Harsha Engineers International Ltd (HARSHA) Q3 FY23 Earnings Concall Transcript

Harsha Engineers International Ltd (NSE:HARSHA) Q3 FY23 Earnings Concall dated Feb. 14, 2023.

Corporate Participants:

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Sanjay Majmudar — Consultant

Analysts:

Harshit Patel — Equirus Securities — Analyst

Amit Anwani — Prabhudas Lilladher — Analyst

Pradyumna Choudhary — JM Financial — Analyst

Dhananjay Majhi — Individual Investor — Analyst

Shirom Kapur — Prabhudas Lilladher — Analyst

Prolin Nandu — Goldfish Capital — Analyst

Sandeep Tulsiyan — JM Financial — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Q3 FY ’23 Conference Call for Analysts and Investors of Harsha Engineers International Limited. [Operator Instructions]

I now hand the conference over to Mr. Vishal Rangwala, CEO and Whole-Time Director of the Company. Thank you, and over to you, sir.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Good afternoon, everyone. Thank you for joining Harsha Engineers International’s quarter three FY 2023 earning call. I would like to walk us through the results for Q3 first and talk a little bit about that and then maybe Maulik will talk a little bit more specific about numbers. So to begin with, we continue to see respectable top-line and bottom-line in quarter three results despite very difficult market conditions across Europe due to energy crisis. This has a top-line impact in our Romania plant as well as supplies going from India to Europe.

Further in Q3 due to strong zero COVID policy implementation in China, there was a impact on China revenue as well. Couple of other factors, which had a top-line impact was one material [Technical Issues] mechanism in place and commodity pricing, price reduction linked to steel and brass commodity price changes. So — as well as our customers started doing a lot of year-end inventory control, resulting in overall softening of our demand as well. So, Q3 is definitely lower than our expectations.

However, these are the significant factors which had a impact on them. While we have improved our EBITDA and PAT over last year and last quarter, we are continuing to work on reducing cost and obviously, partial revenue reduction impact is due to material price adjustment. So we are keeping our EBITDA margins quite strong and intact. Considering material price change and pass-through as well as European demand softening, and the current…

Operator

Mr. Rangwala, sorry to interrupt. Sir, if you could just move the mic a little more closer to you as participants have just highlighted that they are not able to hear you very clearly, sir.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Sure. Okay. Yeah. I hope this is better. So basically — so we are seeing significant price changes because of material pass-through and a significant European demand softening. And overall, there is a whole softening of overall market being there. In current year, we are looking at flattish top-line. However, in EBITDA terms — EBITDA in absolute terms will remain strong as well as we will grow it as a percentage this year.

We have seen some impact in the wind market, specifically in Europe, which is very weak and which has some impact on our growth in bronze bushing business as well. We are closely monitoring — we are closely monitoring how the situation is developing and providing or actually guiding on specific, how it’s going to roll out over next two quarters, it looks very difficult at this point. But we are extremely hopeful that we will — quarter four also will improve from here.

While we talk about this our — we are very bullish on medium to long-term. Our focus there is for continued growth. The drivers for us remain the same. We continue to see new order wins, reference to China Plus One strategy deployment by our customers. We are increasing focus on increasing business share within cage. We are actually continuing to grow with our Japan origin customer base across the globe, as well as we are seeing a lot of good growth possibility in bronze bushing as well as Stamping products. Overall that we remain very optimistic and continuing on that path.

And with that, I ask Maulik to talk about numbers.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Sure. Thanks, Vishal. Hello, everyone. Good afternoon. We have uploaded the financial numbers as well as the investor presentation on our website as well as service exchanges. I’m sure you would have got a opportunity to go through the same.

Let me quickly touch upon the major numbers. For the quarter ended December ’22, for engineering business at consolidated level, we have achieved a top-line of INR297 crores against the INR318 crores in the previous quarter as well as INR312 crores in the same quarter last year. We have some degrowth of minus 7% and minus 5% respectively for that period.

Against that, our profit after-tax for engineering business for the December quarter is reported at INR32.1 crores versus previous quarter reported number of INR27.7 crores with a growth of 16% and INR19.9 crores reported number of previous year quarter three with a growth of 62%. On EBITDA front at consol level for engineering and the solar business, we have achieved EBITDA of 18.1% as per the defined definition and against the 16.22% [Phonetic] in the previous quarter.

With this brief on the financial numbers, I hand over to the operator to take over the Q&A.

Questions and Answers:

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Harshit Patel from Equirus Securities. Please go ahead.

