The second question is on Novelic. We understand that they are setting up, you know, manufacturing in Tamil Nadu. So, how is, you know, progress, in terms of engagement with customers? Any sense you can give of what could be the potential kit value? And in the past, you had indicated that you'll be also, you know, interacting, you know, targeting US and Europe initially with Novelic. So, you know, which geographies are we targeting, any update on that?
Sure. So, on the manufacturing and production thing, I can have Sat answer that. On the overall opportunities, Europe continues to look good because next year is when in -cabin safety has to be part of getting the NCAP certification. So it was moved by a year. So what would have been great if it was 2026, now that's moved to 27. So that's on plan. What they're doing in India, Sat, if you are there, you can fill Aditya on. Sat Mohan Gupta: Yeah, Aditya, I mean, for Novelic India, we have set up the entity in India and we have started the launch process for one of the customers. The SOP is going to be end of this year. the lines are already set up, because it's a sensor assembly unit. So we have an SMT line in-house and we'll be using that SMT line. Vivek Vikram Singh: As you know, we don't use the phrase kit value because to be honest, I don't understand it. I don't understand what it is there. I mean, we supply a sensor, that is the part, second, giving away pricing information is a competitive disadvantage.
How is Sona progressing on rare earth magnets? Maybe you can give us an update on the whole situation.
Yeah, no update as of now as you know, there is a policy that has been released by the government. And when we have anything that is material and reportable, we will report it. For now, we do not use any heavy rare earth magnets in any of our products. So that's where we are as of today.
On the order book, there is a question, what proportion has clear volume visibility and pricing stability over the next 2 to 3 years? And how should we think about conversions into steady revenues and margins as these programs ramp up?
100% has volume visibility and pricing stability, but, it is just impossible to answer how volatility will affect the next 2 or 3 years. So, as you know, in our industry, there's no such thing as firm commitment. Volumes are indicative volumes only. You ta ke your calls. So when we put orders in the order book, we take a call on how much to discount the volume projection given by the customer. We have been doing this for a while, so we do have a fair idea of, you know, how much, to adjust by. But then there are years like the COVID year and semiconductor chip crisis year. Right now there is, frankly an EV and going back to Gunjan's previous question, we don't have a demand problem actually. We have a problem or our, well, not we are customers. They are not able to produce enough to supply the demand right now, and it is not because of us. It is because of weaknesses in the supply chain where certain suppliers are finding it hard to ramp up that quickly. So this works both ways, that there are or ders in the order book which when eventually converted will be far higher, and there are some which will be lower, but over time It pans out, and it is pretty much around that same number.
Cash on books, is there any M&A potential in pipeline?
Nothing that has reached a stage which is worth sharing or reportable. We are always evaluating M&A opportunities at any given time. Over the last 3 years, we would have evaluated over 100 opportunities and frankly acted on one. So that process is always going on. Of course, having cash means that yes, we are always looking very, very aggressively with focus or opportunities that could add to us. But t hat doesn't also mean that if you just have cash, you do M&A just for the sake of deploying capital, because that kind of pressure, as I mentioned before, that anything done hastily and without prudence does lead to bad results. So no, we have cash, but it's not to burn. It is very hard earned cash, it's shareholders' cash. It is our duty as a responsible company to deploy it only when we get an opportunity that is amazing and process all four of our filters that we have already spoken about. Whatever we put in, we must be able to be confident that the product will last for the next 15 years. Second, whatever we do, we must be able to take the top 5 positions in that category. If not, it's not worth doing. Third, we should make good money and good financial returns from doing so. And fourth, that it should be good for humanity. If all these 4 conditions are done, only then do we even consider an opportunity.
Is the worst of commodity pressure behind or should we anticipate increasing pressure before pass -through happens and margins improve or stabilize?
That is a multi-trillion dollar question, in some sense, because if you can figure out when the war will end and when oil and gas and all these things will go back to normal, yeah, you'll be far more wise than I am. I have no idea.
How are things shaping up on the non -automotive front apart from railways? When will we see any developments on robotics and EVTOLs?
