Varroc Engineering Limited (VARROC) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q1 FY '27 Varroc Engineering Limited Post Results Conference Call hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mihir Vora from Equirus Securities. Thank you, and over to you, sir.

Thank you, Operator. Good evening, everyone. We are pleased to invite you to the Q1 FY '21 Post Results Conference Call of Varroc Engineering. The management team will be represented by Mr. Tarang Jain, Chairman and Managing Director Mr. Arjun Jain, Whole Time Director and CEO, Business Unit I; Mr. Dhruv Jain, Whole-Time Director and CEO, Business Unit II; Mr. Mahendra Kumar, Group CFO; Mr. Bikash Dugar, Head IR; and Vishal Raval, Head Finance Controller. So without further ado, I now hand over the call to Bikash for the disclaimer. Bikash, over to you.

Yes. Thank you, Mihir. Thank you, Equirus, for hosting the call. Just a small disclaimer that -- today's disclaimer. Today's discussion may include statements which may constitute forward-looking statements or statements that address expectation or projection about the future, including, but not limited to statement about the strategy for growth, business development, market position, expenditures and financial results are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and involve known and unknown risks, uncertainties and other factors. The actual results, performance or achievement could differ materially from those spoken in any such forward-looking statements. No obligation is assumed by the company on forward-looking statement. With this, I hand over the call to our Chairman, Mr. Tarang Jain.

Thank you, Bikash, and thank you, Mihir and team Equirus for hosting the call. I am Tarang Jain here, and good evening to everyone. India's economy has remained resilient in quarter 1 of FY '27, April to June 2026, supported by a strong domestic consumption, improving rural demand, healthy infrastructure spending and accommodative financing conditions. These macroeconomic tailwinds translated into one of the strongest quarters for the Indian automotive sector with passenger vehicle sales reaching record levels and broad-based growth across 2-wheelers, commercial vehicles, tractors and exports. Improved affordability, rising consumer confidence, robust freight activity and accelerating EV adoption supported demand, while rural recovery particularly benefited 2-wheelers and farm equipment. For the auto component industry, the positive environment led to the higher production schedules, improved capacity utilization and stronger opportunities in electronics, EV systems, lighting and advanced vehicle technologies. Despite the ongoing risk from commodity price volatility and global geopolitical uncertainties, the overall outlook for financial year '27 remains positive with India continuing to be one of the faster-growing automotive markets globally. In quarter 1 of financial year '27, we saw strong growth across all the automotive segments on a year-on-year basis. On a year-on-year basis, 2-wheelers grew by 22.8%, 3-wheelers grew by 39.1%, passenger vehicles grew by 16.8% and commercial vehicles grew by 15.2%. The EV 2-wheeler volume on a year-on-year basis grew by 91%. Despite seasonality effect on a quarter-on-quarter basis, we still saw a growth on 2- and 3-wheelers -- and 2-wheelers grew by 2.7%, 3-wheelers grew by 3.4%, passenger vehicles degrew by 7.5% and commercial vehicles degrew by 16.9%. In quarter 1 of financial year '27, the company registered a very strong growth of 29.9% and the consolidated revenue reported is INR 26.3 billion. The growth was supported by both India operations, which saw a growth of 28.6% and also overseas revenue growth. The momentum of growth in the overseas business, which started in quarter 4 of financial year '26 and gathered further pace in quarter 1 of financial year '27, registering a 45.6% growth on a year-on-year basis. As emphasized in our last earnings call, our foremost priority remains accelerating revenue growth across both India and the international markets. Our EBITDA for the quarter was around 8.5% as compared to 9.5% during the similar period last year. Our PBT before joint venture and exceptional items for quarter 1 FY '27 came in at 4.3% of revenue, an improvement of 20 basis points on a year-on-year basis. The profitability in this quarter was adversely impacted by higher commodity prices due to war-related costs, higher tooling sales and the business mix. Despite that, the Indian operations reported a 10.6% EBITDA margin and around a 7% PBT margin. The revenue from supplying to electric vehicles in this quarter was around 15.8% of revenue and grew by 87% on a year-on-year basis. In the overseas electronics and lighting business, we have further won some business, notably for our lighting operations in Thailand. Sequentially, the losses from the overseas operations as well as from overseas R&D is reducing. We hope to maintain this momentum of increasing revenue and hence, the profitability here. We continue to invest not only in technology, but also in people and strengthening our capability. Recently, we have appointed Mr. Eric Hammond as a Chief Technology Officer for our Business Unit 1. He comes in with 25 years of global automotive technology and engineering leadership experience with deep expertise in electrification, software-defined vehicles, connected systems, embedded software, functional safety and cybersecurity. He has successfully led large-scale global R&D organizations, developed next-generation mobility technologies and partnered with leading automotive OEMs to deliver innovative and safety critical solutions. As emphasized earlier, in India, we continue to leverage our strong customer relationships, technology capabilities and expanding product portfolio to capitalize on opportunities emerging from electrification and the premiumization trends. In our overseas markets, we are strengthening our presence through deeper -- to deep customer engagement, enhanced engineering capabilities and focused business wins, positioning ourselves as a reliable global partner. In quarter 1 of financial year '27, our net new business wins with an annualized peak revenues of INR 5,991 million. The net debt of the company in quarter 1 of FY financial year '27 is INR 5,268 million, which is an increase of INR 316 million from the last quarter, mainly due to the increase in net working capital of INR 441 million due to higher revenues. The net debt to equity is very comfortable at 0.28. The average ROCE of the company is around 24% in quarter 1 of financial year '27. In this volatile new normal environment, we continue to strengthen our company for long-term growth and performance by taking appropriate decisions and meticulously executing them. Our endeavor remains to improve the contribution margin, control the fixed costs, generate free cash flow and improve on the return on capital from all the business segments in which we operate. With this, I will now ask MK, our Group CFO, to walk you through the presentation and give more insights into the financial performance. We have uploaded the investor presentation to the stock exchanges as well as on the website. Over to you.

