Sansera Engineering Ltd (SANSERA) Q2 FY23 Earnings Concall Transcript

Sansera Engineering Ltd (NSE:SANSERA) Q2 FY23 Earnings Concall dated Nov. 08, 2022

Corporate Participants:

B. R. Preetham — Group Chief Executive Officer

Vikas Goel — Chief Financial Officer

Praveen C — Chief Operating Officer

Analysts:

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Nitin Arora — Axis Mutual Fund — Analyst

Basudeb Banerjee — ICICI Securities — Analyst

Sidharth Bera — Nomura — Analyst

Ankit Kanodia — Smart Sync Services — Analyst

Pranay Roop Chatterjee — BCNPL — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. Welcome to Sansera Engineering Limited Q2 FY23 Earnings Conference Call. This conference call may contain forward-looking statements about the company which are based on belief, opinion and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to B. R. Preetham, Group CEO, Sansera Engineering Limited. Thank you and over to you sir.

B. R. Preetham — Group Chief Executive Officer

Thank you. Good morning and season greetings to everyone. Welcome and thanks for joining this call. On this call, I’m joined by our CFO, Mr. Vikas Goel; our COO, Mr. Praveen Chauhan and our Investor Relation advisor team, SGA.

The results and the presentations are uploaded on the stock exchange and the company website. I hope everybody has — had a chance to look at it. I am delighted to update that this quarter we have crossed our highest ever quarterly sales, building on various momentum in the domestic market. Over the years, diversified product portfolio, customers and markets have been our strong suit. And this has helped us to deliver a healthy performance once again.

Our customers continue to appreciate our efforts and we have been recently awarded for excellent supplier performance from Boeing, one of our key customers in the aerospace segment. We have also received awards for Zero Defect Supplies from both [Indecipherable] and Toyota Kirloskar Motor as well.

Talking about some major business wins. We have recently won an order from global OEM with a peak annual revenue of INR1,300 million. This contract would be for a time horizon of around six years starting from 2025. We have also secured a six-year order from a well-known American company in the auto space with a peak annual revenue of INR250 million order. This is in the non-auto space.

Our order wins for connecting rods from Tata Motors and Ford Motors and also Volvo Eicher are progressing well. In fact, the mass production has commenced in this quarter. And we are engaging with them on various other products as well.

Before we dive into our performance during the quarter, I would like to take a moment to speak about EV industry in India and Sansera progress therein. Currently the overall industry is still at a very nascent stage and it is developing at a very rapid pace. EV penetration in India as per various service are just about 2.6% of the total automotive market. And Government of India is targeting between 30%, 35% of EV penetration by 2030.

As we have mentioned in our previous calls, Sansera has already secured business from traditional OEMs and new-age startup in the EV two-wheeler space. Today we have 12 — overall 12 xEV customers in all the sectors including some marquee global names. Our wealth of experience in ICE provides us with a solid foundation to grow in the EV space. Interestingly in the two-wheeler scooter space, today Sansera has six customers for tech agnostic and xEV components vis-a-vis four customers in the traditional ICE components. Also our peak content per vehicle for auto tech agnostic and xEV components in an EV scooter is about INR1827 versus INR1467 in our traditional iScooter.

Production lines for two-wheeler xEV and hybrid PV at our dedicated facility for hybrid and electric components began mass production in quarter four of FY ’22 and it is ramping-up well. Our business — EV business is growing from strength-to-strength with addition of new customers. This quarter close to 3% of our total sales cadence from xEV segment, though still small, it gives have fair sense of our progress directionally.

A couple of our customers in EV two wheeler space are getting — getting us prepared for mass production. As a result we are anticipating accelerated growth of our components in the coming quarters. We have already doubled our revenues from xEV and tech agnostic segments in H1 FY ’23 and we expect this trend to continue in FY ’23.

Coming to our performance. We registered a year-on year growth of 17% and revenues to achieve a total revenue of INR6,362 million rupees with an EBITDA margin of 17%. Our CFO, Vikas Goel will talk about this in detail in a bit later. Sales of our auto segment soared by 20% year-on-year, largely driven by growth in domestic markets. This segment contributed around 90% of sales in Q2 FY ’23 of this 10% of sales came from auto tech agnostic and xEV products versus 7% in the last — Q2 of the last financial year.

In terms of Q2 FY ’23 sales mix, for auto segment covering both ICE as well as xEV and tech agnostic components, 39% sales came from motorcycle segment, scooter accounted for 15% of our top line. China Plus policy of some of our customers where we had secured big business in the past has now started maturing into full volume. Also a couple of our customers are transitioning into a new — into the new engine and are relying more outsourced — more upon outsourced partners leading to a higher share of business with them. So a combination of these two factors resulted in a robust two wheeler growth for us.

Passenger vehicle accounted for 27% of our top line. Commercial vehicle accounted for 9% of our top — given that a significant sales — portion of the sales of CV comes from our Swedish subsidiary we witnessed a subdued performance in Europe in this sector — in this quarter. Our non-automotive segment contributed 10% of the sales in the quarter in our recent sales mix. In our current sales mix, aerospace contributed about 4% of our sales registering a strong growth of 41% year-on year in the quarter. We expect this momentum to continue and registered a 35% to 40% growth in aerospace revenues this year.

