Varroc Engineering Ltd

NSE:VARROC

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Varroc Engineering Limited Q4 and FY '21 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. Varroc Engineering Limited's management is being represented by Mr. Tarang Jain, Chairman and Managing Director; along with Mr. Stephane Vedie, President and CEO, VLS business; Mr. T.R. Srinivasan, Group CFO; Mr. Arjun Jain, President and Head, Electrical and Electronics business; and Mr. Nitin Kalani, Head of Treasury, FP&A and Investor Relations. I now hand the conference over to Mr. Tarang Jain. Thank you, and over to you, sir.

[Tarang Jain, MD & Chairman of the Board]

Thank you. Good evening, everyone. I'm Tarang Jain here, and I would like to thank you for joining the Q4 FY '21 earnings call of Varroc Engineering Limited. I will first start with the India business. The Q4 FY '21 witnessed a robust growth in the two-wheeler and the passenger vehicle volumes in India, held by a lower base due to lockdowns in the last fortnight of March 2020. The Indian two-wheeler production volumes in Q4 were higher by almost 29% year-on-year, and passenger vehicle volumes were up by 27%. Our revenue in India grew by 45% year-on-year, and our EBITDA in India more than doubled. And our margins continue to be strong at close to 12%. I will now move to our global lighting business. If you recollect, Q4 FY '20 volumes were impacted negatively by almost a fortnight-long COVID first wave related to rigid lockdowns across major markets globally. In Q4 FY '21, however, despite this lower base of Q4 FY '20, the passenger vehicle volumes, excluding China, were down by 2.7% year-on-year, mainly due to significant semiconductor shortages. Both Europe and North American markets declined year-on-year as OEMs had to work in a supply-constrained environment, while consumer demand continued to be strong. As a result, our established plants in Mexico and Czech Republic, which contribute almost all of the profits of our lighting business today, saw a sharp decline in production revenue. Our Mexican plant declined by almost 20% quarter-on-quarter, while revenues for our Czech Republic plants declined by about 4% over the previous quarter. Our new plants in Poland and Morocco, however, continued to ramp up the volumes but have not still reached breakeven levels. The EBITDA margins in the lighting business declined sharply in the quarter due to this change in revenue mix between the older and the newer plants, rising commodity prices in semiconductors and in plastic resins as well as certain one-off costs like customer chargebacks on account of premium freight from a large customer pertaining to Q3 supplies. While the current demand for chips is continuing to outstrip supply, semiconductor suppliers are adding capacities, and the supply situation is expected to normalize by September of this year. This is critical for stabilizing the revenues and improving the financial performance of the lighting business in the short term. On a consolidated level, our EBITDA for the quarter was at INR 1,275 million, an increase of 11% year-on-year. Depreciation and amortization costs were higher by about 14% as compared to Q4 FY '20, largely due to a higher asset base. The consolidated profit before tax was negative at INR 1,178 million. The overall tax expenses were disproportionate due to the losses in the new plants on which we are not eligible to recognize deferred tax assets. On new business wins, I'm happy to inform you that in FY '21, our India business has been able to secure overall net business wins of INR 13 billion equivalent annual revenue and almost INR 11 billion of these orders are new business wins. These new orders, which will add to our India business organic growth, also include our new technology-driven products such as EV products, including DC-DC converters, battery management systems and telematics. The orders also include a sizable portion from a new customer, both on two-wheelers and the passenger vehicles. Our VLS business has also been able to secure orders worth EUR 210 million overall in FY '21, which included new business wins of EUR 162 million, net of givebacks and cancellations. Finally, we recognize that there are a number of structural improvements required in our lighting systems business in order to achieve sustainable profitability in line with industry benchmarks. We have launched Project RACE, R-A-C-E, with the support of a global consulting firm to put together a comprehensive performance improvement plan for the business over the short to the medium term. We expect the benefits of this program to be visible within the next 12 to 18 months, and we will be providing you regular updates on the same going forward. With this, we are happy to take your questions now. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

[Ashutosh Tiwari, Research Analyst]

Sir, you mentioned that in the VLS operation, the losses -- so the EBITDA losses mainly because in the older plants, you saw a drawdown in volumes on a quarter-on-quarter basis. Sir, is that volume normalizing now? And you also mentioned in the PPT that some part of it, because of -- the customer decided to focus on new models, which we are not suppliers of, so are we going to see normalizing of, say, North American volumes at a plant or the Czech plant in Q1 or Q2 of this year?

[Tarang Jain, MD & Chairman of the Board]

So like we mentioned that compared to, let's say, in Q3 or the earlier months, even Q2, North America has been a premium plant and even the Czech Republic is our largest region where we kind of play in. So what we saw in Q4 was that the North American volumes fell from an average of EUR 16 million a month to EUR 11 million a month which has impacted the profitability. So the profitability they were generating in the previous two quarters, the second and third quarter, we could not really realize the benefit over here largely, and this was mainly because of the semiconductor issue, which impacted all our customers in North America. That was the only reason for this decline in volume, not the demand. The demand is strong in North America. And in North America, we do see that even presently, the volumes have been soft in April, May. And also, I think, probably in June, I think we expect recovery to start happening, I would say, to good levels what we have seen earlier only from August because this is where we see or we hear that the semiconductor shortages will start probably normalizing for the month of August, more September. But I think what we have got the kind of schedules from our customers in North America is more, I mean, from August onwards where we return to the level of profitability. And then, of course, we have won a lot of new business in North America, and we will see increasing kind of sales there as we go towards the fourth quarter, where we have won a substantial amount of new programs for the North American market. Coming to the Czech Republic. Czech Republic, there we saw a little bit of softening of sales to the third quarter. And Jan to March, we were, instead of EUR 51 million, we were at EUR 46 million, a drop of 11%. It did impact our profitability to some extent over here. But largely, I think in this particular region, we were impacted by a one-off of closer to EUR 5 million debit to us, won by large OEM, which was not really pertaining to this quarter. It was more pertaining to last quarter, but that's not something which there was an agreement about. So this is something which we were not expecting. It was not something which we feel in our view will not justify. So this EUR 5 million also one-off in this fourth quarter also impacted the Czech performance. Coming to this question of yours about new programs and the other. It's not about new program. New programs, of course, are something which are already running for the last many months in our various plants. It is just that what we want to mention in our presentation was that the plants which were kind of producing better results for us, in the past quarters, they were impacted by probably a little bit lower volume because of semiconductors and that one-off in the Czech Republic. And we did see increased volumes in the new plants, though not, of course, still at the levels of capacity utilization. So there, I mean, we saw that, okay, as we have mentioned, that Poland went up for the quarter from EUR 13 million in Q3 to EUR 16 million, and Morocco went from EUR 12 million to EUR 15 million. But this did not really significantly -- cannot improve our -- I mean, our EBITDA performance. So this is where basically this is what we want to kind of share with you. Overall semiconductors, we see really normalization by September, really more to close levels where we can kind of see a strong growth. So I think that probably from September, we can probably hopefully see return to probably a normal level of sales. That's what we expect today. If we hear all our customers on the semiconductor matter, that from September onwards, that we will see probably more of normal sales, which we had really budgeted for ourselves in all the regions.

[Ashutosh Tiwari, Research Analyst]

So is it fair to assume that, let's say, in the first and second quarter of this year, the revenue in Europe will be similar to what we have done in Q4? It will not increase and probably from September month you are saying that it will start evolving. So Q3, we will see the impact of higher revenues?

[Tarang Jain, MD & Chairman of the Board]

Yes. So in fact -- yes, you're right. So in fact, I think we will see probably in Q1. [ I cannot say about ] Q2 because Q2 normally is soft because of summer. But you don't know because of this Q1 being soft with semiconductor. Semiconductor has hit us harder in April and May. It has hit us harder in these 2 months. So there is a possibility, which we're not 100% sure, but there's a possibility that July and August, which are normally soft months, could see improved sales. But that's something which we see today. But as we come closer to date, we'll have more clarity because we don't know. Because if the semiconductor not available, for nowadays, what's happening is that we get a certain intent for the next month, which shows probably a good volume. But as we come closer to the date, we see that at the customer end, that there are -- they have not received electronics and then they decide to kind of go for a shutdown for a few days or a week or something like that. So this is something which we have to wait and watch because we are in the situation of shortage on the electronics front, not on the demand front. Demand front is very strong, I think, globally all over.

