Schaeffler India Ltd


(Bheeshma Sanghani) #1

Schaeffler India Ltd is one of the three subsidiaries of its German parent Schaeffler AG. The other two ( INA Bearings Pvt Ltd & Luk India Pvt Ltd are unlisted ).

As part of its “One Schaeffler India” plan - it recently proposed to merge the 2 unlisted entities into the listed one ( Schaeffler India). It has put out an investor presentation giving out the details which can be found here

The Schaeffler subsidiaries in India are well known and supply bearings & other auto components to the who’s who of the Indian auto industry.

The return on net worth of the listed entity (Schaeffler India) is b/w 13%-14%. Post merger the workout i have done suggests that not only the RONW will increase to 18%+ but the growth rate of the combined entity will also increase significantly and will probably be between 15% to 17% from the current 7% to 8%.

The reason being that the other two unlisted companies are growing at a rate that is much faster and have a better high value product mix. Of particular note is INA bearings which has a lucrative RONW of 34% based on CY16 numbers and Luk India with a RONW of 22% is also doing quite well. These are industry leading numbers & both are very well run & managed companies.

Timken recently announced a purchase of ABC bearings at an earnings multiple of ~45 ( based on current Timken prices 25/09/2017 & ABC EPS as on March 17) - ABC bearings has RONW of 8%. It stands to reason that the earnings multiple of both Luk & INA should be better than 45 given superior return ratios & for that matter even Schaeffler at RONW 13% should be higher )

Post the merger the revenue mix will change significantly & new look Schaeffler India which was earlier having a revenue supplying bearings mainly to the industrial sector will now have a new & improved mix where 55%+ will come from the automobile sector. All the revenue mix details can be found in the investor presentation. However , based on the current financial statements, 53% of the operating profit will come from Sch India, 27% from INA and 20% from Luk.

The number of shares post merger will increase to 31,260,734 from 16,617,270. The details of the share distribution can be found here

A linear calculation produced a EPS of Rs 121 per share ( CY17) post dilution from the current 134 per share however, post the merger, the debt in INA bearings & Luk will be retired from the cash rich Schaeffler India & will add Rs 5-6 per share. INA bearings has a total debt of 185.4cr & Luk has a total of 34.4cr. The total cash reserves of the combined enitity are 793 cr.

I expected the blended PE multiple to be about 46-47 of the combined entity ( given the 52-27-20 mix of Sch India, INA and Luk + based on the valuation paid by Timken for ABC) on an EPS b/w 121 to 130 giving a probable valuation b/w Rs 5566 to Rs 5980 per share. At the CMP of Rs 4810 ( on 25/09) it gives an estimated upside of 20%+

The merger will take 12 mths to conclude. There is a decent 11% arb opportunity in ABC & Timken as well

The workout i have prepared isSchaeffler.xlsx (13.7 KB)
. Data has been sourced from the Sch India investor presentation.

Risks

  • the valuation paid by timken for abc is expensive going by industry reactions. Since the expected value of the merged entity is based on the valuation of abc there is a risk that market will recognize the overvaluation and auto correct to saner levels.

  • The merger may not happen as shareholder & other approvals are still required

Thanks
Bheeshma
Disc invested in the correction today.


(Yogesh Sane) #2

Schaeffler India is buying INA and Luk at 46 times their earnings. That’s looks richly valued to me. Essentially German parent is selling these two subs to Indian shareholders at high valuation, higher than their own valuation and diluting EPS of listed company in the process. I don’t think PE expansion will happen in this case. If at all, stock price already moved 20% north after the announcement.

It appears to me that the valuation is arrived in such a way that shareholding of Indian public in Schaeffler India does not fall below required minimum of 25%. to me that sounds like the main criteria used here.

I am always skeptical about a listed MNC is buying unlisted group company. Usually, that happens when unlisted group company is operating at peak performance.

Timken-ABC merger may involve some operational efficiency gains. I don’t see management talking about such gains here. Transaction rationale is primarily to simplify ownership structure.


(Bheeshma Sanghani) #3

Dated but very insightful report on the bearing sector


(jajushobhit) #4

The latest presentation includes an estimate of the cost and revenue synergies the company is expecting from the merger.
http://www.bseindia.com/xml-data/corpfiling/AttachHis/5f39d58f-d43e-462a-8525-a87da4d23f77.pdf


(spachiap) #5

Management says they can grow at 20% rate. Looks impressive, though pricey, considering the growth, thinking of opening a position.


(Pod85) #6

Has anyone done any detailed study on the merger and nos post that if any value is left ?

Or everything seems to be in the price