Sterling Tools Limited (STERTOOLS) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Sterling Tools Ltd. Q2H1 FY27 Earning Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion, 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 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 the conference call, please signal an operator 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. Thank you, and over to you, Mr. Agarwal.

Thank you. Good morning, everybody. I'm joined today by Mr. Jaydee Badba, Mr. Anish Agarwal, and our newly appointed CFO, Mr. Ahmed Dada, and Strategic Growth Advisors, our Investor Relations Advisors. Our earnings presentation has been uploaded on our website at the Stock Exchanges, and I hope everyone has had the opportunity to go through it. I would like to begin with an industry overview. The Indian automobile industry recorded its highest ever second quarter sales across major vehicle segments in Q2 F527. Domestic sales grew approximately 18% year-on-year to 83.88 lakh units, supported by improved affordability following GST 2.0, healthy rural and urban demand, and vehicle replacement. According to Siam, the industry is expected to maintain positive growth momentum in H2F527, supported by festive demand, new launches, infrastructure spending, and fleet replacement. However, inflation, potential interest rate increases, and geopolitical uncertainties remain important factors, turning to our performance at a standalone level. We are pleased to report our highest-ever quarterly and half-yearly revenue, along with our highest-ever half-yearly EBITDA. We have outperformed the broader automobile industry. While industry sales grew by approximately 18% in Q2 FY27, our standalone revenue increased by around 32% year-on-year. For FY27, against industry growth of approximately 20%, our standalone revenue grew by around 28%. We've been strong traction in the CV segment, particularly high volumes from the market benefits of our customer relationships, and our continued efforts to To diversify across year-on-year to 58.7 crores, H1, 27, compared to 30.8 crores in the same period previous year. However, it is important to note that Q2, F526, and H1, F526 contain an exceptional gain of 9.5 crores. While revenue growth has been strong, profitability has faced near-term pressure. Previous earning calls, we exhausted most of our earlier low-cost inventory in Q1. At the same time, commodity and non-commodity input costs have increased significantly amid ongoing West Asia conflict. Our pricing arrangements with OEMs provide a pass-through of input cost increases. These recoveries typically come with a time lag, temporarily affecting margins. As the higher costs are progressively recovered, we expect margins to improve over the coming quarters, subject to input price movements and broader operating environment, strengthening our core fastener businesses through customer diversification, capacity expansion, and disciplined investment. Against our earlier CapEx plan of $80 crores for Fastener Business, we have already incurred about $25 crores, plans within the range of about $110 crores. We are also increasing our overall F527 CapEx to about $150 crores across all our businesses. The contactors and MSC. Fastener Business continues to provide a strong foundation for the group, supported by the healthy demand, expanding customer relationships, and a continued focus on operational execution. Q2 SEM, Sterling E-Mobility Limited. Remini from this business stood at approximately 23 crore in FY27. In Q2, FY27, taking HY27 revenue to around 37 crores. This quarterly growth has primarily come from higher volumes and new customer additions. The business has made encouraging progress, particularly in the commercial vehicle and light commercial vehicle segments. The applications and expanding our presence in commercial vehicles. The production lines for onboard chargers and multi-fasten units scheduled for commissioning in Q2 has been commissioned as broadening the customer base and sensing the position in higher-value electric mobility solutions. Mobility Limited, we have made steady progress in commercializing our high-voltage DC contactors, and 527 have now commenced towards commercial execution. The business remains at the core of Sterling. Before we move to the question-answer session, I would like to introduce our newly appointed CFO, Mr. Ahmed Dada. Mr. Dada brings nearly three decades of experience across finance, taxation, audit, corporate reporting, and financial control. He has held senior positions at organizations including Sparkminder, 197 Communications, and spent over 14 years at Pricewaterhouse, including international experience in the UK. His experience in manufacturing, finance, regulatory compliance, fundraising, and corporate governance will be valuable as we continue to strengthen our financial and operational capabilities. We warmly welcome him to Sterling Tools, and now invite Amit.

