AXISCADES Technologies Limited (532395) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the AXISCADES Technologies Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Sangeeta Tripathi. Thank you, and over to you, ma'am.

Thank you, moderator. Good evening, everyone, and welcome to the Q1 FY '26 Results Conference Call of AXISCADES Technologies Limited. I'm joined today by our leadership team to provide a brief overview of the business performance and the financial results. We have with us today Dr. Sampatravi Narayanan, our Chairman; Mr. Alfonso Martinez, our Managing Director and CEO; Mr. K.P. Mohanakrishnan, our Deputy CEO and President, Aerospace; Mr. D. Murali Krishnan, our Chief Operating Officer; Mr. Sashidhar S.K., our Chief Financial Officer; Mr. Anurag Sharma, our President, ESAI and CEO Ad Solutions; Mr. Sharadhi Babupampapathy, our President of Defense. Before we begin, please note that this call may contain forward-looking statements based on company's current expectations, beliefs and opinions. These statements involve risks and uncertainties, and the actual results may differ materially. Now I hand over the call to our Chairman, sir, Dr. SRN. Over to you, sir.

Thank you, Sangeeta. Thank you, everyone. It has now been nearly six months since I assumed the role of Chairman of your esteemed company. And during this period, we have embarked on a series of strategic initiatives. I will highlight three major initiatives we have taken up. One, we have set up a target of over 40% year-on-year growth, and we are all set for that. We have an order book of INR 1,260 crores for this financial year FY '26 and INR 1,827 crores for the next financial year, that is FY '27, the forecast visibility plus order book and totaling to INR 3,087 crores. So we are comfortable in a comfortable position to achieve a 40-plus percent growth -- of course, only -- this has to be -- everything has to be converted in delivery, but we are confident of that. There are not major dependencies at this stage for FY '26 and '27. So we are confident of that growth. Please note that this is on the core areas only, that is defense, aerospace and ES. So we will definitely register a growth of more than 40% in these areas, especially in EBITDA, PAT and as well as in the revenue. And the next major initiative we have taken is Power 930, which is reaching INR 9,000 crores. That is $1 billion in the year 2030. So for that, we are building a robust pipeline, also matching infrastructure. So this all should be ready. Pipeline looks very, very good at this point of time. We have time to convert. And this all -- a lot of things are infrastructure dependent. So we are building up the world-class infrastructure to be ready in time for us to grow. If this happens in 2028, '29 and '30, we will achieve -- we will have a much greater growth for these 3 years. So we are kind of -- at this point of time, the visibility is very, very good, and we are -- we hope to be on track on this. The third thing is, as you would have noticed that we have signed some good global partnerships, 2 of them, which is CBDA for missile activities and then Indra for radar-related activities. And we are trying to sort of -- this not only gives us an annuity revenue and visibility, but also gives us a technological edge to become a frontrunner in missile and radar systems. And we are also in the process of forging more such partnerships to stabilize our revenue and growth. So these partnerships are across all the 3 domains, not only confined to defense, but also DESI and aerospace. So with this, I will hand over to our CFO, Mr. Sashidhar, to summarize our investor presentation and to the next steps. Thank you very much.

