Schaeffler India Ltd

NSE:SCHAEFFLER

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Schaeffler India Limited Q2 CY '23 Earnings Conference Call. [Operator Instructions] 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.

[Gauri Kanikar, executive]

Good morning, everyone. Thank you for joining Schaeffler India Limited's earnings conference call for the second quarter and 6 months ended 30th June 2023. We have with us from the management today, Mr. Harsha Kadam, our Managing Director and Chief Executive Officer; and Mr. Satish Patel, our Director, Finance and Chief Financial Officer. Mr. Kadam will first take us through a short presentation on the results, after which we will open the floor for questions.Over to you, Mr. Kadam.

[Harsha Kadam, executive]

Good morning to all my investor friends, welcome you to this earnings call today of quarter 2 2023. Let me take you through the presentation first, and I would appreciate and request you to refer to Slide #2. Today, I will be taking you through the economy and the industry, throw some light on the business, how did we do with the second quarter and 6 months ending 2023, after which, I would take you through the financial highlights for the same period, and then talk a little bit about our future drive towards ESG and what we are doing there.I move to Slide #3 now. Let me start by talking a little bit about the economic situation, and we believe India still remains a bright spot in the world economy. All the necessary appropriate indicators are showing that we are on a good track as one of the fastest developing economy in the world. Six months back, IMF had issued a GDP of 5.9% for India, which got revised 2 days back to 6.1%. The World Bank still holds the GDP for India at 6.3%. When you look at one other important indicator, which is the foreign direct investments that are coming in, we had record inflows of FDIs coming in, in the last 2 quarters. Of course, in the second quarter, there was a bit of a drop, but nevertheless, it is still at an all-time high. What we have seen is also the clear focus and drive by the government in the areas of Make in India or the PM Gati Shakti projects or the extension of the PLI schemes into other sectors, even enabling the exports to go up, as well as liberalizing the FDI norms. So, we see all reforms happening on all the fronts. So that said, we believe that the strong growth would continue in India.I would now throw light on the automotive production. Please partner for the misrepresentation of the bar graph there. While what we are showing is the percentage over the same quarter last year, the way it has been visually represented is incorrect, so pardon me for that. What you see in the automotive growth as well, we had some mixed bags. When you look at the passenger vehicles segment, while the segment as a whole in Q2 was down 6% compared to the preceding quarter, but it was up 7% compared to the same period last year. Commercial vehicles, on the other hand, too, which was down 13% over the preceding quarter, actually have slowed down a bit. It was down minus 2% when compared to the same quarter last year. Some recovery we are able to see is in the 2-wheeler sector where over the preceding quarter, we have seen a 12% jump in production of 2-wheelers, and it remains flat at the same level as Q2 of 2022.Talk about the index of industrial production, and what we see is good growth in the cement production, steel production in the country, obviously, riding on the back of the infrastructure drive and push, which the government is clearly focused and investing in. That said, cement production grew almost 6.2% compared to the same period last year. Steel production grew in double digits, up 12% over last year. And coal production, well, is lower than the preceding quarter, but definitely strong growth of 11% compared to the same period last year. Power generation, on the other hand, for the first quarter end and beginning month of the second quarter was down. However, we have seen some uptick in the month of May. June numbers are still to come in here. So, the core industries grew in Q2 -- was 4.3% growth that it has registered across the country and a half yearly level at about 5.9% growth is what we have seen.I move to the next slide, which is throwing light on the automotive sector performance. And here, what you would see is the -- I just talked about the 2 and 3-wheelers. As we can see, the 2 and 3-wheelers have been having a flattish growth rates when compared to the last year same period. Commercial vehicles up 2.4% compared to the same period last year, and passenger vehicles still showing a 10% growth over the same period last year. Tractors, on the other hand, still remains at about 9% on comparative levels. So, we have seen some softening in the commercial vehicle sector, owing to the price increases that have been initiated in the marketplace, as well as the technology changes pertaining to the BS-VI Phase 2, which are being implemented.I move to Slide #6 and which is where I'll be talking a little bit on the business highlights. Let me take you to Slide #7, which gives a summary of our performance in the second quarter. So, to sum it up, in the second quarter, automotive technologies continued to show a strong growth of business despite some subdued market conditions in some of the sectors. We've also seen a strong growth in our automotive aftermarket on the back of more network penetration that we have done, as well as expansion of our product portfolios that we have seen. On the other hand, industrial growth -- industrial business, we have seen some uptick in some of the sectors, particularly wind, which has been languishing. We have seen some recoveries in the month of June in terms of demand coming back pretty strongly. And we have seen some uptick even in the 2-wheeler sector, which has helped the industrial business continue on its growth path.We also continue on our journey of investments into our plants in terms of capacity expansion. So we recently inaugurated the Savli Hall 2, wherein we will be bringing in more localization of more products that are going to happen in this plant as well, as well as our Hosur greenfield project, which continues and is progressing well. We have seen also some good demand on the domestic business in terms of some of the sectors. Even the raw material sectors have seen a pretty strong demand uptick there, while our own exports, we saw some moderation coming in due to the situation in Europe as is prevalent today.On the journey of ESG, we have started on this journey. And while we are on this journey, we are now getting recognition, which I will share in a while, on some of the projects, one in particular being the water conservation projects, which we have started to now initiate across other locations as well.So all in all, we had a challenging second quarter, but I must say that we have managed the businesses pretty well in terms of securing these low wins that we have -- the low-hanging wins, as well as at the same time, we look forward to the second half, where we believe that there's still going to be some sluggishness in terms of global demand. But the domestic demand uptick, if it were to sustain, we would be in a better position here as well.So to sum it up, on the sales growth, we were able to bring in INR 1,829 crores on to the top line, which is 4.6% higher than the previous quarter -- same quarter of the previous year and 8% better than the preceding quarter of this year. That resulted in an