And good morning, everyone. I am delighted to join Sterling Tools Limited at its important stage in its growth journey. Today, the company has built strong foundation in the fastener business while steadily expanding into electric mobility and newer technology-led opportunities. With learning tools, I look forward to working closely with the management team to strengthen the financial discipline, support business growth, and maintain strong standards, contributing to the company's continuous progress.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone 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 will wait for a moment while the question queue assembles. The first question is from the line of Dave, who is an individual investor. Please go ahead.

Yeah, hi. Thanks for the opportunity. Can you confirm the growth in the SEM and STML business vis-a-vis the Q1 of this year?

Can you repeat that question? I can't hear you.

Can you confirm the growth in SEM and STML business vis-a-vis the Q1 of this year?

Hey, I'm sorry. You know, I'm not able to understand. You know, I can hear you, but I'm not able to understand your question. Do you want to repeat that again? Apologies for that.

I was checking on the SEM and SEML stream of business. What is the growth in Q2 versus Q1 of this year?

Did you want to take that SEM question?

Yeah, it's 26%. It's 26% and it's largely in the SEM.

Okay, and for SEML?

Yeah, this is, this number is Q2 over Q1. Am I right, Jayadeep?

And in STML, it has just started its operation in the Q2 only, where the total turnover is mainly in Q2 only.

Okay. What is the loss per quarter that you are incurring in both of these businesses as of now? And are they largely fix-crossed your operation in nature?

I think there are losses in both the business. SEM, a substantial part is operational in nature. And yes, fixed cost always has an element to that. But yeah, we need to bump up the revenue. Once we reach a revenue of 150 crores plus, we'll probably achieve a break-even point. That might be right.

Sorry, Dave, my apologies. I gave you the volume growth number, which is not representative of the, this thing, because we are moving from lower value two-wheeler, three-wheeler businesses to the much higher value HCV. The growth is about 80%.

Growth is 80%. And what's the value, what is the total value, revenue in the SEM business today?

For the first half, as Atul mentioned, it's 37 crore.

Okay, and we're expecting this above 150 crore return profitable, right?

Correct. That's correct.

Okay, what are the challenges that you see in the SEM business in terms of scaling? That's my last question.

In the SEM Yeah. Yeah. So, you know, as of today, we are, you know, I think a lot of the hard work has already been done in developing the new product portfolio. For us now, it is ramping up of volumes from our new production lines. The, you know, and our revenue, as of today, what we look at for the fourth quarter, because most of the programs that we are working on will go live in the fourth quarter, and I'll just explain why, because we installed our machines, as Atul mentioned, in the second quarter. In the third quarter, we are going to be doing the final validation of these products with our customers, and from the fourth quarter, we start supplying. So starting from the fourth quarter of this year and for most of next year, we already have confirmed businesses from several of our customers, And as long as they are able to meet their production targets, we don't see much of a challenge except the operational and supply chain challenges in meeting the numbers.

Thank you. One last follow-up. When Mr. Atul mentioned, you know, 150 at 150 crore and above we turn profitable, are we talking about annual numbers?

Yes.

Yeah, okay. And we expect to do that for Q2 of next year?

Yeah, I think we expect to outperform that number in FY28.

If I could. Thank you. Thank you. A reminder to all the participants that you may press star and one to ask the question. The next question is from the line of me here from MB Securities. Please go ahead.

Yes, good morning, sir. So, congratulations on a good side of the number. So, I wanted to ask that our revenue grew 32.4% in Q2, but our EBITDA grew only 8.2%. So, is this because of higher input costs still affecting our margins or like how much improvement can we expect in H2 as well?

So, you know, it's a good question. Yes, you're 100% right with revenue growth, but it does not grow at the similar levels. Like I said in my call and as in previous engagements as well, the input cost increase, input price increases have been dramatic this year. This has been an exceptional year in manufacturing. We have seen where input costs have gone up by some parts, some commodities as much as 300%, some by 30%, 40%, 50%. So the inflationary impact has been substantial. We are negotiating. We are bumping up our revenue. That's one way. Secondly, we are negotiating with not only on account of steel, which is a normal practice running for years, but this year's exceptional item is inflation and cost increases. We are negotiating with our customers. Some have come through. Some are in a negotiation. Some of them will come with retrospective effect, but this is a long negotiation process. It does not happen overnight because these are longstanding relationships. First, we do expect we get substantial compensation going forward with retrospective effect. But having said that, this year is going to be, there will be pressure on maintaining our bidder margin this year because of exceptional inflation and steel price increases.

