Ather Energy Limited (ATHERENERG) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Ather Energy Limited Q2 FY '27 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Murali Sashidharan, Head of Communications at Ather Energy. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and welcome to Ather Energy Limited's Q2 FY '27 Earnings Conference Call. From the management, we have with us today Mr. Tarun Mehta, Executive Director and Chief Executive Officer; and Mr. Sohil Parekh, Chief Financial Officer. Before we begin, let me draw your attention to the fact that the discussion today may include certain forward-looking statements which are predictions, projections or other estimates about future events. These statements reflect management's current expectations about the future performance of the company and are subject to various risks and uncertainties that may cause actual results to differ materially. Please note that this conference is being recorded. [Operator Instructions] With that, I now request Mr. Tarun Mehta, Executive Director and CEO, Ather Energy, to share his opening marks. Over to you, Tarun.

Thanks, Murali. Welcome, everybody. Welcome to our earnings call for FY '27. This has been a pretty stellar quarter for us, and I would say actually the entire industry with industry registrations hitting a growth of 82% year-on-year, netting out at about 6 lakh sales for the entire quarter. Phenomenal growth across all the 3 zones that we track, Middle India, South India and rest of India. What's really heartening is I want to bring attention to 2 important points. First, the growth is becoming more broad-based. And that's very important and very, very healthy to see. For example, if you see last quarter, the growth across 3 zones was a bit different with South India leading at 82% and rest of India at about 54% and Middle India in the middle at 66%. But in Q2, we are starting to see signs of growth pretty much coming in at the same level across the zones at 82% in South, 85% in Middle India and 79% in rest of India. So quite a broad-based growth overall. The second important trend is that South still continues to be an absolute monster of a zone, growing at 82% despite a fairly healthy base already, which is what we want to see, obviously, because electrification is still in early stages. Q2 was the first quarter when pan-India [indiscernible] penetration crossed 10%, netting out at about 11.2% for the full quarter. And very -- we do believe that this is still supply constrained at an industry level, and the coming quarters should continue to remain fairly healthy for the entire industry. For us, Q2 was particularly important because this was the quarter when we had our annual A Community Day 2026 and where we launched a whole bunch of things from our ecosystem to software to obviously, the new product, Konarc. Let's start with some of the launches we did in this ACD. ACD overall has become a pretty landmark event for us. It's grown from its humble origins of about 600, 700 owners who came in, in 2023 to almost 6,000 people who got together in Bangalore this year. Fantastic coverage, many, many, many viral moments and a lot of attention that it's helped bring to the brand and established its equity across the country. Some of the important things that we launched in this ACD were starting with Ather True Health. This is a comprehensive health report of a scooter, where we basically started showing the health of different components like the battery, brakes, wells, dashboard, motor, et cetera, on your mobile app. So you can just go to your mobile app, click a button and see the health of different components, which is quite pioneering in our industry. And we convert all of that into a simple health score. Essentially, we want -- the idea here is we want to give EV owners a lot of confidence and comfort that how their EV is performing even after years of usage. And we took it one step forward by starting -- we have started to show with estimated resale value for scooters that have crossed 3 years of ownership. The intention, again, is not at this point to establish a business channel, but to again give EV owners a lot of conviction that they've made the right choice by going to electric and their vehicles continue to retain a lot of value. The second thing that we announced was 10, which is an infrastructure product that enables EV charging in apartments. It's a really smart system that comes with automatic queuing, smart load management. It draws power from common loads instead of individual houses, freeing up a lot of complicated infrastructure that homeowners otherwise would need to do, comes with customized billing and is very cost effective. Eandis is getting industrialized right now and will commence operations -- commence deployment in the next few months as we are onboarding our first few set of partners. Third big thing was A Bedrock, which is our fifth-generation battery packs with enhanced safety and much longer warranty periods. These are fairly well-developed battery packs, which come with real-time micro leak detection. They come with cell balancing that is almost 5x faster than previous generation and are the first battery packs from Ather that come with 10 years or 1 lakh kilometer warranties with a 70% performance guarantee. These batteries have already gone live across the entire portfolio from 450 this time Konarc. And obviously, the big launch for ACV underpinning all of it this year was Konarc, our mainstream product going live this year. Konarc, we decided to focus a lot of -- a lot in this product on the fundamentals of scooters in India. So this is our first scooter that's come with 14-inch front fees. It's come with one of the longest rear suspensions in the country for scooters. It comes with a beautiful par grab handle, adjustable backfres, onboard charging, combined charging so that customers are not even locked into