Schaeffler India Ltd

NSE:SCHAEFFLER

Earnings Call Analysis

Schaeffler India's Growth Amidst Challenges

Despite a challenging year, Schaeffler India sustained modest top-line growth of 3.4% in Q4, with EBIT margins at 14.9%, down 1 percentage point from the prior year, due to a tough global market and a significant 30% drop in exports. However, domestic sales were solid and free cash flow remained strong despite being 27-28% lower in the quarter. The company increased capital expenditures to INR 610 crores, nearly doubling their investment in localization efforts. An e-commerce B2B platform acquisition in the automotive aftermarket area is evolving, with revenues of INR 19.5 crores in the last quarter. Dividends were increased by 8% to INR 26 per share, with a payout ratio of 45%. For 2024, Schaeffler India is optimistic, hoping to build on domestic strength and pursuing a growth trajectory, with special attention to start-up collaborations through their Social Innovator Fellowship Program.

Maintaining Growth Amidst Economic Fluctuations

The company demonstrated resilience in a fluctuating economic environment, characterized by industrial contractions due to seasonal effects and erratic rainfall impacting the agriculture sector. Despite these obstacles, notable sectors such as manufacturing, construction, utilities, and mining exhibited impressive growth rates ranging from 10% to nearly 14%. Inflation remained stable, allowing the central bank to halt repo rate hikes and keep the economic situation steady.

Steady Performance in the Automotive and Industrial Segments

The automotive sector presented a mixed performance, with passenger vehicles showing an 8% production increase year-on-year, commercial vehicles growing by 5%, and the tractor segment experiencing a slight contraction. However, the company secured new business in this sector, displayed an 8% increase in dividend payout of INR 26 per equity share, and maintained a balanced business portfolio between automotive and industrial arenas.

Optimized Capital Allocation and Strong Cash Flow

The organization efficiently managed its working capital and investment, despite a marginal drop in capital expenditure due to timing rather than reduced commitment. Investments in localization and the 'Make in India' initiative nearly doubled from the previous year, affirming the company's commitment to capacity expansion and market leadership. They also generated strong free cash flows, although Q4 saw a slight dip compared to the prior year.

Strategic Acquisition and Focus on Value Creation

A new e-commerce B2B platform acquisition in the automotive aftermarket area signifies expansion and diversification of operations. Current negative EBITDA and EBIT levels are anticipated to evolve into positive contributions, aligning with the standalone performance of Schaeffler India. The company's consistent strategy is to increment its dividend payout ratio, aiming to reach 50% while currently achieving 45%. To add value to the larger ecosystem, Schaeffler India has engaged with startups through the Social Innovator Fellowship Program, emphasizing technology, environmental sustainability, and renewable energy.

Optimistic Outlook Despite Export Concerns

While exports faced challenges, predominantly due to geopolitical tensions impacting demand, the company remains prepared to capitalize on market changes. A focus on domestic business with readiness to leverage export markets as conditions improve reinforces their goal for quality earnings. Investments in localization and engagement in initiatives like the Social Innovator Fellowship Program underscore their commitment to growth innovation, and community support.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Q4 CY '24 Earnings Conference Call of Schaeffler India Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Gauri Kanikar from Schaeffler India Limited. Thank you, and over to you, ma'am.

[Gauri Kanikar, executive]

Thank you. Good morning, everyone, and welcome to the Fourth Quarter and Full Year Earnings Conference Call for Schaeffler India Limited. Today, we have with us from the management, Mr. Harsha Kadam, our Managing Director and Chief Executive Officer; and Ms. Hardevi Vazirani, our Director of Finance and Chief Financial Officer. Mr. Kadam will first take us through a short presentation on the results, after which, we can open the floor for questions. Thank you, and over to you, Mr. Kadam.

[Harsha Kadam, executive]

Hello. Good morning. A warm welcome to this fourth quarter and the full year ending earnings call. I'm Harsha Kadam here.

[Hardevi Vazirani, executive]

I'm Hardevi Vazirani.

[Harsha Kadam, executive]

So welcome, once again, and I would like to take you through the presentation. I hope you are able to see the presentation. I am on the next slide which shows the agenda. I will be taking you through some information on the economy and the industry as well as moving on to the business highlights of Q4 and also the 12-month period of 2023. Next, I would like to throw some light on the financial highlights of Schaeffler India for Q4 as well as for the full year. And last, but not the least, I would like to touch upon a little on how Schaeffler India is adding value to the stakeholder community that we operate in.

Moving on, my -- I'm on the next slide, which is talking about the economy and the industry. Now as you can see, the Indian economy expanded to 7.6% year-on-year on the third quarter of 2023 following a strong 7.8% growth in the previous period. But if one were to look at the index of industrial production, you will see that in the last quarter of 2022, there has been some contraction, but we get, it's more to do with the seasonal effect that is there in the system.

The manufacturing sector sold phenomenally and by -- almost 14%. Construction sector went up almost 13%. The utility is almost 10%. Mining grew by 10%. And some of the service sectors, which is predominantly the financial, real estate and professional services grew by [ almost 6% ]. The weak performance was visible very much in the farm sector, which grew by a meager 1.2% due to erratic rainfall across the country.

