SKF India Limited (500472) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the SKF India Limited Quarter 2 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the conference over to Mr. Sunil Kurup from SKF India Limited. Thank you, and over to you, sir.

Good morning, everyone. Thank you for joining our earnings call and webcast today. With us today are SKF India's Managing Director, Mr. Manish Bhatnagar; Director of Finance, Mr. Anurag Bhagania; Director, Legal and Compliance, Ranjan Kumar; Head Communication and CSR, Aparna Srivastava. Before I turn the call over to the management, I would like to remind you that in this call, some of the remarks contain forward-looking statements, which are subject to risks and uncertainties, and actual results may differ materially. Such statements are based on management's beliefs as well as assumptions made by and on the information currently available to the management. Audience is cautioned not to place undue reliance on these forward-looking statements and making any investment decisions. The purpose of today's call is to purely educate and bring awareness about company's fundamental business and the financial quarter under review. Let me turn over the SKF's -- let me turn over to SKF India's Managing Director, Manish Bhatnagar, who will give you an overview of the company's business activities and developments for the second quarter. He will then turn the call over to Anurag, who will provide an overview of the company's operating and financial metrics. Over to you, sir.

Thank you, Sunil, and welcome to everyone on the call. I was reminded just before this call began that's been a year since we last met on an investor call. And that's a long gap. So it's a pleasure to have all our friends back on this call. Given that it's been a year since we last met, what we thought we should do is spend a few minutes at the beginning of the call focusing not so much on the past quarter, which, of course, we will do in the details as we go through the call, but spend a few minutes at the beginning giving you some information, some direction on our strategic initiatives that we've been working on for the past 1 year and how they will play out in the future. Of course, the world has changed significantly since when we met last, for reasons we all know. But what's not changed is our strategic intent and our strategy and the direction we are moving forward. So I'll spend a few minutes talking about that. Sunil, will you help us move the slides? Hopefully, everyone can see the slides. We should be on a slide that you see which says, what we strive to achieve. This is really our mission and -- vision and mission, to remind everyone, this is not new to anyone of us. Our vision is to operate in a world of reliable rotation. Rotation is everywhere around us. And what we do at SKF is to make sure the world rotates in a reliable way, whether it be [indiscernible] motors, wheels, anything that needs rotation which pretty much covers most things around us. And therefore, our mission is to be the undisputed leader in the bearings business in India and the globe. A reminder again of our values and drivers. Again, none of this is new. This is not new in the last 1 year. It's been our ethos for the last few years. On the values front, high ethics is the most important one that we talk about and we practice every day. And this is high ethics towards our suppliers, towards our customers and towards our employees. Talking of employees empowerment. At SKF, it is more than just a word on a slide here. I worked in many companies before SKF, and I have never seen the level of empowerment that we give to our employees. And India is a very important part of SKF globally. And that would not have been possible if we had not empowered SKF India employees to do what's best for SKF in India. And of course, openness, openness to new ideas, openness to new problems and solving those problems, openness to working with customers, which, of course, flows into the teamwork that we exhibit as a very important value for us. The drivers on the right side, grow with profit, which is true for most companies, certainly true for us. And you will see in today's presentation on Q2 how we've achieved that. Quality is a word that is synonymous to the SKF. It doesn't actually have to be on this slide. The world SKF always means quality. Innovation, we invented bearings. So -- and the world then changed in a very different way after we were able to reduce friction with bearings. Innovation is in our blood. Simplicity and speed is something that is constantly work in progress. I would hesitate to say that we are where we need to be. But we are certainly striving to become a lot more simple, a lot more agile and a lot more quick in everything we do. Sustainability is something that has become front and center for us much more in the last few years. And certainly, last few quarters, you'll see examples in today's presentation on what we are doing to drive sustainability. Just a quick -- a couple of graphs, and none of these graphs are new to any of you on this call, so I will not spend too much time on this. But simply put, we are in a macroeconomic environment of significant headwinds, whether it be GDP growth or production -- or industrial production growth or whether it be the high-frequency indicators around some numbers you see here. And we are in the same storm as many companies that you may have already covered. But what you hope to -- what we hope -- you will see in the next hour or so, we may be in the same storm, but we are in a very different boat in the same storm. So we'll cover that as we go along there. Our highlights over the last 5 years. Net sales, again, this is numbers up to last year. So you can see the numbers. Net sales for last year, we declared a pretty significant dividend of 1,300%, one of the highest in the industry and certainly one of the highest that we've ever declared. And you can see our EPS numbers, the trend over the last 5 years. Coming specifically to this quarter, you've seen the numbers, you've seen the press release, so I will not build too much on this. The quarter that just went by, INR 6.9 billion revenue, down 5.5% year-on-year. Anurag will comment in more details here. But although we were down 5.5% year-on-year, our domestic sales are up 11%, and that's an important indicator for us. Material costs, you can see. Profit before tax, down 170 bps year-on-year for, again, reasons we'll talk about as we go through the call. On the right side, you can see the half year numbers, which, of course, look much worse than the quarter numbers because in the half year numbers, we also have Q1 numbers, April to June. And we all know what happened there. So let me spend some time on the strategy, which was important for us to communicate to you and tell you how we are navigating the way forward. On this slide, which is titled SKF India Strategy, what you see on the left side of this box, those 6 words there, each of those words and each of those visuals mean a lot. Digital sales is all about how can we use digitalization to make it easy to serve customers and to make it cheaper to serve customers. So reduce our cost of sales and improve customer interactions going forward. New business models is all about -- we've talked in the past about our new model around what we call REP, rotating equipment performance, where we want to change from a CapEx to an OpEx model. And we have examples here how we've made progress. Innovation is all about application-specific bearings. There are certain bearings for certain applications in certain markets. And we have good examples in India that we are trying to leverage those applications to launch specific bearings for India. World-class manufacturing. We have 6 plants in India with bearings. And these plants, I believe, are some of the best plants that SKF has globally. And we will, of course -- we don't rest on those laurels, we will do more, whether it's making them smart, using digitalization, making them more efficient. Vocal for local, atmanirbhar are words that are becoming more prevalent now. But we have been vocal for local and atmanirbhar for many, many years now. 95% of what we sell in the automotive business in India is made in India and has been made here for the longest time. And we want to get to that level also for industrial. And that's what world-class manufacturing is all about. None of this is possible without having a workforce that is geared up for these challenges. We've put in place a fairly detailed strategy around attracting and retaining talent. And that's paying us dividends, especially in these times around COVID, et cetera. Cleantech, I want to go back and draw your attention to the slide on our drivers and sustainability. Cleantech is a new addition to our strategy