SCHAEFFLER — earnings call

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Prepared remarks

EXECUTIVE OFFICER · MS. HARDEVI VAZIRANI – DIRECTOR, FINANCE &

MS. HARDEVI VAZIRANI – DIRECTOR, FINANCE &

CHIEF FINANCIAL OFFICER · Management

Schaeffler India Limited April 26, 2024 PUBLIC

Moderator · Conference Operator

Ladies and Gentlemen, Good Day and Welcome to Schaeffler India Limited Q1 CY'24 Earnings Conference Call.

As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing "*" then "0" on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Ms. Gauri Kanikar.

Thank you and over to you, ma'am.

Questions and answers

Moderator · Conference Operator

We will now begin the question-and-answer session.

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

Please go ahead.

Mukesh Saraf

My first question is on exports.

You did mention that you were surprised with the kind of pick up in the first quarter.

So, yes, there has been sequential.

Could you give some more color on how do you see going ahead the ramp up in exports to be?

Hardevi Vazirani So, the question is if I heard it correctly, it was on exports?

Schaeffler India Limited April 26, 2024 PUBLIC

That's right.

So, the question is just on the visibility that you have going ahead because there has been a sequential improvement, but you also mentioned in the opening remarks, it was surprising the improvement.

So, just like something that we can expect will continue to improve from here, how do we look at?

Hardevi Vazirani If we look at exports then Q1’2024 vis-à-vis Q4, we saw a more than 10% rebound, and this came from all the regions.

Of course, one thing is that the stocks that Europe was consuming have reached optimum level and thereby they have started placing the orders now, but at the same time there were some efforts put in by the management to acquire Asia Pacific market where we have also faired quite well.

All in all, the response from all the regions was better than Q4.

So, we can expect kind of this sequential improvement to continue from here on?

Hardevi Vazirani So, the order book looks promising at this point of time.

We plan to maintain the average through the year.

And secondly, on the e-axle order that we have already, you give some sense on this year sometimes we are expecting the business to start there.

So, if you can some timeline there?

Harsha Kadam

On the e-axle business, what I can say is that the project is progressing very well with our customer, and it is according to the timelines that we have committed, yes.

Rightfully, our phased investments also is on track.

And as the situation progresses, we will definitely start to bring in our localization strategy as well and start to implement.

Some actions towards localizing partly our production lines have also started to be now effected.

But as I said, I cannot share more details on the project, but then nevertheless we are on track.

Mukesh Saraf

Under the mobility solutions, se have the industrial bearings there.

So, I mean, does that include only railways tractors, because it's split under mobility and others, just trying to understand what is the -?

Harsha Kadam

I just wanted to correct you that the new division that is created is called electric mobility, which is purely for the electric mobility on road.

Yes.

So, the Railway as a sector continues to remain under the Industrial division and which is now, we are calling it the Bearing and Industrial solutions, it's going to remain there.

So, there has been no deduction or changes within the erstwhile industrial division, there has been only an addition and that's the bearings business, which was in automotive, has now come under the industrial part.

Mukesh Saraf

So, in the stock exchange release, the segmental revenue, there is something called as mobility components and related solutions, and then there's something called others as well.

In each of these you have these four sub-segments.

So, just wanting to understand what are the differences there?

Schaeffler India Limited April 26, 2024 PUBLIC

Harsha Kadam

Mukesh, the way it has been shown here is mobility components and related solutions.

But if you see below that all the four businesses which we track is already there.

Mukesh Saraf

And then below that there's others and in there again, there is bearings and industrial solutions and then the company exports.

I think it gets totaled up into the third segment.

Never mind, sir.

I'll probably take it offline.

Hardevi Vazirani No, no, no, I can answer this right away.

So, if we see mobility components, it is all linked to passenger vehicles, tractors, railways and so on.

But other than that, our sectors like wind, power transmission, industrial distribution, that falls under others.

So, everything that is related to mobility is in in Category-A and rest all sectors are in Category-B.

I will probably take it offline.

Moderator · Conference Operator

Next question is from the line of Harshit Patel from Equirus Securities.

Please go ahead.

Harshit Patel

My first question is on the wind sector.

So, you did mention last time CY'23 had seen because the exports from India was pretty much sluggish.

So, can you think that in CY’24 we can reach back to those CY'22 levels?

And what is the share of wind as a portion of overall our revenues at the moment?