I was talking about the automotive production. The fourth quarter '23 production has been pretty strong in the passenger vehicles, in the commercial vehicles as well as in the tractor segment marginally. So the year-on-year growth for the passenger vehicles was at about 8%. Commercial was 2%, and the tractors saw a contraction to the effect of about 2% over the previous quarter in the last year.

Inflation, on the other hand, remains at a steady state. And thereof the Bank of India has been kind enough to pause the repo rate hikes, thereby keeping it unchanged and enabling the inflationary situation to remain more or less stable in the country as such. All this is on the back of the high food prices and the vegetable prices, which have been riding on the back of a weak harvest season due to the erratic rains that I already mentioned about.

Moving on, I would like to throw some light on the core sectors that you would get to see. Talk about the industrial production sector. As you can see, cement production was equally strong in terms of growth at 7.5% over the previous year. Talk about coal production. The mining has been doing pretty well. I did say it's well above 10%. And here we can see in the last quarter, the trend has been very strong, 12% growth, you are able to see. Even the steel production in the country is riding on the back of the infrastructure push by the government. You'll find that the steel sector also did fairly well with close to 14% growth rate. The star performer has been also on the electricity generation in the country, where the weightage is almost move to 20% of the sector weightage, and that's phenomenal. So clearly pointing that the demand for energy in the country is going up.

I move on to the next slide, which is throwing some light on the automotive sector performance. And what you see here is the 2- and 3-wheelers was one of the sectors that was impacted. The export market of the 2-wheelers was down in the quarter, very badly. And also overall at the year end -- ended the year almost with 20% down on the export side of the business. While the domestic production numbers on 2-wheelers were up almost 4%, what you see the cycle of the drop in the last quarter of last year is predominantly due to the business cycle that the 2 wheelers always has.

Passenger vehicles, on the other hand, did put up some good performance, almost an 8% increase in production for the full year. And for the quarter as well, there was a 5% growth compared to the same period last year on the passenger vehicle as well.

Commercial vehicles, on the other hand, again, on the back of a weak export market, showed a growth of just under 6% in the last quarter, but at an annualized level, grew by almost 5%.

The one sector that has been languishing is the agriculture tractor sector. And here, the reasons are very obvious. Riding on the back of a weak monsoon and such. And the traction that was lost last year continues this year as well, and tractor is one of the sectors that we have seen a degrowth of almost 2% below last year's performance as such.

So with that kind of a backdrop in the situation, I step into the next slide, which is going to throw some light on the interim budget that the Government of India announced on 1st of February. And clearly this budget was -- the focus was all on fiscal consolidation. While -- it talked a lot about development and transformation, which received very positive reactions by the way, but then the fiscal consolidation is one of the clear objectives that has come up. And as you can see on the left side, the tier allocations to each of the areas, and we find that the Defence sector have received a big chunk of the allocations in the budget, followed by the Transport Ministry of Road Transport and Highways, Railway, clearly pointing through the continued [indiscernible] from the Government of India. And so that is kind of enabling some of the business sectors that Schaeffler India operates in.

Take an example, if one were to look at the railway sector, the biggest budget, it was announced that 40,000 normal rail bogies would be converted to Vande Bharat and the standards of safety, convenience and comfort given the highest priority, and that's where we as Schaeffler definitely our product portfolio comes first in Indian business growth in the railway sector.

Also 3 major rail corridors were also announced: The port connectivity corridor, the energy connectivity corridor as well as the mineral and cement corridor. And we believe that this is going to enable the growth of the freight segment within the railway sector.

Talk about electricity. Obviously, clearly, the government's drive on renewable energy production through the rooftop solarization, wherein 10 million households will be enabled to obtain about 300 units of electricity every month is step in the right direction where India moves towards carbon neutrality.

So on the other hand, also the Viability gap funding, which will be provided for harnessing the offshore wind energy is viewed as one other strong stimulant to get the wind sector to perform as well as a major player in the renewable energy generation in India. And the other, of course, is the coal gasification and liquefaction, high focus on biogas and compressed natural gas. So energy definitely here is a clear focus area.

One other segment that definitely receives attention is the electric vehicle segment, where the government will expand and strengthen the ecosystem, although there is already a Phase 1, Phase 2 that is already existing. But the charging infrastructure is clearly going to be the next focus area. Thereby, creating a proper ecosystem to address the growth of the demand in the electric vehicle technology. Here again, Schaeffler will be partnering again in a strong way.

With this, I move to the next slide, which is the business highlights, and let me throw some light on this. So let me start with how big the quarter go for us. The positive point was, in the last quarter, we were able to secure a lot of new businesses, which puts us in the growth trajectory, so that our continued projects pipeline is still full. And also, we did see that there was enough new business wins, both in the automotive as well as in the industrial space. And this is also enabling us to continue and sustain the balanced portfolio -- business portfolio that we have between the automotive and the industrial.

One other good positive development was the Board of Directors of Schaeffler India Limited have recommended a dividend payout of INR 26 per equity share of face value of INR 2. This resulting almost to a 45% payout ratio, which definitely we have improvement over the last year.

ESG has always been our focus area. And the way we run our business is clearly on the foundation of ESG. And here, again, we continue to keep clear focus with our sustainability targets as well as to work with the society and community around us. I will share a slide later.