one charger spec over the ownership period. Our first scooter with the center stand, metal body, a remarkably improved service layout so that you only have to service your scooter once in a year. And obviously, it comes with the bedrock battery with 10-year warranty periods. So overall, Konarc focused a lot on the fundamentals with the target being how do we get more petrol scooter buyers to buy electric. It's launched a great reception already, but this was an Ather product. So obviously, it did not just do this. It also brought to forth some of the really new magical things that our teams have spent a couple of years now really crafting and perfecting, features like Air walk, where the motor detects that you're trying to move the vehicle and gently assists you. The end effect being the vehicle seems remarkably lighter than it actually is or a new feature called Magic Tee, which is essentially keyless, but built in a very intelligent way so that it gives people who may not be very savvy with tech, a lot of confidence in owning a keyless product, loss key detection, and authenticator that works offline, a smart key that works even if it's around of battery, one that locks the handle bar automatically, a lot of features there. One of the more viral features from this launches was AutoPop, where you could just come tap the rear of the scooter and the see pops up, one that consumers are absolutely very excited for, and it's going to get into production in the coming few months. And finally, AEBS, Ather's proprietary advanced electronic braking system, which helps -- which is a remarkable improvement over CBS and reduces the stopping distance substantially even on slipperloads. So with Konarc now live, we believe we've built a very healthy portfolio in the scooter segment between 450 Rista and Konarc, we believe we have covered the market quite well. Obviously, there are still many small segments that remain, and we will focus on them also. But I think for the mainstream market, between what Konarc brought to the fore, we've probably covered the bulk of the territory already. And over the next 12 to 18 months, as different variants over the next -- sorry, a couple of quarters as the different versions of Konarc keep hitting the market, we believe our TAM will continue to expand. We've seen a remarkably strong search in demand metrics across the board. Overall, for the EV industry as a whole, the EV searches, online searches on Google and AI, they were up roughly about 34% year-on-year. So very healthy growth, obviously. Ather searches on the other hand, were up almost 94%. So obviously, a much, much, much stronger growth. inquiries were up even more at about 109%, crossing 10 lakh inquiries for Q2 FY '27. And preorders were up at about 108% year-on-year, hitting about 1.8 lakh preorders in Q2 FY '27. All of these top-of-the-funnel metrics have translated into very strong wholesale volume growth. Wholesale volume grew from 65,000 units same time last year to 93,000 units in Q2, 42% growth year-on-year. This has been enabled by a very healthy ramp-up of our capacity, manufacturing capacity, which has gone up from 28,000 units average per month last quarter to 33,000 units average per month in Q2 FY '27. And obviously, that's also translated into even stronger growth in year-on-year registrations, up from 57,000 units last -- same time last year to 92,500 units, almost 60% growth year-on-year. increasingly and particularly with Konarc launching in a phased manner from last quarter, we have seen an even sharper growth in rest of India than, let's say, South or Middle India. Obviously, this is also because we have started to prioritize a little bit more of sales in the rest of India, particularly in northern markets. Konar itself is being released in a staggered manner with early releases focusing on Uttar Pradesh and Rajasthan, now expanding into Madhya Pradesh, Bihar, Maharashtra, Gujarat, Punjab and many other states. And over the coming months -- coming few months, with Ather going live, we're also looking at bringing Konarc to the southern markets. Overall, all this rising demand obviously necessitates a fresh look at capacity. Inquiries have honestly gone parabolic, as you can see in our presentation that we have shared online. Preorders have also risen up quite a lot. And though we have produced 33,000 units average last quarter, -- on current demand trajectory from the current stores, we -- our team's internal estimate is that we have roughly about 20,000 units per month of unrealized retail that we are not tapping into yet. Now to solve this, Hosur, which is already at its death end, it's at 35,000 per month capacity and AURIC Phase 1, which is going live and will finish complete installation of its CapEx by Q4 FY '27, adds an incremental 42,000 units, which means a net capacity of 77,000 units per month. But if current demand is already is in the 50 50,000 to 60,000 unit ZIP code, 77,000 units obviously does not leave a lot of headroom to grow. So this is a question that we've been pondering for the last few months. What we've decided to do, and we've just taken Board approval a few hours ago, is we've decided to enhance capacity in both Hosur and AURIC Phase 1 in the coming months itself. with Hosur capacity expansion happening right away, an incremental 6,000 units per month capacity that will go live this quarter -- later this quarter. And AURIC Phase 1, an incremental 12,000 units per month incremental capacity that will go -- that will finish -- that will go live by Q2 FY '28, taking our total installed capacity up from 9.2 lakh units, which is where we would have been by, let's say, middle of next year to 11.4 lakh units by Q2 FY '28. So this is an important jump and an important near-term jump, I would say, that our teams have decided to focus on, giving us hopefully enough headroom to grow for the next couple of years as Konarc hopefully