Hardevi Vazirani Before Harsha talks on the business aspect of when, let me clarify that when we talk about our exports, it does not have the wind portion, we sell to the wind producers in India who in turn export to Europe and other countries.

So, when we sell them, it is still domestic sales.

Our export is not directly towards wind, we sell domestically to the wind producers, and they export it.

Harsha Kadam

So, to your question on the business progression, first thing is there are two parts to the business.

One is the domestic demand for wind equipments and second is our customers manufacturing in India and exporting.

So, in the total business, 80% to 85% is exported out of the country by our customers, correct?

So, the domestic demand continues to be stable… has been stable in the past.

It was the export business that was down and over the last few quarters we saw that.

Coming into Q1’2024, what we have seen is a very strong uptick compared to the Q1’2023; if we go back four quarters, we have seen a very strong uptick, almost 70% growth in demand we have seen come back.

Now, if one were to do a little deep dive and look at, there are two applications that go into the wind; one is the equipment itself; and second is the gearbox manufacturers.

What we are seeing is a very strong demand coming back from the gearbox manufacturers.

The wind equipments has improved but not at the same pace as the gearbox manufacturers.

So, I must say that we are beginning to see strong demand for gearbox that are getting exported out of the country as of now.

Hopefully, the wind equipments too would start to make a strong recovery as we are seeing in the gearbox.

Harshit Patel

My second question is on the pricing.

Could you give us a little bit of lever on bearings pricing both in the automotive as well as industrial bearings -- have we taken any price cuts in the past Schaeffler India Limited April 26, 2024 PUBLIC one year or so because the commodity inflation has pretty much stabilized vis-à-vis what it was let's say one and a half to two years ago?

Harsha Kadam

Pricing is always on a comparative level.

That's the first point I want to make.

It's related.

Second is, yes, you're right, the commodity prices have stabilized, and our pricing is always linked to the commodity price movement and so our contractual agreements with the customers are always linked with the price of the commodities at the global level.

So, that said, if the prices would have gone up, certainly we would try and recover those prices from our customers.

But if the prices were to go down as well, we would have to pass on the benefits.

I don't have the details of where we have given or where we have taken.

But what I can say is it is very well sequentiated with the commodity price movements and we continue to operate in that manner, this applies to all suppliers who are in the automotive and the industrial.

Harshit Patel

I understand that you have to pass on those benefits to your large institutional customers, the B2B contracts that you might have.

But do you also have to pass on these even in the aftermarket?

Harsha Kadam

No, aftermarket, we do not pass on.

Aftermarket invariably to cover the inflationary increases, we do increase prices.

All component manufacturers increase the price every year and the automotive aftermarkets and the industrial aftermarkets is the only sectors where we follow this rule to increase the prices every year unless it is a strategic approach not to increase the prices by the organization.

Harshit Patel

Just last one bookkeeping question.

In the vehicle aftermarket solutions segment, are there still bearings or these bearings have also moved to that newly created segment, which is bearings and industrial segments?

Harsha Kadam

So, the vehicle lifetime solutions will continue to sell bearings, they will continue to sell every other product as well.

Only the manufacturing has moved under the industrial side.

So, nothing changes as far as the external customer is concerned.

It is an internal restructuring that we have done and it's just a reallocation of the team, the plant and machinery into industrial.

So, that's the only change, but otherwise from an external perspective everything remains the same.

Moderator · Conference Operator

Next question is from the line of Pradeep Bijlani from Union AMC.

Please go ahead.

Pradeep Bijlani

I have two questions.

Firstly, on the export side, so you called out that the wind sector is largely not part of exports and that is part of industrial, but we are seeing very strong order book.

So, can you call out what is the segment as in we largely have PV, so where are we seeing that growth whether in the North American region or the European region, if you can give a little bit more flavor on that part?

Hardevi Vazirani

If we see our performance on exports, Q1 vis-à-vis Q4 of last year, that is quarter-on-quarter, we have seen the uptick from all the markets, Europe, America, Asia Pacific, also China, we have Schaeffler India Limited April 26, 2024 PUBLIC seen order book improving.

While for the other regions, specifically Europe, which is the main contributor to our export’s revenue, stocks have been optimized at their level, so order book is coming in, but at the same time, management had put conscious efforts to get new order book from Asia Pacific, which has contributed to this increase.

Pradeep Bijlani

The other question which I had was related to the Vitesco merger which is done at the global level.

So, from what we understand, Vitesco also has an India entity and we as Schaeffler have maintained one Schaeffler policy.

