Sterling Tools Limited (530759) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 earnings call of Sterling Tools Limited. 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 date of this call. These statements are not the guarantees of future performance and involves risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Atul Aggarwal, Managing Director of Sterling Tools Limited. Thank you, and over to you, sir.

Thank you, Nessa. Good morning everyone, and welcome to Sterling Tools Limited's Q1 FY '27 Earnings Call. I'm joined today by Mr. Jaideep Wadhwa, Director; Mr. Anish Agarwal, Director; and Strategic Growth Advisors, our Investor Relations Advisors. Our earnings presentation has been uploaded on our website and the stock exchanges, and I hope everyone has had the opportunity to go through the same. I would like to begin with the industry overview. The Indian automobile industry delivered a record-breaking start to FY '27 with the highest ever quarter sales across passenger vehicles, commercial vehicles and 3-wheelers. The strong performance was supported by lower GST rates, easier financing, new model launches and improving consumer demand, along with a favorable base from the previous year. Passenger vehicle sales grew 25.9% Y-on-Y to 1.27 million units, led by continued strength in utility vehicles. 2-wheeler sales increased 20.3% year-on-year to 5.63 million units with scooters significantly outperforming motorcycles. Commercial vehicle sales rose 18.3% year-on-year, driven by replacement demand and higher activity across infrastructure-linked sectors. While 3-wheeler sales grew 29.7% year-on-year, supported by healthy demand both in passenger and goods carrier segments. Exports also recorded their first ever strongest quarter performance across all major vehicle categories, reflecting improving global demand. Looking ahead, the industry outlook for FY '27 remains positive, supported by the upcoming festive season, lower vehicle ownership costs following GST 2.0, easier financing and steady consumer sentiment. At the same time, geopolitical developments, commodity prices and global supply chain disruptions remain key factors to monitor during the year. Coming to our standalone Fastener business. We continue to build on the strong momentum witnessed last year and delivered another quarter of healthy performance. Our growth was driven by an increase in wallet share with existing customers, deeper OEM relationships and continued traction in value-added products, enabling us to outperform the underlying automotive industry. Backed by our focus on customer diversification, operational excellence and cost efficiencies, we continue to deliver healthy profitability and strong cash flow generation despite the evolving business environment. Our standalone business delivered a robust performance during Q1 FY '27. Total income grew by 23.7% year-on-year to INR 201.9 crores, while EBITDA increased by 26.9% year-on-year to INR 31.1 crores with EBITDA margins improving to 15.4% compared to 15% last year. Profit after tax grew by 48.4% year-on-year to INR 16.4 crores with margins improving to 8.1%, supported by continued operational efficiencies and financial discipline. Importantly, our standalone fastener business continues to remain strongly cash generative and net debt free, providing a solid financial foundation to internally support our long-term investments across EV and technology-led growth initiatives. As we continue to strengthen our legacy business, customer diversification remains one of our key focus areas. During the quarter, we made further progress in expanding our presence across commercial vehicle programs with significant inroads into both LCV and HCV segments. Combined with our growing portfolio of critical and value-added fasteners, this positions the business well to continue outperforming the broader automotive industry. During the quarter, we witnessed an increase in steel prices, which created some cost pressure on our fasteners business. However, our disciplined cost management, effective inventory management and existing pricing arrangements with customers helps limit the overall impact. As lower cost inventory has now been largely utilized, the impact of higher steel prices is expected to be more visible in the coming quarter. That said, we remain confident that our pass-through mechanism, along with our continued focus on operational efficiencies and value engineering, will help manage these cost pressures while maintaining a healthy margin profile. Coming to Sterling E-Mobility, we continue to strengthen our position as a comprehensive EV powertrain and power electronics solutions provider. Over the last few years, the business has evolved well beyond motor control units and today offers an integrated portfolio comprising motors, integrated motor and controller solutions, onboard chargers, off-board chargers, DC/DC converters and rare-earth magnet-free motors. This diversified portfolio enables us to participate across multiple EV platforms while increasing the content we supply per vehicle. We are also witnessing encouraging progress across our customer programs. Today, SEM is engaged in 33 active customer programs with strong relationships across leading OEMs, while customer diversification continues to improve with increasing traction in the commercial vehicle segment. We also received business confirmations from 4 OEMs, further strengthening our order pipeline and enhancing our long-term visibility. Our strategy continues to revolve around increasing wallet share with existing customers while adding new customers across vehicle segments. Our motor and off-board charger programs continue to progress well, and we remain focused on expanding our presence across higher-value integrated power electronics solutions. An important milestone for the business during the year will be the commissioning of our onboard charger and multifunction unit production lines, which remain on track for Q2 FY '27. These new product lines will significantly broaden our addressable market while strengthening our capabilities in next-generation EV architectures. Backed by our technology partnerships, we believe SEM is well positioned to address the evolving requirements of electromobility while continuing to build long-term value through technology, localization and product innovation. Moving to Sterling Tech-Mobility Limited, our newest growth platform. We continue to make steady progress in establishing a domestic manufacturing ecosystem for high-voltage DC contactors and relays. The business remains focused on import substitution in a segment that is expected to witness significant demand with increasing electrification across electric vehicles, charging infrastructure and energy storage applications. Our customer engagements continue to progress well with 7 customer programs already secured. Commercial supplies are scheduled to commence from the second quarter FY '27, marking an important milestone for the business. We are also systematically increasing localization, which will enhance value addition, improve cost competitiveness and support margin expansion over time. With our fully automated manufacturing facility in Bangalore and technology collaboration with GLVAC, we believe STML is well positioned to capitalize on this emerging opportunity as the Indian EV ecosystem continues to mature. To conclude, we have entered FY '27 with a strong momentum across our businesses. Our legacy fasteners business continues to generate healthy cash flows and remains the financial backbone of the group, while our investments in electric mobility and next-generation technologies continue to strengthen our long-term growth platform. Supported by strong customer relationships, expanding product capabilities, disciplined execution and a robust balance sheet, we remain confident of creating sustainable value for all our stakeholders. With that, I would like to thank all our shareholders, customers, employees, business partners for their continued support and trust. We remain committed to executing our long-term strategy with consistency and discipline. Thank you once again, and we'll be happy to take your questions now.

