Sterling Tools (NSE:STERTOOLS) Q1 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Q1 FY 'twenty seven Earnings Call of STERTOOLS Limited. This conference call may contain forward looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be on the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then 0 on your touch tone phone. Please note that this conference is being recorded.

0:47 I now hand the conference over to Mr. Managing director of Sterling Tools Limited. Thank you, and over to you, sir. Thank you, Nessia. Good morning, everyone, and welcome to Sterling Tools Limited's Q1 FY 'twenty seven Earnings Call. I'm joined today by Mr. J. D. Barber, Director Mr. Anish Agarwal, Director and Strategic Growth Advisors, our Investor Relations Advisors. Our earnings presentation has been uploaded on our website and the stock exchanges, and I hope everyone has had the opportunity to go through the same. I would like to begin with industry overview. The Indian automobile industry delivered a record breaking start to FY 'twenty seven with the highest ever quarter sales across passenger vehicles, commercial vehicles and three wheelers.

1:42 The strong performance was supported by lower GST rates, easier financing, new model launches and improving consumer demand along with a favorable base from the previous year. Passenger vehicle sales grew 25.9% Y o Y to 1,270,000,000 units, led by continued strength in utility vehicles. Two wheeler sales increased 20.3% year on year to 5,630,000 units with scooters significantly outperforming motorcycles. Commercial Vehicle sales rose 18.3% year on year, driven by replacement demand and higher activity across infrastructure linked sectors, while three wheeler sales grew 29.7 year on year, supported by healthy demand both in passenger and goods carrier segments.

2:38 Exports also recorded their first ever strongest quarter performance across all major vehicle categories, reflecting improving global demand. Looking ahead, the industry outlook for FY 'twenty seven remains positive, supported by the upcoming festive season, lower vehicle ownership costs following GST 2.0, easier financing and steady consumer sentiment. At the same time, geopolitical developments, commodity prices and global supply chain disruptions remain key factors to monitor during the year. Coming to our standalone Fastener business, we continue to build on the strong momentum witnessed last year and delivered another quarter of healthy performance.

3:28 Our growth was driven by an increase in wallet share with existing customers and deeper OEM relationships and continued traction in value added products, enabling us to outperform the underlying automotive industry. Backed by our focus on customer diversification, operational excellence and cost efficiencies, we continue to deliver healthy profitability and strong cash flow generation despite the evolving business environment. Our standalone business delivered a robust performance during Q1 FY twenty twenty seven. Total income grew by 23.7% year on year to INR201.9 crores. While EBITDA increased by 26.9% year on year to INR31.1 crores with EBITDA margins improving to 15.4% compared to 15% last year.

4:22 Profit after tax grew by 48.4% year on year to INR16.4 crores with margins improving to 8.1% supported by continued operational efficiencies and financial discipline. Importantly, our standalone fasteners business continues to remain strongly cash generative and net debt free, providing a solid financials foundation to internally support our long term investments across EV and technology led growth initiatives. As we continue to strengthen our legacy business, customer diversification remains one of our key focus areas. During the quarter, we made further progress in expanding our presence across commercial vehicle programs with significant inroads into both LCV and HCV segments.

5:13 Combined with our growing portfolio of critical and value added fasteners, this positions the business well to continue outperforming the broader automotive industry. During the quarter, we witnessed an increase in steel prices, which created some cost pressure on our partners business. However, our disciplined cost management, effective inventory management and existing pricing arrangements with customers helped limit the overall impact. As a lower cost inventory has now been largely utilized, the impact of higher steel prices is expected to be more visible in the coming quarter. That said, we remain confident that our pass through mechanism along with our continued focus on operational efficiencies and value engineering will help manage these cost pressures while maintaining a healthy margin profile.

