Sterling Tools Limited (530759) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sterling Tools Limited Q2 and H1 FY '25 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference call is being recorded. I now hand the conference over to Mr. Pankaj Gupta, Group CFO. Thank you, and over to you, sir.

Thank you. Good morning, everyone. On behalf of STL Group, I extend a warm welcome to our quarter 2 and H1 FY '25 earning call. I'm joined on this call by Mr. Atul Aggarwal, our Managing Director; Mr. Jaideep Wadhwa, Director; Mr. Anish Agarwal, Director; and SGA Partners. We have uploaded our results presentation on the Exchanges, and hope everyone has had a chance to go through the same. I will now request Mr. Atul Aggarwal for his opening remarks.

Thank you, Pankaj, and good morning, everybody. I welcome to your call for Q2 and H1 FY '25 earnings. Let me start with a brief overview of the industry. Total domestic passenger vehicle sales marginally increased 0.5% to 20.8 lakhs units in H1 FY '25 compared to same period last year. There was a notable increase of 13.2% in utility vehicle sales. Out of passenger vehicle sales, passenger car sales declined by 18.5% in H1 FY '25, vis-a-vis last year same period to 6.6 lakhs units. The domestic CV sales reduced by 4.2% in H1 FY '25, 4.5 lakh units as compared to H1 FY '24, indicating a muted demand for the segment. Here at Sterling, we are pleased to report a strong operational performance across key financial and strategic metrics for the first half of the fiscal year. Total income rose by 31.1% year-on-year reaching a INR 569.6 crore in H1 FY '25. This growth was largely fueled by sustained strength of our SGEM business, which has made significant progress. SGEM share of total revenue increased to 42% in H1 FY '25, up from 30% in the same period last year. Our EBITDA grew 25.9% year-on-year to INR 68.1 crores, supported by both higher turnover and operational leverage. We are excited to share that Sterling Tools, through its wholly owned subsidiary, Sterling Tech-Mobility Ltd., has recently announced a strategic partnership with Kunshan GLVAC Yuantong New Energy Technology Limited, a leading Chinese player in the EV and hybrid EV market space. The company is a wholly owned subsidiary of China Kunshan GuoLi Electronic Technology Company Ltd. Through this partnership, we will manufacture advanced high-voltage direct current contactors and relays, which are essential components, playing a key role in managing and controlling high-voltage electricity flow between battery and motor controller or inverter and other power electronic systems. These provide safe switching and isolation in EV power circuits, ensuring efficient operation while protecting against electrical faults. In the event of accidents or short circuits, these help to prevent hazards such as fire or explosions. As the electric and hybrid vehicle markets continue to expand, it is important that we integrate highest safety measures in electric and hybrid vehicles through advanced technological systems. At Sterling, we understand these priorities and are committed to advancing safety in the EV and HEV sectors. This partnership is expected to generate a revenue of INR 250 crores, and Sterling Tools will bring niche technology to manufacture and assemble HVDC and relays at a new facility in Bangalore through an investment of approximately INR 40 crores. We expect to commence production by Q2 FY '26. By producing these components domestically, Sterling aims to drive import substitution, aligning with Atmanirbhar Bharat vision and supporting the Make in India initiative. The development will empower Indian OEMs, Tier 1 companies and other suppliers to access advanced technology right at home, building a self-aligned ecosystem for e-vehicles and hybrid vehicles. In summary, we remain committed to driving innovation, expanding our margin, strengthening client relationship as we navigate this exciting period. Our strategic initiatives, including collaboration with Yongin and now GLVAC YT position us as a leader in development of electronics and electric vehicle components, particularly for EV and hybrid electric vehicle sectors. With strong momentum and a clear growth focus, we are well positioned to capitalize on emerging opportunities, ensuring sustainable, robust performance in the future. Pankaj, back to you.

