Tonbo Imaging India Limited (TONBO) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to Tonbo Imaging India Ltd. Q2 and H1FY27 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 then zero on your touch-tone phone. Please note, this conference is being recorded. We are pleased to have with us the Senior Management Team, led by Managing Director and Chief Executive Officer, Arvind Lakshmi Kumar, Sir, and Chief Financial Officer, Srivatsan Shivashankar, Sir, who will share his perspective on the company's performance for the quarter and the key business developments during the period. Before we begin, I would like to remind everyone that certain statements made during this call may be forward-looking in nature. These statements are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. I now hand the contents over to Mr. Arvind Lakshmi Kumar, sir. Thank you and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining Tonvo's first analyst call since our listing. Since this is our first call, I'd like to take this opportunity to introduce the company and set the context. I'll cover why defense is changing, what Tonvo builds, the technology behind it, our products and our track record, and how our business model works. Tongos CFO Shiva and Chief Commercial Officer Cecilia will then take you through the financial results and Tongos Chief Business Officer Ankit will walk you through the scale of opportunities that we have for our business. Following this will open for questions. So let me just start with the problem we solved, right? You know, warfare is changing fast and the economics have slipped, right? So if you look at a cruise missile or a ballistic It costs about a million and a half dollars for a single mission. A loitering munition costs about $500, but it can scout, target, and strike. A manned fighter is about $100 million, an unmanned combat aircraft costs just $5 million with no pilot at risk. When you look at a main battle tank, it costs about 7 million, carries 4 crew, autonomous ground vehicle costs less than a million dollars, maybe one operator to run it, and you can run like 6 to 10 of them simultaneously, right? To intercept the drone, a kinetic missile will cost anywhere between $30,000 to $3 million a shot, and the magazine runs out. A directed energy weapon costs less than half a dollar for a shot, right? So the conclusion is very simple. The decisive edge for any battlefield today is better sensors, better edge artificial intelligence, and more autonomous platforms. But, you know, while the platforms have changed, the subsystems inside them have not, right? The sensors inside these platforms are still very expensive and heavy. The processing system is power hungry and draws anywhere between 30 to 80 watts. Radio links can be jammed in seconds. Size, weight, power, and cost are the biggest technical bottleneck today, right? The second problem is access, right? By our estimate, suppliers in the US, Israel, and Europe control over 90% of this frontier defense technology. Export rules such as ITAR and government-to-government approvals limit who can buy it, often with years of delay. Countries that are modernizing and rearming cannot get what they need. So what does Sonbo do, right? We are the intelligent stat for autonomous systems. We design and build the soft systems that autonomous warfare needs. Sensing, processing, communication, guidance, and neutralization. That means high-performance infrared imaging systems for sensing, low-car computing for real-time AI at the edge, optical communication for jam-free high-bandwidth links, small, light, inertially-sterilized platforms for guidance and control, and RF-based direct energy weapons for long-range neutralization. Together, all of these technologies, they cover the battlefield, the dismounted soldier, land vehicles, surveillance platforms, aerial reconnaissance pods, naval vessels, missile systems, and the entire integrated C4 ISR suite, right? And our promise is very simple, right? Our promise is to democratize autonomy at the performance level militaries need and at a cost that enables global scale. Now, everything we run, runs on technology we own, right? We have 100% proprietary IP built over more than 15 years of R&D. We have over 130 engineers in R&D today. We are completely free of ITAR export restrictions, which matters to military that want modern capability without export control dependence. We are completely fabless. We manufacture through certified partners. So all our capital goes into design and intellectual property and not into building factories. Now our track record is proven and real, right? More than 28,000 of our systems are in service across more than 24 countries. Over 20,000 of our thermal sites are in Indian service, 50,000 thermal sites in European service. Israeli French Special Forces use our night vision binoculars, and we have won programs across Armenia, Morocco, and Jordan in open global competitions, right? Now, we report our business in two lines, optical systems, which is essentially the sights and the binoculars or soldier carries, and platform systems, which are, you know, gimbals, fire control systems, weapon stations, and seekers. Now, directed energy is a third, still in development, and our approach is really global first. Prove the product overseas and then drive the adoption in India, right? So, I'll talk a little bit about our strategy, technology, and R&D, right? Our strategy has four key parts to it. First is, we build, validate, and sell every layer of the stack, right? The science and the intellectual property, the imaging modules, the electronic boards, and the end systems. Now, each of these layers is proven through customer sales before we fund the next, and that's how we de-risk our R&D completely. Second, we own the core intellectual property. Optics, sensor electronics, low-power embedded vision, precision stabilization, RF sources, and control systems are all technologies that we own and we have built in-house. Third is we expand geographies. In some geographies, we bid directly, and in some other geographies, we offer OEM subsystems that are white-labeled by our domestic partners in that region. And the fourth is we scale through partners because our model is completely fabulous. So it's a fabulous model with multiplying specified matching partners and this lets us add capacity without building plants. Now in terms of R&D itself, right, the next phase of our R&D is the directed energy system. Now, missiles that cost millions of dollars are being used against drones that cost hundreds of dollars. High-power microwave essentially allows us to break that cost asymmetry. We estimate that the directed energy market outside of India currently is at about roughly half a billion dollars and is going to grow to close to $4 billion by 2030, right? It's a growth of nearly 50% per year. India itself is expected to add close to $300 million by 2030 with both Army and Navy roadmaps calling for about 90 and 40, you know, microwave systems. Our base strike product is at technology readiness level 4 right now, right? We have signed letters of intent for 11 units, 5 for the Indian Navy as a minimum water quantity, and 6 for a European customer. We will keep investing in directed energy over the next 3 to 4 years. Now, you need to treat this as an option that we are building, not a short-term revenue. So, I'll talk a little bit about our H1, FI27 results. Shemal, of course, covered this in detail, but let me give you a quick high-level summary, right? Our H1 FY27 performance has met our expectations with revenue reaching about 219 crores, supported by a very strong second quarter and encouraging order flows of about 188 crores. Our current order book of about 250 crores together with contracts under negotiation of about 408 crores and a qualified pipeline of opportunities support a positive outlook for FY27 and the medium term. Now, products-based defense businesses like ours need to be looked at from the lens of a three- to five-year perspective, and our business performance tracks on an annual basis. Revenue volatility, quarter-on-quarter, has been seen historically, and that should be considered par for the course. Over the last 15 years, sustained investment in R&D has helped us to build a broad portfolio across tactical systems and platforms. While tactical systems contribute about 70 to 80% of our business, we expect platform systems to account for a larger share over time. So we will continue to invest in proprietary technology, including the development of directed energy weapon systems over the next three to four years while pursuing both domestic and export opportunities. Last month, we secured a strategic export order from a European state-owned company for first-order production units. This is for a multi-sensor stabilized seeker essentially marking its entry into an export loitering munition program. On acceptance of the FOPM units, the customer has an option to order up to €13 million worth of systems. Now, this reflects how our investment in imaging, stabilization, and tracking is carrying Tongo from sensors into precision guidance. So, we expect increased adoption of our platform subsystems and the DEW platforms, both domestically and globally, to smooth out interior volatility and also provide sustained growth for the business. Thank you. I'll now hand it over to Shiva and Cecilia to go over financials.

