Varroc Engineering Limited (VARROC) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the VAROC Engineering Q2FR27 Results On-Links Conference Call, hosted by ICICI Securities Limited. As a reminder, all participant clients 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-down telephone. Please note that this conference is being recorded. And now hand the conference over to Mr. Ronak Mehta from ICICI Securities. Thank you, and over to you, Mr. Mehta.

Thank you. Good evening, everyone. On behalf of ICICI Securities, we would like to welcome you all to Viroc Engineering's Q2F527 earnings conference call. Today, we have with us from the management team, Mr. Taran Jain, Chairman and Managing Director, Mr. Arjun Jain, Whole-Time Director and CEO, Business Unit 1, Mr. Dhruv Jain, Whole-Time Director and CEO, Business Unit 2, Mr. Mahindra Kumar, Group Chief Financial Officer, Mr. Vikas Dugar, Head IRN Finance Controller, Business Unit 2, and Mr. Vishal Dhaban, Group Finance Controller, Business Unit 1. We will start the call with a brief opening remarks from the management team about the quarter gone by, and then we will proceed to the Q&A session. Thank you, and over to you, sir.

Thank you, Ronak. Good evening to everyone. I am Tarim Jain here, and thank you, team ICICI Securities, for hosting the call. To start with, I just want to give you the highlights of Q2 FY27. In Q2 FY27, And the half-run financial year 27, the Indian economy remained relatively resilient despite elevated crude prices and supply chain concerns arising from the war. Automotive demand continued to maintain a strong momentum, with EV adoption gaining further traction. From the start of this financial year, geopolitical uncertainties have led to renewed commodity inflation, creating near-term pressure on margins. While customer recovery mechanisms are in place, there is an inherent time lag between the increase in input costs and their recovery. We are actively mitigating this impact through customer engagements, value engineering, localization, and cost productivity measures, and expect the pressure to moderate as recoveries progressively flow through. During Q2 FY27, we witnessed Strong year-on-year growth across all major automotive segments. Two-wheelers grew by 16.3%. Three-wheelers grew by 23.7%. Passenger vehicles by 24.9%. And commercial vehicles by 33.9%. The electric two-wheeler volumes grew by a strong 115% year-on-year. On a sequential basis, the festive season supported growth across all segments. Two-wheelers grew by 11.7%. Three-wheelers by 25.1%, passenger vehicles by 14.2%, and commercial vehicles by 19%, compared with quarter one of financial year 27. For half year financial year 27, industry volumes also remain strong, with two-wheelers growing by 19.5%, three-wheelers by 30.5%, and passenger the vehicles by 21 percent. And commercial vehicles by 24.7% year-on-year. I am pleased to say that quarter 2, financially at 27, the company registered another quarter of strong growth with revenue reaching Rs. 29,479,000, representing a growth of 33.6% year-on-year and 11.9% sequentially. This growth was broad-based. Our India operations grew by 29.5% year-on-year, while our overseas operations grew by 104.1%, demonstrating encouraging traction in our international businesses. For half-year financial year 27, our consolidated revenue stood at Rs. 55,822 million, representing a growth of 31.8% year-on-year. This was supported by a 29.1% growth in our India business and a 70.7% growth in the overseas business. Our EBITDA for quarter 2 of financial year 27 was Rs. 2611 million, representing an EBITDA margin of 8.9% compared with 8.5% in quarter 1 of financial year 27 and 9.1% in quarter 2 of financial year 26. A profit before tax before JV profits and exceptional items increased to Rs. 1,401,000,000, representing 4.7% of revenue, compared with 4.3% in Q1 of financial year 27 and 4.1% in Q2 of financial year 26. The sequential improvement in profitability is encouraging, particularly considering that our margins continue to be impacted by war-related inflation and under-recovery from customers. For half one of financial year 27, our company reported an EBITDA of Rs. 4838 million, translating into an EBITDA margin of 8.7%. Profit before tax, before JV, and exceptional items was rupees. 2,532 million of 4.5% of revenue, an improvement of 40 basis points year on year. In half one of financial year 27, the under-recovery from the customer has impacted the EBITDA by 0.4% and recovery agreed with the customer has not been fully realized in cash in half year of financial year 27 in over rupees 1,140 million. This has adversely impacted our cash flow generation and increased the net debt slightly by Rs. 599 million. We will continue to focus on recovering commodity inflation, improving contribution margins, increasing productivity and maintaining a discipline on fixed costs. Essentially encouraging aspects of our performance is the increasing participation in electric mobility. Revenue from product supply to EV models reached approximately 19% of our Q2 financial year 27 consolidated revenue compared with approximately 16% in Q1 of financial year 27 and EV revenue grew by a significant 130% year on year. An e-mobility solutions business itself recorded. Revenue of approximately Rs 2,773 million in quarter 2 of financial year 27 compared with Rs 1,941 million in quarter 1 of financial year 27. This reinforces our confidence in the investments and capabilities we have been building in electric mobility and advanced electronics. The overseas operations recorded a revenue growth of approximately 138% year-on-year during the quarter. Advanced electronics is benefiting as new business wins progressively convert into revenue. The overseas business also benefited from an engineering income and lower R&D losses due to a little higher capitalization. We remain focused on improving the performance of our overseas businesses through higher capacity specialization, disciplined cost management, and conversion of the recently secured programs into revenues. During half one of financial year 27, the company secured net new business wins with an annualized peak revenue of Rs. 10,127 million. Importantly, more than 48% of these annual peak revenue wins relate to supplying to EV vehicles. This provides further confidence in the sustainability of a growth trajectory and demonstrates that a product portfolio is increasingly aligned with the industry's transition towards electrification and higher electronic content. Our continuous focus on technology and intellectual property is also showing results with the company having filed more than 140 patents so far. During the quarter, we have also taken two important strategic decisions aimed at strengthening Varox long-term competitiveness and creating a sustainable value for our stakeholders. First, we have decided to restructure our two-wheeler lighting manufacturing operations in Italy. And second, we are proceeding to acquire a stake in Borsi Power India, a company focused on battery-packed systems. The Italy restructuring is intended to preserve customer programs and technology while relocating manufacturing to our facilities in Romania and Vietnam. The objective is to eliminate the burden of an under-utilized manufacturing footprint, improve the fixed-cost absorption and plant utilization. And create a stronger earnings and a cash generation model. The restructuring involves one-time shutdown costs whose payback will be three years. The 4C Power India transaction represents another important step in expanding our EV capabilities. It provides whereof with access to an operating battery pack platform and know-how, adding battery packs and Battery management system to our existing lighting, electronics, and the electrical portfolio. These decisions reflect our approach of continuously reviewing our portfolio, allocating capital to businesses where we see attractive long-term opportunities, and taking decisive actions where structural changes are necessary. A consolidated net debt at the end of September 2026 should add Rs. 5,547 million. Compared to Rs. 4952 million as of March 31, 2026. The increase compared with March was primarily attributable to increasing capital expenditure. A net debt-to-equity ratio remained at a comfortable 0.29, while a net debt-to-analyzed adjusted EBITDA stood at 0.57 times at the end of September 2026. We remain committed to maintaining balance sheet discipline while ensuring that adequate capital is available to support organic as well as selective inorganic growth opportunities. As we look ahead, our strategic priorities remain very clear. We will continue to pursue revenue growth while sustainably improving contribution margins through economies of scale, revenue management, and cost efficiencies. We expect improving contribution margins. Combined with disciplined growth in fixed costs to create an operating leverage and support PBT growth. At the same time, our focus remains on converting growth into profits and into free cash flow, reducing leverage and redeploying capital prudently into organic and inorganic opportunities capable of generating attractive returns. In this volatile new normal environment, we will continue to strengthen whereof to disciplined decision-making and meticulous execution. Our endeavor remains to grow profitably, improve margins, control our fixed costs, generate free cash flows, and enhance return on capital across all our businesses. With this, I will now ask M.K., our group CFO, to walk you through the presentation and provide more insights into our financial performance. Thank you.

