SKF India Limited (500472) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the SKF India Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be of 45 minutes duration. With this, I now hand the conference over to Mr. Ashish Pruthi, Head of Marketing and Communications from SKF India Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone. Thank you for joining us today. With us, we have SKF India's Managing Director, Mr. Mukund Vasudevan; our CFO, Mr. Ashish Saraf; and our Legal Director, Company Secretary and Compliance Officer, Mr. 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 beliefs as well as assumptions made by and on the information currently available to the management. The audience is cautioned not to place undue reliance on these forward-looking statements and making any investment decision. 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 now turn the call over to Mr. Mukund Vasudevan, who will give an overview of the company's business activities and developments for the quarter, Q1 FY 2025-'26. We will then open the call for Q&A.

Thank you, Ashish. This is Mukund Vasudevan, Managing Director of SKF India Limited. I will be going through a few topics, which I'm sure has been shared with you also in the presentation. I will go through a quick economic update of the macro in India, talk about the quarterly highlights for Q1 financial year 2026, a quick update on where we are on the demerger process and then end the call with a quick summary, and then we can go to Q&A. So if we talk about the economy, I will start there, right? Overall, GDP, as you all know, is still -- in India, still growing at 6% with the inflation, 6% plus with inflation at around -- with a manageable level at around 3%. Still the growth in the GDP has primarily been coming from government spending and has been coming from services. The manufacturing-related GDP has actually slowed down a little bit. If you look at major sectors, the IIP has actually shrunk a bit in this quarter, dropping to 1.8%. So that is obviously driven a little bit by power, electricity, coal, et cetera, but other sectors are also relatively muted. Automotive has been flat in growth in million units produced. Slight growth in passenger vehicles, very minimal, but decline in both 2-wheelers and then, to some extent, in commercial vehicles overall. Light commercial vehicles growing a little bit more than the heavy commercial vehicles. Iron and steel production has grown, driven by the construction. It's -- but new CapEx projects have actually slowed down in iron and steel. And in construction, we're seeing, again, a slight uptick driven by both real estate as well as the government-related megaproject, infra projects. And that all these has a ripple effect on us. We've seen average growth kind of in line with GDP in our business. But there are sectors which have been up and sectors which are down. If I now switch to quarterly highlights, our net sales, as I said, has grown at around 6% year-on-year, primarily driven by a stronger Industrial growth, we have grown 13% in Industrial year-on-year, which is excellent growth driven by railways, wind and some of the heavy sectors. Automotive, on the other hand, has actually declined or is almost flat by around 0.4%. As you know, the Industrial business is 53% of our business, so Automotive is 39% of our overall business in terms of sales. And the exports is another 8%, which is again declined by 0.9%, so around 1%. The Automotive decline has come from some changes in models with some of our larger 2-wheeler customers, but also an overall decline in both commercial vehicles and passenger vehicles. The Industrial growth, as I said, has come from mainly the heavy wind and railway sectors, and we expect this -- the Industrial growth to continue. Exports is down partly due to tariffs in some of the sectors, but also partly down due to specific industries in Southeast Asia or Americas being down. Our margin this quarter has come down by almost 530 basis points. The reasons for this are related to, one, demerger-related costs, onetime costs, both IT as well as IT-related costs as well as consultants. Now some of this may continue in the future as we -- over the next year, 1.5 years as we're expecting this demerger to continue until the point we are -- the demerger is fully done. The other reasons for increase in costs have been the employee-related costs, which have gone up due to annual increments. We have also started our process of investing more in our factories, so the depreciation costs have actually also gone up. And finally, FX has also had an impact on our business because of the weaker rupee. So all these are contributors. In addition, we also have slightly higher traded volume, which is at a lower margin, and that is creating a mix issue. Net working capital is -- and cash flow are the next topic I will cover. In net working capital, we have actually reduced a bit the net working capital from quarter-on-quarter, but up a bit from full year, primarily driven by accounts receivable, higher volume of business, but also partially the decline from fourth quarter '25 to now has come from a decline in our inventory. Cash flow continues to improve. We have a 13% improvement in our net cash flow. I will now talk a little bit about the demerger and so that we can kind of give you a quick update on where we stand on the demerger. As you know, we are trying to create 2 fit-for-purpose independent companies here, both of which can accelerate growth and profitability independently. We believe the reasons for the demerger are the different macro environment in the Automotive versus Industrial, different customer needs from what Automotive needs given the macro situation and given what various Industrial customer needs. And second and last, the difference in manufacturing style or manufacturing philosophy of the 2 entities. All these together have been the reasons why we are creating 2 fit-for-purpose companies, which will have independent management focus, increased manufacturing efficiency on both sides, tailored innovation, capital allocation more efficiently done, more agility and responsiveness. And finally, more visibility for our investors in terms of how the 2 businesses are doing independently. As we announced in the demerger call, we are also now at a point where we know which manufacturing lines will go where. In manufacturing lines in Bangalore, where we have 10 lines totally, 7 will go to Automotive, 3 will remain with Industrial. In Pune, where we have 22 lines, 12 will remain with Automotive and 10 will go to Industrial. Haridwar, 4 lines, all will remain with Automotive. In terms of land, we are roughly split 85% to 15% in Bangalore, 85% for Automotive. 52% Automotive and 48% Industrial in Pune, and Haridwar will be 100% Automotive. And in terms of manpower, it's 55% to 60% will go to Automotive and 40% to 45% will remain in Industrial. These are rough numbers for the land and manpower, but directionally in the right -- it's what we expect. Finally, in terms of the time line, we have now filed with the NCLT, and we are expecting the shareholder meeting to happen later this quarter. And we will -- hopefully, once the NCLT approval is done, we should be -- in the fourth quarter of this calendar year, we should be ready to list and trade as 2 separate entities. All right. Ending call, ending kind of summary. As I said, good 6% plus growth year-on-year. Industrial doing very well at 13%. Automotive slight decline or flat this quarter year-on-year. Excellent cash flow generation, 13% year-on-year increase. Margins have been soft year-on-year, 530% drop -- sorry, not percent, 530 basis points drop, 5.3%, PBT percent drop, primarily driven by demerger costs, some employee costs and FX. The demerger costs and the employee-related costs, which is the annual appraisal, will continue for the next 1.5 years. The others, hopefully, it's a onetime which will adjust like FX. That's it from my side in terms of the presentation. I will -- just one other comment. The shareholder meeting for the demerger is -- has -- was done on 14th July, and they have approved the scheme as the demerger scheme. So -- and NCLT has noted that also, and we should hear back from on the decision in the month of September. Thank you from my side. I now hand it back to the moderator.

