Varroc Engineering Ltd (NSE: VARROC) Q3 2025 Earnings Call dated Feb. 10, 2025
Corporate Participants:
Tarang Jain — Chairman and Managing Director
K Mahendra Kumar — Global Chief Financial Officer
Dhruv Jain — Director and CEO, Business II
Arjun Jain — Whole Time Director and CEO, Business I
Analysts:
Mihir Vora — Analyst
Aditya Jhawar — Analyst
Nishant Chowhan — Analyst
Gautam Desai — Analyst
Sanjay Chawla — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the Varroc Engineering Q3 FY ’25 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchstone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Mihir Vora from Equirus Securities. Thank you, and over to you, sir.
Mihir Vora — Analyst
Yeah. Thank you. So good afternoon to you all. From Varroc Engineering. We have with us Mr Tarang Jain, Chairman and Managing Director; Mr. Arjun Jain, Whole-Time Director and CEO of Business Unit One; Mr. Dhruv Jain, Whole-Time Director and CEO of Business Unit 2; Mr. Mahendra Kumar, Group CFO; and Bikash Dugar, Head, IR and Finance Controller of Business Unit 2.
We’ll start the call with brief opening comments from the management, followed by the Q&A session. I would now like to invite Mr. Tarang Jain for the opening remarks.
Thank you, and over to you, sir.
Tarang Jain — Chairman and Managing Director
Yeah. Thank you, Mihir. Tarang Jain here. Thank you to team Equirus for hosting a call — hosting the call and a good evening to everyone.
The Indian GDP has slowed down a little as compared to the last year, but still remains strong as compared to the modest global growth. The rural consumption has remained strong in the past few quarters. The income tax cut by the government in the budget and interest-rate reduction by the Central Bank augurs well for India as it will help in further improving the consumption of the discretionary goods like automobiles.
During quarter three of FY ’25, the two-wheeler, three-wheeler and passenger vehicle segments registered moderate growth, whereas commercial vehicles and three-wheelers showed de-growth on a year-on-year basis. Two-wheelers grew by 8%, passenger vehicles grew by 2.8%, commercial vehicles de-grew by 1.8% and three-wheelers de-grew by 2.6%. However, on a quarter-on-quarter basis, we saw de-growth in almost all segments due to the early festive season and postponement of purchases due to the year-end. Two-wheelers degrew by 5.5%, three-wheelers de-grew by 16.2%, passenger vehicles de-grew by 7.8% and only commercial vehicles grew by 4% quarter-on-quarter.
Before moving to the operational performance of the company, I would like to highlight a few events which have taken place. Firstly, the company received NCLT approval for of Polymer Limited with Verok Edging Limited effective 1st April 2024. The effects of amalgamation are considered in the standalone financial statements. An exceptional cost of INR112.7 billion is recognized towards estimated costs like stamp duties directly attributable to this merger. This merger simplifies the Group structure and operations and further improves governance.
Secondly, the China joint-venture has been recognized as assets held-for-sale post the arbitration verdict, which requires us to sell the stake to the JV partner in view of RMB 310.5 million. An exceptional cost of INR796.5 million is recognized since the net realization, including the estimated taxes and other expenses will be lower than the carrying value of the investment.
Now coming to the operational performance during quarter three of FY ’25. The company registered a revenue of INR20,753 million with a growth of 10.1% year-on-year. Various new programs which we won in the past period moved to production during the quarter. Thus the tooling sales in this quarter was much higher. On the other hand, higher tooling costs had a one-time impact on our gross margin. Despite that, our EBITDA on a year-on-year basis remains the same at 9.2%, whereas on quarter-on-quarter it fell by 50 basis-points.
Our PBT before exceptional items and JV has improved by 80 basis-points on a year-on-year, mainly due to control on capex and generation of free-cash flow, which is resulting in lower depreciation and interest costs. On a quarter-on-quarter basis, the PBT has fallen, which is adversely impacted by ForEx translation losses. The company balance sheet continues to strengthen along with improvement in return ratios. The net-debt of the company in nine months FY ’25 reduced by $1,967 million and net-debt to equity reduced to 0.5 times at the end of nine months of FY ’25 from 0.64 times at the end of FY ’24. The absolute net-debt figure was INR7,860 million.