Thank you, sir. I'll give you the financial highlights for Q2 and H1 FY '25 starting with the standalone numbers for quarter 2. Total income grew by 8.4% to INR 168.4 crores. EBITDA grew by 11.9%, reaching to INR 25.3 crores. EBITDA margin increased to 15%, up from 14.6% in quarter 2 FY '24. Profit after tax witnessed a growth of 19.4%, reaching to INR 11.9 crores in quarter 2, and profit after tax margin increased by 70 basis points, reaching to 7.1% in quarter 2 as compared to last year. The half year results. Total income grew by 9% to INR 331.3 crores. EBITDA increased to 13.2% year-over-year, reaching to INR 49.4 crores in this half year. EBITDA margin stood at 14.9% in half year as compared to 14.3%, increasing by 60 basis points. Profit after tax witnessed a growth of 29% year-over-year, reaching to INR 23.3 crores in half -- H1 FY '25. And the profit after tax margins at the half year was 110 basis points higher, reaching to 7%. Coming to the consolidated financials. Total income grew by 35%, reaching to INR 285.9 crores in quarter 2. EBITDA increased to -- increased by 28.2%, reaching to INR 34.1 crores as compared to INR 26.6 crores in Q2 FY '24. EBITDA margin stood at 11.9% consolidated in quarter 2. Profit after tax witnessed a growth of 40% year-over-year reaching to INR 17.5 crores in quarter 2 FY '25, and profit after tax margin stood at 6.1%. Consolidated financial highlights for H1 FY '25. Income grew by 31% reaching to INR 570 crores in the half year. EBITDA increased by 25.9% reaching to INR 68 crores as compared to INR 54 crores in H1 FY '24. EBITDA margin stood at 12% in H1 FY '25 compared to 12.5% last year. And the reason for the margin reduction is the proportion of SGEM business in the consolidated level, which increased to 42%, up from 30% last year. Profit after tax witnessed a growth of 14.5% and reached to INR 36 crores in H1 FY '25. Profit after tax margin stood at 6.3%. We are pleased to share that our credit rating by ICRA has been upgraded, and we have moved from stable to positive outlook given the strong balance sheet. And overall, to summarize, our endeavor is to achieve higher growth as compared to industry, optimize capacity utilization levels and sharpen our focus on new strategy initiatives going ahead. Thank you, everyone. We can now open question-and-answer session.

[Operator Instructions] Our first question is from the line of Deepan Sankara Narayanan from Trustline Holdings Private Limited.

Firstly, from my side, on the EV business, so despite seeing 20% decline in Q-on-Q volume number for one of our top customers, we have managed this just 3% drop in revenues. So what are the key drivers behind this? Is it due to higher LCV contribution or increased contribution from other customers in scooter business for us?

Jaideep, do you want to take that?

Yes. I will say that we are seeing volumes from LCV and our customers pick up. But also I think we've addressed this before that you cannot track the output from -- or you cannot correlate exactly the output from our customers and the shipments from our side because there are materials that go into stock, as some are used for repairs and service and so on. So there is a bit of a mismatch. Directionally, of course, it will be true, but there will always be a bit of a mismatch between our numbers and the numbers of our immediate customers because of these variances. But we have started shipping products to LCV customers. We are shipping to other 2-wheeler customers and 3-wheeler customers, so that is contributing to the growth that we've seen in this quarter.

Good to know that, sir. And earlier, the LCV contribution used to be in high single digits. So how it has been currently? And what is your outlook for next year for LCV contribution?

No sir, I don't think we've ever had a situation. So far, we've had a situation where with LCV contributions were in high single digits for our motor control units because LCVs have just started. The homologation from our customers -- from our key customers have just got completed. So they've just started selling. We do expect to see these sales really ramp up because we think that the products that have been made are very good and the customer acceptance will be high. So we expect to see volumes grow from the hundreds to the thousands in the next year, monthly volumes.

Okay, okay. And can you throw more light on this new JV, high-voltage DC contractor? So what is the kind of market size and competitive landscape in India? And what kind of value additions are we targeting? And will this margin and ROE profile will be equivalent to the MCU segment for us?

Okay. So I can probably take that up. This is Anish. So firstly, this is not a joint venture. This is a technology collaboration agreement, and it's a wholly owned subsidiary of Sterling Tools Limited. The agreement is between the wholly owned subsidiary of Sterling Tools Limited, which is Sterling Tech-Mobility Ltd. and Kunshan GuoLi's DC contactor subsidiary, which is called Yuantong New Energy in China. In terms of the market for this particular product, it's used in all 3 wheelers, all LCVs, all passenger vessels, both electric as well as hybrid. So it opens us up for not only pure BEV, but also for mild hybrid, strong hybrid and plug-in hybrid going forward, which is a play for OEMs, specifically in the Japanese space, such Suzuki, Toyota, Honda, et cetera. In terms of margin structure, we expect double-digit margins going forward, provided our capacity utilizations are good. And that we expect in the next few years once we start production in Q2 next year.

And what about this value addition levels, what we are targeting? And what would be our key differentiators for this product?

So key differentiator at this point in time is that there is no one really manufacturing these products in India. At this point in time, we are probably the first one to localize -- to assemble these products in the first year. Starting next year, we hope to assemble the products here by buying the child parts from our partner in China and then localize step-by-step, depending upon the availability of certain raw materials, which go into these DC contactors. So there's a phased manufacturing program or a phased localization program. But in the first year, we will be assembling, and then we will gradually localize this more and more to reduce the cost.

