Zetwerk Manufacturing Businesses Limited (ZETWERK) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to Z4Q2F527 Results Call hosted by GM Financial Institutional Securities Ltd. 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 a touch-tone phone. Please note that this consent is being recorded. I now hand the consent over to Priyankar Biswas. Thank you, and over to you, sir.

Thanks. So, good evening, ladies and gentlemen. It is a pleasure to host the Z-Work Management for their first quarterly call post the listing. So, without much ado, I will hand over to Amrit and Ankit to take you through, take us through the business model and also on the latest numbers that has been reported today. So, I will hand it over to Amrit to take it on from here. Over to you, Amrit.

Hi. Thanks very much. Thanks for joining.

Welcome to our first annual call.

We'll talk about the numbers, but very quickly, I want to talk about what we do and how we do. We are building a technology-led business for, yeah, so my name is Ambrin, I'm the founder of the CEO. We are building a technology-led business for industry personal driving. Our customers are in our industry companies like KDT or Schneider Electricity. They typically give us drawings or designs of products they want to build in the market. Drawings are written on the get-goings that are software. Our job is simple, we want to convert and design this by edge. This is a real world product. The way we do it, the way we started was a marketplace model, which meant we had no factory before home. We will partner with third party factories. Mostly these are SME factories. As we grow larger, we felt the need to have our own factory. Today we have a hybrid model. We do some through our partners, some through our own factory. But the whole basic premise is that how do you offer consistent quality, consistent on-time delivery, consistent reliability. It wants to be easy. Going in for millions of orders requires a lot of investment in technology, processes, and in systems, which we have been doing over the last eight years. We want to keep planning to do that because eventually it has a long-term course of this. The nature of our customers you will see are extremely diversified. We serve customers in oil and gas, we serve in renewable energy, we serve in consumer electronics, we serve in aerospace and defense. This is extremely intentional. We believe that each of these industries are cyclical industries. But together as a group, we are counter cyclical. So our goal is to build a large, diversified, counter cyclical company in India which can compound over decades, not just over a year or two years. So that's the whole philosophy of the business. We strongly believe in compounding. We want to make the business extremely, eventually boringly predictable. That's the philosophy which we get building the business. So with that context, I'll start getting into the numbers. We'll just reference some of the slides in the deck. I hope you have been able to download the deck. So we'll start with page 3. We'll just profile one of our customers. Every person will do this. We typically profile our startup customers. So this is our customer on Digantara. They are a space, domain, awareness and defense company. We make electronics for their ground equipment which connects to satellites. One of the reasons Digantara loves working with us is that the responsiveness that they see from us is extremely fast. We are able to turn around RSUs in the same day. We are able to produce the boards in a matter of days and weeks. The most visible benefit that companies see is our speed. And working with early stage companies gives us a view of where the innovation economy is heading. Most of our revenue we come with working with larger customers. Getting into numbers, in the... Current quarter, which is Q2, FY27, we grew revenue by 12% quarter on quarter compared to last quarter. What is more interesting for us is that the gross profit grew 39% quarter on quarter, which is much higher than how revenue grew. This essentially is happening because the gross margins are expanding. The gross margins are expanding to Almost 15% compared to 13% same time last year and 12% in the prior quarter. When we get to adjusted EBITDA, when we talk about adjusted EBITDA, we are adjusting it for the non-cash e-stop expenses, which you may have seen with other new age companies. So our adjusted EBITDA for this quarter was 171 crore. Which is 66% higher than the same number last quarter, which is in Q1, FI 27, and even higher than the same number last year. Why is this happening? Again, because of operating leverage. The nature of our business is that most of our costs are upfront in nature. Our costs are either software engineering costs or they are product and design engineering costs. They are fundamentally people costs. And we have built all of this organization. Over the last eight years for a much larger scale and hence that is reflecting in the operating level sticking in. And this we will say that this should be a feature of the business you will see every quarter and the next two years to come. That your gross margins will grow faster than revenue and subsequently EBITDA margins will grow faster than revenue. And absolute EBITDA will keep growing faster than everything else in the business. On offer link at flow, We were still negative, but we improved by almost 67% compared to last quarter, and we improved by 50% compared to last year. So, again, you will see in our business, historically, the second half, which is the October to April time period, is a larger business than the first half. H2 is higher than H1. In fact, in FI26, H1 was only 40% of revenue and 40% of adjusted EBITDA. We expect that same trend to continue this year as well, and that is also our guidance. Overall, we grew 33% in revenue in H1 this year compared to H1 last year. We grew 70% in adjusted EBITDA in H1 this year and H1 last year. We expect to continue this similar momentum for the full year. For example, last year, full year, we did 420 crores of adjusted debinder. Our guidance is we will grow this number by that same 6.70% gains, and our guidance on revenue is to grow the revenue by 25-30% for the full year. Overall, working capital is under control around 30 odd days. We will not double click on some of the segments. As a quick reminder, we operate across two segments. Segment number one is what we call our manufacturing business. That was in FI26, 9400 loads of revenue at 19% gross margin. If you look at H1, we have already done 4500 loads of revenue at 25% gross margin, which is much higher than what we did in FI26. If you look at the business on the TTM basis, we are close to 21% gross margin. The second segment must be called ecosystem. Ecosystem is where we supply raw materials. In the manufacturing business, we will give you a portfolio of what all we do. We make wind turbines, we make solar panels, we make transformers. In the ecosystem business, we supply raw materials. It is a 2-3% gross margin business and growing at, again, roughly good growth rate compared to last week. We will double-click on the manufacturing business. Manufacturing business. In H1, there's 4,448 crores of revenue, which is 20% higher than last year. And in this specific quarter, we did 2,500 crores of revenue, which is 34% higher than last quarter. Again, you will see the same trend follow-through. Gross profit grew higher than revenue, largely because we are increasing the mix of the business towards higher margin segments. We will double-click on this. Gross profit as a percentage touched a historical high of 25.5%. It is the single highest gross profit we have ever reported as a company. When we compare it to last year, we did 22%. When we compare it to last quarter, we did 23%. When it flows down to the segment EBITDA, segment EBITDA was 8.5% in this quarter versus 6.6% in the last quarter. So overall, you will see all the headline numbers are humming. This is the way the business should work. Revenue will grow at a certain speed, but gross profit will grow higher than revenue. EBITDA will grow higher than gross profit and revenue. Because of fundamental operating leverage in the business. We also want to point you towards some non-financial metrics. The most important one is our order backlog. See, end of the day, revenue is a lagging indicator. It is about the past. Order backlog gives you a glimpse about the future. Our order backlog in Q2 touched 14,500 crores. It is the all-time high for the company. It is 67% higher compared to the same time last year. So our order backlog is growing faster than revenue than everything else. It fundamentally means we are a supply-constrained company. We are given a choice, our customers would want all of these orders as soon as possible, you know, but we are wrapping up capacity, both in-house and through partners to deliver this auto-book. We will give you a glimpse of where the auto-book is coming from. Another very important metric, 80% of our revenue comes from repeat customers. It's very, very important because repeat customers are... Easier to mine, easier to navigate than