Schaeffler India Ltd stock’s muted reaction to its quarter and year-ending December results is understandable even though financials were decent.
The stock remains richly valued at close to 50 times the CY24 price-to-earnings (P/E) multiple despite a nearly 40% correction from the peak of ₹4,951 on 18 June. At its peak, the stock’s P/E was almost 80 times. However, even at such a high P/E, mutual fund managers, the supposedly more knowledgeable investors, did not think of exiting as their total shareholding was largely steady at about 14% between March 2024 and December 2024.
Notably, Schaeffler’s sales and Ebitda have shown a linear rise over the past three years, with 13% and 14% CAGR in revenue and Ebitda, respectively. The Street might have aggressively discounted the fact that it has a German parent with a technological edge that should help in making inroads into the electric vehicle market with products such as electric axles.
Revenue increased 12% year-on-year in CY24, while net profit growth moderated at 7% to ₹978 crore. This was due to a sharp 23% rise in depreciation which began as new assets were put into use. Schaeffler’s capex has been about ₹500 crore each year over the past four years.
The management highlighted in the earnings call that the capex intensity is likely to be lower in CY25, with focus shifting towards efficient utilization of the existing capex. It has already constructed buildings at various plant locations, which will be used to add new machinery based on demand conditions. Thus, the annual capex could drop 10-20% versus the last four years’ average.
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In CY24, bearings and industrial solutions (BIS) and automotive technologies (AT) segments formed 44% and 34% of total sales, respectively. Within BIS, Schaeffler derives almost 40-50% revenue from two-wheelers and off-road vehicles such as tractors. Exports are still small at 13% of total revenue with 60% of those going to Europe.
Despite the auto industry’s erratic trends, the AT segment clocked 12% growth in CY24, aided by new customer wins in passenger vehicles for planetary gear shafts and clutches for commercial vehicles. There is scope for upside surprise in the AT segment if the auto sector growth revives with easing monetary policy.
Schaeffler remains debt-free. Its dividend payout ratio stood at 45% for two consecutive years. Still, the current valuation discounts most of the positives. Unless there is a significant increase in sales and Ebitda growth rate from the current level of 10-15%, further P/E expansion appears tough.
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