drives a lot more growth across the country for us. I know the last few months have been quite tight for us with demand far outstripping supply. But with all this capacity expansion finally is starting to yield through, I'm very excited about the next few months as we start seeing results of all of this in the top line. Coming to unit economics, bad news, good news. First, bad news. Commodities have been worse than we estimated a couple -- like just a quarter ago. 3, 4 months ago, we were hoping for aluminum to be cooling down because there were a lot of mess of the [indiscernible] crisis would be resolved soon. Copper was estimated to have flatlined. Plastics was going to get better because, again, [indiscernible] was going to be resolved. And memory was estimated is probably already at its peak. Unfortunately, all these 4 have proven out to be incorrect at least in the short term. Aluminums run much higher at least in Q2, though in the last few days, it's showed some signs of cooling down, so fingers crossed. Copper has run really far ahead, particularly because of prebuying by U.S. and much higher AI demand. Plastics also remain disrupted for much longer because of the [indiscernible] crisis. I'm again hoping that, that peak is hopefully not like hopefully behind us now. Unfortunately, memories continue to be really, really complicated and expensive, and we don't see any near-term solution to that. Overall, commodities have been worse than we hoped. I do continue to believe that this is a temporary hit. But yes, it's definitely lasted a few quarters longer than I would have thought. But against that, teams have put in a remarkable amount of discipline and focus to bring in forth a lot of very, very good solutions, starting with price hikes and SKU management. To give a frame of reference, our average ex showroom price across the country, weighted average ex showroom price average was roughly about INR 150,000 in Q4 FY '26, including ProPack sales that we do, HSA Pro Pack sales that we do. That number for Q2 FY '27 came in at INR 164,000, so INR 14,000 increase in average room price. So a phenomenal improvement and honestly, one that even I was surprised that the teams pulled off. So very good performance for the teams there. Some of it is structural with price hikes, the teams have been able to land successfully in the market. Some of it is also a little bit more temporary with very, very smart SKU management across the board and incentive management. What's also been very successful is Eat Pro attach rate, which came in at 94% for Q2 FY '27 and non-vehicle revenue, which came in at 15% overall. Overall, if you were to see the AGM, and if I were to compare this to Q4 FY '26, Q4 FY '26, 2 quarters ago was 25.4%. Structurally, we have seen some gains, which is sustainable price hikes. [ VAE ] work the teams have taken, cost reduction that teams have driven across the board. All of that put together has given us a 5.3% improvement in gross margin. Commodity inflation has come much worse than we would have liked at a 9.4% hit to gross margins overall. But very smart SKU management by the teams have yielded and has created -- essentially opened up a new lever for us in the business, and it's improved margins by 2.7% in Q2. Netting out Q2 FY '27 AGM at 24%, which is a 1.6% improvement over Q1 FY '27, I think roughly, yes. Overall, H1 FY '27 AGM is at 23%. And all of this has given us a phenomenal operating leverage with EBITDA showing a 1,450 bps improvement year-on-year. from minus 9.6% in Q2 FY '26 to positive 4.9% in Q2 FY '27. Even without other income, this was the first time our business registered positive EBITDA at I think roughly about 1% -- 0.8% EBITDA. And I would be remiss in not acknowledging the first time our business hit positive PAT, something definitely worth celebrating for us. I do want to call out, however, that we're not out of the woods. There's a lot of ops for us to deliver on. And PAT is not the first thing to focus on. The real thing to focus on is top line and improving volume will itself take care of a lot of things and is the right operating leverage to focus on. If that -- if all the capacity work that we're putting in bears fruit well over the next few months, then I believe that, that will take care of itself. In the near term, PAT can go up and down, but definitely worth celebrating this milestone for the business this quarter. Okay. Coming to, obviously, the key thing that all of us are super excited and focused on is the new capacity coming live in [indiscernible]. So AURIC Phase 1 is shaping up incredibly well. We have shared some pictures in the deck for your reference. The battery line, the vehicle line, the paint shop, all of that's coming together really well. Trial production is expected to start in the next few weeks. So very much on track for Q3 FY '27. And we expect to finish our CapEx installation and hence, capacity installation by Q4 FY '27. It will take a couple of quarters for the installed capacity to be fully realized, but all of that is right now tracking very well and very much on track. I was there just a few weeks ago, and the progress is honestly quite phenomenal. So all of us are super excited for this. Coming to finally, a summary. Demand is up quite beautifully. Preorders are up 108%, registrations are up 60%. Production is up 45%, all year-on-year. Important quarter for the industry with 11.6% 2-wheeler penetation, highest ever and the first time it's crossed into double digits at a quarterly level. Very strong growth in revenue from operations for the business, very strong growth in gross margins despite almost frankly, an unprecedented amount of commodity hits. And what we're excited about and looking forward to is the 11.4 lakh annual capacity -- installed capacity over the next few quarters that the team is working on right now. With that, let me just pause and open the floor for questions.

