INITIATING COVERAGE REPORT

INITIATING COVERAGE REPORT

2

Y/E Mar Revenue (Rs. Cr)

EBITDA (Rs. Cr)

PAT (Rs. Cr)

NPM (%)

REPS (Rs.)

P/E (x)

P/S (x)

P/BV (x)

CY19 4,361 634 368 8.4 117.69 28.4 0.77 3.5 CY20E 3,015 395 210 7.0 67.17 49.7 1.11 3.4 CY21E 3,664 547 319 8.7 102.12 32.7 0.91 3.2 CY22E 4,891 788 473 9.7 151.40 22.1 0.68 2.9

Please refer to the disclosure on last page

OUTLOOK & VALUATION We have factored in a 30.9% contraction in sales for CY20E due to the Covid-19 pandemic. Thereafter we are optimistic of a slow recovery and normalization of business in CY21E and CY22E. We have forecasted a Revenue growth of 3.9% CAGR over CY19-22E and derived a revenue of Rs. 4,891.20 Cr for CY22E. We expect the CY22E EPS to be Rs. 151.40 and the PAT margin to be 9.7%. We have assigned a P/E multiple of 32x and arrive at a Target Price of Rs. 4,845 which is an upside of 45% from today’s price of Rs. 3,340. We initiate coverage on Schaeffler India Ltd with a BUY rating over an investment horizon of 24-30 months.

Technologically driven solutions for the Automobile Industry, a safeguard against obsolescence The Auto Industry is seeing a lot of changes such as new norms and new technologies. It has become imperative for companies to keep up with the changes in order to maintain their market share. Schaeffler is a technology company with product offerings for ICEs as well as Hybrid and Electric Vehicles. Its product development is supported by a strong R&D base and hence has ready solutions for BS-VI as well as Hybrid and Electric Drives.

Industrial segment is diverse and growing, providing the perfect hedge against the Auto slowdown The Industrial segment caters to diverse industries such as Renewable Energy, Railways, Mining, Power Transmission, etc. while the Auto business saw a decline of 11.8% in CY19, the Industrial business saw growth in industries like Steel (6%), Wind (25%), Railways (25%) which helped negate the Auto slowdown. Further, Industries like Wind and Railways are seeing strong growth due to export business (wind) and government investments (railways).

Margin Expansion led by consolidation of Brands and supported by new BS6 norms Schaeffler consolidated its brands under the One Schaeffler initiative in 2018. This resulted in better brand recognition and merger synergies like efficiencies in operations, cost savings in transportation and enabled the company to better serve its customers. The BS-VI norms present an opportunity for Schaeffler to increase its content per vehicle with partner OEMs as they have ready solutions in the offering. The company also has technologies for Hybrid and Electric Drives, which are futuristic offerings.

Schaeffler India Ltd## Market Cap. 52 Week H/L CMP Target Price

Rs. 10,440 Cr. Rs. 5,595/3,206 Rs.3,340 Rs. 4,845

## Scrips part of Sushil’s Classic

STOCK DATA

BUY

Reuters Code Bloomberg Code

SCHE.BO SCHFL IN

BSE Code NSE Symbol

505790 SCHAEFFLER

Face Value Rs. 10

Shares Outstanding* 3.12 Cr.

Avg. Daily Vol. (6m) 7915

Price Performance (%)

1M 3M 6M

(15) (24) (15)

200 Days EMA Rs.4399

SHARE HOLDING (%)

Promoters 74.1

FII 3.8

FI/Bank 15.6

Body Corporate 1.6

Public & Others 4.9

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Schaeffler India Ltd.

April 21, 2020

Source: Company, Sushil Finance Research

INVESTMENT RATIONALE “Technologically driven solutions for the Automobile Industry, a safeguard against obsolescence”

The Auto Industry is undergoing a lot of changes, be it due to new regulations which focus on strictly controlling emissions, or due to shift in Technologies used from Internal Combustion Engines (ICEs) to Hybrid vehicles and Electric vehicles. It has become imperative for both OEMs and Ancillaries to keep up in order to not lose market share. The OEMs stand a chance to lose in terms of vehicles sold and the Ancillaries risk losing on ‘Content per vehicle’. Companies who don’t adapt and innovate will become obsolete.

The Schaeffler group has always given high importance to technology, which is reflected in their strong R&D base, which has 8,000 employees and holds 26,500 active patents. As a result, the company enjoys a high content per vehicle and is a supplier of complex critical components to major OEMs in the country. The Automotive sales mix consists of Transmission Systems: 22%, Engine Systems:14%, Belt and Chin Drives:7% and Chassis Systems:7% of total sales while auto after-market sales make up for 18% of Auto sales.

Schaeffler is one of the sector’s technological leaders in numerous manufacturing areas such as cold forming, forging and heat treatment. The company’s own Special Machinery department provides support with the construction of assembly and production lines. Schaeffler has ready solutions for BS-VI vehicles (both petrol and diesel) as well as solutions for Hybrid and Electric Drives. This should especially benefit Schaeffler as in the recent budget the government announced to increase the custom duty for imported parts of Electric Vehicles to promote domestic manufacturing of components under the ‘Make in India’ initiative.

