Indian Bearings Industry

Indian Bearings Industry
Initiating Coverage
Revival in industrial production the key
October 6, 2019
Harshit Patel (harshit.patel@equirus.com, +91-9825406497)

India Equity Research | Industrials
6 October 2019
Sector Note
Automotive and Industrial Bearings
Revival in industrial production the key
Company Snapshot
Why we like SKF India (SKF) more than Schaeffler India (SCHFL) M Cap Price Target
Company Reco. CMP
Rs Mn Target Date
➢ With order wins for Gen3 bearings from a couple of automakers, SKF would reverse
SKF India ADD 2,073 102,399 2,287 Sept’20
the trend of lagging growth in Passenger Vehicles (PV).
Schaeffler
REDUCE 4,203 131,378 4,185 Sept’20
India
➢ SKF would be able to bid for full quantity of railway freight bearings (vs restricted to
only 10-15% earlier) as it has secured all necessary approvals.
Indian bearings industry market size (Rs bn)
➢ SCHFL would face more headwinds (vs. SKF) on account of (a) a demand slowdown
in auto and (b) transition to petrol engines, automatic transmissions and EVs. This is 115 101
93 98
because it is heavily dependent on auto (>60% revenues vs ~42% for SKF) with a 95 85 90
75 75 70
66
comprehensive range of components and systems for the industry. 75
55
➢ An area where SCHFL would have an edge over SKF is faster localization of industrial 35
bearings; most localization for SKF would happen in its fellow subsidiary, SKF 15
Technologies.
FY18
FY19
FY16
FY17
CY10
CY13
CY14
CY11
CY12
Earnings visibility, valuations in line with historical – NEUTRAL is our stance ~47% bearings are used in auto applications
▪ Demand from industrial segment critical for sustained growth: We expect the Indian
ball and roller bearings industry (~Rs 100bn in size, ~5% CAGR in last 8 years) to Industrial,
grow in mid-to-high single-digit CAGR over the medium term. Growth would be 53%
restricted by weakness in its largest user industry, automobiles (>45% share), which
would reel under the dual impact of a demand slowdown and technological changes
Automotive,
(BS4 to BS6, diesel to petrol engines, EVs). A revival in industrial capex across industries
47%
(steel, cement, mining, construction, railways) and localization of manufacturing
industrial bearings by leading players (top-5 command ~74% market share) would
Ball bearings account for ~50% bearings usage
hold the key for sustained growth in both revenues and operating margins.
Cylindrical Spherical Roller
▪ SKF India – Initiate with ADD, Sep’20 TP of Rs 2,287: We estimate SKF’s revenue/ Roller Bearings, Bearings, 9%
Ball
Bearings,
EBITDA/PBT/PAT to grow at a CAGR (FY19-22E) of ~9%/11%/9%/14% and ROE to 10%
50%
expand to ~21% by FY22E from ~19% in FY19. We initiate coverage on the stock
with ADD and a Sep’20 TP of Rs 2,287 set at 28x TTM P/E (~15% discount to last 5-
year average). We expect SKF to trade at a premium to SCHFL on account of better Tapered Roller Needle Roller
earnings visibility and expansion in return ratios vs. a marginal contraction for SCHFL. Bearings, 23% Bearings, 8%
▪ Schaeffler India – Initiate with REDUCE, Sep’20 TP of Rs 4,185: We estimate SCHFL’s
revenue/EBITDA/PBT/PAT to grow at a CAGR (CY18-CY21E) of ~8%/9%/8%/11% Top 5 commands ~74% market share
with a marginal contraction in ROEs over this period. We initiate coverage on the stock Others, SKF India,
26% 25%
with REDUCE and a Sep’20 TP of Rs 4,185 set at 26x TTM P/E (~25% discount to last
NRB
5-year average). Schaeffler may face some near-term turbulence on account of Bearings,
Schaeffler
India,
technological changes on the automobile front – a shift from diesel engines to petrol 7% 16%
engines, transition to EVs etc. Timken India*, NBC Bearings,
11% 15%
This report is solely produced by. The following person(s) are

responsible for the production of the recommendation:
Comparable Valuation
Div Harshit Patel
P/E EV/EBITDA P/B RoE
Yield harshit.patel@equirus.com
Company
FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A +91-9825406497
SKF India 30.5 27.8 24.1 20.0 20.0 17.0 6.0 5.3 4.6 19% 20% 21% 0.6%
Schaeffler
28.4 30.3 25.2 16.7 17.5 15.0 4.9 4.4 3.9 18% 15% 16% 0.7%
India
Source: Companies, Equirus Securities; For Schaeffler India, numbers in the above table would refer to CY18/CY19E/CY20E
Refer to important disclosures at the end of this report 6 October 2019| 1

Automotive and Industrial Bearings India Equity Research | Sector Note
Global bearings industry

Global demand at ~US$ 40bn with ~50% coming from Asia Pacific
Bearings are mechanical elements used to constrain relative motion of rotating equipment to a desired
motion and reduce friction between them. By doing so, they help increase energy efficiency and
While global bearings market exhibited longevity of machines. Bearings find usages in almost all industries — automobiles, railways, off-
healthy growth in last 4-5 years, they highway vehicles (construction, mining), metals, cement, renewable energy, aerospace, pulp & paper
face near-term challenges and industrial drives to name a few.
Bearings usage divided in two The global anti-friction bearings market (comprising ball & roller bearings) has grown at a ~4% CAGR
segments: Industrial (62%) and over 2013-18 to touch ~US$ 40bn in 2018 (Exhibit 1). Growth has been the strongest in developing
Automotive (38%). OEMs/aftermarket nations and end-user industries such as automobile, railways, off-highway and heavy industries.
account for ~70%/30% of demand However, if we were to interpret from the commentary of global majors, the bearings market is not
expected to demonstrate historical growth levels at least in the near term owing to (a) muted automobile
sales (largest end-user industry) across the globe (esp. China) and (b) not-so-encouraging outlook on
many industrial segments.
Exhibit 1: Global bearings market grows at a healthy pace in recent past; stands at ~US$ 40bn
Global Bearings Market (USD Bn) Growth (Yoy%)

45 7% 8%
40 7%
5% 6%
35
4% 5%
30 4%
3%
25 3%
20 2%
0% 1%
15
0%
10 -1%
32.5 33.5 33.5 35.0 37.5 39.5
5 -2%
2013 2014 2015 2016 2017 2018
Source: AB SKF, Equirus Securities
Exhibit 2: Industrial accounts for >60% of global bearings demand Exhibit 3: Share of OEM demand (industrial + auto) at ~70%
Automotive
Aftermarket
8%
Industrial
Automotive OEM
38% 40%
Automotive
OEM
30%
Industrial
62%
Industrial Aftermarket
22%
Source: AB SKF, Equirus Securities Source: AB SKF, Equirus Securities
As per AB SKF’s estimates, industrial applications account for ~62% of bearings usage and automotive
the remaining. Within industrial, the share of aftermarket/replacement (MRO - maintenance, repair
and operations) stands at ~35% and at ~20% in case of the automotive segment (Exhibits 2-3).
6 October 2019| 2
Top-6 customers account for ~60% of market; China contributes ~30% to world demand
SKF group is the market leader in global bearings industry with other major multinational players such
as Schaeffler Group (Germany), Timken (USA), NSK (Japan), NTN (Japan) and JTEKT (Japan) also
commanding a significant share. It is estimated that these top-6 players account for ~60% of the world
market; Chinese manufactures (including major players like Wafangdian Group, Wanxiang Qianchao
Major MNCs have set up manufacturing
and Luoyang) account for another ~20% market share. The remaining ~20% is shared between
units worldwide with top-6 forming
regional and niche bearing companies.
~60% of global bearings production
In terms of geography, Asia Pacific has emerged as the fastest-growing market given rapid
industrialization; the region now accounts for ~50% of the global market vs. <40% fifteen years ago
(exhibit 4). Within Asia Pacific, China alone represents ~60% of the market (i.e. ~30% of global
demand) due to its large manufacturing base – right from automobiles to any kind of industrial
machinery.
Exhibit 4: Asia Pacific has emerged as the fastest growing region and accounts for ~50% of demand
Europe, 22%
North America, 22%
Latin America,
3%
Middle East &

Africa, 3%
Asia Pacific, 50%
Source: AB SKF, Equirus Securities
6 October 2019| 3
Indian bearings Industry

India’s bearing demand crosses Rs 100bn mark, imports have ~40% share
Automobile sector accounts for ~47% As per SKF estimates, India’s ball and roller bearing industry has grown at a modest ~5% CAGR during
of India’s bearings demand. Share of the last eight years to cross the ~Rs 100bn mark in FY19. Its share in global market stands at <4% as
industrial segment would increase of now. Indian market is led by three multinational players (SKF, SCHFL and Timken) and two domestic
gradually with a pick-up in domestic producers (NBC and NRB); these 5 players account for ~74% of the domestic market share.
manufacturing activities
The Indian bearing market is characterised by high dependence on the automobile sector vis-à-vis
global average. The automobile sector — both OEM and aftermarket — accounts for ~47% of
demand vs only ~38% for the globe as (a) automobile production in India has grown at a ~10%
CAGR in volume terms over the last 15 years and (b) industrial automation level (a key driver of
bearings demand in developed countries) in India is still at a nascent stage.
Exhibit 5: Indian bearing industry exhibits moderate growth in current decade to reach Rs 100bn
Indian Bearings Industry (Rs bn) Growth (Yoy%)

115 21% 25%
105 20%
95 14%
15%
85
75 6% 5% 10%
3% 4%
65 5%
0%
55 0%
45 -7%
-5%
35
25 -10%
66 75 75 70 85 90 93 98 101
15 -15%
CY10 CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19
Source: SKF India, Equirus Securities
Customized industrial bearings mostly Overall, ~60% of the demand is catered to by domestic production whereas ~40% products are
imported as they don’t provide enough imported mainly from sister companies of these large MNCs, China and Japan. According to ICRA’s
economies scale to manufacture in estimates, 60-70% of imports are done by large manufacturers mainly for the industrial segment due
India to the requirement of customized bearings. Rest of the imports (~30-40%) are catered to by China.
Present demand levels in these segments do not provide required economies to scale to justify localizing
production in India. On the other hand, almost all automobile bearings are produced locally due to
huge volumes. Chinese bearings have been very competitive in terms of pricing and mainly used in
aftermarket (MRO) requirements.
Exhibit 6: Higher share of auto bearings in India vs global market Exhibit 7: Imports have a visible share, unlikely to decline soon
Automotive, Imports, 40%

Domestic
Industrial, 47%
Production,
53% 60%
Source: Timken India, Equirus Securities Source: Timken India, Equirus Securities
6 October 2019| 4
Ball, roller bearings contribute almost equally to market

Bearings are mainly classified as ball and roller bearings. Ball bearings are typically used where loads
are lighter; as against this, roller bearings find application in tougher conditions as they are able to
withstand shocks to a greater extent. However, on account of a larger contact area and consequently
higher friction, roller bearings can operate at lower speeds than ball bearings of a similar size.
Exhibit 8: Types and usages of various bearings; both ball and roller bearings can be further classified as thrust, angular contact bearings etc.
Ball bearings most widely used bearings.

They are suitable for high speeds, Ball Bearings are used in 2Ws, 4Ws, fans,
accommodate both radial and axial loads centrifugal pumps, electric motors,
Ball Bearings
and require little maintenance. Although alternators, generators, power transmission
small contact area provides low rolling equipment etc.
friction, it limits their load-carrying capacity.
In Cylindrical Roller Bearings, cylinders are

used as the rolling elements as opposed to
Cylindrical Roller Bearings find applications
Cylindrical Roller balls in ball bearings. They have a relatively
in Railways, gearboxes, compressors, mining
Bearings high radial load capacity due to greater
equipment, rolling mills, machining units etc.
contact area and are also suitable for high
speed applications.
Spherical Roller Bearings are used in

applications where severe misalignment Spherical Roller Bearings are widely used in
Spherical Roller exists either from mounting or shaft. They can suspension systems, heavy industrial
Bearings withstand relatively heavy radial loads and conveyors, industrial fans, construction
some axial loads in either direction. They are equipment etc.
also very resistant to shock loads.
Tapered roller bearings have tapered inner

and outer ring raceways as well as tapered They find applications in Railways, M&HCVs,
rollers. They are designed to accommodate mining and construction equipment,
Tapered Roller Bearing
combined loads, i.e. simultaneously acting conveyors, textile machinery and tooling
radial and axial loads. This type of bearings applications.
can work with a broad range of speeds.
Needle roller bearings are essentially Needle Roller Bearings are heavily used in
cylindrical roller bearings with ratio of length automobile components such as rocker arm
of cylindrical rollers to their diameters being pivots, pumps, compressors, and
Needle Roller Bearings at least ~4x. Compared to ball bearings and transmissions. They are also used in engines,
ordinary roller bearings, they have a greater valve trains, steering and braking systems,
surface area in contact with the races, so they axle supports, textile industry, power tools,
can support a greater load. and appliances.
Source: Industry, Equirus Securities
6 October 2019| 5
Exhibit 9: Ball bearings account for ~50% of bearings usage in India

SKF the market leader in ball bearings,
SCHFL in spherical roller and
cylindrical roller bearings, and Timken
Spherical Roller
in tapered roller bearings Bearings, 9%
Cylindrical Roller
Bearings, 10%
Ball Bearings, 50%
Tapered Roller
Bearings, 23%
Needle Roller
Bearings, 8%
Source: Industry, Equirus Securities
Exhibit 10: Industry players & their expertise

Bearings Type Key Players
Ball Bearings SKF India (leader), Schaeffler India, Timken India, NBC
Cylindrical Roller Bearings Schaeffler India (leader), SKF India, NBC
Spherical Roller Bearings Schaeffler India (leader), SKF India, NBC
Tapered Roller Bearing Timken India (leader), NBC, SKF India, Schaeffler India
Needle Roller Bearings NRB Bearings (leader), SKF India, Schaeffler India
Source: Companies, Industry, Equirus Securities
6 October 2019| 6
Competitive landscape and industry dynamics

Top-5 players enjoy ~74% share; industry growth follows auto production, IIP
The Indian bearings industry is dominated by three international players (SKF, SCHFL and Timken) and
Indian market dominated by European,
two domestic players (NBC Bearings and NRB Bearings) who together command ~74% of the market
American & Japanese MNCs; domestic
share. Chinese imports account for another 12-14% of the market, with Japanese players (NSK, NTN
players like NBC Bearings, NRB
and JTEKT mainly) and local manufacturers (Menon Bearings, Bimetal Bearings etc.) catering to the
Bearings and ABC Bearings have done
rest. Chinese imports are priced aggressively and mainly used in aftermarket/ replacement
well over the years
applications. Timken India has recently acquired ABC bearings (a medium-sized Indian player) to
strengthen its market share in tapered roller bearings and enhance export capacities.
Exhibit 11: MNCs account for lion’s share of Indian bearings market; SKF is the market leader
Others, 26% SKF India, 25%
NRB Bearings, 7%
Schaeffler India,
16%
Timken India*, 11%
NBC Bearings, 15%
Source: Industry, Company Filings, Equirus Securities; * Market share of Timken India includes ABC Bearings as well
Bearings demand is closely related to (a) production of automobiles in the country and (b) IIP as it
Revenue CAGR of top-8 bearings players encompasses all user industries of bearings and is the barometer of industrial activities in the country.
declines to ~5% over FY12-FY18 from a Revenues of India’s top-8 bearings companies (both domestic and exports) grew at a solid CAGR of
solid ~18% over FY06-FY12 ~18% over FY06-FY12; this coincided with rapid growth in automobile production (volume CAGR of
~13% during this period) and robust IIP growth (averaged ~8% between FY06-FY12). However,
bearings revenue CAGR tapered down to only ~5% over FY12-FY18, a period which saw India’s
automobile production grow only a at ~6% CAGR (volume terms) and average IIP growth of ~1.9%.
Exhibit 12: Bearing revenue growth declines of late due to muted growth in industrial activity
Revenue of Top-8 Bearings Companies (Rs Mn)

1,05,000
95,000
85,000
75,000
65,000
55,000
45,000
35,000
24,645
33,450
37,111
39,837
41,211
54,289
66,701
65,501
67,190
75,222
84,484
82,297
91,451
25,000
15,000
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Company Filings, Equirus Securities; Revenues of companies comprise of both domestic and export sales
6 October 2019| 7
Exhibit 13: Automobile production volumes have weakened after robust growth in FY06-FY12
CAGR (FY06-12) CAGR (FY12-FY18)

18%
16% 16%
16%
14% 13% 13%
12%
12%
10%
8% 7%
6%
6% 4%
4% 3%
2%
0%
-2% -1%
Tapering down of bearings growth over Passenger Vehicles Commercial Three Wheelers Two Wheelers Total Vehicles
FY12-FY18 has coincided with muted (PVs) Vehicles (CVs)
growth in automobile production and Source: SIAM, Equirus Securities
tepid IIP growth
Exhibit 14: IIP growth has also been muted after a strong performance in FY06-12
IIP Growth (%)

Average: 8.0% Average: 1.9%
18%
15.5%
16%
12.9%
14%
12%
10% 8.6% 8.2%
8%
5.3%
6% 4.4% 3.8%
2.9% 2.8% 2.4%
4%
2.5% 1.1% 0.7%
2% -0.1%
0%
-2%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: MOSPI, Equirus Securities; We have used 2004-05 series up to FY17 and 2011-12 series thereon
As per RBI’s OBICUS survey on the manufacturing sector, blended capacity utilization stood at only
Blended capacity utilization of India’s ~76% in 4QFY19 and is far away from the high of ~83% in 4QFY11 (Exhibit 15). Therefore, we
manufacturing sector stands at ~76%, expect aftermarket/replacement/MRO demand to go up first in the near term for industrial segment as
near its historical average. capacity utilization increases. Post that, we would see fresh capex-led demand from OEMs. It could
help benefit operating margins as typically aftermarket fetches higher margins than the OEM business.
Aftermarket demand set to benefit in
near term and OEM demand Exhibit 15: At present, manufacturing sector capacity utilization level near historical average
afterwards.
India's Manufacturing Capacity Utilization (%)
83%
84%
82%
80%
78% 76%
76%
74%
72%
70%
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
3QFY11
1QFY12
3QFY12
1QFY13
3QFY13
1QFY14
3QFY14
1QFY15
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18
3QFY18
1QFY19
3QFY19
Source: RBI’s OBICUS Survey on Manufacturing Sector, Equirus Securities
6 October 2019| 8
MNCs to increase localization for some industrial SKUs to improve margins

International companies tend to procure special purpose industrial bearings from their sister concerns
SCHFL has much better localization globally instead of manufacturing them in India (especially true for SKF and SCHFL). It does not make
levels than SKF due to a higher economic sense to manufacture low-volume bearings in India as it is a capital-intensive business.
proportion of high-volume auto biz However, both SKF and SCHFL have guided to increase the level of localization as and when
production of select bearings becomes viable in India. SKF has brought down the percentage of traded
goods in the revenue mix by ~285bps over CY11-FY19 whereas SCHFL by ~240bps over CY11-
CY18. SCHFL’s localization levels improved substantially in CY17/FY18 after its merger with INA and
LuK as they had better localization levels (~65% for INA, ~95% for LuK) than SCHFL.
Exhibit 16: SKF has a significantly higher share of traded/imported products vs SCHFL
SKF India (% of Traded Products) Schaeffler India (% of Traded Products)