Thank you. Good evening, everyone. Let me take you to Slide #7 in the presentation, which is on the highlights for Q1. As our CMD explained, Q1 revenue was at INR 2,634 crores, which meant a growth of almost 30% year-over-year. But out of this, if you eliminate the inflation-related impact, it could be a 4% difference. Within this 30%, Indian operations registered close to 29% growth and overseas operations by a growth of close to 46%. Now you may recollect that last quarter, Q4 also, we registered significant growth in the overseas operations. So that is continuing now also. So more than the percentage, it's the direction which is important here. And then revenue from EV models in Q1 was at 16% of total revenue, which again was a phenomenal growth of 87% year-over-year. Coming to PBT during Q1, it was at 4.3% versus 4.1% shown last year. EBITDA came in at 8.5% compared to 9.5% last year, but this was largely impacted by the war-related impact. Basically, the war-related impact at EBITDA level was totally coming to about 0.75%. This has 2 parts actually. The genuine under recovery impacted us to the extent of 0.5%. The remaining 0.25% at EBITDA level or PBT level was driven more by the numerator denominator effect. Then coming to net debt. Net debt was at INR 527 crores compared to INR 495 crores. This was largely because of the front-loading of CapEx, which we explained in the previous calls also. Regarding the order wins, in terms of net new business annual peak revenue, it was close to INR 600 crores. The prominent wins were relating to the 4-wheeler lighting business win for our Thailand operations from a prominent customer. We also restated the e-mobility volumes in India based on the recent trends. So that also increased the overall peak revenue potential. Another significant improvement in terms of the capital efficiency metrics is relating to ROCE, ROE and of course, the EPS improvement also. So, if you take out the exceptional items in Q1 of last year, which was basically relating to the accounting adjustment which we had to do after the exit from China JV. If you compare the ROCE last year, same time, we were at 23.6%. It went up to 24.6% now. A significant improvement in return on equity also from 11% to 16.4% this time. And in terms of EPS also, last time, it was INR 11.5 on an annualized basis, which is now INR 20.3 on an annualized basis. So that's a significant improvement compared to last time. Coming to the other points, of course, the patents filed continues to be strong at 135-plus patents. Going to Slide #8 is about the industry performance. As all of you know, automotive industry continued the good run. It started during the GST simplification exercise. So in Q1 also, the 2-wheeler grew by almost 23%, 3-wheeler by 39%, passenger vehicle by 17% and commercial vehicle by 15%. All these are year-over-year growth numbers. Within this EV 2-wheeler volume registered a growth of 91% year-over-year. And on a sequential quarter-on-quarter basis, 2-wheeler had a marginal growth of 2.7% and 3-wheeler by 3.4%. Passenger vehicle had a degrowth of close to 7.5%. Going to the next slide, Slide #9. So basically, EBITDA came in at 8.5% versus 9.5% last year. If you compare with the previous quarter also, it was 9.7%, now it is 8.5%. But if you really look at the reasons for this, we also had a significant tooling sale in Q1 at a lower margin, which is more like a significant one-timer. Of course, there will be some tooling sales every quarter to a small extent, but this was a large number. So that impacted close to 0.8%. And other major reason was the related inflationary impact, which I spoke about. So that was about 0.8%. So that was the performance during this quarter. And if you really look at PAT, if you take out the exceptional items in Q1, it is almost a 70% growth year-over-year in Q1. The next slide, we updated this information where you can see what happened in terms of geographical segmentation, India and overseas. India, if you really see, like 29% year-over-year growth and 10% sequential growth. In terms of EBITDA also year-over-year growth was 22% and PBT was 41%. Overseas business also, we can see a continuing improving trend from the earlier quarters. The last box relates to the R&D investment, which we started largely from Q2 of last year. That's why it was significantly lower in Q1 of last year. But here again, we see improvement compared to the previous quarter. Coming to the next slide, which is about reduction in net debt. There was a marginal increase in net debt this quarter compared to the March end -- March end number. But like I explained, this was largely driven by the CapEx front loading, which this year is going to be a CapEx heavy year as we explained in the previous calls also. This is needed to support the growth. But even with this increase also the net debt to equity was below 0.3, at 0.28 and net debt to EBITDA was below 0.6. The next slide is about the revenue breakdown and the customer breakdown, which is more for information. Slide #13, we again gave the order book status. So we started with INR 3,509 crores at the beginning of the year. Current quarter, we added close to INR 600 crores. Out of that, close to INR 500 crores has been taken to start of production already. All this is in terms of annual peak revenue potential, not actual numbers for this year. So in terms of mix also, if you really see the Bajaj -- non-Bajaj mix shows -- a Bajaj mix of 58% in the annual peak revenue 75%. So let me stop here. I'll be happy to take your questions.

