Sterling Tools Limited (STERTOOLS) Q1 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Q1FI27 Earnings Call of Stirling Tools 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 involves risks and uncertainties that are difficult to predict. As a reminder, all participant lines will be in 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 and operate by pressing star, then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Atul Agarwal, Managing Director of Sterling Tools Limited. Thank you, and over to you, sir.

Thank you, Nesha. Good morning, everyone, and welcome to Sterling Tools Limited's Q1 FI27 earnings call. I'm joined today by Mr. Jaydee Barba, Director, Mr. Anish Agarwal, Director, and Strategic Goals 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 F527, with the highest ever quarter sales across passenger vehicles, commercial vehicles, and three-wheelers. 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. Two-wheeler sales grew 25.9% Y-on-Y to 1.27 million units, led by continued strength in utility vehicles. Two-wheeler sales increased 20.3% year-on-year to 5.63 million 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. Exports also recorded their first-ever strongest quarter performance across all major vehicle categories, reflecting improving global demand. Looking ahead, the industry outlook for F527 remains positive, supported by the upcoming festive season. Lower ownership. 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. 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. Back 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. The real-owned business delivered a robust performance during Q1 FY27. Total income grew by 23.7% year-on-year to 201.9 crores, while EBITDA increased by 26.9% year-on-year to 31.1 crores, with EBITDA margins improving to 15.4% compared to 15% last year. Profit after tax grew by 48.4% year-on-year. 16.4 crores, with margins improving to 8.1%, supported by continued operational efficiencies and financial discipline. Importantly, our standalone fastness business continues to remain strongly cash-generative and net-debt-free, providing a solid financials foundation to internally support our long-term investments across EB 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. 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 helps limit the overall impact. As the cost inventory has now been largely utilized, the impact of highest yield 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. 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 control assist solutions, on-board chargers, off-board chargers, DC-DC converters, and rare-earth magnet-free 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 time specification continues to improve with increasing traction in the commercial vehicle segment. We also receive business confirmations from four OEMs, further strengthening our order pipeline and enhancing our long-term visibility. It continues to revolve around increasing wallet share with existing customers while adding new customers across vehicle segments. Off-board charter programs continues to work as well, and we remain focused on expanding our presence across higher-value integrated power electronics. 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 F527. These new product lines will significantly broaden our addressable market while strengthening our capabilities in next-generation EV architectures. 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. Customer engagements continue to progress well, with seven customer programs already secured. Commercial supplies are scheduled to commence from the second quarter of F527, 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 a fully automated manufacturing facility in Bangalore, In collaboration with GLBSE, we believe STML is well-positioned to capitalize on this emerging opportunity as the Indian EB ecosystem continues to mature. To conclude, we have entered FI27 with a strong momentum across our businesses. Our business continues to generate healthy cash flows and remains the financial backbone of the group, while our investments in electric mobility and next-generation technologies continue to strengthen our long-term growth platform, supported by strong customer relationships, expanding product capabilities. We remain confident of creating sustainable value for all us. With that, I would like to thank all our shareholders, customers, So they continue to support. Committed to executing a 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 their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Deepan Sankara from Trustline Holdings, Private Limited. Please go ahead.

Thank you for the opportunity. Good morning, everyone, and congratulations for a very strong set of standalone numbers. So, firstly, in the standalone business, we have seen gross margin increased sharply by 270 bps, but overall EBITDA increase has been limited to 40 bps. So, any one of expenses in the fixed cost for the current quarter?

I think... Thank you. Luckily, there are no fixed cost increases, I think. Land-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. Can you repeat that question again?

Sir, overall, the gross margin has increased by almost 2.7%.

Yes.

But EBITDA margin has increased only by 40 bps.

Yeah. So, you know, just to give you a sense, you know, 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 the inflationary cost increase. All commodities besides steel, which is chemicals, tungsten steel, even wages, minimum wages have gone up dramatically this year, but as high as 35% in some areas. And chemicals, everything has gone up. So that is impacting our GM numbers accordingly. But we feel that despite those pressures, you know, we've been able to generate some efficiencies on the shop floor. Now, having said that, our steel is a 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 the counter. And for the first time this year, after a long time, since the inflation impact has been dramatic, we have taken 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... Before we conclude, and before they translate into our...

Okay, super. Noted. And, sir, what is the kind of current capacity utilization we have in our scandal will be placed? And I have noted down that 80 crores of CapEx we are putting up for these scandals, when that will, capacity will get commissioned?

