Varroc Engineering Ltd (VARROC) Q2 FY23 Earnings Concall Transcript

Varroc Engineering Ltd (NSE:VARROC) Q2 FY23 Earnings Concall dated Nov. 14, 2022

Corporate Participants:

Bikash Dugar — Head, Investor Relations

Tarang Jain — Chairman and Managing Director

K. Mahender Kumar — Group Chief Financial Officer

Analysts:

Karan Kokane — Ambit Capital — Analyst

Arvind Sharma — Citibank — Analyst

Abhishek Jain — Dolat Capital — Analyst

Vinay Jain — Karma Capital — Analyst

Rishi Vora — Kotak Securities — Analyst

Miyush Gandhi — Propulsion Capital — Analyst

Basudeb Banerjee — ICICI Securities — Analyst

Presentation:

Operator

Ladies and, gentlemen, good day and welcome to the Varroc Engineering Limited Q2 FY’23 Conference Call hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Karan Kokane from Ambit Capital. Thank you, and over to you.

Karan Kokane — Ambit Capital — Analyst

Yeah, thanks. Good evening, everyone. I welcome you to the Varroc Engineering 2Q FY’23 results Conference Call. From the management, we have today Mr. Tarang Jain, Chairman and Managing Director; Mr. Arjun Jain, Whole-Time Director; Mr. Mahendra Kumar, CFO; and Mr. Bikash Dugar, Head, Investor Relations.

I’ll now hand over the call to Mr. Bikash Dugar. Thanks, and over to you sir.

Bikash Dugar — Head, Investor Relations

Thank you. Welcome everyone, and thank you for joining us for the quarter ended 30th September 2022 earning call for Varroc Engineering. Please note that the results presentation and press release have been uploaded on the website and also in the stock exchange.

Before we begin the call, please note that some of the matters we will discuss on this call, including business outlook are forward-looking. These are subject to known and unknown. These risks and uncertainties are included, but is not limited to what we have mentioned in our prospects filed with SEBI and subsequent annual reports, which are availavle in our website.

With that said, I now hand over the call to our Chairman, Mr. Tarang Jain, to begin the proceedings.

Tarang Jain — Chairman and Managing Director

Yes. Thank you, Bikash, and thank you team Ambit for hosting the call, and good evening to everyone. Before talking about the operational performance of Q2 FY’23, I would like to again inform that we have completed the divestment of our 4-Wheeler lighting business in Europe and the Americas on the 6th of October 2022. As communicated earlier, this has resulted in an impairment due to the lower equity revenues we reveived. In the consolidated books, we have booked a loss of INR5,709 million against the net assets of the VLS business which we have divested. With the transaction now behind us, team in Varroc can now totally focus on the continued operations to strengthen its balance sheet and investor identified focus areas to drive future profitable growth.

Talking about the operational performance. In India, automobile production for all the segments in Q2 FY’23 rose on a year to — year-on year basis as well as on a quarter-on-quarter basis. The main reasons are due to the lower base of last year and the early festive season. On a year-on year basis, two-wheeler production growth by 7.7%, three-wheelers by 24.3%, passenger vehicles by 38.1%, and commercial vehicles by 36.2%.

In terms of our operations, I’m happy to inform you that we grew the revenue from continued operations by 21.2% to INR18,399 million on a year-on year basis. This is the highest ever revenue generated by entities in the countries operations in any quarter. We improved our profitability on a sequential basis with improvement in the EBITDA margins by 100 basis-points. This is the second consecutive quarter when the EBITDA margin has expanded and it came in at 9.2%. The operation PBT before JV profit for continued operations has also improved sequentially by more than 294% in the quarter and it is INR545 million. The reported PBT of INR307 million was impacted negatively by net mark-to-market forex impact of INR242 million mainly on intercompany notes.

We continue to have strong order wins towards new business in half-one of FY23 across business units, enabling our future growth. During half-one FY’23, lifetime revenue from new order wins is INR25,476 million. Out of this, business wins from five prominent EV customers is INR8,676 million. Profitable business wins, improving of the contribution margin, focusing on PBT instead of EBITDA margin, sweating of assets, inventory reduction, commercialization of our R&D efforts, control on costs, growing free-cash flow, debt reduction, and prudent capital allocation remains the focus of the company.

I’m now handing over the call to MK, our Group CFO, who will walk you through the presentation, which is already uploaded in our website and in the stock exchange also.

K. Mahender Kumar — Group Chief Financial Officer

Thank you. Thank you, Tarang. Good evening, everybody. I think the presentation is already uploaded in the website. Let me start with the highlights. The last quarter Q2 was an important quarter for us where we completed this transaction. Of course, we explained the highlights of the transaction in our previous call. But I will still remind you all that we completed this on 6th October. And some of the other highlights have already been explained by our Chairman, but just to highlight once again.

