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Edited Transcript of RANEHOLDIN.NSE earnings conference call or presentation 9-Aug-19 9:30am GMT

Q1 2020 Rane Holdings Ltd Earnings Call

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Rane Holdings Ltd earnings conference call or presentation Friday, August 9, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lakshminarayan Ganesh

Rane Engine Valve Limited - Chairman & MD

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Conference Call Participants

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* Devansh Nigotia

Securities Investment Management Pvt Ltd - Research Analyst

* Manish Goyal

Enam Holdings Pvt. Ltd - Investment Analyst

* Shyam Sundar Sriram

Sundaram Asset Management Company Ltd. - Research Analyst

* Sunil Kothari

* Diwakar Pingle

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Presentation

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Diwakar Pingle, [1]

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So friends, welcome to the Q1 FY '20 Earnings Call of the Rane Group. To take you through the results and answer your questions today, we have the management team from Rane Group; Mr. L. Ganesh, the Chairman and Managing Director, Rane Holdings Limited; Mr. P. A. Padmanabhan, President, Finance and Group CFO; Mr. Siva Chandrasekaran, Executive Vice President of Secretarial and Legal Services; and Mr. J. Ananth, CFO of Rane Holdings Limited.

Please note that we have sent you the press release of each of the individual companies. And also, we have sent you the presentation link of these companies. In case, any of you have not received the presentation or the press releases, you could look at our website or even the BSE site of Rane, or you could write to us at Christensen and we'll be happy to send the detailed earnings presentation over to you.

Before we start, the usual safe harbor clause. I would like to say that everything that is said on the call that reflects any outlook for the future, or which can be construed as a forward-looking statement, must be viewed in conjunction with the risks and uncertainties that we face. These uncertainties and risks are included but not limited to what we mentioned in the prospectus and subsequently in annual reports, which you can find on our website.

With that said, I'll now hand over the call to Mr. Ganesh. Over to you, sir.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [2]

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Thank you, Diwakar. Good afternoon, ladies and gentlemen. Thank you for dialing in. I would like to welcome you to this teleconference. Harish was not able to join today since he had to go and attend a supplier conference of one of our important customers.

You would have seen the Q1 FY '20 performance highlights of the group companies posted on our website. Q1 FY '20 has been one of the most challenging quarters, I remember, in recent times for the industry and the group. As you all know, the automotive industry has gone through a very rough quarter across all the vehicle segments.

The group sales declined by 7%. Revenue from Indian OE customers actually dropped by 13%, which was to some extent compensated by a 17% positive growth in the revenue from international customers.

At the group level, we had a favorable performance with this industry in passenger cars, strong commercial vehicles and Two-wheelers. However, in utility vehicle, due to an end of the program and also higher drop in some sales models, we had a decline compared to the industry. Also in medium and heavy commercial vehicle, the drop in volumes was higher in the higher tonnage vehicles, and this affected and gave us a very unfavorable product mix, especially in Rane Madras.

The EBITDA at the group level dropped from 10.7% to 7.2%. Drop in volume was the main reason. Adverse material cost to some extent, of course, the higher employee costs and lower fixed cost absorption, also added to the problem and, therefore, the drop in EBITDA margin. The aggregate PBT declined to INR 21.8 crores, almost a 70% drop.

Turning to the company, Rane Madras stand-alone experienced a revenue decline of nearly 14.5%, sales to Indian OE customers dropped by 18% and sales to international customers dropped by 11%. The lower volume and unfavorable mix resulted in a drop in the EBITDA margin.

Rane Precision Die Cast U.S.A., we are still operating with low capacity utilization. Moreover, the equipment maintenance and some upgradation to prepare for some new programs also affected the quarter performance. The new businesses we have won will help increase sales from Q4 of the current year and going into 2020, '21.

Rane Engine Valves. The revenue was almost flat, marginally increased by 1%. Actually, the supplies to international customers helped offset the drop in Indian OE business, and therefore, it was a flat quarter. We continue to see improvement in operational performance there. There were some adverse ForEx movement, and of course, the employee cost increase, and this affected the profitability.

Operationally, our turnaround initiatives are on course, but market conditions affected both the top line and bottom line.

Rane Brake Lining experienced a 3.5% decline in revenue. Actually, the sales in the OE dropped by 9%. And the aftermarket was somewhat flat, a very nominal growth of 1%. Our favorable product mix offset higher employee cost and resulted in some EBITDA margin improvement.