[Operator Instructions] The first question comes from the line of Shubham from Investec.

Congrats on great set of numbers. First question, you had reported an order win of about INR 600 crores this quarter. Can you please provide the split between the 4-wheeler lighting order and the e-mobility one?

Yes. So the bulk is e-mobility, which is a -- which is a volume expansion on our existing running programs. So I would imagine, I think 2/3 is e-mobility. And then the balance is a combination of 4-wheeler lighting. I would say the most significant portion of the balance is the 4-wheeler lighting business win. And then I would say different smaller business wins across product groups.

And for your overseas order book, now there has been some reports of expected delay in launches by some overseas OEMs. So do you foresee a situation wherein you would face a delay in your order book execution?

Just to answer this question, so we have reported some wins in past quarters, and it's really across multiple customers and multiple programs. So one is that -- so just to answer your question, we're not expecting a shift in -- our main message so far has been that we will be continuing to increase our revenue in our overseas locations. This will certainly still take place because we are not dependent on any one customer here.

Also for your traction motor business, you had earlier indicated that you are in advanced discussions with an OEM as Bajaj. When should we expect that order win to flow in?

So we've already announced one business win, which we will -- which we expect is going to begin immediately, I would imagine, in fact, in quarter 2. And then there is 2 further customers where I would say we are in fairly advanced discussion, where also I would expect SOPs to take place in this financial year.