You know, CMD explained most of the highlights already. I will take you to the consolidated financial slide from our presentation. So, 2948 crores was the revenue which we reported for Q2, which marked almost close to 34% year-over-year growth. That translated into EBITDA of 8.9% versus 8.5% that we reported for last quarter. And 9.1 that we reported for the previous year Q2. PBT was at 4.7 versus 4.1. And the exceptional items was about for 63 crores. Like our CMD explained, this is needed because of the strategic decision which we took in Italy to exit manufacturing in Italy and also to settle some of the old tax disputes. So, that resulted in a PBT of 78 crores after exceptional items, which appears to be low, but if you eliminate the exceptional items, we were talking about 140 crores of PBT before exceptional items, compared to 91 crores that we did last year. And like how we explained in the previous call, this quarter also continued to face the pressure because of war recovery. So we are making various efforts to recover them from customers. So those efforts will continue in the near future anyway. Coming to the H1 report, 5,582 crores was the revenue reported, which again marked the 32% growth year over year. EBITDA came in at 8.7% compared to 9.3% last year. PBT helped by operating leverage benefits increased to 4.5% compared to 4.1%. Exception items, like how I explained, this time it is because of the strategic decisions which we took in Italy. For Italy. But last year, because of the China JV exit, we had actually a positive surprise of 61 crores, good news and exceptional items. So with this, we are reporting a fat of 111 crores for H1 of FI27. The next slide, we gave the usual breakup between different buckets of businesses. The India business, of course, continues to do well despite the war-related pressures. Of course, the benefit could have been far better without this war impact, but that's the impact you're trying to manage now. Overseas business also, as you really see, there has been a steady improvement. Of course, this was also helped by some engineering or design income recovery during the quarter. And in the last box, we are showing the overall R&D related spending. Again, of course, in line with the accounting rules, we are also capitalizing some of the R&D efforts wherever possible, wherever needed. The next slide, of course, we gave the net debt journey. Of course, the trend downward, trend continues, but as we explained in the previous calls also, this year is going to be a capital savvy year. On top of that, there are about close to 114 crores of cash, which we still need to collect from customers towards war recoveries. So because of that, there is some kind of increase in the overall debt. We should get moderated, but we don't expect a significant reduction to happen between now and end of the year. We try to maintain it around these levels in the coming quarters. Following slide, of course, we gave the revenue break up with Bajaj revenue contributing to 46% of our total revenue and overs is growing to 13% now. In terms of vehicle segments, two-wheeler and three-wheeler constitute about 75% in the total. In the following slide, we are also showing the ordering type data. So we started the year with 3,509 crores of water book. We added in this 6 months close to 1,000 crore plus. And we also took 823 crores to start a production already. So that leaves about close to 3,700 crores of water book by end of H1. Interesting point here is, of course, EV portfolio continues to be strong in this order intake with EV related orders adding up to 48%. And Bajaj also is coming to 55% and then 2-wheel and 3-wheel are adding up to 73% of the total orders. The next two slides talk about those strategic initiatives which our CMD talked about. Of course, the acquisition of 4C is an important milestone for us to expand our content for vehicle in the EV models. Plus, it also gives complements, it also complements those strengths and creates a scalable platform across multiple vehicle categories. So, that's significant advantage for us. So, we'll be starting with a controlling state of 45%, but with an option to scale it up by another 6% in the coming months or years. Now, the last one relating to Italy restructuring, again, this will enable us to overcome the low capacity utilization issue in Italy. Plus, it also enables us to move manufacturing from a high-cost country to low-cost countries like Vietnam and Romania. So, that strengthens our overall cost structure. It gives us the long-term benefits. So as CMD has spent, within three years we will be able to recover whatever we are investing in terms of the closure related cost. So, let me stop here. We'll be happy to take your questions. Thank you.