We did definitely have a challenging year, which tested our agility. As you know, the top line growth, what you see on the right side, was just about 3.4% in the quarter Q4 compared to last year's same period. However, but with the actions that we have put in place and we realize that we have to continue to keep a clear focus on overheads and are [ clear drying ] in our 15, 16 projects, which we continue to keep the focus, so thereby try and deliver the profitability targets in line with the expectation as such.

So we ended the year with an EBIT margin of 14.9% in the quarter, as you can see, and it was 1 percentage point lower than the last year same period. The profit after tax, we were able to deliver 11.7% in the quarter and which was a clear -- once again, 1 percentage point lower than last year.

While the free cash flow looks to be minus 27% or 28% in the quarter, what I could see, which I will throw light on the subsequent slide, is the consistency in free cash flow has improved quarter -- every quarter. On absolute value terms, we have been able to generate good cash into the system. And overall, I must say, it was a challenging year in terms of the market, weakening market outside of India and -- but our exports was also under high pressure in terms of getting to the numbers. So in the last quarter, Q4, our export business was down almost 30%. And -- but yes, we have been able to grow our domestic sales within India as such.

So entering 2024, we definitely see some upticks in some of the sectors. We are seeing a strong rebound from the wind sector, which was down last year. And we have started to see some good demand coming from the wind and automotive to having a dream run particularly in the SUV segment within the automotive sector.

Now that said, I would like to throw some light on some of the new businesses that we have won. As you can see in the passenger vehicles, clearly, our focus is on emission reduction and improving reliability, and we bringing value -- very value-adding products there to our stakeholders, whether it is on the wheel bearings, which is our basic bread and butter product, or for that matter, new clutches, double clutches for the commercial vehicle segment, which is clearly addressing the addition norms -- stringent emission norms that are imposed now.

That said, even our automotive aftermarket, we continue to add more products into the portfolio. And obviously, the e-commerce platform that we have now, this is only a growth enabler and it supports multiplier for us to expand our product outreach to the market with the aftermarket channel.

On the industrial side as well, where a lot more focus is now coming into precision and efficiency, we are clearly positioned to win the businesses as a motion technology company with the product portfolio that we have and what we make in India and quite a few business wins, both in static applications as well as dynamic application, we have been able to bring it our way. And business is only going to fuel the growth going forward as well.

Now that said, I'll move to the next to throw some light on the financial performance in Q4 and the full year. So as I said earlier, the total revenue for the year, what you see, quarter-on-quarter growth has been 2.2% quarter-on-quarter growth and the full year at a total revenue of 17.8%, resulting in a 0.4% quarter-on-quarter growth for the quarter. So over the preceding quarter, we were able to just post about 0.4% growth. Year-on-year, we did about 3.4%. Compared to the last year's performance, this has been a challenging year, as I already mentioned.

How did this growth [ action ] between the divisions, the business divisions, as we can see. Automotive Technologies actually contracted a bit in the quarter compared to the same period over the preceding quarter by 0.9%. However, compared to the same period last year was a strong 9% growth story. 12 month period, we almost got 12%. Automotive Aftermarket, too, had a positive growth story in double digits compared to the preceding quarter or the same period last year, but overall, a 12-month period performance, 15% growth.

Industrial, on the other hand, also had some slowdown in the last quarter, posting about 1.2% growth compared over the preceding quarter. But however, when one were to compare that with the last year's Q4, you will find that it is around 14% uptake. Taking the overall industrial growth at an annualized level to 5.1%.

I will touch upon the point that the export was one of the dampeners for us. And as you can see here in the quarter, it was down almost 5.3% over the preceding quarter, and it was 36% down when compared to Q4 of 2022. So overall, at an annualized level, our export business was down 15%.

That said, clearly, our business mix continues to remain pretty balanced between the automotive and industrial, as you can see on the pie chart there. Our exports, which has hit almost 15% of the total revenue, has dropped 11% in the cake , whereas the automotive aftermarket remains at the steady state of 10%.

I move onto the next slide, which is talking about some earnings quality. And here, you see the profitability picture. The EBIT margin or the EBIT value for the Q4 of 2023, we were able to generate INR 275 crores in cash with an EBIT margin of 14.9%, and that was 1 percentage point lower than the preceding quarter and almost 1.5 to 2 percentage points lower compared to the last year. That said, we still continue to focus on our efficiency and productivity in the operations as well as overhead cost management as such. So clearly, the profit after tax which was also impacted as a result as we can see, we delivered a profit after tax of INR 217 crores in the quarter, taking the profit after tax percentage to 11.7% and at an annualized level of 12.6%, which is 0.2% lower than last year, comparatively. So all in all, a tough year, but then we still try to sustain and deliver the financial results in line with the expectations, and we were able to end the year with an EBIT margin of 15.7% at the year-to-date level compared to the 16% of the previous year.

I move on to the next slide, which is going to throw some light on the working capital. And as I did say earlier, our working capital, as a percentage to sales, we have been able to manage it pretty well, and it is at optimized level that we would like to operate in. And we were able to reach a level of 17% in the last quarter of last year, and we continue to keep -- we managed the working capital in a very efficient manner.

On the other hand, our CapEx, while it appears that there's a marginal drop, but I must say here that we stand committed to invest in the capacity exactly in line with the plan. This investment drop that you see in the last quarter is only a timing issue. So however, we will continue to move. And the investment ratio, as a percentage to sale, the number speaks for itself. As you can see, in the first quarter of 2022, we were at about 4.8%, and we have steadily moved up. And in the last quarter, we were at 7.7%. That clearly tells -- shows that our commitment to investing in India for localization and Make in India continues to hold good.