And also, so given the strong demand momentum that we are seeing across the automotive industry and more for the EV industry where we have a much higher content, how should we think about growth for Bajaj for the domestic business for this year, if you can put a number around it?

Honestly, it's difficult to -- I think it's difficult to predict a forward number, especially if we're talking about forward number for one particular customer. But of course, if EV penetration continues to grow at the rate at which it has been growing, I would definitely imagine that our e-mobility business would gain further significance in our overall revenue. And hence, as a natural result of that, Bajaj would also become more salient than it is today in the overall revenue. But having said that, from an EV perspective, like we've just talked about, there is further customers also that we expect will come on board.

Also, last one on margins. You mentioned about 50 bps of under recovery this quarter. Now how much of that you expect to recover from your customers going ahead? And how should we think about margins for the full year?

Yes. So the efforts are already underway. So we should be getting it between this quarter and next quarter, most of it.

The next question comes from the line of Arvind Sharma from Citigroup.

The first question, which you again indicated already is on the e-mobility segment. Based on the order book that you have, how sustainable do you think the growth is because this quarter was a very strong quarter?

So I would say it's -- the order book is fundamentally strong, right? We are a primary supplier to essentially the market leader when you combine 2-wheeler and 3-wheeler. So from that perspective, I think growth fundamentally depends also on EV penetration, which is something that we see gaining momentum rather than reducing in momentum. Further to that, like we talked about, we have incremental customer gains also, which, in my mind, coupled with the fact that the content in an EV that we have is so high, I would imagine that, that growth really continues to take place.

And just to add to that, see, looking at the situation globally now due to this Iran war, we do see a very positive, maybe you can call it structurally a shift also in the consumer mindset to move towards EVs at least in the 2- and 3-wheeler space. And of course, the moment -- I mean, you see the main volumes are today more in the scooter segment, which is 20% to 30% of the market. But now we're looking at OEMs also looking at motorcycles now. So going forward, we do expect that even the motorcycle segment will see EV penetration as we move forward. And we being one of the very significant players in this EV powertrain segment, I think we stand to gain from it going forward.

Sir, the other question would be on the electronics Romania segment. You've given a separate slide on it. Could you please share the key customer segment? And we don't have a previous quarter or previous period revenue. How is the revenue trending there? What are the key drivers? Electronics Romania Segment.

Yes. So Bikash this side, Arvind. So earlier, our Romania location used to support was the captive for lighting business. So that was clubbed under the lighting revenue. But now since we are doing more related to architecture, so that's why -- and the business which we have won is towards those only. So that's why we have segregated that. And the growth in that Romania business is going to grow. So because of that, we are showing -- we are showing that separately now.

Who would be the key customers out there?

So maybe I'll try to answer this one. So basically, our Romania electronics plant is focused on passenger vehicle electronics. And as Bikash mentioned, the focus is on a variety of low voltage and high-voltage electronics, and we've already announced some order wins in past quarters, and we believe this will continue.

I have a very small data query. When I look at the revenue breakdown that you have in Slide 13, I believe the overseas forging, which is 3.3%, that is a part of the ICE powertrain business when we move down and you have the actual numbers?

Yes. That's right. That's correct.

The next question comes from the line of Rahul Kumar from Vaikarya Fund.

You briefly discussed about this, but can you tell us the progress on the top 3 EV player discussion?

So, I would say there is a top 3 in 2-wheeler and also the top 3 in -- or really the top -- the top 3 in 3-wheeler. So today, we are essentially engaged in terms of business relationship with each of the 3, right? In fact -- and from an e-powertrain perspective, we already have significant business with. And one more -- when I say there is 2 that we are further engaged with is essentially 2 more from the list of the top 3 in both these segments. We've also been able to win business not necessarily for e-powertrain, but for other product lines with another one of these top 3 players. So really, I think across the board, I think the engagement with the market leaders here has been extremely strong, and we expect that, that will convert into more significant revenue, like I said, through the financial year.