Rane TRW had a 3.5% growth in revenue, supported by a favorable demand for occupant safety products from international customers, adverse product mix and provision towards royalty expense resulted in an EBITDA drop. Here, the steering gear division had a huge drop in volume because they mainly service the commercial vehicle industry, but the occupant safety somewhat made up for that.

Rane NSK, again, mainly dependent on past cars for the electric power steering and commercial vehicles for the manual column. The revenue declined by about 9%. EBITDA drop was a factor of mainly lower volume. And some incremental provision, again, for that warranty claim, which still continues. And we also had the additional fixed cost because of the new Gujarat plant without any increase in volume on the quarterly drop in volume.

On the whole, we are preparing for a tough year in 2019-'20. And we are pursuing cost reduction initiatives. We are reviewing the CapEx and decided to commit totally the very critical ones where we have orders on hand. Otherwise, we intend preserving cash flow, cutting CapEx and going on a major initiative to -- for cost reduction.

So with these few words, we will now open the conference for any questions that you might have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Devansh Nigotia from SIMPL.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [2]

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Sir, my question was -- first question was related to -- are we there on XL6 and S-Presso?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [3]

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Sorry? (inaudible)

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [4]

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Sir, are we there on XL6 and S-Presso, the models of Maruti?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [5]

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Okay. Are there any other questions you have?

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [6]

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Yes. So okay. So then I'll just go through all of them. Sir, like key raw material prices have actually moderated considerably in last 6 months, with commodity prices further moderating in July-August. So when you're looking at operating margins in our JVs and key subsidiaries, I mean, do we see that our end gains will be offset by the operating leverage from the volumes? And what's your view -- I mean, what measures are -- other measures, if you can elaborate, that will help our margin negate -- the negative volumes or the current state of domestic JV volumes? On Rane NSK, we see a similar performance for us, in this quarter versus -- when I look at the production numbers through the model that we saw. So what has really led to this outperforming? Which model is at the end of served life in UV? And is it phasing due to upcoming refreshed variant? How should we look at new models in FY 2021? Would -- I mean, so for -- so S-Presso is basically -- is it a product against Kwid that I'm really talking about, which is -- which you surely planned in -- for launch in September-October 2019? And sir, relating to provisions, how much provisions do we expect? Wouldn't this impact on future models awarded by Maruti to us?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [7]

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Okay. On Maruti, the new model, we are there with seatbelts. In fact that is our new entry into Maruti for seatbelts on new models. So we are present. And the other businesses, we are quoting for the new models. But I don't know really exactly which models we have won, but seatbelts, I remember, this particular model you mentioned.

In terms of raw material prices, you're right. There is some stability in most of the commodity prices and marginal decline in steel prices. So we will probably have the benefit of that for a quarter or so. But as you know, with the lag of one quarter, normally, customers expect us to pass it back to them. Like when there is an increase with a lag, they pass it to us. So we may be able to retain the benefit for about a quarter.

In terms of other costs, we normally have a mid-year outlook, sometime in September. But this year, based on the extraordinary circumstances in industry, we already kind of relooked at our costs and started this exercise, even in the second month, sometime in May. And we have asked the company to look at, line-by-line, each variable cost element, each fixed cost element, each CapEx item. And absolutely vital, essential and desirable kind of a classification. And we are working on cutting costs where ever possible to offset the volume drop.

The end of the life program is Ertiga. It's a refresh, you're right. And in terms of provision, while it has no impact on future models, the impact is, of course, most of the impact has been taken last year. And we think, maybe for a couple of more quarters, this will go on. We are unable to predict exactly, so we are (inaudible) we are providing for it. But hopefully, in the next 2 quarters, that batch production should settle down and this provisioning should stop somewhere during this year.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [8]

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Okay. And sir, on Rane...

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Operator [9]

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Sorry to interrupt. Would you like to come back in the queue?

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [10]

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Yes. Yes. I will come back.

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Operator [11]

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(Operator Instructions) We have next question from the line of Sunil Kothari from Unique Investment.

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Sunil Kothari, [12]

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Sir, I have 2 questions. One is regarding annual report of Rane Madras and general your statement sometimes back in the Business Times in some interview. And this seems to be very confident and positive about medium-term growth and sustainability of that. So some thoughts. What we are doing right? Or what is -- maybe -- is that confident about the -- is there positive confidence about in medium-term? And second is related to Rane Precision Die Cast U.S.A. from from quarter 4 onwards, they have a little bit of volume and better business. So should we expect EBITDA positive by quarter 4? These are the 2 questions.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [13]

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Okay. In terms of Rane Madras, the medium-term prospects. Okay. First, we have domestic sales, which, as you know, depends on the industry performance, plus some additional business we have won. Industry performance, of course, we all hope that things will start improving sometime later this year. But my guess is as good as yours. We have to wait and see what happens to the overall economy in the auto industry.

