Carraro India Limited (CARRARO) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Carraro India Limited Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Before we begin, a brief disclaimer. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not a guarantee of future performance of the company, and it may involve risks and uncertainties that are difficult to predict. I will now hand the conference over to Dr. Balaji Gopalan, Managing Director. Thank you, and over to you, sir.

Thank you very much, and a very good evening to everyone. Thank you for joining Carraro India Limited's Q2 and H1 FY '27 Earnings Conference Call. I'm joined today by Mr. Davide Grossi, Whole-Time Director and CFO; Mr. Sudhendra Mannikar, Whole-Time Director and COO; Mr. Ashok Rai, Director, Sales and Business Development; other members of our leadership team and Strategic Growth Advisors, our Investor Relations advisers. Before we begin, I extend my warm wishes to you and your families for a very happy Diwali. May the festive season bring in prosperity, happiness and good health to all of us. The first half of FY '27 was marked by a challenging global environment, but also by encouraging signs of resilience. The ongoing conflict in West Asia, now in its eighth month, has kept energy and fuel prices elevated, while also increasing freight, insurance and input costs, particularly for steel and castings across our supply chain. The global economy has remained more resilient than initially expected, although growth has moderated. Across our export markets, conditions remain mixed. European agriculture continues to be subdued. Turkey remains volatile. And in the U.S., greater clarity on trade arrangements is a positive development even as customers remain measured in their volume commitments. Closer to home, the Indian market has been relatively stronger. Tractor retail demand has remained healthy, reflecting encouraging underlying demand. Wholesale volumes have moderated in recent months, influenced by a high base, an uneven monsoon and the timing of the festive season. Overall, the domestic market continues to offer a more supportive demand environment. Against this backdrop, Carraro India delivered healthy growth in both revenue and absolute earnings. In Q2 FY '27, revenue from operations grew 19% year-on-year and 28% sequentially to INR 6,965 million. For the first half, revenue increased 15% to INR 12,411 million. Q2 FY '27 EBITDA grew 10% year-on-year and 13% over Q1 FY '27 to INR 652 million. This is an important outcome, particularly in a quarter when input costs increased faster than their recovery. It reflects the continued focus of our teams on execution, operational efficiency and delivering consistently for our customers. At the same time, margins reflected the impact of these cost pressures. Q2 FY '27 EBITDA margins stood at 9.2% compared with 10% a year ago, while gross margin for the first half was also lower than the last year. This was largely driven by the combined increase in sale in steel and casting prices, energy, logistics and supplier labor costs. Our customer contracts provide for recovery of raw material price movements, typically with a lag. Other cost increases, including energy, freight and supplier labor are only partly covered by these mechanisms and require separate customer negotiations. Davide will take you through the financial details of these. Throughout this period, our priorities have remained clear: maintain reliable customer delivery, pursue cost recoveries and continue strengthening productivity and localization. These efforts have enabled us to grow EBITDA in absolute terms despite margin pressures, demonstrating the resilience of our operations and providing a solid foundation as we move into the second half of the year. Domestic revenue grew 30% in the first half and now accounts for about 70% of our revenue. Agricultural revenue grew 23%, well ahead of domestic tractor industry wholesales, which grew by high single digits over the same period. The driver is the shift from 2-wheel drive to 4-wheel drive tractors. GST rationalization had brought 4-wheel drive prices much closer to pre-GST reform announcements, 2-wheel drive levels and farmers responded very well. our domestic 4-wheel drive axle volumes continue to grow faster than the overall tractor market. Tractor demand moves in cycles and the softer wholesale numbers in September and October are a reminder of that. But 4-wheel drive adoption is structural rather than cyclical. We remain confident that penetration will keep rising towards the 35% to 40% range over the coming years, and we are adding axle capacity to serve it. Export revenue in Q2 was INR 2,106 million, 4% below last year, but 27% higher than Q1 FY '27. Last quarter, we said the Q1 FY '27 dip was largely a one-off linked to logistics disruption. Recovery has begun as we expected, but it is not yet complete and overseas demand remains uneven. Coming to construction equipment, Tele-boom Handlers remain a bright spot. The ramp-up of our new TBH axle range for a major international OEM is progressing as planned, along with other export programs as well. In India, the Tele-boom Handler market in the first half grew to about 800 machines, opening opportunities with Indian manufacturers and the Indian operations of global OEMs. We now have a couple of Tele-boom Handler programs in series production and 4 to 5 more at the prototype or field validation stage. This is how we are building our next phase of growth; programs in production today and a pipeline that converts over time. In Backhoe Loaders, domestic demand has shown encouraging growth in the first half with further activity at the start of the festive season. Backhoe Loader driveline exports through Indian OEMs continue to perform well. Higher-horsepower transmission, R&D and engineering services. Series production of our customer in Turkey commenced in Q1 FY '27. However, the ramp-up is yet to gain momentum, temporarily impacting offtake. A similar trend is being observed in Europe. Higher-horsepower programs for domestic OEMs are in field validation. Our teams developed 7 prototypes in the first half and 1 has moved into production already. Our focus is on converting development work into products our OEMs, partners can commercialize, not simply on adding to the count. In engineering services, the e-transmission program with Montra Electric has received a prototype order for field validation. We secured further assignments in July from a customer in Western India and discussions with another customers are progressing well. Coming to gears, the gears business showed positive traction in H1 FY '27, although performance is expected to remain flat for the full year. The secured bull-gear nomination with a large global OEM and ongoing customer development programs are expected to support business improvement over the coming periods. Coming to capacity, localization and aftermarket. Our CapEx plan is on plan. During H1 FY '27, the company incurred capital expenditure of INR 204 million. Construction of the new paint shop building commenced, while a site drive subassembly line and a backlash machine were commissioned to enhance portal axle capacity and increase differential support capacity on the 4-wheel drive line. Localization is one of our most direct levers on cost. Raw material localization recovered to about 80% in Q2 FY '27 from 74% in Q1 FY '27 as supply from local partners normalized. Our target remains 86% to 88%. The spare parts business recorded strong growth in H1 FY '27. We signed an agreement for our third authorized service center driven by increased penetration of Carraro drivelines, extending our aftermarket reach. I'm also pleased to share that Carraro India was recognized among India's Most Admired Export Enterprises 2026. It reflects the work of our teams and partners on quality, execution and customer service. The outlook ahead, we remain cautiously optimistic about the rest of FY '27. First half revenue growth of 15% sits within the target range of 10% to 15%, which we indicated, and we expect the full year to remain within that range. Our profitability -- we will be measured. Input costs are still racing into the third quarter and price recoveries trail them by a few months. Our commitment for FY '27 is continued growth in absolute EBITDA. We expect margins to improve progressively as recoveries catch up, localization moves towards target and new capacity lifts utilization. We are encouraged by what our teams achieved in a difficult half. We continue to execute carefully, invest selectively and stay close to our customers in India and overseas. With that, I hand over to Mr. Davide Grossi to take you through our financial performance. Over to you, Davide.