Good evening, everyone, and thank you, Dr. Saran. A warm welcome to all of you for joining us today for the Q1 FY '26 earnings call. I trust you have had the opportunity to review our earnings press release and the investor presentation, both of which are available on our website as well as on the BSE and NSE platforms. Despite Q1 being a traditionally lean quarter, we are pleased to report a healthy performance for Q1 FY '26, marked by double-digit growth in our core businesses, steady progress in our transformation road map and clear visibility of growth and profitability in the coming quarters. So now I'll walk you through some key financial metrics for Q1 FY '26. Our consolidated revenue for the quarter is at INR 244 crores, up by about 9% year-on-year. The reported EBITDA for the quarter is INR 34 crores, up 9% year-on-year compared to INR 31 crores in Q1 FY '25 with an EBITDA margin at 14% in both these quarters. The EBITDA growth year-on-year is at 86% when we normalized previous year EBITDA to INR 18 crores by adjusting the onetime write-back of ESOP provision of INR 12.9 crores -- as such, the normalized EBITDA margins have also witnessed healthy momentum year-on-year, expanding from 8.2% in Q1 FY '25 to 14% in Q1 FY '26. Our consolidated profit after tax for the quarter is up 25% year-on-year from INR 17 crores in Q1 FY '25 to INR 21 crores in Q1 FY '26. With significant order book in defense back ended for execution in H2, the revenue and profitability metrics will accelerate in H2 '26 with ramp-up in defense revenues and attended margin expansion. Our core demand in Q1 grew by 17% year-on-year from INR 156 crores to INR 182 crores, driven by AI, which is electronics, semiconductors and artificial intelligence, which grew by 34%, defense, which grew by 23% and Aerospace, which grew by 8% year-on-year. The core segment normalized EBITDA grew by 61% year-on-year from INR 21 crores to INR 34 crores. Consequently, the margins of the core business have also witnessed improvement from 13.5% to 18.6%. Our core verticals saw significant order intake during the quarter as has been announced from time to time, and we expect that this momentum will build further in H2 FY '26, supported by enhanced procurement from Indian defense and global OEMs. Our noncore verticals, which is heavy engineering, automotive and energy declined 9% year-on-year, largely due to continued macro pressures in the automotive sector and timing-related order ships in energy. We are currently recalibrating this business and improving the mix and cost optimization efforts in noncore, which has resulted in marginal turnaround and profitability in Q1. We are engaged with a strategic adviser in the optimization and restructuring efforts, which is currently underway. In summary, all the core verticals in aggregate continue to record healthy EBITDA margins at 18.6%, which is being diluted to 14% at an enterprise level on account of lower margins on the noncore business. Additionally, we are progressing well on infrastructure and facility development that supports our product-led nonlinear growth strategy over the next 5 years. As has been guided by our CEO in the investor presentation, our objective is to grow by 40% CAGR in revenue as said, in core verticals only, leading up to an EBITDA margin of around 19.5% in 3 fiscal years up to FY '28. This is fully backed by confirmed order book forecast and visibility. The current year FY '26 guidance is around 25% growth in revenue, including core and noncore and 300 bps improvement in EBITDA over the previous year, driven by our core verticals. To conclude, a robust and growing order book in all the 3 core verticals, our strategic collaborations and global partnerships are steadily laying the groundwork for our stated aspiration of reaching $1 billion revenue by 2030. Thank you for your continued trust and support. We now open the floor for questions...

[Operator Instructions] We take the first question from the line of Balasubramanian from Arihant Capital Markets Limited.

I just want to understand defense and aerospace side. I think mostly 70%kind of revenue, how we expose into budget cuts or delays in defense procurement A30 upgrades or LRDs project. And could you please break down the INR 1,800 crores order book with progise3grades, counter and you can share also delivery time lines. And thirdly, it's more interesting AI-powered engineering side. And like what kind of efficiency gains we can expect in terms of reduced design cycles, whether it is justified for premium pricing or market share gains?

Thank you. I tell you on the order book, it is combined of all the 3 activities currently, we have order book and forecast visibility of about INR 540 crores in defense and about INR 210 crores in VSAT and INR 450 crores in aerospace approximately, if should add up. And basically, that is -- so defense alone is about INR 540 crores. This also comprises of OEM activities as well as the 3 groups actually, DRDO, PSU and which is the programs you are talking about, MOD, which is including all the anti-drone and those kind of systems and then the OEM engagements like MBDA, Indra, I talked about. So a combination of all the 3 things. So there is no dependency, there is no delay in the programs we are participating. And we have a long-term visibility on all these things. We work across the platform. For example, we are -- there is some disturbance. We are across the platforms because, for example, our products like the Direction Finder is there almost in every major platform. So we have no dependencies on this for this year as well as next year. So that is -- next is using the PA, we are probably -- we are working on various activities in this -- for the defense A combination. We are also working with some foreign collaboration for establishing that, especially in our anti-drone and related activities and so on. Please note that overall, it's not only defense, we are talking about all the 3 segments at this point of time. Is there anything I missed out, Mr. Balasubramaniam?

Sir, this AI empowered engineering strategy side, is there any...

We are working on that. I'll be able to highlight more next quarter. We may sign something very interesting in the next 1 or 2 months. And we'll be in a position to explain further by next quarter, give us some time. And even Government of India is focused on certain activities related to that. And so we are working on that at this stage.

Okay, sir. Sir, on that Airbus provides a stability business. I just want to understand what are the tangible progress we have taken diversifying into other OEMs and Tier 1s. And is there any tariff impact of other levels because U.S. have imposed various tariff rates to various countries and how we are having advantage compared to other countries?

First question will Mohan will answer. Before that, I will answer the last question and then hand it over to Mohan. One is the tariff impact, we don't have much because we have totally 27% our total revenue, 27% comes from U.S. and out of which mainly it's from merger from East side. And currently, other revenue is booked in U.S. itself, U.S. We are also safeguarding other revenues. We are trying to book everything in U.S. so that there is no India dependency, India, U.S. dependency. So that will be taken care of. And over to you, Mohan, please explain to him what are the steps you are taking to kind of back up the Airbus and the other OEMs and so on, what are the initiatives you are taking?