Understood, sir. So, there would be a price, this is understanding that, okay.

Yeah, and if that's a mutual negotiation we do, we take some time.

Okay, understood. And sir, another question I had was regarding commercial vehicles. So, they have been our key growth driver this year. So, is this, the growth is coming mainly from higher volumes with existing customers or it is like new customers who are also contributing meaningfully?

No, no, all, these are all incumbents. There have been known really new customers or new operators in that segment. So it's existing customers like Tata, Leyland, Volvo, Mahindra, Daimler-Benz, you know, it could be Mahindra, Swaraj, Mazda, which earlier, so it's across the board. It is not, the existing operators have ramped up dramatically.

Means majorly existing customers are only driving this growth. Yeah, thank you. That's all from my side.

Thank you. A reminder to all the participants that you may press star and one to ask a question. The next question comes from the line of Madhur Rathi from Counter-Cyclic Investments. Please go ahead.

Sir, thank you for the opportunity. Sir, I wanted to understand regarding the margin of our fastener business. Sir, can we expect to move to the 14-15% range in the next one or two quarters, or Q1, you mentioned that we had the benefit of low-cost inventory, so how should we look at the margins of this business going forward?

Madhur, so on the fastener business, we've been hovering at between 15% and 16% of bidder. Like I said a little while ago, we hope to maintain that, but this year is an exceptional year. There's been a tremendous pressure, not only account of steel price increases, also because of inflationary impact on every input we have into our manufacturing processes, Power, diesel, carbide, tool steel, people cost. They have gone up dramatically because of minimum wages increases. So it has been an exceptional year with most parameters going up. So there may be pressure on EBITDA's margin this year. Like I said, we are trying to negotiate with our customers for increases. We hope to get substantial compensation, I would say, against that. I, you know, for me to say whether we close the year at the same margin as last year, it's difficult right now. As the time is progressing, I'll have a better estimate on that. But we are under pressure on EBITDA margins. Now, having said that, pressure does not mean it'll be dramatic. It'll be a marginal pressure in terms of numbers.

Sir, would it be fair to assume that by Q4, we could move to the levels, not on an annual basis, but from a quarterly basis, we could move to the 15% levels by Q4 of this year?

Yeah, hoping that. That's correct.

Got it. And sir, I wanted to understand how is the competitive intensity because it seems that one of our competitors were acquired some time back by an Italian company. So, is the competitive intensity much better, or the pricing is much better with OEM, or how is it, if you can help us understand?

So, you know, despite the acquisition of that competitor by an Italian company, we don't feel any pressure coming to us on account of that. There is no pricing pressure. There is no volume pressure. In fact, our volume levels are up almost 28. We are in a good wicket because of our quality customer servicing, volume availability, capacity availability. We are in a good wicket, I think, and obviously backed up by four decades of relationship. So, we don't feel any constraint in terms of growth or pricing or margin pressure.

Sir, my question was more on, is the acquisition beneficial to the whole industry? Has there been any pricing discipline for the acquisition by some large M&C kind of a company from that metric?

It's an exceptional year. As you know, the volumes are up dramatically. I think it's too early to talk about that. For that, maybe you want to ask that question to the Italian company and try to get their sense as to what they see. You know, from our perspective, we feel we are in a good place.

Got it. And so, what are the prospects of exporting our fasteners as well as moving into either structural fasteners that are used and either PEV industry? So, is there a possibility for Storling to move towards that as well?

No, we are not looking at structural partners. Our near-term plan is to stick with automotive and adjacencies of automotive. We have no plan to go into structural or construction. We are trying to do some business with railways, and we grow that business incrementally, and once we understand that business very well, we probably take a more strategic view on that after that.