On the free cash flow, overall, strong generation of free cash flow, [ spitefully ], yes, in the last quarter, as you can see in Q4 '23, it was marginally lower compared to the same period last year in 2022. However, if you look at the annualized level, we were still strong level. So we were able to bring in almost INR 175 crores of cash into the system in the last quarter of last year.

That said, I move to the next slide, which is going to throw some light on the summary and the key performance indicators, I did already talk about. The growth story, 3.4% revenue growth year-on-year. Yes, and at an annualized level, it's a 5.2% growth compared to the same period last year, with an EBITDA margin of 17.9% compared to the previous quarter, 19.2%, of 2022. At an annualized level, we ended the year with an EBITDA margin of 18.7%, which was a marginal drop of 0.3% compared to 2022.

I already talked about the EBIT margin and the profit after tax. I touched upon the CapEx investment rate. Clearly, as you can see here on the CapEx, the row, last year, 2022, we did spend INR 316 crores, investing in our capacity towards our localization effort, which, in 2023, we almost doubled to INR 610 crores.

So that said, I move to the next slide, which is showing some light on the consolidated financial results. As you all know that we did make an acquisition last year of an e-commerce B2B platform, specifically in the automotive aftermarket area of our operations. And we are -- we would like to share with you the separate picture as to how it would look.

So if one were to look at the middle column, the KRSV Innovative Auto Solutions Private Limited, it generated a revenue of INR 19.5 crores coming in, in the last quarter. And taking the total consolidated Schaeffler India results or revenue results in the quarter to INR 1,874.6 crores.

Of course, the e-commerce platform being a new venture, the reach and the span of reach within the market is still in an evolving stage. You will find that the EBITDA and the EBIT will be at a negative level, but we are confident with the kind of growth story that we are painting here, we will soon get this to be a positive value-adding business going forward, which is only going to complement the stand-alone Schaeffler India result as such.

So at a consolidated level, our EBITDA margin comes to about 17.5%, before exceptional EBIT margin at about 14.5%, and the earnings before taxes at about 15.8% overall.

That said, I would now like to throw some light on how, as Schaeffler, will add and create value to our stakeholders. I move to the next slide, which is going to throw light on the dividend payout for the year 2023. I'm happy to share that the Board of Directors of the company have approved a dividend payout of INR 26 per equity share at the face value of INR 2. And this has been an increase of INR 2 per share over the last year, which is a clear 8% increase. And this is also taking the payout ratio to 45%, which is exactly in line with the commitment we as an organization have made to our shareholders to take the dividend payout ratio closer to 50%, and we are currently at 45%.

With this good news, I come to my next slide which is talking a bit about our efforts in terms of encouraging and working with start-ups. And at Schaeffler India, we started off an initiative called as the Social Innovator Fellowship Program, and we have received tremendous response. This is the second year that we ran last year. And we received a total of 260 applications. There were specific areas in terms of applications of technology, carbon neutrality. Then circular economy was one of the subjects that we included. Environmental sustainability was one other, renewable energy is another area.

So out of the 260 applications that were received, we put them through the grinder to select the best top 10, and the top 10 were presented to us. And what we do is these top 10 innovators are then subsequently sponsored by Schaeffler, working with IIM Ahmedabad for a mentorship program, so to help them how to incubate the start-ups and grow the business going forward successfully.

So this is our small effort in the direction to work with start-ups who are truly adding value to India and the community around that. So this is a good initiative and we will continue to work with more and more and more startups as we move forward as well.

With this I move to my last slide, which is more on the summarization. Domestic business continues, and the concern that we saw was only in the exports. And our focus clearly being on the domestic business will continue, while exports we are ready, prepared, as the market landscape changes outside India, we will continue to leverage the growth there as well as the market comes back. We will keep our focus in terms of delivering our promise and the quality of earnings. And we are clearly revisiting our countermeasures and we look to stay on top of this. And our CapEx, as I already said, we will continue our localization trend, localization percentage to go up. Currently, it's sitting at about 75%. We would definitely want to take that up further year-on-year.

So I already talked about it, 2024. We look forward to a year optimistically with strong upticks coming back in some of the key sectors, which mean a lot to the business of Schaeffler India here. And we believe that -- with the strongest portfolio, widest portfolio that we have, and as a motion technology company, we will leverage the growth opportunities that are right in front of us.

With that, I come to the end of my presentation. And over to you.

[Operator]

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

[Gauri Kanikar, executive]

Yes, please.

[Operator]

Thank you very much, ma'am. [Operator Instructions] The first question is from the line of Ankur from HDFC Life.

[Ankur Sharma, analyst]

Just a few questions. Just to start off with -- on the export side, if you could just help us. Would the last quarter be the bottom? Are you seeing green shoots in terms of recovery as we go forward? Just some color on some of your key markets as well EU, APAC, U.S.? How are you seeing basically the end demand from some of these key markets?

[Harsha Kadam, executive]

Thank you, Ankur, for that question. Yes, export did see some strong headwinds, as I already said, and we continue to see it. It all started off with the war breakout in Ukraine, and of course, follow that up with the war in Israel. And surely, that is definitely contributing to this lower demand that we have seen.

