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Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q3 FY '22 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. Varroc Engineering Limited management is being represented by Mr. Tarang Jain, Chairman and Managing Director; along with Christian Paschel, CEO, VLS business; Arjun Jain, President and Head, Electrical & Electronics business; and T. R. Srinivasan, Group CFO. I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.
Thank you very much, and good evening to everyone. Tarang Jain here. And I would like to thank you for joining the Q3 FY '22 Earnings Call of Varroc Engineering Limited. Let me start first with the India business. The Indian 2-wheeler industry volumes were lower on both year-on-year and quarter-on-quarter basis by 23.7% and 13%, respectively. Against this background, our India revenue in the quarter increased marginally by 2% year-on-year and declined only by 4.2% quarter-on-quarter. This is mainly attributable to the sharp increase in commodity prices during the year, most of which was passed on to the customers. The EBITDA margin of the India business was at around 10%, with margins impacted negatively by a time lag in passing through of the commodity prices -- price increases to the customers. Speaking about the global lighting business now, the semiconductor shortage continues to persist globally and it expected to normalize over the next 6 to 9 months. The passenger vehicle volume during the quarter have shown some recovery as compared to the previous quarter but are still significantly below normal levels. The passenger vehicle production volumes in the current quarter in Europe were down 25% year-on-year, North America was down 13% and China was down 3%. This resulted in a 15.1% drop in VLS revenues year-on-year in euro terms, though it was 10.7% higher on a quarter-on-quarter basis. The VLS EBITDA margin improved by 510 basis points quarter-on-quarter due to the sequential revenue growth, customer recoveries for lower volumes and commodity inflation, improved operating efficiencies and better cost control. Our China JV revenue also grew by more than 20% on both quarter-on-quarter and year-on-year basis, with improvement in EBITDA margins. The quarter-on-quarter increase was of 250 basis points. Our Project RACE launched in Q1 of FY '22 improved the profitability of VLS Europe operations to best-in-class levels has made good progress in identifying improvement opportunities across various parts of the business. An implementation of the identified actions is currently underway. The impact of the same will be more visible towards the later part of FY '23. Our overall net debt levels have reduced during the quarter by INR 370 crores due to improved operating cash flow and a weaker euro. The Wheelers operations are expected to start generating positive free cash flow from Q4 due to the improved revenues and a better operating performance. Our order booking, I'm happy to inform you is that our India business has been able to secure an overall net business win of INR 580 crores or INR 5.8 billion on a year-to-date basis, and most of these orders are new business wins. Our VLS business has won EUR 105 million worth of new businesses on a year-to-date basis. The new ordering activity at the customer end is muted due to the backlog of current model volumes as a result of the semiconductor supply shortage. Finally, I would like to mention that we've received an interest from certain parties for a strategic partnership in our Global Lighting Vehicle Systems business. The management is in the process of evaluating the interest with respect to scope, valuation, timelines, et cetera. The investors are currently carrying out the due diligence of VLS, and there is presently no firm or binding offer that has been received by the company as on date. 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, on this debt reduction by INR 370 crores quarter-on-quarter. This is mainly to what, let's say, inventory reduction or debtor coming down? What are the main reasons behind this?
Yes, I will take that question. So basically, this is driven by 2 factors. One is in the VLS business in the last quarter, we have seen sequential revenue growth, about 10% in euro terms and that has contributed to improving the operating cash flow in addition to certain initiatives we have taken in working capital improvement. And during the quarter, we also came to certain settlements with customers but some claims we have related to commodity cost increases and capacity underutilization during the year. And so overall, you can see the VLS EBITDA margins sequentially have improved by 510 basis points, which contributed to the improved cash flow. In addition, the India business continues to generate positive free cash flow, which is also helping in releasing the net debt. The third factor is the euro weakened against the rupee during the quarter, more INR 2 per euro. And that means that denominated in euro also reduced in rupee terms is at extend by about INR 60 crores of overall [indiscernible] we had. So I would say roughly 20% due to exchange rate and 80% due to better operating performance, working capital management.
So there have been losses in the quarter. So your EBITDA level as well -- so this is mainly due to working capital only, I guess. So I mean, I want to understand whether it's a payable increase, which drove this or inventory reduction? So what happened exactly in this quarter?
Yes. Payables have been fairly at a constant level. So it is mainly inventory reduction and also some faster collection of receivables, certain payments, which were on account of tooling and engineering, et cetera, which is new from customers we have been able to collect earlier. So that mainly has driven plus the India overall cost free cash flow.
