Schaeffler India Limited (505790) Earnings Call Transcript & Summary

Good afternoon, and a very warm welcome. Good to see some familiar faces. And this is kind of a ritual we have at least once a year, we meet up, and I'm so glad to see a lot of faces that I recognize. So how do we go with this? It's question and answers.

I think we can begin with the Q&A, if that's okay.

So I open up the floor.

Export. So we have seen a sharp [indiscernible].

Currently on exports, our mix is like 50% is to Europe intercompany partners and 25% is Southeast Asia and remaining is China and Americas. So this is how is the spread. And this was very consciously done so as to have a lower impact of geopolitical disturbance. Earlier, we were a lot dependent only on Europe. And lately in last 2 years, we have developed into other markets. Schaeffler India Limited is not having as such a strategy for exports explicitly. We focus on capacity enhancement for the local market. And whatever is the capacity available for exports, we utilize that. And if there is a good demand, we leverage, we do 21 shifts. We do some efficiency improvement in the plant, and we cater to whatever demand we have, and we have seen good demand from outside India. We don't say that the same momentum will continue forever or even we are not focusing that the share of business of export will be 25%, 30%. It will remain in this range because the bottom line, and that is the denominator is increasing. The domestic market is growing at 14%, 15% for us. So this higher base at the local market, we expect that export will continue to be between 15% and 20%.

Mentioned that exports are not strategy a lot of other companies talking about making [indiscernible].

Harsha has been talking about it actually. So the companies who are making Make in India as a strategy, for example, Harsha was earlier talking about Ford or Stellantis that they are not making cars. They are making engines and then they are buying from the companies like us, the child parts. For us, that is not export. For them, it is export. For us, it is domestic business. So we have to differentiate. This is what we have been doing with wind for many years that we sell to the wind turbine manufacturers and onwards, they export it. So Schaeffler as a strategy that we export out of India. This was several years back when we had export-oriented unit and all of that was there. But we have reached a stage where the group looks at overall where there are highest demands of a specific product, the lines are laid out there. For example, if ball bearing demand is in India, then the line will be laid out here. And from here, the export will be made wherever there is a demand. So the strategy of setting up the production line is where the highest demand in which country it is there. If it is in Vietnam, the line will be in Vietnam. If demand is in India, the line will be in India. can add.

Also, I would like to add here that our export strategy is a subset of our localization strategy. because over the last years, we have focused largely on localizing what we were importing. So as a result of that, obviously, when we start to invest more in local capacities to feed the local market, correct? And it comes out that we are more competitive, nothing to stop us from growing our exports as well because I'm very competitive in the global market. So hence, if you look at our localization percentage 3, 4 years back, we were in the range of 60%, 65%. And today, we are hovering at about 80%, which means 80% of our need we locally produce is proof enough that our localization strategy is the prevalent strategy. It is important. And with the government also wanting it to happen and our customers expecting to locally manufacture rather than trade in the products. So it makes economic and business sense that we do it. Now as a result of that, of course, export comes our way, we will not say. In fact, interestingly, when Hard was speaking, my mind was on that. We export to China. Can you believe that? We are so competitive. A lot of exports from India, bearings goes back to China.

13%.

13% of our export is going to China. Who would believe this? Normally, they say China, No, we are doing the other way around. So it shows that from a competitiveness point of view, I think we have come of age. We have come up.

Mentioned your localization currently at 80%. Any particular target where you want to.

Over a period of next 4 to 5 years.

Obviously, we are going up means it's only one direction, keep increasing. We are on that direction. So yes, we kind of -- we don't set a target for localization, right? What we do localization is more -- the number is more an outcome of where are we reached. We set a target for which product, which customer need becomes important and which market sector becomes important because the customer strategy drives our localization. The -- sorry, the outcome is more the number localization, which you finally realize, oh, I'm at 80%, very good. I'm on the right track. It's not like I want to get to 80%. But then I can get to 80% by localizing something which is not making the right strategic sense, right? We have to invest in what makes the right strategic sense. Case an example, we have started to localize more on the steel sector, the portfolio, which we were importing a lot. Today, we make in India. We have consistently started to localize more on the wind product applications, correct? Wind is something we have been doing, and we will continue to do. We are -- in fact, as I speak, we are expanding our buildings there. So that's happening as well. So talk about localization on the e-mobility side. We started off by -- once we had the first business win on the e-axles, we started to import the e-axles. But then we have to one day or the other, start localizing. So we are in the Phase 2 of localization already on the e-axles, which means we have built buildings, we are setting up production lines. So it's happening. So the customer strategy defines my localization strategy, not a number. The number is more an outcome. Yes.

