Sterling Tools Q1 FY27 earnings call

Sterling Tools Limited delivered a robust Q1 FY27 performance, with total income growing by 23.7% year-on-year to INR201.9 crores. EBITDA increased by 26.9% year-on-year to INR31.1 crores, leading to an EBITDA margin of 15.4%, up from 15% last year. Profit after tax saw a significant rise of 48.4% year-on-year, reaching INR16.4 crores, with PAT margins at 8.1%. The company maintains a net debt-free status and strong cash generation, providing a solid financial foundation for its long-term growth initiatives.

The standalone fasteners business continued its strong momentum, driven by increased wallet share with existing customers and deeper OEM relationships. The company is currently operating at 90-95% capacity utilization. An INR80 crores capex plan for FY27, primarily for expansion in existing facilities, is underway, with a substantial portion kicking in during H2 FY27. This expansion is expected to enable the business to achieve a revenue potential of INR1,000 crores, with an additional INR25-30 crores capex planned for next year to support this target.

Sterling E-Mobility is strengthening its position as a comprehensive EV powertrain solutions provider, with a diversified portfolio including motors, integrated motor and controller solutions, and various chargers. SEM is engaged in 33 active customer programs and has secured business confirmations from 4 OEMs. The company expects 20-30% revenue growth for its EV businesses in FY27, accelerating to 30-40% in FY28, with a target to break even by FY28 at an estimated revenue of INR175 crores for SEM. Current capacity allows for over INR300 crores in revenue without further investments.

Sterling Tech-Mobility Limited is making steady progress in establishing a domestic manufacturing ecosystem for high-voltage DC contactors and relays. The business has secured 7 customer programs, with commercial supplies scheduled to commence from Q2 FY27. STML is also expected to break even by FY28, targeting approximately INR70 crores in revenue. The current capacity for STML is around INR140 crores on a 3-shift basis. The company is focusing on increasing localization to enhance value addition and improve cost competitiveness.

The company faced cost pressures from increased steel prices and broader inflationary costs across commodities like chemicals, tungsten, and minimum wages, with some areas seeing increases as high as 35%. While a pass-through mechanism is in place, there is a typical 2-4 month lag in negotiations. Despite these headwinds, management is confident in maintaining a healthy margin profile through disciplined cost management, effective inventory management, existing pricing arrangements, and operational efficiencies.

SEM is currently making losses, primarily due to an anchor customer in-sourcing product in FY25, which led to a loss of approximately INR280 crores in revenue. Additionally, the company continues to invest significantly in product engineering, design, and development for its EV offerings. The Indian EV ecosystem is still nascent and dependent on overseas technologies. However, the company is building its capabilities and competencies across the EV value chain, with new product lines like onboard chargers and multifunction units expected to commence supplies by December 2026 or January 2027 after on-road trials.

Sterling Tools has signed a partnership for ADAS and driver monitoring solutions. A regulation mandating Level 2 ADAS for medium and heavy commercial vehicles is expected to kick in from January 2028 (pushed from October 2027), impacting approximately 0.5 million units annually. A similar regulation for passenger vehicles is in draft for 2029. The company is actively involved in drafting the standards for 2-wheeler safety rider assistance solutions, positioning it well for future opportunities in this evolving market.