EBIT margin of INR 294 crores coming into the system. And we have been able to sustain and hold the EBIT margin at 16%, which is at the same level as the Q2 of last year. This led to low a profit after tax margin of 13%, bringing in INR 237 crores, and it remains at the same level in terms of the percentage of margin that has come into the system.Talk about the free cash flow, this was one of the strongest quarters for us, where we were able to bring in INR 109 crores into the system in this quarter, which is comparatively higher, almost 37% better than the same quarter of last year and compared to the preceding quarter. The preceding quarter was a very low quarter, which you'll see in the next slide as I move to Slide #8.On Slide #8, I also want to highlight that our sustained good performance is the result of our strong customer engagement activities in terms of business identification and business conversions that we've stayed focused on along the year. So just to throw light on some of them, in the automotive technology area, we have been able to secure new business wins for the passenger vehicles for the wheel bearings on some of the new models that are getting launched, as well as some of the light vehicle clutch systems, and medium and heavy commercial vehicles' heavy-duty clutch systems where we have secured beyond 280 millimeter [ dia ] clutch businesses, which we have resulted into series productions starting off going forward now.On the automotive aftermarket front as well, the recently launched battery for the 2-wheeler market, which was introduced, we have now started to expand the reach of this product across the breadth of the country. We have gone into now launching it into 2 other states as well. In addition to that, of course, we have started to add on new products conforming to the BS-VI norms as the vehicles are coming to a maturity level for vehicle parts replacement. And we also look forward and continue to penetrate into new markets, as well as bringing more new products as we see enough opportunity in the automotive aftermarket space.Talking of the industrial business, here again, we have secured quite a few business wins, be it in the railway sector or be it in the packaging machinery sector, or some of it is also in the robotics sector that we are able to secure. Not to [ left ] far behind, we have also secured bearing businesses in the electric 2-wheeler segment as well. So that said, our focus in working with our customers at an early stage, getting involved at an early stage, engaging with them right through the development process continues.Moving on, I move to Slide #9, just to throw light on the 2-wheelers battery that we introduced under the Schaeffler TruPower brand. We have focused a lot on bringing out performance and value creation for our end users, as well as at the same time, we have made sure it brings in a longer life in terms of the technology that we have used, in terms of the purity levels of the content that go into battery making, as well as long-life terminals that are one of the most corrosive regions within a battery. We have been able to focus on ensuring that we offer a better, superior product with better performance quality as well.I move to Slide #10 to throw some light on the expansion of the industrial production capacity at Savli. And we have added another 10,000 square meters of production space additional. The picture on the right, which is encircled, is the new building that was inaugurated in the month of June. And the hall is now ready to receive the machineries, which have started to flow in. Some of the key processes that we are investing in are the heat treatments and the grinding processes, as well as we are focusing on sectors such as the wind energy, heavy industries and the railway sectors. So products that we are going to manufacture here is going to cater to these 3 sectors. Some of the products are the spherical roller bearings and also the tapered roller bearings, which would be made in this new hall that we have just inaugurated.That's it. I move to the financial highlights now and throw some light. I would move to Slide #12. So, as I did mention, the total revenue generation in the second quarter of this year was INR 1,829 crores, which was 8% better than the preceding quarter and 4.6% better than the same quarter last year. Now, where did this come from? I draw your attention to the right side of the chart, wherein our year-on-year growth was backed by good domestic demand. And the automotive technologies, as you have seen, compared to the last year, grew almost by 10.3%. And the automotive aftermarket, we were able to deliver almost close to 24% growth compared to last year, whereas the industrial was down minus 2.3%, fundamentally contributed by the slowdown in the wind segment in the Q4 of last year and Q1 of this year. And our exports, as I already said, has softened and moderated and was down by minus 3.5%.However, when you look at the 6-month picture compared to the same period 6-month last year, our automotive technology business, we have still posted 15% better than the same period last year, and the automotive aftermarket was 21% better than the same period last year, while industry was down 5% and export was up 3%.I draw your attention to the revenue bridge now. And the last year in the same quarter of Q2, we brought in INR 1,749 crores onto the top line. But this quarter, as I said, we have brought in INR 1,829 crores. If I were to look at the split of where the revenue generation has happened, INR 697 million or INR 69.7 crores came in from the auto tech space. The automotive aftermarket brought in INR 35 crores, and Industrial is still down marginally and export is down marginally. We have always been saying that our beautiful balance between the industrial and the automotive space helps us to manage to post better performances, to rejig our strategies going forward as well. And you see it again here with automotive technologies contributing 41% of the sales mix, industrial contributing 34%, export contributing 15% and automotive aftermarket contributing 10% of the sales mix.I will move to Slide #13. And here, I would like to talk about the quality of our earnings. And I must say that in spite of a challenging quarter with some of the macroeconomic situations headwinds that we were facing, our earnings quality still remains resilient, and we were able to show that resilience in our performance. So just to throw light on the EBIT, the EBIT we brought in, in the second quarter was INR 294 crores, which was definitely 8.7% better than the preceding quarter, wherein we had brought in only INR 274 crores. And as you can see, compared year-over-year on the same period last year, 7.3% growth, resulting in an EBIT margin of 16.1%, which is definitely better when compared to the Q2 of last year, which was at 15.7%. So where did the EBIT margins come from? And when you look at the bridge below, you will find the volume development or the increase in our sales revenue contributed almost INR 56 crores to the bottom line. And we did have some onetime employee costs as we are expanding and our CapEx expansion -- we have to recruit more employees coming into the system, so you see -- which was not there in the quarter of last year, and then some of the depreciation costs. And we do have some other income/cost in terms of our spend that we have incurred due to some of our branding activities and some other expenses that you see. Overall, I must say, a very strong performance on the