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SKF India Ltd
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Ladies and gentlemen, good morning. And welcome to the SKF India Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I now hand the conference over to Ms. Aparna Srivastava from SKF India Limited. Thank you, and over to you, ma'am.
Thank you, Michele. Good morning, everyone, and thank you for joining our investor call today. With us, we have our Managing Director, Manish Bhatnagar; and Chief Financial Officer, Ashish Saraf.
Before I turn the call over to the management, I would like to remind you that in this call, some of the remarks contain forward-looking statements, which are subject to risks and uncertainties, and actual results may differ materially. Such statements are based on management's beliefs as well as assumptions made by and on the information currently available to the management. The audience is cautioned not to place undue reliance on these forward-looking statements and making any investment decision. The purpose of today's call is to purely educate and bring awareness about the company's fundamental businesses and the financial quarter under review.
Let me turn the call over to SKF India's Managing Director, Manish Bhatnagar, who will give an overview of the company's business activities and developments for the quarter 1 financial year '22, '23. We will then open the call for the Q&A. Over to you, Manish.
Okay. Aparna, thank you very much, and welcome to everyone who's joined this call. We have a 2-hour call set up, and hopefully, we can address all questions and comments on this call. We don't have a formal presentation for this call because I wanted to make it more Q&A and answer your questions about SKF. But certainly, I'll make a few comments to open the discussions around the quarter that just went by.
We are truly in an environment which is extremely inflationary. We are seeing increases in costs on material, on freight, on a number of things that impact us. But despite that, we've had turned out a very, very good quarter in terms of revenue and profitability, both there. Our revenues for the quarter are up 52% over the previous year. But having said that, we all know the previous year, it's not a great comparison because of the COVID impact in the same quarter last year.
But even if you compare quarter-to-quarter, so sequentially compared to the previous quarter, we're up about 1.4% on revenue. Likewise, on PBT, while we are up 66% over the same quarter last year, the more important point, I think the more relevant one is, we are up 21% sequentially over the previous quarter.
So really a good performance, a good set of numbers by SKF. And the future is, frankly, anyone's guess right now. We have to see how inflation pans out. We are seeing some slackening on steel prices, which is a big expense for us. We have not yet seen a demand slowdown. The order books still remain fairly robust across segments, and we can talk about that if there are questions on the order book.
But having said that, we know what's happening in the world around us, whether it's Europe or other parts of Asia or Americas, we are seeing a demand slow down. We are seeing a high inflationary environment around the world. So I would be hesitant to say that India will be the outlier. Now -- so we are preparing for winter. Now when that winter comes, we don't know. But I think it's better to be prepared for it than to be taken by surprise there.
So I'll stop here, but -- and will just kind of say that we've had a good quarter of strong growth, good price realization, good mix changes, good working capital actions. And we've been able to offset the inflationary impact in our numbers that you have already seen and analyzed.
So thank you for listening to my opening comments, and I'll open it up now to questions in the order that they're received.
[Operator Instructions] The first question is from the line of Mukesh Saraf from Spark Capital.
My first question is on the revenue mix. Could you give us some sense on how the revenue is across your segments, auto, non-auto and then within that OEM aftermarket, specifically for FY '22 as well as the first quarter?
Okay. Do you have a second question, Mukesh?
Yes. So my second question is regarding the localization targets that we might be looking to achieve, especially given the -- I mean, when I look at the annual report, I see that traded bearing revenues is still about 43% of our overall revenue, and this is in line with, say, the 5-year average that we have. So that localization hasn't changed much. But I do believe that there would be some targets of localization. So how do we look at this traded bearing revenues in the future? How are these expected to move? And is there a localization plan and CapEx around that?
Yes. So I will hand over to Ashish Saraf, our CFO, to answer the first question on the revenue mix by percentage auto industrial et cetera, and I'll come back for the second part of the question, Ashish?
Sure. So for the current quarter, the automotive share was around 42%. Industrial was around 49%. And for exports, it was around 9%. So that was the overall mix for this quarter. For the full year, the mix was pretty much -- automotive was around 42%, industrial was 47% and export was around 10%.
Thank you, Ashish. On the localization question, Mukesh, yes, we have to localize much more than what we've done in the past. You are correct in terms of has localization moved at the pace that we would have liked to over the past few years? No. And that localization is something that we will need to pick up pace. And it's a little bit of an unfair comparison because the last couple of years has been very, very disruptive. We know what happened there.
So now we have to play catch-up. So if we wish away what happened in 2020, 2021 with COVID and everything else and the supply chain disruptions now is the time to catch up. And I think you'll be hearing and seeing a lot more localization plans. I don't want to give a target, here we want to go from X to Y, but certainly, we want to localize a lot more than what we've done so far. But I'll give you some benchmarks and then you can draw it on conclusions.
So automotive, for example, today, we're almost 95%, 97% local. So it's almost, you can say, fully local. On industrial, we are about 35%, 40%. So clearly, our ambition and aspiration is to get as close to the benchmark that we have internally, which is a very high level of localization which, of course, will not happen overnight. It will take time, but that's kind of our ambition and aspiration, and that's what we're working towards.
Any CapEx numbers that you would want to mention in line with this localization or in general?
In general, I can say we have -- we typically do about INR 100 crores to INR 150 crores of CapEx every year. And that has not changed over the past few years. Now that number will change going forward. What that number will be right now, I don't know. But it will be at least 30%, 40% higher than what we've done in the past.
Right. And just a follow-up. You did mention in your opening remarks that preparing for winter. So that doesn't affect any of your CapEx plans as much is what we should understand?
Well, certainly, it impacts, but the difference between preparing for winter and CapEx is that our CapEx plans are not based on 1 winter. And even if we start to think about investing in a new manufacturing line, it takes almost 12 months for start of production. So even if the winter does come, I think it will be a short-lived, maybe this quarter, next quarter, this year, et cetera. It does not impact our CapEx plans in general. But will there be a slight delay? That's, of course, possible depending on how severe the winter is.
[Operator Instructions] The next question is from the line of Sandeep Tulsiyan from JM Financial.
Congratulations on an excellent set of numbers. First question is pertaining to the sales breakup. If you could further split up your automotive and industrial sales between OEM and aftermarket, how these 2 share? And if you could also give us competitive numbers for fourth quarter of FY '22 to see how this mix has changed sequentially? That's the first question.
Yes. So the OEM share is around 55% for this quarter. And aftermarket is 36% Exports is around 10%. And quarter-over-quarter, I would say, OEM share was 52% and aftermarket was 34% and exports was around 14%. So not a significant movement quarter-over-quarter, I would say, in terms of the mix.
So I wanted to split between the OE and the industrial. Within OE, what was the split between -- within auto, what was the split between OE and aftermarket and within industrial, if you could share the same?
So within automotive, the automotive share -- the OE share was around 62%. And the overall VSM share was around 40% for this quarter.
Okay. And then industrial OE share would have been?
Just hold on a sec, sorry I gave you an incorrect number. So, it would be around -- so OE share would be around 65%, and VSM share would be around...
By VSM, you mean aftermarket? By VSM, you mean aftermarket?
Yes, that's right.