6:06 Coming to Sterling e Mobility. We continue to strengthen our position as a comprehensive EV powertrain and power electronics solution provider. Over the last few years, the business has evolved well beyond motor control units and today offers an integrated portfolio comprising motors, integrated motor and controller solutions, onboard chargers, off port chargers, DCDC converters, rare earth and rare earth magnatory motors. This diversified portfolio enables us to participate across multiple EV platforms while increasing the content we supply per vehicle. We're also witnessing encouraging progress across our customer programs. Today, SEM is engaged in 33 active customer programs with strong relationships across leading OEMs, while customer diversification continues to improve with increasing traction in the commercial vehicle segment.

7:06 We also received business confirmations from four OEMs, further strengthening our order pipeline and enhancing our long term visibility. Our strategy continues to revolve around increasing wallet share with existing customers while adding new customers across vehicle segments. Our motor and off board charger programs continues to progress well and we remain focused on expanding our presence across higher value integrated power electronics solutions. An important milestone for the business during the year will be the commissioning of our onboard charger and multifunction unit production lines, which remain on track for Q2 FY twenty twenty seven. These new product lines will significantly broaden our addressable market while strengthening our capabilities in next generation EV architectures.

8:00 Backed by our technology partnerships, we believe SEM is well positioned to address the evolving requirements of electric mobility while continuing to build long term value through technology, localization and product innovation. Moving to Sterling Tech Mobility Limited, our newest growth platform, we continue to make steady progress in establishing a domestic manufacturing ecosystem for high voltage DC contactors and relays. The business remains focused on import substitution in a segment that is expected to witness significant demand with increasing electrification across electric vehicles, charging infrastructure and energy storage applications. Our customer engagements continue to progress well with seven customer programs already secured.

8:53 Commercial supplies are scheduled to commence from the second quarter FY twenty twenty seven, marking an important milestone for the business. We are also systematically increasing localization, which will enhance value addition, improve cost competitiveness and support margin expansion over time. With our fully automated manufacturing facility in Bangalore and technology collaboration with GLBSC, we believe STML is well positioned to capitalize on this emerging opportunity as the Indian EV ecosystem continues to mature. To conclude, we have entered FY twenty twenty seven with a strong momentum across our businesses. Our legacy Farfinals business continues to generate healthy cash flows and remains financial backbone of the group, while our investments in electric mobility and next generation technologies continue to strengthen our long term growth platform.

9:49 Supported by strong customer relationships, expanding product capabilities, disciplined execution and a robust balance sheet, we remain confident of creating sustainable value for all our stakeholders. With that, I would like to thank all our shareholders, customers, employees, business partners for their continued support and trust. We remain committed to executing our long term strategy with consistency and discipline. Thank you once again and we'll be happy to take your questions now. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch tone telephone.

10:35 If you wish to remove yourself from the question queue, you may press star and 2. The first question is from the line of Difan Sankara from First Line Holdings Limited. Congratulations for a very strong set of stand alone numbers. So firstly, in the stand alone business, we have seen gross margin increased sharply by two seventy bps. But overall EBITDA increase has been limited to 40 bps to any one off expenses in the fixed cost for the current quarter?

11:27 I think me just firstly, are no fixed cost increases. I think our on a stand alone basis, our margin was 15% last year, it's up to 15.4% this year. So I'm not able to understand the question when you're saying it's not improved. You repeat that question again? Sir, overall, the gross margin has increased by almost 2.7%. But EBITDA margins has increased only by 40 bps. Yes. So just to give you a sense, which I did cover in my opening speech, which was there have been two pressures coming this year. One is the steel price increase. And second, the big one also is, which is very unique this year is inflationary cost increase. All commodities besides steel, which is chemicals, tungsten steel, even wages, minimum wages have gone up dramatically this year back as high as 35% in some areas.

