SCHAEFFLER - Schaeffler India Limited Share Price

During the Q3 earnings conference call for Schaeffler India Limited, management expressed an optimistic outlook regarding future business growth, driven by favorable economic conditions and anticipated demand recovery in the automotive sector following the recent GST reforms. Specifically, the Q3 GDP growth is estimated at around 6.4%, with inflation declining to 1.7%. The management indicated expectations for a stronger uptick in passenger vehicle demand in the upcoming months, particularly in November and December.

Key forward-looking points included:

1. Revenue Growth: The company reported Q3 revenues of INR 2,360 crores, which reflects a 13.9% increase year-on-year and a 3.4% uptick from the previous quarter.
2. EBITDA Margins: For the first time, EBITDA margins breached the 20% threshold, reaching 20.2%, reflecting improved cost management and localization efforts, which now stand at 79%.
3. New Business Wins: The management highlighted significant new business acquisitions, especially in automotive technology, including clutch applications, which are expected to bolster revenue.
4. Future Capacity and Growth: There are signs that Original Equipment Manufacturers (OEMs) are expecting increased demand, which may lead to increased production capacities. The management stressed the importance of leveraging past investments and maintaining a focus on domestic growth, given that 85% of sales are from the domestic market.
5. Capital Expenditure Plans: For the next fiscal year, capex is projected to show an increase, particularly in sectors where localization and new product development are critical.

Overall, management remains committed to pursuing double-digit growth while navigating the economic landscape shaped by recent reforms and market demands.

Q1: Can you elaborate on whether any OEMs are asking you to increase production capacity due to a demand surge following the GST reforms?

A1: Our discussions with OEM customers indicate they are optimistic about upcoming demand. The GST reforms serve as a catalyst for this, but immediate traction was limited since the reforms were announced in September. Thus, we haven't seen corresponding sales impacts yet. However, we do expect stronger demand in the automotive sector as customers plan their production schedules accordingly.

Q2: With margins improving over the quarters, do you see room for further margin enhancement as you capitalize on recent capacities?

A2: We're optimistic about sustaining and potentially enhancing our margins. We've invested in capacities and localized production to maximize our competitive advantage, particularly in the domestic market where 85% of our business resides. We will focus on leveraging these investments to improve profitability, while also exploring export opportunities when they arise.

Q3: There seems to be a decline in your Bearings and Industrial Solutions segment. Should we interpret this as structural weakness?

A3: The decline is not indicative of long-term structural issues but rather due to project-based timing in our industrial business. The fluctuations in demand, particularly in sectors like renewable energy, reflect executed projects rather than an overall market downturn. We believe that as projects ramp up, growth should stabilize across our industrial segments.

Q4: Can you provide insights into your future capital expenditure plans?

A4: For the upcoming years, we anticipate capital expenditures will increase as we continue to optimize operational efficiency and invest in localization and emerging sectors, including electric vehicles. There will be a considerable focus on elevating our capacity to ensure we meet domestic and export market needs appropriately.

Q5: How is the localization of your automotive products progressing, particularly in the context of your stated goal of 80% localization?

A5: As of Q3, our localization stands at 79%. We aim to surpass 80% as we expand our product portfolio, particularly focusing on automotive components where localization is crucial. The automotive sector typically enjoys higher localization rates, while our industrial products have varied levels due to specific project demands and lower volume requirements.

Q6: What are the major plans for your newly launched product in Savli, and what is the current utilization rate for that plant?

A6: The Savli plant, which produces large-sized spherical roller bearings, has a high utilization rate of around 90%. This indicates our commitment to maximizing asset efficiency. We're expanding this product offering to meet market demand, while also continuing to validate quality and performance standards required by our customers.

Q7: How do tariffs impact your export business, especially in light of your anticipated growth?

A7: Currently, tariffs haven't affected our exports significantly, as the order book from clients in markets like the U.S. remains robust. We do expect that as demands in the automotive sector grow, we will sustain our export levels, leveraging our existing capabilities without feeling the direct impact of tariff changes yet.

Q8: On margins, particularly in the industrial segment, how do you foresee overall growth and sustainability going forward?

A8: Our margins are improving due to fixed cost absorption from increased production capacity and a more robust domestic market. We remain focused on the distribution side of our business, which is vital for enhancing our profitability as it traditionally offers better margins compared to other segments. We aim to maintain this upward trajectory despite the ups and downs in specific sectors.