Sterling Tools Ltd

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Conference Call of Sterling Tools Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the 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 touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Pankaj Gupta, Group CFO of Sterling Tools Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to Sterling Tools Limited Quarter 2 H1FY '26 call. I'm joined today by Mr. Atul Aggarwal, Managing Director; Mr. Jaideep Wadhwa, Director; Mr. Anish Aggarwal, Director; and SGA, our Investor Relations Advisor.

Our earnings presentation has been uploaded on our website and on the stock exchanges and I hope everybody has had a chance to go through the same.

I will now invite Mr. Atul Aggarwal for his opening remarks.

Thank you, Pankaj. Good afternoon, everyone. Let me start with talking about the industry highlights. The Indian automobile industry witnessed steady improvement towards the end of Q2 FY '26, supported by the rollout of GST 2.0, early festive demand and improving customer sentiment. While passenger vehicle sales were marginally lower year-on-year, September saw a strong rebound driven by utility vehicles and record exports.

H1 domestic 2-wheeler sales grew 1%, exports were up 24% post GST rationalization. H2 is expected to see double digit growth, lifting FY '26 domestic sales by 5% to 7%. 3-wheelers and commercial vehicles posted strong double digit export growth, indicating broad-based momentum.

Looking ahead, the industry enters the second half of FY '26 with renewed optimism supported by festive season demand, a healthy rural outlook and the positive impact of GST 2.0 and monetary easing measures. With consumer sentiment improving and OEMs ramping up production, the sector is expected to maintain its growth momentum through H2 FY '26, setting a strong trajectory for the rest of the year.

On our standalone fastener business, total income increased to INR172.2 crores in Q2 FY '26.

EBITDA margin and PBT before exceptional items remained flat on a year-on-year basis.

Exceptional item for the quarter and 6 months ended 30th September '25 represents enhanced compensation of INR9.5 crores, including an interest of INR6.22 crores received from Delhi Metro Rail Corporation (DMRC) against land acquired by DMRC in earlier years.

However, with a positive macro environment, improved customer sentiment and stronger OEM production outlook, we expect the second half of FY '26 to be significantly better. The recovery in automotive industry and steady demand across both domestic and export markets should support higher capacity utilization and margin improvement in our fastener business.

Further, during the quarter, we have begun to see early traction from newly acquired customers, including Hyundai. The onboarding of these new OEMs strengthens our long-term positioning and is expected to drive incremental growth and deeper customer engagement in the coming quarters.

We continue to maintain a net debt-free status with consistent cash flow generation, enabling us to fund group growth initiatives internally. Our mature cash-generative core business provides a strong foundation for strategic diversification into high-growth areas.

We have been consistently outperforming industry growth through new customer acquisition while maintaining strong, stable double digit EBITDA margins. Additionally, project acquisition and critical fasteners marks a key step in this direction with a clear focus on premium value- added products that offer robust margins and higher customer stickiness.

We are happy to share that Sterling Gtake Mobility Limited has been rebranded as Sterling E- Mobility Solutions Limited (SEM). This new identity reflects the evolution of the business as comprehensive provider of advanced EV powertrain and power electronic solutions, which is further strengthened by our partnerships with Advanced Electric Machines as well as Landworld Technology Company Limited.

Importantly, our exclusive partnership with Jiangsu Gtake Electric Company Limited for the Indian market remains strong and continues to flourish. Together, we are developing and localizing multiple products to meet domestic requirements. And we are also exploring new collaborations that further strengthen our leadership in the EV ecosystem.

Building on our current strong foundation in motor control units, SEM has now expanded into integrated motors and MCUs, rare earth magnet-free motors, onboard and off-board chargers and DC/DC converters.

Our STML subsidiary will start commercial production of HVDC contactors and relays in December '25 at its state-of-the-art fully automated manufacturing facility in Bengaluru. This business has a revenue potential of INR200 crores within the next 5 years.

STML is a first mover in domestic manufacturing of high-voltage power transmission components for India's evolving electric mobility and industrial sectors and once again demonstrates Sterling's pioneering spirit and commitment into the electric mobility space.

Our strategic focus remains on import substitution through technical collaborations aimed at establishing localized supply chain for safety-critical components.

Thank you. We can now open the floor for questions. Thank you once again.

Thank you. Ladies and gentlemen, we will now begin with the question and answer session. The first question is from the line of Deepan Sankara from TrustLine Holdings Private Limited.