[Operator Instructions] The first question comes from the line of Yash Goenka from Awriga Capital Advisors Limited.

This is on the Ahmedabad plant where you [ blend ] around INR 150 crores and [indiscernible] CapEx. So my question is, what is the quantum of CapEx and how it should benefit the listed company?

Okay, Ashish, if you could answer this question.

Thanks, Yash, for your question. Again, I don't have offhand the CapEx numbers for -- specifically for Ahmedabad factory as it is not part of the listed company. But principally, the investments that we are making in Ahmedabad, Ahmedabad factory would continue to sell to the industrial company and the -- which is SKF India. And SKF India would in tune -- will continue to sell to the market, right? So any investments that we are making in Ahmedabad is effectively benefiting SKF India in terms of creating a better product availability, localizing the product and ensuring lower cost for SKF and in tune, helping SKF win a better market share in India and abroad.

So any time line on when the plant will commission if you cannot quantify the quantum of CapEx?

Sorry, can you come again with your question?

Can you comment on when the plant will be commissioned the Ahmedabad plant?

The Ahmedabad plant is already commissioned, right? They are already operating in the unlisted entity. There are additional investments which have been planned, and most of the investments should materialize in the 2.5 to 3 years. So sometime by end of 2027 is when we expect all the CapEx to materialize and production to start.