Harshit Patel — Equirus Securities — Analyst

Thank you very much for the opportunity, sir. Sir, my first question is on our overseas operation. So if you could indicate what was the revenue growth or decline was there in both our Romania as well as China operations on Y-o-Y and Q-o-Q basis? And how has been the performance on the margins front over there? And in your opinion, how long could it take us to get back to the historical levels of margins over there? That would be my first question.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Sure, Harshit. This is Maulik, this end. On Harsha China, our quarterly numbers have been degrown by minus 15% [Phonetic] versus Q2, while it has grown by 17% on the year quarter three. On Harsha China only, our EBITDA has remained good for the last quarter. We have achieved a EBITDA percentage of 15.6% in Harsha China on the top-line of INR27.9 crores.

On Harsha Romania, our top-line has remained at INR50.3 crores with a degrowth of minus 6% over last quarter and minus 28% over last year quarter three. Our EBITDA remained flattish, remained breakeven as well [Phonetic] in this quarter versus the positive EBITDA of INR60 lakhs in the last quarter.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

And Harshit, I will address on the — our overseas subsidiaries, I think we are seeing continued improvement on the margin side and EBITDA side. And we did have a difficult situation — we do have difficult situation last quarter in Europe and as well as in China. And part of this volume recovery happens, we are quite confident that we will be positive margins or positive bottom-line, we will achieve in next few quarters, and we’ll grow from there. So that’s the idea.

Harshit Patel — Equirus Securities — Analyst

Thank you very much for that. My second question is on our bronze bushing business, as you have mentioned in your press release as well as you also told us that there is a bit of a slowdown because exports from India are suffering the exports to Europe. So where would be in terms of our growth trajectory in that business? So will we be able to achieve our FY ’24 guidance at least, I believe FY ’23 could be a little bit of a problem, but are we on track to do that INR100 crores kind of sales next year?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So right now, exactly to define that becomes challenging. That overall order win remains with us. How that market recovers, how fast remains a question. So what we are hearing from our customers and overall wind market that second half of calendar year ’23 would be much better for wind. So as and when how that revival happens will be dependent on that, but in terms of opportunity and in terms of potential of the business, we have near that number of INR100 crores. And that how — whether we are able to successfully do INR100 crores will depend partially on the market situation.

Harshit Patel — Equirus Securities — Analyst

Understood. That would be all from my side. Thank you very much for taking my questions. I’ll join back the question queue.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Thanks.

Operator

Thank you. Our next question is from the line of Amit Anwani from Prabhudas Lilladher. Please go ahead.

Amit Anwani — Prabhudas Lilladher — Analyst

Hi, sir, thanks for taking my question. First question is on now as you already highlighted, we are facing some slowdown for exports and bronze bushing also, offtake has been lower and maybe that will continue for one quarter, two quarters. So now the kind of guidance that you are providing earlier on the top-line growth and obviously the margin improving, and you used to talk about India margins at least improving significantly and much higher contribution from bronze bushing over next two years. So are we still remaining firm upon this or any change of stance which is happening?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

See, if am I reading, Amit, your question correctly that what is the growth guidance for ’23-’24 that we are looking at?

Amit Anwani — Prabhudas Lilladher — Analyst

Yes, sir, FY ’24, FY ’25, any changes, because now we are seeing bronze bushing also seeing lower offtake and the targeted that, that will be also a major contributor.

Sanjay Majmudar — Consultant

So just as Vishal explained in his initial comments — this is Sanjay here. As Vishal explained, see, what has happened in this year is definitely looking flattish in terms of the value. Having said that, there is definitely a volume growth. Though not again in our case strictly quantifiable but anywhere between 7% to 8% or maybe even a little higher volume growth, you will definitely see even this year.

Next year, now what is happening, one, all the growth drivers are intact, but next year, we believe that we will wait at least for this quarter, the Q4 of the current fiscal year to go before we want to actually quantify that what could be the growth guidance for ’23-’24. Having said that, our target of a consistent medium to long-term opportunity wise, the CAGR growth of 10% to 15% — around 15% is what we are targeting, and we are very confident that this should happen.

But for ’23-’24, we want to wait for one more quarter and then give sort of an indication, given the fact that we are facing a lot of uncertainties and it’s not exactly possible to quantify at this point in time. So let’s wait for Q4. Having said that, that doesn’t dilute the opportunity of the growth story in any way, but it’s just a medium to short-term problem that we are currently facing. But I think it will be only fair to say that let’s wait for one more quarter and we’ll be able to then give you a little more exact indication about ’23-’24.

Amit Anwani — Prabhudas Lilladher — Analyst

Sure. So sir, is it our customers are seeing lesser offtake or is it the overall wind market?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So, I think it is both. We are seeing less offtake from our customer because they are already cautious about the impending recession, as well as the overall market which has softened. Having said that, specifically, we see that in Europe that is significantly impacted, other regions is, we don’t see a very significant impact, but it could come in. So that’s why there is a lot of uncertainty because its linked to that.

