SKF India Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Growth slowed sharply in Q4, but management calls it a blip: Revenue grew just 1.5% YoY in Q4, dragged by SAP implementation disruption, conscious wind portfolio pruning, and aftermarket contract renewals. Management insists the long-term growth story is intact and expects a return to double-digit growth.
• Wind business deliberately shrunk to protect margins: Wind share dropped from 8% to 5% of revenue as SKF exited unprofitable customers and products, prioritizing margin health over volume. The company will remain choosy and does not expect significant wind growth in 2024.
• Industrial localization is a slow, multi-year story: Industrial manufacturing is only 35-40% localized vs 90-95% for automotive, and the mix will improve by just 1-2% per year. Large bearing localization is constrained by supplier ecosystems, steel requirements, and the need for regional demand to justify investment.
• Margins are volatile quarter-to-quarter but stable annually: Transfer pricing mechanics on traded goods cause quarterly margin swings, but management insists margins are flat year-on-year under OECD guidelines. The 15-16% margin range is the new normal after the abnormally high 2022.
• What to watch next quarter: Whether the SAP-driven billing disruption truly reverses, the pace of aftermarket recovery after contract renewals, and any signs that competitive intensity in auto aftermarket is easing.

Growth: The Q4 Slowdown and the Double-Digit Promise

• Q4 was weak across multiple fronts: Revenue grew only 1.5% YoY, a sharp deceleration from stronger H1. The move from a legacy system to SAP on 1 October disrupted billing, wind business was consciously shrunk, and industrial aftermarket contract renewals required pricing actions that temporarily reduced share.
• The 10-12% floor: Management's bare minimum growth expectation is GDP plus inflation, which translates to 10-12% YoY. Internal plans aim higher, and anything below that floor is considered a blip. The company does not give formal guidance but states this as the long-term intent.
• Industrial expected to outgrow auto over 3-4 years: Infrastructure-led growth in railways, metals, heavy industry, and general machinery should drive industrial growth faster than automotive. However, in the near term, two-wheeler growth is expected at a similar pace.
• Aftermarket is the faster-growth engine: Aftermarket is expected to grow at a faster pace than OEM because it is driven by installed base, reach, and product range rather than project cycles. SKF is investing in distributor capability-building and mechanic enrollment programs to capture this.
• Global exposure is a risk, not a tailwind: Many OEMs that buy from SKF India also export. If their demand shrinks because of global economic weakness, there will be some impact on SKF India. Management acknowledges this but does not quantify it.

Saraf: "GDP is at around 6-7%, inflation is 4-5% so easily bare minimum expected growth for our business is 10-12% yoy. We are aiming much higher and we expect to gain market share from our competition but bare minimum should be 10-12%."

Wind: Deliberate Shrinkage for Margin Health

• Wind share fell from 8% to 5% of revenue: SKF took a conscious decision in calendar 2022 to exit unprofitable wind customers and products, and the impact flowed through 2023. Q4 was particularly weak because H1 was heavier with prior-year orders.
• The structural problem: Wind bearings are manufactured in India but components are imported from Europe, making SKF expensive. Customers squeezed on pricing, and wind has traditionally not made substantial money for OEMs or Tier 1/2 suppliers. SKF is now asking for higher prices, and some customers have asked SKF to exit.
• 2024 outlook is muted: Management does not expect significant growth in wind for 2024. The intent is to grow margins, not volume. SKF will only take wind business if customers give better pricing and will remain choosy.
• Localization is not a quick fix: Wind bearings can be as large as a room and require different heat treatment plants and steel grades. Building the supplier ecosystem for such bearings takes years.

Saraf: "We would either ask customers to give us better pricing, or we would be happy to kind of exit that particular business."

Margins: Quarterly Noise, Annual Stability

• Transfer pricing drives quarterly volatility: Traded goods margins are a function of the Transaction Net Margin Method. If pricing actions lag cost increases in a quarter, margins drop; if pricing exceeds cost, margins improve. Adjustments happen in subsequent quarters, so management insists margins should only be judged over a full year.
• 15-16% is the new normal: 2022 was an abnormal year with very high margins because management took multiple pricing actions while costs were rising. Pricing actions have slowed into 2024 while cost actions have maintained, leading to a post-corrective phase. Management describes 2022 as a positive blip that is now normalizing.
• Manufacturing margins are more stable: Manufacturing margins may see only 1% quarter-to-quarter variation. Steel prices have been relatively stagnant, and no significant inflation-driven pricing actions were taken this year versus last year, which could create a year-on-year anomaly.
• Wall-to-wall profitability governs decisions: Business decisions are taken looking at total group profit, not just SKF India margin. If wall-to-wall margin becomes negative, the business does not make sense. The listed entity's margin on traded goods is protected under transfer pricing rules: SKF India must make a certain margin irrespective of whether the parent makes a profit or loss.
• Industrial vs auto margins differ by entity level: At the group level, industrial wall-to-wall margins are higher. But at SKF India level, automotive margins are higher because auto is 90%+ localized manufacturing, while industrial is only 35% localized with 65% traded. Manufacturing carries higher margins than trading for the listed entity.