12:33 And chemicals, everything has gone up. So that is impacting our GM numbers accordingly. But we feel that despite those pressures, we've been able to generate some efficiencies on the shop floor. Now having said that, our steel is the regular pass through mechanism. They normally those negotiations take two to four months. So we are at a very mature stage of negotiations for price increases on account of steel. And for the first time this year, after a long time, since the inflation impact has been dramatic, we have taken up this matter up strongly with all our customers And we are getting quite a positive feedback from a large number of them that will compensate us for the inflationary impact we have this year. So like I said, these are all two to four months of lag time before we conclude and before they translate into our P and L.

13:39 Okay, sir. Noted. And so what is the kind of current capacity utilization we have in our scandal business? And I noted down that INR 80 crores of CapEx we are putting up for these terminals, when that will capacity will get commissioned? So currently, as of today, I think we are probably at 90%, 95% utilization, which is a very high number, keeping in mind the product mix issues we have. So we have you can pretty much say we are fully utilized right now, but this INR88 crore CapEx we have for this year, some of it has already kicked in, in the first quarter marginally, but substantially a large part of that CapEx will kick in, in the second half of the year.

14:25 So the benefits of the full CapEx will not be felt on a full year basis. They will be felt starting maybe last quarter and the year going forward. So we invest into our capacities a year ahead of currently, keeping in mind the strong tailwinds we have in this business and the feedback we have from our customers. I think we are taking an aggressive posturing and building capacities with a view of the next twelve to twenty four months. Sir, lastly, from my side, what is the kind of guidance we are providing for non fastener business for full year FY 'twenty seven?

15:11 You're talking about non fastener, the step down subsidy business, EV business? Yes. So I think let me just say it like this, that our fastener business will grow like we've been getting we are up, I think, 20% plus in the first quarter. And based on estimates we have right now, the near term looks very similar going forward unless there is something unless automotive industry slows down. The industry is growing as fast as well. Going to our EV businesses, we believe that those businesses in terms of revenue will be up maybe at that level of about 20%, 30% as well on a full AV platform perspective.

15:57 So that's the kind of number we are looking at growth in our EV businesses, between 2030%. Thanks a lot, sir. I'll join back to queue. Yes. Thank you. Thank you. To press star and 1. The next question is from the line of Amit Ahuja from PJ Capital. Please go ahead. Hello. Am I audible? Yes. Yes. Yeah. Thank you for this opportunity, and congratulations for the strong set of numbers. So I'll be asking two questions. And so you indicated that the benefit of low steel inventory has largely been exhausted.

16:45 So like how should we think about EBITDA margin for the stand alone business over the rest of FY 'twenty seven? And my second question is, how should we think about the growth trajectory of the new business lines in SEM and STML? So could you provide a broad timeline for each business and outline their expected growth journey? Yes. Thank you. So on the fastener business, you talked about our lower cost inventory getting consumed. I also said that we are expecting pass through mechanism price increases from our customers on the steel. So from that perspective, I don't see our EBITDA getting any weaker. We hope despite the pressures, we are quite confident that we'll be able to hold our margin structures on a full year basis despite the steel and inflation because we expect to get price increases from customers, which are in a very advanced stage. And also at the same time, we have a good growth trajectory on the overall top line revenue. So keeping everything in mind, we are quite positive that we'll be able to hold our margin structures for the full year.

18:01 On your second question of EV businesses, like I said, we are looking at anywhere between 20% to 30% growth in the EV businesses this year. And with the momentum we have on customer acquisition on both in our SEM and SME business, I think we are looking at maybe another 30% to 40 growth next year FY 'twenty eight basis. So I think the growth we have establishing the growth platform in both our SCM business and STML. Just to summarize, 20% to 30% growth this year in FY 2027 and maybe 30% to 40% growth on top of that next year in FY 2028. Okay. Thank you.

18:51 Thank you. The next question is from the line of Nitin from Innoquest Advisors Private Limited. Please go ahead. I doubt it. Thanks for taking my question. Just continuing the same subsidiary related performance, like, we continue to burn approximately INR 10 crore a quarter, and we also have continued momentum in the Q1. What are the breakeven levels? And with whatever growth rate you are seeing 20%, 30% for this year and 30% for next year, When do we see from which quarter onwards are we seeing a positive at least or at least breakeven scenario for those both the subsidiary, maybe independently both each of them, if you can share?