Amit Anwani — Prabhudas Lilladher — Analyst

Sure, sir. And on the increasing customer wallet share, we talked about Japanese customer, where — that’s where we are focusing on, and obviously the outsourcing of large cages. So are we going progressively there? Is there any development there, any contribution, anything which has happened?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yeah, I mean, in general, we are moving in that right direction. We are winning a lot of business with Japan, our origin customer base across the globe. The growth, 30% to 35% plus growth we are seeing for that customer base.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

In the current fiscal. Yeah.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Currently. We are — for the nine months so far, right. And beyond that even large size cages, we are winning a lot of orders. Part of it is, we are testing and outsourcing. We don’t have a specific large order to be shared that this significant will happen, but it is a very incremental journey. And we are continuing to see traction on both those clients.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

That’s pretty satisfactory. Yeah.

Amit Anwani — Prabhudas Lilladher — Analyst

Sure. Thanks, sir. My last question on — anything on railways, we saw this has been a good focus in budget also on the railway side. Any Company-specific benefit, which you are looking in coming years on the railway side?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So we have — railway, we are seeing a significant growth specifically to one product we have just developed, which is going into the railway. And another product which we have actually, our customers who are importing and now we have become the substitute for that import, where in that situation, we are ramping that up that product. So we are seeing significant growth within the railway or rather we will continue to see this year or calendar year ’23. So I’m very hopeful, but again, those numbers are in range of 20%, 30% plus overall based on what projections we have seen, if we are able to fully realize that import substitution. So very hopeful, very aggressively looking at that.

Amit Anwani — Prabhudas Lilladher — Analyst

Sure. Thank you, and all the best, sir. Thanks.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thanks, Amit.

Operator

Thank you. We take our next question from the line of Pradyumna Choudhary from JM Financial. Please go ahead.

Pradyumna Choudhary — JM Financial — Analyst

Yeah, hi. So you’ve done very well in terms of EBITDA growth, absolute EBITDA growth on the engineering consolidated side. So I just wanted to understand the reason for the same?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yeah. So I think the one important thing that I mentioned earlier that because we have a material pass-through mechanism, and as Sanjay mentioned that we think that we still grew significant — I mean respectably in spite of the headwinds we are facing. So basically, our EBITDA absolute margin remain intact in spite of, if you look at quarter three a little bit soft. So that is basically leading through that EBITDA growth.

Sanjay Majmudar — Consultant

Major contributors being India. India has reported a decent, a very decent EBITDA.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Yeah, so just to add on the performance, which I’ve said about the pass-through, plus we also have a good amount of exchange rate benefit in our EBITDA, which we have already…

Sanjay Majmudar — Consultant

Realized. Which is already realized.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Realized and so strong, and which is there in our investor presentation.

Pradyumna Choudhary — JM Financial — Analyst

Sorry, I couldn’t hear the second reason, one is pass-through, what’s the second reason?

Sanjay Majmudar — Consultant

Second, Maulik said that we have a good decent realized exchange rate also booked in the current quarter, what is actually realized by us.

Pradyumna Choudhary — JM Financial — Analyst

Okay. And so one thing I noticed was our revenue on a Y-o-Y basis — I’m talking about Q3, our revenue actually has declined by 7% — I think by around 7%, whereas our COGS has — cost of goods sold has declined by 17%. So is there any chance that not all of the price decrease of metal has been passed on to the customer?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Yeah. So earlier we have discussed that our price pass-through has a lag, which is three months to four months lag depend on customer to customer. And that lag always give either a benefit to the Company or a hit to the Company for a quarter period and that is being reflected there.

Sanjay Majmudar — Consultant

So having said that, this is always a constant process and with a little bit of lag, it goes down. So exact mathematics is very difficult to say. But that does not mean that automatically Q4 margins will be further subdued. It also means that there would be new orders where we will get better margins, some orders will have a little pass-through effect, but on an average at India level at 20% around that EBITDA we are maintaining. As Vishal explained, hopefully, China EBITDA will further improve this Q4. Romania, we are keeping our fingers crossed, very honestly, we don’t know.

But let’s assume Romania remains more or less in this territory of 0% or a very marginal 1% or 2%. That would mean that Q4, I should see more or less a similar operating and net margins happening, which will mean that as compared to last year. There’s a very decent margin growth this year, notwithstanding the fact that at the top-line level, we are flat. This is the summing substance of the current year as we see.

Pradyumna Choudhary — JM Financial — Analyst

Understood. And in terms of Y-o-Y in Q3, what is the volume growth?

