Margin pressure may offset Schaeffler’s volume gains

Higher content per vehicle, steady aftermarket, and exports are growth drivers

A recovery in the auto sector helped Schaeffler India post better-than-expected results in the December quarter (Q3). New BS-VI products in the passenger and light commercial vehicle segments and volume gains in the commercial vehicles segment led the 23 per cent year-on-year (YOY) growth in revenue.

While auto accounted for half of its sales, strong replacement sales, sequential recovery in industrial products, and exports aided the Q3 show. The gains in the industrial segment could have been better but for curtailment of rolling stocks by Indian Railways. Analysts, however, believe increased allocation to the sector in the Budget could lead to recovery in calendar year 2021 (CY21).

Though revenue growth beat estimates, what stood out was the operating performance. Richer product mix with a higher share of the automotive segment and low cost inventory led to a

177 basis points

(bps) YOY improvement in gross margins. Operating profit was up 56 per cent YOY, while margins were up 380 bps to 18 per cent.

The company, however, indicated that the sharp increase in steel prices could weigh on profitability in the current quarter. Schaeffler India has raised prices to partially offset the impact of this, but the increase in costs in coming quarters in line with demand recovery would make it difficult to sustain the current levels of 18 per cent.

Most brokerages are bullish about the company’s prospects on the back of increased content per vehicle as automakers look to meet new emission norms. Analysts at JM Financial say that new products such as DCT Dampers, belt chain systems, and lubricants are witnessing a surge and are likely to drive improvement in contribution from new products.

Exports, which account for 10 per cent of sales, could see a pickup as the company looks at existing as well as new destinations. However, a fresh wave of Covid-19 infections could derail exports to its largest market, the EU.

The recovery across segments should help the company, but there are profitability pressures in the near term. Moreover, near-term upside is factored in with the stock price gaining 20 per cent since the beginning of February. Investors can look at the stock on dips.

New BS-VI products in the PV and LCV segments and volume gains in CV segment led the 23% YOY growth in the firm’s revenue in December quarter