The NBFC crisis in India, coupled with the increased costs of owning a vehicle (high insurance) has led to a slowdown in the Auto Industry. While Schaeffler is also facing the heat due to low demand from OEMs and the margins are under pressure due to fixed costs, Schaeffler has some buffer due to its strong after-market business. As people are not buying new cars, there is an increased need to maintain existing vehicles. The Aftermarket business grew by ~20% in the last quarter of 2019.

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April 21, 2020


INVESTMENT RATIONALE “Industrial segment is diverse and growing, providing the perfect hedge against the Auto slowdown”

The Industrial business of Schaeffler caters to Industries like Renewable Energy, Railways, Power Transmission, etc. By nature, the Industrial Segment of the business provides a hedge to any Macroeconomic factors affecting the Auto Sector as a slowdown in Industries is seldom together with the Auto sector. The diversity if industries to which Schaeffler is a supplier, also provides a hedge against slowdown in one or two Industries.

For CY19, when the auto Industry saw a slowdown of 11.8%, Industrial segments like Wind, Steel and Railways saw strong growth. Steel industry grew by 6%, Mining and Power Generation picked up in the second half of 2019 and Wind and Railways Rolling Stock grew by almost 25% each. The Machine Tools industry, which works in line with the Auto Industry was hit the most, seeing a decline of 35%.

Wind Industry registered strong growth as all wind manufacturers have decided to make India an export base. Products manufactured in India are exported to countries where the focus on renewable energy has increased. Schaeffler has a strong presence with all major wind energy manufacturers and wind equipment manufacturers.

The Railways rolling stock on the other hand, saw strong growth due to a push from the government’s investments in Metro rails and Infrastructure projects. The Metro rail segment is fast growing and currently constitutes 20% of total railway growth story. The DFC is another area of focus for the government and seeing the government’s investments in the sector, the company has launched next generation heavy duty bearings TAROL Class-K, which are specifically designed to carry heavy loads of up to 32.5 tonnes. The company also has ready solutions such as insulated bearings for e-Locomotives and continues to add new products to the mix.

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April 21, 2020


INVESTMENT RATIONALE “Margin expansion led by consolidation of brands and supported by new BS-VI norms”

In 2018, Schaeffler consolidated its 3 brands FAG, INA and LuK under the ‘One Schaeffler’ initiative. The merger resulted in better brand recognition and the merger synergies achieved as a result yielded cost savings on 1-2%. This was possible as it helped employees work better/ more efficiently as teams started sitting in the same office and inter-department synergies improved. The company said its received positive feedback from customers reporting better efficiency and handling of concerns. Overhead savings and cost efficiencies were achieved as the company implemented consolidated warehouses and full truckload container systems which led to overall efficiencies in transportation.

The company is now focusing on reducing its reliance on Imported components by Localization initiatives for as many products as possible. Currently, 57% of the products are made locally and the plan is to raise this to 75%, which will help improve margins further.

With the BS-VI emission norms kicking in, the company is secured on its content per vehicle contributions i.e. the number of parts supplied to OEMs will not reduce. The company has launched many new products and solutions for BS-VI vehicles which have been homologated and validated by the OEMs. Schaeffler has products for reducing fuel consumption and air pollution, which is the main theme of the BS-VI regime. Hence, the content pre vehicle is expected to increase.

Schaeffler also has offerings for Hybrid and Electric Vehicles, which provide a futuristic opportunity as OEMs look to gradually diversiCY away from Internal Combustion Engines.

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April 21, 2020


COMPANY OVERVIEW

Schaeffler India is part of the Schaeffler group, a global conglomerate supplying critical components to the Automotive and Industrial sectors. The company generated sales of approximately 14.4 billion euros in 2019 and has a strength of 87,700 employees working in 73 manufacturing facilities across 50 countries. The company has sales offices in over 170 locations around the globe. Schaeffler has an extremely broad wealth of expertise in manufacturing and state of the art technology for the highest level of cost effectiveness and high-precision products with a high level of vertical integration.

Schaeffler Global has around 8,000 employees working in 20 R&D centers to develop new products, technologies, processes and methods for solutions that are tailored to the market. With over 2,400 patent registrations in 2019, Schaeffler is Germany’s second most innovative company according to DPMA (German Patent and Trademark Office). Currently Schaeffler holds 26,500 active patents and patent registrations. Schaeffler has a dedicated engineering and R&D support base in India to augment the product teams. Schaeffler also has among the largest after-market networks serving both Automotive and Industrial segments.

In India, Schaeffler has 4 plants and 19 sales offices with over 3,000 employees. In October 2018, Schaeffler successfully merged its 3 brands FAG, INA and LuK under its ‘One Schaeffler initiative’. The FAG plants are located at Maneja (near Vadodara) and Savli (near Vadodara) manufacturing ball bearings, cylindrical roller bearings, spherical roller bearings and wheel bearings at Maneja and next-gen deep groove ball bearings & large size roller bearings at Savli plant. The Talegaon plant which previously operated under the INA brand manufactures engines and transmission components for front accessory drive system, chain drive systems, valve train, shift systems and a range of needle roller bearings & elements. The fourth plant at Hosur (previously operated under the LuK brand) manufactures clutch systems and dual mass flywheels for PVs, LCVs, HCVs and Tractors.

The Promoter Holding for Schaeffler India stood at 74.13% as of December 2019, held by its Parent Group of Companies. The Foreign and Domestic Institutions held 19.42% collectively.

For the year ended December 31st,2019, Schaeffler India recorded a consolidated turnover of Rs. 4,360.56 Cr with an EBITDA margin of 14.5% and a Net margin of 8.4% resulting into an EPS of Rs. 117.69. The company declared a dividend of Rs. 35 per share for CY19.

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April 21, 2020


BUSINESS OVERVIEW: Automotive Business

• The Automotive Segment contributes around 53% of total sales for Schaeffler. Schaeffler’s client portfolio boasts of leading names like Maruti Suzuki, Mahindra & Mahindra, Hyundai, Tata Motors, Denso, TVS Motors, Bajaj Auto, Bosch, Hero Motocorp, Honda, Premier, Ford Motors, John Deere, Escorts etc.

• The main products under this segment include chassis components

and systems, technologies for clutches and transmissions, as well as engine components and drives for hybrid and electric vehicles. Schaeffler’s precision products are key to reducing fuel consumption and emissions while extending the service life of engines and transmissions.

• As a systems partner, Schaeffler’s engineers work on a range of

different technologies designed to make cars cleaner and improve fuel economy. The company has capabilities across engine systems, be it internal combustion, hybrid or electric. Backed by their strong research base, the company develops products right from the product development phase to the volume production phase. Innovations like the 48-Volt Drives (which help improve fuel efficiency of ICEs by more than 20% by installing an electric motor as an electric axle on the rear axle) which enables electric driving at slow speeds such as when parking the vehicle. The Plug-in Hybrid Drives system combines the ICE with a high performance electric drive. Schaeffler develops hybrid modules in various torque classes for installation between the engine and transmission (P2 arrangement) or as a separate axle module (P4 arrangement).

Schaeffler uses Formula E to prove its development for future electric drive volume production, Schaeffler is the exclusive partner of the ABT Schaeffler Audi Sport Team and is responsible for the drivetrain of the ‘ABT Schaeffler FE02’ electric race car (shown above).

Whether it is understanding the system, cooling the motor, developing new materials or recuperation (gaining energy from braking) the expertise is transferred directly from the race track to the development engineers. Schaeffler has doubled its team of component developers for electric vehicles in a short space of time and is focusing particularly on new solutions for electrification of the drive train in volume-production vehicles.

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April 21, 2020



• Futuristic technologies like electric vehicle drive trains and ‘E-Wheel Drive’ put Schaeffler in the drivers seat when it comes to being prepared for the future of mobility. Schaeffler has production ready drive solutions for purely battery electric vehicles in its portfolio. Under the E-Wheel Drive (wheel hub drive), Schaeffler demonstrates how the drive technology can be relocated to the wheels and thus totally new mobility concepts are possible such as self driving cars.

• The Engine Systems product portfolio consists of critical

components like Standard Valve Train, Variable Valve Train, Camshaft Phasing Systems, Chain Drives, Belt Drives, Thermal Management, Engine Shafts supported by rolling bearings for Passenger Vehicles. For Commercial Vehicles the company manufactures Valve Train, Camshaft Phasing Systems, Belt Drives, Water Pump Bearings, Exhaust/Air Management Systems and Rolling Bearings in Engine Applications.

• The Transmission Systems portfolio consists of Bearings for

Transmissions and Rear Axle Drives, Lightweight Differential, Clutch/Gearshift System/Synchronization, Solutions for Double Clutch and Automated Transmissions, Torsion Dampers and Solutions for Automated Transmissions for Passenger Vehicles. For Commercial Vehicles the company manufactures Main Bearings, Needle Roller Bearings, Clutch Release Systems, Gearshift Systems, Clutches, Torsional Vibration Dampers, Hydraulic Torque Converters and Components for Auxiliary Drives.

Electromechanical Camshaft phasing unit

Fully variable electrohydraulic UniAir valve control system

Belt Drive systems Thermal management module

Dry double clutch CVT Transmission

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April 21, 2020



• The Chassis Systems are integral to the safety and comfort that the vehicle delivers. Schaeffler has reengineered them to make them complete mechatronic systems with sophisticated technology ranging from integrated sensors for capturing data, to electromechanical actuators for active chassis applications. The product portfolio for Passenger Vehicles consists of Bearing for the Chassis, Bearings and components for the Steering Column, Wheel Bearings, Electromagnetic Actuators and Space Drive. The Commercial Vehicles portfolio consists of Wheel Bearing Applications, Pinion and Differential Bearings, Kingpin Bearing Support, Components for Brake Applications, Components for Drive Shafts, Auxiliary Drives and Interior Equipment.

• Technologies for Hybrid and Electric Drive Systems product

portfolio offers the full bandwidth of electrification options- from 48-Volt hybrids and plug-in hybrids to drives for purely electric vehicles. This broad spectrum of knowledge makes Schaeffler an expert partner to the various markets and customers it serves- such as with components and systems for hybrid modules, entry level hybridization, electric axle drives and electric wheel hub drives. The product portfolio consists of Components and Systems for Entry-level Hybridization, Hybrid Modules for 48V and High-Voltage Applications, Electric Axles for Hybrid and All Electric Vehicles and Wheel Hub Drives.

Steering Column Ball screw drive for chassis

Brake Adjuster Wheel Bearing

Electric Axle Drive Hybrid Module

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April 21, 2020



• The Automotive Aftermarket division is responsible for Schaeffler’s global spare parts business and delivers innovative repair solutions in original equipment quality.

• All components are tuned to work perfectly together and allow for replacing old

parts fast and professionally. With their REPXPERT brand they offer comprehensive services to garages by conducting practical-oriented training seminars, offering repair assistance via their hotline and garage portal, and by developing special tools.

• With components tuned to work optimally together, and individually put together

repair sets and kits, part replacement is uncomplicated, efficient and professional. • The Passenger Cars Transmission products include Clutch Systems, Flywheel,

Release Systems and Transmissions. The Engine products include Front End Auxiliary Drive, Timing Drive, Valve Train and Cooling Systems. The Chassis Products include Wheel Drives, Axle and Wheel Suspension, Stabilizers and Suspensions, Steering parts and Engine and Transmission Mounts.

• For the Light Commercial Vehicles, the focus is on quick repairs and the products

offered are for Transmissions, Engine and Chassis. Schaeffler’s repair solutions and spare parts make installation uncomplicated and shorten expensive downtimes.

• For Heavy Commercial Vehicles, the company provides solutions that extend

service intervals and lower downtimes which increases vehicle utilization and lowers total cost of ownership. The solutions for Tractors offer Durability and Efficiency with a long service life and high cost efficiency.

Clutch Systems

HCV Wheel Bearings

Torsion Damping

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April 21, 2020


BUSINESS OVERVIEW: Industrial Business

• The Industrial Solutions business of Schaeffler makes up for ~47% of total sales. The product spectrum of this division includes rolling and plain bearings, linear and direct drive technology as well as service features such as maintenance of products and monitoring systems. The industrial division offers a wide portfolio of bearing solutions, ranging from high speed and high precision bearings with small diameters to large size bearings several meters wide. The focus is increasingly shifting towards smart products and on connecting components.

• The Industrial products catalogue consists of more than 40,000 products of varying sizes and the clientele has names like Indian Railways, CNH Industrial, Bosch, Valeo, etc.

Sector Cluster: Wind

• Cost-effective wind turbines require reliable components. Schaeffler is one of the leading manufacturers of rolling bearings and a development partner for the sector for over 30 years.

• Schaeffler manufactures products like Rotor Shafts, Gearboxes, Generators and Wind tracking and Blade adjustment systems. The company also conducts Simulations, Calculations and Tests for its systems and products.

• For hydro power, Schaeffler delivers perfect bearing solutions and support to companies of every size as a development partner. The company caters to conventional hydro power as well as ocean energy (waves and ocean current turbines)

• For the Solar power systems, Schaeffler offers a varied range of rolling and plain bearings suitable for the tracking systems of solar power plants. These bearings are used in both photovoltaic and solar thermal concentration plants.

Sector Cluster: Rail

• Schaeffler’s rolling bearings solutions find applications in a wide range of railway projects, including high-speed transportation, freight transportation and local transport in the world’s growing megacities.

• The products made by Schaeffler for Rail applications include Bearings for pulled cars and multiple units, Traction motors & gearbox bearings, axlebox bearings for freight cars, axlebox bearings for passenger cars and locomotives, mechatronics among other bearing supports.

• Schaeffler also conducts testing, validation and reconditioning for bearings for its clients in the freight, passenger traffic, high speed trains and locomotives space.

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April 21, 2020



Sector Cluster: Power Transmission

• Electric Motors: Schaeffler supplies bearing for standard electric motors as well as highly specialized electric drives. The products supplied include deep groove ball bearings, cylindrical roller bearings, angular contact ball bearings, spindle bearings, axial self-aligning roller bearings, etc. In addition to the products Schaeffler also provides designing and consulting services.

• Fluid Hydraulic Systems: These products are highly individualized and custom specific developments as they have to be extremely reliable and yet cost effective.

• Industrial Transmission: Schaeffler’s rolling bearings are an integral part in the constantly evolving power generation gearboxes.

• Pneumatics: In this area, Schaeffler bundles applications for compressed air technology and thermal fluid technology: from compressors to vacuum pumps to ventilators. Products here include high precision bearings for high speed machines, custom specific special bearings with housing units and components along with rolling bearings.

• Schaeffler also offers bearing solutions for Marine, Locks and Fittings, Electrical Housing Appliances, Infrastructure and other Public and Private Institutions.

Sector Cluster: Off-Road

• Construction Machinery: Rolling and Plain bearings from Schaeffler play a huge role in achieving peak performance in a wide variety of construction machinery around the world. Schaeffler’s products find applications in Mobile Cranes, Wheel Loaders, Vibrating Rollers, Mining Trucks and other Special Construction Machinery. The bearings are supplied for travel drives, slewing gearboxes, slewing bearings, cable sheave bearings, eccentric bearings and bearing arrangements for pivotal joints. Schaeffler also partners in the development of bearings by participating in Application based consulting, Calculation and Designing, Assembly service, training, workshops and Condition-related maintenance.

• Agriculture Machinery: agricultural machinery needs to work very productively and reliably- under extremely difficult conditions. The machinery needs to be protected from dust, hard soil particles, constant vibrations and jarring shocks. Applications are designed for Cultivation and Seeding technology, Tractors, Harvesters. Products include Radial insert ball bearings and housing units, ball bearings, needle roller bearings, cylindrical roller bearings, tapered roller bearings, track rollers-yoke type track rollers-stud type track rollers, spherical plain bearings, spherical roller bearings. The services provided along with the products include application based testing, bearing calculations, technical testing, tribology and surface coating.

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April 21, 2020



Sector Cluster: Industrial Automation

• Printing Machinery: High precision and wear free bearing support for print rollers are essential for high resolution printing. Schaeffler’s products that are used in the printing industry include non-locating bearings, locating bearings, track rollers, oscillating bearings, linear guidance systems, individualized solutions, direct drives.

• Medical Equipment: The company delivers entire assemblies that only need to be screwed on. The applications are found in products like Ceiling stands, CT machines, C-arms, X-ray tubes, Patient tables, Dentist chairs, Dental hand pieces, Direct drives and other laboratory equipment. Customized bearings, calculation and testing, R&D services are provided as well.

• Food and Packaging: Schaeffler’s solutions are used in all types of packaging machines, filling lines, automatic baking ovens and other food and packaging industry machines. The products supplied are Deep groove ball bearings, housing units, track rollers, linear guidance systems, slewing rings and direct drives.

• Productronics: applications in electronics production range from CMP (chemical mechanical polishing), Crystal Pulling, Wafer sawing, Die/Wire bonding, Lithography, Component placement, Drilling and Milling, Reflow Soldering, Handling systems, etc.

• Textile Machinery: Applications in modern textiles, threads and fabrics etc. solutions are provided for Gripper drive in weaving machines, Eccentric unit for embroidery heads, Linear guidance systems in large embroidery machines.

• The company also provides products in the Machine tools, wood, rubber and plastics, assembly & parts handling and Industrial robots segments.

Sector Cluster: Raw Materials

• Metallurgical Production and Processing: Schaeffler group collaborates with well known manufacturers and operators to develop rolling bearings for the steel industry. The applications are in Steel Manufacturing (converters, continuous casting machines) and Steel forming (hot-rolling mills for flat products, section mills, wire mills, cold-rolling mills, multi-roll cold-roll stands, straightened machines). Schaeffler offers an extensive package of service features and devices. The assortment ranges from measuring and assembly equipment to state-of-the-art inspection and monitoring equipment.

• Mining and Processing: Products in this segment find applications in ore conveyor systems, mines, cement plants, oil platforms, crushing machines, construction machinery and construction sites. The company supplies bearings, housing and units for use in Mining, Preparation and onshore and offshore rigs. The company also provides consulting and maintenance services.

• Pulp and Paper: the machinery used in paper industry are large in size and the rolling bearings used are subjected to extremely high demands with respect to moisture, heat, shaft deflections, high speeds and long lifetimes. Schaeffler’s rolling bearings are used in paper stock preparation and paper production. The company provides services like tailor made monitoring and remote diagnosis.

• Schaeffler also offers bearings solutions for Drilling and conveying equipment.

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April 21, 2020



Sector Cluster: Aerospace

• Schaeffler manufactures high precision bearing supports for the engines of airplanes, helicopters, the U.S. space shuttle, and the European launch vehicle Ariane, to name a few. Schaeffler also provides its customers with diagnostics and bearing reconditioning to help lower life cycle costs while maintaining a high level of system reliability.

• The field of applications of Schaeffler’s products in the aerospace industry are manifold and the customer base includes all renowned manufacturers of aerospace engines, helicopters, turbo-pumps and aerospace systems. The company provides complete bearing systems for Trent 500 engine, BR 700 engine, Airbus Helicopters, Space Propulsion and the products include various jet engine bearing designs, helicopter bearing, aerospace bearing and thin section bearings.

• The company also provides services like development and production of the above mentioned products and the performance testing of bearing rig and pre qualification rig testing as well as the diagnosis and repair of aerospace bearings. Schaeffler also offers electroplating services of components for the aerospace and other industries.

• The company provides refurbishment/reconditioning services and holds several official OEM repair approvals.

Sector Cluster: Two-Wheelers

• Schaeffler’s bearings find applications in bicycles, inline skates, treadmills, etc. and it is one of the leading providers in the world in this industry. The applications are found in bicycles and electric bicycles, fishing reels, inline skates and skateboards, fitness equipment, etc.

• Schaeffler provides its customers with a large selection of reliable and cost effective standard solutions like axial angular contact ball bearings, needle roller assemblies, ball bearings, linear bearings, pedal bearings, drawn cup roller clutches, plain bearings and sealing rings.

• Schaeffler also provides services like Calculation, surface coating and design and modeling.

• Schaeffler offers motorcycle manufacturers and customers a product range that includes components and assemblies that extend the operating life of the motorcycle and reduce fuel consumption. The products in this segment include solutions for Engine, Transmission, Chassis and Special applications.

• The BEARINX software developed by Schaeffler enables to calculate and model complex shaft systems as well as complete transmissions. Testing services are also provided in the state-of-the-art R&D center.

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April 21, 2020


BUSINESS OVERVIEW

15.5%

12.4%

6.9%

9.8%

13.2%

21.5%

15.8%

7.3%

11.0%

15.8%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

CY18 CY19 CY20E CY21E CY22E

ROE ROCE

73

9.6

4

63

3.5

2

39

4.8

8

54

6.8

0

78

8.3

9

16.2% 14.5%

13.1%

14.9% 16.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00


EBITDA (Rs. Cr) EBITDA Margin (%)

41

9.8

0

36

7.1

9

20

9.9

6

31

9.2

2

47

3.2

6

9.2% 8.4%

7.0%

8.7% 9.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00


PAT (Rs. Cr) PAT Margin (%)

23

8

51

0

25

5

45

6

54

3

35

9

33

2

25

8

29

6

34

2

-

100

200

300

400

500

600


CFO (Rs. Cr) FCFF (Rs. Cr)

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April 21, 2020

RECENT QUARTER


Net Sales for the quarter stood at Rs. 1,036 Cr as against Rs. 1,186 Cr in the corresponding quarter last year (down by 13% YoY) and against Rs. 1,035 Cr in the preceding quarter (flat QoQ).

EBITDA for the quarter stood at Rs. 147 Cr as against Rs. 172 Cr in Q4CY18 (down by 14% YoY) and against Rs. 143 Cr (up by 3% QoQ). EBITDA margin for the quarter stood at 14.2% against 14.5% and 13.8% in Q4CY18 and Q3CY19 respectively.

Net Income for Q4CY19 was Rs. 85 Cr as against Rs. 107 Cr in Q4CY18 (a decrease of 21% YoY) and Rs. 94 Cr in Q3CY19 (down by 10% QoQ).

Particulars Q4CY19 Q4CY18 YoY Q3CY19 QoQ

Revenue 1,036 1,186 -13% 1,035 0%

Cost of Goods Sold 663 769 -14% 652 2%

Employee Benefit Expenses 80 79 2% 89 -10%

Other Expenses 147 167 -12% 151 -3%

EBITDA 147 172 -14% 143 3%

EBITDA margin 14.2% 14.5% -30 Bps 13.8% 39 Bps

Depreciation 42 39 9% 40 6%

Interest expense 1 3 -61% 0 147%

PBT 124 157 -21% 115 8%

PBT margin 12.0% 13.2% -125 Bps 11.1% 84 Bps

Tax expense 40 50 -20% 21 89%

PAT 85 107 -21% 94 -10%

PAT margin 8.2% 9.0% -87 Bps 9.1% -96 Bps

EPS 26.02 30.95 -16% 31.36 -17%

Highlights from the quarter: • Q4 automotive performance was slightly better than Q3 due to

temporary demand surge and on top initiatives. • Working Capital improved significantly as receivables and

inventory control measures were realized. • Operating profit was better due to on going cost control

initiatives and better automotive sales mix.

• Q4 witnessed slow industrial performance in all sectors

excluding wind. • Intercompany exports saw a dip due to lower demand from

Europe and South East Asia.

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April 21, 2020


Profit & Loss Statement (Rs. Cr)

Y/E Mar. CY19 CY20E CY21E CY22E

Revenue 4,361 3,015 3,664 4,891

Raw Material Cost 1,731 1,154 1,374 1,810

Employee Cost 345 327 371 406

Other Expenses 632 437 531 709

EBITDA 634 395 547 788

EBITDA Margin (%) 15% 13% 15% 16%

Depreciation 159 168 183 215

EBIT 475 227 364 573

EBIT Margin (%) 11% 8% 10% 12%

Finance Costs 3 3 4 5

Other Income 63 64 77 80

Profit before Tax 535 288 437 648

Tax Expense 167 78 118 175

Net Profit 368 210 319 473

Net Margin (%) 8% 7% 9% 10%

EPS 117.69 67.17 102.12 151.40

Balance Sheet (Rs. Cr)


PP&E (incl. CWIP) 1,061 1,064 1,174 1,301

Other Non-Current 181 156 168 188

Inventories 720 742 821 830

Trade Receivables 771 809 903 1,117

Cash and Bank Balances 835 830 854 888

Other Current Assets 77 62 69 81

Total Assets 3,645 3,665 3,988 4,407

Equity Share Capital 31 31 31 31

Reserves & Surplus 2,931 3,031 3,226 3,558

Borrowings (LT) - - - -

Other Non-Current Liabilities 45 45 45 45

Trade Payables 499 412 528 598

Other Financial Liabilities 104 114 125 138

Other Current Liabilities 13 9 11 15

Current Tax Liab & Provisions 22 22 22 22

Total Liabilities 3,645 3,665 3,988 4,407

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Cash Flow Statement (Rs. Cr)


PBT 535 288 437 648

Depreciation 159 168 183 215

Interest 3 3 4 5

CFO before Working Cap chg 697 459 624 869

Chg in Inventories 190 (22) (78) (9)

Chg in Trade Receivables 119 (38) (93) (215)

Chg in Other Current Assets 72 14 (6) (12)

Chg in Trade Payables (289) (87) 115 70

Chg in Other Fin Liabilities (28) 10 11 13

Chg in Other Current Liabilities (2) (4) 2 4

Income Taxes Paid (167) (78) (118) (175)

Other Adjustments (28) - - -

Cash Flow from Operations 510 255 456 543

Interest Paid (3) (3) (4) (5)

Dividend Paid (126) (109) (125) (141)

Other Adjustments (43) - - -

Cash Flow from Financing (171) (112) (129) (146)

Capital Expenditure (327) (172) (293) (342)

Investments (1) 4 (1) (2)

Other Non-Current Assets (36) 21 (10) (18)

Other Adjustments 70 - - -

Cash Flow from Investing (366) (148) (304) (363)

Opening Cash 143 116 111 134

Total Cash Flow (27) (5) 23 35

Closing Cash 116 111 134 169

Financial Ratio Statement


Growth (%)

Revenue -4.4% -30.9% 21.5% 33.5%

EBITDA -14.3% -37.7% 38.5% 44.2%

Net Profit -12.4% -42.9% 52.0% 48.3%

Profitability (%)

EBITDA Margin 14.5% 13.1% 14.9% 16.1%

Net Profit Margin 8.4% 7.0% 8.7% 9.7%

ROCE 15.8% 7.3% 11.0% 15.8%

ROE 12.4% 6.9% 9.8% 13.2%

Per Share Data (Rs.)

EPS 118 67 102 151

BVPS 948 980 1,042 1,148

Valuation (x)

P/E 28.4 49.7 32.7 22.1

P/BV 3.5 3.4 3.2 2.9

EV/EBITDA 16.3 26.2 18.8 13.0

P/SALES 0.77 1.11 0.91 0.68

Turnover

Inventory days 96 146 135 101

Debtor days 53 81 76 73

Creditor days 66 81 87 73

Free Cash Flow to the Firm 380 255 322 381

Free Cash Flow to Equity 332 258 296 342

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MARKET INFORMATION


EV/EBITDA Price/Earning

0

1000

2000

3000

4000

5000

6000

7000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

BSE Sensex Schaeffler India

0

5

10

15

20

25

29-04-2016 29-04-2017 29-04-2018 29-04-20190

10

20

30

40

50

29-04-2016 29-04-2017 29-04-2018 29-04-2019

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OUTLOOK & VALUATION The Schaeffler Group is a well established player in the Automotive components and Industrial bearings segments. What differentiates Schaeffler from the other manufacturers of bearings and car parts is its approach towards R&D and its involvement in the development process of components. Schaeffler works closely with its customers to design and develop new technologies which are critical in making their customers’ industries more productive and reliable. The focus on product advancement and contribution to the growth of various industries makes Schaeffler a true global technology company. This is also why the company enjoys better margins and valuation as compared to other auto ancillaries.

While there are plenty of Industry headwinds for the Automobile sector such as slowing demand, liquidity crunch, higher acquisition costs, changing regulations and the threat from electric vehicles, Schaeffler is uniquely positioned as its sales mix is well balanced between Auto and Industrial businesses. So while the Auto business is down, the Industrial business has grown and this diversity provides Schaeffler with a good hedge.

We have factored in a 30.9% contraction in sales for CY20E due to the Covid-19 pandemic. Thereafter we are optimistic of a slow recovery and normalization of business in CY21E and CY22E.

We have forecasted a Revenue growth of 3.9% CAGR over CY19-22E and derived a revenue of Rs. 4,891.20 Cr for CY22E. We expect the CY22E EPS to be Rs. 151.40 and the PAT margin to be 9.7%. We have assigned a P/E multiple of 32x and arrive at a Target Price of Rs. 4,845 which is an upside of 45% from today’s price of Rs. 3,340. We initiate coverage on Schaeffler India Ltd with a BUY rating over an investment horizon of 24-30 months.


Risks & Concerns

• Prolonged slowdown of Auto Sector could lead to the company performing poorly than our expectations. • The impact of Covid-19 on the company’s operations and revenue could be much worse than we have factored in.

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April 21, 2020

SALES Devang Shah | +91 22 4093 6060/62 [email protected]

Research Associate Dhruvin Upadhyay | +91 22 4093 4082 [email protected]

Rating Scale

This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating. Risk Rating

Risk Description Predictability of Earnings / Dividends; Price Volatility

Low Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%

Accumulate 10 % to 15 % 15% to 20% 20% to 25%

Hold 0% to 10 % 0% to 15% 0% to 20%

Sell Negative Returns Negative Returns Negative Returns

Neutral Not Applicable Not Applicable Not Applicable

Not Rated Not Applicable Not Applicable Not Applicable

Please Note • Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). • ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five

percentage points. • Stock Review Reports: These are Soft coverage’s on companies where Management access is difficult. Views and recommendation on such companies may not

necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews may be just one-time coverage’s with an occasional Update, wherever possible.

…

mailto:[email protected]

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April 21, 2020

Disclaimer & Disclosures : This report has been furnished to you for your general information only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. This Research Report is meant solely for use by the original recipient to whom it is sent and is not for circulation. Any unauthorized use, disclosure or public dissemination or copying of information (either whole or partial) contained herein is prohibited. This Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice/offer for the purpose of purchase or sale of any securities mentioned herein. Past performance is not a guide for future performance, future returns are not guaranteed. Opinions expressed herein are subject to change without notice. Investor should rely on information/data arising out of their own investigations. Investors are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investor may realize losses on any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by us to be reliable. Sushil Financial Services Private Limited or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. None of the directors, employees, affiliates or representatives of company shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages/loss etc whatsoever from the information/opinions/views contained in this Report and investors are requested to use the information contained at their risk.

Sushil Financial Services Private Limited (SFSPL) and its connected companies, and their respective Directors, Officers and employees or their relative, may have a long or short position in the subject companies mentioned in the report and it may not be construed as potential conflict of interest with respect to any recommendation and related information and opinions. Reports based on technical and derivative analysis center on studying charts company’s price movement, outstanding positions and trading volume, as opposed to focusing on a company’s fundamentals and, as such, may not match with a report on a company’s fundamental analysis. SFPSL has different business segments/Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc. and therefore may at times have different contrary views on stocks sector and markets. Research Report may differ between SFSPL’s RAs on account of differences in research methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold - SFSPL, its employees and associates responsible for any losses, damages of any type whatsoever. This Report is not intended to be a complete statement or summary of the securities, market or developments referred to in this document. SFSPL or its affiliates or employees are under no obligation to update the information. SFSPL or its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

SFSPL or its affiliates and/or its employees/its associates or his relative not have financial interest in the subject companies. SFSPL or its affiliates and/ or its employees/its associates or his relative may or may not have beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report. SFSPL/its Associates/ Research Analyst have not received any compensation from the subject company in the past twelve months. Further the subject company is/was not a client during twelve months preceding the date of distribution of the research report and the types of services provided. SFSPL or its research analyst has not served as an officer, director or employee of the subject company. SFSPL or its affiliates and/or its research analysts have not been engaged in market making activity for the subject company.

SFSPL or its associates or its Research Analyst have not received any compensation or other benefits from the subject companies or third party in connection with the research report. SFSPL/its Associates/ Research Analyst/ his Relatives not have any other material conflict of interest at the time of publication of the research report.

SFSPL/its Associates/ Research Analyst/ his Relatives have not managed or co-managed public offering of securities, have not received compensation for investment banking or merchant banking or brokerage services, have not received any compensation for product or services other than investment banking or merchant banking or brokerage services from the subject companies in the last twelve months.

There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities.

Sushil Financial Services Private Limited Member : BSE / NSE - SEBI Regn. No. INZ000165135 Research Analyst – SEBI Registration No. INH000000867 Regd. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

Analyst Stock Ownership No

Stock Recommended to Clients Yes

Remuneration/Benefits received from company in 12 months No

Merchant Banking Market Making activities / projects No

Sushil Financial Services Pvt. Ltd and Group Companies Holding Yes

Sushil Financial Services Pvt. Ltd and Group Directors Holding Yes

Broking Relationship with the company covered No

INITIATING COVERAGE REPORT

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