[Ashutosh Tiwari, Research Analyst]

And secondly, you mentioned in the PPT that there is some kind of impact on margins also because of commodity inflation, which we have not been able to fully pass on the impact to customers. So will the [ full loss ] of the commodity will happen over the coming quarters? Or maybe we cannot pass on the full impact because commodities are still rising, let's say, in this quarter versus last quarter?

[Tarang Jain, MD & Chairman of the Board]

See, according to us, there is some impact of this commodity increases, mainly resins, I would say. But it's not something significant we can talk about, to be honest with you. It has impacted us to some extent, but it's not something significant. And I mean, in the last quarter, but then -- but we are definitely discussing with various customers to recover this amount. But this is not something which is so significant that will impact the performance in such a manner.

[Operator]

The next question is from the line of Basudeb Banerjee from AMBIT Capital Private Limited.

[Basudeb Banerjee, Research Analyst & VP]

A few questions to understand. One, what has been your stand-alone EBITDA margin for this quarter?

[Tarang Jain, MD & Chairman of the Board]

You're talking about in Q4?

[Basudeb Banerjee, Research Analyst & VP]

Yes, sir.

[Tarang Jain, MD & Chairman of the Board]

So the Q4 you're talking about, the VLS or are you talking about the India side?

[Basudeb Banerjee, Research Analyst & VP]

India side, sir.

[Tarang Jain, MD & Chairman of the Board]

India side margin has been around 12% EBITDA.

[Basudeb Banerjee, Research Analyst & VP]

So from that, just wanted to understand that, as you have been saying, that other than the traditional two-wheeler components, which we have been supplying till date, where almost INR 25,000, INR 30,000 value per unit of new products you are in a position to supply. So can you give some outlook of next 2 to 3 years what kind of customers you are going to supply? So many new entrants in the market or even the existing entrants coming up with new models. So just wanted to understand how one should look at the size of opportunity which you are able to grab in next 2 to 3 years from two-wheeler EV perspective.

[Tarang Jain, MD & Chairman of the Board]

So from a two-wheeler EV perspective, see, we have kind of developed our own motor and motor controller. And a number of electronic products like the vehicle control unit, DC-DC converter, and we have the tie-ups for the battery management system and the onboard charger. That's also, we have a telematics unit, which is also linked to the EV. Today, I mean, when it comes to our biggest customer in India on the two-wheeler side, there, the content is very high, whether it comes -- because we are in both the two- and three-wheeler segment. And this production, we are hoping that it will start somewhere towards the -- probably the end of the second quarter. And we are the major supplier when it comes to this product. So I would say that today, if you talk about EV products, even for just a single customer, and what we are, I think, given to believe, I think we could be adding, just on the EV side going forward, I think probably around -- I'm not talking about this financial year. This financial year could start up -- with on a lower side. But I just say -- but I'm just saying that today, if we are going to be doing even 10,000 of EVs a month for -- I mean, for this 1 customer, both two-wheeler and three-wheeler where we expect disruption to happen, is almost a INR 500 crore revenue, additional revenue for us. And that's something I feel is a possibility. There's a possibility going forward. I think two-wheeler disruption will happen quite fast. And when it happens, it will be like how it happened from motors -- from scooter to motor -- the geared scooter to motorcycle many years ago, 20 years ago. I feel that a similar kind of a situation is possible in this. So I'm just saying for a single customer where we are very much present, two-wheeler side and three-wheeler side, I think disruption will happen even much faster because it makes economic sense to have a three-wheeler EV. So this, I expect it to, I think to -- I'm just saying that, today, if the customer does 120,000, it's a INR 500 crore business. We do more than obviously that. And other than that, we are anyway in touch with all the major OEs on the EV side. So I'm not saying that all these products we can sell to all the other OEMs on the EV side, but we are actually in very, very close contact on at least selling 1 or 2 of these products in the Indian market. I would say all the majors, we are focusing on all the major people at the moment or the major OEMs who are coming out with their EV products. So there, we are closely engaged and we are seeing when we are looking forward to winning some business in this year with them, which will probably start -- which will also kind of help us in the coming years. So it will both on the two- and three-wheeler side of things. So I'm just giving you a bit of a flavor, but I can't talk about certain things until we win the business with them. But we are a strong player. We have a first mover advantage as we have already won a business, and we will be starting production with 1 customer in this year.

[Basudeb Banerjee, Research Analyst & VP]

Sure. Always very encouraging to hear the INR 500 crores number which you mentioned and that, too, from a single customer. But all media articles showing that so many fresh entrants, being incumbents or backed by private equities, same big, big numbers of volume in next 1 to 2 years' time. How to understand that? What kind of supply relationship you are building up with those kind of new entrants to the E two-wheeler space?

[Arjun Jain, President & Business Head of Electrical]

Yes. So this is Arjun. I would say we know, I would say, a majority of the new entrants and especially the ones that I assume you are speaking about. But I think as we've stated before, our focus today is really with the traditional OEMs. And for the very simple reason that these are very high engineering effort type of products, right? So the volume realization also is extremely, extremely critical to really the model. Now, of course, the volume realization when we talk about, I think, 10,000 per month volume sounds great. But really, for us, it also becomes the question of really prioritization of [indiscernible]. So this is why our focus is really with the traditional OEMs.

[Basudeb Banerjee, Research Analyst & VP]

Sure, sure. And last question from my side is, as you said, semiconductor issue is expected to get resolved by September, more or less similar commentary by other ancillary suppliers also. So in that perspective, where volume should spike up further in next 3 to 6 months' time, what is the cost you are paying to the consultant for margin turnaround of VLS? And as you said, 12 to 18 months for the time line for the consultant action to get percolated into the EBITDA margin numbers, how one should look at the VLS EBITDA margin in next 2 to 3 quarters?

[Tarang Jain, MD & Chairman of the Board]

Okay, I cannot share the amount we are paying, but I can tell you it's not a significant number. I think today, I think we will get 10 to 20x, I think, within what we are paying them. So we're not -- I cannot share that number with you. But it is not a substantial number which we are paying them. I mean, in relation to our business, is a very small number. But what we expect is an industry -- see the industry benchmark, I would say because here, the focus is more Europe, in the 2 new plants of Poland, Morocco and Czech. This is where we are focusing more, which is 70% of our revenues. Here, we expect that, today, I mean, to achieve industry benchmark would be a minimum of 6 to 7 -- is about 6% to 7% EBIT, not EBITDA, EBIT. So this is something we would like to achieve in this period between 12 to 18 months. Now yes, at presently, I mean, we have been impacted, I would say, at the moment, even in this quarter, the volumes are going to be staying lower and definitely I would say that volume impact will impact, of course, our EBITDA or EBIT result. But I think that today, the whole idea is that, see, today, we are in COVID times and there are so many uncertainties here today, especially if you are an electronics company, you're dealing with a lot of electronics, managing supply chain today is very, very difficult. But today, the whole idea is that today, even with these fluctuations, which we have not been able to manage in a good way but we have seen the last 3 quarters as a company, I feel getting in this global consultant, I think, will definitely kind of help us improve our results. Also, the volumes are at a lower level. We can still have improved EBITDA results -- I mean EBITDA or EBIT results as we move forward. So our target is to at least achieve 6% to 7% EBIT, I would say, as a business. And I think everyone else, I think, reaching this EBIT of 6% or 7% not really a problem in a balance, [ 30% ] of our business. The problem is more in Europe. And that's why our focus is more in Europe to reach the 6% to 7% EBIT within the next 12 to 18 months. And of course, it's not that it's going to just reach one fine day. As we go along quarter-on-quarter, you will see that this EBIT is -- we're getting closer to the EBIT. But yes, we do need a certain level of volumes. We can't have volume which are 20% lower. That obviously makes it difficult. You need -- we have put down a certain investment in capacity over the last 3 years. We do need it, a certain level of volume at least to be achieved to be able to achieve that 6% to 7% EBIT. So we are hoping that we are out of this COVID or we stabilize more from the semiconductor because of COVID only within, let's say, the next 1 year. And then we can see a very stable performance. Also, an industry-level performance coming out of our European plants also.

