Sterling Tools Limited (STERTOOLS.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Conference Call of Sterling Tools Limited. This conference call may contain forward-looking statements about the company, which are based on 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 is being recorded. I now hand the conference over to Mr. Pankaj Gupta, Group CFO of Sterling Tools Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to Sterling Tools Limited Quarter 2 H1 '26 call. I'm joined today by Mr. Atul Aggarwal, Managing Director; Mr. Jaideep Wadhwa, Director; Mr. Anish Agarwal, Director; and SG, our Investor Relations Advisor. Our earnings presentation has been uploaded on our website and on the stock exchanges and I hope everybody has had a chance to go through the same. I will now invite Mr. Atul Agarwal for his opening remarks.

Thank you, Pankaj. Good afternoon, everyone. Let me start with talking about the industry highlights. The Indian automobile industry witnessed steady improvement towards the end of Q2 FY '26, supported by the rollout of GST 2.0, early festive demand and improving customer sentiment. While passenger vehicle sales were marginally lower year-on-year, September saw a strong rebound driven by utility vehicles and record exports. H1 domestic 2-wheeler sales grew 1%. Exports were up 24% post GST rationalization. H2 is expected to see double digit growth, lifting FY '26 domestic sales by 5% to 7%. 3-wheelers and commercial vehicles posted strong double digit export growth, indicating broad-based momentum. Looking ahead, the industry enters the second half of FY '26 with renewed optimism supported by festive season demand, a healthy rural outlook and the positive impact of GST 2.0 and monetary easing measures. With consumer sentiment improving and OEMs ramping up production, the sector is expected to maintain its growth momentum through H2 FY '26, setting a strong trajectory for the rest of the year. On our standalone fastener business, total income increased to INR 172.2 crores in Q2 FY '26. EBITDA margin and PBT before exceptional items remained flat on a year-on-year basis. Exceptional item for the quarter and 6 months ended 30th September '25 represents enhanced compensation of INR 9.5 crores, including an interest of INR 6.22 crores received from Delhi Metro Rail Corporation against land acquired by BMRC in earlier years. However, with a positive macro environment, improved customer sentiment and stronger OEM production outlook, we expect the second half of FY '26 to be significantly better. The recovery in automotive industry and steady demand across both domestic and export markets should support higher capacity utilization and margin improvement in our fastener business. Further, during the quarter, we have begun to see early traction from newly acquired customers, including Hyundai. The onboarding of these new OEMs strengthens our long-term positioning and is expected to drive incremental growth and deeper customer engagement in the coming quarters. We continue to maintain a net debt-free status with consistent cash flow generation, enabling us to fund group growth initiatives internally. Our mature cash-generative core business provides a strong foundation for strategic diversification into high-growth areas. We have been consistently outperforming industry growth through new customer acquisition while maintaining strong, stable double digit EBITDA margins. Additionally, project acquisition and critical fasteners marks a key step in this direction with a clear focus on premium value-added products that offer robust margins and higher customer stickiness. We are happy to share that Sterling Gtake Mobility Limited has been rebranded as Sterling E-Mobility Solutions Limited, SEM. This new identity reflects the evolution of the business as comprehensive provider of advanced EV powertrain and power electronic solutions, which is further strengthened by our partnerships with Advanced Electric Machines as well as Landworld Technology Company Limited. Importantly, our exclusive partnership with Jiangsu Gtake Electric Company Limited for the Indian market remains strong and continues to flourish. Together, we are developing and localizing multiple products to meet domestic requirements. And we are also exploring new collaborations that further strengthen our leadership in the EV ecosystem. Building on our current strong foundation in motor control units, SEM has now expanded into integrated motors and MCUs, rare earth magnet-free motors, onboard and off-board chargers and DC/DC converters. Our STML subsidiary will start commercial production of HVDC contactors and relays in December '25 at its state-of-the-art fully automated manufacturing facility in Bangalore. This business has a revenue potential of INR 200 crores within the next 5 years. STML is a first mover in domestic manufacturing of high-voltage power transmission components for India's evolving electric mobility and industrial sectors and once again demonstrates Sterling's pioneering spirit and commitment into the electric mobility space. Our strategic focus remains on import substitution through technical collaborations aimed at establishing localized supply chain for safety-critical components. Thank you. We can now open the floor for questions. Thank you once again.

