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Earnings Call Analysis
Q3-2024 Analysis
Varroc Engineering Ltd
The company remains focused on correcting a temporary mismatch in working capital and has incurred some arbitration costs relating to a China JV affecting net debt. They anticipate a correction in the coming quarters. Their net debt to equity is now at a comfortable level of 0.7, and a net debt-to-EBITDA is below 1.5, which indicates a well-leveraged position.
After consulting with legal experts, investments in overseas entities were written off as they were made for trade purposes, not dividends or capital gains. Indian operations had already derived benefits like technology sharing, which further supports the deduction claim. Cumulative actions lead to the recognition of deferred tax assets and improvement in the net worth.
Growth is robust in India operations with a 20% year-on-year growth outperforming the overall industry's 15%. The order wins across 9 months stand at INR 67 billion, of which roughly half is attributed to the burgeoning EV segment, underscoring the company's strong future growth prospects.
The company reports significant wins in the EV powertrain sector and is engaged with various OEMs poised for more wins. Their growth trajectory in 2-wheeler electronics and lighting products continues to show an upward trend, ensuring a bright outlook for domestic operations.
The company hinted at the upcoming benefit from renewable energy investments, signaling a future reduction in electricity costs that should impact financial performance positively from May onwards.
The company expects the commissioning of new operating projects and improvements in capacity utilization across their plants to ramp up in the coming fiscal years. The foray into green energy, with an estimated 35% to 40% of energy sourced renewably, reaffirms their commitment to sustainable growth, although specifics on the financial impact of these initiatives remain under wraps.
Management acknowledged the overseas operations faced setbacks, especially in the European markets. Efforts are being made to mitigate customer concentration risk by expanding into motorcycles in Europe and stronger engagements with Japanese OEMs in Vietnam, coupled with the adoption of in-house surface-mount technology (SMT) which is anticipated to boost margins. The focus remains on revitalization of international business, controlling capital expenditures, and enhancing free cash flow to progressively reduce net debt.
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Ladies and gentlemen, good day, and welcome to Varroc Engineering Limited Q3 FY '24 Earnings Conference Call hosted by Equirus Securities.
[Operator Instructions]
Please note that this conference is being recorded.
I now hand the conference over to Mr. Aashin Modi from Equirus Securities. Thank you, and over to you, sir.
Thanks, Manav. Good evening, all participants. Thanks to Varroc engineering management for giving us the opportunity to host the call. We have with us the senior management represented by Mr. Tarang Jain, Chairman and Managing Director; Mr. Arjun Jain, Whole-Time Director and CEO of PTI; Mr. Mahendra Kumar Karumanchi, Group CFO; and Mr. Bikash Dugar, Head Investor Relations.
So I would now like to hand over the call to Tarang sir for his initial opening remarks. Over to you, sir.
Thank you, team Equirus for hosting the call, and good evening to everyone for joining the call. Starting with the current macroeconomic situation. The Indian economy continues to sustain its growth momentum with a GDP growth of 7.6% in quarter 2 FY '24, exceeding market expectations. The automobile production in India during quarter 3 FY '24 grew on a year-on-year basis for all the segments.
Passenger vehicles grew by 5%. Commercial vehicles grew by 5.9%, whereas the 3-wheeler and 2-wheeler segment registered strong growth of 13.4% and 19%, respectively. This growth was due to the strong economy and the late festive season this year. Sequentially, that is quarter-on-quarter, we have seen degrowth in all the segments. Commercial vehicles have degrown by 8.3%, passenger vehicles by 10.9%, 3-wheelers by 8.9%, and the 2-wheelers saw a degrowth of 1.5%.
The degrowth on a quarter-on-quarter basis seems to be mainly due to the year-end phenomenon. Our operations in quarter 3 of FY '24 mirrored the industry situation. Revenue in India grew by 20.1%, which is higher than both 2-wheeler and passenger vehicle industry growth on a year-on-year basis. However, revenue from our overseas operations had a degrowth as 2-wheeler production levels went down in certain markets like Vietnam and Italy. In addition, our customer concentration in these markets impacted our revenue.
As we look forward in our overseas business, our focus is to drive customer diversification in the order book and hence mitigate our customer concentration risk. We also drive cost actions through in-sourcing and working capital optimization. These efforts are likely to lead to a gradual recovery in the overseas markets and improve financial performance in the medium term.
Despite degrowth in the overseas markets in quarter 3, the overall revenue from operations grew by 9% on a year-on-year basis to INR 18,846 million. The reported PBT for the quarter was INR 708 million, which includes profit from a joint venture of INR 250.7 million. The PBT margin improved by 300 basis points on a year-on-year basis and came in at 3.7%. Last year, we created an impairment provision for the loan and equity invested in our touch entity, VCHBV for our 4-wheeler lighting operations, which we divested. We have now written off the loans in quarter 3 as we have completed the FEMA-regulated compliances for write-off with December 1, 2023, as the effective date. This is well supported by opinions from 2 independent senior legal counsels also.
