Varroc Engineering Ltd (NSE: VARROC) Q2 2025 Earnings Call dated Nov. 13, 2024
Corporate Participants:
Tarang Jain — Chairman and Managing Director
K Mahendra Kumar — Group Chief Financial Officer
Arjun Jain — Director and CEO
Dhruv Jain — Director and CEO
Analysts:
Aditya Jhawar — Lead Analyst
Arvind Sharma — Analyst
Vijay Pandey — Analyst
Vishal S — Analyst
Iqbal Khan — Analyst
Jay Prakash — Analyst
Pawan Parakh — Analyst
Rohan Vora — Analyst
Unidentified Participant
Sridhar Kalani — Analyst
Praveen Poreddy — Analyst
Ashwini Agarwal — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to Q2 and H1 FY ’25 Earnings Conference Call of Varroc Engineering Limited hosted by Investec Capital Services. [Operator Instructions] I now hand the conference over to Mr. Aditya Jhawar from Investec. Thank you, and over to you.
Aditya Jhawar — Lead Analyst
Thank you. Good evening to you all. From Varroc Engineering, we have with us Mr. Tarang Jain, Chairman, and Managing Director; Mr. Arjun Jain, Full-time Director and CEO of BD 1; Mr. Dhruv Jain, CEO of Business Unit 2; Mr. Mahendra Kumar, Group CFO; and Mr. Bikash Dugar, Head of Investor Relations. We’ll start with the call with a brief opening comments from the management, followed by a Q&A session.
I would now like to invite Mr. Tarang Jain for the opening remarks. Thank you, and over to you, Tarang.
Tarang Jain — Chairman and Managing Director
Thank you, Aditya, and thank you, team Investec, for hosting the call, and a good evening to everyone who had joined the call. To start with, the India GDP growth for Q1 of FY ’25 was at 6.7%. This was lower than the earlier projections given by the RBI and lower than the growth levels of the previous few quarters. While urban consumption is down, rural consumption has been improving during the financial year, which also reflected in the good growth seen in the two-wheeler industry.
During Q2 of FY ’25, the two-wheeler and three-wheeler segments registered good growth. However, the passenger cars and the commercial vehicles remain challenged on a year-on-year basis. Two-wheelers grew by 12.5%, three-wheelers grew by 6.3%, passenger vehicles de-grew by 0.7% and the commercial vehicles de-grew by 13.3%.
However, on a quarter-on-quarter basis, we saw a growth in almost all segments other than commercial vehicles due to the early festive season. The two-wheelers grew here by 6.8%. Three-wheelers grew by 29.3%, passenger vehicles grew by 5.7% and the commercial vehicles de-grew by 5.2%. Destocking by dealers before EUR5 plus and lack of growth driven by lower consumption is impacting the European and the American two-wheeler market.
In the ASEAN region, the growth was largely driven by low-end segments and the premium segment continues to struggle for growth in this region. During quarter two of FY ’25, the Company has registered a revenue of INR20,808 million with a growth of 10.3% year-on-year. The India business reported a growth of 13.4%. The profit before-tax of the Company was at 4.4% for quarter two FY ’25 due to the positive operating leverage seen in the India operations. The consolidated profitability remains impacted by de-growth in the overseas businesses, R&D spending, and overseas operations for future growth.
On a quarter-on-quarter basis, the Company reported improvement all-around. The revenue on quarter-on-quarter grew by 9.6%. The EBITDA margin improved by 60 basis points and the PBT margin by 150 basis points.
The Company balance sheet continues to strengthen along with improvements in the return ratios. The net debt of the Company in half-one of FY ’25 reduced by INR1,554 million and net debt to equity has reduced to 0.5 times at the end of half-one of FY ’25 from 0.64 times at the end of FY ’24. The absolute net debt figure is INR8273 million.
The annualized return on capital employed at the end of half-one of FY ’25 stood at 19%. The CapEx spent in half-one of ’25 was INR1,030 million. The CapEx spending in half-two of FY ’25 will increase driven by the need for additional SMD lines for electronics and the increased EV capacity needed. We are also investing in-land in Southern and Western part of India for future growth.
As indicated earlier, we are working on various initiatives to drive cost reductions across several categories of costs with special focus on fixed costs. Some of these measures have already started showing impact on our bottom line, but most of them will fully get reflected by Q4 of FY ’25. We have also rationalized headcount levels across businesses and functions. We continue to look at avenues to make the organization more lean, nimble, and agile and to increase speed in decision-making.
The order book for half-one of FY ’25 continues to remain healthy and we continue to build the order book in both India and the overseas business. In half-one of FY ’25, we have achieved net new business wins with annualized peak revenues of INR6,046 million. The order book from EV models constitutes more than 37% of these wins.
