Export, demand slowdown may hurt Schaeffler India's near-term prospects

March quarter earnings were below estimates due to weak show of industrial segment

Shares of Schaeffler India, the country’s largest listed ball bearings maker, were down about 9 per cent over the last three trading sessions on a weak March quarter performance, downward revision of earnings and lack of valuation comfort. While brokerages are positive on the company’s medium-term prospects, in the near term there could be pressure both on exports as well as domestic auto segments.

The company posted an 8 per cent growth over the year-ago quarter led by growth in the automotive businesses. While the automotive technologies segment was up 21 per cent, automotive aftermarket business gained 17.4 per cent. Automotive business accounts for over half of Schaeffler’s overall sales. The company highlighted that it has won an e-mobility solution order worth 300 million euros (lifetime value) for the supply of 2-in-one e-axle.

On a sequential basis, however, sales declined 5.6 per cent. This was largely due to the muted exports segment, which fell 17.7 per cent, and the industrial segment, which slipped 10.6 per cent. The domestic aftermarket business, too, was down 13.4 per cent as cyclical decline was expected post a strong December quarter. Exports accounted for 16 per cent of revenues in the March quarter including sales to group companies, scrap sales and other operating income. Domestic after market segment contributed 9 per cent to the March quarter sales mix.

The fall in exports has come after 10 straight quarters of sequential growth, point out analysts led by Harshit Patel of Equirus Securities. Supplies to Europe (about half of the exports) saw a decline as customers cut inventory levels and the company did not fulfil some orders. While the contribution of exports to the topline has declined from 18.5 per cent in the December quarter to 16.2 per cent in the March quarter, the company has a positive outlook for the segment.

This is on the back of the relocation of business from Europe to India and a healthy order book to be completed over the next year. To tap into the opportunity export presents, it has allocated 30 per cent of its capital expenditure to export-oriented units for CY23, which will help build capacity. Scaling up of exports is expected to take the segment’s contribution to a fifth of sales.

In the industrial segment, barring the wind business, which accounts for about a fifth of the segment and has been a laggard, the company is expected to post good growth.

While the wind segment is expected to play spoilsport in CY23, emerging opportunities in railways and metro (new passenger train sets, multiple metro projects), along with continued private capex revival, would partially negate the impact on revenues, says Equirus Securities. The company has been working on new products aimed at freight wagons where it has a very low market share historically, it adds. While the brokerage has cut its CY23 and CY24 earnings estimates by 7-8 per cent, it has maintained an add rating.

Highlighting the weak operating performance in the March quarter amid muted revenues and higher-than-expected staff cost, Kotak Institutional Equities says that the operating profit was 15 per cent below its estimates. The brokerage has cut its earnings estimates over the next three years by 2-3 per cent and has a sell rating on the stock. Demand moderation in the domestic automotive segment as well as a slowdown in developed markets will impact the revenue growth prospects in the near term, say Rishi Vora and Praveen Poreddy of the brokerage. Valuation of the company at 44 times CY23 earnings also remains expensive, they point out.