SKF India Ltd
NSE:SKFINDIA
Earnings Call Analysis
Q1-2024 Analysis
SKF India Ltd
The company is anticipating a continuation of double-digit growth in its industrial segment, which stands as a strong marker for investors on the future revenue trajectory.
A significant increase in other expenses was noted for the last quarter due to the company's celebration of its 100-year anniversary, an event which is not expected to recur and, thus, suggests a potential normalization of expense levels in future reports.
Efforts in managing the product portfolio thoughtfully to phase out less profitable or unprofitable business, combined with price increases passed on to customers, have led to a stabilization of traded margins. This indicates a move towards consistent profitability and efficiency in operations.
The revenue breakdown showcases industrial and automotive segments contributing 51% and 40%, respectively, to the total revenue with exports accounting for around 9%. Such a distribution implies a strong domestic focus and a diversified revenue stream.
Actions taken to localize bearing production for the wind market, along with securing necessary approvals for supplying the freight wagon segment, point to potential areas of growth and increased market share. This strategic push hints at adapting to market needs and expansion opportunities.
Current localization levels stand at 35%-38% for industrial bearings, with a strategic objective to reach approximately 60% in the coming years. Such localization efforts in manufacturing and sourcing are likely to reduce lead times, cater to customer needs more effectively, and may lead to a reduction in costs and improvement in margins.
Exports represent a smaller, non-central part of the business at 7%-9%, with the primary focus placed on serving local customers and market needs. Moreover, capital expenditure expectations are projected to remain similar to historical levels of around INR 150 crores annually, providing insight into the company's investment strategies for the near future.
Digital integration initiatives, such as connecting customers with warehouses and enhancing service offerings with performance contracts, especially in industries susceptible to high costs of failure, illustrate ongoing innovation and customer-centric strategies to improve market penetration and customer satisfaction.
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Ladies and gentlemen, good day, and welcome to the SKF India Limited Q1 FY 2023-'24 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to hand it over to Aparna Srivastava from SKF India Limited. Thank you, and over to you.
Good morning, everyone. Thank you for joining us today. With us, we have SKF India's Managing Director, Mr. Manish Bhatnagar; and our CFO, Mr. 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 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 business and the financial quarter under review.Let me turn the call over to Mr. Manish Bhatnagar, who will give an overview of the company's business activities and developments for the Q1 FY 2023, '24. We will then open the call for Q&A. Over to you, Manish.
Okay. Thank you, Aparna, and welcome, everyone, on this earnings call. I'm joined by my CFO, Ashish Saraf. Some of you have met him earlier, that it's a pleasure to be on this call. We have about 2 hours set aside for this call. I know there are a number of participants on this call. So we don't want to do a long preamble.You've seen the results. We declared them yesterday evening after a Board meeting. They are fairly strong results, and we're very happy with our performance, given how challenging the environment has been. There are inflation issues, there's supply chain disruption issues, there's issues around demand, et cetera. But given all the macro headwinds, we've come out, we think, with a very nice set of numbers, and we're very pleased about those. So I'm going to just jump straight into Q&A, if that's okay with everyone because we do want to give time to everyone in these 2 hours to ask their questions and get answers from us.So with that, Aparna, I can hand over to you or the moderator to start the questions.
[Operator Instructions] Our first question is from the line of Mumuksh Mandlesha from Anand Rathi.
Congratulations on good numbers. So starting with the -- can you talk about the growth environment in automotive and industrial for both OEM and aftermarket? And how do you see the growth ahead?
Mumuksh, thank you for asking the question. And as a reminder, automotive is about half our business. So it's industrial 50%, automotive 50%, but I'll restrict my remarks to on automotive. I'll give you the high-level comments, and Ashish can jump in with some specific numbers there. In general, we are seeing automotive picking up now. We've had -- as you know, we've had a disruption in automotive for some time now. Commercial vehicles have had a long winter for over 2 years. It really began pre-COVID some changes in regulations and demand, et cetera, we are now seeing commercial vehicles bouncing back.We are seeing the same in passenger vehicles on the basis of a lot of new models being launched and also a high interest in electrification of passenger vehicles. Agriculture has been strong and has been attractive for us. We expect a pretty good monsoon this year, so that will also aid in demand. And 2-wheelers suffer from inflation because 2-wheeler buyers are typically much more sensitive to inflation and pricing. But again, we see that bouncing back. So in general, we remain bullish across all automotive segments. And of course, there are specific subsegments where -- which might do better than the rest. But in general, we remain bullish.On the aftermarket side, likewise, aftermarket demand is really a function of reach and pricing. And on both those parameters, a lot of effort has been put by our aftermarket teams over the last couple of years to make sure we are producing bearings at the right price points for the aftermarket and also make sure we reach retailers and mechanics in the most effective manner. So we remain bullish on both OEM and aftermarket.But Ashish, can we share specific numbers that will help Mumuksh?
Yes. So just to give you a bit of an insight in terms of the overall automotive growth, we have seen a 4% year-on-year increase in the automotive for this quarter. And we see growth happening across segments, predominantly 2-wheeler and powertrain, and we expect this group to continue in subsequent quarters as well.
Similarly, if we share on the industrial segment as well?
Yes. So on the industrial segment, again, we had a strong growth this quarter. We have seen a growth of around 15% year-over-year. The growth predominantly has come from the distribution business, has come from the metals business as well as from the railway business. Having said that, all subsegments within the industrial business have grown really well. Q3 and Q4, we expect the momentum to continue.
Sir, how do you see the growth trends in the upcoming segments, like EVs, construction drives railways and renewable going ahead?