The growth was pretty strong last quarter at 21.2% on a year-over-year basis. And sequentially also, I think we grew by close to 12%. And this quarter had the highest-ever revenue for continued operations in Q2. In terms of the new orders won also it was pretty good. We had new orders total in H1 adding to about INR25.5 billion, including about INR8.7 billion coming from five EV customers, including two prominent EV customers and three new players also.

The EBITDA margin also continues to improve, it reached 9.2% last quarter. Again, because the good improvement from last year same quarter and also quarter-over quarter. So with the completion of the transaction, we now have a cleaner balance sheet where we removed debt and debt like items, adding up to close to INR34 billion, which include at about INR26 billion of debt items and INR8 billion of debt like items. So that was a major cleanup which our balance sheet had undergone. And of course, we also had to pick up the impairment impact because of that. Now with all the changes with improved profitability, we are now in a better position to service and reduce the debt levels going-forward.

In terms of your — overall going to the next slide, in terms of the overall industry trends, Q2 again has been pretty good for the entire industry. Both two-wheeler and passenger vehicles registered significant growth Two-wheeler, of course, grew by close to 8%. But passenger vehicles grew by almost 38% year-over-year. On quarter-over quarter sequential basis also the two-wheeler market grew by about 17% and passenger vehicles grew by 14%. Of course, there are some positives and negatives here when it comes to the industry trends. The semiconductor constrain seems to be easing now. So that can help us — that can help the industry in terms of volumes going forward. At the same time, we also need to see how the overall demand scenario spans out. We see some kind of softening of demand at the low-end of the spectrum. So we need to see how these things span out in the coming quarters.

Now in the next slide, of course, we explained the overall structure of Varroc now after the divestment. Again, we explained in the previous presentation also. Now basically comprises two geographical segments, India and rest of the world. This business, of course, all of you can actually go through and understand.

And then coming to the next slide where we presented the consolidated financials of continued operations. You may notice that the EBITDA margin improved to 9.2% from 8.2% in previous quarter and also in Q2 of last year. And then in terms of the overall PBT margin, its close to about 3% now during Q2 of FY23. Of course, the fact — we also had to put his Forex loss, which is what our Chairman was also explaining in his speech. So with all this, the reported PBT stood at about INR31 crores or INR307 million. One important point to be noted here is the PAT. You might know noticed negative PAT here. But this is because of a couple of reasons. One is the notional exchange losses which we had to pick up in Q2 and also in Q1 are not actually tax-deductible. So because of thast there will be higher tax incidents, plus whatever before tax asset we had earlier, on a similar item at global level also had to be reversed because the transaction values changes subsequently. So because of that you will see a negative PATt. But in terms of PBT it was at about INR31 crores.

Now in terms of the split between continued and — for India operations and overseas operations, you might notice in the next slide that its now at about 9.8% of adjusted EBITDA margin in Q2, this is for India operations, compared to 8.9% sequentially last quarter. In terms of overseas also, the adjusted EBITDA margin was about 3%. Of course, it was higher in Q1 at about 4.5%. The impact of inflation in the overseas markets — still in the European markets had some impact here. We are hoping that going forward it should be should look better. But with all this, the overall continued operations reported 9.2% of adjusted EBITDA margin.

An important question that we all have is, okay, what is this due to the debt position and the overall leverage? As you might notice in the next slide, the net-debt is about INR1,300 crores or 13 INR billion, which is what we indicated in the last call also. Now the consolidated equity stands at about INR900 crores or INR899 crores, to be precise. And annualized EBITDA of about INR672 crores. The ratios are now looking far more comfortable. The net-debt to equity works out about 1.45 after the divestment. As on 30th September it was 1.75 because the transaction got closed only on 6th October. It’s still carries the debt which we subsequently repaid. So that’s why from 1.75 itcame down to 1.45 after the repayment of about INR33 million from the overseas operations. So the net-debt to equity now stands at 1.45 on consolidated basis. Net-debt to EBITDA is also — it’s close to 2 times now or we can say 1.9 times, just below 2 times, lets say about 1.9. This is on the consolidated basis. Even on standalone basis also to see, post divestment it now stands at 1.7. For VLS standalone. So, that is also a comfortable ratio. We will try to improve this as we move forward.

On the right-side — on the screen right you might notice the 31st March scenario, which are both continued and discontinued operations. You might notice the kind of debt we had at the time of close be INR20.5 million. Now this is without even considering the debt like items. If you include that also, you can understand that what happened during this Q2 divestment was a significant relief in terms of the overall — in terms of overall debt burden. And in terms of its service quality also, I think it’s significantly improved.

