ZF Commercial Vehicle Control Systems India Limited analyst Q&A

Firstly, to Sweta ma'am, just on the Q4 margin performance. So it was lower by 230 bps Q - on - Q. So can you just help us understand what factors played on the margins, whether the commodity, forex , employee costs or any other provisions like warranty, which impacted the margins?

Okay. Two factors that I can talk about. One is a bit on material cost. As you know, the last quarter, we've had significant challenges on increased supply, coupled with the w a r life situation in the Middle East. And therefore, we have some increases on the cost side. Conversations are ongoing with the customers for recoveries. And therefore, you see an increase in cost compared to the revenue recorded during the quarter. On the employee cost side, well, there's been a salary increase effective 1st January, and that would also contribute to the cost increase so to speak. There's been no other -- there are no other special items or no specific call - outs on inventory or any other onetime costs.

Got it. Got it, ma'am. And just going ahead for next year, just how do you see the margin range in the context of the commodity INR forex part and the mix. And also there's a going -- next year, we would also see the higher content for ESC, ADAS. So how do you see the margin for us?

I mean I would expect it to be more or less flattish with maybe single - digit small growth for the next year. As we are going in, there are challenges which are being called out on the Middle East war front and caution from the government also to look at o ur expenses and consumption. So very difficult to call out on -- given the macroeconomic situation, I would be cautious on the call out for financial year '26, '27.

Sure, ma'am. Paramjit, sir, just on the ADAS regulation, can you update how are the OEM order wins happening and order book is building up? And if you can mention how is -- how are the key customer wins or what kind of market share we can expect for this regulation?

I think the best person here with us is Shankar, maybe you can give some latest updates.

Hi, good afternoon. On the ADAS side of the business, we have been actively working with all the OEMs with regards to the potential business coming up with the upcoming regulations. In fact, we have already got business awards for the full suite of solutions, which has the compl ete range of ADAS portfolio of products beyond the requirement from 2 OEM customers, whom we are now working with. And with most of the other OEMs, we are in engagement with multiple OEMs on the discussions and next steps. Here, the point of discussion is happening at an engineering technical discussions where the customers have visited our test tracks and observed our solutions in terms of benchmarking since there is a bigger volume segment coming out of regulations, there are several players out there in the market who are also engaging with customers.

Got it. So just Shankar sir, clarify, basically, at least for 2 OEMs, we have won the full suite of solution, right?

That's correct.

Got it. And for the ESC part, we would be quite a major player there across the OEMs.

That's correct.

Got it , got it. Thank you so much for the opportunity. Just lastly to Sweta ma'am, if you could share what would be the FY27 capex outlook?

We're looking at about a spend of about INR 180 crores to INR 190 crores.

And which area, ma'am, this would be?

Some of it is new product -- capex for new products. Others would be replacements and regular upgrades.

Next question is from the line of Lakshminarayanan from Tunga Investments.

Last 1 - year, we have done extremely well in terms of quarter - on - quarter, in terms of growth in top line. But there is a divergence I see in terms of the EBITDA growth, the operating profit growth, if I exclude the other income. And that has been not matching up with the revenue growth. Just want to understand whether this is because of some operating deleverage and how do you think this would actually pan out as the outlook remains pretty robust for this financial year -- for the upcoming financial year, s orry ?

Good afternoon , Lakshminarayanan. As replied also to the previous question, we see this impact of the war and increasing prices of certain commodities, which is leading to a blip on the cost side. Conversations with customers are ongoing to collect it, but there is always a lag between the two, and that's what's showing up as a degrowth in EBITDA. We would expect that to get corrected on a lag basis.

I'm talking about the EBITDA growth with respect to the revenue growth, not talking about the absolute -- I mean, not talking about the margins here. So for example, the revenue growth has been higher, but the EBITDA growth has been lower.

That's because the costs have increased disproportionately to the revenue due to these -- yes, the timing difference between the cost to the revenue.

Next question is from the line of Shubham Bhatra from Ambit AMC.

Basically, I wanted to understand something...

Sorry to interrupt Shubham, your voice is breaking.

Is it better now?

Yes, please go ahead.

Hi, team. Thanks for taking my question. Basically , I wanted to understand on the technology side, we talk about AEBS ...

Shubham your voice is again breaking. It is not stable. The connection is not stable. The voice is breaking. The line for the current questioner got disconnected. We'll move to the next question from the line of Dishant Jain from Quasar Capital.

Hello. Am I audible?

Yes, you are.

Ma'am, is it possible to give the segment - wide growth figure for the quarter, Q4 , like ZS aftermarket and exports?