EBIT of INR 294 crores and sustaining to keep the EBIT margin at 16.1%, resulting in a profit after tax of INR 237 crores in the second quarter, which is 8.2% better than the same -- than the previous -- of the preceding quarter and a 5.1% better profit after tax than the same period last year.And moving on, I would like to move to Slide #14 to throw some light on the working capital and our CapEx spend. As you can see, we did some corrections in our inventory levels in the last quarter of last year, which spilled over into the first quarter as well. And I must say that we have been managing pretty well on our working capital levels. And working capital to sales as a percentage, we are at about 19%, which we believe is the optimum level of working capital that we want to remain at to ensure better serviceability to our customers.In terms of our CapEx spend, we had said that we have increased our CapEx as a percentage of sales to 6% to 7% level last quarter. We continue to sustain the same growth, and we continued to invest in our capacity expansion projects even in the second quarter, investing close to INR 135 crores in quarter 2 alone. Look at our free cash flow, and what we see is one of our strongest performances in quarter 2. Compared to the preceding quarter, we were able to bring in almost INR 109 crores as compared to INR 80 crores compared to the same period last year. Quarter 1, we were very low. We had a negative performance on the free cash flow at an year-on-year level. So we have improved by [ 37% ] in terms of free cash flow performance.I move to Slide #15 now to just explain a little bit on the indicators, so to say. So, to sum it up, I refer to the Q2 2023, which is the first column and draw your attention to look at the 6 months 2023 as well. So I've already talked about the Q2 2023 revenue numbers, as well as the financial indicators. Let me talk about the 6-month period. And as you can see, the revenue end of the half year is INR 3,523 crores as against INR 3,300 crores, which was there last year same period, which is a clear 6.2% better performance than last year.Talk about our EBITDA, our EBITDA was INR 671 crores compared to [ INR 636 crores ] of last year, and the margin, we continue to keep it at 19% as such. On the EBIT at a half yearly level, INR 565 crores as against INR 534 crores with an EBIT margin of 16%, resulting in an earnings before tax of INR 612 crores compared to INR 563 crores of last year with an EBT margin of 17.4%. The profit after tax at a half yearly level, we are at INR 456.7 crores compared to INR 432.9 crores, and we sustained a profit after tax margin of 13%.As I said, our CapEx increase is visible here. At a 6-month period, we have so far invested INR 253 crores as against INR 216 crores last year. And I already touched upon, our free cash flow performance has been strong free cash flow in the system in the second quarter of this year.With this, I would like to now talk a little bit about our journey on ESG, and I move to Slide #17, wherein we -- what you see is the sustainability road map, which we are pursuing. And we have a clear long-term commitment to get carbon neutral and with clear short-term goals as well. Now at Schaeffler India, we have taken up 8 targets under sustainability, which are visible on the slide here. So the first target is on energy efficiency and where we have to get energy efficiency gains at an annualized gain till 2024 at 4 gigawatt hours. And we also want to ensure that we have -- entire chain becomes climate-neutral by the year 2040. And our suppliers, too, our target is to get 90% of the production materials that we source from our suppliers have to be from sustainable processes. And for that effect, we have already completed the self assessment last year. We will now pursue to take this to the next higher level.In terms of fresh water supply, which is the fourth targets that we have, we have taken a target to consistently reduce 20% freshwater supply consumption until 2030 on a year-on-year basis. We have clear targets set up here, and we have projects running to that effect. Talk about renewable energy usage, and our target is to ensure that all our plants use 100% of the power that we buy has to be from renewable sources by the year 2024. We have various projects in terms of power purchasing through renewable sources -- renewable generation sources, as well as investing in solar power in our own generation sources, as well as on projects to look at, can we try to improve the energy efficiency itself in terms of energy usage in our plants? So these are the projects that we have been pursuing, and we'll continue to sustain them.One other important element is the safety of our employees on our manufacturing sites. And clearly, there too, we have targets, where we have set a 10% average annual reduction in our LTIR rates or the accident rates as we measure by the year 2025. We continue to reduce year-on-year 10%. Talk about diversity and inclusion, and we believe we have taken targets here as well in terms of gender diversity. And our target is to get 8% of our population or employees working to be females by the year 2025. All of this resulting in all the 4 plants, Schaeffler India plants in India to become carbon-neutral in their production processes by the year 2030.Now that said, I'd like to move on to the next slide, Slide 18, just to throw light on one of the projects under our ESG drive under the corporate social responsibility, which we had started way back in 2019 and which has now started to deliver significant impact to the society and the community that we operate in, and the project being Jal Sahara, which was a water conservation project, wherein almost close to 180,000 meter cubes of water we have been able to conserve over the last three years since the time the project has started. And this project has been now received accolades and recognitions from various agencies and various forums, and 3 of those I'm showing here on the slide here. This is a big matter of pride for us here that the community and the societies that we operate in, we have a responsibility and we demonstrate that responsibility here. So various bodies, be it the CSRBOX or be it the CSR Journal, or for that matter, even the ASSOCHAM, have all recognized for this Jal Sahara project, and we will continue to sustain this. To draw inspiration from this project, we have now initiated 2 more water conservation projects: one near Hosur in Tamil Nadu, and the second one near Baroda in Gujarat. Now these 2 have been just initiated, and hopefully, we will see some recognitions coming our way from these projects as well.So I move to Slide #19 and to sum it up, we had a strong performance for the quarter across all the domestic businesses, yet our exports moderated a bit in terms of the ongoing situation in Europe and the global demand softening. We also kept our focus on the countermeasures that we operate with in terms of volume gains and also improving the efficiency of our operations to deliver strong earnings quality, which you have seen already. We will continue to keep the focus on investing in our capacity expansions at both our Savli and Hosur plants. And yes, the market and the external environment is pretty volatile and pretty challenging. However, we will remain optimistic, taking judicious decisions to adjust our sales to stay on the course to get to the target so that we deliver the promised value to all our stakeholders.With that, I come to the end of my presentation. Thank you so much.