Our next question is from the line of Himanshu Upadhyay from BugleRock PMS.

Congratulations on good set of numbers. One of my questions was on the Sterling standalone numbers, okay? One of the things we believe was as revenue increases and more production happened at Bangalore, the EBITDA margins will improve for standalone, okay? But now with the 9% Y-o-Y sales growth and gross margin improving by 4% in the first half, the flowing EBITDA is only 0.6%. So why would that be that revenues have increased by 9% and gross margin improving by 4%, still, EBITDA has not improved?

I think it's a fair question. I think when we look at the business, we don't look at Bangalore standalone. Bangalore margins have definitely improved from a unit perspective. The revenue on Bangalore is almost up 40% also. But it's a combination of we are realigning our mixes of products we produce in different facilities, depending on capabilities and capacities. So Bangalore standalone has definitely improved. From an overall perspective, the pass-through of 9% fully may not be there. And I think that's a tough half because like we have been saying in multiple calls, we've been able to get a full pass-through of steel price increases or reductions with most of our customers, but what we don't get is inflationary cost impact on balance value-additive items of people, energy, consumables, et cetera, et cetera. So I think, despite these challenges, our overall margins have improved on EBITDA perspective, which is very much as per the guidance we had given in the last few calls. So we are not surprised where the numbers are. We expected the numbers to look like this. And as per our overall guidance given earlier, we expect our margins in our standalone business to be anywhere between 15% to 16%. And I think we are on track for doing that.

Can you give an idea of what is the capacity utilization at both these plants?

I didn't get that. Can you say that again?

The capacity utilization at Bangalore and the other plant for fasteners versus last year.

Yes. Bangalore still is getting some maintenance CapEx. And I think Bangalore, we are still currently at about 50% revenue. What we expect over time, there's a lot of headroom for growth. As the market keeps on growing, as our product mix, we keep on transferring more and more parts depending on, like I said, capabilities and capacities, the -- Bangalore will start -- will keep on improving. So there's a lot of headroom for growth. I have said that in the last few calls as well. With the current capacities we have in place, we're looking at a revenue of INR 800 crores-plus on a total basis for all our fasteners business.

Okay. And one more question. Have we added new customer in PV, because of which the share has improved from 27% in FY '24 to 29% in the first half of FY '25 or it is because of higher share at the existing large customer for us? This is on standalone revenue breakup, what you have given.

Yes. So on a standalone business, our PV business has grown substantially for, a -- for 2 reasons. One, we have 2 main customers in that segment, which is Maruti Suzuki as a group; and secondly, being Mahindra Automotive division. So Mahindra has grown substantially, which has given us a bump-up in revenue. We had acquired and when we continue to acquire a lot of special products with Mahindra Automotive division and their units are going up, which is automatically translating to our bottom line as well. Plus, at the same time, I think our service levels at Maruti Suzuki as a group are good, which is helping us increase -- acquire new product lines and new customers -- new products with these customers. So these 2 customers, despite the fact Maruti may not have grown, we have grown faster. And Mahindra Automotive division is a huge growth engine for our product passenger vehicle business. Just want to share, which we have been doing over a while now, we have also acquired business at Hyundai. The revenue growth will probably start coming in FY '26-'27 onwards. But yes, from a long-term perspective, we are strengthening our passenger vehicle portfolio, which was one of the weakness we had in terms of huge dependence on Maruti Suzuki. But over time, I think Mahindra AD and Hyundai will probably mitigate that dependence on that single customer.

Okay. And one last question. Any updates on magnetic components business? And what are the top 3 priorities or work to do, so that the business starts becoming revenue generating over the next few, let's say, quarters?

I'll take that question up. This is Anish. From the magnetics business, our discussions with our Korean partners are progressing very well. We hope to close definitive documents in the next 90 to 120 days. And this is a business which is a long-term play for us, and we hope to be in production sometime in early 2026 calendar year, not before that, considering some of the passenger vehicle programs for which this joint venture is being executed will kick in from 2026 only. So Kunshan GuoLi will happen earlier, which is in Q2 next year. And Yongin Electronics, which is for magnetics will start the following year in 2026.

Our next question is from the line of [ Kunal ] from Sunidhi Securities.

I have 2 questions. So the first one is that in the MCU business, I think in the 3-, 2-wheeler segments, I think most of our revenues from Ola Electric. And so what is the risk going ahead if Ola starts manufacturing their own MCUs? I think in some of the media news, they indicate that they might do that. So any update on that? Or how are we diversifying in our customer concentration to do this risk?