onboarding new customers. Obviously, you want to hire new customers, but the business, on a quarterly and yearly basis, will grow just on the basis of all the business. Gross profit, we just wanted to give a quick double click. The overall gross profit was 19% in FI26. Let's take that as a benchmark for the time being. Within 19%, the marketplace model, where we don't do manufacturing ourselves, but we partner with third-party manufacturers, was at 17%. When we do the manufacturing ourselves, it was 23%. This is last year. If you look at H1 numbers, it is already higher on both. Marketplace, the gross margin was 24% in H1. Captive when we do the manufacturing ourselves was 25% in H1. It is higher than the benchmark and it is higher than same period last year. Another driver of margin is India was international. India was 15% last year, international was 28% last year. This year in H1, India is 19% in H1. International is 22% in H1. So, on international and India, the growth margins are higher than the benchmark of last year and the benchmark on a TKM basis. So, growth margin expansion is a feature of the business. You will keep seeing this happening. Our eventual goal is to touch close to 25% growth margin on a full year basis, which we have now done in the last quarter. But we want to achieve that on a full year basis. The three drivers of margin are simple, doing captive is a higher margin, doing international is a higher margin, and there are certain products like space, for example, is a higher margin business, defense is a higher margin business. So, we call it the 3M model, mix, market and model. These 3Ms will drive long-term gross profit, and where we are at this stage in our business, any increase in gross profit is Proportional to it, if it does work, because that cost base will not grow at the same speed at which revenue or gross properties buy. We want to give you a flavor of where demand is coming from. This is slide number 8. So 64% of the revenue from the manufacturing business came from what we call energy. In energy, we may make multiple products. We make solar panels, we make wind turbines, we make transformers. Precision is almost 22%. There we do defense, we do electronics, we do mechanical parts. And the remaining 14% is capital goods. There we make machineries for oil and gas and thermal power industry. 41% came from international markets. 59% came from India. From a fulfillment point of view, 60% of fulfillment in this H1 was through captive factories and 40% of fulfillment was through marketplace model. This number will change in H2. This number will skew more towards marketplace in H2 as some of that revenue kicks in in H2. So this is not the steady state view of the business. This will skew again in S2. One more cut is that 76% of our revenue comes from recurring components, which is built to print. You know, customer is giving us a design, we are manufacturing as per their design. 24% of revenue is coming from our own design, where we design and manufacture the product ourselves. So we'll give you some examples also. Just on international one callout, international was 41% of revenue in FI27, but last year it was 30% of revenue, so a lot of our growth is coming from growth in international markets. We want to do some double-click on the order book, on the order backlog. It is, as I said, all-time high at 14,500 crores. You will see the progression over the last five years. It's a straight-line growth. It's compounding by almost 30-40% year-on-year. In this specific year, it has compounded by almost 70% compared to the same period last year. The bulk of the order backlog is coming from the energy business, but if you see where growth has come from. Growth has come from the Precision business. There is almost 80% growth in the Precision category compared to last year. Precision category, a lot of that growth is from aerospace and defense and space, which are very, very high margin categories. 46% of the order backlog is international, which is very heavy because as we showed you, international is higher margin. So when almost 46% of the order backlog is international, when that converts to revenue, That will show up in the overall margin profile of the business. Another call, 33% of our order backlog is what we call ODM business, where we are designing the products ourselves. ODM is also much higher margin than the regular business fees. Typically, you will see that the order backlog will convert to revenue over approximately 2 years. Slide number 11. Again, just a repeat, 83% of our revenue came from repeat customers. It's been range bound with that number for the last three to four years. We feel this is extremely healthy because repeat customers coming back is the single most important signal that we are doing something right, that we are delivering goods with the highest quality, we are delivering goods with the delivery times that the customers expect and obviously the price that the customers like. One more metric, you see on the graph on the right. We take our current order backlog, we take the new orders we have won, and we divide it by current year revenue. We call it revenue coverage. That revenue coverage is roughly three years today. What that means is for the next three years, we have already won most of the orders that we need to keep the business running. So, this is extremely healthy. When you have a three-year revenue coverage, you can really be long-term monetized. That is why you will see that, of course, the near-term numbers will come from categories that are already presented, like, for example, solar or electronics or thermal power. But a lot of the management bandwidth is being spent on long-term category creation. We are spending, for example, a lot of time on space as an industry or robotic as an industry. We gave you one example of a space customer. We also work with many other space customers. You know, in fact, we work with the largest space company in the world. We are also a customer. So, we are increasingly focusing our efforts that between business, we have built an org, which, you know, is kind of running in a good shape, and as founders, we are spending a lot of our bandwidth on mute identification. Again, just to give you a range of everything we do, our energy business is 64% of revenue, but it is extremely diversified. We make power transformers, we make distribution transformers, we make transformer components, we make wires and cables, we make something called a tracker. Trackers are those things which move the solar panels to the day and solar is perpendicular to the sun. We also make solar panels because one of our first out of our best in H1, we do wind turbine components. Our customers are some of the best companies in the world. We work with Siemens, DC Power, Hitachi, PowerGrid, we work with NGPC, we work with developers in India, we work with developers in the US like Handwater, in Bedrock, and Tandis, we work with Nextrailer, which is the largest hacker company in the world. We work with Siemens, which makes wind turbine, which is the largest wind turbine company in the world. We will see that a big part of the auto backlog is for the grid components. Which is your transformer, White and Cambridge transformer component. It is reflective of the shortage that is there in the industry. For example, the need time to buy a power transformer for a US customer is almost three to five years. We are offering this in two years, which is partially why we have seen a lot of other momentum. And that is a big part of the backlog that we have currently. On Precision, we make electronics, we make aerospace and defense parts, we make some auto components as well. Aerospace and defense is where the order book is almost 10 to 15% of the overall order book. We work with defense PSUs in India, we work with the Air Force. On the consumer side, we work with Acer, Tamsa, we work with Acer, bunch of companies on the consumer and defense side. Lastly, on cattle goods, we work with customers like Tata Steel, Arsena Mitral, Adani, Reliance, all 4500 companies of India. We help build factories for them in terms of machinery that they want. For example, for thermal power, we are supplying supercritical wireless components. We are supplying data center components. We make for oil and gas companies, we make storage tanks and pressure metals. That's the range of the business. That range carried forward in last H1 also. H1, we won 7,800 crores of orders, which is 50% higher than last year. We won orders across the spectrum. We won orders for transformers for US customers. We won orders for defense electronics for Indian defense PSU. We won orders for cables. We won orders for process plant machinery for a major zinc company in India, which is Hispanic. We won orders for TCBAs for consumer and industrial OEMs, almost 1,000 to 1,500 crores of TCBA orders. We want transformer component orders also for companies like CG and Hitachi, the transformer OEMs, we want 500 to 1000% orders, yeah, etc, etc, not both of them, etc. But the main message we want to land is extremely diversified business, capturing multiple thematics and multiple cycles. How