saw the downturn in the auto market from October '18. And we held on to the people.But then when pandemic started last year, then we had to rightsize because at that time we didn't know what is happening as such. And then the whole idea is that how do we kind of focus more and drive more efficiency with the people we have? I mean that's the idea whether it's on -- whether it's to do with addressing certain future technologies, it is the development of existing products, working on design-to-cost ideas or [ VAV ] ideas.So now the thing is that we are focusing more, but everything depends on the volumes. The revenues are there, then fine, you can always hire more people. But yes, but you have to be -- you have to kind of definitely look at your overall cost and we don't want to increase more than 5% to 6% of our revenues in engineering. That is also there. It's not that we are not winning new businesses and all. We're winning new businesses, never the level of EUR 400 million, EUR 450 million earlier, what we have seen last year in the pandemic in FY '21.By '22, the level of programs being awarded is also reduced. Program extensions have actually increased in this period, I mean, for the reasons of whether it was downturn in the market and then now the semiconductor issue.But of course, still -- we have still continued to win at a certain pace. We've won about -- in VLS also, we won about EUR 145 million of the business in the first 6 months. which is, I think, quite good.And so, we continue to win businesses, but I think that we also are driving a level of efficiencies also within the team. And I don't think at the moment we need more than this number of people. What we see going forward, we can easily manage all this product development with the number of people we have and also the other activities within engineering.
Fair enough. So what is the blended cost of capital? And what is the blended return on capital employed that we want to achieve in our businesses over the long run? Additionally, what percentage of debt are you targeting as a percentage of your capital structure?
See, the blended level of margin should be 12%. That's something -- we've always said that that's something we want to achieve. But yes, for that, we do need sales because you can't be saving yourself out of a crisis. You need to sell. You need volumes.So 12% EBITDA. ROC has to be pretax at 20%. That's one thing. And debt, honestly, I mean, the debt must go down. At the moment, it's elevated at over -- the net debt is over INR 3,000 crores. I mean, of course, it has to go down. First we have to deliver level of EBITDA, which is also not possible with the level of revenues we have, especially in the lighting business. That's something we want to achieve as a level of EBITDA.So I think we will see the improvements, this thing as we move forward. But I mean if you ask me, the objective, of course, in the -- probably the next -- I mean I don't see -- in the next 2 quarters, I don't see the debt going down. I mean the debt is going to be at -- probably at this level, maybe slightly more because of the -- we don't expect the revenue certainly come back to a very, very normal state.But in the coming year, when we see that -- from January, we see improvement in revenues and in April, of course, better revenues, then definitely, I think we have to start looking at the net debt levels going down. And I think that we have our -- I mean at least our EBITDA, I think -- I mean our EBITDA to kind of -- net debt should not be kind of -- it should be at least maybe 1.5 or 2x or something kind of a thing. Our net debt-to-EBITDA should not be probably more than 1.5 to 2x, I mean, in the -- probably in FY '23. That's what we want to achieve.
Noted sir, the question here is like we recently heard one of your VLS customers attributing to the fact that they have at least 5 to 6 months of 100% production backlog, whether be it due to low inventory across the supply chain or customer size orders. So we do -- is there a possibility that we see the real ROCs the company is targeting for all the newer facilities once the semiconductor situation is behind us in the next 1 to 2 years, at least for a few quarters?
See, the point is I can definitely tell you that once we see the revenues going back and the level of capacities we have, which is about at least EUR 90 million -- EUR 95 million a month of production revenue, I mean we can definitely see a good double-digit ROC coming automatically.And because that -- that will happen also because we are working also on the margins parallelly. The margins also -- wherever the areas are where we felt there were opportunities, customer side actions, internal actions, design side actions, supply side, we're doing all that now.So obviously, when the sales come back, yes, we are going through a tough phase right for the last -- right from January '20 when pandemic struck and then the semiconductor. Yes, we have had -- we are facing very challenging times. But at the same time, we are not just sitting and brooding about it. We're trying to do something about it.And therefore, we are very aligned with the customer on the business wins. And then we're looking at all areas how we can improve our performance. So we are still working on that. So once the revenues come back, I can definitely say that we can definitively achieve the 12% EBITDA. And today, also, our major CapEx cycle is behind us. We don't have to do so much of CapEx now because all those footprints have been set, which we had put up for people like Volkswagen Group and [indiscernible] in more regions. Just before -- I mean probably just before pandemic struck, we invested a lot of the money to align ourselves with the big players and the winners in the market.So once I think -- and we have all -- we have some of the best programs in the industry when it comes to lighting, one of the best programs. So we just need sales. And if sales come back, you will see that the results are coming. So that's what I want to just say.