Thank you very much. We will begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to queue their answers while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The first question is from the line of Jyoti Singh from Hightong Securities Private Limited. Please go ahead.

Thank you for the opportunity, and so congrats on a good execution on the top line. So basically, first question around EBITDA margin, that somehow we are having the impact, and another thing that India EBITDA margin was about 10.6% in Q1, and then 10.3% in Q2, against 11.5% a year ago. So, why did India margin fall Q on Q while consolidate margin improve? So, is this because of overseas only the reason or any other reason?

No, so, how we explained the reason why India margins softened a bit was because of the challenges we have been facing in the war recoveries compared to last year. I think you were comparing with the last year. Yeah, so, but that's, as we explained in the previous quarter and also earlier in this call, it's largely driven by the under-recovery of war-related costs, which we see as a short-term phenomenon. So, we should be able to get it back maybe in the coming quarters. So, I would rather see this as a short-term phenomenon. On top of that, there is a lot of change happening in terms of business mix also, both in India and overseas. As EV vehicles become more prominent in our portfolio, so some of those business mix changes also will have some kind of an impact on the overall margins. But with the kind of growth that we have been seeing in the last couple of quarters, the operating leverage should again come back to help us once we recover these war-related costs also. So that should get us back on track.

Okay, so just here we need little bit clarity around the margin because the thing is that we are having a lot of impact because of the raw material and again we have this subsidiary thing. So just wonder the clarity what kind of margin that we are looking into H2 and in the coming F0.28. So that will give a little bit clearer picture for the margin.

Yes, I mean, we don't generally give this kind of guidance, but what we can say is, if the macroeconomic situation continues the way it is right now and doesn't worsen further, we should be able to get back to last year levels of EBITDA margin by end of this year in India business, and that should strengthen further next year.

Okay. And another around the body part side. So, eyes and lighting grew around 11 to 15% Q&Q. So, this is in line with the industry volume. So, is there any share gain that we are witnessing or we are growing as per the market?

You're talking about lighting, this one?

Yeah.

My question is that, just to clarify, so your question is, if you have witnessed a market share increase for lighting, I would say that the main reason for our growth has been because the industry in general has been growing. I would not say that the market share has changed too much this quarter versus last quarter.

Okay, and another on the debt side, as we are capex-heavy this year, so will we be maintaining this kind of debt only, or we are targeting to net at zero by FI28?

Definitely, it should come down from the current levels by end of next year. This year, it will more or less be around these levels, plus or minus. As I explained earlier, there is about close to 150 crores to be taken as war recoveries from customers. Because there is a significant amount to be received from government also as government incentives. So these things play a significant role in managing of debt in the coming quarters. But yeah, in terms of a significant reduction to happen, we need to wait until end of next year.

Okay. Just one last question, sir, around the new client or any new product that we are planning to add in the portfolio or new client addition in the coming future because we are doing very well in term of EV and we are 65% power train agnostic. So just wanted your view around that.

We will continue to, of course, add new customers and new products. The giant venture with 4C, which we announced just recently, that will also enable us to expand our product portfolio, add content, and, of course, add maybe a few more new customers also to the portfolio.

Okay, thank you so much.

Thank you. The next question is from the line of Naman from Sangli Family Office. Please go ahead.

Hi, can you hear me, sir? The Congo provides some feedback help from the revenue perspective and EBITDA perspective. But just wanted to understand three things. One is on the new order intake, you know, what sort of target do we have for this year? You know, we've already done about 1,000 crores plus an H1. So does this grow further from here? And what sort of big pipelines are we looking at? Sir, part B of my question is on the overseas, right? We have grown tremendously fast, but the losses have not come off that much at the overseas level, at DBT level. Could you explain why or is there some provisioning costs already adjusted there? And the third part is on the 4C, you know, equity investment. What sort of TAM are we looking at with 4C, considering, you know, 4C has also grown from, you know, 3-4 crores to 18 crores in about 2-3 years. So where can it eventually go and how much delta can it create for us in the e-mobility? So these are the three questions.