19:38 So I think both SEM and STL, we expect them to breakeven FY 2028. This year, yes, they will lose both of them will lose money. But based on the trajectory we have in terms of revenue and our working, we believe both SEM and STML will both breakeven in FY twenty eight. Can you share revenue for each of them separately? What would like? Level of revenue there will be? On an SCM basis, we'll probably breakeven at a level of maybe INR175 crores and STML at about maybe INR70 odd crores. So you can say about INR225 crores, INR240 INR50 crores business, both put together will be breakeven. Okay. And based on our current capacity, what we have built in each, what is the peak revenue potential of this subsidiary?

20:31 So, Jerry, you want to take it by SEM and I'll come to Anish for STML. Jerry? So, business is going through an evolution in terms of the changing of capacity, but we believe that we've got capacity right now for about over INR300 crores without any further investments. In STML? At SEM. At SEM. At STM. STM. And and each of STML, we can do around $1.40 crores on a three shift move. On a... This is based on current CapEx and current capacities on the floor for both the businesses. Basically, both businesses put together, about INR $3.40 crore revenue is the current capacity installed.

21:22 Jadit is 300 sorry, INR $4.40 crore. INR $4.40 crores, yes. INR 300 crores for STM and about 140 odd crores for STM. So INR 400 crores plus is the current capacity on the floor. Okay. And operating margin, I presume it will be somewhere at least high teens or mid sorry, low teens at least for It when we should be about 10% give or take plus minus two. We'll try and keep it in double digit, 10% plus levels. And what is our total exposure, including working capital for each of both the subsidiaries? Exposure from a HoldCo perspective? Yes. So we have invested current our current investment in STML is INR 50 odd crores and our current investment in SCM also from a cash investment perspective is again about INR 49 crores, 49 crores.

22:21 Making INR 100 crores investment in both the businesses. Right. And last comment, like with CapEx, which we are doing in fastener INR INR 88 crore, I think we'll be building a capacity to reach INR 1,000 crore in that, I think with this INR 88 crore CapEx, we believe to touch a if the markets and the customer support us, to touch a revenue of INR 1,000 crores. We may have to do anywhere between INR 25 crores to INR 30 crores investments next year just to balance out everything to arrive at a capacity of to arrive at a potential revenue of INR 1,000 crores. I'm sure that you will do it in '28. Wish you all the best. We have a good traction, good cash flows, good revenue growth. So we are currently thinking on similar lines as well.

23:13 Right. Is there anything which positive surprise which can come in both these subsidiaries in a shorter duration or any such positive announcement or some great changes can come? So I think for SEM, I would say we've had we're getting a lot of success in our LCV and HCV programs, public transport buses programs. If there's a if the government spending picks up in terms of public transport and with this current momentum of oil prices being very high, There's a lot of traction for electric vehicles across the board. If that swings, maintains and picks up momentum, I think our revenue growth numbers can be a lot more attractive than what I've said currently.

24:08 And on STML, the because this is a safety product, the testing validation is anywhere from eight months to sixteen months depending on customer to customer needs. Once we are certified, we believe that revenue growth numbers can be very attractive. I think the missing piece there is we are attracting domestic customers only right now. Once we stabilize our processes and build some revenue with domestic customers, The game changer for that business over the next two, three years would be export market. We want to target exports also as well going forward. Is there any number which you would like to say what is the potential of export business for us?

24:56 No, it's too early. Won't hazard a guess on that right now because we haven't really done much customer interaction on that. We want to stabilize the product, the processes, quality domestically, work closely with them, build confidence in ourselves and our teams and our customers, which will give us the leverage to go outside and sell our product more aggressively. Thank you for sharing all your valuable insights and it will be very helpful. Thank Wish you all the you. Thank you. The next question is from the line of Payal Shah from Billion Securities.

25:41 Please go ahead. Yeah. Thank you so much for the opportunity. I have a few set of questions. First being the announced CapEx of 80 crores for the fasteners business. So could you clarify whether this will be a greenfield investment or an expansion of the existing facilities? This will be purely expansion in existing facilities. So that so the biggest benefit of that is that the lead time to activate them is much shorter. So it's all in existing facilities between Bangalore and our two plants in NCR. So my next question is, what are the milestones that one should look after or monitor over the next three, four quarters or a span of two years across our STM and STML business?

26:40 So I think on both STML, STML, I think the parameters which we focus on is customer acquisition and within that what products we are doing. SCM has graduated from a pure MCU maker to a multiunit maker where we have got a lot of success, like I said, in our LCVHCV business. We want to focus on that. There's other product lines which are under testing and proof of concept with other customers, incumbent customers in India. So we are focusing substantially on getting success with additional incumbent customers across LCV, HCV, passenger vehicles and two wheelers.

27:30 So that's one. And finally, based on how that revenue trajectory is looking in that. In STML, there's a lot of work being already done on the automotive side. We have done a lot of testing and validation and customer acquisition with incumbent customers on the automotive side. So we want to focus on going forward once we stabilize this. Like I said, we want to focus on charging infrastructure, solar infrastructure and exports after that. So you've to keep in mind that these EV businesses have very poor EV ecosystem in India. India is still largely dependent on technologies and supply chain from overseas.

28:15 So we are trying to build our capability, our competencies in the entire EV ecosystem. And even the customers are graduating accordingly. So the whole system is ramping up its entire ecosystem and supply chain. So this is going to be slow at the same time. Once we once all the placeholders are there, once all the technologies are in place, we believe we'll be very well positioned to grow on top of the foundations we have laid. Understood. Understood. Sir, my next question is the onboard charger and the multifunction unit production that are expected to commence in quarter two of this year. So when do you expect these products to contribute meaningfully to our revenues and profitability?

29:10 Jhadi, do want to take that? Yes. Good morning. We've our these products have already been tested for as completely imported units from China. Our lines will get commissioned by the end of this quarter. Once we get samples from these lines, typically customers have to do on road trials, which could take us about four months to do. I mean, the company would typically want to do about 50,000 kilometers of road trials before they will sign on such an important component of their vehicle. So, using looking at that, I'm saying that I feel that we will be in production or we will start supplies sometime in December or January.

30:02 Okay. Okay. And my last question is how do you see content per vehicle evolving as your portfolio expands beyond motor controllers and into integrated power electronic solutions? So as of now, some of the integrated units that we are providing for the heavy bus and... For the bus and heavy truck platforms typically run about 3.5, anywhere between 3 and 3.5 a lakh rupees per unit based on configuration. Thank you so much for the answers. Thank you. That's it from me. Thank you. Thank you. The next question is from the line of Davey, an individual investor. Please go ahead.

31:01 Yeah. Hi. Thanks for the opportunity. In the ACM division, what would be the percentage between two wheeler, three wheeler and commercial vehicles? Currently, as per our plan this year, about one third, about 30, 35% is coming from two wheeler, three wheeler, about 65% is coming from commercial vehicles. Commercial vehicle includes LCV, SCV and public transport buses. Okay. In the two wheeler, sir, if we actually see, you don't have any of the large or the ones that have a few higher market share like, you know, it's around big news, but there are these companies like, TBS, etcetera. Is there any specific reason why we have not been able to penetrate them?

31:46 No, I think those incumbent or large existing customers, they all have some of them have in house production and some of them have longstanding relationships with suppliers. They've been working over the years. There are two programs we're working on for two different two wheeler makers. They are at a very advanced stage. We are hopeful in the next few months, we'll probably get a positive response from one of the makers, that's one for a new program. Secondly, the current penetration level is going to almost 10% in India for two e wheelers.