In terms of new business, it has been very encouraging. We are very well placed with new models with most of our customers. In fact, Tata Motors, almost all their new models start with us. Although, currently, they are also going through a slowdown. So in terms of new business and -- we are very well placed. In terms of organic growth, it will depend on when the auto industry turns around. We hope the earlier the better.

In terms of exports, we have been able to procure some good orders. We continue to get good orders from the U.S. and from some other regions. So that is very encouraging. So that is what we had also mentioned that medium-term Rane Madras is quite well positioned. In fact, even for aluminum die casting for the Indian division, we have got some good orders, which will start benefiting us from 2021. So the order books are very good, including the Die Cast division.

Rane Precision Die Cast, we have secured orders now, as I told you last time. Now those orders have been secured. Some, in fact, earlier than what we even expected. So we see visibility of taking this business to somewhere between $38 million to $40 million by '21-'22. So now it is for us to focus on operation. So top line is ensured. We have to focus on operational improvements. So what we have done now is we have sent a strong team from here on deputation for about 2 to 3 years, including a very senior person from here. And we are focusing on quality, delivery so that over time and the premium [freight] and downtime, et cetera, can be avoided. So those were -- have been dragging the bottom line there. So we are focusing on each of those items. We are spending a little extra on upkeep of days and maintenance, but that has been kind of put into our plan.

To answer your question, let's see the ramp-up because U.S. auto industry, we are also seeing some kind of a -- signs of slowdown. They're not as significant as India, but some time. So I'm not able to predict when it will be EBITDA positive. But as we see, we are evaluating for the decreased turnover, if any CapEx is required, how to kind of fund it and then make sure that by '21-'22, at least, this business is profitable. So that is our plan on the RPDC.

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Operator [14]

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We have next question from the line of [HR Gala] from [Finvest] Advisors.

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Unidentified Analyst, [15]

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Mr. Ganesh, just broadly couple of things I wanted to know. One is, what have been the real causes of this automotive slowdown when, on one hand, we say that the economy is growing at around 6.5% to 7%? So based on your interaction with the domestic OEM and maybe your dealers, et cetera, in aftermarket, what business do you get, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [16]

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Okay. There are several reasons being talked about in our interaction with customers, even our bankers, et cetera. Some of the reasons being talked about, of course, vary from segment to segment. If you take farm tractors and two-wheelers, generally, the rural sector seems to be having a problem in terms of cash flow, in terms of credit availability and generally tightening of norms by banks. So the farm tractors and two-wheelers, definitely, significant part seems to be a slowdown in the rural part of India.

In terms of commercial vehicles, one was the overloading which the government legitimized last year. Now that has automatically increased the capacity of the existing fleet in India by about 15%. Now, the volume growth of goods transported has not grown to that extent. So there seems to be a surplus capacity in the (inaudible) and until that surplus capacity is absorbed industry fields, commercial vehicles do not come back.

Also, there is some confusion on the BS4 and BS6. So the transition -- and there is an expectation from customers that probably prices of BS4 will go down further towards the end of the year, because customers have the upper hand here, because companies cannot sell these models after 1 April, 2020. So there is an expectation, there is a capacity overload. So I think it's a combination of these reasons is what we hear.

In terms of car, I think, it is again the NBFCs and banks seem to have tightened lending, and what we understand is they are restricting their lending to to triple A kind of customer. So earlier, it was really lax and free in their lending. And now they have tightened it so much, only the triple A kind of individuals are getting loans. Generally the sentiment seems to be really poor. People are saying after the budget has improved. But at least, so far, sentiment seem to be very, very negative. I don't know the reason for that. But this is what everybody in the industry is talking about.

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Unidentified Analyst, [17]

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Okay. And then my second question is, now this WABCO is being taken over by ZF Group, which has also taken over TRW. So could there be any structural change in our JV?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [18]

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It's too early to say because they -- while database (inaudible) has been for WABCO, WABCO has -- as you know, is mainly a breaking company where we don't have a conflict of interest. They have a very small steering facility, which is a very, very small player. But to be honest, we don't know the outcome of this because our regulatory approvals in several countries, they have to get. So this is still is a, as we see it, a 1-year process. So at the end of it, we'll have to see. But as I see, there is no impact on JV as I see today.