Saraf: "Don't look at margins for one quarter and take a decision. Look at for below one year."

Localization: A Slow, Structural Constraint

• Automotive is nearly fully localized at 90-95%: SKF India's three factories predominantly make small and mid-sized bearings, which covers the full automotive range.
• Industrial is only 35-40% localized and will rise slowly: Large bearings for wind, metals, and heavy industry require different heat treatment, steel grades, and technical expertise not available in SKF India's plants. Building suppliers takes 2-3 years because of the required technology level and trade-off schemes.
• Manufacturing share will rise 1-2% per year, not jump: Manufacturing content is currently 60% and should gradually improve, but management explicitly rules out reaching 70-80%. The industrial manufacturing mix for the listed entity is around 25% and would increase by 1-2% annually.
• Region-for-region strategy governs investment: SKF's group strategy is organized around four regions, with India part of India & Southeast Asia. Investment decisions require demand from the entire region to justify a five-year payback, because the India market alone is relatively small. This structural constraint limits the pace of localization.

Saraf: "wind bearing could be as big as this room. That kind of capability you need a different kind of treatment plant. You have a different kind of steel requirement which may not be even that you have to build suppliers over a period of time. So that is not something that you can easily localize."

Competitive Landscape: Pricing Power Under Pressure

• SKF commands a pricing premium in most segments: Management claims that customers are willing to pay more for SKF products because of the value created, and SKF's pricing is typically higher than Schaeffler and Timken. The company is positioning itself on value rather than price.
• Auto aftermarket saw competitive intensity rise: Schaeffler reduced pricing and offered stronger incentive programs to multi-brand distributors in the vehicle service market. SKF's incentive program was not strong enough, causing distributors to push competitor products. Management does not know if this pressure is temporary or permanent, noting that competition's margins have also declined.
• Railway freight is a conscious share cap: SKF has 40%+ share in passenger, locomotive, and metro segments but only 10-15% in freight. Government reverse auctions make freight pricing non-competitive, so SKF is not pursuing that business aggressively. The company is working on cost efficiency through component sourcing and design changes before going after higher share.
• Two-wheeler share is improving: SKF is present with Bajaj, Honda, and Royal Enfield and continues to improve share. Overall two-wheeler market share is 25-30%, but presence with TVS is not significant.
• EV engagement is broad but early-stage: SKF works closely with Ola and Ather on two-wheelers and with Tata and Mahindra on four-wheelers. EV is still only 3-4% of business. While the number of bearings per EV is lower, value per bearing is higher, offsetting the volume decline.

Saraf: "Even if you go and look at the price of our product versus you compare it with Scheffler and Timken most of the time you will find our pricing to be higher and the customers are willing to pay us more because we are able to create value for our customers."

Capital Allocation & Leadership

• Capex run-rate of ~₹150 crores expected to continue: Investment decisions are based on demand, channel utilization, technical requirements, and supply considerations. A capex cycle takes 1-2 years from approval to production because machines are not readily available and must be ordered from OEMs with lead times.
• Dividend payout intent is 40-50% of earnings: Unless the company is doing significant capex, the intent is to pay out 40-50% of earnings. Profitability should improve, so dividends per share should go up.
• MD transition underway: Manish Bhatia has given up his regional role as Head of India & Southeast Asia industrial business and taken on the role of Business Head for America's industrial business. He continues as MD of SKF India until a replacement joins, most likely an external hire, expected in calendar Q2.
• India is a talent factory for the group: SKF India is 5% of global revenues but more than 20% of the global talent base. The group is moving senior people from India to other regions, with examples including the MD moving to the US and the CHRO moving to Sweden.

Saraf: "India business, if you look at our share of business, would be about 5% of the global revenues. Right? But in terms of talent base, they're more than 20%. Right? So, from a pure talent perspective, they are leveraging."

Guidance & Commitments

Key Metrics