Schaeffler India Limited (505790) Earnings Call Transcript & Summary

Good day, and welcome to Schaeffler India Limited conference call on the acquisition of KRSV Innovative Auto Solutions Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Gauri Kanikar from Schaeffler India Limited. Thank you, and over to you, ma'am.

Good morning, everyone. Thank you for joining Schaeffler India Limited's conference call on the acquisition of KRSV Innovative Auto Solutions Private Limited. We have with us today from the management, Mr. Harsha Kadam, our Managing Director and Chief Executive Officer; and Mr. Satish Patel, our Director of Finance and Chief Financial Officer. Mr. Kadam will first take us through a short presentation explaining the broader strategic aspects of the acquisition, after which we can open the floor for questions. Thank you, and over to you, Mr. Kadam.

Good morning, everyone, and welcome to Schaeffler India Limited's conference call on the acquisition of KRSV Innovative Auto Solutions Private Limited. And along with me is Satish Patel, our CFO and Director of the company. The Schaeffler Group, as you all know, has been driving forward groundbreaking inventions and developments in the field of motion technology for over 75 years now. With innovative technologies, products and services in both the automotive and industrial space, the company has been and is a reliable partner for making motion more efficient, intelligent and sustainable over the entire life cycle of the products and applications. That said, the post-sales aftermarket business too is an important aspect of our business. Now having said that, I'm sure you will all agree that we see big transformations in the marketplace. Amongst the many transformations you see, one that is playing a very important role is digitalization. In fact, digitalization has become one of the important growth enablers for the Indian economic growth story as well. So every aspect of our lives today is not left untouched by digitalization. So in line with our digital transformation drive within Schaeffler India as well also as well as our strategy to grow the automotive aftermarket business at a faster pace, we have reached an important milestone. The acquisition is a milestone moment for Schaeffler as an organization from many angles: for one, this being the very first acquisition for Schaeffler India entity. For second, this being the very first acquisition in the B2B e-commerce space. And lastly, even as at the Schaeffler Group level as well, this is a very first acquisition in the automotive aftermarket space, just to name a few. I'm on Slide 1 currently. And I would now like to -- briefly like to take you through a short presentation explaining more details on this acquisition, after which, we will open up the floor for questions. Before I take you into the details of the acquisition itself, let me get you all on the same page regarding what this market is all about. And for that, I request you to refer to Slide #2. First, let me start with some data points to understand what the market is about. As you can see, the Indian market is a substantially large market and expected to grow at a phenomenal rate. As you can see, the B2B e-commerce penetration today being just about 2%, it is expected to grow to a level of EUR 1.4 billion by the year 2030 and that would be talking about a CAGR growth rate of 30%, as you can see, getting it to a level of 10% penetration for the e-commerce B2B platform as well within the entire automotive aftermarket business that is present in India. A lot of vehicles that get added coming into the space, the vehicle part numbers are expected to hit close to 60 million vehicles on the road and one of the strongest growing markets for the automotive sector within India as well. So consistently, over the last few years, the automotive aftermarket in India has been growing at a CAGR of 10% in the last 5 years. This is in spite of the pandemic and the impact -- and the disruptive impact that it had on the economy. Predominantly, the large players are the OEMs. And of course, they have a strong distribution network across the country. And with the B2B e-commerce coming into this space as well, what it is going to do is it's only apt that we, at Schaeffler India, participate in this digital ecosystem. With this platform, we expect definitely that we can double our aftermarket sales by the year 2030. What would this mean to us? This will enable us to access the workshops that are there in the market and the ability for us to engage with them more actively, much faster with our future value-added services, which we have already been extending through our REPXPERT. All of this would be now bundled up into the e-commerce -- B2B e-commerce space as well. It is also about creating the right deterrent capability in a way so that we have the ability to protect our business as the auto parts business becomes more digital in the years to come. I talked about speed and obviously, any digital e-platform route is going to enable us for future scalability to increase at a faster pace into other vehicle form factors as well. This is also going to enable us to access a lot of market intelligence information and big data, which today we are struggling to get access to such data itself. So as you have already heard, we are happy to announce the acquisition of Koovers, a B2B e-commerce platform. And this is going to enable us to take the automotive aftermarket business to the next higher level. Now that said, on the 28th of August, the Board of Directors of Schaeffler India, in the special Board meeting that was called, has approved the acquisition of 100% of the shares of KRSV Innovative Auto Solutions Private Limited, which had a strong brand called Koovers. Now KRSV is a Bangalore-based private limited company, offering spare part solutions to the Indian aftermarket workshops via B2B e-commerce platform. Now this acquisition presents an ideal synergy for Schaeffler's future after-sales activities in India. This will become a key enabler for the aftermarket ecosystem, including our own distribution partners and help them to play an important role in the fast-growing and evolving aftermarket digital landscape. So as I have said earlier, this is the first acquisition for us in the history of Schaeffler