Okay, so let me address the middle one first. So, as far as the profitability of overseas business is concerned, like we said earlier, it's predominantly two parts. One is, of course, the Romania business, the other one is the R&D cost overseas. The Romania business, our internal target is to take it to EBITDA break-even by year-end, and that target remains. And as far as the R&D cost is concerned, of course, it's an investment which we're making for the future growth. So, there is not going to be a remarkable change there. But having said that, once the ramp-up happens in Romania and, of course, after the restructuring and two-wheeler lighting business also, the performance should improve starting from Q4 and, of course, most of it you will get to see next year. And then, sorry, on the 4C question, what was your question?

The question was, the revenues are very low at the moment. So, obviously, when it comes to 4C, the battery pack, you know, so the main, I think, our focus will be two- and three-wheeler and this company, 4C, also has a high-level technology and off-road and other non-auto Thank you. So, definitely, I mean, the fact that we've got in and with our customization in the auto sector, especially two and three wheeler, I mean, definitely it's not going to be such a low revenue because that's where I think our customization come into play. So, we are definitely looking at, you know, significant growth in the next two years. Which will be definitely over a thousand crores in over the next few years, then we will be crossing that kind of a revenue as we move forward. Because battery pack for us as, you know, as an EV, you know, as a part of the EV powertrain is a significant, you know, product, you know, and it adds a big, it's a very big part of the portfolio where we do the motor controller, the inverter, the VMS and also the chargers. And with the battery pack now in our portfolio for two and three wheelers, I think we've become, of course, a very important player in India and even maybe overseas, you know, for this segment. You know, and as we can see that there is a huge amount of traction, a huge amount of growth in the two and three wheeler sector. And today we see only the scooter, I mean, today the traction in scooters, we also see going forward a traction in motorcycles. Also coming in. So we see a huge growth and battery pack will be a part of it. So I'm just saying, okay, a number, but we see a huge growth opportunity in the battery pack segment. And coming to your first question, when it comes to, okay, we have achieved, today, I mean, the half fund, I think we have achieved annualized revenue of about a thousand crores.

Yeah.

Yeah. Yeah. So our objective will be that at least we should try to achieve about 2,500 crores plus. In this financial year of annualized revenue, which we feel is possible, it could be actually more awesome.

Okay, sir. Great. Good to hear that. And on the last part on the 4C, just on the accounting bit, so considering that we have the management control, this will get consolidated on conclusion of the SSA-SSA.

Yeah, correct. The intention will be consolidated as a subsidiary.

Okay, and this last part, so I know this is too early, but suppose some milestones are hit, so we get 45 plus it's 51% that way, but eventually is the plan to take it to 100% or like 74.99%, anything on that aspect?

As of now, there is no such thinking, because the other JV partner also is equally committed to Indian markets, so on this point.

Got it. Got it. You know, sir, all the best. Continue delivering. Thank you.

Thank you. The next question is from the line of Arvind Sharma from Citigroup. Please go ahead.

Hi, good evening, sir. Thanks for taking my question. Two questions on my side. First would be on the cash flow. The CAPEX has been quite high, almost 2.9 odd billion for the first half. If you could share with us the guidance for the full-year CAPEX and what would be it targeted at?

Yeah, so I think we maintained the number that we mentioned last quarter also. I think we indicated 500, 550 crores of full-year CAPEX. So, close to 300 plus we did already, so maybe another 200 crores plus will be for H2.

The second question is a bit of a clarification on the term that you've been using on the war under recovery. This is the increase in the cost overall due to war or any other reason, I mean, commodity inflation, right? It has got nothing to do specifically with the war. It's an effect of the war, right? So inflation, inflation and input cost? Just inflation, yeah. And is this an automatic route that you have with the OEMs, or it would still require some pursuing on your part for the OEMs to pass it on?

Not automatic.

See, the basic thing, if you see the underlying contracts, a lot of these things are supposedly automatic. But the point is that today we are in special times. So unless we get the firm confirmations, we can acknowledge the same because we are in special times. You know, so we have to reach that kind of understanding and agreement in these special times with individual customers, then only can we recognize it, because we are very stringent and disciplined on this aspect. So, though there may be underlying contracts, but we don't recognize the same.

Got it. One small satisfaction, sir, apologies, I didn't get it, that 2,500 crores revenue you talked about, what was it exactly, sir?

No, no. We have already won in the first half 1,000 crores of annualized revenues business, and in the next six months, we are looking at at least another 1,500 crores of business wins, new business, net new business wins in the second half.

So, just to clarify further, we measure order wins in terms of annual peak revenue potential. So, it's not that everything falls in the first year. So, the programs reach their peak in a particular year. So, in terms of annual peak revenue, what we took in the first half was worth 1,013 crores, but full-year target like that for us is 2,500 crores. That's what CMD was mentioning. For it, sir.

Thank you so much for taking my questions. That's all from my side.

Thank you. The next question is from the line of Shubham from Investec. Please go ahead.

Hi. Hi. Thanks for the opportunity. Congrats on a great set of numbers. Just one clarification. You reported about 400 crores of peak annual revenue of order wins this quarter. Can you please share more details on this, for which products we have received this order, and what is the SOPE date?

