Schaeffler India Limited (505790) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the results call for Schaeffler India. Today, we have with us Mr. Harsha Kadam, CEO, Schaeffler India; and Mr. Satish Patel, Director, Finance and CFO, Schaeffler India. I now hand over the call to Mr. Kadam, who will take you through a short presentation to our results. Over to you, Mr. Kadam.

Thank you, Vijay. Thank you. A warm welcome to all of you in the call to this second quarter presentation. I would like to take you through a presentation. I'm sure all of you would be referring to the slides. I would like to start my presentation by moving to Slide #2, title weathering a storm. And I'm sure most of you on the call would relate to the situation we all have been going through with the current pandemic, and Schaeffler India was no exception to the situation that all of us together we are in. It is like the lighthouse, which we have to stand. We have responsibility to all our stakeholders. And in spite of the storm, as they say, it's only the tough get going when the going gets tough. So having said that, since the onset of the COVID-19, the full impact of the COVID-19 was felt to its fullest extent in the second quarter of this year, starting April 1. As you all know, the entire country was already in a lockdown mode since the 23rd of March. And having said that, April was the month which was total lockdown situation, and the maximum impact of this entire lockdown on the performance of the organization is reflected in this quarter. I would like to move on to share with you some information about the market, and then we will move into the second quarter and the first half of the year performance. So I'm moving on to Slide #4, which actually starts with -- I'm sorry, just a second. Yes. Let me start with Slide #4. And the Slide #4, what you see is some of the measures that we had to take during the COVID lockdown situation. I refer to the table to the left side, what you see. And what you see gives a clear explanation of the impact on our operations. If one were to look at the first quarter Q1, the column Q1 and as you can see, out of the 69 effective days, only of productive days we had for the first quarter, we lost 8 productive days during the quarter. And this 8 days of loss was in the month of March, since the lockdown began. However, once you move into the second quarter, as you can see, for the month of April, while we had 26 planned days of business and production, you can see the effective days is 0, which means since it was a total lockdown, and the entire business scenario came to a halt. Our customer lines were stopped and hence, we -- the entire month of April was a washout with 26 lost days of productivity. Coming into May, while we have planned 26 days, and the lockdown was relaxed towards the end of May, as you all know. And hence, as you can see, we had only identified 9 effective days of business and production. And effectively, we lost 17 days in the month of May as well. Having said that, we started off in the month of May, around the 25th of May, the first of our plants started to operate. And since the lockdown was not opened in a uniform manner across the country, depending on the COVID situation and the intensity and the density of the cases, different states and different cities started off at different dates altogether. Hence, you will find there is a spillover effect when it comes to the number of days lost, as you see the spillover into June as well. So moving into June, while we had planned 26 days of productive and -- productive days, effectively, we were able to deliver only 17 out of the 26 days, resulting in 9 days of loss because we started off the plants towards the end. And some of our customers were also not yet ready. Customers too had challenges, and the businesses were starting off in a very staggered manner. So if one were to look at the summation for the second quarter out of the 78 planned days, where we lost 52 days out of the 78 days, totaling 67% of the productive days was lost. So it was -- hence, I'd say, I relate and go back to the earlier picture, but Q2 was the quarter in which the maximum impact to the business was felt. While we did -- while we were in a lockdown, of course, we still had the challenge to make sure all our employees stay motivated. And wherever possible, some customers, the essential service customers were still operational, and those customers did get in touch with us to help them with their needs on the services front. So some of our salespeople were still active, and we had the primary responsibility to take care of the health and safety of our employees. And also as the plants move into a restart mode, we had the primary responsibility to take care that we put in comprehensive safety protocols to ensure that our employees resume working in a very safe and confident manner. Now having said that, we put in a lot of actions in place in each of our plants and each of our warehouses and each of our branch offices. Moving forward, I move to the next slide, I'm on Slide #5. This is just to share with you and give you a flavor of some of the actions that we have put. This pandemic has redefined the way we operate our plants as well, and we have seen the maximum amount of challenges in our plants. We have to institute temperature checking every day at the gate, and we are now wanting to increase intensity and the frequency of the checks now. We have also introduced pulse oximeter check once a week for all our employees, and there's a safety briefing that happens every bit before the start of each of the shifts. And of course, we also instituted a practice of having -- taking the pledge so that we all remain safe, and we follow all the social distancing norms and also the hygiene -- best hygiene practices. Even within the canteens, we have made sure the discipline is kept when it comes to social distancing as well as to provide the necessary infrastructure to make sure that we minimize or eliminate any chances of spread, so to say. Even within the offices, we have made sure, very strictly, we follow and comply with this. We have put in some system to make sure that if there is a risk of spread, we minimize it to a very small groups. So we have a cluster system which works very well, and we have been able to trace the movement of the clusters. So we're putting a lot of practices, not to mention the sanitization of the entire shop floor at regular intervals, what we carry out. I move to the next slide, and I would like to touch a little bit upon the economy. As you have seen -- I'm on Slide 7, and what you see is a gradual decline in the GDP of the country quarter-on-quarter. And I guess the Q2 numbers are still not been officially declared, which, I guess, predominantly is going to be sub 0 levels, surely. With this decline, the slowdown, as you see, surely that had its impact on the index of industrial production, which is clearly evident. And the situation in the second quarter got worsened, as you can see all the red bars. And the same is the case with the core industry growth as the productive days were impacted, so the entire economy was impacted, and you see negative numbers coming in here. The good thing was the inflation still continue to remain, although it is pretty high levels. It's not at the level of pre-COVID, but what you see is at least it is stable at 6%, so to say. The government on its part, as you all know, has been trying to do and stimulate a lot, stimulate the economy in its own way. What would the pumping in of almost INR 20 trillion in various categories and sectors, MSMEs and the liquidity injections into NBFCs. Well, we have seen the responses from some of the sectors post-recovery, but I guess we will have to wait and watch to see how this is going to take off going forward. And in spite of the RBI trying to also chip in to help alleviate the situation that we all are in today. I move to the next slide, which gives a little more information about each of the sectors, and I would like to start with the industrial sectors. And what you see are the 4 graphs, the first one being on the cement production in the country. As you can see, for the month of April, due to less days of production and the total lockdown, the production levels have been very, very minimal at 4 million tonnes. Whereas May, once the situation started to relax, you can see the numbers picking up from the production point of view with 22 million tonnes of cement produced in the country in the month of May. The same is the case with steel. I move to the graph on the right, where you see a big improvement in terms of the productivity levels and million tonnes of steel. Yet, the numbers are still lower when compared to the previous year, obviously because we still have to see strong recovery. Hence, you'll see that the cement and the steel, both are in the levels of about 25% to 30% lower than the previous year. Mining is one sector, which has been consistently doing pretty well. But again, even that was affected partially though. Unlike some of the sectors, which had a total shutdown, the mining sector continued to operate in pockets. And as you can see, they did still were at half the levels at which they were in the previous months. Power generation dipped a bit, but again, this is back on track, and it is picking up, and it's continuing to show the level. So hence, you will see, both mining and power generation in the country still continues to be at a fairly -- at certain lower level, but definitely not as bad as the cement and the steel sectors, what you see. I would like to now move to the automotive sector, which is on the next slide. And here, the picture is very different than what you see on the industrial sector. Let me start with the two-wheelers, and you will see the one of the hardest hit sectors in the automotive space is the two-wheeler. And hence, you will see the lowest numbers of production while April was a total washout month for the sector in terms of production, May just about 310,000. And in June, inching closer to the 1 million mark, as you can see here. All in all, it was a sector which was pretty badly hit. And as you can see, the year-on-year, it's 50% down. And I -- it is stated that 2020 would be the lowest numbers of production of two-wheelers in the entire country in the last 10.5 years, at least. Commercial vehicles, well, this, as you all know, has been always at a lower level since a long time. And the full impact of that, you can see in the months of April and May. And this sector, too, has been down almost 60% when compared to last year. Passenger vehicles, the same you will see in the months of April