Shivalik Bimetal Controls Limited (513097) Earnings Call Transcript & Summary

I think a lot of new activities that we are already taking or have taken in the past year, 1 year, 1.5 years, we've always said that it takes time when it comes to our kind of products and -- but I think a lot of them are now starting -- already starting to take shape. We are in prototype stage. We are in pilot production stages and -- which is now going to get ramped up. So we feel that we'll definitely have a stronger Q4 and, of course, a much stronger financial year '27.

I will also add something very interesting over here. You see our anticipation of a lot of our growth coming was from markets such as developed markets such as the U.S., even Europe. What we are seeing interestingly now that our biggest growth market for automotive shunts, whether it's EVs or hybrids or whatever it may be, but specifically for 2-wheeler EVs, is coming from India. The kind of forecast and the kind of developments that we have for some mainstream models from the large 2-wheeler players of India, that could -- that is one thing which in a very, very short term could bring about that level of growth. Now percentage-wise, that growth numbers, if everything goes well, could be -- could repeat those things that happened a few years ago. And the moment you supplement that with the fast growth that we are facing from -- or we are already experiencing from the smart meter growth, and irrespective of whether smart meter installation goes up or not. For us, the growth is still there because of the relays being manufactured as we several times -- we mentioned several times. So we are very optimistic of the next 2 quarters and the next financial year. So it's -- we -- you are looking at this thing as a flat growth, but what we are looking at it is slightly different. Our growth is looking flat or this 8%, 7%, 10% kind of growth in certain quarters. Why it's looking like that? Even after a decline of over 20% year-on-year for 3, almost 2.5 years now, from a large customer like Vishay, even then with that 20%, which used to be an exposure of 30%, 35% of our total revenue, even then we are registering a growth of 8% to 10%. So your question is very valid, and it could be a cause of concern for a lot of people. But when you look at it from the other point of view, that with your major customer registering or the major customer reducing their buying by 20%, 25% year-on-year, you are still registering a growth of 10%. Where is that coming from? That is coming from exactly what Kanav was just mentioning of all of those developments that we have done in the last 2 or 3 years. And those are now materializing one after the other into business. Now whether something takes 1 year to do, whether something takes 2 years to do, it can greatly vary and it can vary straight away by 2 quarters. It can vary straight away by 3 quarters as we have been seeing. But because those developments are converting into business now, we feel we are optimistic. For our kind of business, when you look at it from the -- from -- actually from the product point of view, you'll realize that 1 or 2 quarters here and there is extremely normal for it to happen. So although what we are trying to give as I would say, maybe what we are trying to talk about our development for the future, we have to give some kind of a timeline. Of course, we can't talk about it without that, but those numbers can vary. What we are happy and what we are optimistic about is the fact that those developments have taken place, they're approved, they're moving ahead. They are going ahead. Now as and when it converts into business, you will see growth happening. So when it comes to shunts and EVs and automotive components, there's a lot to be very, very optimistic about for us as the management of the company.

Our next line of questions will be from Deepak.

Am I audible?

Yes, please go ahead.

So Sumer, earlier in the call, you nicely pointed out that looking at shunt resistor volume, we -- it might be misleading because there is an inverse relationship between, let's say, the value addition and the volume growth, that's why you see a higher realization, but the volume is kind of subdued, right? But my particular question is regarding bimetal front. So in the last call, we sounded relatively confident that for year-end FY '26, we'll achieve a volume growth of around 7% to 8% in the bimetal front. Now, but looking at the current quarter at, let's say, flattish kind of growth Y-o-Y, it appears very difficult because in H2 that implies an ask rate of almost 10%, right? So firstly, means what is our volume target for '26 and '27 from the bimetal front? And why is it that the Indian revenue continues to see a decline on a Y-o-Y basis? Means, is it something that we are losing market share or that the product in which we are supplying, that is not doing well? Could you please elaborate on that?

I think the -- we'll start with the second part of your question, and I think Kanav will be able to -- with the domestic market, if we can start with that part first, and then we'll get to the...

Yes, we can do that. Actually, just to let you guys know that, yes, we see muted. In fact, relatively subdued demand in the domestic market. And the reason is clearly that we have not lost any market share, but we also have to understand that a lot of our Indian manufacturers to whom we supply components and parts, and bimetals too, they also export. So they are also kind of facing a similar issue that we are seeing in terms of these tariffs and the global geopolitical situation that we are seeing around the world. So even if the -- for us, the supplies are within the domestic region, with a lot of the end product goes to international borders or international economies, which kind of have an impact on our overall sales. So yes, the domestic market has been very subdued, and we had anticipated that maybe this would get better, which was the feedback that we had from the customers. However, what we are seeing from most of our customers now is that Q1 next year or Q4 of this financial year is where they're projecting very strong numbers again. Because again in anticipation of the India America figuring out the trade deal, which we are hoping that it should kind of get settled because lot of the end customers have kind of reduced and what Sumer had mentioned earlier, also their forecast in anticipation of a reduction in demand in those parts of the world. So those things have an impact, but we are now hoping and we are seeing some positivity coming from the customers in anticipation of the trade agreement that's happening between India and the U.S. So these things, even if we supply in domestic market do have a global impact and which is what we are seeing at the moment.

Yes. But the Indian revenue would be related to the domestic market, right? It is not as if, let's say, if you are supplying to an Indian company and then it exports outside, so those would be captured in your America, Europe and other Asia, correct?

No, it's impossible for us to do that.

No, if we supply to an Indian customer, for us, it's a domestic sale. Now what they produce and export, what percentage of that they produce and export is something that we, in some cases, wouldn't know.

Okay. Got it. It's like that. Okay.

It does have an impact, although it's difficult to point out how much. And also it's cyclical. Sometimes it can be a larger percentage. For example, sometimes we -- our supplies to Havells would, for example, just to name a customer, goes up in a particular quarter or a particular month because their export orders are up. And sometimes they say that our export orders have completely gone down now for whatever reason.

So at best, I would presume that a 4% to 5% growth is what could happen in FY '26 in bimetal in volume terms?

That's realistic. I think it should be more than that, hopefully, but that's something which we do expect that will happen.

Now my second question is with respect to, let's say, shunt resistor. So there is some issue, which is going on with the European automobile companies with respect to chip sourcing from one of the Dutch company, which is Nexperia, right? And because of this ongoing tussle between Europe and Chinese government, a lot of auto companies have flagged this off that, they are not able to source the chip. So just wanted to understand, are we seeing any slowdown further in the European geography for shunt resistor for us, I mean to say in terms of order book visibility?

I think we were anticipating growth, which has not happened. So it's basically subdued and which is basically because of the current issues that are already there. And it is already reflecting in our numbers, and we don't really foresee further reduction there.

And final question is with respect to, let's say, our growth visibility right? Because now you highlighted about that PCBA arrangement. So just wanted a clarification that we had two projects that one was related to white label agreement with one of the clients and another was PCBA. And white label agreement revenue was supposed to flow through in FY '26 with PCBA coming in FY '27, correct? So just wanted to clarify that which project is getting translated into revenue for us, let's say, in which year or which quarter and how you will ramp that up?

The white label agreement, the business has already begun as we had anticipated for or as we had a clear forecast from our customer for Q3 and Q4. For Q3, our orders are already in place. For Q4, we already have a forecast. So the white label agreement part of it is all as per plan. Our forecasts are also as per what our original idea was. Now because of these -- the tariffs, et cetera, things change in the future, not that we have any information of at this point, but in case they do, that's a separate matter. But as of now, that is absolutely in order. And PCBA, as Kanav had mentioned in for one -- another question earlier was for quarter 4, we will have some revenue. So those developments, those testings are already -- the testings are already taking place at customers' end. There are 2 or 3 developments that have reached advanced stages. So Q4 onwards, we will have certain revenue from that business this year, and we will have regular revenue all throughout next year. So I would say, to simply answer your question, both are absolutely on track, both the developments.

Our next line of questions will be from Jayesh Shroff.

Congrats for resilient numbers. I have a couple of question. One is, I think maybe you've answered this in terms of your gross margin this quarter like 2.5% higher than the trend that we've seen. So do you think this is sustainable? Or this is a one-off kind where maybe...

It's -- as I had mentioned earlier, it's a -- I'll give you a very -- like a simple and a real-life kind of example as to what's causing this, and then you'll know whether it's sustainable or not. So for example, we were earlier talking about major customer of ours, Vishay, who used to buy very large volumes of continuous strip form of welded shunt material from us. So they used to manufacture the shunts or the resistor and we used to supply that strip. Now when we do that kind of business, our -- the value add in that sort of business, as you can imagine, is much lower because making parts out of that strip is a very long-drawn process. It involves a lot of steps, and it's a lot of high-precision things happening there. So there's a lot of value add involved. So when we supply strip, our value add is low. Now that business has consistently gone down as a total percentage of our revenue and even overall as volume. And during that same time, and as I had earlier mentioned that we have faced from Vishay about nearly 20% reduction for the third year in a row. So it's come down to almost 20%. So it's come down to almost half of what it used to be at one point. Even then we have -- for overall our resistors and shunts business, we are registering about 8% to 10% growth. So where is that -- where is that other part of growth coming from? That's all coming from components and many of them being high value-add components. And that is exactly the reason why you are seeing a growth in margins. Now all of those businesses are not temporary businesses. In fact, if anything, the complicated small components business, a lot of which have been added and that is what is causing this are actually definitely a longer-term business than a strip business, for example, right? So strip business has lesser production processes happening. So let's say that tomorrow, maybe Vishay can buy that strip from us. And then maybe they can buy it from somebody else if all these tariffs happen and all of that. But when we are making a high-precision, small component, which has -- for which years of development for -- extra years of development have gone in, the tooling investments have been done. So even a 50% kind of tariff cannot immediately push a customer to start buying from an alternate source. So I don't need to get into why that happens. I think it's very obvious, why. So our developments have moved more and more towards that, and that is evident, and that is what is causing this. So if anything, I would say that, that additional improvement in margin is actually more sustainable than it ever has been because why are we going more into those kind of businesses? And we are following a very similar strategy even in thermostatic bimetal, wherein we want to supply more and more high value-add component. So eventually, at some point in the future, maybe a year or 2 years down the line, we will see -- start seeing this trend also showing up in numbers that the bimetal gross margins will also we will see going up. And by then, if our raw material is indigenized, we will see maybe a further improvement in gross margin. So that's why this is one part of our multiple areas of strategy where we are working top line, bottom line. So definitely a sustainable thing. And with this example, I'm sure you would have probably had…

Yes, 100%. But I'm just saying that -- so this is visible primarily since last 2 quarters because I mean in Q1 '26, we improved our gross margin by, let's say, about 1.5%. And this quarter is, again, even -- it's actually almost 2.5% Q-o-Q improvement. So it's a big improvement in just 2 quarters from close to 57% to 53%, it's about 400 basis point improvement in a very short span of time. So I was just asking you in that context because the Vishay business has been reducing, as you said, over the last couple of years. But this improvement in particular, has been happening mainly in last 2 quarters.

Right. And because a lot of the business that we have developed prior to that, let's say, something that may have started in 2022 or 2023, those developments are showing business or a substantial amount of business now. So what happens is in a, let's say, a small-sized resistor and even if it's not an automotive application, let's say, that there's some development that starts in 2023. It usually takes somewhere between a 18- to 24-month period for the entire process development as well as approvals, et cetera, to start. And then usually, typically, we see somewhere between a 10% to 20% volume of what the original forecast was to happen in year 1, that goes up to 30% to 40%. And so if you total up everything, it becomes a 4-, 5-year process. And for whatever reason, and that also happens. So what other reason there's a delay at some point. There is a rejection. There is some kind of -- the results are not being met and those R&D has to be done all over again. So that can drive it up to sometimes even upwards of 5 year. And that is exactly what that barrier is. So maybe a little bit of patience at this point, but it will -- when it adds business and it adds it straight away. And we have seen that happen in the past. And again, why we feel optimistic is because in the last 2 years, the total number of developments that we have done even when it comes to total number of development with customers, part numbers as well as the value of potential business has been more than what we have done 10 years combined, right? So whether it happens in a 2-quarter period or a 4 quarter period, that is obviously a variable thing, but it is -- it will happen. Those investments have been made by both Shivalik as well as the customer, who has paid for certain tooling and development. So it's in a good situation. Now if those developments were not taken place and had not been as successful, we would have a big problem. We would be worried at this point of time. But we are not worried at this point of time because of that. It is only a matter of -- of course, being investors, we totally understand that you look at the length of 1 quarter and a very [indiscernible] what we look at. And it's totally understandable because if I was also in your position at this time, I would also feel that.

No. So I fully appreciate that. I'm -- again, I am also a very early investor and a very happy investor. So I am not complaining in any case. I just wanted to know whether this is sustainable, and I really appreciate the efforts that you guys are doing in product development and diversification. Just one more question. We have been incurring some amount of CapEx. So if you see for quarter ended September '25, we have about INR 32 crores in capital work-in-progress. So what is it? And primarily, when do you think that we're going to maybe come to an end of this CapEx program?

So what's been happening, we had -- major CapEx had come to an end -- other than maintenance CapEx had come to an end about 2 years ago. But we have slightly changed our strategy a little bit. What has been happening, we have seen that the cost of manpower has been consistently increasing in the area that we are in. And also, we have been facing certain issues related to getting the right manpower. I think it is probably because of whatever reason. We feel that sometimes it's difficult to find the right technical people for certain processes. So these two factors in mind, we have been focusing a lot of our CapEx as well as focusing a lot of our development activity towards automation. So what we are doing, we have seen that -- we have seen that in the long run, even in the medium term to a long-run development for it makes a lot more sense for us to continue to focus on automation. And that is -- that strategy has obviously caused us to incur more CapEx. But I think we should be able to see benefits of that in the medium term rather than like any issues.

Yes. And I'd like to add one more thing since it's a consolidated number and our subsidiary is in expansion mode. So out of INR 32 crores, almost INR 20 crores pertains to SEPPL which is underway for capitalization. That's it looks like that it's too high comparative to our previous quarter -- quarterly results.

And that CapEx is now already done.

Yes.

And Rajeev, even in that CapEx towards the finishing stages of that -- the wholly owned subsidiary for the contact business, our strategy. Again, we applied this strategy towards that as well that why not go for more automated processes rather than putting together a new facility with more manual operations rather than. So of course, what we had originally planned versus what we actually ended up incurring as CapEx was different. The number was higher substantially.

Yes. We changed our policy and even we got an opportunity to expand more so that we acquired more land and accordingly you are right. It is related to the long-term vision of SEPPL itself. So that's why the original got extended by 20%, 25% additional CapEx. And these are putting under CWIP, which will be capitalized by end of December. So that's why this going under CWIP.

We'll take a few more questions. I know we've crossed 5:00 p.m., but since we have the management here, we'll take advantage of it. Our next question will be from the line of Naushad.

Hope I'm audible.

Yes. Go ahead.

Congrats team for decent set of number in a tough time. A couple of clarification. Firstly, on the growth side, given the consolidation we have experienced in the last 2 years. And assuming if cycle revives, especially in the pocket where we are facing the problem. And if we have not lose the market share or the client, should we experience at least first year of revival should we experience exponential growth versus our historical run rate and then it should normalize? How should the first year of recovery look like from a growth point of view?

I think you're absolutely right. We were also internally deliberating this. Once the recovery really starts happening, with the existing activities that we have initiated and already working on and are in progress with, we would actually see a very high recovery rate. And just what Sumer was saying that even if our customers come back to their base level without further -- without any growth, we will see a substantial increase in our top line as well as on the bottom line.

And does this imply that whatever negative experience we are currently having with Vishay is all because of the demand issue and their inventory adjustment or is it because they're shifting their sourcing source to someone?

No, no, no. So it's a combination of both. What has happened is that a lot of business from Vishay has shifted to some of its competitors also and which we have also received indirectly. That's why we have substantial growth in shunts in general, even after such a downfall of Vishay. So what we see now though is interestingly that there are certain developments at Vishay, which could bring Vishay back to its original or back to its former kind of volumes. This is what we have because they have developed some new types of resistors using these welded, which -- the kind of welding they need for that, they can only source from Shivalik, so we are in the part of this white label agreement that we are in with them. We are foreseeing that, that development is moving very, very fast, which means that if those numbers were to materialize, then it could come back to similar levels of our total revenue with Vishay in the next year itself. This is a possibility. It's -- I would say 50% of it is still on the -- still on the more optimistic side, but it is a very, very -- it's right there in front of us. It is not something that needs to be developed yet. So there is optimism provided that this whole U.S. thing, a quick resolution is found because even a company like Vishay, which values and has faith in Shivalik's products at some point, we'll have to look at alternate strategies if this 50% were to remain. So assuming that some kind of resolution comes in because that American development for us, not just for shunts, but for bimetal also becomes very, very important. So there is -- when that recovery happens, as Kanav mentioned, when that recovery happens, we expect it to happen in a very sharp way.

A clarification on this, what I've understood. So we are not losing market from a Vishay point of view, but Vishay itself is losing in the market, and that's why it is impacting you? Have I understood it correctly?

Yes. That is part of the problem. You see the biggest reason what happened was, I think Vishay was very over optimistic of its volumes and they overordered, and they overordered to a point wherein they were stuck with inventory, which took them more than like 1.5 years to normalize. And some of it came because of that, which we've been talking about earlier as well that inventory -- over-inventorization because of whatever errors took place at their end. So some part of it is that. And some part of it is that there are competitors of Vishay, which have taken some part of the business, but then they are our customers as well. But if let's say that, that customer was buying 20% of the volume from Shivalik, Vishay would have been buying maybe 60%. And if that business goes to them, that means indirectly some of that business we have lost as well. So such cases have happened. But with these new developments in Vishay, we should see numbers going back to what they were. Because they have a clear technical advantage there. So even if Vishay may be more expensive with the technical advantage, a customer buying from Vishay is still justified.

Sure. Next, on the client addition side, earlier we have talked about -- I think we have touched on the BYD and Hella China, all these new clients, which we were...

Hella China is already our customer. We are already supplying certain components to them. The new development with Hella was related with the Indian market, which is on track at this point of time, it's under development in various stages of development. BYD is a development that we are doing through Vishay. And at this point of time, that is also as per track. And that is not just -- some of those – some of that is for BYD, but it's also for other designs as well. So we are doing a lot of developments with Vishay for some new customers, not directly at this point of time.

And last question from a domestic point of view, if you look at last 5 years of EMS industry was the -- for the assembly guys and it has done quite well for the assembly players. Now given the different policies are coming to support the component side of this EMS industry, any thought on that? How are we planning to participate in this journey of growth for the EMS component, which is emerging?

Yes. So we are now at advanced stages of -- in earlier calls, we have mentioned that in earlier interactions, we mentioned even during AGM that we are working towards entering some new product verticals, which are related only to -- mainly with electronic applications. And so we are also making use of this ecosystem wherein we are getting certain advantages. We have finalized what components we are looking at. We have done the financial working on it. We are at the stage of finalizing where and in fact, those things have also been done. So I think that very soon in the near future, we will be making certain formal announcement as to what we are doing and what kind of products we are entering. It's just a little bit before that stage right now, so I won't be able to talk much more about it. But yes, we are at advanced stages of participating in electronics components manufacturing. Wherever we see that there is something in line with what we already do or some kind of connection, whether it is to add the customer base level or is it at some kind of a metal working process, which we may not be doing at this point of time, but we do something similar. So we have a technical advantage there. So we have chosen those products on the basis of that. None of them are an absolute -- like something that's completely new to us. So we've stayed away, steered clear from those kind of developments. But yes, to answer your question, we are at advanced stages of this kind of a project.

We will take the last question for the day from Bhavya Nahar.

So until last call, I think we spoke of INR 150 crores coming in FY '27 from PCB assemblies and other forward indicated products. So do we still think it is achievable? Because I think one of the earlier questions you mentioned a number of INR 50 crores to INR 70 crores?

But that was just specific to the PCBA.

No. So that was in relation, what Kanav had mentioned with the developments that we already have in hand. So what we may have mentioned earlier as a potential of INR 150 crores is what we identified, some of those opportunities may not be in our hand as of today when it comes to the development part of it, but can be accessed and we are targeting them but that was the potential. But these are the ones that can -- that have -- obviously, it can be a part of top line only if it's once crossed that level of certain discussions and certain developments or certain proposals at the customer end. So what Kanav was talking about was more related to the ones that we are already developing.

And just as a last question, could you please share an update on the progress with busbars? Because I understand they enable faster production, but how are they in terms of cost competitiveness?

In terms of cost competitiveness, you mean to say in terms of...

Busbars, because I think there are new developments that EVs are looking at, right?

They, of course, are -- in fact, we are developing certain specific designs, which would also be kind of an IP protected technologies, which will bring a reasonably good level of valuation process.

In fact, Kanav, our biggest advantage in these busbar developments is the cost competitiveness.

Absolutely.

Am I audible?

Yes. Sumer, I think we lost Bhavya actually. Bhavya, are you able to speak?

Yes. Now, sorry. No, I think so. So I mean can you maybe just finally give us the guidance, how you see FY '27 panning out? What sort of growth do you see?

See, we -- again, it's -- assuming that these trade-related issues that we are facing. So we have to understand that a lot of our existing business as a percentage was based on the U.S., okay? It had been consistently going down, which had -- we had been -- our exposure has come down from 1 year 40% to about 17%, 18% recently. But that 17%, 18% still has an impact. And then where this -- these trade-related issues take this business and where this -- how much impact it has in the overall market, assuming that all of those things are corrected and let's hope, we all hope that, that is, we are -- and keeping in mind our new developments and new projects and then we share numbers and forecasts on the existing business. We feel that double-digit growth definitely for next year is doable, achievable. And probably, if all goes well probably on the higher side of double digits on somewhere in the range of 13%, 14% to 17%, 18% kind of a level, at least that is what we have in mind, where it is possible with the developments in hand. But then are many variable factors out there as you can obviously imagine.

We'll conclude the Q&A session on that note. As soon as this call finishes, you will receive a survey for your feedback. Kindly take a few short moments to participate in this quick survey. I'll now hand over to Sumer for closing comments. Over to you, Sumer. Sumer, would you like to proceed with the closing comments?

Yes, let me conclude. -- Thank you for participating in today's call and being part of Shivalik's journey. As we head into the rest of the financial year, wish you all a very pleasant evening ahead. Thank you.

Thanks, Rajeev, and thanks to Sumer and Kanav as well for your answers today and for everyone for participating. If you have any more questions, please write to us at the email ID at the end of the Investor deck [indiscernible] and we'll be happy to get your answers -- questions answered. Thank you for joining us today, and you may now disconnect your lines.