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Unidentified Analyst, [19]

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Okay. Sir, just last question from my side. What will be the CapEx now you will be aiming at in FY '20? Earlier, you had guided for something like INR 240 crores, INR 250 crores?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [20]

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Certainly, we were nowhere near that. To give you an idea, as against INR 120 crores plan in Q1, we have hardly spent about INR 45 crores. So I think if market continues like this, it'll be well below that, probably less than 50%.

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Operator [21]

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We have next question from the line of Mahesh Bendre from Karvy Institutional Equity.

We have next question from the line of Shyam Sriram from Sundaram Mutual Fund.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [22]

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Sir, pardon me, if you have covered this in the opening remarks. Sir, TRW the margin seems to have come up very sharply. You have mentioned a couple of reasons there. Can you just elaborate on that? And my apologies if you had covered it in the opening remarks, I joined a bit late, sir.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [23]

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Okay. Rane TRW, as you know, has 2 divisions: One is the Steering Gear division, the other is Occupant Safety division. The Steering Gear division, generally, the margins are much higher. The drop in volume was in the steering gear because of the commercial vehicle. As you know, the hydraulic steering we make there mainly goes into commercial vehicle. And even between the commercial vehicle, the medium and heavy commercial vehicle dropped more significantly. And there, the value add for us is much more. So that is the reason for the margin drop, one reason.

The other is in the Occupant Safety division. The royalty payments, as per our agreement, was to start at a particular point in the whole process. And that point has come now. It has started affecting from last year, 1 April. But since the agreement signing and the paperwork was taking time, and that was completed only in May this year, we have provided for the entire last year also in this first quarter. So these are the 2 reasons for the drop in margin. Volume drop and this provision for royalty and technology (inaudible).

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [24]

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Right. Sir, how much would be these royalty payment, sir, as a percentage of sales? Or if you can quantify that number, that will be helpful?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [25]

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I think it is around between -- depending on the product and the technology, somewhere between 1% and 2% on sales.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [26]

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1% and 2% of the Occupant Safety sales?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [27]

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Depending on the model, yes, Occupant Safety. Depending on the particular application, varying between 1% and 2%.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [28]

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And the amount in crores will be, sir? Just for this quarter, what we have provided for last year, as...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [29]

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Roughly about INR 3 crores. (inaudible)

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [30]

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Sir, how much will be the Occupant Safety revenues vis-à-vis Steering, if you can please help with that, this quarter? And how it was the last year? If you can please help with that?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [31]

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Yes. One minute. So Q1 this year, it is about --

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Unidentified Company Representative, [32]

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INR [170] crores.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [33]

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Total is about INR 170 crores. Out of it, [fee base] is about INR 96 crores, and the impact is about INR 72 crores, roughly. So about 57% fee base and about 42%, I think -- 43% airbags. They are almost equal now [getting there].

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [34]

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Okay. Okay. Understood, sir. Understood. So this change in mix is what has adversely impacted the margins that you are seeing?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [35]

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To some extent. Although, the change in mix has also helped and that its -- airbag is mostly exported. So we get slightly better realization on the export business. So it has both some benefit, but -- royalty, I don't think the outflow is much impacted because of that.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [36]

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Okay. And the same Occupant Safety number for last year, same quarter, sir, if you can help with that?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [37]

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Last year, same quarter was almost the same in terms of percentage for 59% and 41%, approximately, out of the total of INR 135 crores. So this growth has been about 25% there, in both together.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [38]

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Okay. Okay. Understood, sir. Understood. Understood. Sir, and on the NSK side of -- I mean, I think, this was touched earlier. The growth -- I mean, we have done better than the underlying production, and that is because of some start of this new model, sir, that you mentioned?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [39]

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Well, I didn't understand. What do you mean better than the underlying production meaning? You mean the...

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [40]

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Sir, Maruti...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [41]

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You mean better (inaudible) industry?

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [42]

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Yes, sir. And Maruti production as well. Is that -- because of any new...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [43]

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Purely product mix. Purely product mix. I think, some benefit out of the product mix. But this is a dynamic thing. So whether it will help, continue to help, we don't know. There are also kind of model sales has not been consistent, it's going up and down in Maruti, also if you look at in details.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [44]

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Okay. Okay. Sir, and in terms of NSK margins...

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Operator [45]

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(inaudible) Would you like to come back in the queue? Please come back in the...

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [46]

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Sir, just on the...