In terms of the — going to the next slide in terms of the overall revenue breakdown. Of course these details, I think they more or less remain the same from the earlier trends except that the — in terms of the broader segments, two-wheeler and three-wheeler now add-up to about 68%, four-wheeler expanded to close to 28%, and other set about 4%. And geographical spread if you see, close to quality percent of the revenue comes from outside. This is including the overseas continued operations plus exports from India. And in terms of customer concentration, you can see that Bajaj accounts for about 39% of overall revenue and others about 61% or 62%.

Going to the next slide, which is about the new lifetime orders which we won in H1. This is how the split is. The lifetime revenue from customers — if you really see the customer concentration part, the odders won from Bajaj add up to only 18%. The remaining orders from other customers add up to about 82%. And other interesting point here is the new orders from EV segment constitute about 34% of the total. But that’s also a strong positive thing which w are looking at. And then in terms of the Two-wheeler and four-wheeler, it is now split like 44% and 56%, with 56% in two-wheeler and three-wheeler and 44% from others.

Of course, in the next slide we have given these EV opportunities, the portfolio of products which we have, which I think we’ve shared in the previous presentations also. Same is the case with the next slide where we talk about what could this mean to FY’25 revenue in terms of two-wheeler and three-wheeler.

Finally, coming to the future focus area of Varroc. This one gives a good picture of what we are planning to attempt in future. These are the five parameters which we’ll be continuously monitoring. We will definitely focus a lot on revenue growth, which will be supported by volume growth as well as the by naming any kind of pricing. And that will be followed by strong feel to improvement, that’s what we are focusing on. This will enable us to strengthen the business, make the business more robust. This should all translate into a good PBT growth. Here again we need to have a tighter control on fixed costs so that the improvement in contribution margin translates into PBT growth. Now obviously the PBT growth should come back into the FCF conversion also, which is going to be a focus area for us.

Now once we complete all this, we generate cash which can be used to reduce the debt levels going forward. And once we actually bring down debt to a reasonable level, we can then think of where to invest. But going forward, our capital deployment will be based on some prudent principles. So that this if this deployment again generate revenue growth and the cycle continues. So that’s going to be a focus area for us going forward.

So with that, I’ll bring this presentation to an end. Of course, we have other slides for about the CSR initiatives and all which we have taken recently. So with this, I hand it over to you. We can take up any questions which the investors may have. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have the first question from the line of Arvind Sharma from Citibank. Please go ahead.

Arvind Sharma — Citibank — Analyst

Hello, good evening, sir, and thanks for taking my question. Sir, my question is on these tax issue that you spoke about. Will they continue over the second half as well? And if not, then what is expected tax rate? If yes, then how much more of these additional taxes could the company be paying?

K. Mahender Kumar — Group Chief Financial Officer

So these are not like additional taxes or something, like what I explained is what the deferred tax asset kind of things which we accumulated earlier as as asset, thinking that there will be a good consideration and good profit on sale of divestment, which did not happen, so we had to give up that. So that’s one. Second thing was there was these exchange losses which we had booked, so that reduced the profits, but reduced the reported profit earlier. But the taxman doesn’t recognize this, so we still have to pay tax on it. So there’s no additional tax but anything here. And going forward, we won’t be having any significant of these — any significant intercompany loans to these overseas entities. So we don’t expect this kind of impact going forward.

Arvind Sharma — Citibank — Analyst

So going forward, taxation should be done at the corporate tax, rigth?

K. Mahender Kumar — Group Chief Financial Officer

Correct. Going forward it should normally.

Arvind Sharma — Citibank — Analyst

Sure, thanks so much, sir. My second question would be on the margins. I’m including both of them. So first on overseas operations. We see the margins have gone down from 4.5% to 3%. Could you please explain the reasons behind that? For the India operations since you cited there are some issues in terms of demand going ahead, if you could elucidate upon that and the possible impact on margins we could see India operation which had been fairly strong at 9.8% but going forward what kind of an impact could directionally we see on these margins if the demand is soft?

K. Mahender Kumar — Group Chief Financial Officer

Your question is about the overseas operation?

Arvind Sharma — Citibank — Analyst

Both,sir. First, overseas operations, the reason behind the 150 bps quarter-on-quarter decline and for the India operations the impact of a softer demand.

K. Mahender Kumar — Group Chief Financial Officer

Yeah so as far as the overseas operations are concerned, I think I explained in my presentation also there was this high inflationary scenario in the overseas markets, particularly in Europe. So that had some impact on the profitability. So we should see how it how it behaves going forward. As far as the India operations are concerned, of course, we don’t want to give any guidance here, but our effort is always to improve margins from where we are.

Arvind Sharma — Citibank — Analyst

All right, sir. So this 9.8% margin. Of course, you can’t give guidance, but you don’t see too many headwinds to this number.