We're probably at 90-95% utilization, which is a very high number, keeping in mind the product mix issues we have. So you can pretty much say we are fully... Thank you, Majali. We'll kick in in the second half of the year. So the benefits of the full CapEx... Starting maybe last quarter and a 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 12 to 24 months. Okay.

Sir, lastly, from my side, what is the kind of guidance we are providing for non-fastener business for fill year FI27?

You're talking about non-fastener, the step-down subsidiary business, EV business? So, I think, let me just say it like this, that our fastener business will grow like we've been getting, we are up. We're up, I think, 20% plus the first quarter. And based on estimates we have right now, the near term looks very similar going forward. Unless there is something, unless the 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 20-30% as well on a full EV platform perspective. So that's the kind of number we are looking at growth in our EV businesses, between 20% and 30%.

Thanks a lot, sir. I'll join Dr. Kim.

Thank you. Ladies and gentlemen, if you wish to ask a question, you may press star and 1. A reminder to all the participants to ask a question to press star and 1. The next question is from the line of Amit Ahusha from PJ Capital. Please go ahead.

Hello. Am I audible? 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. So like, how should we think about EBITDA margin for the standalone business over the rest of FY27? 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?

Yeah. So, on the customer 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 state. 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... We're quite positive that we'll be able to hold our margin structures for the full year. On a second question of EB businesses, like I said, we are looking at anywhere between 20% to 30% growth in the EB businesses this year. And with the momentum we have on customer acquisition, on both in our SCM and SCM business, I think we are looking at maybe another 30% to 40% growth next year, FY28 basis. So... We will be establishing the growth platform in both our SEM business and STML. Just to summarize, about 20% to 30% growth this year in FY27, and maybe 30% to 40% growth on top of that next year in FY28.

Thank you. The next question is on the line of Nitin from Innoquist Advices Private Limited. Please go ahead.

At the outset, thanks for taking my question. Just continuing the same subsidiary related performance, like we continue to burn approximately 10 crore a quarter, and we also have continued momentum in the Q1. What are the break-even levels? And with whatever growth rate we 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 or at least break-even scenario for both the subsidiary, maybe independently both each of them if you can share?

So I think both STM and STL, we expect them to break even FI28. 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.

Can you share revenue for each of them separately? On an

SEM basis, we'll probably break even at a level of maybe 175 crores and STML at about maybe 70 odd crores. So you can say about 225, 240, 50 crore business, both put together, we'll break even.

Okay. And based on our current capacity, what we have built in each, what is the peak revenue potential of this subsidiary?

So, Jadhi, you want to take it by SEM, and I'll come to Anish for SEM, Jadhi.

So, I, you know, our... Our business is going through an evolution in terms of, you know, the changing of the capacity, but we believe that we've got capacity right now for about over 300 crores without any further investments.

In SEML? At SEML. At SEML.

At SEML, we can do around 140 crores on a three-shifted. This is based on current capex and current capacities on the floor for both the businesses. So basically, both businesses put together, about a 340 crore revenue is the current capacity installed, 440 crores, 300 crores for STM and about 140 odd crores for STM. So 400 crore plus is the current capacity on the floor.

Okay, and... Operating margin, I presume it will be somewhere at least high tins or mid, sorry, low tins at least for when we start.

It will be about 10%, give or take, plus or minus 2. We'll try and keep it 10, double digit, 10% plus levels.

And what is our total exposure, including working capitals for each of both the subsidies?

Exposure from a holdco perspective.

Yeah.

So we have invested. You know, our current investment in SEM is 50-odd crores, and our current investment in SEM, also from a cash investment perspective, is again about 48-49 crores. Thank you very much.

Right. And last comment, like with CapEx, which we are doing in Fastener, 88 crore, I think we will be building a capacity to reach 1,000 crore in that, right?

I think with this 88 crore CapEx, we believe, if the markets and the customers support us, to touch a revenue of 1,000 crores, we may have to do… Anywhere between 25 to 30 crore investments next year, just to balance out everything to arrive at a potential revenue of 1,000 crores.

I'm sure that you will do it in 28.

Wish you all the best. Yeah, we have good traction, good cash flows, good revenue growth, so we are currently thinking on similar lines as well.

Right. Is there anything, positive surprise, which can come in both the subsidiaries in a shorter duration, or any such positive announcement or some great change there can come through?

So I think for HCM, I would say we've been getting a lot of success in our LCB and HCB programs, public transport buses programs. 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 shrinks, maintains, and picks up momentum, I think our revenue growth numbers can be a lot more attractive than what I've said currently. And on STML, because this is a safety product, the testing validation is anywhere from 8 months to 16 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 markets. 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 X4 business for us?