The annualized ROCE at the end-of-the nine months of FY ’25 was at 19.3%. The order book for nine months of FY ’25 has further strengthened and we continue to build the order book in both India and in the overseas business. In nine months of FY ’25, we have achieved net-new business wins with annualized peak revenues of INR10,847 million. The order book from EV models constitutes more than 55% of these wins. It is more heartening to see business win in our overseas operations.
We have two big business wins in our overseas operations. First one is front drive and rear drive inverter electronics for the electric passenger vehicles. The second one is the interior ambient lighting. The start of production will take place from FY ’27. These wins are testament to our dedication to excellence and showcases our advanced electronics manufacturing capabilities.
In the Indian operation, the order book which is worth-mentioning is a win for power electronics that is traction motors and controller for a three-wheeler player. The SOP of this will happen in the next calendar year. Our endeavor will remain to expand our presence through focused products to drive sustainable growth, improve the gross margin, keep control on fixed costs and optimize the working capital. All of this will help us to deliver value to our shareholders.
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 uploaded the investor presentation to the stock exchanges as well as on the website.
K Mahendra Kumar — Global Chief Financial Officer
Thank you, Karan. Good evening, everyone.
So let me take you through some of the highlights of Q3. The revenue grew at 10.1% year-over-year during Q3.7 billion INR. Profitability for Q3 came in at 3.2% of versus 2.4% during Q3 of last year and the EBITDA remained flat at 9.2% compared to same-period last year. The journey on-net debt reduction continues, so we have now reduced debt to INR786 crores.
In terms of the lifetime business one in nine months, it was coming to INR59.74 billion with annual peak revenue potential of INR10.85 billion. The interesting point here is 58% of the business win is relating to the movie vehicles this includes a significant win in overseas operations from a reputed OEM. So this will be operational or this will be starting production during FY ’27.
Another important point here is similar to what we indicated earlier, the revenue from EV-related products comes to about 10.5% of revenue now. And if you take nine months together also, it is pretty close to 10%. This is in-line with what we indicated earlier. The arbitration verdict, of course we disclosed in our CMD also talked about in detail. The NCLT approval is also in-place now, so that promotes lot of complexity in terms of our internal operations, in terms of treasury management and other things. And in terms of the new products of the interior ambient lighting and front drive and rear drive inverter, these are the new two products which we added in the overseas harder wins.
Going to the next slide, this is about the industry performance. So if you compare it with the last year same-period, the two-wheelers grew by about 8%. Three-wheeler had a degrowth of 2.6%. Passenger vehicle grew by 2.8% and commercial vehicle had a degrowth of 1.8%. So it was like a mixed back between growth and de-growth. On a quarter-over-quarter sequential basis, if you really see most of the segments had only a degrowth, with two-wheelers having de-grown by 5.5%, three-wheeler had a degrowth of 16.2%, passenger vehicle 7.8% and the commercial vehicle alone grew by about 4%. The point to be noted here is the EV two-wheeler volume also on a quarter-over-quarter basis had a degrowth of 6.8%.
Going to the next slide which is on consolidated financials. So the EBITDA came in at 9.2%, flat as last-time. PBT at 3.2%. The exceptional item of INR91 crores includes basically two items. One is for the impairment for the China investment, which we have to recognize now based on the arbitration verdict and also the expected stamp duty and other expenses relating to the amalgamation of VPL with.
The next slide, looking at the Nine-Month performance, the PBT is coming to 3.5% before exceptional items and the overall growth in terms of revenue, total revenue comes to 8.4%. India operations within this grew by about 11%. The PBT improvement year-over-year was like 0.5%, 3.5% compared to 3% last year same time. This was largely helped by lower interest cost and depreciation.
The next slide, we give the net-debt levels. It’s now — it was at INR786 crores as of 31st December compared to INR827 crores at the end of Q2 and compared to the India dealer, we reduced debt by close to INR200 crores. So with this, the net-debt to equity stands very strong at 0.5 and net-debt to EBITDA is also very strong close to-1. And the return on capital employed annualized comes to about 90.3% coming to the revenue breakdown in the next slide, for nine months, the business-wise breakup is given there.
In terms of segmental breakup, 78.5% comes from two-wheeler and three-wheeler now compared to 75.2% last-time. This is also because of strengthening of the two-wheeler EV business. And then in terms of geographical distribution, 88% of revenue comes from India now and 12% from outside. Similarly, Bajaj share of the total also goes to 45.2%, again because of the increased content on EV products.
