SCHAEFFLER — earnings call

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Prepared remarks

EXECUTIVE OFFICER · MS. HARDEVI VAZIRANI – DIRECTOR – FINANCE AND

MS. HARDEVI VAZIRANI – DIRECTOR – FINANCE AND

CHIEF FINANCIAL OFFICER · MS. GAURI KANIKAR – HEAD, INVESTOR RELATIONS

MS. GAURI KANIKAR – HEAD, INVESTOR RELATIONS Schaeffler India Limited February 19, 2024 PUBLIC

Questions and answers

Moderator · Conference Operator

We will now begin the question & answer session.

Ladies and gentlemen, we will wait for a moment while the question queue assembles.

The first question is from the line of Ankur from HDFC Life.

Please go ahead.

Ankur

Just a few questions.

To start off with, on the export side if you could just help us, would the last quarter be the bottom?

Are you seeing green shoots in terms of recovery as we go forward?

Just some color on some of your key markets as well – EU, APAC, US.

How are you seeing basically the end demand from some of these key markets?

Harsha Kadam

Yes, exports did see some strong headwinds, as I already said, and we continue to see it.

It all started off with the war breakout in Ukraine.

And of course, followed that up with the war in Israel.

And surely, that is definitely contributing to the slower demand that we are seeing.

A lot of our export goes to Europe mainly.

Yes, a little bit of it to China which we kind of are now de- risking it.

Europe, we know, has to come back.

It will come back.

Meanwhile, we are also trying to look at Southeast Asian countries.

We have been actively working with our colleagues there as well.

And we also intend to see how best we can leverage the gaps that we find in Europe.

And to that effect, we are putting some actions in place going forward.

Now, to come back to your question on is this the bottoming out, I hope so.

And hopefully look forward to an improved Q1 starting off this year.

We will have to wait for another couple of months to clearly know what direction this is going to go.

But we are optimistic, and we hope that Q4 2023 was the bottoming out, hopefully.

Schaeffler India Limited February 19, 2024 PUBLIC

Ankur

As you also said, maybe you are also trying to look at more on the Southeast Asian markets as well, maybe to offset some of the weakness in the EU or China.

Is that right?

Harsha Kadam

Yes.

Obviously, we are looking at markets where the economies are doing well.

Like, Indonesia is doing well still, Vietnam is there, Thailand is there.

We are looking at these fundamentally to see if we can start to gain some businesses there – business wins – so that we can try and load the free capacity that we have.

Ankur

Second, sir, on some of your key industrial markets, because clearly, when I look at some of your peers or even the overall industrial B2B space seems to be kind of slowing down in terms of top line growth across some of their end markets.

If you could just help us some of your markets like rail, wind, cement, steel, the Process market, how are things kind of shaping up there?

Are you seeing a pre-election slowdown in some of these markets and then maybe a bump up after that, or is it business as usual?

Some color there?

Harsha Kadam

First, let me start with the first part of the question that you mentioned.

Are we seeing slowing down in the industrial sectors?

We did see some slowdown in some industrial sectors, not all.

There are 2 ways to look at it.

If I were to look at just the Q4, the last quarter of 2023, rightfully some of the sectors like the offroad wherein the construction equipments do come in and the tractors to put together, we did see some slowdown there in the last quarter.

The reasons could be twofold.

1) Tractor, anyway, is already down.

It has been at its lowest point as such.

But more on the infrastructure push, and this is exactly what I referred to that in the interim budget, there was a kind of a wait-and-watch that probably happened because of the upcoming elections.

But however, the interim budget still keeps the focus on the infrastructure push.

With all the construction, the infrastructure industry demands still continue to do.

So, I am optimistic that the infra push is definitely going to continue, and we are going to see some positive traction coming in Q1 of this year.

Another factor was wind.

Wind has come back strongly.

In the quarter itself, we saw it was a much stronger performance.

Over the preceding quarter, almost 11% growth.

And that is a strong uptick on the wind side as such.

We have also seen that clear focus on Railways is also helping us because we have seen a strong growth in Q4 last year as well.

And even at an annualized level, we have seen a strong growth story in the Railway sector for us.

As I said, all in all, yes, there is a mixed bag like the 2-wheelers took a little longer to pick up and they have still not picked up to the speed at which they should be running.

The 2-wheeler sector is still struggling there because their own export market is hit very badly hence.

Overall, we have a mixed bag, but then, we have also seen that in some of the sectors, obviously the demand uptick is visible already.

Ankur

Sir, also in the Process industry?