60%
48% 46%
50% 46% 46% 45%
44% 44%
40%
40% 34%
34% 33%
31% 32%
30% 29%
30% 26%
20%
10%
CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19
Source: Companies, Equirus Securities; For Schaeffler India, above statistics are from CY11 to CY18 as it follows December as
financial year ending
Rising localization of industrial bearings could give a huge boost to operating margins as manufactured
goods carry significantly higher gross margins than traded products. For traded products, Indian units
of MNCs typically work as a distribution entity for their fellow subsidiaries globally.
Exhibit 17: SKF’s manufacturing gross margins higher than SCHFL’s Exhibit 18: SCHFL achieves better gross margins on traded products
Gross Margin on Traded Goods (%) Gross Margin on Traded Goods (%)
70% Gross Margin on Manufactured Goods (%) 60% Gross Margin on Manufactured Goods (%)
58.4% 51.1%
55.3% 56.6% 56.7% 48.2% 47.3% 46.8% 48.2% 47.4%
60% 52.2% 52.5% 50%
51.9% 43.1% 42.8%
48.6%
50%
40%
40% 27.4%
30% 26.1%
23.6%
30% 21.6%
19.3% 18.5%
19.7%
15.5% 17.1% 15.8% 20% 15.1%
20% 14.0% 12.9% 13.4% 13.2% 11.5%
10% 10%
0% 0%
CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18
Source: SKF India, Equirus Securities Source: Schaeffler India, Equirus Securities
SKF has been doing most of the localization through its another fellow subsidiary – SKF Technologies
– which has a plant in Ahmedabad. Therefore, the margin improvement is unlikely to match the
increase in localization levels. In contrast, SCHFL does not have any unlisted entity in India after the
merger of FAG Bearings, INA and LuK; therefore, all margin benefits from higher local production
would accrue to the listed entity.
6 October 2019| 9
Exports not a key focus area for SKF, SCHFL

Timken considers India as an export hub for its global customers as it derives >25% of its revenues
SKF exports more towards automotive from exports. Indian manufacturers such as NBC and NRB Bearings are also active in participating in
bearings whereas SCHFL exports more the export opportunity (Exhibit 19). On the other hand, both SKF and SCHFL follow ‘in the region, for
of industrial bearings the region’ kind of approach. There have been multiple instances where both players have consciously
reduced focus on exports when their capacities were running at optimal levels as they did not have
spare capacity to cater to exports though the opportunity was available. For SCHFL, the proportion of
exports has come down substantially (~11% in CY17 from ~17% the previous year) after the merger
with INA and LuK as both of them are more domestic-focused.
Exhibit 19: Proportion of exports in revenue mix the highest for Timken India
SKF India Schaeffler India NBC Bearings Timken India NRB Bearings
40% 37%
35% 33%
29%
30% 28%
24%
24%
25%
20% 19% 20% 21% 20% 21%
19%
20% 18% 17% 17%
15% 12% 11%
10% 10%
10% 8% 7% 8%
7%
5%
0%
FY15 FY16 FY17 FY18 FY19
Source: Company Filings, Equirus Securities
Note that (a) FY16 was a 15-month period for SKF as it changed its financial year ending from December to March
and (b) SCHFL's financial year ends in Dec, therefore SCHFL's export data is from CY14 to CY18; CY17 and CY18
numbers are for merged entity.
R&D expenses, royalty/technical fees – huge cost components

All players in the bearings industry, which is technologically-intensive, either have access to extensive
SKF & SCHFL spend the most among R&D of the parent or invest on their own to maintain a technological edge.
peers on R&D and royalty expenses.
Globally, AB SKF/ Schaeffler AG spend Exhibit 20: Bearings companies spend significantly to maintain technological edge
~3%/6% of sales on R&D Company Technological tie-ups and R&D expenses
Doesn’t provide details of R&D expenses; pays ~3% royalty and ~1.9%
trademark fees for manufactured products (no fees are paid for traded goods);
SKF India
Royalty and Trademark expenses have averaged ~2.7% of sales for the last three
years
R&D expenses have averaged ~1.3% of sales for the last two years; pays ~2.7%
Schaeffler India (FAG fees for use of technology (royalty) for manufactured products (no fees are paid
+ INA + LuK) for traded goods); Overall fees paid averaged ~1.9% of sales for the past two
years
Doesn’t provide details of R&D expenses; royalty expenses have averaged ~2% of
Timken India
sales for the past three years
R&D expenses have averaged ~1.5% of sales in the past three years; Company
was incorporated in collaboration with French needle bearing manufacturer
NRB Bearings
Nadella which was eventually acquired by Timken. Promoters of NRB bought out
Timken’s 26% stake in the company in 2005.
Company has technical collaborations with NTN (Japan) and Amsted Rail (USA);
NEI (NBC Bearings) it has received Deming Prize in 2010. It is the longest-running and one of the
highest awards on Total Quality Management (TQM) in the world.
6 October 2019| 10
MNCs beat Indian bearings manufacturers on most operational metrics

Bearing companies have achieved Bearings companies (both MNCs and home-grown firms) have been able to register heathy ROEs and
substantial improvement in operating ROICs over the last 4-5 years. Also, barring 1-2 companies, operating cash flow generation has also
margins over the last 4-5 years been strong with almost no stress on the cash conversion cycle. MNCs boast of net cash balance sheets
whereas Indian players (NRB, NBC) have also been able to bring down the net D/E ratio.
Exhibit 21: MNCs beat Indian bearings manufacturers on most operational metrics
SKF India Schaeffler India Timken India
Rs Mn CY14 FY16* FY17 FY18 FY19 CY14 CY15 CY16 CY17 CY18# FY15 FY16 FY17 FY18 FY19
Revenue 24,136 29,973 26,314 27,504 30,345 16,322 17,244 17,963 19,187 45,615 9,290 10,508 10,562 12,340 16,644
Growth (Yoy%) 6% 24% -12% 5% 10% 16% 6% 4% 7% 138% 29% 13% 1% 17% 35%
EBITDA 2,812 3,615 3,362 4,348 4,859 2,417 3,053 2,969 3,665 7,396 1,337 1,622 1,580 1,633 2,886
EBITDAM (%) 11.7% 12.1% 12.8% 15.8% 16.0% 14.8% 17.7% 16.5% 19.1% 16.2% 14.4% 15.4% 15.0% 13.2% 17.3%
Net Profit 2,028 2,559 2,439 2,959 3,358 1,529 1,975 1,951 2,380 4,630 807 948 972 920 1,486
Net Profit Margin (%) 8.4% 8.5% 9.3% 10.8% 11.1% 9.4% 11.5% 10.9% 12.4% 10.2% 8.7% 9.0% 9.2% 7.5% 8.9%
Receivable Days 53 52 69 67 61 65 66 67 61 56 63 64 67 61 58
Inventory Days 41 38 52 54 52 40 44 50 52 60 60 61 65 64 62
Payable Days 44 38 41 46 44 51 48 52 53 55 31 35 47 52 47
Cash Conversion Cycle 50 52 80 75 68 54 61 66 60 61 92 91 85 73 72
CFO 2,177 262 1,150 3,672 1,810 1,174 1,819 1,928 2,408 2,382 425 1,014 1,641 390 2,488
CFO/EBITDA (%) 77% 7% 34% 84% 37% 49% 60% 65% 66% 32% 32% 63% 104% 24% 86%
Net Fixed Asset Turnover 6.7 9.3 9.1 9.9 11.2 4.2 4.8 4.9 5.0 8.2 9.1 8.6 5.7 5.1 3.9
Total Debt@ 271 925 634 1,131 1,224 498 322 271 296 971 132 92 301 512 1,477
Cash & Cash Equivalents 5,348 6,973 7,403 8,962 6,476 3,295 4,704 6,406 8,306 8,476 404 717 1,089 819 1,997
Net D/E -0.4 -0.4 -0.4 -0.4 -0.3 -0.3 -0.3 -0.4 -0.5 -0.3 -0.1 -0.1 -0.1 0.0 0.0
ROE (%) 15% 17% 14% 16% 19% 15% 16% 14% 15% 18% 20% 20% 17% 14% 15%
ROIC (%) 15% 16% 13% 16% 18% 14% 16% 14% 15% 18% 19% 19% 16% 13% 13%
NRB Bearings NBC Bearings Menon Bearings

Rs Mn FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 FY19
Revenue 6,703 6,749 7,255 8,551 9,649 13,386 14,523 15,678 15,630 18,702 1,032 1,114 1,236 1,457 1,740
Growth (Yoy%) 10% 1% 7% 18% 13% 12% 8% 8% 0% 20% 19% 8% 11% 18% 19%
EBITDA 1,231 1,105 1,167 1,683 1,851 2,315 2,351 2,651 2,842 3,662 225 290 334 375 431
EBITDAM (%) 18.4% 16.4% 16.1% 19.7% 19.2% 17.3% 16.2% 16.9% 18.2% 19.6% 21.8% 26.0% 27.0% 25.8% 24.8%
Net Profit 532 420 517 907 917 885 851 951 975 1,404 115 149 192 214 254
Net Profit Margin (%) 7.9% 6.2% 7.1% 10.6% 9.5% 6.6% 5.9% 6.1% 6.2% 7.5% 11.2% 13.4% 15.6% 14.7% 14.6%
Receivable Days 105 115 106 91 85 62 61 56 60 55 68 75 80 81 78
Inventory Days 84 84 80 70 81 80 80 84 88 83 33 35 35 34 32
Payable Days 44 48 48 45 43 41 37 38 41 46 24 21 22 24 22
Cash Conversion Cycle 145 150 138 117 122 101 104 102 107 92 77 88 93 91 89
CFO 706 919 851 1,335 719 2,526 1,788 2,179 1,988 2,983 76 48 199 227 255
CFO/EBITDA (%) 57% 83% 73% 79% 39% 109% 76% 82% 70% 81% 34% 16% 60% 61% 59%
Net Fixed Asset Turnover 2.7 2.6 2.9 3.4 3.3 1.8 1.6 1.5 1.0 0.9 2.8 3.1 3.4 3.4 3.4
Total Debt@ 3,526 3,353 2,796 2,218 2,923 5,721 7,217 7,977 9,216 8,112 203 163 249 288 494
Cash & Cash Equivalents 280 320 236 375 394 10 12 16 121 450 90 54 169 185 193
Net D/E 1.3 1.1 0.8 0.5 0.5 0.8 0.9 0.9 0.5 0.4 0.3 0.2 0.1 0.1 0.3
ROE (%) 22% 16% 18% 27% 22% 13% 11% 12% 7% 7% 29% 31% 33% 30% 30%
ROIC (%) 11% 9% 11% 17% 15% 10% 9% 8% 6% 6% 22% 24% 25% 23% 23%
Source: Companies, Ace Equity, Equirus Securities
* FY16 was a 15 months period for SKF as they changed their financial year ending from December to March
# CY18 financials for Schaeffler India are for merged entities (FAG + INA + LuK)
@ Total Debt includes Other Long Term Liabilities as well
6 October 2019| 11
Demand drivers
Indian bearings industry set to exhibit modest growth over next 2-3 years
Auto industry to see healthy growth, if not as strong as over last two decades
Indian automobile volumes have Over the last two decades, India’s automobile volumes have posted robust growth (Exhibit 22) barring
grown at >10% CAGR over the last the last 3-4 years. India has been amongst the highest automotive growth markets in the world (11%
two decades driven by rising volume CAGR over FY02-FY19) across vehicle categories on account of (a) low ownership levels per
disposable incomes, lower penetration capita, (b) lower share of rail freight in transportation vis-à-vis other major economies, (c) inadequate
and increasing urbanization investments in public transport as against rising transportation requirements due to increasing
urbanization, and (d) improvement in road infrastructure, especially on state and national highways.
As per McKinsey & Company’s analysis, 2Ws/PVs per 1,000 people in India are expected to rise to
~130/46 in 2025 vs just ~92/28 in 2018.
Exhibit 22: India’s automobile volumes have grown at ~11% CAGR during FY02-FY19
Passenger Vehicles (PVs) M & HCVs LCVs Three Wheelers Two Wheelers
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: SIAM, Equirus Securities
We expect automobile volumes to In the recent past, Indian automotive sector has witnessed a sharp slowdown (April-August production
continue to grow at a healthy pace volumes down by ~12% yoy) on account of (a) liquidity crunch for NBFCs as most of new 2Ws/PVs/CVs
once near-term uncertainties are over are financed by NBFCs, and (b) higher acquisition cost of vehicles due to rise in upfront insurance
premiums and technological changes such as mandatory CBS/ABS, improved safety norms and
transition from BS4 to BS6 – these measures have led to significant increase in new vehicle ownership
cost.
However, we believe recent govt. measures would help revive the demand scenario to some extent:
(1) Liquidity & interest rate transmission measures: If repo rate cuts are transmitted to actual
interest rates, it is likely to help demand as financing becomes cheaper for consumers.
However, until higher interest rates provided by PF/PPF/NSCs also come down, banks might
not be able to significantly lower lending rates.
(2) Cut in corporate tax rate: It would help auto manufacturers generate better operating cash
flows and in turn could result into lowering of product prices by manufacturers.
(3) Increase in depreciation rate on all vehicles bought till Mar’20 from 15% to 30% can improve
demand from corporate buyers in the remaining part of FY20, but only to slide in FY21 as it
will lead to preponement of demand and not creation. However, it will benefit CV segment
the most in FY20.
(4) Earlier, Ministry of Road, Transport & Highways (MORTH) had proposed a substantial hike
in vehicle registration fees (up to ~8x to 20x across different segments). These hikes have
been deferred till Jun’20; however, if proposed fee hikes are implemented post Jun’20, it will
have an impact on demand in FY21.
Overall, we expect automobile volume growth to trend in high single digits over the medium term once
near-term uncertainties are over.
6 October 2019| 12
Railway demand (both on passenger and freight fronts) to be a major driver

All major players expect railway share Indian Railways’ (IR) modernizing drive on both passenger coaches and freight wagons is set to boost
to inch up. Timken has the highest revenue contribution of railways for bearing companies. At present, railways bearings market stands at
revenue contribution from Railways ~Rs 10bn (Exhibit 23) and commentary from major players suggests that it would easily grow in a
(~18%) among major players double-digit CAGR over the next 4-5 years. Railways contributed ~7%/3-3.5%/18% of SKF/SCHFL/
Timken’s revenues in FY19/CY18 (market shares in Exhibit 24 calculated based on this).
Exhibit 23: Railways bearings market stands at ~Rs 10bn at present Exhibit 24: It is dominated by few major players
Locomotives, SKF India,

20% 21%
NEI & Others,

34%
Passenger
Coaches, 40%
Schaeffler
India, 15%
Freight
Coaches, 40% Timken India,
30%
Source: SKF India, Equirus Securities Source: Companies, Industry, Equirus Securities
Exhibit 25: Demand drivers and likely impact on major bearings players
Freight: DFC and shift to higher axle load wagons
▪ Two Dedicated Freight Corridors (DFCs) – Eastern and Western - are under the execution stage and
expected to be operationalized by December 2021. Railways plan to create another 3 DFCs (East-
West, North-South and East Coast) at a total investment of ~Rs 3tn. Presently, railways procure
~10K wagons annually (existing fleet of ~300K) which can potentially double in 2-3 years’ time as
IR would need to procure additional ~100K wagons for DFC routes.
▪ Existing 22T axle load wagons use E Class bearings whereas increasing adoption of K Class
bearings for both DFC procurement and usual procurement would result into much higher
realizations for the bearing companies.
Passenger: Shift to LHB coaches and introduction of high speed passenger trains
▪ Railways has planned to completely shift to Linke Hofmann Busch (LHB) coaches from the
conventional ICF coaches (for both new requirement and replacement requirement) in order to
enhance the safety. This would shift the bearing usage from Spherical Roller Bearings (SRB) to
Tapered Roller Bearings (TRB) and improve the bearing realizations.
▪ Government of India (GOI) has put in place ambitious plans to improve urban mobility through
metro rail projects. Apart from 10 operational metro projects, there are 5 projects under
construction and 16 projects under planning stage. It would result into additional demand for the
bearings industry. As per Timken India’s estimates, we would need ~4,000 new coaches for
metros/year and would result into additional bearings revenue of ~Rs 640-800mn.
Impact on major bearings players
▪ SKF India: We believe SKF would stand to benefit the most from conversion to LHB coaches as they
are a majority share supplier over there. Also, its share in freight segment (in single digit as of now)
should also improve gradually as now it is eligible to participate in full tender quantity vs being
restricted to only 10-15% of the tender quantity earlier.
▪ Schaeffler India: Company would benefit from a very strong refurbishing business on the metros
front. SCHFL has ramped up the offerings in Tapered Roller Bearings which are commonly required
in LHB coaches. It has secured several approvals (including the approval from Association of
American Railroads) which make it eligible to participate in the railway tenders.
▪ Timken India: Being the largest player in TRBs and partner of railways in the high speed train
projects such as Train 18, Timken India stands to gain from most of the current developments in
railways ecosystem.
Source: Companies, Indian Railways, Equirus Securities
6 October 2019| 13
Government’s massive infra push to drive demand from steel, cement, off-highway vehicles
As per IBEF estimates, India requires Bearings demand from sectors such as steel, cement and off-highway vehicles (roads, buildings,
infra investments of ~Rs 50tn by 2022 mining) is inter-linked and grows in-line with infrastructure development in the country. As the capacity
utilization in these sectors go up, Maintenance, Repair and Operations (MRO) demand of bearings go
up first and then it further goes up with the new capital expenditures to increase the manufacturing
capacities in these sectors. Some of the factors/policy plans that will help drive India’s infrastructure
development are as follows:
▪ Government of India (GOI) has given a massive push to the infrastructure sector by allocating ~Rs
4.56tn in the Union Budget of FY20.
▪ GOI has set a target to construct 65,000 kms of national highways at a cost of ~Rs 5.35tn by
2022. It also aims to upgrade 125,000 kms of road length over the next 5 years at an estimated
cost of ~Rs 803bn.
▪ GOI’s ‘Housing for All’ program aims to build 20mn/30mn urban/rural homes by 2022.
▪ Airports Authority of India (AAI) plans to spend >Rs 210bn during 2018-22 to build new terminals
in non-metro cities and expand the capacities of the existing airports.
▪ Annual investments in India’s logistics & warehousing sector is pegged to touch ~US$ 500bn by
2025.
▪ The National Steel Policy, 2017 aims to achieve steel production capacity of 300MT by 2031 from
138MT in 2018. It is expected to translate into additional investments of ~Rs 10tn.
Exhibit 26: National Steel Policy aims to take steel production capacity Exhibit 27: Substantial additions to India’s cement capacity are
to 300MT by 2031 expected over the next 4-5 years
Crude Steel Production Capacity (mn tonnes) Cement Production Capacity (mn tonnes)
350 600
550
300
550
300
500 478
461
250 428
450 402 417
200 400 363 376
138 350 328

310
150 122 128
97 102 110 300
80 91
100 66 75 250
60
50 200
150
0
100
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY31P
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY25E
Source: IBEF, Equirus Securities Source: IBEF, Equirus Securities
Digitization & Industry 4.0 to shore up demand for condition monitoring products
Technological basis for Industry 4.0 is digitally linked systems – interconnected production, logistics,
Sensor-enabled bearings have
suppliers and customers – that can help production automation. Proactive condition monitoring of
emerged as key enablers for achieving
rotating equipment in a plant through bearings has emerged as a key enabler in achieving that. Both
Industry 4.0
SKF and SCHFL provide remote condition monitoring solutions which help customers (in industries such
as Steel, Cement, Paper & Pulp) optimize plant utilization, increase asset reliability and have zero
surprise failures. It has resulted into (a) an additional revenue stream for these companies and (b) an
increased level of engagement with customers which help in securing additional product orders.
6 October 2019| 14
Challenges
Rising competition from Japanese players, EV penetration
Japanese threat
Faced by almost stagnant matured markets, leading Japanese bearings players have started looking
at India as a growth market. NSK, JTEKT (Koyo Bearings) and Nachi KG have established their
manufacturing facilities in India (vs directly importing from foreign locations) in last 10 years to be
more competitive in Indian market. As per our interactions with multiple channel partners of Japanese
bearings, these players have been aggressively expanding distribution networks and started focusing
on Industrial bearings apart from only automotive bearings earlier. They have also been successful in
replacing SKF/Schaeffler/Timken in a number of industrial OEM accounts.
Exhibit 28: Japanese players have started manufacturing locally in India
Company Approx. Revenue (last year) Commencement of Manufacturing Operations
NSK Rs 6,000mn 2008 (Chennai)
JTEKT (Koyo Bearings) Rs 3,000mn 2012 (Bawal in Haryana)
Nachi Rs 1,400mn 2013 (Neemrana in Rajasthan)
NTN NA Doesn’t have manufacturing operations in India
Threat from EVs (long-term impact)