[Operator]

Sir, shall we open the floor for the Q&A session?

[Harsha Kadam, executive]

Yes, please.

[Operator]

[Operator Instructions] We have the first question from the line of Vimal Jamnadas Gohil from Alchemy Capital Management Private Limited.

[Vimal Gohil, analyst]

Sir, my first question is on expenses. If I were to understand right, given the fact that our entire exports come from the parent entity, which has been focusing on bringing some of the production lines in Europe to India to cater to markets in Asia Pacific and beyond. Now I understand the macro part, which has been challenging, but the share increase of India itself should have led to some growth, so if my -- which has not happened. So if you could highlight what was the issue there?The second question is on the passenger vehicles growth. You highlighted in your presentation that the production growth has been about 10%. Now if I were to look at our core automotive growth, that has been pretty much in line with that. But given our increase in content per vehicle, our growth should have been slightly higher over there because most of our -- a large portion of our automotive is coming from passenger vehicles.And lastly, sir, if you can highlight what is the full year CapEx that we are looking at for CY '23, including our expansion at Savli and Hosur?

[Satish Patel, executive]

I'm Satish Patel here. Let me take your first and the last questions. The first question is related to exports. Now let me give you a little preface in regards to our export strategy, as well as what all we have done for this business. We have this strategy of expanding exports. We are not only having our business exports with Europe or confined to Germany, but all the continents. As part of our strategy, we have significantly grown in exports. If you see, our growth in exports for the last year, that is 2022, that was over 40%, if I remember correctly. It could be even higher. Last year, not many product relocations also happened as part of our strategy, and that is continuing. On that level of growth, this year, despite the global slowdown of the economy, we have grown in exports for 6 months by about 3%. Now 3% growth that we have recorded for 2023 half year is on a very high base of 2022. In my opinion, this growth itself is quite satisfactory. However, we have to also keep in mind that global conditions are not favorable. Germany economy is in decline by 0.5% negative. Western Europe is growing only at 1%. U.S., the market that we serve, which is North America, is growing at around only 2%. Asia is definitely growing. India is growing significantly. But also if I look at the Southeast Asia, that is growing close to 3.7%, 3.8%. And our business exports is in all the continents, and therefore, we have been able to record this 3% growth. Just to share with you that our export comes almost 35% exports to Asia, largely to Southeast Asia; 40%, 45% to Europe; and 10% to 12% to U.S. and 10% to 12% to China. Because of this mix, we have been able to also ensure that there is a consistent growth.So there were 2 significant parts of our strategy. One, focus on localization and relocations. That has been -- worked quite well. Second, sectorial mix that is present in all the continents. That has also been helping us in order to sustain the growth. It is unfortunate that this year, we have the economic slowdown, particularly the global economy slowdown, Europe, and therefore, there is an impact on our exports. Also coming back to our strategy of exports, as far as our -- whatever localization strategy is concerned, that is on track and that is going to further bring sort of some growth in exports. And therefore, we are of the opinion that we are on the right track as far as exports are consent. And focus on this business is concerned, that also contributes significantly to our performance. And therefore, the strategy is very much intact.Coming to the -- the third question I take first, which is, I think he wanted to know about the CapEx for the full year. For the full year, our plan is to -- and this we had announced in the last quarterly call as well as in the previous earnings calls as well that for the full year, we would have a CapEx outgo of close to INR 550 crores. So it would be above INR 500 crores. For the half year, we have already spent over INR 250 crores. We are on the right track. We have spent for capacity expansion at Savli plant. The new plant, which got inaugurated in June, is fully ready now and that will start delivering the production. Also for Hosur, the plant construction has begun. And for other locations, which are Talegaon for automotive as well as Maneja for industrial business, we are working on the CapEx -- we are working on the expansion and also having CapEx there. Connected to that, I also want to highlight one point that if you see our 6 months' growth, we have grown in the operational area, which is the production and capacity expansion, by 10%. Our trading is in decline, but manufacturing is increasing. This also brings a better mix, and that has helped us retaining the profitability. And this has also helped improving the capacity utilization from the level of 77%, [ 78% ], 79% to over 86%, 87%. A reflection of that -- a reflection of all of this is there that you can see in the quarterly results as well as the half yearly results.Yes. I will hand over to Harsha the second part of your question related to passenger vehicles.

[Harsha Kadam, executive]

Yes. So Vimal, to explain -- there were 2 parts to the question that you asked, one being on the content per vehicle and second was our share or our growth with respect to the passenger vehicles sector. Let me put up some data points to validate that. If you were to look at -- based on the SIAM report, look at the first quarter and the second quarter production numbers, the passenger vehicle production numbers were 10% better than the same period last year. And if I were to compare that with the sales that we do, obviously, because our sales and their production is what we need to compare with, if you look at our sales to the passenger vehicles segment, we have also grown by 10%. So we have not lost share anywhere. Let me now give another data point. If you look at the quarter 2 in isolation, in the quarter 2, the passenger vehicle production was down 7% lower numbers than the preceding quarter, whereas our performance, we have remained flat. We have remained at the same level, which means we have sustained our growth. We continue to grow.While that's on the passenger cars, let me draw a little attention on the commercial vehicles. Commercial vehicles, if you look at their production numbers, for the first half of the year, it has not grown at all. It's just about 1% growth, whereas our business in the commercial vehicles space has grown 22%, clearly validating that our focus and our strategy to look at growing our business in the commercial vehicles space is yielding results. Let's look now at the tractor, which is another segment. And here again, while the segment production itself was 9% up compared at a half yearly level, our business was up 21%. So, all the key numbers, indicators are showing that we are doing pretty well in terms of driving our growth strategy in the auto tech space as well.Coming to the content per vehicle, yes, I did say that for the gasoline engines and whatever small quantity of diesel engines that are being produced in the country today, our content per vehicle remains in the range of EUR 50, which we still continue to keep the numbers. We are better there. We have not lost. Our content per vehicle has not come down. What is helping us here is, the improved growth in the commercial vehicles space, where the content per vehicle is much higher is where we are seeing good successes coming in. So in a nutshell, on the passenger vehicle of the automotive business space, we have posted pretty good numbers compared to what the industry has actually done.