Friends, this is Shiv Shankar here. I'm the Chief Financial Officer of the company, and joining me is Cecilia, the Chief Commercial Officer of Tonbo. Thank you, all of you, for joining us. We have met some of you during the IPO roadshows, and perhaps we are meeting some of you on this call for the first time. Let me take you through the financial highlights for the first half of financial year 27. Revenue from operations for the first half of this year The Q2 stood at 219 crores, which is significantly higher than the 77 crores registered in H1 of the previous financial year. While the year-to-date revenues this year have been higher, it may be noted that the first quarter had revenues of only 36 crores, while Q2 was much higher at 183 crores. The quarter-on-quarter volatility It's not specific to this financial year. It has been observed in the past as well. For example, in FY26, a significant portion of the revenues was booked in the second half. The revenue recognition in H1 was 22%, while the revenue contribution of H2 was 78%. While we are not giving a revenue guidance at this stage, We believe that H2 revenues for this financial year are likely to be materially better than H1. This is based on the 250 crore order book that we have, the contracts under negotiation, and the pipeline opportunities which could convert into orders in the next two to three months. In terms of the composition of our exports, of our revenue, Exports was about 35% in H1, while domestic revenues comprised 65%. Moving to gross margins, the gross margin was INR 75 crores in the first half, and roughly 87% higher compared to the 40 crores that we saw in H1 FY26. The gross margin percentage was 34.62% in H1. It was lower than the 51% seen in FY26 due to the product mix. Moving on to EBITDA. EBITDA for H1 stood at 31.15 crores with an EBITDA margin of 14.2%. This compares well with the EBITDA of 11.75 crores in H1 last year. If I just look at the quarter alone, EBITDA for Q2 stood at 44 crores with an EBITDA margin of 24.11%. The largest cost below the gross margin line is the employee cost. Since employee costs are largely fixed from quarter to quarter, EBITDA margins were low for H1 but are expected to improve for the full year since revenues in H2 are expected to be higher than H1. Profit after tax was 5.8 crores for H2 with a pat margin of 2.61%. Profit after tax for this quarter alone was 23.5 crores, with a pat margin of 12.71%. Given the variation in quarter-on-quarter revenue recognition, we think that the financial metrics of the business, as well as its prospects, are best measured on an annual basis, and neither quarterly or semi-annual would do justice to evaluating the merits of the business. Coming to the balance sheet. The company continues to maintain a strong balance sheet. The net worth of the company was 564 crores as on 30th, September 26. Bank borrowings was about 169 crores, essentially for funding working capital, which is self-liquidating in nature. In a post-September 30th update, one of our banks has increased the cash credit from 30 crores to 50 crores after the quarter end, and we are working to increase our cash credit limits with the other two banks as well. Our order book today stands at about 250 crores as of September. Our contracts and the negotiation are about 408 crores. And we have a set of pipeline opportunities, both in practical and in platform, that we hope to convert in the next two to three months. As Arvind mentioned, the business momentum appears strong for the medium term. We have an intellectual property-led products business. Revenue recognition varies significantly depending on timing of order receipt and order execution. Our approach towards building the business is that if we continue to innovate and invest in R&D, we have the ability to have nonlinear growth at some point. While the market direction is clear that there will be increased acceptance and demand for products that enable battlefield autonomy, It is very difficult to predict timelines. So you would see that in the investor presentation that we have shared, we are given numbers to the extent that we can, but for a lot of our platform opportunities, for example, we will only know over a period of time as opportunities convert. But the opportunity space itself is a large space. With that, I would hand over the mic to Ankit, who will talk about some of the opportunities that we are working on.