Got it. So secondly, on this VLS EBITDA. Now if I look at the 2 plants that you had at Poland and Morocco, there, the EBITDA losses actually has gone up by almost EUR 3.5 million quarter-on-quarter and there is overall reduction of EUR 10 million in the EBITDA, the other plant would have contributed around EUR 13.5 million improvement. Well, actually, in terms of revenue, Mexico was flat, Czech was only EUR 10 million increase quarter-on-quarter. This EUR 13.5 million improvement in EBITDA came from where? Is it like some element of receivables from customers of the commodity attraction of the scheme for previous quarter as well in this quarter?
A lot of the customer settlement happens late to the current quarter actually. So we -- during the quarter, we, let's say settlements of something like, let's say, about EUR 12 million out of that EUR 8 million of [indiscernible] to current quarter and EUR 4 million related to previous quarters, roughly that broad data. So essentially just certain price correction which they got effective during the current quarter, which are under discussion because of the cost increases, which have taken place through the year right in the beginning of the year onwards. Some capacity and replication, which was there because of the lower volumes. It's a combination of that. And yes, and on the newer clients, specifically, there are 2 reasons why we still don't see any EBITDA improvement. One is because the commodity price increases have been sharper this year, so which has offset the operating leverage we got this higher revenue. Plus there have been some supply chain disruptions in terms of availability of materials, especially semiconductors, because of which there have been frequent changes in production line and some [indiscernible] which have also contributed to lower operating performance, but both are kind of expected to stabilize in the current quarter in [indiscernible].
Ashutosh, do you have any further questions?
Sorry, sorry, if I get it correctly, EUR 12 million that we got this quarter, EUR 4 million is related to previous quarters, right, in terms of past due?
Correct.
And secondly, there were some fair correction? Will that also include something related to previous quarters that we got in this quarter?
No. Those are all [indiscernible] effective in the current quarter. Out of 12, 4 is previous quarter and [ 8 ] in the current quarter.
So just to clarify, the EUR 4 million was on account of some underutilization claims on certain programs of one of our major customers, which had to be settled before December end because the customers have December end as their year-end and also some of these programs end of life was also achieved. So the claims were you asked for our purchasing conditions, so that was EUR 4 million. And the EUR 8 million was a general increase already granted by one of our major customers effective November. But obviously, the commodity increases have been quite sharp in the last 1 year more and, therefore, we are expecting a certain increases which would come in more from the January period onwards in Q4. So EUR 8 million was by one of the customers who had actually kind of granted us price increases on -- due to commodity-related inflation from November onwards of last year.
That will continue in the current quarter.
That will continue. I mean, it's like compensating us for the commodity price inflations actually over the last 2 years, but people -- like in India, for example, we have a quarterly settlement, while abroad, probably sometimes annual or sometimes in case of some special situation, whether increase in commodity prices are really tremendous, then we can go back and ask them. And that's what's happening now that we will see, you can say, reimbursement of this commodity inflation going forward.
Okay. So you said that, that EUR 8 million is related to last 1 year, November '20 to December '21?
November '21, only November and December.
EUR 4 million is related to the previous quarter.
EUR 4 million rated to the underutilization of these few programs of a major customer for the -- over the last probably 1.5 years because of the COVID situation.
Okay. Got it. And how do you see Q4 like versus Q3 in VLS, what kind of revenue increase you can see quarter-on-quarter?
So see, what has been happening so far in the first 9 months, if I have to just state it simply, that with all the investments we've made in new plants and overall, VLS has a production revenue, including, of course, China, 50% of China, we should be doing a production revenue of EUR 100 million a month. But what we have seen is that due to the shift shortages, we have seen an average of only EUR 68.8 million in production revenue in the first 9 months. So we are almost 30% down overall. It depends on which plant is more or less, but that's the issue, and that's the reason why there has been a cash burn for us in the first 9 months. But now we see from January onwards, we already see an improving revenue trend. But revenues are increasing by at least 10% -- by at least 10%, 10% to 15%. And this, of course, will help an overall situation of no more cash burn. And also the price increases due to commodity inflation, the reimbursement of that, we already got it from 1 customer, and we are also seeking from other customers in Q4. This will result in -- this will result in a positive, I would say, free cash flow. And also at the same time, we have seen that we have got this Project RACE, which we have discussed in the last 2 quarters also that we have started the Project RACE in June of '21. And we started implementing the ideas from, you can say, September, October of '21. And here also, we see a momentum growing -- and this also will result in better operational listing and overhead performance in Q4 onwards.
[Operator Instructions] The next question is from the line of Aditya Jhawar from Investec Capital.
My first question is that we have to repay debt of about, say, EUR 50 million by March 2022. So does that mean that the strategic sales decision that we are planning to take, the resolution will come before that?
