SKF India Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Tepid growth, deliberate pruning: Revenue grew modestly as SKF consciously walked away from low-margin wind and freight-rail business, while elections slowed aftermarket and distribution. Without the wind pruning, growth would have been 2.5% to 3% higher.
• Manufacturing mix jumped 6pp QoQ: The shift to 64% in-house production from 58% in Q4 FY24 lifted material costs 200 bps but signals localization momentum, a core margin lever.
• Wind and rail drags are self-inflicted and temporary: Wind customer pruning is mostly done by end of Q2, and the rail decline reflects SKF’s choice to exit low-share, price-pressured freight business while still executing Vande Bharat orders.
• Margins held despite mix and cost headwinds: Pricing actions, portfolio cleanup and continuous improvement absorbed the material-cost increase from higher manufacturing, keeping the bottom line resilient.
• What to watch next quarter: Whether the wind business resumes growth after pruning ends, the pace of industrial localization toward the 65% target, and any top-line acceleration as election disruptions fade.

Revenue Drivers & Drags

• Industrial (50% of sales): Heavy industries and metals delivered strong growth, driven by infrastructure demand that management expects to sustain through next year. Railways and defense were flat because of elections and lumpy tender timing.
• Automotive (41% of sales): Two-wheelers, cars and tractors grew well. SKF expects to gain share as the EV market expands and is positioning for high-speed train and semiconductor manufacturing opportunities through 2030.
• Wind business declined by design: Intense price competition flows from wind-farm auctions all the way to component suppliers, so SKF pruned customers. That action is mostly complete by end of Q2, after which growth should resume.
• Railways: freight walked, Vande Bharat kept: SKF is not growing its freight business because its share is much lower than competitors’ due to pricing pressure. Vande Bharat orders have been executed, and the reported result is a mix of wins and deliberate walk-aways.
• Exports (8%–9% of sales): The Korean channel transition has started but is not yet complete. SKF sees substantial opportunity in Southeast Asia and Australia, and hopes to win more parent-entity export volume to the Americas and Europe as it gets more competitive.

Vasudevan: "So the price pressure start from the -- all the way from the auction of setting up wind farms, all the way back to us as equipment -- as component suppliers to equipment to manufacturers. So that's the reason for the price pressures there. It's just very, very competitive, both for the OEM and for us."

Margin Structure & Levers

• Manufacturing mix improved sharply: The mix moved to 64% in-house vs 36% traded in Q1 FY25, a 6pp QoQ jump. This lifted material cost from 58.75% to nearly 60% of sales because overall production increased.
• Traded-product margins are structurally protected: SKF India acts as a limited-risk distributor under transfer-pricing net-margin rules, ensuring reasonable margin regardless of whether the manufacturing entity makes a loss or high profit.
• FY23 vs FY24 margin dynamics: In FY23, global inflation hit margins and significant pricing actions were taken. In FY24, those pricing actions stabilized, so margins did not increase despite a higher manufacturing share.
• Ongoing margin levers: Localization, pricing action, portfolio cleanup (negotiating increases or dropping unprofitable customers), and continuous improvement in manufacturing and procurement will continue to support margin improvement.
• Top-line focus with margin guardrails: Management expects a little more focus on the top line going forward while maintaining or slightly improving margins.

Saraf: "So for the traded products, SKF India acts a limited risk distributor, right, where the margins for the -- for SKF India is calculated under the transfer pricing guidelines, which is the net margin method, right, which ensures that SKF India kind of makes reasonable margin on the products that it is selling, even though the actual margins might be way higher or we might be selling at a loss as well."

Localization & Capex

• Industrial localization target: SKF aspires to take industrial localization from roughly 40%–45% to 65% in the next 2 to 3 years, and the process has already started.
• CRB and SRB localization underway: SKF is trying to localize cylindrical and spherical roller bearings as quickly as possible. CRB is around 25% of the industrial product mix.
• Capex steady: FY25 capex is expected to be more or less similar to FY24. The Korean transition is already baked into the capex spend.
• Renewable energy integration: SKF is investing in wind and solar integration at its Pune factory, though exact cost-savings numbers were not provided on the call.

Competitive Dynamics & Pricing

• Wind pricing is structurally intense: Price pressure originates at the wind-farm auction level and cascades down through equipment manufacturers to component suppliers like SKF.
• Freight rail pricing drove SKF out: SKF’s market share in freight is much lower than competition because of pricing pressures, so it is not growing that business.
• CRB and SRB pricing seen as manageable: Despite competitor capacity additions, management does not expect drastic pricing pressure in areas of SKF’s strength, calling it a dynamic game where competitors and SKF each make their moves.
• Global bearing market subdued: Global bearing growth of 4% is probably not being seen currently. China is down, EMEA is down significantly due to war and Middle East unrest, and the Americas are in very low single-digit growth.

Vasudevan: "I don't expect that there'll be a drastic pricing pressure just because of this. Like any other market it's a dynamic game, they -- competitors will make their moves, we will make our moves."

Services & Adjacent Opportunities

• Services is small, profitable and growing: At 5% to 6% of total business, the services segment is quite profitable. SKF sees more demand as customers want greater uptime and full solutions, and it is looking to expand this business.
• Long-term growth vectors: By FY30, SKF would like to double revenues. Growth avenues include EV market share gains, high-speed trains, semiconductor manufacturing in India, and export expansion in Southeast Asia and Australia.

Guidance & Commitments

Key Metrics