Sir, my final question is, so while I was reading Varroc's QIP document, it was visible that all the top 5 leaders in exterior lighting have lost market share from 2016 to 2020. And although it's great that we are gaining market share, this question is more broad-based to understand what's happening in the whole industry because I would assume significant consolidation would happen through a downturn, which is not visible as this industry does require huge capital and R&D investments and entails very sticky customer relationships. So does whatever is happening could act as a risk for Varroc lighting systems also?
So yes, so the -- your point is correct because it's not that we are the biggest of players. And a bigger part of our business is the lighting business. It's 65% of revenues and 35% comes from India. So India, okay, that's -- does, I would say, fairly well.But today, obviously, I mean, when you see continued issue that comes to revenues, we're not able to do revenues or pandemic and other issues, yes, definitely, I mean it is a challenge. And obviously, one has to think also strategically long term what one should do because, obviously, one is not going to not take the right steps when it's necessary.So yes, I can definitely say that today, we are okay. We are fine. We're going through a challenging time. But if it comes to it, that maybe some decisions have to be taken, one will take those decisions, I mean for the interest of the organization, for the company, for sure.
Sir, I meant that all the top 5 players who are above us, they are losing market share. So what is exactly happening in the industry as a whole? And we are gaining market share, that works better for us. But why are the top 5 players losing market share?
No, they are not -- they have lost market share, I mean, to us over the last 4 years because we have aligned ourselves with the big players like Renault and Volkswagen. And we have won a lot of the important programs from them in the last years. And that's the reason we gained that 1.3% market share over the last 4 years.But it's not that they are not -- so today, I mean, everybody is suffering because of the pandemic and because of -- so they've -- so they have lost -- I mean we won market share on the basis of our competitiveness. We won our market share over the last 4 years. That's why we invested so much in new plants. But it's not that -- it's not that they don't have enough business. They also -- okay, we have got -- I mean -- top 5 or even the people who are 7 or 8, we have gained market share. It doesn't mean that they don't have enough business. They all have enough business. It's not that they don't have enough business. They all that way would do well anyway. But in today's situation, everybody is challenged.
The next question is from the line of Chirag Jain from DAM Capital.
Just wanted to check the time lines for the 7% EBIT margin guidance for the VLS and how much that would be dependent on revenue recovery? I mean if you were to split, let's say, margin improvement because of revenues and even -- let's say, even at current revenues, whatever basis that we are taking, if you were to split, let's say, between these 2 factors.
So basically, see, this project, we want to reach a 7% EBIT level in the European perimeter, which is 75% of our revenues by December '22. That is the target, December '22, but that has to come. It cannot be today's level of revenue, which is quite less in the European perimeter. It's quite less.So here -- so I'm just seeing overall as a group, I mean we are EUR 67 million today per month. We should be at least I'm saying EUR 85 million or EUR 90 million to achieve a 7% EBIT. And that's something we expect in the year of FY '23 and we have a capacity of almost up to EUR 95 million to EUR 100 million if we have the orders. But we need at least EUR 85 million to EUR 90 million in production revenue, not overall revenue, not a tooling revenue. Tooling revenue is different. That may be another EUR 8 million, EUR 10 million on top a month.I'm talking about the production revenue. We need to at least achieve EUR 85 million to EUR 90 million to achieve that level of EBIT of 7% or 12% EBITDA. But that will only happen once all these Project Race initiatives are implemented and our target is December '22.