and May. While April was a total washout. May, some recoveries with some customers did happen. But some of the big customers, we still had challenges to get start off businesses. And hence, that had a direct impact on the demand on our business as well. Tractors, a strong rebound in the tractor sector. And as you can see, we are down 23% when compared to last year. But however, as you can see, the month of June has been a phenomenally strong month. Recovery has been very good with 81,500 tractors produced for the month of June alone, which has been the highest in the last 6 months this year. So on this backdrop of the sector performances, how did we do? And that's what I would like to step into Slide #11, and what you see here is our total revenue. As you can see, as against the first quarter, sales revenue of INR 928 crores, in the second quarter due to the 52 days of lockdown, which was 70 -- 67% of our productive days lost. We posted INR 438.9 crores of turnover, which predominantly came between the months of May and June. So with that, the second quarter performance, when you compare it with the previous quarter, just with the previous quarter, that is the first quarter of this year, we are down 52.7%. And when you compare that with the same quarter of last year, we are down 61%. So the market volatility certainly and the demand slowdown certainly did hit us on our sales revenue in the first quarter. And with respect to the sales mix, when the business began to recover, we did see some faster recoveries in some of the industrial sectors. Hence, you see a demographic shift that has happened. Normally, the mobility sector, which is around 80% to 81% shifted to 79% and the other sectors, which is on the industrial side, moved to about 21% because we had a faster recovery on the industrial sectors. So with this revenue from operations, which was severely impacted in the second quarter due to the COVID and the resultant loss of productivity due to the shutdown. Obviously, our earnings before tax was impacted pretty severely. And as you can see from a 4 positive level for the first time in many, many years, we have posting a negative EBIT earnings before tax of 12.9% negative. And that takes us to a year-to-date level of plus 3.9. So at an absolute value, we have posted minus INR 567 million of earnings before taxes in the second quarter alone. This serves the first quarter where we did INR 1,101 million. So substantial drop on the earnings before taxes, predominantly coming on the back of underutilized capacities in the second quarter and also the loss of -- resultant loss of sales. While all this was there, we did get into severe cost reduction mode, and we have been aggressively driving cost savings to minimize the margin losses. And I must say the entire team at Schaeffler India, including the plants, we were able to flex our costs and minimize -- eliminate a lot of waste costs in the system, which helped us to minimize and contain the losses to this level as the result could have been worse than this. I now move to the next slide, which gives you the performance indicators. And as I mentioned earlier, for the second quarter of this year with INR 438.9 crores of revenue, which is down compared to the same quarter of last year at 60.7% and the previous quarter with 52.7%. We posted an EBITDA of negative INR 196 million, that is minus 4.5% EBITDA margin. The EBIT margin stood at minus INR 695 million, and the EBIT margin was minus 15.8%. And the earnings before tax, I did already shared this in the previous slide. And the profit after tax, we closed the quarter with minus INR 425 million at a negative margin of 9.7%. So at a half yearly annualized level, the sales revenue is down minus 40.3% when compared to the previous year. EBITDA margin, we registered at 8.6%, which is much 14 -- which is much lower than last year at 15.2%, as you can see. And the EBIT margin for the first half of the year is at 1.7%, which was 11.8% same period last year. The profit after tax is at 2.6%, which is -- which was 8.2% the same period last year. So not much information to share as a lot of activity had come to a halt across the country, and Schaeffler India was no exception to that. With this, I would like to also move on to -- while we were in a lockdown mode, we were actively pursuing the new ventures and new opportunities, and there is one important announcement that I would like to share in this forum. We got together and along with our technical teams, Schaeffler has been proud to launch a product on the 1st of July, which is going to be a revolutionary product in the market. This is predominantly applicable in the steel, cement, the wind and the power and energy sectors. And this is a product which is used to raise the uptime of the operations. This is helping us to predict early failures in the critical equipments, and this is also helping to manage the efficiency of the plants. And being a new product with the high level of digital technology comes in with the wireless battery-operated sensor and sensing solutions and works on cloud-based and technology and very user friendly. And the official launch for this into -- in India is scheduled for the 1st of October, and we expect this is growing to create waves in the market soon. So with that, I come to the end of my presentation, and I open the floor.