[Vimal Gohil, analyst]

Understood.

[Operator]

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

[Harshit Patel, analyst]

Sir, in past few years, there have been many acquisitions by the parent company in the industrial space, including that of Ewellix and Melior Motion. So do we plan to introduce this product in the domestic market or those products are already present here?

[Harsha Kadam, executive]

Harshit, let me take one by one. There were 2 major acquisitions that were done in our Industrial division, our industrial business. One was Melior Motion, which happened 3 years back. This was into high-precision planetary gearboxes, which is going into a variety of applications, particularly in high-precision drive applications like robotic arms, be it in the industrial robots or even cobots for that matter, as well as some of the automation industry, where -- the machine tool industry, which needs these kinds of high-precision or ultra-high-precision products. Now, when the acquisition was made, the company was already doing some amount of business in India. They did have a small trading operation. They did not have any manufacturing setup. And by virtue of the acquisition that we have made, we now have integrated the local footprint, whatever it was -- it was an office with a sales team. They have been integrated into Schaeffler India's portfolio. And now, we have been aggressively driving the growth story for Melior.The same is the case with Ewellix. Ewellix, as a company which was acquired, is into linear drives. And this is, again, focusing on the machine tool industry, as well as the packaging goods industry. And we have secured quite a few business wins here as well. And the integration in India, where, again, they have a trading office with a team, is well underway right now. I must say that the local competence that we have been able to integrate comes with rich experience of the Indian market and the product knowledge and the application knowledge.So we have integrated the entire team, which was there by way of these acquisitions into the Schaeffler India team. And now, we have taken over the full responsibility. We have a clear strategy now set out for the next 5 years to start to grow these new acquisition businesses. Do I answer your question?

[Harshit Patel, analyst]

Yes, sir, understood. Sir, secondly, I wanted to understand our auto aftermarket segment a little better. What percentage of sales of this segment do come from own manufactured products vis-a-vis traded products? I believe wipers, lubrication systems, batteries that you have recently introduced, all these would be traded products. On the other hand, shock absorbers, center joint support, these would be manufactured by us right?

[Harsha Kadam, executive]

Yes. Good question, Harshit. Our focus continues and will remain on our own manufactured products because they are the ones which really add true value to the end user, as well as to our OEM customers, who buy these products by way of the OES route as well. So that said, out of the total business that we do, more than 90% of the business is towards our own manufactured product. Less than 10% would be coming out of the white label goods that we do, which are mostly traded. And I guess this equation will continue to remain the way it is because we will continue to invest and focus on capacities, as well as in development activities, when it comes to our own manufactured products.

[Harshit Patel, analyst]

Sure. So, no plans to set up the batteries manufacturing footprint, right? This will continue to be manufactured by our partners.

[Harsha Kadam, executive]

For the white label goods, our business model we like to pursue is to work with our strategic partners, and we work with them in terms of putting in the quality systems, in terms of validation, in terms of homologation, and we make sure that the products meet the performance standard and the quality standards of Schaeffler, but we will definitely not be manufacturing those products. But we will handhold and work with those suppliers to reach the expectation of the set standards of Schaeffler.

[Satish Patel, executive]

And also, just to add one comment that our core business, our core portfolio of bearings, clutches and engine component, we continue to focus on that. Our white good addition in aftermarket business is actually in order to leverage our own core business reach to the market because that helps offering the comprehensive products, including the [ peak ] and the package -- as a package, we are able to offer to the aftermarket, and that helps us actually growing the core business as well. So while goods definitely enables not only the additional revenue but helps actually driving the overall core business. So, that is also one of the important reasons.

[Harsha Kadam, executive]

Also, if I may add to what Satish just said, when we hear the voice of the customers, and in this case, our distributors, where we have an extensive reach, they too voice that Schaeffler is a strong brand in the marketplace, and these are products that definitely would be adding more value to the customer, and hence, it will be good we offer them a portfolio of products rather than just stick with our own manufactured products.

[Harshit Patel, analyst]

Understood.

[Operator]

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

[Mukesh Saraf, analyst]

My first question is on the auto business. We noticed in the last few quarters, there is a flattening out there, and you did highlight about the weakness in the wind energy business. But now with Savli expansion more or less ready, and I think you had also mentioned about some products there on tapered roller side and the spherical roller side, could you give some sense on are these new markets that you will be now trying to get into with this new production? If you could give some sense of what could be the opportunity there from these new products that you'll be coming out with at Savli?

[Harsha Kadam, executive]

Okay. Let me try and break the question into parts. I already talked about the automotive. We do see some sluggishness still. They are not out of the woods when it comes to the chip shortages. So we will continue to watch, monitor the market and accordingly keep adjusting our tactics to be relevant in the game.Let me talk about wind since you are the first one to ask a question about wind. What we have seen is, in the last 4 quarters, wind was continuously coming down in terms of the number of equipments that were produced in the country. The Q2 was the first quarter and that too more so in the month of -- some of it in May and the rest in June, we saw a strong uptick in terms of production increasing, the numbers going up, which actually has helped the second quarter numbers to go up. If I were to just throw some data here, the second quarter, the number of wind equipments that were produced in the country was 16% higher than the preceding quarter. So there was a strong 16% uptick in terms of demand. And our business, to that effect, to the wind sector, was up by 31%. Obviously, the mix was helping us here as well in terms of the products that the customers wanted. So we have been able to leverage the bottoming out and the turning around. What we are looking forward to is that this growth story of wind continues to sustain. For that, we will have to cautiously monitor for the next few more months to see if this trend will continue.And the last one was about the capacity in Savli, where we are investing in some of these products, exports as well as for [ India ]. Yes, as I said earlier during my presentation, the expansion of our Savli project, wherein we are bringing in additional spherical roller bearing lines, we are bringing in tapered roller bearing lines, as well as a lot of facilities in terms of heat treatments, grinding and so on, these are primarily focused on the wind, and some of it is on the raw material sector, and the rest is for the railway sector that we are investing in.

