Schaeffler India Limited (505790) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Schaeffler India Ltd. results conference call for Q3 and 9-month results for the period ended September 30, 2021, CY21. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Chaudhury from Schaeffler India. Thank you, and over to you Mr. Chaudhury.

Thank you. 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 of Finance and CFO, Schaeffler India. I now hand over the call to Mr. Kadam, who will take you through a short presentation on our results and over to you Mr. Kadam.

Thank you, Vijay. And Good morning, ladies and gentlemen, and a very warm welcome to this investor call of third quarter or the 9-month. And I have Satish Patel here, our CFO.

Hello, everyone. Good morning and welcome.

Okay. So without further ado, I would like to take you through the presentation. I hope you have it on your screens by now. I will move into the second slide of the presentation, which talks about the agenda and I will be touching upon 3 specific areas: the industry and the economy; then I will take you through the third quarter results and the performance of Schaeffler India, along with the highlights; and then I will take you through the third part of my presentation, which would be the value creation for our shareholders and what is Schaeffler India doing in this area. Having said that, I move to the next slide, which is Slide #3, which is the economy. And as you all been seeing the strong rebound in the economy post the Wave 2, in the third quarter, we saw significant traction from almost all the sectors of the industry, barring 1 or 2. And what we see is the strong performance on the country's economy in terms of the GDP growth, which through third quarter was projected to be at around 7% and 7.5%. Also good to mention would be the softening of the Consumer Food Price Index and the inflation levels that have been managed at a reasonably good level of below 5% so to say. The Index of Industrial Production too has registered a very strong growth compared to the first quarter -- the last quarter of last year. And this is strongly indicative that the economy was beginning to come back. Look at the core industry sectors, they do have performed pretty well and registered at 19.3% compared to a degrowth that was there at 17.3%, same period last year. Now what the main cause behind this is the very positive consumer confidence and sentiment in the Indian economy to-date. To validate that, I have put across a small chart there, which talks about a survey conducted by The Conference Board, which happens to be the Global Consumer Confidence Survey, and -- which is indexed. And as you can see, the index starts with 62 going up to 169, and India tops the list at 169. And this report is as fresh as last week. So this kind of reinforces that the consumer sentiment is still quite strong. The confidence is quite strong in spite of some of the headwinds that we still see coming our way. I move to the next slide, Slide #4, where I talk about the core sector performance. And as you can see on the bar graphs that has been shown on the slide, the cement production in the country too have been at a much higher average than last year's same period comparison. Look at the steel production, which contributes almost 17.9% to the core sector performance, that steel production too has performed pretty well when compared to last year's performance. One of the sectors which actually was expected to create some challenges, the core production in the country, it is marginally better than last year, but certainly, it is not at the level of the first quarter of this year performance, as you see. The very positive is coming from the energy production in the country. And when you look at the electricity generation in terms of billion kilowatt hours, you will find that the last quarter, the third quarter of the year has been a phenomenal performance and -- which contributes to almost 20% to the core sector performance. So all in all, the Industrial sector have shown a very positive development post the drop in Wave 2 that we all went through. I move to the next slide, which is Slide #5. And here, we will be talking about the automotive sector and the production numbers. And this is where things begin to happen a bit. As you can see, the 2-wheelers was coming back on-track, trying to recover, gain traction. But however, they were still not at the level of last year's performance when you look at the Q3 production numbers, where the average was well above 2 million vehicles a month. And this year, this quarter has been below 2 million vehicles a month. If you look at the passenger vehicles, there was a strong traction in the second quarter of this year, where the production numbers almost hit 300,000, more than 300,000 when compared to last year, which was a very truncated year for the automotive industry. And -- but things begin to happen here due to this ongoing semiconductor chip shortage. We see from the month of July, slowing of production. And as you can see, the production numbers have dropped by the month of September, hardly 200,000 vehicles are being produced in the country. Look at the commercial vehicles, it is still climbing gradually, but again, it was not at the level of where it was in the third and the fourth quarter of last year. However, there is optimism still prevails that these numbers in production, commercial vehicle production should go up. Agricultural tractors, which had a dream run has been one of the strong performers, and -- even this year, and it continues to lead. However, we have seen some softening in the last couple of months in the third quarter as you can see. So all in all, the 2-wheeler and the commercial vehicles have grown at an average production rate about 11% over last year. The passenger vehicles and the tractors, if I want to take the 9-month average, that has grown by almost 30% to 35% than last year. Obviously, some of the enablers will be Government announcing the PLI scheme to boost domestic manufacturing and attract large investments that is expected to come in. Hopefully things will turn for the better in the subsequent quarters. I move to Slide #6. And now I will take you through the Schaeffler India performance in the third quarter. I'm on Slide 7 and the key highlights was we had a record revenue and profitability growth in the third quarter, a very strong performance across almost all the segments of the industry that we claim. That has been one of the hallmarks of the third quarter performance, also consistently strong sustained performance for 4 quarters in a row and staying ahead of the market and outperforming the market. Also we have been successful in gaining some significant business wins in both in the automotive and the industrial space to consolidate our leadership position. However, we did have significant challenges in terms of input costs by way of the steel price increases, which we are working on it to manage, not to mention the chip shortage which is now beginning to impact the Indian auto industry and we have seen some slowdowns there in terms of the demand as well. Another factor which has been consistently pain area is the supply chain challenges in terms of freight and logistics as well. So with all this, how did we perform? When you look at the sales in the third quarter, we ended the quarter with INR 14,876 million, which was 32.7% over the third quarter of last year and 20.7% better over the previous quarter of this year. What will this result into in terms of the EBIT? As you can see, we were able to deliver INR 2,216 million of EBIT and which was clearly 56.5% better performance over the Q3 of last year and 38.2% better than the Q2 of 2021. The profit after tax to that INR 1,708 million and which was clearly 50.5% better than the third quarter of last year and 33.3% better than the Q2 of this year. Free cash flow -- last year was a truncated year in the second quarter and as we came into the third quarter. With that, we have been able to deliver a stronger free cash flow with INR 1,089 million, which was considerably lower when compared to the last quarter of last year. However, it is 172% better than the previous quarter and this was a timing issue here is that we see. I move to the next slide, where some of the key businesses that we won in the quarter. And I would like to start with the automotive technologies. Clearly, our focus on addressing the environment, the carbon emission and our goal towards carbon neutrality, which I will come to in the next few slides and laying emphasis on that of products also should contribute positively towards the environment. We have been able to gain successes in this direction by way of the rocker arm and the Hydraulic dampers, or for the wheel bearings that we have gained for the passenger vehicle segment or for the clutch applications that we have gained in the commercial as well as the passenger vehicle, the dual-clutch transmission system. Even in the aftermarket space, our continued effort to continuously add new products to our portfolio continues and we have been able to bring in the Universal Joint crop as a new product to the market. Apart from be Schaeffler TruPower oil that was already launched. We have now brought in Lithium complex grease as another product by expanding the portfolio. Not to mention the antifreeze coolants that go into automotive applications as well. This is something that we will continue to add more product lines in the automotive aftermarket. Coming to the Industrial space, clearly, our focus has been how do we improve the speed of delivery and to that effect we are -- localization effort is consistently doing well and one hallmark is the launch of the linear motion guide products from India, as we have begun to customize and manufacture them in India to specific customer needs with the shortest possible time. Now apart from that, of course, we do have bagged some orders from the tractor segments in terms of tapered roller unitized solutions as well as some high-speed performance bearings that go into the transmission applications. I move to Slide #9. And this is a snapshot of the performance both for the quarter and for the 9-month period. What you see in terms of total revenue is one of the strongest performance in the third quarter at INR 14,876 million, as you can see, which is clearly 32.7% better than the previous quarter. And it is -- consistently, for the last 3 quarters, we have outperformed the same period comparisons to last year as well. So the split of this improved performance coming by way of growth in almost all the business verticals as the graph below depicts, the revenue bridge clearly shows that we have done pretty well in the automotive technology. The automotive aftermarket, the industrial space, as well as even our export business, we have done marginally better and when compared to Q3 of 2020 last year. If one were to compare the Q3 '21 versus Q2 '21, how did we perform? Automotive technologies grew by 15.6%, automotive aftermarket grew by 50.1%, industrial aftermarket by 26.7%, and exports was more or less at the same level with just about 2% growth. Over a 9-month period, this translates to automotive technologies growing by 74.7%, automotive aftermarket growing by 58%, the industrial growing by about 49%, and exports growing by 76%. So all in all, the average portfolio has helped us to sustain the growth momentum and manage the challenges that we faced during the quarter. And the plants, all the plants are loaded normal capacity levels and they've been doing well. So with the changes that we have seen in the last month of August and September in automotive space, our percentage of the business, the mix has got shifted a bit, so automotive technologies is around 38% of our total business, whereas industry is about 41% as industrial sectors have been performing strongly. The automotive aftermarket garners about 10% of the total sales and exports should be around 11%. With that I move to the next slide. So what has that done to our quality of earnings and what you see the EBIT development. And as you can see, it has been a strong quarter in Q3 for us and we have delivered a 14.9% EBIT margin translating into INR 2,416 million of profitability to the organization. So how did this profit come about when compared to Q3 of last year, where we in the same quarter the EBIT that we delivered was 12.6%. You can see from a level of 12.6%, we have been able to deliver 14.9%. A large part of it came from the volume gains from the market, the sales revenue that we have generated. Of course, we did have some cost increases that have happened along the way. But nevertheless, it has been a strong performance on the EBIT delivery. So the record profit after-tax margins, as you can see, at 11.5% and the same period last quarter was at 10.1% and we have been able to deliver a profit after tax of INR 1,708 million, which is a clear year-on-year growth of 50.5% in terms of the profit after tax. I move to the next slide, which is Slide #11, where we talk a little bit about the working capital and the free cash flow. Yes, the working capital, as you can see, has gone up in third quarter. Some of it is intended, some of it is the slowdown that we are seeing in the industry. Both have contributed it, and our current working capital in the quarter stood at 19.3% of sales, which definitely when you look at the 6-month period, which used to be -- last year used to be a 24%. For that matter, even the 9-month period of last year, which used to be a pretty 24%, we are at the lower levels with increased sales, but comparatively here some work needs to be done. Our investments and CapEx is on schedule and online. We continue to invest consistently in this area. And as you can see the numbers below, we have held at about 3.5% investments to sales consistently quarter after quarter. Look at the free cash flow. The Q2 obviously was negative cash flow for us as we went through the Wave 2 of the pandemic. But coming into Q3, we bounced back and we have been able to deliver INR 1,089 million of free cash into the system in the third quarter alone. I will move to the next slide and this talks about the performance indicators, talking about for the 9-month period as well. As you can see the revenue growth year-on-year for the 9-month period has been 62.3% and the EBITDA margin stood at 17.3%. For the quarter alone, the EBITDA margin was 18.2% and the EBIT margin, which I already talked about for the quarter, third quarter has been 14.9%, which has been a strong performance and the 9-month period, we stand at 13.7% of EBIT margin. And the profit after tax, as you can see, at INR 1,708 million for the quarter, delivering a profit PAT margin of 11.5% and for the 9-month period a profit after tax margin of 10.9% is a very reasonably good performance. So clearly, the focus that we kept on our customers, working with them, engaging with them and our consistent focus to drive the innovation projects to closures and being very agile into the market needs and the countermeasures that we have put in place very strongly to manage costs, both into our operations in our plants and across the value chain has enabled us to post a very strong performance. I move to the next slide, Slide #13. And now getting to the next chapter, which we call it a value creation for shareholders. We believe that we are shared because we have to deliver value to the shareholders. And let me start by saying how do we do that? By first ensuring that we keep -- take care of our employees. So we have put in all the necessary safety protocols that is required to ensure that we manage the pandemic much better than the way it is being done across the country. And one heartening fact here is, I must say that 82% of our employees have already completed the second dose of vaccination across the organization and we still continue to follow strictly the government protocols and regulations and we still continue to operate partial work from home and we still continue to drive these vaccination camps, so as to get to the 100% vaccination as soon as possible. Effective encouragement to all the staff, keeping the morale and motivation high is some of the things that we have been persistently doing, so that we ensure that our employees are safe, so that they're still motivated to deliver the results that we want to achieve. I move to the next slide, and this is where I would like to come to the announcement. The Board of Directors yesterday have approved a subdivision of equity. And as a result, we are happy to share that we have announced 5:1 stock split, which at the face value of INR 2 is subject to now the approval of the shareholders. The 5:1 stock split will see the existing shareholders issued with 5 new shares in place of 1, which they currently own. And the whole thought process and the belief is that we must encourage a wider participation of the investing community and also to improve the liquidity of the equity shares in the market that is available to-date. Having said that, I would like to also take you to another announcement on the next slide and that is on dividend payout, which is again in the direction of creating shareholder value. And I'm happy to share here that target dividend payout ratio, now we have set to 30% to 50%. As you can see from the bar graph, it was at about 30% to 40% and we have now raised it and this has been approved by the Board of Directors in yesterday's Board meeting. So the dividend payout to be announced in the company would be applicable to the regular rules and regulations as that currently prevails at that time. Also this progressive dividend policy is clearly intending to raise and sustain or raise the dividend each year in conjunction with the financial performance and the free cash flow generation each year. I would like to move on to some more interesting subjects and I'm happy to say and proud to say that Schaeffler globally has proclaimed and announced that we will be a climate neutral company by the year 2040. Now what do I mean by that? It means that both the Scope 1 and Scope 2, wherein all our manufacturing plants and the products we produce would contribute positively towards the environment and thereby become neutral by the year 2030. But between 2030 and the year 2040, our target is to get our upstream stakeholders as well into the Scope and thereby ensure we become completely climate neutral by the year 2040. Having said that, the task is now well cut out for us. And we in India, we were of the firm belief that we will be embracing the PSG approach going forward, which has come into the next slide and I'm very proud and happy to say that we are embarking on this journey of PSG, which primarily talks about our effort our endeavor in addressing the environment, in addressing the social capital, and addressing the governance as an organization as well. We are now bringing in a structure here clearly and identifying the areas where we certainly want to work on, as we believe it is not just the profits that we deliver. What is important is how do we deliver those profits, and that's going to be the focus going forward on this journey. And as you can see, we believe that our target is to get to carbon neutrality or water neutrality level soon as well as to ensure that we stay focused on developing the human capital both within the organization and outside organization and the community that we operate in. Not to mention, of course, we continue to keep our position of leadership in the area of governance and we will be putting in very strong risk management and robust processes there to handle the unforeseen and the volatility, the risks that come our way due to them, as well as we will be strengthening our processes and systems as we move forward. I move to the next slide and would like to touch a little bit upon the electric mobility or the future mobility focus that we are now increasing here in India as well. As you can see the 2 graphs that are put up there, the one on the top clearly depicts the development of these technologies in the automotive space as the years unfold. And by the year 2030, the global adoption of electric vehicles as you can see is close to 30%. However, in India, we see a slightly different picture. What you see here by the year 2030 is that only about roughly about 7% of the population, 10% of the population would be embracing the electric vehicle -- pure electric vehicle technology. There is definitely a lag in India, but that does not mean India will not catch up, with all the government initiatives that are now underway to propel or accelerate the adoption of electric vehicles, be it the PLI scheme that the government has recently launched or the rejuvenation of the Fame-2 that the government did last month. So having said that, we have clearly started to work on projects, identified areas where we can bring in value, solutions and products to our customers, be it at the component level or at the mechanical systems-level or even at mechatronic and electrical systems level. So clearly, this we will do either by collaborating with our counterparts in Germany or even engaging with external agencies to work with them as well and we will stay focused and also identifying the benefits and the advantages that come out of this, which is going to help the organization collectively. Having said that, I go to the next slide, where it was an announcement that we have now changed the address of our registered office and our registered office officially has now moved from the Mumbai, Nariman point to the Baner Corporate Office situated in Pune. So clearly, we have 2 floors of office space here in Pune and we are now located very close to the Pune city as well as to the Mumbai highway, which gives us immediate access to Mumbai. And this has been clearly a strategic direction that we are set out to achieve a couple of years back. And having said that, we are moving into one of the best office spaces that is available to us in Pune, and this is another announcement that I wish to make today. I move to my last slide, which is more on the conclusion with outlook, how do we see the quarter ahead. Well we believe that there is a consistent growth momentum in the last few quarters, 4 quarters in a row and we have been able to leverage that in a much very agile and resilient manner, which has helped us to post record revenues, as well as profitability growth, particularly in the third quarter, which has been one of our strongest quarter in terms of performance. Also, we must say that we have had some corporate actions announced today and yesterday. As you can see this is clearly targeted to increase our value creation for our esteemed shareholders. However, we do see some headwinds on the horizon, but by way of the chip shortages, which is beginning to affect the automotive sector of the industry, but we will continue to monitor those external headwinds and also get our act together. So all in all, we stay focused on value creation to our shareholders and we will constantly work towards delivering strong performance quarter-over-quarter. And this is my conclusion. Thank you.

[Operator Instructions] Our first question is from the line of Viraj Kacharia from Securities Investment Management.

Congratulations on good set of numbers in sort of challenging environment. I just have 3 questions. First is, if you can just kind of give an indication in terms presentation and also in the opening remarks, you talked about market share gains in different segments. So can you kind of drill a little deeper in terms of what is our market share across the different segments in automotive bearings, even on the industrial side, what is our share and where are we seeing that growth accruing towards? Second is on the CapEx intensity. So given the kind of demand which we are seeing across segments, is there any rethink on the CapEx program which we had only outlined? And the third part is on the export side, which has been a little subdued this time around, so if you can this provide some color on what's happening there?

Thank you for the [ opportunity to answer ]. Let me clarify that I did not mention market share at the beginning of my presentation. I talked more about the growth in the market as well as our performance with respect to industry growth. So talking about market share, as you know that we continue to measure our performance in terms of the content per vehicle, and I must say that we are constantly improving our content per share. The last investor call, I did share that we are in the range of EUR 40 per vehicle, and we continue to build on it. In fact, we have gained some more traction there in the light commercial vehicle segment as well. So more is being done there now. That's on a positive track and we are clearly on line to the targets that we have set. Second one for you on. Second question was about the CapEx. As you know, we have already spent about INR 140 crores this year on CapEx. And we are on the verge of closer to INR 200 crores spent on CapEx this year. As we had already announced in the last -- on the previous earnings call that we would spend about INR 1,000 crores in 3 years on CapEx. We stay with that commitment and we are actually looking to the growth opportunities, including certain aspects of the business in terms of the localization, in terms of the better mix, in terms of the export opportunities, in terms of the various other factors, including the risk utilization and the capacity expansion. We are still hopeful that we would be able to actually keep this commitment of INR 1,000 crores in 3 years. We have spent in lesser amount last year. We are expecting more this year, and even more in the next 2 years. Our plant set ups at Talegaon is sort of a new plant, which is now getting filled in. There are certain short-term hiccups because of the external challenges like on account of the chip shortages. But discounting that, we still have the opportunities in automotive business. Our industrial business is growing quite well and we are expecting growth momentum to continue, thereby fulfilling and optimizing the capacities that we have at our Vadodara, Maneja Plant as well as the new plant in Vadodara, which is Savli Plant. As we talk to you, we are already expanding the Savli Plant, setting up the new second plant at Savli location. And this plant also will be ready in a span of another 9 months to 1 year. So yes, CapEx, we are on-track and we would keep our focus on and we are hopeful of spending on the backdrop of the possible growth in the market. You had the third question regarding exports. So the question is about during this quarter. However, I would say the growth in the export was already quite good last couple of quarters. We have actually maintained that. So this quarter performance of export is marginally higher. But when you look at the previous quarter, quarter itself was quite high. And when you look at the 9 months, the export growth is definitely phenomenal. The export growth story continues and there are opportunities as we have highlighted, we have been exporting across the globe, be it Europe, be it South America, be it Asia Pacific, including China, so we have actually opportunities of exports in all of our regions, and we have been doing quite well. Yes, this quarter when you relatively compare with the previous quarter, the growth is not significant because the previous quarter itself was quite well in terms of exports. Also we do expect, if I may add, the situation of the pandemic in the Asia Pacific region, in the rest of the countries has actually deteriorated a little bit. That too is becoming a challenge for the demand has softened a bit there. But I guess that will bounce back once we recover the situation.

It's more softer and likely rebound as well.

So on the Industrial side, can you dwell a little deeper into the different segments where we -- what kind of growth we have seen both in terms of the market and for us. So any indication you can give further in terms of the drivers of how has the trend been across different segments and our position there?

So if we look at all the sectors specifically and what we see is that barring railways as a sector in the quarter, all the other sectors, we have -- the growth has been quite good. Railways for 1 reason that there is still a lot of inertia in the sector, the tendering processes have not been opened up as much as we wanted to. So these are some of the deterrents that have slowed down the business or the demand in the railway. But otherwise, a very strong performance in the wind. We have seen some strong traction in the wind sector or in the industrial automation and the machinery, machine tools sector, we have seen a very strong traction as well as the off-road sector continues to be strong. We have also seen the transmission part of the business, the power transmission industrial side, very strong. So the raw material sector has been doing very well as well. Look at the automotive sectors, except for some of the specific sectors like the passenger vehicles, which began to slow down because of chip, even there the sectors which do not use chips, they continue to do well. Tractors have done very well.

We will take our next question from the line of Mukesh Saraf from Spark Capital.

Just to go back to the exports point, like you said, you have maintained the level of exports sequentially. I'm just trying to understand how much exports will play out over the next 2 to 3 years. Is it going to be like once a year you will see a step jump and stabilize on that level as you add new product lines? Or is it going to be like a gradual, steady increase year-over-year. Just trying to understand, because you last time mentioned 8 to 9 product lines you have already added in the export market. So how is that pipeline expected to play out for the next 2, 3 years?

Yes, so let me answer this and probably Harsha would also supplement with some additional comments. Yes, you rightly mentioned that last time we had said that there are certain product lines where we have competence and thereby we have also sort of achieved higher exports and able to actually leverage the competence that we have and thereby avail the benefits of the competitors and increase the high level of exports. Those are the cylindrical roller bearings or roller bearings and that stays, and that we have actually grown year-on-year and that growth in line with the market. So as the opportunities and the export markets in other countries grow, we are in a reasonable amount getting more orders and we are able to grow in those roller bearing segment. As far as the new opportunities are concerned for the new product lines that we had highlighted last time, those opportunities are newer and they are going to grow faster in the future. Some of them are ball bearing, some of them are our products in automotive to a smaller extent, but business, automotive, also contributing. And there are some opportunities on the clutch side as well. So those product lines, though largely on the bearing front, but there are some opportunities also in the automotive space, limited opportunities, but those are also growing. And one part is the product lines. The second part is the reach of the market where we are able to, let's say, increase the footprint in Asia Pacific in addition to the strong footprint that we already had in Americas and the Europe region. So those are the reasons. Harsha, you'd like to add?

I mean we have a clear plan and part of the investment is clearly targeted towards creating and producing products for the export market. That is clearly in our strategy and we continue to build on this. This is not just exporting to the Asia-Pacific region, but it's going to be globally exported across. As Satish already mentioned, some of the product lines, they will only be manufactured in India as well, in line with our strategy.

And I just want to verify that we had mentioned opportunities in TAROL, opportunities in large-size bearings, HCL tapered roller bearings, TRB continues to grow and the step bearings. Those are the product lines where the focus is there. That focus continues. And there are opportunities certainly in those product lines.

Okay. Thank you for that question. My second question is on the price hikes. You had mentioned that obviously [Technical Difficulty]

Mr. Saraf, sorry to interrupt. Your audio is a bit muffled. If you're on a speaker mode or hands free?

Is it better now?

Yes, better.

Sorry for that. [Technical Difficulty]

I'm sorry, Mr. Saraf, we can't hear you now. Mr. Saraf, can you please unmute your connection? It looks like you muted your line. There seems to be no response from Mr. Mukesh Saraf's line. We will try to get in.

Am I audible now? Hello.

Yes, yes. Yes, Mr. Saraf, we can hear you.

Sorry. On the material cost, just trying to understand how much of it is still something that we have to pass through [Technical Difficulty]

Mr. Saraf, I'm sorry. There seems to be some technical issue. I'll have a backup operator check your connection and rejoin you into the queue. In the meanwhile, we'll move to our next question. That's from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

A very strong operational performance yet again in this quarter. Very glad to see that. On the Industrial side, we have seen a very strong momentum from new as well as some of the other peers. You did talk about the segments which are driving this. I just want to understand is there a market share gain per say the Industrial segment, either because of entering any adjacencies there, or is there any shift from the lower priced imported bearings to organized high, high-quality bearings from the likes of [indiscernible]. If you can just share any comment on either of these, that would be very helpful for us.

Yes. Well to answer to your question, I would like to say that we have some businesses that you know were being imported by our customers, now they have started to source locally and we have been very agile enough to capture those businesses as well clearly. Now whether you want to call that as a gain in market share? Well, mathematically yes, it is. It does come down to that. But all I would say is that our concerted effort identifying new customers and new business opportunities continues even now, and that has paid off well in the last quarter as well. So having said that, as I did share the industrial distribution part of the business, which is our aftermarket business, there again, yes again we have done exceedingly well in the third quarter. This is because of the clear focus and the concerted effort and the drive and also planning the logistics and the availability of the products for the customers. So there have been multiple actions that we brought into place to ensure that we try and secure more business. Now has it resulted in market share gain? I think it is too early to tell. We will need more time to evaluate that.

Sure, sir. The second question is on the electrification trends that we have highlighted and Schaeffler parent wants to capture. The related question along with CapEx point, we also have guided for INR 1,000 crores CapEx from CY21 to '23, indicating there is a back ended INR 800 crores CapEx for the back CY22, '23. Now what I'm trying to understand here, under these government initiatives, PLI schemes directed towards the easy parts. Is there any plan for Schaeffler India to manufacture these easy parts and export to the global parent for their requirements? So that is first point. Secondly, what are some other broad areas that we plan to invest? Is it more focused on the industrial part localization? What are some broad areas, for example, this year we are investing in Savli for the industrial expansion per se.? Similarly, where are some broad areas that we want to invest in the next few years and on your comment of our participation under this PLI scheme?

Yes, so let me just comment about the PLI scheme. I think it's a very good question. Shyam Sundar, you would know that as far as auto component or auto ancillary industry is concerned, PLI is made applicable for them and eligibility for certain components for the new technology technologies as well as the technologies which are advanced. So that means the eligibility is for the advanced and technology components that we are already providing, plus the new e-mobility solutions, unlike the PLI eligibility for OEMs, which is entirely for e-mobility. So that's the difference as far as the auto components are concerned. So in terms of what trends liberate from PLI is quite wider and also that we can focus more on our existing technologies and offer the advanced products solutions to the customers. We are still awaiting the list of the products [Technical Difficulty]. Once the list is announced, we would be able to exactly layout as to what sort of existing technologies and the products that we are already supplying are eligible for. But that would be our focus to actually have let's say, re-strategize in terms of what we have to do with regard to our focus for the business with regard to this technology. As far as the e-mobility is concerned, yes, there are opportunities and our focus for the future mobility in line with the global sort of the plan of the e-mobility that Harsha said in his slide, and accordingly India, that actually remains valid. It is most unlikely that it is going to be too much advanced just because of PLI, because there is also a time lag to develop and participate for the e-mobility, that's the time it requires. Fortunately, PLI scheme is also for 5 years, so there is a time lag for both the sort of technological development as well as and PLI. And PLI schemes also actually authorities do tweak and do actually revise, depending on the actual situations and the development of the market. So this may arise. In addition to that, next 2 to 3 years major, let's say, change is going to happen is most unlikely. I think that would take time also for the automotive. There are opportunities in 2 wheelers and 3 wheelers segment we are focusing on. Harsha highlighted that in that slide as well. So these are the sort of focus areas and certainly PLI would actually make us think and rethink on our strategies. Your question is also with regard to that India can be an attractive location in the context of PLI also for our global e-mobility solutions. Yes, there are some opportunities and actually we are working on the R&D part with our global sort of organization, in that space. But that was irrespective of PLI but certainly PLI actually makes it more easier to tweak the strategy and we would keep that focus on also for our strategic redirection that we have to go for in the future.

Understood, sir. I had also asked on this broad areas…

Mr. Sriram, sorry to interrupt. Could you please switch to a handset mode and speak? I think even you're on hands-free mode. Your voice is not…

Is it better now? I hope this is better.

Yes.

So the other part of the question was, in this balance of 2 years and the INR 1,000 crore CapEx that we are investing, what are some other broad areas, other than the probable investments under PLI -- leave that aside. What are the other areas? Is it more focused on the industrial segment, adding products like linear guideway, similar adjacencies that we are exploring on the industrial side? Is that where the focus for this -- our balance CapEx will be, if you can comment on that?

So yes, it is combination of both actually. So yes, we would be investing for conventional. We would be investing for hybrid. We would be investing for localization, and we would be investing for the short-term capacity expansion. So it's a combination of all of that. And this would be balanced both in industrial and automotive. So industrial, there are some sectors where we have opportunities to localize and offer better solutions, so we are investing there. There are some export opportunities, as I mentioned, and we are investing, at least our second and third year of investment is also contributing towards the exports in the roller bearing space. And then we have certain opportunities in the automotive business. So it's all actually sectors and the businesses that we would be investing. So it's not that -- but yes, it is clear that the next 3 years investment is not that significant for e-mobility. I think e-mobility investment is going to come slightly later. And developments and solutions that could be offered, that would begin in the next 2 to 3 years.

On the margin side, sir, just 1 housekeeping question. So if you see the underlying commodity prices have been spiking up too much this year. I understand we have taken some price increases in this calendar year CY21, how much of price increases on an average in the aftermarket? Because OEMs, we would have pass through mechanism per se, which would come through with a lag. Specifically in the industrial side and the distribution, both auto and the industrial distribution side, how much price increases have we taken on an average, and how much is required to bridge the gap with respect to the underlying commodity inflation? That is my last question.

Yes. As we all know that the steel prices are going up every quarter. And by the time we go to the market and try to recover, there is always a lag period, okay? So certainly, we're going through challenging times when it comes to the steel price increases, no doubt about it. We are putting in lot of effort to ensure that it gets equally compensated from the customers, and it's a journey we are on right now. But what's more relevant and important is the other set of actions and countermeasures that we have put in place in terms of managing our costs, our overheads and our spend. So we have also started to work in that direction to see how do we manage to focus here and contain our expenses as well. Apart from this, of course, we have started to revisit our sourcing strategies as well to see can we localize more and more, cut down the imports further of our components and raw materials. So all the 3 approaches are going hand in hand right now. So to clearly quantify and to tell you whether we have recovered the entire thing would be a very challenging task here right now. Satish, you want to add?

Yes, there's couple of comments I think specific to the question about aftermarket and distribution that have we gone for the price increase and how much? Though we are unable to actually let's say top exactly the number how much price increase that we have gone for in both the aftermarket and distribution business. Yes, price increases have been in all the segments, including aftermarket and distribution. However, as you know, the markets are different. In OEMs, OEMs also have gone ahead and increased the prices of the vehicles, and the end consumers ultimately pay for the price increases. So it is across the supply chain and there is a sort of back-end link as well. In distribution and aftermarket, it's more of a market sectors, which also prevails for the price increase. So yes, we have gone for the price increase. And as Harsha mentioned, we are revisiting this depending on the situation of the commodity, cost pressure which is actually ongoing. In fact this year, it has been recurring all through the year, even now it is still very much in parlance. So depending that situation, we would have to revisit this also for aftermarket and distribution. But yes, we have certainly gone for certain price increases there as well, yes.

[Operator Instructions] Our next question is from the line of Sachin Maniar from InCred Research.

Sir, 2 clarification. One is on the -- aftermarket has grown by 50% QoQ as well as YoY. So can you dwell what led to such a high growth and is it sustainable? And the second thing is, in the Industrial segment, we have this industrial segment within mobility and industrial segment within the other segment. What separates them? And actually, there is strong growth in industrial segment other. So can you say which are the sub segment which has led to such a strong growth on a QoQ basis in the industrial segment? Can you highlight few of the segment growth within Industrial segment?

Yes, let me start with the aftermarket part of the question, Sachin. Well, as you know that with the slowdown that's started to happen in the OEM production due to the chip shortage, I'm sure you must be reading that the used car segment is growing much faster now and obviously that would mean the demand for the aftermarket products also would go up. So that demand in the aftermarket products has helped us as well, that's #1. #2, we'll continue to add -- as I shared in my presentation, we'll continue to add more products in our portfolio, both in the conventional products like clutches and bearings, we have been continuously expanding our product in the aftermarket space to more vehicle models. And that's one of the things that we -- that has helped us to also garner more share. The third thing is addition of the new products, which I talked about, like we started off by bringing the lubricant, engine lubricant, engine oil and the lubricant oil and then now we brought in greases, now we have brought in coolants and then we have brought in some other products like the shock absorbers and UJ cross. So are now also looking at how can we diversity and expand our product portfolio. So all the 3 put together has helped us to grow the business in the third quarter phenomenally.

And Sachin, your second question related to within mobility, others grew significantly, which are those sectors and why that growth. The answer is, in mobility, others include basically our wind business and the raw material business. All other businesses within industrial space like 2 wheelers, tractors, all these businesses, including distribution, which is also in the similar segment, and railway, these are all mobility businesses. So basically, raw materials and wind business is in others. And that sector, both, particularly wind, grew significantly this year. Therefore, the others actually growth is, it's been very, very high this year, which is likely contributed by growth in wind business.

Okay. And sir, this both segment has contributed to margins in last 3, 4 quarters? Because we have seen that the others margins is also increasing last few quarters.

As far as wind is concerned, yes, wind is consistently growing since last 3 to 4 quarters. In fact, this year it has grown 100% over last year. Whereas in general, all other sectors have grown about 50%. So wind has outperformed all other sectors. But the contribution in the profit is by all the sectors, no doubt. And it would be very difficult to, let's say, summarize and say only wind contributed.

Our next question is from the line of [ Ramesh ], an individual investor.

Can you hear me?

Yes.

I have a question. You have just now declared stock split, and you have reserves of almost 100x the share capital. Why did you not choose bonus issue? Why you preferred the stock split?

Very good question. Any corporate action you take, there would always be expectation why not this and why this. But let me just answer. If you know, our last stock split was way back, 20 years back. Now for over many years, there has not been any corporate action. It is not only our wish or let's say our own thinking, but there have been lot many feedbacks from the investor community. There have been lot many other sort of feedbacks from all other stakeholders and we have also looked into our own sort of corporate action aspects. And it was actually found appropriate that we go for the stock split. This is the right time where when we go for stock split, our shareholders will be able to participate. We are at the, let's say, inflection point of the growth, the future mobility growth. We are also earmarking our ESG journey. And I think this is also the right time that we have wider shareholders. Shareholders are able to participate and we create value for shareholders. So that's the right time to go for stock split. That's how we have announced. Yes, there are wishes about the stock -- about the bonus issue because of the high reserves. As you know, we have also sort of strong plans in terms of the future growth. We have to make investments for the growth. And probably, there may be a time in the future for some other corporate actions. So yes, there are certain such sort of feedbacks about the bonus issue as well. But we thought it's appropriate to go for this corporate action, which is very, very condition under the current circumstance.

Sir, in general bonus issue will not result in cash outflow, so -- and I don't think you have a history of bonus issue in the past as well, if I'm correct.

We had a bonus issue quite many years back. So we have gone for bonus issue, but it was way back, I think again about 20, 22 years. But yes, you're right, long years we have no bonus issue. We take your feedback as well.

100x reserve, generally people go for bonus issue, 100x share capital have reserves.

Thank you. Thank you for the feedback. We welcome such feedbacks. Probably these feedbacks will help us at some point of time to actually also consider or think about some of the other corporate actions.

We'll take our next question from the line of Sandeep Tulsiyan from JM Financial.

Firstly, congratulations on great set of numbers and a detailed presentation specifically covering the ESG part in detail. I have a couple of questions. Firstly, if you could share a little bit update on the product OPTIME, which we had started selling as a solution, if you can give us some sense of the customer base that you have over there, probable revenue size that can be garnered and the typical margins that you can make in this business?

Sandeep. As you know the OPTIME has been one of the spectacular products that Schaeffler brought to the market, which also incidentally has won the Red Dot Award as such. Coming to India where we introduced this product into the market and -- as a test, and there were some initial hurdles from the Department of Telecoms, which we had to work with, as this product works on the network, which has been ultimately resolved and now we have started to bring the product to our customers here. Some of the target segments like the raw material sectors, primarily addressing the steel, the pulp -- paper and pulp, the cement industry. The customers have received the product very well as they see that it is a value for money product, giving a huge value to their maintenance operations and that is clearly evident. What we are now trying to do is expand the offering to other sectors as well. So clearly, we have a strategy out there in the market to grow the market share in this product and in the business of conditional monitoring. So we are well poised with a good technology product and we will be now integrating this product to other digital technologies that are also there and we will start to hear that very soon, probably in the next quarter.

Got it. And second question was on the 2-wheeler electrification side. Couple of quarters back you mentioned it is too early to comment regarding any tie-ups or relationships we've got with the OEMs. If you can give an update given there have been a lot of bookings that have picked up in the past 2 quarters. So have we engaged into any sort of tie-ups with the current OEMs?

Well, as you know that when it comes to the pure electric vehicle technology, the 2-wheeler and the 3 wheelers, apart from of course the commercial vehicles, buses would be the early adopters of this technology, so rightfully with the government also clearly focusing and driving the growth in that sector to adjust the emission norms and the climate change issues. So we are also embarking on that journey. We have now done technical evaluation as to what can we bring to the sector, particularly in terms of pure electrification. Well, I am not at liberty to release the names of the customers with whom we work as such. But definitely, this is already in the pipeline and we have initiated the development work on projects with a few of our customers.

Got it. And last question, its again harping on the gross margin part. Would I be correct in saying the mix is disproportionately beneficial over the last 2 quarters because railways has sort of, the tender business is absent and exports and aftermarket, order of the market has been growing well. As demand from railways comes back, probably Schaeffler will see a much higher impact on gross margins versus peers, probably because of higher share of OE versus aftermarket. I mean, would that be a correct evaluation?

No, I would not say so, because -- see, first of all, railway is not a major in terms of contribution, a very high contributor in the total sense. Yes, within industrial space, railways is about 4% or 5% of the business of industrial, yes, total industrial. But the gross profit contribution actually comes from all the factors. Mix is one of them. Countermeasures is another, volume gain is third, and sort of this balanced business portfolio is fourth. So there are quite many factors. But I don't think this is going to -- the railway sort of situation going forward is going to make, I mean, any major difference in terms of the gross margin.

If I'm not wrong, railways is about 5% of total sales, right? Not just industrial, about INR200 crore, INR250 crore of business that we do? You can correct…

Railways is about INR150 crore.

Yes.

So it is about INR 5,000 crore if I annualize INR 150 crore.

2.5%.

Yes, it's 2.5%, so from the industrial it's 5%. On total it's not 5%.

Our next question is from the line of Sonal Gupta from L&T Mutual Fund.

I think just on the 2-wheeler electrification part, could you sort of highlight, I mean like which products are you looking at in terms of, from your perspective?

Yes. Sonal, I would like to explain here that Schaeffler already having a lot of competency in terms of the motor as an application in the electric technology as -- even the thermal management system that is required in the electric application, electric vehicle application. Not to mention, of course, the software development, which we already have a little bit of competency in Europe. So apart from this of course, Schaeffler has the capability to scale up and move up the value chain in terms of offering the transmission system that we can integrate with the motor and the rest of the system that goes with that. So just to share, in India, we have developed the 2-speed transmission which is required for -- to give enough torque when a 2-wheeler goes on a gradient. We already have proven solutions here with us. And the question is now to integrate that with the motor and so thereby we can move up to mechanical and electrical system levels product rather than just remain at the component level. So we have quite a few projects running there apart from the twin speed transmission that we have already developed and proved. We also are working on projects pertaining to the drive systems and the thermal management system.

Got it. And so -- and I'm sorry, on the motor side, you have range of motor, I mean, globally or -- I'm sorry, I am not aware on this thing.

Well, just to share with you, Schaeffler did make an acquisition about 3 to 4 years back, a company called Combat Dynamics, which was a small company that was specialized in manufacturing motors for electric vehicle applications, and these are very lightweight, high torque, high power density motors. Now this competency is already there in Schaeffler. Now the question is, adopting this competency to varied applications, like for example, the 2 wheelers in India. So what this does is the winding technology is very different from the traditional conventional motors and there again 1 more acquisition was done in the last 3 years of a company called Elmotec Statomat, which is specialized in the wave winding technology of motors specifically meant for high-power density applications, low-weight high power density applications. Now having both these within our offerings, so we have been able to offer much better performing motors that are required for the electric vehicle applications, that's #1. #2, we are also well poised because we already have leapfrogged into the technology to not just manufacture electric motors, but also design and develop the machines that are required to manufacture those motors. So both competencies currently rests with Schaeffler. Now we are working with the teams to see how can we now bring this to India.

Got it. Got it, sir. So it would be safe to assume that you are already in discussions with some of the EV start-ups, et cetera to potentially this -- because where I'm coming from is that given the same requirements in terms of localization, et cetera, I mean these will have to be localized in India for -- right?

Well, it's a question of -- it's a volume game, as you know. So we will have to take that call, do we make it year from scratch or do we bring in and make investments and start to make here once the volumes pick up? That's a call we will take as we go forward.

Right, right. Great. And just a quick question on the margin side. I mean just like -- like, while we've seen the steel prices go up quite substantially over the last year or maybe 100% or something in that ballpark for the HRC. I mean, is that the right benchmark for the steel that you use or would you use some specialty steel where the price increase may not, may have been of that order of magnitude? I'm just trying to understand from just a pass-through perspective, right, to look.

All the kind of steel that we use in our industry, predominantly there are 2 parts to the application. One definitely is the bearings and related solutions, which are specialized steel there. And the other obviously would be the standard steel which goes into the automotive applications as well. So your point is very right. We have seen steel price increases, accumulative increase over the year starting from a 35%, going up to close to 80%. We have seen that as well. So since we use products from both sides, specialized and non-specialized, we have the challenge of living with both sides.

Got it. So even the specialized steel you're saying would have gone up by…

Yes, yes, it has.

Our next question is from the line of Mukesh Saraf from Spark Capital.

Just had 1 question. On the LCVs as well as on the passenger vehicle side, we are seeing the CNG is getting preferred a lot more of late, so just wanted to understand how does that impact or we maybe have some solutions, some products which are specifically for CNG as a fuel?

Okay. Well, I thought I will repeat Mr. Gadkari's comment that the focus is clearly on ethanol and blended fuels and biofuels and CNG, and the last resort would be LPG, in that order. So the government clearly is focusing on bringing in other fuels. And blended fuels I thought is going to catch up more than the CNG and LPGs, so to say. So well, for us from a transmission application perspective, that doesn't matter what fuel the engine uses as such. From an engine application standpoint, there could be some products which may have to be technologically tweaked to meet the new requirements, depending on the fuel change. But that I don't think is a big challenge for us to deal with.

Thank you. As there are no further questions from the participants, I would now like to hand the floor back to Mr. Vijay Chaudhury for closing comments. Over to you, sir.

Thank you so much. With that, ladies and gentlemen we will now close the call. And if you have any further queries, please do reach out to me or drop an e-mail to me at [email protected]. Thank you and have a great day.

Thank you. Thank you.

Thank you. Ladies and gentlemen, that brings us to the end of today's conference. Thank you for joining us. And you may now disconnect your lines.