Buy Schaeffler India, target Rs 6,000: JM Financial

JM Financial has a buy call on Schaeffler India with a target price of Rs 6,000.

The current market price of Schaeffler India is Rs 5,311.60.

Time period given by the brokerage is one year when Schaeffler India price can reach the defined target.

Investment rationale by JM Financial
Tractors, CVs and railways to drive sales growth: Sales growth momentum picked up towards end-CY17 and is likely to sustain in CY18 an improvement in rural income (tractors/2Ws), higher infra spends (CVs) by the government and increased budgetary allocation to transportation (railways, construction, etc.). Exports have dropped from a high base and are likely to sustain moderate growth in CY18.

Key takeaways from AGM: Schaeffler India is looking at more than doubling its capex to Rs 4bn/annum for the combined entity (50 per cent of this would pertain to Schaeffler standalone) as it aims to increase localisation levels (72 per cent currently) and achieve faster growth. Rising input costs have been countered through a 4 per cent price hike across the board on 1 April 2018 and should reflect in coming months.

1QCY18: In-line growth; sales mix worsens: 1QCY18 results were largely in line with our estimates as sales grew 13 per cent YoY and net profit grew 15 per cent. However, an adverse sales mix restricted EBITDA growth to 5 per cent YoY as exports declined 3 per cent vs. 16 per cent growth in the domestic business.

CY17 annual report takeaways: As per the annual report, key focus areas for CY18 are the merger of group entities, a ramp-up in capacity and cost reduction. Traded goods saw a sharp jump in margins (25 per cent vs. 18.5 per cent) due to lower sourcing costs. The company's cash balance continued to rise (50 per cent of capital employed) and hurt return ratios, but aggressive capex over CY18-20 will effectively utilise the excess cash on its books.

Maintain BUY with target price of Rs 6,000: We continue to maintain our BUY call and forecast 18 per cent earnings CAGR over CY17-19E as we expect healthy growth in the company's domestic segments. We maintain BUY with a target price of Rs 6,000, implying 30x CY19E EPS.