A lot of our export goes to Europe, mainly, yes. A little bit of it to China, which we kind of are now derisking it. Europe, we know has to come back, it will come back. Meanwhile, we are also trying to look at Southeast Asian countries. We have been actively working with our colleagues there as well. And we also intend to see how much can we leverage the gaps that we find in Europe. And to that effect, we are putting some actions in place going forward.

Now to come back to your question on is this the bottoming out, I hope so. And hopefully look forward to an improved Q1 starting off this year. We'll have to wait for another couple of months to clearly know what direction this is going to go, but we are optimistic that -- and we hope that Q4 2023 was the bottoming out, hopefully.

[Ankur Sharma, analyst]

I understand. And you also said maybe also trying to look at more on the Southeast Asian markets as well, right? So maybe to offset some of the weakness in EU or China? Is that right?

[Harsha Kadam, executive]

Yes. Obviously, we are looking at markets where the economies are doing well, like Indonesia is doing well still, Vietnam is there, Thailand is there. So we are looking at the fundamentally to see, can we start to get gain from businesses there, business wins, so that we can try and load the pre-capacity that we have.

[Ankur Sharma, analyst]

I understand. Okay. That's good to know. Second, sir, on some of our key industrial markets, right, because clearly, when I look at some of your peers or even the overall industrial B2B space seems to be kind of slowing down in terms of top line growth across some of their end markets. So if you could just help us, so some of your markets like rail, wind cement, steel, the process market, how are things kind of shaping up there? Are you seeing a preelection slowdown in some of these markets and then maybe a bump up after that? Or is it business as usual? Some color there?

[Harsha Kadam, executive]

So first, let me start with the first part of the question that you mentioned. Are we seeing slowing down in the industrial sector? We did see some slowdown in some sectors, industrial sector, not all. There are 2 ways to look at it. If I were to look at the -- just the Q4, the last quarter of 2023, rightfully, some of the sectors like the off-road, wherein the construction equipment do come in, and the tractors put together, we did see some slowdown there in the last quarter.

The reason could be twofold. One, tractor, anyway, is already down. It's been at its lowest point as such. But more on the infrastructure push, and this is exactly what I refer to that the interim budget, there was a kind of a wait and watch that probably happened because of the oncoming election. But however, the interim budget still keep the focus on the infrastructure push with all the construction industry, the infrastructure industry, demands still continue to do. So I am optimistic that the infra push is definitely going to continue, and it's still going to -- we're going to see some positive traction coming in, in Q1 of this year, okay?

So wind, for -- another factor was wind, wind has come back strongly. In the quarter itself, we saw it was a much stronger performance over the preceding quarter, almost 11 percentage points growth, and that is a strong uptick on the wind side as such. We have also seen the clear focus on railways is also helping us because we have seen a strong growth in Q4 last year as well. And even at an annualized level, we are seeing a strong growth story in the railway sector for us.

So as I said, all in all, yes, there is a mixed bag. Like the 2-wheelers took a little longer to pick up, and they have still not picked up to the speed at which they should be. [ Anyway ] the 2-wheeler sector is still struggling there because their own export market is just very badly. Hence -- so overall, we have a mixed bag, but then you also see that some of the sectors, obviously, the demand uptick is visible always.

[Ankur Sharma, analyst]

Sir, also on the process industry, oil and gas, steel, cement, anything there?

[Harsha Kadam, executive]

Yes. I just talk about the energy sector is doing well. But if I look at an annualized level, surely, we have seen our business grow in the energy sector, mining sector as well as in the process industry sector, all the 3. We are seeing a strong uptick there. Demand has been good.

Q4 has been a bit slow, rightfully, as you pointed out, with the apprehension of the forthcoming elections, it could be a dampener, but I don't think it's a very bad. At an annualized level, definitely we are seeing good growth story in all the 3 areas.

[Operator]

The next question is from the line of Ajox Frederick from Sundaram Mutual Fund.

[Ajox Frederick, analyst]

Sir, my question is again on industrials from a CapEx angle. So from the CapEx, what we are doing, what proportion we'll be doing, particularly to industrials? And what will be the asset turns for that CapEx? And that's the first question.

[Harsha Kadam, executive]

Okay. So we have consistently been investing both in the automotive and industrial space. Rightfully, the large part of the investment is in the industrial space. Why? Because our localization content was lower there, yes. And we have now consistently kept the focus to make more and more products for the industrial space in India. And we will continue to keep that focus to invest on the industrial side of the products.

Automotive, on the other hand, is more what we were importing, we tried to do here now. So that's because -- one of the critical paths criteria for an automotive OEM is to have a strong supplier base supply chain, itself has to be here. And some of the products that we make have some niche technology, which, today, the supplier capability and competency is still not there in India. Hence, we continue to import. But there, again, after our localization drive, is going to enable us to increase our investments on the automotive going forward.

[Ajox Frederick, analyst]

Understood, sir. Just a follow-up to that. So from our target perspective, will we be increasing CapEx from industrials? Or the run rate will still continue?

[Harsha Kadam, executive]

Well, I don't have the precise data right now. But all I can say is, yes, we will keep the focus, both for the automotive and the industrial. As I already said, we are -- we have a major breakthrough in the electric mobility sector now. And rightfully, for that, we will have to start our localization plans. So we will have to start making subsystem-level products in the automotive space as well. So we will be continuing to invest even on the automotive side because there, the technology landscape is also -- we see a demography shift happening in terms of e-vehicle -- electric vehicles catching up as well in India. So we are gearing up for investments even in that field.