Thank you, Shubha. Good morning, everyone. I am Ankit Kumar. I am the Chief Business Officer for Tonbo, and I look after domestic and global sales and business development for Tonbo. I thank you all for joining us. Let me spend a few minutes on where we see the opportunity for Tonbo. Tonbo has built a large portfolio of electro-optical products under one roof, covering tactical, land, naval, airborne, and missile applications. The first opportunity is in tactical systems. This is the most established part of our business. The status requirement just in India includes around 80,000 thermal weapon sites, handled thermal images, combined alongside approximately about 27,000 image intensifier sites to be procured in India. These quantities represent only a part of the Indian Army's overall requirement. Procurement is already underway, and we expect activity of procurement to continue over the next 6 to 18 months. Some categories of procurement move faster than the others. Some of them are through capital procurement. The capital procurement programs generally involve more rigorous testing and take longer time. Internationally, we are pursuing near-term opportunities for approximately 10,000 thermal sites and monoculars combined. These figures indicate the scale of potential procurement. Final quantities will depend on tenders and contract awards. For Tonbo, the opportunity is to compete for this demand with products we already know how to build and supply in volume. The second opportunity is in platform systems. These are products integrated into land, naval, airborne, and missile platforms. They include see-through armor for BMPs, light tanks, wheel armored platforms, and similar vehicles, as well as electro-optical and fire control systems for them. We've already begun several of these integrations. Platform programs do take time to mature, and much of the work has begun a few years ago, and some of it has already started to show results. Most are still small seed programs as of now, but they have room to expand as the platforms themselves enter wider service. For example, we've upgraded thermal imagers in gunner sites on legacy platforms for an overseas army in the past, and now we are working on similar opportunities in India. We are upgrading the thermal imagers for Concurs anti-tank missile launchers, both on BNPs and ground-based launchers. We are also supplying electro-optical fire control systems for remote-controlled weapon stations on the origin platform, and exporting these systems to partners in several countries. In counter-drone applications, we are developing electro-optical fire control systems that can detect a threat and maintain precise video track. That precision is particularly very important when the system is used to intercept the drone. Electro-optics can compete and complement radar and radio frequency detection systems. We are developing panoramic thermal imaging systems, wide field of view systems, as well as long range cameras for air defense applications. Stealth aircrafts are designed to reduce the radar signature to evade radar detection, but it still produces a thermal signature, and that's the opportunity for us. Recent conflicts have also highlighted the role of thermal imagers in air defense applications. Our traditional gimbals were very large, high-precision systems. Today, a lot of drone manufacturers are asking for smaller, lightweight, and more affordable satellite systems. So we are developing these for loitering munitions and for rotary wing and fixed wing reconnaissance aircrafts. We are seeing demand from drone and loitering munitions manufacturers both in India and overseas. On the naval side, we've successfully replaced imported satellite gimbals on naval vessels with systems of our own. These are well suited for FPVs, FICs, and many other marine platforms. Developing this equipment has taken time, and we've learned a lot through the engineering work itself. In precision guidance, our work includes low-cost, lightweight, electro-optical, and infrared seekers for anti-tank-guided missiles and military munitions. These AI-enabled seekers in fire-and-forget mode follow the target and maneuver the missile or the loitering munition towards the target. A seeker places much tighter demands on stabilized systems than a regularized ISR gimbals. It must keep tracking the target as the platform moves and passes information to the guidance system with wave missile delay. We've developed that capability and we continue to improve it. We are pursuing both domestic and international programs on precision guidance using EOIR. And initial supply may just initially cover a few units, but we are under testing phase, and there are much larger opportunities around the corner once these are successfully integrated with these platforms. The third opportunity is in direct energy, particularly high-wave, high-power microwave systems for counter-drone applications. We've been, our focus has been on high-power microwave systems designed to disrupt or disrupt or kill the drone's onboard electronics. Under the Indian Navy's IDEX Aditi contract, we're developing a very long-range system for naval use. We're also developing systems for Indian Army's stated requirements, as well as shorter-range variants for airborne requirements. So we're building three different kinds of platforms there. For investors following Tongop, this is an opportunity which spans manned and unmanned platforms. Tactical systems generate revenue today, and platform OptronX has started to grow, with many feed programs already underway. We serve a broad range of applications and continue to improve our technology so that we can bring it to more platforms. We've had to be patient all this while, and our investors so far have also been patient. Building these products has taken us time and perseverance and acceptance of failures and as well as success. We have learned from the programs that went well, and we have learned from that have taken longer than we expected as well. In platform electronics, our timetable also depends on readiness of vehicles, vessels, aircrafts, our partners are developing. Procurement and delivery schedules can move revenue between quarters, which is why we assess generally our performance annually. Our immediate priorities as of today are to deliver the orders we have, compete for the next round of tactical and platform requirements, and keep investing in products that our customers constantly require. Thank you. I'll pause here and I think we welcome your questions from outside.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ashish Ajit Gulecha from B Ventures LLP Fund. Please go ahead.

Hi, sir. Thanks for the opportunity, wonderful numbers, and congratulations with our team. Am I audible?

Hello?

Yes, sir. Am I audible, sir?

Yes.

Hello? Am I audible? Sir, the question is for the mean person. Like in the November 2026 date, it's clearly said that the energy time is at roughly 290 million by calendar 30, across 100 per system. So, how is this roughly the 11-12x gap between the two figures and one day to a system price is moved, what to get from 200 crore to this is roughly 17 to 25 crore. This is my first question. Second question I will come, then the first question is done. Thank you.

Okay, so to understand the difference in terms of the directed energy systems market size versus, you know, what is there in 2030, right? We are building the directed energy system. So the first directed energy system that we are going to have in production, which we deliver to customers, will start in 2029-2030. The price that we have for the Indian directed energy system, the one we are selling to Indian Navy, we quoted prices at about 200 crores a system. And what we have for our international customers is at about $25 million apiece. Now, the Indian requirement, so the size of the market in India, overall size of the market, right, and this is not the 2035, overall size is about roughly 140 systems when you think about it, each at 200 crores, that adds up to 28,000 crores. Now, out of the 28,000 crores in India, what we expect is that by FY30, the number would be much smaller, and what you see about 290 million roughly corresponds to the FY30 number, not the overall size of the market. The overall size of the direct energy weapon market in India is, you know, 200 crores roughly into the 140 systems, that is 28,000 crores. Okay, got it.