Okay. Understood. Second question is pertaining to some of the aftermarket products that we have mentioned in our annual report that we've been doing sprockets for 2-wheelers, steering, suspensions for PVs as well as a lot of belts for different 2-wheelers as well as EVs. If you could just give us an overview are we manufacturing all of these? If not, these are traded products, then that would continue to keep our traded products share high. What is the overall strategy? Is this a new market or is it a market which is already penetrated to some extent by us? Some color on these products if you could provide overall, please?
Yes. Sandeep. Well, first of all, thank you for reading annual report. I'm glad someone is reading it. But the spirit of the question is, how is the new products panning out in the vehicle aftermarket space? As you know, traditionally, we've been a predominantly bearings company. In the past, we've also added on some ancillary products like greases, lubricants, et cetera. But we really wanted to make a splash beyond our traditional friction-reducing products and therefore, the names you mentioned, sprocket, et cetera, fall in that category.
The reason we said we have a good ambition and a good potential to succeed in this new category is because we already have access to the retail markets where these will also get sold in addition to bearings. And secondly, we have an engineering center in India, which is any way working on product development for this bearing -- for these new products which we sell elsewhere in the world. So it made complete sense because we had the expertise in-house, and we had market access to also launch these in India.
Today, they are still very small. They are not more than 5% of our total aftermarket business. But keep in mind, it's only about less than a year that we've launched it. So we are right now penetrating this market through the traded route. We are not manufacturing these in-house. Over time, if this 5%, and we hope it will become maybe 10%, 15%, whatever it becomes , that's when we would start thinking about manufacturing these in-house.
That's clear. Second question was on another product that we have discussed was the hub 3 solution that we have developed for an electric LCV player. If you could give some more color, what is the differential in terms of cost for a regular ICE engine vehicle versus this solution that you have developed for the EV player? And what kind of a potential that you see in terms of conversion for this product going forward for other players?
Yes. I don't have information on the costs, et cetera. So we'll have to come back to you on that. But I think what you really want to know is, are the margins on this higher than the margins on the ICE products? That may be the more relevant question to ask here. Certainly, margins on electric vehicles products in general are better because these are high-performance bearings. You could -- you're talking about hub 3, but I could add a number of new other bearings to it because these are certainly technologically more superior bearings than our traditional ICE engine bearings, whether it's noise or friction or insulation or any other properties that are important to that manufacturer. So the margins are better.
Now how material would this margin increase be in the overall results really depends on the adoption of electrification in the industry. So today, the electrification in the industry is being led mainly by 2-wheelers. And then we expect passenger vehicles to pick up. We expect commercial vehicles to pick up. So we do expect electrification to proceed at a pace, which is not uniform across all segments.
Going back to your question on hub 3 specifically, hub 3 is for -- both for passenger vehicles, and you could extend that to maybe some LCVs there. So as you know, we work with a number of manufacturers in both these spaces. And our penetration in these segments really depends on the penetration of these OEM players in that space.
Any further questions?
Yes. Yes, I have one more follow-up question on the railway's piece. I think on the railway side, we have major presence on passenger cars as well as on locomotives, while the presence on freight wagons continues to be limited where we were expected to become eligible for bidding for 100% of quantity. Where are we on that road map for class E bearings? And what kind of a share are we targeting going forward Indian railways freight wagon piece specifically?
Yes. We have approval, Sandeep, now for Class E and also Class K. The 2 kinds of bearings. The Class E bearings are lesser load and, lesser load-carrying bearings and Class K are higher-load carrying bearings. We have approvals for both the bearings. We also supplied a sample order to the wagon manufacturers. On freight, as you know that the Indian Railways laid out a tender for a 3-year requirement of, I think, about 90,000 wagons over 3 years, so 30,000 a year. While that number becomes important is that the total wagon population for freight in the country is about 300,000. The railways -- and that's been developed over decades of freight. But the railways is now adding 10% of that wagon capacity every year for the next 3 years. So we think freight will be the next big growth opportunity. And because we are now approved locally, it also becomes a big opportunity for us.
So any indication you would like to give because this order used to get divided between 2 players earlier and the newer years had a very small share. So how would that look going forward between those 4 players who are...
So we are working with all the wagon manufacturers to make sure that SKF bearings also get purchased along with their legacy players there. So we're in discussions with all of them. We have placed pilot orders with a few of them and depending on how they -- how the relationship progresses, we hope to start seeing share gains in the freight in line with what we've seen in the past in passenger and locomotives.
The next question is from the line of Alok Ranjan from IIFL AMC.
Sir, my first question is on the transfer pricing. So if you can highlight in terms of both exports and the traded goods that we get, how is the pricing works, whether it is cost plus or whether it is sales minus? So if you can elaborate on the both sides of transfer pricing?
Okay. Do you have a second question, Alok?
After this, sir.
Okay. Ashish?
Yes. So Alok, the transfer pricing works on the net margin method, right, which is like we are buying any goods from a sister company, right? All the risks or significant amount of risks are borne by the manufacturing entity. And relatively, the sales entity takes limited risk. So considering that the margins for the sales entity is relatively lower than the manufacturing entity.
And same is the case when we are exporting any goods from SKF India to any of our related party company then in that situation since SKF India is manufacturing those bearings, the significant amount of risk is borne by SKF India, hence SKF India gets a better share of margins compared to the related party.
Got it. Sir, in relation to that, sir, in terms of the mix of the product, in terms of industry -- on the industrial side, the localization percentage is lower. Can we say that if the mix towards the industrial side increases, our gross margin and EBITDA margin will get deteriorated compared to when the auto mix is higher?
So can you repeat the question? I'm not very clear in terms of your question. Are you saying that if we have more localization in the industrial market, will the margin be higher?
Sir, my question is that our localization percentage is different in auto and industrial. On the autos, we are highly localized 95% to 97%, while on industrial side, 35% to 40%. A shift in the mix towards industrial in terms of the sales mix, how is the margin on the gross and the EBITDA changes?
That is right. So if the industrial mix increases and if we do not have an increase in the localization. There would be a -- overall margins will come down because our traded [ products ] margins would be relatively lower for the goods which are being traded by us. But if we increase our localization in SKF India, then our margins for the industrial products will be higher. In general, the industrial products have a better margin compared to the automotive products. So if we localize more and increase the share of the industrial products, then our overall margin will improve for SKF India.
Got it. Sir, one clarification in terms of the localization. On the auto side, generally, companies work on a just-in-time basis. So generally a different market have a very localized market -- localized manufacturing for auto side. But on industrial side, since these are low-volume products. And generally, you need higher capacity to ensure that every market is having their own localization. So can we say that the localization percentage on the industrial side will continue to remain lower?
Logically, yes, because the industrial batch sizes are much smaller than automotive batch sizes. So automotive, for example, you can -- one manufacturing line can easily churn out 10 million bearings a year because there's a demand for 10 million bearings a year from maybe 1 customer. On automotive -- on industrial on the other hand, the demand could vary from 5,000 bearings to 1 million bearings. It's a very large mix of SKUs. It has a large tail of smaller volume SKUs.
So there is no way that industrial localization will get to the level of automotive simply by the nature of the business. That's correct. But having said that, it will certainly increase beyond today's 35%, 40%. But it will not get to -- it's not feasible for it to get to 100% or close to that like automotive is.