are we able to do this? We want to give you some view of how we work internally. Today, we were always a digitally-nated business. We have built a lot of software in the last eight years. We are transitioning to be an AI-nated business. So, this is one of the tools we have built. We call it Z-Spec. So, for example, when you have to bid for a tender, typically the whole bidding process takes anywhere between three to four weeks because you have to analyze what is going on, what is the bill of material, then you have to analyze the price. We have built an AI tool internally to our own engineering capabilities, which can take a tender as an input, convert it into a bill of materials in just 10 minutes. We have trained it on thousands of tenders we have built for, both for private customers and public customers over the last eight years. So this becomes a recurring mode. That just allows us to be way more aggressive on the new order booking. Ultimately, new order is a function of how many bids we do. You saw that we won 8000 crores of order last year in H1. Typically, our bid rate is around 20%. So we would have bid for almost 30-40,000 crores of order to win this kind of volume. And bidding for that kind of volume is not easy without doing software. This is one of the tools we have built that, which is slide number 14 I'm referring to, which just makes the productivity of the business way, way faster to kind of win way more audits in the short span of time. Similarly, we have built existing tools as well. Our business people can create their own software tools, which historically how it would happen is a business person would give an acquisition to our engineering team, an engineering team would create a product spec, and then they would Build the software which would take anywhere between two to four weeks, then they would iterate and then the final software would take three months. Now we are able to build the entire thing in like minutes through agentic tools. The example we are showing you is something for quality. All our customers give us a quality assurance plan. It is customer-specific. So we've built an agent which can go to our customer's quality assurance plan and create a SOP, which my person on the shop floor can say that, look, this is the quality assurance plan. I need to follow for this order. And then we can track compliance into that quality assurance plan to make sure there's nothing that has gone wrong. We have a lot of tracking in the business. This is slide number 16. This is one example we have shown where you can internally and then we can decide to show it externally. You can track the shipment of goods from, let's say, in this case, product leaving Mundra and going all the way to U.S. You will see in slide 16 that the product is going all the way around Africa. That is the reason. The reason for that is all of us know there's a crisis in the Middle East, right? So all of this real-time visibility gives customers a lot of comfort, that look, network is on top of it, that yes, there is an unforcing delay, but nobody could have done it better. Just a quick view of everything we do. This is a wind turbine. This is for offshore wind turbines. This is installed in the ocean. You will see people standing next to the wind turbine. This is like 17. We make products as big as the wind turbines. We make products as small as cables and connectors and RF connectors and motherboards for defense companies, for industrial companies, for consumer companies. This is a PCB they have made for a large consumer company in India. These are the parts that are going to space companies, including the last space company we were talking about. This is the largest space company in the world. The next photo is slide number 19. This is the first transformer that we installed in the US market in North Carolina. This is in H1. This is again a power transformer. We mentioned the leak time to buy a power transformer has grown into years. We are supplying it in much faster time periods. We make reactors, let's go for oil and gas refineries, we are coming to slide number 20, there is a catalytic reactor which removes sulfur dioxide from plants, slide number 21, there is a bullet-train girder, the middle one, this is for editing, this is for the bullet-train project, on the left you will see a marine unloader, this is for a refinery to unload crude oil from the ship, on the right you will see an antenna which is for the space research agency over here. So, that's the range you will see in the network. It's a multi-product, multi-capability driven company. That's the business we want to build. From ocean to space, you will find we cover the entire range. Lastly, we will talk about the ecosystem segment. The ecosystem segment is where we supply raw materials. We don't make a finished product. We supply raw materials like aluminum, steel, zinc, and copper. We grew, we had 2000 growth of value in Q2. We grew 50% on an echelon basis year over year. We had a negative 7% growth compared to last quarter. Most of this is attributable to the commodity price itself. The volume growth was stable, but the commodity prices keep changing, so that changes the headline top line metric. The way we have built this business, you will see we make only 2-3% of gross profit and 1% EBITDA. This is intentional, we don't take any inventory, we don't take any positions on materials, we don't speculate on raw materials. So, it is a low risk, low margin business. The reason the ecosystem business exists, the best analogy we can use for is, you know, this is raw materials, like you saw the transformer example. 50% of the value of the customer is seen only. And so we wanted to control the input which goes into the products we make. So having the ecosystem business allows us to have a tight control on the raw material prices. They are able to lock in prices by having good relationships with all the large mint suppliers in India, which are your, let's say, Lanco or Hindustan Zinc or the Tata Steel or the JSPL. It's a pure volume business. The more volume you buy, the more discount you get, and that discount is an industrial cost. When you look at it at an overall basis, the manufacturing business contributed to, in H1, almost 211 crores of segmented EBITDA. The ecosystem business contributed 20 crores of the segmented EBITDA. So, one of the profit pools, the profitability drivers of the business is the manufacturing business, but if you have any questions on the ecosystem business, they have to do profit. This is my last slide, and then I'll pause, slide number 23. We just want to starkly articulate the strategy of the company. On the near term, it is all about monetization. We want to maximize gross margin. We believe that if you maximize gross margin, it will lead to maximizing EBITDA, which is EBITDA is an output, gross margin is an input. Gross margin increase will happen through 3M approach. 3M stands for mix, model, and market. Mix means do higher margin products like airspace and defense. Model means do some captive, some in-house. Market means do more international. If we do three things well, we will lead to higher gross margin, we should lead to higher income. You saw that we have 15,000 pros almost from auto backlog, which grew 67% year-on-year. This is both a good and a bad thing. It's good because it gives us a lot of visibility into the next three years, but it is a bad thing because it tells you that we are a supplier-conspirant business. So fundamentally, we need to improve capacity through either our own network or through our captive network, through third-party network or through captive. At the same time, we want to strengthen distribution. Today, we saw the customer names we worked with. We want to improve wallet share with some of the largest and the best-run companies in the world, which are the industrial giant. The Fortune 500 company is both in India and globally. We want to leverage our existing customer trust and case service to accident us inside. Over the medium term, where I spend most of my time is, I want to increase the company's adjustable market. Okay, today we are serving... This is a fundamental category creation at work. It does not always work out. It may or may not work out, but we believe that maximizing surface area of the business is the best long-term health indicator of the business. That this is where we can sustainably continue compounding journey, not just for the next three to five years, but for the next decade. We want to do things which are more ODM, more design-heavy. We believe that naked India is insufficient with our design in India, so we want to control the bin of materials as much as possible as the company. We want to embed AI filters throughout the business, we gave you some examples. We'll build resources by as required. So, that's it. The remaining three slides are just a summary of everything we spoke about. How our numbers know. Happy to double click on anything that you'd like. But, yeah. 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 the 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 Varun Gandhi from Finn Avenue Growth Fund. Please go ahead.