Got it. And just one final question on the HTML business, as we've commercialized our contactors and relays, so how is our gross margin, so have you been able to reach the desired gross margin level for these products, and how should we look at the scale-up of this business going forward, if you can help us understand?

Yeah, I think the gross margins will be in line with what we project next year. They're already in line as of quarter two. But once this business ramps up, which is last quarter of this year, then we'll get more clarity on gross margins as well as the bit-term margins.

Got it. Sir, that was from mine. Thank you so much and all the best.

Thank you. The next question is from the line of Ansh Khimavat from Capital One. Please go ahead.

Hello, good morning, sir. Am I audible? Congratulations on a great sort of number, sir. I just had a few questions regarding the CAPEX. So, we had initially planned 80 crores on and we ramped it up to 135 crores. So, could you just lay out as to where we are seeing an opportunity and where this CAPEX is going to be incurred?

So, let me break up that CAPEX for you. So, our overall CapEx at a consolidated level will be about 150 crores. 20 crores is going to happen at SEM, and about 10-odd crores at STML. On our standalone partner business, the initial CapEx plan was 80 crores, which has been ramped up to maybe close to more like 130 crores this year. Oh, sorry, 120 crores this year. As the business has been progressing, time has been progressing, and we see the traction, We are building our CapEx with eye to the future of 12 to 24 months because there's a lag for that CapEx to happen and convert to possible revenues anywhere from, depending on the kind of equipment, anywhere from 6 to 18 months. So we are progressively building our CapEx plan, keeping in mind what we hope to do in FY28 and FY29. So, that's why the numbers have gone up substantially. We are planning our next 24 months proactively based on the traction we have with our customers, based on revenue growth, based on our communications and our commitments with certain customers, and lastly, keeping in mind the time lag we have to execute those commitments.

Okay, sir. That's encouraging. So, what kind of capacity will you be adding for the partner's business plan? Like, in the additional 40 crores, if you're adding, what kind of capacity would you be adding?

So it's not, I think, Ansh, it's a very complex question. I think it needs a long conversation because capacity itself across different areas. Pure hard capacity on the shop floor, which will translate to numbers. CapEx also means putting up infrastructure, could be in terms of buildings, in terms of backups, etc., etc. So, not each dollar value or equity value converting into a revenue immediately. It's a combination of capex which we do, which translates to certain capacity increase. For example, I think with about 120 odd crore capex, I think we probably increase our capacity by roughly in value terms, it will probably give us another 150 crores of revenue.

So, also, are other expenses increased by 10 odd crores in the current quarter? We were at around 67-68 crods in the last year, same quarter, and now we've come to around 87 crods, which was 77 last quarter. Is there any update as to why that is happening? Is that making your patience?

Other expenses include consumables. I'll just give you a number. Tungsten carbide prices have gone up by over 300% in the last 12 months. So, this is, so A, backed on inflationary pressures. B, there's been a 28% volume growth as well. If you look at absolute numbers, they'll probably be deceiving. But if you look at other expenses, which have gone up on a standalone basis, they've gone up from 77 to 87, like you rightly said. But percentage-wise, that's the state.

Okay, so the variable end of the expenses is increasing, which is in line with the sales.

Yeah, so I would not look at absolute numbers. I would look at percentages. Percentages are stable despite the fact there have been inflationary price increases in input costs.

Okay, sir. That's increasing. Also, sir, a debt has gone up considerably in this quarter. Is that mainly because of the CAPEX we're incurring or is there any number?

The debt has gone up for two, three reasons. One, we have done a 40 crore investment in our subsidiaries this year, SEM and STML, which was announced in the last quarter. Second, because of our CapEx plan going up to about 150 crores, so we are getting it funding through a higher debt component. So I think these are the two big reasons. And lastly, since the balance sheet side is increasing, our revenue is up, say, 30-odd percent. The absolute value of working capital needs have gone up. And on top of that, we have taken strategic view to add a higher level of inventory for raw material, which we buy from steel mills. Because the market is so buoyant, totally booked out. We are carrying a higher level of inventory for our raw materials, a combination of all these factors.