Okay. And are we in a way more impacted in this chip issue based on the OEM mix or regional mix or probably the model mix? Because what we are hearing from global OEMs, obviously, because of the supply chain challenges, they are also optimizing their overall product mix to maximize profitability. So in some sense, any color on that vis-a-vis, let's say, the overall industry are we more impacted?
Yes. So we could be probably more impacted depending on the model because, obviously, when there is a chip shortage, I mean all the OEMs will -- what they will do is they'll obviously direct the chips towards their most profitable programs.So obviously, it all depends then on which are the most profitable programs. And if you're not in the profitable programs, then you will suffer on volumes. And today, I'm just saying that we are down by about 30% plus with whatever product mix we have. But it's not that, that our product mix is bad. We have got some of the most important programs. But since we are down, I mean, by that product mix -- it all depends on in the region and which programs and to whom you are supplying.
Okay. And just last thing. I think the OEMs generally are saying that obviously, September was a very difficult quarter because of multiple things. I think Malaysia lockdown and obviously fire issues in Japan and stuff like that. And December onwards, we expect some recovery. Obviously still the overall situation in calendar '22 would also be relatively tight on supply side. But still they expect improvement from December quarter onwards.Whereas your comments, even though you did mention about improvement compared to first quarter, second quarter, it doesn't appear to be that great. And it will be more towards, let's say, March and probably June quarter of next calendar year. So maybe any clarity on that front?
So we see improvements in volumes, honestly, probably from January -- I mean, the earliest would be January. You will see quarter-on-quarter improvements. But this problem is not going to go away, for sure. It is going to remain for another 1 year overall. That's what I'm trying to say.So we have to deal with that. We have to accept it and do whatever it takes then to see that you're able to kind of optimize your cost or whatever other actions the customer in a good way so that you are able to -- even at a low level of revenue, you are able to actually reach a certain level of performance.That's what we're trying to do because I don't see really this quarter also that this supply -- I mean the supply of semiconductor is going to be really much better or something like that. I see the earliest probably from January onwards.
Okay. And just last thing on the CapEx side. Any revisit on the CapEx numbers because, obviously, to optimize cash flows?
So CapEx, I told you -- see our target in -- we're not going to be doing more than probably EUR 45 million. That is our budget every year now because there are specific programs and everything.Then we will see how many programs are there. But EUR 45 million, of course, you need to keep winning businesses for your future. So in VLS business EUR 45 million. In India, we try to limit it to maybe INR 175 crores, INR 180 crores or something because here I think -- also because both the places we have done major CapEx cycle. Now it is something only incremental. And if you really get a very, very good project, that's a different thing in an organic way. There's no M&A now. So basically, if something very good comes up, we will invest. But otherwise, obviously, we're not going to be investing more than this. So this is what our basically the budget is. And we don't -- there's no way we can anyway cross this budget in this year or in the coming years -- coming 2 years.
The next question is from the line of Joseph George from IIFL.
I have 3 questions. So firstly, when you talk about the [indiscernible] I understand that the September quarter was like a low point from where we have only improved and to normalization...
Sorry to interrupt, Mr. George. Sir, we're not able to hear you clearly.
So let me try again. So the first question that I had was related to semiconductor issue. So we all understand that the September quarter was like a low point for the global industry. And we also understand that we will not come back to normal at least, say, for the next 12 months. So that is given. For things to completely come back to normal, it will take about 12 months.But what I wanted to understand from you based on what you're hearing from your top 3 customers, would December quarter be substantially better compared to the September quarter? Or you think December quarter would also be similar to the September quarter and hence, we don't really see significant improvement?
No, we see December quarter to be better because we have started all our cost initiatives. So we don't see the quarter from a better point of view of revenues. I don't see the revenues improving.
My question is more from a revenue perspective, sir.
