SKF India Ltd Q1 FY2026 Concall Summary

Key Takeaways

• Demerger dominates the P&L: Net sales grew ~6% YoY, but margins fell 530 bps, with demerger-related onetime costs alone carving out an estimated 1.5–2% adverse impact that will persist for another year.
• Industrial is the growth engine, for now: The Industrial segment grew 13% YoY, powered by railways, wind, and heavy industry aftermarket, while Automotive declined on model changes and weak commercial vehicle demand.
• Localization is the long bet, but it arrives late: New manufacturing capacity in Ahmedabad and Pune will not come online until late 2027 or 2028, so Industrial growth is guided to a muted 8–10% CAGR until then.
• Service business is small but aspirational: Management wants services to reach ~20% of total business, but the current contribution is only ~3% of total revenue (~6% of Industrial), per a CFO correction on the call.
• What to watch next quarter: The NCLT decision on the demerger scheme, expected in September, which would put both entities on track to list and trade separately by Q4 of calendar 2025.

Demerger: Rationale, Progress & Cost

• Rationale: Management cites three drivers: different macro environments for Automotive vs Industrial, different customer needs, and different manufacturing philosophies between the two entities.
• Progress: The scheme has been filed with NCLT; a shareholder meeting on 14th July approved it; NCLT has noted the approval and a decision is expected in September. If approved, the two entities should be ready to list and trade separately in Q4 of calendar 2025.
• Manufacturing line allocation: Bangalore gets 7 Auto and 3 Industrial lines, Pune gets 12 Auto and 10 Industrial, Haridwar gets 4 lines all Auto. Land split: Bangalore 85% Auto/15% Industrial, Pune 52% Auto/48% Industrial, Haridwar 100% Auto. Manpower split: 55–60% Auto, 40–45% Industrial.
• Cost drag: Demerger-related onetime costs (IT, consultants, other) will continue for the next 4 quarters. Beyond that, additional capex will increase depreciation. The Industrial company may also incur stamp duty and registration costs for asset transfers in H1 of next financial year, adding further margin pressure on that entity.
• Margin impact quantified: Demerger costs are expected to impact margins by around 1.5% to 2%, with at least a couple of percentage points of adverse impact on account of demerger cost alone.

Mukund Vasudevan: "We believe the reasons for the demerger are the different macro environment in the Automotive versus Industrial, different customer needs from what Automotive needs given the macro situation and given what various Industrial customer needs. And second and last, the difference in manufacturing style or manufacturing philosophy of the 2 entities."

Margin Walk & Headwinds

• 530 bps YoY margin decline driven by five factors: (1) demerger-related onetime costs (IT, consultants), (2) higher employee costs from annual increments, (3) higher depreciation from factory investments, (4) FX impact from a weaker rupee, (5) a mix issue from slightly higher traded volume at lower margin.
• Employee cost pressure will persist: annual appraisal costs continue for the next year and a half.
• FX impact is hoped to be onetime and to adjust.
• Forex loss of ₹13.6 crore is classified under "other expenses" in the P&L.
• Other income reported in financials comes from manpower services SKF India provides to other SKF companies.
• Net working capital reduced slightly QoQ but is up a bit from the full year, driven by higher accounts receivable on increased business volume, partially offset by a decline in inventory from Q4 FY25.

Industrial: The Growth Engine, With a Muted Bridge

• 13% YoY growth driven by railways (high-speed rail projects, metros), wind (specific profitable applications where share was gained), heavy industry aftermarket (metals), and general machinery (pumps, drives, gearboxes). Distribution market growth lagged the segment average.
• Wind business refocused: Wind has always been a top-5 priority. SKF previously sold all 3–4 main wind applications, but cut off unprofitable ones and focused on profitable applications. A better manufacturing footprint in the region and Ahmedabad helped gain share in specific wind applications.
• Industrial business structure: Roughly 50% aftermarket (through distribution to end customers) and 50% OEMs (manufacturers of equipment for specific segments).
• Aftermarket growth drivers: Local manufacturing, ensuring availability near the customer, distribution channel expansion, and last-mile presence.
• Key OEM/project segments: Industries driven by infrastructure growth: cement, steel and other metals, mining; renewables (wind); rail (passenger, high-speed, and freight through more localized engineering); general machinery (pumps, drives, etc.).
• The localization gap: For the next 3 years, Industrial growth will be more muted because localization of manufacturing comes online only in late 2027 or early 2028. Management guides 8–10% revenue CAGR for Industrial through FY28, calling it cautiously optimistic.

Mukund Vasudevan: "So the reason we had said for the next 3 years, Industrial will be a little more muted is we are trying to localize more in more manufacturing in Industrial. And we expect all that localization to come in line only in late '27, early '28."

Automotive: Flat Market, Capacity-Limited Ambition

• Flat production in million units: slight growth in passenger vehicles (very minimal), decline in both 2-wheelers and commercial vehicles; light commercial vehicles growing a bit more than heavy commercial vehicles.
• Automotive decline for SKF came from model changes with some larger 2-wheeler customers, plus the overall decline in commercial vehicles and passenger vehicles.
• Mahindra wins: SKF is continuing to gain business with Mahindra, particularly in their SUV segment supplying hub units, and is also working with Mahindra Swaraj. Management declined to provide market share figures when asked.
• Growth aspiration: Management aspires to grow above the industry and continue gaining market share. The bottleneck has been lack of capacity; capacity expansion is expected in the 2027–28 timeframe, which will help expand more rapidly than competitors and gain share.

Service Business: Small Base, Big Ambition

• Three components: (1) condition monitoring (products and services for monitoring bearing performance, with analytics software for predicting failure), (2) remanufacturing (disassemble and refinish bearings for heavy industries and railways, with 3 centers in Pune, Ahmedabad, and Jamshedpur), (3) reliability services (taking on the customer's entire asset to ensure uptime).
• Current revenue contribution: Management initially estimated "around 15% or maybe a bit less," but the CFO corrected this to ~3% of total SKF revenue and ~6% of Industrial revenue. The follow-up was cut off before a precise figure was confirmed.
• Aspiration: Grow the service business to around 20% of total business.

Investments & Capacity Build-Out

• Ahmedabad plant: Already commissioned in an unlisted entity; additional investments are planned, with most materializing in 2.5 to 3 years, by end of 2027. Management declined to provide the capex quantum, stating it is not part of the listed company.
• Pune capacity: Continuing to invest in the listed entity, primarily in Pune, for capacity enhancement and localization.
• Investment philosophy: SKF will continue to invest where it makes sense, whether in the listed entity or in SKF AB factories, if it makes the company more cost competitive in the Indian market. Growth and margins should see impact from any investment in Ahmedabad.
• Return target: Any investment targets payback within 5 years or less, for both Automotive and Industrial. Management did not provide asset-turn expectations when asked.

Ashish Saraf: "Any investment as a company that we make, we target to get a return on our investments in 5 years or a lower period, both for Automotive as well as Industrial market."

Guidance & Commitments

Key Metrics