IGI Logo

Sustained domestic growth and softer exports

Schaeffler India’s Q3CY24 print was in-line with our estimates; Revenue/EBITDA/APAT grew 12.1%/9.8%/5.2%, driven by 13% growth in bearing and industrial segment and 11% growth in Automotive technology revenue. Management said operating performance in Q3 was driven by, (1) Continued strong performance across power-transmission, railways, wind & raw-material segments, (2) 11% growth in automotive technology, and (3) Aftermarket segment growing 7% YoY. Though it was partially offset by 15% QoQ decline reported in export revenues due to softer demand in European markets. New Order inflow for double clutch systems for CV, HD valve bridge & Clutches PV & SRB, CRB for industrial segment continued during the quarter. With higher other expenses/employee cost +18%/+21%, EBITDA margins stood at 18.1% (-39bp), while PAT margin declined to 11.9% (- 79bp). We reckon sustained momentum led by, (1) resilient demand for Bearings & industrial segments, (2) better margin outlook over on account of localization and backward integration, and (3) new business wins. We expect localization and strengthening supply chain, the company may improve operating margin. We tweak our estimates and maintain REDUCE rating with revised TP of Rs.3, 866 (implying 50x H1CY26E EPS).

Q3CY24 revenues grew 12.1%; led by Total Bearing & Industrial +13%, Auto motives +11%

Schaeffler India’s Q3CY24 print was in-line with our estimates; Revenue/EBITDA/APAT grew 12.1%/9.8%/5.2%, driven by 13% growth in bearing and industrial segment and 11% growth in Automotive technology revenue. Management said operating performance in Q3 was driven by, (1) Continued strong performance across power-transmission, railways, wind & raw-material segments, (2) 11% growth in automotive technology, and (3) Aftermarket segment growing 7% YoY. Though it was partially offset by 15% sequential decline seen in export revenues due to softer demand in European market. Management alluded with festive season being soft for the auto industry, leading to high inventory levels among dealers, as a result, there hasn’t been an increase in production numbers seen during the quarter. Management believes that a boost in production is essential for Q4

Margin stabilization with improved localization and revenue mix

Q3CY24 gross margin increased by 95bp to 38.2%. With higher other expenses/employee cost +18%/+21%, EBITDA margins stood at 18.1% (-39bp). Sequentially margins declined by 21bp. Employee cost as % of sales stood at ~6.5%, 9MCY24 margin remained lower YoY due to higher employee costs this year as compared to last year 9MCY23. PAT margin stood at 11.9% (-79bp). However, we believe the backward integration/localization of components and change in revenue mix, to help maintain margins and mitigate inflationary pressures for material costs.

Valuation and Risk

We expect Schaeffler India to continue its growth momentum across Industrial and Automotive segment, along with cautious optimism in the export revenue, we remain optimistic on operating performance given, (1) Healthy order book, (2) resilient domestic performance, (3) Wind, PV & Power transmission segment performing alongside improvements in other industrial segment, (4) Renewed focus on localization, and (5) New order wins in select sectors. That said these trends provide substantial head-room for growth in our view. We cut earnings for CY24E/FY25E by 2.3%/7.6% and given steep valuation maintain REDUCE rating with revised TP of Rs.3, 866 (implying 50x H1CY26E EPS). Risks: Slower than expected growth in domestic business and lower pace of growth in exports.

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331