SKF India Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Industrial leads a strong quarter: Industrial segment grew ~15% YoY, powered by distribution, metals and railways, while Automotive grew 4% with two-wheelers and powertrain driving the mix.
• Localization is the core margin story: Traded revenue fell from ~45% to 42% of the mix as import substitution accelerated; management targets 60% industrial localization within a couple of years, funded by ₹150–₹160 crores annual CAPEX.
• Railways unlocks a new growth vector: Freight wagon bearing approvals, obtained about a year ago, now qualify SKF to bid for complete freight tenders, a segment where its share is still mid-single-digit versus high double-digit in passenger and metro.
• EV transition is framed as revenue-neutral and margin-accretive: Two-wheeler bearing count drops 30–35% but value per vehicle stays neutral on higher-spec bearings; current competitive dynamics point to margin accretion, though that may compress over time.
• What to watch next quarter: Whether the double-digit industrial growth pace holds, the pace of localization-driven margin expansion, and any early signs of private CAPEX translating into orders for the drives segment.

Segment Performance & Demand

• Automotive grew 4% YoY with two-wheeler and powertrain as the standouts; cars, trucks and tractors were relatively flat. Management remains bullish across all automotive segments, citing a commercial vehicle bounce-back, new PV model launches, a good monsoon for tractors, and a two-wheeler recovery.
• Industrial grew ~15% YoY with broad-based strength across distribution, metals and railways; all sub-segments grew well. Wind was the only flat spot YoY. Momentum is expected to continue into Q3 and Q4.
• Drives (gearboxes, pumps, compressors) are seeing early movement, which management reads as a leading indicator of a private CAPEX cycle picking up in the next couple of years.
• Wind is showing signs of revival after a flat quarter; the path forward is to localize as much of the supply chain and manufacturing as possible, a process that has progressed significantly over the last 18 months.
• Portfolio diversification provides a hedge: no single segment exceeds 7–8% of revenue, and products are sold on innovation (performance contracts, condition monitoring, remanufacturing) rather than price.

Bhatnagar: "It's only a question of time. It's only a question of time before electric vehicles far outpace the sales of non-electric vehicles."

Localization & Margin Structure

• Localization equals import substitution: 62–65% of industrial bearings are currently imported from other SKF factories worldwide. The internal goal is to reach ~60% industrial localization in the next couple of years, with CAPEX of ₹150–₹160 crores per year (60–70% directed at industrial).
• Traded revenue as a proportion has already declined from ~45% in FY23 to 42% in Q1 FY24, confirming that localization is progressively displacing imports.
• Customer behavior has shifted post-COVID: availability now commands a 3–5% premium over pricing, which strengthens the case for local manufacturing that cuts lead times.
• Trading margins have stabilized after 1–1.5 years of price increases being passed through to customers; the next leg of margin improvement must come from mix, localization and portfolio management.
• Portfolio management is an ongoing exercise to trim less profitable accounts, products and go-to-market approaches. Some businesses are long-cycle and long-contract, so the drag cannot be eliminated overnight, and the internal benchmark keeps rising.
• Steel localization remains a long-term challenge: industry-level localized bearing steel is ~65%, but full localization is difficult in the near term due to technology and pricing constraints. SKF is working with steel mills to close the gap.

Bhatnagar: "Localization really is about import substitution. I cannot comment for 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. This is what we need to change."

Railways: The Freight Opportunity

• Freight wagon bearing approvals were obtained about a year ago, a milestone management calls a "big game changer." SKF is now fully qualified to bid for complete freight wagon tenders, having previously lacked the necessary approvals.
• Current railway market share is high double-digit in passenger coaches, metros and locomotives, but only mid-single-digit in freight. The stated intent is to bring freight share to the same level as the other sub-segments.
• Railways grew 30% in Q1, driven by passenger coaches (including Train 18/Vande Bharat), metros and locomotives. Dedicated Freight Corridors are partly operational with the remainder in testing, creating a structural demand tailwind for high-load freight bearings manufactured locally.
• All railway business flows through SKF India, not SKF Engineering; purchases from SKF Engineering fall under transfer price regulation.
• Solution factories (sub-factories within main plants) remanufacture used bearings to as-good-as-new condition and return them to the original purchaser for reuse in coaches, adding a service layer to the railway proposition.

Electric Vehicles: Positioning & Economics

• Two-wheeler EV bearing content drops from 14–15 bearings to 9–10 (a 30–35% decline), but the type and quality change: lower friction, lower noise, higher insulation. The resulting price point shift makes expected bearing revenue per vehicle neutral.
• EV bearings are expected to be margin-accretive based on current competitive dynamics, though management acknowledges margins may compress as competition intensifies.
• Management believes the established OEMs (Bajaj, Hero, Honda) are best placed to drive growth in the electric two-wheeler space, not the small disruptors. SKF is working with all the large players to co-develop bearing types suited for EVs.
• Electrification is framed as a question of when, not if: the current 5–8% penetration could move to 15%, 20%, 25% or 30% in no time.

Bhatnagar: "Based on what we see right now, we do expect the bearings that go into 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."

Performance Contracts & Services

• Performance contracts sell outcomes (uptime, reliability) rather than bearings, and are gaining traction in segments where the cost of failure far exceeds the cost of replacement: process industries, high-CAPEX industries like wind where accessibility is an issue.
• Management says it is only scratching the surface of the performance-contract opportunity, which helps win share in key segments like steel. The model is not viable for two-wheeler owners.
• Availability improvement works on two tracks: manufacturing bearings locally to cut lead times, and on the aftermarket side, improving reach to customers and digitally connecting them to warehouses to prevent counterfeit purchases.
• Adjunct products (chains, sprockets, timing belts, CV belts, steering/suspension parts) are small at under 2% of business but help drive bearing sales by offering a fuller portfolio to automotive aftermarket retailers and mechanics.

Competitive & Structural Position

• Chinese imports are not a material threat where SKF competes; SKF's own imports from China are 12–15% of its mix. Competition from China is mainly in the automotive aftermarket and has declined further post-COVID.
• Exports are not a focus area, accounting for 7–9% of revenue and treated as filler production when spare capacity exists. No sales teams are pitching for new business globally. The parent's regionalization drive translates to localization for India, not an export mandate.
• R&D spend doubling is a global strategy; in India, the Technology Center with 200 engineers focuses on localizing bearings with the right suppliers and customer testing, plus developing application-specific offerings (ASOs) for individual customer needs.
• Capacity utilization stands at 65–66% on a 365-day, 24x7 basis (cement industry benchmark is ~70% on the same basis).
• Outsourcing of components (rings, rollers, cages) has always been the model; SKF sources from suppliers and assembles in factories, with no change in strategy.

Bhatnagar: "Yes, so you have to look at, I mean, whether it's railways or any other segment, certainly, we sell our products not on price, but on innovation."

Guidance & Commitments

Key Metrics