Yes. So from a revenue angle, I don't see that this quarter is going to be better, I mean, to the last quarter. I'm talking about only VLS. I'm not talking about India. I'm only talking about lighting business.India could be better also, but not the VLS business. That will not be better from a revenue angle. The revenue angle, I feel, will only become better from January onwards.
Okay. Understood, sir. Sir, second question that I had was when I look at your balance sheet, I noticed that compared to the March '21 period, the inventory level at the end of September '21 period was above -- was high above about INR 300 crores. So when I look at consol numbers, your...
How much? Sorry, I didn't hear you well.
INR 300 crores.
How much was the -- how much was it higher by about?
INR 300. It was about INR 1,200 crores at the end of March. And the inventory at the end of September stands at INR 300 crores. Now assuming that the increase is finished goods inventory and not unprocessed raw material, it seems to suggest that you've been able to produce. But the problem is that the OEs are not taking deliveries of what you're producing. So is that the right understanding in the sense that you are able to do a better job compared to what the OEs are doing with respect to their own production levels?
No, see, what is happening is...
Otherwise, your inventory wouldn't be increasing.
Yes, our inventories increased, like I said in the beginning, that right from April onwards, I mean the [ EDI ] in the system, which is the orders from every customer has been, I mean, quite high. I mean it's basically whatever the capacity is, they would take.But frankly, they're taking much less. They're taking probably only 50% or 60% of that every month. And the thing is that we have been ordering the material based on the [ EDI ]. So we're keeping the inventory at a high level, when actually we could have optimized it right from May onwards. Seeing April, we knew that there was a problem, but we weren't allowed to get off this thing.So in my view, whatever you see here, at least EUR 35 million in VLS business is higher inventory, which now -- for September, we have started acting to reduce it. And hopefully, over the next 2 months, we can bring it down to a good level because at the moment, the inventories are very high.And it's not only finished goods. Finished goods are, of course, there and that we are pushing the customers to take because it is as per the EDI. So that we will push out. Maybe 12 million, 13 million of finished good inventory, we'll push out. And that's what we are negotiating with them.But other than that, we've also bought other materials, electronics, wiring harness and other items also, which we could not kind of really act on before August and -- I mean before September. So now the cycle to turn takes about 3 months. That's why the inventory is -- so I would say that frankly speaking, I'm not happy with the elevated inventory levels. This is still quite high. And today, I would say that the OEMs are not keeping inventory. The OEMs are pushing the inventory on the supplier side because they don't want to keep it.So they will order the materials. And then they will ask you to produce. And suddenly one fine day, they will say to you that tomorrow don't supply us. So that's how the behavior has been in this last 5, 6 months, especially, what we see.
Sure. Okay. Understood. And the last question that I had was in relation to the CapEx. So when I look at the consolidated cash flow and what is that the cash outflow for hard asset is about INR 375 crores in the first half. And cash outflow for intangibles is about INR 116 crores. So total it's close to INR 500 crores in terms of total outflow for [ capital EX ].So I wanted to understand what would be your total CapEx this year for the full year? I know you gave some numbers, but those numbers look relatively small in the context of INR 500 crores in the first half.And also, given that your production levels are lower, in that light, can you give some guidance for next year's CapEx, including intangibles, including capitalization of intangibles?
Yes. So I think that -- see, some of the sort of CapEx -- so frankly, the cash flow issue is because basically of -- because of the losses, funding of the losses, the inventory. The inventory was really unnecessary.
Sir, my question is only related to CapEx. It's got nothing to do with working capital or operational losses. My only question is what is the CapEx for this year, including capitalization of intangibles. And similarly, if you can give a guidance for next year as well at the consolidated level?
So CapEx outflow also, we want to keep -- I know that the first 6 months, we have really kind of spent a lot, especially in VLS on the cash flow for the CapEx. It's not that new order of CapEx. It is the cash flow that we've had to spend more money there.But that's something we'll control in the coming 6 months because we will not add -- we will not want to spend -- or the outflow should not be more than EUR 45 million. That is still our target. So yes, we have spent a lot in the first 6 months. But in the next 6 months, we would like to control that part.
