Hello Sir,

Hope you are doing well.

I was recently reading about Sterling Tools Ltd. The company is the 2nd largest automotive fastener manufacturer in India.

However, what I found interesting is that it has a subsidiary – SGEM. The contribution from the same was 0 till FY 21 and at the end of FY 24, it accounted for 35% of the consolidated revenue.

What SGEM does – It is one of the largest Motor Control Unit (MCU) suppliers for Electric Vehicles in India.

Below, we have shared our notes from the Q4 FY 24 con-call of the company to understand the outlook for the business.

 

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Sterling Tools – Notes from Q4 FY 24 concall

– Introduction

  • Indian automobile industry demonstrated resilience and recorded a satisfactory performance in FY ’24
  • The industry showcased a growth of 12.5% in domestic sales compared to the previous fiscal year
  • The passenger vehicle segment led this growth trajectory. With overall sales touching nearly 5 million units, including 4.2 million in the domestic market
  • Our 100% owned subsidiary Sterling Gtake E-Mobility (SGEM), the largest motor control unit manufacturer in India reported remarkable performance
  • The revenue generated by SGEM grew from INR 174 crores in FY ’23 to INR 323 crores in FY ’24

– SGEM

  • We continue to make progress towards our stated goal of 10% to 12% EBITDA margins in this business in a steady state
  • We averaged about 30% gross margin
  • FY 24 volume – So about nearly 400,000 units for the year
  • As of today, everyone that we’re selling to for that model, we are the single source
  • As of today, we are consistently producing more than 2,000 units a day. That takes us to about 600,000-unit capacity for the full year
  • The expansion is largely in place, but there is still some, I would say, finishing touches that need to be executed on that plan
  • We still hope to see about 30% growth in this industry in the coming year

– Fastener

  • We see with the capacities we have in place, including our Bangalore facility and some maintenance capex, we don’t need substantial capex in the fastener vertical
  • I think we can reach a revenue of between INR 750 crores to INR 800 crores with the capacities and the maintenance capex coming through at Bangalore plant
  • Why low growth in FY 24 – If you look at the segments of commercial vehicles have been flat or probably slightly negative. Farm equipment has been negative
  • John Deere is roughly 30% negative in revenue and Mahindra itself is about more than 11% negative in volumes as well
  • Volume/Value growth (similar) – 7% in PV, 21% in 2-wheelers. In commercial vehicles, we were negative 11% and farm equipment we were negative 17%
  • I think it’s a question of customer portfolio profile. We need to strengthen that in PV and the 2-wheeler segment, which is what we are working on. On the CV side, we work with all the customers in India
  • Revenue share – Passenger vehicle for FY ’24 was 27% of the total, 2-wheelers 24%, commercial vehicles 22%, farm 13%, the retail and aftermarkets 12% and 2% export

– MOU

  • We are excited to announce that Sterling Tools has entered into an MOU with South Korea’s Yongin Electronics to establish an EV components facility in India
  • The strategic partnership is anticipated to generate business of around INR 200 crores per annum in the next 5 years
  • Our partnership will predominantly be for the automotive space to begin and specifically in the EV space for components like chargers, both onboard and off-board chargers, battery management systems

– ESOP Cost

  • The INR 2 crores is the impact of FY ’24 is only for the last 2 months
  • FY 25 – the next impact will be the biggest one – it should be around INR 10 crores to INR 11 crores
  • Total INR 22 crores to INR 23 crores impact over 4 years

– CAPEX

  • Overall, we’ll be investing around INR 60 crores next year. This is only for existing businesses. That’s fasteners and motor control unit

(End)

 

Disclaimer: This is not a recommendation to buy/sell Sterling Tools. The securities quoted are for illustration only and are not recommendatory.

 

Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/

 

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