Elecon Engineering Company Ltd (ELECON) Q1 FY24 Earnings Concall Transcript

Elecon Engineering Company Ltd (NSE: ELECON) Q1 FY24 Earnings Concall dated Jul. 12, 2023

Corporate Participants:

Prayasvin B. Patel — Chairman and Managing Director

Kamlesh Shah — Group Chief Financial Officer

M.M. Nanda — Head of Gear Division

Analysts:

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Pratik Kothari — Unique Asset Management LLP — Analyst

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Anish Jobalia — Girik Capital — Analyst

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Ankit Babel — Subhkam Ventures (I) Pvt. Ltd. — Analyst

Deepak Poddar — Sapphire Capital Group — Analyst

Subham Agarwal — Aequitas Investment Consultancy Private Limited — Analyst

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Pujan Shah — Congruence Advisers — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to Q1 FY ’24 Earnings Conference Call of Elecon Engineering Company Limited. This conference call may contain forward-looking statement about the company which are based on the beliefs, opinions, and expectations of the company as on the date of this call. The statements do not guarantee the future performance of the company, and it may involve risk and uncertainties that are difficult to predict. [Operator Instructions]

Now I hand over the conference call to Mr. Prayasvin Patel, Chairman and Managing Director for Elecon Engineering.

Thank you and over to you, sir.

Prayasvin B. Patel — Chairman and Managing Director

Thank you. Good evening and a warm welcome on our Q1 FY ’24 earnings conference call. Today on the call, I am joined by Mr. Aayush Shah, Non-Executive Director; Mr. M. M. Nanda, Head of Gear Division; and Mr. P. K. Bhasin, Head of MHE Division; Mr. Kamlesh Shah, Group CFO; Mr. Narasimhan Raghunathan, CFO. We have uploaded our financial results and press release on the stock exchanges and on company’s website. And I hope everyone had an opportunity to go through the same.

I will start my opening comments with industry insights, followed by a business overview, post which, Kamlesh Shah, our Group CFO, will take you through the financial and operational performance of the company for the quarter ended June 2023.

India’s GDP has continued its upward trajectory and has emerged as the fastest-growing economy. This growth is supported by robust private consumption, increased industrial activity, and strong investment activity, strengthened by the government efforts to boost capital expenditure. The strong demand in sectors such as power, steel, cement, sugar, mining, and infrastructure, coupled with emphasis on industrialization and localization through initiatives like Make in India and PLI schemes, is driving this growth. Furthermore, India’s strategic focus on attracting global supply chains, especially through strategies like China, presents a significant opportunity for the country to become a prominent manufacturing hub. This shift has created a surge in demand, which is benefiting India.

For overseas business. We have been witnessing increased inquiries for our diverse range of products, indicating a positive trend in the market. To capitalize on these favorable conditions, we are increasing our marketing and sales activity for our overseas business. We are also planning to set up a wholly-owned step-down subsidiary in South Africa to cater demand for our products in the African continent. We have signed off on five OEM business in European market, with an estimated annual business volume of approximately EUR5 million. This development is encouraging and moving towards our strategy to tap and gain momentum in European markets.

With more penetration across OEM, we are also building a creditable reference and a brand for our products in these markets. We are committed to becoming the preferred supplier in these markets and are actively engaging with OEMs to achieve this goal. Expansion into new territories and increasing our market share in existing geographies represents another significant growth opportunity for us. We have been diligently working towards establishing a strong brand value for Elecon in order to capitalize on these prospects. The milestone of signing of the OEM business in overseas market and robust domestic demand gives us the confidence in delivering a strong performance and upholding our commitment to achieve consolidated revenue of Indian INR2,000 crores with an EBITDA margin of 22% by FY ’24.

For Gear Division, we proudly hold the position of being one of the largest solution providers of industrial gears. Our commitment extends beyond maintaining this position as we actively seek new opportunities within niche industries. By significantly enhancing our technological capabilities, we have solidified our position as an industry leader with 39% market share in FY ’23 against 34% in FY ’22 in the tier 1 domestic market. We continue to see the conversion of strong order inquiries into growing order book, reaffirming our market strength and the trust placed in our products and services. We target to achieve INR1,700 crores of consolidated revenue for this division by FY ’24.

We have also launched our EON 2.0 series in the last quarter and have been witnessing positive responses from multiple customers across industries and also overseas. This EON 2.0 series has multiple features in terms of operations and maintenance of the product and can pose cost advantages to the customer. We continue to focus on R&D and product development as we strive to deliver high-quality, industry-agnostic, and customizable products that ensure customer satisfaction. Through consistent investments in technology and operations, we have successfully reduced the lead times, thereby enhancing our operational efficiency.

