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    SKF India

    SKFINDIAGood
    Capital Goods·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

    8

    • 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.

    What Changed1

    vs Q4 FY24

    Risks discussed3 → 4 (+1)

    Key financials

    Single quarter

    05 metrics
    1. 01Revenue Growth (Quarterly)1.5%+1.5%YoY
    2. 02Revenue Growth (9-Month)5%+5%YoY
    3. 03PBT Margin (Target)15%
    4. 04Manufacturing Mix60%+4%YoY
    5. 05Traded Goods Mix40%

    Segment breakdown

    Revenue Share9M GrowthLocalization
    Industrial50%5%35%
    Automotive40%4%95%
    Exports10%8%—
    Heatmap· 3 shared metrics

    Guidance & targets

    4
    CategoryTargetPriority
    Revenue
    Annual Revenue Growth
    10-12%
    		Medium
    Capex
    Annual Capex
    ₹150 crores
    		High
    Margin
    PBT Margin
    15-17%
    		Medium
    Market Share
    Railway Market Share
    50%
    		Medium

    Risks & concerns

    6
    RiskSeverity

    SAP Implementation Hurdles

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

    medium

    Global Economic Regression

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

    medium

    EV Transition Volume Decline

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

    low

    Counterfeit Products

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

    medium

    Areas of Evasion(2)

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

    Q&A highlights

    3

    “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

    2 min read5 chapters

    Detailed Narrative

    01

    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%.

    02

    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.

    03

    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.

    04

    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.

    05

    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.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.