Well, it is not necessarily linked to that. So we are -- so yes, what you are referring to mainly is the facility we have in Czech Republic from a syndicate -- so that we have an extension till March and right now, we are in discussions with the banks to roll over for a further period of 6 months. So the negotiation is going on independently. So there is some prepayments, et cetera, which I think can be managed of that operating cash flow plus some additional debt raising that we are working on at the moment. So yes, I mean -- coming to the strategic stake sale. Obviously, we can't be sure of the timing and the quantum of the investment, et cetera. So we are not necessarily depending on that to plan our cash flows and take off our commitments. So this will be [indiscernible].
Sure, Srini. So what could be the timeline broadly if you can help us understand of strategic sale?
This is a bit difficult to predict. I think you will know very well from your experience that this thing can take longer or shorter depending on how the discussion goes. So yes, we can really say that we have the fixed interest and the due diligence process ongoing. And as and when we have a firm or a binding offer or a definitive agreement, obviously, we will update some more data [indiscernible]. So yes, this can take anywhere between -- very difficult to predict, it can be anywhere between 3 to 6 months or even longer depending on the scope of the deal, associated complexities and mechanisms.
Okay, okay. Your second...
We request you to hold, we have lost the connection for management.We have the management line reconnected.
Sorry, the connection dropped. So I think, we think sort of a bit difficult to predict, and there are multiple parties involved [indiscernible]. So we need to wait and see how things develop, and we will keep you all updated regularly on the process as we go.
Absolutely. The next question is on our order wins, specifically on EV in the Indian market. If you can call out specifically any order wins, so we understand that we have been supplying to Bajaj Auto [indiscernible]. But other than that, what are the order wins? Are there any progress in discussions we were discussing the start-ups and few existing [indiscernible]?
Yes. So again, like we've talked about before, we have been engaged with multiple different customers. However, I think also, like we have mentioned before, I think the focus really has been to drive execution and launches of the orders we have already won, right? And I think today, we are in a very, very strong position there, where we have basically launched almost everything. We have either launched or for a couple of components, we have in validation now, so we will imminently launch all of the products that we've been talking about anything that I think that really is, I think, a significant [indiscernible]. And that, I think, is really a significant achievement over the last quarter. Of course, next, we also work on the three-wheeler. I think that is something that happens in parallel. And again, I think now that we will have a level of capacity again, I think it bodes well, I think, really for the future.
Yes. But other than [indiscernible], are there any projects which we can go for commercialization in the next 3 months or we are at advanced stage of winning orders in EV components?
I mean I think I'd rather not talk about where we are in terms of -- before there's a business win, right? I don't think there is any point in reporting it out. So I think we would rather wait for an actual -- we'd rather wait for a business win before reporting it out.
Absolutely. And the final question is on depreciation [indiscernible]. So what -- is the capitalization of the new facilities? Is it largely behind? And should we expect this INR 250 crores kind of a run rate on a quarterly basis or how much increase we should expect from this?
I think, by and large, I think capitalization of the major facilities is done. Of course, there will be ongoing replacement CapEx plus a program-specific CapEx, but that should not kind of [indiscernible], so it will be stable around this level.
Sure. The final question, if I can squeeze. What could be the EV contribution on a consolidated revenue, VLS and India put together?
Sorry, come again.
What could be the overall contribution from sale to electric vehicles that include Tesla, VLS as well as the India business?
See India, I think, see talking about, see, this year is not that much. And you're talking about built-up or EV, you're talking about the EV powertrain only. And over there you're talking about the lighting, right?
Right. Absolutely right.
The EV powertrain, in fact, we have just started, as you know, for the [indiscernible]. So I think next year, I think if you talk about the EV components, I think we would be at least a level of about INR 250 crores next year for the India site [indiscernible] EV powertrain, which will be largely an additional revenue. When it comes to lighting, see, our lighting portfolio, what we had last this thing was about whatever revenues are, it's about between 10 to -- is about 10% to 15%. No, sorry, that was the market share. There was a market share. Christian, would you be knowing that what of the total revenue, what percentage, I mean, would be the EV for the EV vehicles? What revenue would it be for the EV vehicles only, roughly?
Yes. For example, Tesla and some of the other ...
Volkswagen programs and all that roughly I would say what about maybe 15% or 20%.
See the Tesla is, I would say. Sorry, sorry.
Srini, go ahead.
No, no.
So I believe it's between 15% and 20%, 22%, 25%.
15% to 25%.