Yes. On the industrial side, I'll answer for electrification first. And you may know, we announced a new strategy a year ago, focusing on clean and intelligent. And the clean part of it is where electrification plays well. And what the strategy really meant was we will double down on the cleantech growth areas. Two of the segments you mentioned are in that cleantech growth area, which is electric -- electrification of vehicles and railways. Both are doing extremely well. Electrification right now, as you well know, is not a big part of the market right now. We are seeing traction in 2-wheelers. We are seeing traction in 3-wheelers. We have seen some [indiscernible] on passenger vehicles, and of course, within the city of -- intracity public transport.But of course, it's only a question of time. It's only a question of time before electric vehicles far outpaced the sales of nonelectric vehicles. And we are preparing for that in terms of innovation, in terms of technology, in terms of different kinds of bearings that we needed in the electric space. So it's a small market and a small business today, but growing very, very rapidly. And it's only a question of time when it becomes a large part of our business, and we're preparing for it. So that's the message on electrification.On railways, the big driver will be freight. As you know, most of our freight in this country is moved by road, about 14-odd percent is our logistics cost as a percentage of GDP, which is very, very high as compared to any other country of our size. And again, that's because most of it moves by road. Therefore, we expect this freight cost to go down when the railway freight corridors come online. So there's a freight corridor, the DFC, are now partly operational, both in the North and the East and the remaining are in various stages of of testing. We have bearings now approved on those high low carrying freight wagons, and we are manufacturing them locally in the country.So all that helps in gathering a share in the freight business. The railways also will expand for us. And the other part of railways that is important to us is metros. Metros again remains a small part right now, but growing very rapidly. So -- and again, our bearings are approved for the metro lines. So we see growth happening there, too. So that covers electrification and railways.The other thing you said was about drive, et cetera. Drives includes gearboxes, [indiscernible] compared to -- things like those. These are small equipments. And they typically are at the [indiscernible] drives picking up really well at the beginning of an economic boom. Because when you see private CapEx picking up, the first equipment that gets bought are the smaller equipment, which is basically the drive segment. So that, again, we expect private CapEx to pick up in the next couple of years, and we're seeing movement on the drive segment also. So overall, industrial certainly remains very bullish, and Ashish talked about the growth numbers, 15% in industrial, which is kind of representative of our bullishness for the future also.
So broadly we can expect a double-digit growth to continue in the industrial segment, right?
Well, we certainly hope so.
Okay. Also, in the Q1 result, the other expense was lower sequentially. Any reason for it, sir?
Yes. So in Q4 last year, we have -- the SKF celebrated 100 years of celebration in the month of March, right? So there, as a company, we did spend significant amount of money. And that's where it was like last quarter, you saw an increase in the other expenses, whereas this quarter that expense is not there. That's why it's come back to the previous quarter [indiscernible].
All right, sir. Sir, you already talked about focus on the profitability with gaining some unprofitable businesses. Any update on this? And also, how you see the traded margins have been normalized?
Okay. I'll take the first part of the question, Ashish can take the second question. On unprofitable business, and I will expand that to even less profitable business. This is about managing our portfolio in a much better way and a much more thoughtful way. We certainly want to be careful about doing any business on less profitable accounts, on less profitable products and on less profitable ways of going to market. So all of that is part of our portfolio management. It's an ongoing exercise. It's not something we began last quarter. It's an ongoing exercise. But certainly, given the tough economic environment right now, we are making some tough choices internally and externally. And what you see in our profitable growth improvement is also on account of managing the portfolio in a much more thoughtful way than maybe we have done in the past.
And on the traded margins, it has stabilized, right? If you look at over the last 1, 1.5 years, we have taken a lot of price increase because of which we were getting higher margins than we will on the traded products. But now with most of the pricing increase getting passed on to the customer, we are in a situation where are traded margins are more or less stabilized.
Right, sir. Just on a previous answer. The process of a less profitable trend in those businesses has been over? Or do you see continued benefit of that, sir?
It's never over. Our benchmark keeps on rising. So certainly, we have taken the first cut at it in terms of managing the portfolio with the obvious decisions we made right now. But also some of these businesses are also long cycle, long contract businesses. So we also have to be mindful of our customer requirements. We can't just overnight turn the tap off it. So some of these will drag on carry on a little bit in the future also. But it's an ongoing exercise. We've got to keep figuring out how do we constantly increase our margins and get better value for our processes.
Right. Sir, just last, can you share the revenue breakup for Q1 and also FY '23 possibly?
Revenue break-up between industrial and automotive, industrial is -- for this quarter, industrial is around 51%, automotive is around 40% and exports is around 9%.
And the previous year?
And for the previous year, again, industrial is around pretty much in the same range. Industrial was around 52%, automotive is 41% and export is 7%.
And also you can share the aftermarket between the automotive and industrial?
So automotive -- overall, aftermarket is 36% of our total revenue, 25% is industrial, 11% is automotive.
How much automotive?
11%.
Okay.
Our next question is from the line of Harshit Patel from Equirus Securities.
Sir, just a small clarification that you mentioned about previous year, industrial being 52%, exports being 7%, and auto being 41%. That was for the first quarter of last year or for the full FY '23?
It was for the full FY '23.
Understood, sir.
Sure.
Sir, my first question is on the wind market. You had previously indicated that we were making EBITDA losses in this segment, about 8% to 9%, and we're planning to realign both product portfolio as well as the customer mix since you have already highlighted broadly what we are doing at the company level. So could you share some overage especially on the wind front? And just a consequent to that, how is the wind market doing at the moment because we have been hearing that the market is seeing some bit of revival since last few months and the second half of financial year specially looks very promising. So if you could outline what is your outlook in this particular segment?