K. Mahender Kumar — Group Chief Financial Officer

Yeah I mean we still need to see how Q3 spans out. We have just you had in the middle of Q3, so we should, see how the demand scenario behaves in the coming one and a half months or two months. So based on that only we can see how that’s going to have an impact. But as it stands now, we don’t see any kind of thing to worry about.

Arvind Sharma — Citibank — Analyst

Sure, sir. And sir just one final, not a question but just an observation. There has been a fair bit of restructuring in the way you report numbers, so is this the way that we’ll be reporting here on?

K. Mahender Kumar — Group Chief Financial Officer

No see when it comes to restructuring, I don’t think there is any difference in terms of segmentation, yeah we split it between India operations and overseas operations. Yes, that’s how we are going to report in future also.

Arvind Sharma — Citibank — Analyst

Sure, sir, because as per your 1Q FY 23 numbers, India operations were INR12.7 billion but now we see INR14.1 million, so I mean there have been some regrouping but this is how you report here on, right?

K. Mahender Kumar — Group Chief Financial Officer

Yeah, see the major difference is the VLS lighting business in India was not reported as part of India business earlier because the geographic segmentation is something which we will be bringing in only enough. Yeah, going forward this is how it will be.

Arvind Sharma — Citibank — Analyst

Got it. Thank you so much, sir. Thanks for this.

Operator

Thank you. [Operator Instructions] We have the next question from Abhishek Jain from Dolat Capital. Please go ahead.

Abhishek Jain — Dolat Capital — Analyst

Thanks for the opportunity and congrats for decent set of the number in tough times.

K. Mahender Kumar — Group Chief Financial Officer

We cant hear you. Can you speak a little loudly?

Abhishek Jain — Dolat Capital — Analyst

Thanks for the opportunity and congrats for decent set of the number in tough times. Sir my question is related to the overseas operations. So what is your roadmap to improve your revenue and the margin for the overseas operations for the next two years?. And what sort of the target to you have in your mind?

Tarang Jain — Chairman and Managing Director

See basically what has happened is that the business which is in Europe today other than our forging business, which we continue to improve operationally, we we have a two-wheeler lighting business. Ttwo-wheeler lighting business that for the last 10 years and and this business has got plants in Italy, Romania, and in Vietnam. So overall I think this business is quite a steady business. It does a revenue annually at about probably between EUR45 million to EUR50 million a year, what is steady business. And this is something you know we have to see because we have the confidence of all the customers in the two-wheeler business, whether it’s in Southeast Asia or in in Europe. So going forward I see in the next couple of years we see a good traction in our Vietnam business in Southeast Asia. Because that’s where we see where the Asian markets I see more of a — a better growth potential as compared to Europe. So Europe, we’ll have to see how it spans out. Country there is — there are these headwinds because of the war — the Ukraine war. So we have to really see what really happens in the coming months. But till the war in on, we cannot really predict how the volumes will pan out for us, at least in the coming year. But. I think that if — so if — also let’s say if the war is on in Europe, we still expect to grow at — we still expect to grow in a smaller way, probably anywhere between probably 3% to 5% is what we’re looking at.

But when it comes to our Vietnam facility, that’s where our focus is going to be a little bit more on our two-wheeler lighting business and that’s where we are — we are now at at the moment working on growth opportunities over there, also with the Japanese OEMs, and that’s where we are looking that probably we are having a good — we are looking a good, between 5% to 10% growth in the Southeast Asian market as we go along.

So one of the two-wheeler lighting business is something there, we feel more confidence of Southeast Asia rather than Europe. And when it comes to our new business of electronics, which is in Romania. This business, of course, at the moment we have a revenue of about close to EUR25 million a year. Here we are supplying the electronic assemblies to now Plastic Omnium, you know for the lighting business. Here is where we are now looking at future growth, I cannot say. At the moment we are — we are looking at our strategy for growth. But yes, this is also a business we want to we want to grow betwen this thing going forward. So at the moment I think we’ll probably be clearer in the next quarter. You know that about — we are building on strategy now how we want to grow our European business both on a Two-wheeler lighting and the electronic side. But yes, there will be a growth. How much growth, I do not — I’m not very clear at the moment. This is something we’ll be more clear within the next one quarter.

Abhishek Jain — Dolat Capital — Analyst

And for FY’23, it will be tough to make a margin of the 5% kind of the in numbers from the overseas business because there will be continue the pay because of this RM and the wage inflations.

Tarang Jain — Chairman and Managing Director

Yeah so I think that the — we’ll definitely make a margin. We’ll material EBITDA margins. see, it is very difficult to really predict how this inflation pans out going forward. It’s really uncertain, but have confident that we will make a positive EBITDA for sure in this business.