Hi, teams at work. Congratulations on your first reported set. And, you know, just to set the stage, I'd like to mention that I'm really fascinated by what you guys have built here, right? It's a really interesting story and would love to participate in incoming earnings calls, etc. So, Ashut, my question to you would be a more fundamental question over here. You know, clients in each industry, are they paying a premium for network products? Or are they paying what they would for your peers? That would be my first question. Given your product proposition and your value proposition, are they paying a premium and are they comfortable paying a premium?

I think that's an excellent question. So, first of all, we have two business models. We have a captive business model and we have a market-based business model. In the captive business model, we are at... Because we have the full margin, headroom to speed pricing up and up. In the marketplace business model, one can say that are we at marketplace or not. Now, typically, in the marketplace business model, we have a third party supplier who is mostly an SME supplier. The SME supplier in India, on average, offers a 45 to 50% capacity utilization. The reason they operate at 45 to 50% capacity utilization is they typically have one customer only. Like my co-founder Shina is a good example. His father was an employee at BHEL, decided to open a steel fabrication shop. BHEL was his first customer and BHEL was his only customer for a long time. So, because there are 45 to 50% capacity utilization, if you increase that utilization to 75-80%, let's say, you know, that is the source of margin for us. He had it. Taking share, in some shape or form, from the supply side we work with, it's like a take rate kind of a business model. Now, there are certain categories, like for example, in the transformer industry, we are offering a lead time which is far superior. The typical industry lead time is around three to four years, we are offering it in two years. In such categories, we are taking a premium. But the way I would articulate that again, if you want a transformer in four years, This is the market rate. If you want a transformer in two years, this is the market rate. So, amongst the people who are able to offer a transformer in two years, we are not more expensive here at the market.