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

Congratulations for a very strong set of standalone numbers. Firstly, in the standalone business, we have seen gross margin increased sharply by [ 270 ] bps, but the overall EBITDA increase has been limited to 40 bps. So any one-off expenses in the fixed cost for the current quarter?

I think firstly, there are no fixed cost increases. I think our -- on a standalone basis, our margin was 15% last year, is up to 15.4% this year. So I'm not able to understand the question when you're saying it's not -- can you repeat that question again?

Sir, overall, the gross margin has increased by almost 2.7%.

Yes.

But EBITDA margin has increased only by 40 bps.

Yes. So just to give you a sense, which I did cover in my opening speech, which was there have been 2 pressures coming this year. One is the steel price increase. And second, the big one also is, which is very unique this year, is the inflationary cost increase. All commodities, besides steel, which is chemicals, tungsten, steel, even wages -- minimum wages have gone up dramatically this year by as high as 35% in some areas. And chemicals, everything has gone up. So that is impacting our GM numbers accordingly. But we feel that despite those pressures, we have been able to generate some efficiencies on the shop floor. Now having said that, our steel is a regular pass-through mechanism. Normally, those negotiations take 2 to 4 months. So we are at a very mature stage of negotiations for price increases on account of steel. And for the first time this year, after a long time, since the inflation impact has been dramatic, we have taken up this matter up strongly with all our customers. And we are getting quite a positive feedback from a large number of them that they'll compensate us for the inflationary impact we have this year. So like I said, these are all 2 to 4 months of lag time before we conclude and before they translate into our P&L.

What is the kind of current capacity utilization we have in our standalone business? And I noted down that INR 88 crores of CapEx we are putting up for the standalone. So when that capacity will get commissioned?

So currently, as of today, I think we are probably at 90% to 95% utilization, which is a very high number, keeping in mind the product mix issues we have. So we -- you can pretty much say we are fully utilized right now. But this INR 88 crore CapEx we have for this year, some of it has already kicked in, in the first quarter marginally. But substantially, a large part of that CapEx will kick in, in the second half of the year. So the benefits of the full CapEx will not be felt on a full year basis. They will be felt starting maybe last quarter and the year going forward. So we invest into our capacities a year ahead of currently, keeping in mind the strong tailwinds we have in this business and the feedback we have from our customers. I think we are taking an aggressive posturing and building capacities with a view of the next 12 to 24 months.