Thank you, Balaji. Good evening, everyone, and my warm Diwali wishes to all of you. I will take you through our results for Q2 and H1 FY 2027. Starting with Q2. Revenue from operations was INR 6,965 million, up 19% year-on-year and 28% over Q1. Total income rose 19% to INR 7,058 million. By segment, Agricultural revenue grew 29% to INR 3,300 million. Construction Equipment grew 12% to INR 2,979 million. Others, which includes gear, spare parts and engineering services grew 9% to INR 686 million. By geography, domestic revenue rose 33% to INR 4,859 million. Export revenue was INR 2,106 million, 4% below last year's INR 2,201 million, but 27% higher than Q1. Q2 EBITDA grew 10% year-on-year to INR 652 million and was 13% higher than Q1. EBITDA margin was 9.2% against 10% a year ago. Gross margin for the quarter was 23.3% against 26.4% in Q2 FY '26. Profit before tax grew 14% to INR 485 million. Profit after tax grew 11% to INR 351 million with a PAT margin of 5%. While margins narrowed in the quarter, the margin pressure is mainly at gross level, and it has essentially 2 components. First, commodities, namely steel and casting. These are indexed in our customer contracts, but recovered with a lag of 3 to 6 months. Prices kept rising through the first half FY 2027, so recoveries have trailed cost over quarter. This is a temporary effect that we will be reabsorbed in the next month. Second, inflation of transformational conversion costs such as energy, freight and so on, which rose sharply with the conflict in West Asia. These are not indexed, so we recovered them through separate commercial negotiations with each customer, which are in progress and have just started to be reflected in our P&L very recently. The positive impact of such negotiations will be more visible in second half FY 2027 and beyond. Now focusing on first half FY 2027. Revenue from operations grew 15% to INR 12,411 million from INR 10,792 million in H1 2026. Total income grew 16% to INR 12,644 million. Agricultural revenue grew 23% to INR 5,859 million. Construction equipment grew 8% to INR 5,243 million and Others grew 13% to INR 1,309 million. Domestic revenue grew 30% to INR 8,654 million, about 70% of the total. Export revenue was INR 3,758 million against INR 4,113 million last year. Gross profit grew 7% to INR 3,211 million. Gross margin was 25.4% against about 27.5% in H1 FY '26. The decline of roughly 200 basis points is the clearest measure of the cost pressure that we have absorbed so far. Better absorption of fixed costs on higher volume offset part of it and higher other income, including the onetime items offset a further part. As a result, EBITDA grew 8% to INR 1,232 million and EBITDA margin was 9.7% against 10.4% last year. Profit before tax grew 12% to INR 905 million and profit after tax grew 9% to INR 665 million. PAT margin for the half was 5.3%. Our balance sheet remains strong. Debt to equity was 0.34x and cash and cash equivalents were about INR 955 million. Net working capital was about 40 days as we kept close control of inventory, collections and supplier terms while supporting higher volumes. On an annualized basis, return on capital employed was 26.3% and return on equity was 24.5%. With that, I hand the call back to Balaji for his closing remarks before we open the floor for questions. Thank you.

