Ladies and gentlemen, good day and welcome to the SKF India Limited Q1 FY2026 earnings conference call. For the smooth conduct of the meeting, all participant lines are in the listen-only mode. A brief question-and-answer session will follow the formal presentation. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on a touch-tone telephone. As a reminder, this conference call is being recorded and will be of 45 minutes' duration. With this, I now hand the conference over to Mr. Ashish Pruthi, Head of Marketing and Communication from SKF India Limited. Thank you, and over to you, sir.
Thank you. Good morning, everyone. Thank you for joining us today. With us, we have SKF India's Managing Director, Mr. Mukund Vasudevan, our CFO, Mr. Ashish Saraf, and a Legal Director, Company Secretary, and Compliance Officer, Mr. Ranjan Kumar. Before I turn the call over to the management, I would like to remind you that in this call, some of the remarks contain forward-looking statements which are subject to risk and uncertainties, and actual results may differ materially. Such statements are based on management beliefs as well as assumptions made by and on the information currently available to the management. The audience is cautioned not to place undue reliance on these forward-looking statements and make any investment decision. The purpose of today's call is to purely educate and bring awareness about the company's fundamental business and the financial quarter-end review. Let me now turn the call over to Mr.
Mukund Vasudevan, who will give an overview of the company's business activities and developments for the quarter, Q1 FY 2025-2026. We will then open the call for Q&A.
Thank you, Ashish. This is Mukund Vasudevan, Managing Director of SKF India Limited. I will be going through a few topics which I'm sure have been shared with you also in the presentation. I will go through a quick economic update of the macro in India, talk about the quarterly highlights for Q1 financial year 2026, a quick update on where we are on the demerger process, and then end the call with a quick summary, and then we can go to Q&A. So if we talk about the economy, I will start there. Overall, GDP, as you all know, in India is still growing at 6%, with the inflation 6% plus, with inflation at around a manageable level at around 3%. The growth in the GDP has primarily been coming from government spending and has been coming from services.
The manufacturing-related GDP has actually slowed down a little bit. If you look at major sectors, the IIP has actually shrunk a bit in this quarter, dropping to 1.8%. That has obviously driven a little bit by power, electricity, coal, etc., but other sectors are also relatively muted. Automotive has been flat in growth, in million units produced. Slight growth in passenger vehicles, very minimal, but decline in both two-wheelers and to some extent in commercial vehicles overall. Light commercial vehicles growing a little bit more than the heavy commercial vehicles. Iron and steel production has grown, driven by the construction, but new CapEx projects have actually slowed down in iron and steel. In construction, we're seeing again a slight uptick, driven by both real estate as well as the government-related mega projects, infra projects.
And all these have a ripple effect on us. We've seen average growth kind of in line with GDP in our business, but there are sectors which have been up and sectors which are down. If I now switch to quarterly highlights, our net sales, as I said, has grown at around 6% year on year, primarily driven by a stronger Industrial growth. We have grown 13% in Industrial year on year, which is excellent growth driven by railways, wind, and some of the heavy sectors. Automotive, on the other hand, has actually declined or is almost flat by around 0.4%. As you know, the Industrial business is 53% of our business. The Automotive is 39% of our overall business in terms of sales. And the exports is another 8%, which is again declined by 0.9%, so around 1%.
The Automotive decline has come from some changes in models with some of our larger two-wheeler customers, but also an overall decline in both commercial vehicles and passenger vehicles. The Industrial growth, as I said, has come from mainly the heavy, wind, and railway sectors, and we expect the Industrial growth to continue. Exports is down partly due to tariffs in some of the sectors, but also partly down due to specific industries in Southeast Asia or Americas being down. Our margin this quarter has come down by almost 530 basis points. The reasons for this are related to, one, demerger-related costs, one-time costs, both IT as well as IT-related costs as well as consultants. Now, some of this may continue in the future as we over the next year, year and a half, as we're expecting the demerger to continue till the point where the demerger is fully done.