So my second question is in the deck. There is a Chitraki site which says that we have a 3.82 billion global DEW time by calendar year 2030 at 50% CAG. Wanted to understand how is

Tonbo's addressable share compared with Apira,

who is valued at 5 billion and sub 2 km range, given that Tonbo always claimed that into 3 to 5 km multi-range fly restring range. Thank you.

So, our only credible competitor that we have where there is credible data, right? So, first, let's just look at the countries which have capabilities for directed energy weapon. In the US, you have Epirus, of course, and you also have Lockheed and Vaseon, which are building smaller variants. Russia has got a system which is in the sub 1 kilometer range. China, we don't know what it has, and Turkey also has something in the 1 kilometer range. And India currently does not have anything in the 3 to 5 kilometer range. So, our real incredible competitor is Epirus. Now, Epirus is technology. So, when you look at the global market, so once we are ready with our multi-beam price strong, which can address three to five kilometers, the Epirus is restricted largely to U.S. VOD and in some variance to the Five Eyes countries. So, the same Five Eyes countries whom Epirus takes its systems to, Togbo will take our systems to those countries. So, we are already in discussions with, so for instance, you know, we've spoken to Japan about it. Our order we have currently in terms of the LOI that we have is from Europe. So all the countries Epirus goes to, we will go there and we won't have any restrictions. Epirus is restricted in terms of what it can offer to those countries. So we will compete with Epirus on those markets. Okay.

Sir, you would be knowing that through your own words, Directed Energy Systems are at TRL 4 and the market opportunity. So, wanted to understand total cumulative investments to date and expected CAPEX and R&D with respect to Directed Energy Systems, if you could throw some light. Thank you. This is my final question.

So, directed energy weapon, as I mentioned, that the first delivery of these systems will not happen before 29-30. So, there are three concepts. What essentially determines the success of the program, right? First is, you know, the fundamental technology, right? What is the technology that we are building? So, we've been working on this technology for the last two, three years, where, you know, technology on the multi-beam chlystron, technology on the pulse compressor, The technology on Antara Designs, all of that are technologies that we are working on. So from a technology point of view, they are reasonably far ahead. The second thing is that the capital to be able to build it, right? So what we expect that the first system that we are going to build, the rough cost of capital to build it is about 160 crores. Now, the 160 crores is being funded partly by a loan which is coming in from Exim. Exim is sanctioned about 120 crores. We have an IDEX Aditi grant which accounts for another 25 crores. And the balance 15 crores comes from our own balance sheet. So the capital to build the first system, that we already have this. The third is customer intent and, you know, a firm sense of commitment, assuming that we can build it to the spend. We have customers who are willing to buy it at an appropriate price point. So that's why we find on customers up in advance, right? So think of directed energy weapon to be very similar to like your electric car. The first time an electric car came out, you had to ensure that, you know, So when you have to ensure that it can actually give that range, and then you sign on customers who say, I'm willing to buy it, provided it can meet these requirements. So we found customers who are willing to put and sign on and say, look, here are signed NOIs, and if you build it and you are ready with this spec, we will buy it at this price. So that's the third part, which is sorted out, right? And so now what you're going to do right now is the fourth part that we are actually working on is the product engineering part of it, right? And so it's TRL 4 because there is a product engineering risk and testing risk with and what we expect to do between now till FY29 is essentially mitigate that risk and cross that hurdle.

Yeah. Thank you, sir.

I have no further questions. I will comment up to you later. Thank you so much, sir.

Thank you.

Thank you.

Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants, please limit your questions to two per participant. The next question is from the line of Purva Dhaveri from IONIC. Please go ahead.

Yeah, hello. Hi, sir. Good morning, sir. Hello. Good morning. Yeah, yeah, sir. So, sir, I have a couple of questions, sir. So, sir, I wanted to get a sense of the difference in gross and EBITDA margins for technical business versus a platform business. So, and in the exports business as well, what is the gross margin for tactical versus domestic business for tactical? And similarly for platform as well, gross margin definitely for platforms when you export versus domestic.

Did I take a question, Avin? Yes, sir.

Okay. So, starting with the tactical systems. The gross margins in the domestic business can vary from year to year, but they're broadly in the 40% to 45% area. For platform systems, it is higher. It will be in the 45% to 50% area for domestic. In the case of exports, the gross margins, I won't differentiate between tactical and platform at this stage, will be anywhere in the 60% to 65% area. On the export site.

All right, sir. And sir, I also wanted to ask you, sir, regarding the, you know, if we have an opportunity of, you know, I think 13 million euro order, which can come from the European contract, which they recently signed for 65 million euros. Sir, does that include in the contract and the negotiations of 400 crore order book, which we have currently?

It is included as part of the 408 crore contracts under negotiation. It is not included in the order book of 250 crores.

All right. So, you mean to say 13 million euro order, which is an optionality, that is included in your 4 million dollar order book, if I'm not wrong.

That is correct, because we expect that, we believe that, you know, so long as we deliver the product to the specifications that the customer has stipulated, there is more than a fair chance that he will go ahead with the order.

All right, sir. And sir, just last question, sir. Sir, what is the average time it takes us for, you know, us to convert the order book into the revenue? The whole order book, including the technical and platform.

So, in the case of tactical systems, the delivery can take place, you know, within three months if we have all the long lead items as part of our inventory. So, generally speaking, I would say it is three to six months from the time we receive an order. In the case of platform systems, it can take anywhere between six to 18 months to deliver on a platform system. Having said that, I think that the way we try to do things is A lot of the subsystems that go into these tactical systems are common across categories, and therefore, not only do we have the raw material, we have some of the subsystems assembled and kept in place. So even orders that we get, let's say, by December this year for tactical systems, we would be in a position to convert it into revenues in three to four months.

All right, sir. So, John, just to follow on this, sir, follow up on this, sir. So, currently, we have 400 keros of order book under negotiation. So, sir, out of that, how much would be for platform and how much would be for tactical, sir, if you can, you know, just bifurcate that? It would be really helpful.