The next slide on the total order wins, this is what we just spoke about to 59.7 billion in terms of total lifetime value, annual peak revenue of close to 10.8 billion with this significant order win in the recent times in overseas markets, now the overall two-wheeler and three-wheeler comes down to 63.33 and four-wheeler goes to almost 37%. On the EV related percentage win also goes to almost 56% and the non-Bajaj share of the total business comes to 8.66%.
In the next slide we briefly explain the two new products which we recently won as an order, display about the Drive and inverter and also the ambient light ambient lighting. Just some details about the products. So that’s it.
Let me stop here and we’re happy to take your questions. Thank you.
Questions and Answers:
Operator
Thank you very much. We will now begin with the question-and-answer session. Anyone who wishes to ask a question repress star and one on the touchtone telephone. If you wish to remove yourself from the question queue you may press star in two. Participants are requested to use the handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you we take the first question from the line of Aditya Jhawar from Investec. Please go-ahead.
Aditya Jhawar
Hi, thanks for the opportunity. My first question is on China JVs. Now just a clarification now, so we have accepted the offer given by the verdict, right? Is that understanding correct?
Tarang Jain
Correct, correct.
Aditya Jhawar
Yeah. Now the 45 days have lapsed and I’m assuming that we haven’t received any money and there might be no further to and throw with — with the JV partner. So any timelines MK, if you can indicate in terms of how much — when we can get that money and what could be the realization after net in-hand.
K Mahendra Kumar
Yeah. So thanks, here. First of all, this is difficult to clearly put a date to it, but you’re right, the 45-day period is already over, it’s already overdue. But having said that, that both the parties are actively engaged in the discussions. There are certain procedural formalities to be completed like for instance how to determine the tax impact and then we also need to create an escrow mechanism so that the documents and the money get exchanged. So those kind of things are under discussion but yes it’s taking more time than what we initially expected but the discussions are in-progress.
Coming to the net realization of course the tax impact is still under discussion. But based on whatever opinion we got, I think there will be a 10% of capital gains tax, which will be taken as before the tax reduction plus some cost and all. So broadly around INR320 crores to INR330 crore of net realization is what we should see.
Aditya Jhawar
Okay. Okay. That’s helpful. Second question is on overseas operations. So very encouraging to see you getting big orders in the overseas operation. Now it would be great if you can give a little bit of perspective is you mentioned that SOP is 2027. So I’m assuming for both the products, Indian lighting as well as the inverter electronic FOPs 2027. So what would be the order size typically for this and the ASP and what opportunity size we are looking at? Any color? And I’m assuming that the manufacturing of this would be in Poland and any kind of capex that we’ll have to incur for supporting this order?
Tarang Jain
Yeah. I think maybe Dhruv can reply more clearly.
Dhruv Jain
Yes, yes, yes. So just to answer this question, the — the — so when we’re expecting these businesses to go into production, it would actually be around middle of 2026. So it will be — it will be fiscal year 2027. However, it will be most likely calendar year 2027, at which point these businesses will hit their — hit their peak revenue. In terms of what we’re expecting roughly in terms of annual revenue, it would be in the range of $30 million per year. So if that maybe gives you — gives you some insight. And just to clarify, this would be produced in Romania in our Romania electronics facility.
Aditya Jhawar
Okay, that’s helpful. And what would be the capex for this?
Dhruv Jain
So in terms of capex, yes. So in terms of the capex, we are expecting this to be you know, I don’t want to give you some wrong numbers, but it’s essentially the range of in the range of $2 million to $3 million.
Aditya Jhawar
Okay, okay.
Dhruv Jain
Incremental.
K Mahendra Kumar
Most of the infrastructure is already in-place, only certain program-related capex is what we can come.
Aditya Jhawar
Okay. That’s helpful. Now just I think you know on overall on overseas operation, if you split the business into three parts, the new products that we got and we have premium two-wheeler lighting and IMES. So what we understand is that premium two-wheeler lighting was struggling a little bit because of end-market and customer-specific issues. If you can give us an overall update that what should we expect in each of the three kind of businesses? So I mean, Romania, Poland is still relatively small, but what is the update on the — on a premium two-wheeler lighting and IMEA?
Dhruv Jain
So maybe I’ll just go first, Aditya, and I will talk more about the lighting in Italy and Vietnam. So here we actually have also added some new customers this year. So we’ve had some success. We’ve added a major premium to wheel lighting customer. Having said that, for — if we look at the next 12 months, we’re not really expecting any revenue increase. So we are expecting that we’re expecting that the revenue that we have experienced in the last 12 months that it will be along the same levels.
