Tube Investments of India Ltd (TIINDIA) Q2 FY23 Earnings Concall Transcript

Tube Investments of India Ltd (NSE: TIINDIA) Q2 FY23 Earnings Concall dated Nov. 06, 2022

Corporate Participants:

Kalyan Kumar Paul — Managing Director of TI Clean Mobility Private Limited

Mukesh Ahuja — Managing Director

Vellayan Subbiah — Executive Vice Chairman

K Murali — Executive Vice President, TPI

AN Meyyappan — Chief Financial Officer

Analysts:

Anupam Gupta — IIFL Securities Limited — Analyst

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Abhishek Ghosh — DSP Mutual Fund — Analyst

Anika Mittal — Envest Research — Analyst

Nishit Jalan — Axis Capital — Analyst

Armaan Agarwal — Carnelian Capital — Analyst

Jeetendra Khatri — Tata AMC — Analyst

Sonal Gupta — L&T Mutual Fund — Analyst

Vinod Malviya — Union Mutual Fund — Analyst

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Prithvi — Unifi Capital — Analyst

Vipul Kumar Shah — Sumangal Investment — Analyst

Rajrishi — DCPN — Analyst

Raj Shah — Marcellus Investment Managers — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to the Q2 FY ’23 Earnings Conference Call of Tube Investments, hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand over the conference to Mr. Anupam Gupta from IIFL Securities Limited. Thank you, and, over to you, Mr. Gupta.

Anupam Gupta — IIFL Securities Limited — Analyst

Yeah, thanks, Michelle, and welcome everyone to Tube Investments’ 2Q ’23 conference call.

From the management, we have Mr. Vellayan Subbiah, the Executive Vice Chairman; Mr. Arun Murugappan, who will join us in a bit, who’s the Chairman; Mr. Mukesh Ahuja, the Managing Director, he’s already connected; Mr. Meyyappan, who has taken over as the CFO for the company; Mr. KR Srinivasan, who heads the Metal Formed business; and Mr. KK Paul heading the TI Cycles business. We also have Mr. Murali, who heads the Engineering business for TI, and a few other members.

I’ll hand over to the management for the opening comments, post which we can have a Q&A. Over to the management.

Mukesh Ahuja — Managing Director

Yeah. Thank you, Anupam. Good morning everybody. Mukesh Ahuja this side. Just to share you the commentary of Q2. The Board of Directors of Tube Investments of India Limited met on 4th November and approved the financial results as follows.

Standalone results for the quarter, revenue in Q2 was at INR1,906 crores compared to INR1,667 crores of the same period previous year. PBT, after exceptional item was at INR202 crores as against INR164 crores in the same period previous year. Exceptional item of INR23.45 crores represents impairment provision in respect of investments made in Sri Lankan subsidiaries due to the current market condition and ongoing economic crisis. ROIC annualized at 56% for the quarter ended 30th September 2022 compared with 48% in the previous year same period. Free cash flow for the quarter was at INR119 crores.

Details of the businesses. Engineering, the revenue for the quarter, was at INR1,192 crores compared with INR1,027 crores in the corresponding quarter of the previous year. Profit before interest and tax for the quarter was at INR165 crores against INR102 crores in the corresponding quarter of the, previous year.

Metal Formed products. The revenue for the quarter was at INR371 crores compared with INR328 crores in the corresponding quarter of the previous year. Profit before interest and tax for the quarter was at INR48 crores against INR39 crores in the corresponding [Phonetic] quarter of the previous year.

Mobility division. The division has registered revenue of INR226 crores during the quarter compared with INR262 crores in the corresponding quarter of the previous year. Profit before interest and tax for the quarter was at INR10 crores compared to the INR20 crores in the corresponding quarter of the previous year.

And Other businesses, the revenue for the quarter was at INR188 crores compared to INR120 crores in the corresponding quarter of the previous year. Profit before interest and tax for the quarter was at INR8 crores against INR12 crores in the corresponding quarter of the previous year.

During the quarter, the company acquired a 76% equity stake in Moshine Electronics Private Limited on 23rd September, 2022. Moshine is a company engaged in manufacturing of camera modules for mobile phones. As a part of its strategy to pursue opportunities in clean mobility, the company’s subsidiary TI Clean Mobility Private Limited acquired a 65.2% equity stake in IPLT on 21st September, 2022. IPLT is a manufacturer of electric heavy commercial vehicles.

Consolidated results. TII’s consolidated revenue for the quarter was INR3,789 crores as against INR3,263 crores in the corresponding quarter of the previous year. The profit before associate/joint venture, exceptional items and tax for the quarter was at INR439 crores as against INR294 crores in the corresponding quarter of the previous year.

CG Power and Industrial Solutions, a subsidiary where company holds 58.05% stake, registered a consolidated revenue of INR1,707 crores during the quarter as against INR1,469 crores in the corresponding quarter of the previous year. Profit before tax for the quarter was at INR241 crores as against INR144 crores in the corresponding quarter of previous year.

Shanthi Gears, a subsidiary company in the Gears Business, in which company holds 70.47% stake, registered revenue of INR109 crores during the quarter as against INR72 crores in the corresponding quarter of the previous year. Profit before tax for the quarter was INR23 crores as against INR11 crores in the corresponding quarter of previous year.

Commenting on the financial results, Mr. M.A.M Arunachalam, known as Mr. Arun Murugappan, Chairman, Tube Investments of India. The results of the company reflect the stability of its businesses delivering strong results in the wake of continuing economic challenges, viz. high inflation and looming recession globally. Engineering, Metal Forming Products and Industrial chains divisions performed well in the domestic market but faced challenges in its exports business. Mobility division had lower profits due to shrinking of volumes in the industry.

The company expanded its footprint in the clean mobility ventures through acquisition of IPLT, a manufacturer of electric heavy commercial vehicles trucks through TI Clean Mobility Private Limited. The quarter also witnessed the commercial launch of the electric three-wheeler in September 2022.

