ZFCVINDIANSEQ2 FY 2022-23November 22, 2022

ZF Commercial Vehicle Control Systems India Limited

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Management on call

Annamalai Jayaraj

BATLIVALA & KARANI SECURITIES INDIA PRIVATE LIMITED

P. Kaniappan

MANAGING DIRECTOR

R. S. Rajagopal Sastry

CHIEF FINANCIAL

M. Muthulakshmi

COMPANY SECRETARY - ZF COMMERCIAL VEHICLE CONTROL SYSTEMS INDIA LIMITED

Key numbers — 40 extracted

7.3%

DP growth. The projections for India’s economic growth (represented by GDP) have been moderated to 7.3% (source RBI) from an earlier projection of 8.7%. While this is still the strongest growth among va

8.7%

growth (represented by GDP) have been moderated to 7.3% (source RBI) from an earlier projection of 8.7%. While this is still the strongest growth among various other economies of the world, India is als

7.41%

g between May and July, inflation measured by the Consumer Price index (CPI) rose in September to 7.41%. The index of Industrial Production (IIP) in July 2022 grew by 2.4% compared with 12.7% the previo

2.4%

ex (CPI) rose in September to 7.41%. The index of Industrial Production (IIP) in July 2022 grew by 2.4% compared with 12.7% the previous month. As you will know, the financial year ending March 2022, wi

12.7%

tember to 7.41%. The index of Industrial Production (IIP) in July 2022 grew by 2.4% compared with 12.7% the previous month. As you will know, the financial year ending March 2022, witnessed a recovery o

26%

inancial year ending March 2022, witnessed a recovery of Commercial Vehicle production. It grew by 26% compared with the FY ending March 21 which was impacted by COVID. M&HCV (Medium & Heavy Commercial

50%

Y ending March 21 which was impacted by COVID. M&HCV (Medium & Heavy Commercial Vehicles) grew by 50% while LCV (Light Commercial Vehicles) was up 15% and Buses increased by 68%. In the Trailer segmen

15%

&HCV (Medium & Heavy Commercial Vehicles) grew by 50% while LCV (Light Commercial Vehicles) was up 15% and Buses increased by 68%. In the Trailer segment, the adaption of new technologies like Electron

68%

ial Vehicles) grew by 50% while LCV (Light Commercial Vehicles) was up 15% and Buses increased by 68%. In the Trailer segment, the adaption of new technologies like Electronic Braking System (EBS) & I

ogies like Electronic Braking System (EBS) & Intelligent Trailer Program (ITP) saw penetration of >5% and migration to trailer lift axle systems for increased payload and improved fuel efficiency. Gro

50.5%

ts, compared to 54,103 units in the same period of the previous year. This represents a growth of 50.5%. This was largely driven by: • Increased recovery momentum in the commercial vehicle industry bec

INR 348.8

ry, and export segment. Against this vehicle production backdrop, we registered OE sales in Q2 of INR 348.8 Cr as against INR 226.6 Cr in PY – a growth of 53.9%. Some of the elements which explain our gro

Guidance — 20 items

P Kaniappan

opening

“The projections for India’s economic growth (represented by GDP) have been moderated to 7.3% (source RBI) from an earlier projection of 8.7%.”

P Kaniappan

opening

“This is important as we also see softening of commodity prices going forward.”

Vimal Gohil

“So, what is the progress there and if you can just talk about what are the various products which are mandated as per this government mandate, and the second one is on profitability while we have improved our profitability we understand the commodity pressure as well, but what is our desired level of profitability where we will be comfortable going forward?”

P Kaniappan

“We are partnering with one of the OEMs and that OEM has decided to fit the FMS solution or telematics in their system from August 2020 and thereafter we are only steadily increasing our various functionalities and the robustness of the solution and again partnering with them and then see how this will be benefiting the fleet ultimately in the market.”

P Kaniappan

“So, we have launched this product with one of the global players the global customers in India and our focus is to extend it to other customers going forward this is essentially again done in a heavy duty segment.”

P Kaniappan

“Number two, you also might be aware that India is moving going forward the electronic stability control mandates from April 2023.”