In the first half, we added various new-age technological advanced product portfolios in our business. We started the production of integrated generators and soft-touch door panels for Mahindra, where as we won business for battery management systems for electric vehicles, thus further increasing our content in the electric vehicle space.
We also won business for interior ambient lighting from a global player, which helps in increasing our offering for four-wheeler vehicles. We will continue to innovate by further strengthening our engineering capabilities, streamlining our operations through further cost reductions and working capital optimization. Our endeavor will remain to expand our presence through focused products to drive sustainable growth and deliver value to our shareholders.
Beyond business, we continue to focus on various ESG aspects to make the organization more sustainable. We have published our first sustainability report, which can be accessed on our website. Our efforts towards giving back to society is also being recognized. The Kham River restoration in Aurangabad was recognized by the WRI Ross Center for Sustainable Cities as one of the top five finalists globally for their prestigious award. If this project also received globally recognized prestigious [Phonetic] award that is a St Andrews Prize for the Environment.
With this, I will now ask MK, our Group CFO, to walk you through the presentation and give more insights into the financial performance. We have uploaded the investor presentation to the stock exchanges as well as on the website. Over to you.
K Mahendra Kumar — Group Chief Financial Officer
Thank you, Tarang. Good evening, everybody. Let me take you through the highlights. Most of these points have been highlighted by Chairman [Phonetic] already. Basically, we had a revenue growth of 10.3% in Q2, but India business registered a strong growth of 13.4%. Our profitability was at 4.4% at PBT level during Q2 versus 3.9% last year. EBITDA came in at 9.7%, marginally lower from 9.9% which we saw last year. The net-debt reduction journey continues, so we brought it down to INR827 crores now by end of last quarter.
In terms of lifetime orders, the cumulative H1 FY ’25 lifetime orders were INR32.5 billion, which has the potential of annual peak revenue of INR6 billion, and more than 37% of this business is from — is relating to the EV vehicles. The other highlights, of course, our Chairman covered already. Just want to bring your attention to the new products which we listed out here. These are the four new products which we are working on and which are going to give us the future growth potential, which is basically the interior ambient lighting, soft door touch panel, battery management system, and an ISG, which is an integrated starter generator.
Going to the next slide, which is about the industry trend. You really see the trend by segment, year-over-year, two-wheelers grew by 12.5% during second quarter. Three-wheelers also registered a growth of single-digits, 6.3%. Passenger vehicles and commercial vehicles had a de-growth. So passenger vehicles de-grew by 0.7% on a commercial vehicle by 13.3%.
However, on a quarter-over-quarter basis, two-wheeler grew by close to 7%, 6.8%, three-wheeler by strong 29.3%. Passenger vehicle grew by about 5.7% and commercial vehicles had a de-growth. EV two-wheeler volumes on quarter-over-quarter grew by almost 74% so those are the highlights in terms of H1 again two wheeler grew by about 15.8% or three wheeler by 7.6%, passenger vehicle by 2.4%.
Coming to the financials, the 10.3% growth in topline we talked about already. So this resulted in a 4.4% PBT for us. Our Indian operations, of course, grew by 13.4%. The profitability, of course, registered a significant growth compared to a sequential quarter compared to Q1, the PBT went up by 62%, and compared to the same period last year, the PBT went up by about 23%. So these are the significant growth numbers which we could see in the profit level.
And if you really look at the H1, in total, all of you know that in Q1, we had some challenges in terms of the overall growth. So H1 growth came in at about 7.8%, PBT at 3.7%, more or less similar to what it was last year. Indian operations in total, of course, grew by about 12.4%.
On the next slide, we talk about the consolidated ratios and the balance sheet numbers. The net debt came down to INR827 crores, equity of INR1,640 crores. Now some of you may remember that about two years ago after the divestment, it was the other way. We had debt of close to INR1,500 plus crores and EBITDA was close to about INR900 crore — INR800 crores. So it actually now shifted the other way. So that’s a significant development.
Our net debt to equity is now very comfortable at 0.5%. Net debt to EBITDA is at 1.11% based on the annualized EBITDA level. The return on capital employed is also strong at around 19%. The next slide, we get the revenue breakdown. We give the breakup by business unit and also by segment and customer and geography. By segment, if you really 75% comes now — comes from two-wheeler and three-wheelers now. And India revenue is close to about 88% of the total. Bajaj revenue, of course, strengthened from 40.6% to 45.3%, mainly because of the increase in EV business.
On the new lifetime order win, of course, we discussed this already, it’s about INR32 billion, giving us INR6 billion of annual peak revenue potential. The lifetime revenue or break up if you really see two-wheeler and three-wheeler constitute about close to 46% of the total and Bajaj at 47%. And interestingly, the EV part of the overall order intake is close to 37%.
In the next couple of slides we explain what these new products are all about. And then finally, we also gave some pictures of the new or additional CapEx which we are going to spend of basically for growth. We’re going to invest in SMT lines to take the numbers from 10% to 15% to basically meet our demand for electronics. And we are also creating an existing — we are also expanding an existing plant to cater to the demand of — additional demand of EVs and we are also acquiring land both in South and also in the Western part of India to further strengthen our relationship with a couple of OEMs to cater to their requirements.
So that’s — that’s broadly what it is. In the subsequent slides, of course, we explained the — each business separately. So let me stop here and then we can take questions. Thank you.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We’ll take our first question from the line of Arvind Sharma from Citi. Please go-ahead.
Arvind Sharma
Yeah. Thank you so much for taking my question. First question would be on the gross margin in this quarter was slightly on the weaker side quarter-on-quarter. So any specific reason for that?
Tarang Jain
Yeah, I think there is a couple of reasons. I think firstly, in EMS, we’ve had a change in our sales model to the customer, which has contributed to the gross — which has contributed notionally to gross margin increase. And then further, I think there has also been a level of — there’s been a level of mix impact and there are also some resin-related — resin-related lags in our RM pricing or in resin-related RM pass-through lag.
Arvind Sharma
Got it. So is it going to stay at these levels or going forward there could be a normalization like an improvement in gross margin?
Tarang Jain
The resin will, of course, normalize but the — but the notional impact in EMS due to the sales model to the customer that is here to stay. But that does not — that does not impact the bottom line per se. It is only notional in the gross margin.
K Mahendra Kumar
There’s no impact on the absolute numbers, it’s only the percentage which will look different.
Arvind Sharma
Got it. Thank you, sir. The second question would be on your outlook going forward, which segments are the ones where you believe that there could be significant growth?
Arjun Jain
So I think what we see in Q2 is the programs that we had already or the businesses that we had already SOPs and in particular in EV are now seeing — are now seeing volume expansion, which is starting to — which is starting to — which is starting to flow into our revenue. And I think that is a trend that will only continue and strengthen.
Further, the order book that we have declared, I think the program launches are also now taking place. So — and this is really across segments, across two-wheeler and passenger car both. And I think that’s also reflected in some of the business wins and SOPs that we’ve talked about even in terms of new technology.
So I would say it’s a mix. I would say it’s a mix between two-wheeler and passenger car. But yeah, I think the order book is translating into — the order book translates into wheel revenue now.
Tarang Jain
But if you talk about the segments, of course, as you know, lighting is a very big segment, all around. Lighting will of course see with this two-wheeler and four-wheeler lighting will see a strong growth. Also on the plastic molding side, whether it’s two-wheeler and the four-wheeler side. And like what Arjun mentioned, the EV side will see a growing momentum on EV powertrain and non-powertrain parts for two and three-wheelers especially will see also a you know, quite a quite a high-growth in electronics in general. So therefore, you know, we were looking also you know, earlier in investments coming in next year, but we have prepone some of the investments you know for the — for our EV motors as well as for a lot of the electronics. So we are now preponing a lot of the CapEx you know, in this regard now to at least six months earlier. So which is a good sign you know, for future growth.
Arvind Sharma
Got it, sir. And just if I may ask on the tax part, there was — tax rate was quite high. So any specific reason for that in this quarter? And what should be the normalized tax rate for second half and FY ’26?
K Mahendra Kumar
Yes. So there are a couple of reasons here. One is, of course, the — on some of these overseas businesses where we are actually incurring some losses. We haven’t recognized the deferred tax effect as of now. Because we need to see the turnaround to actually get that confidence and give the confidence to the auditors. So once we do that, that will get corrected. But otherwise, it is the normal thing only. The — going forward, the stable effective tax rate could be in the range of around 27%.
Arvind Sharma
Thank you. Thank you so much. That’s all from my side. Thank you.
Operator
Thank you. [Operator Instructions] We’ll take our next question from the line of Aditya Jhawar from Investec. Please go-ahead.
Aditya Jhawar
Yeah. Thanks for the opportunity. A few questions here. On the new business wins, for example, the BMS order win, can you talk a little bit more about it? Did you mention it is for M&A, number one?
Arjun Jain
No, it’s for two-wheeler customer.
Aditya Jhawar
This new BMS win is for a two-wheeler customer. So if you can — Arjun, if you can elaborate whether it’s a new-age OEM, existing customer incumbent, and how do you see volume ramp up on this?
Tarang Jain
It is an existing customer. So it is an order, and it will be quite a large volume going forward, but it’s from an existing customer.
Aditya Jhawar
Okay. Okay. Fair enough. Similarly for this interior in-built lighting order win, if you can talk a little bit about, is it a domestic customer, overseas customer? And how do you see it ramping up? Do we need to set up a separate facility or will it be catered by existing facility?
Tarang Jain
So this, I think Dhruv will explain, but this is, of course, for our overseas business is for our overseas electronics plant in Romania. And it is from an American customer, but I think maybe Dhruv you can elaborate a little bit on that.
Dhruv Jain
Yes. So I think just to add to what my father just said. So this is for a North American EV customer, and this would be serviced electronics plant. And we’re expecting the SOP in 2026.
Aditya Jhawar
So there’s not any major CapEx or anything over there in this regard?
Dhruv Jain
Yes. So yes, so there will be no — in terms of any specific CapEx, this is also reimbursed by the customer.
Aditya Jhawar
Okay. Okay, fair enough. And, you know, Tarang, you mentioned that there is some acceleration in CapEx that you have planned in second half of the year. So for FY ’25, what would be the total quantum? And directionally, if you can talk about you know, what would be the CapEx in FY ’26 as well?
Tarang Jain
So basically, I think we had given a guideline and we were trying to also obviously be more careful on the CapEx, milk our existing assets. So had given a guideline of INR200 crores.
But I think seeing this you know, that we are investing now and including on the land also, so this could go up to this year INR260 crores, INR270 crores. And next year also, I think definitely, we would try to see that it is around INR200 crores, but it could also, depending on the growth and we are quite aggressive now on new sales wins, so there, again, it could go up to INR260 crore, INR270 crore next year also because we don’t want to lose any opportunities you know, in the marketplace at present.
Aditya Jhawar
Okay. Okay. Fair enough. And you know, one question for MK. Clearly, I think debt reduction is going as per plan, very, very encouraging to see that. So is there any target you know, in mind for the second half of the year and you have set a target for debt for FY ’26?
K Mahendra Kumar
Yes. I mean, internally, we have aggressive targets, but I think we should end this year with maybe around INR700 crores to INR750 crores is what is possible. But we are trying to do something more than that also, but certain things need to fall in place.
Aditya Jhawar
Okay. Okay, fair enough. A final question to Arjun. Arjun, if you can talk a little bit about you know, this new product of your integrated starter motor [Phonetic]. What kind of order visibility we have and engagement with customers? And how do you see you know, volume ramp up? Is it one customer, multiple customers you’re engaging with on this product right now?
Arjun Jain
So for one customer, we’ve already SOP’d two models and we have a business win from a further customer as well. And I would say we are engaged in discussion and really prototyping activity with two more customers.
Aditya Jhawar
Okay. And if you can give some color on whether it has incumbent existing customer, new-age customers.
Arjun Jain
So in two ways — this is a nice — this is essentially an integration of the Magneto, the starter motor, and the RR. So these customers are generally the traditional OEMs. And all the — we supply the — we supply the, let’s say, older version of technology to practically every OEM in the country. So everything is to an existing OEM only.
Tarang Jain
But just to elaborate, I think, let’s say, Arjun is talking about at least engagement with four customers, and we’ve already SOP’d with one and other three also will happen going forward.
So two for us — I mean, so two could be — you could say, could also be a partial replacement where we are already supplying magnetos and starter motors and RRs, but to an entirely an additional business where we don’t supply a magneto or a starter motor or RR. So two will be totally additional. So that will give us an additional revenue stream, and it won’t be a replacement.
Aditya Jhawar
Okay. Okay. Fair enough. My final question, Tarang, is there any update on arbitration proceedings in China? And was there any arbitration costs that we have incurred in this quarter?
Tarang Jain
So I think the arbitration costs, firstly, is minimal because all this arbitration is now kind of closed. Now we are just awaiting the final kind of this thing — the verdict from the tribunal in Singapore. And in fact, it has been delayed.
But now, what we understand is that hopefully, you know, this month itself, before the end of the month, we should be able to get a verdict or it could spill into probably December. But in any way, in any case, we have been told it is not — it will not pass December 31. But the signs are that we could get it at an early date now. And once that is done, there will be a lot of clarity on China, you know, how to move forward in a more clear manner.
Aditya Jhawar
Okay, that that’s good to know so I’ll fall-back in queue.
Tarang Jain
Yeah, thank you.
Operator
Thank you. We’ll take our next question from the line of Vijay Pandey from Nuvama. Please go-ahead.
Vijay Pandey
Hi, thank you for taking my questions, and congratulations on the successful order closure. I have two questions. One was on the order book. So after the presentation, the order book or the new order book points to INR22,000 crores revenue in FY ’27. So is it like your expectation or is it like a lifetime order, like how should we think about it?
Tarang Jain
It’s not INR22,000 crores. It’s INR22,000 million.
Operator
Sorry, sir, can you speak a bit louder, please?