Another long-term risk would be increasing penetration of EVs. Number of bearings required in an EV
would be lower as they won’t need many of bearings on engine and transmission fronts. In EVs, internal
combustion engine would be replaced by an electric motor, which will need a lower number of
bearings. Also, it would require a simpler transmission system (may be a two-speed transmission) in
place of 6/8 speed transmission systems; this would also need lower number of bearings.
However, fall in volume of bearings would partially be compensated by higher value per bearing on
two accounts: (a) manufacturers would use sensor-enabled bearings to collect data which can be
further analysed – such sensor bearings fetch higher realizations and (b) more of expensive ceramic
bearings would be used in EVs as they could provide electric insulation and are also light-weight.
6 October 2019| 15
SKF vs Schaeffler India – A comparison

SKF is primarily an automotive and industrial bearings player whereas SCHFL also offers a
comprehensive range of automotive components and systems (capabilities gained through its merger
with other two Schaeffler group entities – INA and LUK in 2018).
Exhibit 29: We expect SKF to outperform SCHFL on most operating parameters over the next 2-3 years
SKF India Schaeffler India
Rs Mn FY17 FY18 FY19 FY20E FY21E FY22E CY16 CY17 CY18# CY19E CY20E CY21E
P&L
Revenue 26,314 27,504 30,345 31,731 35,302 39,682 17,963 19,187 45,615 47,096 51,592 57,920
Growth (Yoy%) -12% 5% 10% 5% 11% 12% 4% 7% 138% 3% 10% 12%
Gross Profit 10,062 11,436 12,581 12,666 14,297 16,270 7,137 8,131 16,880 17,258 18,965 21,541
Gross Margins (%) 38.2% 41.6% 41.5% 39.9% 40.5% 41.0% 39.7% 42.4% 37.0% 36.6% 36.8% 37.2%
EBITDA 3,362 4,348 4,859 4,768 5,519 6,564 2,969 3,665 7,396 6,981 8,051 9,543
EBITDA Margin (%) 12.8% 15.8% 16.0% 15.0% 15.6% 16.5% 16.5% 19.1% 16.2% 14.8% 15.6% 16.5%
Net Profit 2,439 2,959 3,358 3,685 4,253 5,031 1,951 2,380 4,630 4,340 5,220 6,306
Net Profit Margin (%) 9.3% 10.8% 11.1% 11.6% 12.0% 12.7% 10.9% 12.4% 10.2% 9.2% 10.1% 10.9%
Revenue Contribution (%)
Manufactured Products 54% 60% 55% 71% 74% 68%
Traded Products 46% 40% 45% 29% 26% 32%
Automobile 38% 42% 42% 39% 39% 39% NA 51% 51% 47% 46% 46%
Industrial 54% 49% 52% 54% 55% 55% NA 38% 39% 42% 43% 43%
Exports 8% 9% 6% 7% 7% 6% NA 11% 10% 11% 11% 11%
India 92% 90% 93% 83% 89% 90%
Outside India 8% 10% 7% 17% 11% 10%
Gross Margins (%)
Manufactured Products 56.6% 58.4% 56.7% 47.4% 43.1% 42.8%
Traded Products 13.4% 13.2% 19.7% 18.5% 26.1% 21.6%
Expenses - % of Sales
R&D Expenses NA NA NA 0.8% 1.2% 1.3%
Royalty & Trademark Expense 2.6% 2.9% 2.7% 1.6% 1.9% 1.9%
Foreign Currency Stats
Expenses in Foreign Currency NA 9,372 11,181 7,282 12,037 16,267
Earnings in Foreign Currency NA 2,954 2,237 2,962 4,285 4,642
% RMs Imported NA 52% 56% 57% NA NA
Misc.
Other Income - % of PBT 23% 16% 18% 15% 15% 15% 23% 19% 13% 11% 12% 12%
Key Metrics
Receivable Days 69 67 61 65 65 65 67 61 56 60 60 60
Inventory Days 52 54 52 53 53 53 50 52 60 60 60 60
Payable Days 41 46 44 45 45 45 52 53 55 54 54 54
Cash Conversion Cycle 80 75 68 73 73 73 66 60 61 66 66 66
CFO 1,150 3,672 1,810 3,507 3,372 3,993 1,928 2,408 2,382 5,537 5,479 6,274
CFO/EBITDA (%) 34% 84% 37% 74% 61% 61% 65% 66% 32% 79% 68% 66%
Net Fixed Asset Turnover 9.1 9.9 11.2 10.9 10.3 10.1 4.9 5.0 8.2 5.7 5.4 5.7
Total Debt@ 634 1,131 1,224 1,124 1,024 924 271 296 971 394 394 394
Cash & Cash Equivalents 7,403 8,962 6,476 8,239 9,578 11,373 6,406 8,306 8,476 9,339 11,245 14,199
Net D/E -0.4 -0.4 -0.3 -0.4 -0.4 -0.4 -0.4 -0.5 -0.3 -0.3 -0.3 -0.4
ROE (%) 14% 16% 19% 20% 21% 21% 14% 15% 18% 15% 16% 18%
ROIC (%) 13% 16% 18% 19% 20% 21% 14% 15% 18% 15% 16% 17%
Core ROIC (%) 16% 22% 24% 25% 27% 29% 17% 21% 22% 18% 20% 22%
Dividend Payout (%) 22% 21% 18% 30% 30% 30% 10% 12% 20% 25% 25% 25%
Valuation Metrics (x)
P/E 44.8 35.9 30.5 27.8 24.1 20.4 35.8 29.3 28.4 30.3 25.2 20.8
P/FCFF 41.7 100.8 20.8 30.8 33.1 26.8 126.5 1130.0 220.2 46.6 37.4 26.9
EV/EBITDA 28.4 21.7 20.0 20.0 17.0 14.0 42.2 33.7 16.7 17.5 15.0 12.3
Dividend Yield (%) 0.5% 0.6% 0.6% 1.1% 1.2% 1.5% 0.3% 0.4% 0.7% 0.8% 1.0% 1.2%
Source: Companies, Equirus Securities
# CY18 financials for Schaeffler India are for merged entities (FAG + INA + LuK)
@ Total Debt includes Other Long Term Liabilities as well
6 October 2019| 16
Initiate SKF with ADD, SCHFL with REDUCE

SKF to trade at a premium to SCHFL
SKF (Initiate with ADD, TP of Rs 2,287 set at 28x TTM P/E)
We expect SKF to slightly outperform the Indian bearings industry over the medium term (~9% revenue
We initiate coverage on SKF with ADD
CAGR over FY19-FY22E) due to the following:
and a Sept’20 TP of Rs 2,287 at 28x
TTM P/E (~15% discount to last 5-year 1. It has started getting contracts for Gen3 bearings from leading Indian auto manufacturers; it
average) had lost to peers during the first round of Gen3 bearings at the end of last decade.
2. It has secured all approvals required for supplying railways freight bearings and would be
able to participate for the full quantity from next tender onwards vs restricted to 10-15% of
the tender quantity earlier.
3. Most automotive bearings of SKF are for the wheel-end; therefore, it would be affected to a
lesser extent than most other bearings players during the auto industry’s gradual shift to EVs.
We expect only ~50bps operating margin expansion for SKF over FY19-22E as (a) we estimate revenue
contribution of higher-margin automobile business to decline by ~300bps over this period, (b) benefits
from higher localization of industrial bearings would be limited as localization initiatives are to be
driven by SKF Technologies (a fellow subsidiary) and not the listed entity.
We estimate a ~9%/11%/9%/14% revenue/EBITDA/PBT/PAT CAGR over FY19-FY22E and ROE to

expand to ~21% by FY22E from ~19% in FY19. We initiate the coverage on the stock ADD and a
Sep’20 TP of Rs 2,287 set at 28x TTM P/E (~15% discount to its last 5-year average). We expect SKF
to trade at a premium to SCHFL on account of better earnings visibility and expansion in return ratios
vs a marginal contraction for SCHFL.
Schaeffler India (Initiate with REDUCE, TP of Rs 4,185 set at 26x TTM P/E)
We initiate coverage on SCHFL with We expect SCHFL revenues to see ~8% CAGR over CY18-CY21E due to the following:
REDUCE and Sep’20 TP of Rs 4,185 a) It is heavily dependent on the automotive industry, which is undergoing tough times (>60%
set at 26x TTM P/E (~25% discount to revenues come from domestic automobile industry – adjusted for 2Ws, CVs, tractors sales
its last 5-year average) which are accounted for in the industrial segment)
b) It would face challenges in improving content per vehicle owing to:
(1) Lon-term transition to EVs which could require lower bearings content
(2) Short-term transition from diesel to petrol engines which require lower content of
some components that SCHFL provides – dual mass flywheels, hydraulic lash
adjusters, finger followers.
On the other hand, we expect the company to benefit from (a) increased usage of TAROL bearings in
railways and (b) cross-selling opportunities and expanded geographic coverage arising from the
merger with INA and LuK.
We do not expect any meaningful operating margin expansion over CY18-CY21E (only ~25bps) as
operating efficiencies arising from merger synergies (optimization of warehousing and freight
movement and consolidation of functions such as finance, HR, IT, procurement and compliance) would
be offset by a decline in contribution of higher-margin automotive business in the revenue mix. We
estimate contribution of automotive business to decline to ~46% by CY21E from ~51% in CY18.
We estimate SCHFL’s revenue/EBITDA/PBT/PAT to grow at a CAGR (CY18-CY21E) of

~8%/9%/8%/11% with a marginal contraction in ROEs over this period. We initiate coverage on the
stock with REDUCE and a Sep’20 TP of Rs 4,185 set at 26x TTM P/E (~25% discount to its last 5-year
average). We expect SCHFL to trade at a discount to SKF as it may face some turbulence in the near
term (due to technological changes in the auto sector) and lower return ratios.
6 October 2019| 17
Exhibit 30: Relative valuation vis a vis Indian bearing companies

Price M Cap Sales EPS
Company Name Sales (Rs Mn) Sales Growth (%) CAGR EBITDA (Rs Mn) EBITDA Margin (%) EPS CAGR
(Rs) (Rs Mn)
(FY19- (FY19-
FY19 FY20E FY21E FY20E FY21E 21E) FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E 21E)
SKF India 2,073 1,02,399 30,345 31,731 35,302 5% 11% 8% 4,859 4,768 5,519 16.0% 15.0% 15.6% 68.0 74.6 86.1 13%
Schaeffler India* 4,203 1,31,378 45,615 47,096 51,592 3% 10% 6% 7,396 6,981 8,051 16.2% 14.8% 15.6% 148.1 138.8 167.0 6%
Timken India# 778 58,543 16,644 18,136 20,152 9% 11% 10% 2,915 3,666 4,273 17.5% 20.2% 21.2% 19.8 25.5 30.3 24%
NRB Bearings# 92 8,956 9,649 8,984 9,295 -7% 3% -2% 1,851 1,267 1,394 19.2% 14.1% 15.0% 12.4 6.1 7.1 -24%
Price M Cap
Company Name Net D/E P/E EV/EBITDA ROE ROIC Div Yield (%)
(Rs) (Rs Mn)
FY19 FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E
SKF India 2,073 1,02,399 -0.3 30x 28x 24x 20x 20x 17x 19% 20% 21% 18% 1% 1%
Schaeffler India* 4,203 1,31,378 -0.3 28x 30x 25xx 17x 18x 15x 18% 15% 16% 18% 1% 1%
Timken India# 778 58,543 -0.1 39x 31x 26 19x 15x 13x 15% 13% 14% 13% 0% 1%
NRB Bearings# 92 8,956 0.5 7x 15x 13x 6x 9x 8x 26% 12% 13% 17% 3% 4%
Source: Companies, Bloomberg, Equirus Securities; *For Schaeffler India, numbers in the above table would refer to CY18/CY19E/CY20E in place of FY19/FY20E/FY21E respectively; #Estimates
for Timken India and NRB Bearings are consensus estimates
Exhibit 31: Relative valuation vis-à-vis global bearing companies

M Cap Sales EPS
Company Name Price Sales (Mn) Sales Growth (%) CAGR EBITDA (Mn) EBITDA Margin (%) EPS CAGR
(Mn)
(CY18- (CY18-
CY18 CY19E CY20E CY19E CY20E 20E) CY18 CY19E CY20E CY18 CY19E CY20E CY18 CY19E CY20E 20E)
SKF AB (SEK) 155 70,566 85,713 86,155 86,675 1% 1% 1% 14,670 12,693 12,430 17.1% 14.7% 14.3% 14.4 13.6 13.5 -3%
Schaeffler AG (Euro) 7 4,514 14,241 14,347 14,645 1% 2% 1% 2,202 1,946 2,122 15.5% 13.6% 14.5% 1.3 1.1 1.2 -6%
Timken Company ($) 42 3,159 3,581 3,858 3,885 8% 1% 4% 642 747 762 17.9% 19.4% 19.6% 4.2 4.9 5.1 10%
NSK Ltd (Yen) 914 5,03,859 9,91,365 8,90,963 9,04,680 -10% 2% -4% 1,26,131 97,713 1,05,750 12.7% 11.0% 11.7% 107.5 60.2 66.8 -21%
NTN Corp (Yen) 310 1,65,064 7,33,569 6,89,100 7,06,171 -6% 2% -2% 65,871 55,317 61,467 9.0% 8.0% 8.7% -13.1 7.0 18.2 NA
JTEKT Corp (Yen) 1,216 4,17,436 15,20,893 14,93,900 15,32,000 -2% 3% 0% 1,34,171 1,24,140 1,32,100 8.8% 8.3% 8.6% 71.9 96.8 114.1 26%
M Cap
Company Name Price Net D/E P/E EV/EBITDA ROE ROIC Div Yield (%)
(Mn)
CY18 CY18 CY19E CY20E CY18 CY19E CY20E CY18 CY19E CY20E CY18 CY19E CY20E
SKF AB (SEK) 155 70,566 0.1 11x 11x 12x 5x 7x 7x 21% 17% 16% 15% 4% 4%
Schaeffler AG (Euro) 7 4,514 0.8 5x 6x 6x 3x 4x 3x 25% 21% 22% 13% 6% 7%
Timken Company ($) 42 3,159 0.9 10x 9x 8x 7x 6x 6x 20% 22% 19% 13% 3% 3%
NSK Ltd (Yen) 914 5,03,859 0.2 9x 15x 14x 5x 7x 6x 9% 6% 6% 6% 4% 4%
NTN Corp (Yen) 310 1,65,064 1.1 -24x 44x 17x 6x 8x 7x -4% 3% 5% -7% 5% 5%
JTEKT Corp (Yen) 1,216 4,17,436 0.2 17x 13x 11x 4x 5x 4x 3% 7% 8% 3% 4% 4%
Source: Companies, Bloomberg, Equirus Securities
6 October 2019| 18
6 October 2019
Initiating Coverage Note
SKF India Ltd

CMP Target Price
Poised for industry-leading growth ahead Rs 2,073 Rs 2,287

Sept'20
Rating Upside
ADD 11%
Stock Information
Reasonably priced; initiate coverage with ADD
Market Cap (Rs Mn) 102,399
➢ SKF India (SKF), a subsidiary of AB SKF (global bearings giant, headquartered in
Sweden), is the leader in India’s automotive and industrial bearings industry with >25% 52 Wk H/L (Rs) 2,232/1,620
market share. Buoyed by India’s automobile production growth and an uptick in Avg. Daily Volume (1yr) 26,544
industrial activities over the last decade, the company has grown its revenues/ Avg. Daily Value (Rs Mn) 50.7
EBITDA/PAT at a ~8%/14%/15% CAGR over CY09-FY19. Equity Cap (Rs Mn) 513
➢ Over the next three years, we expect it to broadly maintain a similar growth profile as Face Value (Rs) 10
higher-than-historical growth rates in the industrial segment would be offset by lower- Share Outstanding (Mn) 49.4
than-historical growth in automotive segment. We estimate a revenue/EBITDA/PAT
Bloomberg Code SKF IN
CAGR of ~9%/11%/14% over FY19-FY22E with FY21E/FY22E ROEs of ~21% each.
Ind Benchmark BSETCG
➢ We initiate the coverage on SKF with ADD and a Sep’20 TP of Rs 2,287 set at 28x
TTM P/E (~15% discount to last 5-year average). Ownership (%) Recent 3M 12M
Promoters 53% 0% 0%
DII 26% 0% 1%
Market share to improve slightly, financial profile to become healthier
FII 8% 0% -1%
▪ To outgrow bearings industry in medium term: We expect SKF to slightly outgrow the
Public 14% 0% 0%
Indian bearings industry over the medium term (~9% revenue CAGR over FY19-
FY22E) as (a) it is making up for lost ground in Gen3 (HUB3) bearings for PVs, (b) it
would continue to outperform peers on the CV front, (c) the impact of EV transition
would be lower on SKF vis-à-vis other players and (d) it would be able to participate
for full quantity for railways freight demand from the next tender.
▪ Revenue mix to shift in favor of lower-margin industrial segment: We estimate industrial
segment (~12% CAGR) to outstrip growth in the automotive segment (~6% CAGR)
over FY19-FY22E. Consequently, the share of industrial (highly import-dependent)
would likely reach ~55% by FY22E (+300bps over 3 years).
▪ EBITDAM expansion to be modest: We expect only a ~50bps expansion in operating
margins over FY19-FY22E as (a) the contribution of higher margin automobile business
in the revenue mix would come down by ~300bps amid tough demand conditions,
and (b) benefits from higher localization of industrial bearings would be limited as
localization initiatives are to be driven by SKF Technologies (a fellow subsidiary) and Relative price chart
not the listed entity. However, an increasing aftermarket share, higher-value products
SKF IN Equity Nifty Index
like HUB3 and Class K bearings, and cost savings due to IDC would lend some margin 2,400
support. 2,200
▪ FCF generation to remain strong, return ratios to improve: We estimate FCF generation 2,000
of >Rs 10bn over FY19-FY22E even as investments in capacities would be higher than 1,800
the historical average. Also, we expect ROE/ROIC to expand by ~200bps/300bps to 1,600
reach ~21%/21% by FY22E. Key risks to our estimates would be delayed recovery in 1,400
automotive demand and broad-based industrial production. Oct-18 Jan-19 Apr-19 Jul-19 Oct-19
Source: Bloomberg
Financial Summary This report is solely produced by. The following person(s) are
Core EBITDA
Rs Mn Recurring P/E P/B EV/EBIT ROE
Sales EBITDA EPS ROIC Margin Harshit Patel
YE Mar PAT (x) (x) DA (x) (%)
(%) (%)
harshit.patel@equirus.com
FY19A 30,345 4,859 3,358 68.0 30.5 6.0 20.0 19% 24% 16.0%
+91-9825406497
FY20E 31,731 4,768 3,685 74.6 27.8 5.3 20.0 20% 25% 15.0%
FY21E 35,302 5,519 4,253 86.1 24.1 4.6 17.0 21% 27% 15.6%
FY22E 39,682 6,564 5,031 101.9 20.4 4.1 14.0 21% 29% 16.5%
Source: Company, Equirus Securities

SKF India Ltd (SKF IN) India Equity Research | Initiating Coverage Note
To outgrow bearings industry over next 3-4 years

Over the last 6-7 years, SKF has seen revenue contribution from the automotive segment decline from
Underperforms automotive growth in last
~44% in CY12 to ~42% in FY19 (Exhibit 1). The company’s automotive revenues only clocked a ~4%
6-7 years but posts healthy growth in
CAGR over CY12-FY19 despite a ~7% CAGR in India’s automobile production during this period.
industrials. OEMs contribute ~70% of
SKF’s underperformance mainly stemmed from the company missing out on the first wave of Gen3
automobile revenues; industrial revenues
(HUB3) bearings in PVs at the beginning of the current decade. In the automotive segment, ~70% of
equally split between OEMs & aftermarket
revenues come from OEMs and the rest from aftermarket/replacement. Within automotive OEMs,
around half of the revenues come from 2Ws as SKF is a leader in the 2W market; the other half is
divided between PVs, trucks and tractors (4Ws).
On the industrial front, SKF has done much better with segment revenues growing at ~6% CAGR
(CY12-FY19), even as IIP growth averaged only ~2.2% during this period. Contribution of industrial
segment in overall revenues also increased to ~52% in FY19 from ~49% in CY12. Industrial segment
revenues are almost equally divided between OEMs and the aftermarket with railways (~14%),
renewable energy (~8%) and steel & cement (~43%) contributing ~65% to revenues.
Exhibit 1: SKF revenues have grown only at a modest pace Exhibit 2: Share of automobile has gone down in overall revenue mix
Revenue (Rs Mn) Growth (Yoy%) Automobile (%) Industrial (%) Exports (%)
35,000 30% 100%
7% 8% 8% 7% 8% 9% 6%
24%
25% 90%
30,000
18% 80%
20%
25,000 70% 49%
26,314
15% 47% 49% 51% 49% 52%

