For those commuting regularly from Faridabad to Delhi via Badarpur border, the site of a gated production facility just a couple of hundred metres before the border barricade with Sterling Gtake signage may not have been too conspicuous to pay attention to. The entire stretch leading deep into Faridabad is dotted with production units of various size and scale, mostly MSMEs and, therefore, it may not be easy to make a note of this 11-acre facility that belongs to Sterling Tools. But once you move inside and get a sense of action here, the facility may well appear to be more than a regular production unit. Of course, in the current context, it brings so much focus on businesses related to green environment and climate change.
For the fast growing two-wheeler electric vehicle segment in the country, this plant today is a vital cog. According to a senior official of the company, the plant is producing over 30 per cent of an important component of all two-wheeler EVs being produced in the country. And considering the projected uptick in the production volume, the company is all set to scale up the production facility to further strengthen its first mover advantage.
The plant today also represents more than ordinary growth ambitions of the company. There is no gainsaying that Sterling Tools, with over 40 years’ presence, is a well-established name in the automotive space. The listed firm, which has a well-entrenched alignment with leading OEMs, has been growing at its own modest pace. But, now, the addition of the EV component vertical is expected to deliver an electrifying effect to the company’s performance with exponential growth projections.
With EV-centric supplies picking up momentum, the company is expecting to register a major jump in topline this fiscal. “We are expecting to touch Rs1,000 crore mark this year,” says Atul Aggarwal, whole-time director, Sterling Tools, and a leading functionary of the company. Touching four-digit crore topline mark, however, could well be a small element of a rather big vision, wherein the company is looking to attain a leapfrog growth trajectory in the medium to long run.
Current positioning
Sterling Tools’ story typically reflects aligning with the big picture at critical stages, just at the beginning of a major growth opportunity. Its inception point, at about 1980, underlines this intent to ride along a growing wave, since growth in the domestic automobile industry had just started unfolding on a small base. And, then, it gradually took a massive form over the next three decades, putting India firmly in to list of top auto-markets in the world, particularly volume-wise across the segment.
Sterling, which had set its first plant in Faridabad (about a km from its two-year-old EV plant on the other side of the highway) to make fasteners, has seen its story gradually attaining scale over the next few decades. “This facility, set up by my late father and elder brother, was our starting point,” explains Aggarwal. “Our first customer was Escorts and then we began getting orders from Tata Motors. Since then, we have consistently added our capacity as per the demands in the market and have all leading OEMs as our clients”.
The company is today ranked number two in the fastener manufacturing space (estimated to be over Rs4,000 crore business in India on the organised side) with specialisation in cold forged hi-tensile fasteners. During its journey of over four decades, the company has added four plants on its manufacturing map – three in Faridabad and one in Bengaluru (this unit also doubles up as R&D centre). Further, it has developed a comprehensive portfolio of offerings that comprises standard fasteners, chasis fasteners, special fasteners and engine fasteners.
As per a company presentation, direct supply to the OEMs is the major component of the business (as much as 85 per cent), followed by replacement (11 per cent), exports (2 per cent) and others (2 per cent). In terms of segment-specific contribution, the pack is led by commercial vehicle segment.
“The largest segment in our business is commercial vehicles, followed by passenger vehicles,” informs Aggarwal. “These two constitute about 55 per cent of our revenues. And then our supplies to the two-wheeler companies fetch us about 20 odd per cent”. Farm equipment, retail and exports make up for the remaining part of the revenue.
The revenue chart of the fastener division in the last four years clearly earmarks a consistent uptick, maintaining a double-digit trajectory as against the industry average of 8-9 per cent. In the stated period, the fastener division’s revenue has grown from Rs370 crore to Rs604 crore at the end of 2022-23. “In 2022-23, the fasteners segment registered a 27.4 per cent growth in revenues to Rs604 crore, led by a 21 per cent increase in volumes and contributed 78 per cent to total revenues,” says a recent report on the company by a leading brokerage firm.
Catalyst factor
Sterling Tools' financial performance chart in recent years incidentally presents an interesting pattern. From 2021-22 onwards, there has been a consistent growth in incremental business (other than the mainstay of fastener business). This subtly tells the story of the catalyst effect coming into the play with its EV vertical commercially taking off.