So firstly, on MCU division. So despite our top MCU customer reported volume drop of 23% Q-on-Q, still company -- our company is able to report 22% Q-on-Q growth. So what is the kind of contribution we have got from non-scooter MCUs during Q2?

So we had mentioned this earlier that we have -- we are continuing to expand our product portfolio and we have put in a tremendous amount of effort to develop our business with the LCV and HCV customers.

So that -- those customers today contribute -- I'm just -- give me a minute. Those customers today contribute more than 25% of our total revenue. And our 2-wheeler business is about 60% of our total revenue now. And the number will -- and we expect that going forward, the share of business from other segments, that's 3-wheeler, LCV, HCV will continue to grow.

Okay. Okay. And also, can you throw more light on the recent partnership announced with Landworld Technology to produce onboard chargers and DC/DC converters?

Okay. So Landworld is a company based out of Shenzhen. They make onboard chargers, DC/DC converters and PDUs. This is -- these are products that go into typically high-voltage applications.

And I also -- I'll explain the exception also to you. So the applications for such products are in light commercial vehicles, heavy commercial vehicles and passenger vehicles. Basically and typically, the product ranges that are 300 volts and above. Now the reason why we feel that it's very important to play in these product ranges is that we see a lot of consolidation of the aggregates.

So if you look at a bus or a truck platform, they are moving from only using a motor control unit to using a 4-in-1 and 5-in-1 unit. And those units, when you talk about a 5-in-1 unit, that means a motor control unit, a DC/DC, auxiliary drives and a PDU.

Alternatively, the people will look at consolidating the onboard charger with a DC/DC and other elements. So there is a lot of consolidation in the aggregates and our strategy from the beginning has been to position ourselves as a power electronics expert and a power electronics domain leader so that we can provide our customers the right solution.

The other thing that I'll like to mention because it explains a little bit about our group strategy.

We'll be talking today also about STML, our business to make high-voltage DC contactors, which we're starting production in December and Anish will be giving you more details about that.

Now the PDU, the power distribution unit that I'm talking about in these 3-in-1, 4-in-1 and 5-in- 1 units, the biggest component of that PDU is these high-voltage DC contactors. So in effect -- and we talked about this in earlier interactions that the HVDC play in addition to supplying components to other companies across India is also a backward integration for us where in the

future, we will be able to use -- the Sterling E-Mobility business will be a customer for the Sterling Tech-Mobility business.

Okay. Okay. And in the press release, we have mentioned that we are targeting to reach around INR450 crores by FY '30. So will it be a gradual scale up or it will be towards the fag end of the target?

It will be a gradual scale up. We only expect to do INR2 crores or INR3 crores this year.

Okay. Okay. And what is the status on production of this REM-free electric motor? And any customer approvals received? And when will it start contributing revenues?

So we are in advanced discussions with several customers. And we are hoping that in the coming calendar year, I won't say fiscal year, but in the coming calendar year, we will finalize programs with 1 or possibly 2 customers, but we won't see revenue from this portfolio till FY '28.

I mean, when I'm saying revenue, I mean significant revenue. We may see engineering fees or sample fees or stuff like that. Obviously, we'll be doing that.

The next question is from the line of Shashank Agarwal from Cisco.

I just -- 2 to 3 questions. So first is regarding what is the market size of these 3 new products, DC/DC convertors, HVDC contactors and relays?

Well, I think I'll let Anish answer -- Anish, do you want to go with the HVDC contactors and relays, Anish, do you want to address that?

Yes. So we'll segregate the DC/DC convertors and onboard chargers. That's part of Sterling E- Mobility Solutions Limited. HVDC contactors and pre-charge relays is part of Sterling Tech- Mobility.

So with regards to HVDC contactors and pre-charge relays, the market currently would be in the tune of INR300 crores to INR400 crores in India, is growing every year and we expect this market to go up to upwards of INR1,000 crores by the end of this decade across 3-wheelers, passenger vehicles, commercial vehicles, solar and all of that put together.

That's the way we see it. If you look at EV as a subset of it, EV will be 60% to 70% of the market size of the total number that I just gave you.

So in the business -- in the OBC and Power Electronics business, we think that the total market potential and of course, this is dependent on the -- on how penetration will come across. But we are projecting at most 15% to 20% market share. So we are looking at -- so another way to say that we're looking at approximately INR2,000 crores market size by 2030.

And sir, now these companies like Schneider in India manufacturing these?

No, Schneider doesn't make -- I mean, the companies that make this would be companies like Valeo would make an OBC or DC/DC, but not Schneider. Are you talking about the relays or the -- which -- sorry -- I mean, sorry, can you just clarify

So no one is manufacturing in India then?

No.

And sir, for the MCU business, are we looking to supply to TVS, Bajaj, Honda?

We are working with -- we are in discussions with all of the major companies for their future programs.

So because Ampere as a customer also, they are looking to source the MCUs from their parent company. So I was just looking for some revenue guidance in that business for the MCU part?

Yes. So yes, I mean, there are -- various companies have looked at manufacturing MCUs in- house. Ampere is one of them. But we are -- we continue to believe that the opportunity with the incumbents is very significant. This is a very fast-moving industry. The requirements have gone from a plain MCU maybe 1.5 years ago. Everyone was basically working on a standard standalone MCU.

Now the requirements are very rapidly changing to integrated motors and controllers. There is also a move towards integrating other functionalities such as VCUs and possibly even DC/DC into MCUs. So while some companies may localize some models, overall, I don't think that any company can look at making everything in-house and they will have to continue to work with partners like us for either some or a majority part of their requirements.

So sir, basically, a good ramp up in the EV penetration will result in you able to scale your MCU revenue also because in that way, the company will have to buy the MCUs?

Yes. Definitely. I mean, as we see more and more models come out and you see more variants, I mean, so today, companies are -- there are very few motorcycles, for example, in the market.

Mostly it's electric scooters. So as you see more and more variants coming out, you will see more and more -- we will see a lot of opportunity.

The penetration has -- we do have these temporary blips, which is a part of the evolution of our industry. For instance, an unintended outcome of the GST rationalization was that it made the internal combustion engine scooters more economical and reduce the value proposition for electric scooters. So the OEs had to go back and rework their -- some of their value propositions to continue to stay relevant. So that's a part of growing up.

But I mean, the important thing is that we have to -- over a period of -- I mean, there will be a penetration that will continue to increase. And as penetration increases, the opportunities for companies like us will increase also.

And sir, the surface mount technology that you are investing in, sir, how will that affect your expenses? So right now... The manufacturing expense?

So again, the -- as of now we are -- in this fiscal year, we are investing in other production technologies. Maybe the SMT will be for the next fiscal. The -- obviously, any -- it's a matter of a cost because when we outsource, we buy more flexibility in the supply chain, we look at the - - we have the advantage of being able to ramp up and ramp down more efficiently.

But the downside -- but when we make it in-house, we are able to reduce -- we are able to capture more of the value and are able to reduce our cost. So it's a trade-off. So as when we start looking at SMT technologies and so on, then what we are looking at is reducing our cost base.

Sir, can you put a number to it, what is the percentage range?

Look, that's -- considering today, we are making motor control units. We are starting production of OBC and DC/DC, etc cetera. That varies dramatically. But definitely, it does make a difference. The more vertically integrated you are, the more margin you are able to capture.

Okay. And sir, for these new things, the OBC, the connectors, the contactors, the converters, sir, are you just doing the assembly part or you're manufacturing component also?

So in the case of OBC and DC/DC, obviously, we are buying the electronic child parts and we are assembling them and doing the test and validation, which is what is there for all the electronic components in the industry today. That's what the model is because there are no electronic child parts available in India or very, very limited electronic child parts available in India. Anish will give you a little bit more flavor of the manufacturing process for the contactors.

Yes. So with regards to manufacturing of high-voltage contactors., it's very manufacturing- intensive because you're essentially making these child parts right from ceramic assembly to the metal stamp parts to the coil assemblies, the top covers, the bottom covers, et cetera and then you are bringing them all together.

In this first phase of localization, we will be sourcing some of the child parts from our partner in China and we will be putting them together here in India. And as and when we're able to localize these components, we'll backward integrate and we'll localize the supply chain for some of these child parts here in India itself.

The next question is from the line of Payal Shah from Billion Securities.

Sir, so I have a couple of questions. The first being, can you share an update on how our global partnerships are progressing? And what specific benefits they have been bringing in terms of technology or customer wins? Jaideep, do you want to take that?

So look, our technology -- so as of today, we have formalized 4 technology partnerships, Jiangsu Gtake, Advanced Electric Machines and Landworld in the case of Sterling E-Mobility and Kunshan GLVAC in the case of Sterling Tech-Mobility.

I think these partnerships have been very good. We've definitely benefited a lot from the experience from these companies. We have to understand that especially in China, the electric - - the EV industry is far more advanced in terms of volumes and in terms of maturity.