Speaking of the MHE segment, we are experiencing a surge in demand in the MHE division fueled by revival of the capex cycle and strong demand from industries such as power, fertilizers, cement, among others. In the past 12 months, we have successfully turned around energy division resulting into a profitable business. Our strategic approach has involved focusing on the supply of products and aftermarket business, while discontinuing our involvement in EPC project businesses. This shift in strategy has proven effective and aligned with market demands.

With these positive developments, we reaffirm our target of achieving consolidated revenue of INR300 crores in FY ’24. We are confident in our ability to attain this target through our strategic focus, streamlined operations, and leveraging the trust in Elecon brand and service. Lastly, we remain aligned with our vision to maximize value creation for every stratum of society. By aligning our vision with ESG, we have the power to drive positive change, contribute to a more sustainable future, and create long-term value for our stakeholders.

With this, I would like to hand over the call to Mr. Kamlesh Shah, our Group CFO, for financial highlights of Q1 FY ’24. Over to you, Kamlesh.

Kamlesh Shah — Group Chief Financial Officer

Thank you, sir. Good evening, everyone, and welcome to our Q1 FY ’24 earnings call. As already said, we have uploaded our press release on the stock exchanges. I’ll now take you through the highlights of the financial results for Q1 FY ’24.

Revenue from operations, or total revenue from operations, on consolidated basis stood at INR414 crores as compared to INR328 crores in Q1 FY ’23, registering a robust growth of 26%. The domestic market accounted for 73% of the revenue, with the remaining portion coming from overseas market.

Adjusted EBITDA for Q1 FY ’24 stood at INR96 crores, marking a growth of 33% compared to INR72 crores in Q1 FY ’23. Adjusted EBITDA margin for Q1 FY ’24 stood at 23.1%, as compared to 21.9% in Q1 FY ’23, an increase of 120 basis points year on year. Profit after tax for the quarter was INR73 crores, representing a remarkable growth of 72.5%. PAT margin witnessed a significant improvement of 470 basis points. Our focus on operational efficiency and market diversification has contributed to this performance.

Moving on to the segment-wise contribution, Industrial Gears accounted for 87% of the revenue, while Material Handling Equipment division contributed around 13%. Speaking of the Industrial Gears division, consolidated revenue stood at INR361 crores for Q1 FY ’24, reflecting a growth of 27% compared to the same period last year. The EBIT for Q1 FY ’24 stood at INR89 crores, indicating a substantial growth of 60% compared to INR55 crores in corresponding quarter of the previous year. The EBIT margins for Q1 FY ’24 stood at 25%, representing an increase of approximately 500 basis points year-on-year. The order intake for Q1 FY ’24 for Gear division amounted to be INR446 crores, highlighting a strong demand in the market. As of June 30, 2023, the open orders stood at INR655 crores, further emphasizing the robust demand.

Speaking on the MHE side, revenues for Q1 FY ’24 stood at INR54 crores, showcasing a growth of 25% compared to INR43 crores in Q1 FY ’23. This growth serves as a testament to the successful strategic turnaround, translating into a strong quarterly performance. The EBIT for Q1 FY ’24 stood at INR12 crores, representing an impressive growth of 163% YoY. The EBIT margins improved to 23% from 11% in Q1 ’23, reflecting an improvement of approximately 1,200 basis points. Increase in the margin for MHE was on account of change in product mix and higher sales of aftersales and repairs in this quarter. MHE division order intake stood at INR51 crores, with a closing order book at INR138 crores as of 30th June, 2023. Order book, or total consolidated order book, including both divisions, experienced order inflows of INR497 crores during Q1 FY ’24 and the total open orders as of June 30th stood at INR793 crores.

As discussed earlier, we are pleased to announce that we have successfully signed off five original equipment manufacturer business agreements in the European market. These agreements have an annual estimated business volume of approximately EUR5 million. The prototype development of this OEM project is currently in progress, with an aim of supplying this by Q3 FY ’24. We anticipate commencement of commercial production in FY ’25. The agreement signed with these OEMs demonstrate our ability to deliver globally competitive, high-quality products, and our confidence in capturing a significant share of European market.

We have made a progress in recovering funds through arbitration awards. As of June 30th, 2023, we have received INR27.4 crores out of the total awards of INR63 crores, and we expect an additional realization of INR4 crores by Q2 FY ’24. Furthermore, we have initiated fresh arbitration proceedings with a total value of INR31 crores during Q1 FY ’24, outcome of which may take one to two years. We are confident of a positive outcome for the same.

Furthermore, I’m pleased to announce that Elecon has made significant improvements to it balance sheet. As of June 30th, 2023, we are a net cash surplus positive of INR250 crores at the consolidated level.