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Operator [47]

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Please come back in the queue for the questions. (Operator Instructions) We have the next question from the line of Devansh Nigotia from SIMPL.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [48]

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Sir, my question was mainly relating to Rane TRW. Sir, just like the previous participant, I just wanted to reclarify it once. Is there any additional provision for royalty that we have made this quarter?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [49]

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Yes. I explained that the (inaudible) Occupant Safety business. Since we started airbags recently, the first 2 years or something was kind of a holiday period, if you will, and royalty was supposed to start after the first couple of years, if I'm not mistaken. So that point has come from 1 April '18. But since the agreement itself was completed in May, we have provided for entire last year plus the first quarter of this year in this quarter.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [50]

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Sir, can you just quantify the amount and elaborate on the range?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [51]

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About INR 10 crores last year and about INR 3 crores for quarter 1.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [52]

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INR 10 crores for last year and INR 3 crores...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [53]

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Yes, INR 3 crores.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [54]

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Okay. For this current quarter. Okay. Okay. Okay. And sir, in Rane TRW, bulk of export orders reflected in the current quarter? As in are we at the peak in terms of export sales run rate or, I mean...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [55]

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It was still increasing, fortunately for us. We have even got some more new orders for export. So export is going to be -- and we have started shipping back some airbag components and [started] assemblies back to [-- the rest] in Europe, just started. So export will continue to play a significant part of the growth of this division.

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Devansh Nigotia, Securities Investment Management Pvt Ltd - Research Analyst [56]

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Okay. Okay. And any update on domestic Occupant Safety? I mean Renault business, has it commenced or...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [57]

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So Maruti has -- in total, we've got one new business, which is the first major business for us, which is going to start. We're just in the process of starting SOP for the new model. Otherwise, domestic, we continue to get some orders of Mahindra, Renault, et cetera. Nothing major, we continue to win some programs, but not -- nothing is going to be like a big impact one-off kind of orders.

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Operator [58]

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We have next question from the line of [Divya Shah] for (inaudible) Equities.

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Unidentified Analyst, [59]

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Sir, my question is regarding Rane Precision Die Cast. Since we are making much efforts to turn around this company from last 2 years, and as per your annual report, you have mentioned that challenging 2 years ahead of us. So sir, my real worry is about -- is there management concern about how much maximum time you want to spend on this? And how much maximum money you are going to spend till you see the turnaround?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [60]

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Okay. So it's very difficult to quantify this, as you know. But what -- as I have been telling all of you consistently, there were 2 problems in this business: order books and operational problems. So the order book part in the last 6 months has been resolved. So from the current level of about $25 million or so. We see no orders to take the business up to $38 million to $40 million by '21-'22. The orders are on hand. So that part is just behind us. Now we have to improve the operations, where we had a lot of breakdowns in equipment leading to overtime, leading to premium freight, et cetera, and some rejections being over our plan. So the focus is now on that we have sent a very senior operations person from here. We are sending another 3 more managers from India. So the next 12 months is going to be a focus on operational improvements. With these new orders and top line, and with these improvements, we hope that we'll become profitable by '21-'22. Some more investments, of course, for the -- one of the new orders and machining capacity had to be put in. We are evaluating those kind of investments.

And while I can't give you how much number, but we see some positive light at the end of the tunnel. And at this stage, we are in a position where we have to give this as a shot. It's not a situation where you can take a call today. So as I see, we are committed to this business for the next 2 years. And hopefully, show you some good results at the end of 2 years.

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Unidentified Analyst, [61]

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But sir, can you assure us that March '20, the loss of Precision Die Cast will be the less than March '19?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [62]

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I cannot assure you, but we are working towards that and the trend is good. So already, some operational improvements has been done. Premium freights have been drastically reduced. Overtime is coming down, rejections are coming down. So the trend is good. But volume, U.S., as I said earlier to one of your colleagues, volume in the U.S. is something which we can not guarantee. So I only hope that as we see these improvements, volume doesn't go down. But otherwise, yes, we see that it should be some improvement over '19?

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Unidentified Analyst, [63]

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And sir, if your management has any Plan B suppose -- if anything doesn't go as per your plan? Do you have any time limit or money limit that by this time, we will withdraw? Or we will -- I hope this (inaudible)?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [64]

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As you know, it's a very difficult thing. All I can say is, if we go ahead in these investments and machining capacity, et cetera, we are committed to this business, at least, for the next 2 years. Because we have customer contracts, et cetera. So let us see. I mean -- but I would like to assure you that -- 2 things: One is, we are constantly monitoring, reviewing, putting lot of effort to turn around this business. Because if we can do that in the long term, then this will be a very good strategic move for the group. And second thing is we are very aware that this should not affect the basic Rane Madras Indian operations. So we are looking at the finances. We're looking at the requirements of funds, et cetera, very closely.

