Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Varroc Engineering Ltd (BOM:541578, Financial) reported a 5.2% year-on-year revenue growth in Q1 FY25, reaching INR18,989 million.
- The Indian business segment showed a robust growth of 11.3% year-on-year.
- The company has secured lifetime new business wins worth over INR7,959 million in Q1 FY25, with nearly 48% of these wins coming from EV players.
- Net debt reduced by INR668 million in Q1 FY25, improving the net debt to equity ratio to 0.59.
- The company is increasing its renewable energy sourcing, which is expected to result in annual recurring savings of around INR200 million starting from Q2 FY25.
Negative Points
- The profitability was impacted by startup costs for two new plants in Maharashtra, leading to a PBT of only 2.9% in Q1 FY25 compared to 3.6% last year.
- Overseas operations showed negative growth, particularly in the US and European markets, affecting overall performance.
- The commercial vehicle segment experienced a year-on-year degrowth of 1.4% and a quarter-on-quarter degrowth of 13.4%.
- Gross margins slipped by 190 basis points, partly due to raw material cost escalations and startup costs.
- Interest costs remained high at INR44 crores for the quarter, despite a reduction in net debt levels.
Q & A Highlights
Q: What was the impact of startup costs for the two plants in Maharashtra?
A: The startup costs were significant, but we expect improvements in the coming quarters. These plants are for our plastic molding business and fuel tanks for Bajaj Auto. Losses will reduce significantly in Q2, with margins expected from Q3 onwards. (Tarang Jain, Chairman and Managing Director)
Q: Can you provide some perspective on the profitability of India and overseas markets and margin expansion?
A: In India, cost reductions are gradually falling in place, and we expect further improvements in profitability. Overseas, negative operating leverage is impacting us, and it will take one to two years for concrete improvements. We are focusing on cost reductions while waiting for volume ramp-ups. (K. Mahendra Kumar, Global Chief Financial Officer)
Q: What are the breakthroughs in EV orders from non-Bajaj customers?
A: We have two EV powertrain customers beyond Bajaj, with development ongoing. Additionally, we have significant business wins across lighting, painted plastics, and full-service applied polymer parts into passenger cars. (Arjun Jain, Whole-Time Director, Chief Executive Officer - Business Division I)
Q: Can you explain the 190 basis points slip in gross margin?
A: Sequentially, if you adjust for the one-time government incentive from last quarter, the gross margin actually improved by 1%. (Unidentified Company Representative)
Q: Why has the revenue growth in the domestic electrical, electronics, and lighting business been on the softer side despite favorable mix?
A: The volume growth in the two-wheeler industry has largely come from segments where we have lesser presence. Additionally, passenger car lighting has been depressed this quarter. However, our polymer business has performed well. (Arjun Jain, Whole-Time Director, Chief Executive Officer - Business Division I)
Q: Can you provide visibility on debt reduction?
A: We have been reducing debt by INR50-60 crores per quarter and expect to continue this trend. Some investments in land for future growth may occur, but overall, debt reduction will come from free cash flow generation. (Unidentified Company Representative)
Q: What is the status of the four-wheeler business in the domestic market?
A: The four-wheeler business has remained muted in India but is expected to grow in the coming quarters with new business wins. (Unidentified Company Representative)
Q: Why has the four-wheeler segment seen a decline year-over-year?
A: The decline is largely due to significant degrowth in our overseas operations, particularly in our plants in Romania and EMIS. (Tarang Jain, Chairman and Managing Director)
Q: Can you provide a breakup of exports between four-wheeler and other segments?
A: We will include this information in future presentations to provide more clarity on our export business. (Unidentified Company Representative)
Q: What is the expected impact of renewable energy initiatives on cost savings?
A: The renewable energy initiative is expected to yield INR20 crores of annual recurring savings starting from Q2, with an additional INR7-8 crores from Phase 2. (K. Mahendra Kumar, Global Chief Financial Officer)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