Understood. Thanks for the clarification. So, I can safely conclude that, you know, you do have some sort of pricing power at the moment because your value proposition is much deeper than your competitor. My second question would be more on the, you know, your strategy that you mentioned that you want to expand your product into the aerospace defense, etc. So we, as a company, have faced a lot of success in the electrification team, transformers, etc. But there's a very different manufacturing know-how and capability needed in the new industries that we're talking about, right? Do you think how difficult and challenging would it be for you to replicate the success of, you know, the electrification-themed products into the aerospace defense and the precision segment that we're talking about? Since you mentioned you want to, you know, build that particular segment into a meaningful contributor.

So, first of all, we will say that, look, we are not making a forward-looking statement here, we already have approximately 1,500 to 2,000 crores of orders for that segment, from defense PSUs, from space companies, from, you know, private companies who are operating in that space. So, it is a material portion of our order book already, and if you compare it to one year back, one year back it was almost non-existent. Now, how we operate? We have been working on this category for the last three to five years, you know, so it is not an overnight phenomenon. What we have discovered is it does take time. These things take time, they can sometimes take years. What we have learned is that is eventually our superpower. We can afford to spend three to five years to build a category because we are so diversified that building a new category is not Solving for revenue for the next one to three years. We are solving for revenue for the next five years. So, typically the way we operate, let's take the aerospace and defense as one category, it will be done by the founders. As founders, we will spend disproportional time on this category. For the last two to three years, we will be spending one of our founders, spending 100% of the time on this category. Now, the mature categories, what we have done, is we have brought in professional CEOs. You mentioned the electrification theme. So transformers and transformer components is a reasonably big business for us today. Again, I want to emphasize it was not a big business for us three years back. So we have brought in somebody extremely senior from Hitachi to become CEO of my transformer business. So we follow that relay approach. Business building is done typically at the founder level. Once something becomes mature, we typically get who is the best in the industry we can hire to head that business and take it to the next level.

And by that definition, do you think, although you've made the comment, do you think precision is now set to, you know, be the dominant growth driver going forward?

Look, we will just point you the historical numbers. Last, in the actual numbers, we reported 80% growth of order book came. In the precision quantity, the order book grew by 80%. Now, will that, now see, some of these things are again cyclical, like defense industries notoriously cyclical. This is actually the most cyclical industry that includes. So, we don't want to give a formal guidance at some product at some academy level. We want to give an overall guidance. Overall guidance is the order book will go faster than living for the business.

Got it, Achit. And my last question would be, you know, your...

Sir, sorry to interrupt, but can you...

I'll rejoin. I'll rejoin the queue. Just closing comments, guys. I have described Zetwork as a combination of engineering and entrepreneurship. And congratulations once again.

Thank you very much. The next question is from the line of Tejas Mehta from Sierra Capital. Please go ahead.

Yeah, hi, guys. Thanks so much for taking my call and privileged to be on the call and having known the team for some time now. And congratulations for listening finally on the market. This has been a long time coming. Just a couple of questions from my side. One is, are we becoming OCF neutral by this end of year and turn OCF positive from next year onwards?

Yeah, see, just, again, how our financials work, I didn't hear it fully, but I'm...

Tell us, your voice was a bit smudged. I think it got off. Then Rocky comes close to the line, and maybe it becomes more.