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

So firstly, on MCU division. So despite our top MCU customer reported volume drop of 23% Q-on-Q, still company -- our company is able to report 22% Q-on-Q growth. So what is the kind of contribution we have got from non-scooter MCUs during Q2?

So we had mentioned this earlier that we have -- we are continuing to expand our product portfolio and we have put in a tremendous amount of effort to develop our business with the LCV and HCV customers. So that -- those customers today contribute -- I'm just -- give me a minute. Those customers today contribute more than 25% of our total revenue. And our 2-wheeler business is about 60% of our total revenue now. And the number will -- and we expect that going forward, the share of business from other segments, that's 3-wheeler, LCV, HCV will continue to grow.

Okay. Okay. And also, can you throw more light on the recent partnership announced with Landworld Technology to produce onboard chargers and DC/DC converters?

Okay. So Landworld is a company based out of Shenzhen. They make onboard chargers, DC/DC converters and PDUs. This is -- these are products that go into typically high-voltage applications. And I also -- I'll explain the exception also to you. So the applications for such products are in light commercial vehicles, heavy commercial vehicles and passenger vehicles. Basically and typically, the product ranges that are 300 volts and above. Now the reason why we feel that it's very important to play in these product ranges is that we see a lot of consolidation of the aggregates. So if you look at a bus or a truck platform, they are moving from only using a motor control unit to using a 4-in-1 and 5-in-1 unit. And those units, when you talk about a 5-in-1 unit, that means a motor control unit, a DC/DC, auxiliary drives and a PDU. Alternatively, the people will look at consolidating the onboard charger with a DC/DC and other elements. So there is a lot of consolidation in the aggregates and our strategy from the beginning has been to position ourselves as a power electronics expert and a power electronics domain leader so that we can provide our customers the right solution. The other thing that I'll like to mention because it explains a little bit about our group strategy. We'll be talking today also about STML, our business to make high-voltage DC contactors, which we're starting production in December and Anish will be giving you more details about that. Now the PDU, the power distribution unit that I'm talking about in these 3-in-1, 4-in-1 and 5-in-1 units, the biggest component of that PDU is these high-voltage DC contactors. So in effect -- and we talked about this in earlier interactions that the HVDC play in addition to supplying components to our -- to other companies across India is also a backward integration for us where in the future, we will be able to use -- the Sterling E-Mobility business will be a customer for the Sterling Tech-Mobility business.

Okay. Okay. And in the press release, we have mentioned that we are targeting to reach around INR 450 crores by FY '30. So will it be a gradual scale up or it will be towards the fag end of the target?

It will be a gradual scale up. We only expect to do INR 2 crores or INR 3 crores this year.

Okay. Okay. And what is the status on production of this REM-free electric motor? And any customer approvals received? And when will it start contributing revenues?

So we are in advanced discussions with several customers. And we are hoping that in the coming calendar year, I won't say fiscal year, but in the coming calendar year, we will finalize programs with 1 or possibly 2 customers, but we won't see revenue from this portfolio till FY '28. I mean, when I'm saying revenue, I mean significant revenue. We may see engineering fees or sample fees or stuff like that. Obviously, we'll be doing that.

[Operator Instructions] The next question is from the line of [ Shashank Agarwal ] from Cisco.

I just -- 2 to 3 questions. So first is regarding what is the market size of these 3 new products, DC/DC convertors, HVDC contactors and relays?

Well, I think I'll let Anish answer -- Anish, do you want to go with the HVDC contactors and Anish, do you want to address that?