Okay, sir. And on the business end of the face, how is the AEM advanced motor ramp-up coming up, sir? So are we yet in contact with the customers, and have we received any updates on their end?

Jerry, do you want to take that?

Yes. So, you know, I think we had updated that we were looking at doing two POCs for the AEM. Thank you.

Okay, sir. So, by the end of November, so, as far as my understanding is that then we will be in the advanced stages to build a motor for them then. So, right now we are in touch and we are just trying to understand as to what their requirement is, correct?

So, I mean I think, you know, that would be, that is probably a little bit more advanced And what the actual status is. A POC is basically to prove that, yes, the concept works. Thereafter, the customer has to figure out how to, you know, to incorporate it in their designs, et cetera. So there is still a lot of time and effort that is required to take it from a POC to actual production.

Okay, sir. Understood. Thank you.

There's a lot of engagement, but that to translate a brand new, a new concept or a new technology into revenue has a fairly long gestation.

Okay, understood. And so, just if I could, have we taken any new clients in the customers business? So, like we had Tata earlier, have we signed any new customers?

So, you know, we're already working with pretty much all the customers. There are no major customers to be acquired in that personal space. All we need to do is we need to increase new product development with them. We need to increase our share of business spend with them. But in terms of new customer acquisition, we pretty much have all the customers in our tech. If you see the investor, the customer deck, you'll find all the customers are onboarded with us. All the customers with many material value of buying. You've got others like Volkswagen or Cetra Group, which are totally import-based. So, in that sense, all the major OEMs are already on our deck.

Okay, so then I think the assumption that this volume growth can be carried forward for the upcoming, for the remaining part of the year, and maybe in the next year as well, is something which can be made on a relative basis right now?

It can be what? What's the last part of the statement you made?

Which can be, it can be, we can go ahead with that assumption, is that correct?

Yes, I think that's what we are saying. You know, this number is what I'm trying to project is based on our confidence we have with our customers and where we are today.

So, we will be able to surpass the revenue, what we did last year, maybe on the standalone business by the end of this year.

Yes, definitely.

And maybe a 15% increase also on that is a fair assumption. Okay, thank you. Thank you, that'll be for my session.

All the best.

Thank you. Thank you. A reminder to all the participants that you may press star and one to ask a question. The next question comes from the line of Yogesh Patel from Prami Investment. Please go ahead.

Good morning, everyone, and thank you very much. My question is, you rightly said, 28% volume growth, and there would be a cost increase. So, it is very difficult to figure out piece-wise, but in terms of, let's say, volume, tonnage-wise, if I see, so the amount of valuation might be reduced due to inflation, and do you see any kind of improvement in realization because of product mix or any kind of price pass-on, or do you see the…

We lost you in the middle. You want to start the question again. We lost you in the middle.

Sir, you said 28% volume growth, right? And it's very difficult to spread out on per piece basis. But I'm saying in terms of, let's say, if I say the weight-wise and valuation, maybe per kg or per ton basis. So, the incremental growth or maybe revenues generated in Q2 is a combination of new product, product mix, and lack of pricing, lack of prices passed through customers. It means I'm seeing the impact of inflation plus product mix. So, Rafi, can you slightly, maybe not very exact breakup, how much impact of inflation is there in fast-minute business? Rafi?

So, let me just say our 28% is a pure volume growth, which we have in the first half. And I think our value growth is also very similar. So, mathematically, it's already saying that there's not a large part of inflation factored into this revenue right now, which is, like I said, it's under negotiation. It's an ongoing process. So, the inflation price increases from the customers are very nominal right now. A lot of them are under negotiation, which will probably translate into a P&L in this Q3 and Q4.

Okay, we'll get a price recovery in Q2, sorry, Q3 and Q4, roughly.

Correct. And some of those price increases will have a retrospective effect as well.

Okay, got it. Sorry, I am asking, is there any better realization, better because of the product mix, improvement in product mix or high margin product? What could be that percentage involved in the product?

I think those are marginal numbers right now. It's not something to make a dramatic impact quarter-on-quarter with us in our business. It's a total basket we look at over the year.