[Operator Instructions] The first question comes from the line of Amyn Pirani with JPMorgan.

Congratulations on a good performance in a relatively tough time period. My first question is just some clarification on the capacity. Because you are adding ARC in Q4 and within AURIC Phase 1 itself, you are now adding more. By when should we expect that you will be able to realize this capacity? Because I understand that while Hosur is already an existing plant and adding this 6,000, you can realize it immediately. When you add such a new greenfield, by when will you be able to ramp it up to this 6.5 lakhs? Will it be by 2Q itself? Or will it be more by like 4Q of next year?

Amyn, I will have to get back on specifically for the 12,000 units that we are increasing in AURIC Phase 1, but my estimate would be that even that will take a few months. Phase 1, the base capacity of 42,000 units will certainly take 2 quarters to ramp up. The additional 12,000 units that goes live in Q2 might ramp up a little faster. So I'm reasonably sure it will ramp up within FY '28, but I can't give you the exact month right now. But you're right, Hosur ramp-up should be pretty rapid. So we are expecting that to happen over the next, let's say, roughly later this quarter, and you will start seeing the results of that almost immediately on a daily basis from the end of the quarter itself.

Sure. That's helpful. Secondly, just on the commodity bit, like you rightly said and a lot of other OEMs when we speak to them, all of them echo the sentiment that the extent and the amount of time that these commodities have remained high is higher than what most of you in the industry were expecting. And obviously, it's been a surprise. So given where we are today, and let's assume there is no letup and no trend down even, say, next calendar year, how much more pricing levers are available in the system according to you? Because at some point of time, the affordability starts to become a challenge for customers. Some companies like you have done a better job than some other companies. How should we think about the pricing levers available going forward?

Yes. So honestly, on the current portfolio, I would not want to push pricing up at least over the next few quarters. I want to preserve the flexibility for our business to be able to grow sustainably without offering discounts as we -- as all this additional capacity goes live over the next few months. Having said that, what will happen almost organically is that Konarc as a more aggressive entry portfolio, right? And it offers us better unit economics current compared to, let's say, something like Arista. So it opens up the door for us to offer more affordable products without necessarily sacrificing absolute gross margins or maybe even improving them. So we could essentially, in effect, reduce the average ex showroom price that the customer is experiencing without any impact on gross margins. Again, at a high level, I'm saying like there's not an exact guidance, but you get the picture. I think Konarc is this very beautiful lever that opens up this opportunity for us to effectively improve our margins without improving -- without pushing prices up any further or maybe even reducing the average [indiscernible] price a little bit and still maintaining these margins. And that's assuming that commodities do not let up at all. I have been proven wrong ones in some ways, but I would really like to hope that over next calendar, some of these commodities will suddenly cool down. Otherwise, I think it will be quite a monumental thing for the automotive industry to have seen such elevated commodities for such a long time.

