New Hosur EV Plant And Aftermarket Expansion Boost Growth And Profitability Margins

Key Takeaways

• Strategic investment in greenfield plant and localization bolsters production capacity for emerging technologies, enhancing future revenue and improving cost efficiencies.
  
• Diversification into various industries, alongside aftermarket focus, strengthens revenue growth and profitability amidst automotive sector uncertainties.
  
• Sluggish automotive demand, export weakness, and rising costs may hinder Schaeffler India's revenue growth and margin expansion.

Catalysts

Engages in the development, manufacture, and distribution of high-precision roller and ball bearings, and related components worldwide.

• The investment in a new greenfield plant in Hosur for producing components for electric vehicles and transmissions is expected to drive future revenue growth from increased production capacity targeted at emerging automotive technologies.
  
• Schaeffler India's strategic focus on expanding its Vehicle Lifetime Solutions business in the aftermarket, including new product launches in steering, suspension, and drive systems, is poised to enhance revenue streams and profitability margins due to higher aftermarket margins.
  
• The company's commitment to localizing new products, particularly in the automotive space, including components for EVs and hybrids, may improve cost efficiencies and thereby potentially increase net margins due to reduced import dependencies.
  
• The diversification of industries served, such as wind energy, railways, and two-wheelers, along with strong traction in bearings and industrial solutions, positions Schaeffler India for robust revenue growth even in the face of variability in the automotive sector.
  
• The projected scale-down in CapEx after the current expansion phase implies a potential improvement in free cash flow, which can positively impact future earnings by reducing capital expenditure burden.

Schaeffler India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schaeffler India's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 13.4% in 3 years time.
• Analysts expect earnings to reach ₹15.5 billion (and earnings per share of ₹99.08) by about December 2027, up from ₹9.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.3x on those 2027 earnings, up from 57.1x today. This future PE is greater than the current PE for the IN Machinery industry at 22.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.48%, as per the Simply Wall St company report.

Schaeffler India Future Earnings Per Share Growth

Risks

• The reported sluggishness in passenger vehicle production and anticipated continuation of this trend could negatively impact Schaeffler India's revenue from the automotive sector.
  
• Weakness in exports, particularly due to market challenges in Europe, poses a risk to revenue growth from international markets.
  
• The demand slowdown in customer segments such as the automotive sector and pressure on production due to high inventory levels may hinder revenue and margin expansion.
  
• Rising employee benefit expenses and lack of one-time incomes seen in the previous year could exert pressure on the company's net margins going forward.
  
• The ongoing loss-making position of KRSV Innovative Auto Solutions Private Limited may require cash support from Schaeffler India, impacting overall earnings until a planned breakeven by 2026.

Valuation

• The analysts have a consensus price target of ₹4160.7 for Schaeffler India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹4571.0, and the most bearish reporting a price target of just ₹3700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹115.1 billion, earnings will come to ₹15.5 billion, and it would be trading on a PE ratio of 61.3x, assuming you use a discount rate of 13.5%.
• Given the current share price of ₹3327.15, the analyst's price target of ₹4160.7 is 20.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.