[Basudeb Banerjee, Research Analyst & VP]

That's very nice to hear from you of 6%, 7% EBIT margin. But that 12 to 18 months horizon. But I just was trying to understand that by September, as you said, semiconductor issue getting resolved. So if I can recall 6 months back when volume of VLS was improving and the fixed cost management you were doing, outlook of 10% VLS EBITDA margin was there. Only after that, the semiconductor issue came up. So just trying to understand that the moment semiconductor issue gets resolved and your consulting benefits trickle down in 12 to 18 months, but what about the time line in between? Can we expect close to 10% EBITDA margin because your depreciation is longer? So can we expect 10% EBITDA margin before the consulting benefits trickle down?

[Tarang Jain, MD & Chairman of the Board]

So I think that, see, if I were to answer your question, I would say that the third -- in the third quarter is something because we need the volumes or the third quarter is something we definitely want to achieve the 10% EBITDA because we do expect the volumes to return. And we will be striving for a 10% EBITDA as a company as VLS in the third quarter.

[Operator]

The next question is from the line of Abhishek Jain from Dolat Capital.

[Abhishek Kumar Jain, Vice President of Research]

During this quarter, VLS revenue has gone up by 3% quarter-on-quarter in euro terms. And tooling business was also strong. Despite we have seen EBITDA margin turn negative. Gross margin hit significantly in this quarter. Whereas most of the [ auto end ] have seen improvement in margin.So my question, are you able to pass the commodity cost in the coming quarters given the long-term contracts on the material? And there's also a jump in the employee expenses that was another region of the lower margin. So if you can give some sense what are the key margin drivers for the VLS business as you were talking about the 6% EBIT margin in the coming year?

[Tarang Jain, MD & Chairman of the Board]

Yes. So see, if you see really the quarter 4 to quarter 3, that slide, our production revenue was EUR 234 million versus EUR 236 million. So it was like a flat sale on which we obviously did not achieve the kind of -- we didn't achieve the EBITDA margin. If you look at tooling revenue, what happened at tooling revenue is controlled by our customers. There, you do not make any margin really. You may make 1% or something. That is just mainly more top line. Because in the lighting business, the tooling suppliers and all are all controlled by the OEMs. So higher tooling revenue doesn't really help us. What helps us is basically money coming maybe higher production revenue and we making, [ I would say, money from them ]. Now going forward, I mean, let me not get into the other distinct question. But the main question for you is -- the right question you've asked is, what are the levers we have to look at to go to the 6% to 7% EBIT? So this will call for all-around actions. And I'm talking only about Europe here because we don't have issues in the other 30% much. When you talk about Turkey or you talk about Mexico or China and other regions, we don't have those issues. The issues are only in the European plants. So here, I would say, across other regions also, there's a continuous improvement. But I'm saying that where we are affected is more because of Europe. So here, I think we have to attack 3 different areas. One is we have to address a certain level of pricing also on a few programs with customers on certain programs, a certain level -- some pricing or a few programs. We also have to look at some recoveries. On certain programs, we have seen underutilization of our equipment for the last 2 to 3 years for which we have invested. So getting in some recoveries under utilization and some price increases in some of the programs where we feel that we should ask for a price increase, including, I mean, towards resins and some of these other materials also is one-sided action which we will be focusing on as we move forward in the short term. The other area we were looking at is that we find that, obviously, today now most of the lamps are all electronic. 60% to 80% of the bill of materials now is electronics. So here, we feel that whatever sourcing we have done in the past, probably there is more scope of reduction in the PCB accounts, which we procure from various companies, various EMF companies like Flex or ZOLLER or other people. So here, we are looking at in Europe. We are looking at resourcing 12 programs. So in 12 programs, we want to resource the PCBs. We are hoping for a -- what we are finding is that we will see a good reduction, only the time line for getting this reduction because the resourcing takes about 8 to 9 months. We'll try to see whether we can do it faster. But this is an area also which can actually very positively can now benefit -- I mean, in the short term, I would say, within a year, we can start seeing some benefits on the bill of material costs. Also, parallelly, we have got our own electronics plant in Romania, where we have today only one SMT line. We are going to be getting our second SMT line within the next few months. And then we have plans to order another 3 SMT lines in the next 2, 2.5 years. This is something, I mean, I would say that we would like to accelerate and see because whatever we kind of put inside, there is a minimum 10% saving, which we achieve by putting -- by transferring it from a PCB supplier outside to our own plant. So the major action will be on the electronics purchasing costs. That is the second area. And third area is on the planned operational side, the plant cost, how efficient are we? What is our rate of scrap or OE kind of achievement in -- on various machines? What is -- how many direct labor as a percentage, indirect labors, salaried people, our overheads in the plant. I'm talking about plant side. Plant side in these 4 plants, we want to do this full analysis, benchmarking with the best in the business in Europe. And that's why also Bain is there. So Bain is there -- here to kind of do this diagnostic very clearly for us with the best benchmarks. On the plant side, operational costs, customer side pricing, where there's an opportunity, and also on the electronics purchasing on the PCB, these 3 areas is something we are focusing on. And I think correcting this in a certain way, you cannot do it overnight. So this will take this period of 12 to 18 months. But the point is that we feel fairly confident that with the help of the global consulting company, we will be able to achieve the industry standard in the coming future.

[Abhishek Kumar Jain, Vice President of Research]

So will it also impact your deleveraging program? Because most probably that the FY '22 EBITDA will impact in the both side like VLS and the India business because most probably that India business would be impacted because of the lower two-wheeler sales. So will it impact of your deleveraging program? Because this quarter, this year, we have seen a significant reduction on the rate, and you have also taken some -- raised money from QIP. So just wanted to understand what is your CapEx and debt payment plan for FY '23.

[Tarang Jain, MD & Chairman of the Board]

FY '23.

[Abhishek Kumar Jain, Vice President of Research]

'22 and FY '23.

[Tarang Jain, MD & Chairman of the Board]

See, the CapEx is going to be very, very controlled. Now India, we are growing. Like I said, that we are going to control it because there's a very good level of growth also in India. But still, I think we are driving a lot of efficiencies here in all our plants, focuses a lot on efficiencies and not doing CapEx. But I think around INR 150 crores, INR 160 crores CapEx year-on-year in India will happen. Of course, we are looking at a significant double-digit growth as we move forward FY '22, FY '23. But I think we will limit our investments to -- in that range in India. Also, I think two-wheeler sales may be impacted at the moment. But what we hear is that already, we will see a good amount of increase in the second half of June. All the dealerships have already opened. Yes, there's an issue on two-wheeler sales, the demand. Yet, it is still there because people are scared now of the third wave and everything. But still, because personal mobility also is driving purchasing on two-wheelers, not only cars. So we do see a close to our normal sales from July onwards. And we also have witnessed last year that we were so badly impacted till -- for the first 5 months of last year. But the way the recovery has happened actually last year we had made a COVID budget, but we have beaten the COVID budget last year because in the months between September to March, the growth was tremendous. So we do expect that whatever budget we have had for the full year in India, will be met. Now coming to the VLS business. Here also, we have said we have capped our investments. We are not going to cross more than EUR 40 million, EUR 45 million a year as a growing company. Here also, the attempt will be that it will be that, especially now we're looking focusing more in Europe, of course, we don't focus as well, how do we drive more OE better efficiencies in the equipments we have today already? We have a lot of new equipments we have bought in the last 3 years. How do we utilize this better, in a better way? How do we reduce CapExs? Why should we even do EUR 45 million? Why can't we do less, EUR 35 million, EUR 40 million? I mean why can't we do less CapEx? That is also we're going to be striving for. But definitely not more than EUR 45 million a year. We are going to be spending in our wheelers business as we do want to grow. We do want to grow. Yes, we have our troubles at the moment in our operations, but that's something which we don't expect to last for too long. And that's the reason we have gotten this global consulting firm to also kind of support us. And when it comes to FY '22, VLS, yes, there is a softer demand at the moment because of semiconductor. But like last year, also, we saw a huge growth between September, October, November, December also was a growth, but December, because of holidays of Christmas and all, we do see some softer sales in December. But here, I mean, we feel very confident with all the new business wins and also the recovery, which will start happening. You know that we can capitalize on a decent level of sales also in the VLS business this year and in the coming years.