10% 54%
6% 60%
22,276
20,000 10%
5% 50%
2% 5%
15,000
40%
0%
10,000 30%
-5% 44% 45% 43% 41% 42% 42%
24,349
22,750
24,136
29,973
27,504
30,345
20% 38%
5,000 -12%
-9% -10%
10%
0 -15% 0%
CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19 CY12 CY13 CY14 FY16 FY17 FY18 FY19
Source: Company, Equirus Securities Source: Company, Equirus Securities
Exhibit 3: OEMs contribute ~70% towards automotive revenues Exhibit 4: OEMs and aftermarket contribute equally to industrial sales
Automotive
Aftermarket,
30%
Industrial Industrial
Aftermarket, OEM, 50%
50%
Automotive
OEM, 70%
6 October 2019| 2
Automotive segment - Measures taken in past to lead to market share gains

Making up for lost ground in Gen3 (HUB3) bearings for PVs
Started manufacturing higher value The Indian passenger cars market has jumped directly to Gen3 bearings from basic Gen1 bearings.
(~1.75x of regular bearings) HUB3 During this transition, which started at the beginning of the present decade, SKF lost out to competitors.
bearings for a couple of PV players As per management commentary, SKF’s market share in PVs came down to only 13-15% in FY16 from
20-25% in the previous decade. The company has now started making up for that lost ground: (a) It
has won contracts from Maruti and Tata to supply Gen3 bearings for some of their new models. (b) It
has been in discussions with other manufacturers for supplying Gen3 bearings.
In FY18-FY19, SKF incurred a capex of Rs 200mn-250mn to set up a separate manufacturing line at

the Pune plant for Gen3 bearings. It has an annual capacity to produce ~350,000 bearings, which
can be expanded to ~500,000 pieces with minimal capex. Realizations for such bearings are ~1.75x
(~Rs 1,000) of regular bearings; however, the cost of production is also more as it has 3-4 more parts
to it. SKF has already started supplying these bearings and management expects to fully utilize this
capacity in the next two years.
SKF to continue outperforming CV industry

Makes further inroads into CV segment SKF has outperformed Indian CV markets in the last two years led by increased penetration within
led by innovative pinion bearings; OEMs and successful new products such as pinion bearings (Exhibit 5). Note that India’s CV production
outperforms industry growth grew ~3%/11%/24% in FY17/FY18/FY19.
Exhibit 5: SKF has outperformed competitors in the CV segment over the last two years
Growth in CV (OEM) Revenues (%)

120%
96%
100%
80%
60%
46%
42%
40% 34%
27% 24%
19%
20% 12%
0%
2017 2017 2018 2018 2018 2018 2019 2019
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Pinion bearings do away with the We believe most outperformance on the CV front was led by pinion bearings (used on the transmission
requirement of placing a ‘spacer’ in side) for M&HCVs, which the company started supplying from 4QFY17 onwards and was able to
bearings and in turn reduces the replace competitors in some accounts. Pinion bearings are widely accepted as they do away with the
assembly time. requirement of placing a ‘spacer’ in bearings (to maintain proper tolerance levels); this in turn reduces
the assembly time and leads to higher productivity for customers.
Impact of EV transition to be lower on SKF vis-à-vis other players

As per management, most automotive bearings manufactured by SKF cater to the wheel-end of
vehicles; only a small proportion of bearings are on the transmission side of 2Ws/4Ws. Therefore, the
impact of EV transition would be lower on SKF than its competitors. Also, EVs would start using
ceramic/hybrid ball bearings, which are light in weight and help insulate vehicles from any possible
electric current leakage. Such bearings are more expensive than current bearings and would partly
help mitigate the impact of a decline in bearing volumes.
We estimate SKF’s domestic automotive segment revenues to grow at a ~6% CAGR over FY19-FY22E
driven by a ~4%/11% CAGR in OEM/aftermarket. Thus, we expect auto segment’s revenue
contribution to come down to ~39% in FY22E from ~42% in FY19. Also, the aftermarket revenue
share would inch up to ~34% by FY22E from ~30% in FY19.
6 October 2019| 3
Exhibit 6: Automotive segment revenues to grow at a ~6% CAGR over FY19-FY22E
Automobile Revenues (Rs Mn) Growth (Yoy%)

18,000 25%
19%
16,000 20%
13% 12% 11%
14,000 12% 15%
12,000 10%
Automotive segment to post a ~6%
10,000 5%
CAGR (FY19-22E) with aftermarket
10,128
contribution increasing to ~34% by 8,000 -4% 0%
FY22E vs ~30% in FY19 6,000 -5%
4,000 -10%
12,342
11,419
12,822
12,304
13,611
15,290
2,000 -18% -15%
0 -20%
FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Exhibit 7: Share of higher-margin automotive aftermarket to improve going ahead
Automotive OEM (%) Automotive Aftermarket (%)

100%
90%
33% 30% 27% 30% 33% 34% 34%
80%
70%
60%
50%
40%
67% 70% 73% 70% 67% 66% 66%
30%
20%
10%
0%
Industrial segment - Good performance to continue in OEMs, aftermarket

Rising utilization in manufacturing sector bodes well for industrial segment
SKF earns ~65% of industrial revenues (OEMs + aftermarket) from heavy industries such as railways,
steel, cement, and wind energy, and the rest ~35% from off-highway vehicles (construction, mining
etc), motors, pumps, drives and other industries.
Exhibit 8: SKF’s industrial revenues well-distributed among various user industries
Railways, steel and cement — top
contributors to industrial segment
revenues (both OEM and aftermarket) Railways, 14%
Others (Off-
Highway, Drives,
Motors, Pumps Wind, 8%
etc.), 36%
Steel, 21%
Cement, 21%
Source: Company, Equirus Securities; Based on commentary in recent earnings calls transcripts
6 October 2019| 4
As per RBI’s OBICUS survey on the manufacturing sector, blended capacity utilization stood at only
~76% in 4QFY19 and is far from the highs of ~83% in 4QFY11 (Exhibit 9). Therefore, we expect
aftermarket/replacement/MRO demand to go up first for the industrial segment in the near term as
capacity utilization increases. After that, we would see fresh capex-led demand from OEMs. This could
help benefit operating margins as aftermarket typically fetches higher margins than the OEM business.
Exhibit 9: At present, manufacturing sector’s capacity utilization near its historical average
India's Manufacturing Capacity Utilization (%)
83%
84%
Blended capacity utilization of India’s
manufacturing sector at ~76% near its 82%
historical avg.; MRO demand to 80%
benefit in near term and OEM demand
78% 76%
later
76%
74%
72%
70%
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
3QFY11
1QFY12
3QFY12
1QFY13
3QFY13
1QFY14
3QFY14
1QFY15
3QFY15
1QFY16
3QFY16
1QFY17
3QFY17
1QFY18
3QFY18
1QFY19
3QFY19
Source: RBI’s OBICUS Survey on Manufacturing Sector, Equirus Securities
Rotating Equipment Performance (REP) solutions to help improve customer traction

SKF plans to take contribution of In the last 2-3 years, SKF has implemented REP-based solutions in several user industries. Condition
services in the revenue mix to a much monitoring and data analysis from Remote Diagnostic Centre (RDC) leads to lower cost of ownership
higher level from ~7-8% currently for customers by reducing the need for unplanned maintenance and improving asset utilization. SKF
has been successful in increasing the share of business through this approach with customers in
industries such as steel and pulp & paper.
At present, the revenue contribution of REP services is 7-8% (excl. additional product sales gained
through this approach) and the company aspires to take this proportion to early 20s in next 2-3 years.
Freight segment to boost revenue from Railways

Please refer to the ‘Demand Drivers for the Bearings Industry’ section of the report (page 13) for detailed
discussion on both passenger and freight components of railways bearings demand. Till now, SKF’s
major contribution has been limited to passenger coaches (~40% of railways demand) and
locomotives (~20% of railways demand). The company commands a ~60% market share in passenger
coaches and would stand to benefit the most from conversion to LHB coaches.
We expect SKF to make further inroads On the freight front, SKF was restricted to bid for only ~10-15% of the tender quantity (has a single-
into railways freight segment as it is digit market share). However, SKF Group’s Ahmedabad facility (part of SKF Technologies) has secured
eligible to bid for full tender quantity approval from the Association of American Railroads (AAR) and all other approvals required to supply
full quantity to the Indian Railways. We therefore expect SKF’s market share in the freight segment to
improve gradually. Although railway bearings are not made in the listed entity and procured from SKF
Technologies, an increasing trend of localization (also helped by a push from the Railways) would
make SKF bearings even more competitive.
At present, railways contribute ~7% (~Rs 2,100mn) towards SKF’s overall revenues. We expect this
proportion to touch double digits in the next 3-4 years driven by (a) market share gains on the freight
side (b) higher realizations from K Class bearings (way forward for both DFC wagons and standard
wagons procurement) vs E Class bearings and (c) a shift to LHB passenger coaches from conventional
ICF coaches for both new requirement and replacement requirement – here also realizations would
improve due to transition from SRBs to TRBs.
We estimate SKF’s industrial segment revenues to clock a ~12% CAGR (much higher than automotive)
over FY19-22E led by similar growth rates in both OEM and aftermarket. Consequently, we expect
industrial segment revenue contribution to move up to ~55% in FY22E from ~52% in FY19.
6 October 2019| 5
Exhibit 10: Industrial segment revenues to grow at 12% CAGR over FY19-FY22E
Industrial Revenues (Rs Mn) Growth (Yoy%)

24,000 30% 35%
We estimate industrial segment to post
30%
a ~12% revenue CAGR (FY19-22E) led 20,000
25%
by similar growth in OEM /aftermarket
16% 20%
16,000 13%
12% 15%
10%
14,081
13,476
12,000 10%
5%
8,000
0%
-5%
15,416
15,634
17,221
19,309
21,819
4,000
-4% -10%
-9%
0 -15%
Exhibit 11: We do not expect OEM/aftermarket split to change meaningfully within industrial
Industrial OEM (%) Industrial Aftermarket (%)

100%
90%
80%
50% 48% 52% 50% 51% 50% 50%
70%
60%
50%
40%
30%
50% 52% 48% 50% 49% 50% 50%
20%
10%
0%
In exports (mainly automotive in nature), we expect revenues to grow at an ~11% CAGR over FY19-
22E as the company would focus more on Europe and South America to improve capacity utilization
of manufacturing facilities at a time when domestic automotive demand is likely to remain muted.
We estimate a ~9% revenue CAGR Overall, we estimate SKF India to register a revenue CAGR (FY19-22E) of ~9% mainly driven by
over FY19-FY22E with revenue industrial (CAGR of ~12%) and exports (CAGR of ~11%) segments while automotive segment would
contribution of industrial segment remain relatively muted (CAGR of ~6%).
increasing by ~300bps
Exhibit 12: We estimate overall revenues to grow at a ~9% CAGR over FY19-22E
Revenue (Rs Mn) Growth (Yoy%)

45,000 30%
24%
40,000 25%
18%
35,000 20%
30,000 11% 12% 15%
10%
25,000 6% 10%
5% 5%
26,314
20,000 2% 5%
22,276
15,000 0%
10,000 -5%
24,349
22,750
24,136
29,973
27,504
30,345
31,731
35,302
39,682
5,000 -9% -10%

0 -12% -15%
CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
6 October 2019| 6
Exhibit 13: Expect contribution of industrial segment to move up by ~300bps over FY19-22E
Automobile (%) Industrial (%) Exports (%)

100%
7% 8% 8% 7% 8% 9% 6% 7% 7% 6%
90%
80%
70% 49% 47% 49% 52%
51% 54% 49% 54% 55% 55%
60%
50%
40%
30%
20% 44% 45% 43% 41% 42% 42%
38% 39% 39% 39%
10%
0%
CY12 CY13 CY14 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Exhibit 14: Expect share of overall aftermarket to move up by ~200bps over FY19-22E
OEM Aftermarket/Replacement Exports

100%
7% 8% 9% 6% 7% 7% 6%
90%
80%
39% 37% 37% 39% 40% 41% 41%
70%
60%
50%
40%
30% 55%
53% 55% 54% 53% 53% 53%
20%
10%
0%
6 October 2019| 7
Near-term EBTDAM expansion to be modest

SKF manufactures almost all automotive products domestically whereas ~87% of industrial products
EBITDAM expands ~380bps in last 7
are traded in nature (FY19) – either imported or procured from SKF Technologies’ Ahmedabad plant.
years led by increased localization on
The mix of imported/purchased industrial products from SKF Technologies stood at ~84%/16% in
industrial front, higher percentage of
FY19. SKF’s EBITDA margins have expanded ~380bps over the last 7 years (from ~12.2% in CY11
traded goods from SKF Technologies
to ~16.0% in FY19) due to the following:
and focus on profitable growth.
(a) It has improved the proportion of manufactured goods by ~300bps over CY11-FY19 (Exhibit
15) as localization levels for industrial segment have increased (exhibit 16).
(b) SKF has increased proportion of traded goods bought from SKF Technologies (domestic
production), which gives it either higher margins than imported products (on account of no
import duties, lower freight & handling charges) or higher pricing power (exhibit 17).
(c) It has substantially improved gross margins on both manufactured goods and traded goods
(exhibit 18); over the years, the company has adopted a strategy of profitable growth and
reduced exposure to some lower-margin segments and customers.
Exhibit 15: Share of manufactured products stood at ~55% in FY19 Exhibit 16: Share of traded goods in industrial sales has come down
Manufactured Goods (%) Traded Goods (%) Traded Goods as a % of Industrial Revenues
100% 100% 98%
90%
95% 94%
80% 44% 44% 40% 95%
48% 46% 46% 46% 45%
70% 90%
60% 90% 89%
87%
50% 86%
40% 85% 83%
30% 56% 56% 60% 55%
52% 54% 54% 54%
20% 80%
10%
0% 75%
CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19 CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19
Exhibit 17: SKF has increased procurement from SKF Technologies Exhibit 18: Gross margins have shown a sustained uptick
% of Traded Goods from SKF Technologies Gross Margin on Traded Goods (%)
18% 70% Gross Margin on Manufactured Goods (%)
16% 16% 58.4%
16% 55.3% 56.6% 56.7%
14% 60%
51.9% 52.2% 52.5%
14% 48.6%
12%
50%
12%
10% 9% 40%
8%
8% 30%
6% 19.7%
15.5% 17.1% 15.8%
20% 14.0% 12.9% 13.4% 13.2%
4%
2% 10%
0% 0%
CY13 CY14 FY16 FY17 FY18 FY19 CY11 CY12 CY13 CY14 FY16 FY17 FY18 FY19
Going ahead, we believe EBITDAM expansion for the listed entity would be limited on account of
following reasons:
(a) Most of the localization of industrial bearings (as and when volumes become large enough
for a particular SKU to justify local production) would happen in the fellow subsidiary – SKF
Technologies – and that would limit margin benefits accruing to SKF.
(b) The proportion of higher-margin automotive segment (almost all production is localized) is
expected to come down by ~300bps from FY19-FY22E as industrial segment (FY19-22E
CAGR of ~12%) would grow much faster than the automotive segment (CAGR of ~6%).
6 October 2019| 8
However, there are a few margin triggers:

Increasing share of aftermarket (a) We estimate the share of overall aftermarket revenues (automotive and industrial combined)
revenues, better realization in new in the mix to increase by ~200bps over FY19-FY22E. Aftermarket fetches higher margins
products like HUB3, Class K bearings than OEM business as it provides more flexibility to take price hikes; as against this, in the
etc, and cost savings because of IDC OEM business, contracts run for a longer period and price hikes can be taken, if at all, after
would be margin accretive in the tough negotiations with customers.
medium term.
(b) New products like HUB3 bearings for PVs, Class K bearings for railways (instead of Class E),
Ceramic/Hybrid bearings for EVs, and sensors-enabled bearings for applications in various
industries would yield better margins than regular products.
(c) Indian Distribution Centre (IDC), set up in Pune in 2017, would continue to help control
logistics costs on two fronts: (1) Earlier, the company had to pay to air freight on some
imported products to meet urgent deliveries; now, it would need to pay sea freight and stock
We estimate EBITDAM to expand by products in IDC based on demand patterns. (2) The company has rationalized its warehouses
~50bps and EBITDA to grow at a to only 7 from 13 earlier. It is now able to consolidate and get full container loads instead of
CAGR of ~11% over FY19-22E. part container loads. Due to this however, inventory levels would likely remain elevated as
some fast moving products stocked earlier at the Singapore warehouse are now stocked at
IDC; also, goods-in-transit have increased.
Overall, we estimate EBITDAM margins to expand by ~50bps over FY19-22E and consequently,
EBITDA to grow at a ~11% CAGR over the same period.
Exhibit 19: We estimate EBITDA to grow at a CAGR of ~11% over FY19-22E
EBITDA (Rs Mn) EBITDA Margin (%)

7,000 16.5% 18%
15.8% 16.0% 15.6%
15.0% 16%
6,000
12.8% 14%
12.2%
5,000 11.6% 11.5% 11.7% 12.1%
12%
4,000 10%
3,000 8%
6%
2,000
4%
2,979
2,584
2,612
2,812
3,615
3,362
4,348
4,859
4,768
5,519
6,564
1,000
2%
0 0%
Exhibit 20: Cash flow analysis of past 3 years (FY17-19) suggests that major use of CFO has been to buyback equity and pay dividends
Increase in
Repayment of Borrowings, Cash &
Loan by 2% Equivalents,
Related Party, Finance Cost, 2% Net Capex,
4% 1% 12%
Interest Dividend Purchase of
Earned, 19% Paid, 22% Investments
(net), 4%
Deposits
Matured CFO, 63%
(net), 11%
Buyback of
Equity, 58%
6 October 2019| 9
Financial profile to strengthen

Backed by ~9%/11% revenue/EBITDA CAGR over FY19-22E and a cut in corporate tax to ~25%
We estimate overall revenue/EBITDA/
from ~35% earlier, we estimate SKF’s net profit to grow at a ~14% CAGR over the same period.
PAT CAGR of ~9%/11%/14% over
FY19-22E Exhibit 21: We estimate recurring PAT to grow at a CAGR of ~14% over FY19-22E
Recurring PAT (Rs Mn)

6,000
5,000
4,000
3,000
2,000
1,000
2,085
1,901
1,888
2,028
2,559
2,439
2,959
3,358
3,685
4,253
5,031
0
Exhibit 22: Expect FCF generation of >Rs 10bn over FY19-22E

FCF generation to remain strong despite
investments in capacity additions (both CFO (Rs Mn) Capex (Rs Mn) FCFF (Rs Mn)
new products and additional capacity 6,000
4,923
for existing products) 5,000
3,993 3,823
4,000 3,672 3,507 3,327 3,372
3,096
3,000 2,621
1,810
2,000
1,150 1,055
1,000
-1,000 -405 -494 -412

-1,000 -1,200 -1,200
-2,000
FY17 FY18 FY19 FY20E FY21E FY22E
Exhibit 23: Both ROE and ROIC to witness a substantial uptick over the next 3 years
Return ratios to trend up over next 2-3
years; they had touched ~22% during ROIC (%) ROE (%)
previous upcycle in CY11 24% 22%
21%
22% 21%
20%
22%
20% 19%
21%
18% 20%
18% 17% 19%
16%
16% 18%
16% 17% 15%
14%
16% 16%
14% 15%
15%
12% 13%
10%
6 October 2019| 10
Valuation & view