That you can say that, let's say, if we are on a production revenue side, if we are at around EUR 850 million or EUR 900 million, so you can just -- maybe you can take 20% of that. So let's say, it could be anywhere between EUR 150 million to EUR 180 million would be towards EV lighting. And in India site EV, we just started. So it will be a very small revenue this year. And next year, I think this -- I mean, next year, I think the revenue growth should be there in VLS also. So this number of EUR 150 million to EUR 180 million will also grow. So there are chances of it going up to maybe EUR 180 million to EUR 220 million or EUR 230 million next year, at least.
The next question is from the line of Abhishek Jain from Dolat Capital.
How is the revenue contribution on year-on-year basis, North America in 9 month FY'22? And how much growth or degrowth in each geography?
I think if you really take on a quarter-on-quarter basis, Q2 to Q3, North America actually was down about 1.4% in revenue terms. And if I talk about individual plants, I would not just say Europe, on a quarter-on-quarter, Czech was up by 10%. Poland was up by 40% and Morocco was up by 17.7%. So this was, I'm saying quarter-on-quarter, the increase in revenue. When it comes to a year-on-year change, obviously, as you remember, last year, in this third quarter was when we saw a V-shaped recovery. So obviously, compared to year-on-year, I mean, North America was down -- was down 26%, Czech was down 33%, and of course, Poland and Morocco at that time were at a very, very low level. So there, Poland has grown 54% and Morocco has grown 48% on year-on-year basis quarter.
Sir, I was asking the mi,x, revenue mix for the 9 months FY '22 Europe versus North America?
Yes. If you take it on a 9-month basis, North America, from a production revenue perspective will contribute between 17% to 18% of the overall VLS revenue. Then Europe together is about 55% across Europe, which is Czech, Poland, Morocco, all together. And [indiscernible] contributed by India, Brazil and the.
Turkey, Turkey, China.
Turkey, Italy, Romania, Vietnam and all that put together.
And given the geopolitical issues and staff increases and the energy cost, how is the outlook for the year for growth and margin in fourth quarter and FY '23?
Christian, do you want to take that?
[indiscernible], please? I wasn't able to catch the question.
Sir, I was asking about the outlook for the Europe. Given the geopolitical issues and staff increases and the energy cost -- how is the growth and margin outlook [indiscernible]?
So for me, the outlook, let's say, it's depending, of course, on the availability of the semiconductors, but the overall situation is improving, let's say, month by month. We have, let's say, some good agreements in place, but we would say the dominating effect is the semiconductor. On the other side, while we were able to reduce our costs, and, therefore, I see a strong improvement on [indiscernible] according to the revenues we see. And again, for me, more important is that we have secure connections. And as I said, we have some good agreements made with the customers. Therefore, I'm looking really positive to the next quarter.
Okay. And how is the margin outlook for the VLS for the quarter 4?
Yes, I'll take that. So sequentially, we should see an improvement on account of 2, 3 factors. One is we are getting some rate compensations from customers for the raw material price increases which have happened, including the energy cost that you mentioned. So those things somewhere between, during Q3 effective November 1, which continued into Q4, but there are some more agreements getting finalized now, which will be effective in Q4. And then we also see 8% to 10% higher revenues in this quarter compared to the previous quarter because of the improving situation on semiconductor [indiscernible] Christian talked about. And lastly, Project RACE, a number of those initiatives are under implementation now, and those benefits are also starting to get realized and adding to the bottom line. So that also will contribute. So with this, in Q4, we hope to have a positive EBITDA margin in VLS overall and it was an improvement over Q3 and improve that further in the next year going forward.
And what is the current breakeven point for the VLS in revenue terms after taking all costs that it gets the size?
Okay. If you say in EBITDA terms, it depends a bit plant-specific because the different plants have different operating -- but if you say overall at EBITDA level, it is they can do a revenue of, let's say, EUR 75 million to EUR 80 million per month, roughly in the production revenue, we should be able to have a positive [indiscernible].
And if the revenue goes up to the EUR 120 million, then what EBITDA can we expect?
Well, currently, we have capacity with which we can reach a revenue of EUR 100 million.
EUR 1.2 billion of production revenue. At that level, the EBITDA will be at, will be -- No, it will be double digit.
Close to double digit, yes, just about it.
That is for the VLS?
That's for VLS.
[indiscernible].
And can we expect this sort of the numbers -- can it be possible in FY '23, the semiconductor shortage issues, semiconductors shortage issues easing out?
It depends from the rate of improvement, right? Because right now, it's very difficult to say when things will become totally normal. Everybody is kind of -- people are saying it can take anywhere between 9 to 12 months [indiscernible]. So it depends on the rate of normalization. But yes, the things become totally normal, and I think the [indiscernible] volumes go back to normal and capacitization improves, then maybe towards the last quarter of FY '23, we can look forward to.