The other reasons for increase in costs have been the employee-related costs, which have gone up due to annual increments. We have also started our process of investing more in our factories, so the depreciation costs have actually also gone up. And finally, FX has also had an impact on our business because of the weaker rupee. So all these are contributors. In addition, we also have slightly higher traded volume, which is at a lower margin, and that is creating the mix issue. Net working capital and cash flow are the next topic I will cover. In net working capital, we have actually reduced a bit the net working capital from quarter on quarter, but up a bit from full year, primarily driven by accounts receivable, higher volume of business, but also partially the decline from fourth quarter 2025 to now has come from a decline in our inventory.
Cash flow continues to improve. We have a 13% improvement in our net cash flow. I will now talk a little bit about the demerger so that we can kind of give you a quick update on where we stand on the demerger. As you know, we're trying to create two fit-for-purpose independent companies here, both of which can accelerate growth and profitability independently. We believe the reasons for the demerger are the different macro environments in the Automotive versus Industrial, different customer needs from what Automotive needs given the macro situation and given what various Industrial customer needs, and last, the difference in manufacturing style or manufacturing philosophy of the two entities.
All these together have been the reasons why we are creating two fit-for-purpose companies, which will have independent management focus, increased manufacturing efficiency on both sides, tailored innovation, capital allocation more efficiently done, more agility and responsiveness, and finally, more visibility for our investors in terms of how the two businesses are doing independently. As we announced in the demerger call, we are also now at a point where we know which manufacturing lines will go where. In manufacturing lines in Bangalore, where we have 10 lines totally, seven will go to Automotive, three will remain with Industrial. In Pune, where we have 22 lines, 12 will remain with Automotive, and 10 will go to Industrial. Haridwar, four lines all will remain with Automotive.
In terms of land, we'll roughly split 85%-15% in Bangalore, 85% for Automotive, 52% Automotive, and 48% Industrial in Pune, and Haridwar will be 100% Automotive. In terms of manpower, it's 55%-60% will go to Automotive, and 40%-45% will remain in Industrial. These are rough numbers for the land and manpower, but directionally, it's what we expect. Finally, in terms of the timeline, we have now filed with the NCLT, and we are expecting the shareholder meeting to happen later this quarter. We will hopefully, once the NCLT approval is done, we should be in the fourth quarter of this calendar year, we should be ready to list and trade as two separate entities. All right, ending kind of summary. As I said, good 6% plus growth year on year.
Industrial doing very well at 13%, Automotive slight decline or flat this quarter year on year. Excellent cash flow generation, 13% year on year increase. Margins have been soft year on year, 530% drop. Sorry, not percent, 530 basis points drop, 5.3%. PBT % drop, primarily driven by demerger costs, some employee costs, and FX. The demerger costs and the employee-related costs, which is the annual appraisal, will continue for the next year and a half. The others, hopefully, it's a one-time which will adjust like FX. That's it from my side in terms of the presentation. Just one other comment, the shareholder meeting for the demerger was done on 14th July, and they have approved the scheme as the demerger scheme, and NCLT has noted that also, and we should hear back on the decision in the month of September. Thank you from my side.
I now hand it back to the moderator.
Thank you very much. We will now begin the question and answer session. Due to call duration, we request you to limit your questions to one per person. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question comes from the line of Yash Goenka from Awriga Capital Advisors LLP. Please go ahead.
Hi, am I audible?
Yes, you're audible. Please go ahead.
Okay, hi. This is on the Ahmedabad plant where you've lent around INR 150 crore and 200 as deemed CapEx. So my question is, what is the content of CapEx, and how it shall benefit the listed company?
Yep. Actually, if you could answer this question.
I'm so sorry.
Yeah.
Please, may I request you to please mute yourself after asking the question to avoid the background noise, please?
Sure.
Thank you.
Yeah. Thanks, Yash, for your question. Again, I don't have offhand the CapEx numbers specifically for Ahmedabad factory as it is not part of the listed company. But principally, the investments that we are making in Ahmedabad factory would continue to sell to the Industrial company, which is SKF India. And SKF India will continue to sell to the market, right? So any investments that we are making in Ahmedabad is effectively benefiting SKF India in terms of creating a better product availability, localizing the product, and ensuring lower cost for SKF, and in turn helping SKF win a better market share in India and abroad.
Any timeline on when the plant will commission if you cannot quantify the quantum of CapEx.
Sorry, can you come again with your question?