If I may just add, if I may just add. As Ashish said, any investment in the region, right, and it could be Ahmedabad, could even be in Southeast Asian country or could even be in China, if it makes sense, right, it makes us more cost competitive in the Indian market. So the idea is we will continue to invest where it makes sense, whether it is in the listed entity or in any of the factories of SKF AB. And if it is competitive to sell in the Indian market, we will sell it, and that will help us grow. So growth and margins should see an impact from any investment in Ahmedabad. At the same time, we are continuing to invest in the listed entity in both -- primarily in Pune, both for capacity enhancement as well as localization.

Okay. If I could just squeeze in one last. What kind of asset turns you're expecting from the investments you'll be making in Auto and Industrial?

Sorry, what is the question? Asset turns?

Yes.

Is that -- sorry, is that return on assets or...

No. The top line.

Okay. Ashish, maybe you can answer that?

So again, offhand, I wouldn't have the number in terms of the asset turns. But what we -- in terms of return on the investments that as a company we look at is, at a minimum, the return on assets has to be -- or a payback has to be within a period of 5 years or less. Any investment as a company that we make, we target to get a return on our investments in 5 years or a lower period, both for Automotive as well as Industrial market.

The next question comes from the line of Harshit Patel from Equirus Securities.

Sir, you had guided for 8% to 10% revenue CAGR in FY '28 for the Industrial business in your last demerger discussion. Is this because of muted market conditions or us not having the sufficient capacities as fresh capacities in Pune will only come on board after FY '28?

Yes. So as you're seeing right now, I mean, if you take a 5-year CAGR on our Industrial business, year-on-year, we are growing almost 15% year-on-year CAGR over the last 5 years. So we -- while in the recent past, we have had a little bit more muted in the Industrial business where we have had a little bit more muted growth primarily due to portfolio cleanup, meaning we have dropped customers or products which are not profitable, we are -- we expect that growth to come back, right, in -- and then we're being cautiously optimistic here when we say 8% to 10% long-term growth. To your point, the main reason for that will be -- will -- one of the main reasons is more localized production both in the Ahmedabad plant and in the Pune plant. So that growth top line will make us more competitive and we'll get top line growth. And most of those are getting online in '27 and '28. That is one of the reasons. The second is we are also working on the -- on new product innovations and creating fit-for-purpose products, both in terms of by segment in the Industrial but also in what is fit market conditions in India. So we're creating more engineered products, not just replicating products which are global, but creating more engineered products for India. And then the last reason is that we have significantly expanded our commercial excellence efforts, which includes everything from our distributor network or our after-sales network, whether it is mechanics in Auto or it is retail stores or distributors in Industrial. It also includes how do we value sell better, how do we include services in addition to the product sales. All these together, we expect our business to reach that double-digit growth in Industrial at least.

Understood. Sir, in Automotive business as well, we have gained market share in both 2-wheelers and 3-wheelers as well as PVs over the last few years. Do you think we will continue to gain further market share or we will now broadly grow in line with the industry growth over here?

Our aspiration is to grow above industry, continue to gain market share. And I believe with capacity expansion, one of our biggest bottlenecks in Automotive has been a lack of capacity. And what OEM customers look for is committed capacity in the long term. We expect that, that will -- we will expand capacity in, again, in the '27-'28 time frame, and that will help us expand more rapidly than our competitors and hence gain share.

The next question comes from the line of Krupashankar from Avendus Spark.

My first question would be on the growth, what you had highlighted during this quarter coming in from the Industrial business. And you had primarily highlighted that railways, wind and some of the sectors were driving this growth. Can you expand a little bit more on it? Because you had highlighted in the earlier call -- one of the earlier calls that wind was not a market which we are focusing on. Has it come into flavor? And anything more on the Industrial piece, which gives us confidence on continued growth in this segment? Second is more of a bookkeeping question. I just wanted to get an understanding on what is the one-off cost due to demerger during this quarter?