So development soon, but if the question is, when will you see meaningful revenue, assume if your investment horizon is less than 3 years, none of this has any meaning for you as an investor. It will only come after. If we can go back in time, I think 2021 is when we announced, Sat it was 2021 when we won the suspension mode order, right? Sat Mohan Gupta: Yes Vivek Vikram Singh: Now, 2026 is the first year that it will be in hundreds of crores. So it takes 4 to 5 years for anything which is a new product, and if you're doing it organically, to actually get there. Usually, first 0 to 3 years, you don't actually earn any money, you actually spend more money than you earn. Year 4, you start making some money. Your first bit of revenue starts trickling in, which was the last calendar year for suspension mode. And then you get to hundreds of crores, and if God is kind and you r job is good, and you've made a good product, then you get to the thousands of crores. The same thing happened with EV differential assembly. We started in 2016. Until 2018, I don't think we made meaningful money. 2019 started becoming meaningful, and now it's, as you know, uh, fairly meaningful. That's the trajectory any new product development cycle will take. I think Amit also answered when he was asked about HVAC and electric control panels. It is a 3-year cycle. It is not magic that we make something and then immediately we start selling it because our process is B2B. Second, we make safety critical or mission critical parts that have very long testing and safety cycles, and we are not in a rush to cut back just for financial gains and actually endange r our reputation, our trust that has been built over decades. So we will always play it this way. But developments you will keep hearing, as and when we develop, you will see the progress that we are making on each of those fronts.
In the previous call, we talked about the bankruptcy of some of the peers in Europe, and we understood that the largest company was acquired by somebody. If you can throw some light on that, how are we seeing the situation? Is there any opportunity that we are seeing from the remaining two companies?
Yeah, so that some of that has already started flowing in. You saw some of the new wins. The other one, which is the 3rd asset which has been acquired by somebody, obviously we can't comment on that and how they will do in the future is up to them. Our conversations will be with the customers directly and whatever opportunities come, we will keep reporting, as and when we win. But overall, I don't think it is a material change in the opportunity set that Europe presents for us. I think it'll still be a fairly a good place to win a lot of business over the next 12 months or so.
My question is something that we had discussed, you know, a few quarters back, while in Europe the EV, you know, penetration continues to rise, I think part of the EV opportunity, I think you will agree, is also a Chinese OEM opportunity because the Chinese are gaining market share in Europe. So, while we're winning orders from the European OEMs and which is obviously, you know, great, any update d thoughts on how we approach the China opportunity, not just in China, but even outside of China, which is becoming bigger and, and more important for the Chinese OEMs themselves.
It's a good question, Amyn. It is a question that we frequently ask ourselves. The only way to grow will be for now, with the customer. So if you do know we supply to one large, Chinese EV customer. So we are in the parts that obviously they sell domestically, but also the ones they e xport. What is a constraint right now is that unless they move production entirely to either Europe or North America, they will continue to rely on the Chinese supply chain and that is much harder to get into. So let's see how it evolves, so if you go back into history and look at the 70s model when Japan was just exporting their cars, what is happening today with China has happened before. Japan did that the first time and then because of the geopolitical re asons, protectionist policies, they had to shift production to the countries in which they were selling. Only then did opportunities for local suppliers actually come about. So it will take a bit of time. So the surest ways to get in, in the China for China supply chain for the current model over time, as these guys set up in Europe or the US, then we will be competitive because of duty reasons. In the China for China supply chain, it is harder to do right now.
Any update on how is the tariff situation now because obviously there was a deal and then there was a Supreme Court decision and now all of this is happening. So, what is the latest on what is the tariff, if at all, and have things changed, improved, remained the same, you know, any, any update on that?
