SKF India Q1: Profits Rise 3% To ₹159 crore
Transcript
00:00So, thanks, Neeraj. Partly right. So, I'd say answer the question in three parts. First,
00:07I think we took some conscious calls this quarter on the top line to prune customers
00:14who are not that profitable or product lines which are not profitable. So, that brought
00:19down, especially in the wind and some in the railway segments, which brought down our top
00:25line growth, but increased our profit a bit. But that was offset by, the profit was offset
00:32by increase in traded products where the costs have actually gone up. Traded products being
00:37other manufacturing plants of SKF globally, where they're importing from, and the cost
00:44of those have gone up, which has improved our margin. But if you look at a long-term
00:47trajectory, nothing changes. We have consistently over the last four years delivered 12% plus
00:55CAGR of top line growth, 17%, almost 17% of PVD growth, CAGR. So, a quarter doesn't
01:06change our trajectory, quarter doesn't change our strategy.
01:11Got it. So, okay, just trying to understand this, when we're talking about you consciously
01:17taking a decision to prune down on customers which are not profitable. So, therefore, you
01:22are effectively telling me two things here, that one, there is enough business opportunity
01:27even if you prune down customers to clock in that 12%, 15%, whatever the number of growth
01:32that you have in mind over the long term in FY25 itself, never mind the one quarter miss,
01:38and that margins which went down this quarter because of the higher traded products, you
01:43will eventually have the ability to take it higher because I'm guessing you've pruned
01:47down the lower margin customers, effectively your margin should inch higher.
01:51Right. So, you're exactly right. So, this is a blip in this quarter, we will see uptake
01:55in it on both the top line and the bottom line in subsequent quarters. Just to give
02:01you an example, this quarter also, we've seen in the heavy industry, the metals industry
02:07which are infrastructure driven, we've seen almost 25% plus growth in our business. So,
02:15there are pockets of growth here, there are pockets of high profitable growth and even
02:23things like wind and railways, while this quarter was slow, but we will see profitable
02:28growth in the next few quarters. Got it. So, Mr. Vasudevan, you taking over
02:33at a time when there is a new five-year term, lot of emphasis on CAPEX infrastructure, the
02:40budgets around railways, etc. don't seem to have changed too much, maybe no announcements
02:44per se, but it seems that those sectors continue to move along the path charted for them over
02:51the last few years as well. How do you see your divvying up your resources and your production
03:00and your manufacturing between the newer opportunities versus teams that have been continuing? Because
03:07like you said, you're making some changes. So, we are unaware of what industry contributed
03:11to the low margin thing and what industry contributed to the higher margin thing.
03:14Yeah. No, I think we'll make some changes. Some of the traditional industries are still
03:20big for us, being in the sense, around 10% contribution overall, they will continue.
03:26But if you take an automotive, EVs is still very small, but obviously, we have to put
03:33more resources against that to develop products which suit that market. We also have to build
03:39our sales team in that, but we won't do it disproportionate to where we see the growth
03:45and contribution of that in the future. Some of our traditional, even within automotive,
03:49two-wheeler and four-wheeler markets or commercial vehicle markets are important that we have to
03:55protect our base and continue to grow there. Same in the infrastructure areas, right? We will
04:00continue to focus on that, but then the emerging things coming in the next five years, India may
04:04see semiconductor plants. SKF has some excellent products for those. High-speed machinery,
04:10right, coming up as manufacturing increases. Those are all emerging markets and we will
04:14continue to invest in it, but in terms of full shift, it will not happen.
04:21Okay. Okay. So, therefore, let's assume that by virtue of the brand name and the product suite
04:29that you have on offer with the technology on the products that you may have, you might be the port
04:33of first call. Let's assume that and if we work with that assumption, my question to you, therefore,
04:38is that even if the five-year trajectory, you stick between 10, 12, 14, whatever that number
04:44might be, will you be able to do it at better operational metrics? Because Q4, for example,
04:50due to favorable pricing, your margins really got a bit of a bump up. They've come off a little bit,
04:56but is the longer-term trajectory higher on operational metrics? So, I'd say, yeah, we'll
05:00sustain and continue to grow the margin and the margin will be driven by many things. One is
05:05increased localization. We have increased, even from last year to this year, we're seeing almost
05:13a 10% more of localized products being sold into the market, which will improve our margin
05:20fundamentally. We will also see, while it will make us more competitive, but it will also improve
05:24our margin. We will also do this, continuously look at what we spoke about in terms of pruning
05:30and saying how do we manage our portfolio to make sure we are focused on the most
05:34more profitable customers. Manufacturing, one of our strengths, that is a continuous
05:39improvement exercise. It is about making many small improvements continuously so that our
05:45costs of manufacturing come down. So, those are the actions which we continue to take.
05:50Got it. I would love, just moving away from SKF for a bit, but not entirely, I would love to
05:55understand from you, where do you see or which industries do you see the best demand soundbites
06:04from currently? Because there was an election quarter, there is a new government, there are
06:08some changes that might be there in priorities, who knows. I'm trying to understand what is
06:13sounding business as usual or BAU and where is it that you believe or where is it that you are
06:18sensing higher demand from? I would say four sectors and this is probably more traditional.
06:28The metals, mining and cement driven largely by the infrastructure spending that we continue.
06:36I would say that is one area. The second would be in terms of growth, I'm not talking about
06:44volume EVs, both in two wheelers and four wheelers, we will continue to see some growth.
06:49And then renewables. I think railways is kind of lumpy, but we will continue to watch out.
06:57Within railways, high speed trains like the Vande Bharat or train 18 are areas of
07:04our foretaste for SKF and we will continue to kind of gain market share there, continue to
07:09invest in new technology development. Got it. So, industrials and light vehicles, of course,
07:14helped you in quarter four as well and you believe those two continue to be the
07:19areas where the demand might be strong? I would say so, yeah.
07:23Got it. Sorry, moving from margins to revenue to back to margins or supply chain issues a bit if
07:30I can, maybe not margins really, but a lot of companies that we spoke to mentioned about
07:36higher shipping costs and slight disruption in the supplies because of what's happening in the
07:45Middle East. Is that something that impacted you as well by any chance in the quarter or is that
07:49something that might impact, if you will? So, we did. We did have higher impact of it.
07:56We, I would say, less so on margin. It's small. There is some contribution. Luckily, we are
08:04manufacturing almost 60 plus percent locally. So, only 40 percent is imported. So,
08:10but that 40 percent, I'd say the impact has been more on availability than on margin. So,
08:15if anything, it has been delayed deliveries of a product rather than on the margin itself.
08:22Okay. And I believe you and the parent body, the parent company, I believe you've made it
08:29known enough number of times that there is a high focus on India, focus on R&D spends as well.
08:36I would love to understand from you for SKF India, localization and made in India,
08:42something that you referred to, some blueprint of that. And is there a sense that, I mean,
08:47because a lot of other MNC peers of yours tell me this, that they are sensing a higher sourcing
08:54from made in India products for the rest of the world by their global parents. I'm trying to,
08:59it may or may not be in your case, but I'm just trying to understand.
09:02No, it's true. Right. I think there's, first of all, I think it's a perfect storm for India.
09:10I think with increasing geopolitical tension, the China plus one coming up and the increasing
09:19awareness for awareness and recognition for India's manufacturing strength, there's clearly
09:25a drive to set up more manufacturing here. Interest from customers to say, can you make it
09:31in India and send it to us, whether it's in Europe or in America, but let's not also ignore the
09:35Southeast Asia, Australia market where again, there is a significant amount of opportunity
09:40for us to export from SKF India perspective. We continue on that path of localization.
09:47My philosophy on this is kind of, let's get, let's localize to make sure that we win in the
09:53local market. If we win the local market, we will be competitive in the global value chains also.
10:00So we will get natural pull from other countries to be able to send to them. As far as the parent
10:10is concerned, there is a, you know, it's a competitive value chain in the sense if America
10:16finds the most competitive place to manufacture a product and believes India is the most competitive
10:21place, they will buy from them. That's the philosophy we follow. And so we send to our
10:26other entities also, the parent company entities. We, I would say that is something
10:34which we will continue to do and continue to strive to be the best competitive manufacturer.
10:39Yeah, well, most certainly and completely understandable as well. One final word,
10:45what are the risks to this growth numbers that you alluded to? Because, I mean, you being
10:53conservative, you've in the past as a company in the last four, five years, or maybe before that,
10:58at times under-promised and over-delivered, which is a great thing. I'm just trying to,
11:02I'm guessing that you are being conservative or cautiously optimistic right now as well.
11:05But what's the risk to even that? I would say, you know, it's the standard things, right?
11:11There's obviously geopolitical risks, right? I would say, you know, various things like even
11:18elections in the U.S. could move things one way or the other in terms of our export, right?
11:25I'm really glad that with the stability of the government and the renewal and the
11:29continued focus on some of the areas they're focusing on is continuing, right? So I would
11:35say from an operational perspective within India, I don't see much risk. I would say
11:42it's much more of a geopolitical risk. Now, if America or some of European countries go into
11:50recession, then it could change the game because investment flow into India would decrease. And
11:59that could change kind of our investment in new capacity also, the pace of investment in
12:04new capacity also.