ZF Commercial Vehicle Control Systems India Limited (ZFCVINDIA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to 360 One Capital Market Private Limited Q1 FY '27 Earnings Conference Call hosted by ZF Commercial Vehicle. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from ZF Commercial Vehicle Control Systems India Limited. Thank you, and over to you, sir.

Okay. I am from 360 One in here. I'll introduce the management. So good afternoon. Thank you for joining us today, and welcome to ZF Commercial Vehicle Control Systems India Limited call to brief you on their Q1 FY 2026-'27 earnings. Today, the first quarter earnings for FY 2026-'27 will be presented by the management team of ZF Commercial Vehicle Control Systems India Limited. Your host today from ZF Commercial Vehicle Control Systems India Limited are Mr. Paramjit Chadha, Managing Director; Mr. Shankar Venkatachalam, Head of OE Sales; Mr. Swati Dutta, General Manager Finance; and Ms. C.V. Kavviya, Company Secretary. I'll now hand over to Mr. Paramjit Singh Chadha, who will provide further insight into the results. Over to you, sir.

Thank you, Annamalai. Good afternoon to all of you. I warmly welcome you all to ZF Commercial Vehicle Control Systems India Limited first quarter results for financial year 2026-'27. Certain forward-looking statements that we will make today are based on management's good faith and expectations concerning future developments. As you know, the actual results may differ materially from these expectations as a result of many factors. A transcript and recorded audio of this call will be available on the website, www.zf.com under the ZF CV India Investor Relationship section. ZF Commercial Vehicle Control Systems India Limited's results for the quarter ending 30th June 2026 were published on July 24, '26. They are available on the website, www.zf.com under the ZF CV India Investor Relations section. We hope that you have already gone through this. I am happy to talk to you today as we give you an update about the business performance. First, we will discuss about industry and economic updates. I will begin with a brief overview of the macroeconomic and industry environment relevant to our business. The Indian economy continued to demonstrate resilience and strong growth momentum with GDP expanding by 7.8% in Q4 FY '25-'26, taking full year growth to 7.7%. The growth was supported by robust services sector performance, sustained investment activity and improving consumption trends. Industrial activity also remained healthy with output growing by 5.1% in May following 4.9% growth in April, driven by strong manufacturing performance and continued expansion in the power and utilities sector. While mining activity moderated during the period, overall industrial growth remained broad-based and positive. Inflation increased to 4.4% in June, primarily due to higher fuel and energy prices. At the same time, moderating global energy prices continue to provide support to India's growth and inflation outlook, although geopolitical developments and evolving monsoon conditions remain areas to watch. From an industry perspective, the outlook remains encouraging. Strong domestic demand, continued investments in infrastructure and construction, growth in logistics and transportation activity and rising replacement demand from aging fleets are expected to support commercial vehicle demand in the coming quarters. This is sourced from April monetary report. Our second point, we will talk about Indian commercial vehicle industry. India's strong economic momentum was reflected in the commercial vehicle industry with commercial vehicle more than 6 tonnes production growing by 8.4% in Q1 FY '26-'27, supported by healthy freight activity, robust infrastructure-led demand, and continued strength in core sectors. The industry outlook remains positive, underpinned by structural growth drivers such as continued expansion of logistics and e-commerce sectors, sustained infrastructure investments and increased adoption of advanced and electric mobility solutions. Government initiatives focused on transportation modernization and public mobility are also expected to support long-term industry growth. On a segment-wise basis, the mix of buses, medium-duty trucks and heavy-duty trucks remained broadly stable during the quarter. EV bus sales reached 1417 numbers, reflecting the continued momentum in public transport electrification supported by ongoing deployment and healthy order pipeline. The Trailer segment, however, witnessed a decline during the quarter, primarily due to slower mining activity, monsoon-related disruptions and higher input costs, which weighed on market demand. Source RBI monetary report and order report. Next, we will discuss about OE sales. During Q1 FY '26-'27, our sales in the commercial vehicle more than 6 tonne segment grew by 8.6%, marginally ahead of industry's 8.4% growth, reflecting our ability to capitalize on market opportunity and execute effectively in a dynamic operating environment. Growth during the quarter was partially impacted by certain headwinds, including a 9% decline in trailer market demand and a widespread shortage of blue-collar manpower across India during April and May, which affected production across the industry. Despite these headwinds, we are at par with the market, supported by improved realizations from new product introductions such as a [indiscernible] ECAS variants, along with increased market penetration of our e-compressor solutions. Looking ahead, the industry outlook remains positive, supported by resilient demand fundamentals while geopolitical developments, [ inflatory ] pressures and commodity price volatility remain factors to monitor. Strong freight movement, infrastructure activity and replacement demand continue to provide a favorable backdrop for growth. In this environment, we remain focused on executing our strategic priorities and strengthening our market position. We continue to expand our presence in electronic stability control, ESC solutions, ahead of upcoming truck safety regulation. Having secured business nominations from 3 major OEMs and progressing discussions with other key customers, we are well positioned to reinforce our leadership in advanced braking technology. The vehicle scrappage policy is expected to support replacement demand by accelerating the transition to safer, more fuel-efficient and technologically advanced commercial vehicles. In parallel, we are accelerating the introduction of new technologies, including upgraded compressor platforms, touch with gear sensors, ECAS, EVS and e-compressors for electric vehicle applications. We are also increasing the