The basic business of steering in Rane Madras is never affected by fund requirements of Rane RPDC.

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Operator [65]

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You're next question from the line of Manish Goyal from Enam Holdings.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [66]

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Sorry, I'm carrying forward for -- on Rane Precision. What we understand is that earlier the breakeven point was between $30 million to $32 million. So does it continue? Or what is the status on that? Has the fixed cost base increased in the last 2 years?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [67]

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Any other questions you have, which I (inaudible) and answer it.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [68]

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So yes, and follow-up on this that -- so when we say $38 million to $40 million order size, is this long-term contracts like ideally, is it for 3 to 5 years? Or is it based on particular car programs? If you can highlight on that? And my third question is on Rane Madras. You made a positive statement on exports, medium-term looks good. So what are the size of these orders? And from India revenues, what kind of export revenue share we can expect to grow in next 3 to 5 years?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [69]

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So in terms of -- just give me 1 minute, I'm just checking the internal -- [23% India].

So in terms of RPDC, the fixed cost is pretty much in place because it's a very lean operation and the equipment is depreciated. We are adding -- we may be adding some machining capacity, but we hope that, that may not significantly increase the cost of depreciation. Interest will go up marginally because we may have a bottom for this CapEx. Otherwise, people cost -- it's a very lean operation, and we have done some reorganization. So although sending 3, 4 people from here, we have been able to save some cost in the U.S. Therefore, overall, the salary cost will not go up. So fixed cost is not a major challenge there.

In terms of long contracts, yes, all these contracts are between 5 to 7 years in tenure. So that's the good thing. I mean, the only thing is we hope, as you know, the U.S. market should not start falling and hopefully, these models should do well. These are 2 things which are not entirely within our control, you know that. But subject to that, the contracts are long-term. So we've got some good contract. And we are working on 1 or 2 more, but we are evaluating and revaluating the capacity, et cetera, so that we don't overcommit. Now the order book seem to be -- and the inquiry seem to be increasing. But we want to do a good job on this rather than overcommit. So we're very carefully evaluating the capacity.

In terms of exports, Rane Madras, from our existing customers, we've got some good orders. We've been trying to diversify our exports from just steering gear, rack and pinion to also ball joints, which is more attractive for us in terms of sales to capital and contribution, et cetera. So we have won a recent order from our existing customer in North America. And probably make another order in China very shortly for a similar product. So from the existing customers and some new inquiries, exports are going very well. So currently, steering and Die Cast from India, about 23% of revenue is export. So it will -- if the Indian market revise and grow, I think, we'll in the same region, maybe 25%, 26% exports. I mean, this is subject to Indian market coming back to normalcy. I see this 25%, 26% as the share of exports.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [70]

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And on Rane Precision, you mentioned that on capacity, like what is the current capacity? Or how much max we can do per annum from the current infrastructure, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [71]

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So that's what (inaudible) -- when we took over, we did utilities, et cetera. We feel that we can go up to about $38 million, $39 million. So we are reevaluating this and whether we can push it up with some efficiency, et cetera. So we are doing this exercise. But the original assessment was up to about $38 million, $39 million, with some variations on product mix, we can -- in that ballpark figure is the capacity we have estimated.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [72]

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Sir, can you also highlight on outlook for Rane Break and Rane Engine Valves, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [73]

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Both -- Rane Breaks, we have been fortunate that we've got some good product mix. And aftermarket, we have been able to hold to the market, despite the drop in other companies. Outlook, very much it will depend on the Indian performance, industry performance. But then, as you know, export is hardly 5%. So I think it will entirely depend on Indian (inaudible) car business. So that's where Rane Breaks, and Rane Engine Valve, the exporters done well in quarter 1, and we continue to see schedules from international customers for the next couple of quarters being good. So domestic is what is pulling it down. Hopefully, and including two-wheelers for the first time, it is down for us. So we'll have to wait and see how this revives in India.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [74]

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But, sir, like when can we expect PBT breakeven in Rane Engine Valve, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [75]

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So, Rane Engine Valves, as I told you last time also, at that time, it's an 18 to 24 months is when we thought we'll turn around and make it profitable. We still are holding on to that. Only thing the setback is, if the volume doesn't grow. See, it's a high value-add business. So the fixed cost percentage is high. And therefore, it is a very volume-sensitive business. Unfortunately, quarter 1, we were expecting to grow by about 10%. On the contrary, it has been kind of a flat year, so hardly 1% growth. So that is affecting their turnaround. But in terms of operational efficiency, there is continuous improvement; quality, overtime -- no over time, no premium freight. All that has been brought under control. So their entire health now depends on -- of course, some more improvements we're working on productivity this year, which can improve, but it's mostly volume dependent.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [76]