Sanjay Majmudar — Consultant

See, again, I’ll be very honest. We have a brass, we have a steel, but it’s number would be maybe around 7% to 8%.

Pradyumna Choudhary — JM Financial — Analyst

Okay. Just one request before I just conclude. Would it be possible like of course, we are a price pass-through Company and we get seriously impacted by — like our numbers get impacted by the commodity price follow raise [Phonetic], right? So some sort of disclosure on, I don’t know how, but maybe something on the volume side in your presentation going forward, so that we’re able to better assess the business performance would be really helpful.

Sanjay Majmudar — Consultant

No, I appreciate your time, but let’s understand the difficulties that we face. So we have 7,500 SKUs, and there are so many different [Indecipherable] and patterns. So that for example if I’m talking of brass, we have X volume, but giving us much higher average realization. When I talk of steel, we have very small 20 mm, 30 mm, 40 mm products, BGDB [Phonetic] etc., bearing cages where its very high volume, but the average realization is very low. So I’ll be very honest, we will still want you to look at as a percentage EBITDA. It will be very misleading for me to say that this is average realization per piece because I don’t want you to promise something which we can’t deliver.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Absolutely difficult.

Sanjay Majmudar — Consultant

Yeah.

Pradyumna Choudhary — JM Financial — Analyst

Sir, I understand. Thank you.

Sanjay Majmudar — Consultant

Yeah. Thanks.

Operator

Thank you. Our next question is from the line of Dhananjay Majhi from — well, an Individual Investor. Please go ahead.

Dhananjay Majhi — Individual Investor — Analyst

Good evening. Sir, I’m audible?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yes.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Yes.

Dhananjay Majhi — Individual Investor — Analyst

Yeah. Sir, your casting products have low margin, which might be dragging your margin down. So how you would be offsetting? Is that only the products that is brass bushing?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So, I think our casting business, we only do semi-finished business in Europe out of our Romania facility. Otherwise, our focus is on finished product business, and the bronze bushing is actually a finished product with a respectable margin. The casting business, which is relatively lower margin normally exist in out of our Romania facility.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

And as you rightly mentioned, being in Romania, energy crisis have hit us hardly last quarter and which makes it zero [Phonetic] EBITDA for the current month.

Dhananjay Majhi — Individual Investor — Analyst

Okay. So my next question is by any chance if the demand for sensor embedded bearing increases or are we having any capabilities of applying those or slightly modify the question in short, how are we molding ourselves towards Industry 4.0?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So see, there are two aspects of this. One, how we are working internally, we are actually aggressively implementing Industry 4.0 internally to really give us the benefit of optimization of cost efficiency as well as just-in-time and all that. So there is a significant in-house program which we run linking all our machines to our sensor system and we know how to create — how we create the signal and all that, so that right maintenance, right attention can be given. So that is how we do internally Industry 4.0.

Having said that, our product per se, when it goes to bearing, we — our product has no impact, whether this bearing has a sensor built in or not, we are agnostic to that. And even with the sensor built bearing the similar or the same cage goes in, this is being a highly precise product. So as such, that’s how it is. However, to take advantage of this trend, we are within our — we have injection molding cages also and injection molding capability. So we are working with some of our customers to supply additional products within bearing side, so that we can give that molding or a plastic component which incorporates the sensor as an attachment to the bearing. So that’s something as a small way we are working on. Beyond that, as I mentioned that bearing cage, our main product remains same irrespective of whether it’s a sensor bearing or not.

Dhananjay Majhi — Individual Investor — Analyst

Okay. And my third question is actually your plants were facing issues due to energy crisis in Europe. You mentioned here also. So you prior — on the prior call, you have mentioned that there would be demand for some products. So have you generated any revenue or have you generated any orders from that country?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yeah. So we — what we mentioned is that we are working to grow our demand for finished product, which is cages out of our Romania facility. Currently, considering overall demand situation in Europe, that demand remains muted. However, we have continued to work in our business order gestation realization cycles are long, where we have to actually when someone awards us a business, we go into product development, we validate those products and only after approval, we start series production. So there are some wins in pipeline. And we are also very hopeful that additional opportunities will come our way, we will grow that business, but I don’t have any specific large order to talk about today.

Dhananjay Majhi — Individual Investor — Analyst

Okay, no issues sir. Thank you, sir. I’m done.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from the line of Shirom Kapur from Prabhudas Lilladher. Please go ahead.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yes.