I think we are — I think that is — that’s the answer to that question. But on MS perhaps…
Tarang Jain
So just to clarify, so see what we are looking at — you said three businesses. One is, of course, the electronics business out of Romania, which today, I mean is very much underutilized, probably at about 15% 20% 30% utilization that we will start seeing utilization going up from — from July of ’26 and then reach in some months, it will reach that peak, you know of $30 million dollars annually. So — and that’s good and that will occupy a large part of the capacity and maybe we can do even more you know, in the current facility we have, but then of course it is fairly profitable with that level of revenue.
On a two-wheeler lighting, of course, there has been this pain in Europe, you know, because we have two facilities there, one in Italy, in Turin and then one in Vietnam. So there, the larger customer has been so-far over the years and we have seen some fall in sales with. So going-forward, we see sales in the next financial year to be similar in two-wheeler lighting as the current year. But of course, the lighting on the whole is profitable. But we won orders already from one premium customer with a large, I mean revenue size of almost EUR3 million per year, that business will start in FY ’27. You know.
And similarly for two-wheeler lighting, we are pursuing the Japanese OEMs also — and also another European OEM out of Vietnam. So in the future, we see more revenue growth in Vietnam as compared to Italy because people want lower-cost and everything, you know. So we will see — we will see from FY ’27 a good level of growth in Vietnam year-on-year in lighting business. So we have, you know, that’s what we see. In the case of MS, so MS has been profitable year before last, but this year it has been challenged because of the market situation. You know our major customers there are the Caterpillar Group and of course, the oil and gas business, whereas the oil and gas business has done well, but that’s only about 20% of the revenues. The 80% comes from the Caterpillar group and that’s where the volumes have been lower. But — but we have been pushing for some more business with Caterpillar in this forging facility.
So there is also a game of revenues. We are expecting that next year we should have a higher-level of revenues. We’ve already seen some revenues go up from January, you know, but it’s not enough. So we do expect higher-level of revenues from April overall. So with that level of revenues, I mean, our basic objective is that we try to reach at least a PBT neutral kind of a kind of sit instead of a PBT negative, which is there today in this financial year. So there is a lot of effort going. Plus we are also looking at more customers. So we’re in discussion with a couple of more customers also for these kind of forgings. And there also we are expecting some level of success where some business can also flow-in next year in the second-half. So there also we are more optimistic that the results next year in MS also should be better than the current you know this thing financial year.
Aditya Jhawar
Yeah. So this IMES, it is in a way relatively lower synergy as compared to other businesses. So was there any thoughts or consideration to divest this business over a period of time or it’s not on?
Tarang Jain
So presently, see, the point is, I agree with you, it’s not a part of a core business. But in the current situation, current state, there won’t be any bias for the — in this current state. And therefore, I think it is prudent as a company that we focus on increasing sales because the plant is actually quite good and the current customers also very happy. The question is of sales. We have enough capacity. So now the effort is — is a more of a sales effort, I would say, that we are trying to see that we reach a certain level of sales and profitability. So the moment we are not really thinking, though it’s — I agree with you, it’s a little bit of a non-core, but at the moment, we want to — we want to make it really profitable, then once it’s profitable, then we can think about these kind of things for the moment we don’t have that thought process at all.
Aditya Jhawar
Sure. That’s helpful. Final question to MK. Any number that you’d like to indicate in terms of capex for this year and next year as well as targets of debt reduction this year and next year?
K Mahendra Kumar
So your regular capex will be just above INR200 crores, plus we are also investing in-land for this year. So finally, we may end-up this year with about INR260 crores to INR270 crores. Next year also, the regular capex would be in the range of maybe INR200 crores to INR250 crores. But next year, again, if required, we may have to invest something in the land. So that’s where it is.
Tarang Jain
So basically, Aditya, what is happening is that now we are nearing last few years, we have been adding to a capacity utilization in all the plants. Now time has come that we need to buy more land, you know. So definitely in the Pune region or in the northern region. So definitely, there will be a kind of a significance. So we would have to budget other than the INR250 crores, INR200 crore 250 crores for normal capex for some growth capex, we will I think have to budget next year at least I think close to INR150 crores at least of capex towards land because that’s something which will be important, which can again last us for the next seven, eight years at least, you know. So that’s something which will come in one-time next year, you know as an extra capex.