India -- Schaeffler in India. And obviously, this becomes a strategic step for us to maximize the value creation through our retail solutions for our customers. Our ambition in the automotive aftermarket business always has been to simplify the workshop operations and that can be achieved adopting more plug-and-play approach towards our products and solutions, while we continue to build a very strong connect with our customers as well. And this is where Koovers strongly supports this ambition with its innovative digital offering. To explain a little more about Koovers brand and its vision, I draw your attention to Slide #3. So under the -- under this acquisition, the company in question here being the KRSV Innovative Auto Solutions Private Limited. The company is headquartered in Bangalore. And KRSV was founded in the year 2015, and it has a compelling story to tell. The company has a brand name called Koovers and Koovers is one of the fastest-growing automotive company in the B2B e-commerce space. With the projected sales turnover of INR 77 crores in 2023, they have been growing at a CAGR of 112% over the last 3 years. With 7,000 workshops, 1.8 million SKUs and being present in 125-plus towns, they are still predominantly present in the South of India today only. Their product categories have a wide range, ranging from breaks to filters, to lightings, to exhaust systems, to engine parts, to speedometers, to fuel systems, suspensions and the works. Now these are also represented by all the top OEM brands that manufacture the products that I just mentioned, to name a few, Bosch, Valeo, Rane, Gabriel, Exedy, Sona, Hella and so on and so forth. The top OEM brands they represent or all the major brands they represent on the platform comes from the passenger vehicle OEMs as well. Now this is a digitally enabled app-based platform with the ease of access, reach, connectivity and efficiency as they are committed to their tagline of Right Spares at the Right Price and at the Right Time. So Koovers today enjoys a high brand reputation among its customers in the automotive aftermarket in India. This is also the very reason that the brand will continue to operate under the Koovers brand name. We believe this acquisition will be a key enabler for the aftermarket ecosystem, including our distribution partners as well. And Koovers will not only help us to expand our digital presence with quick expansion of scope and the range, but also help us in building an ecosystem of workshops empowering the stakeholders across the entire value chain. With that, I'll move to the next slide to share a little more details about the acquisition itself. So under the share purchase agreement, Schaeffler India Limited will acquire 100% shares of KRSV Innovative Auto Solutions Private Limited for a consideration of approximately INR 142.4 crores. Now this acquisition is fully funded by own cash generation. Now the transaction will be completed in the next couple of weeks and -- in this quarter of 2023 subject to the customary closing conditions. Now for the fiscal year '23, Koovers has recorded a turnover of INR 77.7 crores and has 162 employees on board. Now explaining the integration model post the acquisition, while the KRSV Innovative Auto Solutions will be a subsidiary of Schaeffler India Limited and this B2B platform would continue to operate under the Koovers brand name within the Schaeffler India Limited entity. So moving to the end of the presentation, I would like to draw your attention to the next slide, Slide #5, where I would like to highlight the strategic rationale. So first and foremost, this acquisition is based on the market attractiveness that we see. This acquisition will strengthen Schaeffler India's position as a major player in the Indian automotive aftermarket space and the e-commerce platform will not only help with market penetration but will also help us to access the market intelligence and big data as India's car parc numbers are closing to around 69 million vehicles. This will help us get access to deeper insights into the market dynamics as well as to customize our own offerings in the automotive aftermarket space. The second biggest driver we see is the scalability. India's strong economic growth, supported by the high e-commerce penetration, which is beginning to happen, and it is also linked to the strong automotive aftermarket indicator, the development of the car parc and the average car age will lead to a 75% increase of the automotive aftermarket business by the year 2030. Having said that, this is where Koovers will offer a wide spectrum of automotive products to its customers. And this also brings in a good synergy potential with the existing Schaeffler automotive aftermarket products and its business as well. It also helps us to strengthen the overall digitalization process within the automotive aftermarket ecosystem, which we have been diligently striving to drive it. So with this one other opportunity that we get is to scale up our own automotive aftermarket business to a much higher level, at a much faster pace as digitalization enables us to connect with the end users in a much faster way. Talk about customer centricity and the complementarity, Koovers has an established automotive aftermarket e-commerce platform, which enables -- becomes an enabler for including our customers as well and helps them to participate as well more actively and bringing us closer to the end customer as well. Schaeffler India, of course, would definitely complement the technical platform requirements with its in-house expertise of cloud-based architecture as well as the cataloging expertise that we have within us as well. Last, but not the least, the digitalization. Now this acquisition contributes to the aftermarket digitalization journey, which has been in our strategy as such. And as highlighted earlier, the digital penetration level, which we see in the market, which is currently at about 2%, is going to get to over 10% level of penetration, and we want to play the game there as well. And the -- lastly, the acquisition contributes positively to the ambitious journey that we, at Schaeffler India, have strived to always and plan to scale up our digitalization efforts in India. With that, I come to the end of my presentation. We open the floor for questions.

Before we begin, we ask all the participants to keep their questions to those that are directly linked to the acquisition. [Operator Instructions] We will take the first question from the line of Vimal Jamunadas Gohil from Alchemy Capital Management Private Limited.

Sir, my first question was on, if you can just talk about in terms of synergies, while you did highlight a few points there. Will we be able to host our existing products like your wipers or batteries, et cetera, on this particular platform? Do we expect some synergies and growth in our existing business because of this acquisition? That's point #1.

Yes. Thank you for the question, Vimal. And yes, you said it right, that is -- it is going to bring in a lot of synergy between the products that we already are selling as well, as you know, the current business model that we follow is we put our products on the shelves of our distributors' shops. Well, now the digital platform enables us to have a faster access and reach. This being an app-based platform, obviously, all one has to do is download the app and then scroll through the products that would be available for them. And certainly, we will have the Schaeffler products as well onto the platform.

Understood, sir. Sir, in terms of -- if you can highlight the margins and if the acquisition is going to be EPS accretive immediately or is it going to take some time, if you can highlight that?

Yes. Thank you, Vimal. Satish Patel here. Good morning. In terms of the current Koovers performance, which was indicated by Harsha, of reaching the turnover of INR 77 crores by now with a CAGR of over 100% in the last 3 years. Certainly, they have actually reached -- the company has reached to a level of positive gross profit. And we are expecting that this level would improve because there is a tremendous opportunity of growth. As of now, the platform is largely utilized in South of India, and there are strong plans to roll out pan India. With the advantage of the scale up, the margin level will certainly be there. I'm not able to point out how much would that be. But certainly, there is a good and larger, let's say, possibility of improving the margin. We have to focus in terms of the technology advancement of the platform and we have also to set the entire business with certain sort of centers across India. So that would also involve some sort of cost. But at the same time, there is enough opportunity of growing in this field at a much larger space. And that -- sorry -- that is going to bring the margin in terms of the overall contribution to the business.

Understood. Sir, and just 1 last question was on proposition of some of these OEMs also have their own distribution channel and also their own platform, digital platforms for their spare parts and services, repairs, et cetera. How does our platform sort of differentiate? Why will an OEM host its products on a platform which is -- where there are other OEM -- other products also available? So what's the proposition for OEMs which have that, their captive platforms?

So let me try to answer your question. I think you are meaning our platform. Let me clarify, we do not have a platform as of now. This is the first platform that we are going for in the digital space.

Sir, when I mean -- I meant OEM's captive platform, so Maruti or a Volkswagen may have their own captive platform or a digital platform, it could be anything. So if -- how does our proposition help or how is it different in that sense?

Let me try to answer that Vimal. So if I'm an end user and I would want choices of the product, correct, different brands to be available for me, obviously, I would want a platform which can give me variety, right? So if I have to buy a Maruti product, obviously, I would go into the Maruti website to look at their products. But if I were to also look at the Koovers platform, I will have multiple choices here, so I can pick. Most of the parts today in the automotive aftermarket are also standardized. There could be some specific products pertaining to that OEM brand, though definitely one has the opportunity to buy directly from the Maruti platform as well, as well as from the Koovers platform, correct? So there are products where it is already a standardized product. It doesn't matter which brand it is. So this platform enables us to put all the products, all the brand products on the same -- making it more accessible, more convenient for the customer and giving the customer the preference to make a decision himself.

Understood, sir. Sir, if -- how many B2B partners do we have over here? Any -- sorry, if you highlighted the number, I may have missed it.

I think Harsha mentioned about 7,000 workshops.

And that is just in the South of India, by the way. And this brand is to be now taken across pan-India. So this has been a small company in the South of India, which we want to now leverage and take it across the entire length and the breadth of the country, yes.

We will take the next question from the line of Ashish from JM Financial.

Yes. Sir, my first question is more on getting your thought process on this particular acquisition. So let's say, if our main objective is to further deepen our presence in the aftermarket, could that have been achieved by probably getting more listings on portals or on apps like Koovers or we needed to acquire it in order to deepen our presence? And two, now that this platform is owned by a manufacturer like yourself, will this lead to some of your competitors, et cetera, probably sort of feeling threatened or may want to pull out their products from this platform because they may perceive some sort of maybe a conflict because it's owned by a manufacturer or a product owner like yourself? Your insights will help, sir.

Yes. Let me first get full clarity of your first question, and if I can request you to repeat the first part of the question.

Right, sir. So what I was saying, sir, is that -- so if our primary objective is to actually become more deeper player or more engaged player in the aftermarket space where we sell more or have greater visibility, would that have been achieved by having listings with more number of such B2B players or Koovers kind of players or having more product listings on Koovers itself, for example? I mean do we need to own Koovers as a B2B platform in order to further our interest in the aftermarket or we could have done it, otherwise? That's one. The second, I think, if you want I can repeat, sir.

Thank you. So let me just answer that question. Yes. Partly, yes, but not largely. The reason is that this platform is not only the digital space sort of that we can get into, but it is also the existing network of the 7,000 touch points and over 1.8 million parts. So this is the network that we get and that is going to expand significantly. So it is not only the digital space that we are getting, it is the entire business footprint, which is existing, available and which has a significant scope of expansion that we are venturing into. So we get the benefit of that. The second thing is that we are not going to limit this only to our products, right? This is for all the applicable products in the auto component space. And that gives lot many opportunities in addition to synergizing our own business for our own products, but also expanding in the bigger opportunity that this aftermarket digital space offers. So yes, coming to your question, partly to a certain extent, we could have achieved by actually setting up such platforms, but not to the extent that we can have under the model that we have acquired.

So if I may add to Satish. Mukesh (sic) [ Ashish ], we are already present pan-India. We have a large distribution network already in place. And this is a big strength and the backbone of our automotive aftermarket business. So many times, such e-commerce platforms cannot function without the support of the logistics as well as the back-end support systems. So we believe that leveraging these 2 effectively plus the -- already the workshops that Koovers has in this portfolio, it would only be complementary, if you see. And I think more importantly as well to point out that if we were to try to do this on our own, it will take a longer time. And this -- by this acquisition, it's a faster way to scale up, correct? And that's -- hence, we believe that it's important that the acquisition route is the right way to go forward.

Sure, sir. The second part of my question is that now that Koovers is owned by us, does it sort of maybe put the other competitors, our competitors in a similar product lines, in some sort of a dilemma, whether to continue their presence on the platform because they may perceive it as some sort of conflict of interest? So it could be a perceptional issue, but any insights there will help, sir.

Thanks, Mukesh (sic) [ Ashish ]. You partly answered your question yourself by using the word perception. Let's look at the -- today, the traditional business model that is existing, right? If you see, we have our own distribution channel, plus the OEMs also have their own distribution channels, do their own, as we call it, OES, part of the business. So all of us do coexist within that space. The e-commerce is going to be -- transform the way we are able to do the business. It's not that the business is going to be replaced or it's going to be rejigged or it's going to shift hands. The way we're going to do business in future is going to be more digital. That's what it's all about and that's happening already. Today, the penetration level of the e-commerce in this business space is just about 2%, and it's likely to scale up. And even by the year 2030, if you look at Frost & Sullivan report, it talks about it's going to scale up to about 10%, which means there is still the 90% of the business still continues in the traditional model, which is happening today. So to me, is there going to be competition? I don't think so. It's going to complement each other. So okay, ultimate whose product? Everyone gets to sell their products, isn't it? So it doesn't matter what platform we put them on to. So rightfully, you used the good word, perception. So it's all about perception here. It depends on how one wants to perceive it.

And just to add, Harsha, what we have also taken care in the entire acquisition is that this company is going to remain separate. That is not going to be integrated with Schaeffler India Limited and also the brand remains separate. So Koovers would stay as the brand as it is today. So hopefully, this takes care of certain perception aspects.

We'll take the next question from the line of Mukesh Saraf from Avendus Spark.

My first question is with regards to your existing distribution network that you have on the aftermarket. Will this move in some form be competing with some of your distributors already? And how will you kind of going to manage that situation if at all?

Well, the business model that we're just going to follow is our distributors would definitely play a critical, crucial part in ensuring the entire value chain operates. If you see, this is all about having -- if you look at the tagline, it's having the Right Part at the Right Price at the Right Time. And that cannot happen for distribution network too if not fully aligned with this business model. And rightfully so, this is going to be an enabler, not a disabler for our distributors as well. And we have made all the efforts to make sure that, that level of transparency and trust is going to be there with our distribution partners because they are going to remain a valuable part of this long-term infrastructure.

Yes. To add that, today, if you see there are many layers in the entire supply chain: OEMs, then distributor, then we have wholesalers, retailers and the auto service providers. So these many layers, some of them are going to be actually squeezed. But the layers, the main layer of distributor is actually going to be optimized, and they are going to actually have the larger space available to play in the whole system. So it is more of the next players, which are there, already almost 3 to 4 of them, some of them will be actually squeezed because of the digital service platforms.

Right, right. Understood. And if you have some sense of the 7,000 workshops that are currently getting serviced, what would already be workshops that are being serviced by your distributors already so that some there is kind of overlap? Or do you think that majority of the 7,000 would be incremental workshops that Schaeffler's products will be going to?

So the question is about 7,000 workshops which are currently the touch points for Koovers. How many of them are already touch points of Schaeffler distribution? I don't think we have a number ready here, but some of them would be.

The first thing I think is we have good synergy between our own, the Schaeffler products that we are already selling through our distribution channel, and it's going to complement each other. So it's not going to kind of compete with each other [indiscernible].

Right, right. And just lastly, would this give you some new opportunities in terms of some of these digital products, like you have wipers and batteries, which you don't manufacture. So will this kind of give you some more insights into maybe some other products that you could private label and you could kind of introduce? Is that also kind of an outcome of this?

Rightfully, this is only going to enable us to have more products to be put on the platform because -- and also today, it was just about 1 brand, the Schaeffler brand, but then now we want to have put it up along with the other brands as well. So I think that this is kind of an exponential opportunity for the end customer. Look at it from his point of view, he's going to have choices, he can buy whatever brand he wants and the price definitely is going to be differently priced on the platform. This is also going to enable our Schaeffler products to gain a lot of insights into the way the automotive aftermarket functions and with digitalization coming in, it's very important. We have seen that happen in the other platforms, take for example, Amazon and others, and hence, we believe that this is also going to be 1 important element in the future, and we want to be a part of this future growth story as well.

We'll take the next question from the line of [ Chandra Gupta ], an individual investor.

Sir, 2 questions from my side. First is what happens to the founders or the senior management of Koovers? Will they remain with us? Or will we be putting a new team altogether?

Very good question. Yes, I confirm that founders remain with the company, and we have a specific agreement with certain type of KPIs to be achieved as we have charted out strong growth planned for this acquisition. So founders do remain associated with us. And the management, which largely consists of founders as well as the operative management remains unchanged.

Okay. The second question is now what does this hold for the future of our aftermarket business? I mean will there be more investments going ahead like this, both organic or inorganic? Or how do we see it panning out?

See, we would -- as far as our own aftermarket business is concerned, we have a strategy to grow at least double digit. And that part of the focus remains unchanged. And rather, we are going to focus more. And if there is some sort of a synergy, which is clearly there with this sort of platforms, that is only going to help our own foundation business. But at the same time, I'd like to also mention that this space is for all the auto component products and ours is one of them. So in terms of the overall Koovers sort of business that we look at, maybe our own products would not be as significant because it offers a wider sort of product portfolio, and therefore, our own product will not be significant, but there are synergies of our own product growing in terms of the -- because of the digital space, which is now available to us. And our own core business expansion that we have in terms of the market as well as in terms of the new product launch, like we have launched the battery recently, we had already launched TruPower, certain lubricants and all those type of launches will continue and that will also support the growth in the aftermarket.

Okay. But are we looking for similar such more acquisitions or something like that?

We'll settle down with this acquisition and...

I think the task in hand right now is to ensure that we leverage and justify the investments we have made, and we want to scale this up and enable our distribution partners. They are also selling a variety of products. So this is a platform we are offering even to our existing distributors to put up their products on the platform. So as you can see, there is enough and enough work to be done here, which is the priority right now for us to scale this up and start to leverage and exploit the opportunities we see in this digitalization effort. Surely, we have a very clear strategy that we would like to grow, as Satish already said, our automotive aftermarket business to grow at a double-digit CAGR growth rates. And to that effect, if we have to make investments, whether it's organic or inorganic, we certainly would take cognizance of it as and when the opportunity arises.

We'll take the next question from the line of Ashish from JM Financial.

Just 1 quick question. You did say that Koovers is gross margin positive. But at the same time, you are looking to take it pan-India and expand. So what kind of further investments will be needed from Schaeffler towards this platform in order to expand and go on a pan-India basis? Or do you expect beyond the INR 142 crores that you'll invest to acquire this entity?

Yes. I think 2 types of investments are needed. One is the investment for IT and the technology upgradation because the platform needs to be upgraded in order to serve the pan-India and the larger business that we are actually eyeing for. And second is the logistics network. Though most of the logistics happens direct on this platform, so not so much of inventory that the company holds. But as we expand, certainly, that level of logistics network also goes up. So mainly these 2 investments. But there is no number assigned as yet. But yes, this would -- I mean, there is broad number, but not the exact number assigned. But these 2 are the investments. But we are pretty sure that given the growth opportunities that we have built in, in the acquisition, even after these costs and the CapEx, there is significant growth, both in terms of the top line as well as the margins.

Right. Sir, any scale of magnitude of how much may be needed over the next 3 years or 5 years? I mean any broad magnitude?

No, we are right now focusing on completing the acquisition. We have to then brainstorm also with the founders and work out as to how this business that we sort of focus in terms of the growth that we have planned. So it's very difficult for us to spell out those numbers right now.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Ms. Gauri Kanikar for closing comments. Over to you, ma'am.

Thank you, everyone, for joining us today. If you have any further queries, please do reach out to me at [email protected] We now conclude the call. Thank you.

Ladies and gentlemen, on behalf of Schaeffler India Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.