K. Mahender Kumar — Group Chief Financial Officer

Our course will continue, but it’s difficult to predict the macroeconomic scenario. So let’s leave it at.

Abhishek Jain — Dolat Capital — Analyst

We are we are seeing the impact of the RM inflation in the bottom line, but not in the top line. Even the topline has gone down in this quarter despite the capacity additions in the electronics business in the the Romania and plus that some ramp-up in the other two-wheelers business. So what is the reason that we are not able to do top-line growth.

Tarang Jain — Chairman and Managing Director

See, topline also to an extent does get impacted because what we are servicing in in the two-wheeler is also on the premium side, I mean the premium side and also the entry level. So there is some impact, which is — which does come in and also we have to remember that the month of August normally it’s a holiday in Italy, and normally you don’t have more than one week of sales. So both our forging plant as well as our lighting plant in Italy both have been impacted by lower sales in August, and therefore overall the sales has been impacted for the quarter.

Abhishek Jain — Dolat Capital — Analyst

And then India business we have seen impressive growth in your Electronics business because you have started supplying the motor and control DC-DC converter to the Bajaj Chetak. So just wanted to know how much increase in that — how much content per vehicle and are we also looking to supply to other E two–wheelers plants?

Tarang Jain — Chairman and Managing Director

Yes we do, I mean, and in fact, we are increasing our volumes with Bajaj Auto on the motor the motor control and another products for the EV. So those volumes are going up going up on a consistent basis. So, and also the same time, yes, like we have — we mentioned that even for the EV powertrain we are in discussion with other customers and we are hoping that we have got to be winning some businesses also when it comes to the EV powertrain, and of course, also the other products around the EVs, whether it is lighting, switches or plastics or other products.

Abhishek Jain — Dolat Capital — Analyst

So what kind of the growth you are looking from the electronics business for FY’23?

Tarang Jain — Chairman and Managing Director

So. I think, see we are growing with the — we are growing with the market, and today I think we are one of the early starters and I think that we have efforts, we have a focused approach to EV now. We are [Indecipherable] sales of EV side and therefore I think we look a good book percentage, purchases of EVs quarter over quarter.

Abhishek Jain — Dolat Capital — Analyst

Sir my other question is from the lighting business. So how is the current contribution in the lighting business from two-wheelers versus four-wheeler side.

K. Mahender Kumar — Group Chief Financial Officer

So we don’t comment on those individual sub-segment level data.

Abhishek Jain — Dolat Capital — Analyst

Okay, sir. And sir you wpon the many new business in the four-wheeler lighting side, so can you throw some light over there, what is the content per vehicle there and who are the key customers, and what can be the opportunity side?

Tarang Jain — Chairman and Managing Director

See, I’ve not mentioned about the content per vehicle for lighting, but today our major customers today are Mahindra, Volkswagen and Renault. Nissan. And we also supply something to Tata Motors. And we are now looking at driving sales with another couple of customers as we move forward. And we are quite confident that we will grow our four-wheeler lightining business in a very positive manner going forward.

Abhishek Jain — Dolat Capital — Analyst

And what is the current revenue from the four-wheeler lighting business?

K. Mahender Kumar — Group Chief Financial Officer

Again, we don’t disclose that sub-segment information.

Abhishek Jain — Dolat Capital — Analyst

Okay sir. And my last question is related with this your outlook for the polymer and metallic business. What sort of the roadmp you have to improve these businesses?

Tarang Jain — Chairman and Managing Director

So the poymer business you know, we are both on the two-wheeler side and the four-wheeler side. I think on two-wheeler side we have got substantial, a good market share across all customers in India on the two-wheeler side –most customers I would say. And that’s something — probably we have a range of products we are looking at probably cross-selling of some of the products other than Bajaj to cross-sell with other customers, and that something which already in process and we continue to grow on that side. But I think more our major focus is going to be on the four-wheeler plastics, and that’s why we will see that we focus a little bit better on the four-wheeler side of plastic and we grow that business on a pan-India basis as we move forward. That’s the focus area. When it comes to metallic sice, we see India growth for the next few years for what is the investments we have already made. We are seeing a good growth going forward in metallic, but here like I’ve said in earlier calls we have been very cautious because most of our metallic business is all IC engine related. So like we do transmission part and we do engine valve. So here you know we are very, very particular that we have to look at — ROCE is being over 20 — over 22, and unless ROCE is are there in any new business win, we are not really willing to invest further on the metallic side. But here also the metallic side, our focus would be a little bit more on the exports where we see better contributions towards the margins.

Abhishek Jain — Dolat Capital — Analyst

So as you mentioned and metallic business is highly…

Operator

The operator here. I request you to kindly come up in the queue, sir, again for follow-up questions.