So basically, next year, we are expecting that we should be able to reach because the situation is improving on the semiconductor shortage front. It's improving, but it's not normalizing like what was said that we can only expect not before third quarter of next financial year, kind of a normalization, or it could go into the fourth quarter also. But we will see an improved revenue than what we have seen in FY '21 and FY '22. So we are expecting it is a production revenue to be over at least EUR 1 billion is what our expectation is. And hopefully, that should happen.
On my side, I can underline this, let's say, because it's not only on semiconductors. We have set countermeasures together with the customer to get rid of the critical components in our entire -- and, therefore, let's say, we can as well improve. But I would like to underline what Tarang Jain was mentioning.
And sir, rupees appreciating versus euro. So although it's a positive for the overall debt reduction side, how would it be impact on the revenue terms of the VLS?
Yes. I mean it certainly had some impact which we have seen in the last quarter as well, because in euro terms, the revenue grew by 10% plus, but in rupee terms it was less, at around 7% or so. So this is something which obviously is beyond our control. But I think more important is to have a sustained margin recovery in VLS, I think which will lead to overall improvement in the consolidated, which is what we are focusing on. And yes, and we can bounce back like we're already doing in this month. So we have already gone back [indiscernible] December. So those things -- movements will be there, but that we cannot influence [indiscernible].
So overall rupee appreciated versus euro is positive or negative for the company? If this set-up from the revenue losses from the benefit of overall rate reduction?
Overall, once the operating performance comes back to a normal level, which means EBITDA generation in the normal level, et cetera. Obviously, euros entering in rupee will be a positive one for the business. And the operating cash flow improvement will outpace a debt increase, so to say, in rupee terms. So that's what's in the normal cost. But now it is -- we are not in the normal situation. So that way, it's a bit of a mixed bag right now.
Okay. And sir, during this quarter, you have incurred interim losses of around INR 22 crores on intercompany loans. So what is the size of the loan and as the rupee is appreciating, interim losses will bounce, will reverse in the coming quarter?
Yes, that is the expectation. But once [indiscernible] the losses mark-to-market losses will get lower, so we are roughly talking about EUR 100 million loan, intercompany loan.
Okay. And my last question is on India business in [indiscernible], what components you are supplying right now?
So we supply the motor, the motor controller. We supply the vehicle control unit. We supply the DC-DC converter, we supply also the switches, the telematics, the BMS and also the chargers.
And how much is the content per vehicle, sir?
I think we had a slide around that. So of course, we can't reveal the exact content for specific vehicle because vehicle-to-vehicle it will change. But I think in terms of what we stated in terms of the total content that we would expect to do in an electric vehicle, a two-wheeler, we expect we do around INR 37,900, around INR 38,000. And in the three-wheeler, we would expect to do around INR 46,000.
And what would be the FOB in the -- [indiscernible]?
So again, right, I think defining an FOB, et cetera, at this stage, I think it's probably doesn't make more sense, right? Because the Market is still evolving today, in general, like I spoke about it, actually executing everything we've executed, right? It's not just the [indiscernible], it's also the new Pulsar which is also running in the background. With the semiconductor background we have, I think that is really our position of strength right now with our customers. And I think utilizing that, I think we'll see where we go when it comes to whether it comes to FOB, whether it comes to content, whether it comes to new business wins.We have the major market share when it comes to the [indiscernible] and when it comes to the three-wheelers, we are a single source.
The next question is from the line of Basudeb Banerjee from ICICI Securities.
Just continuing with the previous question, as you said for two-wheeler, the EV is roughly INR 35,000, INR 37,000. How -- that must be including the existing components, which you are supplying to normal petrol models. So adjusting for that, how much 1 should look at for core EV, which is new per se, which were not supplied for petrol models?
I think the calculation today, we have resumed, I would say, just give me 1 second. I think we've assumed around INR 6,000 for non-EV components, so I would subtract from INR 38,000, INR 6,000 to around INR 32,000.
Sir, if I look at the stand-alone numbers, I don't know if I missed something in the initial comments, the revenue sequentially is down now with the domestic two-wheeler market being weak but your other expenses are up almost 20% sequentially. And your interest outflow also moved up sharply to almost INR 29 crores up, almost INR 12 crores from previous quarter. So I think these are the 2 line items which have largely resulted in PBT negative numbers. So anything one-off or how to look at them, sir?
Yes. The finance cost is impacted by the exchange rate, mark-to-market thing we booked on intercompany loans. So that's the notional cost, that's not a cash-out. And product is -- or most of it will revert as [indiscernible] exchange rate reversal. So that...