On this note, I would like to open the floor for question and answers. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Kashyap Javeri from Emkay Investment Management. Please go ahead.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Thank you so much, sir, and congratulations on really great set of numbers. I have three questions. One, on that INR1,700 crores target for Gear division for full year, this now implies a run rate of about INR450 crores of revenue per quarter — for the balance three quarters, and similarly for MHE also the asking rate is definitely higher. So what are the sectors which are giving us confidence of achieving that number? Obviously, the order book [Phonetic] also has gone up quite a bit. So what has driven that?

Second is on the margins guidance that you have given in the press release at about 22% for the full year, even adjusted for about INR4 crores of that GST writeback, our margins are still very strong for this quarter. So is 22% like a base case margin and there is a element of positive surprise to that?

And the third question is what is the net cash on balance sheet as on 30th of June? These are the three questions.

Kamlesh Shah — Group Chief Financial Officer

On account of the sustainability of margin 22%, yeah, we are confident this minimum 22% margin is sustainable at consol level. There is a scope for improvement which we see. However, presently it is difficult. We can spell out that what will be the margin for the entire year. Q2 will be a right time for us to spell out that margin, any improvement for that?

So far as the net cash surplus is coming, as I’ve already said, we have the net cash surplus of INR250 crores as on June 30th, 2023. About the business, Mr. Nanda will just give a highlight.

M.M. Nanda — Head of Gear Division

You see, we are getting very good business from various sectors in India, as a matter of fact, and overseas also, basically. As already explained that we are now focusing on overseas business from the customers — OEMs also, which we already got in our scope from Europe primarily as we just highlighted.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

So any specific — even in overseas, any specific sector which is driving this, whether it is heavy industrials or whether it is the process industries, anything in particular? Hello?

M.M. Nanda — Head of Gear Division

Hello.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Yeah. Sorry, I missed out in between. My question was that even in overseas business, whether it is heavy industrials or whether it is process industries, what is driving the demand? And a connected question is that, if I look at our annual reports for FY ’23, most of our subsidiaries overseas, the sales growth in the local currency was quite muted. So what gives us this confidence even at this point of time that from here on in terms of growth overseas can actually contribute equal or more?

Prayasvin B. Patel — Chairman and Managing Director

See first of all, there is a big thrust on trying to get more OEMs, that is original equipment manufacturers, in our fold as customers, so that we are able to get consistently higher requirements of orders. That is number one, and which we have started doing now aggressively. The other thing is we are putting a lot of thrust in enhancing our marketing infrastructure abroad, whereby we would be able to generate more inquiries as well as get more business. So these are the strategies that we have taken up. Apart from that, we have given thrust — we have penetrated now into areas where we were not there before, certain countries in South America, Australia, etc., etc., which is giving us great opportunities abroad. So we are reasonably confident that we will achieve the targets that we have laid out for exports this year, and going forward, we are also improving our responses for our export companies abroad so that we are able to respond to finally our customers abroad in a much better fashion.

Kamlesh Shah — Group Chief Financial Officer

In regard to your other question, last year the sales is muted, but if you consider the impact of Russia-Ukraine war at the beginning of the year itself, even after considering the impact for that, we have sustained our revenue as well as EBITDA.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Okay, sure. That’s it from my side, sir…

Prayasvin B. Patel — Chairman and Managing Director

This is also in spite of the fact that there has been a recessionary trend in Europe and United States, the aftermath of COVID.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Right. And we remain confident of doing better this year despite that versus what we did last year?

Prayasvin B. Patel — Chairman and Managing Director

Absolutely.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Okay. Thank you so much, sir. Thank you so much. I’m done.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Pratik Kothari from Unique Portfolio Managers. Please go ahead.

Pratik Kothari — Unique Asset Management LLP — Analyst

Hi. Good afternoon and thank you. Sir, first of all, my hearty congratulations on such a remarkable performance and highly appreciate the team for the improvement in disclosures that we have done this time. Sir, my first question is on this five OEM orders which we won. Sir, if you can highlight a bit more qualitatively in terms of the kind of customer segment that we intend to cater to, are these new customers, what kind of products are we developing for them?

Prayasvin B. Patel — Chairman and Managing Director

These are customers, they are original equipment manufacturers from Europe. And they are into various segments, from steel to rubber to plastic to various other industries. So we are reasonably confident that we have to deliver some prototypes which, after those being approved by them, we will start getting regular orders.

Pratik Kothari — Unique Asset Management LLP — Analyst

Okay. So these are not new products, per se. We were already doing this locally.

