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Demand hiccups in key segments to slow earnings momentum

Schaeffler India 4QCY22 numbers were above of estimates. Net sales were up 18% YoY (inline with JMFe), while EBITDA was up by 20% YoY (9% above JMFe). Domestic automotive segment was up 21% YoY, while industrial segment was muted, registering flat growth YoY. Exports saw a solid growth of 55% YoY due to relocation of plants. Margins came in better at 19.2% (vs JMFe: 18%) due to better mix as automotive aftermarket (in domestic) and exports saw a healthy rebound. On 3-year CAGR basis, sales/EBTIDA/PAT grew by 20%/33%/40%. Management increased their capex guidance to INR15bn over 3 years (CY22-24) vs INR10-12bn earlier, as they continue to invest in localisation of products and increase capacities for exports. However, we recommend a switch to peers like Timken India, SKF India and Rolex Rings in the same segment due to lower exposure to Europe (Timken, SKF) and reasonable valuations (Rolex Rings). We downgrade the HOLD as we believe slowing sales in key segments (wind energy, 2W/3W, tractors) and higher imports/traded goods will result in slower earnings growth (16% CAGR over next 2 years vs 33% CAGR in past 3 years), while the stock trades at rich PE multiples of 46x CY23E and 39x CY24E. Our revised TP stands at INR3,000, based on 40x CY24E EPS

* Moderation in industrial segment limits revenue growth: Net sales improved by 18% YoY to INR 17.9bn. Auto OEM sales grew 23.5% YoY (-2.3% QoQ), while auto after-market posted growth of 11.1% YoY (+12.3% QoQ), as price pass through and higher servicing in PVs/CVs drove a healthy recovery sequentially. Industrial mobility recorded decline of 15% YoY (-4.4%QoQ), given tepid demand in 2W/3W sales. Non-mobility industrial sales recorded robust growth of 27% YoY, but were flat QoQ as wind power gearboxes continued to suffer amidst sanctions in Europe. Exports posted robust growth of 55% YoY, as weaker end market demand was more than offset by capacity relocation to India.

* Sustenance in margins despite challenging environment: EBITDA was up 20% YoY to INR 3.4bn and margins came in at 19.2% (+40 bps YoY), 130bps higher vs estimates. The beat was mainly led by better sales mix as gross margins expanded by 200bps QoQ. Employee cost declined by 50bps YoY. Gross margin expansion was a function of better mix (aftermarket and exports) and price pass through in other segments.

* Growth opportunities driving capex for the company: Management highlighted that there is structural shift in strategy by parent to shift capacities to India and it is likely to continue in coming years. Further, there is no limit imposed by parent company on India’s share, as long as the cost and engineering benefits are sustained. Management further elevated its capex guidance to INR 15bn vs INR10bn earlier over 3 years.

* Downgrade to HOLD with revised TP of INR 3,000: We optimistically factor in sales/EPS CAGR of 13%/17% over CY22-24E, as the company is stepping up its capex and relocating plants. However, we downgrade to HOLD as we foresee weakening of demand in key segments present risks to these estimates. Our revised TP stands at INR3,000, based on target PE multiple to 40x CY24E (vs 35x earlier), maintaining 10% discount to target PE of Timken India.

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