At CMP of Rs 2,073, SKF is trading at a FY20E/FY21E P/E multiple of 28x/24x and EV/EBITDA multiple
of 20x/17x.
Initiate coverage ADD and a Sep’20 TP As depicted in Exhibit 24, SKF has traded in the range of 15x-40x TTM P/E multiple since 2011-
of Rs 2,287 at 28x TTM Sept’20 P/E beginning. In the last five years, it has traded at an average TTM P/E of ~32x with the present TTM
(~15% discount to last 5-yr average) P/E being ~31x. Given the company’s healthy growth profile, debt-free balance sheet and prospects
of strong FCF generation, we value the stock at 28x TTM Sep’20 EPS to arrive at a Sep’20 TP of
Rs 2,287 (Exhibit 25); our TP implies a potential upside of ~11% over the next 12 months. We initiate
the coverage SKF with ADD.
Our target TTM multiple of ~28x is at ~15% discount to SKF’s last 5-year average TTM multiple.
Exhibit 24: SKF’s average TTM P/E multiple for last 5 years is ~32x
TTM P/E Average +1 Stdev -1 Stdev +1.5 Stdev -1.5 Stdev

45
40
35
30
25
20
15
10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Source: Company, Bloomberg, Equirus Securities
Exhibit 25: Target price methodology

Parameter Unit Value
FY20E EPS Rs/Share 74.6
FY21E EPS Rs/Share 86.1
TTM Sept’20 EPS Rs/Share 81.7
P/E Multiple x 28
Target Price (Sept’20) Rs/Share 2,287
Price to earning chart Price to book chart EV-EBITDA chart

3,000 EPS 30% 3,000 30% 1,60,000 EBITDA 30%
RoE
Growth 35x 6x 1,40,000 Growth 25x
2,500 25% 2,500 25%
30x 25% 5x 1,20,000 20x
2,000 20% 25x 2,000 20%
4x 1,00,000 18x
1,500 15% 20x 1,500 20%
3x 80,000 15% 15x
15x 60,000
1,000 10% 1,000 2x 10% 10x
15% 40,000
500 5% 500 5%
20,000
0 0% 0 10% 0 0%
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-15
Sep-14
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
6 October 2019| 11
Company Snapshot
How we differ from Consensus
Equirus Consensus % Diff Comment
FY20E 31,731 32,390 -2%
Sales
FY21E 35,302 36,073 -2%
FY20E 4,768 5,084 -6%
EBITDA
FY21E 5,519 5,869 -6%
FY20E 3,685 3,583 3%
PAT
FY21E 4,253 4,167 2%
Key Drivers
FY18 FY19 FY20E FY21E FY22E
Automobile 42% 42% 39% 39% 39%
Industrial 49% 52% 54% 55% 55%
Exports 9% 6% 7% 7% 6%
OEM 54% 55% 53% 53% 53%
Aftermarket/Replacement 37% 39% 40% 41% 41%
Exports 9% 6% 7% 7% 6%
Our Key Investment Arguments
• Expect SKF to slightly outgrow the Indian bearings industry over the medium term (~9% revenue
CAGR over FY19-FY22E) as (a) it is making up for lost ground in Gen3 (HUB3) bearings for PVs,
(b) it would continue to outperform peers on the CV front, and (c) it would be able to participate
for full quantity for railways freight demand from the next tender.
• Modest expansion in EBITDAM (~50bps over FY19-22E) on account of an increasing aftermarket
share, higher-value products like HUB3 and Class K bearings, and cost savings due to IDC.
However, decline in automobile contribution in revenue mix would be a dampener.
• FCF generation of >Rs 10bn over FY19-FY22E even as investments in capacities would be higher
than the historical average; also, expect ROE/ROIC to expand by ~200bps/300bps to reach
~21%/21% by FY22E.
Risks to Our View
• Delayed recovery in automotive demand and broad-based industrial production

• Benefits of localization of industrial bearings not flowing to the listed entity
Key Triggers
• Market share gains in railways freight segment, new contact wins for Gen3 bearings
Company Description: SKF India Ltd was incorporated in 1961 as a result of collaboration between
AB SKF (headquartered in Sweden), Associated Bearing Company and Investment Corporation of
India. The first manufacturing plant of the company was commissioned in Pune in 1965. It supplies
bearings and units, seals, mechatronics, services and lubrication systems to >40 industries. Company’s
manufacturing footprint encompasses three state-of-the-art facilities at Pune, Bengaluru and Haridwar.
6 October 2019| 12
Overview of the parent company – AB SKF

Globally, Industrial contributes ~71% AB SKF (headquartered in Gothenburg, Sweden) is the global leader in the bearings space with hands-
towards revenues vs ~52% for India. on experience in >40 industries. It supplies industrial and automotive bearings, seals, lubrication
India accounts for <5% of AB SKF’s systems, mechatronics products, condition monitoring systems and related services. Company has been
sales; however, it is seen as a high able to grow its sales/EBITDA at a CAGR (CY12-18) of ~4.9%/6.7% to reach ~ € 8,040mn/1,268mn
growth market. respectively in CY18. Globally, Industrial segment contributes ~71% towards revenues (vs only ~52%
for India business) and it also a much higher margins business (EBITM of ~15.6% vs ~6.4% for
Automotive segment in CY18).
Exhibit 26: Revenues have grown at a healthy pace in last 6 years Exhibit 27: EBITDAM too has expanded in the same time period
Sales (SEK mn) Growth (Yoy%) EBITDA (SEK mn) EBITDA Margin (%)
90,000 14% 16,000 18%
12% 15.8%
80,000 10% 12% 14,000 14.2% 14.4% 16%
13.6% 14.0%
70,000 10% 13.0% 14%
7% 7% 12,000
72,589
8%
60,000 12%
10,000
63,423
6% 8.8%
50,000 10%
4% 8,000
40,000 8%
2% 6,000
30,000 6%
0%
20,000 4,000 4%
-2%
64,395
70,778
75,788
77,938
85,713
10,192
10,916
13,522
-4%
9,145
5,586
9,826
9,895
10,000 -2% -4% 2,000 2%
0 -6% 0 0%
2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018
Exhibit 28: Industrial segment contributes >70% towards revenues Exhibit 29: Margin profile of Industrial segment is far superior
Industrial (%) Automotive (%) Industrial EBIT Margin (%) Automotive EBIT Margin (%)
100% 18%
15.6%
90% 16%
30% 31% 29% 13.5%
80% 14% 12.1%
70% 12%
60%
10%
50%
8% 6.4% 6.4%
40% 5.5%
70% 69% 71% 6%
30%
20% 4%
10% 2%
0% 0%
2016 2017 2018 2016 2017 2018
Exhibit 30: Return ratios have witnessed an upward trend Exhibit 31: R&D expenses have been stable at ~3% of sales
ROCE (%) ROE (%) R&D Expenses (SEK mn) R&D Expenses as a % of Sales
25% 23% 3,000 3.1% 4%
22% 21% 3.1% 3.1% 3.0%
20% 2.9% 2.9%
2,500 3%
20% 2.5%
17% 3%
16%
2,000
18%
15% 2%
16%
14% 1,500
14%
2%
10% 8% 12%
11% 1,000
1%
5% 500
1,607
1,840
2,078
2,372
2,246
2,395
2,591
1%
5%
0 0%
0%
2012 2013 2014 2015 2016 2017 2018
2012 2013 2014 2015 2016 2017 2018
6 October 2019| 13
Key Milestones
Year Milestone
1961, 1965 SKF India was incorporated; Started first factory at Chinchwad, Pune in 1965
Commenced production at state-of-the-art DGBB manufacturing facility at
1989
Bangalore
CR Seals India Pvt. Ltd. established a plant in Bangalore which went on to become
1997
SKF Sealing Solutions India Pvt Ltd and it is now a part of SKF India
Became the first bearing company in India to secure ISO/TS-16949 for the
2002
Automotive Business Unit
Implemented 'Direct Customer Delivery' model in place of its Indenting Commission
2005
Business for the imported bearings to reduce the delivery time
Introduced power transmission products (timing belts, v-belts, chains, couplings,
2007
sprockets and pulleys) in the Indian market
Commercialized new manufacturing plant at Haridwar, Uttarakhand; inaugurated
2009
its first SKF Solution Factory in India at Pune
2010 Invested in augmenting capacities at Bangalore plant
Launched the SKF BeyondZeroTM portfolio of products and solutions to help
2012
customers be more energy-efficient
Dun and Bradstreet rated SKF India the best company in the bearing industry for
2014 8th consecutive year; Pune and Haridwar factories won the coveted Gold Award at
the Economic Times and Frost and Sullivan manufacturing excellence awards
Won the approval from Indian Railways for supply of bearings for freight car
applications; introduced SIBCO range of bearing housings and accessories;
2015
inaugurated the 3rd Solution Factory in India at Jamshedpur after Pune and
Manesar
Established a world-class Centralised Distribution Centre at Chakan, Pune to
2016 reduce delivery lead times and provide a wider range of products; inaugurated
Remote Diagnostic Centre (RDC) at Pune to realise the potential of Industry 4.0
Introduced a lot of new product offerings such as 'Made in India' (SNH and SD)
2017 range of housings and accessories, Insert Bearing Units of UC Range, Heavy Duty
Grease Gun, Pinion Bearings for heavy duty truck applications.
Completed buyback of equity shares of ~Rs 3,990mn (~3.7% of outstanding paid
2018
up capital)
Corporate Governance
Based on SKF’s FY19 Annual Report, following are the key highlights of our preliminary assessment of
the level of corporate governance in the company:
SKF philosophy of Corporate Governance is built around the principles of ‘SKF Care’ – Employee
Care, Environment Care, and Community Care.
Board of Directors: SKF’s Board has 6 Directors, of whom two are Non-Executive-Non-Independent
Directors (including the Chairman), one is Managing Director and three are Independent Directors
(including a woman Director). No two Directors are related to each other. Board members have
collective experience in diverse fields of bearings and its user industries, marketing, strategy, finance
and accounting etc. However, in IT systems and governance law related matters, Board takes views of
internal and external experts.
It is to be noted that all the Directors were present in last year’s AGM. During FY19, 6 board meetings
were held and the time gap between any two meetings did not exceed 120 days. All Directors attended
3 or more meetings of the 6 meetings. The Country Management Team (CMT) comprises of senior
management members from the businesses and functions. They meets as and when required but
generally they meet at least once in a month to develop and implement policies.
Committees of the Board: There are 5 board committees – Audit, Nomination & Remuneration, CSR,
Stakeholders’ Relationship and Risk Management (effective from FY20). 3 of the 4 committees last year
were headed by Independent directors. During FY19, meetings held by these 4 committees were
4/3/3/9 respectively. During FY19, 1,888 correspondences were received by the Company out of
which 1,791 were replied to the satisfaction of shareholders during the year only. Outstanding 97 have
already been attended by April 11, 2019.
6 October 2019| 14
Disclosure Norms
As per our preliminary study, we do not find any issues on this front. The company follows disclosure
norms as stipulated by the listing agreement of exchanges and is timely in coming up with
quarterly/half-yearly/annual results and annual reports. Management holds an earnings call after every
quarterly result.
Other Highlights
The Board had recommended a dividend of Rs 12/equity share for FY19 (dividend payout ratio of
~18%) in addition to buyback of shares worth ~Rs 3,990mn. It is to be noted that company had
bought back shares worth ~Rs 2,090mn during FY18 as well.
Price Waterhouse Chartered Accountants LLP are the auditors for the Company.
Management Profile
Name Designation Description
Mr. Subramanyam is a Mechanical Engineer from University of Madras. He has ~42 years of
Mr. Gopal experience in manufacturing - ranging from high precision components to heavy equipment and
Chairman
Subramanyam machineries. He is a former Chief Executive of two L&T JVs - L&T Komatsu Ltd India and L&T
Howden Pvt. Ltd, India.
Mr. Bhatnagar has done his BE (Electrical/Electronics) from BITS, Pilani and MBA from IIM,
Kolkata. He has over 22 years of global experience in various industries including consumer
Mr. Manish
Managing Director goods, materials, healthcare and environmental solutions. Most recently, he was the Vice
Bhatnagar
President & General Manager of Asia Pacific for Danaher’s water businesses. He has also held
leadership roles at General Electric, Underwriters Laboratories and Lakme Lever in the past.
Mr. Bhagania is a Chartered Accountant has also done an MBA in marketing. Prior to joining
Mr. Anurag
Director Finance SKF, he was the Country Finance Leader at Honeywell India and has previously held various
Bhagania
finance leadership roles at GE, Ingersoll Rand and Eaton.
Mr. Cedrone has done his Masters in Mechanical Engineering from Rome University and also
Mr. Aldo Non-Independent attended School of Management, Rome University. He has been associated with SKF Group since
Cedrone Director 1989 in various positions, including as Automotive Division Director; Head - Powertrain &
Electrical TW; Factory Manager; Quality and Production Manager.
Ms. Wakhlu has done MSc (gold medalist), Diploma in Strategic Management and has also
Ms. Anu Wakhlu Independent Director completed ICC Coach Accreditation. She has >30 years of experience as Certified Executive
Coach, consultant and facilitator across industries.
Mr. Stephan is a Mechanical Engineer from University of Essen, Germany. He has been
Mr. Bernd Non-Independent associated with SKF Group since 1994 and is currently President, Automotive and Aerospace and
Stephan Director Member of SKF Group management. Prior to that, he has also held leading positions within SKF
Group in Renewable Energy, and Trucks Business Unit.
6 October 2019| 15
Comparable Valuation – Industrials (Equirus Coverage Universe)

P/E EV/EBITDA P/B RoE Div Yield
Mkt Cap Price Target
Company Reco. CMP
Rs Mn Target Date
FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A
SKF India ADD 2,128 1,05,123 2,337 Sept'20 31.3 28.1 24.3 20.6 20.2 17.2 6.2 5.4 4.8 19% 21% 21% 0.6%
Schaeffler India REDUCE 4,190 1,30,982 4,271 Sept'20 28.3 30.3 24.7 16.7 17.5 14.7 4.8 4.4 3.9 18% 15% 17% 0.7%
Carborundum
LONG 316 59,678 433 Sept'20 24.1 22.9 18.6 13.5 12.4 10.1 3.5 3.1 2.8 15% 14% 16% 0.9%
Universal
Grindwell
ADD 585 64,788 611 Jun'20 38.7 34.9 29.6 23.1 20.3 17.2 5.9 5.4 5.0 16% 16% 18% 1.0%
Norton
KEC
LONG 293 75,340 362 Sept'20 15.5 13.2 10.9 8.0 7.4 6.1 3.1 2.6 2.2 22% 21% 22% 0.9%
International
Triveni Turbine LONG 102 32,945 121 Sept'20 33.4 27.5 24.0 21.7 17.6 15.0 7.6 6.7 5.8 23% 26% 26% 0.0%
Sterlite
LONG 164 65,849 294 Sept'20 11.5 10.9 8.4 7.5 6.7 5.2 3.8 3.1 2.4 39% 31% 33% 2.1%
Technologies
6 October 2019| 16
Quarterly Performance
Y/E Mar (Rs Mn) 1QFY19A 2QFY19A 3QFY19A 4QFY19A 1QFY20A 2QFY20E 3QFY20E 4QFY20E
Revenue 7,550 7,644 7,677 7,484 7,768 7,911 8,036 8,017
COGS 4,429 4,351 4,545 4,440 4,688 4,746 4,822 4,810
Employee Cost 615 698 640 631 643 662 682 703
Other Expenses 1,345 1,368 1,275 1,304 1,237 1,313 1,334 1,323
EBITDA 1,160 1,227 1,216 1,110 1,200 1,189 1,198 1,181
Depreciation 117 117 115 116 139 129 129 129
EBIT 1,043 1,110 1,102 994 1,062 1,060 1,070 1,053
Interest Expenses 17 21 21 18 26 17 17 17
Other Income 225 214 338 292 172 197 197 197
Profit Before Tax 1,251 1,304 1,419 1,268 1,207 1,241 1,250 1,233
Tax Expenses 443 461 535 446 427 273 275 271
Recurring PAT 809 843 885 822 779 968 975 962
Extraordinaires 0 0 0 0 0 0 0 0
Reported PAT 809 843 885 822 779 968 975 962
FDEPS 15.8 16.4 17.2 16.6 15.8 19.6 19.7 19.5
Cost Items as % of Sales
COGS 58.7 56.9 59.2 59.3 60.3 60.0 60.0 60.0
Employee Cost 8.1 9.1 8.3 8.4 8.3 8.4 8.5 8.8
Other Expenses 17.8 17.9 16.6 17.4 15.9 16.6 16.6 16.5
Margin (%)
Gross Margin 41.3 43.1 40.8 40.7 39.7 40.0 40.0 40.0
EBITDA Margin 15.4 16.1 15.8 14.8 15.4 15.0 14.9 14.7
PAT Margin 10.7 11.0 11.5 11.0 10.0 12.2 12.1 12.0
YoY Growth (%)
Sales 13.3 12.4 9.6 6.4 2.9 3.5 4.7 7.1
EBITDA 24.0 10.5 -1.1 4.6 3.4 -3.1 -1.5 6.4
EBIT 27.2 11.4 -1.4 5.1 1.8 -4.5 -2.9 5.9
PAT 25.8 14.0 2.7 14.9 -3.6 14.8 10.3 17.0
6 October 2019| 17
Key Financials (Consolidated)

Income Statement
Y/E Mar (Rs Mn) FY16A FY17A FY18A FY19A FY20E FY21E FY22E
Revenue 29,973 26,314 27,504 30,345 31,731 35,302 39,682
COGS 18,717 16,252 16,068 17,765 19,066 21,005 23,412
Employee Cost 2,541 2,222 2,368 2,583 2,690 2,954 3,197
Other Expenses 5,100 4,478 4,720 5,139 5,207 5,825 6,508
EBITDA 3,615 3,362 4,348 4,859 4,768 5,519 6,564
Depreciation 684 479 457 464 524 635 756
EBIT 2,931 2,883 3,891 4,395 4,244 4,883 5,808
Interest Expenses 0 0 50 77 76 70 63
Other Income 1,014 873 714 924 764 872 982
Profit Before Tax 3,945 3,756 4,555 5,242 4,931 5,686 6,727
Tax Expenses 1,386 1,317 1,596 1,884 1,247 1,433 1,695
Recurring PAT 2,559 2,439 2,959 3,358 3,685 4,253 5,031
Extraordinaires 0 0 0 0 0 0 0
Reported PAT 2,559 2,439 2,959 3,358 3,685 4,253 5,031
FDEPS 48.6 46.3 57.7 68.0 74.6 86.1 101.9
DPS 15.0 10.0 12.0 12.0 22.4 25.8 30.6
BVPS 315.9 343.7 358.1 343.5 391.2 446.2 511.2
YoY Growth (%) FY16A FY17A FY18A FY19A FY20E FY21E FY22E
Sales 24.2 -12.2 4.5 10.3 4.6 11.3 12.4
EBITDA 28.6 -7.0 29.4 11.7 -1.9 15.7 19.0
EBIT 29.0 -1.6 35.0 12.9 -3.4 15.1 18.9
PAT 26.2 -4.7 21.3 13.5 9.7 15.4 18.3
Key Ratios
Profitability (%) FY16A FY17A FY18A FY19A FY20E FY21E FY22E
Gross Margin 37.6 38.2 41.6 41.5 39.9 40.5 41.0
EBITDA Margin 12.1 12.8 15.8 16.0 15.0 15.6 16.5
PAT Margin 8.5 9.3 10.8 11.1 11.6 12.0 12.7
ROE 16.6 14.0 16.2 19.0 20.3 20.6 21.3
ROIC 16.0 13.4 15.6 18.1 19.4 19.8 20.6
Core ROIC 18.1 16.0 21.8 23.8 24.9 26.7 28.8
Dividend Payout 30.9 21.6 20.8 17.7 30.0 30.0 30.0
CAGR (%) 1 year 2 years 3 years 5 years 7 years 10 years

Revenue 10.3 7.4 0.4 5.9 3.2 6.5
EBITDA 11.7 20.2 10.4 13.2 7.2 9.4
PAT 13.5 17.3 9.5 12.2 7.0 10.2
Valuations (x) FY16A FY17A FY18A FY19A FY20E FY21E FY22E