Abhishek Jain — Dolat Capital — Analyst

Okay. Thank you.

Operator

Thank you. We have the next question from the line of Rishi Vora from Kotak Securities. Please go ahead. Mr. Vora please go ahead. It appears that this participant has left the queue. I now invite Mr. Vinay Jain from Karma Capital to please go ahead.

Vinay Jain — Karma Capital — Analyst

Yeah, hi. Thank you for the opportunity, So starting with the India business.

Operator

Mr. Jain request you to kindly come closer to the mic or off the speaker phone, your audio is a bit.

Vinay Jain — Karma Capital — Analyst

Okay. Can you hear me now? is it any better? Hello? So, I wanted to ask question on the India business. So if. I look at, barring electrical and electronics business, all the other business segments has actually — if I look at on a sequential basis, the growth is lower than the industry growth with which we have seen, be it two-wheeler, four-wheeler, or three-wheeler. Any specific reason for that? Because again, for us there would be a component of maybe a partial price increase as well coming through. In the current quarter.

Tarang Jain — Chairman and Managing Director

So see what I what what I see is that we have grown both in our electrical, electronic business and the polymer business. So both I think sequentially the revenues have gone up, if you — if you really go to the details. On a metallic side yes, we have not really grown on the metallic side and because metallic side also does a significant amount of exports which has been impacted because of the situation in Europe.

Vinay Jain — Karma Capital — Analyst

And lighting business if you could comment, so because on a consolidated basis basis the lightning business is also down around 5% sequentially, so is it largely attributed to the overseas business?

Tarang Jain — Chairman and Managing Director

Yes, I think — I think we’re doing fairly well, I think on the growth in India on our four-wheeler lighting business. I think that’s the business — I think customers tended to grow over there so. I don’t think it is any to do with the local domestic market. There, I think we have continued to grow in this lighting business, even in the last quarter.

Vinay Jain — Karma Capital — Analyst

Understood sir. Again on the overseas part also on — the way we are reporting it now. Sequentially the revenues have come off by around INR50 odd crores and the margins also. So what are we guiding for on the overseas business, or ex-India business from a medium-term perspective. So are we still track on achieving that 8% to 10% margin over the next, say three to four quarters.

Tarang Jain — Chairman and Managing Director

Say we are definitely going to be striving — see the issue n Europe the Ukraine war and inflation. That’s the biggest issue here. That’s why it’s very difficult. It is very difficult to kind of predict what’s going to happen on the margins, it’s not that easy, and that’s what the earlier participant also aksed the same questions. So very difficult to give a guidance in Europe on the margins. And also the volumes, I would say considering the situation in Europe at the moment.

Vinay Jain — Karma Capital — Analyst

And how is the ramp-up for the Romanian facility coming up? So is that also getting delayed because of the situation, which is in Europe?

Tarang Jain — Chairman and Managing Director

No, I think the situation — at the moment what’s happening, we already have a set business where we are supplying from our from SMT lines to Plastic Omnium now for the lighting PCB. That businesses going on. Presently, the volumes are okay there. But yes, one is impacted by inflation in that business also. But like I said earlier, we are not strategizing with some other customers and trying to focus on business going forward. So we are looking at a growth. We are looking are looking at a growth also in electronics business going forward. But presently we are in a stable situation at the moment with the revenues we are doing at present. So it will take some more time for growth to take place on the Romania electronics side. But we are definitely working towards winning some new business — new businesses over there.

Vinay Jain — Karma Capital — Analyst

But is it now in the green.

K. Mahender Kumar — Group Chief Financial Officer

The overseas business is just about 10% of the total.

Vinay Jain — Karma Capital — Analyst

No, but in terms of profitability is it still loss-making or is it in the black now?

K. Mahender Kumar — Group Chief Financial Officer

I think we already explained it earlier in the presentation, so it is not loss making, it is making profits. We showed 3% EBITDA.

Vinay Jain — Karma Capital — Analyst

Understood. And last thing, so over the years we have accumulated losses with respect to the VLS business and also we have taken an impairment charge on the asset side. So do we expect any benefits to accrue on the actual tax to be paid in future years or are you expecting a normalized tax rate going ahead?

K. Mahender Kumar — Group Chief Financial Officer

As of now we are not expecting any to come from there, that’s the we reversed the the accumulated deferred tax assets. Going forward it should be the, normal tax rate.

Vinay Jain — Karma Capital — Analyst

Understood. Got it, sir. Thank you so much.

Operator

Thank you. We have the next question from the line of Rishi Vora from Kotak Securities. Please go ahead.