Yeah, look, I think I answered the question that I answered. See, if you look at, again, two trends. H1 is 40% of revenue last year and 40% of adjusted EBITDA. H2 is 60% of revenue and 60% of adjusted EBITDA. We expect the same terms plus minus here and there to continue this financial year as well. So when you look at the numbers in H1, we did almost 270 crores of adjusted EBITDA. When you divide that by 0.4, that's our guidance. So we will do, we are expecting roughly between 5.650 to 7.950 total adjusted EBITDA for the full year. Now below adjusted EBITDA, we have interest and depreciation of the big line items. The, yeah, one important context for all of you is the Q2 numbers is actually before our IPO. We did the IPO on 23rd October. This Q2 numbers is out of September. Also, the IPO proceeds were primary. Primary is going to be used to retire debt in the business. So, whatever is the interest, expenses, finance cost we have, it will materially come down in H2, and on a full year, it will come down in the next financial year, in F28. So, and you see that EBITDA is growing almost 60,000% year and year, right? So these two trends are favorable to the company. Yes, EBITDA pool is increasing and your finance cost, which is a drag, is reducing. So hence, yeah, we expect to enjoy that benefit

in the next H2 and next H2. If I also heard you correctly, I think you pointed on OCS as well. So I think on a full-year basis, like for H1, we said, Q2 was much better than Q1, and X1 full year was better than X1 last year. As you know, over on Europe pages, Q2 Europe, neutral to positive, and next year onwards, we should be also a positive pressure.

Yeah, again, on a TTM basis, we were negative 1 to 3 crores on OCS.

The line for the participant is disconnected. The next question is from the line of Gaurav Jawalkar from JM Financial Limited. Please go ahead.

Hi, sir. First of all, congratulations on improvement in EBITDA. First, I want to understand more on the Z-Work OS, which is your proprietary tech. So, you already explained how it is helping enabling AI, but I just want to understand how does it play a role as a key business enabler for you? And secondly, you are also mentioning that you will be embedding AI throughout the business. So can you talk more about what are the other initiatives that you are going to take to enable AI in a more efficient way as a key enabler for your business?

Yeah. So maybe what we'll do at some point is we'll make a short video and publish it. But think of the flow of the business. The first flow is we are getting a customer inquiry or an RFQ. We are responding to that customer RFQ by giving a quotation, which is in the form of price and delivery time. Then we are winning that order. And executing that order. We have to deliver the order on time. We have to deliver the order with the right quality. And we have to do the shipment for the product. Once the customer has received the product, that is when our scope ends. And our scope has begun when they have given us an RFP. We have built software tools, not AI tools, for the entire flow. We have software tools that help us price an RFQ. We have software tools that help us select the right supplier on the market trade model. We have software tools that help us do the project management. For a wind turbine, for example, does it take 30 days to manufacture this part or 60 days to manufacture this part? Like that is science and art. We want to make it as much science as possible. And that is a combination of... Physics-based decision-making that you look at the drawing and estimate, and also look at past trends, then you have to do quality, and ultimately you have to do shipping, right? Now this remove OS is something that captures that entire lifecycle of an order, from order placement till order receipt. Now AI is just driving productivity at a much, much faster scale. For example, We used to take 7 to 10 days to respond to a customer. Now, our goal is can we respond to a customer in 24 hours? You know, that is almost like magic. And that is one example where AI team truly transforms the business. We have the benefit of having tons of data over the last eight years. Which we are just feeding into, we have made our own AI platform, we call it Zeus, ZDUS, this is after the green god, so today we can simply upload a drawing into Zeus and say, help me find a supplier. What Zeus will say, it will analyze the drawing and say, okay, this is an aluminum die casting order. Aluminium die-casting is a classic autograph supply chain. In Coimpsor, you will find hundreds of vendors instead of, you know, the die-casting capability. Now, we select three or four of those vendors who we have worked with before and say, okay, vendor one has an on-time delivery of 80%, vendor two has an on-time delivery of 50%. Let us give the order to vendor one who has a better on-time delivery, right? So, this entire decision-making process, we have compressed the timeline. From days to minutes to hours. And we think we are not even 1% in the agenda.

So, a lot of, a lot of hope ahead. Now, I need just to summarize, you know, there is a complete digital footprint throughout a product like Cyborg, right? From that time, we receive an inquiry, submission of the port, manufacturing, everything, logistics. And, you know, even on the finance side, the entire order to cash is looking out to pay. What it is called in-house tools we have developed over a period of last 7-8 years, which has been deployed for use, which creates a lot of efficiency and agility contribution.

Okay, so that was helpful. Secondly, so as you mentioned, you're expecting revenue growth of 25 to 30% and EBITDA growth of around 60 to 70%, if I'm not wrong, for FY27. And you have also improved your margins, both in terms of gross margins and EBITDA. So fair to assume that the gross margin and EBITDA margin improvement will continue and that 25% mark that you said that you want to achieve in terms of gross margins. Can we say it is near or possible in FY28, let's say?

Yeah, we should, we should be, I mean, every year we make progress. I think this year, we should be closer to 21% on a full year basis. Let's say we will improve it by 100 to 200 waste points per year. So, maybe closer to FI 29. But, where we are today, any improvement in gross margin is directly acceptable to us.

Okay, and just one more question that I want to ask is that the discontinued operation, it is somewhere impacting your path. So, how much more of a provision is left to do? What is the outlook there? And how is the path looking for these discontinued operations?

Thanks for questioning that, Gaurav. So, you know, we have taken some provisions in this business segment. In the last year and quarter 1 of the current financial year, and I think our guidance would be that we would not see any more provisions or losses in this strategy, and accordingly, in quarter 2 also, it's operationally break-even. We are sort of consolidating it. Another three quarters, we will last this shortly. There's some practical ones around interest allocation. Which also, you know, with this idea of money when we are requiring debt, all the business applications will also not be there. So, I think some money will not see any losses in this category anymore.