As a result, the profit after tax was much higher due to recognition of the tax benefit from the aforesaid write-off. We continue to have strong order wins from our customers in the 9 months of FY '24. Our customers continue to trust us with sustainability for their new products. In 9 months of financial year '24, our new lifetime order wins is INR 67.57 billion and on an annualized basis, INR 11.99 billion.
In quarter 3 of FY '24, our existing customers in the EV space have given us further opportunities as the market continues to evolve. These new orders will enable us to increase our revenue better than industry as the content remains 5 to 6x higher than supplying to the IC variance.
Our revenue from supplying to EV vehicles in quarter 3 of FY '24 was approximately 5.3% of our overall revenue against 4.4% last quarter.
Now I will ask MK, our Group CFO, who will walk you through the presentation, which is already uploaded on our website and submitted to stock exchanges also. Over to you.
Thank you, Tarang. Good evening, everyone. I'll take you through the highlights slide, which is Slide #4. So as Tarang mentioned, the year-over-year revenue growth was 9.4% in Q3. India operations grew by strong 20.1% in line with what we have been saying all along about India operations. However, we had some challenges in the overseas businesses, largely impacted by degrowth in certain markets in Europe and also because of lower uptake by major customers. So the customer concentration is also a factor which impacted us this quarter.
However, we have been working on action plans to achieve gradual revival, and we are hopeful of seeing a gradual revival over the medium term with various actions put in place.
Coming to revenue from EV customers. It was close to 5.3% during Q3, is also helped by strong performance from some of the key customers in the EV segment. Coming to profitability. The EBITDA margin was slightly lower this time at 9.2% compared to close to 10% that we reported in the last 2 quarters. But this was again the impact -- due to the impact of the overseas within growth and revenue.
So the absolute EBITDA during Q3 was about INR 173 crores with PBT margin close to 3.7%, which is still higher compared to last year by about 3%. As our CMD mentioned, PAT was also helped largely by the deferred tax asset creation for the write-off of loans which we actually gave to the divested entities last year -- in the earlier year. We created provision last year, which is what we kind of put into write-off. I'll explain about this in greater detail in the subsequent slides. In terms of lifetime business won, in the 9 months, it was close to INR 67 billion with annual peak revenue potential of close to INR 12 billion.
Coming to the industry numbers. Year-over-year business growth was good for all the industry segments. The 2-wheelers grew by 19%, 3-wheelers by 13.4%, passenger vehicles and commercial vehicles also grew by around 5% to 5.9%. However, interestingly or unfortunately, quarter-over-quarter saw a degrowth in all the segments. Two-wheeler had a degrowth of 1.5%, 3-wheeler 8.9%. Passenger vehicles also went down by 11%, so that's something to be noted.
On 9 months basis also, most of the segments, in fact all the segments registered either single-digit or double-digit growth. 2-wheelers grew by almost 6% or 5.7%, 3-wheeler by close to 19% and passenger vehicle by close to 6%.
Now going to Slide #6, where we show the consolidated financials. The Q3 PBT was 3.7%. And then, of course, EBITDA was 9.2%. Revenue growth, of course, we explained. PAT also we'll discuss subsequently. There was an increase in net debt also which I will explain in the subsequent slides.
Looking at the 9-month performance, the total 9-month PBT was coming to 3.7%, EBITDA at 9.7%. But if you really look at the cumulative year-over-year growth in 9 months, the revenue grew by close to 7.4%. EBITDA grew by 24% and PBT by almost 400-plus percentage.
Moving to the next slide. This is where we are talking about the net debt number. As you may recollect, in the last investor call, we mentioned that the net debt was pretty close to INR 1,000 crores, it was at INR 1,006 crores. This quarter, it actually went up, marginally, to INR 1,062 crores which is an increase of about INR 56 crores. This was largely because of various reasons. One, we also invest in renewable energy, like how we explained earlier. This was meant to reach cost reductions, which will help us in the next year. And there were certain final payments to be made to the divestment-related consultants, which is what we completed during this quarter.
There is also a temporary increase in working capital because we had to correct some of the GST rates on certain parts. So there was some time lag between the payment to GST authorities and the collections from the customers. A major part of that has now been collected. Part of it was done in Q3 and a significant part was also collected in subsequent to Q3 in the current month. We are hopeful of collecting everything this quarter. So that should actually correct the temporary mismatch in working capital.
There are also certain arbitration costs relating to China JV, which we had to pay during the previous quarter. So because of this, there was an increase in net debt. We are hoping that we should get corrected in the coming quarters. So because of this and also helped by the recognition of deferred tax assets and the improvement in network, the net debt to equity is now pretty comfortable at 0.7.
Net debt-to-EBITDA is also below 1.5. Return on capital employed, of course, had the impact of both on the numerator and denominator, numerator because of the lower earnings and denominator of course, now the capital employed is more because of the network addition which happened because of the tax benefit.