Oil & gas, steel, cement, anything there?

Harsha Kadam

Yes, I did talk about the energy sector.

It is doing well.

But if I look at an annualized level, surely, we have seen our business grow in the energy sector, mining sector, as well as in the process industry sector.

All the three.

We have seen a strong uptick there.

Demand has been good.

Q4 has been a bit slow, rightfully, as you pointed out, with the apprehension of the Schaeffler India Limited February 19, 2024 PUBLIC forthcoming elections.

It could be a dampener, but I don't think it's very bad.

At an annualized level, definitely we are seeing a good growth story in all these 3 areas.

Moderator · Conference Operator

The next question is from the line of Ajox Frederick from Sundaram Mutual Fund.

Please go ahead.

Ajox Frederick

Sir, my question is again on industrials from a CAPEX angle.

From the CAPEX what we are doing, what proportion will be going particularly to industrials and what will be the asset turns for that CAPEX?

That's the first question.

Harsha Kadam

We have consistently been investing both in the automotive and the industrial space.

Rightfully, the large part of the investment is in the industrial space.

Why?

Because our localization content was lower there, yes.

And we have now consistently kept the focus to make more and more products for the industrial space in India.

And we will continue to keep that focus to invest on the industrial side of the products.

Automotive, on the other hand, is more what we were importing, we try to do it here now because one of the critical criteria for an automotive OEM is to have a strong supplier base.

Supply chain itself has to be here.

And some of the products that we make have some niche technologies which today the supplier capability and competency is still not there in India.

Hence, we continue to import.

But there again, our clear localization drive is going to enable us to increase our investments on the automotive going forward as well.

Ajox Frederick

Just a followup to that.

From our target perspective, will we be increasing CAPEX on the industrials, or the run rate will still continue?

Harsha Kadam

I don't have the precise data right now, but all I can say is, yes, we will keep the focus both for the automotive and the industrial.

As I already said, we have a major breakthrough in the electric mobility sector now, and rightfully for that, we will have to start a localization plan.

We will have to start making subsystem level products in the automotive space as well.

So, we will be continuing to invest even on the automotive side because there, in the technology landscape, we see a demographic shift happening in terms of electric vehicles catching up as well in India.

So, we are gearing up for investments even in that field.

Ajox Frederick

Just my final question.

On Railways, what is the business right now we are doing and where can that scale up, let's say in 2 to 3 years' time frame?

Harsha Kadam

On the Railways side, predominantly our products are on the axle boxes and bearings that go into it.

We also are a strong player in the traction motor applications which go into all electric locomotives.

The fact that Indian Railways has a clear strategy to become 100% electrification is actually helping us grow our business because we are the only ones who have been able to develop insulation coating bearings for the traction motor application.

And our customers have even recognized us with multiple awards in the last year on this.

That said, clearly our strength is already there.

Apart from this, there are a host of other products.

We are also now getting into the digital space.

How do we operate because everything is going digital?

So, Railways definitely is a very strategic and important sector for us.

And we have won businesses on the Schaeffler India Limited February 19, 2024 PUBLIC Vande Bharat trains.

And as you know, the engineering specifications and standards for the Vande Bharat are very different from the older train technology that was there in India.

And that said, we are gearing up not just in terms of manufacturing capacity, but in terms of engineering competency as well.

Both the areas we have addressed very clearly.

Even now, the third area that we are getting into is also infrastructure to carry out testing facilities for Railways in India.

All the three.

Moderator · Conference Operator

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

Please go ahead.

Mukesh Saraf

My first question is on your EV plans.

You had just alluded that obviously you were going to be earmarking a lot of investments there.

Just trying to understand how it is going to work between, say, with Vitesco India and Schaeffler India, given that at the parent level, the businesses are kind of getting combined.

How will the parent be sharing its technology between the two Indian entities?

Harsha Kadam

Let me break that question into two parts and try to answer it.

The first, obviously, is our e-axle project with the customer here, which we have been actively engaged with.

It is going as per schedule on plan, and performance has been pretty good.

That said, as I mentioned earlier to the previous question, we are also drawing up plans to localize and manufacture the e-axle in a phased manner.

That's going to happen as such.

And investments to that effect are already underway.

So, clearly our commitment and focus to invest into the electric vehicle technology in India is already there and actions are already underway.

That said, we are also actively working with other customers for other platforms, obviously, to try and get more business opportunities into the pipeline in the e-vehicle technology area.

That's the first part of the question.

