RESULT UPDATE

SCHAEFFLER INDIA
Auto volatility queers the pitch
India Equity Research| Bearing

While Schaeffler India’s (Schaeffler) Q1CY19 sales grew 8% YoY driven by EDELWEISS RATINGS
strong 14.6% YoY spurt in industrials, slowdown in the auto primary Absolute Rating HOLD
market took a toll on automotive’s growth—down 3.4% YoY. EBITDA Investment Characteristics None
margin fell 130bps YoY due to adverse sales mix, leading to flat EBITDA
(9% below estimate). Going ahead, we expect industrials to sustain
strong growth led by raw materials, railways and aftermarket. However, MARKET DATA (R: SCHE.BO, B: SCHFL IN)
we perceive challenges: i) uncertainty in automotive PV (28% of overall CMP : INR 5,160
sales) with major auto OEMs reducing production of diesel engine cars Target Price : INR 5,592
due to implementation of BSVI; and ii) margin pressure due to adverse 52-week range (INR) : 5,826 / 4,591
mix despite softening commodity prices. Hence, we revise down CY19E Share in issue (mn) : 31.3
and CY20E EPS 9% and 6%, respectively, and trim 9mCY20E multiple to M cap (INR bn/USD mn) : 161 / 2,368

28x (in line with five-years’ average; from 30x). Therefore, we downgrade Avg. Daily Vol. BSE/NSE (‘000) : 7.1

to ‘HOLD’ with revised target price of INR5,592 (INR6,125 earlier).

SHARE HOLDING PATTERN (%)

Auto continues to be weak; shift to gasoline a further drag Current Q3FY19 Q2FY19
Promoters * 74.1 74.1 -
The automotive segment lost steam in Q1CY19 (down 3.4% YoY) owing to weakness in
MF's, FI's & BKs 14.6 14.6 -
the auto OEM. Production of PV, which contributes 28% to overall sales, fell 3.5% YoY
FII's 2.8 2.8 -
in Q1CY19. Auto replacement was not impacted as much as OEMs and grew ~10% YoY.
Others 8.4 8.4 -
Further, with implementation of BSVI, major auto OEMs have announced cuts in
* Promoters pledged shares : NIL
production of diesel cars (where bearing content per car is higher by INR3,000-5,000) (% of share in issue)
by April 2020. Schaeffler estimates the shift to impact its sales from PV by 2-3%.
PRICE PERFORMANCE (%)
Industrials sustains growth momentum BSE Midcap Stock over
Stock
Index Index
The segment grew a strong 14.6% YoY despite slowdown in two wheelers and
agriculture tractors. Growth was led by railways, raw materials (steel production, 1 month 6.8 4.1 (2.7)
mining, cement, paper & pulp) and power transmission & distribution. Railways (4% of 3 months (1.2) (3.5) (2.4)
sales) grew 30% plus YoY. The company’s Tarole bearings have gained significant 12 months (6.0) 2.1 8.1
traction in railways and management expects the segment to sustain momentum.
Industrial aftermarket (16-17% within industrial) also grew strongly.

Outlook and valuation: Challenges ahead; downgrade to ‘HOLD’

We perceive downside risks to Schaeffler as major auto OEMs are shifting production
in favour of gasoline engines. Hence, we trim 9mCY20E multiple to 28x and revise
down CY19E and CY20E EPS 9% and 6%, respectively. Therefore, we downgrade
to ’HOLD’ from ‘BUY’ with a target price of INR5,592.
Financials (Combined Entity) (INR mn)
Year to Dec. Q1CY19 Q1CY18 % change Q4CY18 % change CY18 CY19E CY20E
Shradha Sheth
Net rev. 11,723 10,835 8.2 11,863 (1.2) 45,615 50,507 57,062
+91 22 6623 3308
EBITDA 1,844 1,839 0.3 1,718 7.3 7,355 8,546 10,357 shradha.sheth@edelweissfin.com
Adj. PAT 1,065 1,086 (1.9) 1,072 (0.6) 4,445 5,227 6,582
Shanmuganandam T.
Adj. Dil. EPS (INR) 34.1 34.7 (1.9) 34.3 (0.6) 142.2 167.2 210.6 +91 22 6623 3357
Diluted P/E (x) 30.8 24.5 shanmuganandam.t@edelweissfin.com
EV/EBITDA (x) 17.5 14.1
ROAE (%) 17.8 19.0 May 6, 2019

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Bearing

Q1CY19 conference call: Key highlights

Revenue growth and margin

 Overall net sales grew ~8% YoY (mere 2% below estimate) post growing 16% in Q4CY18
and CY18. Sales growth slowed as the automotive segment was impacted (down 3.4%
YoY) by slowdown in OEM production. However, it was offset by strong industrial sales
(up 14.6% YoY) and exports (up 24.3% YoY). Management expects auto sales to pick up
in H2CY19.

 Gross margin dipped 130bps, leading to EBITDA margin falling 130bps to 15.7%. Margin
was impacted by adverse sales mix and lower volumes. EBITDA growth was flat at 0.3%
YoY, 9% below estimate. Management expects the cost of key raw materials such as
steel to remain soft during the balance quarters of CY19.

 The company had last announced a price hike in Q2CY18. While full quantum of the
price hike has been absorbed amongst industrial customers, around 80% has been
absorbed by automotive customers. The company expects complete pass through
within the automotive segment in Q2CY19.

 Adjusted PAT declined 5.6% YoY on higher effective tax rate of 34% (up 200bps YoY).

Product mix
 Mix of mobility and others stands at 80.1% and 19.9%, respectively. Mobility includes
two wheelers, tractors, railways, etc., which are accounted in the industrial pie.

 Automotive segment (48% of overall sales)

o The segment slowed down in Q1CY19 (down 3.4% YoY) owing to weakness in the
primary auto market, leading to a decline in its contribution to overall sales to 48%
from 50% in the base quarter. A good portion of the automotive segment is
contributed by passenger vehicles, whose production was down 3.5% YoY in
Q1CY19. Auto replacement was not impacted to the extent of OEMs and grew
~10% YoY.

o Shift from diesel to gasoline: In light of the implementation of BSVI norms by April
2020, auto OEMs are planning to reduce their dependence on diesel cars (as BSVI
compliant diesel cars are much more expensive than petrol versions) and
completely stop production by April 2020. Bearing content per vehicle in diesel
cars is higher by INR3,000-5,000. Shift in production mix in favour of gasoline cars
is likely to impact sales of bearing companies. Schaeffler estimates an impact of
2-3% on sales from PV due to the shift towards gasoline vehicles. Further,
management expects implementation of CAFE 2 norms to lead to higher
hybridisation, which will increase content/vehicle.

 Industrial segment (42% of overall sales)

o The segment grew 14.6% YoY. Growth was strong despite slowdown in two
wheelers and agriculture tractors, which get accounted in the industrial segment.
Strong growth was led by railways, raw materials (steel production, mining,
cement, paper and pulp) and power transmissions and distribution. Industrial
aftermarket (accounts for 16-17% within industrial) also grew strongly.

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o With the industrial segment, core industrial (excluding two wheelers, tractors)
accounts for 30-31%.
o Railways (4% of sales): The segment grew 30% plus YoY. The company is seeing
increased traction for its tarole bearings and expects the segment to grow strongly
going forward. The company started manufacturing tarole bearings in 2018 and is
increasing investments in enhancing value addition within the product line.
o Wind segment clocked positive growth. Domestic order bookings are not
encouraging. Further, execution of two tenders of 1GW each were delayed by the
customer. However, management expects export of transmission equipment to
support positive growth.

 Exports segment (10% of overall sales)

o The segment grew a strong 24.3% YoY. Almost the entire segment is industrial.

Table 1: Revenue contribution and growth by segment

Q1CY19 % Contribution Q1CY18 % Contribution % Growth
Automotive 5,627 48.0 5,442 50.2 3.4
Industrial 4,924 42.0 4,296 39.7 14.6
Exports 1,172 10.0 943 8.7 24.3

Total net sales 11,723 10,835 8.2

Source: Company, Edelweiss research

Others

 Increase in inventory: Production cuts announced by major auto OEMS have led to
inventory pile up with the company. Inventory days have increased by 25 over CY18.
Management expects heightened volatility in demand during the year and highlighted
that it will maintain balance between avoiding inventory pile up and sales loss due to
unavailability of products.

 Capex: Management has guided for INR3.4bn capex for CY19. In CY18, the company
invested INR2.4bn.
 Synergies: The company maintained its revenue and cost synergies guidance of
INR4.7bn per year over five years and INR500mn per year over three years. As part of
the consolidation process, the company set up a warehouse strategically in Mumbai
and Vadodara in the past six months, leading to 100bps drop as a percentage in sales
turnover in logistics cost.
 Total technical fee stands at 1.9% of sales.

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Financial snapshot (INR mn)

Year to December Q1CY19 Q1CY18 % change Q4CY18 % change CY18 CY19E CY20E
Net revenues 11,723 10,835 8.2 11,863 (1.2) 45,615 50,507 57,062
Raw material 7,455 6,754 10.4 7,689 (3.0) 28,736 31,567 35,093
Staff costs 842 784 7.4 785 7.2 3,179 3,485 3,880
Other expenses 1,582 1,459 8.4 1,671 (5.3) 6,346 6,909 7,732
Total expenditure 9,879 8,996 9.8 10,145 (2.6) 38,260 41,961 46,705
EBITDA 1,844 1,839 0.3 1,718 7.3 7,355 8,546 10,357
Depreciation 378 388 (2.6) 388 (2.6) 1,514 1,506 1,613
EBIT 1,466 1,451 1.1 1,330 10.2 5,841 7,040 8,744
Interest 12 27 (55.6) 27 (55.6) 84 70 70
Other income 172 222 (22.7) 265 (35.3) 950 950 1,300
Add: Exceptional items (34) (100.0) (431)
Profit before tax 1,626 1,612 0.9 1,569 3.7 6,275 7,919 9,974
Provision for taxes 561 549 2.2 497 12.8 2,119 2,693 3,391
Minority interest
Reported net profit 1,065 1,063 0.2 1,072 (0.6) 4,156 5,227 6,582
Adjusted Profit 1,065 1,086 (1.9) 1,072 (0.6) 4,445 5,227 6,582
Diluted shares (mn) 31 31 31 31 31 31
Adjusted Diluted EPS 34.1 34.7 (1.9) 34.3 (0.6) 142.2 167.2 210.6
Diluted P/E (x) 30.8 24.5
EV/EBITDA (x) 17.5 14.1
ROAE (%) 17.8 19.0

As % of net revenues
Raw material 63.6 62.3 64.8 63.0 62.5 61.5
Employee cost 7.2 7.2 6.6 7.0 6.9 6.8
Other expenses 13.5 13.5 14.1 13.9 13.7 13.6
EBITDA 15.7 17.0 14.5 16.1 16.9 18.1
Reported net profit 9.1 10.0 9.0 9.7 10.3 11.5

Change in Estimates
CY19E CY20E
New Old % change New Old % change Comments
Net Revenue 50,507 50,879 (0.7) 57,062 57,942 (1.5)
EBITDA 8,546 9,311 (8.2) 10,357 11,038 (6.2)
EBITDA Margin 16.9 18.3 18.1 19.1
Adjusted Profit 5,227 5,732 (8.8) 6,582 7,032 (6.4) Due to shit in OEM production from
After Tax diesel to gasoline
Net Profit Margin 10.3 11.3 11.5 12.1
Capex 3,500 3,500 0.0 3,500 3,500 0.0

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Company Description
FAG is part of the Schaeffler Group of Germany, a leading global supplier in bearings with
revenues of EUR11bn (as of CY12). FAG, Germany, holds 51% stake in the company. In India,
FAG is the second largest player with market share of ~17% and ~45% in overall bearings
industry and roller bearings segment, respectively.

In India, FAG’s exposure to the auto segment is 35% and industrial bearings contribute to
51% of sales. 14% of sales are catered to by exports. While the company manufactures
automotive bearings and part of industrial bearings (~35%), balance 65% of industrial
bearings are imported. As a result traded (industrial) goods constitute 30% of overall
revenue, which are majorly imported from overseas Schaeffler Group companies.

Investment Theme
FAG is expected to deliver strong revenue and profit CAGR of 12% and 21% CAGR,
respectively over CY18-20E along-with core ROCE of 29% by CY20E. High exposure to four
wheelers (~70%+ of auto OEM sales) will drive FAG’s revenues led by cyclical uptick. Having
increased its gross block by 85%, with capex of ~INR3.5bn, we expect strong sales growth.
Historically company has averaged fixed asset turn of 1.8x. EBITDA margin of the company is
likely to expand owing to gross margin expansion led by substituion of traded sales
(imported) with manufacterd sales (localization) and higher operating leverage.

Key Risks
Delay in recovery in key segments can impact our sales growth projections since four
wheelers and commercial vehicles together contribute ~75% to FAG’s auto OEM revenues.

Forex fluctuation

FAG buys traded goods from group company (Schaeffler Tech AG, Germany). As a result, INR
depreciation against EUR may negatively impact margin on these EUR-denominated imports.
Imports constitute 33% of net sales. This also includes currency headwinds on ~34% of raw
material costs (~11% of net sales) which are imported.

Royalty rate increase

Currently, royalty, trademark and service fees as a percentage of overall sales stand at 2%.
Any increase in the same could pose a risk.

Delay in ramping up Savli facility

Any execution delay in ramping up the Savli plant could impact growth as well as our
earnings estimates.

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Financial Statements
Key Assumptions Income statement (INR mn)
Year to December CY17 CY18 CY19E CY20E Year to December CY17 CY18 CY19E CY20E
Macro Net revenue 39,331 45,615 50,507 57,062
GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Materials costs 23,817 28,736 31,567 35,093
Inflation (Avg) 3.6 3.7 4.0 4.5 Gross profit 15,514 16,880 18,940 21,969
Repo rate (exit rate) 6.0 6.3 5.8 5.8 Employee costs 2,987 3,179 3,485 3,880
USD/INR (Avg) 64.5 70.0 72.0 72.0 Other Expenses 5,706 6,305 6,909 7,732
Sector Operating expenses 8,693 9,483 10,394 11,612
Auto OEM(2W) vol. growth 9.0 8.0 7.0 7.0 Total operating expenses 32,510 38,219 41,961 46,705
Auto OEM PV vol. growth 9.0 5.0 6.0 7.0 EBITDA 6,821 7,396 8,546 10,357
Auto CV ind. vol. growth 9.0 17.0 12.0 6.0 Depreciation 1,382 1,485 1,506 1,613
Company EBIT 5,440 5,911 7,040 8,744
Auto 2W OEM vol. growth 8.0 12.0 7.0 8.0 Less: Interest Expense 102 70 70 70
Auto PV OEM vol. growth 8.0 8.0 6.0 8.0 Add: Other income 595.5 908.00 950.00 1,300.00
Auto CV OEM vol. growth 9.3 15.0 12.0 8.0 Profit Before Tax 5,888 6,317 7,919 9,973
Auto aftrmkt sale growth 328.5 15.9 8.9 10.2 Less: Provision for Tax 2,003 2,119 2,693 3,391
Industrial sales growth (2.0) 18.0 18.0 17.0 Add: Exceptional items (45) (432) - -
Export revenue growth 21.0 (6.0) 15.0 10.0 Reported Profit 3,885 4,198 5,227 6,582
Industrial sales growth (1.9) 17.0 18.0 17.0 Exceptional Items (30) (289) - -
Manufactured 101.4 100.1 108.0 105.6 Adjusted Profit 3,915 4,487 5,227 6,582
Traded 12.4 13.1 13.9 14.4 Shares o /s (mn) 31 31 31 31
Mfg. gross margin (%) 48.5 47.3 47.3 47.3 Adjusted Basic EPS 125.3 143.6 167.2 210.6
Traded gross margin (%) 22.7 20.2 20.2 20.2 Diluted shares o/s (mn) 31 31 31 31
Adjusted Diluted EPS 125.3 143.6 167.2 210.6
Adjusted Cash EPS 317.7 186.8 215.4 262.2
Dividend per share (DPS) 9.0 30.0 18.0 18.0
Dividend Payout Ratio(%) 8.5 26.1 12.6 10.0

Common size metrics

Year to December CY17 CY18 CY19E CY20E
Gross margin 39.4 37.0 37.5 38.5
Operating expenses 22.1 20.8 20.6 20.4
Interest Expense 0.3 0.2 0.1 0.1
EBITDA margins 17.3 16.2 16.9 18.1
EBIT margins 13.8 13.0 13.9 15.3
Net Profit margins 10.0 9.8 10.3 11.5

Growth ratios (%)

Year to December CY17 CY18 CY19E CY20E
Revenues 116.8 16.0 10.7 13.0
EBITDA 130.4 8.4 15.5 21.2
Adjusted Profit 101.3 14.6 16.5 25.9
EPS 7.0 14.6 16.5 25.9

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Balance sheet (INR mn) Cash flow metrics

As on 31st December CY17 CY18 CY19E CY20E Year to December CY17 CY18 CY19E CY20E
Share capital 166 313 313 313 Operating cash flow 1,725 1,524 7,104 6,060
Reserves & Surplus 23,085 26,749 31,317 37,241 Financing cash flow (785) (547) 1,440 571
Shareholders' funds 23,252 27,061 31,630 37,554 Investing cash flow (5,255) (2,433) (3,500) (3,500)
Long term borrowings 569 49 - - Net cash Flow (4,316) (1,455) 5,044 3,131
Short term borrowings 1,183 1,844 - - Capex (5,255) (2,433) (3,500) (3,500)
Total Borrowings 1,753 1,893 - - Dividend paid (331) (1,097) (658) (658)
Long Term Liabilities 456 394 394 394
Def. Tax Liability (net) (932) (1,219) - - Profitability and efficiency ratios
Sources of funds 24,529 28,129 32,023 37,947 Year to December CY17 CY18 CY19E CY20E
Gross Block 13,743 15,095 18,595 22,095 ROAE (%) 20.7 17.8 17.8 19.0
Net Block 7,437 7,304 9,298 11,185 ROACE (%) 30.5 25.3 26.4 29.0
Capital work in progress 535 1,617 1,617 1,617 Inventory Days 67 96 88 68
Intangible Assets 5 3 3 3 ROA 19.9 17.0 17.4 18.8
Total Fixed Assets 7,977 8,924 10,918 12,805 Debtors Days 45 56 58 58
Cash and Equivalents 8,938 8,476 11,628 14,759 Payable Days 67 88 88 80
Inventories 6,006 9,101 6,195 6,849 Cash Conversion Cycle 45 64 59 46
Sundry Debtors 6,402 7,513 8,559 9,578 Current Ratio 3.6 3.3 3.7 4.0
Loans & Advances 499 974 974 974 Gross Debt/EBITDA 0.3 0.3 - -
Other Current Assets 1,051 1,467 1,467 1,467 Gross Debt/Equity 0.1 0.1 - -
Current Assets (ex cash) 13,958 19,055 17,195 18,867 Adjusted Debt/Equity 0.1 0.1 - -
Trade payable 5,935 7,878 7,269 8,036 Net Debt/Equity (0.3) (0.2) (0.4) (0.4)
Other Current Liab 408 448 448 448 Interest Coverage Ratio 53.5 84.0 100.0 124.2
Total Current Liab 6,344 8,326 7,718 8,484 LT debt /Cap empl. (%) 7.1 6.7 - -
Net Curr Assets-ex cash 7,614 10,728 9,477 10,383 Debt / Cap employed (%) 29.2 32.0 24.1 22.4
Uses of funds 24,529 28,129 32,023 37,947
BVPS (INR) 744.0 865.7 1,011.8 1,201.3 Operating ratios
Year to December CY17 CY18 CY19E CY20E
Free cash flow (INR mn) Total Asset Turnover 2.0 1.7 1.7 1.6
Year to December CY17 CY18 CY19E CY20E Fixed Asset Turnover 7.0 6.2 6.1 5.6
Reported Profit 3,885 4,198 5,227 6,582 Equity Turnover 2.1 1.8 1.7 1.6
Add: Depreciation 1,382 1,485 1,506 1,613
Interest (Net of Tax) 68 47 47 47 Valuation parameters
Others (532) (595) (927) (1,277) Year to December CY17 CY18 CY19E CY20E
Less: Changes in WC 3,078 3,611 (1,251) 906 Adj. Diluted EPS (INR) 125.3 143.6 167.2 210.6
Operating cash flow 1,725 1,524 7,104 6,060 Y-o-Y growth (%) 7.0 14.6 16.5 25.9
Less: Capex 5,251 2,434 3,500 3,500 Adjusted Cash EPS (INR) 317.7 186.8 215.4 262.2
Free Cash Flow (3,526) (910) 3,604 2,560 Diluted P/E (x) 41.2 35.9 30.9 24.5
P/B (x) 6.9 6.0 5.1 4.3
EV / Sales (x) 3.9 3.4 3.0 2.6
EV / EBITDA (x) 22.6 20.9 17.5 14.1
Dividend Yield (%) 0.2 0.6 0.3 0.3

Peer comparison valuation

Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) CY19E CY20E CY19E CY20E CY19E CY20E
Schaeffler India Limited 2,368 30.9 24.5 17.5 14.1 17.8 19.0
SKF India 1,448 24.2 15.1 21.1
Median - 27.5 12.3 16.3 7.1 19.4 9.5
AVERAGE - 27.5 24.5 16.3 14.1 19.4 19.0
Source: Edelweiss research

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Additional Data
Directors Data
Avinash Gandhi Chairman Dharmesh Arora Managing Director
Klaus Rosenfield Director Dietmar Heinrich Director
R Sampath Kumar Director Frank Huber Director
Sanak Mishra Director Renu Challu Director
Rakesh Jinsi Director

Auditors - B.S.R & Co

*as per last available data

Holding Top -10

Perc. Holding Perc. Holding
Templeton Asset Mgmt 4.27 UTI AMC 2.26
SBI Funds Management 3.29 IDFC Mutual Fund 2.26
HDFC Asset Management Co ltd 2.98 Sundaram Asset Management 2.23
Kotak Mahindra 2.85 Aditya Birla Sun Life Asset Management 1.78
HDFC Life Insurance 2.39 Shree Capital Services Ltd 1.33
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available
*as per last available data

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 Schaeffler India

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c2
Head of Research
NARAIN
0, postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f
9f4d9b8311cf0678cd975097fc645327865,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2019.05.06 19:14:30 +05'30'

Coverage group(s) of stocks by primary analyst(s): Bearing

Schaeffler India Limited, SKF India

`
Recent Research
Date Company Title Price (INR) Recos
18-Feb-19 Schaeffler Strong capex geared towards 5,275 Buy
India growth;
Company Update
14-Feb-19 Schaeffler Industrial segment drives 5,404 Buy
India growth; Result Update
25-Oct-18 Schaeffler Strong growth across 4,803 Buy
India segments; merger completed;
Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

One year price chart

5,750

5,500

5,250
(INR)

5,000

4,750

4,500
Dec-18
Dec-18
Aug-18

Oct-18

Apr-19
Apr-19
Nov-18
May-18
May-18

Sep-18

Feb-19
Feb-19
Sep-18

Jan-19

Mar-19
Jun-18

Jul-18
Jul-18

Schaeffler India

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 Schaeffler India
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