Got it, sir. Sir, one question on the global scheme of things. On the Europe and Ukraine side, we are seeing lot of disruption happening. And SKF is having a bigger plant in Ukraine. Can India be -- in the near term, can India be an alternate source of supply, if there is any disruption which is happening in any of the SKF Europe or Ukraine plant? Can we -- can you please comment on this one?
Yes. We have 1 plant in Ukraine, which is right now functioning. It's not shut down. It's on the -- there are certainly disruptions there, but it's not shut down. But I think more importantly, as and when those disruptions become larger, maybe in Ukraine or some other parts of the world, can India pick up the manufacturing slack? The answer is yes. And even over the last few months, our Indian factories have been supporting our European customers by producing bearings as and when required, assuming, of course, we have the capability to produce those bearings. So the answer is absolutely yes.
Got it, sir. Sir, just one last clarification. On the windmill turbine -- wind turbine gearbox side, generally, we have cylindrical roller bearings, which are there. Now there are some alternatives, which are there like boost bearings, which other companies are talking about [ XZF ] and all. Whether SKF looking this as a threat? Or how do you see this new product boost bearing compared to the normal bearing which used to be there in the wind turbine gearboxes?
I don't have knowledge of what you're talking about. I'm sorry. So we'll have to come back to you on this new bearing you're talking about. I have not heard this as a threat so far. So maybe I'm just misinformed. So let's investigate this and come back to you if it's okay with you.
The next question is from the line of Bharat Sheth from Quest Investment.
Congratulations on good set of number. Sir, taking, I mean, on this localization on industrial side, you are right that in large bearing number of PCs are low, so localization is a bit difficult. But -- so which part of, I mean, industrial side, are we really looking to for a localization? And how big is the potential of that market, that is one part?
And within Industrial, there is a lot of cases of spurious bearing in aftermarket. So what exactly we are doing to resolve that? And third, a lot of these bearings are coming from China and looking at the China. So are we really getting a traction and making a good inroad in the industrial side? So if you can give some color on that, that will be of a great -- and last piece, this K engineering or K bearings, what we talk on this heavy. So how other have gotten approval apart from us?
Okay. There's 3 questions. Bharat, I'll try to answer all 3 in reverse order.
And one question is after that.
Okay. Who all have got the K class bearing approvals? You will have to ask our competitors. I'm not privy to their information. So best to ask them. The second question was around localization and what kind of products are we looking at? It really depends on what segments we expect growth to come from. We expect the industrial growth story in India to be led by infrastructure to a large extent, which means construction equipment, cement, steel, et cetera.
And many of these segments and some segments that support these growth segments like gearboxes, pumps, compressors, motors, et cetera, many of them use a small and medium DGBBs or SRBs, spherical roller bearings and deep groove ball bearings. So we expect our localization efforts, therefore, to be also in line with these products and these segments. Did I answer all 3 of the questions, Bharat?
Sir, no, these aftermarket for industrial, we are -- we were developed...
Yes. Yes. The first question was on counterfeit bearings?
And aftermarket overall industrial, what is our strategy to grow that?
Okay. The strategy to grow in the aftermarket is actually fairly straightforward, and it's also linked to counterfeit bearings. It's increased our reach as much as possible.
In industrial segments and industrial customers do not buy counterfeit bearings because it's cheaper or because they want counterfeit. In fact, very often, they cannot run the risk of running their machinery on counterfeit bearings. They are forced to buy counterfeit bearings because they don't have access or they can't reach authorized SKF distributors for genuine bearings.
And very often, you'll be surprised to know they end up paying a higher price for counterfeit bearings than they would do a distributor for SKF for the genuine bearings and of course, counterfeit bearings leads to failure, et cetera. So our strategy to mitigate the counterfeit problem and to increase our aftermarket business is to increase reach of our bearings to every customer who needs SKF bearings.
Today, our distribution network reaches about 10,000 PIN codes in the country. We have about 20,000 PIN codes total in the country. So we are about 50% penetrated. The rest is where we need to work on through an online channel or through more distributors or master distributors or direct, and that's the ongoing effort on increasing aftermarket.
What stage in this journey we are currently?
Well, we have launched an e-shop, an e-marketplace in January, and we are now seeing very, very large footfalls into that marketplace. I don't know the numbers offhand, but I think we're doing about 4% or 5% of revenue for specific segments through the e-marketplace. So it's still new early days, but we expect this to become larger in the days to come.
Okay. Sir, and second question on share on the auto side. Our larger presence is in 2-wheeler vis-à-vis PV, tractor and CV. So what ar our strategy to grow the share of, I mean, remaining part of this business?
Strength is 2-wheelers, both OEM and aftermarket. That's where more than half our revenue in the automotive comes from. And we will continue to play to our strengths. On the other segment, passenger, commercial and agricultural, we will go ahead and work with specific customers and specific subsegments. Passenger vehicles, we don't have a very large share, and we are okay with that. On commercial, we have -- we work with the largest players in the country, and we have a good market share with all of them. And again, like in 2-wheelers, we will keep working to increase that share and increase our business.
Also keep in mind, commercial vehicles have not grown at the same pace as 2-wheelers for the last couple of years for various reasons that you are well aware of it. So commercial vehicles will be a growth segment for us. but the growth rates there are slower than 2-wheelers. Agricultural tractors, et cetera, is not a large market, but we have a decent sized share there.
Sir, a last question on accounting side...
Mr. Sheth, please keep this your last question as there are many other participants who are waiting for their turn. Please proceed.
Hello?
You're audible, please go ahead.
This import of this product from the sister group company are largely in a euro term or dollar? And if euro is -- has depreciated vis-à-vis rupee. So do we get benefit? Or is there any recent closes there automatically?
Yes. So generally, most of our imports are in euros or SEK, which is Swedish krona. And both the currencies have depreciated. Now for the traded products, the ForEx risks is typically borne by the manufacturing entity. So now in this case, since it is depreciated, the benefit would go to the manufacturing entity. But in case these currencies appreciate, the negative impact will not come to SKF India. So that's how we are structured.
[Operator Instructions] The next question is from the line of Mukesh Saraf from Spark Capital.
My question is on market share. So in the annual report, you have mentioned that our market share has gone up in FY '22. Could you give some sense on which segments we're talking about? And probably if you could give some numbers around how much is the market share right now?
Sure. Our market share is, depending on the segment, varies from high teens to mid-20s. In terms of which segments has it improved, on the automotive side, we are seeing improving shares on the 2-wheeler side and on commercial vehicles. On the industrial side, we are seeing gains in cement, in steel, in construction equipment and in [ drives ]. And again, this is on account of our focus in these segments and the same 4 segments, you'll recall, Mukesh, I mentioned in an earlier question.
These are the high-growth segments where we are seeing good growth, and we're also investing resources in making sure we gain share and expand our portfolio in these high-growth segments. So these are kind of the 6 or 7 segments where we're seeing share gains. It doesn't mean we are losing share in the rest. All it means is that we are static in the rest.