So yes, Ola has announced that they will manufacture motor controlled units in-house. It's a part of their vertical integration strategy. And this is something that they have announced that -- or they've talked about for quite some time. They are not in production yet, but it's something, I believe, that they will do it some time. I do expect that they will be able to develop their in-house units in the future. Our strategy, I think, is very clear, and it's been something which we will be consistent with, which is that we are looking at for both product and customer diversification. We have ongoing discussions with various companies to add additional products to our portfolio. And we continue -- I think the last count is more than 30 active engagements with customers and more than 20 live programs. So we continue to do that. As sales pick up from these customers, we will see our revenues shift from Ola to these customers. With the changes in government policy in terms of how FAME II got morphed and now we have the PMG drive, which changes priorities and also reduces the subsidy, the uptake on some of the newer customers is slightly slower than expected. But we are very positive about these new programs because they've got good products. And we are confident that they will gain good market share, vis-a-vis ICE engines in the future, which will give us the business growth that we are looking for.

Okay, sir. Sir, I just wanted to ask how much CapEx was incurred to double the capacity of the MCU from 3 lakh to 6 lakhs.

So we are -- actually, we won higher than 6 lakhs in terms of capacity. But yes, the total -- and it's difficult to differentiate what we are -- let me -- I'll just take a minute and also talk about what we were trying to do to give you an idea. So we -- as we look at our strategy of customer and product diversification, we also see that our customers had an interest to buy more and more components from one vendor because they want to support the integration. And then in some cases, these units are also getting combined into single packages or single boxes. Now -- so our strategy is that we'll see ourselves not only as a motor controlled unit company, but as a power electronics company, which means with the competence that we are trying to develop is one around power electronics for the automotive industry. And within that, obviously, your charges, you have DC/DC converter, your motor control units, et cetera, et cetera. So we are looking at all of those opportunities and planning that. The reason I'm giving you that background is that the total CapEx budget that we had for this year was -- just a shade under INR 29 crores. We had visibility for about INR 22 crores, INR 23 crores being capitalized before March 31. There are still some long lead items that we don't have a full visibility on. It's difficult for me to say what has -- as a lot of this investment is going into engineering software and going into testing equipment, et cetera, I can't tell you exactly what's gone into the capacity expansion and what goes towards this overall competence building. But the CapEx plan is INR 29 crores. And we have -- we're maybe a shade below that, depending on how deliveries come in and installation commissioning gets completed.

Okay, sir. And then going ahead, how do we see the mix between fasteners and the other component, MCUs? And -- so fasteners will be 50% or lesser than that, maybe FY '27, if you're giving a guidance?

Sorry, can you repeat that question?

So what would the mix of products be going ahead FY '27? It's like fasteners versus MCUs versus the DC contactors and...

I think it's early days. We are drawing up our plans finally for FY 2027, et cetera. Our EV businesses are currently at about a 40% clip. I think we hope to maintain that or improve that going forward.

Our next question is from the line of Siddhant Chhabra from Minerva Asset Advisors.

Am I audible?

Yes, Mr. Chhabra.

So first question would be a bit of a bookkeeping question. So your gross margins from FY '24, which was 24.8% have now gone to 38.2% in Q2 FY '25. And even on a Q-o-Q basis from FY '25 Q1, they've gone up by 10%. So I just want to understand the reasoning behind this spike in the gross margin, right? It's obviously related to the COGS, but if you could throw some light on that, firstly. And secondly, in relation to this, only this question, other expenses as well from FY '24, which stood at 13% of sales have now gone up to 23% of sales. So -- and this spike is also seen on a Q-o-Q basis. So for this also, can you give us a reasoning for the spike in other expenses as well?

Do you want to take that?

So your question is about the standalone, right?

No, this would be on a consolidated level, right? Yes.

Your first question is the gross profit margin, right?

Yes.

Okay. That gross profit margin for the Q2 stands at 51.5%, right? And for the half year, it is around 49.4%.

Sorry, this would be -- my apologies, this would be for the MCU segment, not consolidated.

Okay. So the gross margin for quarter 2 is 38.3% for MCU segment.

Yes.

Yes. So this is up from 28% to 38%, that's right?

Yes. And then from FY '24, it's up from 25% to 38%. So just if you could tell me the Y-o-Y, Q-o-Q basis and what has been the reason for the spike in gross margin.

So one is the definitely is the [indiscernible] and our purchase efficiencies at these levels have been better as compared to -- in the previous year or previous quarter. So -- and the volume which we are doing, we have been able to reduce the cost, which has a mix of better [indiscernible] and complete localization.