Yes. I don't recall making a comment that we're losing -- have an EBITDA loss of 9% on wind. It may not be as profitable as the other segments, but I don't specifically recall that comment. But nevertheless, the spirit of the question is in terms of how the wind market is doing. You are right in saying that there's been a revival and we see signs of revival in the wind space. The wind market, as you know, is also kind of a function of the auctions and the prices set in those auctions for producing wind energy. And I think a number of players who had bid for those were struggling to meet those commitments, and that led to a slowdown in the wind market because of profitability concerns. We are seeing a bit of revival on that space.But as it relates to us, one of our big initiatives is around localization of bearings for the wind market. And we are now -- and localization is not just about manufacturing bearings locally. It's also about sourcing steel locally for those bearings. So it's localization of supply chain and localization of manufacturing. And on both those fronts, we have made a lot of progress in the last 18 months here. So we are now -- we have now begun to source steel locally, and we have now begun to manufacture bearing locally. Of course, not everything is being done locally right now, and there's still some work to be done here. But that is our path forward on the wind market as much as possible localize and help our customers improve their own profitability.
Sure. Sir, secondly, on the railways market. I believe we have already had a very good market share in the locomotive segment. So on the other segments, like coaches and wagons, have you secured all the approvals on the qualification to bid for the full tender quantity? I believe a few years ago, we were not allowed to bid for the few -- for the entire tender quantity because we were still in the process of securing those approvals? Secondly, you have already mentioned, we are already localizing these railways bearing in our sister company, which is SKF Engineering. So what kind of CapEx we are incurring in the sister company for those [indiscernible] as well as railways bearings? That would be my last question.
Okay. On railways, just to correct you, we have a good market share, both on locomotives and on passenger. Where we did not have a good market share was on the freight side, and that was mainly because of the comment you made about approval pending for bearings on the freight wagons. Those approvals have now been obtained and we are fully qualified to bid for the complete freight wagon tenders. Metros, we've always been approved, so no concern there. So now we have all the approvals to bid on all 4 subsegments of railways. On your other question on SKF Engineering, that's the question that I would not answer on this call, and this is a call for SKF India.
Sir, no problem. All the rest.
Thank you.
Our next question is from the line of Akash from Dalal & Broacha Stock Broking. [Technical Difficulty] Mr. Akash, sorry to interrupt, there is disturbance on your line, sir. Could you please use your handset? [Technical Difficulty] Sorry, Mr. Akash, we are unable to hear you, sir. Mr. Akash, may we request you to rejoin the question queue as your line is not clear, sir? Our next question is from the line of Ankur Sharma from HDFC Life.
Before I ask my question, I just have a small suggestion, if we could do these calls a little more frequently, maybe once in 6 months, even that would be great. So something which one of our peers also does. Just to get a broad update on what's going on in the business, et cetera. So just a suggestion if you may kind of consider that. So that was that.Just a few questions. One, in terms of localization, especially on the industrial bearing side, if you could help us how are things progressing there? But I understand the larger industrial bearings, I believe, are made by our parent unlisted entity. But in the listed entity, where are we in terms of the localization, especially on the industrial bearing side?
Yes. So industrial large-sized bearings, you are right, are made by our sister company, and these would be catering to the railways and the wind segment specifically. And the answer back in the earlier two questions. Railways is about 7%, 8% of our business. Wind is about 7%, 8% of our business, let's say, about 15% is catered to from that plant. The remainder of the industrial bearings business is catered from the plants of SKF India. And localization is progressing very rapidly also and it has to also in the remaining segments. There we have a segment that we cater to just metals or steel or cement or infrastructure or construction, et cetera, or F&B, all those bearings will need to get localized.But by and large, we had about 35%, 38% localization today on industrial. We are about 95% plus on automotive. Obviously, our goal is to increase the industrial localization to as high as possible. It will never get to the automotive level because it's a very different industry. So automotive, as you know, has a very high throughput with same kind of bearings, so it's easy to localize that to 95%. Industrial is a long portfolio of not that higher volume of bearings. Therefore, it's not easy to localize everything. But having said that, we hoped all our investments for the next couple of years, a lot of trade will be focused on localizing industrial bearings for every other segment. We certainly hope our internal goal is to get to about 60% localization on industrial in the next couple of years, and we are making plans to get there.
Fair. Understand. Sir, second, on the railway side and especially on the LHB coaches and the Vande Bharat coaches I believe is what the government wants, right, to be there over the next decade or so and replace existing coaches. I think a couple of UIC bearings, which has come in and this has replaced the older bearing, which we use. Am I right in understanding that SKF is among the 2 or 3 players who are kind of qualified for that?
That would be correct. I don't know what UIC frankly is. I'm not aware of that nomenclature. But in general, I can say that we are qualified to be one of the suppliers for passenger coaches in India.
Sorry.
I was saying [indiscernible] we are already qualified or already supplied.
Okay. So we already [indiscernible]. And any sense of the market sizes, sir, in terms of the overall railway market? And if you could break down that between [indiscernible] and the passenger/metro market.
Yes, I don't have the numbers top of mind, sorry. But as a percentage-wise, if I remember correctly, I looked at the numbers about 6 months ago, Metro was the smallest about 5%, brake was about 35% and passenger was about 40% and the balance is locomotive. But we can get back to you [indiscernible] more details and numbers. That's kind of top of my mind right now.
