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Favourable mix and new order wins drive outperformance

Schaeffler India EBITDA was slightly ahead of our estimates; which were 20% above consensus. Net sales were up 20% YoY (2% below JMFe), while EBITDA was up by 25% YoY (3% above JMFe). Strong growth was led by accelerated performance in automotive aftermarket and exports. Domestic automotive segment was up 12% YoY given new order wins in transmission and lubricants verticals, while industrial segment was up 19% YoY (exrailways: flat YoY) and exports up 60% YoY. Better sales mix (higher exports and aftermarket) led to gross margin expansion of 110 bps to 38.9%, thus leading to expansion in EBITDA margins by 90bps YoY to 18.9% (JMFe: 18.0%). On 2-year CAGR basis, sales/EBTIDA/PAT grew by 21%/40%/50%. We believe implementation of CAFÉ 2022 norms, continued order wins in automotive segment and manufacturing capex for exports markets will continue to drive outperformance vs peers, while mix will continue to remain favourable. Besides, sub-segments such as railways, wind energy and off-highways are likely to see increased traction on continued government capex. We maintain a BUY rating on the stock with revised TP of INR 1,950, valuing the stock at 30x Dec’23E EPS.

* Resilient performance across segments despite headwinds:

Net sales improved by 20% YoY to INR 15.2bn, 2% below JMFe. Auto OEM sales grew 7% YoY, while auto aftermarket posted staggering growth of 35% YoY because of ramp up in traded products (lubricants, oil, coolants) and price pass through. Industrial mobility recorded robust growth of 33% YoY, with pick up in metro rail, passenger train and locomotives. However, non-mobility industrial sales remained flat during the quarter indicating slight slowdown in manufacturing/process industries. Exports posted robust growth of 60% YoY, given strong growth in Asia Pacific region.

* Better mix drives EBITDA beat:

EBITDA was up 25% YoY (3% above JMFe) to INR 2.9bn and margins came in at 18.9% (+90 bps YoY). The beat was led by 110bps gross margins expansion on YoY basis on account of better sales mix and sustenance of cost saving measures. Employee costs (-90bps YoY) and operating expenses (+120bps YoY) saw dual impact of normalisation of expenses as well as bunching up of outside services cost. We expect normalisation of margins as share of aftermarket comes down as PV sales pick up.

* Other details: a) Retained INR 10bn capex target and shortfall of CY21 will be made up in CY22, b) Signed MoU with Tamil Nadu Government for new plant to expand Hosur operations, which will cover EV related products like motors, control units and thermal management systems, and c) Cash balance remained robust in CY21 at INR14.1bn, while OCF came in at INR 4.6 bn lower than last year given increase in working capital.

* Maintain BUY with revised TP of INR 1,950: We continue to like SCHFL over other bearing players due to its capability to expand product portfolio in a changing fuel mix scenario and focus on exports by expanding local manufacturing base. Over CY21-23E, we expect 18%/27% CAGR in sales and earnings, given new order wins, increase in CPV and higher exports. We maintain BUY with a revised target price of INR 1,950, valuing the stock at 30x Dec’23E EPS. Key risks: faster than expected transition to EVs.

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