Prayasvin B. Patel — Chairman and Managing Director

We have delivered similar kind of products because these are custom-made solutions for the clients, okay? But we do this for very many clients, okay? It’s a very standard thing because you have to meet their specific requirements.

Pratik Kothari — Unique Asset Management LLP — Analyst

And sir, I believe this would just be beginning of a journey or relationship with them in terms of they trying out or giving us a smaller batch of order. So potentially where can this lead to maybe few years down the line?

Prayasvin B. Patel — Chairman and Managing Director

It is difficult to say because it will all depend on the supply and demand of their products where they incorporate our gearboxes. But as of now we feel that there is a very strong potential that it will lead to a sizable business.

Pratik Kothari — Unique Asset Management LLP — Analyst

Sure. Sir, my second question is we’re seeing heightened ordering in railways, specifically Vande Bharat, even in wind energy. Sir, just do we have any plans to be presented or are we there? What are your thoughts here?

Prayasvin B. Patel — Chairman and Managing Director

We are making inroads into metro gears which are utilized in the metro trains as well as we have also made inroads with a foreign company who is manufacturing gears for the railway industry internationally. And therefore, we believe that this will lead to more business in the coming future.

Pratik Kothari — Unique Asset Management LLP — Analyst

This would be traction gearbox?

Prayasvin B. Patel — Chairman and Managing Director

Yes, traction gears.

Pratik Kothari — Unique Asset Management LLP — Analyst

And in the past we used to be large player in gears for windmills. Anything there?

Prayasvin B. Patel — Chairman and Managing Director

No, because the reason is we have purposely stayed away from windmill gears, the reason being that though they look to be very attractive, they are highly inconsistent in their demands because it is always subsidized by the government, windmills. And it is based on government policies whereby the demands can fluctuate widely and which quite often puts a sizable amount of pressure on the suppliers, either for excess capacity requirements or for manufacturing and then equipments lying with the suppliers for a long period of time. So we have purposely tried to stay away from them.

Pratik Kothari — Unique Asset Management LLP — Analyst

And sir, my last question is on the defense and marine business. I believe we have some aftersales service, which is already ongoing for the project that we have delivered on. Any comments on any new project coming up, anything which is moving?

Prayasvin B. Patel — Chairman and Managing Director

Yes, what is very heartening is that by the end of the year, we expect some good orders. Coming in from the marine sector or the defense sector. And the next two years also look to be extremely promising.

Pratik Kothari — Unique Asset Management LLP — Analyst

Thank you, sir. And all the best.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Divesh Mehta from Dinero Wealth. Please go ahead.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Congratulations on the great set of numbers. I have two, three questions. Sir, I just wanted to understand on the replacement demand. So in the first quarter, how has the replacement demand panned out and how much it was in terms of overall sales?

Prayasvin B. Patel — Chairman and Managing Director

The replacement market for Material Handling business as well as for Gears varies from year to year. The demand this year — this quarter has been healthy, but going forward, it will adjust itself to the annual consistent level.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

So, sir, how much it was for this quarter as a percentage of sales.

Kamlesh Shah — Group Chief Financial Officer

Yeah, one minute. So all put together, this quarter, it works out to be nearly 33% for MHE and Gear both put together.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Okay. And sir, actually I missed on the part of the open order book on the both Gearboxes and MHE division. Can you give that figure also?

Prayasvin B. Patel — Chairman and Managing Director

Sorry, can you repeat it, please?

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Sir, can you help me to understand the open order book for Gearboxes and the MHE division. I missed on that part?

Prayasvin B. Patel — Chairman and Managing Director

Yes, I will give you those figures. The total is 793.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Okay.

Prayasvin B. Patel — Chairman and Managing Director

Okay, which consists of 655 from Gear and 138 from MHE. These are the open orders as of 30th June 2023.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

Okay. And sir, the recent four new orders which you have bagged, that will be for the engineered products, right, and neither for the catalog product?

Prayasvin B. Patel — Chairman and Managing Director

It is a combination of all.

Divesh Mehta — Dinero Wealth Pvt. Ltd. — Analyst

It’s a combination. Okay, sir. Thank you. That’s it from me.

Operator

Thank you. [Operator Instructions] The next question is from the line of Anish Jobalia from Girik Capital. Please go ahead.

Anish Jobalia — Girik Capital — Analyst

Yeah, hi. [Technical Issues].

Kamlesh Shah — Group Chief Financial Officer

Your voice is not clear.

Anish Jobalia — Girik Capital — Analyst

Am I more audible now?

Kamlesh Shah — Group Chief Financial Officer

No, you are audible, but your voice is not clear. It is cracking in between.

Anish Jobalia — Girik Capital — Analyst

Yeah. Is it better now?

Kamlesh Shah — Group Chief Financial Officer

Yeah, it is.