You know, this is a question a lot of people will not know the answer to. But Section 232, which covers a large part of what we export, continues to remain the same. The Supreme Court ruling did not have a bearing on Section 232 because that's under another National Emergency Act which the Supreme Court did not actually pass any judgment on. The remainder has obviously become easier, and the tariffs have become lower because the country's tariffs are kind of gone. But that again, if my answer, I mean, is the same I gave in Q1 of last year, which is tariffs are paid by importers and not by exporters. So, importers have to figure out what that tariff is, and if the Section 232 tariffs are 25% for everybody, which is what the case is. Then you are not worse off or better than before. As long as our pricing or tariffs are lesser than China, it is a good thing. Second, there is a 5 year, I think almost , concession given to OEMs with a certain percentage of domestic value addition in the US to claim back the tariff impacts. So you would be more or less covered within that. It is the end of the year and our revenue hasn't materially come down from the US at all, nor have margins. I know there were a couple of analysts who wrote that our EBITDA will drop from 25 % to 12.5%, etc. etc. on 8th April. But as most things hastily done are, it was a half-baked and uninformed analysis. It doesn't work that way. Things are usually binary decisions. They either happen or not. Now that the whole year is gone, you can see what the real impact is. The secondary impact that I alluded to one year back, that it will have an impact on demand. Because it is, after all, inflationary in nature, right? All tariffs are inflationary. Prices go up, demand will go down, and you can see the SAR that they talk about, full year car sale number is between, now 16 to 16.5 million; one million cars have been lost due to this inflationary impact. And that unfortunately, everybody who supplies to that market will suffer from it.
My first question is regarding the BEV commentary. You know, 3 -4 months back, we had seen major global OEMs taking huge write -downs on their global EV investments. and then, of course, in the last 2-3 months, we've seen, in a new, revival of this category. You as a supplier, you know, what are your mitigation strategies given that you know, even today, global OEMs are talking of monitoring the situation based on the West Asian crisis to really go all out and say that this is a sustained demand momentum coming back. So, you know, when the customers are not able to project long term trends, you as suppliers, how would you allocate capital to these businesses and mitigate either not underinvesting or overinvesting in this category, well, you know, going ahead.
So Jay, one fundamental, I would say, input is this that write-downs, which are balance sheet write -downs of prior investments, have really no bearing on suppliers. Because if you have invested something in R&D or Capex, and now you're taking a write-off, how will that impact the number of parts you have bought from us or not? Does it affect demand if a model is discontinued? Of course, it does. Last year, we saw the full impact of that, right? We lost 300 crore from one customer alone. And that can happen, but does it happen frequently? Not really. Second is, what is the level of abstraction you're at? So if you apply the same product you produce, you supply to multiple customers, you are far more de-risk if you do it across geographies also, your de -risking is even higher. But I, I don't even think, I mean, two quarters back when the pessimism was at the peak would be the right time to ask this question. Now Jay, the tide is shifting, very fast and in the opposite direction, I would say. I don't think there is much concern we have. But on your second question in capital allocation. As much as you can try to invest in fungible capex, that same capex can be used for producing parts for another customer. This is a problem that happens when lines or investments are so specific that they can only be used for one model of one carmaker. Those are the ones where capital allocation becomes very, very tricky. So if you put capacity, like we have, for example, for traction motors, we have a million electric motor capacity overall. More or less that with a little bit of tweaks, you can use it across customers. So as long as overall electrification continues to progress, that decision will bear fruit. And that is why one fungibility of Capex, second, diversification of customer and program base. These are the two things one can do as a supplier.
The first question is on, a product of, what we have is suspension motors. If you can talk about that, how is that progressing, with respect to specific, I think China launch was there and how big, you know, you're looking to cross -sell, let's say, in this reset, which you talked about in Europe or in any other areas, how big opportunity this can become to you. That's my first question. And second, on the Railway Business, how are we looking at growth next year, you know, if you can talk about that.