Yes, sure. So -- give me a minute. So aftermarket has grown by about 25% and -- sorry, our OEM supplies have grown by about 25%, aftermarket by 21%, and we see a degrowth in exports of about 6%, with the growth of 22.5% on export service income.

Sure. And is it possible to give the Europe and U.S. growth for the quarter?

So the Europe growth was about 6% and American degrowth was -- just give me a minute . And yes, there was a degrowth in the Americas of about 22%.

22% ?

So on a blended -- yes, on a blended basis, a 10% degrowth for us.

Sure, sure. And ma'am, just on the demand scenario since government has also increased diesel prices today morning. So like in the past, whenever it has happened, has an impacted the demand -- on - ground demand going forward? Like how do you see the demand from here onwards?

Typically, this would impact the freight rates. So , then impact on freight rates will have cascading effects on the utilization of trucks and thereby the buying capacity of fleet owners. So it may not happen immediately, but this slowdown may be there in terms of the vehicle purchase. So that's something t hat we need to keep a close eye on.

But on the other side, if you see people may like to buy the new truck because old are not so efficient and the cost of ownership is -- so it depends upon how the fleet owners take the decision on which side.

Okay. Sure. Sure. Can I ask one more?

Sure.

And team, is it possible to provide how much aluminum and copper consist of our total raw material cost?

Yes. Approximately in last quarter, the major increase has been in aluminum. It is close to 15% to 18%.

Okay. Aluminum consists of around 15% to 18% of the total cost?

No, Aluminum only , as a commodity. Aluminum as a commodity has been increased from almost INR 233 per kg to INR 274 per kg approximately. It varies from grade to grade. So that is around close to around 18% as a commodity. And that is a major commodity for our products.

Next question is from the line of Preet Pitani from InCred AMC.

Just wanted to ask on the tech side, does AEBS and ADAS work together like if any supplier is giving us order, we mean to give orders for both together or we get orders for both separately?

Ideally, we would look at system partner as a combination setup, because you have both the electronic stability control and the AEBS, which will work in tandem. But today, most of the OEMs have dissociated one with the other. So they are looking at option s where they could use 1 or 2 partners in the cases.

Okay. And in AEBS and ADAS, not ESC, AEBS and ADAS also, it works same way ?

Within AEBS is one of the features of ADAS. So 5 features have been mandated as part of the regulation. So under those 5 features, typically, OEMs would like to go with one partner who's able to demonstrate all 5 features.

Okay. So, just clear me, i f my understanding is correct . For ESC and ADAS, there could be 2 separate suppliers. But generally, for AEBS and ADAS, they prefer single supplier. Is my understanding correct?

Yes, correct.

Next question is from the line of Madhu Agrawal from Agr a wal Family Office.

So my first question is, as we're seeing the safety regulations starting to get implemented, are we already seeing a meaningful increase in our CPV across the bus and CV platforms? Or if it's possible to quantify the before and after?

So today, we already have electronic stability control mandated in all buses, except Type 1 city buses since September 2025. So that's the uptick that you're seeing in the last financial year. Going forward, the next wave of regulation is effective 2027. So it may not be effective in this coming financial year, but more so the work will be happening for that. And the impact of that will be seen in the subsequent financial year.

So that's on the buses above the more than 12 - ton trucks, which are coming in from 2027 ?

That's right. All vehicles that are greater than 6 - ton segment would be impacted by the regulations, which would be rolled out effective October 2027.

Understood. Sorry, what I think I was trying to understand is that are we seeing a meaningful shift in the value of what we are supplying because of the -- and is it possible to quantify what that shift is for us in the value per vehicle because of the re gulations kicking in?

So in the current business, we are already with ABS, basic ABS in all of the vehicles. So in some of these vehicles, we have upgraded to ESC. That delta increase is already impacting the current sales that we are having. When it now spreads across the complete vehicle portfolio platform, we would then look at a penetration increase going from the current stage to maybe completely covering the entire portfolio of vehicles. So there, we will be looking to increase our value per vehicle in the ESC segment directly.

Understood. Okay. And I think the next one is, obviously, I know right now, we've got some challenging macroeconomic conditions. It's very hard to really forecast where things are at. But as the environment should stabilize, how are we thinking about the long - term structural growth opportunity here? Are we looking at penetration - led growth? Are we -- how are we sort of thinking about what the next 2 years look like under more normal geopolitical conditions?