[Ajox Frederick, analyst]

Understood. Just my final question. On railways, what is the business right now we are doing? And where can that scale up, let's say, in 2-, 3-years?

[Harsha Kadam, executive]

On the railway side, predominantly our products are on the axle boxes and bearings that go into it. We also are a strong player in the traction motor applications, which go into all electric locomotives. The fact that Indian Railways has a clear strategy to become 100% electrification is actually helping us grow our business because we are the only ones who have been able to develop insulation coating bearings for the traction motor application and now customers have even recognized us with multiple awards in the last year on this.

So that said, clearly, our strength is already there. Apart from this, there are a host of other products. We are also now getting into the digital space, how do we operate because everything is going digital. So railway definitely is a very strategic and important sector for us. And we have won businesses on the Vande Bharat, so trains. And as you know, the engineering specifications and standards for the Vande Bharat are very different from the older train technologies that was there in India.

And that said, we are gearing up, not just in terms of manufacturing capacity, but in terms of engineering competency as well. Both the areas we have adjusted very clearly. Even now the third area that we are getting into is also infrastructure to do carry out tech team facilities for railways in India, all the 3.

[Operator]

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

[Mukesh Saraf, analyst]

My first question is on your EV plans. You have just alluded that, obviously, you're going to be -- you're marking a lot of investments there. Just trying to understand how is it going to work between, say, Vitesco, India and Schaeffler India, given that at the parent level, the businesses are kind of getting combined? So how will the parent be sharing its technology between the 2 Indian entity?

[Harsha Kadam, executive]

Okay. Let me break the question into 2 parts and try and answer that. The first, obviously, is our e-axle project with the customers here, which we have been actively induced with. It is going as per schedule on plan and performance has been pretty good. Now that said, we are -- as I mentioned earlier to the previous question, we are also drawing our plans to localize and manufacture the e-axle in a phased manner. So that's going to happen as such. And investments to that effect are already underway. So clearly, our commitment and the focus to invest into the electric vehicle technology in India is already there and the actions are already underway. That said, we are also actively working with other customers for other platforms, obviously, to try and get more business opportunities into the pipeline in the e-vehicle technology area. So that's the first part of the question.

The second part being, you brought onboard the question of Vitesco. Vitesco has been a strategic global acquisition for Schaeffler AG, right? So globally, the company has been acquired. Why was this done? Clearly, within the wide portfolio that we have, one of the gap was in terms of the digitalization and electronic offerings, and that was the gap in our portfolio, which finally is filled in. The only way we see now going forward is Schaeffler and Vitesco together, clearly, we have the capabilities now to offer a system-level solution offering to our customers as a one-stop shop, whether it's the electric motor, the reducer gearboxes, the control systems that go with it, the electronics part of it or the thermal management module that needs to be there to ensure the entire system operates in an efficient manner.

All the 4 put together, we have been able to now offer as a one-stop shop offering. That's the complementary outcome of the Vitesco, what you have touched upon. At this point in time, it's only a global acquisition that has happened. We will continue to see how things will evolve as we move forward.

[Mukesh Saraf, analyst]

We're not sure if Vitesco will separately be kind of getting orders from customers and Schaeffler also will be separately getting orders from customers?

[Harsha Kadam, executive]

I am afraid, at this point in time, I will not be able to answer that question as such as it is too preliminary, it's too nascent a stage we are in.

[Mukesh Saraf, analyst]

Sure, sure. All right. Understood that. And second question is on wind. You mentioned that there is an improvement in the wind business. But we also understand, and correct me if I'm wrong, that a large part of our wind business is an indirect export. But obviously, exports itself are not doing too well. So could you kind of explain a bit more? Is there a domestic wind demand that is going up and that is what you were mentioning? Or even the indirect, the gearbox exports that happens even that is kind of ticking up?

[Harsha Kadam, executive]

Let me lay it down for you first. If one were to look at the wind business, wind equipment business in India, 80% of what gets produced in India actually gets exported out of India. 20% of the production is Indias domestic need, okay? Now that said, we have not seen a drop in the domestic demand, which is just about 20%, right? Where we have seen the drop is on the 80% side, yes, because our customers, their projects are delayed. Their projects are put on the back burner and so on and so forth. And predominantly all the exports of the wind equipments, majority was going to European market, some of it going to the U.S. market. So what we have seen is we have seen a drop in the European market. We have not seen a drop in the Indian market nor have we seen a drop in the U.S. market. Correct? So the impact of the European market is what is felt by our customers, which is actually cascaded down to a [ Schaeffler ] supplier now. So I suppose I'm now -- you've got the clarity there.

[Mukesh Saraf, analyst]

Sure. But you had mentioned that there is an improvement. So that is basically the 20% market is seen in?

[Harsha Kadam, executive]

So 20% has remained steady. We are not seeing a drop there at all. Where we have seen a demand uptick is on the 80% side.

[Mukesh Saraf, analyst]

Okay, 80%. Got it. Got it. Understood. And just last one, a quick one, if I may squeeze in. In the presentation, you have mentioned that we have now won an order for the DGBBs for electric 2-wheelers. Just trying to understand, I think in the past, you had mentioned that while the volume of bearings with EVs might be less of a devaluable kind of make up for that? So are we seeing that already in this order that we are winning? In terms of value are these higher than the ICE vehicle DGBBs that we supply?