Prayasvin B. Patel — Chairman and Managing Director

Yeah, it is.

Anish Jobalia — Girik Capital — Analyst

Yeah. Sorry for that. So congratulations for a good set of performance and also for making inroads into the OEM market. So just wanted to understand the domestic business we have — we aim to do between the Gears and Material Handling close to INR1,500 crores odd out of this INR2,000 crores odd, right? So I just want to understand, I had checked with you earlier also in the earlier quarters about how your thought process is shaping in terms of further growth in FY ’25. So if you can just help to understand the quality of the growth which is driving our — the quality of the demand which is driving our growth and how sustainable are we seeing this 25% growth to continue beyond ’24 also?

Prayasvin B. Patel — Chairman and Managing Director

See if you look at our performance, we have been growing. And let me assure you, we will continue to grow because there are lot of segments that we are now emphasizing on, okay? One of them is exports, the other one is the marine business coming out of the defense sector, plus there are new products that we are developing. There is also the new EON series that we have developed. So all in all, we see a rosy picture going forward, okay? We would be able to sustain this kind of growth and who knows if the markets are favorable, we may be able to even exceed them. So we are very gung ho about the situation. And as I had said earlier, we are emphasizing a lot on exports. We are setting up new infrastructure, enhancing infrastructure in various countries so that we are able to focus in a much better fashion on exports and give them the necessary support that they require from head office.

Anish Jobalia — Girik Capital — Analyst

Okay. And secondly, in terms of the international revenue, so I think out of this INR2,000 crores, we will be doing close to INR500 crores from the exports. So what I am seeing is that the international OEMs that are getting signed up, so they will be starting to contribute from ’25. So from INR300 crores odd in the last year, this incremental growth of INR200 crores, so how is this going to come without support of the OEM business and from FY ’25 onwards, how much has the potential from the OEMs that you are signing up and will potentially further sign up to add to this INR100 crores base?

Prayasvin B. Patel — Chairman and Managing Director

See, as of now, as we speak, we have enough inquiries on hand. And on interacting with various branches and segments of the industry, marketing industry, they are extremely confident that we will be able to achieve our targets this year. Apart from this, as you rightly said that the OEMs with whom we have signed contracts, plus other OEMs where we have given offers, plus projects, plus new requirements, we are confident that we will be able to sustain this growth over a period of time.

Anish Jobalia — Girik Capital — Analyst

Okay, sir, all the very best for the future. Thank you.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Sanjay Kumar from ithought Financial Consulting. Please go ahead.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Hello, sir. Congrats on winning five new OEMs. Q2 FY ’23 I had asked you about it, and you delivered in nine months itself, so great work. Can you help with the total outstanding OEMs that we used to work with and how has it changed in the recent past, the number of OEMs that we work with?

Prayasvin B. Patel — Chairman and Managing Director

It depends from region to region. There are various areas where we are working with OEMs. It starts from the far east in the Singapore zone that we have to areas like Africa, especially South Africa, and then we have OEMs in Europe as well as OEMs in South America and in the United States, so it is very difficult to say. These are the ones that we have recently signed off with. They are all in Europe. These are new OEMs that we have encountered, okay. They have high potential, and going forward, we are reasonably confident that we will be able to get good amount of business from them. It is difficult to ascertain as of now as to how much business would come our way, but they are promising a lot to us. We are assessing the situation on our own, considering the recession in Europe as well as the Ukraine-Russia was as to whether the figures that they are committing to us are reasonably correct or not, okay?

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Okay.

Prayasvin B. Patel — Chairman and Managing Director

But they seem to be — even filtering all this out, they seem to be very promising.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Okay But these five OEMs, who were they buying from earlier, sir? That will give us an idea of the potential.

Prayasvin B. Patel — Chairman and Managing Director

It is difficult to ascertain because some of them were buying from China and some of them have new requirements which have come our way, etc., etc. So it is difficult to ascertain.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Right, makes sense. And we’ll be supplying from India or will it be through Benzler Radicon?

Prayasvin B. Patel — Chairman and Managing Director

Both. Originally it would be manufactured in India. It may be supplied through Benzler Radicon group or it might be directly. It depends on which client are we talking about.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

And second, you had mentioned in your press release about opportunities in Africa. What are you seeing what is driving this and if you could help us with the market size of Africa, or at least the markets that you’re targeting there in Africa?