[Mukesh Saraf, analyst]

So the question was more relating to, are these products that you're currently not catering -- I mean, segments that you're not catering to with these products, and so it's like a new market that you're targeting for these products within, say, wind or railways?

[Harsha Kadam, executive]

Okay. Let me clarify that. We have been catering to these customers by way of our imports, meaning manufactured in the plants outside of India. We were bringing these products into India and offering it to our customers. We have a clear strategy to increase the localization content, meaning that we begin to make those products in India rather than import, and we have already started to see the impact of that. Our own manufacturing content in the second quarter sale has gone up to almost more than 76% already. So clearly, our localization is a key strategy for us, exactly in line with the government's drive of Make in India. So we have a strategy wherein we will continue to bring more and more products to be made in India. And we also export them, plus we feed the Indian market as well. All these days, some of these product lines, we were entirely importing, which we now want to make here.

[Mukesh Saraf, analyst]

Right. And just one last one, if I may squeeze in. You had mentioned about getting into bearings for electric 2-wheelers. If you could give some sense on, is the content here much higher than, say, a regular ICE 2-wheeler in terms of the bearing content?

[Harsha Kadam, executive]

Yes. Some of the applications within the electric 2-wheeler space would need bearings with different engineering specifications. And it depends -- some of them would not change in the specifications. Some definitely would change. So bearings that go into high-speed motors, obviously, would require different performance parameters to be met with. So, that said, we have reengineered our products to fit -- meet those specifications as well. And accordingly and appropriately, as bearings, we have been able to position those which go into the high-performance needs. We will be catering through those new specifications that we have come out with and some of the businesses we have started to -- already acquired. So nutshell, yes, we have the capabilities, both the engineering capabilities as well as the production capacities, to offer such products even in the electric 2-wheeler space.

[Operator]

The next question is from the line of Rishi Vora from Kotak Securities.

[Rishi Vora, analyst]

I just wanted to understand what is the current business mix of bearings versus non-bearings for us, as well as within bearings, how much of our revenues is derived from, let's say, wheel-end bearings, engine bearings? If you can give any color pertaining to that, that would be helpful.Secondly, any comments on how the railways segment is doing currently, how has ordering been over the last 2, 3 quarters, and what are your expectations?And just last question on the electric 2-wheeler side. So let's say, if you are supplying X content to ICE 2-wheelers today, once the full transition happens to electric 2-wheeler, how will the content -- the overall content -- because the number of bearings will be lower in electric 2-wheelers. But as you highlighted that because of high motor, the specs would be different. So if you could give any color around that, that would be helpful.

[Satish Patel, executive]

Okay. Rishi, the content as far as our total portfolio is concerned, bearings, we have 60% of total -- out of total product portfolio, bearings consist of 60%. And other components, which are engine transmission solutions, particularly clutch business, and engine components consist of 40% of the product portfolio.The second part of your question was, within bearings, which types of products we have? Now that is detailing into some 5, 6 major segments, and the detail would be provided by our IR Head to you later on because we want not to spend time spelling out each of these segments and how much is the mix.The third part of your question was related to railways, and I could not connect the question. So maybe, if you can repeat the question or...

[Rishi Vora, analyst]

How is railways and how are we doing it? That was the question.

[Satish Patel, executive]

Okay. So would you like to...

[Harsha Kadam, executive]

So like we had shared even in the last quarter's investor call, we have secured some wins even on the Vande Bharat trains that are now launched, and we will continue to secure new business wins on the new projects that the Indian Railways is driving at. On the other hand, even the metros, which is fast expanding in the country, we are very strongly positioned there as well. We enjoy a very good market share there. So overall, both put together, we -- our strategy -- I just talked about our localization strategy, where the inauguration of the Savli Hall and the product portfolio that we want to manufacture, one of it is also for the railways. We will continue to build on it. So rightfully, we will be localizing a lot of parts for the railways, which have been missing for some time. We will continue to now do that more and more. And certainly, we believe that all the future projects that the Indian Railways is aggressively driving, we will be able to be a strong contender to play the game accordingly there as well.

[Operator]

The next question is from the line of Deepak Jain from Enam AMC.

[Deepak Jain, analyst]

Can you give some color on the 2in1 clutch, which you develop for EV OEM? What is the status of that? And is it a domestic OEM or an export OEM?

[Harsha Kadam, executive]

Deepak, unfortunately, I will not be able to share those details. It's a confidential project. Pardon me for that. But yes, it's an important project for us, but I would not like to go into the details of the project at this point in time.

[Deepak Jain, analyst]

In the last call, you said that it's a EUR 300 million opportunity over a 7-year period and commissioning will start from next year's...

[Harsha Kadam, executive]

Yes. All I want to say is the project is well on track. And we have a clear localization plan, yes. And things are working as planned -- according to plan. So, as of now, that's the way it is. But we are on track.

[Satish Patel, executive]

And when we announced also this strategy, we did mention that as far as the transition to e-mobility in India is concerned, we would be ready early enough. And we are happy to say that we are ready early enough.

[Deepak Jain, analyst]

Okay. Second is on this plant relocation, just some clarification. Does it bring incremental revenues also? Or it helps margins?

[Harsha Kadam, executive]

It's all inclusive.

[Satish Patel, executive]

It [ will improve ] the competence on the manufacturing. It brings competence on the technology, engineering and also brings thereby revenue as well as the overall profitability. Localization is always favorable from the cost point of view. In addition to that, also from a customer service level point of view, because when you are manufacturing or having the localization, you have the better supply chain, you have a better network, and that helps increasing the competence in all respect. So certainly, it helps revenue, but it also helps in terms of the overall performance.