By signing up with technical partners, we are able to build -- we are able to really cut short our learning curve and get into -- get to start working with customers very, very quickly. And the strategy that we have is that we start with technology partnerships, but we are always looking at investing in our own tech and our own IP so that in the future, we can be independent.

But by using the technology partnership route, we are able to move very quickly. In most cases, we have been either the first mover or been amongst the first movers. Once we are working with the customer, we have the ability to understand their future plans, their technology road maps and are able to adapt ourselves to that.

And when we do start our own developments, we are able to adapt these developments to the latest requirements from the customers. So we are -- the voice of customer is very strong.

Whereas if you're doing this development in isolation, you can never get it right because you don't know -- you may know what the customer needs today, but you don't know what the customer is looking at in the future.

And I'll give you -- sorry, I'll just -- I'll give you an explanation. It's -- because we were working with the customers and we understood the desire and the strategy to move to multifunction units that we were able to build a strategy to enter into this field and to work towards that.

So we've been doing this for a couple of years and we are now looking at localizing these multifunction units. if we hadn't been working closely with the customers, if we didn't have products that they needed and they were not engaging with us on a regular basis, we would have never have known that. We would have been working on standalone MCUs whereas the market is continuing to evolve. Sorry, you had a follow-up question.

Yes. My next question is, what is the capex plan for the next 1 or 2 years? Given the strong cash position, how much are we looking to allocate towards scaling up the EV and HVDC operations? That's my second question.

So for the capex for the new businesses, let's say, the SEM business- Sterling E-Mobility and then STML, for the first SEM business, we're looking at about INR10 crores to INR15 crores capex coming next year into that.

And for our STML DC contactor business, I think there will be a marginal capex coming in, maybe the tune of INR10-odd crores next financial year. But we'll have some fresh greenfield capex coming in.

We have identified a few more products, which we are working on closely with our technology partners and potential customers in India. Those plans are being finalized. So there will be greenfield operations again. I think we'll get more clarity in the next 3 to 6 months.

And as and when we have clarity, we'll share them with you. Vis-a-vis our standalone fastener business, our capex next year is projected to be anywhere in the range of about INR25-odd crores. So altogether put together, we are looking at about a INR50 crores capex for the existing businesses we have. And for the additional new products we may launch, that will be on top of this.

And if I can just add to what Atul just said, the INR10 crores to INR15 crores for SEM that we are looking at for next year is over and above INR45 crores that we would have invested in FY '25 and FY '26. So 3-year capex of INR60 crores.

Okay. Sir, lastly, what's the overall growth outlook for FY '26-'27, both on top line and margins?

And by when do we expect to cross the FY '25 revenue levels again? That would be my last question?

I think from a consolidated level, my sense is, hopefully, in FY '27, we'll be very close to our numbers what we had in FY '25 on a consolidated level with the new business of STML kicking in and the growth we have in our fastener business plus the growth coming next year in the SEM business. So FY '27, we hope to recover the ground we lost from a consolidated perspective. I think we have full visibility on that.

The next question is from the line of Rahil from Sapphire Capital.

So firstly, these tech partnerships since you have entered them, have you -- have they yielded us more customers immediately? So how fast is the process? If you can give a certain picture on that?

So look, anything in the auto industry, fast is a bit of a illusion because you have to understand that for -- even if you have -- I mean, for instance, if you look at SEM or you look at what STML is doing, while we may have great customer references and some of the customers who we sell to in China or our partners sell to in China may be setting up plants in India.

But still to -- for a product from the time that we first connect with the customer, the earliest we can hope for any revenues is at least a year. Because that's how long it takes to do the trials, to do the integration, validation, homologation, et cetera. I mean, chances are it's more than that. But the best we can hope for is a year.

Okay. Yes. That being said, what I'm asking is, does this -- do these tech partnerships just put you on the map and you're just visible? Or are they actually resulting in more customers? Have you seen the difference before and post these partnerships?

Well, I mean, I'll try and answer this question. Look, in certain fields, if you -- it's not about being on the map. If -- let's say, in the case of an onboard charger or OBC, as we call it, or in the case of a high-voltage DC/DC, until we did the partnership with Landworld, we were not on the map. We were just not -- we were not present at all.

So the technology partnerships gives us the product and the ability to go connect with the customer and say, yes, we can give you a complete solution. And -- but it's -- but obviously, we have to work to convince the customer that we are the right partners, that we can give them the level of support that they're looking for and we have the engineering bandwidth to support their vehicle design and production. I don't know if that's answered your question or not. And if not, I mean, I'll try and -- if you can explain it again, I'll try and see if I can address it.

Let me just supplement that by just saying that I think it's not as simple just putting us on the map. We are trying to bring products to India, which are currently being imported for EV supply chain, safety systems within that. There are no technologies available in India. There's no ecosystem. There's no supply chain in India.

Now the other way would be we start from scratch, develop these products, which can take years of R&D going into it and with no data to back up with our customers. So if we are getting technologies from partners who've been in this business for a decade and from a growing market, which is a world leader today, we are bringing top-of-the-class line products into the country, which are currently being imported.

So we're actually building -- we are jump-starting. We are shortening the time for getting those products to the market for our customers. And that gives us a huge advantage. Now having said that, also, it's not as if the products we are building are just coming from China, we assemble them and ship it to our customers. Each product has to be redesigned or tweaked from a engineering perspective to meet Indian customer needs and requirements.

No single product coming from overseas is ready to fit into Indian EV ecosystem. They all need to be redesigned to some sense, both in hardware and software to fit to the customer needs. So that process, we are only jump-starting and shortening the time cycle for that. And once that is done, we are building on our capabilities independently like we have done in our Sterling E- Mobility business, which be Sterling Gtake earlier.

Today, our skill competence, our competence in our tech centers and our engineering rooms is so far ahead that we are reasonably independent over time from a day-to-day perspective on our tech partners. And I think if we continue on that journey, we believe that we've become independent in every sense of the word from a engineering and a quality and a supply chain perspective.

Okay. Yes, I get that. Now how long are these partnerships for? And is there a risk of...

Typically we sign 7 to 10-year agreements.

Okay. Okay. And beyond that, so then in these next 7 to 10 years or decade, so to speak, your aim is to fully utilize these -- the tech, what do you say, offerings these partnerships have and

then create an ecosystem within Sterling too, so you don't have to depend on them anymore. Is that correct?

That's right. I mean, we have the option of renewing, but the idea is to be able to develop our own tech because we have to also protect against geopolitical risk.

Exactly. And become a one-stop solution for all the auto industry? Exactly.

Yes. Okay. Perfect. And you've given a certain outlook for FY '27. What can one expect for this year? How do you expect to close FY '26 when it comes to consolidated top line and EBITDA margins?

Can you repeat that question again, please?

So you've given an outlook for FY '27. I just want to know for the next remaining half of this fiscal, which is FY '26 financial year, what are your expectations when it comes to top line and EBITDA margins on a consolidated level?

Normally, we don't give hard guidance for the second half of the year, but I can give you -- I can say this that we are -- on our standalone business, we are quite positive, like I said in my opening statement, both in terms of revenue projections and in terms of margin retention and growth.

Our first half numbers bear that out that we have been able to maintain our EBITDA margin and we are quite confident the second half will probably be a shade better than what we have in the first half.

On a consolidated level, I think we'll have a degrowth over last year because we lost our key anchor customer in SEML. But from a overall margin perspective, we hope to retain our consolidated margin numbers as we have for the first half into the second half.

For the standalone business, what are these projections that you have penciled in or it's just a...

I think at the beginning of the year, we said we'll probably grow at 5% to 7% for the full year and we are on track to do that in our standalone business on a full year basis.

As there are no further questions, I now hand the conference over to the management for the closing comments.

Thank you once again for giving us your time today. I think last few conference calls have been quite a learning exercise for all our investors. We have had a huge consequential event about 6 months ago in one of our businesses where we lost a key customer that has impacted our revenue growth.

But as a business, let me assure the investors that we are on track. We are very cognizant of the issues we have. We continue to generate a lot of cash. In our standalone business, that business is very healthy.

It's growing very well, retaining our margins despite some extra inflationary cost pressures coming in. We've been able to grow the product mix. We've been able to grow the margin structures, keeping all that in mind. And we are quite confident of the way forward in our standalone business.

Despite the challenges at SEM, we believe that it has been a huge learning curve for us. We are better positioned to handle the future by adding more products and adding a couple of more tech partners into that business. And our STML business, our high-voltage DC contactor business is also looking very good from the traction we've had with key customers in India.

We believe that on a medium-term, long-term perspective, we are right on track. We have a lot of visibility with where we want to go. The growth may be a little muted right now. But over the next 2 to 5 years, we believe all these businesses and new business we intend to start in the EV ecosystem will bear a lot of revenue growth and margin expansion as well. Thank you.

Thank you, members of the management team. Ladies and gentlemen, on behalf of Sterling Tools Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.