Prayasvin B. Patel — Chairman and Managing Director

If we talk about the South African market, South Africa is a hub for the entire Africa because it’s one of the most advanced countries in Africa and they are very strong on minerals and minerals mining, as well as the technology of mining in minerals. They set up turnkey plants normally to mine various products which could be gold, it could be copper, it could be various other minerals. When they set up the complete plant, these plants require good quantity of gearboxes which normally are either bought from Europe or from United States. This is where we have penetrated, and we intend to penetrate more and more over a period of time. Apart from that, there are mines in Africa where quite often the purchases happen in South Africa and that is also where there is a huge potential of replacement business as well as new requirements for these mines. So this is what we are targeting. Apart from that, there are good number of industries in South Africa. And these also require gearboxes which we intend to cater.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

What would be the market size, sir, of these things that you mentioned?

Prayasvin B. Patel — Chairman and Managing Director

Market size, to tell you honestly, I will email this information to you.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Sure. That will do. Yeah. And finally, traction motor gearboxes, you had said that we previously supplied few components to Indian Railways and specifically, on metro, I’ve seen Voith or IGW’s gearboxes in the metro coaches. So are we in touch with them or…?

Operator

Hi, Sanjay, I’m sorry to interrupt you there. To ask further questions, I would request you to please join back the queue. Thank you.

Prayasvin B. Patel — Chairman and Managing Director

But the answer is yes.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

You’re in touch with Voith?

Prayasvin B. Patel — Chairman and Managing Director

We would be in touch with gearbox suppliers, the likes of Voith and Voith themselves.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Okay, and will it be a JV or will it be a tech transfer, sir?

Prayasvin B. Patel — Chairman and Managing Director

We will be a supplier to Voith and to the others like them, so there won’t be a change.

Sanjay Kumar — ithought Financial Consulting LLP — Analyst

Perfect. Thank you, sir. All the best.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ankit Babel from Subhkam Ventures. Please go ahead.

Ankit Babel — Subhkam Ventures (I) Pvt. Ltd. — Analyst

Good evening, sir, and congratulations for a very good set of numbers. Sir, I just have two questions. First is, sir, the scalability of these five OEMs, what it could be in the next two, three years from the current level of what you mentioned around EUR5 million?

Prayasvin B. Patel — Chairman and Managing Director

As I told you earlier also, and I will again repeat, that it is very difficult to ascertain that because quite often the OEMs, they gave you a requirement which quite often varies in quantity, because depending on their market situation and the competition that they experienced. But as I have ascertained that our intention first is to give them a prototype, get it approved and then look for quantities. And I am hopeful that as of now, the information that they have given to us seems to be quite promising. However, on our own, we are trying to ascertain how much of quantities we are likely to get and what it would mean in rupees and paises.

Ankit Babel — Subhkam Ventures (I) Pvt. Ltd. — Analyst

Yeah. Sir, because in the previous conference calls, you did mention that the size of each OEMs could be INR40 crores, INR50 crores in terms of revenue potential. So from that angle I was trying to understand that. Does these OEMs also have that kind of scalability over a period of time or not, based on your assumptions only?

Prayasvin B. Patel — Chairman and Managing Director

As I told you, the potential is high. Let me put it this way, okay? But as I told you, they always say that once you get the purchase order in hand, that is what confirms everything. But the potential is high.

Ankit Babel — Subhkam Ventures (I) Pvt. Ltd. — Analyst

Okay. I understand. And sir, my second question, again, it’s a repetitive question, so sorry for that. But you said that the industry tailwinds currently are very strong, both in domestic market and overseas markets and you are in the process of getting a lot of approvals from the overseas markets from various OEM. That also visibility you have. And so just to reconfirm, you mentioned that you are going to sustain the current growth rates at least for the next couple of more years. This year you will be growing at 30% is what you are guiding. So this 30% growth is possible for next two years, FY ’25 and ’26 also considering the current visibility what you have?

Prayasvin B. Patel — Chairman and Managing Director

I won’t say that tailwinds are affecting us. As a matter of fact, I would say that the tailwinds are an opportunity for us, okay, because like these new OEMs that we have got, this is the time when our customer is looking for new suppliers, so this is opening up doors for us. Because he feels that he wants someone who’s more competitive, he wants someone who is giving better services, etc., etc. So he’s looking for someone else to fulfill his needs and that is where we step in and that is how we get this opportunity. And this normally happens during the tailwind situation. So I look upon it as an opportunity and that is where we have been able to score over the existing suppliers that exist as of now. And as far as we are concerned, we are reasonably confident that we will continue to grow. The percentage of growth is difficult to ascertain year on year. We have a visibility for this year. But we will be able to reconfirm it by the end of the second quarter. However, going forward, we have great expectations for which we are enhancing our infrastructure to see to it that we are able to cater to the customers’ needs.

Operator

Thank you. Ladies and gentlemen, in order to ensure the management is able to address questions for all the participants in the conference, we request you to limit your questions to two per participant only. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital Group — Analyst

Hello.