Agriculture segment accounted for about 4% of the topline. Off-road sectors registered a substantial reduction, largely owing to the continued supply chain challenges faced by the customer. Sales contribution of the off-road sector came down from 4% in the Q2 FY ’22 to about less than 1% in Q2 FY ’23 and we expect that this would be on the recovery part from the Q4 ’23 onwards. And the remaining 1% of the top line came from a few other things.

On the capex front, our new aerospace and defense facility is almost ready and is expected to get into the operations by the fourth quarter. The mass production, post all the approvals is expected to start from the year FY ’24.

Coming to our order pipeline as on 30th September ’22, our order book of the new business with an annual peak revenues stood at INR14.2 billion with auto ICE contributing of INR6.94 billion, 49% and auto tech agnostic, adding INR4.41 billion, amounting to 31%. Non-auto accounts INR2.84 billion and which contributes 20% to the order pipeline. This order book continues to showcase the progress that we’re making towards our long-term vision of improving market-share participating in xEV opportunity and diversifying into technology agnostic components and focus on non-auto sectors.

Our aluminium forged and machine components continue to see a very healthy traction. Going-forward our growth will come on both auto and non-auto sector. With a strong festive season automakers reported a very healthy domestic demand and we expect the recovery to continue in the coming times. However exports may continue to be a drag for the industry this year. So going-forward, we expect our domestic sales to register higher-growth in — higher-growth. In addition, our growth will be driven by new products like xEV and hybrid components for which mass production has already started.

On the non-auto side, we should see a strong uptick in aerospace and defense business next year. The last two, three years were rather dull the sector, but now the demand have come back strongly.

Now I hand over to our CFO, Vikas Goel to talk about our financial highlights.

Vikas Goel — Chief Financial Officer

Thank you Preetham. Good morning everyone. I would like to cover the performance during second quarter first. Our revenue for the quarter stood at INR6362 million as against INR5418 million last year, which is a growth of 17% on a year-on-year basis. This growth is a combination of superb sales growth in our domestic sales, which was partially neutralized by underperformance in the international fees. In fact I’m delighted that we recorded our highest ever quarterly and half yearly is in the review period.

In the quarter gone by, we were able to pass on the commodity price increase to our domestic customers. This increase was retrospective for two quarters, however the parking of costs makes the margin percentage appear narrower in an optical sense. Further the reduction in international business, both sequentially and on a year-on-year basis also impacted the gross margins negatively.

Our expenses increased by 17% in-line with the revenue growth with the higher COG has a percentage our EBITDA margin for the second quarter stood at 17.1% against 20.1% in the second quarter. We will talk about it in more detail in the second — in the H1 summary. Finance costs for the quarter increased by INR144 million as compared to a INR113 million in the corresponding quarter in FY ’22. This increase was largely due to the higher working capital borrowings to support the business growth and also the interest rate hikes that we’ve been witnessing in the recent times.

Profit after-tax of INR469 million in second quarter as against INR518 million for the last [Indecipherable] period. The geographical sales mix of Q2 FY ’23 stood as follows, India accounted for 77%, Europe 16%, US-based customers 4% and other foreign countries overall 3% as a percentage of total product sales. And exports have been muted in this quarter and we expect this trend to start improving by fourth quarter from this year based on our current visibility.

Now talking about the half yearly results. Looking at the half year numbers the total revenue surged by 25% on a year-on-year basis to INR11,691 million as compared to the corresponding period last year this includes approximately 3.5% of the material inflation pass-on to customers in domestic regions. For H1 FY ’23 EBITDA stood at INR2008 million with a margin of 17.2% the net profit for H1 and ’23 stood at 18,817 million and registered a growth of 16% as compared to 706 million in the corresponding period in the previous year.

Coming to the cash flow and balance sheet for H1 ’23, the company generated a cash from operations of about INR1,299 million against INR709 million last year posting a significant growth in the cash generation. In H1 ’23 we invested about INR1,282 million against the, purchase of property, plant and equipment do support the current order book for new business.

On debt front our net-debt stood at INR6,250 million. The net-debt to equity ratio was 0.56 against 0.57 form — for the year FY ’22.

With this we would like to conclude our presentation and open the floor for question-and-answers. Thank you.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen to begin with the question-and-answer session. [Operator Instructions] Question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services, please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Hi thanks, am I audible?

B. R. Preetham — Group Chief Executive Officer

Yeah.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Yeah, so couple of questions from my side. Firstly with respect to exports we indicated recovery some fourth quarter. So what are the indicators are we looking at which gives us comfort off recovery coming from fourth quarter?

B. R. Preetham — Group Chief Executive Officer

Look we have been interacting with our customers, see most of our customers do indicate that the supply chain challenges that they had was — so the result of that was cutting in schedule and correcting the inventories wherever they had built-up and the indications that we get are that from the — our fourth quarter, which is their first quarter things should become more normal once the correct their inventories and start consuming the material. So we expect both in our non-auto that is off-highway vehicle category where the — as I said in my speech that compared to last year, which was 4% has come down to less than a percent and also on the PV sector this should normalize from the — our fourth quarter.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay, Okay. And secondly on the exports continuing based on the order book, which we have to date. In next two to three years, what percentage of our revenues we expect to be from exports has been set at 10% in FY ’22, do you expect that mix to sustain or that will increase in favor of exports? And within that, do you see shelf US going up vis-a-vis Europe over next two to three years?