Tarang Jain
It’s not INR22,000 crores. It’s INR22,000 million. So it’s INR2,200 crores. And the way to read that…
Vijay Pandey
[Indecipherable]
Tarang Jain
Exactly. And that is the annual incremental over the FY ’24 closure level. So it’s not lifetime, it’s annual.
Vijay Pandey
Okay. Okay. And so there was one more thing I wanted to check on the luxury part. You said in your opening remarks that the luxury in ASEAN is on a weaker side. So how much should we think about like in terms of revenue or in terms of exposure, like is it less than 10%? Is it around 5% or like if you can give a bit of idea on that? That would be helpful.
K Mahendra Kumar
The overseas business, as you know, for two-wheeler lighting is less than 5%. And out of that, when we talk about the customer who is into this luxury two-wheeler segment, they contribute less than 50% of our sales. So that segment is getting impacted because the sales in the ASEAN region of the luxury scooters are less as compared to the mass segment vehicle sales. So it’s overall less than 2%, 3%.
Vijay Pandey
Okay. Okay. Thanks.
Operator
Thank you. [Operator Instructions] Next question is from the line of Vishal S from Svan Investment. Please go-ahead.
Vishal S
Thank you for taking my question, sir, and congrats on a decent set of numbers. Sir, my question is regarding the top line increase we have seen quarter-on-quarter from INR1,900 crores to INR2,100 crores, which is a healthy growth. But in terms of other expenses and employee expenses have remained to the similar levels of the last quarter. So just wanted to clarify, is this a one-off benefit here and gradually going forward next quarter, there will be an increase from here on? That is my first question, sir.
K Mahendra Kumar
Yes. So in terms of other expenses, in Q1, we had certain professional consultancy expenses, which have come down now. So it should more or less continue at this level as a percentage of revenue. And then employee expenses, yes, it should only get better.
Vishal S
Okay. Sir, my next question is regarding you know, our share of business from Bajaj. If you see, year-on-year, it has grown almost around 23%, 24-odd percent. But except for Bajaj, the other customers, it has remained almost on a flattish trajectory year-on-year. So how do we see this going forward? Because when I see the order book and the trajectory has been increasing the share of non-Bajaj is close to around 52%, 53%, and this has been every quarter you know, in the presentation, which you published, it has been increasing. So when this number will start reflecting on the overall top line?
Arjun Jain
So from a timing perspective, and especially given how dynamic the market has been, I think it’s hard to, let’s say, predict an exact FY when we will see some dramatic change in the Bajaj percentages. And even if we look at the — even if we look at the business in ratio, Bajaj has a significant portion of that.
So today I think the way we think about it is the business win and the execution of the business win is far more important than really the customer split. And based on timing, based on how different markets perform, whether it’s two-wheeler ICE products, two-wheeler EV products, how different subsegments in the market perform, how passenger car performs, those percentages can change significantly.
K Mahendra Kumar
Yes. It’s also because the EV content is pretty high. And as the EVs become more and more prominent, obviously, the Bajaj percentage will go up. So it’s not because we have started taking less from others. It’s generally because of the change in the EV penetration.
Arjun Jain
Correct.
Vishal S
Okay. I was coming to this question because you know, I just needed a clarification whether there has been some market share loss one, or there has been some deferment or delay in the new launches from the non-Bajaj customers, which has resulted in you know, this flattish trajectory. Just that clarification I wanted from you.
Arjun Jain
There is no market share loss for sure. I think but again, like I said, right, it’s a timing topic, right? If you look at this quarter, our sale into EV models is 12%, right, which is materially higher than materially higher than any quarter before that. Now of course, a large portion of that goes to Bajaj, which means that their weight in our mix increases.
Tomorrow, for example, if passenger car starts to do better, we will see maybe a reduction in that — maybe we see a reduction in the Bajaj vehicle. But you know, directionally, this is a mix that will broadly — if market continues to perform the way it is, it will stay and it will evolve in line with the percentages that we are forecasting based on our business wins. But tomorrow, two-wheeler EV you know, dramatically increases in size, of course, the Bajaj weight will become bigger.
Vishal S
Perfect, sir. Sir, my last question is regarding — just wanted to clarify, INR700 crore debt you mentioned for FY ’25 as a target, is it the number of net debt or gross debt?
K Mahendra Kumar
Yes, net debt. It can be better also, but there are certain things which need to fall in place. We need to also collect some government incentives and all from the government. So if all that falls in place, it can be better than that. But as of now, to be on the safe side, that’s the target we are mentioning.
Vishal S
Perfect, sir. Perfect. And all the best to the team, sir. Thank you.
Tarang Jain
Thank you.
Operator
Thank you. We’ll take our next question from the line of Iqbal Khan from ICICI Prudential Life. Please go-ahead.