Thanks, Sharan. On your question on additional customers, we -- see, I have joined this AXISCADES in the month of April. And immediately, we started looking at expanding into new customers. We got some a few wins, companies like Tier 1s like MBDA -- we have started engagement with Boeing. All these things, we would see the results coming in the Q3 and Q4. And we have also done some small wins in with Indian Tier 1s as well. So the idea is to see that we bring in more and more customers so that we have the revenues get distributed and we have a risk mitigation as well on that.

Okay, sir. Sir, my last question regarding attrition side, it rose to 19% in this quarter. And as we are moving as defense and aerospace going forward, like how -- what are the steps we have taken for talent retention and what are the training upskilling programs we have taken, especially for critical defense and aerospace?

Murali, can you answer this?

Yes. So yes, attrition is -- control is an important factor for us. And we are working on various employee experience and employee engagement initiatives to ensure that our employees are retained. On top of that, we are also taking significant upskilling programs for our core domains. This includes aerospace design activities, concession, repair and manufacturing engineering. We are also collaborating with various external parties and agencies to reskill and retrain our employees so that our core domains can be strengthened.

[Operator Instructions]The next question is from the line of Varun Kulkarni from InCred Asset Management.

Just a couple of questions. So the first one would be, I see that... We are going to commission new facilities, which would contribute 30% and 50% of the total revenues in FY '27 and FY '28. So how are we planning to fund this CapEx? Would it be in the form of a joint venture? Or are we going to dilute any equity or raise debt? And if it is in the form of a joint venture, have we found any partner as of now? That would be question number one. Second question would be, why is the first quarter generally lower? And what is the time line of the contracts? How is that decided? And what would the revenue flow look like once the order is awarded? And what will be the payment cycle in defense?

Yes. First question is we are -- the facilities are developed by a downstream company called AAIPL, Aerospace Infrastructure Private Limited, which in turn is owned by APA, which is import. So we are trying to raise money or we are trying to get strategic partnership at AAIPL level. -- we have a very -- in fact, we have some oral commitment from -- in 2 tranches. Probably the first -- a small portion we will receive in the month of -- probably in Q2 itself or beginning of Q3. And by Q4, we will probably receive a major portion. And from -- these are all from strategic partners who would also participate in this. And this is secured and we are not in -- currently, there is no plan of either borrowing money or diluting anything at the listed company level. That's number one. Number two, in the defense side, the payment cycle is always hovering around 180 days, somewhere around starting from 90 days. 90 days to go up to because portion of liquidity damages, everything is that performance guarantees. So approximately, it is -- you can safely assume it will be a 120-day payment cycle. And there is a visibility on all these programs, what we talked about in the next 2 this thing, we have a program-wise confirmed everything. So there is no risk in those things. And of course, 2027 FY, we need some working capital -- additional working capital requirement to meet this that we will have to organize at that point of time. So otherwise, we have -- we don't see any major issue in this growth as well as -- and we are covered in almost other things. 30%, yes, you're right in 2027. Our facility will be ready. One portion will be ready by Diwali itself. Around October 28, we plan to move. And Phase 1A of our DAC also will be ready by March. So hopefully, this should take care of 2027 requirements. of course, the of the facility has to be ready. And we have 18 months' time, I hope everything will be ready by that time.

To answer your question as to why the Q1 is always traditionally a lean quarter, that's majorly because of the fact that the defense revenues, which constitute a significant portion of 30% plus, in fact, more so in this year is kind of, I would say, aggregated towards Q3 and Q4. It starts from Q2 and onwards, and it extends up to Q3 and Q4. And what you see predominantly in Q1 are the engineering services revenue, which is of aerospace, ES and other verticals.

Got it, sir. That's super helpful. One last question, if I may.

I would request you to please join back the queue as there are several parts waiting for the -- we take the next question from the line of Saurabh Sadhwani from Sahasrar Capital.

This is my question, I think, to Anurag. So what led to the growth in ESAI, one thing? And the second one, what are we doing with Apple, the win that we announced, what are we doing with Apple?

Okay. Good evening, everyone. So yes, it's an excellent question that what has led to this kind of growth. So we have embarked on a new relationship and engagement with two hyperscalers, which is Amazon and Apple. And we are -- as you know, that the market -- the semiconductor market is moving towards chip manufacturing, which is application-oriented, end-use oriented. And that is where our opportunity arises. And that is where we are looking for design, development and even with Apple. So I hope this answers your question.