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Okay. And last question on Rane NSK. So like largely dependent on Maruti. So in terms of new businesses, how are you seeing the outlook, sir? And as well as even Honda, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [77]

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New businesses, we are okay. I mean, we -- as we keep winning one program, there are 2, 3 ARPUs, we win 1 or 2. So new business, we continue to build. But Maruti's performance, I think, Maruti, you would have seen their statements also, they're also going through a lot of stress. And their focus seems to be on clearing inventory now. I mean, my talk to them internally, they say, okay. We are hoping festive season comes, there will be some improvement. But this is, again, the general expectation of the industry. I don't know more than that, honestly.

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Operator [78]

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We have our next question from the line of [Anirudh Agarwal] from AAA Investments.

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Unidentified Analyst, [79]

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Sir, my first question is actually on what the customers, let's say, have we've entered into contracts in the Precision Die Casting business?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [80]

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Okay. Rane Precision Die Cast is basically supplying to Tier 1 customers in the U.S., which is ZF,JTEKT, Nexteer, Delphi -- old Delphi, and also (inaudible) and LG Electronics, a Korean company. So all the new orders are from same customers. There's no new customer added. These are the customers from whom we have won these contracts.

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Unidentified Analyst, [81]

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Right, sir. And since you are speaking that official improvement are now being seen in the Precision Die Casting business, so even though our revenues were pretty much flat year-on-year although costing have gone up since last year. So any particular reason for the same?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [82]

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Yes. No. As we told you, the volume efficacy days, salaries and wages also its basically fixed cost. So it's a volume-dependent business. And the volumes have been much lower. So capacity utilization is much lower. So in terms of operational improvements, things like quality, delivery, those things have improved. So we're trying to reduce overtime, that has worked. But unless the volume improves, you won't see the benefit of that at the bottom line. And that, hopefully, will start happening from Q4. We are preparing ourselves ramping up for some of the new orders. Some of them will kick in from Q4. So hopefully, by the end of this year, some of these improvements will flow into the bottom line.

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Unidentified Analyst, [83]

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Right, sir. So what kind of top line do we expect in the Precision Die Casting business in FY '20?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [84]

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About $30 million is what we are expecting, roughly is what our plan.

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Unidentified Analyst, [85]

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So then it will be fair to assume that the losses this year would be greater than last year, right? Since the top line would not be growing and (inaudible) assuming there would be some inflation in terms of cost. So the losses that we made last year, it could go up. Is that the way to read this?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [86]

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Well, in terms of operational improvements, we are trying, as I said earlier, we are trying to offset some of those costs, which we incurred last year on freight, et cetera, we are trying to efficiently not to incur. So let's see. We are hoping a slightly better performance this year, and let's see at the end of the year.

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Operator [87]

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We have our next question from the line of [HR Gala] from [Finvest] Advisors.

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Unidentified Analyst, [88]

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Sir, just one clarification. This royalty provision that we have made in TRW. You said it is INR 33 crores -- INR 3 crores for current quarter. And how much was for FY '19? Was it INR 10 crores?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [89]

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Yes. Yes.

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Unidentified Analyst, [90]

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Okay. So now probably every quarter, we will have INR 3 crores type of provision?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [91]

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Approximately. Depending on the product mix, yes.

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Unidentified Analyst, [92]

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Yes. But otherwise, it will continue like that?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [93]

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Yes.

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Unidentified Analyst, [94]

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Okay. Sir, my other question is, now you know lot of things are stated about the electrical vehicles. And I think the government is bent across despite the objects that has taken by all industry champions. So how are we preparing in our different companies to meet these challenge? May not be now, but maybe after 3, 4, 5 years?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [95]

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Okay. Well, in terms of electric vehicle, all the businesses Rane Group except Engine Valves, still applicable to electric vehicle. And to give you some examples, Rane Madras, they already started supplying to some electric vehicle. They have been, in the last 1 year, supplying (inaudible) steering to GM in U.S., which goes to an electric vehicle. We have won some new businesses for electric vehicle. So Rane Madras steering already goes into electric vehicles, there is not an issue.