I would say about, just give me a second. About 250 of that would be tactical, and the balance would be platform.

Yes, sir. Thank you. Thank you so much.

Thank you. Next question is from the line of Vivek Ganguly from TCG AMC. Please go ahead.

Thank you for the opportunity. A couple of questions. So usually in India, a lot of the products, the specs are designed and, you know, maybe the initial is also done by DRDO and then it is given out to the private sector for them to take it to the market. The impression that I get is in the case of the directed energy weapons, you are doing it everything on your own. All the parts are on your own. It is not a DRDO, you know, subset that you are working on. Is that impression, right?

So a couple of corrections. One is that that is how it was traditionally in India, right? DRDO was supposed to build the frontier technology, and then public sector companies or private companies, as in current case, would take it from DRDO and build it. Our model is completely different, right? And we are a product company. And our emphasis is that the technology specs that we can create based on our experience selling these products to international customers is far superior to what comes out today as part of localization. Thanks. So, our model, we do not build a product based on DRDO specs. We create the specs based on our discussions with our customers, make sure the customer understands, you know, the performance, price, comparisons of the specs. We build a product and we sell the product to the end customer. So, this is true of our tactical systems, this is true of our platform systems, and it's true of our direct-to-end energy weapon. So, as an example with tactical systems, I'll tell you, right, for instance, before we started building our weapon sites, the typical, you know, size of a thermal weapon site, which was based on DRDO technology or Israeli technology transferred to Indian public sector, used to weigh about 1.2 to 1.5 kgs. Now, 1.2, 1.5 kgs makes sense if you're putting this on a tank, not on an AK-47 or a Negev or a Dragunov, right? So what that requires is a 400 gram or a 500 gram site. So what we said is what makes sense is a lightweight site. It needs to last eight hours. It needs to engage a target at one kilometer. That's the spec we create. We showed it to the customer. We showed prototypes to the customer. We proved it by selling it internationally. And then the Indian customer put it in their RSP, right? And that's the model that we follow. And that's what we do for all our products.

Right. No, that's very helpful. The second one is on the HPN. So, it's... Something that you are taking the risk on and developing entirely on your own and with the, you know, debt funding, IDEX funding and some part coming from your own balance sheet. Is that the way we are looking at it?

So, every product follows the same philosophy, right? Not just HPM. So, for instance, when we build the gimbals, the gimbal which exists in the market today, we said, look, you know, this is what exists. What we think the market needs is completely different. We will take the risk because, you know, as an R&D company who wants to create solvent capabilities, you need to create that. You need to take that risk to be able to build it. So historically, we have taken that risk. We have been successful in some. We have failed in some, but that's the model we'll take.

I think let me just want to add something. This is Shivar here. So while we are investing in R&D, there are a couple of things that you should bear in mind. A, we design, we choose which product to design and develop based on extensive... Conversations that we have with customers. So it's not completely blue-skying research, right? So we do have a good idea of what the product, what the customer is looking for in terms of product specification. Second is, in terms of the business model, we are not operating on a binary zero or one. You know, either the HPM works at the end of two, three years, or it doesn't. That's not the model we do. For example, Arvind mentioned a few components of what goes into a high-power microwave, but one of the things that is required is a detection system for detecting whether something which is coming in is a swarm of drones or a swarm of birds. Now, this product... So, the drone detection system is already in place. When you have a high-power microwave, you also need a positioning system which can direct the energy towards the sky at an exact location. We are already in the process of developing the positioning system for a Middle East customer, right? So there are two components that we are in, one that already works. One, we are already in the process of developing a TRL level higher than TRL 4. So, All of these subsystems which go into a high-power microwave will keep developing it, and we will have an opportunity to sell each of these subsystems as well, in addition to the final product which will come two, two-and-a-half years down the line.

Got it. Okay. No, that's very helpful. Thank you. That's all from my side.

Thank you. Next question is from the line of Pranay Roop Chatterjee from Berman Capital Management. Please go ahead.

Hello, am I audible?

Yes.

Hi, sir. Thank you for the opportunity and congratulations on a great set of numbers. So my first question was on the Q2 revenues. We saw that, you know, about 51.5 crores of revenues came from US. I just wanted to understand whether this is more on the tactical side or more on the platform system side, and are we supplying directly to, you know, the US government or, let's say, subsystem aggregators there?

So these are platforms, we are not at liberty to talk about the customer's soil, you know, avoid that, but these are platform subsystems.

Platform subsystems. Understood. So, on the new product categories in the platform systems, you mentioned quite a few interesting products, more specifically, you know, smaller gimbals for UAVs and loitering munitions. I just wanted to, you know, understand what are the, you know, stated, like, the procurement plans of the Indian government for these categories of systems, and do you, you know, see a large inflow of orders coming in in the late Is it going to take the next one to two years for this particular category or is it going to take, you know, a longer period of time similar to, let's say, HPMs due to convert and get actual purchase orders here?

Ankit, do you want to take it? Yeah, I'll take the term.

So yeah, like you said, right, I mean, traditionally, we've been building heavier systems, more, you know, with better precision, better accuracy. These are lightweight gimbals for the current demand. And we are already doing pilot integrations with some of our partners in the country and as well as outside. So it is already along the lines where the programs have been created. Now, it will depend upon, you know, when our partners, when those programs, you know, their timelines and their... Their procurement cycle, it will, you know, plainly depend on that. But otherwise, from a product perspective, they're already seeding and already, you know, so in terms of if you compare it to HPM, we are far ahead in terms of TRL level and it is already being seeded.

I understood. And here, since you mentioned that you are working with your partners in terms of pilots, I'm assuming here you are working with, let's say, the larger system aggregators who's supplying the, you know, full-end product like a lot of ammunition or a UVA, you are probably supplying the EUIR guidance system. Is that the right way to understand this?

