Steel Strips Wheels Limited (SSWL.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Steel Strips Wheels Limited Q2 and H1 FY '26 Earnings Call. [Operator Instructions] I now hand the conference over to Mr. Dishant Jain from Anand Rathi. Thank you, and over to you, sir.

Thank you, Danish. Good afternoon, everyone. On behalf of Anand Rathi Research, I would like to welcome you all to the 2Q FY '26 Earnings Conference Call of Steel Strips Wheels Limited. Today, we have with us Mr. Mohan Joshi, Deputy Managing Director; Mr. Pranav Jain, DGM Finance; and Mr. Puneet Sharma, DGM, Finance and Accounts. We'll start with a brief opening comments from the management team, post which we will have the floor open for Q&A. I'll hand over the call to the management team now. Over to you, sir.

Thanks. Good afternoon. Hope everyone is doing well. I hope everyone had an opportunity to go through the financial results and investor presentation, which we have uploaded on the stock exchange and on our company website. I would like to start the earnings call by introducing you all to the new CFO of our company, Mr. Rahul Kumar. He is a qualified chartered accountant and has passed Level III of Chartered Financial Analyst, CFA. He has years of experience in finance, accounts, and commercial control. He has been associated with the company since 2022. Previously, he has worked in industries such as health care, technology and ed-tech. Now coming to our half yearly performance. We reported a healthy top line growth of approximate 13% during H1 FY '26, reaching INR 2,387 crores. Gross profit grew by a robust 10%, reflecting strong momentum. EBITDA stood at INR 234 crores, largely flat year-on-year. However, EBITDA margin witnessed some pressure primarily due to lower export volume this quarter. Exports typically being among our higher-margin segment. Profit after tax for the half year stood at INR 88 crores. The alloy wheel segment has been a standout performer this half, delivering exceptional growth and increasing its contribution to the total revenue to 36%. Volumes for the segment reached approximate 18 lakh units. We expect this upward trajectory to continue and with its share in overall revenue likely to rise further in the coming quarters. The strong performance of alloy wheels has been instrumental in sustaining our overall business margin, and we remain confident about its continued growth and momentum. Our new aluminum knuckles segment has made an encouraging progress since its launch in this half year. We sold around 1.24 lakh units, generating INR 33 crores in revenue. Capacity has already been scaled up to 3 lakh units per annum, and we plan to expand it further to 5 lakh units by this year-end. Our goal is to fully commercialize this business line by FY '26, bringing major OEMs into our customer base and establishing it as a meaningful contributor to the growth. On the export front, performance was subdued this quarter with revenue declining to INR 111 crores, down by 26% year-on-year, primarily due to global uncertainties surrounding potential U.S. tariff, one of our key export markets. We are closely monitoring developments on this front to assess the implications. Meanwhile, we have increased our focus on European markets, where the contribution has risen to 52% of the total exports in this half year. We will continue expanding our footprint across Europe, neighboring region to further diversify and derisk our export portfolio. Looking ahead, we expect strong momentum in the domestic market, supported by recent GST reforms that are likely to boost consumption across the auto industry. On the export side, we will continue to evaluate the impact of tariffs while broadening our geographical reach to mitigate risk. With this, we now open the floor for question and answers.

[Operator Instructions] First question comes from the line of Anand Kulkarni from Front Wave Research.

Just a couple of questions from my end. First being on your capacity addition plan. I see this [ Chennai ] steel wheel. Does this refer to AMW Autocomponent, which is yet to be operational. So when do we expect it to be coming online? Any particular reason for delay?

So as I've already said in my previous calls also, that the first intent of using AMW was to increase the capacity within our existing portfolio of the existing factories. So in that context, what we have done is that we have increased the capacity of our Tractor segment by close to 40% over the past 6 months, and that's why we are in a position to offer the best amount of tractor wheels to the industry, with the help of equipments that we have taken from A&W. The second thing which is underway right now and maybe another 1 or 2 months, capacity expansion in Jamshedpur will be done to add close to 0.5 million wheels into the kitty of commercial vehicles to make sure that the economies of scale continues to be higher, and it's a place which is very strategic to customers as well as from raw material side. So we expect a little bit of margin improvement when these economies of scale pitch into the operations in next financial year. At the same time, steel segment offers low volume growth in terms of the industry. So as and when this capacity will be needed, where the plans are already getting discussed with various segments of the business, I believe that over next quarter, we'll be in a better position to give you the steel wheel expansion and utilization of AMW.