Can you comment on when the plant will be commissioned, the Ahmedabad plant?
The Ahmedabad plant is already commissioned, right? They are already operating in the unlisted entity. There are additional investments which have been planned, and most of the investments could materialize in the next two and a half to three years. Sometime by end of 2027 is when we expect all the CapEx to materialize and production to start.
Okay, thank you.
If I may just add, as Ashish said, any investment in the region, right? And this could be Ahmedabad, could even be in Southeast Asian country, or could even be in China, if it makes sense, right? It makes us more cost competitive in the Indian market. The idea is we will continue to invest where it makes sense, whether it is in the listed entity or in any of the factories of SKF AB. If it is competitive to sell in the Indian market, we will sell it, and that will help us grow. Growth and margin should see an impact from any investment in Ahmedabad. At the same time, we are continuing to invest in the listed entity primarily in Pune, both for capacity enhancement as well as localization.
Okay, if I could just squeeze in one last, what kind of asset turns you are expecting from the investment you'll be making in auto and Industrial?
Sorry, what is the question? Asset turns?
Yes.
Sorry, is that return on assets or?
No, the top lines.
Okay. Ashish, maybe you can answer that, right?
Again, offhand, I wouldn't have the number in terms of the asset turns, but what we think in terms of return on the investments that as a company we look at is at a minimum that the return on assets has to be or a payback has to be within a period of five years or less. Any investments as a company that we make, we target to get return on our investments in five years or a lower period, both for Automotive as well as Industrial market.
Okay, thank you.
Thank you. The next question comes from the line of Harshit Patel from Equirus Securities. Please go ahead.
Thank you very much for the opportunity. Sir, you had guided for an 8%-10% revenue target in FY 2028 for the Industrial business in your last demerger discussion. Is this because of muted market conditions or us not having the sufficient capacities as fresh capacities in Pune will only come on board after FY 2028?
Yeah. So as you're seeing right now, I mean, if you take a five-year CAGR on our Industrial business, year on year, we are growing almost 15% year on year CAGR over the last five years. So while in the recent past, we have had a little bit more muted in the Industrial business where we have had a little bit more muted growth, primarily due to portfolio cleanup, meaning we have dropped customers or products which are not profitable. We expect that growth to come back, right? And we've been cautiously optimistic here when we say 8%-10% long-term growth. To your point, the main reason for that will be one of the main reasons is more localized production, both in the Ahmedabad plant and in the Pune plant. So that growth top line will make us more competitive, and we'll get top line growth.
Most of those are getting online in 2027 and 2028. That is one of the reasons. The second is we are also working on new product innovations and creating fit-for-purpose products, both in terms of by segment in the Industrial, but also in what will fit market conditions in India. We're creating more engineered products, not just replicating products which are global, but creating more engineered products for India. Then the last reason is that we have significantly expanded our commercial excellence efforts, which includes everything from our distributor network or our after-sales network, whether it is mechanics in auto or it is retail stores or distributors in Industrial. It also includes how do we value sell better, how do we include services in addition to product sales. All these together, we expect our business to reach that double-digit growth in Industrial at least.
Understood. Sir, in Automotive business as well, we have gained market share in both two-wheelers and three-wheelers as well as PVs over the last few years. Do you think we will continue to gain further market share, or will we now broadly grow in line with the industry growth over here?
Our aspiration is to grow above industry, continue to gain market share. And I believe with capacity expansion, one of our biggest bottlenecks in Automotive has been lack of capacity. And what OEM customers look for is committed capacity in the long term. We expect that we will expand capacity again in the 2027, 2028 timeframe, and that will help us expand more rapidly than our competitors and hence gain share.
Understood. Thank you very much for answering my questions and all the best.
Thank you. The next question comes from the line of Krupas hankar from Avendus Spark. Please go ahead.
Good morning, and thank you for the opportunity. My first question would be on the growth, what you have highlighted during this quarter coming in from the Industrial business. And you have primarily highlighted that railways, wind, and some other sectors were driving this growth. Can you expand a little bit more on it? Because you had highlighted in the earlier call, one of the earlier calls, that wind was not a market which we are focusing on. Has it come into favor? And anything more on the Industrial piece which gives us confidence on continued growth in this segment? Second is more of a bookkeeping question. Just wanted to get an understanding on what is the one-off cost due to demerger during this quarter. Thank you.