Now actually, I meant -- I think in the last con call, actually, we had discussed about the progress on the 2-wheeler EV side for the EV powertrain products. So on that, we had mentioned that we are in advanced stage with one of the top 3. So do we understand that we are now in discussion with both the top 3 players.

Yes. So again, I will repeat, right? With one of them, we are in discussion for the e-powertrain. With another one of them, we've already won business for another technology product, which we have declared in Q1.

And the SOP, which is starting in Q2, this is with another EV player, right? Am I right in understanding?

Yes. But it's another EV player with investment from an extremely significant global OEM.

Second question is on the overseas actually. I think there was one project which is expected to start from H2 of this fiscal. So are we on track for that? And given the second question is on the overseas again, given the robust business we have done so far, the progress which we have done. So do we expect the breakeven for the overseas earlier versus the previous guidance of Q4?

So maybe just to clarify the second question. So the second question, I believe that our message stays the same. So we are not changing our message from the past. And regarding the first question in terms of the launch that you're mentioning in midyear this year. So we've already had a few new launches this year in our Romania electronics location. I believe that's the one that you are referring to. And this is also why we have seen an increase in revenue quarter-on-quarter in our business overseas. And this will continue to increase in subsequent quarters. So basically, it's progressing well.

The next question comes from the line of Siddhant from Goodwill.

Our largest customer has taken over a global OEM KTM. So are we -- is there any potential for business over there that we have gotten any inquiries?

Yes, of course. So we already do -- even prior to this, we did a fair amount of direct business with KTM. And post this, I would say, more complete takeover, there is incremental opportunities that arise in line with the strategy that Bajaj Auto follows with KTM now. So yes, there's definitely a couple of immediate opportunities, and we hope over time, this translates to more.

Could you quantify them or too early?

It's too early to quantify because-- it's too early to quantify because KTM is a brand with a very high SKU mix, right? So you go at this really step by step in terms of how you grow in there.

The next question comes from the line of Naman Maheshwari from Shanghvi Family Office.

Congrats on a very robust set of numbers, and I hope this trend continues sustainably. Just 2 quick questions more from a forward-looking point of view. We onboard Mr. Eric. So now how does the strategy change with him coming on Board? Are there some new avenues that we are looking to come in basically into e-powertrain or would it focus more on ADAS? And if you could throw some light that what sort of a market are we trying to chase and how to look at customer wins happen? I know it's not going to happen overnight, but how do you see that from a structural point of view for the company? I think it's a very important and a very good appointment. So how does it move the needle or help. So that's one question.

Yes. So I would say the strategy does not necessarily change. I think Eric comes on board and I think really complements with his experience, the path that we have set out for ourselves. Eric has a vast experience with e-powertrain, and this is also where when it comes to 2- and 3-wheeler EV, we are -- I would say really we are e-powertrain market leader. So from that perspective, I think strengthening our position in this core segment, which as we see also is an extremely high-growth segment, I would say, is a critical priority. Of course, as a part of the road map, we look to expand this capability into other market segments. And I would say Eric would definitely -- Eric definitely comes with the experience to really lend to that. So whether it is in terms of addressing higher voltage systems, whether it is in terms of addressing, let's say, really more X-in-1 kind of concepts, we believe this is where the market is moving towards. We believe we have the core capabilities required to execute it. And I think with Eric, I think we also achieved the experience of having seen and done that. So yes, like you, we are also very excited by the appointment. So yes.

And sir, just one more part on the order wins, right? We see a good traction coming on. So how do we look at new engagements that are taking place, right? There are some new OEMs which have set up their shop in India in the EV system like WinFast and everyone. So do you see that incrementally we can get in that supply chain also and we are also having a very large expansion plan so we could be part of it. So just wanted some thoughts on that.

Yes, of course. And with, let's say, the customers you name and also the customers you allude to, we're already engaged, and we would expect to see some action in those spaces.

[Operator Instructions] The next question comes from the line of Jyoti Singh from Haitong.