32:32 The volumes are really going up, as you can see. We believe as the volumes go up in the EV segment, a lot of this incumbent or large existing customers will start doing second sourcing of products, which is where we believe we are well positioned to acquire that business. One follow-up question on this. I've not been following your company for quite a bit, you know, the earlier period. The ACM business, if you can just give us a brief of why are we making losses today? Is it because of the historic business that, you know, we have done with all of the last two wheeler companies or is it because of the investments that we have made in terms of r and d in the the ecosystem? So, you know, in in FY twenty five, SEM business had dropped about INR380 crores of revenue backed on one large key anchor customer.

33:25 But that key anchor customer insource their product, we lost close to INR280 odd crores of revenue in just one year. So that was a huge drop in our revenue, which also means and our infrastructure, our cost levels are based on that larger revenue, that's one. Second big factor is the which is what we still continue to do. We still continue to invest a lot into product engineering, into design and development, basically research and development to strengthen our own our own tech capabilities. So despite the loss in revenue, we continue to invest in engineering capabilities to make ourselves more and more independent, to make ourselves strong in terms of localization, etcetera, etcetera. So it's the investment we are doing in the future and for the future. So short term, yes, there is some pain, but we believe we are on the right track. We need to do these investments in R and D to help us become help us acquire customers, help us make better product lines and help us build our future.

34:33 Atul, if I could add to sorry. Go ahead. Atul, if I may add to that. Just to give you a perspective, we have about 130 people in our organization. More than half are in product or application engineering. Okay? And and that investment is is crucial for the future. The the other thing we need to keep in mind is that as we are launching these new products, there is a huge investment that is going into product testing and validation because each product that is localized, and at each stage of localization, we need to test the product. So if we import a product and give it to a customer and say, you know, please try this out, then we we have to do some level of testing to make sure that the product meets Indian regulations and Indian test standards.

35:24 So the... You know, we obviously have the China test standards or the China DVP. We then do the India... We do a whole set of validations in India. We then migrate to a CKD program where we we bring in completely knocked down pieces and assemble them. We go through the entire test and validation again, and then we localize. And when we localize, we go through that entire test and validation again, and you're talking lakhs of rupees per SKU. So it's all that part of that same engineering investment that we are doing to basically build our future as a comprehensive powertrain and power electronics company. I understand. Thank you for the clarification. One last question.

36:12 We have recently signed, you know, for ADAS and drive monitoring solutions. I just wanted to understand, these are primarily used in four years. Right? So do the current, you know, companies that are producing vehicles don't don't they already have these technologies? What is the traction that we are seeing in terms of, you know, being able to accept the new product or the new solution? So, Anish, yes. Anish will take this question. In ADAS, there's a regulation which has been notified, which is kicking in from October 2027 in medium and heavy commercial vehicles, which is probably 500,000 units a year across five different features of driver monitoring, front collision warning, blind spot, etcetera.

37:03 So to capture that market, we have signed this partnership with a company in China. It's I think the implementation from October maybe pushed to January 2028, but it's already been notified and with that regard, are actually working on. In terms of the existing model, which already have these technologies, it's in passenger vehicles that too in the premium trims of say Mahindra, Tata Motors or the Korean companies that are offering ADAS Level two solutions. There is no regulation, which is on passenger vehicles right now, but we feel 2029, the regulation is already in draft. It will also be notified mandating all vehicles to have Level two ADAS starting 2029 here for the Indian market, barring passenger vehicles and commercial vehicles. Even two wheelers regulation is under draft at ACMA as well as the Ministry of Road Transport and Highways in cooperation with ERA and ICAT.

38:00 And I'm part of that committee also, which is drafting the standard for two wheeler safety rider assistance solutions. Got it. Thank you. Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing comments. Thank you very much for your time today. These interactions help us convey our strategy going forward and also help us understand investor concerns around the company and help us tweak our strategy going forward once again.

38:48 Thank you very much. On behalf of Strategic Dot Advisors Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.