Understood. And for next year, would you have a similar number [indiscernible] EUR 45 million would be substantially lower?
Yes. EUR 45 million, that is our budget.
Even for FY '23, is it?
Yes. That's on the VLS part. India will have INR 150 crores to INR 200 crores, depending on the investments in the [indiscernible].
So sir, my question is would -- should we go with the same assumptions for FY '23 as well for both VLS and India, EUR 45 million for VLS and INR 170 crores, INR 180 crores for India, plus about, say, INR 200 crores of intangibles?
Yes, that would be kind of reasonable , yes, I would say.
[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Most of my questions have been answered. Just one question to Arjun with respect to the EV components for 2 years. So how is our content in electric 2-wheeler, maybe chip or motor controllers and then for ADAS and the onward chargers? Can you throw some light on that?
Yes. So I think Nitin has shared, I think, a slide in the investor presentation. I think for 2-wheeler, it is based on whatever is the industry expectation of price. It's around INR 37,000, INR 38,000. And on the 3-wheeler, it's closer to INR 45,000, INR 46,000.
But that is only for our EV parts, right? The EV -- I mean the EV powertrain parts only?
It would also include, for example, the switch, which is something that we already do for the Chetak, but yes...
Not our other parts like seats and plastics and all that, that is additional?
So that is included. But of course, from a value standpoint, I think the seat will be relatively smaller.But EV stand-alone -- EV component stand-alone, I think, especially at full maturity when we drive, for example, even the full charger localization, et cetera, I think will probably come to around -- will probably come to around a similar number also.
Sure. And just to clarify, our share of business in Chetak for motor controller is 60%, is that [indiscernible]?
Yes.
The next question is from the line of Basudeb Banerjee from AMBIT Capital Private Limited.
Most of the questions have been asked. Just looking at your market share and your stand-alone earnings. So with all these EV 2-wheeler related products, electrification in 2-wheelers, so much buzz. And domestic business, more or less operating normally. Margins to be back with metal inflation stopping, as you mentioned.Broadly, about INR 50 crores of earnings can be achievable quarterly for stand-alone business very much, so INR 4,000 crores of market share. So largely, it implies that the market is not paying anything for the VLS as such. Whereas on your books, almost INR 3,000 crores of debt largely because of funding VLS' losses.So ever strategically it comes to your mind that why not focus on the India business and hive off VLS, which will reduce all these issues and managing so many geographies and the debt issue on balance sheet piling up, as, sir, yourself said that the semiconductor issue is at least a matter of 1 more year. And even at 7%, 8% EBITDA margin, VLS, it is hardly EBIT-neutral.So for PBT number to be substantial, those double-digit EBITDA margins are desirable so -- even post Project RACE. So if you can give some thoughts from that angle?
What you are saying is absolutely correct. Anybody, any promoter has to keep all these options open, looking at one's own situation.So obviously -- I mean just to answer your question, all these -- I mean these options are -- what you are mentioning is all open. We will see how it goes. But you're absolutely right. I mean in your analysis, you're absolutely right. And obviously, I mean it's not that I am not thinking in the same way. Everybody thinks in the same way. But of course, one will have to take the right decision at the right time.So like you said, that the India business is doing well. And I think it also grow in the future. So obviously, we cannot put the India business at risk.Secondly, yes, a lot of the debt, whether it's from India of INR 3,000 crores, whether it's India or VLS, largely more towards managing the debt of VLS. It's not really an India debt from that point of view.So obviously, we don't want -- we are not comfortable with this level of debt, with that debt. I mean we would like it to be substantially down also.So these things obviously there in your mind. And then you're right that the market is not going to improve in the passenger car -- in the passenger care segment for at least a year. Improve in the sense, normalize. It will improve, but it won't be a normal state. So yes, I mean, options are all open. And the thing is we will see what to do.
So basically, your INR 200 crores, INR 300 crores quarterly losses might normalize down to neutrally, so very small earnings. But that's not going to help to reduce the debt in a short time span as such.So basically from that angle, the cost of capital is higher than ROC for a prolonged period. Then erosion of value is happening. Even large corporates even thought on those angles. Our Indian promoters owning car brands on foreign soil also [indiscernible]?