market penetration of our EV-focused solution, particularly e-compressors and EBS systems across independent bus manufacturers. Over the long term, we remain confident in growth prospects of commercial vehicle industry, supported by an evolving regulatory landscape and expanding replacement cycle and increasing adoption of electric and advanced vehicle technology. Talking about aftermarket, the aftermarket business delivered a strong performance in Q1 FY '26-'27 with sale of INR 158.4 crores, representing a 15.6% year-on-year growth. We also achieved our highest ever monthly aftermarket sales in the month of June '26 with revenue of INR 63.06 crores underscoring the strength of our aftermarket franchise and customer reach. This performance was driven by improved fleet utilization, healthy replacement demand and an increasing focus on preventive maintenance by fleet operators. Growth during the quarter was further supported by our strategic focus on aftermarket segment, complemented by enhancing manufacturing capabilities that improve product availability and supply reliability. We continue to strengthen our market position through the launch of new products, including disc brake routers, TRW products and clutch master cylinder. These initiatives under our SPARK, spare parts aftermarket reforms kickoff program continue meaningfully to revenue growth and market share expansion. Looking ahead, continued investment in infrastructure across both the public and private sector are expected to support reutilization and sustained aftermarket demand. We remain focused on accelerating growth through new product penetration, expansion of our AST network and continued rollout of SPARK initiative, including door control retrofit solution to further strengthen our market presence and customer reach. Talking about exports of goods. On the back of the headwinds created by U.S. tariffs, which resulted in muted growth in previous quarter, the industry is now showing signs of recovery. Although the U.S. market witnessed a decline on an annual basis, it is currently ramping up and the outlook for the upcoming quarters remain positive for both the U.S. and European markets. Against the backdrop, the company reported export revenues of INR 271.4 crores in Q1 FY 2026-'27, registering a 9.7% year-on-year growth compared to the Q1 of FY '25-'26. This growth was driven by improving market demand and higher volume of double diaphragm spring brake actuator, UNISTOP disc and clamp brake chambers as well as air compressor. In addition, the successful launch and ramp-up of new products, including the UNISTOP disc brake chamber for North American customers contributed significantly to the growth achieved during the quarter. Looking ahead, with a positive outlook, particularly in the U.S. market, which is witnessing a strong ramp-up along with sustained demand in the European market, we anticipate a steady improvement in export demand. We remain focused on proactively navigating the evolving business environment through continued investment in new product launches, accelerated product ramp-ups and increased penetration of key product lines, including compressors and actuators to drive future growth. Regarding export of services. Export of services recorded a strong growth of 12.5% in quarter 1 FY 2027 compared to the same quarter last year, which was driven by sustained expansion in engineering activities delivered from India to our global centers. Regarding ESG and sustainability. Sustainability remains an integral part of our growth strategy. And during the quarter, we continue to advance initiatives focused on environment stewardship, resource conservation and sustainable mobility. At our [ Lucknowi ] plant, we commissioned 2,100-kiloliter rainwater harvesting system, further strengthening our water conservation efforts and supporting our water positive agenda. At our Ambattur plant, we completed the transition from LPG-based cooking systems to electrical induction level, reducing LPG consumption by approximately 16 tonnes annually and supporting our decarbonization objectives. ZF CVS also rolled out an electric vehicle EV policy for employees across location, promoting sustainable mobility through employee awareness and engagement programs. Recognition and awards. Our continued focus on sustainability and operational excellence was recognized through prestigious industry accolades during the quarter. The CVS Ambattur plant received CII Gold Award, securing the highest ranking among more than 350 automotive sector participants with an outstanding score of 95%. This recognition followed a rigorous assessment conducted by the panel of CII environment, health and safety experts. Further strengthening our ESG credentials, the Ambattur plant were also honored with Spotlight Award for decarbonization and climate action, recognized its significant achievement in carbon reduction, sustainable operation, and environmental stewardship. These recognitions reaffirm our commitment to embedding sustainability into our operation while creating long-term value for all stakeholders. Updates on engineering and R&D. Our engineering and R&D teams continue to drive innovation and support business growth through the rapid development and launch of key products, including the next-generation electronically controlled air suspension and Type 24/24 high force spring brake actuator, enabling new business wins with leading OEMs. The team also strengthened our aftermarket portfolio through the launch of CV brake tires and hydraulic steering systems while introducing quick fitting for Trailer segment, further expanding our product offering across key customer segment. To promote the adoption of advanced vehicle technology, we conducted multiple technology dates -- events at the ZF test track and customer location showcasing solutions such as electronic braking system, electronic stability control, advanced driver assistance systems, modular brake stability program, electro-pneumatic hand brake and electric door system. These engagement received encouraging customer interest and strengthen our technology leadership position. In preparation for upcoming safety regulation, ESC homologation testing commenced for multiple customers at ZF proving ground, further enhancing our testing and validation capability. The Hemi-Anechoic Chamber testing laboratory at ZF test track received NABL accreditation, reinforcing our commitment to engineering excellence, quality and innovation. These initiatives reflect our continued focus on delivering advanced technology, accelerating innovation and supporting the industry's transition to safer, smarter and more efficient mobility solution. Talking about manufacturing updates. We continue to strengthen our advanced manufacturing capability through our multi-divisonal Oragadam facility serving both domestic and global customers. During the quarter, we successfully productionized new assembly lines for ASP cartridges and vacuum pumps while scaling up production of e-compressor and brake signal transmitters to support growing customer demand. To enhance capacity and operational agility, we commissioned new assembly lines for brake actuators and valves across our manufacturing network. Strategic investment at Jamshedpur, Lucknow and Pantnagar further improved production flexibility, responsiveness to customer requirements and delivering the plant. Our operational excellence journey continues to gain momentum with the successful completion of the overall maturity assessment at Ambattur plant, delivering encouraging results across multiple dimensions of manufacturing performance and operational maturity. In parallel, the continued deployment of ZF Commercial System, ZF CS, including key initiatives such as shop floor management and resource qualification to strengthening operational discipline, enhancing KPI visibility and driving sustainable productivity improvements across all locations. These initiatives underscore our commitment to manufacturing excellence, operational efficiency and continuous improvement, providing a strong foundation to support future growth and customer success. Talking about various awards, I'm pleased to share that in Q1 FY '26-'27, our teams received 3 national awards and 5 regional awards across competitions organized by leading industry bodies such as CII, ACMA and QCFI, in addition to several recognitions at the state level. These achievements reflect the dedication, innovation and continuous improvement mindset of our team, while reinforcing our commitment to operational excellence, quality, sustainability and best-in-class manufacturing practices. Some other topics. During the quarter, there were important changes to the company's leadership team. We would like to place on record our sincere appreciation for Ms. Sweta Agarwal for her valuable contributions as Chief Financial Officer and wish her success in her future endeavors. To further strengthen our leadership and governance framework, the Board approved the appointment of Mr. Rakesh Mishra as Chief Financial Officer, effective September 1, 2026. With over 3 decades of experience across finance, governance, compliance and business transformation, he brings significant expertise to support the company's next phase of the growth. Board also appointed Ms. C.V. Kavviya as whole-time Company Secretary and Compliance Officer, effective 25th July 2026. Her extensive experience in corporate governance, secretarial matters and regulatory compliance will further strengthen the company's governance and compliance framework. During the quarter, we also participated in Prawaas 5.0, India's premier public transport and mobility exhibition where we showcased a wide range of advanced technologies focused on safety, connectivity, operational efficiency and electrification. The event provided an excellent platform to engage with OEMs, fleet operators and other industry stakeholders. We received encouraging customer response across our technology portfolio, particularly for our door control system, which received strong customer appreciation for their enhanced passenger safety and integrated fire detection capabilities enabling faster evacuation. The strong interest reinforces the growing demand for intelligent safety solution and validates our focus on technologies that improve passenger protection and operational efficiency. Talking about financial performance. So now we are moving to financial performance for the quarter. For your ready reference, the results were made public at 1:43 p.m. on 24th July, 2026. I hope you have had a chance to go through them. We are happy to share that the quarter ending June 30, 2026, our total income stands at INR 1,101.8 crores with 5.7% growth compared to Q1 of previous financial year. However, our revenue from operations grew by 9.3%. Excluding foreign exchange gains/losses and onetime expenses, our income increased from INR 1,001.5 crores in Q1 FY '25-'26 to INR 1,100.6 crores in Q1 FY '26-'27. The company's profit before tax for Q1 '26-'27 stood at INR 140.1 crores while profit after tax amounted to INR 104.5 crores with a degrowth of minus 14.7%. However, with excluding the impact of foreign exchange gains/losses and onetime item, which was in the previous year INR 43.7 crores, profit before tax stood at INR 140.8 crores in Q1 '26-'27, representing a strong 16.9% growth compared to the Q1 of previous financial year excluding the foreign currency impact. The year-on-year difference is primarily attributable to absence of significant FX gain, INR 39 crores, and higher onetime income INR 4.7 crores recorded in Q1 of the previous financial year. In contrast, Q1 of current financial year was affected by an FX loss of INR 1.98 crores and lower onetime income of INR 1.2 crores. We also discussed the challenges which we faced in quarter 1 of '26-'27. During the quarter, we faced certain external headwinds, including volatility in ForEx, key commodity, energy and consumable prices driven by geopolitical developments as well as an industry-wide shortage of blue-collar manpower during April and May, which impacted production costs across several manufacturing sectors. To mitigate these challenges, we intensified our focus on aftermarket business and implemented selective price increase effective July 2026. We continue to engage proactively with OEM customers on commodity and foreign exchange cost recovery measures with a portion already realized and the balance under active discussions. Under our Perform '26 initiative, we remain focused on continuous improvement measures, CIM, productivity enhancement, value delivery, material cost optimization and [indiscernible] efficiency improvement to help offset inflammatory pressures and strengthen profitability. In closing, we remain confident in the long-term growth prospects of our business, driven by increasing adoption of advanced safety technology, strong aftermarket momentum, a positive export outlook and a robust innovation pipeline. We are well positioned to capitalize on opportunity ahead. We will continue to focus on innovation, operational excellence, customer centricity and disciplined execution to create sustainable long-term value for our shareholders and stakeholders. I would like to thank all our stakeholders for your continued support. Thank you. We now welcome your questions.

[Operator Instructions] The first question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

Congrats on the ESC nominations. Sir, just on the -- firstly, on ESC nomination, sir, you mentioned in the press release, you have won orders across the 12-volt and 24-volt systems. So just want to understand, now will the ZF address across the CV segments, including LCV, which is more than 5-tonner segment as well. And just the LCV, the 12-volt system, will the content be slightly differ than, say, 24-volt system, sir?

This is Shankar here. Taking your question, the ESC win is only across the pneumatic ESC domain, whatever we have shared today in the press. And as part of the 12-volt segment, it's mostly the intermediate commercial vehicle segment, which is in the 12-volt region. So that's the focus, which is mostly pneumatic ESC. And to answer your question on the content per vehicle, it remains the same.

Got it, sir. Got it. Sir, coming to second part, sir, basically, just want to understand if you can update, particularly on the LCV side. We had earlier talked about LCV product portfolio where we want to expand towards LCV and we're targeting around 90 million revenues by 2030. And also just on the longer term, how do you see the ECASS regulation extending to more segments of CV? And how ZF is particularly actively working a lot towards the software in the CV industry as the CV industry players are focusing a lot on the improving payload and the efficiency?

Okay. Let me break this down question by question, perhaps. On the LCV segment, firstly, I think the first focus is on the advanced braking systems. As you might be aware, we are already in series supply on certain hydraulic ESC portfolio products for some of the key OE customers in India. Apart from this, we are also working on the booster and tandem master cylinder for some segments of the hydraulic braking portfolio and looking to grow that business further. So we are working towards the expansion, as you mentioned, towards a bigger presence in the braking segment to start with. Coming to your second question on the ECASS, we are already present today with most of the key bus OEM partners where we are working to position ourselves as an e-car supplier partner. Potentially, there is a legislation coming up in the future. There was talk about all the vehicles adopting the ultra-low entry buses. When that happens, we will be there with all the OEMs. Apart from the bus segment, we see this in a few of the truck segments, primarily in the tractor-trailer domain, where we see the tractor-trailers having height adjustments to be able to adapt to different variations in the trailers. So this is the one other potential that we see that getting adopted and possibly extending into the tractor and trailer segment on the truck side. And what was your third question again? I...