So going to Slide #9. So this is where we explained the logic behind the write-off of loans. We actually consulted a couple of imminent legal experts. We took opinion from Mr. Arvind Datar and Mr. Ajay Vohra, who represent Vaish Associates. We have been working on this for some time now. We collected a lot of evidence to basically just pay out cash for opinion. We also completed -- we also consulted our authorized dealer to basically complete the formalities in relation to FEMA regulations.
So we could complete all this. And based on this, we actually took this benefit in Q3. The underlying logic was like the investments which we made in the overseas entities were more in the nature of trade investments. These were not made just for the sake of any dividends or capital gains. So that was the major underlying logic.
And similarly, the Indian operations also benefited significantly in the past due to a technology sharing between 4-wheeler lighting and 2-wheeler lighting operations. We also derived benefits from supply chain support and also the access to global OEMs and their India operations helped the Indian businesses.
In addition to that, the guarantee commission, interest earned on those loans, they were actually offered to taxation in India in the earlier periods. So that is also another reason why we think we can actually claim this, claim this deduction in India. And one more thing is the divestment, of course, all of you know the kind of challenges we had at the time of divestment, including the macroeconomic scenario.
So in a way, the divestment of this business has also helped safeguarding the interest of India business. So considering all this, the legal experts tell that we have a good case for claim in this reduction. So based on the event, we recognize this benefit.
Coming to Slide #10, which is about the revenue breakdown. The strong performance in India and of course, the degrowth in the overseas business changed the business mix in these 2 segments. The lighting business, of course, is now at close to 21%, which is to be close to 25% earlier. Similarly, the outside India business also shrunk now to about close to 14%, which is to be about 18%, 19% earlier.
And the strong EV performance also resulted in Bajaj's percentage growing to 44% compared to 40% earlier. In terms of new life -- new lifetime order wins, in the 9 months, we have close to INR 67 billion of order wins. If you really look at the breakup, Bajaj-related order wins was close to 54%. And then interestingly, the EV percentage of the total lifetime revenue is now close to 50%. So which is a strong sign for our future growth. Then we have also certain awards which we won in different segments of the business.
So let me close with this, and now we can take some questions. Thank you.
[Operator Instructions]
We have a first question from the line of Abhishek from Dolat Capital.
Sir, you have onetime tax write-off of loans of around...
Sorry to interrupt, your voice has been disturbed.
Are you able to hear me right now?
Yes, we can.
Yes. So as there's a onetime tax reversal and write-off of loans of around INR 2.96 billion, will this -- will be flow into our balance sheet? So just wanted to understand what is the impact on the BS and the cash flow of this particular write-off and cash reversal?
If I understood your question correctly, what was our impact on balance sheet and the cash flow. Am I right?
Yes, yes, yes.
Yes. In terms of balance sheet, this will boost the net worth because to an extent, the production of improvement in PAT, it will result in improvement in network. And then, of course, it also result in creation of deferred tax assets on the asset side. Coming to cash flow, yes, that's -- the whole intention is to save cash. So that's why we are going for this.
So post this transactions, what would be the cash in our books?
Yes. See, this is basically about write-off of INR 1,350 crores. So we'll be switching over to the new tax regime where the tax rate comes to about close to 25%. So then you can compute the benefit, which will spread over the 2 to 3 years based on how we grow our profits.
So next 3 years, our effective tax rate would be around 0% to 10% range or what would be?
Sorry, your voice is breaking.
So in the next 3 years, what would be the effective tax rate, sir? 2 to 3 years?
Switching out to the new regime. But effectively, our intention is not to pay actually tax in terms of cash flow for the next 2 to 3 years.
Okay. So the benefit will be flow for the next 3 years, is -- tax benefit, right?
Correct.
And next question on the non-Bajaj business. We have seen a flat growth in 9 months FY '24. So how do you see growth ahead? Because you have owned many business and around more than 50% order intake is done in Bajaj. So what was...
Your voice is breaking.
Your voice is breaking too much. We can't hear you.
But okay, we have a little bit understood the question, so I can...
Okay. If you could repeat it once more.
So sir, in non-Bajaj segment, we have seen -- in 9 months FY '24. So what would be the key trigger for -- given that you have very solid -- non-Bajaj segment.
So basically, if you really look at our business wins for the 9 months, which is almost INR 1,200 crores. Out of this, 54% is Bajaj. And it's also because of -- largely because of a lot of the business that we won with high content like EV and clusters and lighting. But the other 46% is actually non-Bajaj, which is also quite significant, which is also close to almost INR 550 crores.
So we are actually growing our business wins also with other customers. And we are -- and whether it's on the 2-wheeler side, our focus, of course, we have said always is that one, is that for whatever the products we do today, including our traditional products, we are focusing on capacity utilization. And of course, this capacity utilization is not only coming from Bajaj Auto, it's coming from -- 2-wheelers coming from all the other customers, 2-wheeler OEMs in India.