Iqbal Khan
Yeah. Hi, sir. Just wanted to understand about.
Operator
Can you use your handset mode, please? Your audio is not very clear.
Iqbal Khan
Is it better now?
Operator
Yes.
Iqbal Khan
Yeah. Hi, sir, just wanted to understand from your order win perspective, around 37%-odd is from EVs, right, so can you please elaborate on what all products is there and what is the market size of those products? And how much is Bajaj or how much is non-Bajaj odd of it? So just wanted to get more clarity and sense on this EV products, new order wins.
Tarang Jain
When we say EV customers, — so these are also — we spoke about the interior lighting business, which we have won from U.S.-based EV player four-wheeler clear. That is one thing. Then there are four-wheeler customers in India also, especially for their polymer parts we’ll be supplying them starting this year. So that is also there. And yes, there are incumbent two-wheeler EV players to whom will start supplying BMS. So that is also part of this.
Iqbal Khan
All right. And sir, just one last. About the net debt, you mentioned that INR700 crores, INR750 crores of net debt by the end of this year, is this what I heard is correct?
K Mahendra Kumar
Yeah, that’s right.
Iqbal Khan
It will be from your internal cash generation, right? I mean, nothing of — or is there any other way you’re planning to reduce it?
K Mahendra Kumar
No, no, it’s through internal generation only.
Iqbal Khan
Okay. Fair enough. Thank you, sir. I’ll stand in the queue.
Operator
Thank you. We’ll take our next question from the line of Jay Prakash [Phonetic] an Individual Investor. Please go-ahead.
Jay Prakash
Good evening to all. Thank you for taking my question. My question to the management is that since March 2018, I mean, in last four years, there was no reward for the individual investors, despite there is a growth in your top line as well as your bottom line also. There, you have any discussion or your focus on rewarding the investors? There is no dividend, there is no buyback, anything? That is my question.
K Mahendra Kumar
Yes. Thanks for the question. So as of now, like how we communicated earlier also, we are first focusing on strengthening the balance sheet and reducing the debt. At the same time, we are also giving importance to growth. So these two happen anyway, the benefit will flow to the investors indirectly in terms of the value enhancement. But having said that, yes, at some point in time, we will discuss this at Board level on when to declare dividends, and we will start that.
Jay Prakash
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Pawan from Geojit PMS. Please go-ahead.
Pawan Parakh
Yeah, hi, sir. Just a couple of questions. One with more and more EV business, how should you think about margins for this part of the business? Is it different from the existing business or?
K Mahendra Kumar
It’s more or less similar to the existing business. It won’t be very different.
Pawan Parakh
Okay. So from current levels, how should you think about margins for next, say, one or two, three years?
K Mahendra Kumar
Well, we don’t give that kind of guidance, but definitely, the operating leverage should definitely help us as we continue to grow our business, particularly in the EV segment. So that itself should help us. On top of that, we are also looking at various cost reduction initiatives, like how our Chairman explained in his speech, most of these will start showing results from Q4 onwards. So it should get better from the current levels, that’s where we would like to stop.
Pawan Parakh
Okay. And in terms of revenue growth, sir, if you could give any color going ahead?
Tarang Jain
See, revenue, our stated position is definitely our effort is that we want to be at least 6% to 8% more than the market growth. We understand that, that has not happened at the moment so far. But I think going forward, that is the direction we have that because we place the most importance to revenue growth.
So growth is definitely on top of our minds besides the other initiatives we are anyway taking. So this is something we will keep driving. And we are seeing you know, a good amount of success also when it comes to new business wins and engagement with various customers.
K Mahendra Kumar
Again, please don’t take it as a future guidance. Yes, and one more thing we would like to remind all of you is we also talked about the overseas challenges, which will take some time to stabilize.
Pawan Parakh
Yeah. So almost 85%, 90% of the business is domestic. So sir, I mean my question is whatever orders we’ve won in last say few quarters, does it give a visibility that you know, we can achieve this industry number higher — 6% to 8% higher than industry growth for FY ’26?
K Mahendra Kumar
Yeah, it does.
Pawan Parakh
Great. Great. Thank you, sir. All the best.
Operator
Thank you. We’ll take our next question from the line of Rohan Vora from Envision Capital. Please go-ahead.
Rohan Vora
Hello. Sir, thank you for the opportunity. So just one question was the CapEx that we’ve so some color on what are the products where we are seeing interesting demand trends? And what is the current capacity utilization for those products, so around that? Thank you.
Arjun Jain
Yes. So like we’ve declared, the capacity constraints we face are on electronics and in particular, PCB assembly. This goes into many products, right? So practically goes into maybe half our sales. So that is where we need to drive capacity expansion and we’re driving significant capacity expansion there. And the other one is in terms of the EV product lines. where we also now feel — where we also now face the need to expand capacity. And the third one is in terms of painting in particular for the Northern region.