[Harsha Kadam, executive]

It's a very good question you're asking, Mukesh. So let me again throw some light on this. So if one were to look at the next 10 years, how the IC engine market would be going forward. Obviously, the 2-wheelers being the early adopters of electric vehicle technology. We believe the IC engines could stagnate as start to digitalizing gradually. But you know the size of the market in India, close to 20 million 2-wheelers was produced last year, I guess, for '23 or so. Now that said, the there is substantial market that still will be there for the next decade, okay? That's one data point in.

The second thing is will the number of bearings reduced when the technology moves from ICE to electric? Of course, it will reduce. But then what it would also do is there is a shift in the product specifications and engineering specification. Why? Because the EV requires a different specification. And that's where the new wins that we have started to secure on our bearings for the electric vehicle are differently engineered, and they are a different specification as well.

So to put it in a nutshell, while on the one hand, we see the business overall demand may reduce, not now immediately, but after a decade or so, we're also getting into the EV bearing that would call for different engineering specs. So manufacturing capabilities are being reengineered to that effect. So that's already happening, yes?

Also, we are not ignoring the fact that we are now having the capability to offer electric vehicle technology even to the 2-wheeler. So we are definitely evaluating and trying to work with some of our partners here to see if we can bring electric 2-wheeler solution to the market and that is currently work in progress. I am not at liberty to share more details beyond that.

[Operator]

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

[Harshit Patel, analyst]

Sir, my first question is on our European exports. While I've noticed that the Schaeffler Groups as in parent revenues, which they garner from Europe, they haven't declined very sharply in the past 3 or 4 quarters. On the contrary, our exports to Europe, they have, I think, declined very sharply since you have mentioned both Southeast Asia and U.S.A., they are doing relatively well. So could you help me reconcile this? So are there any specific end user segments or product segments that we are catering to, they would have seen a very sharp decline?

[Harsha Kadam, executive]

Let's ask CFO, Hardevi, to address.

[Hardevi Vazirani, executive]

So Harshit, as you are aware that Schaeffler Group has been actively pursuing the inorganic opportunity. So the growth that you see in our global revenue in Europe market are mainly including the inorganic growth that has happened with acquisition of some of the industrial companies. And the second thing is also that they are rationalizing the inventory. So in Q4, specifically, they tried to reduce the imports from different countries and they try to utilize the inventories which were in its stock. So these are the 2 major reasons that you see that Europe is not -- in numbers, they are not -- revenue has not degrown. But the background is different that we have to know the inorganic portion of that.

[Harshit Patel, analyst]

Sure. Understood. So my second question is on the gross margin. So the gross margins have come off from close to 39% 2 to 3 quarters ago to close to 37% at the moment. So this is a drop of close to 200 basis points in last 2 to 3 quarters. So would you attribute this entirely to the share of exports coming down? Or there are some other reasons as well? So if you could elaborate on this, that will be better.

[Hardevi Vazirani, executive]

So the major portion is due to the drop in export. And in the full year, our exports dropped by 15% points. So this 15% drop in export attributes maximum part of the gross margin drop.

[Operator]

The next question is from the line of [ Saif Saurav Gujar ] from ICICI Prudential AMC.

[Unknown Analyst]

My question is on the expansion plans. So where exactly are we on the Savli industrial bearings facility? You also displayed few months back and the Hosur automotive components part. So have some lines come online or phases of capacity additions actually occurred? And with that, where are we in the overall utilization for bearings?

[Harsha Kadam, executive]

Yes. As you are aware in the previous questions, I did touch upon the answer that our investment continues to stay the course. And as I already said, we are at close to 7%, 7.5%, 8% of cost sales we are reinvesting. Predominantly, a large part of it definitely is in the industrial space. And most of it going into our Savli plant because that is the plant where we have space for expansion. The other plant, Maneja, which is also an industrial plant, there is no space for further expansion. Hence, all the expansions happen in Savli.

Now that said, obviously, some of the product lines like large-sized bearings or spherical roller bearings and our angular contacts, all these, which are required in the process industries, the renewable energy sector is the clear focus area and railways. So we continue to invest for all these 3 sectors. And our investment plans are clearly on track. We continue to do that.

[Unknown Analyst]

And anything particularly on the Hosur side, how is that moving so, the capacity?

[Harsha Kadam, executive]

Yes. Hosur is a totally greenfield project, and building construction is ongoing. And as I see it now, hopefully, we should be able to start the productions to come out by the first quarter of 2025, we should be churning all the products with that plant as well.

[Unknown Analyst]

And on the Savli side, it is a phased manner. The additions are in the phased manner, right?

[Harsha Kadam, executive]

Because right now, we're building hall -- I'm not sure if you were there in the last visit to Savli. So you would have seen the hall, that hall is getting filled up. Now we're going to start the additional construction of another additional hall, equaling the size of the current hall. So that said, because Savli, as I said, has plenty of space. We are not even occupying half the land area yet. And that's something clearly focused going forward as well.