And on the 4-wheeler side, also, we are focusing on the plastics, and also on the lighting business, where also we are kind of winning business, and we are also kind of utilizing those capacities. But yes, going forward, I think we have seen a lot of good interest from all the OEMs and also a few new start-ups, permanent start-ups on our EV powertrain products, and we had reported actually a couple of wins on the EV powertrain in the last quarter, and we are strongly engaged with a few other 2-wheeler OEMs also. And we are hoping that in the coming months or coming quarters, we will succeed in winning some new -- some more business, when it comes to EV powertrain.
When it comes to products like lighting and also the instrument clusters, that's something we are anyway actually driving higher and higher sales. And so basically, whatever is the content based, which is more 2-wheeler electronics and EV, we are very well engaged with customers, and we are winning businesses. So I would like to say that when it comes to the India story, it's very much intact and growth oriented. Even if you see our growth in Q3, our India operations has grown 20% year-on-year versus 15% for the overall industry.
And even in the 9 months, we have grown 11% as against 6% of the industry growth. So we have actually -- we have been actually growing quite well, I would say, when it comes to the markets. And yes, Bajaj, yes, is our major customer. And whatever we can do with Bajaj, we will do, but it doesn't mean that our efforts are not on with all the other OEMs. And going forward, you will see that we have won some very interesting business with the other OEMs as well, 2-wheeler and 4-wheeler.
Okay, sir. And the overseas business...
Sorry to interrupt, sir. May we request you to rejoin the question queue as there are several participants waiting for their turn. [Operator Instructions]
We have our next question from the line of Prateek Poddar from Nippon AMC.
A couple of questions. One is on INR 3,000 crores of orders this quarter, right? Is that a fair understanding?
Sorry, we couldn't hear you well. I'm sorry, can you just repeat your question?
Am I audible? Hello?
Yes, now we can hear you.
Okay. I would say you have won INR 3,000 crores of orders this quarter, right? Is that a fair understanding?
Yes.
Okay. The second question is, when I look at FY '25, I'm on Slide #10. You say start of production from FY '25 is around INR 4,600 crores. What is the average life of these orders in the sense in how many years or when does this peak out?
That's what -- in the initial speech also CMD spoke about that the peak annual volume -- peak annual revenue of this is around INR 1,999 crores.
And by when do you hit that? Like when do you achieve this?
So Prateek, the peaks will take place over different years, right? It depends on multiple factors, but primarily also when the OEM will SOP and really well the OEM would SOP. But you could expect -- I mean, whenever an order win is declared, you could expect SOPs generally within let's say, 12 to at worst case 30 months.
So here, what happens I'll tell you is that, when it comes to the 2-wheeler market, normally, you normally is much faster the development cycle. So I think it could be within a year or so. But when it comes to the 4-wheeler segment, there, it could even go up to 1.5 to 2 years because that's the way the order wins are.
And for 4-wheelers, normally, they take a longer time on the development compared to the 2-wheeler. So that's the reason that we are giving, okay, the lifetime, and we are also saying annualized basis. But on an annualized basis, also, you're right. I mean, 2-wheeler and 4-wheeler, if you break it up, I think, how much is the 4-wheeler out of the total business win?
16.6%. INR 1,124 crores.
That is a lifetime order win, out of that around...
16%, 17%.
16.6% yes there in your presentation Slide 10.
16%, 17%.
So 16%, 17% would be more the 4-wheeler business win in this and rest would be more the 2- and 3-wheelers.
Which would ramp up fast, right, as you just explained within 12 to 18 months.
It will go faster.
The second question was on your China JV. I just see the PAT has increased sequentially quite strong. Could you just explain this?
Yes. So this is largely helped by the revenue growth as well as the margin improvement. There were certain price increases also which happened. So all this enabled us to decent profit growth.
Is this sustainable, sir going forward also? The INR 25 crores kind of run rate?
So normally, what we see in the Chinese market, see for them, it's more of a calendar year. So last quarter is always fairly strong. And then that would mean like Jan to March would be Q1 for them. But because of Chinese New Year, obviously, the sales -- and the sales would be less in the first quarter, Which is for us, the fourth quarter.
So -- but having said that, yes, the Chinese market, the sales, obviously, you can see the market has not really been growing that well compared to the earlier years. But where we are concerned going forward, I think that we have had some very interesting business wins. So we are looking at a decent growth in the coming year and years. So it will be more like more of increase in our market share in the Chinese market. But the growth, of course, is not more than 5% in the Chinese market.
Understood. Understood. That's very helpful. The third question was, sir, on your other expenses, I think we have been highlighting about reducing the fixed cost and that's an exercise which you have started -- from maybe start of this financial year. But I mean, as of now, I can't see any improvement. So how should I think about reducing your fixed costs?
Yes. See, it's -- other expenses are not entirely fixed cost, as you know. There are certain variable cost elements also. In fact, a significant part of that is variable cost, including your PLI, freight, packing costs and all. But having said that, some of the onetime fixed costs also we had to pick up, like I was explaining earlier that the arbitration related costs and all we had to actually pick up. So those things are more like onetime ones. They are not sustainable or continuing fixed cost. So that should get corrected in the coming quarters.