And so just -- I mean, in continuation with that, when we say market share gains, is it more to do with import substitution? Or is it to do with actually gaining or actually in the competitive [ moving ] business? Or is it like new business opportunity that we are getting more -- is there like a pricing -- not a pricing war, but the like a stiff pricing competition?
It's both. Import substitution is not a big play. I mean, the large players are not really, with few exceptions, are not importing very directly. They're still buying from -- locally from people like us. So when we say a share gain, of course, there is some import substitution, but that's not the big driver for the share gain. The big share gains we are seeing is taking share from competition.
Got that. And my second question is regarding, in general, your margins. I mean with the steep increase in steel costs. We're still seeing that your gross margins are maintained around that 40% mark even in the first quarter FY '23. So this does obviously tell us that you've been able to pass through a lot of your cost increases. My question is what happens when steel starts cooling off? How much of this can be retained and hence, margin upside can be higher? Or do we have to again kind of -- do we have to pass through the cotton prices also, especially in the aftermarket?
So it really depends on the segment. It depends on the customer, and it depends on the market. In general, automotive OEMs, the prices are linked to the steel index. So when the steel prices go up, our prices go up. When steel prices go down, our prices go down. It's fairly straightforward that the industry practice and we are no different there.
On the aftermarket, we certainly have pricing power. So the aftermarket, we don't increase or decrease prices every month, depending on steel going up or steel going down. So we typically take a price increase in the aftermarket, it stays. I can't recall a time in the last 5 years, we've taken a price down in the aftermarket. So you've taken a price increase and it stays.
On the industrial side, it's a bit more complex. On the industrial side, unlike automotive OEMs, these are not linked to the steel index. Instead, we have binding contracts with the large industrial OEMs. These could be 3 months, 6 months, 1 year, et cetera. So we have to play out the entire time duration of the contract before we can go and ask for a price increase. The obvious solution here is we should limit our contracts to a smaller time period as possible.
With steel being so volatile, we clearly -- it would be foolish to tie in a 5-year contract because we don't know our prices will move. But this is knowledge in hindsight. So all our contracts going forward, as we negotiate new contracts, are either a smaller time period contracts or we are including in the contracts of clause to link it to steel prices. So we hope to see that also taking shape going forward.
Right. So what I understand is, in summary, in the aftermarket side, we can probably retain a lot of this benefit from -- if at all, you see a good correction in the steel prices.
Yes. Correct. The aftermarket, it's sticky. It will stick. On the OEM side, it's a question of negotiation and the duration of the contracts.
The next question is from the line of Sameer Dosani from ICICI Prudential AMC.
Firstly, so I'll request if you can do this frequently that will be good for us. Second, I mean, overall, when you speak about increasing localization, I assume that includes our unlisted entity as well. So can you increase localization, whether that share will come to the listed entity or it will have some? How does that split to listed versus understand? And also, what is -- can you share some color on the export strategy? Is there some strategy to shift business or maybe manufacturing or making India as a hub for the global parent?
So Sameer, the 2 questions you've asked me get asked at every investor call, and I'll give the same answer to every investor call. And I'll say it again here. Number one, we are not -- our strategy is not based on exports. Bearings, by the very nature of our business, it is to serve local customers. And it may differ for the competitors of ours, but for SKF, we want to be as local as possible. So our strategy is not to increase exports. We use exports as a filler. So for some reason, we have a gap in our manufacturing lines for low demand.
We would use that to fill the lines to export something. Or if we have a war in Ukraine and they need our help, we will step in and make some bearings for them. But we don't have salespeople out there in the world trying to sell India-made bearings to increase share. So that is not our strategy. Exports does not really want to focus on. That's a conscious decision we have made, which may be different from other competitors, but that's all right. That's our strategy.
On your first question on, on the 2 entities we have in India. There is no magic formula here. There's nothing like saying, okay, 50-50 or 20-80 or 60-40. Both these entities are serving different segments and different -- have different manufacturing capabilities. The listed entity that we have, the one that we're talking about right now is specifically set up to serve automotive customers and industrial small- and medium-sized bearings, which means if the demand increase we see comes from these segments, we will have to invest in the SKF India facilities there. The other entity is more an export facility, not -- export is wrong the word, is more an aggregation facility will the aggregate demand for large-sized industrial bearings around the world.
In response to your previous question, I said, industrial bearings, their batch sizes or the requirements can vary from 5,000 -- actually sometimes even 500. 500 to 5,000 to 50,000. So fairly small numbers as compared to the small and medium-sized bearings. So that other facility in Ahmedabad has been set up very differently to make large size bearings. Even if you wanted to make those bearings in our Pune plant in SKF India, we could not do that because we don't have the capability. And likewise, if we wanted to make small and medium bearings in the Ahmedabad facility, we cannot because we don't have the capability there.
So it's not a question of a choice we are making internally where to invest. It's a choice that customers make for us, where is the demand. Demand comes for large-size bearings. It will go to Ahmedabad. If the demand comes to a small and medium, it will go to the listed entity.
Fair point. So just a follow-up. So increasing localization, is it going to be smaller sized bearings or is it going to be on the larger bearings that you'll see?
Yes. So the big market is in the segments I mentioned, construction equipment, steel, cement, motors, gearboxes, is all small and medium-sized bearings. It's not to say large-size bearings will have no investments. Railways, for example, our large-sized bearings, wind is large-size bearings. That investment will need to go to Ahmedabad, but for everything else, it will have to come to the Pune or Bangalore or Haridwar.
So is it fair to say larger part will come to the listed entity, you think?
I don't know the answer. It depends on the demand from customers. If tomorrow the wind business in India really picks up. If it becomes 10x our current volume, that investment will need to go to the Ahmedabad because we can't make the wind bearings in any other plant. But if tomorrow, our tractor business increases by 50 that investment will need to come to Pune or Bangalore because we can't make that in the Ahmedabad.
Understood. Understood. And lastly, you spoke about gaining market share in specific segments in India. Just to understand what are -- I mean, are these -- what kind of efforts or what are the benefits that are playing out in our favor that we are -- what actions are we taking to gain this market share in India? Just to understand that.
Sure. And I'll answer a larger question around strategy. Strategy is as much about doing certain things as it is about not doing certain things. We can't be doing everything. And because that's not strategy, that's insanity. So we are -- we have a strategic plan that we laid out a couple of years ago, which got delayed because of COVID. But now this COVID is behind us. We have kind of reevaluated our strategic plan and decided that here are the few segments we will focus on.
And when we say we focus on these segments, it means doing a number of things. It means making sure we have the right products to service those segments. So I'll give you one example. So for example, in construction or heavy industry. There are segments around idlers, segments around conveyors and pulleys and segments around crushers. Now our strategy it will have to inform us, do we have the right products for all these segments or not?
And what we've learned now in the last 18-odd months that while we have products in some segments, we don't have in some other segments. So then we put our entire product development team in India to work on those new products in some segments. So for example, in crushers or in dump trucks, we need a different technology and our teams are now working on developing those products. So that's on the engineering side.