Congrats on the beat on the revenue side. So first question on the revenue as well, like it's nearly 2x that we have delivered and we have guided mid- to high teens for '27. So this is the first quarter we have delivered this kind of growth. So what kind of expectation we can build going forward?

No, I think that this year seems to be very strong for us. And though we have grown 30% this quarter, we do believe that probably for the whole year, we could be achieving about at least between a 20% to 25% growth in this financial year, looking at how things are moving at the moment. So that would be our expectation because the second half last year was fairly good. So considering that, I think 20% to 25% would be the right level of growth we would be achieving this year.

We don't take it as a guidance, but it's more like our ambition.

And sir, also, like earlier participant was asking a question around WinFast and other player. So can you guide us any new client that we have in panel or any other that it is in the pipeline so that we are seeing the visibility for even FY '28?

I think most -- I think especially in any new customer engagement, I think we generally cannot talk about that before there is actual certification of SOP. But having said that, right, I think it is clear there is entrants. It is clear there are people entering the market. It is clear also that existing incumbents in the market are looking to build more vehicles also for export. So wherever those opportunities are, we will look to participate.

And we've already won some new customers also in this year. So -- but the thing is that we cannot disclose the names at the moment. But we are engaged. And definitely, one of the objectives is to get in new customers also, not just rely on existing customers who are very important to us. But yes, we are expanding our customer base also in India as well as abroad.

So sir, going forward, we are targeting diversification of the customer and some certain percentage that we are targeting from each customer or Bajaj will be continue a major customer for Varroc?

And we said this before, but I would say our path is not necessarily a customer diversification strategy. I think our path forward is really a product line -- a product line and competence-driven strategy. So there is clear product lines where we look to drive growth and where we look to drive focus. And as those materialize, I think it really depends on how the end customers also perform in the market, which determines the customer mix for us.

Yes. But the point here is that like we have said before that the Bajaj Auto continues to remain a very important customer for us and will be always. But having said that, I think we are actually kind of also kind of growing with quite a few other customers. So going forward, you will see that increased revenues coming in from many other customers also, not just from Bajaj.

And sir, just last question on the order book side, like this time, we have a major customer around 70% -- 72% from the EV side versus ICE was 28%. So we are going to see this kind of revenue shift on the segmental side keep getting like I understand we are 95% powertrain agnostic. So we are seeing much demand from the EV side and as well as on ICE or how it is going on?

So I think there's a few different questions in there. Firstly, I would say we are not 95% powertrain agnostic. In fact, I would say where we're I think only around 70% powertrain agnostic. The balance comes from our ICE powertrain, e-powertrain business. But yes, I think like we said earlier also during this call, we expect the balance to move more towards EV product, really driven by the fact that EV penetration is increasing, right? So this does not mean that ICE is declining in absolute terms, but it means that in terms of the percentage of our growth, we would expect more to come from.

[Operator Instructions] The next question comes from the line of Ankur Poddar from Svan Investments.

Congrats on a good set of numbers. My question is regarding our overseas business. Firstly, can you let us throw some light on how the order wins do we see going forward? And secondly is on our margins, we see that the losses have come down. So by when do we expect to breakeven in terms of EBITDA as well as on PBT? And what do we see steady-state margins going forward?

Yes. So to the first question regarding -- regarding what we're projecting in the future as order wins -- so I'll just say again that when it comes to the past year, I believe we have mentioned certain significant order wins. And certainly, we are expecting to see this also in the future. So in subsequent quarters, we believe we will be mentioning certain significant order wins, both in the electronics as well as in the lighting space overseas. Yes. So as far as the margins are concerned, previously also, we explained in 2-wheeler, we already make money. We are on the positive side already, 2-wheeler overseas. Only in Romania, we have been having challenges. So earlier also, we explained that by end of this year or by Q4. In Romania, we will reach EBITDA breakeven. Coming to the overall guidance, we generally go by PBT targets. Our long-term strategy is to take it to 10% PBT in the next 3 to 4 years.

The next question comes from the line of Mihir Vora from Equirus Securities.