So, do you have any visibility as to what would happen to the Vitesco entity and the Schaeffler India entity, how are you thinking about that, and if any timelines as such with the management who want to give out?

Harsha Kadam

First, the name of the company is Vitesco, and this globally is a strategic acquisition for Schaeffler fundamentally because as we are venturing more and more into the electric vehicles’ technology space.

The critical part of electric vehicle technology is power electronics and that is where Vitesco's competence brings in a lot of value for Schaeffler.

Hence, strategically this global acquisition.

That said, in India too, Vitesco is present as a private limited company, and right now, as I'm speaking, we are evaluating the functional integration of Vitesco into the Schaeffler portfolio.

However, the full integration of Vitesco within the Schaeffler India Limited listed entity would take some more time as we will have to do a thorough due diligence as well as do a lot of groundwork before we venture in that direction and as of now, I'm not in a position to reveal the time plan for this.

Moderator · Conference Operator

Next question is from the line of Pramod Amthe from InCred Equities.

Please go ahead.

Pramod Amthe

So, the first question is wanted to get your perspective on the railways segment in detail about new range.

How is the pricing scenario there in the current situation?

We understand the opportunity is pretty large but there are incumbents who are there versus you entering into that segment.

So, how do you see the pricing scenario when you have won these new contracts?

Harsha Kadam

So, let me give a background and then probably I can try and answer the question.

So, the earlier model with which the Indian Railways operated was, they were issuing tenders for whether it is the wagon, whether it's a locomotive, with all the divisions they have geographically, and the manufacturing units they have, each were independently issuing tenders and one had to bid and compete in the tenders.

With a lot of privatizations happening now, particularly on the wagons, we are already seeing the wagon manufacturing is now being privatized.

We see a different approach with the private manufacturers now.

So, we see less of tendering, but more of technological discussions and engaging with suppliers from a partnership perspective and that's beginning to happen now.

But has it completely changed in railways?

Not yet.

It's beginning to happen.

So, this is the first transformation we have already seen.

So, what does this mean to players like us?

For one, it means that we can offer better value solutions and products to the customers.

As now with privatization and modernization both going hand-in-hand, the demand for better value products is definitely going to be there and we are strongly positioned and competent with all the capabilities, the investments, the manufacturing footprint that we have Schaeffler India Limited April 26, 2024 PUBLIC put in place for railways to compete in a better way.

So, that is the big change that is happening.

Rightfully, yes, there are four or five players in India who compete within this railways.

But as you know, railways is a growing business and very relevant for our play of things and we have our portfolio of products where we are strong and as the railways get modernized and they raise performance level, we strongly believe we have portfolio which can compete in those new applications that are already there.

So, coming to pricing, I am not able to answer it precisely as to what do you mean by pricing, but the model is transforming there, and we believe that we are able to now start to play strongly in the railways sector as well.

Pramod Amthe

The second question is with regard to the new products you talked about in the annual report.

There seems to be like almost 10 new products which you plan to introduce per se.

Wanted to know amongst these, what are the big ones to look forward in terms of addressable market or in terms of making the influence on your revenue in the next two, three years perspective?

Harsha Kadam

See, our strategy in the market is, if you take the automotive market, IC engines will still continue to grow, albeit at a lower CAGR growth rate, but then there is still definitely demand for IC engines.

So, our investments in that direction to manufacture those products will continue and hence we will continuously pursue the market for new business wins on those existing portfolio.

The second is, we will continue to upgrade our existing products to meet with the changing regulatory norms that are coming up, the new CAFE norms, or for that matter, if Bharat Stage 7 were to come in.

Yes.

So, we are now building up the engineering competency as well to stay competitive there.

On the other hand, with the emerging technology like electric vehicles as well, we continue to invest there both in terms of competence development as well as phased manner localization as the market is beginning to pick up more and more electric cars are produced in the country, we already have a business win and we are now pursuing other new opportunities there.

So, there will be new business wins even on the electric vehicles’ technology space as well.

So, rightfully said if you are going to ask me which is the big ticket one?

Well, I would say both on the automotive side and the e-mobility side we have big wins.

So, cumulatively, we will continue to pursue, and we will continue to make business wins.

Even on the industrial side for that matter, with so much infrastructure growth that is happening or core industrial sector customers are investing in new capacities and new greenfield projects, so there again, we continue to produce the existing products more and service their requirements as such.