P Kaniappan

“Again we have been quite successful in securing portion of that opportunity because normally initially it comes with only bus segment, we expect that may be followed to the truck segment in the next one or two years.”

P Kaniappan

“The next change is even in the connectivity area we are now going to be soon releasing our FOTA, FOTA is firmware over the air update meaning you can like our mobile it gets all their updates so we are working on this and soon we will be launching our FOTA possibility which will help us to really again differentiate ourselves in the market.”

P Kaniappan

“We have with the support of our global colleagues again we are now launching this product some OEMs have made a launch of the adapted solution we expect this to really come to the market in the next one or two years progressively from the OEMs.”

P Kaniappan

“So, these are some of the technologies and market is now rapidly adapting or working towards and really launching these products, so we are well positioned to support the customers and probably next one or two years this will be the major products in the market.”

Risks & concerns — 3 flagged

This should support the revival of the replacement cycle, notwithstanding pressure from high inflation and a rise in borrowing rates since the start of the Russia-Ukraine conflict.

— P Kaniappan

So, what is the progress there and if you can just talk about what are the various products which are mandated as per this government mandate, and the second one is on profitability while we have improved our profitability we understand the commodity pressure as well, but what is our desired level of profitability where we will be comfortable going forward?

— Vimal Gohil

It is very difficult to give you overall picture but most of these products are high content product and the volume increases and of course when we localize more and more, the delta may definitely come down but today that is the situation.

— P Kaniappan

Q&A — 7 exchanges

Thank you for the opportunity. My first question is on AIS-140 you spoke about a few products over there just wanted to know what has been the progress there, have we added almost all the Indian OEMs for these mandated products that need to be installed in their vehicles? So, what is the progress there and if you can just talk about what are the various products which are mandated as per this government mandate, and the second one is on profitability while we have improved our profitability we understand the commodity pressure as well, but what is our desired level of profitability where we wi

P Kaniappan

AIS-140 actually it is a mandate and basically it requires that you should have a tracking device and a push button so that in case of emergency people can press the push button, then the signal will go to the government control center, etc., so it is essentially meant for passenger safety. So, this has been mandated now in all the passenger carrying vehicles so for us it is largely related to the bus segment. We are partnering with one of the OEMs and that OEM has decided to fit the FMS solution or telematics in their system from August 2020 and thereafter we are only steadily increasing our

Good morning and thank you for the opportunity. My first question is to the same point that was earlier asked regarding margins so last time around you were mentioning that we have not yet taken the entire price, the price pass through yet with many customers and negotiations are going on so just trying to get a sense of where are we in that process, have we been able to now get most of those pass throughs or is there still a backlog there?

P Kaniappan

Actually, we have secured by and large the material cost impact, we have about one quarter time lag, but otherwise we have secured up to that point on the commodity inflation. On exports we have seen a single digit kind of growth 5% to 6% growth Y-o-Y given that you have exposure to both Europe and US can you give us some sense on the environment over there, there are a lot of talks about the recession, etc., so could you tell us how is your order book looking like, are your customers scaling back on production or is it just a chip shortage that is right now impacting? Actually, in a way it is

Thanks for taking my question, good morning, Sir. Just on the export side could you give us a sense of how much is euro denominated versus dollar denominated? R S Rajagopal Sastry: We have almost equal mix euro and dollar.

Sonal Gupta

So then the currencies for this quarter would be approximately offsetting right then we should not have… R S Rajagopal Sastry: Yes, from our export receivables foreign exchange impact perspective we are neutral. No, I was just trying to understand like the rupee exports versus the underlying exports to calculate the constant currency growth that is what I was trying to understand and secondly could you sort of give us a sense in terms of exports what is the split between the passenger vehicles versus the commercial vehicles? R S Rajagopal Sastry: As I just said we do sell one product for passe

Good morning. Thanks for taking my question. I just wanted to ask what was the revenue mix for Q2 FY2023? R S Rajagopal Sastry: Revenue mix we have 348.8 Crores coming from OEM, 102.8 coming from aftermarket and 262.7 coming from exports.