Can you call that out how much would be the arbitration costs for the onetime fixed costs which you have picked up this quarter?
For example, it is close to about INR 10 crores. INR 8 crores to INR 10 crores.
Okay. Got it. You also talked about -- in your presentation about lowering of electricity cost by investing in renewable energy. And our understanding was that would have started reflecting from quarter 3. So has there been a delay over there? Or it's already getting reflected?
No, it was not quarter 3. It was always scheduled for actually March kind of commissioning -- commission around March. But we should start seeing the benefit, if not from April at least from May onwards.
And how much can this help us by?
I don't want to give first micro level detail, but yes...
The numbers are interesting.
Sorry, sir, can you repeat? The numbers will be?
They'd be quite interesting for you. We don't want to let you know at the moment, let us first realize those numbers, which we feel should probably materialize more from the month of May.
And also it will come in phases. It's not just a onetime kind of -- there is more to do in this area also, but it will happen over a period of time.
Got it. Sir, there is with this creation of deferred tax asset, obviously, the cash which you save, does that mean that the repayment of debt will be quite fast in the sense, let's say, earlier if you were planning in 2 years with virtually no tax payments for the next 3 years, the cash savings, we can assume a very fast debt repayment. And maybe by the end of next financial year, we could be very close to net debt, I mean zero net debt or...
I don't want to give you a future prediction, but yes, that's the objective. The objective of this is to conserve cash.
Okay. And just small bookkeeping question. We have seen a sharp increase in depreciation, and the idea was always CapEx will be lower than depreciation. Are there one-offs over here also, which you are writing it off?
It's not because of traditional, I would say, CapEx-related depreciation, but is somewhat related to that. We have started a new -- we commissioned a new plant in Jharkhand here in Pune. So it was a leased facility. So the leased depreciation and interest are accounted in both depreciation as well as interest. So that's the reason.
This is despite us running at 70% capacity utilization. So which segment...
Sorry to interrupt, sir. We have our next question from the line of Naveen Baid from Nuvama Asset Management.
The speaker before me was just confirming whether the order wins for the quarter were to the tune of INR 3,000 crores. If I look at the order wins for the past 2 quarters, just for the 9 months, if I look at the orders win for the past 2 quarters, there are roughly INR 4,700-odd crores. And for 9 months, it is INR 67-odd crores. So the numbers are not adding up. So this quarter's orders win are likely to be INR 2,000 crores and not INR 3,000 crores. Is that correct?
This quarter, the order win has been around INR 3,000 crores, adding up compared to the first 2 quarters.
But has there been some cancellation like how do you explain that?
No, no, no. 6-month number was around INR 3,900-crores-odd and this quarter also is closer to INR 3,000 crores.
Not exactly INR 3,000 crores, slightly below INR 3,000 crores. Yes.
Okay. And this INR 6,700 crores obviously includes the order win from the EV side?
Yes.
Yes. Yes.
Okay. What's been the gross margin this quarter?
Sorry?
Gross margins?
Gross margins from these orders?
No, no. What's the gross margin this quarter?
That we -- it's around 30...
Yes, it's around 36.3%.
36.3%.
We have our next question from the line of Jyoti Singh from Arihant Capital Markets.
My question is on the debt side. Like earlier quarter, we have committed like we were going to reduce our debt, but now it increased in this quarter. So like what are the objectives going forward on the debt side?
No, like how I explained in the earlier presentation, it was -- part of it was because of some temporary reasons because of the working capital mismatch, which we had. It should actually go down from hereafter. That's our intention. So the objective is still intact. We are very much working on debt reduction.
Okay. And sir, any target that we are keeping for the debt reduction that we can disclose?
We don't want to give a number to it. But like what we said, there is no reason for us to borrow more for any of our business requirements. So whatever cash that gets generated out of business will only go to reduce the debt.
Okay. And sir, earlier also we commented that the H2 will be stronger, but somehow Q2 quarter-on-quarter not that great. So what are the expectations for Q4?
Talking about the top line or?
Bottom line.
Overall, sir. I'm talking about margin and top line.
We don't give any guidance like that, but I mean normally, Q4 industry should be reasonably well. So that should also reflect in our performance. But then like our CMD explained, recovery in overseas segments will take some time.
[Operator Instructions]
We have our next question from the line of Tirth Gosar from [ Svan Investments ] .
Sir, I have a couple of questions. My first question is relating our growth. So we have seen, yes, quarter-on-quarter, almost all segments have seen a slip. 2-wheeler has seen not a better performance than other segment. And in fact, if you see EV 2-wheelers have seen a growth across all your customer category.
So can you explain -- and we have gained some good order book also over a period plus we also delved upon that our content per vehicle or value per vehicle have also increased increasingly with every new order. So can you explain why quarter-on-quarter, the growth will be muted. And what is going ahead, how do you see this movement ahead in next 3, 4 quarters going ahead?