So, clearly, wherever the opportunity is there, we believe that there is a growth opportunity, Schaeffler would continue to focus and continue to invest.

Moderator · Conference Operator

Next question is from the line of Mahesh Bendre from LIC Mutual Fund.

Please go ahead.

Mahesh Bendre

We have been talking about CAPEX of INR 1,500 crores over the next three years.

So, we already done CAPEX last year, we are in the midst of that doing that.

So, when will this get reflected in the numbers, I mean when this CAPEX that we're putting into factories, will start reflecting in our sales?

Schaeffler India Limited April 26, 2024 PUBLIC Hardevi Vazirani So, partially, it is already reflecting.

It is reflecting because the investment is not only into the into the capacity, investment is in setting up of new plant of Hosur, investment is into backward integration, roller localization in Savli.

So, there are many things which are done to do the localization of finished products.

So, we are already selling those products in the market from imported sources.

When we localize, we are now selling from within our plant.

Sales does not necessarily increase or when we do backward integration, the parts are available easily within the local market.

So, there are several topics within those investments of INR 1,500 crores which are not directly always linked to increase in sales, but yes, we can say that significant amount is towards that.

So, some part we already see that it started impacting and that is the reason you see that the company is able to sustain the margins despite inflationary pressure of over 8% that the margins are maintained, because localization has been done for the child parts, etc., So, CAPEX is to be seen in those categories and you will see that increasingly when the market comes back in tractor, commercial vehicles, you will see those effects coming in.

So, you mean to say that the CAPEX will start influencing our operating margins maybe because a lot more things we were importing will get produced in our factories now?

Hardevi Vazirani So, it is already impacting and that's why see we are able to sustain our EBITDA margins close to 18% despite having last year inflation averaged above 7% in the prices, personnel cost, fuel, etc., but we still registered EBITDA margin over 18%, and this is all possible because there are several measures in those directions.

Out of our total sales, how much is from the aftermarket, both including auto and industrial?

Hardevi Vazirani So, Vehicle Lifetime Solutions, we already showed; from the domestic sales it's close to 10%, the similar would be in industrial distribution.

Moderator · Conference Operator

Next question is from the line of Saif Gujar from ICICI Prudential AMC.

Please go ahead.

Saif Gujar

Can you share where are we on the Hosur plant?

Harsha Kadam

As you know, last year we had started off the year by laying the foundation stone for the greenfield project construction.

As I'm speaking now, the first hall construction is underway.

Last month, me and the entire leadership team were there to assess the status of progress and I must say that we are on track.

So, once the hall and the building is completed, the machines would start to roll in as well.

So, as we are going to set up some new machines would come in and some would be moved from our existing location to create more space in the older plant as well, so that you we will start expectedly next year to start to produce from this plant.

So, all in all, we expect by the end of this year the entire project to be completed.

Moderator · Conference Operator

Next question is from the line of Salil Desai from Marcellus Investment Managers.

Please go ahead.

Schaeffler India Limited April 26, 2024 PUBLIC

Salil Desai

When you mentioned that new extra efforts were made to increase the exports in Asia Pacific, can you explain a little detail what these efforts are in the sense, do you need to put marketing teams there or do you need to talk to the group and make a case for sourcing it from India?

Hardevi Vazirani So, as you know that sub-region India is a part of region Asia Pacific, there are ongoing discussions with Asia Pacific management board on the order book situation, and in Asia Pacific, we are present in 11 countries where in Southeast Asia, there are seven countries and the markets like Indonesia, Philippines, Malaysia, Thailand or even Korea, these all are part of Asia Pacific.

So, the management boards of those respective companies are in the common meetings where we drop the action and the respective colleagues from the industrial division in those countries, they put extra effort to get us the order book.

And also, that the Southeast Asia countries, we don't have many plants who produce the products that we produce, so they import from us.

This would be kind of a more sustainable source of exports for you, it's not a one-time win.

Is that understanding right?

Hardevi Vazirani That's what we are trying to do.

Moderator · Conference Operator

Next question is from the line of Muksh Mandalay Shah from Anand Rathi.

Please go ahead.

Mumuksh Mandlesha

Industrials and bearings have seen a good 15% growth on a YoY basis and if we look at Q4 quarter which is 5% growth.

So, from which sectors we have seen much better growth this quarter?

And also, just to add on aftermarket, we have seen a 10% growth in sub-sectors or products you mentioned which has seen good growth in aftermarket as well?

Harsha Kadam

So, let me take the industrial part first.