And to kind of answer your question as to what led to the growth in ES revenues in Q1. Essentially, our business with Texas Instruments as compared to last year has started growing significantly, which is kind of expressed in the revenue growth in ESI.

Okay. Okay. Just one follow-up on the Apple side. Are you trying to build ASICs for them now? Apple and Amazon.

No, no. Basically, I just don't want to dwell too much into this, but I can say this is Ravinarayan here. In the case of the first customer, you are talking about the phone company, we are not working directly on the apps or the chips. We are working on the support activities. We are trying to create certain boards for them to do the test and evaluation of their product. And in case of the second company, which is delivery and that is a marketplace company, we are working with mostly -- we are working on the product side like Kindle and Alexa and those kind of things. Again, we are helping them create the product and test the products. We are setting up a world-class acoustic lab for them, the second company as part of our Ultra. That also may be ready by this October, November. And we probably will -- once it is ready with the God grace, we will be in a position to take care of most of their product requirements time to come. In the first company, we are going to work with their local partner in India, who is their manufacturing partner closely, very closely and so -- and provide all the support activities and boards for them, the manufacturing partner. This partner is not traditional couple of guys whom you know there is a third one, which is coming up. So this partner, we are going to work along with the phone company. So this is two both -- and what led to our growth is we were -- our dependency on Qualcomm and Texas instrument, we broke and we are working through the AI chip manufacturers. And we are establishing a very strong relationship with two of them, especially the upcoming AI chip companies. And these things are looking up good. Also, we are looking at major applications in ADAS and SDV areas. We had last week some major wins last couple of weeks have been extremely good. And we won some of the -- especially in the areas of ADAS SDV and transportation-related activities in the ESA. So this looks good at this point of time. outlook, not only this year, next year looks good. And we are again working with one more hyperscaler started. So probably we'll be able to highlight it the next year -- next call.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, just first up, I wanted to understand on your core business, I mean, we are looking at 40% CAGR over the next 3 years. So what sort of margin aspiration we can have over the next 3 years? I mean, I think first quarter, we were at about 18.6% EBITDA margin. So how should one look at as your scale picks up?

Currently, the ESAI margins are very good. And currently, the ES margins are at 23% -- are you able to hear...

I'm trying to understand as a core business as well.

Yes, yes, yes, sir. I'm just coming back to this. Currently, the ES margins are at about 22%, 23% and followed by defense margin, which is at 19-plus percent, followed by aerospace margin, which is at 16%. But aerospace margin this time is quite less. Q2 also may maintain because of a lot of holidays and so on. So basically, we are looking at an average -- there is a lot of improvement in these 3 areas. We may end up anywhere between 19.2% to 19.7% or 19.8% this year. And years to come, it will be between 20% to 21% in the core sectors.

So that... 2% in next...

Yes, it will be averaging between 20 will definitely be -- this year, it will be around 90-ish 19 plus something. Next year onwards, it will be between 20% and 21%....

20%, 21% next year Okay. Got it. That's very clear. And in terms of our outlook that we have shared on our Power 930 plan. So I would just -- I mean, if this year, we grow at about 25%, so we'll reach around INR 1,300 crores kind of a top line at a consol level. I mean to reach INR 9,000 crores in the next 4 years will require at least 60% CAGR growth, right? I mean, is that add something I mean, are we too optimistic on that? Or is it something that is doable for us?

No, no, no, no, no, not at all. We are not throwing any numbers or not dining or anything because we are very systematic about it. We are very serious about it. This year and next year, we are working without any infrastructure or without any major change. Please understand that we are almost investing about $200 million, about INR 1,500 crores in infrastructure before the beginning of '27. So that should lead us to a tremendous jump growth of nearly about, I would say, 80%, 90% or more than 70%, which will compensate for -- let us put it this way. First 2 years, about 40%, 45% growth on core areas. noncore, we hope we would have got an answer for noncore by next year, definitely by beginning of next year. So the average growth will be about 45% next year. And then there will be a steeper growth because of the fuel by the infrastructure and facilities and new customer acquisitions. We are pretty much planned it out, and we are -- there is no hypothetical issue in this, and we are fairly confident about it.

Okay. Fair enough. And just one last thing on the ESOP cost, what was the ESOP cost in this quarter? It was INR 12.9 crores, right?

No, it was around INR 3 crores because at the moment, there is only the Chairman who is best with the grant. The rest of the plan is on the -- in the works and it will start showing up from Q2 onwards.

And so FY '26 entire year, we are targeting about INR 50 crores to INR 60 crores of ESOP cost?

Maybe slightly lower than that is what at the moment we are looking at, yes.