That is correct.

That is good. Understood. So, one more question if I can squeeze in. You know, specifically on the, let's say, EU IR missile seeker side for ATGMs, what I understand is that on a couple of programs, we are the sole providers, especially with, you know, some of the state-owned entities like BDS. I just wanted to understand whether you have, you know, actually supplied these products as part of your, you know, confirmed POs or, and you expect to get a large order in your hair in the next one to two years, or is it more in the prototype and the pilot stage similar to, let's say, UAVs and all of the munitions.

Ah, so both the, both the lightning munitions and seekers, ah, sorry, go, go, go ahead, okay. Go ahead, go ahead, go ahead, go ahead. So, both the MPATGM seeker, the command launcher unit, and the seekers that we put on loitering munitions are far beyond prototype, right? They have been field tested. Some of them have gone into larger quantities as various subsystems, and they essentially, so essentially we look at an MPATGM, that's a system which has been validated, right? It's been validated for shock, validated for accuracy, validated across, you know, stationary and moving targets, right? Both for loitering munitions in their terminal guidance and MPAT GMs all through the face of their flight. So, and, you know, the systems that we have supplied to both, you know, domestic customers and some of our international customers are essentially being field tested and validated. So, only when we are doing production orders, the production orders will come in right now. So, there's no technology risk, so to speak, either of them.

Thank you. Sir, I'm sort of getting a bit confused. Since, you know, a large part of current order book, quality, you know, about 200 crores out of 250 crores, that sits in, you know, the platform systems. So, is that more oriented towards, let's say, the older technologies, the larger gimbals for, you know, larger manned vehicles? Is that the right way to assign this? So does that also include, you know, purchase order for our newer systems, like, you know, these e-wire seekers and, let's say, UABs, counter-grown systems, that sort of categories.

Ah, it includes both.

It includes both. Understood. Understood. Well, thank you for answering my questions, and best of luck for future. Thank you.

Thank you. Next question is from the line of Darshal Javeri from Crown Capital. Please go ahead.

Hello. Good morning. Thank you so much for taking my question. Firstly, I have a really great kind of results, sir, and for your listing, sir. So, I just wanted to understand, like, our order book is for platform and this both, right, tactical systems, right? So, for beating our H1 revenue, we nearly have to convert a full order book into revenue, right? So, are we sure we'll be able to complete it in this six months?

Yeah, so there are three boxes that you need to look at. The first box is the order book where we have 250 crores. You're right, that has got some platform systems and the execution of some of the platform systems can, you know, will likely go into next year. So there is a portion of the 250 crores which will get executed this year. The second is the contracts under negotiation, which is about 400 crores, and if you remember the earlier part of the call, I said about 150 will be platform systems out of the 408, and about 250-odd will be the tactical systems. So, the contracts under negotiation, you know, assuming that they come through by December, we should be able to convert it into revenues in this financial year. The third is the opportunities, and you would see, you know, three, four slides in the investor deck. There are various programs which are currently going on where RFPs have already been circulated, where field trials are going on, where there is a set of orders which are expected both this month and next month. So we could have order execution from our current order book, from the contracts under negotiation, as well as orders from the opportunity set that we are able to convert into firm orders before December or January. I will ask Ankit to give you some color on the opportunities that can convert at the shorter time frame.

Thank you. Yeah, like Shiva mentioned that, you know, there are many programs which are in very advanced stage when initially I mentioned that the opportunity is about 80,000 thermal weapon sites. A large part of it is through a procurement cycle, which is, you know, pretty quick in terms of procurement cycle. And some of those cycles are already in motion. And, you know, and that's how traditionally also it has been with Tonbo, that we've been on programs and a lot of programs that start to get seeded in the first quarter of the year, second quarter of the year, we generally, second quarter of the year, generally, these start to convert into purchase orders and third and fourth, This is when a lot of execution happens. So it's along the same lines. There are a lot of them right now which are very close to the finish line.

Okay, fair enough, sir. I just wanted to know in terms of our margins, sir. So, I think H1, we are around 14% margins. I understand there is cyclical and we should look at it annually only. So, annually, could we do margins that we did last year for the last 2-3 years? Like, that's the average margin we can take for our annual revenue?

Can I take that?

Yeah, right.

Yeah, so I think, you know, there are two or three components to this, right? One is the gross margin. Now, that depends upon the product mix that we have and the contract that we negotiated, you know, at a certain point in time. In the second half of the year, we do expect a higher export component, which would help in terms of the gross margins. As I mentioned earlier in the call, we do expect the H2 revenues to be materially higher than H1. So if you look at it in terms of the EBITDA line, below the gross margin, the largest component of the expense is the employee expense. So when you have employee expense as a percentage of revenue, that would be high in H1. It would be relatively lower in H2 when we deliver higher revenues. And therefore, the EBITDA margins will kind of go up simply because we will deliver higher revenues. So a combination of higher gross margins because of a change in product portfolio and change in the domestic export mix. As well as the fact that operating at a higher revenue level should take the EBITDA levels to be higher than the 14% that you saw in H1.

Can we quantify that? Range will also be fine.

No, I don't think we're going to be giving any guidance either on revenue or margins at this stage. You just need to bear in mind that we have IPO'd quite recently, just a couple of weeks back, so there are certain restrictions in terms of what kind of guidance we can give at this stage.

Okay, fair. And this last question for my answer, what would be our targeted order book, you know, closing order book for the year? Like, what's our target? Because I think we'll be nearly consuming our current order book. I understand there are 400 crores of orders also, but any notionally target, like, you know, like you want to have 4528 order books or orders. And what is the pipeline like other than these orders that you're looking for?