[Harsha Kadam, executive]

Yes. Deepak, it goes without saying that if it's in our strategy, obviously, our strategy is to grow profitably. So it can be just growth. It has to be profitable as well.

[Deepak Jain, analyst]

Sir, lastly, any update on PLI?

[Satish Patel, executive]

Yes. PLI, as we already announced that we have been one of the 70 number of -- 75 number of applicants who got selected out of over 200 applicants. So we are already selected as Component Champion for the PLI scheme. Currently, the scheme is at the product approval level. And there is a process which is very robust that government has set to approve the products and also to approve the entire process application. That is at that stage, and it is going on. So considering the time line, it seems that next few months, there would be -- that step completed. And thereafter, we will have the -- accordingly, the further steps with regard to availment of incentives would begin.

[Operator]

We have the next question from the line of Pramod Amthe from InCred Capital.

[Pramod Amthe, analyst]

Sir, the first question is with regards to the localization drive, which you've taken up. If you are to look 3 years down the line, what this mix will look like, imports versus local? Any thoughts on this?

[Satish Patel, executive]

Yes. So currently, we have about 75% domestic production and 25% imports. And this was actually 70%-30% in the past. That has reached to a level of 75%-25%. Our localization drive continues, and that is going to reach to a loan of 79%, 80%. So the mix also would improve to a level of 80%-20%. That's the strategy. We are on track currently. Yes, there can be slight adjustment to that either side. But overall, I would say, we are on track and working on the localization. So far, we have been able to successfully localize whatever projects and the products that we had defined in this strategy, and we are going to continue that focus also in the future.

[Harsha Kadam, executive]

Also, I think another data point is, if one were to look at Q2 of last year, our own manufacturing was about 74.5%, which today is at 76.5%. So literally, we have increased our own manufacturing, which really points to the localization initiatives.

[Pramod Amthe, analyst]

Okay. And the second question is with regard to your participation in the EV momentum. You did talk about 2-wheelers and I think, in the conferences, on the cars. Anything on the bus electrification you guys are working on or you've already won the orders? Because that also seems to be a government focus to push through. And which areas will that be?

[Harsha Kadam, executive]

Good question, Pramod. Right now, we are focusing on the passenger vehicles, and that's where our focus is. We already have secured one business win, which we want to execute. While we are evaluating and studying -- the commercial vehicles require some different technologies when it comes to power electronics and so on, which as Schaeffler, we're still missing in our portfolio. But nothing to stop us from -- going forward in the years to come, certainly, I don't see a reason why we cannot play the game in the commercial vehicles space.

[Pramod Amthe, analyst]

And a related question is, since you talked about this passenger vehicle win, will it have an influence on what you will import versus locally manufactured? And what is the extent -- as you go forward, is there a -- you feel there has a good capability to do a substantial part of local manufacturing for this?

[Harsha Kadam, executive]

Logically, the right thing to do would be to manufacture in India now that we -- as you heard Satish talk about that we are one of the 75 Champions that have been selected under the PLI scheme. So, obviously, it is logically right that we mask the entire product here. But then, what we believe needs to be developed and should be here as well is, the supplier base has to be there in place. The supply channels have to be in place, which is something we are working upon. So, we will definitely move in phases and in stages to start to first, import the product, but then start to localize in India as we go forward. That's clearly in our plan.

[Operator]

[Operator Instructions] The next question is from the line of Suraj Sonulkar from Asian Markets.

[Suraj Sonulkar, analyst]

Sir, I had a question particular to your wind business. You've given a 16% growth for the market and 31% for Schaeffler India. Similarly, is there any number for the growth in the international market for us?

[Harsha Kadam, executive]

No, I didn't get the question when you say international. Is it wind international you're talking about?

[Suraj Sonulkar, analyst]

The export, we do...

[Harsha Kadam, executive]

No, let me clarify. Our customers, they manufacture the wind turbines and they export it out of India. So if you look at the number of in wind turbines produced in the country, more than 80% to 85% of the production of our customers is exported, okay? We only supply to them within India. We do not export directly to the wind. So in a way, by default, our products are already in the export market through our customers' product. I hope I was clear.

[Suraj Sonulkar, analyst]

Okay. Continuing to this, I just wanted to understand, in the European wind market, players like GE, Vestas and [ MSI ], they have reported failure of turbines recently in last 1 year. And there are significant warranty claims associated with that related to the component side. So in any way, are we impacted through that because we are a big supplier of bearings in that?

[Harsha Kadam, executive]

Yes. Thanks for the question, Suraj, and let me clarify that at this point in time, the investigations are ongoing. But very clearly, it has not impacted our business or products in any which way so far. So that's a good thing, positive thing that our products have not failed. They have been doing well. I believe it has to do with some other supplier. We don't know which one is that yet.

[Suraj Sonulkar, analyst]

Okay. Does it mean that there might be higher opportunity for us in terms of replacement of those?

[Harsha Kadam, executive]

That decision is up to the customer to make, would he want to source it from alternate suppliers or would he go back to the same supplier to do a correction. The traditional normal approach would be for them to go back to the same source, but we never know. But we are ready. If the opportunity comes, we will be ready.

[Operator]

The next question is from the line of Sabyasachi Mukherjee from Bajaj Finserv AMC.

[Sabyasachi Mukherjee, analyst]

So first question is -- I understand the mix between bearings and the non-bearings such as clutches and engine components. So my question is, what component of your business is probably at a risk from the technology disruption in terms of the electric vehicles? Is it 40% -- entire 40% of the business? And if yes, how are you trying to kind of mitigate the risk going ahead?