So I think here, I think it was more to do, I think, with the season and everything, whether the degrowth in all segments. So the way we see quarter-on-quarter the industry, I'm talking about India now, the industry degrew 3%, but we grew 3%. And we've always maintained that we are going to be at least 4%, 5%, 6% more than the industry. So that is intact.
And I don't -- and I think that today, the auto market is still doing quite well. And I don't see a reason why it will not continue to grow. By what percentage, I don't know. But I think the growth story definitely is intact in India across segments even for commercial vehicles because our GDP growth is staying quite good.
So I don't really see any kind of an issue really in future growth when it comes to the Indian market. We are quite bullish and -- like I said earlier, we're very well engaged with all the customers on the 2-wheeler and on the 4-wheeler side, and we feel pretty confident.
My second question is, what do you expect your tax outflow percentage as we are moving towards the new regime for the next financial year?
No, we don't give any forward-looking guidance like that. All that we can say is, yes, our intention is to conserve cash by taking this benefit, but we don't give guidance on future profits.
Okay. Sir, regarding our China JV plan arbitration, which was there, how is it moving forward? Are there any positive news there?
So we were -- so there is an arbitration on in Singapore with the partners. In between, we have been trying to have a split with a partner. As you know, that there are 2 plants and 2 entities. We are trying to go in for a split, but so far, we have not been successful. I think the order on the arbitration probably will come in probably by July by Half 1. So then we will probably know what the result is.
We don't know what will really happen over here. Probably one partner buys the other or in between, there is a kind of just conditions get created for a split. It all depends on the treatment. So the moment we don't know. But largely, I would say, all the arguments and all on this in Singapore are basically largely done. There's probably one more, I think, hearing probably in the month of May or June. And after that, I think probably there will be that decision taken. So we'll come to know probably in the first half of FY '25, we will know the result of this JV.
Okay. Sir, what was the CapEx in the first 9 months? And what is the CapEx expected for FY '24 and '25?
First 9 months, we spent about INR 125 crores. We may finally close the year with about INR 160 crores, INR 170 crores kind of -- this is for India operations, maybe another INR 20 crores for overseas. So close to about INR 180 crores could be the number.
Okay. And sir, '25?
It could be around this range only. We don't intend to take it beyond INR 200 crores.
We have our next question from the line of Arvind Sharma from Citi.
Sir, first question would be on the PLI incentives. If you could share any views there? Is there any accrual happening? Or when do you expect that? I have a second question on order books, but first, your views on PLI.
So we've not accrued anything for PLI yet, but for certain product lines, we would expect to, soon.
All right, sir. The second question would be on the order wins. We see the lifetime order of around INR 67.5 billion that we've given. Are all these new orders or how many of them would be fresh orders? And since you've shared the FY '25 and FY '25 onward split, is it possible to share till when what's the order life or what's the time when we will fructify?
Okay. So I'll go one by one. This will be a combination of new, new programs as well as volume expansions on existing programs, right? Or let me not necessarily call them existing programs, but volume expansions where there is modifications in the program. So if we have declared X volume as an order win in the past, and there's an expansion to that, that will obviously come -- that delta differential will come in what we report now. That's one. The second one was in terms of the SOP expectation, I think we've already shared some information around when we expect that should take place, right?
Yes. FY '25 onwards -- for how long it will continue.
So directionally, like we said, right, I think it depends lots of times and it depends on customers as well, right? So 2-wheelers are generally a faster cycle, passenger cars are generally a longer cycle. But I would -- I mean they would generally take place within 12 to 30 months.
12 to 30 months?
Yes.
All right. Great.
12 to 30 months not from now, but from the actual order win.
[Operator Instructions]
We have a next question from the line of Prateek Poddar from Nippon AMC. Mr. Prateek are you there?
Sorry, I was on mute. My apologies. Am I audible?
Yes. Yes.
Yes. Sorry. Just profitability of these new orders, right, you won close to INR 5,000-odd crores of orders, maybe slightly lower than that in the last 6 months, the profitability, is it -- can you just comment on it? How should we think about it? Is it higher? Is it lower? Because the mix is quite interesting, right, in terms of EV players versus -- so just trying to think about the profitability of these orders.
So I would say it's hard to comment on profitability specifically because every product line tends to have different product economics, right, really based on manufacturing processes, engineering intensity overhead intensity. So the way I would describe it is, it is sustainable profitability, right? We have strong internal thresholds based on which we quote, and that is what we would expect.
Understood. Understood. And just one small question, and I'm just going back to what I was asking earlier in terms of the ramp-up, the way you are explaining that it takes 12 to 30 months from the start of production for the orders to ramp up looks like FY '25 and maybe FY '26 where we realize bulk of this INR 5,000 crores of new orders in the last 6 months. It could be quite substantial. So we could see a far higher outperformance over industry growth over the next 2 years versus what we would have seen in the past. Basically, that's the order book which we have just gathered. That's a fair understanding?
