Beruflich Dokumente
Kultur Dokumente
SCHAEFFLER INDIA
Auto volatility queers the pitch
India Equity Research| Bearing
While Schaeffler India’s (Schaeffler) Q1CY19 sales grew 8% YoY driven by EDELWEISS RATINGS
strong 14.6% YoY spurt in industrials, slowdown in the auto primary Absolute Rating HOLD
market took a toll on automotive’s growth—down 3.4% YoY. EBITDA Investment Characteristics None
margin fell 130bps YoY due to adverse sales mix, leading to flat EBITDA
(9% below estimate). Going ahead, we expect industrials to sustain
strong growth led by raw materials, railways and aftermarket. However, MARKET DATA (R: SCHE.BO, B: SCHFL IN)
we perceive challenges: i) uncertainty in automotive PV (28% of overall CMP : INR 5,160
sales) with major auto OEMs reducing production of diesel engine cars Target Price : INR 5,592
due to implementation of BSVI; and ii) margin pressure due to adverse 52-week range (INR) : 5,826 / 4,591
mix despite softening commodity prices. Hence, we revise down CY19E Share in issue (mn) : 31.3
and CY20E EPS 9% and 6%, respectively, and trim 9mCY20E multiple to M cap (INR bn/USD mn) : 161 / 2,368
28x (in line with five-years’ average; from 30x). Therefore, we downgrade Avg. Daily Vol. BSE/NSE (‘000) : 7.1
Auto continues to be weak; shift to gasoline a further drag Current Q3FY19 Q2FY19
Promoters * 74.1 74.1 -
The automotive segment lost steam in Q1CY19 (down 3.4% YoY) owing to weakness in
MF's, FI's & BKs 14.6 14.6 -
the auto OEM. Production of PV, which contributes 28% to overall sales, fell 3.5% YoY
FII's 2.8 2.8 -
in Q1CY19. Auto replacement was not impacted as much as OEMs and grew ~10% YoY.
Others 8.4 8.4 -
Further, with implementation of BSVI, major auto OEMs have announced cuts in
* Promoters pledged shares : NIL
production of diesel cars (where bearing content per car is higher by INR3,000-5,000) (% of share in issue)
by April 2020. Schaeffler estimates the shift to impact its sales from PV by 2-3%.
PRICE PERFORMANCE (%)
Industrials sustains growth momentum BSE Midcap Stock over
Stock
Index Index
The segment grew a strong 14.6% YoY despite slowdown in two wheelers and
agriculture tractors. Growth was led by railways, raw materials (steel production, 1 month 6.8 4.1 (2.7)
mining, cement, paper & pulp) and power transmission & distribution. Railways (4% of 3 months (1.2) (3.5) (2.4)
sales) grew 30% plus YoY. The company’s Tarole bearings have gained significant 12 months (6.0) 2.1 8.1
traction in railways and management expects the segment to sustain momentum.
Industrial aftermarket (16-17% within industrial) also grew strongly.
Overall net sales grew ~8% YoY (mere 2% below estimate) post growing 16% in Q4CY18
and CY18. Sales growth slowed as the automotive segment was impacted (down 3.4%
YoY) by slowdown in OEM production. However, it was offset by strong industrial sales
(up 14.6% YoY) and exports (up 24.3% YoY). Management expects auto sales to pick up
in H2CY19.
Gross margin dipped 130bps, leading to EBITDA margin falling 130bps to 15.7%. Margin
was impacted by adverse sales mix and lower volumes. EBITDA growth was flat at 0.3%
YoY, 9% below estimate. Management expects the cost of key raw materials such as
steel to remain soft during the balance quarters of CY19.
The company had last announced a price hike in Q2CY18. While full quantum of the
price hike has been absorbed amongst industrial customers, around 80% has been
absorbed by automotive customers. The company expects complete pass through
within the automotive segment in Q2CY19.
Adjusted PAT declined 5.6% YoY on higher effective tax rate of 34% (up 200bps YoY).
Product mix
Mix of mobility and others stands at 80.1% and 19.9%, respectively. Mobility includes
two wheelers, tractors, railways, etc., which are accounted in the industrial pie.
o Shift from diesel to gasoline: In light of the implementation of BSVI norms by April
2020, auto OEMs are planning to reduce their dependence on diesel cars (as BSVI
compliant diesel cars are much more expensive than petrol versions) and
completely stop production by April 2020. Bearing content per vehicle in diesel
cars is higher by INR3,000-5,000. Shift in production mix in favour of gasoline cars
is likely to impact sales of bearing companies. Schaeffler estimates an impact of
2-3% on sales from PV due to the shift towards gasoline vehicles. Further,
management expects implementation of CAFE 2 norms to lead to higher
hybridisation, which will increase content/vehicle.
o With the industrial segment, core industrial (excluding two wheelers, tractors)
accounts for 30-31%.
o Railways (4% of sales): The segment grew 30% plus YoY. The company is seeing
increased traction for its tarole bearings and expects the segment to grow strongly
going forward. The company started manufacturing tarole bearings in 2018 and is
increasing investments in enhancing value addition within the product line.
o Wind segment clocked positive growth. Domestic order bookings are not
encouraging. Further, execution of two tenders of 1GW each were delayed by the
customer. However, management expects export of transmission equipment to
support positive growth.
o The segment grew a strong 24.3% YoY. Almost the entire segment is industrial.