Yes. Sure. I'll let my CFO, Ashish, answer the second question, specifics on the demerger costs. I can answer the where is the industrial growth coming from? First, if I think there may be a misunderstanding that wind is not a focus. Wind has always been a focus, one of our top 5 priorities, and it will continue to be. What we have done in the past is we have sold all applications in wind. There are many, many applications in wind -- not many, 3 or 4 main applications in wind, which all of it were not profitable. And so we just cut off unprofitable applications and focus on the applications where we thought -- where we believe we can be profitable and we can offer better value to the customer. And with that focused strategy, we have actually gained more share. Partly, it's a focus, but partly also the fact that we have got a better manufacturing footprint, both in the region as well as in Ahmedabad for making these products. So we have gained share in wind, but specific applications. So it is a misunderstanding to say it is not a focus. It is a focus. It will continue to be in India, but we will pick and choose the applications within wind that we want to play in. Other sectors which have grown well in Industrial are, as I mentioned, railways with some of the high-speed rail projects, we are continuing to do well there and metros. In the heavy industry, we are primarily seeing some expansion in metals, mainly in aftermarket, not new projects, but aftermarket. So growth has been there. We have also seen some expansion in general machinery, which is everything from pumps, drives, gearboxes, et cetera. We're seeing some expansion there. And overall, our distribution market has actually -- it's not as much as the 13% average growth we've seen, but it's continued its steady growth of around 8% to 10%.

So just to add to or respond to the question on demerger costs. So if you look at our current quarter, cost of demerger was around INR 184 million. A significant chunk of that cost was on IT implementation, which is as we are going through a demerger between Automotive and Industrial businesses, a significant spend has been made in creating and deploying SAP as well as other softwares that we use within SKF. Apart from that, ensuring that we have a separate data infrastructure in place both for the Automotive business as well as for the Industrial business. So that's where a significant amount of cost has been incurred on IT. And similarly to kind of to support the whole demerger process, we had to engage with or take support of consultants in terms of ensuring that it is being done in a compliant manner. And that is where you see a significant amount of cost incurred on consulting. We expect this cost to continue until first half of next year. First half of next financial year is when we kind of expect this cost to continue.

Apologies. Just I couldn't hear the exact quantum of the cost because there's some disturbance on the line. Can you repeat just the quantum?

Yes. So the total cost was INR 184 million.

The next question comes from the line of Gokul Maheshwari from Awriga Capital Advisors LLP.

Sir, in the past few annual reports, you've mentioned your -- more business which you're doing with particularly Indian OEMs like Mahindra, et cetera. Can you just give an update with respect to what kind of business have you won, whether you've been getting business with the new models and your progress with respect to the share of business?

So we are continuing to gain business with Mahindra, particularly in their SUV segment, and we supply what we call the hub units for them. In terms of market share, I'll have to come back to you specifically as to what is our market share with them. Ashish, if you have any insight into that, you can. But I would say it's still -- I would come back to you on the numbers. The one other thing I will mention is Mahindra, we are also working with Mahindra Swaraj on the tractors, and we have been gaining business with them also on the tractors business. Anything, Ashish, you would add on share? I don't think we report this publicly, but I can come back to you with the numbers.

Yes. I don't have the numbers, Gokul, as of now [indiscernible] come back.

The next question comes from the line of Mayank Bhandari from Asian Market Securities.

Sir, just checking, you have given earlier margin guidance of 16% to 19%. And now this demerger cost will be continued for at least next couple of quarters. So what kind of margin we should anticipate for this particular year?

Ashish, if you could answer that? We are -- I mean, if you could answer that for the next -- I would say the demerger costs will continue for the next 1 year, right? So I would say, 4 quarters, and we're being cautious here because there, we expect that some of this will continue, not just IT but other costs related to the demerger. And then beyond that also, we will have some additional CapEx. So the depreciation will -- the new factories in Pune come on, the depreciation will start hitting us also, right, while we are taking actions to offset this as much as possible, right? We are -- I would say, we are expecting slightly muted margin. 16% to 19% range is what we'll get to in the 2028 onwards time frame. So Ashish, if you can comment in more detail on this.

Yes, sure, Mukund. So I think as Mukund said, this demerger cost is going to continue till H1 of next financial year, right? And this demerger cost is going to impact around 1.5% to 2% on the margins. So you could expect at least a couple of percentage adverse impact on the margins on account of the demerger cost. Apart from that, there could be some additional cost which the industrial company might incur in first half of next financial year with respect to stamp duty and registration cost for the transfer of assets. That could also additionally impact the Industrial business margins in the first half of next financial year.