Yes. No, that's true. But yes, we are all hoping for it to come down, but I think it's...

The next question comes from the line of Kapil Singh with Nomura.

Congratulations for a wonderful performance. Firstly, on Konarc, you talked about quite a bit and very interesting product. Just any sense we have in regions where you have launched, how many incremental bookings are coming in dealerships where Konarc is launched? Like there will be some cannibalization as well, but net-net, what are you observing over there? And how is the customer response so far?

Yes. So I think we did not share the exact data because Konarc is, honestly, Kapil, very new in our sales channel. It literally only saw 1 month of sales in Q2, month of September. And it's still at an early stage. only, I believe, like not even 10,000 units have been sold by the end of Q2. Having said that, the response has been very positive. There has been -- like in the few limited markets of Rajasthan, Uttar Pradesh, where we launched it, inquiries, preorders, walk-ins, everything was up several times, pointing to an incredibly strong potential. In fact, it's lifted up our inquiries. If you see our top of the funnel metrics that we have shared, it's lifted up our inquiries by a huge margin because customers across the country are quite excited. In fact, I think one thing that we probably underestimated was the demand for Konarc Z, the line that we haven't -- that we have showcased, but we haven't started production and sales of yet. given the solid set of features like AutoPop, Magic Key, et cetera, there is a phenomenal demand for Konarc Z also. So I do believe that Arista will have to make some more space for Konarc to continue growing because its demand is very strong, definitely in the North, but I will not be surprised to see very strong traction in South also. One thing that initially I was maybe a little nervous is that how would a shape like this land in the market? Our thesis was that Konarc -- like we built Konarc to essentially be more relatable, right, like more familiar for customers. Our early concern was that what if it lands as a simple design. But it seems to have landed really well, at least in the northern markets where people are -- many customers are seeing this as finally a proper scooter and not just an electric one, which is a very complicated thing I know to articulate, but it's something consumers seem to be seeing across the board. So early days, I do want to emphasize that, but very positive and strong signs across the board, which is why so much capacity expansion we are doing on the back of.

And Tarun, secondly, just on your ASPs, we are at 160,000 plus. Are these all scooter customers because typical scooter would cost like roughly around 100,000, right? So -- or are there motorcycle customers who are also now looking at scooters as a viable option? Just your thoughts on that.

Honestly, Kapil, I don't think it's the motorcycle customer that we are pulling in yet. I think what we continue to tap into a lot of people's surprise is willingness of the same scooter buyer to pay up for better experiences, better quality and better features as demonstrated by also a much higher success of Ethostat Pro than honestly any of us anticipated. Our -- and we ask this question to each other every quarter. And consistently, the feedback from the team says that this is the scooter buyer. This is not a niche premium buyer only. This is your average scooter buyer who's seeing a lot of value into this. Just see Konarc, for example. We haven't shared exact data, but early signs of Ethostat Pro attach rates of Konarc are as strong as Arista. There's almost no change. So I think I think -- I don't think these are the motorcycle buyers. I think these are still very much scooter buyers. People see the value in a quality electric product quite clearly.

Okay. And just lastly, any thoughts on like how is the pricing and cost shaping up for Q3? Any color over there?

Sorry, [indiscernible] pricing or commodities?

Both, actually. I mean, have you taken any pricing in Q3 so far? And is there more commodity pressure ahead in Q3?

No, we are not taking any more price hikes in Q3. As I guided the quarter before, we will stay put with these prices for a while. Let Konarc also stabilize for the first next few quarters. At this point, commodities seem to be on balance flat. They don't seem to be going up. We didn't see a rising trend in the last few weeks that would tell us that Q3 would be worse than Q2. But honestly, this world has been very volatile. So we can only play it by the year. Let's see.