Rishi Vora — Kotak Securities — Analyst

Yeah. Sorry, I got disconnected. First question on — you did allude to the fact that you want to improve the contribution margins of the business. Now if I just specifically talk about the polymer business, that business even if look at before 2019, ’20, have been doing that’s a high-single-digit EBITDA margins with ROCE of — post-tax ROCE of less than like mid to-high single-digit. So how do you — going-forward what are the key initiatives which you will be taking in order to improve the profitability of the ROCE after this?

Tarang Jain — Chairman and Managing Director

O firstly see look — see today we have already, like you said, we have made a lot investments in the past. And today we are still not our full capacity utilization. So therefore I think there is still scopw with whatever the capacities we have today to improve to load more business over here, and we are growing — we are growing their as such. And also whatever investments we are making, we are looking at — we are very-very — looking at a very considered approach. I mean, we’re not going to go — we are going to be very careful when it comes to capital intensity. That’s something we’re going to be extremely careful going forward. Other than that, already we are very, very. We have been working a lot and we’re very focused on basically operational efficiencies how to drive OEs, control your variable cost, also better sourcing with the growth we are taking place. How to do better sourcing from the market. So definitely we want to drive our contribution margins up as our CFO Head mentioned in the presentation. So the focus is on improving contribution margins to better control on our manufacturing plants, mainly a lot on the variable cost, including also of material cost. And I think that’s somewhere where we are actually getting, I mean a good traction there. Also we are also working on — trying to recover wherever material increases are taking place — they kind of recovery from the customer on a regular basis. So there is — we are actually pushing the customers. The composite of whatever the material cost increases, including the electronic price increases which take place. So we can’t get a better recoveries from customers also which was not that strong probably pre COVID. So that’s something that we have taken it in a much stronger way.

K. Mahender Kumar — Group Chief Financial Officer

And moreover if you see in the last four five years the business mix for Delhi operations is drastically sinking. Now we have a growth coming from electrical business, then you have the polymer business and aftermarket. So that has the better profitability in the industry as compared to other businesses. And this is what will drive the business margins going ahead, and internally also lot of work is being done to control cost and increase the efficiencies.

Rishi Vora — Kotak Securities — Analyst

Understood. And what would be the capacity utilization in your polymer business unit currently?

Tarang Jain — Chairman and Managing Director

I think depending we have got a total of about 13 plants. It could be anywat depending on the plant. It would be probably anywhere between 55% to 75%. It depends on which plant.

Rishi Vora — Kotak Securities — Analyst

Ulau, sir. understood. And sir going forward, as you have also won several orders for EV components, obviously the margin profile of those components would be very different ROCE that returns would be different. So how will your margin profile and ROCE change? Will EV components with higher margins equivalent or lower margins than your current business and my sense is asset turns are much higher than the current business lines. So will it be margin-dilutive but ROCE accretive or you think on margins also it could be accretive?

Tarang Jain — Chairman and Managing Director

No, So see definitely see electronics, EV components are definitely helping us drive better ROC and better margins going forward. And that’s what, and this is future Electronics and the EV part is the future along with the four-wheeler — or the four-wheeler businesses what we do. And this is something where, I mean there is a very good focus. So, you’re right. I mean, yes, maybe pre COVID we did not see that kind of ROCE, but I think going forward we have our — we are moving towards the target of at least 22 ROCE, aAnd also better double-digit margins. That’s something we are focusing — we would focus on.

Rishi Vora — Kotak Securities — Analyst

And sir, just last question. What would be the CapEx guidance for this year?

K. Mahender Kumar — Group Chief Financial Officer

Yeah, see, for the remaining six months it could be somewhere between INR100 crores to INR150 crores.

Rishi Vora — Kotak Securities — Analyst

Okay. Thank you. I’ll fall in the queue.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Miyush Gandhi from Propulsion Capital. Please go ahead.

Miyush Gandhi — Propulsion Capital — Analyst

Hi. Thanks for taking my question. Sir, would it be possible for you to share how was the growth in the four-wheeler business for us.

Operator

It appears that this participant has placed his call on hold. We will move on to the next question. We have the next question from the line of Basudeb Banerjee from ICICI Securities. Please go ahead.

Basudeb Banerjee — ICICI Securities — Analyst

Thanks. Just few questions. One, just in the last question you said second half capex planned is INR125 crores, how much was the capex in first half sir?

K. Mahender Kumar — Group Chief Financial Officer

In India operation it was around INR70 crores odd only.

Basudeb Banerjee — ICICI Securities — Analyst

And console?

K. Mahender Kumar — Group Chief Financial Officer

Copnsole, I think it will be less than INR100 crores.

Tarang Jain — Chairman and Managing Director

Consol anyway, it’s not the right way to compare now because it had discontinued operations also.

Basudeb Banerjee — ICICI Securities — Analyst

So the SEBI format reported console numbers included discontinued operations.

K. Mahender Kumar — Group Chief Financial Officer

Correct, Correct.