How much is that, sir?
That is INR 21.8 crores for the quarter.
Okay. And other ...
Other expenses were also high. The other expenses also were high.
Okay. Other expenses are a number of things included in that, that includes certain legal costs we are incurring in fighting off some patent litigation and some other costs, include our selfless some other operational costs, one-off incurred in the VLS business because of, let's say, supply disruption from semiconductors and so on. So it's a combination of multiple items.
So this [indiscernible] on one-off VLS costs accounted in the stand-alone?
So you are looking ...
Are you talking about the India side?
I understand. Okay. Stand-alone is mainly the legal costs and some other personal fee we had doing for the quarter.
So almost sir, I can see what INR 25 crores Q-o-Q increase, which is on a base of INR 129 crores is close to 16%, 17%. So how much one should look at as one-off in this number?
If you're looking at the stand-alone financial statement, not in the presentation, then the mark-to-market loss on the exchange rate on intercompany loans is booked at another cost. It is not under finance cost. The finance costs went up because last quarter, we issued nonconvertible debentures of INR 375 crores, which is mainly to fund VLS for the liquidity repayments and some loan repayment, and that is the one which contributed to a higher interest cost, it's mainly related to supporting VLS operations.
So stand-alone interest cost, there is nothing one-off, but how much one-off will be in the stand-alone other expense then?
Exchange rate is INR 21.8 crores, which is a -- other than that, I would think it to be about specific could be about INR 3 crores to INR 4 crores. That's what I broadly remember, but I can confirm later.
Okay. So broadly INR 25 crores means Q-o-Q, it will be normal. So that [indiscernible] is the one-off quarter roughly?
Yes.
And in your results also, if you can explain about the patent infringement stuff where you also highlighted no provisioning for that. So what is it all about?
Yes. On the patent infringement, basically, there are total 6 cases going on overall. And there in -- so this is in different stages of hearing, et cetera, in the court. And we had preliminary ruling in a couple of those cases, which basically said we had to disclose, make certain disclosures in our supplies to customers regarding potential patent infringement [indiscernible] and the risks associated. So far, there has been no quantification or decision on any claim, either by [indiscernible] by the claim nor by the court, so that is still open, because we have contested the patents on prior art basis, which means those original patents granted to the other party were not valid because those were all the widely and publicly known design information in the public domain. And those claims have not still been different. Those are still under adjudication by the court. So based on the legal opinion we have currently, chances of, let's say, successfully [indiscernible], let's say, reasonable and based on which -- and it's not possible to quantify any potential liability. That's why we have not made any provision, but just made a disclosure. And there are more hearings coming up in the coming months. So where we will get a clear direction on [indiscernible].
And how much has been the legal expenses for this in VLS?
On this case, probably would have spent something like -- my guess is about EUR 1.5 million, something like that over the last year or so.
Okay. Okay. And last question for Tarang. Last quarter, you may also mentioned that because VLS is like going to a worse for a prolonged period to [indiscernible] if at all there is a good deal for VLS and it can get sold to some other global like makers. So any advancement on that angle, sir?
So here, actually, like what our CFO just mentioned earlier. So here, I think there has been expression of interest by a few parties or from the -- also from the auto space. So we have been discussing with them, but we still have not received a binding offer yet. The process is on. So just to clarify that, see, we are actually open to a strategic investor for our lighting business because for the simple reason that going forward, we do see that the semiconductor shortages will remain for at least 9 months to 1 year and there are. And we also have to then invest money. We have to invest in the growth, there's CapEx involved and other things. So it's good to have probably at this stage because already 2 years have gone during this COVID time and obviously, the revenues have been disrupted. We already made a large amount of investments, which still has to see that level of revenue coming still in -- which will take probably to reach that kind of capacity utilization, what we expect probably will take another probably 8 to 9 months. So therefore, I think we had -- like last time, we -- there was a little bit of a mention there that -- we are in -- so we are looking at that, and we are in discussions now. So in at.
Partial stakes or full sale efforts?
No, it will be kind of the stake. It won't be a post tax sale. It will be like a JV.
See, all those things are part of the discussion. So.
But we won't have full-stake sale.
Which entities, which geographies, what company stakes, all those things are still open. So we are discussing, so it's too early to say there will be a minority stake or majority stake or whole of wheelers business or part of VLS business, et cetera.
It also depends on the valuation -- so we'll have to decide from that. But there is a good amount of interest. That's all I can say -- that's all we can say.