Shirom Kapur — Prabhudas Lilladher — Analyst

Hi, thanks for the opportunity. One question. On our EBITDA, I understand in your disclosures it includes other income and other income has come significantly higher this quarter at about INR13 crores versus only INR2.5 crores about two and a half last quarter. So stripping out this other income, are we still going to see EBITDA margins rising significantly? Because I feel it’s getting a little bit skewed based on our other income increase.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So if I understand your question correctly, if you are comparing other income, please understand that this year we have a portion of almost INR5 crores, which is the realized FX. When I say realized, that means whatever is the difference between the booking of the sale, and the actual realization, it has been realized during the quarter and therefore it is in my pocket. So in my humble view as an export-oriented Company, the realized current gain is an inherent part. So if, for example, there is a loss, that loss gets booked as other expense and which is a part of my operating cost. Therefore, my other income which is realized should be a part of my operating income and not my non-operating income.

So if you remove the realized gain, if you consider that, then there is no difficulty in terms of comparison of the margins at the operating level. Yes, there is a treasury income in terms of interest, that is fine. Similarly, there are the mark-to-market currency. So when I translate my closing balances at the current currency level, there is a mark-to-market translation gain which could be reversed or which could be maintained depending on how the currency fluctuates.

So that is fine. I mean that as a part of your analysis, if you remove that is effectively okay. But I think if you consider the realized gain, they are okay. There should not be any problem.

Shirom Kapur — Prabhudas Lilladher — Analyst

Understood. Thank you. And my next question is regarding we’ve seen a higher percentage of sales as your other expenses and employee benefit expenses have increased as a percentage of sales. So, going forward, if your realizations continue to fall and that impacts your top-line, will you continue to see this percentage grow? Or is there any one off this quarter that cause your expenses and employee benefits to increase versus last quarter?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

So, at the console level, some employment has grown up due [Indecipherable] being a Christmas quarter and otherwise what we have observed is on account of the metal price reductions impacting the top-line value getting down so indirectly it increases the percentage terms, while in absolute terms, if you observe, it remains more or less constant on a regular increase year over year.

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay, got it. And last question is on your precision stamped components business. Do you have any updates on this? Any numbers you could share in terms of growth or margins maybe?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

I think from a [Technical Issues] I can share just the directional and what we are seeing. In terms of specific numbers, it will be difficult to share. Directionally and on the ground, we are seeing significant growth specifically in this business. Again, we are starting from a relatively small mix [Phonetic], but we are seeing this here about 25% plus growth in general in that business. And with the order wins in the pipeline, I think we are very bullish and hopeful on that business in general, overall margin point of view in general, very similar or slightly lower than our average margin for standalone basis. That’s the general what we can share. Currently, we are not separating those out of the overall.

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay, got it. And these components are primarily exported or they are sold in India because if there’s softness in Europe, will this also get impacted?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yes. No, we right now, the majority of business is bound for India with some opportunity outside, but major focus is in India, that’s where we have growth. So yes, I mean, right now we are not seeing any impact related to Europe or anything in this business.

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay, understood. Thanks. And all the best.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you.

Operator

Thank you. Our next question is from the line of Prolin Nandu from Goldfish Capital. Please go ahead.

Prolin Nandu — Goldfish Capital — Analyst

Yeah, hi, sir I have a couple of questions from my side. The first one would be even our domestic or engineering standalone business has two elements to it. One is what we supply within India and what we export out of India. How different are the margins for these two businesses? For the domestic as well as the export part.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

They are fairly similar. There could be obviously pockets and things and opportunities which could create a differential. Obviously export business, if I look at historical trend, it gives us exchange rates related-benefit which probably improved just because of that inherent advantage built into it. Beyond that it depends on the situation. The situation per se, domestic or export wouldn’t necessarily have a different margin profile.

Prolin Nandu — Goldfish Capital — Analyst

Sure, sir. And just on this exchange benefit part to it, right. In the past call you have mentioned that if I’m not wrong, we hedge 50% to 60% of our currency exposure. So correct me if I’m wrong, this exchange regains that we are talking about would not have accrued had we hedged completely 100%. Is that understanding, right, back to back when we win orders, if we would have had 100%, we wouldn’t have got any exchange rate benefit. Is that understanding correct?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So on the forward recap session [Phonetic] it will be part of our realized gain, which are not special in the terms of forward, or options related [Phonetic]. It is part of our other comprehensive income and it is what there in the other income, whenever it will actually happens, it will fall there. No, but to answer your question, I think yes, you’re right.

Prolin Nandu — Goldfish Capital — Analyst

So sir, what is the cost-benefit? Have we historically done that analysis that why do we want to take calls on exchange rate and why not make 100%?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

It’s a very interesting question. So at the board level, the policy is that what is our ultimate aim? Our ultimate aim is to protect our margin. Correct. So in a volatile situation, what is the safest way to ensure that we remain 50-50 more or less. So you hedge 50% keep your 50% positions open. So either way, if situations change on the extreme, for example, this time it was extreme, I think we closed the exchange rate at a little over 82, correct?

