Schaeffler India: Exports, order wins likely to keep ball rolling

Ball-bearing maker expects gains on margin front in the second half of FY23

At 85 per cent return, Schaeffler India is the best-performing auto stock in the BSE 200 universe since the start of FY23. The gains for the country’s largest ball-bearing maker by market capitalisation came on the back of a strong performance over the past few quarters, earnings upgrades, and an improved outlook.

 As was the case in the previous quarters, the company reported robust June quarter sales growth of 42 per cent year-on-year (YoY), led by a recovery in the automotive segment and strong exports. While the overall domestic automotive segment was up 43 per cent, sales to auto makers grew 40 per cent; revenues from the auto aftermarket were higher by 54 per cent.

The transition to BSVI norms has led to multiple new product additions, such as bearings, clutches, transmission, and engine parts, which are creating healthy demand in the aftermarket market for the company. The auto segment accounted for 48 per cent of the firm’s revenues.

 The operating profit was up 55 per cent YoY, while the margin came in at 18.4 per cent — down 160 basis points YoY. The beat on the operating front, according to Sandeep Tulsiyan and Gaurav Uttrani of JM Financial, was mainly led by a strong volume beat that gave operating leverage, even as the gross margin was down due to a lag in price pass-through. The company expects to recover its margin in the second half of the year, led by staggered price hikes. In the previous (March) quarter, the company had hit a record margin of 19.7 per cent, led by an improved mix.

According to Sharekhan Research, the June quarter was yet another quarter of strong performance in a tough market, beating earnings expectations of 7 per cent, led by higher sales and a better operating profit margin.

Not just Schaeffler but other players in the ball-bearings sector also are showing good growth trajectories. Elara Capital highlighted that the listed bearings segment reported the fastest growth of 16.5 per cent in terms of the three-year annual revenue average as compared to other automotive segments. Bearings also led the pack in terms of three-year operating profit growth of 24.7 per cent, according to analysts led by Jay Kale of Elara Securities.

Growth will be driven by new order wins in the automotive segment, a ramp-up in exports, and access to a robust product portfolio from the parent’s basket, said JM Financial. The company is ramping up capex under the PLI scheme at its new plant, which will enable it to localise several of these new products for both export and EV segments, said the brokerage.

While prospects are sound, the stock has been downgraded by Sharekhan Research given its expensive valuation. The brokerage, which has a hold rating, has revised its price target to Rs 2,800; the current price of Rs 3,606 is at a 29 per cent premium to this. The stock is trading at a steep 52.8 times its CY23 price to earnings estimates and it is at a significant premium to its historical average.