Next stage is on the manufacturing side. After we develop those products, are we making the right investments to manufacture those bearings where they are needed. And third is on the go-to-market side. As we are hiring more people, are we hiring people who come from a bearings background? Or are we hiring people who come from a segment or industrial background? So I would much rather have a guy who knows the cement industry and can walk into a cement plant and speak to the cement factory manager and talk to that manager in his language versus have a person who comes and who knows only bearings. So I'll give you -- these are some examples of changes we have made in the last 18 months or 24 months, and that's bearing fruit now.
Understood. Understood. Lastly, if I can squeeze one. What is the margin trajectory going to be for SKF as a whole because in the backdrop of steel prices cooling off a little? So can you just share some insights on that?
I have no idea, frankly. I have no idea. If you can give me a trajectory of steel prices and freight prices and ForEx, I can tell you trajectory of margins.
The next question is from the line of Harshit Patel, an Individual Investor.
This is Harshit from Equirus Securities. Sir, my first question is on the overall auto bearing industry. So could you give a split -- I mean, could you give us a sense on what would be the overall bearing content in a typical 2-wheeler passenger vehicle and the commercial vehicle in the value terms? And similarly, how the overall industry value would be bifurcated between engine, transmission, wheel-end so on and so forth? That would be my first question.
Okay. That's a very specific question. I'm sorry, I don't have the answer for you right now in terms of value by vehicle, et cetera. I can tell you in terms of number of bearings per vehicle. I think you're looking for a more market research kind of answer. So I'll have our teams come back to you.
Sure. So sir, even if you could answer on number of bearings even that will be very helpful, if that is possible?
So I'll answer with 2-wheelers as an example. 2-wheelers typically use between 12 and 16 bearings between the wheel and the transmission and the engine.
Right. Sure, sir. Sir, my second question would be on our rotating equipment performance business. So you have [ innovated ] quite a lot in the annual report as well. So sir, could you highlight as to what proportion of our overall sales did be derive last year from these activities? And also going ahead, which will be the end user industry that we are targeting?
It stood at about 5% to 7% of our business is REP or Rotating Equipment Performance. The industries we are targeting is where the cost of failure is more than the cost of replacement, which means -- what does it mean? It means that we have to target industries like steel or cement or wind turbines, for example, where they cannot afford unplanned downtime, they can't afford failure because the cost of a bearing failing in a wind turbine or the cost of a bearing failing in a steel mill or a steel converter or a cost of a bearing failing in cement press, it's not just the cost of the bearing, bearing. It's the cost of the loss of production. So those industries cannot take the chance.
Therefore, they would much rather work with someone like us to be able to predict failure before it happens. So what these industries hate the most is unplanned downtime. They would really like to see is that, okay, here is an SKF bearing in my converter. It's today being monitored by SKF through a remote diagnostic center. And based on the data we are sending to them, we think in the next 3 weeks sometimes this bearing is probably going to fail. With this information, that factory manager can then make a call in the next planned downtime on a week from now. He will call SKF in when the machines are stopped, pull out that bearing. And meanwhile, the SKF guys have come with a new bearing to install to replace the taken out bearing, so the machine starts running all over again when the planned downtime is over.
And then the SKF guys go back and take a look at the bearing and see what needs to happen there in terms of evaluation or remanufacturing or what have you. So in these industries, the cost of failure is much more than the cost of replacement. And therefore, these are the industries we are targeting with REP.
Understood, sir. And if I can just squeeze in one last question. So you have given quite a lot of idea on the initiatives that we are taking on the freight wagon front, wherein we are coming from a very low base. So could you give us an idea about our overall market share in passenger coaches and locomotives where we are one of the leaders of the market? That will be my last question.
Yes, we are around 30%, 40% in those 2 segments.
The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.
I have 2 questions. First, on the aftermarket side, you mentioned that availability is one of the most critical drivers, whilst an online platform will help, but in India, typically, you need a physical presence. So is it possible to quantify what has been the increase in terms of China footprint since our focus has been rising on the aftermarket side? And what -- have you budgeted any increment in terms of channel footprint over the next 2 years?
And the second question is on the road map on localization. You mentioned 35% is the localization on industrial side, but is there any road map in terms of where you want to reach in the next 2 to 3 years? And has the capital allocation been sort of pin down to sort of reach that target? And who takes the decision in terms of CapEx? Is it the Indian entity? Or is it the parent entry in terms of CapEx to be incurred on the localization side? These are my 2 questions.
Okay. The last question is easy. Our localizations will be somewhere between 35% and 95%, 35% today. And like I said earlier, the benchmark is 95% for automotive. Obviously, it will not hit the very high number of automotive for a reason I gave earlier. So it will be somewhere in between this and that number. And of course, it will not happen overnight. It will happen over a phased approach, and it also depends on which segments we focus on, which bearings we make, et cetera. And that plan, we will share with you as and when we can. The CapEx decisions linked to these investments are made locally by us and as they should be because these are -- this is our business, and we know it best.
On your first question on the aftermarket side, I think you mentioned automotive. But the e-marketplace or the online marketplace is more geared towards industrial. On the automotive side, we are fairly well penetrated through our distributor network and then the retailer network and then the tertiary mechanics network. On the industrial side is where we have some work to be done. The example I gave earlier about counterfeit bearings and the 10,000 PIN codes was in relation to that. So that's where we want to increase our footprint, not by adding more distributors but by adding more accessibility to all the PIN codes in the country that need our bearings.
The next question is from the line of Sonal Gupta from L&T Mutual Fund.
Just -- I mean, going back to -- could you give on a full year basis for FY '22, I mean, like a little more granularity in terms of the revenue mix? So auto, like you said, is 42%. How much would be out aftermarket as a part of autos?
So we already answered that, right? We said out of auto, around 35% is aftermarket and where 65% is OEM.
Okay. I thought that was for the quarter, sorry. And in industrial, would you be able to break this up as to how much would be wind and railways and I mean just trying to understand...
Industrial is much more diversified. None of our segments are more than 8% of the total industrial business. So you can make a good guess. It's about 7%, 8% for the last -- sorry, 7%, 8% for the total business. Not the industrial businesses. So wind, railways, et cetera, are ballpark in that range of 7% to 8%.
And Industrial would have a meaningfully large aftermarket?
Yes. That's right.
Would you be able to share what this is?
It's around 45% to 50% would be the aftermarket business within industrial.
Got it. And just my last question was, again, on the auto aftermarket side. What we're seeing is that a lot of the OEMs are also trying to grow their aftermarket revenues. They're getting into traded products, they're getting into -- they're trying to enhance the share of the pie, especially on the 2-wheeler side, you've seen fairly aggressive moves. So does that really impact you in any way? I mean, does your source -- I mean, do they source for you for aftermarket? Or will they be sourcing from other suppliers or aftermarket? Just trying to understand.
Yes. And that's a good question. We are seeing a number of OEMs in the automotive space also get into what's called OES, original equipment spares, not just in bearings, but across the entire spares product line. Bearings become a very critical part of this portfolio, unlike, let's say, a bulb in a headlamp or a blade in a windshield wiper. A bearing contributes a lot to the performance of that vehicle. So if a 2-wheeler manufacturer has put in an SKF bearing as an original equipment spec and they try and sell OES, they would want to make sure the same bearing that they put into their original vehicle also gets put as a replacement.