P/E 42.7 44.8 35.9 30.5 27.8 24.1 20.4
P/B 6.6 6.0 5.8 6.0 5.3 4.6 4.1
P/FCFF -74.0 41.7 100.8 20.8 30.8 33.1 26.8
EV/EBITDA 26.7 28.4 21.7 20.0 20.0 17.0 14.0
EV/Sales 3.2 3.6 3.4 3.2 3.0 2.7 2.3
Dividend Yield (%) 0.7 0.5 0.6 0.6 1.1 1.2 1.5
6 October 2019| 18
Balance Sheet
Equity Capital 527 527 513 494 494 494 494
Reserves 16,119 17,585 17,860 16,475 18,829 21,546 24,761
Net worth 16,646 18,112 18,373 16,969 19,323 22,040 25,255
Gross Debt 650 340 850 900 800 700 600
Other Long-term Liabilities 275 293 281 324 324 324 324
Minority Interest 0 0 0 0 0 0 0
Account Payables 2,929 3,040 3,897 3,491 3,912 4,352 4,892
Other Current Liabilities 986 1,255 1,037 1,282 1,282 1,282 1,282
Total Liabilities & Equity 21,485 23,040 24,438 22,966 25,641 28,699 32,353
Gross Fixed Assets 3,777 4,058 4,422 4,634 5,634 6,834 8,034
Acc. Depreciation 798 1,252 1,668 1,963 2,488 3,123 3,879
Capital WIP 119 352 371 622 622 622 622
Other Long-term Assets 2,260 1,685 2,384 2,561 2,561 2,561 2,561
Inventory 3,350 4,166 4,029 4,610 4,608 5,126 5,762
Account Receivables 4,829 5,143 4,908 5,213 5,651 6,287 7,067
Other Current Assets 975 1,485 1,033 814 814 814 814
Cash & Cash Equivalents 6,973 7,403 8,962 6,476 8,239 9,578 11,373
Total Assets 21,486 23,040 24,438 22,967 25,642 28,699 32,354
Non-Cash WC 5,239 6,500 5,035 5,863 5,878 6,592 7,468
Cash Conv. Cycle 52 80 75 68 73 73 73
WC Turnover 5.7 4.0 5.5 5.2 5.4 5.4 5.3
Gross Asset Turnover 4.3 6.7 6.5 6.7 6.2 5.7 5.3
Net Asset Turnover 9.3 9.1 9.9 11.2 10.9 10.3 10.1
Net D/E -0.4 -0.4 -0.4 -0.3 -0.4 -0.4 -0.4
Days (x) FY16A FY17A FY18A FY19A FY20E FY21E FY22E

Receivable Days 52 69 67 61 65 65 65
Inventory Days 38 52 54 52 53 53 53
Payable Days 38 41 46 44 45 45 45
Cash Conversion Cycle 52 80 75 68 73 73 73
Cash Flow
PBT 3,945 3,756 4,555 5,242 4,931 5,686 6,727
Depreciation 684 479 457 464 524 635 756
Others -797 -623 -550 -701 -687 -802 -919
Tax Paid 1,420 1,414 1,727 2,123 1,247 1,433 1,695
Changes in Working Capital -2,150 -1,048 937 -1,072 -15 -714 -876
Operating Cash Flow 262 1,150 3,672 1,810 3,507 3,372 3,993
Capex -304 -405 -494 -412 -1,000 -1,200 -1,200
Change in Investment -2,201 1,223 -2,737 2,719 0 0 0
Others 767 653 582 757 764 872 982
Investing Cash Flow -1,739 1,471 -2,649 3,064 -236 -328 -218
Change in Debt 650 -310 510 50 -100 -100 -100
Change in Equity 0 0 -2,095 -3,996 0 0 0
Others -159 -952 -668 -819 -1,407 -1,605 -1,880
Financing Cashflow 491 -1,262 -2,253 -4,765 -1,507 -1,705 -1,980
Net Change in Cash & Cash Equivalents -985 1,359 -1,230 109 1,763 1,338 1,795
6 October 2019| 19
6 October 2019
Initiating Coverage Note
Schaeffler India Ltd

CMP Target Price
Friction ahead – initiate with REDUCE Rs 4,203 Rs 4,185

Sept'20
Rating Upside
REDUCE 0%
Stock Information
Near-term challenges to persist; initiate coverage with REDUCE
Market Cap (Rs Mn) 131,378
➢ Schaeffler India (SCHFL), a subsidiary of Schaeffler AG, headquartered in Germany,
has transformed into one of India’s leading automotive and industrial component 52 Wk H/L (Rs) 5,826/3,836
suppliers (from just a ball and roller bearings manufacturer) post its merger with INA Avg. Daily Volume (1yr) 7,178
Bearings and LuK India in CY18. SCHFL has grown its revenue/EBITDA/PAT at a Avg. Daily Value (Rs Mn) 36.0
~12%/17%/15% CAGR over CY09-CY17 (pre-merger). Equity Cap (Rs Mn) 313
➢ In the medium term, we expect SCHFL to face challenges in the automobile space Face Value (Rs) 10
owing to tepid demand and negative impact of technological changes (shift to petrol Share Outstanding (Mn) 31.3
engines, gradual long-term transition to EVs). We estimate a ~8%/9%/11% CAGR in
Bloomberg Code SCHFL IN
revenue/EBITDA/PAT over CY18-CY21E with CY20E/CY21E ROEs of ~16%/18%.
Ind Benchmark BSETCG
➢ We initiate coverage on SCHFL with REDUCE and a Sep’20 TP of Rs 4,185 set at 26x
TTM P/E (~25% discount to last 5-year average). Ownership (%) Recent 3M 12M
Promoters 74% 0% 23%
DII 15% 0% -12%
After a hit in CY19, financial profile to improve in CY20 and CY21
FII 3% 0% -2%
▪ Headwinds in auto segment ahead: SCHFL’s revenue growth in the medium term
Public 8% 0% -8%
would be driven by (a) revenue synergies post-merger with INA and LuK – bundling of
products, higher content per vehicle and distribution network expansion, and (b) strong
growth on the industrial front, especially in the railways segment. However, revenue
CAGR (CY18-CY21E) would be restricted to ~8% only as increasing adoption of petrol
engines vs diesel would hit revenues to the tune of 2-3%.
▪ Revenue mix to shift in favor of lower-margin industrial segment: We estimate industrial
segment (~12% CAGR) to outstrip automotive segment growth (~5% CAGR) over
CY18-FY21E; consequently, the share of industrial segment (highly import-dependent)
would reach ~43% by CY21E (+400bps over 3 years).
▪ Sharp expansion in EBITDAM unlikely: We estimate operating margins to take a hit in
CY19 led by a sharp decline in the automotive revenue share (-400bps yoy), but expect
them to bounce back from CY20E onwards. Key margin levers would be: (a) potential
cost synergies of the merger – optimization of warehousing and freight movement and
consolidation of support functions within organization (b) increase in localization levels Relative price chart
by 1-2ppt each year and (c) rising export focus. Overall, we estimate EBITDAM to SCHFL IN Equity Nifty Index
expand by ~25bps over CY18-CY21E (and ~165bps over CY19E-CY21E). 6,500
▪ FCF generation to remain strong, return ratios to be steady: We estimate FCF 5,500
generation of >Rs 11bn over CY18-CY21E despite higher-than-historical investments 4,500

in expanding capacities of existing products and localization levels. Also, we expect
ROE and ROIC to witness an uptick after a substantial decline in CY19E. 3,500
2,500
Oct-18 Jan-19 Apr-19 Jul-19 Oct-19
Source: Bloomberg
Financial Summary This report is solely produced by. The following person(s) are
Core EBITDA
Rs Mn Recurring P/E P/B EV/EBIT ROE
Sales EBITDA EPS ROIC Margin Harshit Patel
YE Dec PAT (x) (x) DA (x) (%)
(%) (%)
harshit.patel@equirus.com
CY18A 45,615 7,396 4,630 148.1 28.4 4.9 16.7 18% 22% 16.2%
+91-9825406497
CY19E 47,096 6,981 4,340 138.8 30.3 4.4 17.5 15% 18% 14.8%
CY20E 51,592 8,051 5,220 167.0 25.2 3.9 15.0 16% 20% 15.6%
CY21E 57,920 9,543 6,306 201.7 20.8 3.4 12.3 18% 22% 16.5%

Schaeffler India Ltd (SCHFL IN) India Equity Research | Initiating Coverage Note
Revenues to grow in high single-digits in medium term

Revenue mix skewed towards automotive segment after merger with INA & LuK
Automotive/industrial revenue mix at SCHFL was more focused on the industrial segment (~69% of revenues) pre-merger (till CY17).
~60%/40% vs ~31%/69% pre-merger However, post-merger (effective from CY18) with INA Bearings (~88% automotive) and LuK India
(~100% automotive), the revenue mix has tilted in favour of the automotive segment. The segment
now contributes ~60% of the combined entity’s revenues; note that this contribution is adjusted for
bearings sales of 2Ws, CVs and tractors, which are considered a part of industrial revenues. SCHFL
has become one of India’s leading automotive components and systems supplier from just a bearings
and related products manufacturer after the merger with other Schaeffler group entities.
Exhibit 1: Focus on automotive segment increases post-merger
Schaeffler India Ltd INA Bearings Pvt Ltd LuK India Pvt Ltd
▪ Schaeffler AG held ~51% stake ▪ Schaeffler AG held 100% stake ▪ Schaeffler AG held 100% stake
▪ Product profile: Ball and roller bearings for all ▪ Product profile: Engine and Powertrain ▪ Product profile: Concentric Slave Cylinder
types of industrial and automotive applications Components for front accessory drive system, chain Assembly, Clutch Master Cylinder Assembly, Semi
▪ Plants: Maneja (flexible plant catering to mid-size drive systems, valve train components, gear shift Slave Cylinder Assembly, Adapter Assembly, High
volumes) and Savli (mass production as well as systems and a range of needle roller bearings Pressure Pipe Assembly
customized low volume solutions) ▪ Plant: Talegaon, Pune ▪ Plant: Hosur, Tamilnadu
Overview of CY16 Financials
Revenue (Rs Mn) 18,139 Revenue (Rs Mn) 10,418 Revenue (Rs Mn) 7,298
EBITDA (Rs Mn) 2,961 EBITDA (Rs Mn) 1,461 EBITDA (Rs Mn) 1,262
EBITDAM (%) 16.3% EBITDAM (%) 14.0% EBITDAM (%) 17.3%
PAT (Rs Mn) 1,945 PAT (Rs Mn) 685 PAT (Rs Mn) 611
PAT Margin (%) 10.7% PAT Margin (%) 6.6% PAT Margin (%) 8.4%
Net Debt (Rs Mn) (6,406) Net Debt (Rs Mn) 1,816 Net Debt (Rs Mn) 23
Net Worth (Rs Mn) 14,525 Net Worth (Rs Mn) 1,992 Net Worth (Rs Mn) 2,788
Industri
Automotive, al, 12%
31%
Automotive, 100%
Industrial, Automotive,
69% 88%
Segment-wise Revenue Mix (%)

Passenger Cars 11% Passenger Cars 59% Passenger Cars 24%
2Ws 12% 2Ws 21% 2Ws 0%
Tractors 4% Tractors 0% Tractors 19%
CVs 2% CVs 6% CVs 25%
Auto Aftermarket 2% Auto Aftermarket 2% Auto Aftermarket 32%
Wind Energy 7% Wind Energy 0% Wind Energy 0%
Railways 6% Railways 0% Railways 0%
Other Industrial OEM 30% Other Industrial OEM 8% Other Industrial OEM 0%
Industrial Aftermarket 26% Industrial Aftermarket 4% Industrial Aftermarket 0%
Exhibit 2: Both INA and LuK grew at a faster pace (off a low base) than SCHFL pre-merger
Revenue CAGR (CY13-16) EBITDA CAGR (CY13-16)
Schaeffler India 8.2% 17.3%

INA Bearings 15.8% 78.9%
LuK India 8.3% 50.0%
6 October 2019| 2
Exhibit 3: Revenue mix heavily in favour of industrial pre-merger… Exhibit 4: …but shifts in favour of automotive segment post-merger
Passenger Industrial
Industrial Cars, 11% Aftermarket,
Aftermarket, 14% Passenger
25% CVs, 2%
Cars, 27%
Tractors, 4%
2Ws, 12%
Industrial
OEM, 26%
Auto
Aftermarket, CVs, 8%
2%
Tractors, 6%
Auto
Industrial Aftermarket, 2Ws, 12%
OEM, 43% 8%
Revenue drivers ― Synergies from merger, industrial business ramp-up

Looking at revenue synergy potential of ~Rs 4.7bn on annualized basis by CY23E
SCHFL aims to achieve revenue synergy potential of Rs 3.8bn-4.7bn on annualized basis over the next
Product bundling, higher content per
5 years (by CY23). Key areas to realize this potential: (a) Bundling of products for both automotive and
vehicle, and distribution efficiencies to
industrial OEM customers. (b) Achieving higher content per vehicle (CPV) by cross-leveraging strong
drive revenues
customer relationships of each entity. (c) Increasing aftermarket reach due to expanded geographical
coverage. SCHFL expects revenue synergies of Rs 3.2bn-4bn from product bundling and higher CPV,
and Rs 0.6bn-0.7bn from distribution efficiencies.
Exhibit 5: Targeting revenue synergies of Rs 3.8-4.7bn over next 5 years
Type of Opportunity Description Comments
* Combined entity could bundle the products and offer
(a) Clutch package: Clutch release bearing (INA) can be
packaged deals to the OEM customers.
packaged with clutch system & linings (LuK) and clutch
* Through this approach, company would be able to work
Bundling of Automotive OEM release system (LuK)
better with OEMs since the inception stage of a new
Products
(b) Transmission package: DGBBs and TRBs of FAG could be platform development program.
packaged with Needle Roller Bearings and Shifting * Key account manager has a higher chance of realizing
systems of INA complete sale of a system than individual products.
Strong Presence in: * Leveraging strong customer relationships on either side:
LuK: Tractors, CVs, SUVs For example, there exist opportunities of bringing the
Higher Content per Vehicle (CPV)
INA: PVs, SUVs solutions that company provide for a passenger car engine
FAG: PVs, 2Ws from INA portfolio to a tractor engine of a LuK customer.
Various types of bearings – Plain and TRBs from FAB

Bundling of Industrial OEM portfolio and Needle Roller and SRBs from INA portfolio
NA
Products could be combined to provide comprehensive solutions to
customers in Steel, Cement and Oil & Gas
Current Distribution Network: * Presently, all 3 entities have dedicated and independent
Expansion in Distribution distribution channels.
SCHFL INA LuK
Network * Distribution network would benefit immensely from
Industrial 205 30
expanded geographic coverage as well as increased
Automotive 130 throughput per distributor.
6 October 2019| 3
Exhibit 6: Product portfolio and expected bundling opportunities of SCHFL, INA & LuK
Effective impact of technological changes in automotive industry to be slightly negative

Overall impact of technical changes in The automotive industry is undergoing multiple technological changes: (a) A shift from BS4 to BS6, (b)
auto sector to be slightly negative in increasing adoption of petrol vs. diesel engines, (c) gradual transition to EVs over the long term. The
near term aggregate impact of these changes would be not-so-positive for SCHFL.
Exhibit 7: Technological changes would necessitate a change in product offerings for SCHFL
Change Impact
▪ Diesel engines have more content vis-à-vis petrol engines; therefore, it
requires more value to be supplied.
▪ Diesel engine inherently has more harshness and vibrations, therefore
dampening equipment like dual mass flywheels (DMF) are
predominantly used in diesel engines. Also, valve train components such
Increasing adoption of
as hydraulic lash adjusters (HLA) and finger followers (FF) are more
petrol engines vs diesel
prominent in diesel engines.
engines
▪ However, in absence of diesel engines, some of petrol engines are
increasingly being equipped with multiple cam phasers and other new
components to match the efficiency of the diesel engines.
▪ Overall, management expects this shift in engine preference could have
an impact of ~2-3% on company’s revenues from CY19 to CY20.
6 October 2019| 4
▪ Auto OEMs have already started launching BS6 engines and in order to
meet the emission norms, they have more content per engine than a
BS4 engine (although not as much as diesel engines).
Shift from BS4 to BS6
▪ BS6 compliant petrol engines have started using more of components
such as DMF, HLA, FF etc to make up for the loss in efficiency of the
diesel engines.
▪ Transition to EV could result into a loss of some components on both
engine and transmission fronts if company does not upgrade its
offerings at all. However, under its strategy of ‘Mobility for Tomorrow’,
SCHFL globally has been working on a range of newer solutions for the
vehicles of tomorrow.
Gradual shift to EVs in the ▪ As per the management, fall in volume of bearings in EVs would
long-term partially be compensated by higher value per bearings on two accounts:
(a) manufacturers would use sensor-enabled bearings to collect data
which can be further analysed – such sensor-enabled bearings fetch
higher realizations and (b) more of expensive ceramic bearings would
be used in EVs as they could provide electric insulation and are also
light-weight.
Source: Company, Industry, Equirus Securities
Railways to grow at a faster pace on increased usage of TAROL bearings

Expects to ramp up supply of TAROL Railways is making a transition from traditional Cylindrical Roller Bearings (CRB) to Tapered Roller
bearings to Indian Railways Bearings (TAROL), demand for which would be driven by metro trains, high-speed trains, higher
capacity of freight wagons and LHB coaches. SCHFL has secured all required approvals (including
from the Association of American Railroads) in CY18 that makes it eligible to participate in the tender
business of Indian Railways. It has also established a TAROL manufacturing line at Maneja plant and
is in the process of increasing localization levels.
Also, the company has set up a refurbishment facility for TAROL bearings; therefore, reconditioning/
refurbishment business is growing as well. Railways business had grown by ~30% in 1HCY19 and is
set to emerge as one of the fastest-growing segments for SCHFL.
Expect ~8% revenue CAGR over CY18- Overall, we estimate SCHFL’s revenues to grow at a CAGR of ~8% over CY18-CY21E as automotive/
CY21E with revenue contribution of industrial/exports clock a ~5%/12%/12% CAGR over this period. Also, we expect the share of
industrial segment rising ~400bps industrial revenues to improve to ~43% (+400bps) and that of automotive to drop to ~46%
(-500bps) by CY21E. We expect aftermarket revenues to clock higher growth rates and contribute
~26% of revenues in CY21E (CY18: ~24%).
Exhibit 8: Automobile sales to grow at a CAGR (CY18-21E) of ~5% Exhibit 9: Industrial sales to grow at a CAGR (CY18-21E) of ~12%
Automobile Revenues (Rs Mn) Growth (Yoy%) Industrial Revenues (Rs Mn) Growth (Yoy%)
30,000 20% 30,000 25%
15%
20%
25,000 12% 15% 25,000
20%
20,000 7% 10% 20,000

22,081
13% 15%
12%
11%
15,000 5% 15,000
10%
10,000 0% 10,000
5%
20,212
23,264
23,699
26,596
14,874
17,790
19,770
22,124
24,978
5,000 -5% 5,000

-5%
0 -10% 0 0%
CY17 CY18 CY19E CY20E CY21E CY17 CY18 CY19E CY20E CY21E
6 October 2019| 5
Exhibit 10: We estimate overall revenues to grow at a CAGR (CY18-21E) of ~8%
Revenue (Rs Mn) Growth (Yoy%)
57,920
70,000 160%
138%
51,592
140%
47,096
60,000
45,615
120%
50,000
100%
40,000 80%
19,187
60%
17,963
17,244
30,000
13,086
16,322
14,467
14,024
40%
20,000 12%
7% 10% 20%
4% 3%
10,000 26% -3% 16%
11% 0%
6%
0 -20%
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19E CY20E CY21E
Source: Company, Equirus Securities; SCHFL, INA and LuK merger is effective from CY18 onwards
Exhibit 11: Share of industrial to move up by ~400bps over CY18-21E Exhibit 12: Share of aftermarket to rise by ~200bps over CY18-21E
Automotive (%) Industrial (%) Exports (%) OEM Aftermarket/Replacement Exports

100% 100%
11% 10% 11% 11% 11% 10% 11% 11% 11%
90% 90%
80% 80% 24% 26% 26% 26%
70% 38% 39% 42% 70%
43% 43%
60% 60%
50% 50%
40% 40%
30% 30% 66% 63% 63% 63%
51% 51% 47% 46% 46%
20% 20%
10% 10%
0% 0%
CY17 CY18 CY19E CY20E CY21E CY18 CY19E CY20E CY21E
6 October 2019| 6
Sharp near-term EBITDM expansion unlikely