The second part being you brought onboard the question of Vitesco.

Vitesco has been a strategic global acquisition for Schaeffler AG.

Globally the company has been acquired.

Why was this done?

Clearly, within the wide portfolio that we have, one of the gaps was in terms of the digitalization and electronics offerings.

And that was the gap in our portfolio, which finally is filled in.

The only way we see now going forward is Schaeffler and Vitesco together, clearly, we have the capabilities now to offer a system level solution offering to our customers as a one- stop shop.

Whether it's the electric motor, the reducer, gearboxes, the control systems that go with it, the electronics part of it, or the thermal management module that needs to be there to ensure that the entire system operates in an efficient manner, all the four put together, we have been able to now offer as a one-stop-shop offering.

That's the complimentary outcome of the Vitesco that you touched upon.

At this point in time, it's the only global acquisition that has happened.

We will continue to see how things will evolve as we move forward.

Mukesh Saraf

We are not sure if Vitesco will separately be getting orders from customers and Schaeffler also will be separately getting orders from customers?

Harsha Kadam

I am afraid at this point in time, I will not be able to answer that question as such, as it is too nascent a stage, we are in.

Schaeffler India Limited February 19, 2024 PUBLIC

Mukesh Saraf

And the second question is on wind.

You mentioned that there is an improvement in the wind business.

But we also understand, and correct me if I am wrong, that a large part of our wind business is an indirect export.

But obviously exports itself are not doing too well.

Could you explain a bit more?

Is there a domestic wind demand that is going up and that is what you were mentioning, or even the indirect, the gearbox exports that happen, even that is picking up?

Harsha Kadam

Let me lay it down for you first.

If one were to look at the wind equipment business in India, 80% of what is produced in India actually gets exported out of India.

Only 20% of the production is India's domestic need.

That said, we have not seen a drop in the domestic demand, which is just about 20%.

Where we have seen the drop is on the 80% side.

Because our customers, their projects are delayed, their projects are put on the back burner, and so on and so forth.

And predominantly, all the exports of the wind equipments, a majority was going to the European market and some of it going to the US market.

What we have seen is we have seen a drop in the European market.

We have not seen a drop in the Indian market, nor have we seen a drop in the US market.

The impact of the European market is what is felt by our customers, which is actually cascaded down to us as a supplier now.

I suppose I have now brought the clarity there.

Mukesh Saraf

But you had mentioned that there is an improvement.

That is basically the 20% market in India?

Harsha Kadam

The 20% has remained steady.

We are not seeing a drop there at all.

Where we are seeing a demand uptick is on the 80% side.

Mukesh Saraf

Just the last one, a quick one, if I may squeeze in.

In the presentation, we have mentioned that we have now won an order for DGBBs for electric 2-wheelers.

Just trying to understand, I think in the past, you had mentioned that while the volume of bearings with EVs might be lesser, but the value will make up for that.

Are we seeing that already in this order that we are winning?

In terms of value, are these higher than the ICE vehicle DGBBs that we supply?

Harsha Kadam

It's a very good question you are asking, Mukesh.

Let me again throw some light on this.

If one were to look at the next 10 years how the IC engine market would be going forward.

Obviously, the 2-wheelers being the early adopters of electric vehicle technology, we believe the IC engines could stagnate or start to decline gradually.

But the size of the market in India, close to 20 million 2-wheelers produced last year, I guess, for '23 or so.

That said, there is a substantial market that still will be there for the next decade.

That's one data point.

The second thing is, will the number of bearings reduce when the technology moves from ICE to electric?

Of course, it will reduce.

But then, what it would also do is, there is a shift in the product specifications and engineering specifications.

Why?

Because the EV requires a different specification.

And that's where the new wins that we have started to secure on our bearings for the electric vehicle are differently engineered, and they have a different specification as well.

To put it in a nutshell, while on the one hand we see the business of overall demand may reduce, not now immediately but after a decade or so, we are also getting into the EV bearings that would call for different engineering specs or manufacturing capabilities being re-engineered to that effect.

That's already happening.

Also, we are not ignoring the fact that we are now having the capability to offer electric vehicle technology even to the 2-wheelers.

We are definitely evaluating and trying to work with some Schaeffler India Limited February 19, 2024 PUBLIC of our partners here to see if we can bring electric 2-wheeler solution to the market.

That is currently work in progress, and I am not at liberty to share more details beyond that.

Moderator · Conference Operator

The next question is from the line of Harshit Patel from Equirus Securities.

Please go ahead.