So really, the OES market is -- derives its share or its volumes from the OEM market. I would be very hesitant to say that an OEM manufacturer would put SKF in the original equipment and then put some other brand or other traded products from another country in their OES because that's called reputational damage to the OEMs if that bearing fails in the aftermarket. So in all these cases, you are mentioning, we are seeing a very, very tight cooperation between SKF and that manufacturer. Of course, it depends on the relationship we have with them at the OEM level first.
Got it. But these OES supplies would count as OEM for you? I mean, like -- or do you count it as -- because it's going -- I guess the packaging, et cetera, will be different for that?
Well, it today counts as OEM because it goes to the OEM. But today, it's not that material, frankly. It may seem like a lot, but it's not that much.
Got it. Because I mean that -- because again, in these segments, you're seeing a fairly large share of aftermarket revenues and like you said, bearings is a key product in there. So that's why -- but you're saying that as of now, it's not very...
As of now, it's -- it's not to say it won't become large in the future, all I'm saying is as of today it's not a large part of even their revenues.
Right. I mean -- and the point I was getting at was that there is a cannibalization of your aftermarket because of this and because of OEM sourcing from some...
No. On the other hand, I would say it's actually beneficial to us because if a large OEM manufacturer now puts out an OES under their brand name, it's, let's say, SKF inside that packaging, it's more likely than not that the mechanics now would then use that OES to retrofit a 2-wheeler versus putting in place some other bearing.
The next question is from the line of Jeetendra Khatri from Tata Mutual Fund.
My questions have been answered.
The next question is from the line of Salil Desai from Marcellus Invest Managers.
So the first question is, in the annual report, you have some references to a patent filed, 14 filed and 3 in process. I wanted to clarify these patents are -- are they part of what the India R&D center, the global technical center does? Or do you do separately your own R&D also product development for your business?
It's actually a combination of both. So we do some -- R&D is predominantly done at the engineering center, but the patent filing can happen at both entities.
Okay. So these would be an India-specific product that you are developing and for that you file a specific patent that will largely be kind of geographically we implemented in India?
Yes.
All right. Okay. Second question, globally, are you seeing, or at least we are seeing that most of the larger bearing players are trying to have a more industrial orientation in the business, right, most of them auto originally. And there's been a fair bit of M&A in this regard. Do you see that as a sign of a rising competition in the industrial business where you have probably a more established business today?
Salil, sorry, repeat your question. They're not clear to me. What are you asking exactly?
Yes. See, globally, what we've done is that some of the peers, at least the large global players, some of them have been trying to increase the share of industrial business in their overall revenues. A couple of them also done some large M&A transactions in this field. Would you think that given your strong presence in industrial market? This is a sign of the rising competition as the market gets more consolidated on the existing side. If you have any views or if you seen a trend like this?
Is it a sign of surviving competition?
You see more competition on the industrial side, there's consolidation, right? Let's say, your larger peers are acquiring the smaller names. And they increase their industrial share versus auto and you already are a larger industry player globally. So would you think that's a threat or how would you respond to that?
I'll restrict my comments to India. I don't want to comment on what's happened globally if that's okay with you. In India, we are about 50-50 between automotive and industry, but our industrial business is growing faster than the automotive business. Globally, we are about 70-30 in favor of industrial. So I think over time, we will also move towards that mix. So in terms of growing our share of industrial in Indian, and that's where all the discussion so far around localization, new product development, aftermarket development share gains. So a lot of effort is going towards increasing our industrial footprint and industrial businesses.
So to that extent, we will certainly become -- we certainly hope to become an even stronger player in the industrial space than we are today. We are the market leader today in industrial but our -- but we will consolidate that even more through all these efforts. On specifically on M&A, we have -- we have looked around the country, we really haven't found anyone that interests us that much from an industrial M&A perspective. So we are not going down the M&A route to consolidate and strengthen our industrial position. It will all be organic, all through our own efforts.
Great. Good to know that. And so finally, just one clarification. When you say localization, what you -- are you referring to kind of a like-to-like replacement what has been imported to complete manufacturing of that product in India? Or is it a mix of some local procurement versus some parts still getting imported?
Okay. So localization for us is not just the manufacturing of bearings. This is an industry where the supply chain can be very complex. To give you a very simple example, Salil and I'm making it simplistic here, but a bearing would have the rollers or the balls, would have the cages, would have the inner ring and the outer ring. So let's say, 4 components. And of course a couple of other components, but let's -- for the sake of simplicity, lets keep this 4 components.
When I say localization, it also means localizing the suppliers for these components. Sometimes it could be the steel we are sourcing. Sometimes it could be the component we are sourcing. And of course, it could also be the bearing we are assembling or manufacturing. So when I say localization, I mean localization of the entire value chain, not just -- it's not as simple as SKF setting up a new line to assemble bearings because if you're still importing that steel from China, it is still not fully localized.
Perfect. This is really useful to know. And sir lastly, on the REP, the business model. So there is kind of a bearing supply component to it. And then there is a service component where you must be charging on the monitoring of the equipment. So if you can explain in detail how the model works? You charge a fee on the service part, I assume, right? And then there is the hardware supply. And between the 2, I think you had a sale contract where per tonne basis, then would that involve a fee and either component also or just completely per tonne basis. So maybe an explanation how the model works?
The classic REP contracts are performance contracts. They are not linked to a fee or the bearings or anything like that. These are really linked to performance. For example, we have a contract with a steel supplier. It's a pay per tonne contract. The more steel you produce, the more you will pay us because we are then guaranteeing you uptime on your steel mill. So by guaranteeing you a higher uptime through our bearings or our diagnostics or our insights, you are able to produce more steel and therefore, we would like a share in that additional steel you're producing. So it's a pay per tonne contract.
In some other contracts, it could be reducing mean time between failure. It could be increasing availability. It could be downtime. So it really depends, Salil, on the customer and what are their pain points. And therefore, in response to an earlier question, I had commented that when we hire our go-to-market people now or our salespeople now, we are now hiring industry experts. We are no longer hiring bearing experts.
So the cement guy needs to be able to walk into a cement plant and at a glance, identify the pain points for that factory manager and then propose an REP solution, which will then mitigate that pain point and not just talk of bearings because then you are reduced to a supplier of a component versus being a true partner in the performance of that factory. So that's what we are structuring REP contract as.
The next question is from the line of Vijay Sarthy from Anand Rathi Shares and Stock Brokers Limited.
Just one question. Sir, it is generally perceived that the bearing is basically a buyer's market and the perceived quality is almost same among the customers. And given that the pricing is more of competitive or concerted in some cases, but how do you -- what is this positioning -- unique positioning point for you to increase market share? Because you mentioned market share has increased. How does this work if you can help again?
Well, obviously, I'll disagree with you, but we continue to disagree. We don't think bidding is a buyer's market. If that was the case, it would be a simple price game and a race to the bottom then the cheapest bearing would have the highest market share. But that, as you know, is not the case. We are, by no means, the cheapest in the market, but we have the highest share. So that I would just put out there a data point for you, to say, I would disable that it's a buyer's market.