[Abhishek Kumar Jain, Vice President of Research]

So how much debt reduction we can assume in FY '22 and FY '23? And as you also get the money from the QIP, what is the utilization in payment of the debt, if there are?

[Tarang Jain, MD & Chairman of the Board]

No. So what is -- so what we are doing is that we have a net debt of INR 2,250 crores in March end, which was a slightly lower number than FY '20, where we were at some INR 2,450 crores. Now see, this is a -- this year is a challenging year in the first 5, 6 months for us. So here, I think the whole idea for us would be that, I mean, for this year, I mean, we don't want to promise more. We would like to maintain the level of net debt for this coming year at least because there are challenges. And see today, there's semiconductor, yes. You have also heard from other suppliers, I mean, other companies like us. We are looking at September. But I would say that to be on a probably a little bit more on a conservative side, we would like to maintain the net debt. We would be happy if we have to maintain a net debt at this level even in March '22. This is what we will be looking at. Now what about the money which we have realized about, whatever, around INR 685 net, which we got from the listing. I would say that about 60%, probably 60% or 65% has been deployed towards the VLS business, partly, of course, more than about 50% was more towards meeting the debt repayment schedules for the year, more that. And partly also to help in the cash flows towards CapEx payments and things like that. So we have already deployed, you can say, about 60% to 65% of the money towards VLS. The balance is already in India.

[Operator]

The next question is from the line of Aditya Jhawar from Investec Capital.

[Aditya Jhawar, Analyst]

One thing just wanted to understand that until Q3, absenteeism rate and premium freight, they were quite a bit impacting our margin. So where are we on this absenteeism rate? And on the premium freight, we clearly understand that there is a kind of a dispute that we have with the customer and the amount of the EUR 5 million that you alluded to, how we should expect in the next few quarters? And is there -- has the customer agreed on funding the part of it? And incremental, how should we expect the number in the next few quarters?

[Tarang Jain, MD & Chairman of the Board]

So basically, see, we have no premium freight or labor issues now in Q4 at all. So that is a thing which we had mentioned that, that was -- that came to an end in Q3 itself. What had happened was that in the month of January or whatever, one of our major customers, they put another demand of this major, this thing on -- due to premium freight, they said this is something also pertaining to the earlier quarters, Q3 or Q2 or whatever. And we disputed it. I was myself involved in this with this customer. Myself, I was involved. And we tried to tell them that this is not fair, and we don't accept this. But -- and we negotiated for a long time with them. But somehow, they were hell-bent on debiting this amount, and they've debited it. But what we are doing now is that not only with this customer, that is something we cannot -- we will not get it back. That's something debited, and they're not willing to discuss it. But what we are doing now is that with various customers, what we've taken up this year is there are a lot of underutilized -- not only due to COVID or something. Even earlier, with this customer and some of the other customers also, we are aggressively going after the underutilization claims on various programs where our assets have been underutilized, where the promised volumes have not been generated. So that's something we are quite confident of getting some money back from them against this. Not against what they've already debited, that is gone. But we are going to get claiming money towards underutilization on various programs where we find there has been underutilization. Also, we are going in for resin price increases, but that's not a very substantial amount. But it is an amount. And there also with various customers, we are going in for -- also for resin price increases over there. And also, we are now studying also internally on a few programs in Europe of going in for -- because there has been some extension also on certain programs by the customer. So here also, we are asking in for some price increases on certain programs will also be going in for price increases on these programs. So this is what is the thing. But there is no, Aditya, to answer your question, we don't have any premium freight or labor issues anymore from Q4 from January onwards.

[Aditya Jhawar, Analyst]

Okay. Okay. Fair enough. Sir, just the recovery of this underutilized, Tarang, has there been any precedence of customer agreeing? Or do you think that this might spoil the relationship with some customers if you go by that route?

[Tarang Jain, MD & Chairman of the Board]

See, the point is that any way the system is normally that the underutilization claim is always honored during the end of the life of the program. So let's say, if a customer said that they will take over a 4-year period 1 million pieces -- I'm assuming a number. I'm not saying that is the number. One million, and if they take only 700,000, then we can put in a claim of 300,000 on them. And they normally, they address that issue, they address it. But now what we are doing is that in all the cases, we're not even waiting for that. We are asking for a little bit earlier only for some of the underutilization stating that we are in COVID times, and there is a lot of issues on volumes on certain programs. So this is something worth to be addressing. And in some cases, we may have to wait for end of life, which is there's some end of life also happening in this year. And in some cases, we are not waiting. And this year, we are trying to claim it, and we are hoping that we will be successful. We are actually quite advanced in some of the cases. What do you feel, Stephane? Stephane, do you want to add on this point?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

Yes. No, I fully concur with what you are explaining. We are trying to push for a resolution and get a cash settlement. But in some cases, we are opening for compromising and maybe instead of getting some price reduction that were already pre agreed on the credit term line in the contract, we will cancel the price reduction that should have applied this year or next year. So this is also another way to get compensation. The fact is that in the current situation, it's very difficult for a supplier like us to adapt to the rollercoaster from the customers. Sometimes we get a phone call on a Tuesday that from tomorrow, from Wednesday, their plants will be stopped and they are not able to make cars and this -- they will remain stopped for a week or two. So we have the people. We have the lines. We have the equipment. We have the material. And so this is not possible to really orderly wind down the operation and work on this fixed cost and reduce them.So this is part of the negotiation of the discussion that we have with the customers. Obviously, we are very mindful. We don't want to break the relationship. But as long as we are fair, we are fact-based, we put the data on the table, this is part of the relationship and this is a give and take. And so far, I think the momentum is pretty positive, and we have already first small wins in the last few months.

[Aditya Jhawar, Analyst]

That's helpful. My second question is that your commentary indicated that demand is not an issue and clearly other [ auto ancillaries also suggested ] semiconductors is a challenge. So since we are also seeing a ramp-up in some of the facilities and when the semiconductor issue gets resolved, should we expect a nonlinear kind of a growth from Q3 onwards as compared to the current quarter that you also have reported as the issue gets resolved and as our new facilities get ramped up both in terms of top line as well as an impact on margin as early as Q3 onwards?

[Tarang Jain, MD & Chairman of the Board]

Stephane, do you want to answer that?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

Yes. We have already the heads-up on the information from the customers that as soon as they are able to stabilize the pipeline of semiconductors, they want to work at maximum capacity. They are already running some studies with us. Can we go even above the maximum capacity that initially was contracted because they want to recover the lost vehicles that have not been able to be produced in the beginning of the year. As Tarang mentioned, there is no demand pricing. Right now, when you look everywhere in the world in terms of the stock level at the car manufacturers, this is the lowest in the history almost. We have never had such a low inventory of vehicles. And it is starting to become a problem at the dealership in countries where you buy vehicles on stock. You go to the dealership. You don't find the right options. You don't find the right color. So the OEMs are really eager to produce more because the demand is there. So that's also the situation we are in right now. When the customers are shutting down sometimes for 2 weeks, 4 weeks, we have some extreme cases, 8 weeks or 9 weeks, what do we do with the labor? What do we do with the costs? Do we remove everything right now knowing that we will need -- the people who will need the capacity in the next few months coming up? So this is a trade-off. This is a day-to-day management and decisions that we have to make. But the demand is there, and we expect the digital increase as soon as the semiconductor will be available. Our best guess, and I think the industry best guess is September. We have good signs. We are speaking with the semiconductor maker on a daily basis right now. So we have pretty good visibility that starting in September, we see that the demand is pretty sustained. Now everyone will try to produce more and add to the maximum capacity. So that's the next challenge coming at us and coming at the industry, I would say.

[Aditya Jhawar, Analyst]

Okay. Okay. And Stephane, if you can tell us that what is the contribution of electric vehicle supply to pure electric vehicle in VLS revenue now?

[Tarang Jain, MD & Chairman of the Board]

Would you -- what would it be today? Do you know, Stephane? What would you guess?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

I don't have a case size figure in front of me, but we see that the share of electric vehicles is growing steadily. You know that we have even more market share for the electric vehicles than even the conventional ICE vehicles. We have been historically always very strong in this segment. I was with [ Paul ] yesterday, and they were happy to convey to us that in last month, they produce more Mustang Electric, the Mach-E than conventional Mustang. So for the Mustang last month, the first time in history, they produced more electric vehicles, where we are, by the way, the supplier for the headlamps than the normal Mustang. So I think this is a very strong sign here that the industry is shifting, and it's shifting very fast.

[Tarang Jain, MD & Chairman of the Board]

But Aditya, I think that what we mentioned also earlier, I think we should be around 8% to 9% of the total industry. We, I think, would be electric -- we would be supplying for at least 8% to 9%, I feel, of the market because the VW programs are very strong in the market now in Europe. And that is also -- and plus, of course, the new models, what Stephane also mentioned. So I think we will be 8%, 9% of the market, global market today.

[Aditya Jhawar, Analyst]

Okay. Okay. My final question, Tarang, is on India business. The BS-VI product that we had launched, are we able to engage with more than 1 customer in that? And the related question to this is similarly for electric vehicles. We understand that one of the customer we are -- we have the firm order with, what have -- at what stage the talks are with other OEMs? Have that reached a stage of RSU, I mean, ordering levels? Where are we? Or is this [indiscernible] only the decision speed of supplying EV products to other than the 1 OEM that we are engaged with, both BS-VI and EV?

[Tarang Jain, MD & Chairman of the Board]

Yes. So see, on the BS-VI products, I think when it comes to certain products like the Magneto, I think there is a strong -- this is something which is going to be the BS-VI Magneto. This, I think, probably various customers have shown interest in us because I think our product is very good in the market. It's been very well acknowledged by all. I think they know the performance of a Magneto in the market, we're better, whoever we supply to, [ Audi ]. And so I think this volume is going to grow, I think, substantially as we move forward on the BS-VI side. This is -- then also we are driving more on the EFI side. I think we see that even with Audi, I think, in the coming this thing through the new models, that whatever we were doing in the last year, our volumes will double for Audi on the EFI front. Plus, of course, also, we are talking to 1 or 2 other OEMs. The problem is things are a little slow. I mean this lockdown and some of the testing and orders got a little bit postponed and everything. But I think on the EFI today, we are doing only with Audi and with -- for JAWA, Mahindra JAWA. But where the volumes are also are doing fairly well. But now there are another 1 or 2 OEMs, I think 1 is more serious. We are already in testing. Another 1 OEM is in serious discussions. I think we should be getting 2 more customers during this year. We should be winning, I mean, these programs. Other than this, the BS-VI, okay, the other products, I don't know which ones you are pertaining to.

[Aditya Jhawar, Analyst]

The second similarly for EV, if you can highlight.

[Tarang Jain, MD & Chairman of the Board]

On the EV side, we are in -- so here we are, I would say, nothing has really kind of concluded, I would say. We are still -- we are still discussing with all the large OEMs. We are in very, very close discussions. But yes, nothing is something close to formalization, let's say, the next few months. But I think in this year, this year, we feel fairly confident that we'll win some EV products with the other customers. But yes, because some of the lockdowns and all, even these last 1 or 2 months, honestly, they may not had much of a discussion with the OEMs. They have not also had meetings with us. So I think as we move forward, we are very confident because people know that we have some very good tie-ups on some electronics also. And also, I mean, we have been a first mover, I would say, in the products. Maybe there have been maybe 1 or 2 other companies also, but we're definitely the first mover in some of the products. And so we feel we're fairly confident that we will achieve some decent results in this financial year. We'll win some business on the EV side with other customers other than our main customer.

[Aditya Jhawar, Analyst]

Perfect. Just last question, if I can squeeze. What would be the share, the overall [ cap ] value of our products put together for a electric two-wheeler now? And if we have to think about our improving capabilities, what that number can be after, say, 2 years? Per value, how much we can potentially supply to electric two-wheeler?

[Tarang Jain, MD & Chairman of the Board]

So I would say the total sum of content that we would enjoy on a two-wheeler, I think, would be close to around $500. But of course, this varies also by what exactly the two-wheeler is trying to do, right? Now, well, I think our focus has been, as we went about developing our product, was to really have something that -- was to really develop product that would be compatible or that would operate at EV that is comparable to an ACTIVA 110CC. And I would say the number that we have here or this is around $500 number, that is really what it would kind of be comparable to. Of course, I would say the specification, et cetera, the exact architecture, et cetera, some OEMs have finalized, some OEMs are still in the process of finalization. So it will really evolve, I think, based on what the vehicle really becomes. But from our perspective, I would say, in particular, on products like motor, the controller, the DC-DC converter, telematics, which we have completed total proprietary capability around, we really should be able to address a majority of market needs.

[Aditya Jhawar, Analyst]

That is very good to hear. So that $500, as of now, it is our capability to supply to an electric two-wheeler right?

[Tarang Jain, MD & Chairman of the Board]

[ When you say ] -- while I say that statement, there will be, let's say, over time, maturation of cost as well also. Right now, it is not -- I mean, when I say that, what I mean to say is there might be some reduction, et cetera, that take place over time. But the fact of the matter is that it is a significant growth in content per vehicle versus what is only [ ICE engine ]. But you know, one more product which you should see here, I would say -- see, I think this is the gamut of products we have for the EV at present. We are not looking at anything else because there are already 5 or 6 electronic products in the motor, and this is a big range. We're not looking at something else. But 1 product which I think is very -- which is going to be really a good product in a two-wheeler are electronic clusters, the dashboards. There, the technology coming in around telematics, the TFT clusters. There, the value add is huge. That's one thing. And secondly is on the high-end lamps, the LED lamps. And even the transition, like today, let's say, you have vehicle, two-wheeler vehicles, like, say, even the Hero. Like Hero is a very big customer for lamps other than Bajaj, there even HF Deluxe and all. I think a lot of these are going -- when they go to LED lamps, a product which is hardly some INR 300 or something, straightaway going to INR 1,000 or INR 1,200 is a big jump. And we see that happening quite fast. So for us, other than, okay, the EV side obviously disruption, that happening is going to be a huge thing for us. But even other than other BS-VI products in the cross-selling or whatever, but these 2 products, the LED lamps , conversion of LED lamps, plus the high-end lamps also and this cluster side, we will see a huge growth here. And it's all electronics. We see a huge growth we see in these 2 product groups for India, with all two-wheelers all two-wheelers.

[Arjun Jain, President & Business Head of Electrical]

And if I go a step further, I think a core reason why we are able to drive potentially more Magneto business, potentially more starter business, et cetera, also maybe around [indiscernible] is because it's partially also because of this transition towards more electronics in the lighting and the clusters, right? [indiscernible] you have an LED headlamp, there is impact on the rest of the electrical system of the vehicle also.

[Operator]

The next question is from the line of [ Kaushal Mehta ] from Nepean Capital.

[Unknown Analyst]

Sir, a single question, which is if I look at the sequential numbers from Q3 to Q4, the revenue for both the India business and VLS is actually higher. And despite that, margins on both the businesses have come off, despite higher utilization levels as well as getting over the freight cost as well as absenteeism margins have actually come up. So I just wanted to sort of understand what's happening there.

[Tarang Jain, MD & Chairman of the Board]

See, what is happening there is that, see, let's not take the tooling revenue. Let's take the tooling revenue out. The tooling revenue is all controlled by customer. It's just a top line for us. You may make 1% or you don't make any money on tooling. So there, I mean, if you really say that our total reported revenue, Q3 was EUR 260 million or EUR 267 million, but the tooling revenue went up from 7 to 26. So our production revenue actually was -- went down by EUR 2 million, not much, but actually flat from EUR 236 million to EUR 234 million. So that was [ different ]. But the issue here was that where we make the maximum profit, which is North America, in Czech, so North America went down -- the mix changed basically. It went down from EUR 41 million to EUR 33 million. And Czech went down from EUR 152 million to EUR 146 million. But see, so North America was a big impact for us from a profitability angle, and Czech went down on the EUR 5 million. But I don't know whether you heard me earlier. We had a EUR 5 million debit, close to a EUR 5 million debit from a customer in our Czech operations, which is unfortunate. We lost something we believe should have been debited to us pertaining to the earlier quarters. So that spoiled the results for Czech other than just a small decrease in the -- I mean due to some sales and all. So these 2 are our main [ proponent ]. Poland and Morocco, unfortunately, though the sales were higher, they're still at a very -- somewhat they are probably 50% of what we should -- 50 to -- is about 50% of what we should be achieving for the investments we have made. There should be minimum. I mean, you did almost like only a EUR 5 million revenue when you should be doing a EUR 10 million revenue for the investments we have made. And so that, of course, impacted us. And yes, in these 2 plants also, we do believe that we need to kind of work on other areas. Like I said, we have to work on all 3 areas, some customer side actions, supplier actions and operations also, which we are doing to improve the results even -- so I agree with you that the results should have anyway been still driving better in Poland and Morocco. Also, if the sales were lower. And in Czech also, the results should have been more. America, I feel, is purely an issue of semiconductor. And 16 million average and 11 million average, that is definitely impacting our profitability. So there, this is not -- that is only pure semiconductors. While in the European plants, it is also to do -- other than semiconductor, it is also to do with something more on the operations side where we can do better, and which we are going to do, which we're addressing now.