And my normal average hedges were maybe in the region of 79, 80 or 81. So here, technically and theoretically, there is a loss. Now imagine a situation where supposing the currencies become good and strengthened and we would have closed at 78, then in that event also I would be more or less on the benefit side, my forward would have given me a better realization and my open positions would have incurred some notional loss. So this is a volatile situation. It happens, I think this 50-50 remains a fairly decent [Indecipherable] media to ensure that we are either way, we are okay.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

I think again, what we are doing again this hedging process is short-term…

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

It is rolling forward. It keeps on rolling, right? And all our material pass-through mechanism also takes care of a significant chunk of the variation which happens in terms of cost basis, right? So I think when it comes to protecting long-term margin these material mechanism play a significant role and short-term margin protection we are just going some [Speech Overlap].

Prolin Nandu — Goldfish Capital — Analyst

No, that’s fair, sir. But historically we have seen a lots of — in case if we keep unhedged, right and the currency does not move in our favor then there is a lot of volatility in the earnings. That’s a limited point I wanted to make, right? In some sense we should probably focus on our expertise in terms of converting and — those kind of margins and not — that’s just a suggestion, right? In terms of doing a cost benefit analysis of hedging the exposure completely. So just an suggestion and my question is on bushings, right? In some sense now, we — this time we are mentioning that there has been a slowdown in the market. So this bushing market in terms of customers, they are more or less doing domestic customers, right? Am I correct?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So our customers currently are primarily domestic but ultimately they are actually exporting [Technical Issues] these are gearbox manufacturing companies which are exporting gearboxes and supplying mainly to wind market [Phonetic].

Prolin Nandu — Goldfish Capital — Analyst

I get your point. So that’s what in the last call you had mentioned that this customers who are domestic will ultimately be exporting. But when it comes to this particular bushing, they are importing some component, right? In some sense. So I thought that even that slowdown that we are witnessing in an overall wind market should have this whole import substitution mechanism or whatever that trend should have cushioned that to some extent, right. So is that happening for this gearbox manufacturer, import component is coming down and our supply is going up? Is that happening at least?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yeah, so that has happened actually in a significant way. And that’s why last call we had expressed that even though there was already some amount of wind slowdown happening in the market, we were not experiencing because we were largely focused on becoming the input substitute. Once we hit that reasonable or a complete input substitute status, we got the direct impact of the market condition or market situation. We have actually successfully created a substitution in one case and another case we are in process of creating that under substitution.

So we are very hopeful that we should see improved situation because as I mentioned, that another case we are working on becoming that input substitute where we are an approved supplier now and we have just started series production and all that. So with that we are confident that we will see some improvements going forward. But currently, the demand where we have already achieved the substitution remains a challenge.

Prolin Nandu — Goldfish Capital — Analyst

Understood. And from your customer end and all these redesigning of windmills and gearboxes that you had mentioned last quarter, that is largely done right in some sense. And our project products have also been approved in one case. And in the second case, we are in the process of getting that approval. So all the redesigning part is pretty much done right?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

We see that the next gearbox is under redesign. So we are working with our customer on developing those next set of products. I think my earlier conversation was about how this conversion is rolling on in the industry, this conversion from bearings to bookings. And our estimate today is that about 15% to 20% conversion has taken place so the next set of conversion will continue to roll next four, five, six years in the industry. So that conversion is in process of taking place.

Prolin Nandu — Goldfish Capital — Analyst

Understood. Fair point. One last question on your international business or your Romania, as well as China subsidies. Now, China margin is quite hardly to see that we are already at 15% and much near to our overall consolidated or standalone numbers. Romania is something where, as you have mentioned last quarter, that we have passed on some sort of a price increase to your customer.

So while slow down — it would be fine on the top-line, that top has declined this quarter, but I would have assumed that profitability would have gone up. But your comment suggests that last quarter we were very minor profitable. But this quarter we are motivating break even, right, in some sense. So could you help us understand not just this short-term profitability in Romania? But two to three years down the line, what is the number or what is the range of Romania’s margins that we should work with?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Pro to answer that question of an immediate short-term question, obviously, in Romania there was some volume impact because of overall Europe situation.

Also there were further increase on the energy side last quarter, which we were in process of, we are in process of passing through to our customers. So there was some impact related to energy crisis. Even though if you look at we have kind of bridged the gap per se versus the previous quarters. Now, in a long-term basis when it comes to the menu [Phonetic], we are looking at EBITDA margin for the casting business, about 6% to 8% EBITDA margin, we think we can fairly sustain. And for a finished product business, about 15% to 18%, 15% to 16% EBITDA margin we think we can fairly sustain.

As a combination, we are looking at about 9% EBITDA margin in a midterm coming out of Romania and working towards that in terms of growing the finished product, stabilizing in terms of cost and other things when we finish the casting product and all that.

Prolin Nandu — Goldfish Capital — Analyst

One last booking question would be, we have, if I’m not wrong, our gross block [Phonetic] is close to INR820 odd crores. Can you help me give a break up of how much of this is domestic and how much of this comes from our subsidiaries in China and Romania?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Roughly INR500 crores would be domestic and INR300 would be China and Romania.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

For precise number, you have our reports available.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

This is very — top of head number.

Prolin Nandu — Goldfish Capital — Analyst

Great. No, no, thanks a lot. Thank you for that and all the best.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you.

Operator

Thank you. The next question is from the line of Sandeep Tulsiyan from JM Financial. Please go ahead.

Sandeep Tulsiyan — JM Financial — Analyst

Yeah, a very good evening.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Good evening, Sandeep.

Sandeep Tulsiyan — JM Financial — Analyst

Yes, this is pertaining to — pertaining to this nine month sales number that we have reported, if you could broadly share the breakup between cages and scrap within that, broadly how it would look like.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Okay, Maulik?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Meanwhile, Sandeep if you can move to your next question, I will give you the [Technical Issues].

Sandeep Tulsiyan — JM Financial — Analyst

And also, when you share that Maulik bhai, within that, if you could share out of these cages how much was exports from India? So that would just give the sense to compare how that number has changed year on year.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

That is there in our presentation. Exports, I can tell you one second. So exports from India as of now is 48% to 49% for nine months YTD.

Sandeep Tulsiyan — JM Financial — Analyst

48% to 49% of China [Phonetic] sales or of total India sales?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Total.

Sandeep Tulsiyan — JM Financial — Analyst

Of total sales.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Actually, if you remove the scrap and our scrap for the nine months YTD is around 126 [Phonetic], so 116%. [Technical Issues]

Sandeep Tulsiyan — JM Financial — Analyst

And this exports, how it would have fared year on year, if you could give a sense broadly.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Can you repeat your question, sorry?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Nine months to nine months, how the export fared?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So the last year our export was around 51% — 50% to 51%.

Sandeep Tulsiyan — JM Financial — Analyst

That has gone down to 48% to 49% now. Got it. The second question was basically when we look at the EBITDA numbers, you clarified that one should add back the realized gain within that. So when I add back this INR5 crores number which is realized to the EBITDA number, then that is what EBITDA growth is ideally we would look at what the Company has sustained. That is the correct way to assess that, right?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yeah, but with a rider, Sandeep that this is a consolidated number where my Romania advertised 0 and my China advertise also in terms of percentage, good, but because the top-line is impacted in volume terms it is low. But yes, at an operating level, we are very clear that we should look at about 15% to 16% and slowly and steadily we want to grow it up to 18% over the next couple of years.

Sandeep Tulsiyan — JM Financial — Analyst

Right. And just to clarify, when we mentioned that we are hedging our forex exposure, there will be some near-term translation losses also, as in mark-to-market losses also. And when currency rate moves up, say it moved up from 79 to 82 in the current quarter, next quarter onwards, 82 will become the base rate at which we charge the customer. So the next hedge will get set at 82 and it will become part of top-line. Is that correct understanding.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

[Speech Overlap] When we do the material pass-through, the benchmark numbers are itself in foreign currency, and it gets converted on the average exchange rate of the same period. So indirectly, there is a pass-through covered, in the material pass-through, the exchange rate also gets covered. And that’s why we follow the 50% varying strategy.

Sandeep Tulsiyan — JM Financial — Analyst

[Speech Overlap] Correct. But when you all say forecasting for forward quarters to the customer, the billing happens in foreign currency. So the benefit will essentially become part of top-line, and it will move out of other income gradually, which is why…

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

You got it right.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. And lastly, just on the Japanese customers, you briefly mentioned the growth numbers. I know the base is small. Is it possible to quantify for the current nine-month period? How big would that be? Or is it too small to quantify?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So all the Japanese customers put together not all, but the major three Japanese customers our top-line for nine months is INR49 crores, roughly, which was INR47 crores full year last year.

Sandeep Tulsiyan — JM Financial — Analyst

INR47 crores in FY ’23?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

That’s right.

Sandeep Tulsiyan — JM Financial — Analyst

[Indecipherable] Got it. All right. Thank you so much gentlemen for taking the questions.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you, Sandeep.