Harsh Gemavat

Just wanted to ask what is the adoption rate of the newer products and what kind of content increase are we looking at from each segment exclusively buses, passenger cars, etc.? On specific few products there is the content increase and these products many of them just we are entering into the market except ESC which is coming through a mandate for all the buses of certain class most of the things it is essentially I would say for example I talked about the electric compressor. Electric compressor the content itself is typically high per electric compressor but then the size market is only ele

Sir if I look at your services business which comprises software services, R&D services, and other business support services and you mentioned that there is a growth in this segment and I see that there is a center which was inaugurated in Hyderabad also couple of months back or so, so from an organization point of view how do you see the scale up of this particular thing and whether it is going to be margin accretive for our overall business?

R.S Rajagopal Sastry

From the perspective of the expansion you saw in Hyderabad, ZF in India have got various entities and the Hyderabad expansion belongs to ZF India Private limited which involves the existing entity in India already. Ours is actually in Chennai and we have really moved to a new location that is DLF from the RMZ location because we found that the current space is not adequate. So in the new location we have 840 seats, so there is a clarity that we may progressively increase the numbers in the engineering software team and today close to about 500 so it will go to 840 number, so that is why we hav

Thank you for the followup opportunity Sir. Just one clarification on PLI you said that while the company is meeting the sales targets, the investment targets are yet to sort of fructify, if you can just explain this in a bit more detail my understanding is that the sales and the investment targets should go in tandem if I am wrong please help me correct that and the second question would be the content per vehicle given the fact that we are talking of multiple products across the current ICE and the EV segment as well would it be fair to say that our content per vehicle which is around $550 t

P Kaniappan

On the content side, it is just I have been spending time to explain so much of pipeline of technologies that we are brought to India working with customers many of the customers have released but the actual content is largely driven by the way the market will evolve more of EV production will definitely support us and of course the regulations and all those things will drive but in principle yes our view is that now that the inflection points of adoption of technologies in India so it should definitely support us to achieve a rapid improvement in the content which in my view probably should s

On behalf of B&K Securities we thank all participants for joining the call. Special thanks to ZF Commercial Vehicle Control Systems India management for taking time out for the call and giving us opportunity to host the call. Have a good day.

P Kaniappan

Thank you.

Speaking time

P Kaniappan

Moderator

Vimal Gohil

Mukesh Saraf

Harsh Gemavat

R S Rajagopal Sastry

Lakshminarayanan

Sonal Gupta

Annamalai Jayaraj

R.S Rajagopal Sastry

Opening remarks

Annamalai Jayaraj

Thanks. Good morning, everyone. Thank you for joining us today and welcome to ZF Commercial Vehicle Control Systems India Limited quarterly earnings conference call. The second quarter earnings and half year results for FY 2022-23 will shortly be presented by the management team of ZF Commercial Vehicle Systems India Limited, formerly known as WABCO India Limited. Your hosts this morning from ZF Commercial Vehicle Control Systems India Limited are Mr. P Kaniappan, Managing Director and Mr. R Rajagopal Sastry, CFO, as well as Ms. M Muthulakshmi, Company Secretary. I will now hand over the call to Mr. P Kaniappan who will provide you with further insights into the results. Over to you Sir!

P Kaniappan

Thank you Mr. Jayaraj. I warmly welcome you all to ZF Commercial Vehicle Control Systems India Limited’s second- quarter results and half-yearly performance for FY 2022-23. Certain forward-looking statements that we'll make today are based on management's good faith expectations and beliefs concerning future developments. As you know, actual results may differ materially from these expectations because of many factors. ZF Commercial Vehicle Control Systems India Limited’s results for the quarter ending September 30, 2022, were published on November 4, 2022. They are available on www.zf.com website within the ZF CV India investor relations section. We hope that you have had an opportunity to go through them. The transcript and the recorded audio of this call will also be made available on www.zf.com under the ZF CV India investor relations section. Let me begin with the business update. Industry and economic update: Let me share a few key macroeconomic aspects that are relevant to our i

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ZF Commercial Vehicle Control Systems India Limited

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