SKF India Ltd Q4 FY2025 Concall Summary

Key Takeaways

• Muted Q4 sales, margin spike from one-off: Revenue grew just 1% YoY as exports fell ~13%, while operating margin jumped from 11.9% to 23.3% on cost savings and a large transfer pricing catch-up adjustment.
• Demerger is the structural story: SKF is splitting into two independent listed entities (automotive and industrial), each with its own manufacturing footprint, capital allocation, and management focus, aiming to accelerate both growth and profitability.
• Capex set to double: Current capex of ~INR130 cr is expected to rise to ~INR250-270 cr in FY26 and stay elevated for two years, funding a new Pune greenfield plant for the industrial entity and capacity additions on both sides.
• Cash flow dipped on working capital, recovery promised: Higher year-end inventory and receivables pulled cash flow down; management calls it a one-time issue and expects a strong rebound next quarter.
• What to watch next quarter: Whether the promised cash flow recovery materializes, the pace of capex deployment across the two new entities, and any further transfer pricing volatility in the new financial year.

The Demerger: Structure, Logic & Progress

• Two fit-for-purpose entities: The split separates automotive and industrial into independent companies, each with distinct manufacturing philosophies, customer value propositions, innovation cycles, and tailored capital deployment, plus sharper investor visibility into each business.
• Plant allocation taking shape: A new greenfield plant near Pune will serve the industrial legal entity, built on existing land with no new acquisition, pending approvals; it will house some relocated industrial lines plus fresh capacity on both sides.
• Ahmedabad stays separate: There is no plan to merge the Ahmedabad facility, which makes larger bearings for global supply, into the new industrial entity.
• Carve-out financials still in progress: FY25 segment-level EBITDA and PAT are not yet available; FY24 EBITDA margins were auto ~18% and industrial ~17%, with FY25 expected to be broadly in line.

Mukund Vasudevan: "The reason for the demerger is we are creating 2 fit-for-purpose independent company, which will accelerate both growth and profitability in both companies."

Q4 & Full-Year Financials

• Q4 revenue: Sales grew only 1% YoY, partly because Q3 was very strong and exports dropped ~13% on macro weakness in the Americas and Europe.
• Q4 margin surge: Operating margin rose from 11.9% to 23.3%, driven by cost-saving efforts, gross margin improvement, and a significant transfer pricing catch-up adjustment completed in the quarter; FX impact was limited.
• Full-year sales: 8% growth, with industrial up 10%, automotive up 6%, and exports muted at 3%.
• Full-year PBT margin: Down ~0.6 ppts as gross margin expansion was offset by higher depreciation from investments and higher employee costs.
• Cash flow: Fell due to a change in net working capital toward year-end, with more sales driving more inventory; described as a one-time issue expected to reverse strongly.
• Other income bump: Predominantly from higher cash balances generating interest income, plus income from a sister company that will continue till 2029.

Transfer Pricing & Margin Mechanics

• The Q4 adjustment: A significant chunk of the full-year transfer pricing correction was booked in Q4, reflecting international guidelines for related-party transactions; it flows through the "purchase of traded goods" line. The FY25 adjustment is now complete.
• Future volatility possible: Management acknowledges that transfer pricing volatility may recur but says any correction will be done within the financial year, as it was for FY25.
• Margin aspiration: Management aims for margins to broadly align with the group's reported 18%-20% EBITDA for industrial bearings globally, supported by ongoing operational efficiency, cost management, portfolio pruning, and pricing efforts.
• Depreciation headwind ahead: Capex investments in the coming quarters will push depreciation slightly higher, but management is working to hold margins steady despite that.

Ashish Saraf: "So what we said last time was that there was some correction which was made on account of transfer pricing in the previous quarter, but we haven't fully corrected the transfer pricing adjustment. So a significant chunk of the adjustment on account of transfer pricing was done in this quarter, which led to the uplift in the overall margins for the financial year."

Working Capital & Balance Sheet

• Inventory buildup: Rose primarily on the automotive side to support OEM customers in subsequent quarters, plus end-of-financial-year expectations of higher demand; on the industrial side, inventory was built for confirmed orders from railways and others that will be invoiced over the next few months. Not related to the demerger.
• Receivables: Largely in line; a slight increase in days is temporary and should normalize.
• Working capital improvement underway: Management is working on more advanced forecasting and S&OP processes to improve inventory management.

Mukund Vasudevan: "Not related to the demerger at all, not at all. So this is purely -- as we mentioned, we do need capacity. We're short of capacity, especially on automotive, so we built up some inventory to satisfy that demand..."

Demand Environment & Segment Outlook

• New business lines gaining traction: Over the last 1.5 years, SKF has become more aggressive in industrial services (remote monitoring, remanufacturing, reliability and uptime services with sensing and analytics) and new competitive products for the metals segment, especially steel long products.
• Management evaluation unchanged: Senior management is evaluated on sales growth and operating margin, not specifically on exports, and this philosophy has not changed in three years.

Mukund Vasudevan: "We are not separately evaluated on -- all senior management is not separately evaluated on exports. It is evaluated on growth and margin only and not on -- not specifically on exports. I think that is the philosophy of our company and we intend to continue doing that..."

Capex & Capacity Expansion

• Capex doubling: From the current ~INR130-150 cr run-rate to ~INR250-270 cr in FY26, and expected to stay at that elevated level for the next two years.
• New Pune plant: A greenfield facility for the industrial entity on existing land, pending approvals; it will move some specific industrial-focused lines and add capacity on both the automotive and industrial sides.
• Capacity details still being finalized: How much additional capacity will be added is still being worked out.
• Localization ambition: Long-term target to be localized close to 70% at an ISEA level.

Guidance & Commitments

Key Metrics