B. R. Preetham — Group Chief Executive Officer

Yes, if you look at our order book as well as our current order positions, which production has already begun, except for this this year when right from the beginning of the year we have clearly said that this year would be a subdued exports. We did not expect any growth in this, but going forward our expectation is as the things become normalized, we should be back to between 35% and 38% of international revenue on our overall gross sales. So it could be that quarter-on-quarter there could be some variation, but we expect that overall it will be between 35% and 38% of our international — I mean revenues should come from our international market. When I say international market, this would include our sales from Sweden as well and also our exports from India. So we do not expect any big change in that mix because our current order book also indicates the same thing.

And to add to — to answer to your second question how our US order book is looking or our US sales are looking, US continues to be a very focused market for us. We are adding a lot of business in US, for example the order win that we have mentioned about in this presentation which is about INR130 crores worth of order annually for six years from a global OEM starting from 2025 will amount to almost INR700 crores over the business period and the second order also is for the — from a North American customers in the non-auto segment. Again we have also been working on a lot of xEV components for a marquee customer. So our US business is looking very-very strong.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Got it. And second question with respect to the euro depreciation against INR. So what was the impact of that in 2Q? Maybe if can share euro INR realization for the quarter vis-a-vis first quarter?

B. R. Preetham — Group Chief Executive Officer

Yeah, Vikas?

Vikas Goel — Chief Financial Officer

So we have rather balanced mix of our trade in terms of euro. We import a lot of materials in euro currency, while we also export so the — approximately 40% of our exports is in euro and 60% happens in dollar currency. And against that 40% almost, I mean if I look at an overall basis, the ratio within the euro is about 75%, 25% — 75% of that is imports. So net impact on euro appreciation or depreciation is rather marginal at this point in time. While we have a significant headroom in the dollar, which actually is good news going forward.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay so what was the [Indecipherable] realization for the quarter?

B. R. Preetham — Group Chief Executive Officer

You mean the forex average utilization — average realization.

Vikas Goel — Chief Financial Officer

[Speech Overlap] what was the overall impact is what your question is?

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Yeah and if you can share the forex realization as well on USD INR basis.

Vikas Goel — Chief Financial Officer

So in terms of overall gain or loss we had the kind of a neutral — we incurred a mark-to-market loss of about INR6 million because of the forward contracts that we had in place. But in terms of average realization I can share with you — give me some time, I’ll share it with you.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Sure. And last question on iron cost inflation. Would it be fair to say 2Q was probably the last quarter of inflationary pressures and 3Q onwards do you expect some relief for savings on iron cost which would be having mathematical impact positive impact on margins?

Vikas Goel — Chief Financial Officer

No, like see while the second quarter saw some cooling down of raw material prices, but in our results all the effect of raw material increase which was during the first quarter and later on which got slightly rolled back in the second quarter has all come in Q2. So in Q3 that definitely will improve because Q3 will be for only Q3 the thing, but I expect that in Q3 the operational leverage will not be substantial because as the Q3, there would be — Q3 quarter will not be as strong as Q2 in terms of domestic volumes. There will be year-end model change will come in December, where the one year almost one-week of maintenance off will be there with lot of customers. So Q3 will be — in terms of leverage, so we expect that our margin will continue to be in this range between 17% to 20% and more towards 17%, 17.5% in this Q3, but Q4 we expect that good improvement in margins. And definitely the operational leverage will also kick-in and also there will be recovery from exports.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Sure. Thanks and congratulations to you.

B. R. Preetham — Group Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Nitin Arora from Axis Mutual Fund. Please go ahead.

Nitin Arora — Axis Mutual Fund — Analyst

Hi sir, good morning thank you for taking my question. So we had a very strong start of orders, new orders this first half. Can you talk more about the new platforms where you bidding both in Europe and US. Also in context of — do you see the new platforms, which [Indecipherable] are getting delayed. And also the size of these potential orders? If you can throw some light on these.

B. R. Preetham — Group Chief Executive Officer

Good morning, Nitin. Is this the question pertaining to overall platforms or only ICE or it is xEV, so can we understand it?

Nitin Arora — Axis Mutual Fund — Analyst

Yes, so first is on the export side, basically US and Europe across the categories so across the segments, whether it’s ICE or it’s electric, whether it is aluminium forging specifically. So first on the exports if you can talk about whether you’re seeing some delay in the new orders, what are the potentials of the new orders which you are bidding? Because first half has been very strong when eventually, people are talking about slowness coming in going forward so. That’s I wanted to know.

B. R. Preetham — Group Chief Executive Officer

Yeah, so the new orders that we are participating are all generally orders which are — which are going to be executed for the new platforms from FY — I mean, calendar year ’25, ’26, ’27. So a lot of these orders that we are participating and we are winning also corresponds to that. So this also goes in-line with what we have been maintaining that more-and-more outsourcing is being looked at for the new platforms. The recent wins that we have — what we have mentioned in our presentation as well is from a global OEM for North American operation and this is — we have been working on this project from almost now 1.5 — close to 1.5 years. The product has been tested, various stages of proto [Phonetic] has already gone through. So this production would begin in ’24, but the relatively volumes will start picking from ’25.