Sure. So, first question, I would let Sat answer, but my one -liner is suspension motor is going to be the fastest growing business by far. I mean, triple -digit growth is not really common. So it has also got the advantage of a small base, but it will be very, very good because the customer we supply to their model has had an amazing launch and the product, performance and the product acceptance is genuinely overwhelmingly good, but Sat over to you on suspension motors. Sat Mohan Gupta: Sure, Vivek. I mean, we launched the suspension motor last year and though, I mean, it was on, on one of the models of the customer during the year, the vehicle has done very well. And, so the customer has now launched their other premium model, and the volumes are go ing very good, and the product is perceived, both in China and the rest of the world, with a very good quality ratings and also with the performance of the motor and the complete system. So, the opportunity is high. I mean, we are looking at a very high volume, as Vivek said, I mean, 3 to 4 times growth compared to last year. The acceptance of the product, in China market as well as, it's being perceived in the European market also. So, our end customer is working with other OEMs in Europe, and it is wide acceptability in the automotive sector. Vivek Vikram Singh: Yeah, so Nitin, hard to say because it's so high that it's hard to put a number on it. It could be a very big material part of our revenue. I mean, this year, at the end of this year, it'll still be single digit. Next year, maybe it even touches double digits, that's, that's the amount of growth you can have in that product. But it depends a lot on where the next customer is, and the ability of our customer, Clear Motion , to win the next customer. And on railways, obviously, Amit will answer that question. Amit Mishra: Hi Nitin, you know, we don't give guidance on growth, for, say, year by year, so. I will look at more like the next 3 to 5 years where we see growth coming from railways. There are multiple levers. First is, even today there is more demand than what we are servicing. So first is by improving our own process improvement, working with the supply chain, we can do more than what we are doing. Second, there are gaps, white spaces, even in our existing products. So we talk about brakes, couplers, suspension, but even there, there are white spaces. We are not covering every subsegment and every part of these systems. So, we are working on them. We don't call them a new product when we talk about new products, but we are working on variants to cover new types of rolling stocks where we are not present today. I think that will be the second major driver. So in the next 3 years, I think these two, I think will be the major drivers when we're looking at 3 to 5 years. There are new products which are also, we are bringing them to the market. We are getting approval this quarter. We announced HVAC and electric panels. There are other products where we are developing and we believe those products will become significant drivers in 3 to 5 years. So for the next 5 years, I think these are what we have identified as growth opportunities. One, to improve supplies, improve capacities at our end. Second is, filling white space within brakes, couplers, and suspension. And then the new products, I think they will become significant drivers in 3 years' time. But overall, we are confident about g ood, healthy growth over the next 5 years in the railway business based on products which are already under development and not counting any other products that we may add in future.
Just a quick follow -up from my side. I think just continuing on the railways question that Nitin asked . Amit, can you quantify the market size of some of these new products that you mentioned, added in this quarter as well as the last quarter, I think electric control panel, HVAC, etc. Any idea on the market sizing for these products?
Yes, see, HVAC, and electric panels both are large segments or large markets. HVAC is about between 2 ,000 to 2,500 crore market size, and electric panel is also about 1 ,500 crore. So in the context of the size of our railway business, these are two large segments. But then this is covering all types of rolling stock. So both electric panels and HVAC have applications from locomotives, passenger coaches, train sets as well as in the metro. Today, we have made a start. We have entered these segments. In electric panels, it will take us 12 to 15 months to cover all types of rolling stock because our development is more advanced. In HVAC, it will take at least 3 years for us to cover all types of rolling stock, especially in the segments where we want to play, because the approval cycles are very long, field trials are much longer there. So, yeah, the market opportunity is very large, but it takes about 18 months to 3 years between two products to cover the entire range of rolling stocks. And that's why in the answer to the question that was asked by Nitin, I said, new products will become a meaningful driver from 3rd year onwards. In the next 2 years, there will be more operational improvement as well as our existing products where we are trying to fill some white spaces.
Just the second question, you know, is on the commodity impact that we saw in this quarter, about 80 basis points. Is it more to do with the lag in the pass through to the customer, and we should see this normalizing, or is you know, how do we think about it, or is it, you know, the, some of the commodities are elevated like energy costs, etc. have also gone up. Is that something that we absorb for now and, you know, we'll wait when it sort of normalizes. So what, how do we think about the commodity cost, going ahead?