The performance of the subsidiaries CG Power and Industrial Solutions Ltd and Shanthi Gears has been consistent delivering strong performance and

Profitability across the segments. Thank you.

Vellayan Subbiah — Executive Vice Chairman

Yes. With that, we’ll be happy to turn it over and take Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Hi, sir. Hi, couple of questions from my side. One is on the Engineering business, are we seeing any moderation trend on the export side, like many of our peers are, this thing or exports continue to do very well?

Mukesh Ahuja — Managing Director

Yeah, Murali, you would like to take this question.

K Murali — Executive Vice President, TPI

Yeah. On the export side, because of subdued demand and the stock pile up, it is — all the customers are trying to mitigate the stock and they are correcting the stock and we hope, in the coming quarters, the demand will pick up and revert back once the stock has come to a normal level.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay, okay. And also at the broader Engineering and Metal Formed business, have we started to see moderation in commodity prices for us and in turn passthrough of that happening to customers or that is — we are yet to see that phenomena?

K Murali — Executive Vice President, TPI

Mukesh, you would like to answer?

Mukesh Ahuja — Managing Director

Yes, commodity, like you rightly said, commodity prices are softening and as you are already aware, we have arrangement with all the customers on the increase as well as decrease. We have fair amount of agreements in place. So that will be concluded accordingly.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay. So this quarter we would have seen some moderation in growth because of commodity prices passthrough.

Mukesh Ahuja — Managing Director

Those commodity prices softening trend has just started and we are yet to see the phenomena of price reductions taking place. I’m sure maybe coming quarters, we’ll see that and then we’ll settle it with the customers as well as suppliers accordingly.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Got it. And, thirdly, with respect to the export business, given that the rupee has been depreciating, are we seeing benefit of that and that is the reason why our margins in Engineering business and Metal Formed business have expanded materially? Is that the only — or the major driver of margin expansion?

Mukesh Ahuja — Managing Director

Margin expansion in Engineering businesses, there was a pending settlement with the customers as well as suppliers, so one-time settlement has happened for this quarter and we see that maybe margins have gone up in the Engineering business as well as MFPB. But on steady-state basis, whatever margins we were taking, that will continue in future also.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay. And was there any benefit of currency as well in this quarter or that will again come in coming quarters?

Vellayan Subbiah — Executive Vice Chairman

We couldn’t hear you, Jinesh.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Sorry, was there any benefit of weaker rupee in this quarter or you expect that to come in coming quarter?

Mukesh Ahuja — Managing Director

So that is surely going to — like Murali said that, weakening rupee is going to support exports going forward. So we are also in discussion with all the OEMs and distributors in the exports business. And going forward, we expect the businesses should improve in exports.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Got it. Thanks, I’ll fall back in queue.

Operator

Thank you. We have the. Next question from the line of Abhishek Ghosh from DSP Mutual Fund. Please go ahead.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Yeah. Hi, sir, thanks for the opportunity. Sir, just couple of questions. Is the entire gross margin improvement that one has seen in the current quarter is due to that one-time settlement or is there some amount of STE prices have corrected, there’s some benefit of that as well?

AN Meyyappan — Chief Financial Officer

So it’s a combination of one-time settlement as well as we include the share of business as well as the weakening rupee. It’s a combination of all and we are confident of a steady-state, whatever we are maintaining, that will continue.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay, okay, okay. And sir, the other thing is, steel price, we have seen much sharper decline, while the commensurate revenues have been — if one looks at on a sequential basis, have seen very marginal decline. So if you can help us a bit, volume growth that will be helpful, sir?

Mukesh Ahuja — Managing Director

We have, let’s say, volume growth of about 20% in Engineering division and about 12% in MFP, and in Cycle business there is a decline of about 10% [Phonetic]. These were the major divisions.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay, okay, got it. And sir just one last question. In terms of, if we look at the overall cash flow as well as consol is concerned, standalone you’re clocking almost about INR500 crores, INR600 crores of cash flow at this point in time. And on a consol basis, the cash flow is in excess of INR1,000-odd crores. So how should we look at the capital allocation perspective from here on, given the cash flow generation is very strong and, given that all those adversities in terms of crisis and other things seems to be behind? So how should we look at going forward when there is so much of cash flow generation, how should one look at the capital allocation, if you can help us with that? Thank you.

Vellayan Subbiah — Executive Vice Chairman

So, Abhishek, I think kind of directionally we’ve been hearing and kind of been indicating how we are kind of using this, nothing is changing with that approach, right? See, broadly when you look at the consol cash flow, I mean, like, basically the cash flow, you should still see TI and CG as two independent entities. Obviously there will — I mean, I don’t want to make any forward-looking statements, but kind of both companies have a dividend policy. So the way to look at TI is that TI has its on cash flow plus any dividends received from CG, right? And then what we’ve kind of articulated in CG is that CG — sorry, dividends received from CG and Shanthi, and what we’ve articulated is that CG might start pursuing its own CG 1, CG 2, CG 3 at some point in time, right? But from — so then to kind of — then you have an amount that comes to TI, which is basically TI’s own free cash plus the dividends received from those two entities. Using that, we’ve been articulate about how we’re deploying that free cash and that is to kind of drive the growth in the new ventures, either be it — I mean now it’s shifted a bit more to TI 2, whether it kind of — we kind of — like, we’ve been kind of fairly active in the electric vehicle space, we’ve announced two or three sectors that we’re quite interested in. That’s where most of the capital will continue to get deployed and the principles kind of continue to be the same principles that we’ve articulated since the last three years, in terms of how we will deploy that cash and then kind of the amount of [Technical Issues] taken. Nothing is changing from that perspective.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay. Sir, just one thing…

Vellayan Subbiah — Executive Vice Chairman

We’re deploying the capital basically towards these new businesses and the growth in the new businesses.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Fair. So sir as you have seen large part of the capital at least in the TI 2 has now gone into EV in last one year or so, but you also made some small acquisitions in electronics and medical. So incrementally from hereon, should we expect the thrust to move towards those two new sectors as well? Is that a right understanding just looking at the opportunities available?