[Unknown Analyst]

Sure. And second question is on the inorganic part. You just mentioned about inorganic acquisitions, which the group has been doing. So we are left with INR 15 million of cash. Even with 30% to 50% of dividend payout and the CapEx commitment, you still are with cash, right? So any plans for further inorganic opportunities apart from Koovers?

[Harsha Kadam, executive]

Yes. We are watching for -- looking out for good opportunities. We will continue to look out for good opportunities. As I said, last year, we did acquire Koovers. Koovers was a smaller acquisition comparatively. But nevertheless, the inorganic growth of Schaeffler India definitely is a clear strategy for us, and we will stay the course there as well. And we are cognizant of the cash we are [ picking ] on as well.

[Operator]

The next question is from the line of Mayank Bhandari from Asian Market Securities.

[Mayank Bhandari, analyst]

Sir, my first question is, within industrials, can you give us a direction of like how railways business have grown in CY '23?

[Harsha Kadam, executive]

Last year, when I look at the full year, our railway business has done reasonably well, and we have registered a double-digit growth, right? In fact, on the industrial sectors, almost all the sectors we have done a double-digit growth compared to the previous year. So which is pretty strong, pretty good. Of course, we did have some challenges, the off-road, as I said, because that's only sector which was a little bit dampened because of the demand delivery. But railways, yes, we have a good growth story, double-digit growth rate. And as I said, our investment strategy remains there as well. And we will continue to leverage the newer demands that are coming out of the Indian railway sector as such in terms of performance and reliability. Definitely, we'll have the competence and the wherewithal to deliver the products, meeting both the areas of performance and reliability.

[Mayank Bhandari, analyst]

Okay. So I mean the overall growth has been 5%, which means probably wind has declined in business is the reason, except that all sectors have grown double digit?

[Harsha Kadam, executive]

As you say, wind has declined. You'll have to compare that with the previous year and then see because wind in the first half was down pretty badly. It just started to take off only in the last quarter or Q4 of last year. So to that effect, overall, yes, wind was down, but then it started to show positive traction and upward trend. And that is encouraging for us because wind is one of the very important strategy businesses for us, and we have a lot riding for the wind sector as well.

[Mayank Bhandari, analyst]

Okay. And sir, can you give a breakdown of the auto business in terms of CV for the full year CY '23?

[Harsha Kadam, executive]

Sorry, I didn't get the first part of your question.

[Mayank Bhandari, analyst]

The breakdown of the full -- the auto business in terms of CV, PV, tractors for full year CY '23.

[Harsha Kadam, executive]

Is your question about the market?

[Mayank Bhandari, analyst]

No, not market, your -- Schaeffler's India breakdown?

[Harsha Kadam, executive]

Okay. As I said, automotive has posted pretty strong growth story compared to the previous year, yes. And both in the power transmission and engine applications, we have done pretty well. The engine and transmission part of our business, including the clutches, has done a very strong growth story. Particularly, our clutch business has had a very strong traction, riding on the back of some of the market also trying to adopt the dual clutches, where our key strength is. And we are one of the largest player in the dual-clutch application, and we have been able to leverage that. So we've been doing well there.

Yes, talk about on the bearing side of the business. It is a challenging part of the business as such. But here again, varies as such, it's not that we have lost market share. We have sustained our market share. But definitely, it has not grown as much as it should have grown on the engine and transmission and the clutch part of the business. So overall, automotive has still seen traction. And as we see IC engines still continue to demand. And with the initial norms becoming more and more stringent, obviously, the current products that we offer needs to be reengineered, and we are leveraging on that because we have the strong engineering and design competency existing within India and also in Germany. We cross leverage the competencies we have, and we have been able to stay a strong and potent player in the automotive application space as well.

So another data point is our business within the commercial vehicle sector has grown phenomenally in the last 1 year. This is clearly because of our focus that we have now brought on to the commercial vehicle segment, and we have been actively working to launch more and more new products in the commercial vehicle segment.

[Operator]

Ladies and gentlemen, due to time constraint, this will be the last question for today, which is from the line of Mahesh from LIC Mutual Fund.

[Mahesh Bendre, analyst]

Sir, exports for this quarter is around INR 211 crores, which is, I think, the lowest in the last 9 quarters. So you hinted that this could be the bottom. So going forward, this number will improve maybe gradually, but there won't be any degrowth as such?

[Harsha Kadam, executive]

Mahesh, let me correct you first. I did not hint that it will be the lowest quarter. It was hinted by one of the participants in the call. I said I hope it will be the last quarter, right? And I still hold that answer that I'm also hoping that this will be the last quarter, yes.

That said, yes, we are, as said, looking at alternatives to see whether we can bring in more new businesses from other parts of the world to ensure that our export market, export capacities will start to fill up. So -- but yes, Q4 was the lowest that we have hit. Will it remain? I cannot say that. We'll have to wait, this quarter will tell us where this is heading to. That would be my answer to you.

[Mahesh Bendre, analyst]

Sure. And sir, we have talked about INR 500 crores CapEx for the next 3 years, and then we are through with 1 year. So next 2 years, our plan are still we are holding that CapEx guidance?

[Hardevi Vazirani, executive]

That is right. We will be holding the CapEx guidance.

[Operator]

As 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. Thank you for joining us today. If you have any further queries, please do reach out to me at [e-mail], and have a good day. Thank you.

[Operator]

Thank you very much. Thank you, members of the management. Ladies and gentlemen, 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.