over the last 1 year or so. Whether it's remanufacturing or using cleaner energy, it's all about reducing our carbon footprint as we go forward. Specifically, on the right side, you see some examples here. I won't talk about these, but you can read this and you get a sense of what we're trying to do. Specific initiatives that drive -- that tie back to our strategy on the left side of this slide. Just a few examples of -- on the next 3 or 4 pages, specifically to bring the [ strategy home ] for us. You will see on each of these slides on the top left, 2 or 3 of those initiatives that I talked of on the previous slide. So for example, here, we are -- our REP solution tie back very nicely to 3 of our initiatives around digital sales, innovation and new business models. As an example here, we worked with a steel customer recently. And how do we help them increase their efficiency and their utilization? And all intent here is that we have to align our interests with the customer's interest. I keep telling our people here, when we wake up in the morning, our interest is to sell more bearings. When the steel customer wakes up in the morning, his interest is not to buy more bearings, his interest is to run the plant well. At some point, we have to align those interests together. That SKF's interest and steel customers' interests are aligned together, and that's what REP is all about. With this example, we have tied up with them for a very comprehensive high-value 5-year performance based contract to really help them achieve their goals. The scope goes beyond just bearings supply. The scope goes in our operations, maintenance, and of course, supply, but really to help them improve their utilization and their efficiency, in the end help them get a better output from their plant. And this is what REP is all about. This is one example, but we now have multiple examples, multiple contracts across industries around similar configurations. Remanufacturing is all about contributing to a green environment, to the circular economy. How do we reuse or remanufacture a used bearing back to its original performance level? We don't need to make a new bearing. We can reuse that bearing. So not only bring it back to its original performance, but I think more importantly, lowering the environmental impact of making something new. So as an example here, you see, we are working in our factory in Pune. We are remanufacturing bearings that have been returned to us from a cement customer. Not only are we providing a better value to this customer, but we're also reducing the lead time to this customer. A new bearing would typically take about 8 months to deliver because these are customized bearings. With remanufacturing, this lead time gets reduced to a month. So now think about this lower environmental impact, better price value and a better lead time to customers. So win-win for everyone here. An example on cleantech and sustainability. What you see here are solar panels. And we are now partnering with a couple of companies in this clean energy space. As an example, on this slide, we are now putting up solar panels on SKF's Pune location. We have this in some other locations, but Pune is the big one that we're going for. It will help us meet our commitments towards our own cleantech goals that we've identified, and it has a really good fit with what you saw earlier on with our REP and remanufacturing offers, too. I talked about this local -- local for local and vocal for local. We have been atmanirbhar in this country for 60 years, so this is not new to us. But now what we need to do is make our factories much more flexible, much more smart and much more capable of small batch production. Because as we start increasing our industrial sales in India, industrial needs a smaller batch output compared to automotive. And that is our intent and wish going forward, using various tools, digitalization, et cetera, to help us get closer to our customers and be able to produce those flexible lot that customers need. This is all about world-class manufacturing. You see our employees here on this slide. We're very proud of all of them. And this is all about what we call the future workforce. How do we develop new competencies in our employees, whether our current set of employees or the new ones we want to hire. To be able to provide value to all our strategic initiatives, whether it could be REP or cleantech, et cetera, but that's a big, big focus for us going forward, how do we build a future workforce totally aligned with our strategy [indiscernible] All right. I want to spend a few minutes now talking about our response to COVID. It's very topical. I won't read everything on this slide, but you can read this. But the one thing I want to point out, which is different that SKF has done compared to most other companies you may have covered. I mentioned in the beginning, we are in the same storm, but we are in a very different boat. And by that, I mean, we have taken a contrarian view to many of our competitors, and it's playing out very well. So for example, we were absolutely clear that our factories need to go back to operations as soon as possible and our suppliers need to be able to ramp up very, very effectively with us. So even before we were allowed to open our factories, our manufacturing team, the supply chain teams have worked with suppliers. And this could be them -- supporting them in terms of management practices, could be helping them with working capital, could be helping them with ramp-up solutions. But all our suppliers have ramped up at the same pace as we have ramped up and at the same pace that our customers want us to ramp up. Second, we were absolutely clear, we will keep all the safety precautions in place, but we will be work from office and not work from home. So all of our employees are now fully back at office, 100%, not last week, but for the last 2.5 months. And of course, we're taking care of all the employee health and sanitation, everything else. But we believe it's really helped us come together in these quite tough times to be able to build a culture of collaboration, to build a spirit of winning. And our customers recognize this. We are winning orders. We are gaining share across sectors. Because by doing this, we are able to promise our customers reliability of supply chain, predictability of operations, and that's what our customers need most at these times. I'll take a few minutes now talking of our CSR initiatives. Just go back one second, Sunil. The numbers here are important. We've now touched over 200,000 lives with our flagship CSR programs. The first one is around eco impact parks. We work very closely with communities in developing lakes and parks to make sure that we are able to contribute back to the environment as much as we take from that, but sometimes even more. We have launched scholarships for girls. We now have about 180 beneficiary girls. We take care of their entire education from class 10 all the way to whatever they want to pursue. They want to become lawyers, engineers, IAS officers, we say, "Don't worry. We will take care of everything." And we focused our efforts on very specific 10 affected districts, where there's drought and there's poverty. So we're able to really serve the underserved communities. Youth Empowerment at SKF is a program we run where we train automotive service technicians, again, from underprivileged, underserved communities across many, many states in the country. We're not just making sure they're employable at service stations, we also support them if they want to become entrepreneurs. And that number on this slide, we've now established 20 entrepreneurs. These are young people, young men and women who now have their own service stations, helping them move forward in life. Sports education program. We have more than 500 beneficiaries here, where we use sports as a medium to focus on nutrition, to focus on developing a winning attitude in children, and of course, to make sure that they develop holistically and not just in one parameter. In summary, if you go forward, we talked of our vision, mission, value and drivers. That defines everything we do. We talked of our strategy at length and hopefully, you've got a glimpse of what we hope to do and what we've done so far. We have built a very, very resilient business. We have a very strong leadership in place now. We will invest, and our investments will not get postponed, they may get delayed by a couple of months, but we will invest. And not just we will emerge stronger, but we have emerged very, very strong through these times. And of course, we are a part of the community we live in, and we will keep engaging meaningfully with them. So with that, I thank you for listening to me. We are now open to questions, I believe. Sunil, [indiscernible]

Yes. Yes.

Excellent. So with that, we're open to questions. There is a few here. So if you ask your question, we can answer them as much as we can. Thank you.

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

Congratulations for good set of numbers in such a challenging environment. Just had a couple of questions. First is, just wanted to understand if you can just provide a data on the mix part in terms of automotive and industrial and the replacement versus OE for this quarter? And how does it compare to last quarter? Second is on the margin side, if we look at our current quarter, both contribution margin and operating margin, has there been any -- is it -- so if you see the contribution margin, there's been some moderation sequentially. So is it largely a function of mix or are there any other reasons? And similarly, in other expenses, we are seeing some spikes. So is there any one-off there? Third question is on the export part. Just trying to understand how should we understand this going forward because we've seen some moderation in this quarter as well. So what is your long-term thinking on the export part? And what kind of investments we're looking to support that?

Can I answer the exports question first? I'll answer the exports question first, [ Viraj. ] Thanks for asking all those questions. And then Anurag can talk you through details of the numbers you asked. Our philosophy at SKF globally, and India is no different, is that all our operations are primarily focused on domestic business. So unlike some of our other competitors, our focus is not on exports. So exports, whether it becomes 7%, 10%, 5%, I don't lose any sleep on it. Our intent is to grow the domestic business, and we will do all that we can. So we are not -- we don't have teams going out and trying to gain export business. That's not our philosophy. With that, Anurag, back to you.

Yes. Thank you, Manish. I will go back, [ Viraj, ] to the questions that you asked. You're looking for mix data for the quarter as compared to the prior quarter. And I'm talking about the revenue mix here. First, largely on the automotive and industrial. It's an interesting quarter. There's a big shift that is happening. You would have seen automotive segment reports from other companies as well. Automotive has definitely been growing much faster as compared to industrial, particularly the last quarter. This quarter, we had automotive as an overall mix close to about 32% -- hold on a second, 32% -- sorry, 43%. That's the mix, that's right, 43%, and about 50% is industrial. So it's a big shift that is happening and about 7% is export. And if you really break that down, there is significant growth across all sub-segments within automotive and not so much on the industrial side. So it's largely a mix effect, which answers the second question that you had. In terms of our contribution margins, you're right, it's pretty much a mix effect. The automotive business is largely OEM-driven, and 30% or so around on the distribution side and 50% on the industrial side is on distribution. So it's largely a mix effect, I would say, when it comes to contribution margin. The other expenses going up, I think there are certain impacts coming out of foreign exchange. But there are no other such one-offs. I mean, there are going to be some spikes in expenses in terms of COVID management and so on, but I don't think that's a big driver to the results. Largely, it's driven by some of the foreign exchange impacts that we've seen both in this quarter as well as in the prior quarter. But yes, the mix story is one of the important aspects of the financials. And as we see, this seems like going to be a trend, at least for the coming quarter as well. The automotive seems to be growing much faster right now. And as you would recall, this is coming off a low base in the last year. So that growth is but natural. It was just waiting to happen. We have to watch out, though, in terms of the sustainability of that growth, and we will keep a close eye on that.

Okay. Just one follow-up question. On the industrial side, if we look at the major industries, which you cater to steel, cement, you've seen a healthy demand and recovery in those segments. But for us, it's not really reflecting in that way yet. So where are we seeing the weakness? And how should we see the industrial business performance, say, for next coming quarters? That's one. And second, just to add to it. On RD, if you can just provide some perspective, our ambition was to make it almost 20% of our revenue in a couple of years. So where are we in that journey? What is the contribution we are seeing right now? Because in the past, we talked about us having significant wins. So what is the status, if you can tell us?

Can I take that, Anurag?

Yes. Yes, please.

So let me take both the questions, it's Manish here, [ Viraj. ] On industrial, number one, we are extremely well diversified. So no one sector contributes to more than 7% to 8% to our industrial portfolio. All the segments you mentioned, cement, steel, textiles, F&B and you can go on. Where we are seeing strength in the last few months is around the infrastructure-linked industrial segments. So we are seeing some strength in cement, steel, metals, construction equipment, et cetera. We're also seeing some strength in the consumer-linked industrial businesses, so things like F&B, things like textile, et cetera. Where we're seeing some weaknesses is around where the CapEx cycle has not yet picked up. So we're not seeing -- while we're seeing good consumption on the end user side, we are not seeing those significant investments as yet on the OEM side for many of these segments. So until the CapEx cycle picks up, which we don't know when that will be, hopefully soon, we'll keep seeing weakness there. The other 2 segments, which are not typically industrial, but important to us, wind and the railways. Wind has been a bit of a slow catch up over the last 6 months. A number of large players have put their investment plans on hold for various reasons, including prices in the auctions and export markets slowing down. So we don't expect wind to start picking up traction anytime soon. Railways, on the other hand, is chugging along, no pun intended, rather nicely. We do have a slowdown on the aftermarket business because, frankly, we don't have too many cranes running these days. So to that extent, our aftermarket business has slowed down, but we hope that will pick up as soon as the railways gets back to normal. On the new builds for the trains, they are proceeding as expected. In fact, we have a couple of tenders coming out in the next 2 months where we are bidding for. We also won something last month. So on the new builds, we don't see a problem. On your question on REP, our ambition was 20%, and that still remains. There's been a slowdown now because of COVID. But that ambition still remains. We are right now at about 5% to 7%, I would think. But more importantly, we are at this level with some very, very key important customers. The example I showed earlier on, on a slide was a large steel customer, then I can give you some more examples of large cement customers, et cetera. So all the large customers are seeing value in it. And then we hope to replicate that. The cascading effect is very, very quick from large to small customers. So our strategy right now is to go up to these marketing guys and then build down further to smaller ones.

The next question is from the line of Sandeep Tulsiyan from JM Financial.

I have two questions. Firstly, to elaborate a little bit more on the sales mix, if you could share the similar mix for the whole of financial year '20. And also within auto and industrials, you used to share some color on the Y-o-Y growth rates in trucks, cars, 2-wheelers and also in industrial, wind, railways and aftermarket, if you could share those details, please?

Sandeep, hope you are doing well. Tough times. We're catching up after a long time. But as Manish rightly said, the world has changed. And we have seen that happening pretty much for our business too. The mix has got shifted, as I said earlier, towards more of automotive in the first half of the year. And I'm talking YTD, meaning starting from April, really, up to September. So the first half of 2020, '21, our overall sales mix is 40% automotive, 53% industrial and 7% exports, okay? Within that set of 43% -- 40%, 53% and 7%, you've got subsegments, which I'm not going down further, but I'll give you an indication of the growth rates. Cars grew about -- well, if you look at [ full year, ] then it will all look negative growth. So clearly, it's not a good number to talk about. Cars, degrew 32%. Trucks, degrew 52%. It's pointless to talk about those numbers because then we are talking about the full year. What I can help you with is maybe look at this quarter, what is the growth rate within this quarter versus last year for the subsegment. So cars was up about 20%, trucks is up about 20%, tractors is up about 14%, 2-wheelers is up about 18%. And there's other subsegments, which is about 10%. And our distribution is up about 11%. So that's the growth rate within the automotive subsegments. And when we look at industrial, we've got similar double-digit growth, I would say, in most of the segments with the exception of general machinery, railways and energy. They are the segments which are actually we are seeing some softness for this quarter. And again, I'm talking this specifically for this quarter because if you talk about YTD, it will just look a very unfair comparison because...

I think it's fair. I think, Sandeep, I think it's really pointless, irrelevant to look at half year numbers growth rates. It's more relevant to look at the quarter that just went by because that's really a true quarter of operations.

And how was the aftermarket portion in second quarter on the industrial side?

The aftermarket on the industrial side has been a little slower, I would say, as compared to the automotive aftermarket. The growth rates are still positive, and we are expecting it to get stronger as we go along. But at this moment, I think it's all a result of how the aftermarket business owners are starting to see the growth come back and how they are starting to stock for the potential demand that is expected. Right now, I would say it is not double digits and which is not something that we would aspire to be. We definitely want it in the double digits.

Last question was on one of the new products on hub 3 bearing, one of the new OEMs that we had tied up with. We had spoken about it at length last time when you had done a call. And the volumes were expected to pick up to, say, 50% by -- in a 6-month period and gradually being ramped up to 100% by end of FY '21 is what the guidance you had given. Just wanted to get some update on that. And what's the current capacity for these hub 3 bearings that we have?

Yes. Sandeep, I made this comment last time also. For some reason, in the previous calls, we've got fixed on hub 3. It really is a very small part of our business. It does not move the needle, whether it becomes full capacity or half capacity. So I can give you the answer, but it is very meaningless and irrelevant to our total numbers. But having said that, I'll answer the question. So we've tied up with 2 OEMs, not just 1. And both the OEMs are performing well. We are -- we have been -- we're a little short on utilization only because their volumes are down. But as and when their volumes start picking up, we will be up to full capacity to service their volumes.

All right. Sir, lastly, if you can just share the same mix for last financial year between auto/industrial exports, that would help. That would be my last question.

Sandeep, a clarification, you're looking for the mix between first half and first half of last year. What is the mix of first half of last year?

No, the full financial year, the full financial year of...

I don't have it handy. I can give you either this quarter or the first half of last year, if you can live with that. But I don't have the full year handy right now.

All right. I'll connect separately with you and try to take that information, sir.

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

My first question is regarding the CapEx number. So you had indicated in the previous time we interacted, say, last year, that CapEx is probably about INR 150 crores kind of a number annually. I just wanted to check, is there a change in that number now? Are we still looking to go aggressive on CapEx? How are we looking at that?

Yes. So our CapEx numbers are in line with what we've given to you in the past. There's no change there. We may only decide to delay a few investments depending on market situations. But in general, our strategy remains unchanged, whether it's new products, new solutions or CapEx. The numbers you have in your head are ballpark accurate. There could be adjustments up and down and there could be a timing issue, but ballpark accurate.

Right. And again, so are we looking at, say, in the next couple of years or maybe 3 years or so, how are we looking at the entire industrial segment? How much are we looking to localize? And what would be the current traded revenues?

You're a little soft. Let me rephrase your question. Was your question, for the next couple of years, how are we looking to grow the industrial business?

Yes. And primarily by localizing it rather than importing it or trading in that. And so what is the current traded position -- traded business?

Our intent is to localize industrial more and more every month, every quarter and every year. Of course, as you know, industry volumes are small. There are lots of -- so it's not like millions of bearings a year like automotive needs. So one has to be careful in terms of what we localize. And therefore, I've talked of our strategy around building a flexible manufacturing capability. Today, our localization for industrial is around, Anurag, 40%?

30 -- 35%.

Is around 35%. Our intent is to take it up -- frankly, my goal would be to take it as high as automotives. But we also know it will not happen in the next couple of years because we have to be thoughtful and mindful of the small lots we need to produce. If someone needs only 100 bearings, it would not be advisable to do that manufacturing locally. So it depends on customer demand, depends on the scale, depends on the volume. But you will see localization levels go up from 35% to whatever number we land at, every month, every quarter, every year.

Sir, just to clarify, this 35% includes what we buy from SKF Technologies?

That's right.

Okay. Right. So I mean, it would largely be SKF Tech. So can we assume that right now we are probably sourcing about 30%, 35% of our industrial business from SKF Technologies?

Yes.

Okay, okay. And just one last question. On the margins side of it, just looking at your gross margins, the contribution margins, right from, say, the last year first half, we've seen that it dipped from -- I mean, if I look at your raw material cost, it used to be around that 58% to 60% ballpark as a percentage of revenues. That kind of dipped last year to about 64%, 65%. So obviously, gross margins fell. And now we are stabilizing it close to 62-odd percent. So we're still below the FY '19 kind of levels, where we were well below 60%. Is this a factor of just the mix? Or is there a product level -- some competition, pricing or any such factors playing out to impact our gross margins?

Mukesh, it's always going to be a combination of multiple of factors. There's always -- there is a mix impact, which plays the biggest out there, and then, of course, coupled with the impact of metal price changes, the impact of certain inflationary costs that we might have, and then, of course, the work that we do towards working with our customers on the price changes. So I think it's a combination of that. But you're right. I think largely it is more mix-dependent. And a fluctuation on the mix is pretty obvious, right? And this year, while we are gaining on the metal price deflation for, at least, the first 6 months, we are adverse on the mix. So therefore, you see that our material cost is actually adverse over the prior quarter, but at least 140 basis points or so better versus the last year. So it's a combination of things. There's no structural change, I would say, that is happening. What we do in terms of our pricing strategy completely is on track, and we will continue to do that with our customers as we go along.

Right. And so directionally, I mean, we can say that we can go back to the FY '19 levels as our mix kind of normalizes over the next, say, few quarters or so? And there's nothing that should stop us from going there.

Absolutely.

The next question is from the line of Hitesh Goel from Kotak Securities.

So you had given some numbers on the growth rates for this quarter. Can you just give us the growth rates for auto segment exports and industrial on a Y-o-Y basis in terms of revenue? I'm just trying to tie up that 6% decline Y-o-Y in your revenues.

Yes. Mukesh -- sorry, Hitesh, automotive as a segment overall, no exports, grew 15%. Industrial, overall, including our distribution, energy, railways, all of it, degrew 7%, and export degrew 50-plus percent. So that means net-net, we were down 6%, but we were up 11% on domestic.

Great. And my second question is basically on exports, right? So I mean, it is more related to industrial business also. So can you give us some color -- and in India, the industrial volumes are quite low because you said there are small batches and there are different bearings across industrial. How is the scenario in countries like China and all, I guess, the bearing industry is like significantly higher than India. So is there a localization higher there? And how do you see global support for India? Is India cost-competitive that exports can ramp-up in a big way from SKF India. So if you can also...

Hitesh, I'll repeat my answer that I gave earlier. Exports is not a focus, it's not a strategic initiative for us in India. Our initiatives, our focus is on servicing customers in India and manufacturing in India.

Okay. And on the industrial business, I mean, can you share some color on how is it in China? Is the localization higher in China and because it's much bigger? Sir, trying to understand what can be trajectory of industrial business in India.

Well, I don't know specifically China numbers, but I would imagine that any country that has a larger scale of demand, they would have then the right investments they need to make to be able to produce that scale of bearings. So an example I gave, if a customer needs 100 bearings in India, it is not advisable to make wholly 100 bearings on a line in India. But if you multiply that customer by 10 customers and now doing 1,000 bearings, then of course, it becomes more feasible to set up a line for 1,000 bearings. So any country with a larger scale, will, of course, have more localization.

Okay. Sir, just if you can take one more question. Is there a proposal to merge SKF Technology any time soon? Because there is transfer pricing arrangement as well. So can we expect cleanup of the structure going forward for SKF?

I don't know what you mean by cleanup. I will not comment on that phrase you used. But there is no plans to merge SKF Technology with SKF India.

The next question is from the line of Deepesh Agarwal from UTI Mutual -- UTI AMC.

Also my first question is despite the increased localization efforts, we have seen the share of traded goods going up over the past few years. Probably, that's because of the increase in procurement from the unlisted parent entity in India. Sir, what is our sourcing strategy for future? Would you be keen for increasing the procurement from that entity further, given it would be a lower-margin business for us?

Deepesh, and we made this point earlier on also in a few conference calls. Our manufacturing lines are based on the size of bearings. They are not really -- we don't decide what we'll make depending on industrial automotives. SKF Technologies is totally focused on large-sized bearings and SKF India is totally focused on small and medium-sized bearings. So industrial demand could be small, medium or large. It will be serviced from the factories that are established to make those size of bearings. So there's no strategy in our mind that we will source only from SKF Technologies or only from XYZ or only from Pune. It really depends on customer demand for industrial, what size they want, and we'll source accordingly.

Okay. Okay. And can you help me understand the breakup of that INR 150 crores CapEx number, which you highlighted? What would be the expansion CapEx out there?

We don't discuss those details, Deepesh. Sorry about that.

Okay. And sir, on the railway side, sir, last time, when you did the call, you were looking to scale up the railway freight business significantly. Can you help us with some quantifiable data how the SKF has progressed on the railway freight side of the business?

Yes. Railway -- as you recall, railways has 3 businesses, freight, locomotives and passenger. Freight was, as we mentioned on the previous calls, not our biggest strength. Our biggest strength is locomotive and passenger. On freight, you rightly pointed out that our plan was to increase the freight contribution and our freight share. We also talked in the past about the different kinds of bearings that go into freight. We talked of class C, class K, et cetera. So we are making tremendous progress on all the bearings for freight. There are tenders out there in the market already floated, and some are coming in the next couple of months towards more freight bearings. We are bidding actively for those tenders. We've also got approvals for localization of some of those bearings. So all the efforts we talked about on the calls last year are all bearing fruit now. Keep in mind, railways wins are a much longer cycle than something else is. So it would not be unusual for us for the wind cycle, for the sales cycle to take between 12 and 18 months there. And so what we spoke about last year is now playing out now in terms of wins for us.

Okay. Our class K bearings would have got all the approvals by now, right, sir?

We have -- I need to -- I'm drawing my memory here. But for class K -- yes, I think we've got all the approvals. But I could check and come back to you.

Okay. Okay. And sir, lastly, if I can squeeze one more question. Is there any increase in the content for vehicle for you on the BS-VI? And can you also highlight, going ahead, how you see the content per vehicle going ahead?

There is no -- emission norms do not change the content of bearings in a vehicle, they may change the quality of vehicles. So we may start using -- some manufacturers may want to use lighter-weight bearings, lesser friction bearings, et cetera. But there's no change in the number of bearings being used in a vehicle.

Deepesh, I want to clarify, to your earlier question, you made a comment, which was an assumption that our manufacturing mix is going down in spite of more and more automotive sales. The fact is that it's actually gone up. So from about 50% last year, we are about 57% this year -- this quarter in terms of the manufacturing mix. Just a data correction there.

I was referring for last 3 years data.

Okay.

So from '17, '18 to FY '20.

It keeps changing depending upon the mix. So if you're -- I don't know what reference point you're using. But if this is 3 years, I'll have to go back and check.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam Sundar from Sundaram Mutual Fund. Sir, you did indicate that SKF has gained market share in the automotive segment. If you can please provide some perspective on -- is this via addition of new products or incremental share gains with the OEMs? Some more perspective on which segment of the automotive have we gained market share. That is my first question. And secondly, in the same context, so you did indicate that the auto portfolio for us has grown 15%, and the cars, trucks, tractors all have grown in double digits, sir. But if you look at the underlying OEM production per se, what I'm saying -- what I'm talking about is the vehicle production. For example, Maruti production in the second quarter has grown by 4% on a year-on-year. Hero production has grown by around 3% on a year-on-year. So given this, how do we reconcile that with our auto portfolio? Is it because the OEMs have asked us to produce more in anticipation of the festive production that comes in October per se? Is that how to read our numbers in that context?

So Shyam, you've answered your first question in your second question. Your first question was how are we gaining share? What's happening? And your second question was Maruti growing 4%, but we growing 20%. And of course, we are growing 20% compared to Maruti 4% as an example, is because we are gaining more share there. And that story plays out across all sectors in automotive. But the spirit of the question is not that we are gaining share. Of course, we are. But why are we gaining share? We are gaining share for 2 reasons mainly; number one, customers today need reliability and predictability of their supply chain. They want to derisk their availability. They don't want to depend on small manufacturers, small-scale manufacturers, less reliable manufacturers or suppliers, and they want -- don't want to depend on suppliers outside the country. We have been atmanirbhar for 60 years in India. So we are the first port of call when customers want to derisk their supply risk. So that's one reason why we are gaining share. And the reason we are the first port of call is because in times like this, in crisis times like this, no one has delivered as SKF has done. Our factories today are operating 24/7. We cannot keep up with the demand because customers -- our factories are fully operational, fully ramped up, and we have been for more than 2.5 months now. Other players may or may not have been -- may or may not have ramped up as quickly. The second reason for the share growth is around launching new products. As you rightly pointed out, we've -- one of our strategic initiatives is around innovation, innovation around application-specific bearings for the aftermarket, innovation around hub 3, innovation around [indiscernible] for commercial vehicles, et cetera, et cetera. So we have been innovating with new products, and we have been launching those products, and customers are now seeing the value proposition of this product. So combination of new products, combination of reliable supply, that's a sure shot for gaining share.

Understood, sir. Sir, when we talk about these new products and share gains, is it largely -- so I mean, we were a big supplier in the wheel and bearing segment. So have we added something more on the chassis or the powertrain portfolio, I mean, going forward? And is it also being driven by less -- lower reliance on imports by the OEMs? Is that also driving share gain for us?

Yes, both -- we have gained both in the powertrain and in the engine, along with [indiscernible] of course. And when customers are derisking their supply chain by focusing on local supply, like I said, the first port of call is SKF. There's no one else. Because no one has a ramp-up capability and the scale to supply them those bearings as we do.

Understood, sir. Understood. That was very helpful. And my second question is on the -- you did comment that the aftermarket on the auto side has been -- has again grown at double digits, whereas the industrial aftermarket is yet to catch up. Now from an underlying momentum perspective, are you seeing sustained momentum in the automotive aftermarket more than the industrial aftermarket per se? And what we also understand is some of the imported bearings into the aftermarket per se has come down. So is that, in a sense, helping very large organization such as us in gaining some share in the aftermarket?

So structurally, both the aftermarkets are different. Automotive aftermarket depends on number of vehicles plying on the roads. The lockdown has impacted that population on the road, but not as much as the lockdown has impacted industrial units. Industrial units have been shut for 2 months or 2.5 months or whatever. And even now when they're ramping up, they're ramping up in a very graded, measured manner. The industrial aftermarket, therefore, is directly linked to how quickly the industrial units start ramping up. The automotive aftermarket is linked directly to the number of vehicles on the roads. And if you peek outside your window, Shyam, you'll see that there's no dearth of 2-wheelers and 4-wheelers on the road. So in a sense, the automotive aftermarket will, of course, naturally pick up faster than the industrial aftermarket. But over time, as industries start ramping up, industrial will also catch up.

Understood, sir. That was very helpful. If I may squeeze one last question, sir. On the railway side, you did mention that we are doing a lot of bidding on the wagon side. So generally, from a momentum perspective, there has been a higher thrust of railways to increase the model share of freight per se in India. So is that -- do you see more of an increase in momentum on the wagon side? Is that a structural trend that you are witnessing maybe from last year and maybe more and more increasing this year? Is that something that you are seeing there?

I think you're right. I think the wagon shift in freight, that's been a defined priority for the government. The DFCs are finally coming onboard now. They will see a big push towards freight. We are seeing a number of freight builders start to build out those wagons. So that momentum is ongoing. It has been ongoing for some time now. It slowed down a little bit because of COVID, but it's back on track now. And as the momentum picks up, we will hope to benefit from that.

The next question is from the line of Basudeb Banerjee from AMBIT Capital.

A few questions. One, you said in the earlier comments that first half of this fiscal, auto mix is down to 40%, and industrial 53%. What was this mix in Q2 only?

We said that. So in Q2, you are meaning to say what? Q2 of last year?

No, no, this year. This...

Okay. This year previous quarter, which means April to June?

No, sir, July to September.

The recent quarter, we said it is 43% automotive, 50% industrial...

Sir, so this was only for recent quarter, not for first half.

Okay?

So the first half numbers, Anurag talked about that. You can look at the recording. But frankly, it's other...

No, no. I thought that the mix which you said was for first half, April to September. If it is for July to September, then it is okay.

Just for the sake of clarity, I'll quickly repeat it for you. For the quarter, that is July to September, the mix is a 43% automotive, 50% industrial, 7% export. For the first half, which is April to September, it is 40% automotive, 53% industrial and 7% exports. Okay?

So not much, only 3% difference, sir?

Yes. There's a shift of 3%.

Yes. Second question is to continue with the earlier participant's question. Good to see you gain share where industry production was up some 3%, 4% Y-o-Y. Now with festive season entering the last period fortnight, how is the intent for production for the forthcoming months from the same set of domestic OEMs, sir? Is that still at this elevated levels? Or there is some reduction?

I can only comment on the forecast that we have received from OEMs, and they are pretty good. Now, how robust are the forecast, you do ask them.

Sure, sir. And last question is, sir, as you said, within the industrials sourcing from SKF Technologies, that has been varying between what 30% to 50% of overall industrial. Sir, just wanted to understand what is...

That's not what Anurag said. It is not varying between 30% to 50% of total industrial. The total industrial is about 35% traded. In that 35%, SKF Technologies is about -- it's traded locally and then it is traded globally. The local trade, which is SKF Technologies and now called Lincoln is about 35%. Rest is all imported from different plants. That's how [indiscernible]

Sir, so what is the utilization level of SKF Technologies India overall as such?

Sorry, what is the?

Capacity utilization of SKF Technologies as such?

Well, it is not in the public domain. So I'd like to refrain. But it is less than half utilization.

Sir, basically, I just wanted to understand that does the pricing also depend on utilization levels because it is such niche high-end product, where the steel is not that high. But if utilization is very low, then the costing also needs to get passed on. So from that angle just wanted to know.

The pricing is resale price-dependent. So what is the ultimate selling price, and then you've got a price factor based on that because that's the local compliance that we have to follow, right? The regulatory requirement says that it has to be dependent on the final selling price. And that's what we have to follow.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to Mr. Sunil Kurup for closing comments. Over to you, sir.

Thank you, everyone, for joining the call. And on behalf of SKF India Limited, I wish you all a very happy festive season. Thank you.

Thank you, everyone.

Thank you. On behalf of SKF India Limited, this concludes this conference. Thank you all for joining. You may now disconnect your lines.