Multiple merger benefits for Schaeffler India

Share of auto segments, complete systems offerings to help margins

Shares of Schaeffler India, earlier Fag Bearings, spurted 16.4 per cent on expectations of synergy gains from the merger of listed and unlisted entities of Germany-based Schaeffler group, a global supplier of automotive and industrial components. Schaeffler India announced the consolidation of the two unlisted Schaeffler group entities — INA Bearings India and LuK India — with itself after market hours on Wednesday. 

The merger of the three firms is expected to create an entity with an annualised CY17 revenue of Rs 4,000 crore and operating profit of Rs 600 crore. Currently, Schaeffler India, a leader in spherical and cylindrical roller bearings, accounts for over half the revenue of the group from India. 

This, combined with INA Bearings’ leadership in needle bearings and LuK India’s clutch and transmission components, will make it a complete automobile systems provider, rather than a component manufacturer, thereby making it a key supplier, improving its bargaining power with clients in the industrial and auto segments. 

While the obvious gains are revenue and cost benefits of a combined structure, higher content per vehicle from the expanded product portfolio, better product mix and improved margins are the other reasons for the stock’s re-rating. 

Analysts believe unlike some of the other multinational companies, a single structure for all entities in India will benefit minority shareholders, as their interests are now aligned with that of the promoters. Nishit Jalan and Hitesh Goel of Kotak Institutional Equities say the deal would assure investors that any upside from potential new opportunities in India will likely get captured in the listed entity itself, which could lead to valuation re-rating of the stock. 

On product and revenue, the merger will increase the share of the automotive segment, both for original equipment manufacturers and after-market segments, to 62 per cent of revenue, from the earlier 31 per cent. Unlike the majority revenue from the industrial segment of the standalone entity, revenue growth of the combined Schaeffler entity will be better driven by faster-growing passenger vehicles, two-wheelers, tractors and the after-market segment, say analysts at ICICI Securities.

However, investors will have to be patient for the gains to accrue. Despite the significant equity dilution for Schaeffler India due to the share swap and a valuation of 3.5-3.6 times’ enterprise value to sales of the unlisted entities, Kotak Institutional analysts believe the deal will be earnings-accretive in the next few years, as the synergies will take time to play out.