Jaideep, do you want to complement, please?

Yes. Sure. I think there's also a couple of -- obviously, there is the product mix and buying efficiency that has kicked in. There's also a couple of other areas. You'll see there's an increase in other expenses. We have started paying royalties through GJ, which are now mentioned in that area. So as a part of the whole agreement, there was negotiation on pricing, on other areas, and we also agreed to pay our royalties because we were not able to conclude the joint venture agreement. Also we had certain provisions that we were carrying. If you look at our numbers, we -- for our gross margin, we were historically looking at carrying a provision because of the warranty that we give to our customers [ that was ] explained in earlier calls, but we have a 3-year warranty as per same requirements. So as for good bookkeeping practices, we've been keeping a provision, so that we will not hit with any unexpected or large charges. As products that we've supplied in the beginning of our work have started completing 3 years, we are writing back some of these provisions. So I think there is some level of improvement that we do have. There's also a little bit of bookkeeping and realignment of heads that is causing this change. But at the EBITDA level, you'll see that we are fairly consistent.

Right. Also you mentioned the volume point that since your volumes have increased, you have been able to reduce cost, which is a fair point. But if you look at quarter-on-quarter volumes, they have been similar. And even on a quarter-on-quarter level, your gross margin has gone from 28% to 38%. So what would be the reason there? Why has COGS gone down there because the volumes have remained similar?

Yes. My volume comment was last year to this year, not -- volumes are fairly stable between the 2 quarters, very little difference between the 2 quarters. As I said, there is -- it's to do with the royalties that, Pankaj, kicked in on June 1?

Yes, sir.

So we have some royalties that kicked in. But when we were negotiating royalty payments with GJ and renegotiating our contracts with them, we also negotiated hard on some of the supplies that they were making to us. And so we got some benefit there, which shows up in the COGS. But like I said, there's an offset to some -- in some part to -- in the other expenses.

Right. Royalties, sorry, I didn't get that. Was it 7% to 8%, you said royalties were 7% to 8%?

No, no. It's not -- we did not give a number, and I would prefer not to do that.

Okay.

I just want to add one thing, what Jaideep and Pankaj said. I think one of the reasons for increasing margin structures -- or gross margin structures in the SGEM business is also product mix changing as well. So we got SOP started for a lot of customers, and I think a lot of this -- depending on the product mix, the product mix is changing as a percentage. So that is also helping our margin structure.

Okay. Got that. Now my second question is on the customer split. So as we know that you have a lot of customers in -- especially in 2-wheelers on the newer OEM side, like Ola, especially, Ather, et cetera. Now can you give us any understanding or any guidance on what you are doing to onboard some legacy names on the OEM side, like TVS, Bajaj and across segments, not just 2-wheelers, even 3-wheelers, EVs, et cetera?

Okay. So I think you've touched upon one of the most important initiatives for us. We are working very hard to try and onboard legacy OEMs or the incumbents in the 2-wheeler space. We are in active discussions with several of them. I can't share details, but to say that there are at least 2 or 3 discussions that are ongoing and moving forward. But we don't have a confirmed program that I can mention to you at this time. On the 3-wheeler space, we have -- we don't have any activity as of today with the listing or incumbent OEs, to be honest, because it's just that there's a lot more activity happening in the new companies that are there. So the 3 companies that have historically had presence in this market, which is Bajaj, TVS and Piaggio, we are not working with any one of them right now, though we are in touch with these companies. On the LCV space, we are strongly established with some of the incumbents as well as with some of the startups. So in the LCV space, we do have some of the marquee incumbent customers as our customers.

Okay. And any time line maybe we could expect regarding the addition of these legacy names in other segments? Or would that be too much of a stretch to ask about?

No, no. I can give you -- I can share with you what we are seeing in the industry right now. You see, with the start-ups, the lead time from the time you start engaging with the customers to the time to go into production is typically 6 to 12 months. That's how long we engage with them on engineering, on builds, on trials, on homologations, validation, blah, blah, blah. In the case of the incumbents, it's much more structured and much more formalized. And typically, customers will be talking today about FY '27 volumes -- or FY '27 launches. So as far as the incumbents are concerned, volumes that they would be -- that they would give to people that they will onboard in the next few months will be in FY '27.

Okay. So if we do make additions in that -- in these names, it would be FY 2027 onwards.

That's right. And that's -- and so in that respect, the industry has matured and has started a much longer-term planning. So the OEs have a very comprehensive model launch plan that they are following. And if they move forward, they're working with suppliers to identify partners and locking programs.

Right. Okay. Also just wanted to understand one thing quickly. This is not a question. It's just a small -- I need some numbers. Could you give me the contribution of HVDC contactors in 2-wheeler, 3-wheeler, 4-wheeler and commercial vehicles?

Anish, take that.

Yes. So I can't give you the exact value in it, but 3-wheelers sometimes have 1 contactor. Sometimes, they have 4 contactors for 3-wheeler. LCVs have somewhere in the range from 4 to 6 contactors. Hybrids have 2 to 3 contactors. Battery electric vehicles have, again, 5 to 7 contactors. 2-wheelers may have 1 contactor or may not have a contactor at all. So it depends on OEM to OEM and 2 wheelers.

Just to add. It's early days. I think -- we're starting a new product line in India. Currently, all these products are import based. It's a new setup, a new technology which is coming to India. There's a lot of work we have done with customers. We have some ideas where we need to go on pricing and margin structure and supply chain. I think it's too early to talk about margin in that business right now. We probably have more clarity one full year of operation. But all I can say is all the numbers based on our working and our market research and our customer engagements look quite healthy.

Our next question is from the line of Pramod Amthe from InCred Capital.

So just continuing on the high voltage DC contactors, considering that you're in early stage, how do you see -- because looking at your MCU, it was a single client handholding into that business. How do you see which segments to kick off first? Or will it be a client concentrated and then pick it up? That's the first question. Second related to that is, what you feel are the critical factors to monitor for success of this venture, considering that it's a very high asset turnover business seems to be?

So it won't be a highly concentrated business in the sense of what we've done with MCUs. These are used predominantly by Tier 1 customers. So the companies, which are supposing making the battery packs for 3-wheelers, LCV, passenger vehicles, they will be the users of these products because they have to put these surface protection, DC contactors inside their battery pack. And they're also used by certain power electronics companies, which are global MNCs as well as India MNCs that they will be using the DC contactors. So it's going to be supplied to Tier 1 customer, who will then put these components and then give it to the OEM. But the OEM also validates these products with Tier 1 customer in India.

And what is the key factors to look at, track, to find a successful this venture, especially as a shareholder's sentiment?

I think the winning business, obviously, with these Tier 1 global MNCs as well as Indian suppliers to these OEMs will be critical from a sales side and, obviously, how we localize some of the child parts which go into the DC contactors at the right price point will be critical.

Sure. And the second one is more on the strategy side. Considering you have seen more and more joint ventures or the JVs getting formed in the EV space, how do you look at your technology landscape might be 3 or 5 years down the line? Where is -- where do you want to move strategically, either in terms of product lines or in terms of customer lines? Because if I had to look at your fastener, there's a decent amount of penetration you have on these EVs. Government also seems to be pushing more for bus and ambulance type of EV programs. So how do you look to look at your technology maps?

So I think -- it's Atul here, let me take that. Like I said in the past communications for the last couple of years, we have laid out the broad strategy for our businesses going forward. For the standalone business, we've been saying it's reasonably a mature business. We've been around for 40 years. And I think that's the anchor we have in terms of revenue, cash flows, et cetera. But having said that, it's also matured. We expect this to grow in line with automotive industry or maybe a few percentage points faster than that and -- which is what we are saying going forward. But we will be adding more and more products for EV, hybrid and power electrical segments and -- which is what we have done. We have made 2 announcements, which will convert to revenue in the years going forward. One you see with DC contactors and second one will be magnetics. And we already have a mature business and a growing business in our motor control unit business. There are other product lines we are currently researching, starting and looking at opportunities, identifying technologies. You'll hear us do more and more announcements going forward. I cannot give you any definitive time lines right now, but I can broadly share with you that that's our strategic road map. We want to have more of a play in new businesses. Substantially, most of the businesses will be greenfield and debut some products which are not currently made in India. So we'll have been -- based on our success of our motor control unit business, we have set up 2 tech centers. We'll be adding more centers for the 3 product lines that I've mentioned, EV, hybrids and power electricals. That's going to be future we see for ourselves in the short to medium term. And you'll see us do more and more announcements going forward.

And the last question, if may I. So for your MCU business, the large client is having some challenges on the service and quality as it is dragged down by the government or the press. How do you see your component -- because you also mentioned about warranty costs and all. Is there any sensitivity or studies you might have done for any exposure of yours in that area or you're quite sure your product is much stronger to withhold on the standards?

Jaideep?

Sure, yes. So yes, Ola has faced criticisms in the past, and Ola is a very big customer for us. So if there is a drop in Ola volumes, we will see an impact on our business. The way we are trying to address these concerns is really to work through, like as I said, on customer and product diversification. That's the core of our strategy, and that's what we continue to work on. I can share one insight on Ola working. Their implementation is very effective. I have to say that the speed of doing things is outstanding, and inventory unparalleled. I do hope for the sake of the EV industry that they address the concerns that they are facing, and I believe that they have the ability to do so and to be able to get on top of it really quickly. And once they do that, then they will continue to do well, and I think the industry as a whole will benefit from that.

[Operator Instructions] Our next question is from the line of Manan Vandur from Wallfort PMS.

Congratulations on the numbers. I have 3 questions, sir. First question is what is our capacity utilization for MCU?

Okay. So the capacity utilization on average for MCU is about 80% -- or actually just less than 80%.

Okay. Less than 80%, okay. And the optimum capacity utilization will be 95% or something?

Yes. You could put it. But we also have been -- for us to increase capacity in that area, there's some debottlenecking that we can do.

Okay. Got it. And sir, the next question is about that, as of now, we have 6 lakh units, right? So what do you think is the total addressable market? How much capacity does -- do we have in comparison of the whole industry? For example, combining 2-wheeler, 3-wheeler, LCV, M and HCV, all of these, combining all of this, how much in comparison do we have out of 6 lakh? And how much will the total be having?

So I think one way to look at it is that -- I don't know what the capacities are. But if you look at the total number of electric vehicles sold in the country, our -- what we have shipped is about 25% of that volume. So just as an example, if 1 million EVs across all product categories have been sold in and then leaving out e-rickshaw in this calculation, then we've sold 250,000, okay? So we are -- another way to look at it is that we are at about 25% market share at an industry level.

Okay. Got it. The third question is about the recent partnership with SMB company. We say that we will do around 250 crores by FY '30. Does this mean that 250 each year? Or is this divided over the next 5 years? Or is it like we might do 100 crores in the first year in FY '26 and then we might do 150, then 200, 250 and so on? Is it that way?

Yes. It is not the cumulative revenue. It is the revenue for FY '30 that we are targeting.

Okay. So it will be in a phased manner, maybe 100, 150, 250, that way?

Correct.

Okay. Got it. And sir, the last question is on the government push in the LCV and M and HCV that we might be seeing for MCU. Because we see that LCV has gained around 9% for H1 out of the total for SGEM. So how do we see it going forward?

So I think the PMG drive should give a push to sales in the medium and heavy commercial vehicles. So -- and also the other thing that the government is pushing very correctly with an investment in charging infrastructure. So I think these elements would help improve sales in the higher segment. So I did see a newspaper article this morning to say that subsidies on 3-wheeler cargo vehicles will probably start declining or will be withdrawn. So the government is continuing to fine-tune. And because we play unlike many other companies, we don't play just in one segment. If we go across the entire segment with our products, which have ranged from 1 kilowatt to 225 kilowatts, so we have the ability to adapt to differences -- different growth patterns within the industry as policies push the industry in different directions.

Okay, sir. And last question is, sir, how much does Ola have -- how much -- how much does Ola contribute to our revenues for the SGEM and in the MCU?

Ola is our biggest customer by far. And I'm going to say that over 70%, 75% of our total revenue.

Over 75%. And second and third would be, sir, what were the names for second and third?

I'm sorry. I couldn't hear that.

For second and third customers, what would be the names?

I guess, Ampere will be our #2 customer. And maybe some of the 3-wheeler companies would be our third biggest customer. Then it gets fragmented below that.

Our next question is from the line of Mihir Damania from Fident Asset Management.

So my first question is the Ola's new range of e-bike and the third-generation scooters are likely to be launched in the next few months. So are we -- have you had a discussion that we're going to supply MCUs in these newer launches?

So the product that the bikes that were rolled out at the event on August 15 were powered by our MCUs, that they were our MCUs which were installed on those right now -- at that time. We are, however, given to understand that they want to an integrated -- yes, I said the products that got rolled or the samples that were rolled out on 15th of August were actually had our MCUs on -- powering them. But we are given to understand that they want to use an integrated motor and controller in -- on these models and that integrated motor controller will be made in-house.

Yes. So the indicated motor would be -- so the motor will be integrated with the MCU. So are we in supply with -- are we in talks with the integrated motor manufacturer or would it be likely that our MCUs will not be used in this newer range?

So we recognize that integrated units where multifunctions are combined into -- in one box or one package is the trend in the industry. And therefore, we also have some plans around this. But specifically to answer your question, as and when Ola completes development of their integrated motor and MCU solution, that is when -- that is what will be used in the bikes, and they will not be using our product there.

Okay. Got it. And who would be our key customer, say, in the e-3-wheeler and LCV segment currently?

So on the LCV segment, we sell to Switch, which is the Ashok Leyland subsidiary [indiscernible] we sell to some start-ups including -- we sell to [indiscernible] group. So there's just a whole bunch of people, plus all the startups. In the 3-wheeler segment, we supply to [indiscernible] we supply to a number of customers in the e-3-wheeler segment.

Our next question is from the line of Devchandra Ramani from Minerva Asset Advisors.

I want to understand regarding the provisioning policy, which we are following for the warranties. So based on FY '22 to FY '24 numbers, we are providing for around 3% of the sales MC units. So would it be safe to understand that in FY '24 Q2 as well, our provisioning policies more or less similar and it has not been changed?

Yes, it's more similar. Yes, that's right.

Okay. So backing on that point of view looking at FY '25 Q1 versus Q2 numbers and in other expenses line item, there's a difference of around INR 10 crores. So if you are saying that the provisioning policy is more or less the same, then would it be fair to conclude that the rest of the difference is coming because of the royalty payments to the Chinese partners?

Well, I think there's a lot of development work we are doing beyond our regular business. There's a lot of work being -- a lot of support or buildup being done for the engineering center, our tech center for integrated motor control units, for making our products more robust. So there's a lot of technical work going. There's a lot of technology work going on multiple fronts, which is causing this spike as well. But these are, like I said, I use the word spike. It will stabilize over time. You will find it's a combination of issues, not one particular issue which is causing the spike in other expenses.

Okay. Got it. And just to confirm the sustainability side of it. So would it be safe to consider that the gross margin, which we clocked in during FY '25, Q2, those gross margins are sustainable?

Yes. Early days to talk about that. I think I would rather focus on number at operating margin levels. Again, numbers will vary depending on how much investments to do any quarter on technology, on people, on building capabilities and on the shop floor process and improvement, et cetera, et cetera.

[Operator Instructions] Our next question is from the line of Prateek Bhandari from AART Ventures.

Just a couple of questions from my end. You mentioned that we are currently running and operating at a capacity utilization of 45% to 50% in the Bangalore plant. And I wanted to understand as to when we see that we would be operating with the full optimization levels. By when we expect that? And also what would be the balance CapEx required to enhance this operational efficiency?

I think we'll be fully optimized by FY '27. And bulk of the CapEx has already been planned for this year. Most of the CapEx will be online by FY '25. Rest would be maintenance CapEx that we need going forward. So FY '27 is the number you're looking at fully optimized Bangalore facility.

All right. And looking at the margins -- prevailing margins, do we endeavor to maintain the 8% to 9% of margins in the SGEM?

Jaideep?

Yes. I believe that at the EBITDA level, this business will not only provide 8% to 9% margin within the future. Our ambition is to get to low double digits, which should be the steady state margin for this business.

Okay. And STL, at a standalone basis would be sustaining at the similar margins or there is a headroom still for it to grow?

Based on the visibility we have and communications earlier and today, we are looking at anywhere between 15% to 16%.

Okay. And you mentioned that Ola would be your biggest customer when it comes to SGEM and 2-wheeler segment of the same. So if I talk about the revenue mix of the SGEM business, what would be the component of the 2-wheeler versus the other segments?

So 2-wheeler is the predominant. I think we've given its numbers that it's 91% for all the other -- 91% for 2-wheeler and 9% for all the others.

And out of this 91%, what contribution would be coming from Ola and others?

I think I just addressed that a little while ago that Ola is almost 75%.

75%, okay. And just a last question from my end. You mentioned that we are aiming to have a revenue of almost INR 250 crores by FY '30. So can you give a sense of what we are expecting for FY '26, in particular from this new partnership with the Chinese player?

So I think we probably start -- like I said, in our communications, we are looking at starting operating in Q2 FY '26. So it's too early to talk about FY '26 numbers. We'll have some revenue, but there will be marginal revenue numbers.

Okay. And this INR 40 crores of investment, would it be split over the 5-year period? Or how would it work -- how would the dynamics for this investment work like?

I think that INR 40 crores investment will probably happen in the first 2 to 3 years itself.

Our next question is from the line of [ Prateek Diria ], who's an individual investor.

My questions have been answered.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you, everybody, for being patient with us, listening to us. We have tried to lay a road map going forward. And hopefully, we'll keep on sharing more information to you more closely. We've had a great first half, and we hope to maintain similar numbers for the second half of the year as well. Once again, thank you for joining us today.

Thank you. On behalf of Sterling Tools Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines.