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Schaeffler India Limited (NSE:SCHAEFFLER), a ₹86.9b small-cap, is a machinery manufacturing company operating in an industry, which faces increasing demand of capital equipment and machinery from developing economies in Asia, Latin America and the Middle East. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 18% in the upcoming year , and a whopping growth of 46% over the next couple of years. the growth rate of the Indian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Schaeffler India is a laggard or leader relative to its capital goods peers.
See our latest analysis for Schaeffler India
What’s the catalyst for Schaeffler India’s sector growth?
Machinery manufacturers face the challenge of managing a plethora of new data so that it becomes useful, adapt technology to run their supply chains more efficiently. In the past year, the industry delivered growth in the twenties, beating the Indian market growth of 22%. Schaeffler India lags the pack with its lower growth rate of 16% over the past year, which indicates the company has been growing at a slower pace than its machinery peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 21% in the upcoming year. This future growth may make Schaeffler India a more expensive stock relative to its peers.
Is Schaeffler India and the sector relatively cheap?
Machinery companies are typically trading at a PE of 18.73x, in-line with the Indian stock market PE of 17.53x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 12% compared to the market’s 9.5%, potentially illustrative of past tailwinds. On the stock-level, Schaeffler India is trading at a higher PE ratio of 34.22x, making it more expensive than the average machinery stock. In terms of returns, Schaeffler India generated 14% in the past year, which is 2.3% over the machinery sector.
Next Steps:
Schaeffler India is machinery industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If Schaeffler India has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the capital goods sector. However, before you make a decision on the stock, I suggest you look at Schaeffler India’s fundamentals in order to build a holistic investment thesis.