Harshit Patel

Sir, my first question is on our European exports.

While I have noticed that the Schaeffler Group's, as in parents' revenues which they garner from Europe, they haven't declined very sharply in the past 3 or 4 quarters.

On the contrary, our exports to Europe, they have, I think, declined very sharply.

Since you have mentioned both Southeast Asia and the USA, they are doing relatively well.

Could you help me reconcile this?

Are there any specific end-user segments or product segments that we are catering to would have seen a very sharp decline?

Hardevi Vazirani

Harshit, as you are aware that Schaeffler Group has been actively pursuing inorganic opportunities.

The growth that you see in our global revenues in Europe market are mainly including the inorganic growth that has happened with acquisition of some of the industrial companies.

And the second thing is also that they are rationalizing the inventories.

In Q4 specifically, they tried to reduce the imports from different countries, and they tried to utilize the inventories which were in stock.

These are the 2 major reasons that you see that Europe numbers, the revenue has not de-grown, but the background is different that we have to know the inorganic portion of that.

Harshit Patel

Sir, my second question is on the gross margins.

These gross margins have come off from close to 39% two to three quarters ago to close to 37% at the moment.

This is a drop of close to 200 basis points in the last 2 to 3 quarters.

Would you attribute this entirely to the share of exports coming down?

Or there are some other reasons as well?

If you could elaborate on this, that will be very helpful.

Hardevi Vazirani

The major portion is due to the drop in exports, and in the full year, our exports dropped by 15% points.

This 15% drop in exports attributes maximum part of the gross margin drop.

Moderator · Conference Operator

The next question is from the line of Sourav Gurjar from ICICI Prudential AMC.

Please go ahead.

Sourav Gurjar

My question is on the expansion plans.

Where exactly are we on the Savli industrial bearings facility you also displayed a few months back and the Hosur automotive components part?

Have some lines come online, or phases of capacity additions actually occurred?

And with that, where are we in the overall utilization for bearings?

Harsha Kadam

As you are aware, in the previous questions, I did touch upon the answer that our investment continues to stay the course.

And as I already said, we are at close to 7.5% to 8% of our sales we are reinvesting.

Predominantly, a large part of it definitely is in the industrial space and most of it is going into our Savli plant because that is the plant where we have space for expansion.

The other plant in Maneja, which is also an industrial plant, there is no space for further expansion.

Hence, all the expansions happen in Savli.

That said, obviously, some of the product Schaeffler India Limited February 19, 2024 PUBLIC lines like large-sized bearings or spherical roller bearings or angular contacts, all these which are required in the process industries, the renewable energy sector is the clear focus area and Railways; we continue to invest for all these 3 sectors.

And our investment plans are clearly on track.

We continue to do that.

Sourav Gurjar

And anything particularly on the Hosur side?

How is that moving, sir?

Harsha Kadam

Hosur which is a total greenfield project, and the building construction is ongoing.

And as I see it now, hopefully we should be able to start the productions to come out; by the first quarter of 2025, we should be churning out the products from that plant as well.

Sourav Gurjar

On the Savli side, the additions are in a phased manner, right?

Harsha Kadam

Yes.

I am not sure if you were there on the last visit to Savli.

You would have seen the hall.

That hall is getting filled up.

Now we are going to start the additional construction of another additional hall, equally the size of the current hall because Savli, as I said, has plenty of space.

We have not even occupied half the land area yet.

And that's something is clearly our focus going forward as well.

Sourav Gurjar

And the second question is on the inorganic part.

You just mentioned about inorganic acquisition which the group has been doing.

We are left with INR 15 million of cash.

Even with 30% to 50% of dividend payout and the CAPEX commitment, we still are with cash, right?

Any plans for further inorganic opportunities apart from Koovers?

Harsha Kadam

Yes, we are looking out for good opportunities, and we will continue to look out for good opportunities.

As I said, last year, we did acquire Koovers.

It was a smaller acquisition comparatively, but nevertheless, the inorganic growth of Schaeffler India definitely is a clear strategy for us.

And we will stay the course there as well.

And we are cognizant of the cash we are sitting on as well.

Moderator · Conference Operator

The next question is from the line of Mayank Bhandari from Asian Markets Securities.

Please go ahead.

Mayank Bhandari

Sir, my first question is, within industrials, can you give us a direction of how Railways business has grown in CY23?

Harsha Kadam

Last year when I look at the full year, our Railway business has done reasonably well, and we have registered a double-digit growth rate.

In fact, in the industrial sectors, almost all the sectors, we have done a double-digit growth compared to the previous year, which is pretty strong, pretty good.

Of course, we did have some challenges in the offroad, as I said, because that's the only sector where it was a little bit dampened because of the demand being very weak.

But Railways, yes, we had a good growth story, double-digit growth rate.

And as I said, our investment strategy remains there as well, and we will continue to leverage the newer demands that are coming out of the Indian Railways sector as such in terms of performance and reliability.

Definitely, we will Schaeffler India Limited February 19, 2024 PUBLIC have the competence and the wherewithal to deliver the products meeting both the areas of performance and reliability.

Mayank Bhandari

The overall growth has been 5%, which means probably Wind business has declined that is the reason, except that, all sectors have grown double digit?

Harsha Kadam

As you say Wind has declined, you will have to compare that with the previous year and then see because Wind in the first half was down pretty badly.

It just started to take off only in the last quarter, Q4 of last year.

To that effect, overall, yes, Wind was down, but then it started to show a positive traction and upward trend.

And that is encouraging for us because Wind is one of the very important strategic businesses for us and we have a lot riding for the Wind sector as well.

Mayank Bhandari

Sir, can you give a breakdown of the auto business in terms of CV, PV, and tractors for full year CY23?

Harsha Kadam

Is your question about the market?

Mayank Bhandari

No, not market; Schaeffler India's breakdown.

Harsha Kadam

As I said, automotive has posted a pretty strong growth story compared to the previous year.

And both in the power transmission and engine applications, we have done pretty well.

The engine and transmission part of our business, including the clutches, has had a very strong growth story.

Particularly, our clutch business has had a very strong traction riding on the back of some of the market also trying to adopt the dual clutches where our key strength is.

And we are one of the largest players in the dual-clutch applications and we have been able to leverage that.

We have been doing well there.

Talk about the bearing side of the business, it is a challenging part of the business as such.

But here again, bearings as such, it's not that we have lost market share.

We have sustained our market share, but definitely it has not grown as much as it should have grown on the engine and transmission and the clutch parts of the business.

Overall, automotive has seen traction.

And as we see, IC engines still continue to demand.

And with emission norms becoming more and more stringent, obviously the current products that we offer need to be re-engineered and we are leveraging on that because we have the strong engineering and design competency existing within India and also in Germany.

We cross leverage the competencies we have, and we have been able to stay a strong and potent player in the automotive application space as well.

Another data point is our business within the commercial vehicle sector has grown phenomenally in the last 1 year.

This is clearly because of our focus that we have now brought on to the commercial vehicle segment, and we have been actively working to launch more and more new products in the commercial vehicle segment.

Moderator · Conference Operator

Ladies and gentlemen, due to time constraints, this will be the last question for today, which is from the line of Mahesh from LIC Mutual Fund.

Please go ahead.

Schaeffler India Limited February 19, 2024 PUBLIC

Mahesh

Sir, export for this quarter is around INR 211 crores which is, I think, lowest in the last 9 quarters.

You hinted that this could be the bottom.

Going forward, this number will improve, maybe gradually, but there won't be any de-growth as such?

Harsha Kadam

Mahesh, let me correct you first.

I did not hint that it will be the lowest quarter.

It was hinted by one of the participants in the call.

I said I hope it will be the last quarter, right?

And I still hold that and that I am also hoping that this will be the last quarter.

That said, yes, we are, as I said, looking at alternatives to see whether we can bring in more new businesses from other parts of the world to ensure that our export capacities will start to fill up.

But yes, Q4 was the lowest that we have hit.

Will it remain?

I cannot say that.

We will have to wait.

This quarter will tell us where this is heading to.

That would be my answer to you.

Mahesh

Sir, we have talked about INR 500 crores CAPEX for the next 3 years and we are through with 1 year.

For the next 2 years, still we are holding that CAPEX guidance.

Hardevi Vazirani

That is right.

We will be holding the CAPEX guidance.

Moderator · Conference Operator

As that was the last question for today, I would now like to hand the conference over to Ms. Gauri Kanikar for closing comments.

Over to you, ma'am.

Gauri Kanikar

Thank you everyone.

Thank you for joining us today.

If you have any further queries, please do reach out to me at [identifier removed].

Have a good day.

Moderator · Conference Operator

Thank you members of the management.

Ladies and gentlemen, on behalf of Schaeffler India Limited, that concludes this conference.

We thank you for joining us, and you may now disconnect your lines.

(This document has been edited for improving readability)

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