Recommendation from Automotive industry company

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

SCHAEFFLER: IN STEP WITH THE AUTOMOTIVE BOOM

HERE IS WHY
✓It has consistently increased sales
✓Working capital is getting better
✓Cash flow position is stable

The pandemic-induced lockdown caused widespread business disruption. The automobile sector, in particular, suffered a daily output loss of between ₹1,000 and ₹1,200 crore during the lockdown. Green shoots emerged with the opening up of the economy and a gradual recovery in vehicle demand. The automobile sector will remain one of the best performing sectors going forward, especially looking at the expansion planned by automobile companies. Schaeffler India with international parentage will be a beneficiary of these investments. The company is engaged in developing, producing and distributing highprecision roller and ball bearings.

The business is a division of Schaeffler Group. With 75 production sites in 22 countries, 22 research and development centres and 85,000 workers, the firm operates in 200 locations throughout the globe. Schaeffler India focuses on smart products and on connecting components for a wide sectoral range. The company is among the top three suppliers for many leading OEMs in India. Components and mobility-related solutions account for 80 per cent of the company’s revenue. For the year ending March 2022, around 89 per cent of the income has come from the domestic market, with the remaining 11 per cent coming from the foreign market. 

The company’s performance has gradually improved following a drop brought on by lockdown caused by the pandemic in Q2CY20. Sales growth over the past five years has been 25 per cent on annualised basis (the company follows calendar year as financial year). The firm generated revenue of ₹5,560.51 crore in CY21. The recent Q2CY22 saw a rise of 42 per cent in its revenue over the prior year same period and around 11 per cent growth in sequential basis at ₹1,748 crore. For the past eight quarters, the company has consistently increased sales. Since the company’s operating margin is presently 18.7 per cent and expanding YOY, there is a consistent upward trend in its efficiency. 

The company’s working capital is getting better, according to the recent quarter performance. It has influence over its customers and debtors, and its days to collect money have reduced to 50 days from the past average of 67 days. The company is debt-free. The cash flow position of Schaeffler India is stable. It produced a considerable quantity of cash at ₹464.67 crore for CY21. The business regularly reinvests an average of 70 per cent of its cash flow in growth and capacity expansion. The firm recently announced the opening of its biggest Consolidation and Distribution Centre (CDC) in Hosur. The 100,000 square feet warehouse is the largest exterior warehouse for Schaeffler in the Asia Pacific region. 

It plans to establish four such centres across India. In the June quarter, the bottom-line increased by 76 per cent on yearly basis to ₹225.75 crore. The management of the company has provided a good business forecast, driven by volume growth across all its verticals. The industrial and automotive aftermarket sectors, strong growth momentum in export markets, and stronger prospects for the bearings business would be seen in the upcoming years. Over the past three years, its earnings per share have increased at a very outstanding rate. The company is trading with a P/E ratio of 34x. Looking at all these factors we recommend our readers to BUY this scrip.