Aditya Jhawar
Yeah. And debt, MK?
K Mahendra Kumar
Debt reduction, I think you’ve seen the number, we are right now at 786. So like what we indicated earlier, we may end this year with somewhere around INR700 crores to be the number. This is without considering the China realization. China realization when it comes, obviously, it will be less to the right stand. So from there, I think whatever free-cash flow we generate next year minus the investment in-land, we’ll decide the debt level for next year.
Aditya Jhawar
Okay. That’s it from my side. All the best.
K Mahendra Kumar
Thank you.
Operator
Thank you. Before we take the next question, a reminder to all the participants. If you wish to join the question queue, you may press and one on your touchdown telephone. Ladies and gentlemen, if you wish to join the question queue you may press star and 1 on your touchstone telephone.
The next question is from the line of Nishant Chowhan from Geojit. Please go-ahead. Mr, your line is in the talk mode, sir. Yes, please go-ahead with your question.
Tarang Jain
Nishant, we can’t hear you.
Nishant Chowhan
Hi, am I audible?
Operator
Yes, sir, please go-ahead.
Nishant Chowhan
Okay. Yeah. So my question is related to the employee expense. So if I see quarter-on-quarter, I think we have been seeing an increasing trend of expenses towards the employees. So could you just help us understand, I mean, what is happening in over and what would be the sustainable run-rate of employee expense going ahead?
K Mahendra Kumar
Yeah. So a couple of things happened. This quarter, we also had some severe in Spain, some of these overseas locations, that’s more like a one-timer. Plus last quarter, we also had certain credits, certain reversals or provision reversals which we took. So because of that, the quarter-over-quarter will appear to be a big variance. Going-forward yes we are also doing some kind of restructuring currently so that will bring in some kind of reduction starting from March onwards. So that’s how it develops from now on.
Nishant Chowhan
So any idea where would this settle a sustainable run-rate of employees?
K Mahendra Kumar
More or less state the current level as the growing in level, but what happens is next year, of course, obviously, there will be a merit increase also that will be partly mitigated by the headcount reduction exercise, which we did recently. But yeah, so other than that, more or less the current level of spending will continue.
Nishant Chowhan
Okay. Okay. And secondly, would it be possible to give out the number for — I mean, what would be the Nine-Month revenue for our international subsidiary? I mean the lighting and the electronics business in Romania.
K Mahendra Kumar
No, we don’t give that kind of split yeah. So for us entire business is a total business, but by segment we have given anyway in our presentation.
Nishant Chowhan
Okay, okay, okay. Thank you. Thank you for your time.
K Mahendra Kumar
Thank you.
Operator
Thank you. Ladies and gentlemen if you wish to ask a question you may press on your touchtone telephone anyone who wishes to ask a question may press and one on the touchdown telephone. The next question is from the line of Nikil Bora from Equirus Securities. Please go-ahead, sir.
Mihir Vora
Yeah. Thank you for taking.
Tarang Jain
A lot of disturbance on the line
Mihir Vora
Hello. Is it audible? Is it clear?
Tarang Jain
Yeah. Yeah, go-ahead.
Mihir Vora
So sir, my question was basically on the integrated start ISG thing which we are working on and we can see fewer — very fewer models right now in the industry, but there seems to be a good scope for that. So can you throw some light compare — comparing it to the starter motor, how much the content increases here and what is the comparison, like what make the OEM shift to this kind of the technology? And are we in engagement with any customers like multiple customers?
Tarang Jain
So we already have — we already have two customers for the product. One is already in SOP and the other one is in development. Fundamentally, the I think there is two or three factors, right? I think one is there is definitely a gain in — there is definitely a gain in efficiency and in fuel efficiency. Secondly, I think the — in terms of rider feel as well, there is an improvement. And thirdly, I think the total packaging space required also reduces, right, from having you know, two independent — two independent electrical machines having one integrated electrical machine. Let’s say these are the broad benefits. In terms of the — in terms of the sorry, I think that was — I think that was your question. Does this address it?
Mihir Vora
Sorry? Hello?
Tarang Jain
Yes, no, sir. Have I addressed everything in your question?
Mihir Vora
No, so basically the question was also on the content value part, like how would it fare against the starter motor that?