Vellayan Subbiah — Executive Vice Chairman

Yeah. I think that is fair. Yeah, I think that’s fair.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay. Okay, sir. I have few more questions. I’ll come back in the queue. Thank you so much.

Vellayan Subbiah — Executive Vice Chairman

Okay. Thanks, Abhishek.

Operator

Thank you. We have the next question from the line of Anika Mittal [Phonetic] from Envest [Phonetic] Research. Please go ahead.

Anika Mittal — Envest Research — Analyst

Sir, is there any update regarding acquisitions according to medical device update?

Vellayan Subbiah — Executive Vice Chairman

Yeah, so like we’ve said, we’ll only kind of discuss it — I mean there are potential kind of targets in the pipeline in that business. We’ll only discuss it once we have something definitive to talk about.

Anika Mittal — Envest Research — Analyst

Thank you.

Operator

Thank you. We have the next question from the line of Nishit Jalan from Axis Capital. Please go ahead.

Nishit Jalan — Axis Capital — Analyst

Yeah. Hi, sir, thank you for the opportunity. I have two questions.

Vellayan Subbiah — Executive Vice Chairman

Hi.

Nishit Jalan — Axis Capital — Analyst

Firstly on the new EV businesses, if you can give us an update in terms of the timeline of launches that we are looking at, specially on the tractor and the truck side. And what kind of response you have got four three-wheelers — electric three-wheelers that we have launched and any details in terms of our distribution network, [Indecipherable] capacity, aftermarket production that you are looking at? So first question is a broader question on the EV portfolio that we are looking to create. Second question is a follow-up, on the Engineering segment, you mentioned that there was a one-time settlement which was done. So just wanted to understand, so there will be a lot of amount which will pertain to the previous quarter’s pricing because that would have come in this quarter also. So just wanted to understand what is that number so that we can understand what is the underlying profitability for this quarter which may be more sustainable. Thank you so much.

Vellayan Subbiah — Executive Vice Chairman

Okay, so first on EV, to just give you a sense, like the response in three-wheeler has been very positive. I think kind of a lot of good feedback, both on traditional and on social media channels. So I think the proof of the pudding is really kind of what’s going to happen in sales and profitability. So that we will start because December, basically we will start selling vehicles in the market. And so just your question on distribution, we started off with 40 distributors — with 40 dealers. And that is we want to keep it tight in the beginning, we’ve had tremendous interest in potential new dealerships but we are basically going to keep it tight in the beginning, kind of drive our sales through 40 dealerships and then look at a broader expansion, [Indecipherable] and wait and ensuring that we get the model right with the first 40 dealerships. So that is on three-wheeler.

The second launch will actually be on the heavy commercial vehicles where basically we will start selling limited number of trucks, maybe like 30 a month or so. In the next — I would say, actually starting again in December, we should start selling about between 30 and 50 trucks a month. There also there has been tremendous response in terms of the interest in the product. There it looks like we will be a bit more supply-constrained initially. We are working on a new facility that we hope to be ready in first quarter of 2024 — I mean, financial year 2024, I mean. The — and therefore we might have a more formal launch in the final quarter of this year once we know that we’re going to be able to produce at higher volume. That is for this thing.

And then tractor, we’re really anticipating kind of a launch, either in the last quarter this year — of the smallest tractor, it’s a kind of — we’ll basically start off with a, what I would think of as a very small tractor which has very niche use cases, right? And that might launch either in the last quarter of — I mean it might push to first quarter of 2024 again. So those — that’s when I’m kind of basically looking at launches for these — financial year 2024. And which will basically mean April-May-June, it might be [Technical Issues] but — and so that’s basically kind of what we’re looking at for timeline. That was on electric.

You also had a question on — sorry, Engineering. [Speech Overlap] We already answered that question basically. I think you are asking more specifically for what is an amount that you can use as PBT to sales for Engineering. I don’t think we’ll give guidance to that specific level. In general, like we’ve told you, we’ve told you where we are going on each of the businesses, right, which is, like, we want to push them over a three-year timeframe to a higher number than we are today. So some of that evidence you’re seeing playing out but there’s still more work to be done there.

Nishit Jalan — Axis Capital — Analyst

Sir, I was not asking for a specific guidance. I was just asking for this quarter what [Technical Issues]

Vellayan Subbiah — Executive Vice Chairman

Yeah, you’re asking exactly how much is attributable to the one-time settlement, which is, in a sense, asking the same thing, right? That’s why I’m saying we’re not going to give kind of exact number, saying, yes, how much is kind of due to the one-time settlement.

AN Meyyappan — Chief Financial Officer

I’ve already mentioned that it is a function — not function of only customers and suppliers settlement, it’s a combination of, let’s say, rupee weakening and we have gained some share of business and some mix improvement. So it’s a combination of three, four things which has resulted into this. Yes, we updated in last call.

Operator

Thank you. Ladies and gentlemen, as the line of the current participant has got disconnected, we move on to the next participant. And the question is from the line of Rajrishi [Phonetic] from DCPN [Phonetic]. Please go ahead. Mr. Rajrishi, I have unmuted your line. Kindly proceed with your question. Mr. Rajrishi, we are not able to hear you, kindly use your handset.

As the current participant is not answering, we move on to the next participant. We have the line of Mr. Nishit Jalan, again connected. Mr. Jalan, please proceed with your question.