No, that's correct. What you're saying is correct.
We'll move on to the next question. That is from the line of Nishant Vass from ICICI Securities.
So my first question is on, just to understand it with a more granular construct on the Project RACE improvement. So you mentioned about a necessitation of EUR 90 million kind of revenue run rate. So on your current revenues, it's like roughly 35% revenue growth. That is one, let's say, point that you need for your operating improvement.Can you mention because you -- you talked about your cost, I'm sure the consultant has done some analysis. So can you share more details into which portions of fixed cost will you pull out? And what kind of reduction, let's say, at a breakeven level or at various cost level, major cost items are you targeting over the next 12 months? That would be helpful.
Yes, so the first item I would say is on the pricing of the products. Because the volumes are less, we'll be looking at certain important products for a price increase and not passing on -- this is a part of Project RACE only, yes, and not passing on the LTAs because the volumes are less, which we normally give in the month of January.That is one thing we are going to be looking at and seeing that we want to drive that kind of improvement. And that definitely kind of helps our margins. There also onetimers like getting some underutilization money, obsolescence money out, which always takes time. But that's something we would like to also pull out from some of the OEMs. So this is one part, which we say customer performance.Second is, I would say, the design-to-cost. We find there are opportunities in some of the programs, which have got a little bit higher bill of materials on our side. And here, we have talked to a couple of OEMs to see that we are able to kind of give them a newer, more optimized design, which can help our BOM cost overall go down in some of these programs, which have got higher BOM cost.So that's an opportunity also which we have had an understanding with a couple of OEMs, and we are already working on that. So that is another thing which will happen probably over the next 6 to 9 months that we will get the realization.Third is basically the improvements in the plants. In plants, how to improve the level of productivity. Okay. One is, of course, that with low revenues, you anyway remove all the agency workers or the contract labor and everything.But other than that, also, we are looking at scrap reduction further. How do we kind of have a better line layout. Those kind of operations side by which we can kind of improve the expense side. Plant side would be -- of course, direct labor is quite obvious. Indirect labor, the overheads of the plant, some of the other launch costs also for the salaried people. So there also we want to optimize the plant level also.The right level of best industry benchmark, that's something we have also received from the consulting house we are working with. We know the best industry benchmarks, what is in the plant level cost. That is something we want to also address and the other improvements in the plant.Then, of course, is on the global SG&A and engineering, that is corporate cost. There also, I mean we are going more towards fast at 1x towards EUR 1.5 billion of revenue. But obviously, things have changed after the pandemic. So obviously, we have started taking some actions, yes.So we had reduced the number of people in April, May, June of last year. But again, we hired a lot of people because when we saw the V-shape recovery, we thought that the pandemic is over. But then again, now the semiconductor was a totally new problem. It's also a result of pandemic only.So we want to rightsize our overall SG&A and also engineering level cost and still be able to achieve. So that's also an area we are focusing on, how to rightsize the corporate side -- I mean the people side. So that's also another area we are looking at.These are, I think, some of the major areas, I don't know whether I'm missing one more area. Christian, do you remember -- I think there's one more element, right? There's one more I'm missing maybe.
No problem. I think probably it's not -- so if you can just elaborate how much are you expecting your people cost to come down in VLS over the next 12 months on a broad percentage?
Sorry. Before I answer that, other is on the purchasing side. So that is actually resourcing of electronics. So we have our own Romania facility. We want to do more of electronics. We get a 10% saving there and also some resourcing. Without any change of design, the PCBs today we're buying at a certain price with opportunities to -- so there are about 5 major programs maybe we would resource -- hello?
Yes, sir, please go ahead.
So -- yes, so one is resourcing of electronics. And there are some other opportunities also on the pricing side of certain commodities. So that also is a big number. So all these put together is what we are kind of looking at. So what was your question on manpower?