So, a couple of sectors that we have seen strong demand coming up in the first quarter, one, obviously wind, we already talked about it, the second one is the two wheelers which we classify under the industrial division, and here again as you know the two-wheeler business bounced back with double digit production growth rates happening in the country.

We've also seen a strong demand coming in the power transmission sector, which is fundamentally the gearboxes as well as electric motors that are manufactured in the country.

So, these were some of the large.

Of course, we did see also from the cement and the steel sector good demand coming back, although not as high as it was when compared to the two wheelers and the wind.

The wind and the two wheelers have been the strongest growth for us in this quarter.

And coming to the second part of the question that is on the Vehicle Lifetime Solutions, well, while it appears that we have done better when compared to Q1’2023, but the first quarter of every year is always a low start for the Automotive Aftermarket or Vehicle Lifetime Solutions as we call it.

But surely, with the vehicle parc numbers increasing in the market, the demand for the after-market products also is going up.

Hence, strategically one of the reasons we also resorted to acquiring the B-to-B e-commerce platform exactly to facilitate the growth story of the Vehicle Lifetime Solutions products there.

Schaeffler India Limited April 26, 2024 PUBLIC

Mumuksh Mandlesha

So, fair to say in vehicle lifetime solutions, broadly, the growth has come across the product lines and sub-segments?

Harsha Kadam

Yes.

Also, what's also happening is the transition of BS-IV to BS-VI, which happened in 2020, now you will see more and more vehicles of BS-VI coming back for repairs and hence our portfolio of products, we have been proactively developing and now keeping them ready.

We have been able to service those vehicles that come back with BS-VI technology.

So, our product offering was also made ready and hence we are seeing now the good demand coming for the BS-VI products as well.

Mumuksh Mandlesha

I mean, the upcoming new emission norms like CAFE and BS-VII, how do you see the change in content per vehicle sir there?

Harsha Kadam

The content per vehicle?

Yes, rightfully when the BS-IV to BS-VI transition happens, obviously, the value of the product that we are offering is definitely much better as it has to conform and also perform to the new requirements of the new regulations.

So, rightfully if BS-VII were to come, yes, we are prepared, and we do have the engineering capabilities to reengineer our existing product to meet the new demands of regulations that do come in.

So, we have done that in the past, we will continue to do that going forward in future as well.

Moderator · Conference Operator

Next question is from the line of Rishi from Kotak Securities.

Please go ahead.

Rishi

Just a little bit more details on the export side of things.

While you alluded that we had seen a recovery across geographies, but at least in terms of end consumer segments, if you could comment like which are the important segments for us in terms of exports and where we are seeing some green shoots at least on a sequential basis, so any insights on that would be helpful?

And just one bookkeeping question.

Any CAPEX number which you would like to put it for CY'24, that would be helpful?

Hardevi Vazirani So, on export, these are our intercompany export, so we supply to our group companies, and they sell it to the end market.

The exports are mainly in industrial division, there are some parts in automotive also, but main is industrial division.

And your question on CAPEX, as we had committed that in three years, we will do INR 1,500 crores and this is the third year, and we will be keeping our promise.

So, despite 1Q number of INR 170 crores, overall full year still would be around INR 500 crores?

Hardevi Vazirani Can be over that, but we don't give the year guidance.

Moderator · Conference Operator

The last question will be from Mr. Balasubramanian from Arihant Capital.

Please go ahead.

Balasubramanian

Sir, on the localization side, like what kind of subsystem level products we are focusing on in the automotive segments.

Schaeffler India Limited April 26, 2024 PUBLIC

Harsha Kadam

I will not be able to give you specifics as to which product lines we are localizing.

All I can say is that our consistent effort to continue our investments to localize more and more in India is well on track.

Our localization percentage as of Q1 was at 77% and last year it was at around 75%.

So, we will continue to localize more and more and now our effort is also on to localize more and more at a component level for the automotive applications where we continue to import some high specialty products from Europe, we definitely want to localize that as well.

So, our effort is focused on localizing our purchases that we source from our suppliers outside of India as well.

That's a clear focus area for us.

Moderator · Conference Operator

Ladies and gentlemen, that was the last question of the day.

I now hand the conference over to Ms. Gauri Kanikar.

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].

Thank you and have a good day.

Moderator · Conference Operator

On behalf of Schaeffler India Limited, that concludes this conference.

Thank you for joining us and you may now disconnect your lines.

(This document has been edited for improving readability)

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