Schaeffler India Limited (505790) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Schaeffler India Limited Q2 CY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Ms. Gauri Kanika, Head of Investor Relations, for opening remarks. Thank you, and over to you.

Thank you. Good morning, and welcome, everyone to Schaeffler India Limited's Earnings Conference Call for the second quarter and half year ended 30th June 2026. Today, we have with us from the management, our Managing Director and CEO, Mr. Harsha Kadam and our Director of Finance and Chief Financial Officer, Ms. Hardevi Vazirani. Mr. Kadam will first take us through a short presentation on the results and after which we will open the floor for questions. Thank you, and I now hand over to Mr. Kadam, please.

Yes. Good morning. Good morning to all the investors, a warm welcome to this earnings call.

Good morning, and warm welcome to our second quarter and 6 month closing call.

Okay. So let me start by taking you through the presentation. I hope you already have it open. I would like to move to Slide #3. As always, I would love to talk about -- start with the customers and the recognitions that we received from the customers. Quarter 2 has been a very strong performance and recognitions coming from the customer side as well. So as you can see on the slide, we have had many award being given by the customers, starting with -- on the industrial side from Voith Turbo. We also had from Sandvik Mining as well on the industrial side, recognizing us for focused development and cost reduction activities that we carried out. We have had quite a few coming from the automotive space as well and our esteemed automotive customers award given from by John Deere, then Toyota Kirloskar as well and the appreciation awards coming from DENSO India as well. Not to mention the Escorts Kubota as special category award that has been given for our long association as well. Apart from this, the corporate social responsibility work that we carry out consistently with the sheer commitment, and we were awarded for our community development projects that we indulge in and some of the work that our team has done in developing the tribal areas has been recognized by the [ CSR ] convention and the award was given to that affect as well. What is also important and prestigious is to point out the Zero PPM award for quality that we have received from one of the most stringent quality demanding customers Toyota Kirloskar. And we received the award for a Zero PPM, which clearly signifies and underlines the fact that our commitment towards quality, ensuring that our customers get zero-defect product continues, and we stay the course with this. I would like to now move on to Slide #4, and I would cover 3 parts in my agenda today, starting with the economy and the industry. I would like to throw light on the business performance, Q2 as well as the 6 months, then a little more on the financial performance for the same period Q2 and 6 months. Let me move to Slide #5. And what you see on this slide is the economic situation in the country. drawing your attention to the bar chart, which shows the GDP, while the first quarter Q1 calendar year, that is Jan to March, registered a 7.8% GDP growth the quarter 2 estimates are over in around 6.5% to 7%. The numbers are -- official numbers are still to come in. There has been -- it appears there has been a marked slowdown, obviously, with all the geopolitical situations that are redefining the business rules even in India, I will come to that in my subsequent slides. Then talk about the index of industrial production has managed to show a better performance over the preceding quarter and it continues. So the manufacturing output is definitely there. It's continuing. The CapEx demand as well has improved in the last 2 quarters. Automotive production too has continued to register a strong double-digit growth rate compared to the previous year. However, Q2 being a financial year start for many of the auto OEMs you would see it always starts off on a low key note, and it tends to pick up. Marginal growth or even a small drop, you could see over the preceding quarter. but yet a strong performance when compared to year-on-year. Point of concern that has started to emerge is on the inflation. The consumer price index, as you can see, has started to creep up for the last 6 quarters. When you look at it, the first 4 quarters showed a very good trend, and then it has started to go up rapidly and currently, the Q2 estimates are showing 3.9, obviously with all the input costs going up in the manufacturing sector, plus the food prices going up. It's clearly reflecting in the commodity prices that are going up as well. I move to Slide #6 on the core industrial sector performance. And what you see there is a very strong performance for the last 6 months, Jan to May, 5 months, I would say. And with cement production month after month, much, much better than the preceding month, as you can see same period last year. And surely, the infrastructure drive by the government of India is clearly pointing to the fact that the core sectors relevant to the infrastructure growth have been demonstrating a pretty strong growth. Cement, the same you would see in the steel sector as well and growing at 6% over the last year. and talk about coal production. This is where you see a shift happening clearly in line with the carbon neutrality and the use of renewable energy directives. So you would see the coal production come down over the last 2 months consistently, whereas the electricity generation still is on the positive side, which means, clearly, the shift is more towards the renewable energy sector. So this -- on this backdrop on the industrial sector, the positive notes on which the economy and the industry is performing. I would like to now move the slide throwing some light on the automotive sector. Now what you see on the slide is the 2- and 3-wheeler production numbers. And as I said earlier, the manufacturing industry and manufacturing sector output is really doing well and that is clearly evident in every -- each of the segments that you see here. The 2- and 3-wheelers, as