So INR 40 crores, INR 50 crores in that range, I mean.

Yes, that is right.

Okay. Okay. And when we say 300 basis point improvement in margins, so we exclude this ESOP cost, right?

We actually have factored this ESOP cost in this. It is a net improvement in terms of EBITDA margins.

I mean after factoring in ESOP cost, we are expecting 300 basis point improvement in margins?

Correct.

Okay. Because currently, I think last year, we were at 14%. First quarter also, we were at similar 14%, right, EBITDA margin.

As the real impact and the real, I would say, the turboing of the revenue and margins will start happening from Q3. End of Q2 and Q3 onwards.

[Operator Instructions] The next question is from the line of Harshit, an individual investor.

This is Harshit Kapadia. I'm calling from Elara Securities. Just have two questions. One thing, there is a recent defense acquisition approval, which came for INR 67,000 crores. Would you be able to share which of the areas AXISCADES is involved in those particular 8 to 9 platforms, which have been disclosed? And secondly, I have a question related to -- I'll just first get the first question answered.

Sunil, can you answer this question?

Yesterday, the approval, is there any activities in which we are involved Yes. So we are involved in the Mountain radar.

Okay.

So in that the distil beam forming and the signal processing systems will be from us.

Okay. Okay. What about Brahmos missile? I think there was also a big order for Brahmos missile of close to INR 11,000 crores, and we are supplying wiring harness. So are we part of that or we are not part of it?

I didn't get -- can you just repeat the question, please?

Yes. In the INR 67,000 crore order, they also mentioned Brahmos missile was also part of that procurement deal. So are we not supplying wiring harness for the Brahmos missile or for that particular project, we are not participating? Can you answer this?

Brahmos wiring harness is an ongoing order for us, and we will be qualifying into production soon. And the later part of deliveries, we will definitely be a part of it. Apart from wiring harness, we are also working on critical electronic systems for Brahmos.

Okay. So -- but still, we are not right now part of it, but we will be part of it probably in FY '27 and '28. Is that what?

No, no. Let me just to give a clarity. Brahmos has got 71 wire harnesses. We are already selected in the major one. So within 6 months, we -- when we complete this, we should be part of it. And going forward, even in -- beginning of FY '27 onwards. So by the time this project matures or starts, we will be ready for that. And remaining also, I think we have a shot at that, which has not yet been finalized. And so we will have a measure this thing in that and also onboard computers and strategic electronic units. And also, we are in the process of major development with reference to that and which I cannot disclose at this stage probably, but we'll inform you in Q2. So we have a sizable share in these things...

We take the next question from the line of Vijay Sardi from Shubkam Ventures.

So you've laid out your plan for the next 5 years. I just want to understand that most of the growth comes with a lot of being a core system supplier integrator and not just being a component player. I understand that you also do some subsystem activity. How do you think we will progress from the next 3 years to the next 5 years, say, for instance, Project Kusha, we are doing digital beam forming unit. But when it comes to further moving up the scale in terms of revenue, do we really see ourselves moving up the platform level? Or how is it likely to be? Some insights on that will help.

See, basically, there are -- we don't want to single out a particular project. But basically, we are -- one hand, we have our own modules, which is going into subsystems, which goes into every major product like direction find direct RF, as you said, the exteriver digital beam forming units. These are all our standard products offerings goes irrespective of who wins. Secondly, we are trying to take care of -- if you look at Brahmos and Kushar, for example, we are already setting up competencies in major platforms such as rocket motors, seekers and then the electronics, onboard computers and electronics. These three, except warhead, we are concentrating on everything. So this is on the missile side. And similarly, in the radar side, we are attempting for full radars in many cases. And also, we are looking at foreign OEMs for radar maintenance, radar support, integration, et cetera. And our facility, once it happens, will be among the largest for radar. Yes. And with Indra, with collaboration, we are also making products which to start with we are trying to do the antenna and probably at some point of time, this is going to be for exports and for total system also. We are not merely the system integrator. We are -- we make our own sub systems, we integrate and we develop it from the ground. And so we have planned for all these things at this point of time.

So in layman, would you qualify yourself to be a Tier 1 player in the next 3 to 4 years? Is that understanding right?

We are... Yes, yes, of course. When we say we are looking at, for example, the Tier 1 means let us say, in the case of -- I'm hypothetic saying Kush, we will have about 4 Tier 1s, one who takes care of the electronics and radar, one who takes a complete missile integration, one who takes up the ground systems and one for the other propulsion and other things. Basically, we should be in a position to attempt all these things, any one of this or something like that, maybe once the facility is ready. And yes, we should be ready by that time in every case. That's what is our focus.