Yes. I was just trying to -- on a broader line item, any thoughts on how much is manpower cost likely to come down by next year in VLS?
Yes so, I mean I -- see today, I would say that probably there is an opportunity overall as a company. I'm just saying that we should be at least trying to target at least probably a couple of percentage points. Overall, I'm saying -- this is including plant level, including at the plant level, that's what we should be trying to, this thing, at least have to achieve this thing -- I mean through this thing.It would be a little bit more also, but I'm just trying to be a little conservative. But we have actions. So let us see because there is a benchmark on global SG&A. People say this should not be more than -- I mean more than 3.5% gross, your SG&A; out of which, your manpower cost is at least 70% of that.So we have to reset benchmarks. We don't want to be more than 5% of our revenues on engineering. At the plant level also, there is a certain level of direct labor as a percentage to production revenue. There's a certain percentage of direct labor, indirect labor, salaried people.So those things, we have those benchmarks. And that's what we are trying to achieve for a best industry benchmark level. And that's what we have in front of us. And that's what we would want to do before the end of December '22. And actions are already on, and we're pretty aggressive over there on the people side already.
Understood. Appreciate the detailed answer. My second question is again on VLS. I see that your order wins net basis -- the basis has come off even from quarter 1. And you have a high base effect over last year.So any thoughts -- is this an underlying market situation? Or you're kind of being more cautious in terms of waiting for orders in terms of pricing and stuff so that's why you're not going after larger order sizes? Some thoughts on this why the order wins are trending a bit softer.
So it's just that the customers are not coming out with the new programs, with new models and all because of the situation. So what they are doing is they're extending the existing programs.So what we have more and more is extension by 2 years, 3 years. People -- I mean because of the lower volumes, they don't want to invest in new models because that requires a lot of money. So there's some postponement of new programs.So therefore, I think -- I mean this year, we were also trying to target closer to probably EUR 300 million of new business win. Okay, we are at EUR 145 million. But at the moment, because of this real semiconductor crisis, people are not really -- it's not they're not focusing on new program. But they're focusing less.Less new programs or refreshes coming in at the moment. Maybe things might change in January. For the moment, the things are a little bit slow for what we see. And that's the reason that's impacting us also. There's no intention from our side not to win new business. There's no intention like that.
Right. No, I was just thinking that because you're trying to do pricing corrections, there might be some changes in terms of what kind of orders you are getting.Anyway, my last question is on the finance side, like see a bit meaningful jump on a quarter-on-quarter basis on your interest cost. So I know obviously your gross debt levels have gone up. But is there also blended cost structure going up, blended cost of capital going up on those debt side? Anything that you can share what is happening on the interest cost side?
So definitely, the blended cost of capital is going up. But maybe I think either Srini or Nitin can take that question.
Yes. There is some increase in the borrowing cost because we had to -- to fund VLS, we had to take some loan -- short-term loans in India which has higher rate of interest than the normal case. So that is definitely there, including the nonconvertible debentures that we had issued last month.So to that extent, yes, there is an increase in the refinancing cost. But hopefully then, we are able to, let's say, refinance the debt which we plan to do in the coming months. Hopefully, that weighted average cost can come down. We can refinance some of the higher cost debt you have taken.
So, Srini sir, how should we think about the blended cost on an annual basis? Should it be higher vis-a-vis last year by 100 basis points, 150 basis points? What is your thought on that?
This year, yes, you can say compared to last year probably. Next year, probably we should come closer to the last year level, assuming we are able to get the refinancing done before end of this financial year.
The next question is from the line of Avadhooot Joshi from Newberry Capitals.
Just extension to the earlier answer, which you have given to the RACE program. Just I want to know the quantum of this like in percentage wise, which is easily achievable for us. Like if we take design-to-cost, then there will be changes in the product and then approval from the customer side, like VPAT approvals and stuff, it may take time and -- but if you look at the productivity side, which depends totally on [ standard volume ] -- so I want to know the quantum of each of these changes and which we can easily ad hoc from our side?