Nishit Jalan — Axis Capital — Analyst

Yeah. Sorry, sir, I got disconnected, and I know you must have answered the question. So only point I was trying to ask was, what was the number in this quarter in terms of pricing, just that we got from previous quarter? I was not asking for any forward guidance. So that is the only point I was asking if you can answer. And secondly. I have a follow-up on electric three-wheeler launch. Like you talked about electric trucks, we are looking at 30 to 50 units per month. Any such target or what kind of numbers would you be looking at electric three-wheelers? And. I would assume that initially you are starting with the Southern states, so all the dealers — party dealers are pertaining to Southern states. Is that understanding correct?

Vellayan Subbiah — Executive Vice Chairman

So again we won’t give specific guidance on what we are looking at for electric three-wheelers. Basically, this is going to be a very — it’s a very different product from the chop. And so it depends on what kind of consumer demand we see. To your question on which states, I think you asked was the second part of your question, Nishit. Paul, can you just kind of answer which states we’re going to initially?

Kalyan Kumar Paul — Managing Director of TI Clean Mobility Private Limited

I think initially we’re going for [Technical Issues], Tamil Nadu, Kerala, AP and Karnataka [Phonetic]. These are the four states that we are planning and we are [Technical Issues] move into the first-quarter of next year, then we will be looking at different target states as we move forward.

Vellayan Subbiah — Executive Vice Chairman

So, Nishit, hopefully that answers both your questions.

Nishit Jalan — Axis Capital — Analyst

Yes, thank you so much.

Vellayan Subbiah — Executive Vice Chairman

Okay, thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Armaan [Phonetic] Agarwal from Carnelian Capital. Please go ahead.

Armaan Agarwal — Carnelian Capital — Analyst

Good morning, sir. Thanks for the opportunity. Just one question from my side. On this — if I see this Mobility segment, so between a standalone and consol statement, there is a charge of INR24 crores. So just wanted to understand what this is relating to. Is it relating to our EV initiatives that we are spending right now? And just an idea like how this could move in future?

Vellayan Subbiah — Executive Vice Chairman

Yeah, so we talked about that, that is for the Sri Lankan subsidiaries.

Armaan Agarwal — Carnelian Capital — Analyst

I’m not talking about the extraordinary charge, I’m talking about the Mobility business.

Vellayan Subbiah — Executive Vice Chairman

Oh the Mobility? Are you talking about Clean Mobility or you’re talking…

AN Meyyappan — Chief Financial Officer

Overall mobility?

Armaan Agarwal — Carnelian Capital — Analyst

Sir, if I see our standalone statement, you have…

Vellayan Subbiah — Executive Vice Chairman

Okay, yeah, okay one second, Meyyappan will answer your question.

AN Meyyappan — Chief Financial Officer

Yeah, this is Meyyappan. Yes, actually I think you are asking about the Mobility segment profitability in channel and the consolidated why it is different. Okay, that includes the TICMPL also — TI Clean Mobility. TI Clean Mobility has incurred a loss in this quarter, that’s why that got adjusted in this Mobility segment. That’s the difference between them.

Armaan Agarwal — Carnelian Capital — Analyst

Okay. And so this is related to the Sri Lanka business, right, the consol chart?

Vellayan Subbiah — Executive Vice Chairman

Okay, I’ll tell you what, I think to kind of — I understand where your confusion is coming from, Armaan. So what we will look at is, we look at kind of whether we separate out Mobility and Clean Mobility into two kind of separate kind of tracks, because that might create confusion. I think that’s fair. We’ll kind of think through that in other quarters.

Armaan Agarwal — Carnelian Capital — Analyst

Yeah, okay. Thank you for that. This was my question, thank you.

Operator

Thank you. We have the next question from the line of Jeetendra Khatri from Tata AMC. Please go ahead.

Jeetendra Khatri — Tata AMC — Analyst

Yeah, sir, can you hear me?

Operator

Please proceed.

Jeetendra Khatri — Tata AMC — Analyst

Yeah, yeah, thank you. Sir, I wanted to know what would be your possible market share in some of the key large divisions of business. If you can share that? Like tube products or auto chains or fine blanking?

Vellayan Subbiah — Executive Vice Chairman

Yeah, we don’t — we have not shared kind of specific market share data in anything. I mean we have fairly good market share positions in our businesses but we’ll not share specific numbers in anything.

Jeetendra Khatri — Tata AMC — Analyst

Okay, okay, thank you.

Vellayan Subbiah — Executive Vice Chairman

Thank you.

Operator

Thank you. We have the next question from the line of Sonal Gupta from L&T Mutual Fund. Please go ahead.

Sonal Gupta — L&T Mutual Fund — Analyst

Yeah, hi, good morning and thanks for taking my question. So just wanted to understand in terms of the EV, on the EV side, I mean given that we’ve seen a very sharp spike in battery commodity prices and they seem to be still going up, I mean how you’re looking at the sourcing and procurement process and overall does that change the equation and economics for you?

Vellayan Subbiah — Executive Vice Chairman

Yeah. I think that’s a great question, right? Basically EV batteries that used to be 40% is now 50% is kind of the cost of these vehicles pretty much. And so that’s actually where we’ve been spending a fair amount of time. Right now, like you probably know, most of the cells kind of end up coming from China, though there are more expensive manufacturers in Japan and Korea as well. So what we’re kind of thinking through there is more of a longer-term strategy in battery whether we can — whether we have to — clearly the cells is not a business that we are kind of interested in. And I think the track for cells is going to be that currently all the cells are getting imported in India. With the PLI that has gotten announced and Reliance and a bunch of others have won that PLI, it looks like there will be cell manufacturing capacity that comes to India in the long-term and we’re beginning to kind of work with some of those partners as well, so that they can be long-term suppliers of cells for us.

Then beyond the cells, we’ve got packing [Phonetic] and the BMS. And those are areas where currently we are outsourcing, but we do believe that we will need to develop capabilities over time. So that’s something that we’ve started investing in from an R&D perspective that we understand what the capability to bring some of — because definitely that’s going to drive compared — I think as far as — like you correctly said, a lot of whether guys win in EV or not is going to be driven by the battery side of thing, if battery is 50% of the cost, it’s going to drive huge competitive advantage.