Thank you, Davide. Let me summarize before we take your questions. The first half was shaped by a difficult global environment and rising costs and our margins reflect that. But our domestic business grew strongly, exports began to recover in Q2. Our priorities for the second half are very clear. We will recover the cost increases we have absorbed, bring localization back towards target, add capacity where demand is proven and convert our development programs into production. We remain optimistic about the rest of FY '27. We expect continued growth with profitability improving gradually as conditions allow. Thank you very much. We would now be happy to take your questions.

[Operator Instructions] First question comes from the line of Raghunandhan N. L. with Nuvama Research.

Sir, domestic revenue growth has been strong at 30% Y-o-Y in H1. Within this, approximately how much will be the cost inflation impact? I am trying to understand the volume growth and value growth.

Raghu, so out of the total growth that we have seen so far in the first half, we can say that roughly 2% is the, let's say, price increments that we could get so far, which is part of this. So clean it's a 12% to 13% growth year-on-year for the first half.

And the remaining price increase which are to be received from customers, can you give some color how is the customer negotiations progressing? Are they constructive? Will Carraro need to absorb some impact?

Yes. Raghu, this is Balaji here. When this issue started, it was something new for the industry. So there is no proper thumb rule or a process that was established. But all the customers had agreed in principle that these are pass-through and it will be absolved by them. But as things started extending beyond what they expected, it started affecting their margins as well. So we have to go to the discussion table. It is not that they are denying it or they are refusing to give it. They are engaging us with a lot of discussions on what is the right amount. And there is no index or a reference point that we can put our finger and say this is the amount. So these discussions are going on. We have been successful with many. There are, I would say, 30%, 40% still left where negotiations are going on. We would attempt to recover the entire gap that is there, purchase variation with sales variation. But we'll have to see practically how much we close because for an episode like this, we wouldn't want a bad feeling from either side. We are being reasonable. We are sharing all the details with them. We are being transparent. And my team, Ashok and his people are engaging and they are confident of recovering most of it. I will let Ashok speak a few words on this to give you the real feeling.

Raghu, Ashok here. See, the message is clear that as you ask one word, is it constructive? The answer is constructive. It's a matter of time that how much we recover, but the discussions are going in a very constructive direction.

I think -- just to add one element here. I think from Q3, we will already start seeing the initial result of this negotiation.

You indicated that the domestic TBH program, serial production has started for 2 customers. Can you indicate how has been the start? Is it -- can you indicate how much is the revenue in H1? And how do you expect the ramp-up to happen both with the existing customers and the 5, 6 new customers you are looking at adding?

Raghu, Ashok here. See, this program, when you say we have started giving the prototype mainly to some -- couple of customers more around 2 months ago, 3 months ago. So basically, they will give us the results from the FY '28 mid onward and '29 onwards, we expect that they will start giving us on the balance sheet. This is the overall picture. And the 1 or 2 customers, they are slowly gaining the traction. Traction means the significant volume is quite low because, as you know, the market size itself is very low. We are talking about something like 800 machines, which were earlier around 300 or 400 machines in the first half. This month -- this first half, they have sold almost 800 machines as an overall market. And the OEMs whom we have started supplying, they are entering into now in this segment. Earlier, this market has grown by 1 or 2 OEMs.

Noted, sir. Exports has witnessed a recovery in Q2 versus Q1, a significant recovery of 27%. On a Y-o-Y basis, how do you see H2? Can it be flattish?

Raghu, Ashok here Again. See, in case of export, there are many, many variables are there on the table. One is the logistics, which still has not improved. Second is the markets are -- across the world are changing very dynamically. For example, Turkey, which we were expecting in the first quarter that it should go up and it started showing positive signs. But in Q2, it started showing a decline. Then some market like Algeria or African market, we saw a traction in the agricultural. Then we saw some traction in Latin America that has also gone down in the agricultural segment. And Europe also started showing some negative on the agriculture. So in this changing scenario, different regions are giving different kind of indication, and it is changing quarter-on-quarter. But on a broader side, it should be flattish, plus slightly up on the export side. We are not expecting a dramatic increase on the export side. We are trying to protect the order book based on the customer orders and the regional inflow of the orders from our customers.

Maybe also here, I would like to add, if you remember, when we commented last quarter results, we wanted to stress that the bad performance of export was a one-off, strictly related to the disruption that was there in the supply chain globally. And the result of the Q2 is a proof of the fact that we are pretty much back on track. I think we can assume and hope that Q2 will be replicated in Q3 and Q4. So overall, we will have a minor growth or overall flat for the year.

[Operator Instructions] The next question comes from the line of Lakshminarayanan with Tunga Investment.

Just want to understand with the agri growth, how much is -- if you can just split it by domestic and international? And within domestic, how much is indexed towards 4-wheel drive, that will be helpful. And second, on the international market there has been a mild decline. And on a constant currency basis, what has been the decline? And also, in the international, we were getting certain orders for I think, TBH or some of the other products where there has been -- we got some orders, I believe. So I want to understand -- I mean, what is the total scope and did we get a few more orders subsequently? These are my questions related to the agri space as well as on the CV space, especially for the internal markets.

Your first question was with respect to the domestic market. The growth is, in terms of -- majority growth is coming from the 4-wheel drive axles actually, because that is what is structural to...

No, just [ to help ]. We have done around -- if you look at the agri market, agri sales for the first half, how much is [audio gap] and how much is international?

So I'll tell you the total amount of revenues in H1 for agri domestic is INR 4,800 million, INR 480 crores, which is a 34% increment versus previous year. If we look at export agriculture first half, we have INR 105 crores against the INR 120 crores of previous year, that's a minus 12% year-on-year.

And if you just look at the Indian domestic business, which is around INR 480 million, I think that it is a mix of both 4-wheel drive and the non-4-weel. Can you just give that mix?

No. As we have always said, Carraro is not into 2-wheel drive. There is a legacy 20 years back, we had started through one customer, and that is still continuing, but that is in decimal. It will not even get captured in our revenue. We are focusing only on 4-wheel drive.

Okay. And I think this is very impressive growth. And any idea what has been the 4-wheeler growth for India in per se? I mean, is it growing at 10%, 20%. So the tractor market I believe has grown 11%, I think tractor market has actually grown in the first half...

See, in the market research data that comes and what is released by OEMs also, there is still not a very defined separate category where they define the 4-wheel drive, yes. But we use our intelligence based on what the customers are doing. And I would say unofficial sources that we are -- the industry is roughly at around 23%, 24%. It is in that range, but seems like it will move to, say, 27%, 28% in the coming months. So there is an offtake. Capacities are an issue today for all the OEMs. They are not able to feed the dealers with 4-wheel drive tractors. And for that reason, you will also see hardly or no reference of 4-wheel drive advertisement or marketing that is happening because they would not be able to meet the demand if it opens up. So they are waiting for the suppliers to gear up and meet the requirements, and that is when the acceleration will be much faster. But now, to answer your question, the trend the market is moving towards 4-wheel drive from the earlier 2-wheel drive. So we are still at around 25% of the market share, yes.

Sir, and just double-click on that, if you look at the 4-wheel drive, so how much of that is actually fed by captive, if you just blow up that 23%, 25% how much of that is driven by captive and how much is done by non-captives?

As I stated now that we don't have at the moment the real research data. But since we speak to many of the OEMs, we have collected those data. So when we say that we have almost 60% in the non-captive -- 58% [indiscernible] as a market share of Carraro. So we believe that 30% would be with the captive, but it's just a guess it's a calculated guess, we can say that. It is not something which is scientifically researched and calculated one.

Right. Sir, and there is a movement towards better safety standards or better emission standards in tractors. So what kind of potential it would have because there would be some changes in -- or there may be some [ up structure ] in terms of the revenue you can actually get. How far are we in that journey as a country? And how you can actually capture that? And I think another follow-up question I had was on the international order book. So I mean these 2 things.

Answering on your emission norm question, in this case, see, there are emission norms which are going to change somewhere in October. This is supposed to do for 75 horsepower and below 30 horsepower. We are not present in those 25, 30 horsepower. But in 75 horsepower and above, which are mainly in the export market, it is going to add the exposure of the Indian OEMs in a positive way to the export market because they can export it to the developed countries with the emission norm, which is Stage 5, which they are building up from 75 horsepower and above. For Carraro, it is good for the Indian industry that the capability to export will go up. And for all the other non-emission countries, we already have the engines and the scope of the Indian OEMs to export is going to go up for the higher horsepower.

There is another question which I had, which wasn't answered is on the international order book, part of the 2 questions I had.

The order book for the next 6 months?

No, sir, there is a -- I think there is an outlook for new model or I think a Tele-boom Handler or something I remember, which we had for a longer-term. I just want to understand that part.

Yes. See, Tele-boom Handlers with the global customer, it is going as per plan. We had estimated in the beginning INR 300 crores in 3 years. We are in the second year now. And it is well as per their plan. We are not having any problems. There is a good pull for it. And whatever numbers are being asked, it is challenging for us to supply considering the disruption in supply chain. But to answer your question, the plan of the Tele-boom Handler with that global OEM to reach INR 300 crores in 3 years, we are well aligned with that. There is no change in the Tele-boom industrial market.

The next question comes from the line of Priyesh Kothari with [indiscernible] Fund Management.

I had 2 questions. Just wanted to understand that how complex are our products and how difficult would it be for the OEMs to develop and manufacture these in-house?

Okay. Only 1 question?

Yes. The second one is...