I think that see today -- in today's situation, what is happening is something like a design-to-cost or even getting a recovery from customer would have been tough in a normal situation. Because of the situation we are in, we are able to get something out in this kind of a situation.And then see the other aspects. I would say that this is a special thing. I mean getting something from the customer is the most difficult thing. But the design-to-cost and that is the most difficult, which today, if we are trying to target eventually a net of EUR 76 million through this project at the level of revenue of, let's say, even with EUR 1 billion production revenue a year. So -- yes, so what was I saying? I forgot, actually. I was on that one point. So this -- yes, so basically -- so customer recovery actually and this is something which is a special thing, which we are able to -- again, so total is, let's say, about EUR 76 million we've to get out. At least I think probably 25% of that would come from this customer side actions of design-to-cost and that. The other things are like more internal, which anyway we were doing it as improvement point. Some of these are okay because of some revenue being down, anyway automatically -- like direct labor and all that stuff, which anyway we would go down.But the other optimization of manpower or taking some more steps for further scrap or other improvements on the shop floor or those -- or something more on the purchasing side or resourcing of electronics, those things are more in our hands what we can do.And that is something we anyway are confident. And all these things, the initiatives we have got, they are all -- I mean they're all like kind of individual initiatives. So it's not there's some general number. I mean these might be quite a few hundred of initiatives.So we know that under every initiative, let's say, if the customer, this thing -- this customer, this program so much. It's like that. It's defined specifically. So we are addressing it like that. It's not just a general thing that you will go and get something from 1 customer, like that. There are specific actions, Program RACE from customers or what we do in a particular plant or with a particular supplier. So all the issues are all written down. And then we track every initiative to see that it is being executed. Some may take longer, some may take...
Understood. 75% from internal gives much more confidence that it is doable, 25% depends on customers. And we can manage it, I think.The second question is about the second move in our consolidated financials. There is certain alleged patent infringements that we have received notice. Would you like to elaborate on that?
I'm sorry, I did not get it. I didn't hear you very clearly. It was not very clear. I'm sorry.
Am I audible now?
Now you are, yes, yes, yes.
Second question about the alleged patent infringement, the second note in our consol.
The value of patent?
Yes, yes, yes. Would you like to elaborate on that?
So maybe, Srini, you would like to give an update on that?
Yes, yes. So basically, the matter is under litigation. So we have -- the hearing on one case has taken place, first hearing in the German court. One more hearing is I think scheduled for the end of November [indiscernible]. No judgments have been handed out yet and there are more hearing getting scheduled in other cases.So as of now based on the advice of the lawyers, we are kind of confident that our exposure on this issue will be quite limited. We don't expect anything financially material to come out of it. So that's why we are [indiscernible].
[Operator Instructions] As there are no further questions, I now hand the conference over to the management for the closing comments.
Yes. Thank you. So yes, I mean in the -- we had actually -- I had actually thought that FY '21 was -- we've seen the last of it and the worst of the year. But this year, of course, the semiconductors obviously is proving more challenging for us.But all I can say is that in both our businesses, whether India or the lighting business, we are extremely focused. Yes, we -- the unfortunate part is that this time, it's not a demand issue. It's more supplier related issue because of semiconductors. And it's a big issue, which will take some more time.That's something -- so revenues are not in our hands. But we do need the revenues. But anyway, whatever -- I mean whenever the situation improves, I think it will improve from the January quarter, I feel the volumes will start coming back. But until then, at least, we are focusing on internally to see what we can do.So we are very determined in our result to see that even with the level of revenues we have, that we are getting an improved results, especially more on the VLS side, maybe are more impacted on the sales.So we continue to kind of stay focused and continue to see that we have better quarters ahead of us. We will see a better quarter 3 and quarter 4 as we move forward. And hopefully, next time when we meet, we can probably be -- it can be a little bit on a happier note than it is at the moment.So that's all I just want to say. Rest, of course, I have already mentioned and answered to your questions. Thank you.
Ladies and gentlemen, on behalf of Varroc Engineering Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you.