Okay, I'll just give you the opening remark on that, and then I will ask Ankit to add. As I said, you do need to look into the fact that there are three boxes, not look at it in terms of just saying that the existing order book will get exhausted, because some of the contracted, because the contracts under negotiation of 400 crores, As I mentioned, a portion of that, you know, is anyway going to be for next year, right? And the third set, which is what you need to focus on, the opportunities, there are certain procurements being done by both commands under the OCPP program, as well as the Ministry of Defense, where there is a lot of procurement being done, both in the immediate short term, which means in the next two to three months, as well as in a more medium term of nine to 12 months. Let's just focus on the immediate short term, right? We are looking at, if you see the slide on tactical systems in the investor tech, right? We are indicating 75,000 thermal weapon sites, 5,000 thermal images, and 27,000 image intensifiers, et cetera, et cetera. So that's a large number. So just to give you some perspective on this number, right? And Arvind, in the beginning of the call, mentioned that, you know, in terms of the total weapon sites which are installed in India, it's, you know, some number between 20,000 and 30,000. The quantity that the government, you know, between the Ministry of Defense and Commands is looking to procure this year is several times that number over the next 12 months. So, some of this, as I said, we expect a lot of these to convert into orders in the next two to three months. We will be able to execute some in this financial year, and there will be a large part which will be an overflow which will go into the next financial year. So, the answer to your question, what will be the order book that we will have in March 27th? Whatever orders that we get under the OCPP program or some of the other programs that Ankit referred to, We will probably execute 100-200 crores this year, and whatever we get in excess of that will be the opening balance for next year.

Okay, that's it for me. Thank you so much. All the questions.

Thank you. Next question is from the line of Karanti, Bethany, from Beltmill Securities, Private Limited. Please go ahead.

Hi, I just want to take a macro level outlook for even the kind of the rising geopolitical issues at this point of time, and also the defense spending that's going up. How far in the next couple of years or coming quarters your company is going to take the advantage of these? And what are the factors that influence your revenues? That's what I want to know for you at a macro level.

So, okay, I'll address it and of course, I have a follow up on this. So, you know, at a macro level, unfortunately, the world that we live in was not going away, right? There are problems, right? So, you know, someone might look at it as a short term view. And, you know, there is always this whipsaw effect happening right now, where the US midterm elections did not go in favor of Republicans. So, people assume that defense budget is going to get cut. Therefore, US defense stops come down, right? Over a long term, you know, of course, when you look at it from, for us, two, three core area countries of interest to us. One, of course, is India, right? India, I mean, we are not dependent on this geopolitics. We need to arm ourselves. We put together a plan. The TPCR lays out what we need to do for the next 10 years. So I think barring any crazy changes in India, I would imagine that India would continue the same way. So from a macro perspective, India's technology procurement in line with the TPCR will The second place where our business which we look at is Europe, right? And Europe right now, Europe has realized that it won't take too long for the scenario to go back to how it was before where their dependence on U.S. will cause a constraint to their own sovereignty and national security. So, Europe, from all our knowledge and what we understand, is going to continue to rearm, and they have an $800 billion budget put out for rearming right now over the course of the next 5 to 10 years. There's nothing which says anything contrary to that. So, I presume that that's going to go on as well, right? And so when you look at these two markets, India and Europe, where we are supplying today, from a current short-term changes in geopolitics, I don't think that's changed the long-term outlook which is let's say the next three to five-year outlook on how these countries are going to procure.

Just this is a specific question, are you exporting anything to the US at this point of time? Just want to know. No, we can't comment on that.

Okay then, thank you.

Thank you. Next question is from the line of Manish Goyal from Thinkwise Wealth Managers, LLP. Please go ahead.

Yeah, thank you so much, and congratulations on a very good set of numbers, sir. One question on competition from BEL Optronics, I believe it's a subsidiary of BEL, and just would like to know, like, what kind of competition we see from them? Do they really compete with us? Because last year, they had 100-odd crore revenue, which actually had come down from 180 crore from the previous year. And they probably had got funding or grant from the Indian government for the product development in the last few years and also to set up facility. So maybe if you can give us perspective on the competition from BEL and maybe any other Indian company. That was my first question.

So, I think to address competition, so address competition in two ways, right? One is competition within India and a competition internationally from any Indian competitor, right? So, the competition internationally from an Indian competitor doesn't exist because no other Indian competitor, you know, sells these countries or sells these kind of systems right now to these countries that we sell to, right? Competition within India, yes, we do have, so we, and, you know, we have competition across different lines of business and different competitors. In, you know, the area of business which constitutes most to our revenue, which is our tactical systems, our competition typically is Bharat Electronics, Tata, Alpha type of companies. Now, the fundamental difference between Bharat Electronics, I mean, any of them and us, is that when you look at the complete value chain of, you know, thermal weapon sites, right, we are one of the few people who own the intellectual property across the maximal part of that value chain, right? So, in a sense that whether it is the optical designs, whether it is sensor electronics, whether it is video processing electronics, whether it is fire control electronics, we own the intellectual property, right, as opposed to some of the others who partner with other people and because of their partnerships and what they buy from others, they are, you know, either their price points are higher or their ability to configure to a very dense spec is very low, right. So, in that sense, we think we are better placed. Now, I mean, having said that, you know, the competition will exist. I mean, like, it's not that we're going to win 100% of the programs that we have here. Historically, when you look at tactical systems, there are about 30,000 tactical thermal weapon sites which have been deployed in the country today, out of which 20,000 have come from us, right? So, more than 65% is market share in terms of thermal weapon sites. The programs which are coming in, India needs to grow from whatever 30,000 thermal weapon sites to maybe 300,000 weapon sites, right? So what we have to expect is that there will be competition. Maybe we will not be 65%, maybe we will be 50%, maybe we might be 60%, but we will have a fairly large percentage compared to, and historically, that's what we have done. Now, when it comes to platform systems, the kind of platforms that we make right now, right, which is the gimbals, the, you know, remote control weapon station sites, other people in the country don't pay. For instance, Bharat Electronics is also a customer of ours. Bharat Electronics has got bell-off, which makes optronics, but the electro-optic system, which goes on to the remote control weapon station for the Arjun Mark 1A tank, it is son-bolts and not a bell-off system. So, even though they do have some subsystems, they don't have the kind of portfolio that we have across practical and platform. So, it puts us in a better position compared to our existing Indian competitors. In the Directed Energy Weapon, we don't have any competitors Thank you so much.