Tarang Jain
So standalones, I would say probably around at least 15-ish with somewhere between 15% to 20% value increase.
Mihir Vora
Okay. Sure, sure. And sir, my second question was on the China JV part. So basically, we — I assume that we would be having some synergies in terms of lighting technology from the China JV. So post this arbitration post the stake sale, so how do we look at technology transfer or something like that from that China JV? So how does it impact our lighting business in domestic or say Romania?
Tarang Jain
So I can speak for India, I think I think one from an India perspective, I think we are self-sufficient anyway in India, especially for the technology levels required and further for the future level of technology also required, I think whether across China or other parts of the world, broadly we are protected. So we don’t see any risk for — and we don’t see any risk. In any way we do — so post this exit from the joint-venture, there’ll be more from the manufacturing angle. We do want to maintain a level of engineering in China, you know, for our four-wheeler lighting, especially on the four-wheeler lighting part. So we will have a team and also for the ADAS electronics, which we already do today. So we do have some engineers who kind of drive our ADAS engineering over there. And plus post the sale, we will want to maintain a strong level of team in China for engineering on the four-wheeler lighting side.
Mihir Vora
Yeah. Okay, sir. And sir, my last question would be, are we seeing some traction on the four-wheeler lighting domestic part also like we predominantly have been a two-wheeler lighting company, but is it that we are seeing some traction on the four-wheeler side as well?
Tarang Jain
Yeah. So we continue to — we can — I would say we have decently sized book of business. We continue to win business. We continue to deliver. I think most recently, we’ve executed the — we supported a customer relocalization of a full-fledged LED headlamp which has been completely indigenized. So you know, like with, I would say there is a — I would say there is a good level of traction based on the service-based on the service that we offer.
Mihir Vora
Okay, okay. That’s all from my side. Thank you, sir.
Tarang Jain
Thank you.
Operator
Thank you. A reminder to all the participants, if you wish to ask a question, you may press star N1 on your touchstone telephone. Ladies and gentlemen, if you wish to ask a question you may press Tar and 1 on your touchstone telephone the next question is from the line of Gautam Desai [Phonetic] from Vaillant Capital [Phonetic]. Please go-ahead.
Gautam Desai
Hello. My question was more on the slide, which says the EV product offering and that the total value is INR35,000. So is it possible to give some kind of breakup of the you know the value of each of these 7, 8 items and my second question was that recently Pricol has released its presentation and they are doing the instrument clusters for the Pajab, and the three-wheeler so and they plan to eventually go into e-cockpit as well as navigation. So my question was like we are also looking at the same-space and we are also looking at getting into PMS. So how do we stand, especially, especially in respect to Bajaj, you know in the EV portfolio?
Tarang Jain
So again, I don’t want to — I don’t want to comment vis-a-vis versus one competitor specifically per se. But I mean like with any — like with any product group, there will be multiple players in each product group, right? I think the value that — the value that we speak about is really, I would say, a total addressable value within the vehicle, most of which is already captured. Now, of course, program to program, product-to-product, there will be — there will be variations. So I would really look at that number that I would really look at that number that we state directionally in terms of the total addressable value within a vehicle. And of course, like I said, in the case of certain customers and one customer in particular, we’ve already been able to capture a large majority of that value.
So I think that’s how I would put it. Of course, that value can also range based on what exactly is the performance requirement of the vehicle and what exactly the definition of the vehicle. The higher-performance vehicle is generally higher-value. Lower performance is generally lower-value.
Gautam Desai
So I was asking from the perspective that some of our products, they are getting obsolete like it was and the RR and the CDI and this kind of products. And at the same time, there are new products that we are launching. So do we see a cannibalization of our revenue because of the loss of certain products and at the same time, that loss is regained through the launch of more higher-value products. And in those high-value products that we get, how do we stand? That was like more what I was trying to figure out. And the second was obviously was the breakup of the cost of each of these eight items and the value of each other items.
Dhruv Jain
Okay. So I’ll go one-by-one at the questions. So there is a different powertrain technology, right? I mean at this most simplified level, the way to think about it is, okay, you have — you have an IC engine, you have an EV, right? So different powertrain have different have different component requirements. Today, we have a strong portfolio across every powertrain and I would include CNG also over there now. So for us, fundamentally we are placed — we are placed effectively regardless of which powertrain does well. Now of course, I mean it is obvious. If you have more EV, you will have lesser, you have more EV or a EV grows faster than ICE, you could make the suggestion that EV potentially cannibalize some of ICE’s growth. But that is not necessarily the way we think about it, right? The way we think about it is that you have to be prepared from a technology standpoint in each powertrain.
