SKF India — Q3 FY24 earnings call

Call held 21 Feb 2024

Management summary

SKF India faced a challenging quarter characterized by a sharp growth slowdown to 1.5%, attributed to operational hurdles during an SAP migration in October/November and strategic 'customer pruning' in the wind sector. Despite these short-term headwinds, management remains bullish on the long-term India infrastructure story, targeting double-digit growth. The company is actively shifting its mix toward higher-margin services and localized manufacturing to offset the lower margins associated with its 40% traded goods portfolio.

Highlights

  • Revenue growth slowed to 1.5% YoY in the quarter, primarily due to SAP implementation challenges and portfolio pruning.

  • 9-month FY24 revenue growth stands at 5%, trailing the long-term target of 10-12% (GDP + Inflation).

  • Industrial segment contributes 50% of revenue, with Automotive at 40% and Exports at 10%.

  • Railways segment (7-8% of total revenue) maintains a strong 40%+ market share in passenger, locomotive, and metro segments.

  • Automotive localization is high at 90-95%, while Industrial localization remains low at 35-40%.

  • Wind business share declined from 8% to 5% following a conscious decision to exit low-margin contracts.

  • Management expects to maintain a PBT margin of approximately 15% despite transfer pricing volatility.

  • Annual capex for the listed entity is guided at ₹150 crores, up from the previous ₹100 crores.

Key financials

  1. Revenue Growth (Quarterly) 1.5% +1.5%YoY
  2. Revenue Growth (9-Month) 5% +5%YoY
  3. PBT Margin (Target) 15%
  4. Manufacturing Mix 60% +4%YoY
  5. Traded Goods Mix 40%

What they filed

Q1 FY27: revenue up 27.3%, net profit down 47.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue399 559 493 462 496 +24%577 +3%595 +21%588 +27%
EBITDA63 106 123 74 58 −8%82 −23%33 −73%88 +19%
Net profit94 110 203 119 106 +13%62 −44%-20 −110%62 −48%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

SegmentRevenue Share9M GrowthLocalization
Industrial50%5%35%
Automotive40%4%95%
Exports10%8%—

Guidance & targets

Revenue

  • Annual Revenue Growth Revenue · FY25 · Medium confidence 10-12%
    India's GDP growth is heading to 6% to 7% plus we have inflation of 4%-5%. So ideally, we should be growing at 10%-12%.

    — Ashish Saraf, CFO

Capex

  • Annual Capex Capex · FY24 · High confidence ₹150 crores

    Previously ₹100 crores → ₹150 crores

    This year I expect our capex to go to INR150 crores for SKF India... purely from SKF India standpoint, I expect that our capex investment is going to be in the range of INR150 crores for us as we move forward.

    — Ashish Saraf, CFO

Margin

  • PBT Margin Margin · FY24 · Medium confidence 15-17%
    current margins is around 15% pre-OECD, right? That's what we are seeing over there... 17 is a, is a, is a, I would say a lot better, better sense of the trend.

    — Ashish Saraf, CFO

Market Share

  • Railway Market Share Market Share · Medium Term · Medium confidence 50%

    From 40%+ today

    With respect to passenger vehicles, we have a market share of around 40% plus, with railways in general and we easily expect it to touch 50%.

    — Ashish Saraf, CFO

Risks & concerns

  • SAP Implementation Hurdles

    medium

    System deployment in October/November led to billing delays and inability to supply general machinery customers on time.

    Management acknowledged

  • Global Economic Regression

    medium

    Shrinking demand in Europe and other global markets impacts indirect exports through Indian OEMs like Bajaj.

    Management cautious

  • Counterfeit Products

    medium

    Counterfeit bearings continue to impact the aftermarket, particularly in the two-wheeler segment.

    Management acknowledged

  • EV Transition Volume Decline

    low

    EVs require ~30% fewer bearings (7 vs 10 in ICE), but management expects higher value per bearing to offset the volume loss.

    Both downplayed

Areas of evasion (2)

  • Specific profitability of the unlisted Ahmedabad entity.
  • Exact realization differences between ICE and EV bearings.

Q&A highlights

2 direct
Growth Slowdown in Q4 (Oct-Dec) Direct
What has happened is, one is we have had relatively lower growth in the Distribution market, right? And second is we also had a bit of an operational challenge in Q4. We basically deployed SAP, right?

Explains the sharp deceleration in growth from historical levels to just 1.5%.

Asked by Mirae Speaker

Wind Business Strategy Direct
We consciously took a decision to look at our portfolio for the wind business... and basically prune those customers, either exit those businesses or get a price increase. So, because of that, our wind shares relatively dropped.

Confirms a shift in strategy prioritizing profitability over volume in the renewable sector.

Asked by HDFC Speaker

Transfer Pricing and Margin Volatility Partial
My recommendation to everyone, don't look at margins for one quarter and take a decision. Look at for below one year... because what happens is that my cost of the products that I get from the groups... is based on the previous quarter margins.

Reveals that quarterly margin dips are often accounting artifacts of the group's transfer pricing mechanism rather than fundamental business deterioration.

Asked by ICICI Pru Speaker

2 min read 5 chapters

Detailed narrative

Operational Headwinds and SAP Migration

The quarter ending December 2023 was significantly impacted by the deployment of a new SAP system effective October 1st. This transition caused operational challenges in October and November, leading to billing delays and an inability to supply customers in the general machinery segment on time. Consequently, quarterly revenue growth plummeted to 1.5%, a sharp contrast to the company's long-term target of 10-12%.

Strategic Portfolio Pruning in Wind Energy

SKF India has undertaken a deliberate 'customer pruning' exercise in its wind business, which saw its revenue share drop from 8% to approximately 5%. Management cited low market pricing and insufficient returns as the primary reasons for exiting certain contracts. While this move has weighed on short-term growth, it is expected to improve overall portfolio margins as the company focuses on profitable segments.

Railway Segment: A High-Growth Pillar

The railway business remains a bright spot, contributing 7-8% of total revenue and growing at double digits. SKF holds a dominant 40%+ market share in passenger coaches (including Vande Bharat), locomotives, and metros. While the company is an approved vendor for freight (Class-E bearings), it is currently maintaining a lower market share (10-15%) in that sub-segment due to non-lucrative pricing in government reverse auctions.

Localization and Manufacturing Strategy

A key divergence exists in SKF's localization levels: the automotive business is 90-95% localized, whereas the industrial business is only 35-40% localized. Of the industrial manufacturing, only 25% occurs within the listed SKF India entity, with the remainder coming from the unlisted Ahmedabad factory or imports. Management aims to increase the manufacturing share by 1-2% annually to capture higher margins and reduce FX risk borne by the group.

EV Transition: Value over Volume

In the automotive sector, the shift to Electric Vehicles (EVs) presents a mix of risks and opportunities. While an ICE two-wheeler typically requires 10 bearings, an EV requires only 7. However, management notes that the price per bearing for EV applications is significantly higher due to technical requirements, which effectively offsets the volume decline and protects the top line.

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