On the software part, I mean, a lot of CV players are focusing on the payload, et cetera, to drive efficiency. So I just want to understand how ZF is working to take these opportunities?

So on the software part, we are basically into the telematics domain already, which provides a comprehensive way of evaluating how the performance of the vehicle is and in terms of the repeat operation management and tracking. Apart from that, we already are into the trailer EBS and the trailer PULSE mechanism setting, which provide capability to do load monitoring, load evaluation as well. These are all capabilities and features that are already available. Looking ahead, then there is also the work towards the software-defined vehicle, which we are at a conceptual stage as a company, and trying to see how OEMs would be interested in partnering with us and taking that concept forward.

The next question is from the line of Mukesh Saraf from Avendus Spark.

This is Mukesh Saraf. My first question is on the ESC nomination itself. So you mentioned that you'll be part -- you're already nominated for 3 OEMs. Would your market shares in this ESC be similar to the pneumatic braking system market shares we have, given that you're nominated? Or is this going to be nomination platform-wise, segment-wise? Or is it across the board you will be supplying?

Thank you for the question, Mukesh. I would like to take that. And to answer you, yes, as we have been nominated with most of the major OEMs, we would be retaining our majority position in the market, and we will continue to work with them on ABS plus ESC solutions, which we are offering across the Indian market.

Right. And so in the previous call, you also mentioned that OEMs will typically want to work with the same vendor for the entire ADAS suite. So that will include AEBS also, for example. So now that you're working on ESC with the OEMs, in all probability, should we assume that AEBS will also be part of the supplies for you?

So I think during the last call, it was also mentioned that today, the market has provided several options that are available, wherein the AEBS, ADAS portfolio can be disconnected from the braking, and there are many service providers that offer this solution in the market. So we are at this point of time in the ABS plus ESC domain as a majority player. And with the ADAS, there are many other players in the market as well who offer this solution as a standalone.

Right. Right, right. So AEBS is something that we'll have to still wait and see how -- whether we can get in nomination there as well?

Today, we have a few partners in the e-bus domain. We have already been nominated by a few of the key bus manufacturers, where we are working with them on the ABS -- sorry, the EBS plus ESC with the complete suite of solutions that offer the complete set of features, which we have as it is available in the European market. So that's the full suite. And this is where we are looking to position this product and take it forward from there.

Got it. Got it. And secondly, we're starting manufacturing next year, third quarter for the ESC. How would the levels of localization be for this product to begin with?

So we are working on a high level of localization with our local EMS partners where we have possibilities to localize the ECU as well as some of the other products which we are using. Already, we are somewhere near 40% to 50% localization. By the time SOP, we will be greater than 75%.

Got it. Got it. And just last question on exports. We do understand that last year, we've seen some impact with the tariffs across U.S. Could you give some sense on the outlook this year? Because I think we have been talking about a lot of new orders that we are winning, especially in Europe. So to help to understand how exports can pan out for us this year, how is the order book looking like, new product introductions, all of that?

So in the current quarter, we are seeing a momentum that is gaining back after the last year dull. And this is primarily driven by some of the actuation products from North America as well as some of the air compressor portfolio products. So these are the key growth drivers which are being produced out of our SEZ plant in Chennai. And we are looking that this outlook continues to remain positive in the coming months as well.

Any guidance or any sense like can we see continuous double-digit growth in our export revenues for this year?

At this moment, we are not able to predict because there are a lot of geopolitical uncertainties around it. So I'm sure nobody in the world could put a finger on it for sure. But I would say it looks positive for sure. So in the sense that we would be definitely looking at a strong rebound happening in the market.

The next question is from the line of Dishant Jain from Quasar Capital.

Sir, first a few data questions. Can you provide the domestic OEM growth for this quarter as well as the U.S. and Europe market growth Y-o-Y?

Yes. I think the domestic year-on-year was 8.6% over last year. But the vehicle growth approximately 8.5%.

8.5%.

Yes.

Okay. And what about the U.S. and Europe markets?

So U.S. and Europe markets saw degrowth versus last year, approximately 10 percentage degrowth, while overall I think Europe -- I think U.S. market was a bigger degrowth than the Europe market. So that was the bigger level growth. But our overall sales has been better.

Okay, sir. And sir, can you just provide some commentary on how the domestic demand is currently behaving in the Indian market, like your talks with the current OEM players and everybody, just about the -- how the domestic demand is behaving in terms of production?