Prayasvin B. Patel — Chairman and Managing Director

Yes.

Deepak Poddar — Sapphire Capital Group — Analyst

Thank you, very much, sir, for the opportunity. And many congratulations for good set of numbers.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Deepak Poddar — Sapphire Capital Group — Analyst

Sir, I wanted to understand couple of things. Now this quarter itself, what was the arbitration award that we received?

Kamlesh Shah — Group Chief Financial Officer

No, arbitration award we received in earlier period. We have realized the money now. Arbitration award was already there with us.

Deepak Poddar — Sapphire Capital Group — Analyst

So is there any amount that has come into P&L in this quarter?

Kamlesh Shah — Group Chief Financial Officer

No, there is nothing in P&L. All is in the balance sheet and the cash flow directly.

Deepak Poddar — Sapphire Capital Group — Analyst

So one-off in this quarter is only INR4 crores, right, the GST writeback, so even if…?

Kamlesh Shah — Group Chief Financial Officer

Yeah, that is only writeback of GST which in earlier quarter we have made a provision for that. But considering the some work on account of cross charge mechanism, we have utilized. We get an opportunity to utilize that.

Deepak Poddar — Sapphire Capital Group — Analyst

Sir, even if we adjust that, our EBITDA margin this quarter is close to 23% to 23.5%. But for the entire year, we are we are looking at 22%. So is there any pressure on your margins or going forward in coming quarters that you foresee because of which we are guiding a little tapered down margins?

Kamlesh Shah — Group Chief Financial Officer

At the beginning of the year, we have already informed we are going to have some cost on account of brand building in the overseas market. So that has not turned out in this quarter. That may turn out in the next to next quarter both. So that is the reason we have given average margin of 22%.

Deepak Poddar — Sapphire Capital Group — Analyst

That’s quite helpful, sir. And my second question is on your — so the second question is on your MHE division. The EBIT margins that we are seeing is quite good at 23%. So is that a sustainable margin that we see going forward?

Kamlesh Shah — Group Chief Financial Officer

Sustainable margin, we should consider 18% to 20%. Due to the product mix, and the supply of equipment and the aftersales service, the margin may undergo a change.

Deepak Poddar — Sapphire Capital Group — Analyst

Understood. And then, sir, whenever we bid for any order, so what is the minimum margins that we keep it for ourselves, both in the MHE and the Gearbox division?

Prayasvin B. Patel — Chairman and Managing Director

It varies from project to project and from order to order, so it’s very difficult to ascertain.

Deepak Poddar — Sapphire Capital Group — Analyst

Understood. That’s quite helpful, sir.

Prayasvin B. Patel — Chairman and Managing Director

We we have tried to maximize our margins and let me tell you one thing that we will continue to try to maximize our margins on a consistent basis. I am reasonably confident that we will be able to sustain the EBITDA margins that we have right now. And going forward, the general impression that I have is we may be able to improve it also.

Deepak Poddar — Sapphire Capital Group — Analyst

That’s great, sir. And quite helpful, sir. All the very best to you, sir. Thank you.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Subham Agarwal from Aequitas. Please go ahead.

Subham Agarwal — Aequitas Investment Consultancy Private Limited — Analyst

Yeah. Thank you for the opportunity. Sir, my first question is related to the cash that we have. As earlier mentioned, we have close to INR250 crores now. So I wanted to understand, given that there is no major capex coming in, what will be our capital allocation strategy going forward?

Prayasvin B. Patel — Chairman and Managing Director

Right now, the cash that we generate, we try to invest it so that we get the best possible returns at the lowest possible risk. And going forward, we are creating this kitty which would be helpful to us. In case there is any need for the organization to either diversify, acquire, or utilize it for the benefit of the organization in the near future.

Subham Agarwal — Aequitas Investment Consultancy Private Limited — Analyst

So are there any specific areas that we are looking at in order to diversify or increase our capability by acquiring some assets? Are we in the process already?

Prayasvin B. Patel — Chairman and Managing Director

No, we are not in the process. However, this is a kitty which would be useful in case that opportunity arises.

Subham Agarwal — Aequitas Investment Consultancy Private Limited — Analyst

Okay. And sir, my second question is related to the exports. So obviously, given our strategy of increasing export in terms of total revenue, this will be an area which will grow for us, and we have put a lot of effort in the last years in this particular segment. So I wanted to understand: a, how satisfied are you with the current progress that we have; and b, what is the challenges that you are facing to achieve the milestone that you have set for the company?