Basudeb Banerjee — ICICI Securities — Analyst

So, overall for the full-year roughly you are expecting around INR250 crores.

K. Mahender Kumar — Group Chief Financial Officer

Yeah, I think the right way to see it is, just look forward. I think that’s the right way to actually think about it. So going forward it will be INR100 crores to INR150 crores in H2.

Basudeb Banerjee — ICICI Securities — Analyst

Just trying to see that now in today’s presentation this INR1,300 crore of net debt which was expected to be met cash a few months back and your the trajectory per annum free cash flow, just trying to understand how much time will it take to — take that to net cash levels at this level of margin where you are already at record revenues. So what kind of sustainable capex to reduce debt you will be looking forward to?

K. Mahender Kumar — Group Chief Financial Officer

Yeah, so like what I mentioned, of course, we have — you know our current EBITDA margins from the current run rate in terms of revenue, so you can compute it. As far as capex is concerned, I mentioned under INR100 crores to INR150 crores next six months. After that also it could be in the range of maybe INR200 crores to INR250 crores the following year. So we will have very tight control on capex going-forward. So based on that we can work out. I mean, we don’t want to give any guidance here. But we are very focused on containing our capex, improving profitability and also improving the free cash flow situation overall.

Tarang Jain — Chairman and Managing Director

And then the debt also.

K. Mahender Kumar — Group Chief Financial Officer

Yeah all that will flow into debt reduction.

Basudeb Banerjee — ICICI Securities — Analyst

And, sir, like in this quarter interest outgo which was INR49 odd crore, now after the reduction, on this level of debt what will be the sustainable interest outgo?

K. Mahender Kumar — Group Chief Financial Officer

Yeah, like what I mentioned no, you’re not in net debt levels and you know the average rates right now. So I think I think when compared, as we continue to generate that will come down. But based on the current levels we can compute the interest burden for the remaining six months. The Indecipherable] business where overall working capital to sales used to be almost zero or negative, and now under this new business do you see any chances of work capital to sale structurally changing? Because why I’m asking is already generating free cash flow and reducing debt is of paramount importance in case working capital reverse structurally, how one should look at it? Yeah, you’re right, was there. I think we will continue to have good control on working capital going forward. We don’t want to give any kind of indications or estimates now, but that’s certainly one of the focus areas. In order to generate good free cash flows we need to now working capital also under tight control. We are focusing on that.

Basudeb Banerjee — ICICI Securities — Analyst

Sir, the earlier part when you said three weeks of manufacturing holidays in August for European operation, so what kind of such holidays one should expect in the Christmas month?

Tarang Jain — Chairman and Managing Director

So see, we are all impacted. See, normally December in India also one of the weaker months and when it comes to Europe, obviously there 10 to 15 days there is no working there practically. So obviously the month of December you do see an impact.

Basudeb Banerjee — ICICI Securities — Analyst

Surely sir. So broadly holidays from Q-o-Q perspective will broadly remain similar, so no incremental benefit or damage because the wallet is on revenue?

Tarang Jain — Chairman and Managing Director

Yeah,yeah, correct analysis. is the way it has been in the past years. I’m not taking of COVID years.

Basudeb Banerjee — ICICI Securities — Analyst

And last question, sir, like — we were discussing earlier that the fire accident, the new facility of four-wheeler lighting will come up somewhere end of FY’22. What is the progress with respect to that? And how you are improving the utilization of Chennai facility? Have some key OEMs are planned to bet added, so what’s the status there?

Tarang Jain — Chairman and Managing Director

So basically where it comes to our new facility in Pune, I don’t think we mentioned that. It is going be ready in ’22. I mean, so we are going to be looking at SOP somewhere around April ’23. That’s what we are looking at. I mean, the plant is, I mean moving on a very fast pace. So I think we should do SPO. I think it really bring in some more benefits from single piece going out there. And yes, we are looking at, of course, more business in today.

When it comes to Chennai, Renault Nissan is a main customer we have there today, other than [Indecipherable] where we are exporting for lighting, but Renault-Nissan — recently also we won another very big business of about INR70 crores of business annually a year in this last quarter, and I think it’s – Chennai plant is playing along well I would say. We are growing our revenues also in Chennai, and going forward we are in touch with also another large customer and we are hoping that we see some good traction with this other customer also moving forward in Chennai.

Basudeb Banerjee — ICICI Securities — Analyst

Sure, sir. Thanks. All the best.

Operator

Thank you. I would now like to hand it over to the management for closing comments.

Tarang Jain — Chairman and Managing Director

So thank you, and and thanks again for joining, listening, and asking your questions. We continue to pursue excellence in our day-to day life for creating value for all you stakeholders. Thank you.

Operator

[Operator Closing Remarks]