Sure. I'll let my CFO, Ashish, answer the second question, specifics on the demerger cost. I can answer where is the Industrial growth coming from. First, I think there may be a misunderstanding that wind is not a focus. Wind has always been a focus, one of our top five priorities, and it will continue to be. What we have done in the past is we have sold all applications in wind. There are many, many applications in wind, not many, three or four main applications in wind, which all of which were not profitable. And so we just cut off unprofitable applications and focus on the applications where we thought, where we believe we can be profitable and we can offer better value to the customer.
With that focus strategy, we have actually gained more share, partly the focus, but partly also the fact that we have got a better manufacturing footprint both in the region as well as in Ahmedabad for making these products. So we have gained share in wind, but specific applications. So it is a misunderstanding to say it is not a focus. It is a focus, and it will continue to be in India, but we will pick and choose the applications within wind that we want to play in. Other sectors which have grown well in Industrial are, as I mentioned, railways with some of the high-speed rail projects. We are continuing to do well there and metros. In the heavy industry, we are primarily seeing some expansion in metals, mainly in aftermarket, not new projects, but aftermarket. So growth has been there.
We have also seen some expansion in general machinery, which is everything from pumps, drives, gearboxes, etc. We're seeing some expansion there. And overall, our distribution market has actually, it's not as much as the 13% average growth we've seen, but it's continued its steady growth of around 8%-10%.
So just to add to or respond to the question on demerger cost. If you look at our current quarter, our cost of demerger was around INR 1-2 million. A significant chunk of that cost was on IT implementation, which is as we are going through a demerger between Automotive and Industrial business, a significant spend is being made in deploying SAP as well as other softwares that we use within SKF. Apart from that, ensuring that we have a separate data infrastructure in place both for the Automotive business as well as for the Industrial business. So that's where a significant amount of cost has been incurred on IT. And similarly, to kind of support the whole demerger process, we had to engage with or take support of consultants in terms of ensuring that it is being done in a compliant manner.
That is where you see a significant amount of cost incurred on consultants. We expect this cost to continue till the first half of next year. First half of next financial year is when we kind of expect this cost to continue.
Apologies, just I couldn't hear the exact quantum of the cost. There's some dissonance in the line. Can you repeat just the quantum?
Yeah. So the total cost was INR 184 million.
Okay. Okay. Thank you. One last question, if I may.
Sorry to interrupt, sir. May I?
Sure, sure. I'll get back with you.
Thank you. Yes, sir. Thank you so much. The next question comes from the line of Gokul Maheshwari from Awriga Capital Advisors LLP. Please go ahead.
Yeah. Hi. Thank you for the opportunity. So in the past few analyst reports, you've mentioned your more business which you're doing with particularly Indian OEMs like Mahindra, etc. Can you just give an update with respect to what kind of business have you won, whether you've been getting business within your models and your progress with respect to the share of business?
We are continuing to gain business with Mahindra, particularly in their SUV segment, and we supply what we call the hub units for them. In terms of market share, I'll have to come back to you specifically as to what is our market share with them. Ashish, if you have any insight into that, you can. But I would say it's still I would come back to you on the numbers. One other thing I will mention is Mahindra. We are also working with Mahindra Swaraj on the tractors, and we have been gaining business with them also on the tractors business. Anything, Ashish, you would add on share? I don't think we report this publicly, but I can come back to you with the numbers.
I don't have the numbers as of now.
Great. And then secondly, just on the you mentioned.
Persons are up. May I request you to join the queue for a follow-up question, please?
Yeah.
Okay. Thank you. The next question comes from the line of Mayank Bhandari from Asian Market Securities. Please go ahead.
Thanks for the opportunity. So just checking, you've given earlier margin guidance of 16%-19%, and now this demerger cost will be continued for at least the next couple of quarters. So what kind of margin we should anticipate for this particular year?