The SOP dates, okay, the order bins are mainly there are one lighting business in India, four-wheeler lighting business, which we have won. Then there are two-wheeler lighting business also, which we have won in this quarter. So majorly is coming from the lighting business this quarter. And we don't name the customers from...

Yes, across, so largely I think this year it is more to do with India, I think. Most of the businessmen across, I think, are product groups. Major part of this is across two-wheeler and four-wheeler lighting. Then, of course, there are plastic body parts and there are other such business, some electrical products also. So, but of course, this is in the second quarter, but then we expect also, you know, business wins also abroad. You know, going forward, in the further six months, therefore, I put a bigger number, you know, in the second half, where we're expecting, you know, better results than in the first half.

This is not a guidance, this is our internal target.

Yeah, yeah, okay, okay. And on the Trasher Motor side, I think in the past, we've highlighted that you will start, you know, supplies to another customer, ex-Pachaj. And so what's the update on that? Is that supply started or is there any timelines on that?

Yeah, so we are very close. To be frank, we expect it to have started by now. But unfortunately, I think we've had a late stage hiccup. But it is something that we expect we will get past quickly and we should be able to start very quickly now.

It's not really a hiccup, but it's just something in alignment with the customer where there were some This thing is from their side, not from our side, and so that's what we're working on, but we'll be starting production soon.

To further clarify, I think when you finally integrate on the vehicle, there are always observations. So that is what we saw through now.

Okay, okay. And on the, you know, on the researching part, now, what was the drag on margins as of now? And when should we expect this researching to, say, close?

The Italy part. In fact, drag in terms of profits is not very significant, but I think the key benefit here is moving from high-cost manufacturing locations to low-cost manufacturing locations. So in terms of benefit, whatever cost we are incurring, we will get it back in three years. After that, it will start flowing to the bottom line.

Okay, and when shall this research be completed fully?

It should be done by six months from now, but from next financial year, we should see the benefit flowing.

Okay. Thank you. Thanks.

So, benefit will start flowing into P&L from next year itself, next quarter itself. The only thing for us to recover the investment, it will take three years.

Okay, okay.

Thank you. The next question is from the line of Mihir Gora from Aquarius Securities Private Limited. Please go ahead.

Yeah, thank you for taking my question and festive greetings to the management. So, sir, my first question was broadly more of industry-wide where, you know, currently we are seeing a lot of our peers also getting into the battery assembly segment. Just wanted to understand here whether what is driving the excitement around this segment, is it the content value margins? And the question around this is mainly because in China, we see majorly OEMs, you know, doing the battery assemblies also in-house. While what makes us think that in India, OEMs will continue to outsource the same? Is it that we are in discussions with the OEMs and we are seeing that traction?

See, basically, frankly, you know, we want to be a one-stop shop for two- and three-wheeler EV powertrain as a system, and going forward, including also the gearbox and everything. That is our strategy because, see, we see the fastest adoption, when it comes to India, which is the largest market in the world, the fastest adoption on EV, firstly, now on the scooter side, you know, and again, it will happen on motorcycles, so the scope is huge. And we want to be, you know, all the length and breadth of the whole two and three meter EV power train. Business, we want to be a big part of it. And we also see that, you know, so this will really help a growth here on here exponentially. Being in this, of course, the content also is quite good in this product. And instead of the margins are quite low, yes, a heavy product like battery pack cannot match with, okay, other EV powertrain components on margin. But still, as a quantum, the profits are not that small on a big value product like the battery pack. And today, see, we have our also very strong relationship in the two- and three-meter segment. Of course, all customers in India and abroad. So we feel that, you know, being, I mean, a big part of the EV powertrain and encompassing everything to do with the EV powertrain, I think we have a better chance at a one-stop shop to all our customers going forward. And I don't see, frankly, today that the customers would like to invest, you know, in EV powertrain. They didn't do it for ICE powertrain also except for the engine assembly. But here I don't see them getting into this, you know, these kind of products. I don't see that happening. I see that it's being outsourced only. And whatever little bit was happening inside, also I think going forward will be outsourced. I don't see them doing more of manufacturing and being so much in the manufacturing side.

Okay, okay. And just one clarification here that when we, you know, look at this kind of JVs, so do we also, you know, maybe some kind of a pre-discussion with OEMs or something to just garner whether what kind of interest this product can generate? Do we do that kind of checks as well?

Yeah, yeah, definitely. Without that, we cannot get into it unless we have that level of confidence.

Sure, sure. Okay. My second question is on the European side, where in terms of margin, if we see this quarter, we are closer to breakeven or we are at a breakeven levels. But however, given the current increase in the prices of these electronic components, do we expect the similar trajectory in the near term or in a shorter term, we'll see some kind of a margin decline again because of the increasing electronic pricing? Are we able to basically pass on the increased commodity prices there?

Yes, no, no, so, you know, similar to India, of course, in Europe, it's a global phenomenon, you know, the war impact and the AI demand-related impacts, particularly on electronics. I think, so, of course, even on the European side, we have faced some of these negative effects. But we have, but we are, of course, managing the recoveries with the customers, and certainly going forward, we don't expect the situation to worsen. We expect the situation to improve in subsequent quarters.

All right, all right. And lastly, sir, on to the Robania Electronics number, we have been seeing a good improvement there. But just wanted to get an idea whether this trajectory in the second half will improve or we'll be at the quarterly run rate of 75 crore, which we have done this quarter only.

No, no, no. Like how I explained earlier, this also includes the design income which we received this quarter. So we should not go by this number alone. So we will see gradual improvement, but we should not be guided by this number alone.

Okay, okay, okay. And lastly, just one clarification that given the restructuring of the Italy operations, are we also planning on restructuring some other operations into the overseas part, which we may see ahead, or this is something which would be the last one here?

Nothing at this point in time, but we also mentioned in the previous call that IMS is one opportunity which we will continue to explore, the forging business which we have in Italy. But there is nothing which is at a concrete shape as of now, but we will continue to look for opportunities.

All right. Okay, so that's all from my side. Thank you for taking my questions.

The next question is from the line of Sarga Shetty from VELDVM. He's got it.

Hello. Hello. Yeah, hi. Good evening, sir. So, my first question was actually regarding the note discloses an ICC arbitration of OPE mobility. So, maybe the season of 66.4 million USD. So, if you could explain what are the breaches of OP Mobility that we are alleging and what is the expected timeline for the resolution and what is your assessment of the, you know, is there any potential financial exposure we are getting through this?

See, basically, see, we have got two legal cases going on. One is with DYC in Singapore courts, tribunal, and then there is also one with OP Mobility in Europe. So, yes, these are on, and there are, of course, discussions on. See, we will definitely be striving, you know, that we close these. You know, both these legal cases before the end of the financial year. So we are going to be striving to see that we close this and we just focus on our business. Because we also don't want to continue with this kind of arbitration or legal cases for too long. So both these cases are ones we are trying to see how we can reach a resolution and conclusion on both of them before the end of the financial year.

So, should we expect any, you know, financial impact after we close this or is there anything like that we should consider?

We cannot comment one way or the other, but all that I would like to say here is, of course, there is a claim and there is a counterclaim also, which is also equally big. So, but finally, it depends upon what happens in the final settlement, but as of now, we cannot give any kind of direction to it.

Okay, okay, okay. Yeah, and my second question is actually regarding, like, you know, as we, you know, kind of restructure our entire foreign base, and so what are the EV products that you're targeting, like, you know, with your base in Romania and Poland now? So what are the products you're targeting to capture? Are you trying to capture any, you know, momentum in Europe and US? So what are there any custom interaction you're beginning with or so, yeah.

No, no, so when it comes to our European manufacturing footprint, so the fastest growing plant is in Timishwara in Romania. This is, of course, our electronics plant. Here the main focus for us is on passenger vehicle electronics, and it's an answer we've given also in a previous investor call that in general, of course, in this... In this industry, there is, I mean, there is, of course, you know, more, or in the passenger vehicle industry, we are seeing more electronics content both for high voltage and low voltage electronic parts, and this is the trend that we are trying to capitalize. So we have won a good amount of business in the, you know, for high voltage electronic sofa. So there's more electronics to do with the e-power train. But, yes, in the future, we are also targeting on the low voltage side as well.

And, sir, on the 4C side, 4C Power India, how do you see how large is the battery pack industry and the BMS opportunity for VARAC over three to four years? So, I don't know if you have answered this question.

It will be at least, over the next two to three years, it will be at least about a thousand crores of revenue.

What was it?

BMS will take some time.

No, no, no, sir. I think let me clarify. I think there was two parts to your question. One is what is the market size and second, what is the potential revenue? Every battery pack generally goes integrated with the BMS. Now the total market size, I mean, you can imagine, let's say anywhere between 35,000 to 50,000 bucks a pack for a two-wheeler and, you know, double that number maybe for a three-wheeler, multiply that by EV penetration. To come to an understanding, what is a two-wheeler, three-wheeler alone, let's say market size. And I think what our CMD mentioned is what we expect to be able to capture over the next two to three years.

What is the battery pack?

Yeah, yeah, yeah. And so any, you know, like, what kind of run rate are you expecting to close your FI27? Like, any ambition for closing it? Like, are you upgrading your, you know, your guideline guidance going forward?

Sir, I think it's too early to comment on EBITDA and all. First, let's complete the acquisition and then infuse money. Once we take over, then we'll be able to come back with some kind of reasonable issues.

No, no, I'm talking about the overall business. See, like, I think your earlier ambition was 20-25% growth rate. And this H1 has been really good. So, like, are we seeing a similar kind of traction in H2 as well? And, like, what kind of seasonality are we seeing? Yeah.

I mean, generally Q4, I mean, after festival season, generally the demand moderates, but this time we're expecting that it will continue. But we should wait and see what happens.

Okay. Yeah, yeah. Thank you. So that's it from my side. I'm happy revaluing to all.

Thank you. The next question is from the line of Kostav Agrawal from Park Capital Practices.

I'm not able to hear you. I'm sorry. Sorry, you are not Oliver.

Sir, can you hear me now?

Yes.

Kostav, please go ahead.

Thank you for the opportunity and greetings to the environment. Sir, I had a question regarding the EV and its margins. So, you have said earlier that EV content per vehicle is about five times the highest at around 35,000 for E2 wheeler. And EV revenues has more than doubled and is about 19% of the sales. Yet, our EBITDA margins have fallen 47 BPS per year. So has water related cost and inflation has been so high that it has more than offset the EV mix benefit? And the second part of it would be how much content per vehicle would you expect the battery pack JV, which we have to foresee to add?

Yes, I will go one by one. I think what we have always maintained is that at a PBT level, our e-mobility components are comparable to, let's say, anything else that we do, and the threshold that we think about is really from a PBT level. So, you know, from a product mix perspective, of course, yes, I think there has been, when you look at, let's say, our gross margin deterioration, there will be, let's say, some level of small impact due to EV or due to e-mobility being a larger part of the product mix. But as we have stated before, the much larger impact is really the war impact, which affects commodities, whether they go into electric vehicles or whether they go into ice vehicles. So that is really a broad spectrum impact across the world.

Okay, sir. So, my next question was regarding the aftermarket. So, we could see that historically our aftermarkets have grown around 25% to 35%. However, in this quarter, we have grown around 10% year on year. So, anything specific you would like to mention that drove this slowdown and when do you see the growth coming back specifically?

I mean, there is some impact because of the war, there was inflation and there was some kind of moderation, but we don't think this is a long-term issue. So, the journey should continue towards stronger growth.

The journey will continue, and we also launch new products also in our portfolio, and we do expect a good level of growth in our aftermarket segment, like we have been doing in the past.

Okay, and sir, my last question would be regarding the revenue growth. So, we have had a 33.6% revenue growth, but in terms of volumes, I wanted to understand how much of the volume, how much of the revenue growth has come from the commodity pass-through and the more related recoveries out of it.

We mentioned in the slide about 5 to 6% of our growth came from commodity inflation. The rest of it is the volume growth.

Okay. Thank you so much. That's fun, I think.

Thank you. The next question is from the line of Nikhil Chaudhary from Toro Wealth Management Ltd. Please go ahead.

Yeah, hi. I had just one question. Am I audible?

Yes, sir.

Yeah, hi. So, did I hear it right that on the disputed provision that we have made, we expect the resolution, the timeline should be like year end?

Yes, financially our end is that's what we're going to strive to do.

Okay, okay. And just one more follow on, like what gives us the confidence in recoverability because I read the footnote that auditor has qualified it, but probably we are reasonably confident. Like, could you just spend probably a few seconds on that? Like, because just want to know probably if this could materialize into actual hit or there is a possibility of reversal now that you have provided in Q2 numbers.

We have been touched with our legal team, you know, and they feel that there could be a, there is a possibility of a resolution. So going by that, I do feel that probably before the end of the financial year 27, we can reach conclusions on both these cases. So that gives us a certain level of confidence that we can close it.

Okay, okay, and once the resolution is done, this should probably lead to a reversal of what we have provided in this quarter.

Yeah, then there is no provision which we did this quarter for any of those disputes. If you refer to the exceptional item, it is referring to the Italy closure and the tax dispute of a different kind. That's not about these two.

Okay. Okay. Understood. Maybe my error on my part. Thank you so much. I will come back.

Thank you. The next question is from the line of Prince Goenco from Narlouya Financial Services Ltd. Please go ahead.

Hi, sir. Thanks for taking my question. I have a couple of questions. It is first one, diversity is reading a drone unwritten person. How much of this?

Sorry to interrupt.

Am I?

Am I already done?

My first question is related to the overseas revenue. Overseas revenue has grown more than 100%. So, how much revenue growth was driven by new programs ramp up? And can the momentum be sustained in the second half?

No, so most of it is driven by new programs only, but the fact of the matter is the base was also a lower base because of the degrowth we had in the previous years. Thank you. So, but yeah, definitely we should.

Okay. And the second one, sir, the two wheeler premium lighting business witnessed a revenue decline primarily due to the lower volume from Tiago. We can't hear you.

No, you stand. I'm sorry.

We don't hear you. Sir, I'll request you to keep the connections with the device.

Am I audible?

Yes, sir. Please go ahead.

And the second one is two wheeler lighting business. The two wheeler lighting business witnessed revenue decline primarily due to lower volume of Tiago. So what is the current business outlook with Piago, and how much of the loss their venue has been offset through new customer editions?

We don't supply to Piago. Piaggio.

So in this quarter, it also contains August month. And August month is a holiday month, you know, because for this business, the main customers are European customers. So this is the reason why with these two-wheel lighting customers outside India, more in Europe, that's why there was some lesser revenue. But in general, there is no deco that we are facing. So we are expecting actually to be certainly at this level revenue, maybe even some increase going forward because we have won some new business when it comes to two-wheel lighting outside India.

Okay, I got it. That's all for myself. Thank you.

Thank you. The next question is from the line of Apurra Mehta from AM Investments. Please go ahead.

Congratulations on great set of numbers. I just wanted to know on this battery pack business, you know, where are we going to source the raw material and the technology and going forward, you know, how is the technology going to evolve for us?

So, I think in terms of technology, of course, the partner that we have brings the technology. So, they have a fair level of experience of supplying battery packs across different classes of vehicles, from two-wheeler, three-wheeler, all the way to buses and heavy commercial vehicles, and honestly, even railway battery packs. So, technology is not a concern. In fact, technology is fairly established. And in terms of the sourcing of, when you say raw material, I assume you mean cells, sourcing of cells, of course, again, we have in the JV, we have relationships with cell manufacturers, and also we are very happy to work with our customers where they have specific cells that they want to use.