And the second order that I’ve also mentioned is on stationary engine platform. And this is starting first in Europe. This is a North American-based customer, but the order is starting in FY — I mean, calendar year ’25 in Europe, but very interestingly this order would be — we have almost 10 times potential on this order from North American base. So what we are looking at, we have also be in participating in many more such — such RFQs where there is a good amount of progress. We are quite confident that the volume of such orders will keep coming, but what I need to also mention here that this is not only restricted to ICE whether it is in passenger vehicle, commercial vehicle or in stationary engine category, but on xEV front as well, there is a lot of traction. And in this specifically what I need to mention is this would not be dependent on model year because we are participating in both current as well as the newer upcoming program. So we have been given opportunity to participate in both and, I’m quite happy to share that while we have last time I had mentioned that we have received certain RFQs, I mean certain orders from this marquee customer there is a good amount of progress. Our development is going well, we have already developed four of these components and the customer has had several visits to us and this businesses is progressing well. While, I say that this is mid-term to-long-term view, but what we look at it as I mentioned we expect that our Q4 and calendar year Q1 of the next financial — next year, we expect that there would be a volume recovery because most of the inventories in with our customers have already been corrected or are in the process of getting corrected.

Nitin Arora — Axis Mutual Fund — Analyst

That’s helpful Preetham, thanks for that. The second question is you talked about known auto which is keeping net of INR50 crores, INR57 crores quarterly run-rate revenue. And aerospace has doubled almost in last one or two quarters. So this off-road impact the category, which was INR20 crores coming to INR2 crores, will that get normalized by next quarter? The question is that if that would have been normalized you would have be doing INR70 crores to INR80 crores in this quarter out of that so. Can you throw some light because how the revenue ramp-up should happen in that?

B. R. Preetham — Group Chief Executive Officer

Yes Nitin, see, basically I think the customer when we have interacted they had a lot of dependence on China for sourcing lot of critical electronic and other components from their which they had a lot of issues in — those things. So they had to cut their production there is a very, very healthy order book for them, but they were not able to fulfill those order book. So as I understand that now things are becoming much more better and clearer and in anticipation of [Indecipherable] they are also built-up the inventory on other components which they have normalized. So I expect that because we have also added components in that sector to that customer we had expected — in fact very good growth for that customers this year, but for this factor so, I expect that this would be back on-track from quarter four.

Nitin Arora — Axis Mutual Fund — Analyst

That’s helpful. And lastly, Preetham we talked about putting up a plant in US for a customer. And then the last one — the order quarter reversed and I think last call you said we still want to put it. So can you throw some light because is it something for a very specific customer we are going and be added hoping that the big order will come and that’s the — that will be the catalyst for putting up the plant or we are still going ahead and putting up the plant, if you can throw some light on that decision?

B. R. Preetham — Group Chief Executive Officer

Yeah, Nitin while I had clearly specified in the previous calls and during the topic of this discussion also that while our interest in US plant is for a very big opportunity that exists in both auto and non-auto market and HCV market in US. So and their policy towards China Plus and moving away is wanting them to be closer to their own geography is the main driving force for us to look at the US facility, while this order which got canceled apparently had accelerating effect on this. So because now this order was kind of — because this specific order was everything had to be done on in the US while our strategy was on other components we will do most of the green machining and forging in India and do finishing operations and assembly operations in the US to keep the supply-chain lean so this strategy we continue to have because our focus on US is continuing our growth in US in both auto and non-auto as well as xEV continued. So we are quite keen on setting up a manufacturing facility, but the timeframe we have no constraints like the earlier this thing. So in fact we had a detailed visit to US last month I was on to look at various potential sites. And talk to various customers about their upcoming programs and this thing. So our plants are very much intact of starting now only the timeframe is what when we need to decide so at an appropriate time we will take the decision but the plans are being done for having a facility in US.

Nitin Arora — Axis Mutual Fund — Analyst

Thank you Preetham. It is always pleasure talking to you, thank you.

B. R. Preetham — Group Chief Executive Officer

Thank you, Nitin. It’s always — our pleasure too.

Operator

Thank you. [Operator Instructions] The next question, is from the line of Basudeb Banerjee from ICICI Securities. Please go ahead.

Basudeb Banerjee — ICICI Securities — Analyst

[Indecipherable]

Operator

Mr. Banerjee, sir we are not able to hear you clearly? Can you use the handset model while speaking.

Basudeb Banerjee — ICICI Securities — Analyst

Am I audible?

Operator

Much better sir. Please proceed thank you.

Basudeb Banerjee — ICICI Securities — Analyst

Thanks two%. One-third like custody of presentation, 4% of revenue is from Hero space in 1H. So which mean that roughly INR50 crores. Am I right sir?

B. R. Preetham — Group Chief Executive Officer

Pardon me. Can you just be louder about this.

Basudeb Banerjee — ICICI Securities — Analyst

Sir, as per your presentation, aerospace revenue is roughly 4% mix in 1H and 1H revenue is roughly INR12,00 crores. So roughly INR48 crores, INR50 crores revenue was from aerospace.

B. R. Preetham — Group Chief Executive Officer

Yes, very close to that. It was 40% [Phonetic] that we indicate there are [Indecipherable] product sales.

Basudeb Banerjee — ICICI Securities — Analyst

So just wanted to know like last few quarters back, we were discussing about post COVID aerospace revenue moving back towards INR200 crores. So what’s the situation with regards to that and what’s your outlook in terms of timeline periods such as annualized run rate.

B. R. Preetham — Group Chief Executive Officer

Basu, yes we would definitely the plan for reaching the aerospace to INR200 crores is very much intact and that is where our progress is also being [Indecipherable] this year. Recovery of aerospace sector is quite good. So we expect that we would be doing better than H1 and H2. Our order book also indicates the same thing. And with the new plant opening up in this — starting production in the next financial year, we do expect that we will be reaching or will be doing better in at least our target was in three years’ timeframe we should reach INR200 crores. So we would be still — the target is still there and we are we are hopeful that we should be doing better than that.

Basudeb Banerjee — ICICI Securities — Analyst

Sure. Sure. So roughly three years means including ’23 you mean or from ’24?

B. R. Preetham — Group Chief Executive Officer

No, including the — see ’24, ’25, ’26 so the three years is what [Speech Overlap]

Basudeb Banerjee — ICICI Securities — Analyst

Understood, understood. Second thing, sir as you mentioned in the earlier part of call, 38% of consol revenue to be out of India, including Sweden CV parts business, so if you can mention the health of the Swedish business now and your outlook for next couple of quarters margin situation there?

B. R. Preetham — Group Chief Executive Officer

Yeah, see like last-time also I had mentioned that this year our Sweden sales will be subdued because of the change in strategy from our OEM, a major OEM where we were 100% in certain category of components and then there was another source, which were 100% so they wanted both of us to be 70% so that transition is going on and added to that the energy crisis has put some pressure, but we expect that in the coming year the Sweden growth will be back to normal revenues of — like the previous year, though we do not — do not expect too much of change in volumes but operating efficiency by increasing automation and increasing engineering efforts from India we expect that we will maintain a healthy double-digit EBITDA from Swedish facility from next year. This year as per as I mentioned in the earlier reports also we will have a de-growth and this would be only a temporary year in terms of Europe revenue, I mean in terms of Swedish revenue.

Basudeb Banerjee — ICICI Securities — Analyst

And how much was the EBITDA in first half sir, if missed out?

Vikas Goel — Chief Financial Officer

For the Swedish facility you mean?

Basudeb Banerjee — ICICI Securities — Analyst

Yeah.

Vikas Goel — Chief Financial Officer

Okay. So basically the today’s margin of 16.7 includes that deterioration of European margin so this level should also help. And third questions, sir, as in your earlier discussion also you mentioned that in 3Q operating leverage will be at a disadvantageous position. Though Q1 it was an after effect of cost percent of 1Q and 2Q together. So the outlook should be Q3 margins remaining static with gross margin improving and other costs as a percentage of sales moving up. So if you can, help us understand in this 400 bps of gross margin deterioration, how much was because of two quarters piled up together?

B. R. Preetham — Group Chief Executive Officer

Yeah so Basu I think for better understand ability I would suggest that because Q2 was slightly skewed all the raw material effect got accounted for in Q2 so if you look at H1 that would be probably a better — I think so. Vikas could probably give more meaningful breakdown of that Vikas?

Vikas Goel — Chief Financial Officer

Yeah, so Basu in terms of if you look at H1 results, about 1.9% is the margin deterioration. On account of material inflation and the geographic sales mix combined. There is a slight increase in manufacturing expense which is also responsible for that of 0.2%. And we expect this to be kind of a run-rate going-forward so — if the material cost remain same. So instead of 4%, right. Then we had the operating leverage on employee cost and other expenses put together, about 0.6% which should partially offset during the third quarter because of the subdued volumes because of the cyclical nature of the industry. All of these should improve only the recovery of exports during 4Q as well as on the operating leverage getting better because of volume expansion in the 4Q. We expect to hold our margins, our EBITDA margin in the third quarter and achieve an uptick during the fourth quarter because of improvement of all these factors.

Basudeb Banerjee — ICICI Securities — Analyst

So if I missed out, can you explain the 1.9% — how much time will it take for the full reversal of that?

B. R. Preetham — Group Chief Executive Officer

It is not a full — it is not a reversal. It is a optical effect of material content becoming higher in the overall [Speech Overlap] so Basu in that 1.9% about 1.3% is the optical impact of raw-material about buying 0.4% was the effect of change in geographical mix. If you please see that almost 25% is quarter-on-quarter 25% is erosion of exports compared to the last — Q2 of last year to Q2 of this year. So this 0.4% as the exports become better will come back definitely on margins. And this 1.3% which is the raw-material impact optically will continue to be there for some more time till the raw-material price gets corrected.

Basudeb Banerjee — ICICI Securities — Analyst

Understood. And last question if I can chip-in, October retails and wholesales of two-wheeler EV saw a good spike up. So as you are supplying to multiple OEMs, how is the production schedule outlook looking ahead for the next few months? Is that spike up sustainable or moving up further or you see some normalization?

B. R. Preetham — Group Chief Executive Officer

So overall we see that two wheeler industry is doing better than what was expected, especially there is a lot of stability coming in from some of the new age electric vehicle startups where there are lot of issues so we see that there is good steady — the thing. One of our key customers, [Indecipherable] have also been doing pretty well. So there are some of the customers who still are struggling, but overall we see that two-wheeler industry is doing better than what we had expected. So the order position overall if you look at it from all the customers put together looks better.

Basudeb Banerjee — ICICI Securities — Analyst

And any color on two-wheeler EV specifically?

B. R. Preetham — Group Chief Executive Officer

Yes, see two-wheeler EVs in fact continues to do well. Our participation has also increased we now have six customers. The volumes have started going up that is the reason that you see that. We’ve already started registering a noticable portion of our revenues that’s coming from EVs now, 3% of our revenue started coming from EV, which is small, but directionally what we were able to achieve. We are very clear on that even the order book also indicates that almost 20% of our order book, we have xEV components, specifically. So we are quite bullish on performance of xEV two-wheelers for the coming quarters as well.

Basudeb Banerjee — ICICI Securities — Analyst

Sure sir. Thanks all the best.

B. R. Preetham — Group Chief Executive Officer

Thank you Basu.

Operator

Thank you. [Operator Instructions] The next question is from the line of Sidharth Bera [Phonetic] from Nomura. Please go-ahead.

Sidharth Bera — Nomura — Analyst

Yeah, hi sir. Thanks for the opportunity. Sir, my first question is on the order book so we have shared that orders book has gone up from 11 to 14 [Phonetic], now you have shared 1.3 from this 1.5 from the two customers what about the rest sir how have those have got added?

B. R. Preetham — Group Chief Executive Officer

You mean — there has been order inflow from all the sectors. There have been order inflows from quite as a good number of aluminium orders we, have been able to get. So in fact there is substantial increase in that too if I am not — this thing that almost INR100 crores of orders have been booked on aluminum components itself. So we have been seeing — we have got received orders from aerospace sector, differences is shaping up well. So there is a good amount of order inflow from all the sectors.

Vikas Goel — Chief Financial Officer

Sidharth, quite interestingly if you look at the order book 18% of this order book is coming out of xEV only and that’s the most interesting part and that’s in-line with what we had been talking about directionally and that all makes us quite comfortable that that indicated 40% plus coming out of non-auto ICE, I mean non-auto tech agnostic and EV, I think we are very well on-track rather we might exceed that. like to keep that.

Sidharth Bera — Nomura — Analyst

Got it, got it. Sir, this aluminium component orders which you talked about, these are for which sector broadly? Will it be more for aerospace or is it across components?

B. R. Preetham — Group Chief Executive Officer

No, these — what I spoke about, specifically is about — currently on two-wheelers.

Sidharth Bera — Nomura — Analyst

Okay, more for two wheelers.

B. R. Preetham — Group Chief Executive Officer

Yes.

Sidharth Bera — Nomura — Analyst

Okay, okay. And second is on this ramp-up for the second half, can you just sort of guide us in terms of — in terms of pickup in terms of orders, execution what all things we should expect to come through in the second half of the year?

B. R. Preetham — Group Chief Executive Officer

See some of this xEV customers with whom we have been working on the mass production has commenced and the ramp-up will happen on that, on the two wheeler front. We have already started commenced production. I’m very happy to say that Tata Motors have — we’ve added them as our customers. We are very, very happy and proud to be that — the production of that has started. There is a very positive feedback from the customers on that. We have Source Motors, the production has started for that, we’ve added Volvo Eicher, the production again a standard for that. There has been an increase in — these are all sectors where we were not very strong and be it agri, be it commercial vehicle in India, all these are sectors where our presence was not very strong and we have been able to penetrate this and the production has started. Hybrid components for our customer has already started and it is at a full ramp-up now. There is a braking system components, which goes to European sector where the ramp-up — I mean full mass production has started which will also contribute to this revenue. So these are all some of the of course, I said that aerospace and defense continues to recover and new orders are also being executed. So all these things should give us that required push into the — the next level of revenue growth.

Sidharth Bera — Nomura — Analyst

Got it sir. Second question is on the exports, which you have already touched upon, just some clarification. So earlier you have said exports, is likely to be flattish for the year. Now if you see for the first half they are down about 15% on a Y-o-Y basis. Trending at about INR100 crores in the quarter. So now if we look at from the next couple of quarters first is do you still maintain that earlier guidance of about flat for the year and that implies that we should be somewhere back to the earlier levels or slightly higher than the earlier levels in the second-half would be right way to, think about it?

B. R. Preetham — Group Chief Executive Officer

I still think that more or less we should be in that range itself because, I expect that the quarter four to be relatively strong for exports. So my expectation is that we should be more or less very very similar to the last year numbers.

Sidharth Bera — Nomura — Analyst

Got it, got it. Okay, sir thanks a lot. I’ll come back in the queue.

B. R. Preetham — Group Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Ankit Kanodia from Smart Sync Services. Please go-ahead.

Ankit Kanodia — Smart Sync Services — Analyst

Audible? Hello?

Operator

Op: Yes, Mr. Kanodia.

Ankit Kanodia — Smart Sync Services — Analyst

Yeah, thank you, thank you for taking my question. In your presentation Slide number 23. We have given the sales mix in four aspects, one is in terms of geography, one is in terms of customer, one is in terms of product mix and then one is in terms of customer relationship. I just had a longer-term, I wanted to have a longer-term view on your side as to how do you see all these four parameters going in the next two to three years directionally. I know you can’t pinpoint a particular number, but if you can give us some color on all these four aspects that could really help. Thank you.

B. R. Preetham — Group Chief Executive Officer

So thank you. Geographically, we have already made it clear for the next two, three years we expect that not going to be a very big change. We expect about 35, 65, broadly of our geographical mix between international revenue and Indian revenue. In terms of customers as we keep expanding our sectors and adding new customers, I expect that in the next two, three years, none of our customers would be more than 10%. So while we grow with each of these customers, but relatively the other growth is much higher, so which would mean that our dependency on one customer would keep coming down. So I expect that the biggest of our customers to be very close to a double-digit not more than that. In terms of product, as I said that you know overall if you look at it, our target is in by next three to four years we should reach that 40% of our revenue should come from non-auto and tech agnostic. It could be 25 [Phonetic], 15 [Phonetic] or it could be in 20 [Phonetic] 20 [Phonetic] but we have said that overall as a basket 40% of our revenue should come from non-auto and tech agnostic components and we are — I am quite confident the way our order book is shaping up. We would still be doing better in terms of if they offtake improves then this ratio will be much better.

In terms of our relationship with the customer as we strengthen our existing relationship with our customers we are also adding a lot of customers and that is one of our focus that while we keep adding new customers we would not lose our focus on our existing customers so we keep working tirelessly to make sure that our existing customers keep giving better share of business and add more products. So I expect that while we focus on the newer technologies, our bread-and-butter comprehend specifically connecting rod for passenger vehicle and commercial vehicle segment internationally it’s our target that overall we should reach on a medium term, about 10% of global share of business and we are working very tirelessly towards achieving that. So these are fundamentally how we are looking.

Ankit Kanodia — Smart Sync Services — Analyst

Thank you, thank you so much sir for the detailed answers. Just a follow-up on that. If you broadly assume that domestic and export market percentage would be broadly similar so, is it fair to assume that the EBITDA margin will also be on a similar range or do we have other levers through which we will see an uptick in margin going ahead?

B. R. Preetham — Group Chief Executive Officer

We expect that with better utilization we have always maintained that our EBITDA margin should be between 17% and 20% is what we say and as our utilization and recovery in the two wheeler sector happen we should be towards the better half of that range. So that is what we expect.

Ankit Kanodia — Smart Sync Services — Analyst

Thank you sir. Any particular long-term risk or any particular point which you will be most particular about when you, think of realizing these all long-term goals of sales target?

B. R. Preetham — Group Chief Executive Officer

No, as you keep accelerating the growth there are always challenges the company face and it’s nothing different to us also, we also go through the, same thing while we cater to large inflow of RFQs and large inflow of orders that are getting executed there is a stress on the entire human — all the manpower that we have especially on engineering. So we have been working on — have mentioned in my previous call also that we have been working on. Processes and systems as to how to better our this thing, because as the customer expectation the product lifecycles are coming down, development times are coming down, the customer expectations also become steeply increasing. So with all these things in mind we have been working on adding so that could be one of the challenges as to how effectively we can manage our engineering resources to cater to the increasing demand. As we diversify into different products and different sectors these challenges become more amplified. So the company is very well aware of it and we have put a structure in-place we are trying to mitigate that risk by working on succession, working on skill development of our various levels, we are quite confident of coming through it.

Ankit Kanodia — Smart Sync Services — Analyst

Sir, one last question. Thank you so much for answering my everything in detail. Just one last question on competition, how do you look at competition in this space and how are we positioned towards that? If you could give some color.

B. R. Preetham — Group Chief Executive Officer

So competition is definitely going to be there we are quite aware of this fact because as the market is progressing towards EVs especially in EV segment. There is price pressure, there is competition because the adjustable space is also limited. So Sansera we did fully-integrated facilities where we offer you know the entire solution from right from design, testing, forging, machining, heat treatment, special process as one-stop solution to our customers this gives us a slight leverage over the competition we are quite aware of it that we need to both domestically and internationally compete with very very competent companies who are equally competitive in terms of engineering abilities and cost competitiveness. So Sansera is also — we are also preparing ourselves as we try to be more engineering focused and more new technology focus. So we hope to keep outperforming our competition.

Ankit Kanodia — Smart Sync Services — Analyst

Thank you so much sir, that is it from my side. And all the best.

Operator

Thank you. The next question is from the line of Pranay Roop Chatterjee from BCNPL [Phonetic] please go-ahead.

Pranay Roop Chatterjee — BCNPL — Analyst

Hi good morning to everyone present. Am I audible?

B. R. Preetham — Group Chief Executive Officer

Yes.

Pranay Roop Chatterjee — BCNPL — Analyst

Yeah, so my first question is with regards to the xEV flash tech agnostic portfolio and I wanted to check three things here. Firstly, what other products that are driving bulk of the volumes and how does the product complexity compare with your core ICE products? That is one. Second, is how do the gross margins and contribution margins for these new products compare with your core ICE portfolio? And lastly how did you start and go about building a competency and actually signing clients because there are other ancillaries, whose majority of the revenues already come from. EV and tech agnostic segment and I believe they would have larger-scale and be more cost-competitive. So it’s interesting how quickly of transitioned to TEC and EV so if you could just talk about the competition and you know who are these competitors and how do you develop advantage over them?

B. R. Preetham — Group Chief Executive Officer

Praveen would you like to answer?

Praveen C — Chief Operating Officer

Yeah sure. I think the very interesting question here. How — how to look at the competition how to build orders and how to remain up. So we have been right from the beginning talking about our capabilities into precision components. And to everybody’s knowledge, EV still continues to have a lot of content out of the precision component. They will just stack the component category [Indecipherable] there are similar hi precision components in the segment. So our first choice has been to pick-up two spots. And what we see is that the customers the new as well as the fabless established numerous pretty well the new customers also have realized that we were very critical parts and we need to only pick-up those suppliers who handles capabilities right from engineering to implementation of those so we, have been able to continuously up those kind of orders and as we have been saying that our content per vehicle today is higher in the EVs out of similar [Indecipherable] components as compared to what have been getting.

That is one part of it, second is that we realized quite early that light weighting would be very important going-forward in order to have a higher might need or doesn’t seem. Energy Source which is battery and we certainly had our earlier Exposure into aluminum companies out of our aerospace business so we developed and William forging and that’s what exactly is the number two that’s lot of components are emerging and in fact transitioning over a period of time into aluminum forged impacts into the EV segment and just to give you slightly more update on thinking about this Aluminium is that while Aluminium die castings had been prevalent and in fact they had been quite a lot of capacity available in India. Aluminium forging is a different thing which is having a higher strength as compared to die-casting components. So therefore that is where we are into it and that is where we see that a lot of transition happening, not only domestically, but internationally also. So these two factors put together and our diversification and openings into getting into any other kind of precision category parts, I think has led to getting a lot of business and that is one the customers have been appreciating.

On the competition side I would say, I think Preetham did touch upon that earlier also that we have certain, very important edges particularly in terms of having our own engineering base and having our own machine building capabilities. These two put together and the fungibility that we have across our capex from our ICE to non-ICE businesses, I think all these put together we certainly think that we have a medal [Phonetic] here. We have been getting benefited by that.

B. R. Preetham — Group Chief Executive Officer

In terms of margins what you asked for. In the new category of components, in fact right from that time that — the thing that we have been mentioning that where Sansera belief is that we have three with very clear principles on which we take the business. One is it should be engineering centric, second one as it should be scalable and third one is we look at very closely the ROCE and EBITDA has to be around 20%. So that’s how we try and get into these components. So I don’t — while we say that we are getting into xEV components, but these are primarily precision engineered products so these are activity-based costed and these are these followed a similar pattern of costing what happens in the ICE segment as well. So it would not be very different to what our current existing margins are.

Pranay Roop Chatterjee — BCNPL — Analyst

Thanks a lot. That’s a very detailed answer and the second and the last thing I wanted to check is on the aerospace segment. You expect quite a strong pickup so if you could just help me understand firstly is it largely linked to Boeing’s production schedule? Is that your major client? And second is, who are your key competitors here and how strong is your visibility on the scale-up INR2 crores to 250 crores.

B. R. Preetham — Group Chief Executive Officer

We work with both Boeing and Airbus through their — Boeing directly and for Boeing and Airbus through their tire ones and tire two. And our visibility, see in aerospace industry since the raw-material ordering cycle is pretty long compared to because you need to have a visibility of almost one year because you are ordering cycle is also one year so we do have a clear visibility on or at least we get a fairly good visibility from our customers in terms of what they want for the next full-year and also we do have certain order book why or what we are working on, certain FAI’s that we have been working on. So all this put together, we do see that a good amount of recoveries on the cards because we do have a fair amount of sense on what is going to be built for the next one year in terms of our existing business and also what components are getting into production. As I say that, there is one is on commercial aerospace, but on defense also we are putting in a lot of focused effort and opportunities that are being created by Government of India and Atmanirbhar Bharat is also helping us to getting into various sectors where private sectors is catering too. So I can’t mention too much details into all those things. But then we are quite upbeat on defense programs coming through. So overall defense and — aerospace and defense as I said factor to Mr. Basu’s question that we are looking at and are reaching that markup to INR200 crores in all two to three year’s time.

Pranay Roop Chatterjee — BCNPL — Analyst

Great. Thanks a lot, I will join the queue.

Operator

Thank you. Ladies and gentlemen that’s the last question. I now hand the conference over to the management for the closing comments.

B. R. Preetham — Group Chief Executive Officer

Thank you very much for your patience and all the interest that is there. We really appreciate your interest in our business and I’m sure that you will have many more questions and we will be more than happy to answer any of your queries, either directly or through SDA so we would be more than happy so all the best and look for interacting with all of you in the future as well. Thank you very much.

Vikas Goel — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]