[Unknown Analyst]

Got it. And sorry, same question on the India business. Margins sequentially came off but revenues were higher.

[Tarang Jain, MD & Chairman of the Board]

So I think India side, I think, see, what has happened is that there has been also a lag -- see, from October, we have seen increasing raw material costs. There will be substantial cost increases on steel and aluminum and even resins and everything. Now there is always a lag of at least 3 months in our business. And the lag has been substantial. So okay, some of you were able to manage the quarter of October to December because we didn't feel that pain. But we have felt the pain in Jan to March. We've had to absorb certain costs. Now we will get that difference in the month of April. Jan to March, we have lost some margin and material costs have been a little bit higher as a percentage because of the lag. And it's not some normal kind of increase. The steel increases, price increases or some of the resin increases have been substantial even on a polyurethane form, which we buy for our seats, which is a big business for us. It's a huge increase. It's very difficult to kind of be able to absorb all those costs, and the customer is also not kind of kind of addressing that, I mean, that issue. That's why also with a good level of sales in Q4 as compared to Q3, we have not been able to kind of really absorb all the costs. Do you want to add something, Arjun?

[Arjun Jain, President & Business Head of Electrical]

Yes. I think there's also been a level of impact in terms of some of the fixed cost reductions we drove in the earlier quarters. And I think part of that also has come back in Q4, which is not necessarily a continuous impact.

[Operator]

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

[Ronak Sarda, Vice President of Auto, Auto Ancillary]

Just a clarification first. This EUR 5 million hit in Poland, I mean...

[Tarang Jain, MD & Chairman of the Board]

In the Czech.

[Ronak Sarda, Vice President of Auto, Auto Ancillary]

Sorry, in the Czech plant, what does it pertain to? I mean is it related to warranty? Or is it purely on the freight side or something like that?

[Tarang Jain, MD & Chairman of the Board]

90% of this is purely claim against premium freight of the earlier Q3 quarter, which actually we thought was already settled, and there was nothing due from our side. But it came up again, and we didn't have any bargaining power to stop it.

[Ronak Sarda, Vice President of Auto, Auto Ancillary]

Got it. And the other question was, I mean, if I see your previous interactions, you had highlighted that Morocco plant will start or will be like a PAT positive at the EUR 6 million monthly run rate. I mean we obviously are almost there in terms of the overall revenue as the manufacturing revenues are slightly lower. But I mean it's still pretty substantial negative EBITDA. So any specific concern here? Or I mean -- or do you see some more ramp-up? I mean is it more of a ramp-up issue now? Or is it some other issues now impacting the profitability?

[Tarang Jain, MD & Chairman of the Board]

I think the cost side of things in Morocco, whether it's something on the material side or something also -- we have also strengthened some of our team in Morocco now. And so I don't think that the EUR 6 million, we will be able to make a PAT anymore. I think it requires a higher revenue and probably closer to maybe -- because if we have invested all the investment we made in Morocco is for a revenue of about annually EUR 130 million, for which we have won the programs. And we should be at least trying to be able -- we were expecting it to go to at least EUR 10 million by now, which has not happened. But at EUR 6 million PAT, I think maybe I don't know whether we mentioned this as PAT or EBITDA, I don't know. But I think on a PAT, we will definitely need at least EUR 8 million to EUR 9 million to reach a PAT kind of a positive number. I don't think it's going to happen at a EUR 6 million revenue. I don't think that is possible. We can be looking at probably more towards the EBITDA side of things that you know that we are EBITDA positive at that level because the investments which are made are very high. And also we have a certain level of cost there. So it's not possible to meet this PAT at EUR 6 million revenue.

[Ronak Sarda, Vice President of Auto, Auto Ancillary]

Got it. And the last question on the India side. I mean, while we're obviously interacting on the large OEMs on the EV product, but given how Ola Electric has made a splash with the volume and they have the financial backing given the capital raise [ just now ], would you be -- would you carefully comment? Are we in discussion with them or any previous discussion with them? So specifically on Ola, I mean, not the other start-ups, but if we can talk about Ola Electric specifically.

[Arjun Jain, President & Business Head of Electrical]

So of course, I think with all of our different customer engagements on EV, I think we are covered by NDA beyond the point. So I'm not sure how much I can really speak about a specific customer per se. But again, what I would repeat is, with every significant EV start-up that you would know, it is not that we have not had discussion, right? We know all of them. I think all of them know us also, I think, quite well. But again, if we are thinking about, let's say, this big volume ramp-up by June, I mean -- or let's say, by July, let's be honest, we are already too late to the party, right? So I mean that's not really the volume story that we will be a part of today anyway because like I said, these are very engineering-intensive products. Over time, for sure, and I don't think that we are saying no, but where our engagement has been the deepest is the customer that we know the best. And again, given the fact that resource constraints do exist, that is really where we will look to continue to prioritize.

[Operator]

[Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

[Pritesh Chheda, Analyst]

Sir, I have 2 questions. One, I wanted to know the bridge of the margin differential on an annual basis for VLS, which is, let's say, about, I think, 1% or this year versus 6%, 7% last year. If you could help us give a bridge on what would be the gross margin erosion in that? And what would be volume-led operating deleverage impact? So that it's very easier for us incrementally to track on an annual basis the progress in VLS. That's my first question. My second question is on Slide 8 for the U.S. operation. We have mentioned about a customer not picking up the model for which we are supplier. So I wanted to know the reason here. Is it transitionary? Or this gap needs to be now filled up with a different model, if you could help. Because this part of the business is actually profit-making in VLS, which is, I think, the Mexico plant.

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Yes. Nitin, this side. On the gross margin, if you see last year, we are at about 22%, 23%, basically. That has gone down to roughly 16% or -- sorry, 18% this year, basically on account of increasing change in mix of the revenue coming from the new plants and old plant, basically. That is one reason. Apart from that, we see a lot of scrap increases. Also, scrap rates have gone up because of new programs that we have started in the new business basically. So a mix of that. And also, I would say, during COVID, our overheads were higher than sort of normal basically. So as a result, we have seen the gross margin drop a bit basically. And...

[Pritesh Chheda, Analyst]

Sir, just to intervene here. I think your gross margin here means contribution margin. You're saying mix of plant. I think it is contribution margin.

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Yes, yes. It's -- I'm referring to the contribution margin.

[Pritesh Chheda, Analyst]

Can you just tell us what will be the gross margin erosion?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Gross margin erosion also will be about 5% to 6%, I would say.

[Pritesh Chheda, Analyst]

If the total differential between the 2 years is 7% in margin or 6% in margin, you cannot have both the items at 5%, 5%, right?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Yes, both will not be at 5%, 5%. I think raw material would be about 400 basis points basically. And I think manpower would be another 1% and about 1% on fixed cost.

[Pritesh Chheda, Analyst]

So basically 4% from GM and 2% from plant mix?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Yes, that's right.

[Pritesh Chheda, Analyst]

Okay. Done. But there was no volume slide in the 2 years, or volume was largely intact?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Volume was, I would say, a little lower than last year because the average selling prices have gone up because of the LED content. At the same time, obviously, the raw material percentage to sales in new products like LED are higher as compared to the traditional lamps basically.

[Pritesh Chheda, Analyst]

Okay.

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

As the new plants sort of play a larger role in the overall scheme of things, basically the Poland and Morocco, there, the raw material cost as a percentage of sales higher is higher because they are largely the LED category lamps, basically.

[Pritesh Chheda, Analyst]

Okay. On that Slide 8, customers model loss?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

One second. What was the question? Mexico.

[Pritesh Chheda, Analyst]

Question was in U.S., you have written that a customer would...

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

Maybe I can answer to this one, Nitin. This is directly linked to the semiconductor. This specific customer has a limited number of semiconductor and decided to focus the production on their newer model, not on the older model. That's purely their decision. Their mix decision was driven by the limited availability of the components.

[Pritesh Chheda, Analyst]

[indiscernible]

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Your voice is very low.

[Pritesh Chheda, Analyst]

I'm sorry. I said, do you consider this to be a transitionary impact?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

This will not reflect the mix that we will see in the subsequent quarters.

[Pritesh Chheda, Analyst]

Sorry. This will not?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

This will not replicate in the subsequent quarter so.

[Pritesh Chheda, Analyst]

So it will not repeat in the subsequent quarter?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

No, no.

[Pritesh Chheda, Analyst]

Okay. So those semiconductor issue at the customer end is rectified for that model?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

I cannot speak on their behalf, but this is directly linked to the semiconductor. So if they have enough availability, then they will come back to the mix that they had before.

[Operator]

The next question is from the line of Nishant Vass as from ICICI Securities.

[Nishant Vass, Auto and Auto Ancillary Analyst]

So my first question is on VLS. I think, obviously, at least looking at it from an order cycle perspective, India definitely has done better than last year. But I think, obviously, it looks quite stark that you're seeing a 50% drop your net order wins over last year. And we can clearly see that your re-win rates have dropped by nearly 60%, 70% over last year. So can you shed some light as to what is the [ heavily ] issue happening there? Is it you are going away from a pricing basis with certain programs? Or in new electric programs be more pricing competition, so you're not having the same win rate? So can you shed some light on the ordering structure, please?

[Tarang Jain, MD & Chairman of the Board]

Stephane?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

So about the new business wins. During this COVID year, I'd like to remind everyone that in the first almost 2 quarters. The customers were stopping all the new business rescue, they were putting on all the new development and people were working from home also as customers. So this slowed down the process. So we consider that winning EUR 210 million of net new business win is a good performance for the previous year. That was not a year as usual. That was not business as usual. That was not a year where we had the same amount of opportunities handed over to us. And this year, we are coming back to a more normalized situation. And we started pretty strong with the win, for example, of the new Audi A3 rear lamp both for the European volumes and China volumes. We continue to be very strong also with Changan in China, a very successful OEM in China. We won 2 small SUV projects with them. So that's -- we see a pretty good momentum with this new year. But for last year, we think that was a good performance. Then as a consequence also of last year, we will see some customers that will decide not to launch a new model but extend the life of current model. So we expect to benefit from this also in the next month with some good news in terms of business expansion.

[Tarang Jain, MD & Chairman of the Board]

And Stephane, I think this business extension, I would say, is also one of the major reasons also for us not having that level of business because I think it's not only 1 customer. It's a few customers who are extending the life of their programs, quite a few of them. They don't want to invest in new programs presently to that extent, like it was in the past.

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

Yes, that's true. And for us, it's always the good news, the business extension, because we don't have to invest additional engineering for this additional revenue. And we don't have to put in place new CapEx, obviously. But also, we don't have to go through another launch phase of these new programs because this is just the extension of an existing program where the launch is behind us, where the operators are trained, where the production is stabilized. So it's always good news. So I think this is one of the positives from this negative situation of the crisis last year.

[Nishant Vass, Auto and Auto Ancillary Analyst]

So Stephane, if I can -- obviously, you seem to be quite confident. So could you shed some light in terms of your -- one of the largest customers, Ford? They've embarked on a large-scale electrification program with Ford F-150 lighting, obviously, their larger selling model as well as the Mustang. So are you guys doing the front lighting for them?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

So the -- Ford has just unveiled this model. So they have not chosen yet any supplier for the Ford F-150 lighting for the electric trucks. We -- you know that we are a strong partner of Ford, especially also on the electric vehicle. So we are the supplier of the Mustang Mach-E, like I mentioned earlier. We are the supplier of the new electric vehicle platform that Ford will be launching in North America. This we won. So we will be a strong contender for the lighting. But the competition is not yet open. There is RFQ out there, so it's not sure. It's not a business that is sure yet.

[Nishant Vass, Auto and Auto Ancillary Analyst]

Okay. And my second question on the customer is, again, this customer is the North American EV customer, the revenue seems to be not stopping in terms of the drop. Can you shed some light in terms of are you guys making any headway with that North American EV customer incrementally?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

In North America, we'll be launching in, I think, in September. It's confirmed now, the new radial platform. So they have an SUV that they are launching. I don't know if you are familiar with Rivian. This is a new EV player, with the shareholders are mainly Ford Motor Company and Amazon. So this is a -- this will be a sizable business for us. The volume is about 100,000 vehicles per year, and we have the full rear lighting for this customer. So this will impact our EV position in North America. Then in North America, we will be launching in a few months the ID.4. I remind you, we are the supplier in Europe, we are the supplier in China. And now forward again, this business will be launching in North America also. And I mentioned the Mach-E. The Mach-E is very successful. We are running at max capacity right now. And speaking with the customer to even increase further capacity as the vehicle is selling very well. So these are a few of the high-profile EV vehicles that we are serving in North America. You know that, historically, we have always been a partner of Tesla. We have seen our Model X, and then we are on Model 3 and Model Y, but only for the small lighting, only for the models that were available. So we have the [ fascia lamp ], we have the reflex lamp, and we are producing for their North American business but out of our plants in Europe. And then we are very close to get a good news for the Berlin plant. There is a decision that will be taken in the next days.

[Nishant Vass, Auto and Auto Ancillary Analyst]

Okay. And my small management -- small data question is quarter-on-quarter, China joint venture profitability has seems to have dropped. So can you shed some light into what is the stable profitability level at the China joint venture?

[Stephane Vedie, President & CEO of Varroc Lighting Systems]

I believe the main driver when we look quarter-over-quarter, that means, it's driven by the Chinese New Year. That's the same topic every year. There is a period where we have to close the operation and when the customers are also closing the operation. So I believe this is the main driver, yes. We don't have any significant impact of performance in China. The production is still very well under control, and the volumes are pretty strong. China is also impacted by semiconductor. By the way, but we see North America impacted the strongest than Europe and then Asia as the number two in market, I would say.

[Operator]

The next question is from the line of Giriraj Daga from K M Visaria Family Trust.

[Giriraj Daga, Investment Manager]

So I have 2 questions. First, I believe what -- can you hear me?

[Tarang Jain, MD & Chairman of the Board]

Yes. Yes, we can hear you.

[Giriraj Daga, Investment Manager]

Yes. So I have 2 questions. First, can you -- like the CapEx number, what you have mentioned, INR 150 crores in India operation and EUR 45 million in the VLS, it does not include the cost incurred on intangible assets. Is my understanding right? And if yes, what is the number you are considering in FY '22 and FY '23? Just a related question, how do we see this line item for the next, let's say, 2, 3, 4, 5 years kind of outlook?

[Tarang Jain, MD & Chairman of the Board]

So yes. So intangibles is not in this figure. Intangible is more the engineering capitalization, which we do, which would be how much, Nitin?

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

About INR 300 crores.

[Tarang Jain, MD & Chairman of the Board]

About INR 300 crores a year is what we do. Now this number could go down slightly as we go forward because, see, both CapEx and engineering, both we are driving efficiency. So obviously, there's no question of this number going higher. It can only go lower. But this is a ballpark number which we have today for this year.

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

Paid by the customer.

[Tarang Jain, MD & Chairman of the Board]

And this is all paid by the customer. I mean, that intangible is not -- it's all paid for, is in the piece price.

[Giriraj Daga, Investment Manager]

Okay. But since the amortization is 40%, not fully, so I just wanted to understand that number.

[Nitin Kalani, Head of Treasury, FP&A and Investor Relations]

There will be some differences across periods basically because the capitalization and the actual piece volumes are different in Europe basically. So that should eventually catch up.

[Giriraj Daga, Investment Manager]

Okay. My second question was on the claim of standard utilization. So I want to understand like what kind of IRR we have been promised by the customer. If you can give a fair range of that -- like the 4-year period you were promised that kind of IRR and once that is not achieved, will be paid at the end of the period. So what is that IRR number?

[Tarang Jain, MD & Chairman of the Board]

No, see, they don't promise any IRR because, as you see, they only go by which is the lowest cost they're getting. The point is that we have an IRR target, which would be at least 20% IRR. So we are looking at program and now we are far more focused also on the IRR because sometimes earlier, we were saying, okay, 15%, 16% also. But now we are pretty much focused on the IRR. And it's possible also if you're driving more efficiencies across, the 20% IRR is possible. So we have own internal target of 20% IRR. So it is not customer is giving you or something. You have to make it happen.

[Giriraj Daga, Investment Manager]

The customer gives you the outlook for the volume, right? And on the basis of that, you calculate your IRR.

[Tarang Jain, MD & Chairman of the Board]

Yes. No -- so you're right. So basically, what happens is you are doing a 20% IRR on the stated volume, which they have set. Now if they're not meeting that over -- but so -- and what happens is over the life of the program, if it's 3.5, 4 years an extension, then you don't only include the extension also. Let's say, 4 years life. At the end of the 4 years, you would have to see that what is under utilization, what has been a depreciation which has been as a cost or maybe some engineering, which is under amortized or whatever, all that you can claim from them end of the life.

[Giriraj Daga, Investment Manager]

Okay. But your customer must also be having a similar kind of a calculation, right? So my question is that we are in a country where the cost of capital may be 5%, 6% or the cost of equity capital may be 8%, 10%. In that country, you're able to have a 20% IRR. So is the customer more like okay that in the end of the period there might...

[Tarang Jain, MD & Chairman of the Board]

No, but just to clarify. See, IRR is different from a discount factor. So today, we may take a 10% discount factor in Europe. I may take up a higher discount factor by doing NPV and all that kind of a thing. But see, but IRR, we take it at a 20%, which is something which we feel is definitely possible. While...

[Giriraj Daga, Investment Manager]

But the European programs, I'm more particular concerned on European programs, not on the domestic side.

[Tarang Jain, MD & Chairman of the Board]

See, the Western world, the discount factor -- because see, we also internally have to do an NPV calculation, right? So there, we take a 10%. We take a lower discount factor compared to what we would do in India.

[Giriraj Daga, Investment Manager]

Yes, that was my question. So the -- okay.

[Tarang Jain, MD & Chairman of the Board]

Yes, India would be 14%, 15%. But IRR is, in any case, the discount factor may be but IRR, what we have to kind of also kind of look at the other side has to be 20% in both cases, India as well as abroad.

[Giriraj Daga, Investment Manager]

Okay. Maybe at some point of time, I will understand with Nitin maybe in more detail off-line.

[Operator]

The next question is from the line of [ Apurva Mehta ] from [ PAM Investment ].

[Unknown Analyst]

Yes. Sir, just wanted to know where we can really go to back to the 9%, 10% of margins in the VLS business. And what kind of utilization you should see, what kind of revenue you could see that we can reach to that level? Because it is dragging and the margins are dragging a lot. From 7%, we have dropped to again 1%. And what is the outlook for maybe next year or next 2 years, where we can look over for the next year?

[Tarang Jain, MD & Chairman of the Board]

Yes. So see, the point is that we have always said that we have to do 10%. Yes, there have been issues at our end, and we've not met those numbers. And for that, we are to blame. It's not that the whole industry is at a bad level. I'm not talking about last year. Whole year, okay, may be bad. But last quarter, I mean, surely, people have kind of performed. So that's what I was saying initially, that see, we have to address Europe as a focus. That's where we feel it's not only a question of just sales. Sales, of course, is important. That will be 50%. 50% should be -- is a sales side that we have to do a level of sales in Europe. -- we should be, in our view, at least -- I mean, if we take all the 3 plants together, we should at least try to do EUR 65 million, EUR 70 million of sales. That's something which we -- the EUR 50 million sale is something which we need. But I am just saying that's only 50%. Today, I mean, we have to also structurally look at certain other areas also where we feel that there are certain things we have to do, if we have to get in the stability on the EBITDA or EBIT level. What did I said? Customer side actions. There will be certain -- in some programs, we have to go for a price increase. There is no option. A few things we will do, yes, it's not that easy, but we have to address it in a certain way, some programs we want to go. And there are opportunities to do that because they're asking for some program extension and all, and we can find a way how to get a better price on a few programs. We can't do it all around. And we only have only a few programs we will target. Other is, I said on electronics purchasing, I don't think we are competitive today in Europe in most of our -- and major [ bomb today is ] electronics. So today, we are buying PCBs from outside. Of course, today, the industry, all our competitors -- if you do 50%, 60% in-house. For that, I think we will take at least 4, 5 years to reach that 50%, 60% level of doing in-house. And we have a plant, we have started in Romania with 1 assembly line. We will touch 5 in about 2, 2.5 years. But then we have to go to at least 10, 12 lines to be able to largely 50%, 60%. At our end, we have to do minimum that much of SMT lines to be put inside our own thing, which will give us right level of bill of materials. But other than that, you also have to purchase from outside. So there, I feel we are more expensive in our buying, and we are looking at resourcing 12 major programs in Europe today, where we're going to take a decision this month, maybe before the 15th. And we are going to resource these programs at lower cost for the rest of the life of these programs. Yes, it may take probably 8 months or something. But then post that, we will probably kind of this thing kind of to get a better margin out. And thirdly is the operations side. Operations side, also, we are not kind of, I would say, I think we need to get more efficient in our plants in Poland, Morocco and Czech. And that's the reason for -- in these areas to focus and get better results. We have gotten this global consulting firm to kind of support us in being able to achieve the industry benchmark of 6%, 7% EBIT or maybe 11%, 12% EBITDA.

[Operator]

Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to Mr. Tarang Jain for closing comments.

[Tarang Jain, MD & Chairman of the Board]

So thank you, everyone, for this call today. Yes, I know that I think all of you are very disappointed in our Q4 results, especially on the VLS results where we had the revenues. But still, we have -- we've not come out with a decent performance. And there is really no excuse for it. But I think going forward, I can tell you, yes, there are some disruption happening today because of semiconductors, so volumes are also impacted presently. But we are fairly confident that going forward, we will be able to reach, I think, this industry level EBIT margin of 6%, 6%, 7%. It will take us, yes, as we go quarter-on-quarter, say, from third quarter we will see that the margins are getting better. And then within 12 to 18 months, I think between that period, we will reach the industry benchmark, in industry-wide benchmark. We feel fairly confident. And that's the reason we have kind of contracted also. We brought in this global consulting firm to support us in this exercise. I think it's not something of a rocket science to be able to achieve this. Yes, we have been not being able to do it. In these last 15 months or 2 years, we have not gotten the results in VLS. So that's something we are committed to kind of, I would say, reach sooner than later. On the -- we know fairly well where we have to attack and what we have to do in VLS and it's mostly in Europe, which is 70% of our revenues. When it comes to India, we have -- I think we have had an improved performance in the last 2 years. We are improving year-on-year. And we also are looking at kind of a huge growth as we go in the future years. We are looking, I think, maintaining a 12% EBITDA or higher is something which is very much possible as we move forward. And I think we will only grow from strength to strength when it comes to our India business. On the two-wheeler side, of course, which is 85% of our revenues, there, we are in all segments, whether it's BS-VI and even EV side. We are very well kind of covered over there for the long term. And also, I think on the four-wheeler side, where we do various products especially plastic interiors, engine valves, certain forge products for hybrid vehicles, also by EV vehicles there, there also, we have a very clear strategy on what we want to do in the next 5 years. So I think that India side, we are very well placed. VLS side, also from a business angle, we are very well placed. From an operations side, we have not performed, which is showing in our poor results. But going forward, I can assure you that we will definitely -- you will see better performance from the third quarter onwards. So with this, I thank you once again in -- for this call and also for all this patience. In the last couple of years, you kept this patience. We were just -- I would just request you to please bestow this trust as we move forward for a little bit more time, and you will see better results. Thank you.

[Operator]

Thank you. On behalf of Varroc Engineering, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

[Tarang Jain, MD & Chairman of the Board]

Thank you.