No, it's too early. I 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, in our teams, in our customers, which will give us the leverage to go outside.

Thank you for sharing all your valuable insights and it will be very helpful. Thank you. Thank you for the rest.

Thank you. A reminder to all the participants to press star and one to ask a question. The next question is from the line of Payal Shah from Billion Securities. 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 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...

Okay. So, my next question is, what are the milestones that, you know, one should look after or monitor over the next three, four quarters or a span of two years across our STM and STML business?

So, I think on both STML and 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 multi-unit maker. We have got a lot of success, like I said, in our LCV-HCV business. We want to focus on that. There are other products 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. So, that's one. And finally, 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 got to keep in mind that these EV businesses have very poor EV ecosystem in India. You know, India is still largely dependent on technologies and supply chains from overseas. So we are trying to... You know, build our capability, our competences 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 all the placeholders are there, once all the technologies are in place, we believe we'll be very well positioned to To grow on top of the foundations we have laid.

Understood, understood. So, 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?

Jayadip, do you want to take that?

Yeah, good morning. So, you know, these products have already been tested as completely imported units from China. Our lines will get commissioned by the end of this quarter. Once we give samples from these lines, typically customers have to do on-road trials, which could take us about four months to do. So, I mean, the... 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, 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.

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 three and a half, anywhere between three and three and a half or 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. Ladies and gentlemen, if you wish to ask a question, you may press star and 1. A reminder to all the participants to press star and 1 to ask a question. The next question is from the line of Dave V, an individual investor. Please go ahead.

Yeah, hi. Thanks for the opportunity. In the SEM 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 percent is coming from two-wheeler, three-wheeler, about 65 percent is coming from commercial vehicles. Commercial vehicles include LCVHCB and public transport buses.

Okay. In the two-wheeler, sir, if you actually see, you don't have any of the large or the ones that have a few higher market share, like Aether. I don't want to take news, but there are these companies like Aether, Edo, TVH, etc. Is there any specific reason why we have not been able to penetrate them?

No, I think in those incumbent or large existing customers, they all have, some of them have in-house. And some of them have long-standing relationships with suppliers. They've been working over the years. There are two programs they're working on for two different two-wheeler makers. They're 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, you know, Current penetration level is going to almost 10% in India for two e-wheelers. The volumes are really going up, as you can see. We believe as the volumes go up in the EV segment, a lot of these incumbent or large existing customers will start doing second sourcing. 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 few years. In the SEM business, if you can just give us a brief of why are we making losses today? Is it because of the historic business that we have done with one of the last two-wheeler companies, or is it because of the investments that we have made in terms of R&D in the year?

So, you know, in FY25, SEM business had clocked about 380 crores of revenue, backed on one large key anchor customer. But that key anchor customer insourced their product. We lost close to 280-odd crores of revenue in just one year. That was a huge, you know, drop in our revenue, which also means, and our infrastructure, our cost levels. But based on that larger revenue, that's one. Second big factor, 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 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. Et cetera, et cetera. So, it's an investment we are doing in the future and for the future. So, short term, yes, there is some pain, but we believe you're on the right track. We need to do these investments in R&D to help us become, help us acquire customers, help us make a better product line, and help us build our future.

Atul, if I could add to it, sorry? Atul, if I may add to that, just to give you a... You know, a perspective, we have about 130 people in our organization. More than half are in product or application engineering, okay? And that investment is crucial for the future. 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 a product. So if we import a product and give it to a customer and say, you know, please try this out, then we have to do some level of testing to make sure that the product meets Indian regulations and Indian test standards. So, 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 bring in completely knocked on 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 STU. 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. 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 they already have these technologies? What is the traction that we are seeing in terms of, you know, being able to accept a new product or a new solution?

Hello, Anish. Anish, we'll 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 half a million units a year across five different features, you know, of driver monitoring, front collision warning, line spot, etc. So to capture that market, we have signed this partnership with a company Thank you. I think the implementation from October may be pushed to Jan 2028, but it's already been notified, and with that regard, we are actually working on. In terms of the existing models, which already have these technologies, it's in passenger vehicles, that too in the premium trims of, say, Mahindra or Tata Motors or the Korean companies that are offering ADAS Level 2 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 2 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. 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. A reminder to all the participants to press star and one to ask a question. Ladies and gentlemen, if you wish to ask a question, you may press star and one. 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. You know, 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. Thank you very much.

On behalf of Strategic Growth Advices Pvt Ltd, that concludes this conference. Thank you for joining us and you may now disconnect your lines.