Okay, and just one last question if I could squeeze in with your IPO proceedings and as you said that the interest allocation for discontinued will also be taken care of. Can you also share your thoughts on PBT, I mean, when we will turn PBT positive or any path on that, what's your outlook or internal guidance in that?

Because on H2, we should be pivoting ourselves.

I think that's reasonable. And again, if you see, one of the tracks is on the ESOF charge. ESOF charge was also a little bit higher in Q2. We don't expect it to be at that level in H2. The reason ESOF charge was slightly higher in Q2 was because of, again, IPO. Some of the employees had IPO-related investing. So, that's taken in Q2. So, those are all one-time charges. They will normalize. So, they expect to be PVT-positive.

In fact, we track a method called Cache-PVT. So, you know, for quarter two, we go hand it to our Cache-PVT properties. We go, you know, adjust our PVT for these non-cache charges. There was a sudden hedging into an application and on. So we were sort of stashed to be developed.

Thank you, sir. That was so much clear. Thanks for that.

Thank you very much. The next question is from the line of Varun Gandhi from Finan Venue Growth Fund. Please go ahead.

Thank you again. My next question would be more from a medium term standpoint. As you mentioned, your near term objective is to optimize for margins while focusing on time expansion in the medium term. How do you see the trade-off, you know, between these two levers of growth, and where do you think the company can stabilize or, you know, get in the mature growth phase? Some thoughts over there, please.

Yeah, no, look, we are as close to that as you can imagine. Now, we are talking about time expansion for a three to five year time. If you look at an order backlog, our order backlog is almost, as I said, 14,500 crores. For the next three years, we have sorted, you know, we have to just convert the backlog into revenue. And if you see one more number, which is 80% of the revenue is from repeat customers, that's the same thing for backlog also. So our business is fundamentally a very healthy foundation, you can say. Customers are repeating, and customers are placing larger and larger orders in the year. Right? So, it is, you know, as close to auto mode as possible. So, what we have done, the constraint is supposed to speak becomes bandwidth of management. Now, end of the day, there will be 24 hours a day, and we don't work on 24 hours as much as you want to sometimes. And, and so what we have done is we have made a relay on for mature categories, we mentioned Transformers as an example, we've hired somebody very senior from Hitachi. So mature categories have CEOs whose job is to grow their business, hired at the industry growth rate. For new categories, which are zero to one categories, and zero to one also I've explained it into two. There is fundamental stuff like space and robotics, which is a three-year project. Then there is low-hanging fruit today also. One example of low-hanging fruit is battery energy storage. We work with so many solar developers in India and US. We have been supplying solar modules to them. We have been supplying transformers to them. We have supplied switch gears to them. They also now need battery energy storage. So if we are able to crack product for battery energy storage, we have customers who will need to place orders to us tomorrow. So, we spend a lot of our bandwidth on both of these initiatives, which are one is near-term, low-hanging fruit initiatives, one example is BESS, another example is wires and cables. Then there is fundamental long-term strategies, which is like a space and robotics. We have created bandwidth for ourselves by Bringing in very, very talented people from the industry and, you know, giving them help to grow. The other thing I want to mention is for the new categories that we are creating, there's a space of the categories. We will not, on day one, hire a hundred member team. We will hire a five to ten member team. The total investment size is the one to ten crore range. You know, so these are not material drivers of near-term profitability. Now, of course, if I don't do that investment, my profitable number will look higher by that number in the short term. But we believe that by investing, let's say, 10% a year for the next 3 to 5 years, we can create a new $100 million category which does not exist. So that trade-off we feel is worth it for us.

Got it. Appreciate the answer. Amrit, my next question would be, you know, I hear your demand side story, you know, solid value proposition, but on the supply side, can you walk me through how do you, you know, set up or optimize the entire supply chain? And this, again, you know, ties up to the fundamental need for Z-Work itself, right? How do you optimize the entire supply chain for so many categories and yet be able to execute?

Yeah, see on the supply side, how it works, typically, is supply side is, you can draw like a two-by-two axis, on one axis is the material, on the other axis is the process. For example, there is C fabrication. Another example would be aluminum die castane. Another example would be plastic injection molding. Now, this combination. Materials can be steel, aluminum, plastic, titanium, etc, etc. Process can be casting, forging, machining, injection, molding, fabrication, etc. The universe of that will look like, let's say, 100 steps permutation combination. We would say we are good at maybe 10 to 15 of them. We are good at steel fabrication, we are good at machining, we are good at die casting, we are good at injection molding. We may not be good at forging, as an example. So, our universe is a die casting product. Hello? The supplier we work with, we gave an example. We have got an order for a, let's say, a sonar company who wants a die-casting product. We are getting it done through a coin virtual vendor who has a die-casting shop, but his product has a die-casting shop only for auto. Now, that is the know-how I'm bringing. Let's look. The supplier is a die-casting supplier, has only worked for autos, but his machines and his factory can produce a die-casting for a renewable energy customer. Now, this supplier is a coin-better supplier, may not even know that this renewable energy customer exists. So, we're bringing that distribution, we're bringing that engineering to suggest that this Factory, even though they have never made this part before, have the ability to make that part because of the machineries they have, that requires deep technical underwriting, which is the DNA of the company. We have 3,500 people overall in the company. Almost 800 of them are doing design and engineering. It is almost 20% of the company's headcount. We have experts of die casting, we have experts of injection molding, we have experts of machining, we have experts of fabrication. As we're getting larger, we're increasing expertise in design style also. So that fundamental engineering DNA is the heart of the business. Even that same people are all engineers only. So that's the DNA we bring in and then we feel that that's what answers sometimes understand the class better than they understand themselves.

Thank you again for the clarification. So, a new supplier, let's say, joins your network. Sorry to interrupt, but can you please rejoin the queue? Yes, sure. Thank you, guys.

Thank you very much. The next question is from the line of Sudhirina Kulkarni, an individual investor. Please go ahead. Suddindra, please go ahead. Since the participant is not audible, we will move to the next question. The next question is from the line of Tejas Mehta from Sierra Capital. Please go ahead.

Hi, thanks. Thanks again. Sorry, I logged off last time. Just a couple of questions. One is on the OCF side, that is operating free cash flow. When are we turning positive? That is one question. And what are the working capital cycles that we are seeing now? What are our orders?

So, on the OCF, you know, when Amrith was running the numbers, quarter two was arguably like, you know, 60-70% better than quarter one. And on the H1 current year versus H1 last year, again, there was massive improvement. So, I think for a full year, on a full year basis, we should be between neutral to positive this convention here itself. And next year on those, I think, family would be, would be OCF positive.

Right, and on the working capital side, yes.

Working capital side is around 30-31 days, as we see.

Okay, okay. Now, just a couple of headwinds, you know, I wanted to just get them addressed. One is, you know, the US AI driven rally that has cooled off a lot in the last few days. And, you know, right now, people are predicting some sort of a downturn over there. Are we, so there's a lot of data center capex that happens because of that, and a lot of associated energy demands, right, related to data center. Are we anywhere exposed to that segment in the U.S. as of now or in our order book? And are we seeing any slowdown over there?

Yes, so we have exposure to the US AI KPIC cycle. It would be again in the 10 to 20% of the order book at this point in time. So that is the first answer. Yes, we have exposure, but we are so diversified that we don't think it will matter. The company has multiple growth options. For example, right now we're seeing a lot of growth from thermal power in India, we're seeing growth from renewables in India, we're seeing growth from aerospace and defense in India. These are three growth drivers which fundamentally did not exist last year. Now, the other bit that we think about all of this is yes, there is some noise in the market, mostly on the stock market, but when we look at customer behavior, nothing has changed. We are still getting a lot of RFQs. We are still, customers still creditizing us to deliver things faster in a much, much more complex time period. So, we have not seen at this point any change in customer behavior in terms of either new RFQs or the value from their asking for which is everything first. Now, could it happen in a few quarters of the next year? We don't know. But at this point, we are not seeing any change in customer.

Okay, got it. And regarding the solar sector in India, there also I am hearing noises. Around, you know, sharp slowdown in the sector after this June regulation on ALCN, and now we are moving to fully DCR ecosystem from 1st of January. So, we have seen a lot of slowdown in the business for a lot of players in India, and I think marginal players have been sidelined completely. Any particular impact that we are seeing on our book at this point of time?

I mean, not yet. Again, in H1, we won almost 500 to 2,000 crores of orders for that product from largely domestic customers in India. And, of course, these are discontinuities. Like many regulatory teams, whether it's ASTM or ALMM, where U.S. is having its own ALMM movement, in fact, today. So these are all discontinuities that happen. They typically impact for a couple of bottles at best. The way we think about it is once the GMI is out of the bottle, you cannot put it back in the bottle. It's very hard. The long-term trend is going to be more renewable. Even data centers, for example, like data centers in India has not yet begun. You know, financially, the thing we hear from US investors is it's like a tsunami in the US. It's very much in the short of Europe and it's starting to touch the short of India. And you know, so there is a lot of growth room ahead. But as I said, we are not different in one category for another.

Right. And thirdly, again, on the energy side, just one last question. On the energy side, Europe seems to be a very big potential market given that the energy costs have really gone to the roof in that continent. Are we looking at making any improves in that geography given that there is a substantial opportunity on the energy space?

Yeah, look, I think that the way we think about it at this point in time is we want to double down on what is working, like for us, US is working, India is working. Europe, yeah, theoretically is a large market. India and US fundamentally are decoupling from China also. Europe is not yet decoupling, there is still like a lot of China in their supply chain. So, we will wait for that shift to happen for us to seriously consider yellow. Even because of market size, see there's two ways to think about tailwinds. There's a demand side tailwind, there's a supply side tailwind. Ideally, you want both. India and US are markets, but both are happening. GDP growth is very, very high, and there is massive decoupling from China that is happening today. So, that presents a very, very strong product market fit. That is the way we think about it.

Okay. Got it. Thank you so much, and all the best for a bright, listed feature.

Ladies and gentlemen, in interest of time, that was the last question. I would now like to hand the conference over to management for closing comments.

Yeah, so thanks a lot for attending and we look forward to keep interacting with all of you every quarter and every year to come. And we are trying to build a very long-term business which will grow not just for the next quarter, the next year, but grow hopefully for the next decade. That is the general sense we will apply to decision-making manual in the company. And we hope to have your support.

Thank you very much. On behalf of Z-Work, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.