Basically stand-alone India business. So if it's able to do some factors into revenue at 12% EBITDA margin, so almost INR 500 crores of annual EBITDA, that will be good enough to suffice for the valuation where there will be no debt and if you have it off the whole debt issue will be also gone and then it will be a new growth path altogether. So from that angle and as you rightly said, further 3, 4 more quarters of lower production can continue to impact the balance sheet, so that will be the continued process.
Yes.
And last question, sir, if you can highlight. How to look at the sustainable tax rates down the line because I can see so many comments on tax in this quarter results, if you can explain it?
Yes, it's a good question actually because currently, what's happening, the losses we are incurring in the newer entities, we are not able to [indiscernible] the deferred tax credit from those entities because they don't have an established profit [indiscernible]. So cumulatively, if I have to say, as of end of December, I think we have unaccrued deferred tax assets of something like close to EUR 20 million, which technically we can accrue there is so -- it's a kind of off-balance sheet asset [indiscernible]. So that situation will continue for some more time till the entities reach the breakeven point and generating consistent profit that is for 4 quarters and after which we can accrue. So you may see in FY '24 or something other big deferred tax credit coming into the books, big amount on if that happens. So on a consistent basis, it's taking account the investment tax credit as well as the natural tax rate at different geographies. For VLS, we should have an effective tax rate of between 18% and 20%. That's what we expect. And India, obviously, will be around 30% to 35%, depending on the business, et cetera. expected average for the group, I would say, is around, yes, 23% to 25% on the.
And by when India can come down to 25%?
See, we are carrying some [indiscernible] today. So marginally, we would have kind of used up by now or later, but now that's also delayed because of the COVID and reduced profitability [indiscernible]. So now we have to actually do the calculations again and see, but at least it will be sometime in FY '24, I expect we can see over to the 25% region.
The next question is from the line of Ashutosh Tiwari from Equirus Securities.
Sir, I think I missed -- you talked about definitely EUR 1 billion-plus revenue in VLS next year. But at that level of revenue, what would be the margin that you expect at EBITDA level?
I think it will be -- it can be high single digit
Okay. Okay. And how should we look at interest cost going ahead because of this debt reduction in this quarter as of December -- so how should we look at the consol interest cost for next quarter?
See, in the debt level, we are trying to kind of stabilize. And once operating cash flow becomes strongly possible, which we hope will happen from Q1 next year. This quarter should be kind of breakeven still or marginally cost there. Then we can start considering the bringing on the debt. But at the same time, we have also refinanced some of the existing borrowings like this was earlier in the call, [indiscernible], et cetera. This allows this to be a mixed impact replacing some of the lower cost rates and a higher profit for the shorter term. So you will see an absolute finance cost for FY '23 may not be very different from FY '22, okay? The debt amount average may come down, but the cost set [indiscernible] plus the short term may go somewhat. And FY '24 onwards is when you'll see a sustained reduction in kicking in, we rebase on the higher cost set and improve the mix as well as reduce.
But this quarter, the interest cost is around INR 51 crores, INR 52 crores. So it will come down from that level right, in the subsequent quarters?
Subsequent quarters by -- see, if you are looking at the financial statements, what about interest costs you are saying, that probably will continue. But for the total however, analysis in the investor presentation, we reclassify some exchange losses into finance cost on the borrowings, which is explained in the notes, et cetera. That amount is not quite likely to continue. So to that extent, you will see lower finance going forward if you're looking at.
The next question is from the line of Nikhil Rungta from Nippon India Mutual Fund.
Sir, just 1 thing from my side. I mean, as an investor, we have seen it's almost 8 quarters that we have posted losses now. When is it that we can start seeing company into the V?
I would say, probably, it will be probably from Q1 of the next financial year that we can see a kind of a PAT, a PAT level positive because of the -- largely because of the higher revenues coming into the VLS business and also because we will be getting by then, a lot of our commodity prices which we have been incurring over the last 8, 5 quarters, then also we will see that has been compensated by most of our customers. So therefore, I see probably the Q1 of the next financial year to be a PAT positive. That means that, hopefully, with the higher revenues, we are not making a PAT loss. It's probably a smaller PAT loss in Q1 in VLS. And India, of course, does a decent PAT. So overall, we don't see -- we see a small PAT positive in Q1.
Okay. And -- every quarter, we have been seeing there is some of the other -- I mean, if not one-off type of things. Last couple of years, during COVID, auto slowdown, then we have semiconductor issue. So -- and every time we have been impacted by the VLS part. So as mentioned by participants before Basu specifically. So why is it that we are looking for a JV in VLS? I mean last year as well, we [indiscernible], and I believe we have almost utilized the entire amount. And now again, we are looking for a JV partner. So do you think we'll be in a position to turn around that business with the amount coming in or won't it be better to high beat off and start focusing primarily only on the India business?