Tarang Jain
For the Northern customers.
Rohan Vora
Understood. Understood. And sir, in case of PCB assembly, so what is the current utilization, and how long can the current capacity support new CapEx comes in?
Arjun Jain
So at this point, for PCB assembly, we are fully utilized, which is why we are driving the capacity expansion.
Rohan Vora
Understood. Understood. Thank you, sir.
Operator
Thank you thank you. We’ll take our next question from the line of Vijay Pandey from Nuvama. Please go-ahead.
Vijay Pandey
Hi, thanks, sir for another question. Just wanted to check on the — if you could give us an idea about the content for EV and ICE for your products in that?
Tarang Jain
Sorry, can you repeat the question?
Vijay Pandey
If you can give us an idea about the content for…
Operator
I request you to use your handset mode.
Vijay Pandey
Hello.
Operator
Yeah, please go ahead.
Vijay Pandey
If you can give an idea about — if you can give a little bit of idea on the content per vehicle for electric vehicles and ICE, given so such a big order from — like from electric vehicles?
K Mahendra Kumar
Two-wheelers if you look at — if I compare the EV models with the 125-cc vehicle, so the content on an average with our incumbent customer being incumbent customer in two-wheeler ICE for 125 cc, it will be around INR4,000 to INR5,000 per vehicle. Whereas, for EV, it will be around INR25,000 to INR30,000 content per vehicle. So that’s around five times to six times of the ICE content.
Vijay Pandey
Okay. And but the margin is broadly similar for both EV and ICE components, right?
K Mahendra Kumar
Yeah, comparable, yes.
Vijay Pandey
Okay. Okay. Thank you.
Operator
Thank you. We’ll take our next question from the line of Nishant [Phonetic] from Geojit [Phonetic]. Please go-ahead.
Unidentified Participant
Yeah, hi, am I audible?
Operator
Yes, please go-ahead.
Unidentified Participant
Yeah. Hi. Thank you for taking my question. So firstly on — I think in Q1, you mentioned about some start-up costs related to the new plants that were coming up in Maharashtra. So could you just help us understand, I mean, where are — and those costs reflected in Q2 and how they would be going ahead?
Arjun Jain
Yes. I think we are at a place of far more stability now versus Q1. However, of course, there is always room for improvement across all operations. But yes, I mean, in all seriousness, we are definitely past the initial startup costs now.
Unidentified Participant
Okay, any number that we could put around, I mean, what percentage?
K Mahendra Kumar
No, we don’t give those specifics. As Arjun pointed out, it’s getting better certainly.
Unidentified Participant
Okay. Thanks. And secondly, I think there was some notional impact on gross margin that was mentioned earlier by Arjun. Could you just expand a little bit? I mean, I didn’t get that part clearly.
Arjun Jain
So the notional impact is previously in one of our foreign plants, we were selling ex material. So the material let’s say, the material cost was not part of the material cost is not — there is no material cost in the price. However, that the customer has changed the model now, so the material cost is now once again a part of the price.
K Mahendra Kumar
So earlier, we were only getting the conversion cost. Now both material is part of the cost and the corresponding revenue is also part of the revenue.
Tarang Jain
It is only for one of our major customers. For one of the major customers in that plant, in the forging plant.
K Mahendra Kumar
So it’s the arithmetical impact. Both numerator and denominator — sorry?
Unidentified Participant
Sorry, so that had some negative impact on our gross margin?
K Mahendra Kumar
Yes. It’s purely arithmetic. Both numerator and denominator if they go up by the same number, you will have some impact on the percentage.
Unidentified Participant
Okay. Okay. Fair enough. And lastly, sir, if you just help me with what would be our average interest rate on the debt side?
K Mahendra Kumar
So right now it’s around 9%.
Unidentified Participant
Okay. Thank you. Thank you so much.
Operator
Thank you. [Operator Instructions] We’ll take our next question from the line of Sridhar Kalani from Axis Securities. Please go-ahead.
Sridhar Kalani
Good evening. Thank you for the opportunity. Kindly pardon me, I was a little late to join the call. On the EBITDA front, on the stand-alone basis, we can see that we have almost clocked 11.4%. 11.5%, but on a console basis, it is lower than 10%. Now I understand that there was some gross margin impact on your international business. Just wanted to understand if there is anything else that has impacted the margins in the European business. And what steps are we taking to improve the same? This is my first question.
K Mahendra Kumar
Yes. I think Arjun explained earlier, maybe you weren’t there at the time. So there are two factors here which happened. One, of course, there was some change in the mix of businesses. Plus there was also some lag in recovering some of the inflation cost in terms of input cost, which should get corrected over a period of time. The second part is the arithmetic part, which we just explained.