[Operator Instructions] The first question is from the line of Nishit Jalan from Axis Capital.

Sir, I have 2 questions. Firstly, if I look at your first half, you have done a CapEx of about INR 185 crores. Now obviously domestic demand is struggling. So just curious to understand the reason for the CapEx. Are we looking to start exporting from India in a much, much bigger way? Or do you think that this CapEx is largely to drive localization in India because from what I understand that around 30% was still import content that we have? Or thirdly, you believe that you have won a lot of new orders, a lot of new products could be introduced in India, which are not present. And since we have moved to BS-VI vehicles, there's a lot of scope of that? So just wanted to understand what is the growth CapEx exact need you are foreseeing because of which you are incurring this CapEx? There's still a lot of confidence that you're putting up on the company. And secondly, while things are -- were really bad in the last quarter, what kind of outlook are you getting from your customers, OEM customers as well as on the replacement side of it as to how things are shaping up for the remainder of the year?

Okay. Satish, you want to take the CapEx part of it. And I can take the second part.

Yes. Thank you, Harsha. So as far as your first question about the CapEx is concerned, the amount that you read as we have published in the cash flow statement is INR 185 crores. However, I have to also clarify that since we have adopted the IND-AS 116 standard effective 1st of January, the assets which are on lease are required to be transferred to capital account. That constitutes INR 64 crores. So effectively, out of INR 185 crores, INR 64 crores is not the real cash outgo or not the real CapEx. It is more of a reclassification of the leasing from leasing to capital. To that extent, there is also a liability book. So there is no impact either on the financial position or on the cash flow. So effectively, we have CapEx outgo during the first half of the year of INR 120 crores. This INR 120 crores CapEx is not because of the significant focus on exports at least in this year. This is largely for the adjustment, for the maintenance and to a certain extent for localization. As we had already announced that we would spend about INR 1,000 crores in a 3-year time span. This year, allotment was about INR 330 crores. Although we have outlined that sort of plan, we have actually been growing very cautiously in this direction and we have minimized the CapEx in the past 6 months. So the first 6 month, CapEx is mainly for the replacement and to a certain extent, localization. We -- as far as the second half of the year is concerned, we would continue to focus not significantly on the exports, as the debt export situation is not significantly going to change at least in this year. When we talk about exports, we are talking about more for 2021 and going forward. So this year, situation is not significantly changed -- going to change because of the pandemic impact all over the world. However, yes, going forward, this situation is going to be favorable to us because of the market, which we are being offered, particularly in the Asia Pacific. Those are the markets that offer from opportunities for us for the exports. So coming back to the CapEx, my clarification once again is that, that is mainly towards the replacement and the overhauling, and the CapEx spend that we have for the first 6 months is INR 120 crores.

Sir, just a quick follow-up on that. When I was asking about exports, I was not asking about this year. What my point of view was from the next 3 to 5 years, do you think exports can become a big opportunity for us? We read a lot of news flow that companies are reducing dependence on China. India is a very attractive on cost front. So my question was more on that front that can exports grow in a more meaningful way? Or can exports become a more significant proportion of our total revenues over the next 3 to 5 years?

Certainly. Certainly. So as far as -- yes, Harsha, do you like to go ahead?

No. No, go ahead, complete. I'll then add too.

So certainly, so as far as our midterm plans are concerned and looking to the developments around this pandemic and also looking to the developments within our organization and our own focus and the strategies. Yes, exports actually offer us good opportunity going forward from '21, so next 3 to 5 years. That is one of the focus area as well. So we are having those in our strategy, localization is one of the important strategy. Export is another important strategy. And we have the sort of opportunities in Asia Pacific markets and some of the markets for the product portfolio where we have the competence and we have the critical market as well. And that is largely the large side bearing, the cylindrical roller bearings -- I mean, large portion of the roller bearings where we have the competence, and there are opportunities exist in Asia Pacific as well as the other part of the world. So certainly, export is going to actually be one of the focus area, and it would be very difficult to say that would it significantly change or our focus would be significant and the export is going to contribute significantly higher than as of now. That would be very difficult to confirm. But yes, export is going to be actually in terms of the growth higher than what we have in the past.

Yes. Nishit, I would like to add another point to what Satish just mentioned. If you see in the country today and what we do, there are 2 kinds of export that happens. One is directly what we export to assist the facilities outside India. Second is our customers also have started to make a lot of export, increase their exports from India to the outside world. And we also see a significant increase in this. Hence, the investments and the capacity additions what we are doing is going to address both the needs.

Sure, sure. That's helpful. And sir, the second question on the outlook front.

On the outlook front, yes, we do see some green shoots already in some of the sectors. We have started to see a little bit of a better recovery on some of the industrial sectors like we have seen wind recovering faster, railways recovering faster, tractors and farm equipment, definitely, it was way ahead of its recovery already. We are seeing now signs of some recoveries coming into the passenger vehicle segment as well. Two-wheelers was a little slow in getting back on track. We still are optimistic, and we will have to wait and watch. Hopefully, August will be a month that's going to show a turnaround of the Two-wheeler business, which has literally hit the rock bottom. So all in all, some -- you have a mixed recovery happening in the marketplace. Some sectors have started to look up and started to move up. Some have still not recovered. The machine tool industry, we still see, is languishing. It has still no signs of recovery yet, but commercial vehicles is another sector where we see with still no signs of recovery as such.

Sure, sir. very helpful. Sir, just one follow-up. What would be the annual maintenance or replacement CapEx that we need to incur?

Approximately 50% to 60% of what we spend is on replacement. It changes slightly year-on-year, but approximately half to little over half of what we spent on total CapEx towards replacement.

[Operator Instructions] The next question is from the line of Sandeep Tulsiyan from JM Financial.

So my first question is on the diesel versus petrol mix, if you can share that how that has been shaping up over the past 2 years? And in the first 6 months, what would be that ratio as compared to 2018 and '19?

Okay. Well, looking at the development in the last 2 quarters with all the volatility and the challenges that the passenger vehicle sector has been phasing and also the transition from BS-IV to BS-VI. And hence, the resultant technology shift happening from diesel to petrol. What we are seeing is, yes, there is a definite percentage reduction in the number of diesel vehicles that are being produced. Last year, the percentage stood at something like 36% of the vehicle, and it is further going down. Now having said that, our customers are also working on making the diesel engine technology compliance to BS-VI norms. And there have been a fair amount of success as well. So on the one hand, you have a continuity of the diesel engines as well, especially in some of the higher cc of vehicles, so to say. On the other hand, you do also see a reemergence of petrol in the smaller cc of cars. So both these technology trends are now moving. And having said that, Schaeffler India, we were -- we are very strongly positioned in the diesel technology. We definitely have product portfolio in the petrol technology. And it was only a matter when the shift happened that we had to bring those technologies for the petrol engines and configure them to adapt to the Indian needs, which we have successfully done with our customers. And we are at various stages of evaluation. Some, we have already started in terms of business. So the direction in which we are going is the right one and be it the petrol or the diesel for the engine application, I must say that we are well geared up to meet the market needs as it is today. We are also seeing that the light commercial vehicles as well have improved their diesel engine technologies, both in the engine and the transmission application. And that is where we have seen a higher level of success when compared to the passenger vehicle because fundamentally, the light commercial vehicles or the light passenger vehicles were the ones that were under high pressure because a lot of it was being sold in India, and it was also the customer's prerogative to initiate changes in technology in this sector as well, which we have also gained a lot from.

Okay. Any mixed number that you can share for first half and last year?

In terms of percentages, well, like I would say, our target and measure has always been the content per vehicle, which we measure. And I must say that we have been -- we have achieved very good improvement and success in the content per vehicle in the light commercials category. Passenger vehicles, too, have seen improvement, but still, it has fallen a little short of our expectations, fundamentally because some of the projects, which -- because of project delays from the customer's end. And we have the technology, we have the product. And we are also working on localization plans, which is exactly high relatable question that came up first on in terms of our capacity investments going forward. So content per vehicle, definitely, we have seen a good jump on the light commercial vehicle side. Passenger vehicles, we still have some room to go.

Got it. And sir, second question, since you mentioned on CPV side, wanted to understand when a parent company is giving an indication that typical content per vehicle is close to 130 ROs per vehicle, what would be that number for India? And which all products do we include the products currently catered by us to different OEMs or the potential basket that Schaeffler has for that particular customer when we refer to that CPV number?

Okay. The number what you mentioned, 100, 130, whatever, that's the total potential content per vehicle that is there in the application, be it the passenger vehicles or be it the light commercial vehicles, and that's the average across, okay? Now as Schaeffler, certainly we have a target internally to keep improving the content per vehicle. So what does this mean for us? We would have to get into some specific applications within the region. Also, we may have to get into some new product portfolios to increase our portfolio offering within that engine, whether it's a diesel or the petrol, it doesn't matter. But it's just adding more product portfolio. So clearly, we do have a strategic plan, looking at our core competency in the engine application and the transmission application. Those product portfolios, which add value in terms of bringing down emission norms is a high focus area for us, right? And because, obviously, that's the need of the hour to get down the emission levels. And as the country is progressing towards the COVID norms, it becomes all the more important that we build it in our strategy to stay focused on these products, which help achieve those norms. So exactly in the line with that strategy, we are going to continuously invest. Yes, out of the 130, there could be some product portfolios where we may decide not to be participating at all because we have strength in some portfolios, and we would like to stay focused on that.

The next question is from the line of Vimal Gohil from Union Asset Management.

Sir, if you can just provide what was the breakup between auto and industrial for OEMs and aftermarket, respectively, for this particular quarter? What is mix?

You mean in terms of our business with these 2 broad areas, business areas?

Yes, yes, between auto and industrial. And if you can just provide the breakup between OEM and aftermarket for both these segments.

Okay. I guess, this was the quarter where -- as you know, the industry and when you look at the industry, per se, the automotive sector was the most hardest, as you saw in my earlier presentations as well. So generally, Schaeffler had a very good balance of having almost an equal share between the automotive and the industry. Up until last year, end of last year, I guess, the industry was about 47%, and the automotive was about 53% of the total portfolio, which moving into this year, particularly in this quarter, the second quarter of this year, that has got a little bit skewed. I see that the industrial part of the business, I think, is more of 57%, while the automotive has been -- the rest of it has been automotive. So this shift has happened primarily because of the good recovery of some of the industrial sectors during the second quarter and the slower restart of the auto sector. That's fundamentally defining it.

Sir, how much of your auto business would be aftermarket and same for industrial as well?

It would be about 20% to 25% within total of ...

The aftermarket, yes.

Yes. So aftermarket business is 10% of the total revenue. And since automotive is about 44%. So off automotive, automotive aftermarket should be about 22%, 23%.

22%, 23%. Okay. So it's turns about 10% of the total business [indiscernible] auto aftermarket at least.

Yes.