The next question comes from the line of Gunjan Prithyani with Bank of America.

Just a couple of follow-ups. Firstly, on the margin front, when I look at the cost numbers that you've shared, it seems like there's almost like 400 basis points of commodity pressure in this quarter, but we were still able to expand the margins. I mean, almost 5 percentage point plus sort of value engineering mix or just the SKU that we've been able to manage in this quarter. I'm just trying to understand, is there any element of this 5%, 5.5% of benefit that we saw in this quarter, which sort of reverses when the supply situation normalizes or Konarc ramps up? Any thoughts there? And also, was there any element of subsidy in this quarter because that was also sort of tailing off, right?

So first, subsidy continues to stay. That's pretty much same as Q2. There could be a few hundred rupees of difference here and there between variances, but broadly the same. You will see in the slide that we have shared, and I know it's very last minute. So -- but you will see in the slides that we have shared, we exactly called this out because we did not want people to believe that all of the gains that we have delivered in this quarter are necessarily structural. So a little bit of nuance we brought in the reporting this quarter. We believe roughly about 5.3% margin improvement that we have driven over the last 2 quarters is broadly structural in nature. What I mean by that is this is largely price hikes that seem to have landed well in the market or cost reductions, which are obviously permanent, VAV, so on and forth. What's a little bit more lever kind or more temporary in nature are things like SKU management and pullback of incentives or other support mechanisms. In Q2 compared to Q4, that amounted to roughly about 2.7%. So this is a lever that I would say, think of 2.7% here as a lever that we will exercise in a more finite time window if we are supply constrained or if commodities are this elevated. If either of this cools down, then we will probably open up this lever again. So PLR, 2.7% is a bit more temporary in nature.

Okay. So just to put it other way, 5.3% is the price and cost improvements that you all have made, 2.7% is a mix or other supply stuff that gave you tailwind. But it's not necessary that this entirely reverses in a normalized supply environment because some of these mix benefits will still prevail, right? Like it's -- this 2.7% is also not one-off. I'm just to be amply clear on that.

It's not one-off. It's not one-off. That's why I'm using the word lever. So if, for example, we continue to remain, let's say, we supply another 20% next quarter. But if demand goes up even more, then essentially, this lever will pretty much apply in the same way or a large part of this lever will still continue to be very valid because we'll obviously push the SKU in a more healthy trend in our favor. So over 2% improvement from -- compared to Q4 FY '26, out of which 2.7% is a more temporary lever that we will -- that we can choose to activate if we enjoy this supply-demand mismatch or if the commodities are this outlandishly elevated.

Got it. And the second question I had was on the EL platform. Any thoughts that you can give on what is the sort of cost improvement we get on this platform? And this is irrespective of the mix because eventually, at some point of time, Arista will also move to EL platform. So what's the structural benefit we get in terms of cost improvement on EL?

We'll have to give it some quarters to see where it lands up. But even within the first literally 1 or 2 months of production, when typically new products have a very elevated cost structure, Konarc like-to-like is a few thousand rupees cheaper compared to Arista already right off the bat. And we believe that with stabilizing production, this difference will expand quite materially. Again, it's -- sorry, Gunjan, it's very, very variant dependent. But I would not be surprised if a like-to-like version of Konarc is 6%, 7% better in gross margins to Arista in the long term. That would be quite a believable long-term estimate.

Okay. Got it. And lastly, on the rollout of Konarc, you did share a little bit in the earlier parts, but I'm just trying to understand a little bit more on how we've thought about rolling this out because it's still -- it will take us about 2 quarters to ramp up the capacity, and we're going very phased-wise, essentially targeting newer markets in North, whereas I'm sure there is already a lot of inquiries and demand you must be seeing in your home market like South and middle of India. So I mean, some philosophy on why did we follow this Jio rollout as well as the 99,000 variant, which is where I think a lot of excitement lies, which will expand the TAM. That comes only in quarter 1 or quarter 2 basis the time line that I recall from the Community Day. If you can just share your thoughts on how did we think about this rollout?