But more importantly, how do we gain share? Let's take -- and again, I'll repeat an example I gave earlier on. In terms of industrial customers, the cost of a bearing frankly is very, very small in the largest scheme of things for a factory manager. It's a very small part of that machinery. The cost of a bearing in a commercial vehicle is very, very small compared to the cost of the entire vehicle. So that -- so what customers really go and risk the performance of their vehicle or their machinery by buying the cheapest bearing, I would imagine not. Why? Because the cost of failure is so much higher.
Yes, they could go buy a cheaper bearing than SKF. They could buy a Chinese import and put it in the machinery. And if the machine we face, that will cost them a much more higher loss of production and revenue and profits than if they had paid the premium to SKF at the beginning. So that's where we need to gain share on. We need to gain share on technology. We need to gain share on performance. We need to gain share on availability.
That, by the way, has become an increasingly -- increasing point of differentiation today as compared to 2 years ago. With the recent supply chain disruptions in the COVID world and this current Ukraine war, et cetera, availability and reliability of supplies is a big differentiator for people who want to gain share. No one wants an assembly line stopping because, oops, we could not supply the bearing and it's stuck on the sea in some port in Chennai. So these are all the differentiation points I'm laying out for you in terms of share gains that are important that we are working on.
Sure, sir. One more question. So what can obstruct you to achieve your long-term target of localization in industrial business?
Well, the obvious answer is demand. If demand falls off the cliff, we are not seeing, by the way, but that's the obvious answer. Short of demand falling off the cliff, there are no other obstructions.
The next question is from the line of [ Tanush Mehta ] from JM Financial.
Sir, most of my questions have been answered. I just had a small question. I just read in one of your press releases that SKF had partnered with Indian Railways for remanufacturing of bearings and they've successfully recycled close to 20,000 bearing. So can you just throw some light on that?
Yes. The Indian Railways, as you know, runs in the world's largest or second largest train network anywhere. And so our bearings go into the bogies and I'll pick an example only of passenger wagons right now, leaving aside locomotives and freight. So our bearings go into these bogies. And as and when these bearings have a life, it could be a number of kilometers or time, et cetera or just monitoring their condition through diagnostics. Whatever marker railways will use and it varies region-to-region. They have 2 options. They had -- they can -- when that marker is over, could be time or could be duration of mileage or condition monitoring, they need to bring those wagons back to their workshops.
And Indian Railways runs many, many workshops around the country, you know all the names, the CLWs, et cetera. And then they take out those bearings because they cannot run the risk of a bearing failing when the train is running. Again, it goes back to an earlier answer, the cost of failure is so much higher than the cost of replacement for a train wagon. If a bearing fails, the train derails and there's loss of life. So the Indian Railways will not take a chance of the bearing failing.
So when that marker that they have set is met they will pull that wagon to back to the automotive workshop, take out those bearings and send it to SKF for what we call remanufacturing. The bearing has not failed, but it comes back to SKF for checking the quality of the bearing. In many cases, we will say the bearing is okay. It has so much more life left on it or we will say it needs some bit of refurbishing and what we call remanufacturing. So we can do that in our factories and send it back to the railways. And that's what is our 20,000 bearings per year remanufacturing program.
Okay. So basically, this would be more of a repair and maintenance work?
It would be -- yes, I would call it refurbishment or manufacturing, but yes, on the same lines.
Okay. And I've seen, so from like -- from 2010 to 2022 in the last 12 years, we've seen our sales rising from INR 2,000 crores to close to around INR 3,500 cores, INR 4,000 crores now, whereas at the same time period, our net block has gone up from INR 280 crores to INR 400 crores. I just wanted to know that with the increase in CapEx that we are planning every year, that is around 30% to 40% increase in an annual run rate for CapEx. Can we see a gross block going 2x in the next 3 to 4 years?
So again, it's not going to be 2x. But again, it will all depend on the CapEx investments that we make. So given that we are looking at investing INR 100 crores to INR 150 crores, right, per year. I don't think it will be 2x.
The next question is from the line of Viraj from SiMPL.
Most of my questions have been answered. Just one on REP. So this is the are 3 parts to the question. First, we've been offering this particular service solution for a little more than 1.5 years now. And we've been quite ahead of the competition also in terms of rolling out and catering to customers. So I just want to understand what will be our share currently in the marketplace for REP. Will it only be a solution for the India market, which will be catering from SKF India or we will also look at eventually rolling out to geography, say, Southeast and the likes? That's part 2.
And part 3 is since this is a more performance related kind of revenue model. What changes on the cost part you would have to do to make sure that the business is profitable. And is the business right now still in investment stage or it's quite profitable? Any perspective you can share on profitability?
Yes. I'll restrict my answers to India, if it's okay with you and not comment on Southeast Asia. That's out of scope of this call. In India, our REP business is today an investment stage. We launched it about a couple of years ago, but it's been a very difficult couple of years because of the pandemic and everything else. So it's also a learning we've had around which industries are most accepting of a performance contract and which industries are not. So there's no point selling an REP contract to an industry where the cost of failure is less than the cost of replacement. It simply does not make economic sense for the industry. And therefore, we are now focusing our efforts in REP is the learning we've had on some specific end segments and some names I mentioned earlier.
In terms of share of REP, very, very early days. It's about 5% or 7% of our total revenue. I don't know what does that translate in terms of market share in the segments. I don't even know if other competitors have comparable offerings that we have. Maybe they do, maybe they don't do. But still very, very early days to compare market shares there.
It's more important right now to figure out how many customers can adopt these performance contracts as quickly as possible because that leads to a multiplier effect, and we should be less concerned about market share and more about adoption. So that's kind of where our focus is right now. And certainly, with our new focus on some specific industries, we are seeing better progress than we have done in the past.
Sir, on the cost part, if you can share because there's more of a performance-driven kind of a pay model as against your product base in which we have traditionally been kind of more ...
Right. The cost -- most of these performance contracts are linked to data being streamed from the bearings into a remote location. If you ever come to Pune, for example, we'll be happy to show you around what we are calling the remote diagnostic center. These are a bunch of engineers who are basically monitoring assets on some large screens in front of them, 24/7 across the country. But again, these engineers are doing are not willing it firsthand, they're not doing it themselves. They're monitoring algorithms and machine learning programs that are monitoring the data from all these assets.
And the engineers are there to mainly alert to customers if the algorithms point towards an aberration. So for example, if a bearing in a steel mill converter start to show signs of failure, it will alert our engineers who will then cross check the data to make sure the algorithm is saying what is supposed to say and then work with the customer to make sure they understand the consequences.
So the only additional cost that I would say are the cost of setting up this remote diagnostic centers and engineers we need to hire to monitor that there. That, of course, gets amortized, it becomes easier, the more assets we start monitoring. So it's an investment stage right now, but over time, it will become more and more part of the business, and those costs become even -- cost becomes very insignificant compared to the performance gains we get from them.
So when this business kind of reaches a steady state or a mature state, how would one understand the margin structure in this kind of businesses? I mean any learning from how it would have evolved at the parent level? Anything you can share on that front?