you can see, has also registered a very strong growth even compared to the preceding months has started to do well, except the passenger vehicles where we did have a drop [ shandrop ] of almost 8% drop that we have seen in the month of June over the month of May. But however, compared to the last year, a very strong growth there, again, which I already said up of 15%, 15.7%. Talking about the commercial vehicles, again, month of June has been pretty strong. And compared to the last year, obviously, it's a big jump. But over the preceding month of May as well, strong performance there from the commercial sector in terms of the production numbers that is there. tractors again is demonstrating a good direction. However, this is something that now we have to monitor closely due to the not so good performance of the monsoon is what we are hearing but I guess the monsoon can always be delayed, and we'll have to wait and watch how this pans out and how this is going to impact our business a lot rides for us on the tractor business as well. So that said, let me now move on to the business highlights. I draw your attention to Slide #9, wherein my talk, I'm going to talk about the quarter 2 performance. As you can see, the revenue generation in the quarter was INR 2,681 crores, which is a clear 17.5% higher performance compared to last year. And over the preceding quarter, Q1 '26 was a 7% higher performance. This is in spite of the fact we have had challenges with the automotive sector production numbers, particularly in the passenger vehicles where there was a drop in Q2 production numbers. Also with all the geopolitical volatility that still exists and with the input costs that have gone up as well, we have been able to post reasonably very good performance, I must say, in a challenging quarter. This has come in spite of the drop in the passenger vehicle production numbers, we have been able to still arrest any adverse impact from the passenger vehicle segment one, because of all the new business wins, which I will come to in a while, but also of sustained effort in trying to maximize the capacities in our plants through business increases with our existing customers and the new projects which were also realizing the business as such. We have seen a good growth in our vehicle LATAM solutions. Obviously, this is because of some of the capacity advantages, we were able to leverage that and our exports business did pretty well as well. Industrial business on the other hand, while it registered a single-digit growth has been still on a positive traction there. Now that said, when we look at the earnings quality, we were able to deliver INR 513 crores at an EBITDA level in the quarter, and that's clearly a 19% better performance than last year as -- and the preceding quarter as well, resulting in a profit after tax of 336 -- INR 337 crores, which is about 12.6% profit of tax. We also did register a reasonably good free cash flow. Obviously, this has been a little lower. There are attributable reasons to it, our input costs going up, our inventories have gone up, particularly, this is a strategic step that we have taken to shore up inventories in some of our business sectors. And hence, that has impacted the free cash flow. Also to point out is some of the adverse situation that we faced with the LPG and the oil prices going up, our input costs have gone up, which is expect to be compensated by the customers, which we are still in discussions with them add to that some freight cost increases, which have impacted the bottom line here and some of the IT costs that came in, in the quarter as such. But overall, our CapEx also remains on track. We continue to invest appropriately as needed in line with our strategic growth direction and inventories is something which is clearly we are watching. And whatever inventory levels we have built up is clearly a planned inventory level, in line with the situation evolving geopolitical situation and the market demand in the country. That said, I move to Slide #10. And as usual, I always love to talk about the new business wins because this is what keeps us going and sustains our growth momentum. And every business vertical that we operate in has brought in our new businesses. On the automotive space -- business wins, again, the demand for the double truce in the tractor segment, more and more adoption of double clutches is being now used by the tractor segment, and we have been benefiting from it. The other one is the business win for the overrunning alternator [indiscernible] which is the compact which actually brings in the compactness in terms of the package that you deliver to the customer and the overall package of the entire system as well. So we have been consistently working on that, and the business wins we secured here with some of our prestigious customers. On the vehicle lifetime solutions, we have started to increase our market coverage. One step that we took is to -- after a gap of 2 years, we revived the use of the rep expert lands which is going to travel across the country, covering close to 8,000 kilometers to be in very close contact with the mechanics and to upskill them in terms of training, in terms of fitting our solutions and also [indiscernible] them on the upgraded technologies that we are adding on to existing offerings in the marketplace. So there are very focused -- and workshop engagements that are being done through the rep expert and our portfolio of expansion, particularly in the MENA product portfolio is something we are focusing on, and we have started to bring more products in our range into the market for the aftermarket. And [indiscernible] has been a stellar in the quarter on business acquisitions. We have secured a lot of business opportunities and wins already [indiscernible] portfolio of synergy, [indiscernible] roller as well. Even TRB for that matter, some of the [ preplan ] bearings for the raw material sector as well -- applications, and I think 1 of the largest business acquisitions, highest value has happened in the industrial space in the quarter -- second quarter. I move to now on Slide #12, which talks about the earnings quality and the