Prayasvin B. Patel — Chairman and Managing Director

If you are asking about the level of satisfaction, I would say the first year has gone in trying to organize ourselves, but now I feel that the traction it is now taking a sizable traction. And going forward, the way that our marketing people are, I’m seeing the confidence in them. I believe that we would be very, very much bang on target this year as well as in the future.

Subham Agarwal — Aequitas Investment Consultancy Private Limited — Analyst

Okay, perfect. Thank you for answering my question.

Operator

Thank you. The next question is from the line of Gunjan Kabra from Niveshaay. Please go ahead.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Sir, thank you for the opportunity and superb set of numbers, so congratulations. Sir, I wanted to understand how much is the total order book in defense right now and what kind of operating margins do we have specifically in defense since they are large scale [Phonetic].

Prayasvin B. Patel — Chairman and Managing Director

The margins would vary from project to project, so it would be difficult to tell you as to what would be the margins.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

On a blended or average basis, if you can say, in defense.

Prayasvin B. Patel — Chairman and Managing Director

I would put it this way that it will depend on the competition we have, the product it is, etc., etc. But all I can tell you is that as of now, all the recent project that we did was profitable, and we are striving hard to see to it that the profits are reasonably good in this business.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Okay. And sir, how much is the order book from defense right now?

Prayasvin B. Patel — Chairman and Managing Director

The order from defense right now?

Kamlesh Shah — Group Chief Financial Officer

We don’t have any such project order as on today. It is small gearbox requirement or otherwise those kind of orders are there. So it’s not material. Generally we consider such kind of order on — and maybe a small amount on account of the spares kind of business, which is to the tune of INR100 crores plus.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Okay And also, sir, the order intake in this seasonally weak quarter has been around INR442 crores, which was very high than the very good quarter last quarter, which was around INR370 crores. So has the business momentum — is it because of more of exports or good order booking in India right now?

Prayasvin B. Patel — Chairman and Managing Director

I would say right now the product mix from export, domestic, and the marine business, all put together in this quarter has been reasonably okay. And the demand is coming from all sectors. And we are expecting good orders from all these three segments.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Okay. And sir, you are guiding good prospects as well. So INR2,000 crores revenue will be achieved this year, then I think we’ll be operating at full capacity utilization. So the further growth — we are not doing any capex. Then further growth, how will that come? Are we not looking towards capex because just wanted to understand where will the growth that we think it can come will come from if we don’t do capex.

Prayasvin B. Patel — Chairman and Managing Director

The capacity utilization as of now is approximately 76%, okay? So there is a potential to further scale it up. And this is where today there is hardly any subcontractors, okay. If we add subcontracting possibilities together with the additional gap in capacity that we have, I still feel that we can do nominal capex, which is required for modernization and upkeep. Apart from that, I don’t think we will need anymore capex for at least the next two, three years.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Okay. And sir, just last question, sir, standard products is around 47% this quarter and customized was around 53%. So are we targeting more of customized from next or more of standardized, or is it on order basis whatever you receive?

Prayasvin B. Patel — Chairman and Managing Director

It is on order basis whatever we receive. We never say no to our clients. Every order is most welcome.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Okay. So we don’t have any target of having more of customized or more of standard?

Prayasvin B. Patel — Chairman and Managing Director

I don’t think it is in our hands. It depends on what the customer requires, and we have ongoing customers. 70% of our customers are repetitive, and we can’t go and tell them that you buy only this. So we accept the order with a smiling face, whatever they give us.

Gunjan Kabra — Niveshaay Investment Advisory — Analyst

Oh, great. Thank you so much and good luck.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Pujan Shah from Congruence Advisers. Please go ahead.

Pujan Shah — Congruence Advisers — Analyst

Hi, sir. My question would be on the patented product. So in the previous presentation we have shown that we are waiting for three patents for the approval. So can you just give the sense about that and what the market size would be on that specific segment and which product are we going to get that patent or the specifics?

Prayasvin B. Patel — Chairman and Managing Director

The new EON series that we have developed is what we are trying to patent as well as there are other few products. The potential is reasonably high because this is in the catalog product range and. But it is difficult to put a value to it right now because it will depend on how well it is accepted in the market. Though right now there is substantial amount of traction on these new series that we have developed, but it is difficult to put any figures.

Pujan Shah — Congruence Advisers — Analyst

Okay, got it. Thank you. That was my question.

Prayasvin B. Patel — Chairman and Managing Director

Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to the management for the closing comment.

Prayasvin B. Patel — Chairman and Managing Director

Thank you. I take this opportunity to thank everyone for joining the call. We will keep updating the investor community on regular basis for incremental updates of our company. I hope we have been able to address all your queries. For any further information, kindly get in touch with us or Strategic Growth Advisors, our investor relation advisors. Thank you once again.

Operator

[Operator Closing Remarks]