Okay. Let me finish Yes, it's [ too-stressed ] also. See, it's not a matter of product complexity. Surely, it is an engineered product, a lot of R&D hours go into it, a lot of testing, field validation and the market fit. These things are very important, okay? What matters here is you are basically looking at make by division by customers, okay? What supports the buy decision is the fact that your time to market is very shortened when you go with a solution provider, technology company like Carraro because their R&D has to develop it, test it, validate it and then you are still not sure when you place it in the field, if there is a small glitch and it fails, you have enough competitors to blow it out of proportion. So they carry that risk. But when they come to a company like Carraro, that already has that experience and it's already probably supplying somewhere else in the world. So we are aware of soil conditions. We know our product. The products are well tested and validated. So it's a quick fix solution for them to launch it. Now having said that, usually for any vehicle, you cannot have 2 different sources of gearbox or transmission because when it goes for servicing, it's going to be a nightmare, which gearbox, which spare parts is involved. So it is always desirable that when they take us into a project, it continues till the end of that model. So it is many, many years. However, when the volumes increase, they could get into this temptation of getting into their own in-house captive, but they need a complete supply chain development. They need a big team, they need to invest, they need to have space. And in any case, we also innovate the product technology. So it's not really a product that we are offering them. These are differentiated products suiting to what the customer needs. Otherwise, we will have one gearbox being sold to Mahindra, one to Escorts, to Sonalika and TAFE. These are not identical gearboxes. It looks the same, but the inside gear ratios, the torque, everything is different. So differentiated product is what we offer to the customer. And that is why there is a tendency to buy and not make it in-house. Reaching a point where after 6, 7 years, they may parallelly do it and take it captive, but we are technology partners for all the OEMs. So by the time you take this product out from us, the technology patch up requires another higher technology that they would need. So they would remove this and give us a new project that is there. All in all, in the last 30 years, we have only grown with any customer. We don't have a revenue drop with any customer. That itself shows that our business model of developing the product and codesigning with the customer has helped us till today, and that is how it will go for the future. Have I answered the question?

Yes, sir, that was helpful. And my second question was that -- so Mahindra has cut its tractor industry growth guidance from 5% to flat. So how are we looking at this slowdown? And how do we plan to sustain growth? And what will like be the key drivers. If you can throw some color on that.

See for us, If we are looking at Mahindra, they are looking at the entire tractor market. They are looking at the entire tractor industry, 1.2 million. What Carraro focuses and I explained to the gentleman from Tunga, we are into 4-wheel drive only. So the growth and penetration in 4-wheel drive is the future for us. And in that 4-wheel drive growth, we have approximately 56%, 58% non-captive market share. So the future is good. The industry is moving in the direction that Carraro has the product availability. The global market 4-wheel drive is about 95%, 98%. We are at 23%, 25%. So the runway is very clear. We have the right products and the industry needs the support and technology from Carraro. That is why we are very confident of the growth in the future.

The next question comes from the line of Raghunandhan N. L. with Nuvama Research.

Going forward in terms of major orders which are likely to start production either this year or next year, any orders you would like to call out which will add to our performance?

Raghu, Ashok here. See, there are many projects which are going on. Normally, any project before it comes to series production, we are not authorized to explain and inform to the market. This is first point. Second point is this prototype, whatever we have given based on certain projections from the customer, and we have to validate those assumptions before we announce. But as we said originally from day 1 that we are targeting towards the $350 million to $400 million or INR 3,500 crores turnover for Carraro in the next -- by 2030. By the projects what we had, we are still intact with that guidance.

Even for the immediate next year also, our indication, the data we are getting, there is going to be a growth in our top line. Hopefully, it will be double digit, but somewhere close to double digit for sure. So it's an interesting journey that we are having in front of us. The market is supporting, our product fit has been established, which is a very big challenge, particularly the 4-wheel drive on which we are banking. It's important that the technology we offer is appropriate for the final end customer. Very often, there is a gap. And here, we are very lucky that there has been no requirement to redesign or modify any of our product solutions. What we have offered and tested in the field has been accepted by the market. So this is a positive way of looking at it.