Vivek Vikram Singh: Sure, but Gunjan, it's not 80 bps for a commodity. 80 bps is a commodity and product mix. And as you know, the traction motor has been the highest growth driver where the margins are lower. So my bet, I don't have a breakup. Rohit can answer better, but ma jority of the 80 bps would be product mix -related, not commodity-related. But Rohit. If you can answer last quarter, or what would it look like this year? Rohit Nanda: So, Gunjan, this 80 bps is actually almost half for the mix and half for the commodity prices, and, you're right, most of this would be, for the material price, and, that is a pass-through with a lag, so it is largely because of the lag effect. but you als o have to recognize that the commodity prices continue to trend up, so it's not as if, you know, this has stopped. So, if the prices stabilize this, I think, commodity price inflation, margin impact, and you also know there is a numerator denominator effect also wherein the percentage margin gets impacted. So to that extent, you know, historically, also, since you've also been tracking the company now for a fairly long time, you've seen that in a commodity inflationary cycle, the percentage margin tends to sort of take a dip, and absolute margin may not get impacted. So I think, until we have commodity price inflation, you will see this impact one way or the other.
On the traction motor, is there any change in the business pipeline you're seeing because of the whole, you know, the, the noise ar ound EV seeing more, you know, more favorable policy support from the government and in that sense, OEMs trying to build more around it. Is there any pipeline change that you're noticing in the traction motor? And how would you sort of, you know, talk about the growth in traction motors over the next 2 or 3 years? Like you said, suspension will be the fastest growth.
The traction motor will be the second fastest because it already has a decent base. It's almost 10% of our revenue now. The suspension motor is smaller, hence, it will have triple -digit growth rates. This will have high double -digit growth rates, actually, maybe, yeah, very high double -digit growth rates for some time. The reason is this, and Gunjan, I'll just like to replace one word, not the noise, the signal around electrification. So one is where we are already there on the programs, the volumes are going up. I would say slightly more than what we had assumed, on existing programs, and we are obviously seeing new inquiries, so it's both. Policy-wise, also, Gunjan, I think there is a growing concern in the government. As you know, our country, if you look at all industries, I'm not talking about automotive, it's about 80/20 that 80% is petrochemical based or oil and gas -based energy, and 20% alone is electrification. There is a very high need for electrification to increase from 20% to cover, and I'm talking across not just automotive. And I think you should see over the next 18 months, a lot more policy push to reduce our country's oil and gas exposure. This is also the reason the currency remains weak. So there is a very, very high realization of how this dependence is bad for us. And a lot of work should happen in the next 18 months from the policy side. The consumer demand side also, I expect that, as more and more people realize that the TCO in an inflated diesel and petrol price environment, the TCO is so much better for electric vehicles, especially if they are for any economic use, if it's used as an economic asset. So 3 wheelers, delivery, two -wheelers, electric LCVs, buses, I think the pace of electrification is going to go up significantly.
One more question is on the railways. How should we think about steady-state asset terms, margins, ROC versus your core EV business? And will this growth structurally improve or dilute overall returns?
It will improve returns because from a return perspective, they're very, very high return, businesses. It may be slightly diluted on margins, but return-wise, it will be much higher.
Have you tracked the recent decline in BYD sales following removal of EV purchase tax exemptions? Automakers that build their strategies around budget, PHEVs and BEVs seem to be hit hardest. Given that 70% of Sona's order book consists of BEVs and PHEVs, do you view this Shifting subsidy landscape as a structural risk.
Short answer, no, because most of these orders are already in geographies where there are little to no subsidies. US, Europe, India also, I think subsidies are almost on their way out almost. So, Yeah, not, not really, is the answer. I don't know. Rohit do you want to add, because I don't know what to say in this one. Actually, I think this is more if we had a huge exposure to China or one particular guy or something, but we don't, and I It isn't, I think, pertinent.
We have historically talked about 24 to 26% margins. So, would you like to give an update on that? Are we comfortable with that band?
No, I'm not. We had already said that it will be 23 to 25 % after the railway acquisition. So that is the band. 24 to 26% is the band prior when we, the core business. I think now it is 23 to 25%, and that, I think we can say we should be able to continue being in that band.