SCHFL manufactures almost all automotive products domestically whereas 70-80% of industrial
SCHFL has a higher share of
products are imported from fellow subsidiaries globally. The company has gradually improved the
manufactured products (~68%) vs SKF
share of manufactured goods in the mix to ~74% in CY17 from just ~66% in CY12 (Exhibit 13).
(~55%)
However, this proportion has dipped to ~68% in CY18 as company faced some capacity constraints
in industrial segment on account of strong demand and had to resort to more imports.
Exhibit 13: Share of manufactured products stood at ~68% in CY18 Exhibit 14: Gross margins of manufactured goods have come down
Gross Margin on Traded Goods (%)
Manufactured Goods (%) Traded Goods (%)
60% Gross Margin on Manufactured Goods (%)
100%
51.1%
90% 48.2% 47.3% 46.8% 48.2% 47.4%
33% 31% 30% 29% 26% 32% 50%
80% 34% 34% 43.1% 42.8%
70% 40%
60%
27.4% 26.1%
50% 30% 23.6%
21.6%
40% 19.3% 18.5%
67% 69% 70% 71% 74% 68% 20% 15.1%
30% 66% 66%
11.5%
20% 10%
10%
0% 0%
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18
Going ahead, margins would find support from the following:
(a) Management estimates cost synergy potential from the merger of SCHFL, INA and LuK to be
~Rs 400mn-500mn, to be achieved on annualized basis in next 3 years. Of that, the split
would be as follows:
a. About Rs 240mn-300mn would stem from optimizing warehousing and freight
movement – leveraging volumes of all entities, maximizing utilization of trucks, and
enhancing the engagement of specialized 3PL service providers.
b. The remaining Rs 160mn-200mn would be generated from efficiency
improvements – reorganization of field sales force and consolidation of functions
such as finance, HR, IT, procurement and compliance.
(b) SCHFL plans to take up localization levels up by 1-2ppt each year. Present level of
localization: SCHFL ~70%, INA ~65% and LuK ~95%. Also, it is not just focusing on finished
goods localization, but also on localization of intermediate components.
(c) Increased export focus in recent times would also help expand operating margins as exports
Cost savings, increasing localization,
are typically higher in margins. The company is in the process of getting some global
and higher export focus would be
capacities relocated into India to build more export capacities out of India.
margin accretive in mid-term; however,
declining share of automotive revenues However, a decline in share of higher-margin automotive segment by ~500bps over CY18-CY21E
would pressurize EBITDA margins would limit EBITDAM expansion. We estimate EBITDAM to expand ~25bps over CY18-CY21E (and
~165bps over CY19E-CY21E). Consequently, EBITDA would grow at a ~9% CAGR over this period.
Exhibit 15: We estimate EBITDA to grow at a CAGR of ~9% over CY18-21E
EBITDA (Rs Mn) EBITDA Margin (%)

10,500 19.4% 22%
19.1%
17.7% 20%
9,000 16.5% 16.2% 16.5%
15.2% 15.6% 18%
14.8% 14.8%
7,500 16%
13.1%
14%
6,000 12%
4,500 10%
8%
3,000 6%
4%
2,540
2,204
1,836
2,417
3,053
2,969
3,665
7,396
6,981
8,051
9,543
1,500
2%
0 0%
6 October 2019| 7
Expect ~11% PAT CAGR over CY18-CY21E

Backed by ~8%/9% revenue/EBITDA CAGR over CY18-CY21E and a cut in the corporate tax to
We estimate overall revenue/EBITDA/
~25% from ~35% earlier, we estimate SCHFL’s net profit to grow at a ~11% CAGR over this period.
PAT CAGR of ~8%/9%/11% over
Note that SCHFL’s tax rate was ~31% in CY18.
CY18-CY21E
Exhibit 16: We estimate recurring PAT to grow at a CAGR of ~11% over CY18-CY21E
Recurring PAT (Rs Mn)

7,000
6,000
5,000
4,000
3,000
2,000
1,760
1,592
1,218
1,529
1,975
1,951
2,380
4,630
4,340
5,220
6,306
1,000
0
Exhibit 17: Expect FCF generation of >Rs 11bn over CY18-21E

FCF generation to stay strong despite
investments in capacity additions. CFO (Rs Mn) Capex (Rs Mn) FCFF (Rs Mn)
Guides to higher capex (than historical 8,000
levels) over next 2-3 years 6,274
6,000 5,537 5,479
4,893
4,000 3,517
2,817
2,408 2,382
1,928
2,000
552 597
62
0
-551
-2,000 -930
-2,439 -2,400
-2,800
-4,000 -3,400
CY16 CY17 CY18 CY19E CY20E CY21E
Exhibit 18: Both ROE and ROIC to increase meaningfully after a decline in CY19E
Return ratios to trend up after a decline
in CY19E; they had reached ~27% ROIC (%) ROE (%)
during the previous upcycle in CY11 30%
27%27%
27%
24%
21% 19% 20% 18%
18%18% 16% 17%
18% 16%16% 15% 16%
15% 15%15% 15%
14% 14%14%
15% 13%13%
12%
9%
6%
3%
0%
6 October 2019| 8
Valuation & view

At CMP of Rs 4,203, SCHFL is trading at a CY19E/CY20E P/E multiple of 30x/25x and an EV/EBITDA
multiple of 18x/15x.
We initiate coverage SCHFL with As depicted in Exhibit 19, SCHFL has traded in the range of 10x-45x TTM P/E multiple since 2011-
REDUCE and a Sep’20 TP of Rs 4,185 beginning. In the last 5 years, it traded at an average TTM P/E of ~34x with the present TTM P/E being
set at 26x TTM Sept’20 P/E (~25% ~31x. We expect SCHFL to trade at a discount to SKF due to lower return ratios and near-term
discount to last 5 year average) headwinds in the auto sector. We value the company at 26x TTM Sep’20 EPS to arrive at a Sep’20 TP
of Rs 4,185 (Exhibit 20). At CMP, our TP does not imply any potential upside over the next 12 months.
We initiate coverage on the company with a REDUCE.
Our target TTM multiple of ~26x is set at a ~25% discount to SCHFL’s last 5-year average TTM
multiple.
Exhibit 19: SCHFL’s average TTM P/E multiple for the last 5 years is ~34x
TTM P/E Average +1 Stdev -1 Stdev +1.5 Stdev -1.5 Stdev

50
45
40
35
30
25
20
15
10
5
0
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Source: Company, Bloomberg, Equirus Securities
Exhibit 20: Target price methodology

Parameter Unit Value
CY19E EPS Rs/Share 138.8
CY20E EPS Rs/Share 167.0
TTM Sept’20 EPS Rs/Share 161.0
P/E Multiple x 26
Target Price (Sept’20) Rs/Share 4,185
Price to earning chart Price to book chart EV-EBITDA chart

EPS 8,000 30% 3,00,000 60%
8,000 30% EBITDA
Growth 45x RoE 7x
7,000 7,000 2,50,000 Growth 50%
25% 30x
6,000
40x 6,000 25% 6x
20% 2,00,000 40% 25x
30x 5,000 5x
5,000
15% 25x 4,000 20% 4x 1,50,000 30% 20x
4,000
10% 20x 3,000 3x
3,000 1,00,000 20% 15x
2,000 5% 2,000 15%
10x
0% 1,000 50,000 10%
1,000
0 -5% 0 10% 0 0%
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-19
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-15
Sep-14
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
6 October 2019| 9
Company Snapshot
How we differ from Consensus
Equirus Consensus % Diff Comment
CY19E 47,096 47,124 0%
Sales
CY20E 51,592 52,414 -2%
CY19E 6,981 7,257 -4%
EBITDA
CY20E 8,051 8,417 -4%
CY19E 4,340 4,273 2%
PAT
CY20E 5,220 5,052 3%
Key Drivers
CY17 CY18 CY19E CY20E CY21E
Automobile 51% 51% 47% 46% 46%
Industrial 38% 39% 42% 43% 43%
Exports 11% 10% 11% 11% 11%
OEM 66% 63% 63% 63%
Aftermarket/Replacement 24% 26% 26% 26%
Exports 10% 11% 11% 11%
Our Key Arguments for a REDUCE Rating
• In the medium term, expect SCHFL to face challenges in the automobile space owing to tepid
demand and negative impact of technological changes (shift to petrol engines, gradual long-term
transition to EVs). We estimate revenue CAGR (CY18-CY21E) to be restricted to ~8%.
• We estimate operating margins to take a hit in CY19 led by a sharp decline in the automotive
revenue share (-400bps yoy) and expect them to bounce back from 2HCY20E onwards. Overall,
expect EBITDAM to expand by only ~25bps over CY18-CY21E.
• FCF generation of >Rs 11bn over CY18-CY21E despite higher-than-historical investments in
expanding capacities of existing products and increasing localization levels. However, we expect
ROE/ROIC to contract marginally over a 3 year period (CY18-CY21E) as CY19 would see a
sharp decline.
Risks to Our View
• Realization of revenue and cost synergies from the merger with INA and LuK flowing through
earlier than expected
• A faster recovery in domestic automotive demand
Company Description: Schaeffler India is a manufacturer of high-precision components and systems

(including bearings) for automotive applications and ball and roller bearings for industrial applications.
Company has four manufacturing facilities across India:
(a) Vadodara, Savli plant: Product range - next generation deep groove ball bearings and large
size roller bearings. It is a plant for mass production as well as customised low volume
solutions.
(b) Vadodara, Maneja plant: Product range - vast range of ball bearings, cylindrical roller
bearings, and spherical roller bearing. It is a flexible plant catering to mid-size volumes.
(c) Pune, Talegaon plant: Product Range - Engine and Powertrain Components for front
accessory drive system, chain drive systems, valve train components, gear shift systems and
a range of needle roller bearings and elements.
(d) Hosur plant: Product Range - Concentric Slave Cylinder Assembly, Clutch Master Cylinder
Assembly, Semi Slave Cylinder Assembly, Adapter Assembly, High Pressure Pipe Assembly.
6 October 2019| 10
Overview of parent company – Schaeffler AG

Globally, Industrial contributes ~24% Schaeffler AG (headquartered in Herzogenaurach, Germany) is a global automotive and industrial
towards revenues vs ~49% for India. supplier and manufactures high-precision components and systems in engine, transmission, and
India accounts for <5% of Schaeffler chassis applications, as well as rolling and plain bearing solutions for a large number of industrial
AG’s sales. R&D expenses stands at applications. Company has been able to grow its sales at a CAGR (CY14-18) of ~4.1% to reach ~ €
~6% of sales. 14,240mn in CY18. Globally, Automotive segment (both OEM and aftermarket combined) contributes
~76% towards revenues (vs only ~51% for India business). Being a research and technology driven
organization, it spends ~6% of sales towards R&D activities.
Exhibit 21: Revenues have grown at a CAGR of ~4% in last 5 years Exhibit 22: However, margins have decline during the same period
Sales (Euro Mn) Growth (Yoy%) EBIT (Euro Mn) EBIT Margin (%)
14,500 10% 1,800 14%
9% 12.6%
9% 1,600 11.7%
14,000 12%
8% 10.6% 10.9%
1,400
13,500 7% 9.5%
1,200 10%
13,000 5% 6%
1,000
5% 8%
12,500 800
4%
600 6%
12,000 3%
1% 2% 2% 400
11,500 4%
1% 200
12,124 13,179 13,338 14,021 14,241 1,523 1,402 1,556 1,528 1,354
11,000 0% 0 2%
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Source: Schaeffler AG, Equirus Securities Source: Schaeffler AG, Equirus Securities
Exhibit 23: Automotive segment contributes >75% towards revenues Exhibit 24: Transmission systems contribute the most within auto
Chassis
Industrial, Systems, 17%
24%
Engine
Systems, 31%
E-Mobility,
5%
Automotive
Aftermarket, Automotive
13% OEM, 63%
Transmission
Systems, 46%
Exhibit 25: Automotive margins are on a declining trend Exhibit 26: R&D expenses have increased substantially in last 3-4 years
Automotive EBIT Margin (%) Industrial EBIT Margin (%) R&D Expenses (Euro Mn) R&D Expenses as a % of Sales
13.3% 6.0%
14% 900 5.9% 6%
5.6%
11.8% 800 6%
12% 5.1% 5.1%
10.4% 700 5%
10% 600
5%
7.7% 9.2% 500
8% 4%
400
6.1%
4%
6% 300
200 3%
4% 3%
100
622 673 751 846 847
2% 0 2%
2016 2017 2018 2014 2015 2016 2017 2018
6 October 2019| 11
Key Milestones
Year Milestone
1962 Precision Bearings India Limited was incorporated
1969 FAG Germany acquired shares of Precision Bearings from Norma Hoffman
1975 Commissioned a plant for Railways bearings
1986 Changed the name of the company to FAG Bearings India Ltd
1992 Changed the brand name from Norma to FAG
LuK established a JV with Rane for manufacturing clutch systems in India; FAG
1997
commissioned an export oriented unit for Cylindrical Roller Bearings
Commissioned India's first Wheel Bearing Plant at Vadodara; LuK started
1999
production of clutches for tractors at Hosur
INA’s Pune plant was set up; FAG became part of Schaeffler group; LuK India was
2001
formed as company acquired Rane’s stake in the JV
New INA plant inaugurated at Talegaon, Pune; Production of HLA/RFF started at
2007
that plant
2011 Commissioned 3rd Generation Wheel Bearing plant at Vadodara
Inaugurated FAG’s Savli Plant with advanced Gen C bearings production;
2012
Production of Hydraulic CRS started at LuK, Hosur
2013 Started production of OAP at INA, Talegaon
FAG Bearings India Ltd was officially renamed to Schaeffler India Ltd; Started
2017
production of heavy duty clutches at LuK, Hosur
Completed the merger of Schaeffler India, INA Bearings and LuK India to create
2018
‘One Schaeffler’ entity in India
Corporate Governance
Based on Schaeffler’s CY18 Annual Report, following are the key highlights of our preliminary
assessment of the level of corporate governance in the company:
Schaeffler’s core principals of Corporate Governance are (a) emphasis on integrity and accountability,
(b) practices aimed at a high level of business ethics and effective supervision, and (c) enhancement of
value for all stakeholders.
Board of Directors: Schaeffler’s Board has 9 Directors, of whom eight are Non-Executive Directors
(including the Chairman), and one is a Managing Director. Out of eight Non-Executive Directors, four
are Independent Directors (including a woman Director). No two Directors are related to each other.
Board members have collective experience in diverse fields of automotive industry, banking and
finance, law etc.
It is to be noted 8 out of 9 Directors were present in last year’s AGM. During CY18, 4 board meetings
were held and the time gap between any two meetings did not exceed 120 days. All Directors attended
2 or more meetings of the 4 meetings. Operations of the Company is entrusted to the Managing
Director, who is assisted by a Core Management Team and Senior Executives having rich experience
and expertise in their respective fields.
Committees of the Board: There are 5 board committees – Audit, Nomination & Remuneration,
Stakeholders’ Relationship, CSR and Risk Management (formed in CY19). All 4 committees last year
were headed by Independent directors. During CY18, meetings held by these 4 committees were
4/3/2/2 respectively. During CY18, 9 investor complaints were received out of which 8 complaints
were resolved satisfactorily and 1 was pending as on Dec 31, 2018.
Disclosure Norms
As per our preliminary study, we do not find any issues on this front. The company follows disclosure
norms as stipulated by the listing agreement of exchanges and is timely in coming up with
quarterly/half-yearly/annual results, investor presentations and annual reports. Management holds an
earnings call after every quarterly result.
Other Highlights
6 October 2019| 12
The Board had recommended a dividend of Rs 30/equity share for CY18 (dividend payout ratio of
~20%). Company has gradually increased its payout ratio to ~20% in CY18 from just ~5% in CY12.
Company has not done any buybacks despite holding considerable excess cash on the balance sheet.
B S R & Co. LLP, Chartered Accountants are the auditors for the Company.
Management Profile
Name Designation Description
Mr. Gandhi is a Mechanical Engineer by qualification and has a rich experience in the
Mr. Avinash Chairman &
automotive industry. He is also a freelance consultant who has advised Indian automobile
Gandhi Independent Director
component manufacturers on strategic matters.
Mr. Arora is a Mechanical Engineer from University of Mumbai and holds the prestigious TRIUM
Global Executive MBA degree from Stern School of Business, London School of Economics and
Mr. Dharmesh
Managing Director HEC Paris. His total experience spans over 27 years and has been with Schaeffler India since
Arora
2012. Prior to joining Schaeffler, he has worked with General Motors over two decades and held
various global leadership positions over there.
Mr. Patel is an Associate Member of the Institute of Cost Accountants of India and holds a
Director Finance & Master’s degree in Commerce. He has been associated with the Company since 1992 and has a
Mr. Satish Patel
CFO vast experience of >28 years (>12 years at Schaeffler India in leadership roles) in controlling and
finance management. Prior to joining Schaeffler, he had worked with Elecon group for two years.
Mr. Klaus Non-Executive, Non- Mr. Rosenfeld is the CEO of Schaeffler Group and has >20 years of experience in Banking &
Rosenfeld Independent Director Finance. He has studied business administration and economics at the University of Muenster.
Mrs. Challu has Master’s Degree in Economics (Gold Medalist) from University of Lucknow. She
Mrs. Renu
Independent Director has worked with State Bank of India (SBI) Group for over 38 years, holding various top
Challu
management positions.
Dr. Mishra holds MS and PhD in Metallurgical Engineering from University of Illinois at Urbana-
Dr. Sanak
Independent Director Champaign (UIUC), USA. He was a Vice President of Arcelor Mittal and Chief Executive Officer
Mishra
(CEO) of its Greenfield Projects in India.
Mr. Jinsi is a Bachelor of Engineering (Electrical) from Punjab Engineering College, Chandigarh
Mr. Rakesh Jinsi Independent Director and has a vast experience of >30 years with leading automobile companies such as Eicher, Hero
and Force Motors.
Mr. Kumar holds a Degree in law and commerce and had been associated with Remfry & Sagar
Mr. R. Sampath Non-Executive, Non-
for 25 years as an Attorney-at-Law. Presently, he practices primarily in the area of corporate and
Kumar Independent Director
general commercial law and works predominantly for European companies.
Mr. Ziegler has studied business administration at the AKAD University in Germany and has ~38
Mr. Jürgen Non-Executive, Non- years of experience in areas of sales, logistics, project management, financial controlling,
Ziegler Independent Director strategic planning, and business restructuring. He is currently Regional CEO-Europe, of Schaeffler
Group.
6 October 2019| 13
Comparable Valuation – Industrials (Equirus Coverage Universe)

P/E EV/EBITDA P/B RoE Div Yield
Mkt Cap Price Target
Company Reco. CMP
Rs Mn Target Date
FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A FY20E FY21E FY19A
SKF India ADD 2,128 1,05,123 2,337 Sept'20 31.3 28.1 24.3 20.6 20.2 17.2 6.2 5.4 4.8 19% 21% 21% 0.6%
Schaeffler India REDUCE 4,190 1,30,982 4,271 Sept'20 28.3 30.3 24.7 16.7 17.5 14.7 4.8 4.4 3.9 18% 15% 17% 0.7%
Carborundum
LONG 316 59,678 433 Sept'20 24.1 22.9 18.6 13.5 12.4 10.1 3.5 3.1 2.8 15% 14% 16% 0.9%
Universal
Grindwell
ADD 585 64,788 611 Jun'20 38.7 34.9 29.6 23.1 20.3 17.2 5.9 5.4 5.0 16% 16% 18% 1.0%
Norton
KEC
LONG 293 75,340 362 Sept'20 15.5 13.2 10.9 8.0 7.4 6.1 3.1 2.6 2.2 22% 21% 22% 0.9%
International
Triveni Turbine LONG 102 32,945 121 Sept'20 33.4 27.5 24.0 21.7 17.6 15.0 7.6 6.7 5.8 23% 26% 26% 0.0%
Sterlite
LONG 164 65,849 294 Sept'20 11.5 10.9 8.4 7.5 6.7 5.2 3.8 3.1 2.4 39% 31% 33% 2.1%
Technologies
6 October 2019| 14
Quarterly Performance
Y/E Dec (Rs Mn) 1QCY18A 2QCY18A 3QCY18A 4QCY18A 1QCY19A 2QCY19A 3QCY19E 4QCY19E
Revenue 10,835 11,003 11,915 11,863 11,723 11,167 11,978 12,227
COGS 6,754 6,869 7,424 7,689 7,455 6,891 7,666 7,826
Employee Cost 784 793 816 785 842 915 915 915
Other Expenses 1,459 1,540 1,678 1,671 1,582 1,768 1,653 1,687
EBITDA 1,838 1,801 1,997 1,718 1,844 1,594 1,744 1,799
Depreciation 359 366 372 388 378 385 414 414
EBIT 1,479 1,435 1,625 1,330 1,466 1,209 1,330 1,386
Interest Expenses 13 17 13 27 12 8 11 11
Other Income 222 292 170 265 172 125 179 179
Profit Before Tax 1,689 1,710 1,782 1,569 1,626 1,326 1,498 1,554
Tax Expenses 549 590 484 497 561 501 296 307
Recurring PAT 1,140 1,120 1,298 1,072 1,065 825 1,203 1,247
Extraordinaires 35 6 391 0 3 0 0 0
Reported PAT 1,105 1,114 907 1,072 1,062 825 1,203 1,247
FDEPS 36.5 35.8 41.5 34.3 34.1 26.4 38.5 39.9
Cost Items as % of Sales
COGS 62.3 62.4 62.3 64.8 63.6 61.7 64.0 64.0
Employee Cost 7.2 7.2 6.9 6.6 7.2 8.2 7.6 7.5
Other Expenses 13.5 14.0 14.1 14.1 13.5 15.8 13.8 13.8
Margin (%)
Gross Margin 37.7 37.6 37.7 35.2 36.4 38.3 36.0 36.0
EBITDA Margin 17.0 16.4 16.8 14.5 15.7 14.3 14.6 14.7
PAT Margin 10.5 10.2 10.9 9.0 9.1 7.4 10.0 10.2
YoY Growth (%)
Sales 134.9 139.6 142.1 134.4 8.2 1.5 0.5 3.1
EBITDA 107.8 109.1 120.5 69.5 0.3 -11.5 -12.7 4.7
EBIT 108.6 109.8 123.6 59.5 -0.9 -15.8 -18.1 4.2
PAT 98.3 107.5 121.4 57.7 -6.6 -26.4 -7.4 16.4
6 October 2019| 15
Key Financials (Consolidated)

Income Statement
Y/E Dec (Rs Mn) CY15A CY16A CY17A CY18A CY19E CY20E CY21E
Revenue 17,244 17,963 19,187 45,615 47,096 51,592 57,920
COGS 9,907 10,826 11,056 28,736 29,837 32,627 36,380
Employee Cost 1,321 1,492 1,531 3,179 3,587 3,847 4,164
Other Expenses 2,964 2,676 2,935 6,305 6,690 7,067 7,833
EBITDA 3,053 2,969 3,665 7,396 6,981 8,051 9,543
Depreciation 655 641 711 1,485 1,590 1,869 2,090
EBIT 2,398 2,328 2,954 5,911 5,391 6,182 7,453
Interest Expenses 21 18 10 70 41 24 24
Other Income 562 683 679 908 654 820 1,001
Profit Before Tax 2,938 2,993 3,623 6,749 6,003 6,979 8,430
Tax Expenses 963 1,043 1,243 2,119 1,664 1,759 2,124
Recurring PAT 1,975 1,951 2,380 4,630 4,340 5,220 6,306
Extraordinaires 0 0 0 432 3 0 0
Reported PAT 1,975 1,951 2,380 4,198 4,336 5,220 6,306
FDEPS 118.8 117.4 143.2 148.1 138.8 167.0 201.7
DPS 10.0 12.0 17.0 30.0 34.7 41.7 50.4
BVPS 775.8 887.7 1020.2 865.7 962.6 1079.3 1220.4
YoY Growth (%) CY15A CY16A CY17A CY18A CY19E CY20E CY21E
Sales 5.7 4.2 6.8 137.7 3.2 9.5 12.3
EBITDA 26.3 -2.7 23.4 101.8 -5.6 15.3 18.5
EBIT 24.6 -2.9 26.9 100.1 -8.8 14.7 20.6
PAT 29.2 -1.2 22.0 94.5 -6.3 20.3 20.8
Key Ratios
Profitability (%) CY15A CY16A CY17A CY18A CY19E CY20E CY21E
Gross Margin 42.6 39.7 42.4 37.0 36.6 36.8 37.2
EBITDA Margin 17.7 16.5 19.1 16.2 14.8 15.6 16.5
PAT Margin 11.5 10.9 12.4 10.2 9.2 10.1 10.9
ROE 16.5 14.1 15.0 18.4 15.2 16.4 17.5
ROIC 16.0 13.9 14.8 17.8 14.9 16.2 17.4
Core ROIC 18.3 16.9 21.0 21.8 18.1 19.9 22.3
Dividend Payout 8.4 10.2 11.9 20.3 25.0 25.0 25.0
CAGR (%) 1 year 2 years 3 years 5 years 7 years 10 years

Revenue 137.7 59.4 38.3 26.6 19.5 19.9
EBITDA 101.8 57.8 34.3 32.1 16.5 17.2
PAT 94.5 54.1 32.8 30.6 14.8 16.6
Valuations (x) CY15A CY16A CY17A CY18A CY19E CY20E CY21E

P/E 35.4 35.8 29.3 28.4 30.3 25.2 20.8
P/B 5.4 4.7 4.1 4.9 4.4 3.9 3.4
P/FCFF -179.8 126.5 1130.0 220.2 46.6 37.4 26.9
EV/EBITDA 41.6 42.2 33.7 16.7 17.5 15.0 12.3
EV/Sales 7.4 7.0 6.4 2.7 2.6 2.3 2.0
Dividend Yield (%) 0.2 0.3 0.4 0.7 0.8 1.0 1.2
* SCHFL, INA and LuK merger is effective from CY18 onwards
6 October 2019| 16
Balance Sheet
Equity Capital 166 166 166 313 313 313 313
Reserves 12,726 14,585 16,787 26,749 29,779 33,428 37,837
Net worth 12,892 14,752 16,953 27,061 30,092 33,741 38,149
Gross Debt 0 0 0 577 0 0 0
Other Long-term Liabilities 322 271 296 394 394 394 394
Minority Interest 0 0 0 0 0 0 0
Account Payables 2,405 2,710 2,868 7,878 6,968 7,633 8,569
Other Current Liabilities 935 805 813 1,764 1,764 1,764 1,764
Total Liabilities & Equity 16,554 18,537 20,930 37,674 39,216 43,531 48,875
Gross Fixed Assets 7,854 4,502 5,140 10,777 14,177 16,977 19,377
Acc. Depreciation 4,397 640 1,341 3,470 5,060 6,929 9,019
Capital WIP 519 241 327 1,617 1,617 1,617 1,617
Other Long-term Assets 1,283 1,440 1,175 2,112 2,112 2,112 2,112
Inventory 2,203 2,740 2,736 9,101 7,742 8,481 9,521
Account Receivables 3,364 3,263 3,199 7,513 7,742 8,481 9,521
Other Current Assets 1,024 586 1,388 1,547 1,547 1,547 1,547
Cash & Cash Equivalents 4,704 6,406 8,306 8,476 9,339 11,245 14,199
Total Assets 16,554 18,537 20,930 37,674 39,216 43,531 48,875
Non-Cash WC 3,251 3,073 3,642 8,520 8,300 9,113 10,257
Cash Conv. Cycle 61 66 60 61 66 66 66
WC Turnover 5.3 5.8 5.3 5.4 5.7 5.7 5.6
Gross Asset Turnover 2.3 2.9 4.0 5.7 3.8 3.3 3.2
Net Asset Turnover 4.8 4.9 5.0 8.2 5.7 5.4 5.7
Net D/E -0.3 -0.4 -0.5 -0.3 -0.3 -0.3 -0.4
Days (x) CY15A CY16A CY17A CY18A CY19E CY20E CY21E

Receivable Days 66 67 61 56 60 60 60
Inventory Days 44 50 52 60 60 60 60
Payable Days 48 52 53 55 54 54 54
Cash Conversion Cycle 61 66 60 61 66 66 66
Cash Flow
PBT 2,938 2,993 3,623 6,749 6,003 6,979 8,430
Depreciation 655 641 711 1,485 1,590 1,869 2,090
Others -560 -462 -483 -1,092 -613 -797 -977
Tax Paid 1,125 1,123 1,215 2,287 1,664 1,759 2,124
Changes in Working Capital -90 -121 -228 -2,473 220 -813 -1,144
Operating Cash Flow 1,819 1,928 2,408 2,382 5,537 5,479 6,274
Capex -575 -930 -551 -2,439 -3,400 -2,800 -2,400
Change in Investment -1,996 -919 -2,297 -12 0 0 0
Others 350 462 495 617 650 820 1,001
Investing Cash Flow -2,221 -1,387 -2,353 -1,834 -2,750 -1,980 -1,399
Change in Debt 0 0 0 -116 -577 0 0
Change in Equity 0 0 0 0 0 0 0
Others -172 -218 -251 -410 -1,347 -1,594 -1,921
Financing Cashflow -172 -218 -251 -527 -1,924 -1,594 -1,921
Net Change in Cash & Cash Equivalents -574 323 -196 22 863 1,905 2,954
* SCHFL, INA and LuK merger is effective from CY18 onwards
6 October 2019| 17
Equirus Securities
Satish Kumar Head of Equities satish.kumar@equirus.com 91-22-43320616
Research Analysts Sector/Industry Email Equity Sales E-mail
Ashutosh Tiwari Auto ashutosh@equirus.com 91-79-61909517 Girish Solanki girish.solanki@equirus.com 91-22-43320634

Bharat Celly Healthcare bharat.celly@equirus.com 91-79-61909524 Ruchi Bhadra ruchi.bhadra@equirus.com 91-22-43320601
Depesh Kashyap Mid-Caps depesh.kashyap@equirus.com 91-22-43320671 Subham Sinha subham.sinha@equirus.com 91-22-43320631
Deepan Kapadia IT Services deepan.kapadia@equirus.com 91-22-43320643 Viral Desai viral.desai@equirus.com 91-22-43320635
Dhaval Dama FMCG, Mid-Caps dhaval.dama@equirus.com 91-79-61909518 Vishad Turakhia vishad.turakhia@equirus.com 91-22-43320633
Harshit Patel Capital Goods harshit.patel@equirus.com 91-79-61909522 Cash Dealing Room E-mail
Consumer
Manoj Gori manoj.gori@equirus.com 91-79-61909523 Dharmesh Mehta dharmesh.mehta@equirus.com 91-22-43320661
Durables
Maulik Patel Oil and Gas maulik@equirus.com 91-79-61909519 Gaurav Mehta gaurav.mehta@equirus.com 91-22-43320680
Pranav Mehta Building Materials pranav.mehta@equirus.com 91-79-61909514 Manoj Kejriwal manoj.kejriwal@equirus.com 91-22-43320663
Banking &
Rohan Mandora rohan.mandora@equirus.com 91-79-61909529 Sarit Sanyal sarit.sanyal@equirus.com 91-22-43320666
Financial Services
Shreyans Mehta Infrastructure shreyans.mehta@equirus.com 91-22-43320611 Shrikant Pandya shrikant.pandya@equirus.com 91-22-43320660
Siddharth
Metals, Chemicals siddharth.gadekar@equirus.com 91-22-43320670 Vikram Patil vikram.patil@equirus.com 91-22-43320677
Gadekar
Associates E-mail Compliance Officer E-mail
Akshay Falgunia akshay.falgunia@equirus.com 91-79-61909516 Jay Soni jay.soni@equirus.com 91-79-61909561
Corporate
Lalit Deo lalit.deo@equirus.com 91-79-61909533 E-mail
Communications
Narendra
narendra.mhalsekar@equirus.com 91-79-61909513 Mahdokht Bharda mahdokht.bharda@equirus.com 91-22-43320647
Mhalsekar
Nishant Bagrecha nishant.bagrecha@equirus.com 91-79-61909526 Quant Analyst E-mail
Prateeksha
prateeksha.malpani@equirus.com 91-79-61909532 Kruti Shah kruti.shah@equirus.com 91-22-43320632
Malpani
Ronak Soni Ronak.soni@equirus.com 91-79-61909525 F&O Dealing Room E-mail
Rushabh Shah rushabh.shah@equirus.com 91-79-61909520 Bhavik Shah bhavik.shah@equirus.com 91-22-43320669
Shreepal Doshi shreepal.doshi@equirus.com 91-79-61909541 Dhananjay Tiwari dhananjay.tiwari@equirus.com 91-22-43320668
Varun Baxi varun.baxi@equirus.com 91-79-61909527 Kunal Dand kunal.dand@equirus.com 91-22-43320678
Vikas Jain vikas.jain@equirus.com 91-79-61909531 Mukesh Jain Mukesh.jain@equirus.com 91-22-43320667
Rating & Coverage Definitions: Registered Office:

Absolute Rating Equirus Securities Private Limited
• LONG : Over the investment horizon, ATR >= Ke for companies with Free Float market cap >Rs 5 billion and ATR Unit No. 1201, 12th Floor, C Wing, Marathon Futurex,
>= 20% for rest of the companies N M Joshi Marg, Lower Parel,
• ADD: ATR >= 5% but less than Ke over investment horizon Mumbai-400013.
• REDUCE: ATR >= negative 10% but <5% over investment horizon Tel. No: +91 – (0)22 – 4332 0600
• SHORT: ATR < negative 10% over investment horizon Fax No: +91- (0)22 – 4332 0601
Relative Rating
• OVERWEIGHT: Likely to outperform the benchmark by at least 5% over investment horizon Corporate Office:
• BENCHMARK: likely to perform in line with the benchmark 3rd floor, House No. 9,
• UNDERWEIGHT: likely to under-perform the benchmark by at least 5% over investment horizon Magnet Corporate Park, Near Zydus Hospital, B/H Intas Sola Bridge,
Investment Horizon S.G. Highway Ahmedabad-380054
Investment Horizon is set at a minimum 3 months to maximum 18 months with target date falling on last day of a calendar Gujarat
quarter. Tel. No: +91 (0)79 - 6190 9550
Fax No: +91 (0)79 – 6190 9560
6 October 2019| 18
© 2019 Equirus Securities Private Limited. All rights reserved. For Private Circulation only. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Equirus Securities
Private Limited
Analyst Certification
I, Harshit Patel, author to this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no
part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures
Equirus Securities Private Limited (ESPL) having Corporate Identification Number U65993MH2007PTC176044 is registered in India with Securities and Exchange Board of India (SEBI) as a trading member on the Capital
Market (Reg. No. INB231301731), Futures & Options Segment (Reg. No.INF231301731) of the National Stock Exchange of India Ltd. (NSE) and on Cash Segment (Reg. No.INB011301737) of Bombay Stock Exchange
Limited (BSE).ESPL is also registered with SEBI as Research Analyst under SEBI (Research Analyst) Regulations, 2014 (Reg. No. INH000001154), as a Portfolio Manager under SEBI (Portfolio Managers Regulations, 1993
(Reg. No.INP000005216) and as a Depository Participant of the Central Depository Services (India) Limited (Reg. No.IN-DP-324-2017). There are no disciplinary actions taken by any regulatory authority against ESPL.
ESPL is a subsidiary of Equirus Capital Pvt. Ltd. (ECPL) which is registered with SEBI as Category I Merchant Banker and provides investment banking services including but not limited to merchant banking services, private
equity, mergers & acquisitions and structured finance.
As ESPL and its associates are engaged in various financial services business, it might have: - (a) received compensation (except in connection with the preparation of this report) from the subject company for investment
banking or merchant banking or brokerage services in the past twelve months;(b) managed or co-managed public offering of securities for the subject company in the past twelve months; or (c) have received a mandate
from the subject company; or (d) might have other financial, business or other interests in entities including the subject company (ies) mentioned in this Report. ESPL & its associates, their directors and employees may from
time to time have positions or options in the company and buy or sell the securities of the company (ies) mentioned herein. ESPL and its associates collectively do not own (in their proprietary position) 1% or more of the
equity securities of the subject company mentioned in the report as the last day of the month preceding the publication of the research report. ESPL or its Analyst or Associates did not receive any compensation or other
benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ESPL nor Research Analysts have any material conflict of interest at the time of
publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ESPL has not been engaged in market making
activity for the subject company.
The Research Analyst engaged in preparation of this Report:-
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Indian Bearings Industry - Equirus Industry

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Revival in industrial production the key

Harshit Patel (harshit.patel@equirus.com, +91-9825406497)

Automotive and Industrial Bearings

Revival in industrial production the key

This report is solely produced by. The following person(s) are

Refer to important disclosures at the end of this report 6 October 2019| 1

Global bearings industry

Global Bearings Market (USD Bn) Growth (Yoy%)

Source: AB SKF, Equirus Securities

Middle East &

Asia Pacific, 50%

Source: AB SKF, Equirus Securities

Indian bearings Industry

Indian Bearings Industry (Rs bn) Growth (Yoy%)

Source: SKF India, Equirus Securities

Automotive, Imports, 40%

Ball, roller bearings contribute almost equally to market

Ball bearings most widely used bearings.

In Cylindrical Roller Bearings, cylinders are

Spherical Roller Bearings are used in

Tapered roller bearings have tapered inner

Source: Industry, Equirus Securities

Exhibit 9: Ball bearings account for ~50% of bearings usage in India

Exhibit 10: Industry players & their expertise

Competitive landscape and industry dynamics

Others, 26% SKF India, 25%

NBC Bearings, 15%

Revenue of Top-8 Bearings Companies (Rs Mn)

CAGR (FY06-12) CAGR (FY12-FY18)

IIP Growth (%)

Source: RBI’s OBICUS Survey on Manufacturing Sector, Equirus Securities

MNCs to increase localization for some industrial SKUs to improve margins

SKF India (% of Traded Products) Schaeffler India (% of Traded Products)

Exports not a key focus area for SKF, SCHFL

R&D expenses, royalty/technical fees – huge cost components

MNCs beat Indian bearings manufacturers on most operational metrics

NRB Bearings NBC Bearings Menon Bearings

Railway demand (both on passenger and freight fronts) to be a major driver

Locomotives, SKF India,

NEI & Others,

138 350 328

Source: IBEF, Equirus Securities Source: IBEF, Equirus Securities

Threat from EVs (long-term impact)

SKF vs Schaeffler India – A comparison

Initiate SKF with ADD, SCHFL with REDUCE

We estimate a ~9%/11%/9%/14% revenue/EBITDA/PBT/PAT CAGR over FY19-FY22E and ROE to

b) It would face challenges in improving content per vehicle owing to:

We estimate SCHFL’s revenue/EBITDA/PBT/PAT to grow at a CAGR (CY18-CY21E) of

Exhibit 30: Relative valuation vis a vis Indian bearing companies

Exhibit 31: Relative valuation vis-à-vis global bearing companies

Schaeffler AG (Euro) 7 4,514 0.8 5x 6x 6x 3x 4x 3x 25% 21% 22% 13% 6% 7%

NSK Ltd (Yen) 914 5,03,859 0.2 9x 15x 14x 5x 7x 6x 9% 6% 6% 6% 4% 4%

JTEKT Corp (Yen) 1,216 4,17,436 0.2 17x 13x 11x 4x 5x 4x 3% 7% 8% 3% 4% 4%

Source: Companies, Bloomberg, Equirus Securities

SKF India Ltd

Poised for industry-leading growth ahead Rs 2,073 Rs 2,287

the historical average. Also, we expect ROE/ROIC to expand by ~200bps/300bps to 1,600

Refer to important disclosures at the end of this report 6 October 2019| 1

To outgrow bearings industry over next 3-4 years

15% 47% 49% 51% 49% 52%

Source: Company, Equirus Securities Source: Company, Equirus Securities

Automotive segment - Measures taken in past to lead to market share gains