Localization And Automotive Wins Will Unlock Europe And Asia Pacific

Key Takeaways

• Focus on localization and manufacturing efficiency should reduce costs and improve margins, boosting future earnings.
  
• Engagement with e-mobility and hybrid technologies could expand revenue streams and market share.
  
• Economic challenges and operational restructuring may impact Schaeffler India’s growth prospects, while geopolitical uncertainties and previous investments could affect profitability and shareholder value.

Catalysts

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

• Schaeffler India's strategic focus on localization and manufacturing efficiency has led to increased local production, which could reduce costs, improve gross margins, and boost future earnings.
  
• The recent wins in automotive technology, particularly in clutch systems for commercial vehicles, indicate strong future revenue growth potential from new product lines.
  
• A significant uptick in export business, especially to new geographies in Asia Pacific and Europe, suggests sustainable future revenue growth, given the geopolitical advantages and expanding market reach.
  
• The growing engagement with the e-mobility sector and hybrid technologies positions Schaeffler India to capture emerging market opportunities, potentially increasing revenue streams and market share.
  
• Prudent working capital management and a focus on capital efficiency may enhance free cash flows, thereby strengthening the company's overall financial health and profitability.

Schaeffler India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schaeffler India's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.4% today to 12.9% in 3 years time.
• Analysts expect earnings to reach ₹15.4 billion (and earnings per share of ₹94.64) by about May 2028, up from ₹9.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹13.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.4x on those 2028 earnings, down from 57.8x today. This future PE is greater than the current PE for the IN Machinery industry at 30.7x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.92%, as per the Simply Wall St company report.

Schaeffler India Future Earnings Per Share Growth

Risks

• The moderation in India's GDP growth to around 6.5% and potential slowdown in economic expansion could impact Schaeffler India's future revenue growth.
  
• Ongoing geopolitical developments and uncertainties in major export markets might affect the sustainability of Schaeffler's strong export performance, potentially impacting earnings.
  
• The restructuring of business verticals for operational efficiency may lead to transitional challenges, which could impact revenue and profit margins.
  
• Any potential impact from global initiatives, like the Vitesco integration or tariff changes, which have unclear outcomes, could affect the operational and financial performance of the company.
  
• The focus on capacity utilization and capital efficiency suggests that previous investments have yet to fully translate into expected returns, which could affect long-term profitability and shareholder value.

Valuation

• The analysts have a consensus price target of ₹3733.0 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 ₹4279.0, and the most bearish reporting a price target of just ₹3100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹119.4 billion, earnings will come to ₹15.4 billion, and it would be trading on a PE ratio of 56.4x, assuming you use a discount rate of 13.9%.
  
• Given the current share price of ₹3473.45, the analyst price target of ₹3733.0 is 7.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.