Then if you break down the battery strategy, as far as we’re concerned and how effectively can we source the cell, which is one area we’re very focused on, both basically by developing a lot more capability for it in China and — currently in China and then obviously kind of that — have to transition to India over the medium-term. And then kind of working on the technology which we currently outsource for packing and for BMS and whether we bring those two in-house, I think is a valid question, that we will be able to answer more articulately for each of the product lines within the next, I would say, three to six months.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it, got it. No, so what I was trying to understand is that, given that initially — I mean, I do understand that I mean like getting into cell manufacturing is a completely different ballgame and anyway that’s not — that was not my question. I’m just trying to understand, like, given the increasing price of cells, do we — I mean, like, is that changing your business plan a bit or you still see the TCO is sort of very favorable?

Vellayan Subbiah — Executive Vice Chairman

There is no change in business plan because commodity prices are increasing. I think that we’ve continued that it would happen through the cycle but if you actually look at it, at the same point that commodity prices are increasing, kind of, fuel prices are increasing as well, right? So actually when you begin to look at this thing from a TCO perspective, there’s not too much of a difference in the math. If you were planning on kind of doing something at — cost of diesel of INR80 and now it’s INR100, obviously that kind of changes your benefit that you get from a transition to EV as well. So I would say that it’s — you can’t just look at commodity prices for batteries in isolation. And as a result, it doesn’t mean kind of any significant changes in our plans.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. And just related to that — sorry, I’m not sure if there is any FAME subsidy for like heavy commercial vehicle to attract [Indecipherable]. So…

Vellayan Subbiah — Executive Vice Chairman

Basically, these are conversations we have started with the government. It’s kind of curious to us also what is this FAME for heavy commercial vehicles. We are in active conversations with the government on this, right? Because obviously, the government also kind of agrees that — I think that the government agrees in that is a very, very broad-based statement, but I’m just saying, kind of, there’s general openness to discussions on whether there should be FAME for heavy commercial vehicles and tractors, because both of those conversations we are having with the government right now.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. And on the three-wheelers, you’ll be — I’m not sure — you will be compliant and you will get something in subsidy, right?

Vellayan Subbiah — Executive Vice Chairman

Yes, for the three-wheeler we will get them.

Sonal Gupta — L&T Mutual Fund — Analyst

That’s about, what, INR15,000 per kilowatt or I mean that’s [Technical Issues] INR10,000…

Vellayan Subbiah — Executive Vice Chairman

I thought it was INR10,000 per kilowatt. Is it now INR15,000 per kilowatt?

Sonal Gupta — L&T Mutual Fund — Analyst

No, no, that’s for two-wheelers, sorry, my bad.

Vellayan Subbiah — Executive Vice Chairman

Yeah, it’s INR10,000 per kilowatt.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. Great, thank you so much. Yeah.

Vellayan Subbiah — Executive Vice Chairman

All right, super.

Operator

We have the next question from the line of Vinod Malviya from Union Mutual Fund. Please go ahead.

Vinod Malviya — Union Mutual Fund — Analyst

Thank you for taking my questions, sir. So I just had one question. You have given a very good roadmap for your foray into the electric vehicle side. Can you also give a commit — I mean what kind of capital commitment you are planning to make on the three-wheeler electric — sized up we have for the trucks and the tractor side for the next one year?

Vellayan Subbiah — Executive Vice Chairman

Yeah, so, I think the capital commitments we’ve kind of articulated towards the first go around was, right, so for three-wheeler, I’d say, quite a bit of the capital has already been incurred. So I think on specific numbers, we might give better guidance in the next three months but a large part of the capital has already gotten incurred for both three-wheelers and for tractors. So there is — factory build-out, some of it is required for tractors. And for three-wheelers, the factory build-out, obviously, is complete. And we’re starting production kind of fairly quickly. But we’ll give you more specific numbers in the next earnings call.

Vinod Malviya — Union Mutual Fund — Analyst

Okay, and on the truck side?

Vellayan Subbiah — Executive Vice Chairman

That’s what I’m saying. The trucks, the factory build-out — that’s the first factory we’re building out. So we’ll articulate a clearer strategy in terms of what we’re doing with the first factory, how much capacity we are going to build there and how that capacity build is going to look over time in the next earnings call.

Vinod Malviya — Union Mutual Fund — Analyst

Okay. Thank you, sir. That’s all from my side.

Operator

Thank you. We have the next question from the line of Abhishek Ghosh from DSP Mutual Fund. That would be a follow-up question. Please go ahead.

Vellayan Subbiah — Executive Vice Chairman

Hi, Abhishek.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Yeah, hi, sir, thank you so much for the opportunity again. Sir, just couple of things, just read-through from the annual report. You’ve mentioned that you are looking at products for import substitution and expansion of geographies. So just was curious to understand this import substitution you’re referring to the auto segment itself or is it like across multiple sectors. How should one look at it just to understand the market size opportunity from that perspective?

Mukesh Ahuja — Managing Director

Basically import substitution [Technical Issues] for Engineering division in the tubes as well as CRS’ [Phonetic] business because we have studied and we find that lot of special cells as well as some tube segments are getting fully imported in the country. So we are working on how to substitute that particularly in TI 1.

Vellayan Subbiah — Executive Vice Chairman

And the broader thing on import substitution has also been most of the TI 2 strategy is driven by that, right? We take medical, we take electronics, all of these things. That whole strategy is driven by these kinds of things only.

Abhishek Ghosh — DSP Mutual Fund — Analyst

I was trying to understand, is it only related to that or is it beyond that also. Is it more related to the current import that you already do in TI 1, so that’s helpful.