Okay. Understood. Sir, my second question was on alloy wheel segment. We can see in our monthly updates, the product mix is changing. Alloy wheel is doing better than our steel wheels. Still that is not reflecting in our EBITDA margin. So I'm trying to wrap my head around this, so what's happening with the EBITDA margin?

Okay. So as I said that in our case, EBITDA margins will not play a very significant role in terms of percentages because raw material keeps on changing. So as all of us know that aluminum prices are at record levels, and it has moved from a level of close to INR 225 a kg to currently around about INR 265 to INR 270 a kg. So it impacts the margin percentage. But from a per wheel basis, which we are trying to talk about, I think we have reached a level of INR 262 in last quarter, which was amongst the best. And in this quarter, we are at INR 242 wherein the impact of the U.S. exports fall in terms of sales was around close to INR 50 crores in terms of quarter 1 to quarter 2, wherein we lost close to INR 8 crores, INR 9 crores in terms of our margins because of the loss of sales and higher cost of operations in those plants. And the level of INR 262 is fairly a decent level where we have achieved it over the past 2 years, wherein we started with INR 185-odd levels to slowly and gradually hit the number of INR 262. And we are hoping that alloy wheel segment will continue to be the front runner. And once the situation of tariff eases up with the current ongoing discussions with the government, I believe that we can scale back to those levels.

Okay. So a couple of more questions on this front. On the tariffs, have we been able to pass down whatever the increased tariff has been, or like we have taken 100% hit of the thing? And second one, if you can paint some picture around expansion in Europe, the subsidiary that you have acquired. Any traction you are seeing, how much has been compensated in nature, on alloy exports?

So I'll answer the second question first. So the European subsidiary, which is under consideration right now is a trading arm only. It has nothing to do with the manufacturing. So it is a customer demand that it serves from that country to them via we manufacture it from India and supply to that subsidiary. So there is no margin impact or anything of that sort. The second thing, which is on the U.S. tariff. I think the tariffs are fairly very, very stringent right now in terms of 53% to us, wherein it does not leave us any scope of negotiations if we want to do that business, because the incremental punishment for any importer in U.S. is to the tune of maybe 24% to 25%. So even if we compensate by 4%, 5%, it doesn't make sense. So currently, the U.S. business is fairly, fairly dim and the compensation is happening only from the European side. The alloy wheel segment exports are fairly doing good and ramping up. So we are expecting some bit of recovery from the export loss from the European side. On the U.S. side, we don't see any possibility as of now where some compensation of price can get the business back because the penalty amount is fairly large. So in case we are into a situation where the penalty which is on account of the import of Russian oil, which is 25%, gets waived off, then India stands at close to 28% for us as an industry. At that point in time, we can think of getting into a negotiating space and try to see that if some bit of negotiation can be done on prices for starting the imports.

Just to end on this note, any guideline if you want to give on EBITDA per wheel a couple of years down the line, 2, 3 years down the line?

See, over the years, I think when we started this aluminum factory was one of the reasons that we see the challenges in steel wheel market, being a sunset industry where alloy penetration is increasing in the PV segment, although in tractor and truck segment, it remains stagnant and there is no scope of aluminum. Today, I'm proud to say that close to 35% plus of revenue is coming from aluminum business, which is higher accretive business. At the same time, aluminum knuckles is a start of the business where we see similar kind of trends coming in, in terms of the industry growth and penetration growth for us. So I believe that the erstwhile thought of INR 300 a wheel is what the site is. But currently, with the business challenges which we are facing and the export drop, which is pushing up the cost a little bit, I anticipate that first, reaching a INR 260, INR 265 level is considered to be the first milestone, then hence fourth, we are going to be moving towards that level that we have spoken.

[Operator Instructions] Our next question comes from the line of Shankar from Eraya Capital.

So I wanted to ask around EBITDA per wheel. Can you give me a breakup of EBITDA per wheel for steel and alloy wheels separately? So yes, that's my first question.

So we don't do it separately ourselves. But yes, if the detailing of segment-wise can be spoken about, I think we can take it offline with SGA. But as a company, we don't do it separately because there are common functions and common portfolios. But yes, on request, I think we can discuss it offline with SGA with the help of our team.

Can you give me any ballpark range for that, like if you have any? We can discuss it...

I'll try to give you a perspective in terms of percentages because we have never considered this as separate for per wheel of steel as well as aluminum because in steel also, there are four segments of the business. But typically, what we have guided in past also that the domestic steel businesses are in the range of 8% to 9% in terms of EBITDA margins. The export steel businesses are in the range of 13%, 14%, 15% margins. In terms of aluminum wheels, the margin range between 11%, 12%, 13% with the increased prices. And the volume mix will play the percentages from that perspective. But as you know that the volume -- the percentage is not the right benchmark to see it over a period of time, because raw material can change. And if tomorrow 20% drop in the raw material comes in, this margin of maybe 10% will look like 11.5%, which is not the right depiction. So we will give you a perspective of per wheel kind of a concept if we take it offline. Will that be fine?

Yes, yes. So I just want to understand on the trajectory, as you stated that you look to target INR 265 and then INR 300-odd levels. So can you give any time lines as to what do you have in mind? When do you look to achieve those numbers?

So as the business grows, I think this year, as we had anticipated earlier, the top line remains committed towards INR 4,800-odd crores in terms of the figures which are looking like right now, wherein some bit of dent came in from the perspective of exports, but still we'll try to achieve that level. And over this period, the intent is that the capacity of 5 million alloy wheel capacity will hit close to 4.1 million or 4.0 million or 4.2 million in this financial year. The expansion of capacities is also going to be happening mostly in and around alloy wheels and knuckles, which is the accretive business towards margins as well as a future where lightweighting and aluminization is happening. So I believe that over next 2, 3 years is what I feel is the trend that we are anticipating towards this INR 300 kind of an EBITDA per component that we can think of.

Understood. So next, I wanted to ask around the volume growth. Can you give any guidance around what can be the volume growth we can expect for full year if current tariff situation remains the same? And similarly, what kind of EBITDA growth we can expect if tariff situation remains the same.

See, what we had anticipated at the beginning of the year that there will be a 5% to 6% kind of a volume growth, which I feel that it is looking tough. And I think that will fall down around 2% or 3%, which is completely impacted by the fact of exports, wherein the question is out of syllabus right now. So I'll not be able to answer that. So 2% to 3% is what I think on a volume growth. In terms of EBITDA growth, I believe last year, we did around about INR 490-ish-odd crores kind of a number. I think we have done close to INR 235 crores right now. So there will be an impact of EBITDA if the situation remains same. And anywhere between INR 260 crores -- sorry, INR 470 crores to INR 480 crores is what we are trying to think on a flattish year for this financial year.

Understood. What are the trends that you're seeing in November, given we are already in November, what are the trends you're seeing in Q3 in terms of volume growth? Like is it...

So what we feel is on the domestic side, I think the GST side is still prevailing. I think the festive mood has been extended by the help of GST for all the segments. So I believe that two-wheeler where our exposure is less, but albeit industry is facing a lot of demand, and it is a happy moment. PVs post the miraculous number, which came in during the festive season, I think the outlook for next 3 to 5 months is visibly better. I believe that, that number is going to be between 6% to 8% higher to reach a number of 3% to 4% for an annual growth. On the Tractor side, the segment is growing very, very good this year. I think there is a possibility that for the full year, we may report anywhere between 8% to 9% to 10% kind of a volume growth. And for CVs, I think it's been very dull moment despite having all the engines which are working for the economy. But I think that is something to do with the business sharing with railways or other segments where I feel that the volume growth is going to be maybe flattish or maybe 2% on the plus side.

Understood. Just last on -- same on the EBITDA per wheel, I wanted to ask, given the historical trends that I'm seeing. So what I have is -- so we did around INR 250 -- we achieved INR 250 levels in FY '23 itself. And from then, we -- as you said, in last quarter, we did INR 260, but volumes have grown, but not per wheel -- EBITDA per wheel has not grown materially as volumes have grown. Like any trend that you are seeing because of that, that is -- any reasons for that?

So I think when we compare it with that period of INR 250 in 2022, '23, in that financial year, we have also indicated that there was a INR 55 crores to INR 65 crores worth of inventory gain because of the sharp rise in the raw material. It was a one-off in that financial year because of which this INR 250 came in. And that got normalized in the financial year, which was preceding. And since then, I think it's a slow and steady angle on towards higher side towards where we reached INR 262 as the highest number last quarter. We would have reached that level given that the situation is out of our control, and we are trying to offset it by the European side of the business or transferring more and more in terms of the segments that we can offer to the European side to compensate.

[Operator Instructions] Our next question comes from the line of [ Sashi Pratlab ] from [ Pratlab ] Securities.

As I joined a little late on the call, apologies if anything is repetitive. My first question is the export slowdown was cited as a major reason for margin compression. If exports normalize in coming quarters, what would be the likely margin recovery range that we look at?

So I have answered this question earlier, but I'll repeat it. I think we lost around INR 20 per wheel kind of a margin in this quarter, which is amounting to between INR 8 crores to INR 9 crores purely based of the volume drop, which happened. In volume -- in value terms, it was around INR 50 crores worth of export, which got hit in Q2 versus Q1. And I anticipate that some solution will be found out. And I'm fairly hopeful between the governments that there's negotiation going on. But without negotiations and without the removal of the duty, which is penalty of 25%, I believe that it will be very tough to do business with U.S. because those kind of margins are not there available in the business. And I mean, if it gets started in maybe next 2 months, I believe that Q4 will be better and we can get back to the margin profile of Q1 with better margins and better products at the same levels.

Understood, sir. Second question is on the aluminum knuckles segment, which has ramped up very quickly for us. So when do we expect it to reach breakeven or contribute to our overall EBITDA?

So the segment is already broken even. I think we are running at a pace of close to 0.3 million annual base capacity. And the capacity by this financial year-end will be close to 0.5 million. And we are also augmenting a capacity expansion to add up another 0.5 million where discussions with the customers are ongoing. And we anticipate with the order book, which is visible to us to reach a level of close to 0.5 million kind of a capacity by Q4 end or Q1 of next financial year. I think the margin highlight also I told you that once we reach to a certain stage, I think the mid-teens kind of a number is where the margin is standing right now, although the value is less in terms of turnover, but the industry offers a similar kind of industry potential, the way that alloy wheel has taken up shape. So lightweighting and aluminization is the theme. And EVs anyways is going to be having this as a mandatory thing. But the penetration is towards the ICE engines where we anticipate some of the programs to be converting the forged knuckle -- steel forged knuckle to aluminum knuckle by next financial year of Q3. And similar trends are visible in the market. And I think it is going to be seeing the same story the way that aluminum has played out for us.

[Operator Instructions] Our next question comes from the line of Vignesh from KSEMA Wealth.

Hey, sir. Am I audible?

Yes, please.

Just regarding the capacity utilization, we are close to almost 75%, 80%. So by this year or next H1, we should be reaching around 80%. So after that, what's the plan for the capacity expansion, sir? Any idea like how much capacity are we putting in or any plan internally? Just want to understand that.

So as I said that the capacity expansion will be only towards the aluminum segment of this business right now, wherein a large amount of money can be spent. Otherwise, internal capacity expansions, as I hinted towards the Tractor segment and the CV segment was done with utilization of the existing equipment of AMW and some repair amount which we spent on that. So we are anticipating this capacity of aluminum wheels to be hitting close to 80% to 82%, 85% in over next maybe 7, 8 months, wherein the thought of adding up aluminum wheels capacity is going underway. I think by next quarter, a lot of clarity will come in, in terms of time lines and monies to be spent on that and what kind of capacity we are adding. Similar way, knuckles is where we are having close to 0.5 million, say, for this financial year. Another 0.5 million will be needed in next financial year, where discussions are ongoing with the government -- with the customer for the time lines and the money to be spent. So I think these are two areas where we are looking out for capacity additions.

Okay. That was helpful. And one more thing on the export side, apart from U.S., how is the demand situation in Europe and other geographies for alloy wheel? And how is the customer preference -- or the -- or from our supply point? How are they responding?

So I think Pranav, would you like to take the details in terms of percentage and all that for the European side?

Yes, please. Just hold on. So in H1 FY '26, our U.S. market of overall export is 44%, 52% is for Europe and 4% is rest of world. And in FY '25, 64% is in U.S. and 32% is in Europe and 4% in other countries. So we gradually increase our share of European business from 32% to 44%.

Okay. And demand has [ grown over there ] or opposite?

The demand side is fairly stable in Europe, given that old customers and no tariff situation or anything of that sort. I think aluminum wheel is ramping up nicely, we have two programs with the European OEM has already started on the aluminum side. And we anticipate two more programs, which are going to be starting in Q4 of this financial year, if everything goes right with the customer testing and everything. And in terms of new awardings and new pipeline, which is going to be visible in next financial year is also very strong with four programs from the European OEMs already awarded to us where program development and touring development is underway. So European side, there is no problem. I think the situation remains very fragile in the U.S. where solutions are being found.

So for next year, exports we might see the growth back again, sir?

It is very tough to say. I think we -- in this -- at the beginning of the year, we clearly thought that we are going to be hitting INR 600 crores to INR 650 crores. I mean we have lost INR 50 crores in 1 quarter itself. So propagating that 4 quarters will be INR 200 crores. It is very tough for us to compensate this INR 200 crores from the European side. But efforts are going on given that you do not know what kind of shape the tariffs will take. So business wins in Europe is being focused. Business wins for alloy wheel is being focused. And just in case something doesn't work, at least we'll try to see if we can make up for the lost ground in this financial in the coming financial year.