[Harsha Kadam, executive]

Mr. Mukherjee, It's a good question. Yes, as we said, the 40% of the products that we make are going into the engine and transmission application as well, and there is what is also called a chase application. So if I can clarify, first and foremost, the chassis products, definitely, they still continue to be there. There's no impact for the chassis application products that we make. Again, coming into the engine products, yes, there are some products which would get phased out as and when the adoption of the electric vehicle technology comes in more and more. But when we look at the study reports, the research papers, India is still a long way. What do I mean by that? By the year 2030, 2031, out of the -- if you were to take -- out of 100 vehicles produced, the passenger vehicles produced, close to 80 out of the 100 would still be using gasoline engines. So it's still 15% to 20% adoption rate. That's one data point.The second data point is, when you look at the number of -- absolute number of vehicles produced in the gasoline, it is not going to go down. It is going to remain flattish because there is obviously some organic growth happening. However, we do not rule out the possibility of the electric vehicle adoption increasing, provided a legislation change happens. In India, a lot of things is driven by legislation changes. And if that were to happen, then yes, obviously, there is going to be some change, and that certainly would start to impact in terms of lower production numbers for us for those products which go into the gasoline engines. However, we are also actively working already on our electric -- e-axle projects with one customer. And now, we have a few more RFQs, which we are working on. This is exactly in line to secure the future that we are investing in.Another data point if I can put on the table is, when you look at the value of product, the so-called content per vehicle, as I talked about earlier, in the gasoline engine, is ranging average of about EUR 50 per vehicle. If I were to apply the same formula to an electric vehicle, the content per vehicle is dramatically higher for us. So it is -- any which way we look at it, it is a win for us. Not to mention that the vehicles -- gasoline engine vehicles that are produced are still going to be on the road. They're not going to be taken away. There's still going to be some aftermarket demand. Our play in the automotive aftermarket is going to help us there. So it is not like we are going to shut down the production and what do we do with the manufacturing capacities. Obviously, we need to still continue to feed the requirement because as we see, India still is a slow adopter when it comes to the EV technology.

[Sabyasachi Mukherjee, analyst]

Understood, sir. Just a follow-up to that. So what does it has impact on the margin implications of that? Because as far as I believe, your bearing components will have a higher gross margin, whereas the engine components and the chassis will have a lower gross margin. And as we move from more 75% to probably 80% localization levels, that also will help improve our gross margins. But from a mix angle, bearing versus non-bearing, depending on the EV portfolio, how does it impact the margins?

[Satish Patel, executive]

Yes. In fact, it's a very good question, but very difficult to answer at this point in time because we are still at the infant stage of e-mobility, right, in India. And to already envisage what could be the level of profitability, I think that's very difficult to answer. But coming to your portion of the question where you mentioned about the mix, it is not like that certain business in our today's portfolio, which is engine, chassis and bearings, among them, there are significant margin variations. Yes, within the product, yes, but not at the sector -- at the division level. So I do not think that even if we go to -- transition into e-mobility, that would create a significant change in the mix, be it positive or adverse or negative. So it is unlikely from the mix point of view. But from the shear margin point of view in e-mobility, it's very early to comment.Additionally, I want to also provide a comment that in order for companies to switch to e-mobility, a lot of initiatives are undertaken by the government. One of them is PLI. And therefore, I always comment that PLI incentive of PLI benefit is not for earning profit or making money. It is actually to support transition into e-mobility so that investments are actually fast tracked and also other sort of activities are undertaken so that your breakeven point becomes faster. So such initiatives are also going to help transitioning e-mobility, even if from the profitability point of view, e-mobility becomes challenging in the initial phase of the transition.

[Sabyasachi Mukherjee, analyst]

One more question, sir, if I may, I can squeeze. So, on the debate between in-house manufacturing and outsourcing of the key components of a bearing and -- like cages or the rings or something else, what's your thoughts and what has been the trend for the last 5 years? Do you see more outsourcing of some of the not so noncritical components going ahead?

[Harsha Kadam, executive]

I would say more than calling it noncritical, I would put it this way, Mukherjee, that as the capability to produce critical components in India of more and more suppliers are becoming capable, I see no reason why we should not be modifying the business model to source component-level products and add more value in terms of the product and solution by way of digitalization, by way of embedded technologies. So that's where every big organization would move in that direction. In the past, all of us were constrained that the capability of the suppliers was upcoming. But now, I guess, that's maturing. As it matures and our supplier capability -- if they can make more and more precision engineering products at components -- or within a bearing, at the component level, well, that's the natural evolution of the business, and I guess that's what we see happening in India as well.

[Operator]

Ladies and gentlemen, this would be the last question for today, which is from the line of [ Saif Saurav Gurjar ] from ICICI Prudential Mutual Fund.

[Unknown Analyst]

Sir, on the last con call, you had highlighted about our export order book position, which was around 1 year of orders, and your target to reach around 20% of revenue from exports, right? So any update on the same in terms of export order book now, where it stands at and target to achieve this 20%?

[Satish Patel, executive]

Yes. Well, we might have just made a remark about a particular percent, but let me tell you, we can't say 20% or a particular percent. What we can say is that we have this strategy of growing exports in 2 parts, one is the product and second is the [indiscernible]. And on both fronts, we are working. That's what I specifically mentioned in my initial -- there was an initial pistol exports, and I had commented about both the aspects. And with that strategy, we are quite confident that we would be growing also in the mix perspective. In fact, last year, we had already reached to a level of almost 17%. It is only because of these global economic conditions and particularly conditions in Europe, whereby the demand from the end market itself is impacted globally, and therefore, our exports are impacted. So hopefully, this is not going to last long. 2024, I think the Europe economy is also going to grow on a positive side, and that would help further reinstating the orders for those demands, new demands. And thereby, we should be able to be on track also on the mix point of view -- from the mix point of view.

[Operator]

Ladies and gentlemen, due to time constraint, 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, executive]

Thank you, everyone, for joining us today. If you have any further questions, please feel free to reach out to me at [e-mail]. We now conclude the call. Thank you, and have a good day.

[Operator]

Thank you, members of management. On behalf of Schaeffler India Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.