According to Aggarwal, Sterling Tools has been quite pro-active in spotting opportunity in the EV space, it had started the exercise when EV was more of a buzz than a reality. “Around the middle of the last decade, we were looking for fresh opportunities and we found that EV space is the domain for the not so distant a future,” Aggarwal explains. “We travelled and interacted with a lot of companies in China, Taiwan, Israel and Germany to figure out a specific opportunity. We realised that EV era will usher in soon in India and we wanted to be ready with our offerings for companies in this space”.
In anticipation of the EV era’s commencement, Sterling forged an alliance with Chinese EV component major Gtake in 2020 forming a subsidiary called Sterling Gtake E-Mobility. “We were able to come to an understanding to form a joint venture with them in 2019. The definitive agreements were also signed. And, after that, the subsidiary was floated,” Aggarwal informs.
Initially, it was supposed to be technical and financial joint venture between the two firms but after Covid , as Chinese investments faced resistance from the government, a subsidiary was formed with Gtake providing full-fledged technical support.
And the product the partners stumbled upon as their first mainline EV centric offerings is Motor Control Unit (MCU), a major specialisation of Gtake, which has a dominating presence in China as a technology leader for EV and hybrid vehicles. Going by the standard definition, the MCU is a critical part which is more like an electronics package that operates between the batteries and the motor to control the electric vehicle’s speed and acceleration much like a carburetor does in a gasoline-powered vehicle.
The EV subsidiary of Sterling made its foray in the segment with this specific line of product for high speed electric two-wheelers, a segment which is on a high rise growth curve, despite recent regulatory hurdles like government’s tough stand on subsidiary dole out to OEMs under FAME scheme. In 2022, over 600,000 two-wheeler EVs were sold in India and, in the recent months, despite pricing pressure owing to reduction in subsidy, the per-month sales trajectory has broadly remained in the above-40,000 units per month level and, in July, it even inched close to 50,000 units. “We have a tie-up with one of the leading players in the segment for last two years and have now also signed a similar bulk supply contract deal with another major 2W OEM known for its EV products,” says Pankaj Gupta, CFO, Sterling, who refused to divulge the names of the OEMs relying on the company for supply of their MCU requirements.
The increasing earning from non-fastener business is testimonial to the fact that the MCU offerings are probably doing well to help the company make a splash in the EV vertical. With nearly 15 contracts (including small ones) in its kitty, the earning from EV vertical shot up to over Rs170 crore in 2022-23. It marks a significant jump from less than Rs40 crore registered in its debut 2021-22. “On the basis of our current order book, we are expecting a further jump of about Rs300 crore from EV business during the current fiscal,” says Gupta.
Portfolio expansion
According to Gupta, the fast-growing EV business in the domestic circuit and Sterling’s pro-active move in taking a strong position vis-à-vis bulk supply of a critical component bodes well for the 40-year-old company. No doubt, it has a formidable base in the fastener business but EV could quickly add more to the topline. “You look at fastener business. Our maximum contribution to a commercial vehicle would amount to Rs2,500-3,000 per unit, with a margin of 14-15 per cent. As against this, our MCU to high speed EVs fetch Rs8,000-12,000 per unit though the margin is somewhat lower.”
Nothing surprising, Sterling seems all set to expand its EV-specific offering portfolio. In the coming months, it is expected to announce its foray to commence supplying MCUs to light commercial vehicles (it is working closely with a leading OEM in the space), which will mark beginning of a new product line within its EV vertical. According to Gupta, the company is also looking at bringing more products under this portfolio which may include DC chargers and other equipments and tools for the larger green technology domain.
To be in the forefront of the EV growth curve from the component manufacturing side, the company has also initiated capacity expansion for its MCU production unit, starting the process of enhancing its annual capacity to 500,000 units from the current base of 300,000 units. “We have drawn a capex plan of about Rs200 crore for the next few years to scale up both our verticals. We have low debt on our balance sheet and are comfortable financially. The capex we have planned can easily be met through a mix of internal accruals and external borrowings,” Aggarwal emphasises. And most of Sterling’s near-to-medium run capex play is likely to be devoted to provide more power to the EV business, as the company is targeting a 50 per cent share for this business in the next two-three years.