Operator

Thank you. Our next question is from the line of Dhananjay Majhi an individual investor. Please, go ahead.

Dhananjay Majhi — Individual Investor — Analyst

Thank you for taking my questions again. So for a short term, there is a high inventory in your business, as it is only 5% of the total bearing cost. So your cages, I’m talking about the cages. So how are you managing those things?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Can you repeat?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

[Speech Overlap] finished goods inventory across our 20 plus warehouses across the world, which is a major component of the inventory, raw material in terms of number of days still remains around 24 to 25 days. [Indecipherable] finished goods about 45 to 44, 43 days. I think it’s almost — in terms of number of days it is almost the same as you compare with this year. One or two days plus or minus is something we can’t actually control.

Dhananjay Majhi — Individual Investor — Analyst

Okay, no issue. And sir what is your capex expectations for the next quarter or the next year?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

We have actually, we have approved capex from the board for this year of about INR70 crores, sorry INR100 crores, sorry and right now we have actually seen in our presentation we have shared that about INR50 crores is what including WIP we have spent this year so far. And so immediate capex short term will depend on — we are looking at the settling up of the third facility in India. So it depends on that investment, when that happens.

There is some uncertainty about it. It’s a little bit of a longer process to actually acquire land and execute all that. So I’m not able to accurately share that — that’s one of the biggest ticket items in next quarter or this quarter coming up. Plus there are a few [Technical Issues] plus there are few other capex plan but obviously we have slightly slow down our capex expansion or addition because of — there was a little bit slow down in European market and a little bit of potential of other areas also slowing down. So that’s the status.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Yeah, but medium to long-term target remains the same as we had shared on the earlier call. About INR300 crores in three years and INR100 crores per year. That’s what we are looking at.

Dhananjay Majhi — Individual Investor — Analyst

Okay, sir, and sir about your EPC business actually that made a loss I think, if I’m not wrong. So can you please convey some color on those things?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Yes. So our solar EPC business, this is primarily a project business as we had mentioned earlier that our objective in this business is to focus on profitable projects and we believe that we have successfully done this year, even though you’re correct that last quarter we have made the loss. Now, this is a cyclical business again driven by fourth quarter.

Basically, we will see, we are planning, we are looking at a significant top-line growth in fourth quarter and having a fixed cost structure to this where we have a low revenue quarter where as an example the last quarter where loads of project not in pipeline or not on completion level, then we will see that. But overall, we are quite positive of that business on an annual basis, we are positive. I think on the nine-month basis also, it’s just breaking even. So that’s the concept and idea. This remains again a small business for us with not a focus of investment or significant growth. But we are very mindful of not losing money in that.

Dhananjay Majhi — Individual Investor — Analyst

Okay sir, thank you.

Operator

Thank you. Our next question is from the line of Shirom Kapur from Prabhudas Lilladher. Please go ahead.

Shirom Kapur — Prabhudas Lilladher — Analyst

Hi, thanks. I just had one follow-up question. So I noticed that you have utilized all the proceeds and the IPO that were earmarked for debt. So would that — debt repayment have come in your long-term or short-term debt. Would be able to share that?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Sorry. Your question is that we have repaid the debt.

Shirom Kapur — Prabhudas Lilladher — Analyst

Yes. So was that in short term or long term? [Speech Overlap] Yeah, was that repayment in your short-term or long-term. The remaining amount from Q3 that you repaid, was that in short-term or long-term debt?

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

So we have repaid the India debt, both all short term and long term, which was mentioned in our perspective. We have recently borrowed further on the working capital requirements on our EPC front in India, while the debt in China and Romania remains debt-free [Phonetic] because the process has not been used towards the repayment of the subsidiaries’ money.

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay, understood. Thanks.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

This is export packing credit?

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Export packing credit.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

It is very cheaper [Speech Overlap].

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay, so the working capital is primarily for your subsidiaries, not for India.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

No, no. Even at India level, our business we can borrow at a very competitive rate in foreign currency or in local currency. There’s an export finance. And we keep on taking it as and when required.

Shirom Kapur — Prabhudas Lilladher — Analyst

Okay. Got it. Thank you so much.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now have the conference back to Mr. Vishal Rangwala for closing comments. Over to you, sir.

Vishal Rangwala — Chief Executive Officer and Whole-Time Director

Thank you, everyone. Appreciate you joining this call and hearing through us an update about our third quarter. And please reach out to us if there are any questions. Thank you very much. Thank you for your participation and have a good evening.

Maulik Jasani — Vice President of Finance and Group Chief Financial Officer

Thank you.

Sanjay Majmudar — Consultant

Thank you.

Operator

[Operator Closing Remarks]