financial performance. So talking about the revenue from operations as can see in the second quarter, INR 2,681 crores came into the system through the revenue route, which is a clear -- better performance of growth and the preceding quarter of Q1 and a 17.5% compared to the same period last year. Now that said, where did this come from, as you can see from the table below, the automotive technologies brought in 33% growth compared to year-on-year vehicle LatAm solutions at 9.9%, bearings and industrial grew by about 5% on an average over the year, and our export business grew 24%. Over the preceding quarter as well, while the vehicle [ laktime ] solutions and our exports grew double digits. There are the 2 automotive as well as bearings and industrial conditions also grew and beat single digit at 3.6% and 6.5%, respectively. With the demographic or sales mix 35% of our revenue comes from the automotive technologies. And here, the automotive technology includes the e-mobility part of the business. The bearings in Industrial Solutions brings in about 35% and the rest is split between vehicle lifetime solutions, 12% and our exports, which is at about 17%. All in all, a strong performance in the second quarter with all the challenges that we had fundamentally on the supply chain [indiscernible] and on the input cost side, we have been able to demonstrate a consistent strong performance. With that, I move to Slide #13, which talks about the earnings quality. And what you see here is the EBITDA number, INR 513 crores coming into the system of [indiscernible] EBITDA which is a clear 6.3% increase over the preceding quarter, a 14.3% better performance than year-on-year. Now to just look at the split of where did this come from? The gross margin improvement brought in about INR 147 crores. We did have some cost on the employee costs with the new codes coming in as well. The wage codes that have been implemented now and some of the other income expenses. So net has been a strong performance at the EBITDA level, resulting in -- better profit of the tax at INR 337 crores as against INR 320 crores last year. Overall, the [ emerging ] quality, earnings quality definitely could have been better. We did get impacted on the foreign exchange effects -- as well. input cost route and both these have impacted to a certain extent our bottom line performance. But nevertheless, we still have done reasonably good compared to last year. I move to Slide #14 and talk about the working capital, as you can see in the quarter 2, our working capital has gone up to INR 2,029 crores. So clearly, this is a planned activity that we have lined up as we are building up inventories in some of these specific sectors for some of our specific customer accounts. And this is the planned activity, and we have a clear plan of how to [indiscernible] going forward as well. CapEx, on the other hand, remains at more or less the same level. We continue to invest in expanding our manufacturing capacities and -- which we believe is clearly needed if we have to sustain this growth momentum in the country and continue to deliver a double-digit growth ratio. Free cash flow certainly is under focus and we have work to do here as well. Clearly, this is 1 of the impact is company because of the increased working capital and the reduction in the earnings which we believe in the second half, we are going to the lost ground going forward? I move to Slide #15 and talk a little bit on the key performance indicators of snapshot. As you can see at the 6-month level, our revenue growth is about 18% compared to the last year. And as you can see, with an EBITDA margin of 19.1% in the quarter, resulting in a 6-month EBITDA of 19.2% and an EBIT margin of 15.8% and the profit after tax to continues to remain at the same state of 12.6%, 12.7% at a 6-month period as well. All in all, top line growth, yes, we have managed to increase that bottom line. We have held our ground very strong year in spite of the challenging situation in terms of input cost and some of the foreign exchange increases that we have incurred. With that, I'll move to Slide #16, wherein I want to throw light on the KRS -- innovative water solutions, a wholly owned subsidiary of Schaeffler India Limited. Now Here, again, KRSV or Koovers, as we call it, registered a revenue growth of INR 79 crores in the quarter. And EBITDA still, we are in the negative here, as the focus is on scaling up the operations. While we have registered with the revenue growth of INR 79 crores exactly delivering as per the committed plan that we have made. We still have some work to do on the bottom line on the EBITDA and the EBIT side. That is something we are addressing it as I'm speaking now. So overall, not a consolidated Schaeffler India Limited both entities put together. The revenue generation has been INR 2,760 crores at an EBITDA of 18.5% and an EBITDA of 15.2%. I move to now the last slide, Slide #17. So overall, has been a pretty good quarter in terms of our business performance. And in spite of all the challenges that we are facing on the geopolitical side, on the supply chain side, on the input cost side, year-on-year double-digit growth is something we have been delivering consistently, and we were able to sustain that coming out of the automotive vehicle lifetime solutions and our export business. Marginal impact, as I already said, input cost increases as well as freight cost increases and also the FX impact has 3 impacted marginally or bottom line. But again, it's a decimal point drop, but then we have managed to hold that as well. Working capital, yes, we are monitoring it. And however, I talked about only working capital is something planned, but we need this to keep servicing our customer needs. So that is something we will recover soon. And the CapEx framework stays on track, and that is always there. And yes, more challenges are visible on the horizon. We closely monitor the situation, and we are trying to be more agile and trying to -- and the situations in a more proactive manner or committed to deliver value to all our stakeholders continues to remain. And -- well, I come to the end of my presentation. That's it.

[Operator Instructions] We take the first question from the line of Harshit Patel Equirus Securities.

Sir, my first question is on our industrial segment. It has recovered well after the dip in the last quarter, but still the growth is very soft at about 5% Y-o-Y. So my question is, is the portfolio recalibration now complete, roughly how much revenue we will constantly let go and [indiscernible] to the double-digit growth?

Thank you, Harshit, and let me talk about the strong performance in the sector. As you see core infrastructure sectors contributing to the infrastructure growth, they've all done well- we have grown a market growth there. Our raw materials sector have performed pretty strongly there. One would look at quarter-on-quarter on a year-on-year basis. We have done well in our power transmission sector as such. Yes, there has been impact from the wind energy 1 from a timing perspective and a few from our contracting process, which is ongoing. So we do have a small [indiscernible] has come in, which is something we expect we should recover going forward as well. If you look at industrial, 1 of the areas where definitely we are increasing our focus is to look at the distribution side, the aftermarket business side as well. And clearly, that is something. We -- in the second quarter, we did pretty good in terms of recovering over the preceding quarter, and we are in the right direction to recover. So our aspiration is to make sure the industrial business to get to a double-digit growth rate, yes. Of course, it has a own set of challenges in some of the sectors. And we will currently keep the watch and see how do we get this to also up to a double-digit growth rate.

So my question on the exports. There has been an outperformance versus our own guidance. In the first half, we have grown about 28% Y-o-Y. [indiscernible] '26 guidance of about 10% to 12% growth, which [indiscernible] from 5% to 10% that you had guided during the fourth quarter. So what is containing this momentum? Is this more of intercompany allocation? Is there [indiscernible] the case group, are there any geographical mandate, some [indiscernible] have come from the [indiscernible] , how much of [indiscernible] would you like to revise your overall -- export guidance further? And a small follow-up to be to do anything in the stock between Europe, U.S., Southeast Asia and [indiscernible].

Thank you for your question on exports. Yes, it is mainly because of intercompany allocations. So what is happening is that in the process of localization, many capacities are being built up here in India and mainly in Savli. And the group is trying to leverage on the capacities, which are available in India, which we are developing for local market, but there are always opportunities if there is capacity available to serve the intercompany locations worldwide. And fortunately, the demand from all the regions, Europe, Asia Pacific, China, it has been in the double-digit range, which is leading to the growth that we have reported. Also, we have to be -- we have to consider that FX is also in our favor, specifically not so much for Europe because there we have [indiscernible] but in other regions like Americas, Asia Pacific, Greater China, we have U.S. dollar billing. So we are, to some extent, also benefited from that. We will be careful in future guidance due to the ongoing geopolitical disruptions. While all round efforts will be done to sustain and this level of momentum close to 15%, 20% growth, but you never know. We have faced this once in 2023. So we are trading very carefully. But from our side, we want to maintain this. And the order book is solid for the year. So very likely, we will maintain it.

So I think a good point to add here is we never gave a guidance for the growth. We would -- our wish is to contain the exports -- so there could be in 1 quarter, a surge in orders, which [indiscernible] nothing to do with the growth. It is to do with what is our cap, we would like to put at 20% of -- export. It's good to have a good balance between domestic and exports than what we have.

So to also have the natural hedging against our imports. It is currently working really very well.

We take the next question from the line of Raghunandhan N.L. from Nuvama.

Congratulations, sir, on the strong results and awards. Firstly, on the aftermarket side, generally, for the components aftermarket is a stable business. and most peers grow at high single digits in this space. Schaeffler has done particularly well that more than 20% growth -- minimum growth of 20% last 3 years. But Q2, the growth has come down to 9.9%, 10%. So considering that revenue has reached last -- how do you see this particular segment performing? Would you say the growth will be stable going forward? Or because of your efforts in terms of increasing the product portfolio can the growth reach to higher levels .

Thank you, Raghunandhan for that question. Yes, your observation is exactly our observation, too. We're well aware of the fact that we that we can do much more. What we are seeing is some capacity constraints that we have, which is something that is currently being addressed as I speak, so we are trying to bring in more capacity so that we can feed both the OEM requirements and the aftermarket requirements. So invariably in a high-growth situation, the OEMs end up getting the priority and the VLS kind of takes the second preference. And that is something we do not want. We want to definitely prioritize and we are addressing the capacity gap that we have in meeting the entire VLS demand. That is something work in progress right now. And here, again, just to add, it's not just about Schaeffler capacity. We have work cut out in terms of our own supply chain capacity as well, a lot of local suppliers are still under development, but I'm sure we will get them all to a closure so that we continue to ensure the entire supply chain is now aligned with the increase the demand situation, both on the OEM side and on the VLS side.

On the cost side, trying to understand that many of the auto component and other suppliers have been facing pressures on commodity side and the pass-through happens with some lag, so trying to understand how are you managing that situation. Also on the [indiscernible] hike, which you spoke about, are you seeing OEMs responding positively? Do you expect the compensation to be given in the coming quarter? And again, continuing the point on the cost side, other expenses in the opening remarks, you referred to increase in the freight cost and IT cost increases. So this elevated level of other expenses, does it have any one-off? Or should this level continue?

So I took 1 and the other expenses that you mentioned. Other expenses have marginally increased. So in quarter 2 of last year, we were at 15.1% of other expenses. Currently, we are at 15.4%. So that is a 0.3% increase. And this 0.3% increase is covering fuel price increases, which we all witnessed. In Q1, it was only single month March, whereas Q2 is full quarter impact of the fuel prices, which is within the other expenses category. Second thing is Harsha talked about the capacity constraint at our Hosur plant, which is leading to impact on VLS business because we are prioritizing OEMs. This capacity constraint is leading to the airfreight of incoming material as well as outgoing material. While all round efforts are being made that volumes are absorbing these level of enforcing cost, it is very unlikely that customer will reimburse this customer would expect that we are doing some productivity measures, BAV, et cetera, to absorb such kind of cost. On wage increase, we have seen average of wage increase of 10%. Again, this is not subject to the recovery from the customer. What is recover from the customer is indexation of FX, which we are working on currently and very likely in second half of the year, we will see some traction on price corrections and other is on steel price indexation. Other than that, the customers usually expect that the company will implement productivity measures to absorb the increases.

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

Yes, sir, my first question is going back to the pricing part of it. We have seen our gross margins expand this quarter Q-o-Q. Could you give some -- so what I want to understand is how does the pricing work across your different segments. One is, say, intercompany on exports. How does that work with commodity costs and ForEx and say, with OEMs and with the aftermarket. I'm assuming aftermarket price hikes would be easier. So if you could kind of just give how the pricing work across these end markets.

So Mukesh, thank you for the question. And let me start with the other way around, this is the automotive OEMs. As you know, the automotive industry works on an indexation mechanical. And not all mobilities put under that list. So there was an earlier question on the labor wage code increases. Surely, that is not on the list. So to get compensated from the customers not at all. Yes, we are in dialogue with most of the OEMs. We have already been talking to them, particularly on the input cost increases due to LPG propane that have gone up because of the situation there in West Asia. So that is something that is in discussion and these commodities are not in the -- list. So definitely, the dialogue is going on. We will see more shoes. And as Hardevi rightly said, in the second half of this year, we expect some positive traction to come back. We will [indiscernible] there. So overall on the automotive side this is our [indiscernible]. Now regarding your question on pricing between the segments, I'm afraid that is something I cannot reveal -- that would be like I mean it's...

So what I mean is how does the pass-through work across these segments, like for exports with the parent, is there like every quarter kind of a reset with respect to how ForEx is moving and raw material costs are moving? Or is that annual just to get some sense on this quarter, your gross margins have gone up. So I'm just trying to understand what are the different variables in those margins?

So when we talk about the intercompany exports, it is a conflict pricing principles. Transfer prices are determined and -- is done at end of the year in December. So this is a general methodology. And this is followed by every company, and it is as for the OTC guidelines.

Sure. So that's -- I understand that part of it. Okay. And just coming back to the Industrial business, I think this is something that you've got many questions about it's kind of remained -- and I look at the nonmobility side of it, the bearings and industrial segment within the non-mobility business, it's remained at this INR 400 crore kind of a number now for the last 6 to 8 quarters. So just -- is there some -- I mean could you give some sense if our market shares have however remain stable in this period, and it's only an end kind of an issue. Sometimes it could be railways sometimes to be aftermarket. But market shares overall, have they kind of remained stable in this segment? And in your opening remarks, you had mentioned about some large orders in terms of value in this industrial segment. So if you could give some more color on that, if that would kind of change the trajectory on this number.

Mukesh, just to get a clarification, your question was towards the non-mobility -- okay so as I already mentioned, 1 of the core industrial sector, the raw material sector, which is the core metal industries and the continuous process in the times that we cater to, whether it's steel, aluminum, cement we have seen strong traction in the quarter, correct? And obviously, that's because of the growth in the infrastructure sector that's already happening. We have seen pretty good traction there. We've been localizing a lot of parts to cater into this sector. So there, we are well on track, and it's working. Industrial automation as respective, yes, well -- and that is something we are looking at what new product portfolios that we have to add to get into this sector, the power transmission sector, we are pretty strong there. We are doing very good there as well, good growth in the second quarter. We had almost close to 8% growth there as well. So overall, when you look at the nonmobility sector and purely the inside, certainly, we have done well. We are doing well there. Maybe maybe the distribution side of the business is something we see more opportunities there. And that is clearly on our radar to exploit and move forward there more.

Rather than I would just say that our end nonmobility side, we have grown double digits.

Yes, yes. If you look at it in double-digit growth overall in the non the automotive side of the billing business is a little under pressure.

Right, right. So okay, I was just looking at the non exports also. So obviously, the industrial non-mobility includes exports, which has done really well. But I do get your point. We look forward to some improvement there.

We take the next question from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, my questions have been answered.