Ashish, if you could answer that. I mean, if you could answer that for the next. I would say the demerger cost will continue for the next one year, right? So I would say four quarters, and we're being cautious here because we expect that some of this will continue, not just IT, but other costs related to the demerger. And then beyond that, also, we will have some additional CapEx. So the depreciation will, when new factories in Pune come on, the depreciation will start hitting us also, right? While we are taking actions to offset this as much as possible, right, we are. I would say we are expecting slightly muted margin. 16%-19% range is what we'll get to in the 2028 onwards timeframe. So Ashish, if you can comment in more detail on this.
Yeah. Sure. So I think, as Gokul said, this demerger cost is going to continue till H1 of next financial year, right? And this demerger cost is going to impact around 1.5%-2% on the margins. So you could expect at least a couple of percentage adverse impact on the margins on account of the demerger cost. Apart from that, there could be some additional cost which the Industrial company might incur in the first half of next financial year with respect to stamp duty and registration cost for the transfer of assets. That could also additionally impact the Industrial business margins in the first half of next financial year.
Okay. Okay, and just one question regarding this.
Sorry to interrupt. May I request you to join the queue for a follow-up question, please?
Sure. Thank you.
Thank you. The next question comes from the line of Rahul Kumar from Nuvama. Please go ahead.
Yeah. Hi. Thanks for the opportunity, sir. My question is on the export side. Could you share the share of auto and Industrial in export?
Yeah. Ashish, if you could comment on that.
Yeah. So the overall exports that we have within SKF is around 8% of our total revenue. And of the 8%, almost 5%-5.5% is pertaining to Industrial, and remaining 2.5%-3% is pertaining to the Automotive.
Okay. Thank you.
Thank you. The next question comes from the line of Vipulk umar, Anukchan Shah from Sumangal Investments. Please go ahead.
Hi, sir. Would you comment on the service part of the business where we are looking after maintaining the plants? That business was started a few years back, but there is no comment in your presentation or on the con call for that.
Fair point, right? I think we can maybe send you some information, or in the next investor call, we can talk a little bit more about it. But I'll give you the highlights. There's three portions which we do in service, and overall, that business has been doing quite well, right? It's been growing in double digits quite consistently. The three portions of the business are, one, what we call condition monitoring, which is both products and services related to monitoring of bearing performance. So this measures vibration, and this measures noise, this measures speeds, etc. And we have probably the best-in-class analytics software to say, "What is the reason?
“Can we predict failure from the sound pattern?” and let a customer know that there is a likely failure had to happen, right, so that they can replace the bearing or lubricate the bearing or realign the bearing before there is an actual failure, and then you have downtime in the plant. That is condition monitoring. The second one is what we call remanufacturing, where we do business with some heavy industries and railways to remanufacture bearings. What we do is we disassemble and refinish bearings, right, whether it's the components or overall, so that we can reinstall it with a guarantee of the same level of performance quality, and this kind of ensures that it's faster turnaround time, plus it's lower cost for the customer, so we do remanufacturing.
We have three remanufacturing centers across India, one in Pune, one in Ahmedabad, and one in Jamshedpur, where we do remanufacturing. And the last business is what we call reliability services, where we take on the entire asset of the customer and we help ensure its reliability or uptime. So the contract is structured in terms of reliability and uptime, where we will either.
Sir? Sorry to interrupt. There is some audio break.
Okay. Can you hear me now?
It is still a little bit audio breaking.
Okay. Is it breaking, or is it?
Oh, yes, sir. Yes, sir. It is fine now. Thank you.
Okay. All right. So I don't know till what point you heard, but three kinds of businesses we have under services. One is condition monitoring, one is remanufacturing of the bearing, and the third is overall reliability of an asset for the customer. So we take on the entire plant or portion of the plants and ensure uptime. And we do that by either replacing the bearing or maintaining the bearing, whatever is required, lubricating the bearing. We take care of everything for the customer in a kind of comprehensive contract. All of these are growing, and they're growing well in high double digits, or high teens, sorry. Yeah.
What is the revenue contribution from service business?
Sorry to interrupt.
This is just a follow-up question.
Sir, please come back in the queue for a follow-up question, please.
I believe it's around, Ashish, you can comment on this, but I think it's around 15% right now or maybe a bit less.
It will be a bit less. Just one sec. I'll tell you one.
Our aspiration anyway is to grow that to around 20% of the business.