See, see, to be honest, frankly, I mean, the lighting business is a good business. And when we took the business, if you may remember, it was at 12, it was a very low EBITDA business and with a lower level of revenues, we grew it. We doubled the revenues by us, we were making, we increased EBITDA from 3.8% when we took it to almost 9.5% to include China also to 9.5% in the December '19 quarter. So the point was that over a period of time, we were able to improve the EBITDA, we could convert even some of the loss-making plants to profitability like Mexico and India at that point of time when we took it over. And that's the reason we were betting and we looked at market share growth in this business, and the customers also gave us a thumbs up because we were doing a good job, in this business, it's just that, okay, I mean, we had not anticipated the virus to be there. The virus, it was a situation, which coincided with our heavy investment in lighting business. And that's where we have been navigating this problem for the last 2 years. We thought okay, that there was this shutdown in FY '21 and then there was a reshaped recovery but we did not realize the extent of the semiconductor problem. We didn't expect the shortage to be there to such an extent that it again. So I thought that we don't believe in the business, this business will definitely turn around. It's only that we need the revenues. So we have -- so we need the revenues. We -- that's primary and secondly, now we're getting back all the -- I mean, the cost we've incurred on material back also from this January from at least the major amount -- the majority of the customers. And thirdly, we are also now looking at the Project RACE where we are trying to look at improving our site operations, we're looking at overhead controls and also control of other costs, including even material costs, there are opportunities. So we're looking at and plus also design to cost. We're looking at also designs, it can be more optimized. So this business is a profitable business, but you cannot do anything without revenues. You need revenues, you can't just save yourself out of trouble. You need to sell, you need to sell yourself. So you need sales to cover up price. You cannot just go through things. And that's where it has been the major problem in the last 9 months. But we see the revenues now going up, like I said, by 10%, 12% already in January. So we see that this will sustain in every quarter, we are hoping for a better revenue, but the revenue will only stabilize probably by December of '22 -- that's the way we see it. And therefore, we said that look, we should still be there and we should get in a strong partner, where together, we can see how to look at strengthening this business also going forward. But let's see how it pans out. I mean we do see how it pans out. So we are already in discussions. So let's see how it pans out in the end. But we will take the best decision for the company for [indiscernible] in the end.
Okay sir, just to continue from your comments, the last qualitative question from my side, you mentioned that the lighting VLS is a good business to be in. So is it a good business from the perspective of customers and the management or do you really think it's good from the shareholder perspective?
No, I think it is good from a shareholder. I think it's a profitable business. It is unfortunate that we are in this situation. It was not what we had [indiscernible] to be honest. And like I said, it kind of coincided with a CapEx cycle in the 6 new facilities and INR 2,000 crore investment, the problem here was that, actually, that we have a lot of underutilization in the new plants and then commodity prices as a lot of things have come together, and that's why we've been navigating this in a business, which is a profitable business. So I feel that this business is good for investors. It is not -- it's good for the shareholders and good for the investors. It is a good business. But yes, I mean, honestly, yes, but we have to be a little bit prudent because of so many uncertainties around -- it's good to have a partner, at least that we realize that alone running a global business and in current times, where you can't predict the external environment so well, semiconductors or other issues. So it's good to have a partner and I think that today, I think we're working on our costs and also on our pricing, on our designs -- but all this -- I think this can be a stable business going forward. I'm quite comfortable in being and remaining in this business, for sure.
As there are no further questions, I would now like to hand the conference over to Mr. Tarang Jain for closing comments.
Yes, thank you. So I think we were able to answer the questions, both around our lighting business and also the India business. And I think now we see after a couple of years, India, of course, has been quite stable in its results. Over the last couple of years, when it comes to lighting business, yes, there has been a lot of navigating to do, a lot of ups and downs we have seen in the last couple of years. But now we see definitely the light at the end of the tunnel where we see that the chip shortages are getting better. The availability is getting better. I'm not saying it's still there, but I think that today, I mean, the 3 things, improved volumes, getting back the prices on the commodity inflation and thirdly, our Project RACE -- we are looking at optimizing our costs at the plant level as well as our overheads. So with all these actions, I'm pretty confident that going forward that our lighting business will first generate positive cash profits and then, of course, positive PAT as we go along over the next 9 months to 1 year. So stay -- so I would say that don't lose the confidence in Varroc and especially in the lighting business, I think you will see improved results quarter-on-quarter as we go along. Thank you.
On behalf of Varroc Engineering, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.