Yes. So we'll segregate the DC onboard chargers. That's part of Sterling E-Mobility Solutions Limited. HVDC contactors and pre-charge relays is part of Sterling Technologies -- STML, Sterling Tech-Mobility. So with regards to HVDC contactors and pre-charge relays, the market currently would be in the tune of INR 300 crores to INR 400 crores in India, is growing every year and we expect this market to go up to upwards of INR 1,000 crores by the end of this decade across 3-wheelers, passenger vehicles, commercial vehicles, solar [Technical Difficulty], all of that put together. That's the way we see it. If you look at EV as a subset of it, EV will be 60% to 70% of the market size of the total number that I just gave you.

So in the business -- in the OBC and Power Electronics business, we think that the total market potential and of course, this is dependent on the -- on how penetration will come across. But we are projecting at most 15% to 20% market share. So we are looking at -- so another way to say that we're looking at approximately INR 2,000 crores market size by 2030.

And sir, now these companies like Schneider in India manufacturing these?

No, Schneider doesn't make -- I mean, the companies that make this would be companies like Valeo would make an OBC or DC/DC, but not Schneider. Are you talking about the relays or the -- which -- sorry -- I mean, sorry, can you just clarify what are you...

Other than relays, so the relays [indiscernible] Schneider makes switchgears, industrial applications. They don't really make HVDC contactors and relays. They buy them for industrial applications. And automotive applications, Schneider is not in this business at all.

So no one is manufacturing in India then?

No.

And sir, for the MCU business, are we looking to supply to TVS, Bajaj, Honda?

We are working with -- we are in discussions with all of the major companies for their future programs.

So because Ampere as a customer also, they are looking to source the MCUs from their parent company. So I was just looking for some revenue guidance in that business for the MCU part.

Yes. So yes, I mean, there are -- various companies have looked at manufacturing MCUs in-house. Ampere is one of them. But we are -- we continue to believe that the opportunity with the incumbents is very significant. This is a very fast-moving industry. The requirements have gone from a plain MCU maybe 1.5 years ago. Everyone was basically working on a standard standalone MCU. Now the requirements are very rapidly changing to integrated motors and controllers. There is also a move towards integrating other functionalities such as VCUs and possibly even DC/DC into MCUs. So while some companies may localize some models, overall, I don't think that any company can look at making everything in-house and they will have to continue to work with partners like us for either some or a majority part of their requirements.

So sir, basically, a good ramp up in the EV penetration will result in you able to scale your MCU revenue also because in that way, the company will have to buy the MCUs?

Yes. Definitely. I mean, as we see more and more models come out and you see more variants, I mean, so today, companies are -- there are very few motorcycles, for example, in the market. Mostly it's electric scooters. So as you see more and more variants coming out, you will see more and more -- we will see a lot of opportunity. The penetration has -- we do have these temporary blips, which is a part of the evolution of our industry. For instance, an unintended outcome of the GST rationalization was that it made the internal combustion engine scooters more economical and reduce the value proposition for electric scooters. So the OEs had to go back and rework their -- some of their value propositions to continue to stay relevant. So that's a part of growing up. But I mean, the important thing is that we have to -- over a period of -- I mean, there will be a penetration that will continue to increase. And as penetration increases, the opportunities for companies like us will increase also.

And sir, the surface mount technology that you are investing in, sir, how will that affect your expenses?

So right now...

The manufacturing expense?

So again, the -- as of now we are -- in this fiscal year, we are investing in other production technologies. Maybe the SMT will be for the next fiscal. The -- obviously, any -- it's a matter of a cost because when we outsource, we buy more flexibility, we -- in the supply chain, we look at the -- we have the advantage of being able to ramp up and ramp down more efficiently. But the downside -- but when we make it in-house, we are able to reduce -- we are able to capture more of the value and are able to reduce our cost. So it's a trade-off. So as when we start looking at SMT technologies and so on, then what we are looking at is reducing our cost base.

Sir, can you put a number to it, what is the percentage range?

Look, that's -- considering today, we are making motor control units. We are starting production of OBC and DC/DC, et cetera. That varies dramatically. But definitely, it does make a difference. The more vertically integrated you are, the more margin you are able to capture.