Yes. It is. I mean, for sure, I mean that's our intention. And we are hoping that whatever other SOP dates, the customers have told us if they get realized, yes, I think it will keep with our objective of actually kind of growing faster than the market. A lot of these products are also high in content. And next year, we had mentioned probably in some of the -- one of the earlier calls that our revenue towards EV, we would like it to be INR 1,000 crores. And that is -- there's a very good possibility of achieving that in the next financial year.
We have our next question from the line of Mr. Abhishek from Dolat Capital.
Sir, what was the operating margin ex overseas business?
We don't give those subsegment details.
So what is the margin for the domestic business right now?
Sorry, we don't share that.
But see, we told you that 85% of our revenues were from India.
Yes. And sir, this overseas businesses continue to create -- from last many...
Your voice is breaking. Can you repeat it?
So these overseas -- financials -- expect some more in the...
No. We can't hear you, sorry.
Are you able to hear me, sir?
We can't hear.
It's not very clear for some reason.
Sorry sir, we can't hear you.
Are you able to hear me right now?
Yes, please go ahead.
Yes, now it's fine.
Yes. So my question was related with this overseas business. Basically, that was a drag for the company's financials. So can we expect some more write-off in the coming days?
No, we don't see any need for write-offs. In fact, our intention is to actually improve profitability and also growth in all these overseas markets. So we don't see any need for any kind of write-off at this stage.
So how you will achieve the 10% kind of the margin target as there will continue to be a pressure because of this business? So what is your plan for that to achieving 10% or 11% kind of operating margin?
So like our CMD already said, right, we work on derisking the customer base. We have already made moves towards in-sourcing and improving, let's say, some of the material margins. And also we work given that supply chain globally are slightly better, especially from a semiconductor standpoint, we work on working capital optimization also, right?
Plus we continue to work on cost reductions across our businesses.
Okay. And my last question on the Electronic business unit, where we have seen a 15% growth in 9 months. So how much is the incremental revenue from the EV business in this year? And what would be the target for the next year?
So like what we explained at the total level, EV revenue is about 5% of the total, 5.3%. And last year, I think it was pretty negligible. So the entire thing is incremental.
It will grow as we move forward.
[Operator Instructions]
We have our next question from the line of Mr. Aashin Modi from Equirus Capital.
Sir, my first question is regarding the lighting -- India lighting business. So it's a very fast-growing segment and with a lot of premiumization happening across. So how do we see that business growing and with competition intensity increasing over here, how do we see that business going there? 9-month performance has not been that strong in that business?
So I think when you read the 9-month performance, that is our global lighting performance including India, of course, as a percentage of our total sales. Right now, of course, like we have talked about -- I mean, as you also see, right, overseas is reduced as a percentage. So that obviously impacts lighting as well.
But in India, we don't see any roadblocks to lighting growth at all. In fact, our lighting business in India continues to do well. And that is largely driven, like we said before, right, by the fact that we have been very early mover, if not first mover, especially when it comes to LED lighting. So we continue to have program wins. We continue to see volume expansions, whether in two-wheeler, whether in passenger car, and we expect that trend will continue.
Sure. Sure. And then my next question is regarding the EV-specific component. So do we -- have you agreed any new products over there? And where are we on the journey of adding other regions for our EV-specific products?
So today, practically in the product range that we already addressed and we already market, I don't think we want to add any products beyond that. In fact, we are clear, we will not add products beyond that. Like we stated last quarter, we were able to add 2 customers, 2 further EV customers for EV specific components. And we will see those realizations over the next 12 to 18 months. Of course, these components, I mean, essentially, when you make -- when you are trying to supply the EV powertrain, it's extremely engineering-intensive component and there's also a very long sourcing timeline kind of component.
So we continue to have strong engagement with multiple other customers. And hopefully, we should have over the coming quarters, we should have more to report.
And sir, are we -- do you have enough capacity to back the growth that our major customer is seeing on the EV side? Or do we need to put in more capacity for the EV-specific component?
So I think we've already given visibility around what our total CapEx numbers would be limited to. And within those numbers, we are able to support any expansion the customer would like.
[Operator Instructions]
We have a next question from the line of Priya Ranjan from HDFC AMC.
Just a couple of questions. One is on this EBITDA margin. If I look at the quarter-on-quarter, the volume, I mean, top line was flat. Still, there has been 60 basis points. So is it largely because of mix or there is something more to it?
Yes. It's largely driven by the challenges we had in the overseas markets, so that had an impact.
Okay. So overseas have higher margins. And where is this INR 10 crores arbitration charges is booked? Is it part of the other expenses or it's...
Correct.
So that explains that -- I mean the -- because if I do the INR 10 crores in the EBITDA, then I think 40, 50 basis point impact is because of that, right?
No. See, there was arbitration expense in the previous quarters also. It's not that it was 0 earlier. It was maybe to a smaller extent. So last quarter, it was close to INR 10 crores. And arbitration plus a couple of other consultancy...