Yes. The margin structure will certainly be better than selling only products. That's obvious because this is not about selling more bearings. It's about selling better meantime between failure. It's about selling more uptime, et cetera. And the contracts will be structured in the future where we can gain in the share of profits of customers. So if we can help the customer increase uptime. Let's take the example I gave earlier, pay per tonne contract we have with a steel mill. The more you produce, the more we get paid. Beyond a time -- beyond a point, our incremental cost is 0 here, apart from, of course, the cost of bearings we need to supply to them to make sure their converter keeps running on time.
So the margin structure will be far superior than the bearing product line in steady state. Now what that number will be, I don't know right now, frankly. That depends on adoption of the REP contracts by segments and customers. And certainly, the more profitable the segment that adopted, the higher the margin.
The next question is from the line of [ Vipul Kumar Shah ] from [ Sumangal Investment. ]
Sir, congratulations for a very good set of numbers. Continuing on the previous speaker's question. So REP business is 5% to 7% of our total annual turnover right now. Where do you see it over the next 3 to 4 years?
Our stated ambition is for it to get to 20% of our business in the next 3 years.
So right now, can I ask whether that business is EBITDA positive or negative?
It's right now neutral.
Neutral, okay. And what should be the margin trajectory if it reaches 20% of our turnover?
It will be better than the bearings product line.
Significantly better?
Yes, I hope so. That's the intent we're doing it. And again, to elaborate on the previous answer, it depends on the adoption of performance contracts, depends on which industries and depends on what performance are we promising. So if we are only promising incremental gains we will only have incremental profitability. If we are promising major gains, we will have major profitability, and that's an education we need to do in conjunction with the customers to make sure we are sharing in the profits equally.
The next question is from the line of Jason Soans from Ashika Stock Broking limited.
So I just wanted to know about in terms of this EV transition, how is it going to play out? So obviously, IC engine bearings will probably slowly phase out and then you will have these bearings, which will cater to the EV applications? And you did mention that they are higher-margin products and technologically superior. So just wanted to know from a landscape perspective, how does this -- what's your sense of how is going to pan out in terms of probably the volume of bearings will come down, but there will be more specialized bearings? So the -- in terms of product mix perspective, margins will improve, there, will be more higher value bearings. How is it going to -- what's your sense on that? Just wanted perspective from our side for that.
Sure. The short answer is that while the number of bearings will go down, the price per bearing will go up. And our estimate tells us will be revenue neutral in the electrification game, and we may be margin positive because of higher performance and better margin bearing. That's the short answer. The longer answer is that electrification is today crawling at a fairly slow pace. There's more noise in the market than reality.
Also, the adoption of electrification is very different across different segments and within the segments across customers. 2-wheelers, as we know, is probably the furthest along the block in terms of adoption. And then followed by passenger vehicles followed by last mile commercial vehicles followed by intracity buses, et cetera. So it really depends on the adoption curve of electrification to give you a better answer in terms of margin improvements over the years.
Sure. And just a question in connection with that. So I was reading about your hybrid deep groove ball bearing, which is basically a combination of ceramic rolling elements as well as steel rings. So do you see an increased usage of ceramics for EV bearings going ahead?
Yes. They actually made for exactly that purpose. The hybrid ceramic bearings, and you're right, the ceramic refers to the cores or the rollers. Everything else is steel. They are meant for exactly that purpose. They have the better insulation, lower noise, less friction, high speed, et cetera. And we expect the hybrid bearings to lead the way in electrification.
Sure. Sure, sir. And just one final question from my side. You did mention that -- so SKF is obviously -- so bearings are a local play and it's also just to filler. So in terms of locally, there is a lot of focus on infrastructure initiatives and the government of India and a lot of other initiatives as well, looking at positioning India as a viable and a strong manufacturing alternative to China. So I just wanted to know what your sense in terms of a ground level, what do you see? And what's your sense of the manufacturing landscape you're in India. And how do you see it going out for the next 3 to 5 years?
Yes. I think it's a little naive to imagine or to say that we will replace China supply chain excellence in 3 to 5 years because that excellence has been built up over decades. So all those will talk about replacing China with Made in India, it's a little naive about that. But having said that, having said that, there is certainly a demand from customers and industries to derisk China, the so-called China plus 1 or China plus 2 strategy.
Now when you say plus 1 or plus 2, India is one of the many countries, which could be plus 1 or plus 2. It could be Bulgaria, it could be Mexico, it could be Vietnam. It could be any other country. And I don't think we are there yet in terms of our supply chain excellence. We may have good manufacturing capability, but we don't have world-class logistics, for example. We don't have world-class clearances. So I think lot more needs to happen on the ground to be able to say that we are a credible threat or a credible player in the China plus 1 or China plus 2 game.
Sure, sir, sir, my question was, I mean, clearly, so China is a behemoth, yes, definitely, that is -- but even if you see -- even if you see gradual steps, are you seeing some gradual concrete steps, my whole question was that. So even if a small portion is diverted towards India, that also is a bit -- on a base, it becomes a big jump. So I was talking about on that perspective.
Yes. Absolutely. I think the small incremental shifts we are seeing -- of course, we are seeing that, but yet to see that large incremental shift that will be more than rounding of error. We're yet to see that.
The next question is from the line of Sandeep Tulsiyan from JM Financial.
Yes. I had a couple of more questions. First one was on the pricing versus volume growth. If we look at the last 3 years CAGR for our sales, somewhere between 10% to 11%. I know it's not very simplistic. There's a big portion of mix change over here also. But if you could give us some sense how much of this 11% annualized growth rate would have come from pricing increase and how much of that would have been volume growth?
Yes, I don't have the numbers for 3 years CAGR, Sandeep, but I can give you a sense for last year. This is what we have. I have top of memory right now. Pretty much our sales volume is led by volume about 40% and price mix change about 60%.
Sorry, price change is what?
Price and mix both, about 60% and volume about 40%.
Understood. Understood. Second question was pertaining to the OES sales part that you explained. What we have seen is that typically with a lot of these Korean car manufacturers, the Tier 1 supplier tend to be a Japanese or a Korean company. So would that be a hinderance in increasing the OES sales as -- and then that piece grows?
Well, specifically for those examples you mentioned, we are not a large player in any of those segments.
Okay. That explains. A third part of the question was on the comments made by our global CEO on the investments in Asia Pac. He mentioned that current share of Asia is at 60%, you were going to increase it to 85%. And we want to make all incremental investments towards manufacturing plant in Asia. I'm assuming India is a large part of that. But you did mention export does not feature in our overall strategy of growth. So is -- was that reference more towards the unlisted entity? Or how do you just tally these 2 views?
No. That reference was more to localization. It wasn't in reference to a specific plant. It was meant in terms of more localization, therefore, more manufacturing in the country.
Okay. So he foresees that kind of growth within the Asian end markets...
Yes. Right.
Okay. Understood. And one last data keeping question is on the 4Q mix, what Ashish shared was on the OE aftermarket side and exports. If you could also please share the automotive and industrial mix for fourth quarter, so we did a proper sequential comparison.
Yes. So for the fourth quarter, last year, mix was -- so last year, for the fourth quarter automotive was 40%, industrial was 47% and export was 14%.
Ladies and gentlemen, this is the last question for today, which is from the line of Bharat Sheth from Quest Investment.
As we have no response from Mr. Sheth's line, on behalf of SKF India Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.