Schaeffler India – Another EV Story!


Company Name – Schaeffler India Ltd (Schaeffler India)


Current Share Price – INR 2,977 (August 29, 2022)


Market Cap – INR 46,531 cr


 

1. What is interesting about the stock?


“Members of the millennial and Gen Z generations care more than past generations about climate change, but younger Americans have been slow to show that belief in one important way: electric-car buying. Only 10% of electric vehicle buyers are between the ages of 25 and 34… A big reason: price. But the cost gap between electric models and gas models is beginning to shrink — and that shift is going to accelerate.” – CNBC


Tide is turning with the shift happening toward EVs. We had written a detailed article on Electric Vehicle Automakers in India. Click here to read.


Auto-component players are playing their part in the shift. Schaeffler India is one such company.


Schaeffler India is engaged in the development, manufacturing, and distribution of high-precision roller and ball bearings, engine systems, transmission components, chassis applications, clutch systems, and related machine-building manufacturing activities. Company operates in the following business segments:

  • Automotive Technologies (39% revenue in CY21): It develops and manufactures custom solutions for conventional internal combustion engines and hybrid and fully electric drives. The product includes hybrid and electrified drive systems, chassis systems, transmission systems, etc. for Tractors, Commercial, and Passenger vehicles.

  • Industrial (39% revenue in CY21): This division offers a wide portfolio of bearing solutions, ranging from high-speed and high-precision bearings with small diameters to large-size bearings that are several meters wide. Its products include Maintenance services, Mechatronics, Digital services, Rolling and plain bearings, etc and it caters to railways, industrial automation, 2-wheelers, power transmission, etc.

  • Automotive Aftermarket (9% revenue in CY21): This segment provides solutions to the global spare parts business and delivers repair solutions in original-equipment quality. Products include replacement parts for transmission, engine components, etc., intelligent solutions for repair and service points, etc. It caters to repair garages, retail markets, fleet workshops, etc.

Schaeffler India follows the calendar year as its fiscal year in line with its parent. Exports contributed 13% of revenue in CY21.


The Company owns and operates 4 production facilities across India. It regularly upgrades the technology across its facilities to manufacture best-in-class products. Its manufacturing units are located in Vadodara and Savli in Gujarat, Pune (Maharashtra), and Hosur (Tamil Nadu). The Company has 2 R&D centers (Pune and Hosur) and it spends ~2% of its revenues (in CY21) on Research & Development.


The Company is a subsidiary of Schaeffler Group which is a leading global automotive and industrial supplier. It has been in operation for 70+ years and has been known as a manufacturer of high-precision components and systems for engine, transmission, and chassis applications in the automotive industry. It has operations in 200 locations worldwide with 75 plants in 22 countries, 20 R&D centers, and ~83,000 employees. The group has been granted ~26,000 patents till 2021.


Why invest in Schaeffler India?

  • Strong parent – top 3 players in most segments

  • Robust financial position

  • Preferred partner in India – among the top 3 for most leading OEMs in India

  • Focus on R&D – 157 patent applications from India in the last 5 years

2. Key Historical Financials

  • Revenue de-grew in CY19 and CY20 but increased sharply in CY21. Growth has continued in Q2CY22

  • EBITDA margin has expanded from 14-15% in CY19/20 to 18-19% in the last few quarters

  • Cash Flow Convertibility (CFO/EBITDA) was poor in CY21 due to higher inventory and lower payable days

  • Company has high ROCE/ROE in CY21 at 25%/19%

3. What is my view on company valuation?


Schaeffler India’s share price has jumped ~4x in the last three years with profit increasing by ~2x implying a significant jump in the valuation multiple on the back of the EV narrative!


Company trades at a P/E (TTM) multiple of ~60x vs SKF at ~54x.


India business contributes to ~5% of the Schaeffler Group’s revenue and ~10% of profits. Schaeffler Group has a market cap of Euro 3.5 billion vs Schaeffler India’s market cap of INR 46,500 cr or Euro 5.8 billion. Schaeffler Group owns a 74% stake in the India subsidiary which is currently valued at Euro 4.3 billion. So, Schaeffler India is significantly overvalued at the current levels.


Investors can evaluate entering the stock at reasonable valuation levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Excess liquidity in the market can keep the narrative going for the immediate-to-medium term

  • Delayed approval from industrial customers and late launches by automotive players esp. EV platers can impact growth

  • Any future COVID-19 wave and subsequent disruptions in global supply chains could impact demand and operations

  • Auto Component players face continuous pricing pressure from the OEMs, especially in an environment with high commodity prices

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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