And also export is mainly bearings.

Yes. Export is mainly bearings. You have because automotive customers don't look for an export at all. They have their own supply base wherever they go. However, that is changing. As Hari said, Ford and Stellantis are kind of redefining it. We are seeing it already that Ford is coming back into India, not to make cars, but to leverage the setup they have in Chennai to produce engines and take it back. But then obviously, the supplier base is from India then. So the business model is getting changed even there. I see a transformation there. Yes, that's an opportunity any which way for us. We are already working there.

In terms of capacity, the key criteria would be that strong demand for the product that you're getting in India.

Otherwise, just for export to do it here, the risks are higher. Another war breaks out and then you have a drop in demand, I will have a production line standing idle, no demand in India. So we have been very careful on that front to say no because India also must need that product. Then it makes sense. I kind of derisk my strategy. Otherwise, pure export strategy in today's geopolitical environment is far too risky. That's my view.

So the A part, if you could touch on the growth factor, the content, the EV train part, the market share additional, how do you see that going ahead? Because the conventional part is anyway growing. In fact, the last number that I saw it was like almost like 30-plus percent kind of growth in Automotive technology.

You're talking about the electric mobility, EV.

Automotive technologies within that, how much is the electronic part.

Okay. So if you see 29%, 30% growth in the automotive space, correct? A lot of it came even on the ICE engine part, okay? I'll come to the e-mobility later, the electric vehicle. But even the current gasoline engine itself, we have been doing pretty strong growth. Why are we doing? Thanks to GST 2.0, that helped us because the market demand went up. And clearly, there are new and with BS-VI more and more products coming in, the demand for new clutch systems and new engine systems, both have come up very strongly. And we have -- that is one. Two, we also were already in a localization plan for that as well. Because when we started off, we were setting up the lines, we were importing the parts from Germany. Now that the lines have come in, more parts are being made locally. So that in itself is enabling the growth, and that's why you see a strong growth on the automotive side. Talk about e-mobility, of course, the base is very small for us. So that's why you would find a 300% good jump in demand because the main factor, obviously, being my customers' product is doing very well in the market. And we have a large stake there, the e-axle, which we talk about. And rightfully, since that took off very well, we have benefited that, and we are riding the wave there.

How far ahead usually in your business, do you have visibility of orders?

Good. Very good question. So we -- what we do is a couple of things. There is one which I have to load the plant, a running plant because capacity is already there. Now I need to make sure that stays loaded. So business acquisition is a continuous activity that runs in the marketplace. And to do that, we have 2 things. One is the ongoing product itself, ongoing production product, we continue to pursue the customers and secure businesses. The second is a little midterm, let's say, 1 to 3 years midterm. Now that's where we look at the new launches which are going to come up 3 years down the line, correct? Normally, our Tier 1 customers, they start to develop it 2 to 3 years or 4 years in advance. I've seen 3 years as a traditional. And so we start engaging at that time itself. Now there, again, when we start engaging, you're not sure whether you're going to get the order, correct? So what we do is we track the progress of the project because there are competitors also buying for the same one. So we measure the probability success rate at different stages of the project, okay? So there's a 25% probability success rate, 50%, 75%. So when you're getting to 75%, you're almost sure that you're going to get the order. So we kind of always try and track it. We have a visibility, but the probability is progressive there. So there are projects where at 25% itself, we have lost. There are projects we've gone to 75% and then the customer delays to kill the project. We have seen all kinds of things happen. But it is very important for us, and we keep that. And we have a ratio called a book-to-bill ratio, which is a metric we use to measure, which confirms -- if I continue to keep my book-to-bill ratio above 1, above 1, that means I will continue my growth story the way I'm growing. The moment it dips below 1, I know I don't have enough new business opportunities, correct? -- so that my growth may go down over the next 2 years. So which means we go back to, again, secure new businesses with different accounts so that we come back to that above 1. So that is one true indicator for us, which we track very closely.

And given that this West Asia conflict has been going for a good while now, what's been happening and then there is this tariff and there is this oil and a whole bunch of other things. Has that -- over the last month or 2, has that book-to-bill as you look out, may not be 2- to 3-year out business, but at least a 6- to 12-month business, has that kind of tapered one way or another or that's kind of steady as we speak?

I think I have to clarify here. The West Asia crisis is more impacting our industrial side of the export business because our exports are predominantly bearings. It doesn't impact the automotive at all. Where it impacts the automotive is from a cost -- input cost point of view because the fuel prices went up, LPG prices went up. So that impact definitely has come in. And rightfully, we have started to go back to the customers to try and recover. We still have a lot of ground to cover there. So that's happening. So from a demand perspective, there's no impact at all, okay, because we don't export anything on the automotive side. Yes. In fact, that's why I said the GST 2.0 is more a homegrown story. The government decided to change this last September. And after that, you see a strong uptick in demand. In fact, last month, I was reading the first-time car buyers have now come back. The number of people who are the first-time buyers have overshadowed or overtaken the repeat buyers. Unfortunately, that ratio had changed. Last month was the first month it got reported that the first-time buyer has now overtaken the repeat buyer, which is a strong indicator that more and more people want to buy cars now, which is a strong indicator of the government step that it took is helping.

And that trend is still intact.

That trend is still intact, at least to should for now it is.

On the commodity pass-through basis, how much you are able to pass it on with this commodity price -- commodity cost increases to your customers. With a delay, should we expect that -- I mean, how much of pass-through should we think about?

So fundamentally, if you look at it, everything should be passed through, but it is easier said than done. advantages on steel, while steel works with a very steel price escalations, it works on a very indexed formula. Every Tier 1 has an indexation. We agree on the indexation. It's built into the contracting process. So if steel prices go up, we get compensated. But the other input costs are negotiable, unless like FX, if I'm importing a lot of parts, child parts, I may be making it here, but my input components are still coming from out, the FX impact will be hurting now with the way rupee has depreciated, right? Now that is very difficult to get a compensation, right? So it's a mixed bag with the input fuel costs going up, correct? And it's -- I have a double whammy One, because my own input costs went up because of the West Asia. My suppliers input cost went up and he has raised the prices as well, yes. So I need to recover the entire value chain now needs to align to it. Yes, some of it, our customers have appreciated and recognized, but some are still work in progress. .

And historically, usually 70% is recovered.

The acquisition.

80% has to be adjusted with our own operational efficiency, localization and so on.

So we try to manage more on our cost control measures internally. We do that.

From a growth vector perspective, Sheri seems to be having a much bigger potential than even the Phase 1 CapEx that has been rolled out, the footprint. I mean.

Obviously, because that's a greenfield project we started with one hall, and we started off initially by using that as feeding line for the existing plant. Now we are moving to a stage we're going to start assembly of new product. In fact, as I speak, there is one production line that is on the way from Europe that we want to bring here and set it up in the current -- and we are also going ahead with the second hall building as well.

So this will be part of Phase 2 or is it the Phase 1 that you are?

I guess it is spilling over to Phase 2 Phase -- any color on what will that number look like? I don't have the numbers right now. But certainly, it is focused on the passenger vehicle transmission side.

Just on the order visibility point that you shared with us and the fact that you try and sort of work with OEMs on their development and increase winning those not on idiyncric basis, but relative to peers, what sort of increases the probability of sort of grapping share, what defines those going up?

So one straightaway I would say is the technology differentiation. I think that definitely would play its part, and that's critical today because every Tier 1 would look at what's the differentiation you want, performance or even the price for that matter, both. A case in example, if I have to quote is the e-axle that we have brought out. Our design is very different. It's a coaxial design, meaning it's very compact. The one that goes into the area is a very compact solution. The DevOps and the motor are met on the same shaft. So which really makes it compact. Of course, there are other players, my competitor would be offering an off-access solution, but nothing wrong with it performance, but there's a trade-off. It takes more space. So I guess the differentiation would definitely be one of the key indicators which the customer would want. And once you're getting into the game where you have electronics and software is coming in, obviously, the more features you bring in, the more value it can demonstrate, obviously, it makes.

The technological superiority would be not palatable that or do you think.

Well, the Indian market, the Tier 1s, they want the best of technology at the lowest cost, right? So why not I would say there has been a mix there, okay? Some of these sectors are really good, very strong, obviously, based on the back of government policies. Clearly, when they declared that infrastructure is going to be a focused growth area and the government is rightfully investing in infrastructure growth. All the related industries, we have seen strong traction. Steel straightaway, cement, super. Construction equipment is picking up, has to pick up now. Unfortunately, we saw last year, it didn't grow. It was negative in fact. I was in the BOMA conference, and there's a lot of bullishness, by the way. But I guess we'll have to wait another 6 months to see. Mining is a sector which has never picked up. But again, that's to do with the policies of the government because unless they open up leases, it won't happen, right? But there are other sectors, renewable energy is doing very well, growing very strong. So wherein wind and solar both come in. Of course, today, we only play the wind, solar. We don't have an offering, because we don't never looked at solar. We do have some offerings, but the Indian market is not the right -- the product is not right for the Indian market. So we have not launched it. That said, you look at the others like railways, booming now, doing very well. The good thing is more than the numbers, the the market is transforming there. The Indian railways is moving up. You have seen the quality of trains that are coming out. Performance has gone up, reliability has gone up, safety is high. So all these 3 are becoming strong enablers for us to compete there. So the new portfolio of products that we want to bring in now in the railways are definitely going to help us to consolidate and grow further our position, yes. The same with wind. We have been consistently investing in our -- increasing the size of the bearings that we offer to the wind because wind is also graduating from the lower capacity to mid- and higher capacities. And as they start to go up, the power generation capacities are increasing now. Now we hear a lot about 6-megawatt capacity turbines. The size of the bearings are increasing, and we are accordingly investing in that as well. So I would say industrial is good. It's growing, but automotive is growing faster. That's how we see because the GST 2.0 has favorably impacted the automotive side very strongly. A little on the 2-wheelers, of course, did well as well. 2-wheelers. Your guess is as good as mine. I would say one thing, yes, there is an integration, what you're looking at is why is it legally not integrated. Rather than that, I would like to see it from the customer's point of view. And there, I wish to clarify. From a customer's point of view, we are not kind of -- they don't see it as 2 different companies today. Why? Because the entire decision-making, the leadership team is all in the listed company. We are running the business as such. So there are enough and enough opportunities where the Vitesco portfolio is also going to the same customers through us, meaning it's not like it is standing alone and we are not getting any advantage out of it. No, there is a business advantage. It's beginning to happen already. Yes, from a structure point of view, you might see it as it's not integrated. I do acknowledge that point. Now surely, you will get to read it as and when it happens, we will get to read it. It's work in progress.

I said, fundamentally, there is no hurdle.

There is no hurdle.

It is that the group has to integrate Vitesco into Schaeffler entities worldwide. And there are a few dozen companies. it is easier to do the private companies, private companies rather than private company into listed company, where there is not sufficient space, right? We are already 74.13% Schaeffler holding and only 26% is public. So if legal integration has to take place, there has to be a few steps before that. No time line as.

Is the demand coming from the new wagonassglace railways also have that steady replacement demand?

So I think the railways, the first thing was the strategic direction which they took to 100% electrified and which they are almost there. Indian railways have been by far one of the best in terms of electrification of all the track. That -- what does that mean? That means your locomotives have moved away from diesel to electric. And I think there, that's favoring us. Why? Because the traction motors that go on to these electric locomotives use insulation-coated bearings. And we are one of the few who make it 100% locally, whereas our peers continue to import a lot of it. So the electric locomotives with the electrification, I think we have benefited well, and we continue to grow on that. The second, I think, is an important thing, which is I talked about it already, the upgradation in the railways, what we see happening with the Vande Bharat, speeds going up and the freight trains load carrying going up, both is enabling us to look at new product portfolios, yes. Classic is the Class A product for the freight cars. I used to read that they are trying the double-decker container transportation on freight. Now there's a triple decker. I was amazed how the hell are they going to move 3 containers on 1. So obviously, the load carrying load on the bearing changes and the load carrying capacity shoots up, right? And so with more and more upgradation, it is only opening more doors for us as well to get into a larger play there. Talk about the axle boxes, traction motors, gearboxes as well. So I think railways is fantastic high growth. And for Schaeffler, it's one of the important growth sectors for us strategically are focused on that..

Continues to be around 13%.

It will continue.

And double-digit growth at least.