And if you're going above industry average, roughly we are gaining market share from other players, right?

Yes, we are. Yes, we are.

And considering the CapEx in fastener business and EV business, what is the potential revenue? I'm not saying you give your target, but aspiration kind of in 28 and 29 roughly from EV and fastener business? It may be a hypothetical number.

Our first target is to reach 1,000 crore revenue in our fastener business ASAP. And we hope we are quite positive if the current momentum continues and the kind of investments we are doing in our business, we probably will have visibility on that in a very near future. Talking about SEM and STML businesses, SEM is on a rebuilding of the business. We've gone through a big shock in FI26, and we're rebuilding our business as of FI26 and FI27. We are quite hopeful that business this year will turn around substantially by refocusing on the kind of products we are doing and the customers we are doing, and that will help us lay the foundation for the years going forward. Similar for STML, I think the validation and the testing periods are as long as 12 to 18 months. A lot of that work has already been done, and you'll see some revenue ramp up coming dramatically next year based on top of this year's numbers.

Okay, but roughly, what would be the number?

I don't want to put a number out there. Maybe we can have this conversation when we do our F527 investor call.

Okay. Sorry. I completely agree. But I just want to know what is the potential event possible in this capacity?

So, like I said, I don't want to do that right now. There's a lot of groundwork happening. Certain information is confidential right Right now, based on certain contracts, we have to customers on the EB businesses. So, I would, like I said, maybe get into that conversation in FY27 investor call.

Okay. Okay.

Just last question.

Mr. Yogesh, sorry for interrupting. Please rejoin the queue for more questions. The next question is from the line of Ayush Abani from SIE Advisors. Please go ahead.

Hello. Am I on the bill?

Yes.

So, I wanted to ask that the onboard charger and multifunction unit production lines have been commissioned as planned, right? So, when do you expect these products to start contributing meaningfully to revenue, and how important could they become for SEMS growth?

So, if you see, our lot of SOPs, our customers, SOPs are starting in Q3, Q4. In Q4, you'll see a substantial bump up in revenue compared to Q1, Q2. And I think businesses have been acquired, customers have been acquired, and developed and tested. They're converting into revenue in Q3, Q4. And FY28 will be a much bigger year on top of that. We have refocused a lot into these new product lines. And the unit prices of these product lines are much higher than we were doing for the two-wheeler segment business. These businesses are primarily focused on commercial vehicles, light commercial vehicles, public transport, which has a more sustainable growth. So you will see a lot of that revenue ramp up coming in Q3, Q4, and FY28.

Okay. Okay. Understood. And I also wanted to ask that, can you clarify the KPEX amount, whether it is 135 crores or 150 crores?

1.50 crores for FY27 at a consolidated level.

Okay. Thank you so much.

Thank you. The next question comes from the line of Dev, who is an individual investor. Please go ahead.

Yeah. Sir, in the presentation, under the e-mobility segment, you mentioned that we have 42 active programs and 23 business contracts. I just wanted to understand how many of these contracts have come in H1 of this year, where you signed contracts.

Jerry? We've got five new contracts that are coming into production by the end of this year.

Okay. So, this 23 number includes the five, but the production will happen this year. It's not yet started, right?

Not yet. I mean, when I say, you know, we may have supplied quantities in the tents, but not the full production quantity.

Okay. And, you know, are we also working with some of the bigger commercial vehicle OEMs like Tata, Ashok, Leyland, etc., Aisha, on the SEM business?

Yes.

Yes. Have we signed any contracts with them till now?

Yes.

It's under engagement? Okay. Yes.

Yes.

Okay.

Okay.

Thank you. Thank you. Ladies and gentlemen, due to time constraints, we have reached the end of question and answer session. I now hand the conference over to management for closing comments.

Thank you, everybody, for joining us today, having us time, helping us last six months, and where we see the business going forward. We hope to engage with you again in the future calls. If anybody has a request for additional information, please reach out to SGA, our investment advisors. They'll organize a communication with us, and hopefully we'll try. Thank you very much.

Thank you. On behalf of Sterling Tools Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.