So on the focus areas, what we have, we have several products like we already spoke about the safety side of the things where we are looking at braking. There apart, there are also products under the efficiency portfolio. We also spoke about compressors w ith optimized power reduction feature. These all offer a fuel savings benefit to OEMs. And then also on the AMT, where we see potential penetration increasing, that will allow us to grow in the segment of offering more AMTs to market. And then there are some focus areas where we are looking at ESC as a growth for both the hydraulic as well a s the pneumatic platforms.

Next question is from the line of Nishant Vass from 360 ONE Asset Management.

My first question is on the exports. Obviously, there might have been some potential dispatch issues this quarter. Can you confirm on the export side, were there any such challenges you faced? That's one. And second, connected to the exports is obviously, the U.S. tariffs came in force, and there have been obviously some push and pull and I think stabilization will OEMs might have happened on the pricing side. So how does the U.S. market shape up next year? That's my second question. And lastly, from a medium - term standpoint, obviously, ZF has gone through some restructuring in its home markets. They have had long plans of larger sourcing from India. So can you give us an update in terms of where is the growth right now, also consideri ng the backdrop of high energy costs in Europe? Probably some of the challenges would have come back to the fore on manufacturing. So where are you from a localization and export in India medium - term 2030 standpoint? Those are my three.

Okay. I mean updating on the exports, what we see is a degrowth overall. We see a growth in Europe, coupled with a degrowth in Americas. What -- as a trend, what we saw was a reduction or the gap in the supplies increasing compared to last quarters up to Q3, which is now catching up. So we still see a 20%, 22% degrowth as compared to the same period in the last financial year. Predicting for next year, we expect -- since we are seeing this gap narrow down, what we would expect is an increase in the trend in the U.S. markets as well for the Europe markets, of course. And whether that would really catch up to now 2 years back kind of volumes still to be seen because there's still a 20% gap over.

See, this vehicle production in the U.S. market, we can see last 4 months, there is.

There's an uptrend.

Uptrend, which was going down trend for many months. So I think that gives some hopes on that.

Yes. That's the next year's cost. With respect for sourcing from India, continuous effort to localize and also maybe potentially introduce our suppliers to be able to supply directly to our factories in the Europe, but that's not within the scope of our a ctivity. On the R&D cost, projects are continuously evaluated and allocated to the R&D team in India. So we would see some expansion of the service revenues.

Okay. So as in , the reason I'm asking is, I appreciate the fact that some of these decisions are at a parent level, but visibility, obviously, when programs have to be moved typically in this sector, typically it's a 24 - month lead lag for programs to move. So from an FY30 target that the parent put out, and I think Mr. Holger had reiterated that recently in his conversation with media somewhere down the road in the next 12, 24 months, you should be seeing some of that move, right? Otherwise, how are you going to meet FY30 targets at a group level from India?

So okay. We are getting some new RFQs, I would say, and that's ongoing. But what has been given out as a target for India's growth very definitely stand. So that commitment is definitely there from the group to the country.

Next question is from the line of Pritesh Chheda from Lucky Investments. Pritesh Chheda : Sir, for FY26 , if you could give the OE aftermarket and exports growth and the revenue number?

Full year?

Ye s , I think what was given was for quarter 4, right, 25%, 21% and minus 6%. Can you give for full year ?

OE growth was 17.5%, aftermarket 15.5%, with export degrowth of 11%. Service income increased by 10%.

Can you give the absolute number as well OE, aftermarket , and export ?

Yes. OE is INR 1,978 crores, aftermarket INR 583 crores, exports INR 1,025 crores, with service income INR 509 crores.

Okay. And the other part I missed was you guys gave the aluminum , copper and the metal content in the RM. What was that?

Aluminum also has some part of copper in this. It's an aluminum alloy, which because of this global geopolitical situation, there has been a crisis of aluminum availability in the market in last quarter, and that has also caused the increase in the price of aluminum and some more commodity. We talk more about aluminum because that is one of our major raw material, which we are using. So that is the update we have provided.

Okay. And sir, one clarification. In the truck segment, the ESC, which is being sold is a voluntary fit - outs right now or any particular category of CVs, the mandatory fit - outs have picked up?

As of now, there is fitment happening voluntarily primarily in the POL that is the petroleum and oil tanker segment, where they see the application in the hazardous goods type of usage required environment. So there, we see a voluntary fitment. The regula tion kicks in from 2027.

Okay. Just for a clarification. So the first deliveries for us, which is as per the mandated 2027 should begin from which quarters?

October ' 27.

Next question is from the line of Darshan Bhandarkar from Banyan Tree Advisors.

Could you share Q3 FY26 and Q4 FY26 quarterly average content per vehicle for our OEM segment?

So the Q4, you're referring the Q4 financial year '26 versus the previous year? Or what is it that you are?

No, no. Q3 FY26 versus Q4 FY26 , Q - o - Q trend.

So the Q3 FY26 , we saw a value per vehicle of approximately 45 .5K . And in the Q4, it was around 40 K -- 39 . 5.

Because there is a one - off decline ...

There were some one - timers that happened in the close of the previous quarter. Those are the ones that contributed to this delta increase in the value content per vehicle in October to December. Whereas those were nullified in the quarter 4.

What were those -- can you please point out that ?

Could you please repeat the question? What was the what?

What was the one - off in last quarter?

It was related to certain selling price variances that we got from customers. Those were some one - timers that were got in the close of the quarter. That led to the increase in value per vehicle, which was recorded as part of the sales that was retrospecti vely realized in the quarter 3.

If you remove those one - timers, you would be more or less flattish on the value per vehicle.

Next question is from the line of Lakshminarayanan from Tunga Investments.

Two questions. One is that we are seeing an increase in the tonnage of vehicle. In addition to it, there is also a movement of multi - axle towards tractor trailers. Now in these 2 accounts, either when the tonnage increases, whether the component which you are actually placing in the vehicle, does it also increa se in terms of value as the tonnage increases? Or it is the same whether the tonnage is X or even X plus Y.

There are -- the tonnage increase is directly proportional to the number of axles that are there at the vehicle level. So when you talk about a multi - axle, we have different configurations. We have 4x2, we have 6x4, 8x2, 10x2 and so on. So these multiple configurations which are there, those are the ones that contribute to any kind of increase in our content per vehicle because each axle, we have the components that are fitted, maybe it's an actuator, maybe it's a wheel speed sensor, mayb e it's the foundation brake side of things. So these are all the contributing factors to contributing to an increase in the content per vehicle. So the basic tonnage increase doesn't really add that much of a value, except for the fact that maybe the customer may switch to a higher duty compressor or as a lighter duty compressor from an LCV to M&HCV segment. That's the kind of a difference we would see.

Got it. Got it. And the other question is that there have been free trade agreement between India and U.K. or India and Europe, right -- sorry, India and Europe. Now what does that mean for our exports? Does it actually enhance visibility and also yields a better value proposition for us in the relevant markets.

Yes. I think this is already -- if you see announced, but it is in the draft stage, and it may take some more time, maybe about 1 or 2 more years to get it finalized. And that also will have a slow ramp - up. Definitely, whenever it is implemented, we will definitely have advantage because we have many plants across Europe, and there will be better competitiveness from India to Europe and vice versa.

Okay. Sir, if I look at our Chennai facility for exports, we have a large land and we always had a large plan for exports to the U.S. market. And we also can add with higher level of automation and modularity in terms of manufacturing. Now there has been some kind of slowdown in the last 1 year in terms of the U.S. market driven by uncertainty in tariffs. Now is it fair to assume that everything is behind and that we are in a perfect launch mode in terms of enhancing or -- I mean, leaving the current Gulf crisis, is there a possibility that it can be -- it can give a good tailwind for our revenue and theref ore, margins as we step into the next 3 years ?

Yes. I think it's a very difficult question to answer. But looking at ZF focus for India, we are definitely exploring more RFQs are coming to us for coating, for export from India. And not only Mahindra World City, we have a big plant in Oragadam. Mahindr a World City, I would say the overall plant utilization is at almost peak level. And further expansions, we will be doing in Oragadam.

Got it. Got it. So you are saying that is it -- if I understand right, it's still uncertain and in terms of the tariffs or it is uncertain because of the gulf crisis?

Gulf prices, I would say. Tariff, I think now it is getting tapered down, as we said that our sales is almost 50 - 50, I would say, for America and Europe. And overall, if you see it is minus 11% in spite of tariff in place for many months now. So that way, I would say that effect of tariff is tapering down slowly.

Thank you. Ladies and gentlemen, due to time constraint, we will take this as the last question for the day. I now hand the conference over to the management for the closing comments.

Yes. So on closing comment, I would say that when we see this quarter after having a very good quarter of last year, April volumes are also better as compared to -- if we see comparing the previous years with no special aspects. And even May volumes are l ooking good, whereas generally, first month of the year is not so high volume historically. So we do see a good quarter this year also. And only aspect of geopolitical situation, we have to closely watch and ensure that we -- in case of any issue, we do the flexing of our costs. So with that, I would like to thank all for giving the support to ha ve this historical performance, and we will continue to improve our efficiencies and ensure that we continue to monitor our overall performance. Thank you.

Thank you very much, sir. On behalf of 360 ONE Capital Markets Private Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.