Sure. Thirdly, sir, on the gross margins or the EBITDA margins, whichever you may. And then clearly, when I look at, say, the last 6, 7 years, clearly, we've seen this big shift, right? So maybe in '16, '17, our EBITDA margin, [indiscernible] at about 13%, 14% or maybe at 15%. Now we are a number closer to 17.5-odd percent. So, A, what's driving that shift? Is it more leverage and higher top line driven shift? Is it a change in the mix? Is it better localization? So just trying to understand the 2, 3 drivers behind this higher margin and sustainability more importantly of these models.
Yes. It's everything [indiscernible], honestly. Over the last few years, last 5-odd years, we've changed the structure of our business somewhat in terms of where do we focus on strategically and not just sell to everyone who comes to us. The combination of figuring out which segments will drive the best profitable growth and focusing on that. We mentioned on a previous conversation about managing our portfolio much more thoughtfully. Over the past couple of years, and this is the impact of COVID and post-COVID, how do we improve our operational efficiency to really a much more -- in a much more [indiscernible] way.And lastly, localization because localization really helps us drive our cost down. It really helps us to control our quality, control our ability and control of costs. And that, in turn, helps us drive better share with customers because customers are also facing the same problems that we face in terms of supply chain disruptions. Customers for the last couple of years, as you might well know, are more open now to prioritizing pricing -- sorry, prioritizing availability over pricing. So we are certainly seeing a change in also customer behavior, they don't mind paying the 3%, 4%, 5% premium if availability improves. And so that's really -- our localization efforts are also helping there. So the combination of a number of things that you mentioned in terms of driving EBITDA margin upwards.
Right. And just one last question. I'm not sure if you shared this, but if you could just help me with the subsegment-wise breakup of sales for FY '23. So 2-wheeler, passenger, tractor, CVs, and also the OEM and industrial share there as overall sales.
Sure. So automotive, as I said, is overall 41%, right? Out of which, 2-wheeler is around 11%, powertrain is 6%, cars is around 6%, trucks and tractors are around 7%, and aftermarket is around 11%.
Sure. And in industrial, if any further breakup. I heard wind and rail are 8% each.
Yes. So on the industrial side, aftermarket is around 25%, drives is around 8%, heavy is around 4%, [indiscernible] is around 2%.
Our next question is from the line of Deepesh Agarwal from UTI Mutual Funds.
My first question is, we have seen 2-wheeler industry is now transitioning towards electric 2 wheelers. So can you help us understand how you have contained per vehicle with that move in 2-wheelers when you supply for IC and then moving to electric?
So Deepesh, we answer this question on every conference call and [Technical Difficulty]. So on 2-wheelers, the bearing content on the wheels does not change because whether you have electric or nonelectric, you still need two wheels on a 2-wheeler, right? So two wheels [indiscernible] where the bearings will change is on the engine side. Typically, a 2-wheeler has about -- and I'm giving a kind of simplistic answer, about 14, 15 bearings on the engine side, that will not drop to about 9 or 10 bearings. So while the number of bearings go down, the type of bearing will change and the quality of bearing will change. So electrification needs much lower friction, much lower noise, much more highly insulation on the bearing, et cetera. So the type of the bearing will change, and therefore, the price point of the bearing will change. We expect our bearings to be -- our bearing revenue per vehicle to be neutral even though the number of bearings will go down.
Okay. Sure. The second question is on railways. So can you help us understand the bifurcation between SKF Energy -- SKF Engineering and SKF India because I can see some of the PQs for the railways are the SKF Engineering rather than SKF India.
So we are not -- in general, all our railway business is done through SKF India. We don't do any business through SKF Engineering with our customers. So pretty much all our top line booked in SKF India as such.
Okay. The next question is, on the wind, what percentage of our wind revenue of this 7%, 8%, which you guided would be for the domestic market? And what percentage would be in direct export?
Well, it's all domestic market. But having said that, when you say domestic market, it is all that we sell to manufacturers in India to have plants in India. Now, what they do with their products is a different part that we're not concerned with. So we may have customers who buy bearing domestically from us for making gearboxes, but they in turn export their gearboxes to wherever they need to. But all our sales is domestic business.
Right. Right. And can you share some comments on the exports? I know it's not a very focused area for SKF, but it still contributes a sizable portion of your revenue. How is the demand trend out there?
It's not a sizable portion, it's about 7% to 9%, and it's not something that we focus on. We are really focused on localization and really focused on serving the local customers as best as we can. Exports, really our outlook is that this is more a filler production for us. If we have some spare capacity, if someone else outside the country needs some support production, we are happy to pitch in. But we don't have sales teams out there in the world pitching for new business. That's not kind of our focus, as you rightly said.
Okay. Sure. And the last question, if you can share your guidance on CapEx and trend for next 2, 3 years?
Yes. We expect CapEx to be in line with what we've done in the past, around INR 150-odd crores a year, give or take, 20% up or down. And that will not change over the next couple of years.
Okay. At SKF India level INR 150 crores?
I'm sorry?
At SKF India, INR 150 crores, right?
Yes. That's right.
Our next question is from the line of Bharat Sheth from Quest Investment Advisors Private Limited.
And sir, on industrial, when you are talking of [ digital ], and it is a business where we provide the solution also taking a long-term maintenance of the plant as well as. So how do we see that our offering really improving? And second thing, when you spoke on the availability or what the price is, so what exactly on ground we are doing to improve that? In last call, you mentioned about digitally connecting and all. So if you can give broader outlook, one, on this industrial side?
Yes. On the industrial side, of course, we are focused on providing services to our customers. And I think what you mentioned is one part of our services, which are performance contracts where we don't sell [indiscernible], but we sell performance. And that's been an ongoing strategy for us for the past couple of years. And certainly, it's helping us win share in key segments where performance becomes important. So for example, the seed industry is a big driver for the performance contracts.The other question you asked was on -- what was the second question?
Availability of our prices. So how these solutions business is really and digitally connecting a distributor and all, so that [indiscernible] bearing do not go to the customer.
Yes. So on availability, there are 2 ways of ensuring good availability. One is, of course, manufacturing the bearings locally as much as possible. Because when you manufacture them locally, you cut the lead times, both for manufacturing and for freight and movement to customers. That's one big initiative for us. The second one is around on the aftermarket side. How do we be sure we have good reach to our customers because sometimes customers are not able to reach SKF, and they want to buy SKF. So typically, they would go to -- they think they're buying a genuine bearing, but it could end up with a counterfeit bearing or they could go to a competitor bearing. And that's where we need to also improve our reach and digitally connecting our customers to our warehouses is part of initiatives.
So where we are in this call, generally, what you spoke about on solution and how do we -- is there still further room to grow all these significantly?
Yes, absolutely. There's a lot of room to grow on performance contracts. We are only scratching the surface there. In some industries, we're doing better. And you have to look at performance contracts as has been attractive to industries where the cost of failure is much more than the cost of replacement.
What kind of process industry? Sorry.
Yes. So process industries or even high CapEx industries like wind, et cetera, where the accessibility is an issue for wind turbines. So the cost of failure can be catastrophic there. The cost of replacement is lesser. So that's where the performance contracts come into play, it will certainly not be a viable place for a 2-wheeler order because the cost of failure there is not more than the cost of replacement. You have to choose your industries well, mainly industrial, process industries, noncycle industries, things like those.
And last question on, last call, we said that these refurbishing of passenger coach is also could be a big opportunity. So where are we now in the refurbishing of the coaches with the change in bearings and on?
Well, Bharat, we don't refurbish coaches, we refurbish the bearings that go into those coaches. So absolutely, we have what we call solution factories. So the solution factories are set up as a sub-factory within our main manufacturing factory where we take back the used bearings and we remanufacture them. So we pretty much make them as good as new and then send them back to the original purchaser for reuse in their coaches.
And one squeeze in question with your permission. In our latest annual report, we stated that this whatever import or I mean, sourcing from this domestic SKF technology. This year, the number indicated are as high as 25% over last year. So this is what you gave in your commentary on opportunity on industrials or that really reflects that 25% outsourcing from our group companies.
Sorry, it's not very clear to me. But typically, if you look at last year, we grew by around 17%, right. And that happened pretty much across our segments. So since we grew at around 15% to 17% last year, naturally, our purchases from SKF Engineering would accordingly increase in the same lines.
This year for '23, '24, we have indicated a 25% growth amount that we -- I mean, when related party transits, we take the approval for AGM?
Yes. So like as you said, our expected growth rates are high-double digits, and we typically take an approval for related parties in excess of that, which has a buffer. That's why you see a little higher approval for the transaction.
[Operator Instructions] Our next question is from the line of Jeetendra Khatri from Tata Mutual Fund.
For 2-wheeler OEM, I wanted to know what would be your bearing content in or let's say, what would be your exposure towards budget or entry-level motorcycle and new motorcycles, how would you divide the market into 2?
Can you ask the question again? It's not clear from you. Bearings don't change that much between the price point of the vehicle.
Our next question is from the line of Suraj Sonulkar from Asian Markets Securities.
I just want to ask you, I mean, can you mention what is the growth in railways in this quarter?
Just a sec. Year-over-year railways have seen a 30% growth.
And wind business?
The wind has seen -- wind has been relatively flat.
Okay. Secondly, on railways, I just wanted to understand -- I mean, you mentioned that we are doing business from SKF India. So is it like some part of the business comes under transport pricing with the sister concern?
That's right. So whatever we buy from SKF Engineering comes under the transport price evolution.
Okay. So how much percentage of that is from that in railways and how much is directly from SKF?
I wouldn't have a specific number in terms of by business, how much percentage of our total sales is what we are buying from SKF Engineering.
Okay. One question particular to the localization plan and the parent plan of regionalization of supply chain. How does these 2 things sync in together for us because parent is more focusing on the regionalization of supply chain across the continent and India, I mean they are also focusing on localizing in India? So can you just give some qualitative feedback on how maybe this can be a positive trigger for SKF going forward in terms of export or in terms of other opportunities for -- particularly in the Asia Pacific region?
Just to clarify, regionalization and localization are the same thing. So when we say regionalization, we mean -- don't think of it as Asia region, think of it as India region. So as much as possible if we can regionalize the sale thing is localize, whether it's India or China or Malaysia or Dharapur, wherever else it might be. So they are the same thing. So parents, the SKF ABs drive towards regionalization of supply chain is the same thing as what we are calling localization of supply chain.
But that does not fit in when we say our export will be limited from India?
Yes. We are not focusing on exports from India. We're focusing on localization or regionalization. For us, India is the region. So we are focused on localization for India.
Okay. No, I think of the next thing -- and one more thing on the presence in the robotics and industrial automation, are we seeing good inquiries in that segment from Indiana market?
I think we are seeing some inquiries from robotics and automation, mainly around motors and drives. It's not something that I would say is a material part of our business right now, but we are seeing some inquiries.
Our next question is from the line of Mukesh Saraf from Avendus Spark.
My first question is, again, on the industrial localization. We are also kind of noticing a lot of your peers, obviously the large ones are also now embarking on a significant localization plan for the industrial. So could you give some color on what is driving all the large players to now focus on localization? Is there a new opportunity that is coming out on the space probably defense or PLI, some other things in various other sectors, some color there would really help on what's driving this localization now? And would this open up any new market or new opportunities, which may be so far will cater by maybe an organized segment or anything of that sort?