Sir, lastly from my side, what is the kind of guidance we are providing for non-fastener business for full year FY '27?

You're talking about the step-down subsidiary business, EV business?

Subsidiary, yes.

So I think, let me just say it like this, that our fastener business will grow like we've been -- we are up, I think, 20% plus in the first quarter. And based on estimates we have right now, the near term looks very similar going forward, unless there is something -- unless automotive industry slows down. The industry is growing as fast as well. Going to our EV businesses, we believe that those businesses in terms of revenue will be up maybe at that level of 20% to 30% as well on a full EV platform perspective. So that's the kind of number we are looking at growth in our EV businesses, between 20% and 30%.

[Operator Instructions] The next question is from the line of [ Amit Ahuja ] from PJ Capital.

Congratulations for the strong set of numbers. So I'll be asking 2 questions. And so you indicated that the benefit of low steel inventory has largely been exhausted. So like how should we think about EBITDA margin for the standalone business over the rest of FY '27? And my second question is, how should we think about the growth trajectory of the new business lines in SEM and STML? So could you provide a broad time line for each business and outline their expected growth journey?

Yes. So on the fastener business, we talked about our lower cost inventory getting consumed. I also said that we are expecting pass-through mechanism price increases from our customers on the steel. So from that perspective, I don't see our EBITDA getting any weaker. We hope -- despite the pressures, we are quite confident that we'll be able to hold our margin structures on a full year basis despite the steel and inflation because we expect to get price increases from customers, which are in a very advanced stage. And also, at the same time, we have a good growth trajectory on the overall top line revenue. So keeping everything in mind, we are quite positive that we'll be able to hold our margin structures for the full year. On your second question of EV businesses, like I said, we are looking at anywhere between 20% to 30% growth in the EV businesses this year. And with the momentum we have on customer acquisition on both in our SEM and STML business, I think we are looking at maybe another 30% to 40% growth next year, FY '28 basis. So I think the growth -- we are establishing the growth platform in both our SEM business and STML. Just to summarize, for 20% to 30% growth this year in FY '27 and maybe 30% to 40% growth on top of that next year, in FY '28.

The next question is from the line of [ Nitin ] from Inoquest Advisors Private Limited.

Just continuing the same subsidiary-related performance, like we continue to burn off approximately INR 10 crores a quarter. And we also have continued momentum in the Q1. What are the breakeven levels? And with whatever growth rate you are saying, 20% to 30% for this year and 30% to 40% for next year, when do we see -- from which quarter onwards are we seeing positive at least or at least breakeven scenario for those -- both the subsidiary, maybe independently both, each of them, if you can share?

So I think both SEM and STML, we expect them to break even FY '28. This year, yes, they will lose -- both of them will lose money. But based on the trajectory we have in terms of revenue and our working, we believe both SEM and STML will both breakeven in FY '28.

Can you share revenue for each of them separately, what level of revenue there?

On an SEM basis, we'll probably break even at a level of maybe INR 175 crores and STML at about maybe INR 70-odd crores. So you can say about INR 225 crores, INR 240 crores, INR 50 crores business, both put together, will break even.

And based on our current capacity, what we have built in each, what is the peak revenue potential of this subsidiary?

So Jaideep, do you want to take it by SEM and I'll come to Anish for STML? Jaideep?

So our business is going through an evolution in terms of the changing of the capacity. But we believe that we've got capacity right now for about over INR 300 crores without any further investments.

In STML?

At SEM.

At SEM. Anish?

For STML, we can do around INR 140 crores on a 3-shift basis.

This is based on current CapEx and current capacity on the floor for both the businesses. So basically, both businesses put together, about INR 340 crores revenue is the current capacity installed.

Jaideep, it's INR 300 crores.

Sorry, INR 440 crores, INR 300 for SEM and about INR 140-odd crores for STML. So INR 440 crores plus is the current capacity on the floor.

And operating margin, I presume it will be somewhere at least high teens or mid -- sorry, low teens at least for when we start..

It will be about 10%, give or take, plus/minus 2%. We'll try and keep it at double digit 10% plus levels.

And what is our total exposure, including working capital for each of -- both the subsidiaries?

Exposure from a holdco perspective?