Others
Increase in inventory: Production cuts announced by major auto OEMS have led to
inventory pile up with the company. Inventory days have increased by 25 over CY18.
Management expects heightened volatility in demand during the year and highlighted
that it will maintain balance between avoiding inventory pile up and sales loss due to
unavailability of products.
Capex: Management has guided for INR3.4bn capex for CY19. In CY18, the company
invested INR2.4bn.
Synergies: The company maintained its revenue and cost synergies guidance of
INR4.7bn per year over five years and INR500mn per year over three years. As part of
the consolidation process, the company set up a warehouse strategically in Mumbai
and Vadodara in the past six months, leading to 100bps drop as a percentage in sales
turnover in logistics cost.
Total technical fee stands at 1.9% of sales.
As % of net revenues
Raw material 63.6 62.3 64.8 63.0 62.5 61.5
Employee cost 7.2 7.2 6.6 7.0 6.9 6.8
Other expenses 13.5 13.5 14.1 13.9 13.7 13.6
EBITDA 15.7 17.0 14.5 16.1 16.9 18.1
Reported net profit 9.1 10.0 9.0 9.7 10.3 11.5
Change in Estimates
CY19E CY20E
New Old % change New Old % change Comments
Net Revenue 50,507 50,879 (0.7) 57,062 57,942 (1.5)
EBITDA 8,546 9,311 (8.2) 10,357 11,038 (6.2)
EBITDA Margin 16.9 18.3 18.1 19.1
Adjusted Profit 5,227 5,732 (8.8) 6,582 7,032 (6.4) Due to shit in OEM production from
After Tax diesel to gasoline
Net Profit Margin 10.3 11.3 11.5 12.1
Capex 3,500 3,500 0.0 3,500 3,500 0.0
Company Description
FAG is part of the Schaeffler Group of Germany, a leading global supplier in bearings with
revenues of EUR11bn (as of CY12). FAG, Germany, holds 51% stake in the company. In India,
FAG is the second largest player with market share of ~17% and ~45% in overall bearings
industry and roller bearings segment, respectively.
In India, FAG’s exposure to the auto segment is 35% and industrial bearings contribute to
51% of sales. 14% of sales are catered to by exports. While the company manufactures
automotive bearings and part of industrial bearings (~35%), balance 65% of industrial
bearings are imported. As a result traded (industrial) goods constitute 30% of overall
revenue, which are majorly imported from overseas Schaeffler Group companies.
Investment Theme
FAG is expected to deliver strong revenue and profit CAGR of 12% and 21% CAGR,
respectively over CY18-20E along-with core ROCE of 29% by CY20E. High exposure to four
wheelers (~70%+ of auto OEM sales) will drive FAG’s revenues led by cyclical uptick. Having
increased its gross block by 85%, with capex of ~INR3.5bn, we expect strong sales growth.
Historically company has averaged fixed asset turn of 1.8x. EBITDA margin of the company is
likely to expand owing to gross margin expansion led by substituion of traded sales
(imported) with manufacterd sales (localization) and higher operating leverage.
Key Risks
Delay in recovery in key segments can impact our sales growth projections since four
wheelers and commercial vehicles together contribute ~75% to FAG’s auto OEM revenues.
Forex fluctuation
FAG buys traded goods from group company (Schaeffler Tech AG, Germany). As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated imports.
Imports constitute 33% of net sales. This also includes currency headwinds on ~34% of raw
material costs (~11% of net sales) which are imported.
Currently, royalty, trademark and service fees as a percentage of overall sales stand at 2%.
Any increase in the same could pose a risk.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to December CY17 CY18 CY19E CY20E Year to December CY17 CY18 CY19E CY20E
Macro Net revenue 39,331 45,615 50,507 57,062
GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Materials costs 23,817 28,736 31,567 35,093
Inflation (Avg) 3.6 3.7 4.0 4.5 Gross profit 15,514 16,880 18,940 21,969
Repo rate (exit rate) 6.0 6.3 5.8 5.8 Employee costs 2,987 3,179 3,485 3,880
USD/INR (Avg) 64.5 70.0 72.0 72.0 Other Expenses 5,706 6,305 6,909 7,732
Sector Operating expenses 8,693 9,483 10,394 11,612
Auto OEM(2W) vol. growth 9.0 8.0 7.0 7.0 Total operating expenses 32,510 38,219 41,961 46,705
Auto OEM PV vol. growth 9.0 5.0 6.0 7.0 EBITDA 6,821 7,396 8,546 10,357
Auto CV ind. vol. growth 9.0 17.0 12.0 6.0 Depreciation 1,382 1,485 1,506 1,613
Company EBIT 5,440 5,911 7,040 8,744
Auto 2W OEM vol. growth 8.0 12.0 7.0 8.0 Less: Interest Expense 102 70 70 70
Auto PV OEM vol. growth 8.0 8.0 6.0 8.0 Add: Other income 595.5 908.00 950.00 1,300.00
Auto CV OEM vol. growth 9.3 15.0 12.0 8.0 Profit Before Tax 5,888 6,317 7,919 9,973
Auto aftrmkt sale growth 328.5 15.9 8.9 10.2 Less: Provision for Tax 2,003 2,119 2,693 3,391
Industrial sales growth (2.0) 18.0 18.0 17.0 Add: Exceptional items (45) (432) - -
Export revenue growth 21.0 (6.0) 15.0 10.0 Reported Profit 3,885 4,198 5,227 6,582
Industrial sales growth (1.9) 17.0 18.0 17.0 Exceptional Items (30) (289) - -
Manufactured 101.4 100.1 108.0 105.6 Adjusted Profit 3,915 4,487 5,227 6,582
Traded 12.4 13.1 13.9 14.4 Shares o /s (mn) 31 31 31 31
Mfg. gross margin (%) 48.5 47.3 47.3 47.3 Adjusted Basic EPS 125.3 143.6 167.2 210.6
Traded gross margin (%) 22.7 20.2 20.2 20.2 Diluted shares o/s (mn) 31 31 31 31
Adjusted Diluted EPS 125.3 143.6 167.2 210.6
Adjusted Cash EPS 317.7 186.8 215.4 262.2
Dividend per share (DPS) 9.0 30.0 18.0 18.0
Dividend Payout Ratio(%) 8.5 26.1 12.6 10.0
Additional Data
Directors Data
Avinash Gandhi Chairman Dharmesh Arora Managing Director
Klaus Rosenfield Director Dietmar Heinrich Director
R Sampath Kumar Director Frank Huber Director
Sanak Mishra Director Renu Challu Director
Rakesh Jinsi Director
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*as per last available data
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c2
Head of Research
NARAIN
0, postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f
9f4d9b8311cf0678cd975097fc645327865,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2019.05.06 19:14:30 +05'30'
`
Recent Research
Date Company Title Price (INR) Recos
18-Feb-19 Schaeffler Strong capex geared towards 5,275 Buy
India growth;
Company Update
14-Feb-19 Schaeffler Industrial segment drives 5,404 Buy
India growth; Result Update
25-Oct-18 Schaeffler Strong growth across 4,803 Buy
India segments; merger completed;
Result Update
5,500
5,250
(INR)
5,000
4,750
4,500
Dec-18
Dec-18
Aug-18
Oct-18
Apr-19
Apr-19
Nov-18
May-18
May-18
Sep-18
Feb-19
Feb-19
Sep-18
Jan-19
Mar-19
Jun-18
Jul-18
Jul-18
Schaeffler India
This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration
No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or
solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as
defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency
Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is
provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The
user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it
deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the
merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The
investment discussed or views expressed may not be suitable for all investors.
This information is strictly confidential and is being furnished to you solely for your information. This information should not be
reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in
part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use
would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing
requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons
in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date
of this report and there can be no assurance that future results or events will be consistent with this information. This information
is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as
may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss
or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed
to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies,
directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential
including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary
trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed
herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in
this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in
the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design,
original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in
any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.
ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including
network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown,
maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be
liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or
expenses arising in connection with the data presented by the ESL through this report.
We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers
simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of
their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to
time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) be engaged in any other transaction
involving such Securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other
potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of
publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above
mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not
consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional
advice before investing. This should not be construed as invitation or solicitation to do business with ESL.
Additional Disclaimers
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule
15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and
Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as
specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied,
duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC
in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an
agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in
this research report should be effected through Edelweiss Financial Services Inc.
In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional
experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the
“Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated
associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being
referred to as “relevant persons”).
This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment
activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant
persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This
research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other
person.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103"))
who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an
Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to
the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain
international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in
securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or
principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv)
there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for
service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.