And on the margin front, you know, when can we see on what level we can see break-even or when can we see meaningful, you know, profitability coming on this side of business?

I think we should discuss that maybe in the future calls. First of all, let's complete the transaction and talk about it.

Okay. And on the under-recoveries, which means it was modulated there, if we want to realistically get it, that means the margin should go up similarly at 114 crore to the EBITDA will go up.

Yeah, so basically there are two parts to it. One is the under-recovery, which of course should improve the margins. That's close to about 0.6% here over here. The remaining is more like an arithmetic impact because we won't get margin on inflation, right? So to the extent the base increases, so as a percentage, it may theoretically remain the same. Okay.

And that 114 crore, what? Our chairman spoke about the recovery pending from the customer where they have already agreed for the price division, so that's the cash flow in fact.

Okay, okay, okay. But on the recovery on the margin side will be close to 0.8% what you have written? And that should be subsequently recovered in Q3, Q4?

Yes. Yeah, we will continue to make the efforts, but yeah, it should happen. It will, yeah, make that happen.

Okay, thanks a lot, yeah, wish you all the best.

Thank you. The next question is from the line of Naman from Sanghri Family Office. Please go ahead.

Yes, I hope I'm audible. Great. So, sir, one thing which was strikingly good, right, are EV-based revenues through roughly about 130%, right, all part. And I am assuming that this is majorly two-wheeler, two-wheeler combined. I'm hanged. You know, when we see two viewers per day, the growth has been close to about 100% for the industry, and for our anchor, it has been about 104%. So, there is a meaningful delta between 102% and 150%, which is our growth. So, is it because we are winning some new customers in EV that are also going to become sizable? Or is it because of some new products that we are selling, which we were not selling previously, or is it a combination of both?

No, I think honestly it is really, in terms of material, of course, with the incremental customers that we have, there is billing for, let's say, topics and prototypes, samples, etc. Thank you very much. I would not say that that is what is meaningfully moves the needle. I think it's really a problem.

Yeah, so it's basically... Point to point, I think we should see only the direction because one is the volume growth, the other one is the content growth which we have.

Next question is from the line of Jyoti Singh from Hayatong Securities, Private Limited. Please go ahead.

Thank you for the opportunity. So, sir, just two questions. One, I wanted to understand that in our ICE powertrain, what kind of growth that we are expecting going forward compared to our e-mobility segment going forward because we are seeing more of EV penetration increasing going forward. And another on the four-wheel lighting. And that we are doing in Thailand. So when we can expect to start?

Directionally, like we said before, and I think as we see in our numbers also, I think e-mobility will definitely grow exponentially faster than ice powertrain for us, driven by a couple of reasons. I think one, I think the content we have for EV. For e-mobility products versus the content we have in ICE, for ICE powertrain only products, the difference is huge. We are talking about 7x, 8x almost. Great. Simply put, the more EV penetration we have, the growth rate will be in line with what we are seeing right now. Having said that, I think even in ICE powertrain, I would say we, you know, especially as the industry moves to the next set of emission norms. We will see some level of growth in technology continue to take place. That will essentially create an incremental level of content for us. Those are the opportunities that we will pursue. We would still expect to see growth there, but yes, for sure, the e-mobility growth will be far quicker than the ice power trade growth.

And to answer your second question regarding when we will start production in our Thailand 4V lighting plant, so this will be in the middle of next year. So let's say middle of 2027 is when we will start production. So we have several launches that will be happening next year, but this will be mid-2027.

Okay, and just one last question around aftermarket. So why we are lagging here, and are we using any market share in the aftermarket?

See, what has happened is that there have been some challenges, especially in the first quarter, where we recovered something in the second quarter because of this inflationary situation because of the war. And therefore, yes, our revenues have been impacted in Q1. In Q2, it has returned. But yes, compared to the growth we have had in the past, obviously, it's the most abdued. But going forward, we do expect a return. You know, to the kind of growth levels we experienced in the past. And plus also now in this quarter, we have also added a number of new products, you know, to our aftermarket portfolio, which will also help us, you know, return to our growth. So because aftermarket division is a very important division for us, also a profitable division. So we do expect it to grow in a very meaningful way going forward.

Okay. Thank you, sir.

Thank you. The next question is from the line of Shubham from Investec. Please go ahead.

Hi, just a quick clarification. On the two-wheeler Italy researching part, you mentioned cost savings should begin in FI-28. You know, if you could please also continue the amount of cost savings that we should expect in FI-28.

No, so we mentioned the investment amount and said three years payback, so we can calculate based on that. Yeah, so savings will start starting from next year.

Okay.

Any other questions? Sorry, the line got disconnected for the participant. We take that as the last question. I now hand the conference over to the management for closing comments.

Thank you. So, thank you, everyone, and I would like to reiterate that Varrock today is not only growing, but also taking decisive action to strengthen the quality and sustainability of that growth. Our objective is very clear, to build a stronger, more profitable, and a more technology-led Varrock. So, with this, thank you once again for joining the call and for all your continued trust and support to us.

Thank you. On behalf of ICICI Security, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.