And this is going to continue for a couple of quarters? Or this will now because I think most of the hearing is done. So what is...
It will not to this extent is our expectation because like what you said, most of the arbitration hearings have been completed. But it will come down gradually. Yes.
Okay. Okay. And in terms of overall capacity utilization of different plants, if you can throw some light on what are our operating capacity utilization and how much benefit, I mean, as we enter next year with a very good order book and the order ramp up. So should we expect meaningful operating utilization level going forward, I think FY '25, '26.
Yes. So I think like we stated in the past, I would -- our blended capacity utilization because, of course, we operate multiple different processes would be around, some places maybe around 70%. But again, I think we have the order book, we have defined what our CapEx outlook is for this year and also for next year. And within that, we believe we should definitely be able to execute the order book. Of course, that will also lead to an improvement in capacity utilization.
And as we move towards the greener energy, so what is our plans of -- how much greener energy in terms of our internal utilization? What should be the percentage here from that coming...
The proposed one which is under implementation, we should be somewhere between 35% to 40% in terms of the overall sourcing from renewable energy.
Okay. And this will be supplied back to the grid and then whenever you require so you can utilize it from the grid?
Yes. I mean we'll get billed for the net amount of commercial.
Understood. Understood. And in terms of your cash conversion to EBITDA, I mean, that has been not so strong. So any specific reason is I think the only working capital-related issues is there because your EBITDA was, I think, INR 175 crores, INR 73 crores this quarter. I guess with around INR 40-odd crores will be primarily driven to the CapEx. So where has been the...
You're right. I think I also explained it earlier in the slide. So the temporary working capital challenges this quarter created that kind of disparity, but if you see the earlier quarters, it was coming out nicely.
Okay.
Quarter-on-quarter, it's better cash conversation, you should look for a longer period. So 9 months, the numbers look good.
We have a follow-up question from the line of Prateek Poddar from Nippon AMC.
Maybe if you could just spend some time explaining us as to the overseas operations, we have seen a very, very sharp decline, let's say, if I were to say from quarter 1. How should we think about it? I know you've explained it in bits and parts, but the risk mitigation -- I mean the customer concentration risk, which we have seen and you're trying to mitigate that, how should we think about this business in the next 2 to 3 years or maybe next 12 months?
So see, there abroad -- the major area for us is Europe. And of course, we have also Vietnam. So see, here, the issues that we largely do with the European market, where we are concerned, whether it's to do with 2-wheeler or whether it's to do with the electronic products. And of course, this has been a little bit compounded by concentration on a few customers. And basically, what has happened is that our -- when it comes to 2-wheelers, our focus has been more on scooters. And where scooters have actually degrown more than the motorcycles in that segment.
So what we are doing is -- and now we're also winning businesses on the motorcycle front, where it comes to Europe. And also when it comes to our Vietnam plant, the focus is now going to be much more with the Japanese OEMs. Today, the conversation is more actually with some of the European OEMs even in that market. Yes, we have Japanese customers, but now we would like that we are focusing more on the Japanese OEMs, and we also strengthened our sales team in -- both in -- also in -- I mean, also for Southeast Asia.
We already have our office in Japan, which is also closely working on seeing that a lot of these businesses kind of this thing really converted into orders for us. So there's a lot of focus when it comes to, I would say, Southeast Asia. And when it comes to Europe, yes, the growth there will not be as high as Southeast Asia comes to 2-wheeler. But when it comes to electronics, the plant in Romania, that's where we are looking at -- we are really focused on winning new businesses over there.
So one is, of course, the focus on sales wins, all the overseas. The other is what we have done is that -- which includes China and also in Vietnam that we have -- we were so far though our margins were quite okay. I would say, across listing product lines. But we didn't have our own electronics so far. When it comes to 2-wheeler products or for 4-wheeler lighting in China.
So now we have installed our own SMT to the extent of at least when it comes to 2-wheeler, I think it will be almost 100%. When it comes to 4-wheeler, it will be 30% to 40%. So this will also increase margins to the extent of at least 3%, 4%. So this is one big step. So one is sales growth, utilization of capacity is there which we have seen in the last quarter go down and which will be impacted for the next few quarters also. But we are working very proactively on sales wins, which probably should happen, probably, let's say, within a year's time that we'll see that growth this thing taking place.
On the other hand, cost controls and mainly on the BOM side, SMT. In-house SMT is what is going to drive margins up, which will help the overall situation of our business division abroad.
Ladies and gentlemen, that was the last question for the day. And I would now like to hand the conference over to management for closing comments.
So thank you very much. So I just want to kind of say that the focus of the company remains to further strengthen the Indian operations, bringing back the profitability in our overseas of operations, control our overall CapEx and generation of free cash flow and reduction in net debt.
So with this, thank you for joining the call, and we'll again meet soon after 1 quarter. Thank you.
Thank you.
On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.