Vellayan Subbiah — Executive Vice Chairman

That’s what I said, right? As Mukesh said, it is TI 1 also. So everybody has been reaching for the same thing.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Correct. That’s clear. Sir, the other thing is, if you look at broadly, again in the Annual Report broadly what we understand is you’ve put broadly three to four newer factories both in Engineering division and the Mobility division. But TI 1 seems to be coming back in terms of overall volume growth, now things having stabilized. Engineering division is already at 20% of exports. So you think at some point the TI 1 capex will also be — have to be ramped up significantly? Is there a thought or strategy in mind?

Vellayan Subbiah — Executive Vice Chairman

Abhishek, I don’t know if the problem’s with us, but we seem to be kind of [Speech Overlap].

Mukesh Ahuja — Managing Director

We lost you. we lost the last…

Vellayan Subbiah — Executive Vice Chairman

There seems to be a problem here.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Hello, sorry, am I not audible?

Mukesh Ahuja — Managing Director

We lost the last part of the question, please?

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay, so where I was coming from, sir, that, you’ve put about I think three to four newer factories or in both in terms of brownfield and greenfield in the last one, one and a half year and that should drive some amount of growth. But now I think that TI 1 seems to be stabilizing well because auto numbers are coming up well, your export piece is doing well, Engineering you’re almost doing 20% of exports now which was sub-10% few years back. So you think the TI 1 capex also needs to be increased from here on, was my question. Till now we were more focused on…

Vellayan Subbiah — Executive Vice Chairman

Yeah. So Abhishek, yes, TI 1 capex is going up. But when we think of the free cash flow generating, that free cash is after TI 1 is incurred in capex, right? So we always think of the free cash at the company level. We put away the fact that this much is required to drive the growth in TI 1 itself. And that is already included in kind of the cash flow the company has to generate. So Engineering, for example, has to generate that free cash after investing in the capex that’s required for its own good.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay, okay. So and do you think — you don’t think there is a substantial –whatever they will generate extra cash flow will keep flowing back into the business. That’s the way you are looking at each SBU?

Vellayan Subbiah — Executive Vice Chairman

Correct.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Okay. And sir, just one last thing if you can help us understand with the status of the lead program which you have started. Have you already started to see benefits of that in the numbers or going forward? Just some thoughts there will be helpful, sir. Thanks.

Mukesh Ahuja — Managing Director

Yes, we started the journey about probably, let’s say, nine months back and we are able to see the initial benefits cropping up but I — we feel, as a company, it’s a long way to go because it’s at a phase which is — we should feel about three years [Indecipherable] which is basically a cultural change and how do we push down the responsibility at the last level in the organization by becoming more and more lean in terms of the way we operate. So the journey is continuing but initial benefit has already started flowing in which is reflected in the results also.

Abhishek Ghosh — DSP Mutual Fund — Analyst

Great. Thank you so much for answering my questions. And wish you all the best.

Vellayan Subbiah — Executive Vice Chairman

Thanks, Abhishek.

Operator

Thank you. We have the next question from the line of Niket from Motilal Oswal AMC. Please go ahead.

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Yeah, thanks for the opportunity. Hi, thanks for the opportunity. I just joined a bit late so I’m not — hi, Vellayan. So just two, three questions. One is if you can just talk a bit on the financing part for the EV vehicles. How will that ecosystem really work for all the three verticals, which is tractor [Technical Issues]

Vellayan Subbiah — Executive Vice Chairman

Yeah. Okay, Niket, so thanks for your question. Sorry, did you have more to the question, Niket?

Operator

Sorry to inform you, sir, the line has got disconnected for Mr. Niket. If he gets connected again, I’ll take him in the queue, sir. We’ll move on to the next participant. The name is Mr. Prithvi from Unifi Capital. Please go ahead.

Prithvi — Unifi Capital — Analyst

Sir, I just have couple of questions. In the first question, on the EV side, at what revenue level will the company reach breakeven?

Vellayan Subbiah — Executive Vice Chairman

EV. So I would think of it as kind of each of the individual businesses will start breaking even at different points in time. I would think that we’ve got to get to — so obviously kind of — I think the tractor is a bit kind of difficult to predict right now. But trucks, I would think that it will be just a bit over kind of a INR1,000 crores a year is where trucks would breakeven. And for the three-wheelers, yeah, I think the number could be similar, kind of, I think somewhere in the INR1,000 crores area.

Prithvi — Unifi Capital — Analyst

Okay, that’s helpful. And just on your new segments, electronic devices or medical equipment that company is planning to enter, say, let’s take a five-year view, any rough guidance on how much these new segments can be at consol revenue level?

Vellayan Subbiah — Executive Vice Chairman

I don’t — I think it’s too — it doesn’t make sense to give projections kind of on a five-year view. First, let’s start the businesses. We don’t want to put undue pressure on those businesses also to kind of build an expectation. We have some ingoing hypothesis but we don’t want to give any guidance on what that could be. First, let the businesses start, then we’ll look at it.

Prithvi — Unifi Capital — Analyst

Okay, sir, thanks. Thanks a lot.

Vellayan Subbiah — Executive Vice Chairman

Thank you.

Operator

Thank you. We have the next question from the line of Anupam Gupta from IIFL Securities Limited. Please go ahead.

Vellayan Subbiah — Executive Vice Chairman

Hi, Anupam.

Anupam Gupta — IIFL Securities Limited — Analyst

Yeah, hi, Vellayan. Just a few questions…

Operator

I’m sorry to interrupt, Mr. Gupta, you’re sounding too distant.

Anupam Gupta — IIFL Securities Limited — Analyst

Yeah. I hope this is better?

Operator

Yes, yes.

Vellayan Subbiah — Executive Vice Chairman

Yeah.

Anupam Gupta — IIFL Securities Limited — Analyst

Yeah. So firstly, if I see Engineering and Metal Formed products business in this quarter, Engineering saw a Q-on-Q decline whereas Metal Formed saw a Q-on-Q improvement and I think there was some PV [Phonetic] obviously which played a role. But have you seen railways kicking-in in this quarter or is there still some time that railways will come up for you in Metal Formed?