Then within the ICE powertrain because you talked about a product like a CDI, yes, the CDI is already largely converted to a fuel injection system. Every domestic vehicle will really be — will really have a fuel injection control unit, which is something that we — which replaces the CDI. This is something that we already do. So within each powertrain, we drive progress to — we drive technology progress to capture whatever is the technology level that is required now for the vehicle. So don’t really have a concern around — around — I mean, we don’t — we don’t — we don’t really think about it from the perspective of cannibalization. We think about from the perspective that we have an overall market and you have to be prepared to service each segment of the market.
Then in terms of the value of components, like I said, right, I mean, the value can range dramatically based on what is the performance — what is the performance requirement. So it would not be — it would not necessarily be correct only to give you a value. But I think in terms of broad values, it’s quite easy to — it’s quite easy to find out what broad values for, let’s say any powertrain would be what broad values for a charger would be broad value for BMS would be at an individual component level.
Gautam Desai
Okay, that’s helpful. Thanks a lot.
K Mahendra Kumar
No, also to add, actually see today even the current products like engine valves and all, there is a huge demand for these kind of products. Today, in fact, we’re in a situation where we don’t have capacity to actually offer to the customers. There’s so much of demand because some of the people have exited this business so there’s a lot of demand and pressure on us to deliver. So that’s not a business which is re-growing actually is a growing business for us.
Gautam Desai
Understand. that’s all from my side.
Operator
Thank you. Ladies and gentlemen, if you wish to join the question queue you may press on your touchdown telephone. Ladies and gentlemen if you wish to ask a question you may press star and one on your touchstone we take the next question from the line of Sanjay Chawla from Investment Managers. Please go-ahead.
Sanjay Chawla
Hi, thank you for the opportunity. Can you explain a little bit more and can you quantify the impact of the stooling sales and margin impact and what would the margins be like without this?
K Mahendra Kumar
Yeah. See, toolings generally go with the lower margins than the regular product. So if you see the impact I mean if you really see this quarter margin, gross margin with last quarter I think close to about 0.4% is because of the tooling sale impact.
Sanjay Chawla
So this is a Q2 impact.
K Mahendra Kumar
Q3, Q3 versus Q2.
Sanjay Chawla
Right? And also you mentioned inventory correction, how much was the impact because of that?
K Mahendra Kumar
See so these are normal corrections which we take whenever we do the fiscal verification. So there are two, three reasons. One is this inventory correction plus there are also certain one-timers in the base. So all these things contributed to the remaining gap when you see year-over-year. But quarter-to-quarter this is the only one.
Sanjay Chawla
Okay. And can you give some indication of pointers as to where the margins are headed? You’re also doing this cost optimization, headcount reduction exercise. So when do you see these margins being headed let’s say next year.
K Mahendra Kumar
It should certainly be better. We don’t put a number and give a guidance to it. But yeah, you’re right, there are various actions which are in-progress, the cost optimization things and we are also doing a Phase-2 in renewable energy plus interest saving itself should be significant if you really end this year with below INR700 crores. Then similarly depreciation should more or less stabilize at the current level until we do the next level of significant capex. So that way, I think all these things are positive trends for the coming year, but you don’t want to put any number to it.
Sanjay Chawla
And any savings from this end of arbitration, any sort of impact on that as well from that as well?
K Mahendra Kumar
Yeah. So the money inflow when it comes, obviously, it will reduce debt significantly. I’m not even counting on that.
Sanjay Chawla
I mean the impact on the EBITDA margin. What were you incurring any more cost in the opex side from this arbitration which was going on?
K Mahendra Kumar
We don’t expect anything now. See, we actually incurred a significant level of arbitration, legal cost last year itself. So this year it is not so significant. There may be some closure related cost once we complete the transaction. But other than that, we don’t expect any significant number.
Sanjay Chawla
Okay. Okay. Thank you.
K Mahendra Kumar
Thank you.
Operator
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Tarang Jain
Yes. So thank you once again to everyone for joining the call and for your continued support to our company. Thank you.
Arjun Jain
Thank you.
K Mahendra Kumar
Thank you.
Dhruv Jain
Thank you.
Operator
Thank you, members of the management. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines.