SKF India Limited (500472) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SKF India Limited Q1 FY '21/'22 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 investor's call and webcast today. With us today are SKF India's Managing Director, Manish Bhatnagar; Director Finance, Anurag Bhagania; and Company Secretary, Ranjan Kumar. 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 the company's fundamental business and the financial quarter under review. Let me turn the call over to SKF India's Managing Director, Manish Bhatnagar, who will give an overview of the company's business activities and developments for the first quarter. He will then turn the call over to Anurag Bhagania, who will provide an overview to the company's operating and financial metrics. We will then open the call for Q&A. Over to you, Manish.

Thank you, Sunil, and [Audio Gap] call on behalf of Anurag, Ranjan and Sunil, a warm welcome to this investor meeting after some time. Glad to see the interest on this call. We have a full house. I appreciate all of you joining in. We have planned this for an hour. I don't want to take too much time speaking. We want to spend the bulk of this one hour on answering questions which I know you will have. Is the presentation on Sunil? Okay. So good. So hopefully, you can see the first slide of our presentation. And clearly, it's been an extremely challenging environment. What's happening around us with the second wave and therefore, the impact on business. And we certainly want to talk about what are we doing differently to enable growth in this extremely tough environment. This morning, we will talk about five segments. I can't see the all of our segments on my slide. Hopefully, you can see them. But we will talk about our strategic focus areas, and that's an important discussion to have. I will spend a lot of time on them. And then we'll jump to micro and macro outlook. We'll talk about results of last year. And we want to spend some time talking about highlights of the year gone by, which is more to provide you examples of our strategy in action. And finally, we'll summarize at the end. So let's jump to our strategic focus areas, the next slide. SKF's strategy, as you all know, is centered around the rotating shaft and our two value propositions: the product and Rotating Equipment Performance or REP. This is the foundation from where we work towards our vision of a world of reliable rotation and our mission of being the undisputed leader in the bearings business. We did share last time, we've also outlined six strategic focus areas, which will guide us to successfully leverage all the opportunities created around us through digitalization. And finally, sustainability is the core -- is at the core of our strategy and is embedded in the business, everyone working at SKF in India and globally has a role to play in tackling these challenges around the environment and that's what's driving for green means. I'll spend a few seconds on each of these six focus areas to give you a flavor for this. Digital sales -- in a traditional setting, industrial companies run a fairly dated sales process without a fully connected value chain. This certainly creates inefficiencies since most customers -- and since most processes and most customer interactions are manual and cumbersome in nature. So this focus area really focuses on reducing waste for the customer and for us and, therefore, in turn, improving the customer experience. We are in the process of developing a fully connected value chain based on our digital platform. And this truly will continue to enable the product to be the core or the backbone of our offer to customers, but enable REP to be delivered much more efficiently. And that's a good segue into REP or new business models, our second focus areas. A combination of what's happening around us, digitalization and the shift from transactional to fee-based models, we believe will change the way we do business with our customers. The example I repeat pretty often is that our sales guys wake up in the morning thinking how do we sell more bearings to a customer. The customer wakes up every morning thinking how can we buy less bearings from SKF. So inherently, there's a conflict between our dreams early in the morning between us and our customers. And REP, through a new business model, really hopes to align those expectations, align those dreams. So we are tied at the hip in terms of expectations and vis-à-vis. So we really want to sell a fee-based model tying our results, tying our prices, tying our offerings to the customer with us, and that's the impact of REP. And of course, as we move more and more towards REP, towards the more fee-based business model, it's also good for our margins. We cannot do REP without doing true innovation, and that's our next focus areas. Historically, our bearings are manufactured and sold through distributors, which pretty much means our products end up in machinery for which they were either overengineered or under-engineered. Therefore, adding unnecessary cost to us or putting the customers' machinery at risk. There was very little focused innovation in the past, targeting end users, but now our R&D processes have changed and are changing continuously to ensure this does not happen in the future. Therefore, our new focus -- and by new I means for the last couple of years, is on increasing MTBF or Mean Time Between Failures, and which basically means the seamless integration of bearing performance data into our customers and our own design processes. And this, of course, leads to further development of our two value propositions. Next, world-class manufacturing. As you know, we are very focused on local manufacturing, and we can only become the undisputed leader in the bearings business if we have the cleanest, the smartest, the safest, the most efficient and the most flexible factories in the world. And of course, these factories need to be as close as possible to customers to ensure shortest lead times. So a lot of our investments in the future and for the last many years is focused on investing such factories and localizing our manufacturing as much as we can. All these trends impacting us and all the challenges that we face and all the ambitions we share, really all come together to mean one thing, we have to adjust our size and the type of our workforces, which means building in new competencies and skills. And this is what the future workforce really means for us. It's about focusing on new value-added processes, developing digital solutions that will remove the need of our workforce to do repetitive tasks, whether in our own factory or in our factories, and that's the vision of our future workforce. And finally, we have, in great earnest, began our journey towards becoming a clean tech company. We will keep doing this and keep looking for companies to -- who are developing such technologies -- we talked of RecondOil at the last earnings call and as customers look to us to help them reduce their environmental impact, we will keep adding technologies that have a natural fit with our REP and our remanufacturing efforts. So I spent some time on this slide more than I probably needed to do, but I think it's important to give you a sense of flavor of our strategy. And I hope you'll note the strategy has not changed in the last few -- couple of years, but we can certainly talk more about that. Of course, our strategy may or may not change, but our values and drivers remain unchanged for a long period of time. Certainly, our values, high ethics, empowering ourselves, our employees and our customers, openness to feedback, openness to new ways of working and teamwork, which is extremely important in a global company like us, keep -- these are our values going forward and has have been for last -- past few years. Our drivers grow with profit sales. SKF is known for quality, that stays. Innovation is not just only a driver also one of our focus areas. Simplicity and speed and sustainability are our drivers. The macro outlook, I will not spend too much time on this, all these graphs you are aware of. But simply put, we are now finally seeing some green shoots. And all these graphs, whether it's GDP expansion or industrial or manufacturing activity or high-frequency indicators, we are seeing an uptrend in the last few months, and that's certainly good news for us. Last year's results, it's been three months since we declared those results. But I won't repeat the numbers. You've seen these numbers already: net sales, PBT and earnings per share. We'll certainly answer questions if you have any of these numbers. Let's jump the slide. Go ahead. Anurag, do you want to talk about this?

Yes. So the results were out on Friday, and I'm certain that people who are on the call would have seen the results in much more greater detail already. But as a quick highlight, I think we had a very strong second quarter, continuing on the back of the last two quarters where we see a big swing upside, particularly because of the low base effect and the reported revenues at INR 6.9 billion, a 130% increase and the reported profit before tax over INR 1 billion, INR 1,058 million to be precise, and a net profit of INR 791 million, INR 79 crores in [ number one ]. But these numbers are huge upside over last year, primarily because of the low base effect of the previous year. The purpose of today's meeting is certainly to talk about these numbers in much greater detail and answer questions that you might have during the course of the call. With that, I'll hand it back to you, Manish.

Thank you, Anurag. Let's move forward. I want to spend the next few minutes and not too much time talking of some highlights. These are examples, anecdotes from the past year, showing you our strategy in action. First and foremost, of course, these are the four stakeholders we keep interacting with employees, shareholders, people like you in this call store, our customers and the communities we operate in. Most importantly, it's been an extremely challenging year for our employees and for our entire workforce. Like many other companies, we've gone above and beyond trying to do what we can: safety measures, EHS measures, vaccination measures, COVID care centers, all that we can to ensure our employees remain safe, and we come back to our factories and it's safe place to operate. There might be a question later on, so I'll preempt right now. We now have about 25%, 30% of our staff vaccinated, either one shot or two shots. We are conducting a lot of vaccination camps at all our sites. We're only constrained right now by the supply of vaccines. But we are in constant touch with local governments and local hospitals to see how can we get the maximum vaccination for our staff as soon as possible. Safety, not just in corona times, even regular times, is extremely important to us for a company this size, for our operations of this scale. We've had just five recordable accidents and 0 fatalities at our sites last year. This is a good example of REP in action. As I mentioned to you, REP is about aligning our interest with customer interest. This is an example of a steel producer, one of the largest in the country. Aligning our interest with them simply means that we get paid when they produce more. So the contract we have with them is that the more you produce, the pay per tonne contract, we get paid more. So we, of course, have the full contract of bearings with them, but they only pay us when they have better productivity at their sites. Automotive is a big part of our business. And within automotive, 2-wheelers is a big part. Strategic partnerships on this slide means more than just a supplier of their use, more than just -- just-in-time inventory suppliers, but this is partnership that goes beyond production, this is partnerships in R&D, partnerships in design, development. And that's the kind of partnerships we would like to build. This is an example of building such a partnership with a leading 2-wheeler company. And through that, we've increased our share of business 3x. Likewise, commercial vehicle manufacturers who frankly gone through a very tough time last couple of years for reasons that you know well. It was extremely important for them to work with someone like us, and we were happy to provide our services on engineering on application support, in this example, to upgrade their wheel lengths, for medium and heavy commercial vehicles because they're already looking for improved reliability, and therefore, overall end customer satisfaction. And they came to us because of our deep expertise in such application. You may have heard, we've launched an e-marketplace, the first in the industry. In January this year, we had hoped to be fully functional and fully scaled by this time, but thanks to way wave 2, we are still in pilot. Therefore, we hope to be fully operational at the end of this year now. But we are now offering our bearings to 9,500 pin codes out of 19,000 pin codes in the country. That's a 50% reach. And to put this in perspective, our distributors who are, of course, a fairly widespread it is they don't reach the pin codes we want to reach through our online store. So it's a great way to, of course, reach more customers, increase our share. It's also a fantastic way to reduce counterfeits because wherever we cannot reach and customers want to buy a square, they unfortunately go to counterfeiters who supply them fake SKF bearings. And the irony is that customers end up paying full [ sets ] because they don't know it's counterfeit. So they are paying full price for what they think of genuine bearing. And when those counterfeit bearings go into the machinery, the machinery fails and that gives us a bad name. So this online store is as much aimed at stopping counterfeiting as it is to increase our reach. We work with customers, and this is an example of our first focus area, digital sales. How can we improve efficiency, lower cost of them and for us. So [ digi-connect ] has been launched earlier this year. It's a fully digital tool and we are in the process of fully digitalizing all our interactions with them. Something as simple as, where is my stuff? Where is my stuff? Where is my stuff? In the past, they would call us and customer service would kind of struggle to give the answer to them and now it's all fully digitalized through [ digi-connect ]. We operate in communities around us. Extremely important to be responsible citizens. 42% of our energy is now through green and renewable. And of course, it has a good bottom line impact, but more importantly, it also helps to reduce our impact on the communities around the factories we operate in, and we are very, very proud of this fact. Finally, CSR. You see a picture here. These are not our employees. These are CSR beneficiaries who's contributed INR 19 million last year and benefited over 200,000 beneficiaries with a scholarships or environmental programs or sports initiatives, whatever we need to do to be better corporate citizens around where we operate. With that, I'll summarize very quickly. On the left-hand side of the slide is, hopefully, you saw this in the presentation, our vision, our mission, our values and guidance. I spent a lot of time on our strategy [indiscernible] examples of it through some of the slides there. Hopefully, it's been well articulated and hopefully you have easily understood the strategy, if not we're happy to answer more questions. Our numbers show we've built a good business and it certainly helps us on stronger in these very difficult times. And finally, we want to engage thoughtfully, meaningfully and in a very [ trusive ] manner with everyone around where we operate. Going forward, we hope to continue to improve our competitiveness in core segments, automotive and industrial. We'll keep focusing on improving productivity and efficiencies. We have a very strong balance sheet that you may have seen. And of course, people in this room and people not in this room, great leadership, confident employees and building robust processes to keep delivering our #1 driver of growth with profit. With that, thank you for listening to me. It's now 10:20, we have a lot of time now to answer questions. So Sunil, back to you.

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

Congratulations for good set of numbers in such a challenging environment. I just have three questions. First is, if I look at FY '21, if I look at our overall contribution of gross margin. So even if you're adjust for the one-off gain we got because of transfer pricing, on the trading business, we kind of reported a very high gross margin. So if we adjust for the product mix, it seems to be quite high. And the same trend has been reported in Q1 '22 results as well. So just trying to understand what are the drivers of this, and is this sustainable going forward? And a related question is, and last one, we took a lot of cost measures, productivity measures. So how much of this is sustainable in the future? So that's one.

This is Anurag. And as you reflect back on the previous quarter when we had a significant increase in gross margins, and we did speak pretty widely about it that it was a onetime adjustment. You see the whole principle around transfer pricing is such that the two related parties need to transact at an arms-length basis. And with respect to the relationship that we have with related parties that we buy from, there are certain margins that we need to retain in the country. That margin, if it breaks a certain threshold, it needs to be made good by the other related parties who is the manufacturer of the product. So in that sense, there was a onetime increase that we saw in the first quarter -- calendar first quarter of 2021. Other than that, I think largely the margin is a reflection of continuous cost efficiencies and inflationary elements that keep impacting the financials. What you see in the current quarter, and you're right, our margins are still better. This particular quarter, if you really look at the mix of industrial businesses improved. It's improved by almost like 5 to 6 percentage points. And as you would know, industrial businesses is a little more profitable or rather significantly more profitable than the automotive business. And therefore, the profitability mix is actually driving most of it. In addition to that, I also want to point out that so far, the cost inflationary elements don't seem to have impacted our financials. Maybe that is because of the long effect of purchase of material in advance and some of it may come in the future. So my initial hypothesis is going forward, you will see a certain decline in the margins. We have done many price actions though, some of that will certainly be recovered through the price actions. But largely, I would see the trend either flattening out or slightly dipping for the rest of the year. Going to your other question around productivity. The productivity initiatives that we had in the last year Viraj, were across the board. And the whole principle around those cost efficiencies that we worked on was to make sure that, a, we are going deep and wide within the cost structure of our organization. At the same time, we wanted to make sure that the initiatives that we are taking are more sustainable in nature. Some of that is a onetime effect because of the low level of economic activity, which are variable in nature, but the initiatives around fixed cost, I would say, largely are structural. And therefore, we don't anticipate a significant increase coming back. They'll be more in the sustainable nature, I would say.

Okay. Just a follow-up on the mix part, which you highlighted, that industrial is more profitable now. If I look at our own history, we -- so for us, primary auto is largely manufactured in house and only a small part of industrial is what we manufacture in house historically. And hence, the traded business margins are a little bit lower than what we earn in the manufacturing business. So has there something changed in the last year, 1.5 years in terms of within industrialization in terms of localization versus trading, which has driven this better margin profile? Or there's a revision in terms of the terms of dealing and the transfer pattern which you talked about, which is driving this structural change in margin?

So Viraj, as I mentioned earlier, there has been no change in the structure of the transfer pricing principles that we operate. It has been consistent from the practices that we've had in the past. What has definitely changed is the extraordinary financial impact that we had in the last year. So take, for example, the impact of foreign exchange. Take, for example, the underutilization that we saw of our fixed cost with respect to the trading business. So if you think about it from a related entities transfer pricing agreement that we have, these costs need to be made good to the local entity. And therefore, we saw that increase coming. There is absolutely no change as far as the overall transfer pricing policies are concerned, and then they have been applied pretty consistently. As far as the mix of the business is concerned, it keeps kind of maybe hovering around 50% industrial, 50% automotive. Some quarters it moves around 10% upside on industrial, 10% upside on automotive. It simply is a factor of how the economic activity in the country is going on. So take, for example, the automotive business in the previous quarter was almost like [ 50% ], whereas in this particular quarter that we just reported out, our industrial business is about 58%. So it's just the reflection of the economic activity in these respective segments.

Okay. If I can just add one more question? On REP, if I were to dwell down, so you gave three interesting examples in terms of how we won business with different customers. Can you share when you say we are moving to a fee-based model, typically, how we go about pricing and charging to the customer, in a sense that how is the mix between product and service and replacement element? Is that also built in here? And just to tie this to a more broader question is, since we're moving more and more towards REP eventually, say, next 5 years, 10 years on the line, how we're aligning our cost structure in line with that particular offering?

So this is Manish again. REP in the purest form, what we internally refer to as a Level 3 REP, the highest form, the aspirational REP is a pure fee-based structure. It's not linked to any bearing sales. So which means, as an example, I'll make it simple. If a customer today has a 95% uptime, and we go in and pitch to them that we can increase their uptime from 95% to 96%, that 1% additional uptime for them is worth a lot of money to them. And our pitch to them is don't pay us any money till you get the 1% uptime increase. But when you do get the 1% uptime, we want a good share of that increased profits. So that's the purest form of REP, where our interests are completely aligned. Of course, that's aspirational. It's not going to happen overnight. And you're right in saying that it might take you to 3, or 4 or 5 years for us to get there. In transition, what we get in the right now is the level 1 and level 2 REPs where it's a combination of product and service fees. It's a hybrid model. So like this pay-per-tonne contract that I talked about, where we have a contract with a customer for bearings and we have a contract for them for the pay-per-tonne, with only one condition that we will take over your entire bearings supply. So we don't really want to be focused on only SKF bearings but all the bearings your purchased because, frankly, we cannot impact your productivity or utilization unless we have control over all the bearings you use. Now they may use competitor bearings, they may use some other bearings, but we go in and take a look at their complete usage. And as and when those bearings fail, we may decide to replace them with a different bearing, a new bearing, a remanufactured bearing, et cetera. And that also brings us down to your second part of the question around costs. So that is an important part for us to manage costs accordingly to be able to provide the same level of guaranteed service to customers.

Okay. And just last for here is one of our larger competitor has launched a similar service under off-time. So if we were to just kind of understand our service offering vis-a-vis their's, where is there a differentiation lie? And a related question is, globally, even in the annual report you mentioned that globally, the condition market is upwards of $5 billion. So for parent, what kind of a market share they have globally? Any perspective you can share on this?

Sure. I believe, of course, and you would hear no different from our competitors that I believe we are the best performance company in the world, and frankly, they would say the same. That's a question of [indiscernible]. But I think what is important to understand is the feedback around these performance contracts. And the feedback, I mean, it's very easy for anyone to supply bearings you could do Viraj, I could do anyone else could do. It's very difficult for someone who is not as advanced in the bearing technology as we are with a 100-plus years of bearing technology to be able to provide those solutions to customers to be able to pinpoint exactly what's not working. So it's very easy, for example, -- I mean I'll make it simple for you to understand. If a bearing fails, it's very easy to take up the old bearing and put new bearing in. But that's not a very margin-accretive business. The margins will come from figuring out why that bearing has failed and what kind of bearing now needs to go back into it or what process needs to change in terms of how the bearing is being used. And that's where the knowledge and the legacy and the application development and the engineering of SKF comes into play. So the $5 billion market you talked about on conditional monitoring, it's made up of, I'm assuming, hundreds of small players. Most of these small players don't have the deep expertise that someone like we would have to be able to make a difference, and that's what makes it so margin-accretive for us.

And just to add to what Manish said, Viraj, if you look at the conditioning market overall globally, it's kind of came into being through the consulting route. And it is now significantly changing into people who have the expertise in that space. So just to allude further to the point. I mean it's not a consulting domain, really speaking. There has to be subject matter expertise. And therefore, the value proposition that we offer to the customer makes a significant more impact in terms of benefits that we are talking about.

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

Yes. Many congratulations on good set of numbers. The first question is pertaining to the Electrical 2-wheelers market where we have made a brief comment in the past that we have some change going to this segment, which is very miniscule in size as of now. So if you could share some perspective as to based on the current product pipeline which are the products that can be introduced for this Electrical 2-wheeler segment? And what could be the ballpark content per 2-wheeler that we can look forward to in the future? That's my first question.

Okay. Electric 2-wheelers, it's still some way out. We're seeing a lot of interest in the market; a lot of new entrants in this market, both on the component space and in the vehicle space. Not many of them have reached the scale they need to be at to be able to make a true dent and be profitable. But having said that, there's no question that we don't know how much time will it take, whether it's 3 years or 5 years, we don't know, but Electric 2-wheelers will certainly be here sooner than we think. And it's, of course, linked to a number of issues beyond just manufacturing, infrastructure, et cetera. As far as we are concerned, we are speaking to everyone in the space, big or small, whether they have the technology or not, whether they're assembling or manufacturing. Because, frankly, we don't -- we're also learning with all these people. We don't know who will succeed who will not succeed. So we are working with all these people. As of now, I think we work with 8 or 9 manufacturers and more than 25 component -- by manufacturers I mean vehicle manufacturers and about 25 component manufacturers across all components that go into Electric 2-wheeler. And if I expand your question to electric EVs, electric vehicles in general, we also work with folks who are developing electric cars, electric public transport, et cetera. So it's a journey that we are on. And we are certainly geared up. We have the technology. We have the global research and we have the experience outside India to be able to serve these markets as and when they develop through their maturity. To your pointed question on number of bearings, I think you asked in electric vehicle. Well, the wheels don't change. We still need 2 wheels or 4 wheels, so the number of bearings do not change. On the engine side, the bearings might change and they may become less. So typically, a 2-wheeler has about 10 to 12 bearings on the non-wheel side, that may drop to about 6 or 7. However, while the number drops, the expectations from those bearings and therefore, the technology that goes into those bearings and therefore, the material that goes into these bearings also gets a big upgrade. So we don't expect our realization per vehicle to go down while the cost per bearing might go down -- sorry, while the number of bearings might go down.

Understood. So that's pretty clear. Also, second part is on the railways front. If you could more share your perspective in two or three different areas? One is on the freight wagon side where are we in terms of qualifying to bid for 100% of quantity for the Class E bearings in that journey? And by when can we expect -- escape to see a material -- to gain a material market share over there? Other part on the railways side is on the metro railways as well as the locomotive bearings that we have started to manufacture for some of the local locomotive manufacturing plants, if you could share some perspective where are we in that journey? And what could be the possible contribution of railways as a whole from the next two to three years' perspective?

Yes. So the railways clearly has four segments. There's freight, there's passenger, there's locomotive and there's the new emerging segment of metros. I'll talk very briefly about all four. The freight one is where you began your question. That's an important one. We've all heard the DFC. The DFC has been delayed by more than a few months now. We do expect -- now what we're hearing is that we do expect completion by June of next year. Some portions have already become operational, but not fully. So that certainly has an impact on our Class K bearings because as you know, those are the varies that can take a much higher axle load. But nevertheless, irrespective of when the DFC goes online or not, regular freight has not suffered as much as passenger through the last 1.5 years due to COVID lockdowns. In the COVID lockdowns, passenger trains have stopped or have been much reduced, but not freights. Freight today, the total fleet size in the railways is about 3 lakh wagons, and they add about 10,000 to 12,000 wagon wheels every year. And our Class [ ETBU ] is going to the wheel sets of these wagons. So it's an important market for us, not just for those 10,000 to 12,000 new wagons being added, for which you worked with all the wagon manufacturers and you know all the names [indiscernible] et cetera, [indiscernible] et cetera. But we also have a fairly good play in the aftermarket because all these wagons need to come back periodically for repair and maintenance. And so we have a fairly good presence there. When I say presence, I have to qualify my comments by saying, traditionally, we have not been very strong in the freight segment on the new build. We are now making an effort now to become stronger on the new build, and we've now got approvals for both new builds and for the aftermarket that's upcoming. And of course, when Class K bearings become operational and the DFC goes online, I believe we will have a fairly good strength there. We have received the first lot by the [indiscernible] of first order of class K bearings that got 2,400 bearings from one of the wagon manufacturers. So that's good news. So that's on the freight. On the passenger, frankly, there's not great news because passenger wagons have -- new production of passenger wagons is almost stopped unlike the freight wagons for the last 1.5 years for obvious reasons. So peer's passenger trains go back fully -- go back operation and fully, we don't expect that segment to pick up anytime soon. The aftermarket will be a business for us, but the aftermarket, frankly, is linked to utilization and the more trains that run, the more trains or more wagons come back into the workshops for repair. And that's a straight link between the number of trains being run and the aftermarket demand. That, of course, has also slowed down in these COVID times. Locomotives, we've always had a good strength and that continues. So no new commentary there. On the metros, we are making really good progress. Apart from all the big city metros, the Delhi, Bangalore, et cetera, and the Mumbai ones, there are a whole bunch of smaller cities now. At last count, we counted about 25, 26 new cities either having launched metro projects or in the process of announcing metro projects. So we're working with all of them in various stages of their approval process to get us qualified. But having said that, you do need to understand that the biggest metro projects in the country, Delhi and Bombay, are even now more than 55%, 60% of the total bearings demand in the country. So our intent and our efforts are with both the large metros and with the small cities as and when they come.

So lastly, just on the bookkeeping side. If you could share the revenue breakup between auto, industrial exports and also between OE and aftermarket within auto and industrials for first quarter as well as for the last financial year, if you can, FY '21 as a whole?

Okay, Sandeep, Manish and I think this will be a question in other people's mind also, so we can kind of answer it together. So automotive, industrial and exports, for the quarter that we just completed, which is first quarter financial year '21-'22, automotive was 38%, industrial was 53% and export was 9%. The corresponding same quarter of the last year, automotive was 33%, industrial was 60% and export was 8%.

Sir, I mean for the financial year full, FY '21 [indiscernible]

You're talking about the full year '21?

Yes.

'21 versus '20 [Foreign Language]. All right. The full year numbers I have at handy. I'll just quickly give it to you. The period ended March '21, automotive was overall 43%, including OEMs and aftermarket; industrial was 50% and exports were about 7%. And the previous year ended March '20, automotive was 37%, industrial 53% and exports about 10%.

The next question is from the line of Ankur Sharma from HDFC Standard Life.

So first, I had a small request, if you could hold these calls every quarter, it would be of great help to investors like us to kind of get a better understanding of your business. So that's my first request, if you could kind of look into it and maybe -- just like some of your peers do it every quarter. So it would be great to kind of have it from SKF [indiscernible]. So that's one. Hello?

Okay. We hear you. We'll think about it.

Sure. Sir, secondly, if you could talk about your industrial end markets. We've been hearing fairly positive commentary again from some of your peers in terms of the industrial aftermarket driving utilization in the core process industries also on the renewable side. So if you could talk about that? And also, if you're seeing any new CapEx-driven demand as well from the industrial bearing side, yes?

So the industrial markets are a combination of the aftermarket and OEM. And in the OEM side, it's -- we are a fairly -- like many of our competitors, actually, I think, more than our competitors, we are much more diversified. And again, different companies classify industrial differently. So let me first clarify what is industrial for us. The big segments in the industrial are railways [indiscernible] what we call general machinery, which is pumps, drives and motors; it's textiles; it's F&B; it's metals [indiscernible] of construction, highway, et cetera. So a number of segments in the industrial portfolio. Railways, we've already talked about, it's doing okay, not great on the passenger side, better on the freight side, good on the metro side. But of course, we'll see a bounce back once trains start operation... are seeing actually a pretty good strength on the aftermarket except for the last month or a couple of months in the markets being closed. But by and large, our distribution business is showing some positive signs, both on prices and on demand across all segments. The other one where we are seeing some good traction is on general machinery, pumps, drives and motors, especially on the smaller sizes. Why that is important to us is because they are a good proxy for industrial activity. I don't think large machinery is a good proxy, but smaller machinery is always a good proxy n for what's happening in the general economy because pumps, motors and drives are used by almost every industry in the country big or small. And typically, they become the first equipment to be bought when capacity needs to be picked up. So we are seeing a good demand from there. We're also seeing an upgrade of motors from the old standard to the new [ AEM 3 ] standards and that's also good news for us because we are clearly the leader in those -- in bearing for those new standards. So we are seeing good pickup in general machinery. On the wind side, it's been a little bit choppy only because we have these 3 or 4 large players, a, it's large players, and it's a very cyclical project business and not all of these large players are by themselves doing well. Where we are seeing some positive traction is an export from India, not by us, but by our customers. So people who are making gearboxes and exporting from India, we are seeing some good signs there. We are not seeing a good demand from people who are manufacturing for India and mainly for policy reasons, wind is struggling in India for reasons, again, you may be aware of. Finally, on things like F&B and textiles, they are really booming. They are really -- in our portfolio, there were not large segments a couple of years ago, but the last two years, they've really picked up steam. And we are investing in new resources in those segments, new technologies and new manufacturing to be able to supply to these new emerging segments.

Okay. Yes, sorry, go ahead.

No, no, I was going to say last and not the least, as and when our new e-marketplace goes into full swing by the end of the year, we certainly hope to gain some benefits from additional reach into the country.

Okay. Fair. So from your comment, as you've said the industrial aftermarket doing very well would be primarily for the process industry like cement, power, metals, as their utilization levels go up, but are you also seeing new CapEx-driven demand coming up as well on the OEM side?

Right. So yes you're right. The aftermarket is fully linked to utilization and all the industries you mentioned are good examples of utilization doing well. On the OEM side, it's not so much industry-led, but it's more customer-led. We are seeing some customers investing in CapEx, and of course, we're working with them, but I would hesitate to make a broad across-the-industry remark on CapEx relation.

The next question is from the line of Chetan from AlfAccurate Advisors.

My question is primarily on the gross margins again. So if we see that this year, our trading margins have again gone back to 13.5 percentage, where -- and some portion of this is a benefit from transfer pricing, whereas our manufacturing margins have kind of remained steady at 60%. So going ahead, what can be our standard trading margins? Is this 13.5% of traded margin likely to sustain or remain standard from here on? Or is this going to keep changing?

So Chetan, the trading margins that we are entitled to is in the range of 6% to 8%. That should be your expectations going forward, not beyond that. As far as manufacturing margins are concerned, my outlook at this moment would be that while we do everything in terms of driving [indiscernible]. Sorry, can you mute yourself Chetan? My guidance on the manufacturing margin would be that we will continue to see some significant inflationary pressures for the rest of the year. We will certainly try and contain them, reduce them, eliminate them. But if it is not possible, we'll pass on the inflationary impacts arising out of steel or transportation, or foreign exchange impact back to the consumer through price impacts. So largely, I think we should have a stable gross margin with a couple of minor blips here and there.

As a percentage of total revenue has come down in FY '21. It is now at 42%. So have we seen an increase in localization in last year? And -- or is this was largely led by decline in automotive? And increasing the are we going to make any efforts? Or is there going to be any incremental CapEx for increasing the localization percentage?

So Chetan, I'll break down the question into multiple parts. So the first part is in terms of the mix. What is -- yes, you're right, as far as year 2021 is concerned, a big part of our revenue mix is automotive. It has certainly got better because of two reasons. One, automotive had been struggling in the previous years due to multiple [indiscernible] okay? And then post the first quarter impact of COVID, there was some pent-up demand that has bumped up the automotive business quite a bit in the last couple of quarters. So certainly, automotive has been a stronger mix as far as the year 2021 is concerned. Which essentially means that as you compare quarter-over-quarter, there is better utilization of the factories, okay? So that plays into the impact on the margins. The second part of your question on the investments as far as capital investments are concerned. As we earlier said, we generally make about INR 150 crores to INR 170 crores worth of investment every year. Although the pace has slowed down a little bit, but I don't think there is any concern and are pursuing ahead with the investment. We see the market opportunities opening up once again. And therefore, we are confident of making those capital investments also in the future. Right now, we may be about 3 to 6 months [ delayed ] either capital that is work in progress or capital that is not fully installed and we are waiting on people to come to our sites and factories to get those installations completed so that we can produce more. We obviously do see some demand opportunities for our manufacturing operations that we could not serve fully well and which will be a big focus for us in terms of where we invest our capital. So largely more in terms of expanding our capacities, but also in terms of newer offerings in the places that we don't exist.

Okay. Okay. And just lastly, I wanted to ask on the railway segment. So you alluded that we have been gaining share and improve -- gaining the approval. So in terms of the current business, is our market share, what would be our market share, say, in the Class E bearings? And what would -- and has it improved over the year? And secondly, with the new DFC coming in and the Class K bearings having higher content and the value, so what could be the opportunity size that can get added here due to DFC for us? Just a broad picture.

Yes, sure. So on the Class E bearings, let me just say we have a good market share. And that market share will only improve once we get the Class K bearings approved and operational once the DFC goes online. When that will happen? I'm not sure as yet, but as soon as DFC goes completely operational, I expect next year sometime mid '22 is when you will see the Class K benefits coming to us.

Ladies and gentlemen, that will be the last question for today. I will now hand the conference over to Mr. Sunil for closing comments.

Thank you, everyone, for joining the call. I hope you have a good day. Thank you very much.

Thank you.

Thank you.

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