Die Casting, aluminum casting, we are supplying to some electric vehicle. In fact, we have also started supplying some two-wheelers some aluminum components for electrical. Of course, in every [nation's stage], as you know. So Rane Break Lining, the friction material, there is not much of change. Some formulation change. So the product still remains intact. And Rane NSK, EPS, et cetera, remains the same, seatbelt, airbag. So the only challenge will be in Engine Valves where we are addressing this issue. Maybe 5 years down the line, we will not see this kind of growth, et cetera. So how do we tackle that is something which is engaging the attention of the Board and the management there. Only one company will have a challenge.

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Unidentified Analyst, [96]

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Yes. Now sir, last question about the capital expenditure. You said that maybe about half of what you had planned INR 250 crores. Company-wide, sir, can you give how much will be the minimum amount that we will be spending?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [97]

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It's very difficult to say. As I said, the daily basis companies are watching. So we will (inaudible) whatever is absolutely essential. To give you an idea, I said, only INR 45 crores we have committed this first quarter and that was really INR (inaudible) crores. So it only depends on how the market [revives]. We will -- so very minimum. That's all I can say.

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Unidentified Analyst, [98]

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Okay. But sir, in Precision Casting, you said that you are going ahead with some CapEx plans. So how much would that be?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [99]

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We have not estimated that. We were just working with the planning and the order books, just on product mix, et cetera, they are evaluating. So the next 2 to 3 months, we will know. This is for an order, which will start only sometime in '20 -- third quarter of '20. So we still have a lot of time for that period. We've just started evaluating that.

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Unidentified Analyst, [100]

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Okay, sir. And last question. Sir, how much is our gross debt as of 30th June?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [101]

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As a Group, I think, its around INR 590 crores, about INR 590 crores.

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Unidentified Analyst, [102]

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This is including short-term and long-term, both?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [103]

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Yes, including. Yes.

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Operator [104]

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We have the last question from the line of Shyam Sriram from Sundaram Mutual Fund.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [105]

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Sir, you mentioned, we have won a lot of new models from Tata Motors. This is on the passenger vehicle side from Rane Madras? And these are manual gears, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [106]

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Yes. This is manual -- mechanical rack and pinion, which goes through the electric power steering. That's right.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [107]

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Okay. Okay. Understood, sir. And sir, you mentioned on the exports, which is doing very well on from a TRW perspective. Sir, how much are the exports this quarter? Can you help us with that?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [108]

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Yes. Export, as I said, is about 57% of revenue, I think, is export. Sorry, just 1 minute. I'll...

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Unidentified Company Representative, [109]

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INR 100 crores.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [110]

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60%. 60% is export, correct. Yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [111]

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60% of the...

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [112]

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Of the total sales of the division, 40% is domestic.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [113]

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Okay. Understood, sir. Okay. Understood, sir. Sir, and just on one more thing. In Rane Break Lining, the two-wheeler revenue has actually grown. I mean, while the per (inaudible) per contribution to Brake Linings is pretty -- is still smaller, but the two-wheeler segment has grown. This is because of the ABS supply that we have started, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [114]

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That's right. That's right.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [115]

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Yes. Okay. Okay. Okay. And sir, broadly, from an aftermarket perspective, because Rane Break aftermarket is a very key segment. Are we -- and on the aftermarket, even in other divisions, are we seeing any slowdown or some liquidity challenges from dealers that is limiting their offtake?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [116]

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Yes. Yes. There is a slowdown and people are kind of delaying repair work, I think. And payments are challenges for sure to small dealers. So whether we are dealing with direct dealers, they're being very cautious. So even if sales suffers a bit, that's a risk which we don't want to take. So yes, there are challenges in the aftermarket, yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [117]

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Okay. Sir, one last question, if I may squeeze, sir. You did talk about cost initiatives that we are taking. If you can just highlight any couple of margin levers that we may have? I mean, because the industry is what it is. And where can we cut costs? If you can just give some examples or any thoughts on that, sir?

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [118]

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No. I mean, it's very difficult to articulate in an environment like this. But the -- every line item, I can sort of tell you, almost like looking at through the tiny ledger and looking at every line. So that is what each company is doing now. So whether variable costs or fixed costs, they're not assuming anything is fixed. Look at every line item and see what can we see. Whether it be on [bought outs], whether it be make -- reducing shift working to reduce the fixed running factories, running cost, fixed cost, of course, travel. So every line item we are addressing.

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Operator [119]

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Thank you. Ladies and gentlemen, that was last question. I now hand the conference over to the management for closing comments. Over to you.

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Lakshminarayan Ganesh, Rane Engine Valve Limited - Chairman & MD [120]

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Thank you very much. Thank you.