Mukesh Ahuja — Managing Director

Anupam, it’s yet to kick in. Your observation is right. In coming quarters we are expecting that’ll kick in.

Anupam Gupta — IIFL Securities Limited — Analyst

Okay, I understand. Secondly, Vellayan, can you talk about what’s happening on the optic lens business, what’s the progress there and what sort of results have come out from the initial testing which you were doing?

Vellayan Subbiah — Executive Vice Chairman

I would still say it’s slow, Anupam. It’s slower than we expected. We have started basically — now we are working on — little bit of — first customers have basically kind of have started production. We’ve got, I would say, four out of six processes validated. So we’re still kind of validating a couple of more processes before we can start scaling out any production with them. Clearly, the learning curve in the business is higher than what we expected it to be, but we’re still on it. I would say that — my sense is it’s taking more time than we expected.

Anupam Gupta — IIFL Securities Limited — Analyst

Okay. And just continuing there, is there any way that this can be integrated with the Moshine thing which you have acquired? Is there any sort of integration possible there?

Vellayan Subbiah — Executive Vice Chairman

So in a sense, like, management and leadership-wise, yes, there will be integration but in terms of the operations like basically it’s two very different things right? So kind of these are glass lenses, Moshine predominantly is for the mobile phones so they use plastic lenses. And what we will — so that’s the first thing, right, so kind of it’s not like this product, the output of this product goes into Moshine, right? So that’s not the case because these are glass and that’s plastic. And the second is that, over time, there can be integration that will kind of happen but I don’t think that that’s kind of anything in the near-term — next — like a year or two, that’s not going to happen.

Anupam Gupta — IIFL Securities Limited — Analyst

I understand. And just one last question on the heavy commercial vehicles. So in the sense that you are — since you will be very close to launching, how does your product compare with a similar ICE product, let’s say, in terms of tonnages and distance and — not distance, tonnages basically, how will it compare in terms of pricing and other features? And secondly, do you see significant competition also coming in, in the EV side? Are you seeing some sort of testing already at homologation stage by other players?

Vellayan Subbiah — Executive Vice Chairman

So in terms of your second question, as far as our understanding is that there does not seem to be too much that’s at homologation stage right now, especially on the very heavy trucks. We cannot see too much of that there. And the second question in terms of — see basically, you will have to look at it at a TCO — from a TCO perspective, right, because the math is going to be — we’re obviously going to be much more expensive than the ICE stuff with a similar tonnage. So — the math is all going to be driven by TCO and I would just say from TCO, the math is fairly compelling as far as we can see. And initial conversations with customers also, they seem to agree. So it’s going to be driven more by TCO discussion. I don’t want to get into kind of what will the product pricing be at this stage, but obviously it’s just kind of suffice it to say that it’s going to be significantly higher than the ICE.

Anupam Gupta — IIFL Securities Limited — Analyst

Sure, okay. Okay, that’s helpful. That’s all from my side, thank you.

Vellayan Subbiah — Executive Vice Chairman

Yeah. Thanks.

Operator

Thank you. We have the next question from the line of Vipul Kumar Shah from Sumangal Investments. Please go ahead.

Vipul Kumar Shah — Sumangal Investment — Analyst

Hi, sir. In the truck business, we’ll be mostly in the medium and heavy trucks only or we’ll be introducing entire range of ICV and LCV also?

Vellayan Subbiah — Executive Vice Chairman

The stated strategy at this point is that we’re in medium and heavy commercial vehicles.

Vipul Kumar Shah — Sumangal Investment — Analyst

Okay, okay, sir. Thank you.

Vellayan Subbiah — Executive Vice Chairman

Thank you.

Operator

Thank you. We have a follow-up question from the line of Rajrishi from DCPN. Please go ahead.

Rajrishi — DCPN — Analyst

Yeah, hello?

Vellayan Subbiah — Executive Vice Chairman

Yeah, we’re here.

Rajrishi — DCPN — Analyst

Am I audible?

Operator

Please proceed, Mr. Rajrishi.

Rajrishi — DCPN — Analyst

Yeah, hi. Just wanted to ask, you’ve done a fantastic job with the acquisition of CG Power and the kind of opportunities that’s perceived in electronics, mobiles and medical devices, etc., which you have also elaborated about. Like what I understand is you issued the shares to investors, you did a placement and that was funding the acquisition of CG Power. So you have anything of that in — as a strategy?

Vellayan Subbiah — Executive Vice Chairman

So I think that we have discussed this in previous earnings calls, right? Basically what happened was CG Power happened at the point of COVID. And I didn’t want to put TI’s balance sheet at any significant risk. So we basically raised the — a small amount of capital at that point to offset the expense that came with CG Power because it was in the middle of COVID and the environment was quite uncertain, right? Otherwise, kind of, I think that’s the only time in TI’s history that we’ve ever kind of raised money. And so it’s not our stated intend to kind of raise at the parent company level and use that as a mechanism for driving this growth at this point in time. We do believe that between the free cash and kind of other forms of generation, we should be able to generate enough cash to drive that growth.

Rajrishi — DCPN — Analyst

And Mr. Vellayan, this kind of news articles which we read about Apple shifting significant production to India and India emerging as electronics hub and you have also elaborated in the previous con call that 95% of the components in mobile, etc., is imported from China and you think over the next decade that, that kind of ecosystem will be created here. So that presents like unprecedented opportunity, that’s how I understand it. Can you just elaborate your view?

Vellayan Subbiah — Executive Vice Chairman

Yeah, I agree. It’s an unprecedented opportunity, I believe, for us not to be very actively involved in. It’s an area that we’re spending a lot of time on, on beginning to think of how we can get involved. Yeah, the only thing is that we — I mean, like our own approach is some of these things needs kind of patience because we are looking at kind of how we build it out over the next 10 to 15 years. We’re not that concerned about doing something immediately tomorrow but it’s an area we’re spending significant time on and I do feel like it will begin to yield results over time.