And on these thermal insights, like what Ankit mentioned, that there is a 80,000 units opportunity. So, just want to know, like, ideally, it's like, are these products under serial production, like approval, and then it also goes through the P&L procurement of the defense, or it is under capital procurement? And just want to know, like, how is it planned over a period of time that so much needs to be produced in a particular year and deliver? Just want to get a person.

Ankit, you want to answer that?

Yeah, I'll take that. Two parts of the question, right? Whether we are geared up to supply such volumes, I think that's fairly straightforward. We've been supplying very large volumes over many years now, and we are one of the largest manufacturers of thermal imaging sites in the country. So, we are not very concerned and also, you know, how our model of production is, manufacturing is very much, you know, like...

Sorry, I need to... Sorry, Ankit, what I was trying to understand is that usually defense forces have a three-year plan, power plan, and maybe a lot of this procurement would be qualified under serial production or say this year, next year. So, is it already under that category or how should we understand?

Yeah, so see, what's happening right now is that a lot of thermal weapon-side procurements are happening under OCPP. I'm not sure if you're aware of the OCPP head, which is other than capital procurement procedures, where commands have powers to upgrade existing platforms. And there are a lot of weapon upgrade programs which are going on. There is in fact a very large list of programs that was released by SIDM a few months back. Capturing most of the approved SIDM, approved OCPP procurements. And OCPP is not multi-year. The timeline is not more than 12 months on the time they envisage the procurement to delivery. And so there is a large number of, large volume of sites which are going to get procured under this head. And then there is capital. Capital will take time. Capital is still to pick in. We are still dealing with some RFIs right now with infantry and we are expecting RFPs to come out soon, but that can take a year, year and a half for the trial, the testing procedure itself to complete. So that is where, you know, your second point is valid that, you know, it may take time and it may be delivered also over a few years, but OCPP ones are very fast.

So this 80,000 is under OCTP or how is it?

It's both. It's a mix of both.

Okay, and last question on the R&D, like, we have a strategy of debiting to the P&L as well as capitalizing some amount. And I believe what you had explained earlier in IPO time was that, like, directed energy system, till you probably see revenues flowing in, you would not capitalize. I just want to know what is the number for current year and how much is going to be both on P&L and on the capitalization.

Okay, so Shiva will talk about the numbers, but I'll give you a context in terms of how to think about capitalization, right? Capitalization is not when revenue starts to flow in, when there is visibility of revenue, which means that the blue sky research part of the technology development is complete, and you know that there is a customer intent put in either in terms of LOIs, or you know that, yes, you know, the uncertainty technology risk can be de-risk, right? Engineering risk of product development risk is the one which is there. That's the time when you start capitalizing. So historically, what we have done, like for instance, in directed energy weapons, development of technology which goes into, let's say, the Kleistron, which is the RF source, that gets expensed because that is still blue sky research which we are experimenting. But product development, taking that Kleistron and making it into a product which is the HPM source, that will get capitalized because you know that there's a customer intent, There's 11 units which are there both from India and from Europe, right? So the capitalization, I mean, and it goes back to Indian accounting policies that if it is blue sky research, we cannot capitalize it, we need to expense it. So, Shua, maybe you can just give color on the numbers that we intend to do for this year and next year.

Yeah, so let's get into two, right? One is the research that we do for tactical platform, and the other is the research that goes into the high-power microwave system. I think in the first half of the year, there's a spend that we had on R&D with order of magnitude about 16 crores, of which about 3 crores or so went into P&L, and the rest of it was capitalized. I would expect the same kind of trend to be there for H2 as well. So the total R&D spend that we would have, order of magnitude, will be about 30 crores, of which the capitalized amount would be about 25 crores or so. This is on the R&D, excluding HPM. As far as HPM is concerned, the total project cost is about 160 crores or so, where the hard cost, which is the cost of materials that would need to be procured, is about 120. The rest of it is stock costs, which will include the interest during construction. It will include the pre-operating cost like testing and so forth. It will also include the salaries of the people that we will have on our rolls. That order of magnitude over the next two and a half years will be about 20 crores. The employee expenses capitalized for the HPM project will be about 20 crores, and that's a subset of the 160.

Okay, and this product what you develop would be eventually sold, right? So when you say R&D, you incur of 160 crores. So it is basically you will be the bidding that particular product and it will get sold. How should it reflect?

Yeah, so the product that we built itself can be sold, but what can likely happen is that once we have a product, we may be using it for demonstrations and stuff like that. So the first unit that we produce may not get sold. It may just get accepted by the customer, and we will produce a few more units of that kind. Answering your question, the entire 160 crores is not a debit to the P&L in the sense it is not a cash burn. Some portion of the 160 crores is represented by a hard acid like a vitamin Plystron or a pulse concentrator or an antenna or whatever else.

Okay.

Thank you so much and all the best.

Thank you. That was the last question for today. I now hand the concerns over to Mr. Arvind Lakshmi Kumar, sir, for closing comments.

Thank you. Thank you, everyone. Those were insightful questions. I appreciate you taking the time understanding our business. You know, this is the first call post-art listing, so hopefully we answered all your questions and you have a good grasp of what you set out to build. Thank you, everyone.

Thank you. On behalf of Tonbo Imaging India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.