First, localization is not to fight against the unorganized segment. Localization really is about import substitution. I cannot comment on the other players that you mentioned, but certainly for us, if today, 35% to 38% of our industrial business is localized, which means 62% to 65% of industrial bearings are being imported from other SKF factories around the world. Just what we need to change. We need to change that to get a higher localized content on our factories in India. Why that is pretty straightforward because our customers want it. Our customers really don't want to be at the mercy of long lead time supply chains. It's not so much frankly a cost issue. There could be some better fit, but the largest issue is long-lead supply chains. And that's what is driving us in terms of more localization on the industrial side.
Sure. So we shouldn't expect localization to, say, lead to higher volumes as such. It's probably -- it is primarily on the substitution?
Well, I hope when we are able to supply to our customers better lead times, they will -- it will also lead to a better share with them. So it's not -- I mean, why do we need to do import substitution, not because it's the nice thing to do. We are doing it and investing in that localization because we hope to get returns on it. And the returns we hope to get on that is by getting more share with customers. And in the last 1 year, the example I gave, yes, there's AGM if you watch it, is via the customer a large cement OEM, Humboldt, and we had 0 share with that customer because we were importing those bearings from Europe. And because you were able to localize those bearings in India, we now have high double-digit share with that customer.
Got it. Great. And my second question is on the EV side of it, given that we have a good exposure to 2-wheeler space and we've probably seen 2-wheeler EVs see some higher penetration than the other segments. Any specific order of things that you want to mention or probably any more color there on how your orders are placed on the 2-wheeler EV side of it and how the content there for your power vehicle is vis-a-vis ICE in terms of value?
Probably answer the content and the value question to an earlier question. So I can give you that answer. On the larger one on electrification of 2-wheelers, our take is that electrification is a question of when and not if, and I'm sure you'd agree with that. Today, frankly, we sell about, let's say, about 20 million 2-wheelers a year, approximate, give or take a few. Not more than 5% to 8% of that market is electrified. But it is not to say it will not become larger very, very soon. The 5% to 8% could go to 15%, 20%, 25%, 30% in no time. And there the question is which customers are well positioned to drive that growth.Our belief is that the customers best placed to drive growth and gain share in the electric 2-wheeler space are today's big players. It's the Bajaj, the Hero Honda, et cetera. It is not a small disruptors as much as we hear about them, the big growth will come from the established players. And the established players today have a very, very strong partnership with SKF, all of them. We're working with all of them to codevelop bearing types, especially suited for electric vehicles. And you will also extend that logic to passenger vehicles. So we believe that when that growth happens, we are well positioned in terms of both development of bearings and stickiness with customers to drive that growth for SKF.
Our next question is from the line of Mumuksh Mandlesha from Anand Rathi.
Just you mentioned about the wind and EV growth Y-o-Y for Q1 quarter. Can you mention some other subsegments like 2-wheeler, powertrain, cars, EV tractors or the aftermarket and industrial aftermarket drive heavy metals?
I already mentioned it earlier, right. If you look at for this quarter, we've seen strong growth in 2-wheeler, powertrain for this quarter, whereas for cars, trucks and tractors, it's been relative for the distributor -- on the industrial side, we are still seeing strong growth across all segments, except wind, which has been flat year-over-year.
Our next question is from the line of Anish from Hawar from Haitong Securities.
So my first question is -- I'm sorry to hop on localization. My first question is, firstly, a clarification. You mentioned 35% to 38% localization in industrial. Does it include both listed and the unlisted arm? Or is it just the SKF India you're talking about?
SKF India.
Right. Secondly or in continuation, could you please talk about this road map for getting to the 60% target in a couple of years? Talking about which segments will drive what will be the CapEx and the asset terms you will be looking at?
I think I answered that in an earlier question, but it's every segment, it's not specific segments. Localization is really driven by where the growth comes from, and we've seen very strong growth in Industrial. Apart from wind and railways, we have a presence in almost every industrial segment. See cement, construction equipment, food and beverages, mining, textiles, and I'm sure I missed a few already here. All of those will drive localization. Keep in mind that localization is for products, localization is not necessarily for the segments. The same product will go into many segments. So when we localize more of, let's say, deep groove ball bearings, so DGBBs, they will feed multiple segments. When we localize cylindrical roller bearings or CRBs, they will feed multiple segments. So we expect localization to feed demand and drive share growth in almost every segment.And the CapEx that I talked about in response to a previous question of INR 150 crores, INR 160 crores, we expect about 60%, 70% of that to go towards industrial.
Continuing on the same topic, how has the localization improved over the last 5 years since you mentioned it's one of the drivers of margin improvement that has happened? Some numbers will be helpful here.
I don't know the numbers 5 years ago, but it was 30%.
Right. Appreciate that. Secondly, on the traded revenues, if I look at FY '23, the proportion is just over 50%, and that's moved significantly over FY '22, which was around 44%. So could you please talk about what were the drivers of this move?
Yes. So again, I'm just looking at the numbers. So traded just for the current financial year '23. The traded was around 45%, and it's actually come down 42%, say, for example, for this quarter. So you can clearly see that localization is healthy.
Right. That's very helpful. The second topic is for Manish. Yesterday, in the AGM, you talked about doubling of the R&D spend. Could you please talk about what would it be directed towards? And would there be any in the listed of SKF?
Yes. I was talking more on some of the global strategy. That's a global strategy for SKF, about doubling R&D spends. But I think -- so without giving the specifics of what do we need to do differently in India, you may know that we have a technology center in India, where we employ about 200 engineers. And these engineers are working day and right to focus on innovations and technology development, both for global customers and for customers in India.Localization, as an example, to pick on your previous question, is not as simple as finding a source and start manufacturing bearings locally. A lot of technology also goes into that. So for example, the Humboldt example I talked at the AGM yesterday was a lot of hard work in developing bearings locally with the right suppliers, working with the customer to ensure the right testing. So a lot of work also goes in making sure we have the right development, which meets the standards for SKF and for the customer. So that's one part of it.The other part of it is also developing new bearings or new bearing types, what we call application-specific offerings or ASOs. So these are customers who may come to us with a very new application or a different requirement for the same application. There sometimes we have to do some research or development into taking an existing product and modifying it or developing a new product completely. A bearing has many components to it. At a very simple level, it's got a couple of rings, a cage, some balls or rolling elements and greases. We could do research, and we could make tweaks to any of those elements to make a new application-specific offering. The engineers who are working in our Bangalore technology center are working to develop these application-specific offerings, sometimes new offerings, sometimes modified offerings, sometimes working with customers. So all kinds of things across the entire gamut of technology development.
That's quite helpful. Last question is on railways. Firstly, a clarification. Was it 30% growth in this quarter.
That's right, for this quarter. That's right.
That's significant. Congratulations on that. Now would you be able to share some market share numbers specifically in the railways? And given that you've now -- the freight approvals are in place, do you envisage a similar market share in freight as well compared to the other segments that you're operating in?
Yes. So we are high-double digit on passenger coaches, metros and locomotives. We are mid-single digits on freight, and our intent is to get the freight market share at the same level as the other segments.
Our next question is from the line of Mr. Akash from Dalal & Broacha Stock Broking.
Yes, sorry, I actually got disconnected the previous time I got the chance. My question was how much of CapEx SKF is planning to do in the next couple of years in the coming year and as well as the next 2, 3 years.
INR 150-odd crores each year.
Okay. So seeing the kind of growth and the effect more done by the government and the private sector on the industrial side and a boom that is taking place around the automotive side, will it be comfortable to say that SKF will be able to grow at a double-digit rate in the next 2, 3 years?
Well, we don't give forward guidance. But certainly, our expectation is to keep growing at the rates we've been growing, if not marginally better.
[Operator Instructions] Our next question is from the line of Akshay Karwa from Anand Rathi.
My question pertains to new products, new offerings that you have. So as in the engineering services, right, in the last year, Q1 FY '13, we were developing products like chains and sprockets for motorcycles, timing belts for passenger cars, EV belts for scooters, steering suspension parts for passenger cars and so on so. Where do we stand with that? And what sort of revenues are we expected to book from them? And what sort of new products are we expected to see in the next 1 or 2 years from that end?
Yes. So our bread and butter business is bearings. Everything else that you mentioned are adjunct products to improve our detailed presence. And what you mentioned was mainly for the automotive aftermarket, it was not meant for the OEM side. And so we have launched all of them with a reasonable success. Again, they are very small part of our business, not material enough, where they really help us is in driving more bearing sales as we are able to offer a full portfolio to the care of the mechanics.
Got it. If you could put some numbers like some percentages, like as in this more in number than...
It's less than 2%.
Less than 2%. Got it. And secondly, my last question is regarding to the EV bearing. So you mentioned in the earlier comment that basically in an ICD 2-wheeler, the number of bearing are close 14 or 15 bearings, while it's in an EV, I mean it comes down to almost like 50%. Although we -- and the volumes come on over, but the pricing is a bit higher -- it's a bit more premium compared to the IPV part of it. So if my understanding proves me right, so net-net, there would not be any loss of business from this entity despite the EV volume progressing, so this could potentially lead to better margins in the future if IP volumes come down, let's say, the next 5 to 6 years? So is my understanding correct over here?
Just to correct you, it's a 50% drop. It's about a 30%, 35% drop. I said about 14% to 15%, was up to 9% to 10%. There's a minor correction there. But nevertheless, we expect this to be revenue neutral for us in terms of value to us. Profitability, I think it will be slightly better. I don't actually have a good answer for you right now, I haven't done the research on that. Based on what we see right now, we do expect the bearing that going to the EV space to be margin accretive. But that's based on current competitive dynamics. As and when these things become more competitive, the margins may drop a little bit. But overall, I would expect this to be accretive.
Our next question is from the line of Pramod Amthe from InCred Capital.
So if I'd like to look at your subsegments, it seems to be like 8, 9 of them. How do you see competitive intensity currently has that compared to last 2 years? And what's the outlook on the same for the next 2, 3 years, do you expect them to continue to remain in that sense for each of the subsegments or the years meant to be so?
Yes, the big change or the big difference between SKF and our competitors, as you've seen on this call, we don't have a high dependence on a single segment. 7%, 7.5%, 8% is kind of a max exposure to one segment. So we are extremely well diversified, which means we are very, very well positioned to withstand economic cycles. Some segments go up, some segments go down. But overall, that's a good hedge against market movements or demand movements. So we face competition in all these segments. We face -- our competitors are sometimes more focused on a few segments, not on all the segments that we are in, we face different competitors in different segments. In railways could be someone else and wind could be someone else, et cetera, but we face competitors everywhere. And we face competition not just from large global players, but also local Asian players or Indian players. But we are well positioned, as you've seen in the margins growth and our share growth to keep on winning in this market.
And just to go on to saying, especially in the high-growth segments like railways, do you see your products are unique advantages versus the competition? And hence, the intensity might be lower in those high-growth segments or the new segments, which are opening up for a substantial growth?
Yes. So you have to look at -- whether it's railways or any other segment, certainly, we sell our products not on price, but on innovation. And innovation is not just about products. Innovation is also about services we offer. In response to a previous question, I answered about remanufacturing of railway bearings. We have the most advanced remanufacturing facility of railway bearings in the region. We also speak to the railways around what we call condition monitoring. So how can we predict failures on the coaches before they happen. So it's really a combination of innovation on the product side, innovation on the services side and remanufacturing services to be able to win more with railways and similar with other segments.
Our next question is from the line of Saif Sohrab Gujar from ICICI Prudential AMC.
My first question would be on imports from China. So we understand it has a big proportion of the Indian bearing industry, right. So how is the competition from imported bearings and compared to pre-COVID levels? And which segment it is particularly in?
I don't know what you mean by it's a bit for median bearing industry. It's not a big part of where we compete. For us, as a company, we don't have more than 12%, 15% of imports from China for our supply chain. From the customers we sell to, yes, of course, some of them buy from Chinese companies, but we see that going down every year. And certainly, you're right, after COVID, it's gone down even more. So we don't -- we really don't see a big competition from China in the segments we compete with, except maybe on the aftermarket side in automotive with some degree. But beyond that, that's not a big threat to us.
Okay. And second question would be, again, on the localization front, itself. When we talk about one our focus is import substitution. Second, is that also about localizing the components in India, the various components we talked about, which go into a bearing. Is it also focusing on that? And if yes, how much further headroom we have there?
Yes. Localization is not just about making bearings locally. I think I mentioned earlier, unless the big part of bearings is steel, as an example, unless we also localize steel, the job is only half done if we impose the steel and make the bearings locally from an imported steel. So we are working with steel mills to also localize steel or bearing steel because that, as you know, is a very high-quality steel. So yes, it's localization of supply chain and localization of manufacturing.
Our next question is from the line of Anish Rankawat from Haitong Securities.
Just a few bookkeeping questions. What is the capacity utilization SKF India is running at currently?
You have to define capacity utilization first. Are you comparing on 365 days or are comparing on the calendar year less holidays, et cetera. So the answer can vary.
Whichever you think is relevant for our knowledge?
No. The reason I asked that question is when you compare capacity utilization across industry, let me clear, you always ask the question what's the base here. So for example, today, the cement industry is working at about 70% capacity utilization, which is based on 55%. We are at about 65%, 66% capacity utilization on our plants, that's based on 365 days of working and 24x7. So giving you 2 benchmarks, you can compare both, but you must compare like-to-like.
That's helpful. And in the overall CapEx guidance of about INR 150 crores, what would be the maintenance CapEx?
It's about 25% of that or sometimes actually no, but even less than that. Maybe what 20%.
Okay. And lastly, you're talking about localizing steel is the most important aspect of supply chain. How much -- and I'm talking about the industry level, how much of the requirement is localized in your view? And what is the potential?
Yes. So steel goes into making the rings, the inner ring and the outer ring and makes into -- and goes into making the rolling elements, could be rollers or balls whatever. For the industry level localized steel would be pretty close to 65%, I would think. I'm guessing it could be even less lower, I am thinking of bulk -- high level numbers.
Right. Okay. And do you see it going to fully localized or that's something that...
That's going to be very difficult, not in the near time. It's both a question of technology and pricing. And I think it will take some time for us to get there.
[Operator Instructions] Our next question is from the line of Mukesh Saraf from Avendus Spark.
Just one question from my side on the railway freight bearing segment, where you mentioned that you have made some business of market share and one that -- are you targeting for that to kind of improve? So I mean, if I go back to some of the comments, say, made a few years back say, 2015, '16, the time, I think SKF had got approved as a vendor to again railways on the freight side. And the target was to kind of improve market share from that time. But say, 6, 7 years in, we still are at say single-digit market share. So I want to understand what different are we going to do now? Is there something that we were lacking, which now we have kind of fixed and so the market share we can kind of look for it to go up on the key side of it?
Yes. So I don't know what happened, what comments I made in '15, '16, I was not here at the time. So I cannot comment on those comments. What I can say is that what's happening now is that we've got a tool and the tool only came like a year or so ago. I mentioned on a conference call a couple of years ago that we have begun the approval process and the approval process takes time. It takes time, as you may know it takes 18 months, 24 months. So we now have the approval for freight wagon bearings and that's what the big opportunity for us.
Okay. So the approval actually is coming much later, as well.
Like I said, I can't comment on 2015 quarter, it has come last year.
[Operator Instructions] Our next question is from the line of Shirom Kapur from Prabhudas Lilladher.
I just wanted to speak about the localization is one where you speak about localizing supply chain. Kind of related to that in case I hope I'm not repeating as I missed the earlier part of the presentation, but are we also looking at increasing outsourcing of these bearing components you mentioned like railways, cages, et cetera? Or is that largely produced in how you if you could kind of give a share of how much of that outsourced and whether outsourcing would benefit SKF overall profitability and allow us to SKF to focus more on the final value-add aspect of the metals?
Well, we don't make the rings and rollers in-house, we never have. So that's -- there's no change in strategy there. We have suppliers, the suppliers rings and suppliers cages and suppliers rolling elements, and we assemble those in our factory. There's been no change in our strategy over the last few years on that one.
Thank you. Ladies and gentlemen, as there are no further questions from the participants, and we will close the conference. On behalf of SKF India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you. Bye-bye.
Thank you.