Rajrishi — DCPN — Analyst

Just another thing, like there is talk about Tata is tying up with Wistron, etc., for production of Apple phones. So you would be interested — like your focus is, what, components or something like mobile manufacturer itself? If you could…

Vellayan Subbiah — Executive Vice Chairman

See, at this stage, our larger interest is components, I mean if something significant on the assembly side offered itself. See, our concern with assembly is that we didn’t want to get into kind of caught in a very low-margin business, right? So I think assembly will depend on the nature of the opportunity in that segment, right, unless it kind of gave us some understanding or path that will allow us to kind of improve the margins of the business. That’s why we see something that requires more intellectual property and R&D, which would be more on the component side. We’ll therefore kind of be able to afford a higher-margin business and that’s what kind of our initial focus continues to be.

Rajrishi — DCPN — Analyst

Okay, thanks a lot. Thank you.

Vellayan Subbiah — Executive Vice Chairman

Thank you.

Operator

Thank you. [Operator Instructions] We have the line of Mr. Niket connected again from Motilal Oswal AMC. Please go ahead, Mr. Niket.

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Yeah, just — yeah, thanks. Just one question, if you can just highlight how are you looking at the financing part for all three EV verticals that we have.

Vellayan Subbiah — Executive Vice Chairman

Yeah, so obviously, the financing strategy will be different. In three-wheeler, we’ve got three tie-ups right now with three financers already and we are looking at developing a couple more. That includes banks and NBFCs. On the truck side, we have one tie-up in place and we are looking at developing two more. Trucks, we’re thinking, will be more driven by banks, though some NBFCs are active. Because of the rates at which some of these trucks go, it’s more driven by — the larger feeds are all catered to by bank. And tractor also, we’ve started talking. I think we have two relationships in place. And again it will be a combination of banks and NBFCs because both are fairly active in the tractor market.

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Got it, got it. And how much benefit does it bring to our EV business of having multiple businesses in-house, like, for example, you do board panels in-house, you also have industrial chains, auto chains and then you also have Chola [Phonetic], then you have EV motors. So how much benefit on cost does it bring to vis-a-vis, a competitor trying to make a similar product?

Vellayan Subbiah — Executive Vice Chairman

Yes. I would say that there is some benefit. I don’t know how much of the benefit is a cost benefit, Niket. It’s — being able to take product to market more quickly is the way I would look at it, Niket. The way you have to really look at electric is the whole first generation of electric product we’re doing, we’re basically outsourcing obviously everything, right, because of other capabilities we don’t have in-house, I definitely see motors, everything has been outsourced in the first generation of what we do. What we have to begin to look at over time and that’s why now we’re kind of significantly upping our R&D spend, it’s to see what we start developing more specific capability on, so that for Gen 2 of all the electric products, there is more of what we have, introduced into the mix, right? And I would say the more of what we have can fall into different categories, some of which is products, but some of which is capabilities we don’t have today. Somebody asked about battery, right? We’ll have to look at that, right? Somebody — I mean another huge area is just software, right, as more and more software go into vehicles. And how we develop more capabilities on that. So all of those kinds of things are all going to be part of Gen 2 of the vehicles. Gen 1, I would say the advantage from some of these things, it’s still a bit more limited at this stage but we definitely see it as something that will help our competitiveness once we go forward.

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Got it. And one last question, if I may squeeze in. Will you be also open to look at some of the tie-ups, because, as you rightly said, on the battery side, some of these are far critical elements of the EV piece. So, say, someone like a BYD or any other company within China or anywhere in the world which doesn’t have tie-up wherein spaces that you are present, will you be open to that or you feel that outsourcing model works relatively better rather than having a like a joint venture kind of a model?

Vellayan Subbiah — Executive Vice Chairman

I mean, we are definitely open to it. I definitely think that — so the short answer, Niket, is that we are open to it. But I don’t know if BYD is the right answer because BYD kind of makes their own product as well, right, and it is looking at kind of potentially coming in. The second thing is that, it appears that the government is fairly clear that they don’t want majority Chinese ownership in a lot of these things.

Niket Shah — Motilal Oswal Mutual Fund — Analyst

Right, right, right. Fair point. Perfect, sir. Thank you and best of luck and congrats on a good quarter.

Vellayan Subbiah — Executive Vice Chairman

Thank you.

Operator

Thank you. We have the next question from the line of Raj Shah from Marcellus Investment Managers. Please go ahead.

Raj Shah — Marcellus Investment Managers — Analyst

Yeah.

Vellayan Subbiah — Executive Vice Chairman

Hey, Raj.

Raj Shah — Marcellus Investment Managers — Analyst

Am I audible?

Operator

Yes, please proceed.

Vellayan Subbiah — Executive Vice Chairman

Yeah.

Raj Shah — Marcellus Investment Managers — Analyst

Yeah, so, as you mentioned, sir, about the optical lens business [Indecipherable] steep and longer than expected. I just wanted to know your view on the TMT bars business. How has been the journey and what are the learnings from these kind of businesses?

Vellayan Subbiah — Executive Vice Chairman

Yes, so TMT bars is another one where basically I think the basic focus has been kind of what it would take to differentiate in a commodity product, right, because a product kind of fixed predominantly as commodity is more difficult for us to participate in that business in the long-term. So that’s where I’d say the biggest learning curve has been, right, which is that, though there are real product differences we can create, the ability to get the market to understand those product differences is a bit more challenging, right? And so that’s, I would say, kind of our biggest learning from that business where we continue to make investments, getting the market to value that differentiation, the reality of what the market is absorbing is different.

Operator

Sir, the line of the participant has got disconnected. Ladies and gentlemen, that was the last question that the management could answer. I would now like to hand the conference over to the management for closing comments.

Vellayan Subbiah — Executive Vice Chairman

There’s nothing specific from our side. I will hand back to you.

Operator

[Operator Closing Remarks]