Sridhar Kalani
Okay. Understood. So currently, the EBITDA margin is, I think, in low single digits for your European business?
K Mahendra Kumar
Yes. So I think we should look at it at the consolidated level. So consolidated level gives the right picture. So yes, so that’s where it is now. It should get better going forward.
Sridhar Kalani
All right. And on the tax front, you had mentioned that this is a one-time deferred tax expense, right?
K Mahendra Kumar
No, no, no. See, the deferred tax asset, which we created end of last year will have to be recognized or taken to the P&L every quarter or every month, rather. So that is the impact which you see in the deferred tax line item.
On top of that, where we are losing money or where we’re incurring loss on some of these overseas operations, we haven’t recognized the tax benefit on those losses as a deferred tax effect because that requires a strong confirmation that the future is going to be highly profitable to recover those losses. So once that confidence comes in, we will certainly recognize that particular asset also. So right now, it’s on a conservative basis.
Sridhar Kalani
So the auditors have not disallowed recognizing the DTA because of low availability? Is the understanding correct?
K Mahendra Kumar
No, it’s not disallowing or anything. We also did not take it because we also wanted to see that positive news coming in, and then we’ll start recognizing it.
Sridhar Kalani
Okay. Understood. Understood. Thank you so much.
Operator
Thank you. [Operator Instructions] We have a question from the line of Praveen from Kotak Securities. Please go-ahead.
Praveen Poreddy
Hi, team. Thank you for the opportunity. I just have one question. So in the notes, it’s mentioned that the Company received an order from GST for appropriation of GST rights to the tune of INR63 crores.
Operator
Praveen, can you use your handset mode, please?
Praveen Poreddy
Yeah, I’m using my handset. Is it better now? Can you hear me?
Tarang Jain
Can you talk bit louder?
Praveen Poreddy
Yeah. Is it better now?
Operator
Yeah. Please go-ahead.
Praveen Poreddy
Yeah, I was just referring to the footnotes that the orders that you got from GST, right, pertaining to GST dues. If you can throw some color while the Company is planning to contest for the penalty and interest rate in the core, but what will be the likely impact in 3Q?
K Mahendra Kumar
We don’t expect any near-term impact here because the base duty has been paid already, so that is settled. The dispute is only about the interest and the penalty. And this is an industry-wide issue, it is not just not returning to us alone. So there is a classification confusion, which got created because of the inadequate explanation in the tariff codes, so which is being contested by many participants of the industry. So we will take the legal recourse for this. And once that issue is settled, this will get settled. But we don’t see any immediate or near-term impact because of this.
Praveen Poreddy
Okay. But the INR63 crores, whatever is paid, it will be recognized in the third quarter, right?
K Mahendra Kumar
No, no, that is already done. Means, basically the GST, which we are recovering from customer, and customers are taking credit. So there’s nothing to be further recognized on the INR63 crores. It’s only the interest on penalty, which is under discussion. Understood. Thank you so much.
Operator
Thank you. We’ll take our next question from the line of Ashwini Agarwal from Demeter Advisors Llp. Please go-ahead.
Ashwini Agarwal
Hi, good evening. [Indecipherable] moving equipment and construction machinery business, you had hoped for an improvement in the outlook there. Are you seeing any green shoots there?
K Mahendra Kumar
Can you please repeat it? We lost you in the beginning.
Ashwini Agarwal
I’m saying is that one of your European subsidiaries has an exposure to earthmoving equipment and the construction machinery business, right?
Tarang Jain
That’s right.
Ashwini Agarwal
Are you seeing any improvement in the outlook there because you were hoping to see some turn there?
Tarang Jain
Yes. So here with this Company, we are definitely very strongly engaged you know, for getting more business from them. There are large customers. So the discussions are on there, and we are hopeful that we will win some more business on an immediate basis. So those discussions are on with this customer already. And we are hoping you know, that we are able to win some additional business from this customer.
Ashwini Agarwal
Okay, but nothing visible right now?
Tarang Jain
Nothing has been clarified. We know what is possible, and that’s what we are discussing on, but it is confirmed, we are not — we cannot say anything.
Ashwini Agarwal
Okay. All right. Okay. Thanks. All the best. That’s all from my side.
Tarang Jain
Thank you.
K Mahendra Kumar
Thank you.
Operator
Thank you. Ladies and gentlemen, we’ll take that as the last question for today. I would now like to hand the conference over to management for closing comments. Over to you.
Tarang Jain
So thank you once again to all for joining this call and for your continuing support. See you again in the next quarter.
Operator
Thank you, management — members of the management team. On behalf of Investec Capital Services, that concludes this conference. Thank you for joining us and you may now disconnect.