Yeah. So out of the total revenue of SKF, it's relatively small. It's around 10%. But look at it from a business perspective because most of the services are out of.
Sir, sorry to interrupt. The audio is breaking.
Ashish, we can't hear you.
Can you hear me now?
Yes.
Yes, sir. Now it's better.
Just answer in terms of Industrial, how much it is, and then we can.
Yeah. In terms of Industrial, it's around 6%.
Okay, sir. Thank you.
Thank you. The next question comes from the line of Shagun Beria from Anand Rathi. Please go ahead.
Hello.
Yes, ma'am. You're audible. Please go ahead.
Okay. Yeah. So I just wanted to ask, in the Q1 results, there's a Forex loss of INR 136 million. So which line item is it a part of? Next, is that in the earlier July 25th investor PPT, there is an outlook that you have shared for three years on Auto and Industrial, where we see the growth in Auto is expected to grow at around 10%-12%, which is more than the Industrial growth that you expect of around 8%-10% in contrast to the trends that we are seeing currently, wherein Industrial is growing double-digit led by heavy machinery and railways.
So I know that you have mentioned the drivers of the Industrial business, but I just want to understand the thought process as to why the Industrial growth is just a high single digit, which is a bit lower than the auto growth that you expect. Also, in the demerger numbers, how is the split of other income and any indicative return ratios numbers for both segments?
Okay. I let Ashish answer the question on Forex and which line item it is in, right? I will answer the growth question. So the reason we had said for the next three years Industrial will be a little more muted is we are trying to localize more in more manufacturing and Industrial, and we expect all that localization to come in line only in late 2027, early 2028. And so that is the main reason we have projected muted growth in Industrial. I think the last quarter should not be taken as a reference. The Industrial business also tends to be lumpy in terms of we win a few project orders, and the next quarter, the same projects may not be there. Automotive tends to be a little more steady from that perspective. So don't take one quarter's trend as a prediction of the future.
Automotive, this quarter was muted for various reasons, but we do expect that growth to ramp up quickly as we build up capacity, and we are expecting a few other new market share gains in the near future. Ashish, on Forex?
Yeah. So the foreign exchange income or loss is basically part of other expenses, right? So there is a line in the P&L called other expenses as part of that.
I know the follow-up question on other income.
Other income that you see in the financial statements, these are manpower services which SKF India is providing to other SKF companies. That is the income that we have reported in other income, or we continue to report in other income as a part of our financial statements.
Okay. Just one last question. Is there any thought process?
May I request you to join the queue for a follow-up question, please? Thank you. The next follow-up question comes from the line of Gokul Maheshwari from Awriga Capital Advisors LLP. Please go ahead.
Yeah. Thanks for the opportunity again. Just my question was on that you mentioned that there are certain specs for Indian products which you are planning on the Industrial side, and Industrial business being a wide spectrum. But if you could just highlight certain growth drivers within subsets of Industrial business which you're going after, more for a three- to four-year perspective?
Okay, so the Industrial business is roughly the way we look at it, at least the way we are structured, is it's roughly 50% aftermarket, where we are selling to the end customers directly, and that is through distribution mostly, and the other 50% is to OEMs, where we sell to manufacturers of equipment which go into specific segments. Yeah. The aftermarket growth will continue across a wide variety of industries because this is an installed base of bearings where replacement is needed, so that growth is going to be driven by us, of course, locally manufacturing more, but also ensuring availability of that product near to the customer, so with our distribution channel expansion, our last-mile presence of the bearings or availability of the bearings, we will see growth in that, and that is kind of more a commercial excellence effort, as we say.
In the project orders or what we sell to OEMs, the key segments which we will continue to focus on are industries driven by infrastructure growth, and this could be cement, steel, and other metals, mining. In addition, we will also continue to focus on renewables, as we said, and wind, and in rail as the rail network expands. Rail, we are also trying to penetrate. In addition to passenger and high-speed, we are also trying to penetrate the freight market through more localized engineering. General machinery, which is pumps, drives, etc., will also be a focus.
Excellent. Thank you.
Thank you. Ladies and gentlemen, we'll take this as a last question for today as the duration of the call is completed. On behalf of SKF India Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.